Q3 2024 CME Group Inc Earnings Call
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Speaker Change: Welcome to the CME group third quarter 2024 earnings call at this time I would like to inform all participants that your lines have been placed on a listen only mode until the question and answer session of today's conference.
Speaker Change: I'd now like to turn the call over to Adam minute. Please go ahead.
Adam minute: Good morning, I hope, you're all doing well today, we released our executive commentary earlier. This morning, which provides extensive details on the third quarter 2020 for which we will be discussing on this call.
Adam minute: Start with the Safe Harbor language, and then I'll turn it over to Terry.
Speaker Change: 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.
Speaker Change: 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.
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.
Terry: Thanks, Adam and thank you all for joining us this morning, I'm going to make a few brief comments about the quarter and the overall environment.
Following that Lynne will provide an overview of our third quarter financial results. In addition to land we have other members of our management team present to answer questions. After the prepared remarks.
Terry: Our record breaking performance in the third quarter demonstrated the continued growing need for risk management globally.
Terry: Third quarter average daily volume up $28 3 million contracts was the highest quarterly Adv in CME group's history and increased 27% compare compared to the same period last year.
Terry: This strong growth was broad based we achieved year over year growth in both volume and open interest across every asset class for the second consecutive quarter in aggregate, our financial products volume grew by 28% and our commodity sector volumes grew by 20%.
Terry: This record volume was aided by the effectiveness of our volume tiers, including a 36% year over year growth.
Terry: And our interest rate complex to $14 9 million contracts a day with all time record volume levels for both sulfur futures and treasuries, we achieved this growth without lowering any fees or introducing any new incentive programs for these products.
Terry: The lower RPC was driven by increased trading volume and are focused on touring allowed our incremental earnings growth given the operating leverage in our model.
Terry: Our sulfur complex traded over $5 9 million contracts per day in the quarter and $6 9 million per day in September all while seeing the customer network broadened with large open interest holders, reaching a new record high in September as you know, we often hear the view that a rising fed rate environment is best.
Terry: Cme's interest rate volumes, however over the last year, there have been no fed rate hikes, and one rate cut and our interest rate complex grew 17% over the prior year, which had six rate hikes totaling 2.25%.
Terry: Opposing views of potential and actual fed rate changes combined with ongoing levels of issuance and deficit financing should continue to provide <unk> for interest rate trading beyond.
Certainty around the U S election, and geopolitical events around the world also contribute to a growing need for liquid and efficient markets to manage these risks and interest rates and across all of our asset classes.
Q3 was also a record quarter for our international business.
Terry: Our average daily volume reached eight 4 million contracts up 29% versus last year.
Terry: This was led by a record $6 2 million average daily volume for EMEA.
It was up 30% and $1 9 million contracts per day in APAC or up 28% a record international volume was driven by growth in all six asset classes in both EMEA and APAC were the highest volumes coming from interest rates and equity products. In addition to the impressive volume results, we delivered record financial.
Speaker Change: For the second consecutive quarter with that short summary, I will now turn the call over to Lynn to review these results in more detail.
Lynn: Thanks, Carrie and thank you all for joining us this morning.
Lynn: CME group set all time records for quarterly revenue net income and earnings per share in the second quarter. This year and immediately surpassed each of those records this quarter.
Lynn: Starting with the highest ever quarterly revenue at nearly $1 6 billion up 18% from the third quarter in 2023.
Lynn: Clearing and transaction fee revenue increased 20% on a record quarterly volume.
Lynn: Market data revenue of $178 million increased 6% from the same quarter last year and other revenue increased 29% to over $109 million.
Lynn: Our strong cost discipline led to adjusted expenses of 489 million for the quarter and $391 million excluding license fees.
Lynn: <unk> operating income of approximately $1 1 billion set a new quarterly record.
Lynn: Our adjusted operating margin of 69, 1% was up 260 basis points from 66, 5% in the same period last year.
Lynn: Tommy Group had an adjusted effective tax rate of 22, 3%.
Sir you talked about the strength of our international business, our strong growth coming from outside the U S. As a resulted in a lower effective tax rate. We expect this trend to continue in Q4, and we're lowering our tax rate guidance for the year to a range of $22, 5% to 23% as a result.
Lynn: Driven by the strong revenue growth and operating margin level, we delivered the highest quarterly adjusted net income and earnings per share in our history at $977 million and $2 68 per share respectively. Both up 19% from the third quarter last year.
Lynn: This represents an adjusted net income margin for the quarter of 61, 7%.
Lynn: Capital expenditures for the third quarter were approximately $30 million in cash at the end of the period was approximately $2 6 billion.
Lynn: Our continued product innovation, new customer acquisition and deep liquid markets across the six major asset classes has led to a consistent higher level of demand for our product.
Lynn: You may groups daily trading volume surpassed $25 million contract and 55% of the trading days in the first three quarters of 2024 versus 35% of the days in the same period of 2023.
Lynn: So each of the last six months, where monthly volume record, helping us deliver our best quarterly financial results in Q2, which were immediately surpassed by New records this quarter.
Lynn: We're very proud of the team for their efforts to provide our clients with the technology and products they need for risk management, while driving earnings growth for our shareholders.
Lynn: I would now like to open the call for your questions.
Lynn: Okay.
Speaker Change: Thank you at this time, if you would like to ask a question. Please ensure that your phone is unmerited press star one and record your name clearly when prompted.
Speaker Change: You would need to withdraw your request you May press star two again that is star one if you'd like to ask a question one moment for our first question.
Speaker Change: Our first question is from Dan Fannon with Jefferies. You May go ahead.
Dan Fannon: Hi, Thanks, good morning.
Dan Fannon: <unk> had a long standing capital return policy.
Dan Fannon: Terry you've given some thoughts around the M&A, but wanted to get your updated thoughts on both of those after you guys. You just highlighted record quarter after quarter and also evaluation that continues to compress versus peers. So curious about a buyback in the context of those two other things around the dividend policy as well as potential M&A.
Dan Fannon: Thanks, Dan I think I heard you correctly, you are little soft coming in but you asked about buybacks and potential M&A.
Speaker Change: Okay got it right exactly I think that's what you asked for it so on the capital return to shareholders.
Speaker Change: I have said that we will always be monitoring to see what is in the best interest of our shareholders at any given point in time, our dividend policy over the last several years as soon as the company extremely well.
Speaker Change: Zero rate environment.
Speaker Change: With the rates changing dramatically and other things happening with throughout the world. We always constantly monitor this and we will continue to do so again with my board at its upcoming meetings. It doesn't mean, we're doing anything with just continuing to monitor it as far as M&A activity goes Dan.
We've been very fortunate to put ourselves in a very strong position to be competitive around the globe with the transactions we've already done but at the same time, if there's something there that we think makes sense, we're not afraid to take a look at it but right now that's all I'll say a lot of M&A.
Speaker Change: Great and then just I guess as a follow up last quarter, you gave us updates around the efficiencies that you provided to your customers.
I think with both DTC as well as more broadly can you update us on the number of customers as well as the dollar amounts around that and ultimately just the conversations and how those are evolving given.
Speaker Change: The increased potential competitive backdrop, that's out there today.
Speaker Change: Yes, Dan Thats, great well I appreciate the question and I'm going to turn it over to Suzanne Spera, who will give you those that data.
Suzanne Spera: Thank you for the question.
Speaker Change: Terms of our portfolio Margining program that you mentioned, where we offer offsets between interest rate futures and options against interest rate swaps. We continued delivering average daily savings about of about $7 billion to clearing members through that program. Most of that is from U S dollar swap activity.
Speaker Change: And then the cross Margining program with stack, we continue increasing the number of participants in that program. We currently have 12 clearing members participating in that program and have achieved upwards of $1 billion in average daily savings for that program as well. So we are still focused on growing both of those programs and we do can.
