CME Group Inc. Q1 2023 Earnings Call
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Reading and welcome to the CME group first quarter 2020 to be earnings conference 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 would like to register for a question. Please press. The one followed by the four on your telephone if you require operator assistance. Please press Star Zero as a reminder, this conference is being recorded today Wednesday.
April 26, 2023. It is my pleasure to turn the conference over to Adam <unk> Senior Director Investor Relations. Please go ahead Sir.
Good morning, and I hope, you're all doing well today, we will be discussing CME group's first quarter 2023 financial results.
I will start with the Safe Harbor language, and then I'll turn it over to Terry.
Statements made on this call and in the other reference documents on our website that are not historical facts are forward looking statements. These.
These statements are not guarantees of future performance.
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 provides details on the first quarter of 'twenty three.
Make a few brief comments on the quarter and current outlook and Lynne will summarize our financial results. In addition to land we have other members of our management team present to answer questions. After the prepared remarks, John Joe. It is also on the call with US. This morning, John will be staying on with CME through at least the end of the year as a special.
Advisory to the company.
Among other things Johns responsibilities will continue to be work with Investor relations activities, but this is the first for John to be on the call not in the CFO role. So John Please don't jump and witness speaking.
I would like to thank you John for your over eight years as CFO as well as your important work as CME prior to that John has been a key part of every major milestone our company has achieved over the last 20 years and we thank him for his many contributions to our business and we look forward to continually working with John throughout the balance of the year.
That I will turn to a few comments regarding the first quarter, which was continued evidence of this new era of uncertainty as I said in my financial Times Op Ed from February risk management has been elevated from a supporting player to the star attraction as investors are managing portfolios with near constant market.
Challenges.
Following the best year in CME group's history first quarter 2023 average daily volume increased 4% from an extremely strong first quarter 2022 to $26 9 million contracts and was just short of our all time quarterly record average daily average daily volume in the first quarter of 2002.
127 million contracts. This quarter included our all time highest single day volume was $66 3 million contracts on March 13th all of this and other things have led us to the highest adjusted diluted EPS in the history of CME group.
Throughout the entire quarter, there were shifting perceptions about the feds near term rate path as well as significant banking concerns in March and the continued development of the sulfur market led to the increasing need for the management of interest rate risk.
This drove 16% growth in our interest rate Adv to a record $14 5 million contracts.
Record March silver futures Adv of $5 2 million contracted exceeded previous record seen in Euro dollar futures.
And since quarter end, we successfully completed the migration of our Euro dollar open interest to sulfur without issue on April 15th.
In addition, our past investments in building out our options franchises are paying off with.
With such turbulent macroeconomic backdrop options are an increasingly important risk management tool first quarter options Adv grew 26% year over year to a record $5 8 million contracts, including double digit growth across interest rates equities and metals and 30% growth in non.
U S trading activity.
First quarter options revenue grew 12% to a record $218 million.
First quarter was a great example of CME group seamlessly doing what we are designed to do the significant volatility spikes and associated turmoil affecting the banking sector. In March further highlighted the systemic importance of sound risk management practices by institutional participants there are no guarantees.
But hedging can provide certainty and the significant first quarter activity highlighted that some of today's most important trades are to manage risk.
<unk> future is more uncertain than ever but we know we can expect a whirlwind of geopolitical and economic hurdles to persist and we will continue to focus on innovating and offering market participants meaningful capital and operational efficiencies across a diverse and global relevant product set to manage their risk with that.
I will turn the call over to our new CFO Patrick to cover the first quarter financial results.
Thanks Terry.
<unk> had the best quarterly results in our history during the first quarter CME generated over $1 4 billion in revenue up 7% compared with a strong first quarter in 2022.
Overall revenue growth outpaced volume growth of 4%.
Market data had a record revenue quarter up 9% versus Q1, 'twenty $2 million to $166 million.
The need for our products and data to manage risk in an uncertain market environment continued to build on the strength seen last year.
Expenses on an adjusted basis were 459 million for the quarter and $362 million, excluding license fees and approximately $12 million towards our cloud migration.
CME had an adjusted effective tax rate of 23, 4%, which resulted in an adjusted net income of 882 million up 15% from the first quarter last year and adjusted diluted earnings per share to common shareholders of $2.42.
The highest adjusted quarterly net income and EPS in our history.
Capital expenditures for the first quarter were approximately $16 million.
<unk> paid dividends during the quarter of over 2 billion and our ending cash balance was approximately $1 7 billion.
The team at CME group remains focused on providing the risk management products needed by our clients and driving earnings growth for our shareholders.
Before we open up the call for your questions I'm going to briefly hand, it back to Terry Thanks, Dan and before we get to your questions. As Lindon said I wanted to take a few just a moment to acknowledge Sean Tully, who announced his decision to retire from CME group in June of this year since joining us in 2012 as Sean has been a strong leader for our financial products business.
<unk> and continuing to grow that through the period of tremendous growth and transformation and I, especially want to recognize Sean for his outstanding job that he and his team did in the interest rates to facilitate the successful transition from LIBOR to silver. This was no small feat as many people on this call remember we had.
Many of the conversations prior to the transition about what are we going to be able to transition or others going to do with Sean and AGA and others did an amazing job of bringing 90, 999% of the sulfur business here to CME group and knowledge the largest contract in the world. So planting what euro dollar futures used to be really an amazing accomplishment.
