芝加哥商業交易所 (CME) 2016 Q2 法說會逐字稿

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

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, Brian, Derek, and Sean are on the call as well, and will participate in the Q&A session.

Before they begin, I'll 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 was another solid quarter for us. Average daily volume in Q2 rose by 13%, the same growth rate as our record first quarter. We had double-digit growth again from each of our buy-side client groups, including asset managers, hedge funds, proprietary trading firms, corporate, and retail. Despite the recent slow-down in volatility post-Brexit as measured by the Vick's, we are tracking up 10% compared with last July.

We were pleased to set an open interest record in the second quarter of over 116 million contracts, and we are near peaks in our large open-interest-holder data in several product areas.

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 saw robust electronic trading activity outside of the US, with Asia up 21% versus Q2 last year. Latin America rose 16%, and Europe rose 12%.

Following the Brexit announcement we had significant activity from outside of the US, with 5.3 million contracts traded from Europe, and 1.9 million contracts traded from Asia the day after. In Q2, the electronic volume from outside of the US was 24%. In July that has jumped to 27%, and the day after Brexit, 29% of the activity was outside of the US.

In Europe, volumes in five of our product areas grew by more than 20%, with the strongest growth in energy and equities, with year to date ADV up 38% and 35%, respectively. In Asia, future ADV and energy rose by more than 140%, and metals volumes jumped more than 80%. Latin America growth was also led by energy.

In addition to the country of origin information that we shared with you, we also track electronic volume throughout the 24-hour trading day. In Q2, volume during Asian hours grew by almost 40%, from 260,000 contracts per day last year to 360,000 this quarter. During European hours, from 11 PM to 7 AM Central time, volume rose from 750,000 per day to 1.1 million per day, up almost 45%.

Turning to our efforts in options, we remain the leader relative to other global exchanges, with Q2 options rising 15% and electronic options average daily volume rising 23% to 1.7 million contracts. In Q2, the percentage of options that traded on Globex reached an all-time high of 57%, up from 51% in Q1.

We saw the highest electronic percentage to date in interest rates, energy, and metals. Agriculture options reached a record quarterly ADV of 345,000, up 26% from the prior year. Lastly, in June we had the highest month ever in total weekly options products, with 495,000 contracts per day, up 57%.

Moving on to our commodities portfolio, we had a very impressive quarter, with energy, ags, and metal each up more than 20% in revenue. We also set new records of large open-interest holders in metals and ags, re-affirming that global customers continue to manage their commodities markets risk exposures at CME Group.

We track substitute products very closely, and we have out-performed peers in crude futures, crude options, natural gas futures, natural gas options, gold, and copper so far in 2016. Energy was particularly strong, with Q2 average daily volume of 2.3 million contracts, and July has continued to be robust, with volumes up 20%. In Q2, crude was up 38%, natural gas rose 17%, and refined products increased 18%. The European and Asian activity in energy mentioned earlier highlights our externally focused attention on our customers globally, and the growing relevance of our product set.

Growth in energy options has been meaningful. WTI options volume rose more than 20% to more than 180,000 contracts per day, while natural gas options were up almost 20%, as well. Within energy options, we have grown from 49% electronic in Q1 to 53% in Q2, and up to 57% so far this month. Energy ADV in the second quarter was the second-highest quarter, ever behind the record first quarter this year.

Our metals business during the quarter was phenomenal. Volume was up 41% and transaction revenues rose 35%. Our precious metals average daily volume was up 43%, while copper rose 33% versus a year ago. Options activity was strong, up 32% compared to last year. Metals had the second-best quarter ever, and we have out-performed substitute products at other exchanges by a significant amount. We were also able to achieve multiple all-time open interest records in copper, as well as set the all-time records for large open-interest holders in both gold and silver in July.

Last, but not least, our agricultural business had its highest volume quarter in our history. Ag options rose 26%, and futures were up 22%. Soybeans led the way, up 49%, while corn, soybean meal, and hard-bread winter wheat each grew more than 20%. It is worth noting that there are increasing expectations of the likelihood of La Nina. We would expect that to impact both agricultural volumes, as well as benefiting our natural gas markets.