Speaker Change: We're working with and engaging with the regulators to be able to expand that cross margining program to customers as well so our efficiencies Dan just to make sure. We're perfectly clear still averages between <unk> and portfolio margin close to $20 billion. A day. So I just want to make sure. They don't think thats changed one way or another.
Speaker Change: Understood. Thank you.
Thanks, Dan.
Thank you. Our next question is from Chris Allen with Citi. You May go ahead.
Yes. Good morning, everyone I wanted to ask about new customer acquisition, which you called out index for the first time.
Chris Allen: Any color just in terms of how much impact you are seeing in terms of volumes from new customer acquisition, and where are these new clients coming from.
Speaker Change: Thanks, guys I appreciate the question I'm going to turn it over to Mr. <unk> to give you some color on that but I think one of the things that I just want to highlight is really important is the numbers that came from outside of our U S. With the record volume, it's a big part of some of the new client acquisition that Julian and her team have been able to do globally, but Julia algorithm driven to you yeah. Thanks for the question Chris.
Julia: New client acquisition has certainly been really a core pillar of our commercial model and an area of investment for us over the last few years. We're excited that those efforts are really yielding strong results.
Julia: Kind of think about this in two different buckets, one is our retail client base and one is our institutional client base.
Julia: Our output outpacing our 2023 performance.
Julia: Over 3% and then new institutional client growth, we're seeing that up almost 40% this year versus our three year average, which is great. So I'd say, there's a couple of things behind that certainly we've done a lot to build out a new inside sales team and they are really a dedicated sale.
Julia: <unk> team that is focusing on prospecting lead qualification and growth around really our medium size and high potential accounts.
Julia: They are leveraging data theyre doing automation and this low touch sales model.
Julia: Really is helping us to drive greater efficiency and also scale in that outreach.
Julia: We have seen a lot of launch of new hedge funds and really the rise of commodity focused strategies.
Julia: <unk> are also helping create some significant opportunities across our client base.
Julia: CME direct continues to attract a record number of new option traders that was up 30% this quarter.
Julia: And so we see that all is really critical to the institutional model as well as a lot of the new products that I'm sure. We'll talk about on the call today, whether it's credit or TBA as those are really powerful opportunities for us to reach new clients and bring them into the CME ecosystem.
Julia: On the retail side.
Julia: Really what we're focused on less about Adv and more about really how many accounts, we're opening and how many new traders were bringing into CME through our retail channels in Q3, we welcomed over 176000, new traders through our retail channels.
Julia: Our year to date and 60000 in Q3 alone and so that's a 30% increase year over year.
Speaker Change: That is pretty consistent as you.
Speaker Change: Previous quarters, what you see in the data that we released this time is really kind of spread across regions, where we saw 53% of that growth coming from the U S.
And 16 within APAC and are 31% in EMEA.
Speaker Change: And so where we're really focus there is on bringing our new to futures brokers brokers into this ecosystem and also our existing partners and this is a critical part of how we are continuing to drive NCA in this space.
Speaker Change: Working with them on education, and marketing content, and so where our distribution partners are successful we have seen that success too and that's really what's bringing those new traders to CME.
Speaker Change: There are attracted by the products that we have and we expect that to continue in the year ahead.
Speaker Change: And just a quick follow up you noted that plus 500, we will surpass expectations.
Speaker Change: And we obviously robinhood just launched last week on futures trading. So when we think about Robin's account growth is there any way to frame out.
Speaker Change: How would you would expect penetration of I think it's a 23 million accounts they have right now.
Speaker Change: How that may translate into volumes.
Speaker Change: Yes, I mean, we were working with.
Speaker Change: All of those firms I'd say they have their own internal targets.
Speaker Change: The account openings and I think with all of this.
Speaker Change: Robin Hood and the one in the launch last week.
Speaker Change: We're going to open up access on still a measured basis right and some of these are.
Speaker Change: Making sure. They are testing these products out there working on the content. So I don't think we're going to see 23 million accounts trading futures immediately, but we really want to work with them to make sure right that the products that we're introducing to them and those clients are ready to be trading futures and so.
Speaker Change: <unk>.
Speaker Change: What we can see both with plus 500, and Weibo is that adoption rate has happened even faster than what those firms have predicted and so I'd say, they're very advanced in their customer journey in analytics, and so thats, all providing them as well as us information on how we can kind of support the active trader in their journey.
Speaker Change: So some may add something to that as one of the things. We have said historically since I took <unk> public one or two its very difficult to predict future volume. So when youre looking at new client acquisition, we know what their behavior may or may not be it's still really difficult to pinpoint what that can transition into but I do think when you look at the trajectory of our business over the last two.
Speaker Change: One eight plus years as being a public company you can see it's up into the right growing by customers and close to new large open interest holders that I referenced earlier in my comments overall, good factors for new client acquisitions, but again, we can't predict future volumes.
Speaker Change: Thanks.
Speaker Change: Thanks, guys.
Speaker Change: Thank you. Our next question is from Ben <unk> with Barclays. You May go ahead.
Speaker Change: Hi, good morning, and thanks for taking the question.
Speaker Change: I wanted to kind of follow up there I know, it's hard to predict new volumes, but.
Speaker Change: Just thinking about like what retail trading activity may look like can you just talk about the sort of P&L implications, presumably we would see.
Speaker Change: The lower rate per contract as people are trading more of like the minis and some of the smaller products, but how do you think about what we might sort of be able to expect there or what are the implications from like an RPC and volume perspective, again, I know, it's hard to predict the volumes themselves, but just how should we think about interpreting results as we start to see a bigger contribution from retail.
Speaker Change: So let me let me make a couple of commentary I guess that it is very difficult to predict and every constituency that we have here is completely different so when I talked earlier in my comments about the tiered pricing how that incremental volume drops to the bottom line is a good thing and that does take the RPC down a little bit with those higher tier.
Speaker Change: Or is that still a good thing for us because of the increased volume so when you're talking about retail in general you don't automatically have to assume it's going to be a lower rate per contract because we changed the pricing on some of our products as you may or may not recall, we didn't price them based off of a notional value and pricing them. So when we did the <unk>.
Are the micro or the many bitcoin contract, we didn't take the notional value and decided thats how the price should look we priced it on the constituency of the client base on what they're getting for their value added that they are receiving from CME group. So we look at pricing in many many different lenses and it doesn't have to be just that.
Speaker Change: Our retail client constituency or the size of the contract or the institutional or the size of the contract. So I think it's really important that we continue to strike that balance with our client base to build the business, but it is hard to say that it'll be a lower rate per contract. It's hard to say there'll be a higher rate per contract. So again I think it's it all depends on the constituency that we are attracting.
Speaker Change: And this new retail business I have said a million times over the last year or two I think this is going to become more and more blurred as we move forward with other institutional type trading and it's going to be in a very exciting time.
Speaker Change: The proliferation of artificial intelligence to other technologies.
Speaker Change: Accessibility into marketplaces, what retail can do but again, it's really hard to predict what that's going to return to our revenues Lynn.
Speaker Change: Yes, I would just add you know our focus is not on growth in RPC. Our focus is on growth in revenue and growth in new client acquisition of any type for focusing on how we drive that top and bottom line and we're not focused on that RPC line in particular, it's really the overall picture and growth level.
Speaker Change: I guess I'd like to tell you that we have a special formula, but we don't and.
Speaker Change: I don't think you would want us to have a special pharma because everybody is different as the market continues to grow so it's exciting for us and again I think the one thing I can that's truly.
Speaker Change: Truly point too as the pricing change from Micros that we did not do based on a notional basis and that's the trajectory we're going as we look at the constituency.
Speaker Change: Got it that makes a lot of sense, maybe one follow up just something kind of.