Following sean's retirement in June Tim Mccourt, Who's been overseeing our equity index and foreign exchange crypto currency business as well as film Shaun responsibilities and lead the organization covering our financial and OTC products as well as the utmost confidence in <unk> ability to manage this broader portfolio so sean on behalf of.
Everybody here, we'll have more accolades with you off the call but.
Thank you for everything you've done and maybe you can say a few words that people that <unk> been talking to for so many years, yes. Thank you. So much Terry it has been an honor to work at CME Group. These past 11 years to work with you Terry and the entire outstanding team at CME with all of our customers with our investors with our analysts and with our regulators together, we delivered enormous valley.
Due to market participants, including several billion per day and margin efficiencies and many new products, including many new options, many new currencies in OTC swaps clearing.
Ultra 10 year futures, so for futures and options and CME terms sulfur and for investors in the first quarter of 2023, we delivered all time record revenue for our rates business with silver futures and options Adv exceeding the best ever quarter for Eurodollar futures and options Adv historically as well.
As delivering a nine 8% compounded annual growth rate in revenue for the rates business. Since the first quarter of 2012 last having worked closely with Tim of course, an argument, Arizona over the last several years I am very confident that the financials business is an extremely capable hands going forward.
Thank you to all of our customers. Thank you to all my colleagues and thank you again, Terry. Thank you Sean I appreciate it very much.
With that being said, we're going to get into your questions now and <unk>.
Sean will be participating in that so I am sure you will enjoy it as answers as always so with that we'll turn it over to you for your question.
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Our first question is from the line of Rich Repetto with Piper Sandler. Please go ahead.
Yeah, Good morning, Terry and team and firstly I'd, just like to Echo your comments and congrats John P and and Sean as well on their transitions.
Anyway. So Terry you brought up that risk management focus that you that you and.
In your editorial pretty timely with the banking crisis, two weeks afterwards, but Don at the FAA, we talked about sort of the longer term impacts that it could have on risk management and utilization of the CME products. So I was just trying to get an update after more time has passed.
And just give some insight I guess, Terry and Sean about the conversations you have with.
With risk management.
Focus on these mid tier banks, what might change and what might it mean to the CME going forward.
Yeah.
It's hard to predict the future, but we did say down at the conference here, referring to them both.
Because of what's gone on in because if you look at yesterday some of the things that have gone on and then return you're seeing our business grow because people understand that they need to manage risk in order to do.
Continue to stay in business for themselves. So some of these second and third tier banks, we did not hedge some of their portfolios. This is a big push by not only Sean and Tim According to their teams, but also by Julie Winkler and her sales team to cross sell but again I think what's important here is we talked about some of these second and third tier banks, mostly will be doing swath.
<unk>, which we think is actually fine for us because there are normally going to be doing a swap against the larger bank in that larger bank will be doing the layoff with CME group. So we see that as a net positive and thats kind of how we've been going through this internally with our own folks here rich over since we saw each other probably down in Boca and putting more work into that so Julian and her team.
We've been doing that along with Sean and Tim and I'll, let them comment, but that is a big push that we're looking at the show people the benefits, even if youre doing a swap.
We think there is a benefit to the liquidity that we provide for the bank's totally outside risks as well.
John or Tim or Julie you want to talk about it I'll just say that we have initiated a sales campaign, specifically focused on regional banks across the firm.
And we are very focused on providing them with the interest rate swaps and other products that they need in order to better manage their risk.
We are very excited about offering them that especially with our OTC interest rate swap clearing and as Terry said whatever swaps. They do in addition to potentially increasing our OTC swaps clearing business.
On the back side of those swaps will be hedged by larger banks are they're using our futures or <unk>.
The broker Tech U S Treasury platform so.
The better people manage risk.
The better it is for themselves and the better it is for <unk> shareholders.
Tim and Julian answer Seth I would just add I think the relationships with a lot of these regional banks.
Ben.
Something we've been working on is as we've got the terms so for benchmark here at CME group.
This is a key.
Asset of which these individual these firm needed access to this rate and so getting out licensing those firms up.
It was an activity that we've been doing over the last year and a half and so those relationships are not I mean are still relatively new but the fact that we have them.
Within our client outreach is a key part of that and a lot of it is education and this is something that CME group has a very long history of doing.
Very well and it's something that we'll continue to do with these firms.
Rich Thank you Adam.
We're at.
Yes, definitely and the focus on risk management.
Right.
It's been great working with both Sean and I and John Thanks.
Thanks, a lot rich really appreciate it thank you rich.
Our next question is from Dan Fannon with Jefferies. Please go ahead.
Thanks, Good morning, and congrats to both Sean and John as well.
Question is on market data, obviously, the price increase that went into effect that drove some of the sequential growth in I guess record revenue, but you talk about also increasing subscribers. So just curious about this as a good starting off they're jumping off point here for revenue and then ultimately where the subscribers are coming from is it mostly retail or.
How we can think about momentum in the market data business.
Well I have learned is starting to go to Julien.
Sure. Thanks, Dan. So if you look at the market data revenue. This year, we did grow 9% off of the first quarter last year.
You have the impact of the price increase which went into effect in January as a reminder, that was about a 4% increase for market data also within this line you do have about $4 million in audit fees and catch up payments for prior period activity. These do tend to be more episodic.