Turning to financial products, and starting with interest rates, average daily volume in Q2 was up 3%, and year to date we are up 7%. Within Euro-dollar options, volume increased 28% during the second quarter. Recently we have had progress developing liquidity and trading on the screen, with electronic percentage increasing from 23% to 25% from Q1 to Q2. Also, the electronic volume during the US hours when the pits are open continues to increase significantly.

Fed funds futures continue to be robust, as we have seen Fed expectations move around before, during, and after the Brexit vote. Fed funds futures averaged more than 142,000 contracts per day in Q2, up almost 140%. In addition, we spoke about the successful launch of the Ultra 10-year product last quarter. Volume has jumped from 35,000 contracts per day to over 60,000 and July is tracking at that same level.

We launched swaptions clearing in the second quarter, with five approved clearing members. We have now cleared dealer to dealer and customer trades. In addition to swaptions, our recently launched Brazilian real IRS clearing offering began scaling in June. We've now had 24 participants who have cleared the product thus far.

We continue to out perform other related markets, indicating the proportion of activities shifting to our interest rate futures and options. For example, while we are up 7% year to date in interest rate volumes, global dealer to client swap clearing volumes are down 10% in the dollar fixed-to-floating market. We continue to capture market share in treasuries, which we talked about before, as cash treasuries are down 5%, while our treasury futures are flat.

Our open interest in rates continues to hit record elevated levels, above 63 million contracts in March and June, while rate-related open interest at most other exchanges peaked several years ago.

Turning to equities, ADV was up 25% in Q2 to almost 3 million contracts. As I mentioned, we have had great participation from clients around the world. We had solid activity in equity options, which grew 24% during the quarter. We were particularly pleased with the record of more than 440,000 equity options that traded post-Brexit before the US stock market even opened.

In addition, last week we announced the launch of S&P 500 total return index futures, and the S&P 500 carry-adjusted total return index futures. These innovative products are intended to mimic the economics of a total return swap in futures form, allowing swap dealers and their end clients to avoid higher costs as a result of new swap margin rules that are expected on September 1.

This is another example of CME Group's ongoing commitment to meet the changing needs of our clients in an evolving global market place. The S&P 500 total return index futures will be available to trade via BTIC, which is Basis Trade Index at Close, and will further expand the US major index BTIC offering, which traded a reckoning $32 billion in notional value during Q2.

Lastly, our FX business was down 7% in Q2, as the trading environment was challenging pre-Brexit. So far this year, we have out-performed the two largest FX platforms in terms of trading activity versus last year. Our FX markets performed very well during the post-Brexit day, when the markets were active, and we had record British pound activity, with more than 500,000 contracts traded that day.

Speaking of Brexit, we were very busy after the results came in, particularly during the pre-US hours. We had a record 350 million messages to process, and as the slide in our presentation shows, we handled it without any issues. This is a tribute to our hard-working colleagues who were ready to handle strong activity when volatility spiked.

We have had a tremendous opportunity during the last few months to deeply engage with our global clients as market rules continue to evolve with uncertainty post-Brexit, and also the upcoming implementation of margin for uncleared swaps. We have been talking to folks about the greater regulatory certainty under US regulation, and based on the results again this quarter, it is clear customers on every continent are comfortable with the US regime. This was further solidified with recognition and permanent QCCP status in Europe that we received in June.

The next potential catalyst for increased exchange trading in swaps clearing is in about five weeks, when the first phase begins in the inter-dealer market requiring daily initial margin and variation margin to be exchanged on a bilateral, non-centrally-cleared portfolios in the US.

There will be a 10-day margin period of risk that will be put in place for un-cleared swaps, and there will be less netting available compared to the 5-day period for cleared swaps, and generally 1 to 2 days for futures and options. Based on many client discussions, we are accelerating internal product development to try to create solutions that can provide relief for participants, including intermediaries and clients.