Speaker Change: A little bit more nitpicky, but just curious the licensing fees picked up this quarter.
Speaker Change: I know you kind of exclude those from your core opex guidance for the year, but just any color on what we should expect from that line item.
Speaker Change: Sort of the drivers of the sequential step up and how we should think about what that looks like over the next couple of quarters.
Speaker Change: Yes, so we did see a step up in licensing fees not surprising given the high volume levels and the growth there as you know a good portion of that the majority comes from our equity complex, which had nice growth, 9% up quarter over quarter and 17% year over year. The other item that youre seeing this quarter is we do have some existing.
Speaker Change: <unk> OTC clearing programs that has been in place for a number of years given the strong growth in that business over the last year.
Speaker Change: It has an off cycle measurement periods. So the impact of that with being in Q3 I would now because we did get a couple of questions. This morning, there were no new license fee related programs in our so far our treasury complex. Two main items are going to be the overall growth in the business and that that.
Speaker Change: Those programs related to OTC clearing, which again have been in place for many years.
Speaker Change: Mike do you have anything to add on the OTC side, Yes, just one thing to add on overall futures and options growth continues to bolster our OTC IRS business we.
Speaker Change: We saw double digit volume growth year over year in both Latam and U S dollar swap activity.
Speaker Change: The important figure to highlight with Suzanne mentioned already today is that out of the $7 billion to $8 billion in portfolio margin savings that we see in the overall so for us the overall swap complex.
Speaker Change: Over 90% of that is in U S. Dollar swaps, we have about $40 billion in margin collateral for swap activity and 80% of that is being attributed U S. Dollar swaps. So we've had some considerable buy side clients and bank clients put true risk with the CME in U S. Dollar swaps, hence the over $7 billion, a day and portfolio margin savings.
Speaker Change: I also think it's important to highlight that other ccp's have highlighted their margin and collateral levels. It is important to keep in mind that all of the collateral and other ccp's is not specific to swaps and currencies that we enjoy any material margin savings were sofa and treasury products. Some of those swaps are related to Swiss yen, Canada Sterling and euro.
Speaker Change: And for those of you were wondering who the Hell that was as Mike Dennis.
Speaker Change: New head of our.
Speaker Change: Great franchise. So thank you Mike Thank you Sir.
Speaker Change: Yeah.
Speaker Change: Alright, well. Thank you so much for the response appreciate it.
Matt: Thanks, Matt.
Speaker Change: Thank you. The next question is from Ken Worthington with Jpmorgan. You May go ahead, hi, good morning wanted to ask about the digital business can you talk about the launch of <unk>.
Ken Worthington: Coining the theory Etfs and the impact that they've had on your futures business. They would appear to have helped a good amount and as you think about the opportunity to further grow that digital platform. The perpetual market still seems to be quite a bit bigger than the calendar market does the perpetual market present an opportunity.
Ken Worthington: For further growth at CME.
Ken Worthington: Okay great.
Speaker Change: Great. Thanks, Darren and thanks for the question.
Ken Worthington: Certainly the development.
Speaker Change: The Etfs, both in a spot based and futures based ETF structure for bitcoin and either have not only developed the ecosystem further for those products, but also provide an opportunity for the futures complex to grow at CME like we've seen a lot of asset classes futures are at the center of these highly related.
Speaker Change: Interrelated ecosystems, and when we see the volumes in our Critser complex. The futures Adv was up almost 285% to a record 102000 contracts and when we look at the micros drop even more with Bridgepoint up 470% and ether micro either up 641% respectively.
Speaker Change: This is because our futures not only enable more common ETF strategies, such as trading Etfs versus futures or using futures to source inventory stock loan in the ETF market. It's also our futures are often provide a better more efficient way to create redeem the etfs is our ability to transact.
Speaker Change: These I guess the underlying index closed the CME CF breakpoint reference rate for our reference rates also underlie seven of the 11 point spot Etfs. So this is a growing ecosystem. We are certainly at the center of it here at CME, we continued to be a leader in this space offering that regulated trusted and transparent futures market.
Speaker Change: Going to the perpetual market, it's not necessarily easy comparison, because those perpetual exists more crypto native platforms that are not regulated outside of the U S. But we continue to engage with customers to make sure. We're working with them all the tools they need to manage risk in these uncertain times without crypto currencies or other products.
Speaker Change: To engage staff to make sure they have all the tools they need.
Speaker Change: Particularly important is that Youre seeing me and for the marketplace. They could do it in a trusted transparent in a regulated manner and that's what we often barker from product here. Thank you.
Ken Worthington: Some color on that Ken had good yes that was great. Thank you.
Thanks, Ken.
Speaker Change: Thank you. Our next question is from Patrick <unk> with Piper Sandler you May go ahead.
Yes. Good morning, Thanks for taking my question.
Patrick <unk>: I had one on the competitive landscape in rates today.
Patrick <unk>: Today marks the one month anniversary since FY <unk>.
Patrick <unk>: <unk> launched its silver futures contract volumes have been modest disabled. So Terry I was just hoping you could maybe its state of the union on the competitive landscape and just your updated feelings.
Patrick <unk>: Sensitive competitor exchange launched.
Speaker Change: Thanks, Patrick and again, I think you're right that the volumes have been modest but it is early so I am not drawing any conclusions through as it relates to any competitor.
Speaker Change: We will continue to stay focused on the things that we are doing today, a lot of which Patrick will you heard us highlight over the last several months and years and we highlighted it again today, which is.
Speaker Change: Efficiencies that we've been able to create for our clients in those asset classes that people are trying to compete with us.
Speaker Change: So again I think thats right.
Speaker Change: We feel very good about our strong performance.
Speaker Change: There was some question about the growth of our interest rate products that we had to put incentive plans in we clearly stated that we did not and still had the growth. So I think that goes to show you that.
Speaker Change: The value of <unk> products to its end users.
Speaker Change: And we also will go to the fact that still the cheapest cost to any participant.
Speaker Change: As the transaction fee. The bid offer is extremely expensive when it gets wider if you look at some of our competitors and Mike can maybe add some more color to this on the backend of their offering their spreads are a lot wider than CME is which the cost will be dramatically higher than any incentive program that could possibly pay or a transaction fee associated with that so Mike you gave a little color than I will.
Speaker Change: Come back and finish up yes, sure and thanks for the question Patrick Good morning.
Mike: Terry is referencing it's still early days, but what we see is our bid ask spreads are on average at quarter take tighter and from months Ofer contracts I'd almost a half tick tighter as you move out the sofa curve as we all know a haptic equates to $12 50 per contract and sulfur futures, which towards the size of the transaction fee or.
Speaker Change: Or potentially wherever the incentive is to trade that market yes.
So any way Patrick I think that we're keeping a close watch on it but we're staying really focused on our business and bringing the efficiencies Suzanne referenced the $1 billion. A day that we are achieving with FIC. We wanted to make sure. We can continue to build and grow on that program. We think has been very beneficial we gotta get more firm signed up there's a lot on firms played so.
We're hopeful that they get signed up for that and they are starting to see that they don't want to be left out of that potential $1 billion plus on a daily basis with the FIC arrangement. So.
Speaker Change: Again, I think that's it.
Speaker Change: Our position there.
Speaker Change: But I won't comment any further than that if you're referring to some of their local media. That's been put out there as it relates to what I have said about treasuries are you just referring to so first of all I know you are talking about.
Speaker Change: Just silver, but if theres anything that you have to say on treasuries I'd be happy to.
Speaker Change: I've said I've said, it pretty loud and clear publicly about how I feel about this and.
Speaker Change: I know that I keep getting rebuttals that moneys from U S. Participants are held in U S banks, which is irrelevant that could be held in fort Knox. It wouldn't matter. We are talking about the resolution authority and the authority of who gets to make the decisions over a default and that would be the bank of England and the FCA not the United States of America, if in fact those.
