芝加哥商業交易所 (CME) 2016 Q1 法說會逐字稿

Good day and welcome to the CME Group first-quarter 2016 earnings call. I would like to turn the conference over to John Peschier. Please go ahead.

Thank you for joining us this morning. Gill and John will spend a few minutes discussing the results and then we will open up the call for your questions. Terry, Bryan, Derek, Sean and Kim are on the call as well and will participate in the Q&A session.

Before they begin, I will read the safe harbor language.

Statements made on this call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and 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 forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC which are available on our website.

With that I would like to turn the call over to Gill.

Thank you, Mr. Peschier, and thank you all for joining us. It is an exceptional start to the year with record quarterly average daily volume which is up 13% compared with an already strong first quarter last year. We had very balanced growth in both financial and commodity products, each up double digits. We track customer segment activity closely and in Q1 we had more than 10% growth from asset managers, hedge funds, corporates, proprietary trading funds and retail clients during the quarter. Volume from banks was up 1% which is strong relative to the decrease in the overall trading businesses over each of the last few years.

More recently April activity has been fairly strong compared to last year and is up more than 20% in total. It is encouraging to see relatively good volumes as April has been our slowest month over the last two years. Open interest remains elevated and is up significantly since the beginning of the year.

This morning I will start with our secular drivers and then I will shift to a few product highlights. We have consistently expanded our global participation in spite of the challenging macro environment. We are very pleased with the tremendous results from outside of the US during the first quarter. We had record quarterly non-US volume by far as well as the highest proportion of the business from outside of the US since we started tracking the information with more than 25% in the first quarter compared to 23% in the first quarter of last year.

In Europe, we had a very strong first-quarter activity with volume increasing 28% from 2.3 million contracts per day last year to more than 2.9 million per day this year. The increase is led by equities which jumped 70% and energy was up almost 60%. In Asia, energy was up 75% and equities grew by about 70% with metals rising more than 30%.

Focusing on Asia for a moment, we have been discussing the opportunity to expand our user base to include Chinese firms and entities for many years. Our focus started primarily with intermediaries and we are now engaging directly with asset managers, hedge funds and other entities there. We generally look at our trading data in terms of what we see through Mainland China, Hong Kong and Taiwan. In Q1, we reached approximately 200,000 contracts per day combined which is up from 100,000 contracts per day in Q1 of 2014 and 125,000 contracts last year.

Our most notable recent success is in our energy franchise where we have seen Mainland China average daily volume increase from less than 10,000 contracts in the middle of last year to more than 30,000 contracts in Q1. A highlight from Hong Kong activity is in our equity business with average daily volume there more than doubling to almost 25,000 contracts per day in Q1. The surge in volume is great to see and we are very fortunate to have highly appealing products to offer these clients.

Based on the challenges in China over the last year, we believe many of these firms are comfortable trading in our regulated markets and benefiting from the significant liquidity we have around the clock.

Speaking of that, in addition to the country of origin information we share with you, we also track electronic volume throughout the 24-hour trading day. In Q1, volume during Asian hours grew by almost 30% while activity during European hours rose 60%. Liquidity begets liquidity and we are displaying deeper electronic markets in both futures and more recently options around the clock.

Turning to our efforts in options, we remain a strong leader compared to other global exchanges with Q1 options volume hitting a record 3.5 million contracts per day which is up 22% with electronic options average daily volume rising 26% to a record 1.8 million contracts. The continued electronification of our options franchise has enabled us to further globalize participation in our options markets with our European options volume up 36% and Asian options volumes up 25% in Q1.

Our continued investment in systems enhancements, new products and client education are driving significantly increased usage of our options products from end users with volumes from hedge funds and asset managers up 34% and up 29% respectively.

A couple of quick points and I will finish in commodity products. Starting with interest rates, volume rose 9% to more than 8 million contracts a day and revenue increased by 14% with eurodollars leading the way. We hit record levels of open interest in Q1 in our rates business driven by eurodollar options and treasury futures which hit all-time highs. We also had very strong options activity with the highest quarterly volume ever and reached a record percentage of the options trading on Globex in March with 71% electronic in treasuries and 25% electronic in eurodollars. So far in April, the electronic percentage in eurodollar options has grown to 27%.