I mentioned the S&P 500 total return index futures launch prior to September 1. Within our interest rate and FX areas, we are examining multiple new product ideas and looking at product construction. Within FX opportunities, we are working on include clearing for OTC FX options, and non-deliverable forwards. In addition, within rates, we believe this could be a catalyst for our swaptions business, and we are getting in-bound calls from customers about other ideas.

Lastly, I mentioned repo clearing last quarter, and we continue to make significant progress on the operational side in terms of technology and clearing, and we are working closely with large banks, asset managers, and hedge funds. In addition, we are planning to be operationally prepared to launch fairly soon after regulatory approval.

In summary, we continue to expand our global footprint and product offerings to create opportunities for our clients and our shareholders. We have worked hard to position the Company for success in a world that needs transparent, clear solutions for risk management now more than ever.

With that, I'm 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 driving global revenue growth, operating our business as efficiently as possible, and returning excess capital to our shareholders in a consistent manner.

As Gill mentioned, we had another excellent quarter. Total revenue was up 11%, compared to a very strong quarter in Q2 last year, with four of our six product areas delivering more than 20% revenue growth. Our adjusted expenses excluding license fees were flat with the second quarter of last year, so almost all of the incremental revenue dropped to the operating income line. Our adjusted operating margin expanded by 3 percentage points from a year ago, and adjusted EPS was up more than 15% for the second quarter in a row.

This quarter we removed amortization from our adjusted results, and we provided a summary of the impact on prior quarters, both in our earnings presentation deck, as well as in the income statement trend file we post on our website. This change puts the reporting of our adjusted results in line with our US exchange peers.

Our rate per contract for the second quarter was $0.782, up from $0.756 in Q1, due primarily to a positive shift in product mix, which was slightly offset by the member-non-member mix. Market data revenue was $103 million, up slightly from the prior quarter.

Moving to expenses, excluding license fees and adjustments, our total expense was $270 million, exactly where we were in Q2 2015, which I am pleased to report along with the solid top-line growth. For the first half of the year, on this basis we were at $534 million, up about 0.5%. For the second half, I would except expenses to be about $548 million.

The increase from the first half is based on our heavier spend on customer-related activity in Q4, and the acceleration of product development which Gill alluded to. We will be lower than our initial guidance at the beginning of the year, which included amortization and excluded license fees, by $4 million. Instead of being up 1%, we are guiding to a 0.5% increase on that basis.

We ended the quarter with approximately 2,640 employees, up 40 from last quarter, driven primarily by entry-level hires, and hires in lower-cost locations. Our compensation ratio from Q2 came in at 14.5%, and is down from 17% in Q2 last year.

Looking at the non-operating income and expense line, our ownership in the S&P Dow Jones joint venture drove more than $27 million in net earnings from un-consolidated subsidiaries, up slightly from Q1.

Turning to investment income, we received $2.6 million in dividends from BVMNF. In addition, our investment returns generated through reinvestment of cash performance bonds and guaranteed fund contributions during Q2 decreased sequentially to $5.2 million, from $7 million in Q1. This is a result of lower average daily investment balances from the prior quarter, and our net return during Q2 was 9 basis points. While we have been approved to establish an account with the Fed for house cash, it is not live yet, and we continue to work through the operational details.

Turning to taxes, for the quarter we ended at an adjusted 36.5%, which is where we guided.

Now to the balance sheet. At the end of the second quarter, we had $1.34 billion in cash, restricted cash, and marketable securities. During the second quarter, capital expenditures net of leasehold improvement allowances were $20 million, as we continue to leverage more software and infrastructure as a service, which is included in expense. We originally guided to $115 million to $120 million for the year. I'm going to reduce that by $15 million to $100 million to $105 million, based on efficiency efforts and timing.

One final item I want to outline today is a new program we have available for equity members. These firms are required to hold shares of CME Group Class A common stock, in addition to seats to receive equity membership privileges. Under the terms of the program, participants may substitute the assignment of their required shares by paying us a monthly subscription.