Speaker Change: Contracts were to be cleared there so that has been our argument and people keep dodging. It I know that there are duly regulated clearing entity, but that's got nothing to do with our arguments. So I think that I have been to as many people as I, possibly can will continue to continue to be loud about this.
Speaker Change: And make sure people understand what could be the detrimental effect of having U S treasuries.
Speaker Change: Not only being clear it overseas, but at the same time, having the resolution authority being overseen by a foreign regular and not the United States government.
Speaker Change: So I will wait to see on that but I'm not backing down from that argument because I think is very legitimate and if they want to move into the United States of America and compete with US here under our laws as I've said to many of people up all my chair back and walk out because my arguments over.
But that's not the case.
Speaker Change: Okay. That's great color. Thanks for that and then just a follow up.
Speaker Change: On pricing, specifically and rates theres been a lot of speculation recently about what you could potentially.
Speaker Change: Do in response to <unk> launching <unk>.
Speaker Change: Talking about possibly cutting rates.
Speaker Change: Given what you've spoken about on this call and the value that you feel that you've provided your customers you are coming off so you're on track for your third consecutive year of record interest rate Adv.
Speaker Change: I guess the question is is it misguided for us to assume that rate.
Speaker Change: Possible price increases in the rates complex.
Speaker Change: Off the table at this point thanks.
Speaker Change: I think as we have guided for anyone to assume they know what we're thinking about how we're going to run the business going forward on pricing as I've said, we adjust our tiers all the time, we do a whole host of different things throughout the years.
Speaker Change: It doesn't have to do anything with competition Thats got all to do with the marketplace. So Patrick as I said earlier.
Speaker Change: <unk> stated that we did not put any new incentive plans in place and we've had an incremental growth that's a record and this quarter for bulk sulfur and treasury. So I think that speaks volumes to where we're at today.
Speaker Change: Okay. Thank you that Terry.
Patrick: Thanks, Patrick.
Speaker Change: Thank you. The next question comes from Alex Kramm with UBS you May go ahead.
Alex Kramm: Yes, Hey, good morning, everyone.
Maybe.
Alex Kramm: In the context of new customer acquisition and would you focus on <unk> can we can we maybe go into the energy business in more detail here I mean, there are clearly a lot of.
Alex Kramm: No macro changes structural changes that quite frankly from my perspective seem to be the most interesting asset class in the next couple of years, given energy transition everything thats going on so you have a very U S focused business, but obviously some of these changes are global so just wondering what you're doing to maybe capture some of that structural excitement.
Alex Kramm: And what you're seeing in terms of new customer generation, maybe around the world and what your customers are doing different already and how youre positioned.
Speaker Change: Thanks, Alex Thanks for the question I'm going to turn to Derek but I think you raised a really good point about what this asset class could mean over the next couple of years.
As we either transition out of it are continuing to build on top of it. So I think there's a lot of verdicts you ought to be.
Speaker Change: Brad yet so it's interesting with this asset class. So I think youre right to pointed out there yeah. Thanks, Alex I think youre seeing a lot of things that we're seeing right now and number one we are putting up a year to date record revenues in our energy business, we put together another extremely strong quarter.
Speaker Change: With our volumes up 21%.
Speaker Change: <unk> actually our options business up 45%, that's a new record for us for the quarter across the energy complex as a whole you asked a great question, we spend a lot of time digging into where the business growth is coming from and I'll provide some color as I have on previous calls when you look at the growth of the business. We look at the record year to date results of this business that business is coming we're seeing outsized growth coming.
Speaker Change: From outside the U S. That's what we're so excited about we talked about the new client acquisition story that Julie talked about boots on the ground engaging new customers that for the first time with physical flows of <unk> and Henry hub hitting the shores of Europe, and Asia, that's bringing new commercial and buy side customers into our market. When will you look at the numbers that that under.
That you look at our buy side business is up 26% this year, our commercial customer visit up 16%. This year, our bank business up 13%. This year. When you look at where the growth is coming from from a geographical point of view our European business. This year is up 37% our laptop business up 30%. So when we're looking at growth it shouldnt.
Speaker Change: Surprised that when you see physical flows of U S benchmarks priced on Nymex and this is true on the Ags and metals side as well those physical flows hitting the shores of Europe and Asia, that's driving new customer acquisition for us, they're not necessarily new customers to the energy complex, but there are customers that recently had only traded euro.
Speaker Change: Our Asian products. They are now, adding our global benchmark says that is the import risk. They are facing right now. So when you look at the results of the business, we're seeing that to be physical flows are driving global participation. So the other couple of pieces I point to is that we're seeing growth across not just <unk>, we're seeing significant and even faster growth on the natural.
Speaker Change: Gas side of the business when you look at the business. This year were at a record level of seven over almost 780000 contracts in our Nat gas business. That's up 33%. This year. This is a market where the U S is now producing and exporting record amounts of natural gas priced on Henry hub, which is the market we own roughly 80% of the market share perspective that bill.
Speaker Change: <unk> is flowing back into CME from European customers, adding Henry hub pricing and exposure to their overall portfolios. That's been a big driver of the record activity in our Natgas options growth as well as these markets are extremely difficult to hedge on a flat price basis. So we're seeing increased activity on the option side. So hopefully that gives you some color from the client.
Speaker Change: Active from a regional perspective and from the underlying product perspective, Linda just to add a little bit to what Eric was saying we have seen with these new supply lines being drawn the strong growth in both Europe and Asia in our crude business and Henry hub I think what we're also seeing is a longer term trend one of the limiters on the Henry hub side is the ability to liquefy the naphtha.
Speaker Change: So gas to then export it internationally, we do expect and we do see the build out in multiple liquefaction facilities that are ongoing. These are multiyear projects, but there are a number that are meant to come online in the next couple of years, so were increasing that capacity and that ability to export could also be a tailwind for our business as more international customers with.
Speaker Change: Dan look to hedge back to that export point, thanks, Glen Thanks, Derek Alex did it.
Speaker Change: So to your question.
Alex Kramm: That's great color and I'll squeeze in one quick one here on the tax rates.
Alex Kramm: Clearly you use suggesting the international growth is really helping that one I mean thats been really a multiyear trend. So if we continue this is four for 2025 do you think this.
Alex Kramm: Around 23% as a better a better tax rate to use is that is that in your plants.
Speaker Change: I'm, assuming you're referring to energy Alex again on this.
Speaker Change: Alright, Thanks Ray.
Speaker Change: I'm, sorry, yes, I thought you said sorry.
Speaker Change: Sorry, we have a bad connection here, it's hard to hear.
Speaker Change: So Alex we did we did lower it based on the outsized growth that we're seeing internationally certainly we will provide tax guidance as part of our outlook and guidance for the coming years, we have seen that outsized growth for several years as you noted.
Speaker Change: Basically there are a number of factors that will be in play, including things like changes in administration and potentially what's going to be the political dynamic and impact on taxes. So it's a little premature for us to take a position on that go forward tax rate at this point, but we will certainly follow up on that.
Speaker Change: Thanks, Alex sorry for the thank you hear you properly unattached, Michigan.
Alex Kramm: All good.
Alex Kramm: Thanks, Bob.
Speaker Change: Thank you. Our next question is from Kyle Voigt with <unk> you May go ahead.
Kyle Voigt: Thanks for taking my question.
Kyle Voigt: Just going back to a broader discussion on pricing over the past few years, you've announced pricing changes in the fourth quarter that go effective in <unk> for.
Kyle Voigt: For changes that went effective in 2024, I think you've got it to one 5% to 2% assuming constant volumes of a pricing change in 'twenty. Three I think it was four to five can you just give us an update on how youre thinking about futures pricing over the medium term and I guess is there any reason to think that 2024 as pricing change levels are not a good baseline assumption.