On the product development front, we mentioned our launch of the Ultra 10-year contract on our last earnings call. This product has continued to gain momentum and has attracted attention with several articles written over the last month related to this innovative new product. In addition, we are pleased that we cleared our first swaptions trade earlier this month and we think this is yet another example of innovating and being first to market with a customer-led solution.

We held a swaptions customer webinar that attracted over 500 participants with significant follow-up discussions and we had a number of productive client events related to the product. Our dollar rate swaps market share reached the highest level in March that we have seen over the last six months and we had a 15% pickup in revenue capture in swaps clearing versus Q4 last year.

Lastly, we are actively involved with a working group of intermediaries and customers on a potential repo clearing offering. If that develops over the next quarters, we will share additional information.

Turning to equities, we are pleased with the start of the year with Q1 volume up 28% and April up more than 30%. We have had solid activity in equity options which grew 20% during the quarter. In Q1, our S&P 500 options market share versus CBOE expanded to 29.4% from 27.8% last year. Open interest in equity options rose 13% compared to the prior year and our new BTIC order type continues to perform well and trade at 20,000 contracts for the first time on March 31.

Moving on to our commodities portfolio, these business lines overall were up 13%. Energy has been particularly strong with record Q1 average daily volume of 2.5 million contracts and April has continued to be robust with volumes up almost 40%. WTI futures had a record quarter averaging about 1.2 million contracts per day and gasoline futures activity was also at a record level.

I mentioned options earlier and within energy, we had record WTI options volume of over 200,000 contracts per day and more than 145,000 contracts per day on Globex. Our natural gas options were up 38% during the quarter and we had a record percentage of volume traded electronically there. Additionally, we set a record number of large open interest holders in our energy futures in Q1.

Our metals business was also a standout in the first quarter with volumes up 23%. Our precious metals average daily volume was up 26% led by options which rose 36% in Q1. As many of you know, we have made significant inroads into base and ferrous metals businesses and we continue to expand our presence in these key growth areas.

Our copper business is up 11% and we hit a new open interest record during Q1. We continue to outperform our primary competitor in this market where we have posted faster growth in copper in each of the last five quarters.

In aluminum, we continue to expand our suite of aluminum offerings achieving record volumes and increasing our open interest fivefold in the last 12 months. And in iron ore, leveraging our customer value proposition of global electronic trading of futures and options and customer anonymity, we have had growing open interest and a record trading day of almost 13,000 contracts. We have now achieved iron ore market share of 10% in Q1, up from just 3% in 2015 as we continue to successfully expand and diversify our global suite of metals products.

Finally, agricultural products have been particularly strong in April and are tracking toward a monthly average daily volume record for the month after a slow start to the year. Trading has taken off based on production uncertainty in South America where wet conditions in Argentina and dry conditions in Brazil are causing concerns. We had two consecutive record trading days last week in the overall complex with almost 3 million contracts including record soybean product volume above 1.5 million contracts on one of those days.

Electronic ag options are surging up from near 130,000 in April last year to more than 250,000 daily so far this April. Importantly, open interest in soybean and corn futures are up 16% and 8% respectively from last year. Finally, last week we reached an all-time high in large open interest holders in agricultural products.

In summary, we continue to work with our customers on bringing innovative risk management solutions to the marketplace and our product diversity is unparalleled. John will touch on our progress to continue to streamline our infrastructure costs, to reallocate our expenses to growth initiatives and to further innovate in our businesses.

With that, I am going to turn the call over to John to discuss the financials. Thank you.

Thank you, Gill, and good morning, everyone. Our team has been intensely focused on three things, driving global revenue growth, operating our business as efficiently as we can, and returning excess capital to our shareholders in a consistent way. As Gill mentioned, we had a tremendous start to the year with strong and balanced revenue growth. Total revenue was up 11% compared to a very strong quarter last year while total adjusted expense rose just 3%. Our adjusted operating margin expanded to 65% and adjusted EPS of $1.15 was up 17%.

Our rate per contract for the first quarter was $0.756, down 4% from $0.789 in Q4 as our overall ADV rose 29% sequentially. The biggest impacts were member versus nonmember mix and volume discount tiers this quarter due to the large increase in activity.