Currently there are 370 institutions that are required to hold CME Group Class A common shares as part of their equity membership. A typical equity member is required to hold 20,000 shares per exchange in addition to seats. For most of the equity members, the subscription rate will be $7,500 per month per exchange. This will provide choice for the firms, and potentially allow them to free up capital to deploy in other ways.

Each of the 370 firms will have full discretion on whether or not to participate in the program. The timing on their evaluation and decision to participate is expected to lead to an orderly share release over time, and should be easily absorbed by the market. As it is unclear on the participation level, we will update you next quarter on the up-take. At a 50% participation level, we would generate an estimated $20 million of incremental annual revenue, and up to $40 million if all equity members switch to the monthly subscription.

In summary, I am very pleased with the hard work this quarter across the entire business. Our secular growth drivers continue to deliver results with our without volatility. Our efficiency on expenses has been excellent, and since the first of the year we have returned $1.4 billion in dividends.

With that, we would 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.

Thank you.

(Operator Instructions)

Ken Worthington, JPMorgan.

Hi, good morning. Thank you for taking my question. Still really interested in this Fed account for house cash concept. Can you share some of the -- maybe the operational details that you're working through? I can't really tell if those will be interesting or not, but thinking they may be. When would you expect that to go live? What it be this year, next year? How quickly does that go fully operational?

Hi, Ken, it's Kim. The operational details are not very interesting, actually. What we're working with the Fed on the set-up for the account. I think we would anticipate that we would have the account active before the end of this year, probably in a two, three-month time frame. Right now it's available for house accounts only, so that would be the amount of cash that we would have available to invest in it, potentially.

Okay, great. Thank you very much.

Rich Repetto, Sander O'Neill.

Good morning, Gill. Good morning, John.

Good morning, Ken -- or Rich, sorry.

I've been called Ron recently, as well. Thanks, Gill for the -- you did an extensive product volume and even geographic review of how you're doing, how well you're doing. My question is, do you guys target what new products can actually impact your volume or your revenue in a year's time period, if you assume -- I know this isn't reality, but if you assume a similar environment, what do you try to get -- expect to get from these new products as a Company, as an exchange? Then the follow-up would be which of the big ones -- which products are most impactful to that?

Rich, I'll stop and I'll ask both Derek and Sean to comment if they want to. I think when you talk about product innovation here, you are always facing the uncertainty of whether it will be successful or not. What we have started doing, particularly in the last five to seven years, we've had a comprehensive plan. Part of that planning is talking to clients on the very broad-base basis.

In previous calls I've spoken to you about the number of folks that tune in to seminars that we put on. That's an indication to us. One example is the Ultra 10, 10-year bond that we launched. Enthusiasm behind the bond and the corresponding volume that we got since launch has been great. We've got a pipeline on both the commodity side and the financial side, and our guys are pretty excited about some of the prospects there. I will turn it over to Sean to comment on some of those things, and then Mr. Sammann can talk about others.

In terms of the bottom line on these products, if you look at the TN, as Gill mentioned, we were doing 60,000 contracts a day. You can look at our rate's RPC, which is publicly available. You can see that we're running currently at several million dollars a year in terms of revenues, in terms of the run rate.

If you look at Mexican pesos -- so in our interest rate swaps clearing business we now offer 19 currencies, relative to the largest competitor offering 17 currencies. We've got two now unique value propositions in terms of currencies, both the Mexican peso and the Brazilian real. In terms of the Mexican peso, we have MXN1.5 million a month is our current run rate. While it is a small currency, it's actually having a significant impact on that business.

With the Brazilian real, as Gill mentioned on the call, we're hitting a critical mass in the month of June. To put it in perspective, we launched -- it takes time for the new products to gain traction relative to building a critical mass of participants.