For comparison, there was about 1 million in these type of fees in Q4. So it's a combination of that pricing increase as well as the increased subscriber count, which I can turn to Julie to talk about what you're seeing there.
So thanks for the question down it certainly last year all throughout 2022. We also saw a continued strong demand for our professional devices in a real time data.
We offer the largest.
<unk>, a proprietary data of anyone and I think people.
Especially post pandemic has seen the value in that and the fact that we've continued to invest in the data sets that we offer and the technology and how they are receiving that data. So Q1, we saw just a continuation of that trend.
And also there is a.
Other aspects of the business, particularly as we think about organic growth under our non display licensing. So this is where people have needs to utilize our data in other algorithms and trading applications and so this is another part of the business up almost 9%.
And alongside all of this we set up in the last two years. This dedicated sales team and I'd be remiss without saying that is having an impact on the results right. We are in a position where we have.
Historically, we had not been out there selling.
Selling market data and explaining to people what was actually available and I think we're starting to see some uplift from that as well. So it is institutional users to your question.
Is not coming from our new retail participant.
Great. Thank you.
Yeah.
Our next question is from Alex Kramm with UBS. Please go ahead.
Yeah, Hey, good morning, everyone.
I feel like this is a throw away question that we ask every time after we have a big quarter like we had in the first first quarter, but I guess it has to be asked every time.
Obviously with April after a slow start I know, we see this again time and time again, you have a lot of volatility a little changes in the environment and then things got a little bit quiet when one thing when people have to leak there was a little bit but curious Terry if theres anything you would point to that speak to the underlying fundamentals.
This is what the market any particular slowdown in any particular client types or anything that would make you think differently about what youre seeing so far this quarter I know, it's hard to predict but.
It's got to be asked.
No and I appreciate that Alex it doesn't need to be asked and I think a couple of different things. We are a player in April April is historically, one of the slowest months in the industry and for whatever reason and spend that we've for a number of years.
Don't have the reason why that is the case one of them I guess would be that we don't have a role in April so that's it.
One thing of interest.
One of the things that I look at it is really not just only our company I look at.
The broader industry across the board and I thought that we were the only ones suffering in the lower volume environment in the month of April why everybody else was gaining I'd be a little bit more concerned and I'm talking apples to apples in the futures world. So that is not the case everybody is kind of on the same pace in April as they have been historically. So this is nothing new.
And it's a phenomenon that's going on for years, one when I was younger we saw the the months of August being traditionally a slower one because of European holidays, shutting down and things of that nature.
Things just kind of move around a bit and for whatever reason this happens to be the slower months that we've seen in.
Over the last several years, but what's interesting about April as we've had our metals complex has been up.
Our AG complex is up and our energy you know say, 33% of metals AG running around 15% and energy up just over 3%.
For the month of April so that that is a bright side. So the beauty of CME group, Alex as you know, we're not just one asset class, where a multi asset class organization. So when we do see a slowdown.
We have said historically see pickups and others are nothing.
An example of that and maybe not to the volume of $66 $3 million, but we are definitely seeing an uptick in other asset classes, one others are down.
Alright fair enough I'll jump back in the queue.
Thank you Alex.
Our next question is from Brian Bedell with Deutsche Bank. Please go ahead.
Great. Thanks, Good morning, and also congrats to John and Sean and and and and Lynn as well.
A question on.
Two part question, but mostly focused on the debt ceiling negotiations and.
The two partners are you in.
Number one how do you see the negotiations as well as just the continued debate on on on the fed cycle and the volatility that could connect.
That could occur in the tenure and long into the curve impacting volume. So maybe just some commentary around that and then I guess and maybe that's true for Sean.
And then on the debt ceiling negotiations, maybe maybe Terry just your view of whether this time is similar to past negotiations do you think things will be reconciled well or or is this time.
Different and then I guess, if we do have a default scenario.
What are how would that impact.
The Treasury futures.
So this is purely a speculation question as best as you can imagine Brian because.
I've been around long enough to watch the 2011 that negotiation literally go down to the last hour before the clock ran out on government spending and there was a negotiation between then speaker banner and then President Barack Obama. So you never know what's going to happen I can only tell you a few things and one of the things I'm, saying to my folks here in the organization is.
When you look at the setup today in Congress.
The things I look at it as far as where this may or May not go you can only see so much right. So.
The speaker is going to propose a piece of legislation that Scott.
Massive cuts associated with it over the next 10 years, the president is not going to like that and then return the speaker is offering up one five trillion and listening to the density and thats going to be the legislation now.
<unk> passed the house, but if they lose five votes then it doesn't pass the house, so pretty interesting dynamic right now that probably won't go anywhere in the Senate or it probably won't go anywhere with the administration. So then we go on to the next round of negotiations. So let's think a little bit about how the negotiations are working in Washington, right now as you read.
Call if anybody's a student of politics, you saw that those 15 rounds of.
The vote is going for the speaker of the house and in those 15 rounds. There was a handful of people that we're trying to extract certain things for their benefit maybe holding the speaker's fee to the fire on sort of the things I was not part of it but you can only assume what was going on because of <unk>. Finally got to a place which means there was a negotiation going on so I'm assuming that negotiation we will.