Kyle Voigt: For 2025.
Speaker Change: Well, Kyle I think pricing.
Speaker Change: We evaluate that throughout the entire year for the for the next year and there's a lot that goes into it other than just see if we can increase it by a percent or two.
Speaker Change: One of the things I've always said.
Speaker Change: I'm sure you've heard me say this is theres got to be a good value add associated to our clients. When we change pricing, we invested heavily with our Google transition. We're excited by the future of that what it means for clients. So that could have an impact on pricing one way or another may be to their benefit of obviously.
Speaker Change: But again I think when you look at just blanket pricing increases thats not something that we do.
Speaker Change: And I know some suggest that that was becoming a pattern, but it's because of what we were able to deliver to the marketplace over that time period, we were able to do price increases.
Speaker Change: Again, we evaluate that pricing throughout the entire year before we make any decisions and bring it to my board Glenn do you want to comment any further yeah. The only thing I would add.
Speaker Change: Kyle is that the wondering up to 2% you quoted that was on the clearing and transaction fee just keep in mind that we do look at different levers as we're thinking about pricing changes could include changes to the fee schedule. It could include things like incentive program or other agreements. There. There is the data components and also.
Speaker Change: Things on on collateral also noncash and cash collateral.
Speaker Change: So we did guide to one and half to 2% this year on the clearing and transaction fee. We said two 5% to 3% on total revenue given some of the changes we made on the other fee lines and we've been tracking towards that.
Speaker Change: Throughout the course of this year.
Speaker Change: Great. Thank you and then maybe a follow up for land on the expense trajectory I think in 2023, you had $56 million of cloud migration expenses that was expected to grow by $15 million. This year I guess can you confirm whether that level of migration spend is still on track and then can you remind us how we should think about.
Speaker Change: Cloud migration expenses into 25% and 26 will there be incremental spend needed in each of those years and maybe address the interplay of that and the trajectory of DNA over that timeframe too.
Speaker Change: Yes sure. So if you look at the migration spend for this year. The total spend is on target for our guidance of $90 million now the difference between that and the $15 million increase you do have some roll off an existing.
Speaker Change: In a business as usual expenses as we've been migrating to the cloud you see about $25 million and costs that are rolling off which would get you to that differential that increase of $15 million year over year. So we are on track with our guidance on that expenditure like what we've also said is that we would expect incremental costs.
Speaker Change: Two our migration for the first four years, we are in year. Three so we do expect to still see incremental cost next year related to that migration.
Speaker Change: Note that the Google related expenses were included in our overall expense guidance, so that three 9%.
Speaker Change: Implied by our expense guidance did include that Google spend so that has been trending down as we are starting to see some of the benefits of rolling off.
Speaker Change: On premises operating expense.
Speaker Change: Yeah.
Speaker Change: Great. Thank you.
Speaker Change: Thanks, Paul.
Speaker Change: Thank you. Our next question is from Brian Bedell with Deutsche Bank You May go ahead.
Brian Bedell: Great. Thanks, Good morning folks thanks for taking my questions.
Brian Bedell: Just one quick one on back to the competitor ons on so for Terry Thanks, very much for the commentary there very very good and very detailed on.
Brian Bedell: On the pricing.
Brian Bedell: Of the Super contract since hearing is that.
Brian Bedell: Is that something you could use in the future I mean.
Brian Bedell: Comparative of obviously with the tick size in the <unk>.
Brian Bedell: Widening of the bid ask spread dwarfing that it would seem like you would need to do that but is that something that.
Brian Bedell: That you could do in the future in terms of.
Brian Bedell: Pricing to certain members are using any incentives on that should should.
Brian Bedell: Should the market share increase from the competitor.
Speaker Change: Yes, Brian I appreciate the question and as you can imagine.
Speaker Change: I'm not going to comment on that because theres. So many different levers that we have here to bring value to our clients as I continue to say and I'm not going to pre determine what I should or should not do on this call right now.
Speaker Change: We have to we do a lot of theoretical game.
Speaker Change: Planning here at my team and we look at certain things on pricing, we look at certain things on value add but as I said, we did not increase put any incentives in for the last and we had a record quarter. So we're pretty pleased with the way the market is anticipated our offering to date so.
Speaker Change: It would be foolish of me to try to to suggest that we would do anything different at this moment you have totally totally clear.
And then maybe just Lynn could you review the collateral balances in their rates paid for the quarter and then I guess exiting September given we had the record in the month.
Speaker Change: Sure.
Speaker Change: In Q3, our average cash balances were 72 billion, which was similar to the 73 billion we saw in the prior quarter.
Speaker Change: Our rates, we earned on that remained consistent at 36 basis points.
Speaker Change: On the noncash collateral side, we saw a slight increase to 165 billion for the quarter versus 161 billion last quarter, and we continue to earn 10 basis points on that noncash collateral.
Unknown Executive: So far in October, who's seen sliding creases in both of those elements: the US cash balances are averaging 73 billion in months to date, and the non-cash collateral is averaging 173 billion.
Speaker Change: So far in October we've seen slight increases in both of those.
Speaker Change: Element the U S cash balances are averaging $73 billion in month to date.
Speaker Change: And the noncash collateral is averaging 173 billion.
Speaker Change: Okay.
Unknown Executive: Okay, and is this spread the same, given the rate cuts, or is that different coming into three key?
Speaker Change: The spreads the same given the rate cuts are different.
Speaker Change: Different coming into <unk>.
Unknown Executive: Continue on those cash collateral; you have the 25 basis points for turn to clients. The difference between the 36 that we've been earning and the 25 is our ability to optimize our returns using some other vehicle.
Speaker Change: Continue on the cash collateral you have the 25 basis points return to clients. The difference between the 36 that we've been earning in the 25 is our ability to optimize our returns using some other vehicles.
Unknown Executive: So that's did not change during the quarter. If rates continue to decrease, inability to get those outsized returns might be pressured, but the overall rate that we're paying has not changed, and it's been at that same 25 basis point. And for quite a few rate hikes, yeah, it's been since the IRB rate was at 1.65%.
Speaker Change: So that that did not change during the quarter if rates continue to decrease and ability to get those outsized return might be pressured but the overall rate that we're paying has not changed and it's been at that same 25 basis points for quite.
Speaker Change: Quite a few rate hikes.
Speaker Change: Yeah, it's been since the.
Speaker Change: The <unk> rate was at 165%.
Unknown Executive: Got it, okay, okay, so the spread is still 36 basis points, is that right? It's still 25 or more earning more because we're able to optimize those returns.
Speaker Change: Got it got it okay. So I'm sorry, so the spread is still 36 basis points is that right.
Speaker Change: 25% are earning more because we are able to optimize those returns, yes, I see what you're saying, yes, okay got it got it thank.
Unknown Executive: Yeah, I see you were saying yep, okay, got it, got it, yep, thank you. Thanks, fine, and the else, good, yeah, totally good. Thank you so much for all the answers.
Speaker Change: Thank you.
Speaker Change: Thanks, Brian and good.
Speaker Change: You have to totally good. Thank you so much for all the answers.
Unknown Executive: Thanks, fine.
Speaker Change: Thanks, Brian appreciate it.
Unknown Executive: Appreciate it.
Craig Siegenthaler: Thank you. Our next question is from Craig Siggenthaler with Bank of America. You may go ahead. Thank you. Good morning, everyone. Most of my questions were asked, but I wanted to try to ask them in a different way, so I apologize if any repetition.
Speaker Change: Thank you. Our next question is from Craig Siegenthaler with Bank of America. You May go ahead.
Craig Siegenthaler: Thank you good morning, everyone.
Craig Siegenthaler: Most of my questions were asked but I wanted to try to ask them in a different way so apologize if any repetition.