Compared to the fourth quarter, our members volume grew 30% and nonmembers jumped 23%. In addition, we had higher volume discounts in Q1 relative to Q4 as a result of significant growth in certain products. Market data revenue was up 4.5% compared to Q1 last year and in line with our guidance. We continue to monitor this line carefully as we are seeing some rationalization as we bring all customers in line with the full price offering and we are seeing some screen declines due to recent bank staff reductions.

Adjusted operating expenses for the quarter totaled $327 million, up 3% driven primarily by an $8 million increase in licensing and other fee agreements. Excluding license fees, our total expense year-over-year was approximately flat and as a reminder, our annual guidance was a 1% increase on that basis. We ended the quarter with approximately 2600 employees with the majority of the hiring done in India and Belfast which is part of our plan to reduce technology expense while improving service by staffing in those lower-cost locations and reducing contractors. Our compensation ratio for Q1 came in at 14.1% compared to 16.1% for the full-year of 2015.

Looking at the nonoperating income and expense line, our ownership in the S&P Dow Jones joint venture drove more than $26 million in net earnings from unconsolidated subsidiaries which was up 13% from the prior year. We are pleased with the investment we made in the Index business while also assuring we continue to offer the world's leading Index futures products on CME.

Now turning to investment income, we had a meaningful increase in investment income driven almost entirely by the returns generated through reinvestment of cash performance bonds and guaranty fund contributions. The rise in short-term rates at the end of the year resulted in an increase in investment income of $17 million. During Q1, we had returned approximately $10 million of that to clearing firms which is displayed on the income statement under other nonoperating expense. This amount is anticipated to increase as our investment returns grow.

We recently received approval to establish an account directly at the Fed. At this point the account will only be for clearing firm house positions held in cash. We are currently in the process of operationalizing the accounts with the Fed. When effective, we expect to pass a higher rate to clearing members for their house positions than we do today.

Cash held in segregated customer accounts will continue to be invested through commercial banks and U.S. Treasury securities as they are now. We expect that the house accounts will be operational in the next month or so. As in the past we plan to continue to pass through the majority of the earnings back to the clearing members.

Turning to taxes, for the quarter we ended at 36.3%, slightly below our guidance.

And now to the balance sheet. During Q1, we paid almost $1.2 billion in dividends to shareholders including our variable dividend and the first regular dividend. At the end of the first quarter, we had $1.33 billion in cash, restricted cash and marketable securities. We added $130 million during the quarter driven by the sale-leaseback transaction of our datacenter with CyrusOne.

During the first quarter, capital expenditures net of leasehold improvement allowances were $16 million as we continued to leverage more software and infrastructure as a service which is included in expense. We continue our intense focus on efficiency with the sale of our office buildings over the last few years and more recently our datacenter, we are taking an asset light approach which will allow was to focus on running our core business. In 2015, we delayered the management structure, closed futures pits, reduced marketing cost and focused on datacenter consolidation. So far this year we have completed the sale of our datacenter, sublet excess office space in Chicago, announced the closure of our trading floors in New York at year-end and have begun to offshore some positions reducing compensation and consulting costs.

With the sale and leaseback of our datacenter, we will continue to operate our trading and clearing functions as well as our co-location business and we will continue to receive the corresponding co-location revenue. From an earnings perspective, this transaction is approximately neutral. In terms of expenses, we will see a net reduction in total quarterly expense of about $1 million primarily in depreciation and we expect a corresponding increase under interest expense.

Turning to the New York floor, we will save approximately $5 million of expense annually beginning in 2017 and possibly another $3 million per year if we can successfully sublease the space.

In summary, I am very pleased with the hard work this quarter across the entire business. As you know, operating leverage in our business is significant and this was clearly evidenced by the margin on incremental revenue of approximately 90%.

We have outlined many positives going forward including building liquidity around the clock and from around the world, innovating new products, getting access to the Fed accounts which should benefit both our intermediaries and our shareholders, and continuing to focus on our efficiency strategy.

With that, we'd like to open up the call for your questions. Given the number of analysts who cover us, we ask that you limit yourself to one question so we can get to everyone. Please feel free to get back into the queue if you have any further questions. Thank you.

(Operator Instructions) Dan Fannon, Jefferies.