In the month of June we had a $5 billion equivalent total volume cleared in the month of July -- sorry that was in the month of May, excuse me -- $5 billion in the month of May. In the month of June we had $35 billion. The Brazilian real again, it's a unique value proposition relative to our largest competitor. It is a larger currency than Mexican peso, so we do expect eventually to make more in the Brazilian real than we are currently making in the Mexican peso.

We've had big success in our equity products that were launched in November of last year. The dividend futures, which we've spoken about, are running about 1,000 a day. The bigger and more exciting thing there relative to future growth is we've got over 50,000 contracts in open interest. In terms of BTIC, we're trading -- that's on the S&P 500 in particular -- we're trading over 5,000 contracts a day.

If you look at new products, we hope that they drive typically 3% or so of our top-line growth. We have other new products that we're launching with swaptions. As I said, it takes a while to build a critical mass. With the Brazilian real it took us from August of last year until June of this year to start hitting a critical mass. We do expect with US dollar swaptions to hit a critical mass hopefully in fourth quarter, and to begin to see significant growth starting then. We see strong growth across each of our product areas, with top line of 3% plus. Derek, do you want to jump in?

Yes, I think it's from a product launch perspective, which we tend to look at this in terms of either client need, market structure shift, and what has changed in the environment that provides an opportunity for us to provide a service that is not offered by someone out there.

Another way to think about product development opportunities is where there are global benchmarks that might be in disrepair or broken benchmarks, clients not able to manage a risk the way they could. Those are market entry opportunities for us.

For example, our move into aluminum 18 months ago was a result of customers not being able to access their physical aluminum, get it out of their warehouses. The growth in market share and revenue generation on our copper business has been largely helped by our entry into the aluminum market. In fact, Miller-Coors announced just last month that they're going to be shifting their price benchmark for their North American aluminum procurement to a CME-based product that we launched 18 months ago.

Looking forward, the other area product opportunity in development is where we can add products to our overall portfolio. As Gill mentioned, we've hit record revenue generation in our agriculture products business. We announced last month that we'll be launching our European wheat contract on September 12 of this year. That fills out what is already a globally utilized contract with a product that addresses some of the shortcomings in the current product.

Great opportunities there, and where it fits into our portfolio of services, making it easier from a capital perspective or an operational asset perspective for our customers to manage all their risk at CME Group, that's been our focal point for product development.

Okay, thanks for that 3% target, Sean. I'll get back in queue.

Chris Allen, Buckingham.

Good morning, guys.

Good morning, Chris.

I'm just curious. Obviously, we saw some great strength in agriculture and metals this quarter. I think Gill you alluded to some of the strength in that was probably driven by weather. I'm trying to also think about moving forward where the growth is likely to come from here from current levels. There's been some articles about Chinese retail ventures getting involved in metals future trading, agriculture future trading. I'm wondering if there's any sense for what is sustainable moving forward, what's been cyclical, what gives you confidence that maybe can grow from current levels?

Sure, as you pointed out, there's a regional growth story here, particularly outside of the US. On the commodities front, it's particularly strong, coming from Asia in both the energy and metals front. Mr. Sammann, do you want to add some detail there?

I think we're particularly excited about the numbers we've been sharing with you guys about the commodities footprint that we're growing in Asia. If you look at the energy revenues we generated year to date, energy revenues is now representing almost 35% of the total revenues we're generating out of China and greater China as a whole. Our business in greater China, meaning Hong Kong, China, and Taiwan is up 227%. The metals business, specifically, is our second-biggest revenue source in the same region. That's up 61%.

The opportunity set that we've got when we own the co-mix benchmarks on the metal side, our ability to position ourselves as a global benchmark in region, with the sales efforts that Brian and his teams have been putting forth in region to make sure that we are accessing a customer base with global liquidity by time zone, as well. That's how we see the opportunity continue to build into that community.

I would also add, that if you look at the importance of their commercial customers to our commodities complex as a whole, we've continued to focus on them being as a primary driver of our access. As you address those end-user customer needs, that brings the other market participants -- the props, the banks, the others that want to be where the end-user customers are. Whether you look at the revenue growth of the franchise as a whole, the record level of large open-interest holders, the record level of open interest itself layered on top of the China growth, tells a story of globalizing participation in our markets, and globalizing access to those global participant based on the commercial side.