Craig William Siegenthaler: But first, when we have a follow-up on Robin Hood's future in index options, launch this quarter, I was curious which products do you expect to see the largest uptick in demand? You know, we're thinking SPYWTI, and also how do you think SPY will compete against its core competition, including SPX, given its tax efficiency? And we're curious what insight we both launch was able to inform you on this, just given Robin Hood's differentiated clientele.
Craig Siegenthaler: But first of all we have a follow up on Robin hoods future and index options.
Craig Siegenthaler: Launched this quarter I was curious which products do you expect to see the largest uptick in demand we're thinking S. P Y W. Ti.
And also how do you think S. P Y will compete against its core competition, including SPX given its tax efficiency and we're curious what insight weevils launch was able to inform you on this just given robinhood differentiated clientele.
Speaker Change: Alright. Thanks, Craig appreciate the question on the Robin Hood, and the product I'll, let Julie take that on this SPX versus suppose I'm going to let Tim talk about that in a moment. So Julia why don't you start yes. Thanks for the question Craig what we have typically seen.
Unknown Executive: All right, thanks, Craig. Appreciate the question on the Robin Hood and the product.
Unknown Executive: I'll let Julie take that on this SPX versus the Spose. I'm going to let Tim talk about that in a moment, so Julie, why don't you start?
Julie Winkler: Yeah, I think through the question, Craig. You know, we have typically seen in new retail clients coming to trade semi products. The first entry point is within our micro equity suite. You know, these active traders are often using this to hedge existing, you know, stock portfolios. They have typical experience trading cash and cash equity options. And so this is a natural overlay to move into the derivative space in equities first.
Julie: In new retail clients coming to trade CME products is the first entry point is within our micro equity suite.
Julie: These active traders that are often using this to hedge existing stock portfolios. They have typical experience trading.
Julie: Cash and cash equity options and so this is a natural overlay to move into the derivative space in equities first.
Julie Winkler: What we have seen is, as you mentioned, the diversification that we then are quickly able to follow up on is an important part of our product suite for retail, where we are able to then work with our distribution partners to offer them things like WTI and energy, as well as, you know, our metals complex has continued to see a lot of growth too with our micro gold.
Julie: What we have seen is is as you mentioned the diversification that we then are quickly able to follow up on <unk> is an important part of our product suite for retail where we are able to then work with our distribution partners to offer them.
Julie: Things like W Ti and energy as well as our metals complex has continued to see a lot of growth to with our micro gold So I'll turn things over to Tim.
Tim McCourt: So I'll turn things over to Tim to talk through a little bit of the competition side of things. Great, thanks, Craig, and appreciate the question. When looking at the S&P 500, because it's important to note that these are highly interrelated, but just to clarify that when we look at the futures and options on futures products at semi group, they are also efficient from the tax, especially if they are also a Section 1256 contract that enjoys the blended 60/40 capital bean tax. That is an index-based determination that is something that we enjoy. Other index products are also able to provide that ETFs are not.
Julie: Tim to talk through a little bit of the competition side of things.
Tim: Thanks, Greg and appreciate the question when looking at the S&P 500 ecosystem is important to note that these are highly interrelated, but just just to clarify that when we look at the futures and options on futures products at CME group. They are also efficient from a tax perspective. They are also a section 456 contracts that enjoy.
Tim: The blended $60 working capital gains tax that is an index based determination that is something that we enjoy other index products are also able to provide that etfs are not and when we look at the way that our contracts will be not only distribute through robinhood, but all of our partners. It continues to be an important tool for traders to manage their risks to actually.
Tim Mccourt: And when we look at the way that our products will be not only distributed to Robin Hood, but all of our partners, it continues to be an important tool for traders to manage their risk to access that market. And when we look at how we're doing against ETFs, I'm excited by the fact that more retail distribution partners are coming online. Even if we look at Q3, we've had very strong performance in terms of our futures versus ETFs as a product choice. And when we're looking at that, we're in the highest multiple in my 11 years here at semi tracking it.
Tim: Is that market and when we look at how we're doing against Etfs.
Tim: Excited by the fact that more.
Tim: Retail distribution partners are coming online because even if we look at Q3, we had very strong performance in terms of our futures versus Etfs as a proper choice and when we're looking at that were at the highest multiple in my 11 years here at Seabee tracking it with our S&P 500 futures at CME group.
Tim McCourt: With our S&P 500 futures at semi group or out trading the associated S&P ETFs by a factor of 15 to 1 for the third quarter. So optimistic about what even more distribution platforms offering our products alongside the cash market than ETFs. We think it'll be a great opportunity for the market to take not advantage. Not only the advantage of the tax efficiencies, but all the capital efficiencies we offer here.
Tim: Our our trading the associated S&P Etfs by a factor of 15 to one for the third quarter, so optimistic about what even more distribution platforms offering our products alongside the cash markets and Etfs.
Tim: We think it'll be a great opportunity for the market to take not advantage not only advantage of the tax efficiencies all the capital efficiencies we offer here at CME group.
Unknown Executive: Thank you. That was great.
Speaker Change: Thank you Greg for no that was great very comprehensive. Thank you just for my follow up we have a question on event contract. So a large online broker launched a political election and whether contract platform recently, it's been getting a lot of media attention.
Unknown Executive: Very comprehensive. Thank you.
Craig Siegenthaler: Just for my follow-up, we have a question on it and contract. So a large online broker launched a political election and weather contract platform. Recently, it's been getting a lot of media attention, as I'm sure you're aware given the upcoming U.S. election. And this is an example of a broker offering contract. So some vertical integration.
Speaker Change: As I'm sure you're aware given the upcoming U S election, and this is an example of a broker offering contract. So some vertical integration I'm wondering if there's an opportunity for CMA to play a bigger role in this business.
Craig Siegenthaler: I'm wondering if there's an opportunity for CME to play a bigger role in this business. And if you think there is a large term for event and political election contracts in the United States.
Speaker Change: And if you think there is a large tam for event.
Speaker Change: And political election contracts in the United States.
Speaker Change: So Greg Thanks for the question and.
Unknown Executive: So, Craig, thanks for the question.
Unknown Executive: And I will start in the let Tim go ahead and make a comment or two as well as it relates to that. So that we've been asked if I don't know if your question is being asked in a different way, are we going to list political event contracts? And the answer is, at this moment in time, no, but if we never forego any opportunity that we might see in the future. But at this given moment in time, we do not see that as an avenue that CME wants to partake in. I don't see that too dissimilar road to Bitcoin.
Speaker Change: I will start and then I'll, let Tim go ahead.
Speaker Change #100: Make a comment or two as well as it relates to that so that we've been asked if I don't know if your question is being asked in a different way are we or are we going to list political event contracts.
Speaker Change #100: And the answer is at this moment in time, no, but we never forego any opportunity that we might see in the future.
But at this given moment in time, we do not see that as an avenue that CME wants to partake in.
Speaker Change #100: I don't see that too dissimilar load to bitcoin, we did not participate in that for many many years until we thought it was mature enough for us to listed and make sure that the product was not readily manipulable under the core principles of the CFT you see I'm not suggesting that the product is being listed today is but we need to know more about it and to watch some cycles before we decided to jump into something.
Unknown Executive: We did not participate in that for many, many years until we thought it was mature enough for us to list it and make sure that the product was not readily manipulable under the core principles of the CFTC. And that's suggesting that the product that's being listed today is. But we need to know more about it and watch some cycles before we decide to jump into something like that. So I don't know if your question was, are we going to get into that or not? So I want to make sure that was perfectly clear that, at this moment in time, no.
Speaker Change #101: Like that so I didn't know if your question was are we going to get into that or not so I want to make sure that was perfectly clear that at this moment in time, no, but we never forego potential opportunities. If we think that they are right, but timing is always everything for me and my team. So we will see how that works out on the other part of I'll, let Tim address sure. Thanks, Dan I think the one thing I would say with respect to our.