Continue on but the difference. This time is you're dealing with a much different Congress with Republicans holding the majority obviously in the house side in them looking to extract a lot of cuts whether you agree with that or not is not for me to make that decision on to tell you what I see so I wouldn't be surprised if they don't get something passed out of this out of the gate and.
But then well workovers historically people never wanted to go back to their districts and be the person who did not vote for a debt ceiling lifts, which could hurt the U S economy.
The U S chance, we had a downgrade in this country before im not saying thats happening again, but there are people that they have firm believes that you have to look at the long picture and the government spending is out of control as they are not my words. These others. So I just want to make sure.
Say that so I think it's going to be a little bit more tricky than historical debt ceiling that we've seen and as far as the fed cycle goes I'll, let Sean comment on that what it means to it and then maybe you can comment about the treasuries and what it means if anything to us.
Yes, thanks very much for the question and thank you Terry.
In terms of the fed just thinking our futures market as expected the federal tightened by 25 basis points at the upcoming <unk> meeting likely.
And then over the next year and a half reduce rates by 200 basis points. So obviously there is huge uncertainty built into that yield curve.
That people are going to need to manage.
Going from this extraordinary cycle tightening cycle excuse me two very quick large easing cycle and the exact timing of that.
It creates an increase in England incredibly.
Uncertain environment, where people are going to need to hedge risk. So I think that that cycle will continue to be positive for us bigger picture in terms of treasury issuance.
In regards to the debt ceiling in the first quarter of this year U S. Treasury only issued 64 billion net.
Coupons, so with a one four trillion dollar deficit. The treasury is not issuing a lot of coupons and obviously, a 64 billion in new issuance is unsustainable.
And driving down the Treasury general account in order to be able to do that so I would expect.
A very large increase going forward in U S treasury issuance in order to cover that very large deficit ended that wood.
At some point provide a very nice tailwind for our business and with that I'll hand, it over to Neil.
I'll cover two areas one is operational and the other is risk from an operational perspective, the treasury market practitioners group has put out.
Our document.
On best practices on handling.
Maturing securities and coupons.
CME works with SIFMA and other industry bodies to actually align itself.
On the operational side and on the risk side, we have handled these scenarios similar scenarios in the past, we don't take it lightly and as Terry pointed out.
We are also taking into account a different environment the political environment. So taking all of those into account we manage risk.
With respect to our collateral and as well as our inter.
Interest rate market, both long and short end.
And you know as a as an example, you can see that in March.
It was one of the most stressful periods for rates and you know the clearinghouse the CME clearing houses and its clearing members really manage that very well. So I have no doubt they will do the same so Brian I think to your question is very relevant and deserves a lot of attention. We can only do what we can do here, we're here to manage risk for people who.
We are analyzing these situations with day in and day out my comments as it relates to the 15 rounds to elect the speaker could that play into the density and people might say well. There is nothing one has nothing to do with the other you can only analyze whats the amount of information.
<unk> you have and that's the limited amount of information we have right now so we are preparing as Neil and Sean said to make sure that we are prepared for our clients to manage risks and I agree with John I think it creates a tailwind for us irrespectively on the outcome of how the government settles. This one way or another so but thank you for your question.
A lot of great color. Thanks, Thanks, so much everyone.
Thanks, Brian . Our next question is from Kyle Voigt with K B W. Please go ahead.
Hey, good morning.
Just wanted to make sure I'm understanding the dynamics around the LIBOR transition.
Correctly, because as you noted earlier in April we did see a material step down in eurodollar futures open interest as the product transitions, but we didn't really see a commensurate step up in so for futures open interest at that time. So if we look at aggregate futures that lie for the rates complex is now down year on year I'm, just trying to understand whether to interpret that.
<unk> NOI trends over the past couple of months as more related to a short term dynamic around the LIBOR transition or whether this is a result of the extreme interest rate volatility we saw in March.
And if that caused any deleveraging more broadly across your user base. So any additional color, helping us understand what's kind of driving some of that a lot of changes in rates specifically given the moving pieces here would be very helpful.
Sean you want to start and then.
Yes, it's a very good job.
Very good question. Thanks Carl.
The interest rate business just went through was arguably the single largest transition in its entire history and Kyle I'm very glad to say that if you look at the year over year open interest for the interest rate futures and options complex is up 2%, yes, it's only up 2%, but it is up 2% having gone through that transition.
You are correct, we saw a small uplift in the overall open interest, but only small if you look at what we did on April 15th is we converted each and every eurodollar future and each and every eurodollar option into its respective so for future and so for options as you.
Can imagine there are participants who would've had offsetting positions between those two different instruments and therefore, those trades would have compressed if you look at the first quarter. Another question. We've gotten a lot historically is what was the basis trading or the spread trading between so for futures and eurodollar futures and that was in the first quarter about 150000.
Contracts a day so.
We saw a compression.
He was very uncertain from my perspective, and at my level, we do not see the individual accounts and the individual account positions. They are confidential inside the <unk>. So we would not have known what level of compression, we would've gotten through that process and you can see the results again I am heartened that overall.
Open interest in listed futures and options is up year over year.
And Kyle I think some of the things you've got to look at it is also.
If you were had a concern that anybody else pick up open interest in our listed products such as sulfur.
And while we didn't get it and as I said in my earlier comments 90, 999% of all open interest is here.
Gives me at CME group, So we didn't see that and for whatever reason people.