Great. Thanks, guys.

Michael Carrier, Bank of America Merrill Lynch.

Thanks, guys. A question on the cash. When we look at it sequentially, it seems like maybe the cash didn't tick up as much. I know the dividend increased at the beginning of the year. I wanted to get a sense of if there's anything from a timing standpoint, or maybe from the CapEx standpoint? It seemed a little bit less than expected.

Sure, Mike. It's not unusual for our cash balance to grow slower in Q2. The primary reason is that we have two tax payments in the second quarter, and for this quarter it was $416 million. We also have our regular dividend of $202 million that happened this quarter. It's not unusual for Q2 to be a slower quarter in terms of cash build. We have tremendous leverage in our business model, and we've been able to return $1.4 billion in dividends year to date, so obviously that is a cash impact.

Got it. Okay, makes sense. Thanks.

Thanks.

Brian Bedell, Deutsche Bank.

Great thanks, folks. Maybe you could talk a little bit about market data in terms of what the prospect is for some more price increases in that for 2017, and then take-up of some of the programs. Also, the program that you talked about, John, is that revenue -- will that revenue fall into the market data line?

Hi, I'll take the market data. It's Bryan. First of all, we've been monitoring closely our subscriber base since we implemented the full fare back in January. We're pleased to see we're not seeing any substantive reductions or consolidations in that regard.

With that in mind, we've really been focused on developing new opportunities for revenue. One of the areas that we have an increased emphasis on is our development of derived data, and it's representing a very nice revenue stream for us. You can expect to see more activities on that end. While we haven't announced any type of price increase in 2017, we will be expecting an increase that will impact certain segments and offerings associated with our market data.

Brian, in terms of the new subscription plan, the purpose of the program is to provide our members flexibility. The members either can hold our shares or they can free up those shares and pay us a subscription fee. This gives our members a choice on how to deploy their capital. Also, it may make it easier for potential new members, especially those in the -- those international members may find holding CME shares prohibitive.

This is good for our current members, it's good for our potential new members, and it's good for CME, because we will be generating recurring revenue from that payment. It's likely going to show up in our other revenue line, not necessarily in the market data line. Obviously, this is all incremental to our bottom line.

The range is $20 million to $40 million based on your estimates?

Yes, assuming a 50% take-up, it's about $20 million. If all members chose to do this program it would be $40 million. We don't have a clear line of sight in terms of what the up-take will be, so we will be able to update you next quarter as it rolls out.

Okay, great. Thanks very much.

Thank you.

Warren Gardner, Evercore.

Great, thanks. On the back of that last question, just for market data. It's focused on the derived data, I think. I was just curious how interested you guys, or to what extent you've explored adding to that business inorganically -- additional analytics or other solutions like some of your peers have, to maybe broaden or maybe improve the overall value-add of that offering?

We certainly are open to looking at any opportunities that can augment or enhance the strong and robust business that we have with respect to market data. As I've indicated, there are tools that we have at our disposal right now as we're developing new products internally that we really haven't leveraged to the degree that we believe that we can. Part of that is in the derived data space, and developing new products as a result of that. We're certainly happy to look at any opportunities that do augment the great robust business that we have today.

To add to that, one thing to remember is we do have a data investment in our JV with S&P, so that's an area that is also looking to grow, and we'll be looking at non-organic opportunities, as well. We're not only participating directly through, as Bryan indicated, our data business here but we'll also be participating with our S&P partners with the joint venture.

Great, thank you.

Thanks.

Kyle Voigt, KBW. Please go ahead.

Hi, good morning. Thanks for taking my question.

Hi, Kyle.

I have a question on pricing. It looks like you began charging for Brent trading in July for non-market makers. Can you give us some more color on why you thought it was the right time to make this move, whether or not you've seen any material difference in client trading activity since you made the change; and then lastly, whether there are any plans to end the incentives for market makers in the future? Thank you.

