Q2 2023 CME Group Inc Earnings Call
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Greetings and welcome to the CME Group second quarter 2023 earnings Conference call. During this presentation participants are in a listen only mode.
Afterwards, we will conduct a question and answer session at that time, if you have a question, but the one oh by the four on your telephone.
Is that any time during this call since you need to reach an operator, but Josh yeah.
It's my pleasure to turn the conference over to Adam minute. Please go ahead.
Good morning, I hope, you're all doing well today, we will be discussing CME group's second quarter 2023 financial results.
Start with the Safe Harbor language, 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 statements are not guarantees of future performance. They involve risks uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements.
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.
As Adam said, we released our executive commentary earlier today, which provides details on the second quarter of 2023, I will 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 as.
We mentioned last quarter or 2023 is setting up to be an extremely favorable backdrop for risk management. The continued geopolitical uncertainty and the increasing cost of capital for businesses.
Just a couple of other things.
Have helped us deliver our financial results for the quarter.
The benefit of CME group's diverse product portfolio spanning six asset classes was on display adv across our commodities asset classes increased 20% with 34% growth in agricultural products, 27% growth in metals and 9% in energy interest rates average daily.
AUM of 11 3 million was up 6% for the quarter and is up 11% compared with the first half of 2022.
Despite a substantial decline in equity market volatility our equity class deliberate average daily volume of $6 2 million contracts during Q2.
Our non U S. A D V was $6 3 million contracts for the quarter, including double digit.
Year over year growth in eggs metals and energy.
<unk> again played a critical role in Q2 was ADB growth of 20% to $4 7 million contracts, including the highest quarterly agricultural options Adv on a record up 32% from Q2 last year.
Our product innovation in this area has driven strong growth with new participants and more product choice to more precisely match risk as clients continue to look for ways to protect their portfolios in these uncertain times as it relates to our rates market expectations of short term rate changes up or down.
And the divergent economic data continued to drive risk management as we saw with the recent resolution of the debt ceiling and the Treasury Bill issuance increased dramatically over time, we expect a more coupon issuance, we expect that more coupon issuance and ongoing debt financing will contribute to greater hedging needs for years to come.
On the commodity side exports are increasing the demand for risk management, using our benchmark agriculture and energy products.
With this favorable backdrop, we will continue to focus on opportunities to accelerate growth, including our recent announcement with D. T cc to increase cross margin opportunities for the Treasury markets.
Additionally, our ongoing focus on product innovation and data services continues to enhance trading opportunities for our clients.
We believe the strong underlying environment combined with our strategic execution across growth initiatives positions us for accelerated growth in coming years with that I'll turn the call over to Lynn for the second quarter financial results.
Thanks Terry.
During the quarter CME group generated $1 $4 billion in revenue up about 10% compared with a strong second quarter last year.
Clearing and transaction fees grew over 9% while market data revenue increased 8% versus Q2 2002.
Expenses on an adjusted basis were $452 million for the quarter and flat versus the first quarter at $374 million excluding license.
This quarter, our investment in the cloud migration was approximately $15 million.
Our adjusted operating margin for the quarter expanded to 66, 8% up over 250 basis points compared to the same period last year.
CME group had an adjusted effective tax rate of 23, 3%, which resulted in an adjusted net income of $836 million driving diluted earnings per share of $2 30.
Both up 17% from the second quarter last year.
In addition to our expanding margins the strength of our operating model was evident this quarter as we delivered an increase of approximately $120 million in both revenue and adjusted net income compared to last year.
Capital expenditures were approximately $22 million as CME group pay dividends during the quarter of $400 million.
Our ending cash balance was approximately $2 billion.
As you can see with the current results the entire team at CME group is focused on growing the business.
We have delivered double digit adjusted earnings growth in each of the last eight quarters.
Although it is challenging to predict volumes or market conditions over the short term when you look at the last five seven or 10 year period, we have grown our earnings by a compound annual growth rate of 10% to 12% per year. Despite multiple periods of zero interest rate policy and the impacts of the pandemic on the global economy.
As Terry mentioned, we're in a favorable environment for risk management, and we're taking a number of actions designed to accelerate our growth going forward through customer expansion, new product and service innovation and enhancing capital efficiency.
Given this our goal as a management team is to deliver growth in the coming decade above the historical averages.
Ill turn the call back to you. Thank you and we are very pleased with the continued strong financial performance of the company before I open the call for questions I'd like to ask Tim a court and Derek salmon to comment briefly on the recent trends that we're seeing in short dated options products and I'll go to temper as Tim Thanks Terry.
We are pleased with the performance of our equity options on futures, which year to date grew $1 3 million contracts per day short dated options, including zero days to expiry or zero DTE options remained a strong driver of our multi year growth.
Volume in our same day expiring options is up 33% from last year and up 220% since 2021, and now make up 27% of our equity options volume.
It is important to also note we are seeing volume and open interest growing across the entire maturity curve year to date equity options are up 6% compared to a record year in 2022 with particular strength in NASDAQ options in Russell 2000 options, which are both up double digits.
This strong growth story further demonstrates the value customers continued to derived from trading products and the most important equity indices that CME group.
And while short dated options have been largely an equity story to date, we're beginning to see expansion to other parts of the portfolio, which Derek will speak to you now.
Thanks, Tim as we've discussed in recent quarters options have become a larger part of our global customers risk management and trading strategies year to date average daily volume in our options franchise across all asset classes is up 26% driven by interest rates metals and equities and our non U S options business is up 33% through June .