Ill take down risk or add risk because that is their decision as we said earlier, we are here to manage it so open interest fluctuations up and down or something that we've all seen historically in this business forever.
Yes.
Very helpful. Thank you thanks Scott.
Our next question is from Owen Lau with Oppenheimer. Please go ahead.
Good morning, and thank you for taking my question. So CME has a strong balance sheet could you. Please give us an update on the M&A strategy and any gaps that you would like to feel both locally and internationally given that the valuation of many companies have come down quite a bit. Thank you.
Sure. Thanks Alan.
Certainly M&A is something that we are comfortable with and we've used a number of different tools over the years from large scale M&A to creation of joint ventures to our most recent investment in the index joint venture with S&P last year. Yeah. We're always looking at what is out in the market and looking for opportunities for us to create value for our shareholders.
We do feel that we are coming from a position of strength, though given some of our past transactions. So we don't feel a pressure to act unless we see something where we really can create that value.
So I would say that nothing has changed in that regard. It's something that is part of our tool chest that we are happy to use when we when we see the right opportunity come up.
Got it okay. Thank you very much.
Our next question is from the line of Alex Blaustein with Goldman Sachs. Please go ahead.
Hey, good morning, guys. Thanks for the question.
I was hoping you could spend a minute on competitive dynamics in the equity derivative space.
Obviously, SPX options and <unk> seen a really nice growth in a lot of it came from the dailies.
Understanding that it's a different products had then.
Any and micro mini futures for you guys, but are you seeing any evidence of substitution away from your complex and if so what sort of customer group is that mostly prevalent in thanks.
Thanks, Alex Tim you want to go ahead and just yeah. Thanks, Alex for the question I think when we look at the operating growth in the equity complex is certainly a growth versus growth story, and we're seeing very strong growth here at CME.
When you look at your equity options conflicts at CME for options on futures, we had a record Q1 adv of over $1 3 million contracts, which is up 7% versus 22 full year and up 11% versus Q1 of 'twenty two when we look at some of this growth you can't ignore the multiyear trend of inquiry.
Singly short dated options coming to market as a result of the market wanting more precise risk management. The same day expiring options were zero Dte's is the latest step in that trend. We're seeing me also has zero dte's everyday of the week from the S&P out for five weeks, we continue to introduce products that are important to our customers.
And we've seen very strong growth in those same day expiring options. They are up over 41% in Q1 versus the 2022 full year volume.
But when we look at these explorations it's important to notice that we also have over 50% growth in Q1 versus 22 full year in our options that are longer than one week in exploration. The story at CME is not just the same day expiring options, we have very strong growth and growing open interest in our complex with the queue.
On average open interest for equity options being $5 2 million contracts up about 8% year over year.
But also let's look more broadly at CME. This is not just an equity option story, we have a very strong options offering at CME with a record Q1, Adv of $5 8 million contracts with 26% growth versus Q1 of 'twenty two across all of our options and also set a quarterly record not only in equity but also of interest.
Right options at CME. We've also had very strong growth in our metal complex options up about 24% and our non U S options Adv was up about 30% over the same period last year. So not only are we growing we're not certainly not seen our participants turned to other markets, particularly amendments all of their option related risks here at CME.
Yes, I'd just add Tim talk more broadly I mean, this is that there's such a differentiating factor for CME group, where we've got core benchmark liquidity in every major asset class not just in the future, but more importantly in the options options are critical because options actually create a stickier futures environment for customers because of the capital and operational efficiencies of the offsets in our clearinghouse Tim.
And the success that we've had across the franchise as a whole and just to repeat what I already said at the top of the call. We set a record revenue quarter of $218 million in Q1 of this year and that was broad growth across the entire franchise and as it relates to the sticky value proposition customers are using the story, particularly as it relates to options as a board.
Broader part of their overall.
Risk management tools and.
Yes, we're seeing a shift to shorter dated options, we ourselves set a record in our weekly options across the franchise as a whole of one 4 million contracts, but that actually was not what drove that record $5 8 million that actually represented about 25% of our options complex down from 30% last quarter. So our growth is in term risk management tools.
Across the curve and users open interest holders our biggest client segment growth driver for the entire franchise was buy side that tells me. He is using our products and particularly we saw that true ring true, particularly strongly in.
In our energy complex and Henry hub natural gas franchise, not only did we see a natural gas options business up 16% against really difficult comps of last year, but we're seeing that business up again in April as Terry referenced energy up as a whole about 3% this year and large part due to what we're seeing.
Henry hub gas options and futures. So it's a broad based story, it's one that differentiates us from our competitors. It's term open interest and you know what open interest means to transaction revenues and volume and client capture. So we're excited about that we've had great success in building our front and we will continue to serve the needs of customers globally and I think the data points we showed today.
Speak to our strong strengthening franchise for futures and options.
Okay. Thanks for all the detail, but just to be clear youre announcing substitution with competitive products and equity options.
That's correct right.
Thanks.
Thanks, Alex.
Our next question is from Chris Allen with Citi. Please go ahead.
Yes. Good morning, everyone. Maybe you can just talk a little bit about the pricing and rate per contract I was wondering if you can give any color.
What the price when it looked like on a full quarter basis, if the price increases that had been there.