Unknown Executive: But we never forego potential opportunity that we think that they're right, but timing is always everything for me and my team.
Unknown Executive: So we'll see how that works out on the other part of the Tim address.
Tim Mccourt: Sure. I think the one thing I would say with respect to our offering of event contracts here at CME Group is it's important for us to offer those products to the market in a way that leverages the other futures contracts that we haven't seen me. So our approach with event contracts are there have a underlying associated future that also trades at CME Group, which is a key part of our product offering. We also look at longer dated year-end event contracts on the equity indices. So continues to work with market participants to figure out a traditional types of products that they want in the marketplace.
Tim: <unk> bank contracts here at CME group is it's important for us to offer those products to the market where that leverage the other futures contracts that we haven't CME. So our approach to prevent contracts are they are have a underlying associated future that also trades at CME group, which is a key parts of our product offering also look as longer dated.
Tim: Year end event contracts on the on the equity indices will continue to work with market participants to figure out. If there are additional types of products that they want in the marketplace. Like I said earlier that holds true for all of our asset classes, but for big contracts is key to US right now to focus on trans posing the liquidity, we have in there sort of older sibling contract.
Tim Mccourt: I guess at earlier that holds true for all of our asset classes, but for event contracts it's key to us right now focus on transposing the liquidity we have in there sort of older sibling contracts in a new form. Offer more ways to trade those same markets. We'll continue to engage with the market, see what else we should be talking about.
Tim: In a new form offer more ways to create those same markets. We will continue to engage with the market see what what else we should be.
Unknown Executive: Thanks, Jim. Thank you.
Speaker Change #102: Thanks, Tim.
Speaker Change #103: Thanks, Greg does that address your questions.
Unknown Executive: Your questions. Now that was great. Thank you, guys.
Greg: No that was great. Thank you guys.
Speaker Change #104: Thanks, Greg appreciate it.
Owen Lau: Our next question is from Owen Lau with Oppenheimer. You may go ahead. Good morning, and thank you for taking my question. So I have a quick question on your expense guidance. If I look at the first three quarters of last year, your comm ratio was about 14% on average. This year, for the first three quarters, your comm ratio is only about 13.1% based on my math. But your revenue this year is much stronger than last year.
Speaker Change #106: Thank you. Our next question is from Owen Lau with Oppenheimer You May go ahead.
Owen Lau: Good morning, and thank you for taking my question.
Owen Lau: So I have a quick question on your expense guidance.
Owen Lau: If I look at the first three quarters of last year. The comp ratio was about 14% on average this year for the first three quarters. Your comp ratio is only about 13, 1% based on my math, but your revenue. This year, it's much stronger than last year. So is that is there any change on your full year comp expense this year.
Owen Lau: So, is there any change on the full year comm expense this year versus last year? And do we expect a big two up of your incentive comm in the fall quarter? Thanks.
Owen Lau: Versus last year and should we expect a big true up all of your incentive comp in the fourth quarter. Thanks.
Speaker Change #108: Thanks, Alan Lynn, Yes, so we do have.
Speaker Change #109: True ups for incentive comp throughout the year as we look at incentive based or performance based compensation that will flow through in the various quarters.
Speaker Change #109: Say, what you are seeing is some of the operating leverage in our business.
Speaker Change #109: To drive that revenue, it's not a direct correlation to us adding additional head count.
Speaker Change #109: So I think you're just seeing the benefits of that model rolling through this year.
Speaker Change #110: So we should expect like a bigger true up in the fourth quarter as well.
Speaker Change #110: You should think about for modeling perspective.
Speaker Change #111: No. So the true up happens over the course of the year. So if there is any outperformance or underperformance you will see that in each of their respective quarter. So its not a large true up on incentive comp in the fourth quarter.
Speaker Change #111: And our expectations on compensation are built into our expense guidance for the year.
Speaker Change #111: Okay.
Speaker Change #112: Good afternoon.
Speaker Change #113: We are growing revenue with the same amount of people that we have in place with the same cost expense that we have because of the amount of the operating leverage model that we have so that's why the math is all yours to RFP.
Speaker Change #113: Alright got it that's it for me Thanks a lot.
Speaker Change #114: Thanks Alan.
Speaker Change #115: Thank you. The next question is from Mike Cyprus with Morgan Stanley You May go ahead.
Mike Cyprus: Hi, good morning, Thanks for taking the question maybe one for you Terry just coming back to your earlier comments on Treasury futures clearing abroad. Just curious in your conversations with regulators what level of receptivity are you hearing to your arguments that treasury features should not be cleared abroad, and what actions might we see if any taken and then if a <unk>.
Mike Cyprus: Petitor, where to set up a U S clearinghouse to clearer Treasury futures here in the U S. What would be the scope for them to sort of access netting benefits from a related clearinghouse in London.
Speaker Change #117: Well, that's a great question, Mike I mean, one of the things that I am going and talking to about Treasury futures clearing is and I am getting some traction on is I don't think people realize the size of the derivatives market that it is today, which is 13% larger than the cash market on an annual basis of of <unk>.
Speaker Change #117: Notional trade. So you have a new law on cash treasury clearing, but the exclusivity of that particular law on cash treasuries being cleared under the guidance of and regulation of the SEC not any joint guidance I think people will start to realize that.
Speaker Change #117: These products Treasury futures Treasury cash potentially Etfs are a huge part of the ecosystem that make that market work.
Speaker Change #117: I think people are realizing that now again I don't think people realize the size of the derivatives market and the importance thereof. It I think everybody understands so I think people are starting to take notice of it I cannot predict what the outcome is going to be one way or another but I will tell you that there's been.
Speaker Change #117: Inquiries coming from the hill to the to the regulators I know theres been responses from the regulator back to the hill that Theyre, taking this very seriously and they are trying to analyze what it means for our cross border clearinghouse to be clearing foreign sovereign debt and futures.
Speaker Change #117: And how does that work as it relates to potentially the Mou that are under they have today, which have been amended which nobody's talking about either as you may or may not know the bank of England change their bankruptcy laws and they no longer have U S participants and no longer have protection under the bankruptcy laws.
Speaker Change #117: The U K the U K is now the bank of England is the default for all.
Speaker Change #117: Bankruptcies as it related to systemically important institutions and that is different from what was in the original Mou with the FTC when they became.
Speaker Change #117: Registered in both U S and <unk>.
Speaker Change #117: The U K, so I think theres a lot of changes. So people are understanding that we're explaining that to them the importance of it and what does it mean, if they were to come open up <unk>.
Speaker Change #117: Hearing house in the U S. As the second part of your question I believe and they did have that.
Speaker Change #117: <unk> LC H.
Speaker Change #117: <unk> LLC had.
Speaker Change #117: U S clearing entity, which is now dormie I don't believe its up and running at all for any products and if in fact, they decided to reconstitute that clearinghouse here in the U S. The offsets would not be what they suspect they would be in London. So they would lose the offsets against the portfolio. So I guess I would have to ask whats.
Speaker Change #117: The benefit of them doing it and the cost associated for the London clearinghouse to reconstitute that clearinghouse in the United States to do so so I'll turn it to my colleague Suzanne Sprague to clean up anything that I've said in properly, yes, just as a second part of your question on the ability to achieve the offset between clearing houses in different geographies no. It's hard to speculate on how the.
Suzanne Sprague: Regulators would look at that today, but our own experience in the past has shown that it is very expensive to do so.
Suzanne Sprague: The regulators had basically required that clearing houses to hold capital in the amount equal to the margin savings will give you a participant.
Suzanne Sprague: The clearing houses basically still have to be fully capitalized in each jurisdiction to recognize the benefit of the margin offsets that you give to customers and the reason for that really has been back to Gary's point on the resolution regime, given that the domestic regulator would be the one overseeing the resolution of each clearinghouse.