Thanks, good morning. Since your last call there has been a lot of headlines around M&A or potential M&A in your industry. Gill, if you could update us on your thoughts around your views around M&A, both large-scale as well as strategic. And then, John, also maybe talk about the financial aspects as you guys think about return thresholds around potential acquisitions?

Dan, I think the story is consistent with what we have spoken to you about in the past. We will continue our focus on our globalization on the options growth I had talked a little bit about a short while ago. And as well as what we are now calling capital efficiencies which is a combination of a bunch of things which is essentially whether we are talking about clearing of OTC trades, the futurization of the marketplace, brand new clients or the cross margining and the compression services that we offer. And with that focus that we have we continue to remain opportunistic with respect to any kind of opportunities that we might see that make sense for both ourselves, our shareholders as well as our clients.

Dan, this is John jumping in. We look at both organic and inorganic growth opportunities all the time and really it is about creating shareholder value in the best way possible. So we look at acquisitions in particular. We look at it from obviously multiple valuation metrics, is it accretive over time to earnings? Does it create value by looking at cash flow models? So when we look at return thresholds, we usually use about 9% to 10% as kind of the threshold that we look at.

But I think for us it's are we creating shareholder value, how is the best way to get from a strategic perspective to where we want to be? Is it growing the business organically, investing the business organically or is it purchasing good services or another company from somebody else? So that is what we would look at.

Thank you.

Richard Repetto, Sandler O'Neill.

Good morning, guys. So my question is on expenses. You are running significantly below the full-year guidance like we come out with 1.15 and the guidance I believe is 1.18. And this was a high revenue quarter, you got high payroll taxes. The other thing to go along with that, you are running significantly below on CapEx as well, the full-year run rate. So I'm just trying to see what the expense guide, whether it's maintained and if it is maintained, what could we be spending stuff on in the back three quarters?

Thanks, Rich. Expense control and running our business as efficiently as possible is a very big focus of the entire management team and it has really become part of our DNA. When we look at the expenses, the first quarter tends to be a slower quarter in terms of expenses as we build up and projects get launched in the second and third quarters. But if you look at slide 14, you can see the results of our focus on expenses. You can see that over time we have had expanding operating margins and we've got incremental margins last year of 112% and 90% incremental margins this quarter and operating margins around 65%.

So it has been a large focus of ours. In terms of the guidance, we have guided to a very modest 1% increase in expenses ex-license fees. We are not adjusting guidance at this time but we are intensely focused on the business and running the business as efficiently as possible.

What this does is this allows us to free up costs for growth initiatives and some of the growth initiatives Gill outlined in his prepared remarks and for example swaptions is something that we will be launching that maybe Sean can comment on as an example of what we are working on.

Yes, sure. In terms of our OTC clearing, which Gill talked about in terms of offering capital and margin efficiencies to the marketplace, we actually we recently launched BRL, interest rate swap clearing which is a unique value proposition relative to our large competitor. Mexican peso, we launched a little over a year ago, it is doing extremely well. We did have our first swaptions trade very recently. We are very excited about how that will develop over the coming two quarters.

And in addition to that, we are working very closely with the marketplace on repo clearing as Gill mentioned in his remarks. So we are talking to and working closely with the same set of folks that we worked with in order to launch our successful interest rate swap clearing initiative and we are looking at replicating that with solving a lot of the marketplaces issues in the repo particularly in the treasury repo market similarly.

So, Rich, I mean we are focused on expense management, we are focused on reducing infrastructure costs and freeing up those costs to invest in new initiatives like Sean just mentioned.

Ken Worthington, JPMorgan.

Good morning. In terms of your use of the Fed for house positions, how much money can get placed with the Fed under the existing structure that you just got set up with the approval? And to what extent can you move beyond this for just house positions in the future?

And then you mentioned the passing of the majority income back to clients. To what extent does this give CME an opportunity to keep more as well? I'm sure you won't answer but I will ask it anyway. If so, how much?

Thanks, Ken. We have been very focused on driving our investment income line. In fact, if you take a look since 2012 in the first quarter of 2012, we actually had an $18 million expense in nonoperating income and now we have driven that to a $5 million income on that line. So overall when you look at the earnings that we got for managing collateral, we earned approximately $7 million this quarter through investing that collateral which is about double last quarter. It was driven primarily by the increase in interest rates.