Within this larger growth story, we've seen growing demand for weekly options explorations across all asset classes with weekly options volume up 21% year to date and growing to 26% of total options trading.
In addition to equities commodities traders have similarly, embrace shorter dated explorations, which allow our global customers to hedge specific event risks such as crop reports and OPEC meetings agricultural weekly options were up 168% in the second quarter, which contributed to a record quarter for agricultural products overall and.
In energy, our WTO weekly options grew 126% versus second quarter last year, while our gold weekly options were up 33% year over year.
The strength of our options franchise allows CME group to uniquely deliver significant capital and operational efficiencies and meets our customers needs for short dated options to help them, most effectively manage risk across their entire portfolio.
And with that we can now open the call for questions.
Thank you.
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One moment please for the first question.
Our first question comes from the line of Benjamin <unk> with Barclays. Please go ahead Sir.
Hi, there. Thanks, so much for taking the question.
I wanted to go back to a comment that you made land in your prepared remarks just about.
Sort of positioning the business to kind of grow faster than the historical average over the next decade, if you could maybe unpack that a little bit what are sort of like the key elements that you see is it sort of a global increase and just need to manage risk is it more customers is it sort of increasing RPC more more volatility how do you kind of think about what that looks like over the next decade as you indicated.
Sure I'll start.
Hey, good number of my colleagues will want to jump in here I think the growth story is one that we've been talking about for a while at a number of the levers that we look at if that new customer expansion if that.
International growth new product innovation has been certainly a big focus.
Looking at the OTC alternative products as well as looking at capital efficiency is so I don't know if Julie if you want to comment on a few of those initiatives that are underway.
Certainly the cross margin initiative is one that our clients are quite excited about and one that we have talked about for a number of years delivering that is going to be an important thing capital efficiencies continues to be at the top of their list and very important thing in order to deploy more capital and do more trading at CME.
I think the macroeconomic environment is quite positive across a number of our asset classes and feedback from our clients.
Is that they are using our markets to hedge those growing risks.
As you know as well as.
<unk> seen that increase treasury issuance on the horizon, that's going to mean more hedging from broker dealers as well.
Buy side again, I think across the segments.
We're sensing quite a bit of positivity and.
As we continue to rollout more products.
The options that Derek and Tim talked about earlier.
Another highlight that we're giving our clients a lot of different instruments to be able to express.
Therefore, it expectations about the marketplace and we feel we're very well positioned from our team being able to support them globally.
And that is certainly part of the international growth that we have commented on and believe it still fits us quite well for the future.
We also feel real good about our data services business.
Delivering the 8% growth.
And the number of new products services and analytics that the team is working hard to deliver.
In some cases things that we had not previously.
<unk> out to our customer based on our data. So all of those things give us a positive outlook for the future.
Thanks, Julien Thanks, Lynn Ben I, hopefully that gave you some color on what we're thinking here at the exchange.
Yeah very helpful. Thanks, guys.
Okay. Thank you.
Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Hi, Thanks, Good morning, I guess, a little bit of a follow up on that just you've had good volumes in the first half of the year, but the investor comments and concerns continues around it continues to be about sustainability.
Sustainability of that and potentially the worst or I'm, sorry, the best being behind you. So as you think about <unk>.
All of the growth opportunities you see and you highlighted already maybe pick the one or two that you could.
Thank you that you would highlight here in the short term and then maybe expand a bit upon the DTC partnership and what we should think about in terms of how that gets rolled out and maybe the timing and the potential implications of that agreement.
So Dan. Thank you for your question you've got a couple.
Questions in.
In there so the DTC, we did put out the release with <unk> just a couple of weeks back and we're hoping we're waiting on regulatory approval, which we are expecting and hopefully we will have that implemented going into the first quarter of 2024.
We feel fairly confident about that now so otherwise we wouldn't put out the release. So we are looking at that and again I think if you recall going back many quarters couple of years back when John until I gave you some figures and about what he expected as far as the efficiencies of what that agreement could mean, once we acquired <unk>, which we thought we'd be.
Somewhere today around 20% and we thought that we could be 70% plus we still feel very confident that that is going to be the case once it gets fully implemented and put forward. So that's the DTC question. The other question within a couple of drivers for the business. I think is what you asked on the out years and I'll ask Tim noted a couple of comments as it relates to his business.
And Derek as well sure. Thanks Terry.
Larry mentioned in the opening remarks, there certainly are a continued period of uncertainty in front of us, which will provide a continued tailwind for CME as we continued to offer risk management solutions to our clients.
Drilling down a little bit if we think about some of the various asset classes. If we look at the rates complex, where we successfully completed the transition from LIBOR to sofa, that's not the end of the journey, it's really the beginning of what's in front of us if the Julie's comments. If you think about coupling that with the macroeconomic backdrop on a tightening in the resolution of the debt ceiling.
We're only in the early days of seeing some of those drivers factor into their risk management needs of our clients. What I mean by that is if we look at the recent treasury issuance. Most of the analysts were expecting one two trillion to be issued through now through June and year end most of that issuance is going to tee builds at present instead of coupons, we look at the product offering.
CME at present that is not something that we currently offer with respect to the risk management, we're accessing that he built market. So as that issuance moves from T. Bill two bonds there'll be.