On the member mix shifting is this just something that youre seeing in the first quarter of this year or has it been a longer term trend I know you've had new sales efforts in different asset classes to whether it's regional banks or other players on FX and things like that so just trying to get a better sense of the pricing trajectory moving forward.
Sure. Chris This is Lynn I'll start on that if you look at the pricing increases overall.
One 3% increase on 23% increase in volume sequentially. So we saw real strong strong capture there.
What we're seeing if we look year over year, where volume levels are a bit more similar I'm going from about 26 million contracts a day last Q1 to nearly 27 contracts a day. This year, we saw 3% uplift in RPC. So if we take a step back and look overall, we still feel comfortable with that guidance we provided.
At the 4% to 5% increase based on the full year, assuming similar volume to 2022, we feel like that has really pulled through what we're most excited about is we are seeing continued strong liquidity and tight bid ask spreads across the products and we're not seeing an impact to our markets based on.
Based on these.
Based on these changes in terms of the changes on the member mix that is going to ebb and flow it depends on the products and it depends on the time I don't see an overall long term trend on on that.
Great. Thank you.
Chris.
You only saw.
Two months out of a full quarter impacts so you'll see a full quarter impact in Q2.
Understood. Thanks.
Yeah.
Thanks, Chris.
Our next question is from Ken Worthington with Jpmorgan. Please go ahead.
Hi, good morning.
Wanted to follow up on Alex's question.
On zero date options, we're hearing more market makers are using them to delta hedge.
Is there any pricing advantage that you see in zero date options versus futures.
If so why wouldn't this trend sort of continue and do you have an estimate of how much of the E. Mini business is really used to delta hedge by your institutional investors.
Yeah.
Yeah, Thanks, Ken so.
I think it's interesting question, one I don't necessarily agree with the concept that zero D. G. E auctions are a replacement for futures.
Domestically auctions or non linear products that have very dramatically different risk profiles intra day that do not line up with the one form movements of the index that our future dose. So I don't think it's replacing me because I think that is not necessarily a.
Fit for purpose hedge and replace with many options. The one thing that I will say that's great is when we look at the totality of the equity ecosystem. Our E. Mini complex at CME is the leading price formation for equity index products across the globe as such we're also be preferred hedge vehicle for the totality.
Index trading that goes on where that's hedging SPX options with us hedging OTC swaps, whether that hedging TGF activity. So these are things that we all see that risk recycling into our market as the primary venue for equities. When we looked also at the market maker activity with really relating to your question from just what's publicly available.
RPC trading those options in lieu of E. Minis is not a cost effective strategy for market makers were members at CME and I don't necessarily think that is happening from the fundamental economics available at CME versus other venues.
So can we appreciate your question I appreciate youre hearing, but I think there is some talking their book, but I think Tim gave a pretty specific example, about true risk management and what it is so thank you for that question, though.
Great. Thank you.
Our next question is from Michael Cyprus with Morgan Stanley . Please go ahead.
Great. Thank you good morning, continuing with the options theme, but a different question here coming back to the strong and record options activity that you guys are seeing can you just talk about the sustainability of this level of activity how broad based is that across your customer set and what would you say is the opportunity for continued options usage.
Across your customer sat and maybe you could talk about some of the steps that you are planning to take over the next 12 to 18 months around product development to drive continued growth and options from here.
Yes, great question. The reality is that the growth of our options as accelerating growth in our futures as we mentioned before it's a sticky value proposition for customers that are using options in their portfolio of hedging and the cross margin inefficiencies they can't get anywhere else.
To your question on the kind of spread our participation across our client segments.
This is a broad set of participants is driving growth, we as I mentioned before by side in a record quarter for us our buy side participation in auctions was up over 40% perhaps were up in kind of the mid 20%. We saw growth in retail we saw commercials and banks participate. So this is broad based participation as I mentioned.
Before can't stress enough.
The reason that customers are using options here is because theyre, adding increasing amounts of that to their portfolios out across the curve. So Tim mentioned the position that we have in open interest.
In the.
Equity side of the business, we're seeing that growth across all our asset classes as well.
I think it was mentioned briefly before that with the overall franchise being up at record levels. Our non U S growth is even faster than our growth inside the us growing at 30%. So we see growth across client segments, we see growth across geographies. When you actually look at the rates of growth across the board we saw our EMEA options.
Is up 41% of our Latam options customer business up 29% and our Asia Pacific business up 16%. So as it relates to the sustainability relates to the client efforts relates to the front end work we've done in CME direct which is our own plant and we've got record participation and record revenue generation through our own fan-tan.
Which is expanding access to clients curious either directly through our connection to us or for our partners as well on top of that we've been continuing to build option specific sales assets in our regions in Europe in Asia, We're seeing the fruits of that Julie can speak to the sales campaigns that we execute in any given year and the staff that we have.
That's not only training customers on how to access our front end, but with a significant amount of educational resources that we're putting in place in Europe and Asia to draw more customers use to increase their participation in options across the board. So hopefully that addresses the kind of the growth and scale of the opportunity set we continue to see outsized growth outside.
The U S and we'll continue to grow and develop those products that suit customer needs.
Thanks, Eric I appreciate it thank you Michael.
Our next question is from the line of Simon clinch with Atlantic Equities. Please go ahead.
Hi, everyone. Thanks for taking my question.
I was wondering if I could just get some housekeeping numbers for you from.