Hi Kyle, it's Derek. I think we've been building our market share in Brent, and really building our global participation in Brent. When you build markets and you enter where an incumbent is already present, you need to enter by providing incentives that make it easy to access and where you don't make it too economically painful.

What we've done is over the last probably 24 months or so, we've looked at the traction we've gotten -- 10%, 12%, 13%. We've now actually rolled out our Brent options market as well last quarter. We're at a point now where we said we think we've got a sustainable participation level across the franchise as a whole. Energy is up 25%. We've always said Brent is an important part of the overall story.

The market is telling us it wants to trade WTI. When you look at the differential fortunes between what's happening between what happens on the WTI side of the fence, where our business is up about 45%, 48% in [ISIS]. Brent business up about 19%. The market's telling you it wants to trade on the WTI side of the ledger.

We've been successful with the commercial participation, and we believe at this point we're happy to be able to start to scale back some of those incentives, that they liquidity itself is sufficient to be able to maintain participation in the market. In any type market-maker incentives in place, they're always by nature temporary. If you're successful with the value proposition, that will hold once you remove the incentives. I think the overall performance of the franchise speaks to the success and the value we're bringing to the commercial participants.

Thank you.

Rob Rutschow, CLSA.

Hi, good morning. I believe the other exchanges that have excluded amortization of purchased intangibles have argued that their acquisitive and doing acquisitions as part of their business model. I'm wondering if the change in disclosure for you guys is a reflection of changing your outlook on doing deals; or if it's just a change -- a belief that the market's not appropriately adjusting your earnings? If it's the latter, I believe the prior CEO had said that large deals are very unlikely. I don't believe we've heard Gill say that, so are large deals still very unlikely, or are you looking to do some more acquisitions going forward?

Hi, Rob, this is John. Our view on M&A hasn't changed. We will be looking at all potential M&A to create shareholder value and grow in our strategic point of view. We'll evaluate all opportunities. With regard to why we changed to -- on amortization, all of our other US exchange peers have taken amortization out of their -- out of their earnings. BATS came out last quarter excluding it, CBOE removed it from their results. We thought it was important from a comparison purposes to exclude it so that the investing community can have an apples-to-apples comparison with the other exchanges.

Okay, thank you.

Okay, thanks.

Andrew Bond, RBC Capital Markets.

Thanks, good morning.

Good morning, Andrew.

When we look at your energy business versus ISIS, obviously a lot of positive take-aways due to the fundamentals and innovation on your part. The growth incumbents are now seeing competition from NASDAQ and NFX, which continues to grow open interest through lower pricing. I was wondering if you could give us your take on NFX, as well as what you're hearing from customers? Do you believe they're likely to become a more significant threat to volumes or pricing, generally?

Hi, Andrew, it's Derek. I'll take that. If you start to look at the franchise as a whole, the energy's business up 25%, we're seeing the significant growth up-take on the WTI side of the ledger. We're also seeing significant growth on the electronic side of our business. When you couple together the huge growth that we're seeing in the core franchise, we're seeing the large open-interest holder record levels. We're seeing commercial participation and revenue generation from the commercial participants at record level. We actually find that our business as a whole is beyond just any particular single product slice.

When you talk about individual views of nat-gas itself, when our nat-gas franchise year to date is up 12%, and ISIS revenue was actually down 4% in nat-gas, but when you go to a pre-NFX launch we were about 65% of the nat-gas options market, NASDAQ is about 35%. If you look at the rolling 60-day average, we've actually increased our market share since NFX has launched. We're at 68%, ISIS 20%, NFX is about 12%. When you actually look at a two-man race, we were 65% of the market. In a three-man race we were 68% of the market. That's a bigger market.

When we talk to our customers, what's important to them is the full range of products and services inside the asset class. We think about the 76% market share we have in the nat-gas futures, the growing percentage market share -- which we're getting paid by our customers to deliver, on top of the fact that the overall franchise in TI.