Buttressing, our treasury complex, both within our futures and options as well as broker Tech I think then when you also look at the uncertainty in the rates market with the <unk> <unk> meeting today is over 99% chance of another 25 basis point increase but if you look further out that are expected to be somewhat range bound for the rest of the year with possibly one more time.
Five basis point increase in 2023, but then youre seeing the fed watchful at CME predict a 51% chance of a reduction before March of 2024, so sort of this consensus view that rates go up stay the same or go down is going to be a tremendous backdrop for our clients need to manage that uncertainty and have all the product to do so at CME.
The various asset classes across futures options and swaps and the cash Mark.
Let me make a couple of comments to that because I think it's an important question that you asked and it's really tough for us to predict the future, but as you recall at the beginning of 2022 I said it was going to be in a very exciting year, because a lot of things are setting up in favor of risk management. We think this is exactly the environment that we've been talking about for several years that we see going out for several more.
Come so that's why we're really excited about some of these out years some of the things that Tim just referenced risk management cannot be neglected for one moment for any business that we have multiple examples of failure, whether it's in small bank failures and others that continue to not manage risk are there going to be we think potentially have to manage that risk that they're going to stay in business as a whole host of factors that are coming through.
Fruition that we think are a tailwind for CME group I'm going to let Derek make a few comments on his asset classes. So I think this is an important question not only that you're asking but for all the analysts and investors to listen to Derek.
Derek Yes, I think that we have.
<unk> already heard from from Terry on the options and commodities growth just a couple of data points that I think underscore the breadth and the scale of the options growth.
Not only is our non U S options growing faster than our U S options options are growing faster than the franchise overall, but also if you look at the first half year volumes every single asset class.
Our client segment with the exception of banks is up this business up 24% year to date and what's most important is our buy side client volume and options is up 38% year to date. So it speaks to the breadth and the scale and I think the attractiveness of our option solutions across the entire customer range. So this is not led by one asset class not led by one class.
<unk> segment, so it's really grown in scale across a lot of client segments and then on the on the commodity side you hear Teri talk a lot about the benchmark status of our products, we have built long and hard into expanding our portfolio of products. If you look at what we've done in our energy franchise, but I don't have the crews grades contracts to both deferred.
But also expand the.
The.
Our success and the validity of our WTO market with that crude's guys contracts. We set an all time record of open interest in over 500000 contracts open interest in those products. So as the world evolves. This has been a multiyear story of expansion of our benchmarks, serving our clients as the world globalized in some cases the world fragments, we have <unk>.
For each of those scenarios. So that's what we do we saw client need and we fill in parts of their portfolio that they need risk management and we become their solution provider and as we said, Dan we can't predict volumes, but as I've said in my prepared remarks earlier when youre looking at the largest asset class in the U S equity markets and equity markets around the world and basically.
Zero Vol environment, right now and we still traded at $6 2 million contracts a day I think that goes to show you what can happen even when there is no viable when people say where are the future of items that I think we're just kind of giving you. An example, where we see that even in a low vol situations.
Great. That's helpful. Thank you very much thanks, Dan.
Thank you.
Coming up next we have a question from the line of Kyle Voigt with <unk>.
B W. Please proceed with your question.
Hi, good morning.
Maybe a question for FERC Terry since early last year, you sounded more open to executing on M&A, if the right opportunity presented itself.
Given M&A announcements were seeing from some of your peers domestically and internationally can you just provide an update on the M&A environment and given that you have not executed or announced any deals are you not seeing the right opportunities in terms of checking the right boxes or has that been more price driven.
And then I'll.
So maybe a question for Lynn or Mercury Terry do you think in terms of.
The next 10 years as you mentioned kind of accelerating the growth should we think about M&A as being a larger driver.
Of accelerating that growth over the next 10 years versus what we saw over the last 10 years.
Okay great.
Great question, I think when Youre looking out several years into the future.
There's a lot of things that can happen in one of the things that I see happening shape CME and the future is the technology growth that we have with our Google transaction that will allow us to do certain things that maybe our competitors cant, but we don't need to do M&A in order to accomplish those.
Goals of growth going forward. So I think we're in a very strong position from that standpoint as far as M&A on what my competitors are doing I don't like to comment on what they're doing.
Not in the room is thinking talking to them about what strategic analysis. They did why theyre doing those type of transactions as I have said, we will only do things that we think are strategically benefit to our.
Investors in.
Into our clients.
And again right now we are focused on the growth of this company through many different avenues and if in fact, there was a transaction I am still open to it but it's not going to be out from left field I assure you that's something that we've been very focused on and I'm not saying my competitors are they did they are just doing different things. So we have a strong franchise we were.
To continue to build on that Tim made reference to the early innings in risk management and some of these products. We truly believe that in the distribution of our products and technology. That's in the market data that jewelry is working on what we're doing with Google. We think is really exciting going forward. So we don't necessarily need to do M&A, but we're not going to shy away from a different fact, we see it as a benefit to our investors.
And then if you want to comment further.
I think Jerry covered it well, we're looking at the organic growth and.
There were opportunities out there its certainly something we look at but we've been very disciplined in our approach to M&A as you've seen over the years and Kyle I will make one more reference and I think I've said this on our prior call. We are in a very strong capital position. If in fact, there was an M&A transaction to come our way where some of our so called peers as you referenced they are getting heavily levered right now.
And when assets get shop, they're going to get chopped that people that can afford to pay for them no matter. What they are it does mean that we're going to acquire them, but we're in a strong position to look at a lot of things strategically that may or may not benefit our business, we will make the decisions based on that.