In terms of the cash collateral versus noncash and sort of what the earned rate was on the cash collateral as well please.
Yeah sure. So if we look at the cash collateral for this quarter, we earned <unk> $93 million on those balances.
Average balances were down a bit from last quarter, but our return did increase from 32 basis points to 33 basis points. So if we look at the averages.
If we look at Q1, we were at 109 six in average balances in cash that compares to $117 six that we saw in Q4.
On the noncash collateral side, which may be helpful. As well, we had average balances for Q1 of $99 to that.
That's up from $89 7 billion that we saw in Q4.
And a reminder that the earnings on the noncash collateral comes through in our other revenue line.
Okay, great. Thank you.
So I'm not sure.
Yeah.
Our next question is from Craig Siegenthaler with Bank of America. Please go ahead.
Thanks, Good morning, everyone.
When I have a follow up to Chris's question, but wanted to really focus in on the rates business.
The rates RPC was down 1% quarter on quarter. Despite the <unk> hike. So I'm wondering if you can comment on the underlying organic trends, which impacted the blended RPC and explain why our revenues per contract trended lower despite the hike.
Sean Yes, sure very happy to do that if you look at the first quarter.
And actually if you look at the year to date, our Treasury futures overall.
Year to date are only up 1% in terms of their volumes. So the huge growth that we saw in the first quarter was driven by.
The short term interest rate futures and as you know and as we've reported many times the RPC on our <unk> complex is about 10 cents below our tourist complex. So that massive increase that we saw on the short end driven by the silver futures and options.
As well as the huge growth.
Where we do have some volume tiers right Ted led to us to somewhat lower RPC. If you look at the RPC for so for futures and options.
Post the February 1st increase silver futures and options RPC are now matching the historic levels of Eurodollar futures not so we have delivered.
The volumes and the RPC is for those products.
And that drop into RPC relative to the much stronger growth.
<unk> is not a surprise as expected yeah, and if I could just take it to the higher level. Craig If you look at the growth in volume versus Q4, a rates business was up 47%. So that 1% decrease that youre seeing in RPC really shows that the changes in pricing, including the roll off of some of the sofa incentives all of that is offset.
Getting higher volume tiers that you would see without really strong growth in volume. So that that RPC result was particularly strong in rates.
Yeah.
Great. Thank you.
Thanks, Greg appreciate it.
Our next question is a follow up question from Rich Repetto with Piper Sandler. Please go ahead.
Yeah.
Just a follow up for my friend, Derrick and energy and you got to be breathing a little fire relief as the year over year comps dramatically go down.
From <unk> to <unk>.
Last year energy after the Ukraine crisis settle that didn't settle out but the impact sort of settled out.
The volumes went down 23%. So I guess the question is Derik is could you just give us an update on LNG overall outlet.
Health of the energy complex, and you've seen $2 million or so.
But again it'll be much easier comps <unk> going forward.
Yeah. Thanks, Rich that's a great point, if you look at actually did the first quarter energy Adv, yet just below $2 1 million.
When you compare that to the full year of 'twenty, two that had that huge bump in that that tough comp that were facing in Q1 of this year, that's actually up 3% versus full year 'twenty, two and is up 14% sequentially versus Q4. So the trend is very much what we expected to see not only in this is actually more important if you look at the rebuild.
And re stacking of our open interest were up at about $1 9 million contracts open interest in our WTO futures that based in Brent followed that same trend to kind of drifted down of a course of year. It came back up so we're seeing a nice resumption of participation.
From a financial players.
Yes financial players hedge funds asset managers, and we're seeing that reflected in the open interest trends so once.
Once we saw the kind of the deleveraging impact of higher margins begin to recede that Boston financial players back and we're seeing more ETF participation on broadening the the complex as a whole I think to the things. We're most excited about in our energy business, you've heard us talk a lot about the centrality of W. T I S.
The global benchmark for the crude oil market, we've seen that certainly in the record levels of exports I think Q4 U S. Export of just over 4 million barrels a day that puts the WTO squarely in the middle of global energy markets. So what are we doing about that well not only are we seeing a resumption of activity in <unk>, but we have about five years ago has seen a structural shift in the energy market.
We recognize that <unk> being a global benchmark needed to be explicitly connected to the export community. So back in 2018, we built a suite of products with all our crude grades contracts that are basis contracts that traded primarily in Houston, and Permian and the Midland contract as a basis for our WTO contracts. So customers that are involved in.
Either domestic or more in play the export market are increasing their activity in those grades contracts. The reason I mentioned that is because we just we're just sitting below we just had a recent record open interest in those contracts of 490000 contracts open again, those trade as a basis to our WTO contract. So at both reinforces W. Ti.
And explicitly connects WBI to the global export market.
And individual day volume traded record on the eighth of February at 57000 contracts and the last point that I'd make on that is the significant participation is coming from commercial and physical players, but last point that I think we'd want to be remiss in not speaking to is the Henry hub franchise similar story, there with LNG facilities.
Coming online in the U S and the success that we're seeing in the low priced gas developed here in the U S. Our Henry hub franchise actually saw an increase on the future side in market share backup of a back up above 80% in a competitive market and we're seeing that serve as the primary basis point for trading and the pricing of LNG cargos, leaving the U S and increasingly.