We talked about the footprint we're generating in China right now. That's what our customers want access to. They want access to global prices, they want access to a product where you have global participation from the commercial side and international footprint side, and where we're in a process of electronifying the nat-gas options business, because that's what makes you sticky.

I want to remind everybody that when you look at the NFX value prop, they've said we're going to do it free, and we're going to do it on a block basis. You've heard us build markets for 15 years by electronifying them. We've taken our nat-gas options from 5% electronic to 25% electronic over the last 18 months. That's why you're seeing us grow outside the market share in revenue-generating products like nat-gas options. You'll see us continue to push that with the overall revenue story, as well.

Our revenue growth is up 21% in energy as a whole. ISIS revenue growth was up 14% in energy, and NASDAQ is in energy either flat, maybe negative, based on the incentives that paid out.

Thanks, Derek.

Thank you.

(Operator Instructions)

Rich Repetto, Sandler O'Neill.

Yes, hi. This is for John. In your CapEx guidance -- I think it's $100 million to $105 million -- you've only done $36 million in the first half. It definitely implies a big ramp in the second half. I just want to see what's that targeted at? I know there's the treasury repo platform, et cetera. If that's a significant component, could we get some more detail on it? Thank you.

Yes, sure, thank you. Just a couple of things to point out as it relates to CapEx. On a year-over-year basis CapEx was down, but that was primarily driven by our New York City staff space build-out after the sale of the NYMEX building. If you exclude all the real estate, our technology spend for the first quarter is slightly higher than the second quarter last year, and about $4 million higher than the first half of last year.

We're continuing to invest in our technology footprint. I think the second half, we are making investments and continue to make investments in our technology platform for the items that you had referred to -- things like repo, things like improving our capacity.

If you take a look at our slide 8 in our deck, you can see that the day after the Brexit vote, we had the highest message -- highest message traffic in our history. It was -- it did not impact our speed whatsoever. I think keeping our platform robust, and keeping our platform improving the technology, improving the functionality, so that's the items that we'll be investing in the second half of the year as we continue the trend.

Okay, thank you.

All right, thanks.

Alex Kramm, UBS.

Hi, good morning, everyone. Sorry, I came on late, so I apologize in advance of this was asked already. I want to just touch base on Brexit for a minute, not so much in terms of the risk here, but wondering if you're thinking about any opportunities coming out of this? The way I would think about it is, you're like the best house in the neighborhood right now, with regulatory certainty in the US, whereas in Europe there might be a lot of changes down the line. Is there an opportunity for you to engage with clients and say -- listen, we are launching some new products here. You know exactly what you're going to get here for the next 2, 3, 5, 10 years -- do more business with us. Or is this not really where your focus is? Thanks.

Alex, there is opportunity. As you know, Europe is a very large part of our franchise on a global basis. The short answer to your question is yes there are, and yes, we are -- there are opportunities, and we are in full engagement mode with our client base regarding deeper participation into our market place. Some of the opportunities that present themselves fit very nicely with what we are seeing to be changing or evolving client demands and client needs.

One of the things we referred to in the earnings call in my formal remarks was precisely that opportunity that lays ahead of us. Derek, Sean, Brian, and their respective staffs are talking very intently to our clients, and to understand what their needs are. As you point out, the certainty of US regulation is a very large driver there, too.

Excellent, thanks very much.

Sure.

Thank you. It appears we have no further questions at this time. I'll turn the call back to our speakers for any closing comments.

Thank you for joining us today. The entire team at CME is focused on driving the top line for the future, and operating the business as efficiently as possible. Let me illustrate that for you. When you compare the first half of 2014 to the first half of 2016, we have organically grown the top line by $332 million. At the same time, our expenses, excluding license fees and amortization, is down $14 million. Thank you very much for joining us today, and we look forward to speaking with you next quarter.

Thank you. This does conclude today's program. You may now disconnect your lines, and have a wonderful day.