Understood. Thank you.
Thank you.
Thank you. Our next question comes from the line of Simon clinch with Atlantic Equities. Please proceed with your question.
Hi.
Thanks for taking my question.
We could just run.
Back to what Lynn Lynn what you were talking about in terms of the.
I guess, the expanding product opportunities in the pipeline for market data with me with Judy was talking about this but could you expand on sort of I guess, how influenced that has been accelerated that has beaten by the Google partnership or if that is yet to come.
And perhaps give us a flavor of the I guess the pace of this innovation over the next several years.
So Neil or Julie you want to touch on that between the market data then the Google partnership.
Ill kick off Teri <unk>.
Julie speak to the commercial side.
In terms of data platform, we have finally built it and its available at about 24 petabytes of data.
We have developed a set of services.
That that we are working on releasing to our volumes.
I will let Julie speak a little bit about the commercial opportunity in that area.
Yes, I mean, why don't I just start for a minute just talking about.
The data services performance and then.
Now quickly go into some of the product build out that we've been working on with Google.
As I mentioned earlier.
This quarter, we're up 8% versus where we were a year ago and that is driven from high demand from our professional user bases as well as our retail clients.
And we're seeing a steady increase in the number of those professional traders that are accessing our real time exchange content and really seeing growth across all of the fiber segment.
Yes.
In Q2.
We did not see as many of those one time true up as we saw in the first quarter. So we definitely.
Still had positive growth, but if you remember back to Q1 Lynn had mentioned some of those one time payment. So those can come from everything from audits for ups and derived data on at ease.
Even through upstream realtime subscribers from accrual. So just wanted to call that out as well we've continued to say those are sporadic revenue.
But it's worth calling that out this quarter.
And again, we're feeling quite positive about.
We're the <unk> as well as the new products that we've been able to introduce ads.
So Neil pointed out and for us being able to really get our data into global cloud at the magnitude that we're sitting at now has allowed us to accelerate the development of new products for our data business and including new analytic products as well. So we've been highly focused on how we're going to enhance.
The business end and that is through making our data more available through API.
Increasing the flexibility in how we can package our data how we distribute our data how we are going to be able to price. Our data. All of this is just much better enabled once.
This is assessable through the cloud as well as we believe making it much more easy for clients that don't access CME data to date being able to use these new services.
The computation that you can do is just our enhanced from what we're doing in an on prem environment, and so that's allowing us to create as well as some new compelling trade execution analytics.
We've been able to put that into production.
This quarter and we'll be sharing that with our clients shortly and so this is really us being able to leverage our own proprietary data and.
And giving our clients.
This benchmarking activity and allowing them to really take action on that data and providing them with insight.
And all of this just leads into how are we helping our clients better manage their rent. So we're also looking at some new opportunities.
On the clearing and the risk side. So it will be seen more of that rollout and it's just the speed and efficiency, which with the cloud puts behind us.
It is allowing that new product production that we otherwise had not seen specifically within the database.
Hope that helps thanks, Julie Diamond hopefully that gave you some color on <unk>, yes. Thank you very much.
Thank you.
Thank you.
Next question comes from the line of Alex Kramm with UBS. Please proceed with your question.
Yes, Hey, good morning, everyone.
Thanks for the proactive comments on some of the equity franchises DTE.
There's clearly some some investors are comparing your trends versus some of your competitors out there I guess the other thing that stands out when I look at that franchise is that the micro percentage has come really down a lot I don't want to just simplify that as saying retail is off but just wondering if you could comment on what's what's going on there do you see.
Those volumes going elsewhere or is this when you talk to maybe your retail brokerage.
Partners is that just the drying up of reach activity post Covid and then related to that as you talk about the growth acceleration over the next.
Decade, or so I mean is retail is still a component of that or was that just an interesting story opportunity over the last couple of years, but now really its about.
Much much bigger and other things again.
Thank you appreciate your question I'm going to let there's a lot of people kind of chomping at the bit to take that question, but I'll, let Tim start and then I'm going to join in the rest of the team go ahead.
Great. Thanks, Alex Thanks for the question when we look at the micro E mini complex at CME, certainly we've seen some mean reversion in volume, which is not surprising giving as Terry mentioned in his comments the volatility coming inbound from the equity markets as well as upward price trends in all the major indices.
When those things coupled together it tends to be a less attractive trade to the more active individual client that we see that prefers the micro over some other products available not only in <unk>, but in the ecosystem more broadly.
It's important to note. This is micro volumes golfing coming off of a phenomenal record 2022, if we look at the micro S&P 500, as an example.
Q2 volume that we've seen this quarter while down is.
Bill on par with what we saw in 2020 in 2021 and it actually is higher than that and the same holds true for the micro NASDAQ. So it's a tough relative comp, but it is certainly a very strong product with respect to its risk management and trading needs that it provides the other thing that's interesting to note is the micro launched in 2019.
Now a few years old is really starting to mature as a product and what I mean by that is even though some of the volumes have come down from a revenue perspective. It is actually flat to last year or slightly up through H, one and Thats. A result of two things one the pricing actions, we've taken with respect to the micro E Minis, which continues to be at a premium.
Versus the other risk adjusted regular E minis, but the other is the member mix. So even in a lower volume environment, we're seeing larger non member proportionality of that customer mix, which has increased the RPC about tencent since this time last year for micro E mini.