Access to the Fed accounts will be for house positions held in cash so to the extent that that cash balance increases there is an opportunity for us to earn more and we will be able to provide more color on how much is about that impact next quarter when the Fed accounts become operational. But to give you an idea, about 20% of our $138 billion in collateral is house account related. Maybe Kim could comment on the Fed account.

The cash component of that 20% is lower, that is the part that (inaudible), I think, Kim, it is $3 billion?

Currently the cash balances on the house positions is $3 billion. That is not a number that we control, it is a number that the clearing members control with the decisions that they make about what they post for margin. But obviously the return that they get on the funds that they post with us is part of that decision.

And it is a higher return for our client base and one of the exciting things about having this account for us.

And then you asked about the customer accounts. Those are authorized. That process is underway between the regulators. That is not something that we can really comment on the timing of but we know that it is still being worked on.

Mike Carrier, Bank of America.

Good morning. This is actually Sameer Murukutla on for Mike Carrier. Thanks for taking my question. Good morning. I am going to just leverage off of Dan's question a bit. Can you provide an update on your thoughts into the level of your stake in BM&F given their current M&A that they are involved in? And any comments on the possible interest in the Indian Commodity Exchange? Thanks.

Sure, this is John. BVMF is one of our most important international strategic relationships regardless of any ownership stakes. We continue to hold about a 4% stake in BVMF, the value of which has increased over $150 million since the end of 2015 and we will continue to work with them as we have historically.

In terms of the Indian Exchange, we are not going to comment on any of the rumors or M&A activity there.

Okay, thanks for taking my question.

Alex Kramm, UBS

Good morning. Wanted to just touch on the energy business for a second here. Clearly one of the more impressive areas in terms of growth but one of the things that has always been or that has been (inaudible) is that you are outperforming at least in terms of ADV, your primary competitor. So would love for you to talk a little bit about what is going on there. And obviously you all have different product mix so maybe if you can drill a little bit deeper not just about Brent but also about WTI, natural gas, gas oil, other areas where you are competing more or less directly, where you are winning and why you are winning if you are winning?

Yes, it is Derek here. I would say we are absolutely pleased but not totally satisfied with the growth that we continue to impact here on the energies business. I mean we have not only have we grown to record levels in Q1, we have increased our large open interest holders and it has been pretty strong growth. We talked last quarter about the benefits of the overall broad market adoption increasingly towards WTI with the result of the lifting of the export ban in the US. That has actually significantly increased participation in our markets on the futures as well as the option side.

But in terms of where we're going outside of that options has been a significant area of growth for us inside the energies business and I would actually also direct you to some of the comments that Gill made in his prepared remarks around where and how we are globalizing our footprint right now.

If you look at where the growth of our business is coming from, our EMEA business for energy business up about 40%. That is outperforming the business as a whole. What is really exciting is the investments that we have made in boots on the ground, sales campaigns and product sales in Asia for us is bearing significant fruit. Our Asian energy business is up 82% year on year and that is significant growth in almost every major trading center.

I was in Shanghai and Singapore last week meeting with a lot of our clients and we continue to be able to attract them with our functionality both on the futures as well as the options side and the broad base of participation in our markets.

So we tell a lot of the WTI story, there is a nat-gas story, there is a gasoline story. We set an all-time record in our gasoline futures as well so it is broad-based growth, it is global growth and it is across our asset class in the presence of building OI and large open interest holders.

I would just add to that specifically on the international side within Asia for example, we are seeing growth coming from each of our client segments in the energy quadrant, crops are up 31%. Banks interestingly enough were up 104%, hedge funds 96%, corporate firms coming in 88%, retail 85%. We are seeing similar activities coming out of Europe so for example on the hedge fund and in the asset management community, 26% growth specifically in the energy quadrant. So it goes to our sales penetration and efforts in that regard in terms of how we are targeting our focus and our campaigns in these areas.

Alex Blostein, Goldman Sachs.

Thanks. Good morning. Just a quick follow-up on market data, I don't think it was asked yet, but the 4% to 5% guidance for the year that you guys provided on the last earnings call, does that still hold or just kind of given some of the headwinds that you highlighted on the headcount reductions, should we think about a slower number, a lower number for the year?