<unk>, replacing lost Russian gas to Europe , and Asia. So we think the volume trends are solid Terry mentioned, a little bit earlier in answering a separate question.
Our volumes in the commodity side generally are up in the second quarter, and we're seeing energy followed that trend as well with the energy volumes. So far month to date Q2 in April up 3% really led by Henry hub. So a lot to like in whats going on happy to take more of those questions offline. There is a lot of detail there, but we like the global basis position, we have in both the natural gas.
And crude oil market.
Thank you.
Thank you rich thanks Derek.
And our next question is also a follow up from Alex Kramm with UBS. Please go ahead.
Yeah, Hey, Thanks again, guys just wanted to squeeze in a couple of follow ups on the sulfur LIBOR LIBOR transition.
One I know this was a huge lift for both of you guys. But then also the industry. So a lot of resources went into that so now that that's basically behind US just wondering what's next I guess when it comes to the sulfur I mean is it.
Do you think sulfur is being used like LIBOR in the past what's different there's still a lot of education that you maybe need to do to fully educate about household for is different or do you think that's all done I guess the question is you know, Kansas, So for Florida, even more and are in the future. Then secondly, just a quick one.
The OTC transition went on Friday, I think huge clearing volumes that we observed.
You actually were charging for that maybe you can just clarify because just wondering if we need to expect a huge OTC revenue number in the second quarter, maybe you can compare it to maybe what we saw in the first quarter.
In terms of run rates. So we're not too surprised though it seems like it may have been a good revenue day for you.
Yes, Alex so really good questions really appreciate your pointing those out so two questions there.
In terms of answering the first one and so for replacing eurodollars or LIBOR.
It's very clear from the first quarter with silver futures and options, beating the all time best quarter in our 40 year history of Eurodollar futures and options and so for futures and options are being used just as intensively and just as extensively as eurodollar futures and options ever work. So that's a that's a very positive sign in.
To that in terms of the long term strategic positioning of the business.
The interest rates business is better positioned today than it ever has been before I would argue in its entire history and a part of the reason there is the global banking system has turned to CME terms. So for for lending there are now more than $3 seven trillion dollars worth of loans across the world and I think now.
Nearly 90 different countries.
Or based on C. N E terms, so far that are based on <unk>. So for futures, so $3 seven trillion worth of loans more than 2400 <unk>.
Individual institutions that have been licensed which Julie mentioned earlier gives us a huge opportunity relative to cross selling opportunities and to increase our penetration of folks like regional banks, where they have had to license our CME terms, so far and create that relationship with us through that so I think I think that that's been a very positive for us.
Especially again, you know everyone knows U S dollar LIBOR owned by ice benchmark administration.
And you know under U S law under the LIBOR Act and.
And recently selected by the FCA in the UK.
CME terms, so far is the safe harbor, so CME term software will be used by ice benchmark administration starting on July one.
In their U S dollar synthetic LIBOR in order to.
To manage tough legacy contracts. So we have replaced U S. Dollar LIBOR, that's a that's a huge opportunity for us and again strategically better positioned in terms of future growth.
Usually excited.
I'd always out and as you've heard me on many years on this call.
We redesigned when we launched Tso for futures and options, particularly we redesigned the way packaging bundles, it's a technical issue, but we redesigned our packaging bundles are quoted in the market and trade. It that's going to make it much easier for us to launch hopefully later this year options on silver box bundle.
Those options on silver packaging bundles, you have heard me say this before and so many times, we love to have listed cleared standardized contracts at a lower total cost and the OTC equivalent well options on packaging bundles are gonna be listed cleared standardized lower total cost alternative to the swaption market. The swaption market isn't cleared so I'm.
Massively excited about that opportunity for the sofa business that we didn't have with your dollars because your dollars Werent originally designed with that in mind, when we designed the silver futures and options.
We had that in mind from day. One in addition to that we're very excited about Esther our ester futures are the most liquid European short term risk free rate contract in the world.
And we're very excited about our TBA futures and other features that we've launched so the pipeline that we have in front of US for further development is very strong and I would say, it's as strong as it's ever been so just to put a.
Finishing up on sean's points, and I would never try to.
Because go ahead, sorry, I OTC conversion piece I did Miss that question sorry. So we did charge you are correct, we did charge for that conversion.
And it was a much lower charge than we normally charge and I think we posted $10. So it was $10 per swap that is published fee. So yes, we did charge for that event.
But you know Alex you were right to point out about the conversion into our futures market and the growth thereof, but as you just heard from Sean We believe that this is obviously an ongoing marathon and we will continue to build on to this franchise.
We are excited for the future and the distraction of moving Euro dollars silver is over which allows us to do the other things that John referenced that's the exciting part from my standpoint, where I look at this so the growth is very exciting perspective going forward.
Thank you for your time.
Thanks again.
Thank you.
And it appears we have no further questions at this time I'll turn the call back to management for closing remarks.
I want to thank all of you for participating in today's call and I, especially want to thank my entire team at CME group the global employee base all throughout the world has been able to deliver the results that we were able to present to you today and I think it's massively important to continue.
Drive opportunities and efficiencies to your customers because as we do that we will drive value to our shareholders. That's the equation. We live by we thank you all very much I want to thank again my entire team. Thank you.
And that does conclude the conference call for today, we thank you all for your participation and kindly ask that you. Please disconnect your lines have a great day everyone.
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