It is something that is important to remind people love is the revenue performance of micro E. Minis is different than the volume performance through each one of 2023 and with respect to maturation and the other point is look at the open interest of micro E. Minis. If we look at the top 10 open interest days for the micro E Mini complex at CME. All 10 are in June of <unk>.
<unk> thousand 23 with single date open interest records in several of the micro E. Mini contract. This is a statement that the micro E. Mini is becoming a risk management tool along started trading tool, where more and more clients are holding them versus just intra day trading which is a very positive development for the overall health of the market the last <unk>.
That I'll make on this is we can't look at micro E. Minis in isolation. They go hand in hand with their older sibling. The E mini contract and when you look at the combined performance and the resilience of the E. Mini futures complex at CME for equity indices remains very strong towards most analogous product choice and that is of the Etfs and what I mean by that if we look at the <unk>.
We out trade the top three S&P Etfs by a factor of 10, 7% to one that for Q2 of 2023 that is up from a factor of 941 year ago. In Q2 of 2022 same thing for the NASDAQ This quarter, we out traded the Etfs and our combined futures nine.
7% to one versus seven 3% in 2022 and somebody to the Dow this quarter, we outright the Etfs $23 three times that of $16 two times last year. Despite the slowing growth in micro E. Minis off of a record year still a very strong equity futures offering here at CME.
Thanks, Tim as Tim pointed out is certainly our equity portion of our retail business is the majority of that but with equity vol hit.
Hitting two year lows, we would expect there to be some softness in the volume. However, our overall retail business remains extremely strong we had a record setting year last year and we are.
Looking at just revenue being down slightly this year, which is very very strong performance. We saw positive growth in both Europe , greater landmass Lat am and also China.
In the second quarter and one of the real parameters.
We also mentioned on this call and for US as a key sign of the health of this marketplace for retail participation is the total number of retail traders, which was up 7% in Q2 over Q2 of 2022 and.
And also just the number of new traders, so our firm's ability and <unk> ability to continue to attract new people to CME markets that was also up 4% in Q2 of 2023. So I think from our signs we certainly see that the equity vol had some impact on things, but the fact that we have.
A diverse asset class, we saw increased activity in some of the other asset classes fire retail.
And here, we are we're still very well positioned for future growth quarters.
To add a couple of data points to what Julie said, specifically when you look at retail in our metals complex. For example, retail volumes year to date are up 21% and as you know metals as our highest rate per contract business at $1 50.
So options growth has benefited from retail participation of 8%. This year, so the benefit of being able to walk into a customer any customer or distribution partner in offering every major benchmark liquidity product to that means that when sector rotation happens, we're going to be the beneficiary of that so we see strength in certain asset classes when they start to rotate whether because you have got normalization.
The volatility of our cost of capital, we're going to benefit from that and we see that that's the benefit of the story and the growth behind the franchise. So Alex you're very few comments and I think hopefully you find the most salient.
One of the things that we talk about retail and we always have its an ebb and flow situation for a lot of people are retail is described a little bit different is more professional type participants as Ms. Lincoln there was pointing out so.
When you talk about Covid and you talk about other factors, yes that was in there.
But our retail is classified is different than the average person trading on maybe a robinhood platform or something of that nature, and what Tim had to say about.
How the competitors are performing against CMA, you can clearly see that our volume share is not only not decreasing but increasing against the local like our competitive type products. So hopefully those questions.
<unk> been answered properly for you.
Yes, that's a great color. Thank you very much.
Thanks, Alex.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead Sir.
Great. Thanks, Good morning folks thanks for taking my question.
Maybe if I can just go back to the options.
<unk>, obviously, that's been improving nicely.
I'm looking at.
Options as a percentage of total Adv was in the mid to high teens over the last couple of years now you've sort of vector at above 20%. So just wanted to sort of.
To understand your confidence of that type of trend improving over the next year.
And.
And then maybe just talk about the RPC dynamics of the options business versus the futures in terms of whether you think that's potentially accretive to two RPC and then you also mentioned on page three of the.
Quarterly earnings commentary.
About the direct front end platform.
Being stimuli trading of electronic options is that just in the energy complex or is that set across the business.
Thanks, Bryan Derek and Tim you want to start and then lastly, yes in reverse order I'll actually start with your last question, Brian . So yes, you've heard US talk on previous calls about CME direct that is our proprietary front end that we provide to our customers that gives them all the functionality all the analytics all the capabilities and all the connectivity including API.
First to our markets for both futures and options that really started as a mechanism to make sure that we were able to provide the full breadth of capabilities and services to our global customer base seamlessly connecting to everything that we have to offer that has now extended itself. So this is a cross asset class not just limited to energy and the growth that we've seen there has.
Been substantial it's actually rapidly evolved to become the single largest <unk> provider or link into our options business with the highest rates of penetration on the interest rate side. So it's an integral part to our growth story.
The options analytics space, we've developed a whole suite of capabilities, whether it's pre trade analytics or post trade a tool to help customers will look at that positions.
Strategies, they want to implement that new capability developed over the last four to five years and it's just as we continue to expand the tools and capabilities. It just brings more customers that are willing enabled trade options and creates a seamless experience one single front end into all of our asset classes with a full suite of functionality analytical tools we.
We're still in the early innings of developing those capabilities in partnership with quick strike and we're very happy with the growth that we're seeing there that's actually becoming a critical part of our future as delivery as well as all of our blocks are reported through there. The last piece I'd note on the front end there is that we're seeing the largest uptake in growth there is from some of our.