When we provided guidance last year, we provided a range because it is very difficult to predict. We had given guidance as a 4% to 5% growth rate. We came in this quarter up 4.5% from Q1 last year which is in line with our guidance. We are seeing pressure as customers move to our full priced offering as well as a decline in screen counts as banks lay off staff as you have probably heard from the banks earnings calls. So we are very focused and working hard on our data business but we are seeing some headwinds as you indicated.

Brian Bedell, Deutsche Bank

Good morning, folks. Just to pile on on the Asia question, thanks for all the disclosure on that. That was a good discussion you just had about some of the progress there. But I guess if you can think about or try to highlight how big you think this market can eventually be for CME in terms of penetration rates? Obviously the growth recently has been especially strong. But do you see this as just an ADV perspective being able to become as large as Europe let's say in the next two or three years? Can you talk about some of that penetration opportunity? And then also related to, John, I think you cited more projects in growth initiative spend later in the year. Is part of that included in that spending level?

Brian, this is Gill. I am going to start and I am going to ask Bryan to basically expand more as to where we are seeing growth specifically. If you look at the product opportunity set, if you look at the opportunity in terms of the product that we have across all of the asset classes that we have, we have highly relevant prominent products for all of our clients in all places around the world. Within Asia specifically, we have been focused over the last few years on China but what we have not talked about is the sales effort that Brian will go a little bit into other parts of Asia which I would say are more developed in terms of the education side of things. Korea comes to mind.

China, we have given you some numbers this quarter specific to China. These are accounts that are based in China but they might be trading, they probably will be trading from outside of China. As China continues to expand its policies for access, you would see that number grow. The timing behind that remains to be seen. But as we sit here now, China is allowing and has allowed their intermediaries as well as their direct accounts such as the hedge funds, the prop shops and the commercial entities to establish operations outside of China and that is the floor that we are seeing.

India is an untapped opportunity at this time. There are very significant changes afoot in India that will also lend themselves and translate into opportunities for us.

So with that broad view about China and I'm only talking up out areas in which we will see the highest impact, I am going to turn it over to Bryan to talk about some of the volume flows that we are seeing that are driving the high rate of growth there.

So with respect to the efforts in Greater China and Hong Kong and specifically Hong Kong, we are seeing revenues are up about 51%, 56% growth in our volume that is being driven from energy equities as well as some of our interest-rate products. Within the segments, the growth is really coming from props, a growing number of private hedge funds and asset managers have also evolved. We are working very closely with our intermediaries to help bring that business into our markets. We are seeing some good traction in terms of liberalization of the central state owned enterprises.

For example, SOEs were permissioned up until about two years ago, 31. Now it is about 112 are in that area so we are seeing that as additional opportunity.

Sovereign wealth funds and asset managers are increasingly growing their business with us and again, we are focusing in that area and really building on opportunities to work with corporates particularly insurance companies. We see more Chinese banks that are inquiring about trading our products and also looking to build their efforts inquiring about OTC clearing with us which is a very good sign.

Within Taiwan, year-to-date volume in revenue was up about 40% and 36% respectively. The main drivers in those areas were equities FX, energy and interest rates. The main participants are banks, asset managers and again, we are seeing some good opportunities with insurance companies.

There has been some progress within Taiwan in terms of allowing securities firms to offer global futures so we are working very closely with our intermediaries to bring that business into our group.

Within Japan, we have seen consistent growth of about 7%. Revenues were up about 32%. You have to keep in mind Japan is the second biggest holder of US debt so there is great opportunities there. Main drivers have been from banks and we are seeing some nice growth coming from asset managers.

Gill alluded to Korea. We continue to see very nice growth coming out of Korea. It was two years ago that there were no Korean FCMs that had an average monthly volume of about 100,000 contracts. Today we are happy to say that we have eight firms that are providing at least 100,000 sites per month which is a great progress and the drivers in that area are equities, rates, foreign currency and energy.

Singapore, it is up about 18% coming out of that region. We are seeing some nice growth coming from the banks in particular as well as proprietary firms and corporates and commercials.

Another area that we are very excited about is Australia. We really haven't mentioned that. Our volume this year in Australia is up 12% and our revenues are up I think approximately 50% if my memory serves me correctly. The top three products are interest rates and equities and ags are up about 27%, foreign currencies are up about 39%. Our main focus in working with Australia again is within the asset management community hedge funds and the banks.