Suzanne Sprague: Regulators have wanted to be fully capitalized even in spite of any margin efficiencies that youre between clearinghouses. So we hadn't been able to get over that hurdle in the past I would I would anticipate that would hold true in the future.
Speaker Change #119: Super Thank you for the comprehensive answer there and just a follow up if I could on interest rate swap clearing I thought I heard referenced about 40 billion.
Speaker Change #120: Dollar margin of swap collateral just curious how much of that was on the U S interest rate side, and maybe you could just elaborate a bit on what sort of growth you're seeing across your interest rate swap clearing business how much that's contributing overall today. It seems like this could be a growth opportunity for you given the larger clearinghouse overseas what steps might be able to take to convince cut.
Speaker Change #120: <unk> to move their swap clearing business over to you how might you increase that appeal and reduce some frictions that make it more seamless for customers to move more activity over.
Speaker Change #121: And Mike you guys want to address that yes sure. Thanks for the question. So in terms of the amount of U S. Dollar swap margin as a percentage of that total it is the majority.
Actuated I think between about 75%, 80% in terms of the amount of.
Speaker Change #121: Total margin requirement that we have coming from the swap activity I will.
Speaker Change #121: I'll reemphasize again, just the point of the efficiencies that are gained and the portfolio Margining program. I think that is a primary driver to the level of activity that we see and our swaps offering capital efficiencies in that space have been a large telco point really since the onset of the clearing mandate for swaps clearing, especially because.
Speaker Change #121: The regulations require a five day margin period of risk for those products.
Speaker Change #121: There is even more focused on being able to offer efficiencies within the swaps complex and across other asset classes or other complexities within the interest rate asset class like futures and options.
Speaker Change #121: Pass it over to Mike for anything else you wanted to add there on the competitive landscape yeah, Mike. Thanks for the question good morning.
Mike Cyprus: For me being here a short period of time My first order of business was to meet with all their dealers and kind of talk exactly about what you're highlighting is our margin efficiencies between so for futures Treasury futures in our swap portfolio.
Mike Cyprus: Obviously, a general theme on the Street right now is Basel III game challenges with capital tightness of liquidity and how this is all going to impact the balance sheet. So we're definitely in front of clients. We're definitely explaining this value proposition, we have seen a little bit of renewed interest in sending portfolios to us to do some what if scenarios and some portfolio calculation.
Mike Cyprus: So we do think to your point that it is a good area of growth for us.
Speaker Change #122: Great. Thank you.
Mike Cyprus: Thanks, Mike.
Speaker Change #123: Thank you. Our next question is from Bill Katz with TD Cowen You May go ahead.
Okay. Thank you very much for taking the question. This morning, just maybe on expenses just you reiterated your guide of $1 $5 5 billion for the year, which would assume some seasonal pick up into the fourth quarter. So how much of that is seasonal.
It is more structural and then as you think about the business conceptually youre operating at a very high level of profitability, 69% margin. How do we think about that going forward is there a natural governor to the margin would you let that drop to the bottom line. Thank you.
Speaker Change #123: Okay.
Glenn: Yeah Bill this is Glenn so on your first question.
Glenn: One thing to keep in mind as we typically have some of our larger marketing events in the fourth quarter. So it is not unusual for us to see an increase in that quarter related to that spend. So you will see if you look back at 2023.
Q3 to Q4 expense growth was $40 million that is the same growth that would be implied by our guidance of Q3 to Q4. So the majority of that is going to be that that outsized marketing spend some of it also will go to things like the joint support for some of that new retail ftm's that have come online. So.
Glenn: Capitalizing on some of that opportunity for revenue growth and then you will continue to see some of that ramp up and our cloud migration expense that growth in the technology line as we've moved more applications to the cloud you will see that grow and we've seen some of the offsetting <expletive>.
Glenn: Declines in depreciation rolling through but all of that was anticipated in our guidance as we continue on that migration path.
Speaker Change #125: Would be that amount move up.
Speaker Change #125: In terms of our margin, we don't we don't target and operating margins kind of similar to the question on RPC before we're focused on how we drive that earnings growth. If there are opportunities for us to invest in new opportunities or new growth initiatives. We certainly are going to do that not not focusing instead on what our target.
Speaker Change #125: <unk> operating margin would be we're focusing on driving growth. So.
Obviously, we have enjoyed very nice margins and it relates to the ability of <unk>.
Speaker Change #125: To return a lot of cash to our shareholders.
Speaker Change #125: But that is.
Speaker Change #125: As part of the beauty of our model and the cash generated generative nature of the business, but it's not something where we have a specific target in mind for a margin level.
Speaker Change #126: Okay. Thank you and just as a quick follow up just going back to the rise of the retail opportunity broadly.
Speaker Change #126: Given that sort of an ongoing opportunity how do you think about the for those clients that may be on the platform, where do you, let's say a year or so just whatever the appropriate seasoning point would be what kind of uplift do you tend to see in terms of that volume growth and is there any way to sort of think about what that is as a percentage of your total adv. Thank you.
Speaker Change #127: Thanks, Bill I'll, let Julian talk a little bit on our retail growth and.
Speaker Change #128: And then you did a lot of it already but maybe you can just add a little bit more to go.
Speaker Change #127: Yes.
Speaker Change #127: Terry mentioned earlier and difficult to kind of predict revenue and again, you've got to remember across our distribution partners. They also have slightly different businesses right. So we had some of our distribution partners that are futures only firms we have others that have abroad.
Speaker Change #127: Abroad.
Speaker Change #127: Portfolio and are initially coming to us as existing Cfd providers. For example, some of these distribution partners that we're working with in Europe as well as just the.
Speaker Change #127: Account size that each of these different players are targeting as well and so it's difficult to kind of give a more sweeping or generalized view into what that ADB growth can be which is really why we're highly focused on.
Speaker Change #127: Bringing net new traders into the marketplace as well as our education and our content opportunities across that so.
Speaker Change #127: We work with each of these distribution partners, we have well over 100 of them around the globe.
Speaker Change #127: And really try to fine tune with each of them what content is most appealing to them and also what else. We can be doing in terms of hosting joint events with them both online and in percent Theres still continues to be a great way of how we see acceleration of their revenue growth is to help educate them and bring in other people.
That are third party Influencers that also just talk about what some of their trading strategies are in the space. So it is really I would say.
Speaker Change #127: Our multifaceted approach in order to bring volume and clearly right when I spoke earlier about their initial interest in equity.
Speaker Change #127: We're going to trade what also is moving right and so we often are making sure that we are working with our partners to provide product information to those contracts that are at that point in time seen higher volatility.
Speaker Change #127: And that's where again our diverse product portfolio really plays into that where if equity vol is down we can very much switch to talking to them about <unk> and micro gold, which is really what we saw with micro volume up 35% year on year already so.
Speaker Change #127: This is part of.
Speaker Change #127: Really our strong offering and continuing to look at some other new product opportunities in the retail space with our partners for next year or two so we're excited about that thanks, Joe. Thanks.
Thanks, Bill and just.
Speaker Change #129: Add to what Julie said the beauty of this quarter again as in the last one on all six of our asset classes were up it wasn't just one that was moving all six were up at the same time, which is really amazing for us. So thanks for your question Bill.
Speaker Change #127: Thank you all.
Speaker Change #129: Yes.
Speaker Change #130: Thank you and that was our last question I'll now turn the call back over to management for any closing remarks.
Speaker Change #131: We thank you all for joining us. This morning I appreciate it very much look forward to communicating with you throughout the quarter and talking to you again next quarter. So thank you all be safe.
Speaker Change #132: Thank you that does conclude today's conference. Thank you all for participating you may disconnect at this time.