Buy side participants and brokers as well. So this is a platform that brings customers to our market provides a full suite of services and introduces them to everything we have to offer the last piece is the when.
When you referenced the overall percent of options as a percentage of total volume. There is two parts of that not only are we seeing options continued to outpace futures, which is positive for the franchise in that more options business brings more embedded futures hedging associated with it but as I mentioned at the top of the call with our options business year to date.
Up about 24% are non U S options business is growing even faster up 33% for the first full half year. So when we think about growth levers and opportunities the way our sales force is out there specifically educating clients on options use how to access those tools at CME group and the growth that we're seeing we think we've got a still a good deal of.
Asian, yet ahead of us when you look at the footprint that we have in options in Europe , and Asia versus the U S.
<unk> and the story so let me just accentuate a couple of points here, Brian because I think it's really important we are the largest futures exchange in the world. Our futures franchise is massive one of the reasons. It is what it is is because of the growth of options, but the real growth is in the futures for the out years, which all of our options then business continues to be here or better.
That only bolsters, our futures and hedging business going forward.
To me a real story for the futures franchise with CME group. So it's not just an option story like some people are talking about it there are different.
Affirms that they represent we are a futures exchange with options and the options grow the futures as well and next point cannot be missed I don't want you to think we're the only growing options and futures or not so that's a very important point that we have to go forward.
Yes.
That's super helpful. Just the RPC dynamics against that the options versus the futures.
Got it again.
Dr Barbecue dynamic.
That's about it.
Yes, yes.
Total RPC this quarter across our options complex was 66, 6% slightly down from what we saw overall it does depend on asset class, how that will compare and what is trading in terms of those options.
That's great color. Thank you so much thanks.
Thanks, Brian .
Thank you and next we have a question from Craig Siegenthaler with Bank of America. Please go ahead Sir.
Hey, good morning, everyone. Our question is on pricing.
Given your success with the larger than usual price sites. Early this year can we start to see larger price hikes again next year when the <unk> 24, and then again in 125.
Eric Greg It's Terry Duffy, Let me, let me make a comment on that price hikes are part of the business, but that's not the strategy and how we grow the business. So we look everybody's got costs that they have are incurring and we're no different but thats not our strategy to grow the revenue of the company our strategy is to grow it a bit.
That growth what we charge. So again, we will continue to look at that.
A month by month basis, and make decisions as we see fed, but we're not prepared to say right now what our pricing will or will not be in the next couple of years in the out years.
Just to add to that Craig as you know, we do a very bottoms up build on that that pricing strategy. This is not an approach where we have a target that we are looking to hit it really market by market product by product customer type and we will determine what we think is the right adjustment if any for that market. So it's something that we evaluate in that time period.
We don't look at a multi year pricing strategy. It really depends on the market environment. The health of the market and what we ultimately are trying never to do is impact volumes, because we want to see that velocity of trade moving through our system given the high level of incremental margin that we that we earn on that trading.
Thank you.
Thanks, Brian .
Thank you.
Our next question comes from the line of Owen Lau with Oppenheimer. Please proceed with your question.
Hey, good morning. Thank you for taking my questions. So I have a quick two part question. The first one is a follow up to the market data question. It was up year over year, but down sequentially. How much was the one time payment in the first quarter and then the second one it's about digital assets.
I think Jim you will launch bitcoin ratio future. Soon could you. Please give us give us an update on the digital as its trading and institutional participation in CMV and how quick a summary judgment from judge tourists onto <unk> potential to impact CMV. Thanks.
So thanks, Alan I'm going to ask Glenn to give you. The first one on the market data question and then Tim will touch on the digital assets.
Yes, so and in the first quarter, we saw about $4 million in one time audit fee and catch up payments.
We didn't.
In Q2 this quarter, we saw about half a million in audit fees. So that really explains that differential Q1 to Q2.
Okay.
Great. Thanks, when we look at crypto currency complex at CME Youre correct, we recently announced.
It is an innovative and interesting product and that is the big point ether ratio spread contract that will go live the weekend of July 2019.
Interesting words, the effectively the price of either divided by the price of corn and one contract that will trade alongside the other crypto currency products, including offsets for clearing at CME. When we look at the crypto complex EMEA remained strong our value proposition remains salience with our institutional client base. We've seen continued adoption of our <unk>.
<unk> in terms of both traders in the OTC space as well as futures traders as well as the growing importance of our contracts is the underlying some of the most popular etfs out there in this space, which we're continuing to grow both creating volume and open interest when we look at the volume that we're doing in the larger size of appointing either contract that is up about 6% versus.
This period <unk> through 2022 and on pace for another strong year in crypto CMA.
When we look at our product development.
We do stay currently in the Big point and ether Lane for tradable products, we do have a multitude of reference rates, but with regards to your question is about the ripple case, it's really not in our position to comment on that case.
Our mantra and the philosophy that we use we will continue to only deploy products as the regulated venue offering regulated product and we'll wait for further regulatory clarity from the SEC and the CPUC before we introduced additional products. Thanks, Tim. Thank you.
Thanks.
Thank you.
Our next question comes from the line of Ken Worthington with JP Morgan. Please go ahead.
Hi, good morning, and thanks for taking the question.
The FCC has a number of proposals for centralized clearing.
In the rates markets for treasuries and repo. So a couple of questions here I guess first Terry which of the major parts of the clearing proposals are most likely to make their way into the final rules.