Chris Harris, Wells Fargo.

A question on your margins. I mean a great margin quarter, 65%, I mean I think that is one of the best results you guys have ever had. If we think bigger picture and you guys keep delivering double-digit volume growth and 90% incremental margin, your margin is going to move up fast in a hurry. So just wondering is there a limit where you guys are really comfortable about taking the margin to before we start seeing a fairly sizable increase in the expenses or is that really nothing for us to be focused on at this point in time?

Thanks, this is John. Yes, we were limited by 100% is our limit. But no, in all seriousness, we continue to run the business as efficiently as possible. As you can see from the amount of volume we have been able to handle without any issues, we have been able to handle that this quarter without any incident. So I think for us we do have natural increases to our costs over time and that would be inflationary things, salaries, wages and the like.

But we provide a tremendous amount of value to our clients and so as more liquidity comes into the marketplace, there is more trading that occurs which is a tremendous benefit to our business and the amount of volume that we are able to handle we've been proven out to have been able to handle that.

Other things that impact the margin is also the license fees we pay on equity contracts primarily so there is some share that impacts kind of our margin level. But there is nothing artificial out there that prevents that from going higher.

This is Gill. If I could just add to what John said. John is spot on with respect to the current operating structure that we have and products as we continue to innovate across the asset classes. But as we roll out new and innovative products or services in response to what our clients' needs are and in conjunction with the capital efficiency goal that we have for our clients, the repo clearing services is one such thing and that is a separate infrastructure from what we currently have.

John has fine tuned the current infrastructure to hum like you are seeing it now and within that construct, the operating margin can absolutely grow. But as you introduce more things for our client base, you may see a slight reduction depending upon the success of the products and services that we roll out.

Ken Hill, Barclays.

Good morning, everyone. I just wanted to follow up on the market data specifically those customers who are rationalizing their behavior and I guess choosing to turn that service off. Are those guys who may be didn't need it to begin with and just realized that were paying for it or did this actually just get to be too high a price for them to pay?

And I guess if it is that latter part, is there any flexibility within the service to really tailor market data for what a customer needs over time? Potentially could you be rolling out new products that might meet some of these people's need who have gone away recently?

This is Gill. I think as John alluded to in his remarks and in response to one of the questions, a large chunk of that is coming from the layout that we see that the banks are undergoing with respect to pricing pressure, it being too high. If you compare our market data fees to the exchanges that we compete against, you will see that we are lagging behind them in terms of price so we don't think that is the issue. We think it is firms rationalizing their needs over time. Bryan, you might want to add.

You certainly hit it. As the full fare came into play, we did expect that there might be some drop off from individuals that may be using a particular screen and not really utilize it for trading quite frankly but for observing the markets. Those level of users have been pretty small. I mean the biggest impact as Gill had referenced is the rationalization that we are seeing from firms that have been consolidating their operations and making those decisions with the respective reduction in staffing and layoffs.

Kyle Voigt, KBW.

Thanks for taking my question. So I was just wondering if you could comment on competitor energy platform, NFX. It looks like they will begin charging for some fee for trading with the phase-in period starting next month. Do you believe the momentum that they have had in building open interest to market share is sustainable after they begin to charge for trading? Are you hearing any feedback or pressure from your clients regarding them being unhappy with trading fees or other services? Thanks.

This is Derek. Thanks for your question. When we look at the status of where our nat-gas business is, if you look at the six months prior to NFX launches, we were averaging in nat-gas options where they are making their hard push right now about 70,000 contracts a day. If you look at the last six months, our ADV is close to 100,000 contracts so we have grown that business 40% over the course of time that NFX has come into the market and to the extent that we've got the fastest-growing part of that nat-gas options business for us is the electronic nature of that business, a record 25% of our nat-gas business has traded electronically. They are driving that 40% growth.

If you look at what NFX is putting up, it is a block business, it is not electronic and it is only on the financially settled side. So given the fact that we have added 30,000 contracts ADV since pre-launch of NFX to post-launch and they are doing 12,000 to 15,000, we are not seeing any real feedback from customers asking us to do anything different other than continue to scale our infrastructure electronically and grow the business.

Rob Rutschow, CLSA.

Good morning. Just one more follow-up on the market data question. Are you able to size the bank industry in terms of the overall screen count? Does it looks similar to the contribution to trading volumes?