Maybe second how do you think these rules could impact rate liquidity and volatility and ultimately.
Flow through CME rate activity, and then lastly to what extent is participating.
Secondly, and a clearing platform for treasuries and repo important or even a priority for CME.
Okay I can there's a lot to unpack there and a lot that I don't have the answers for because these proposals that you are referring to at the SEC.
The treasury market I know I think there's a lot to be done yet before they're finalized to a point, where we see how theyre going to be implemented.
As far as the trading on the repo, Tim if you want to comment on that but on the SEC proposals Ken.
I don't see anything in there that's a negative for CME for starters I want to make sure I said that if in fact it was to go through as proposed and I see it only as a net positive for CME.
So what that is I don't want to make predictions on what it could or could not be it reminds me a lot of and I don't want to put the same enel side, but during 2010 Dodd Frank when they said that swaps clearing was going to be worth a $1 billion to everybody that had a clearinghouse was a bit of a <unk>.
Mr. <unk> because that was made up by some government officials not us so I want to be careful on that.
Ken about how can we make any predictions, where it's going but I will say there I don't see any negatives in any of the proposals for CME as I've gone through them that stimulated covenant sure I think the one thing I would add is while we've continued to evaluate proposals and the various suggestions and regulatory reforms that may be discussed we're certainly looking to participate in those converse.
Patients with our clients and with the regulators to see what makes sense from a risk management in a very perspective for our customers.
As Terry said very hard to predict what the final rules may look like but I think broadly speaking when we look at the totality of the gravity of the interest rate complex CMEA, Ross futures and options gas market of broker Tech and OTC clearing we certainly are already in a position of strength the ability to unlock unlock capital efficiencies for our clients.
We were averaging about $7 5 billion of savings across our portfolio of margin in.
In the rates complex today, so anything that would increase the velocity or the benefits of central clearing is certainly will be something that we're looking to engage but it's important to note not only with our portfolio margin as Terry said earlier with Big Cross margining on the horizon with the expanded suite of products available to the client across sulfur the ultra 10 nodes filter 10 bonds.
Is that we're already providing a lot of a lot of capital savings to clients. Our these may be additive, but we'll have to wait and see how the final rule shakeout.
Thanks, Tim Thanks, Ken Great. Thank you.
Thank you.
And next we have a question from the line of Michael Cyprus with Morgan Stanley . Please proceed with your question.
Hey, good morning, Thanks for taking the question wanted to ask about capital management. If we look back over the past decade, you guys have returned a tremendous amount of capital through the dividend and primarily the special dividend a lot of that was during a zero rate backdrop, but with meaningfully higher rates today over 5% just curious how the rate backdrop is impacting.
In your calculus, and thought process around capital management and to what extent might you think about evolving shifting to policy and considering buybacks. Thank you.
Thanks, Mike I'll, let Larry comment then I will as well.
Yes, so as you know Michael we've had that policy in place with our variable dividend. Since 2012, we've returned over $21 $5 billion to shareholders in the form of dividends during that time, we do think a lot of our shareholders. Appreciate the transparency of that approach and the ability to track progress towards it.
As we move through the year.
We do like both the flexibility and that transparency that being said, we always do look at alternatives to make sure that the way. We're returning capital is the most attractive form or.
Investor base and to date, we have found that that dividend.
Dividend policy has been repaired.
And Michael just so you know I mean.
As far as share repurchases, we've talked about that we continue to talk about it in as lenders referenced we will do what we believe is in the best interest of the shareholders at that time. So we're not taking anything off the table, but right now our dividend policy has proven out to be the right one for now.
Great. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Patrick Mali with Piper Sandler. Please go ahead Sir.
Yes. Good morning, Thanks for taking my question.
So I wanted to go back to the expanded cross margining opportunities with the DTC Terry I know this is something that's been in the works for a little while now so just wondering what maybe caused us to come to fruition now and then.
Assuming you do receive regulatory approval and launch in the first quarter.
How quickly would you expect that to maybe ramp in terms of client utilization. Thanks.
Yeah, Thanks, Patrick and congratulations on your new role at the firm I will say a couple of things that the agreement with DTC has been in the works for a long time, so you're exactly right a little frustrating on Napa why now I think that when you look at where it was and we're only one part of the equate.
We need a DTC to be prepared to do this as well they had some other projects in the works they had to finish up and everything takes a little bit longer than you anticipate so we couldnt control their side of what they needed to do for this agreement.
We have now come to a finalization on this with them and we're like I said earlier, we're looking to have this as soon as it's approved hopefully being implemented by Q1 of next year and again extremely excited about what this could do for the marketplace because of what Tim and others have said, what we see out in the out years as far as.
Risk management goes and how necessary is going to be for all products. So if youre going to have that capital efficiencies amongst products is key in order to grow these businesses and make it more efficient for each and every client. So we do believe that this cross margining agreement will be extremely beneficial to the clients and make their capital more.
Which in return should benefit immensely.
I'll, let you comment more on the agreement.
Under what Patrick was risks, yes, thanks, Jerry So again, when we look at this announced that we're excited or one that we're finally able to bring this to market early next year, but it's also sort of when we look at the benefits to clients and we look at the immediate benefits was a near term benefit and certainly the expansion of the products are now available for the cross.