And then separately, does opening an account at the Fed give you any sort of long-term growth opportunities aside from just picking up the extra spread that that provides? Thanks.

It's Bryan. On the market data side, yes, we are able to size across the user base the profile of user. And while we saw a downtrend this past quarter specifically within the bank sector, I can't comment whether or not we are going to see a continued trend going in that direction. What I can say is that we are closely monitoring our performance and have every expectation to continue making the good progress we have with market data.

The opening of the Fed account also gives both our customers as well as us additional opportunity.

On the headcounts in particular for our customers, it does allow was to offer them they significantly increased return on their cash. So it should make us a more valuable proposition for them.

Richard Repetto, Sandler O'Neill.

Thanks for the follow-up. Gill, on the presentation you talked about -- and this is page 16 -- the secular drivers of growth and it being the potential for more futures and options volumes due to capital efficiencies. And I was wondering can you give us an update on cross margining, I think it was $3 billion or so? And I guess what your expectations here and not having the dealer volume in over the counter interest-rate swaps, what do you think about the potential there of cross margining?

I will start and I will ask Kim add here. The capital efficiency title has at least two or three things beneath that that might be helpful for you to think about. I would say in terms of the opportunity to be efficient for our client base futurization is at the top of that list. So developing products in house that our customers can use on a more capital efficient basis is one of the things that we have been doing and will continue to actually do.

If you look at the compression services that we implemented not too long ago up to this point in time, you have had $21 trillion in notional value that have been compressed over time. And as you look at the performance of these OTC market itself, it has taken an uptick from the fourth quarter of last year.

Now this value proposition, this group of value propositions that I just described no one else can provide that, the compression in conjunction with the cross margining and in conjunction with the futurization opportunity. So I think from that perspective, we are quite excited as the interest rate environment continues to shift.

And then I would just add I think this is not something that is exclusive to CME but CME is working with the industry to try and get better recognition for customer margin in the treatment of capital at the bank level. That will be a very significant element in reducing the cost of doing business.

Alex Kramm, UBS.

Hello again for a follow-up. I want to go over to your equities business for a minute. On that slide that you had on equities, I think it is page 10, you mentioned that on the S&P 500 options I guess options on futures you now have -- your market share increased relative to CBOE. I don't think you have talked about that business on a competitive basis in the past or in those terms. So just wondering if this is an active focus of yours to kind of look at that market and compete more aggressively and maybe quote away the user base from the securities-based options to the futures market. So any color there will be interesting. Thanks.

So we are always focused on the clients and the value that we add to clients and therefore we are also always focused on market share. So in each and every one of our businesses, we are continuously focused on our direct competitors but also substitute products and making sure that we add the most value.

So while we may not have talked about this as actively before, this is certainly something that we look at very closely. In particular if you look at that business, we are very focused on the ability to cross margin obviously underlying futures against the options. As the most efficient platform possible we are continuously focused on TCA or total cost analysis. We've talked about this across each of our different business lines. If you recall at the beginning of last year, Greenwich Associates did a big study that looked at our interest-rate futures as always being the lowest cost relative to the interest-rate swaps industry in terms of representing risk.

Similarly we have come out last year with something called the big picture and then we did an update this year again with the big picture where we are showing that as an example, our equity futures far more efficient for investors for giving exposure to the equity market than ETFs. So we are continuing to look at the substitute products both from a customer client value proposition but also from a market share perspective.

Patrick O'Shaughnessy, Raymond James.

So speaking of portfolio margining, wondering if you can comment on the LSE Deutsche Boerse planned merger and whether some of the capital efficiencies that they are proposing would impact you guys competitively I think specifically with regard to your rate clearing business, your rate swap clearing business?

Patrick, this is Gill. I think on the first part of your question you should ask them. They seem willing to talk about the opportunities.

On the second part of the question, I have to go back to what Sean had said before. Focus on the competitive dynamics of what we all do here. And so we believe that as I said, we have the best value proposition for our client base and we intend to grow upon that.

We have no further questions at this time. I would like to turn the program back to management for closing remarks.

Thank you so much for joining us this morning and we look forward to talking to you in the next quarter. Bye-bye.

And that does conclude today's program. You may disconnect at this time. Thank you and have a great day.