That agreement and like everything earlier include our silver futures the ultra 10 year U S. Treasury note futures the ultra Treasury bond futures, the FIC cleared treasury notes and bonds and repo transactions that have a time to maturity of greater than one year. We will also be eligible. So this is exciting in terms of trying to unlock those benefits and as we've said.
Previously on the earnings calls and certainly before we think our present clients are taking advantage of them, but typically more to the order of 20 or 30%. If you expect to get those all separate centers closer to 70% or slightly higher but this is the first step the part the important part of entering into these agreements is that we will continue to work with their clients.
Trying to avail, even more capital efficiencies. After this initial rollout. This is something that we're engaging with clients about alright, we look to further expand the program to allow clients to avail of these efficiencies. In addition to the commentary member proprietary account lots of things on the horizon.
To explore years down the road beyond just the initial rollout of early next year.
Thanks, Tim.
Thanks, Pat very helpful.
Yes. Thank you.
Thank you.
And we now have a question from the line of Chris Allen with Citi. Please go ahead Sir.
Yes. Good morning, everyone. I was wondering if you're an upbeat on the collateral balances both cash and noncash.
During the quarter.
<unk> related revenues generated during the quarter, where they currently stand for July .
Thanks, Chris Flynn.
Sure if we look at the quarter. The average balance for cash was $128 1 billion that was up from $109 6 billion last quarter.
For the non cash balances, we saw $109 4 billion on average up from $99 2 billion in the first quarter.
So we earned $107 million.
On the cash balances this quarter and just under $20 million on the noncash.
This quarter again that noncash amount rolls through the other revenue line.
If you look at year to year to day month to date, so far in July the balances in cash have come down.
Seeing about 109.
And cash on average so far in July .
And the non cash balances. So far this month are running at $127 9 billion.
Great. Thanks.
Thanks, Chris.
Thank you.
We now have a question from the line of.
Bonds with Rosenblatt Securities. Please go ahead.
Hey, Thanks, Good morning, So energy open interest is beginning to trend upward from other longer term decline can you talk a little bit about the overall health of the energy business. The drivers here structurally in the geopolitical environment is still impacting current trends in natural gas and oil.
Thank you Andrew Good question Derek.
I think we've seen a really nice return to normalized levels of volatility and therefore normalized levels.
Margin required to trade. This we saw some of that business shift out, particularly financial players step out of the energy business last year, we're seeing that business returned significant you pointed to the trend not just in the open interest but volumes as well when you look at the primary drivers there are some cyclical some structural the cyclicals, we're certainly put ourselves in a position to be the biggest Ben.
Fisheries of those when you look at particularly the strength of a globalizing natural gas franchise that is really globally centered around Henry hub.
Natural gas continues to be expert at record amounts out of the U S through the LNG facilities Thats at Max capacity right now Theyre more facilities coming on board over the next five years. So from a term perspective CME group's Henry hub franchise is the central pricing point for global natural gas when you look at growth across the client segments there were seeing.
Significant growth in actually new client acquisition is happened in the fastest in natural gas with our European customer base that Shouldnt surprise, given some of the challenges that Ukraine War has posed in terms of disruption to fuel supplies of both crude and natural gas. So when we look at that global growth is particularly strong in natural gas out of Europe , and we're seeing significant.
Growth in options there as well so similar structural story, that's taking place in crude oil as you know in June <unk> implemented a Midland WTS marker into the Brent basket and that is actually just further reinforce <unk> as the primary global benchmark setting the price of oil in terms of the outsize footprint <unk>.
The pricing of oil seen this shift and as I talked about on last call that over time <unk> would be that global physical benchmark of reference that position has only strengthened and we have taken significant work to build out as I mentioned before the Gulf coast crude grades contracts that connect specifically our physical.
Deliver wty contract out to the export markets as the U S is now exporting over 4 million barrels a day a record clip as well so those contracts themselves have over 500000 open interest that complements the growth of just under 2 million contracts open interest in WTS. So the structural shifts for both Henry hub, a market that we own 82% market.
<unk> and WTS market, we are 90% market share will continue to be central to not just the energy transition, but growth in the franchise overall across client segments.
Andrew Let me just.
Say, one more thing as you referenced and I talk about this a lot too as geopolitical I think geopolitical is got a factor in every single trade in every single asset class going forward I mean, the tensions around the world are just amazing when you look at not only with the what's going on between Ukraine, and Russia, and the rest of the world being involved in it the potential of what's going on between.
In China, and Taiwan, I mean, the tensions are so high all over the world that geopolitical has a factor on every one of these markets and risk management is critical to it. So I think youre spot on for raising the geopolitical risk, but it is not only associated LNG is across the board.
Thanks, Derrick Derrick.
Thanks, Andrew.
Thank you.
Our final question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Oh, Great man that my questions have been answered just one clarification.
Right heed or I'm, sorry, the rate earned on the cash collateral balances in the second quarter and the rate that youre paying out to the clients.
Yes, so the rate on the fed accounts remains at the 25 basis points to spend at that level for the last eight rate hike.
We are earning we earned in the second quarter about 34 basis points.
Up just slightly from what we had seen in Q1.
Okay great.
Great. Thank you.
Thanks, Brian .
Thank you.
Ill now turn the call back to the management.
Closing remarks. Please go ahead.
Let me. Thank all of you for participating in the call today. We appreciate your questions and the opportunity to answer them have a nice day and we look forward to speaking to you soon thank you.
Thank you.
That does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect. Your lines. Thank you once again have a great day.
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