芝加哥商業交易所 (CME) 2016 Q3 法說會逐字稿

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

Good morning and thank you for joining us. 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 may participate in the Q&A session.

Before they begin, I'll read the Safe Harbor language. Statements made on this call and 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 on our website. Also, on the last page of our earnings release you will find a reconciliation between GAAP and non-GAAP measures.

With that, I'd like to turn the call over to Gill.

Thank you, Mr. Peschier, and thank you all for joining us. We have consistently talked about our focus on globalizing our Business, growing our industry-leading options and futures franchise, and solving challenges our customers face through a number of innovative product extensions. We made progress across all of these areas during the third quarter. Year to date, our volume is up 8%, as is our transactions revenue, while earnings per share is up more than 10%.

This morning, I will start with our secular drivers, then I will shift to a few product highlights. We have expanded our global footprint in spite of the challenging macro environment over the last five years. This quarter, we saw volume from Europe and Asia grow in the low-single digits while the US activity was flat. Energy in particular stood out in Asia, Latin America, and Europe. We also saw noticeable outperformance in FX during third quarter out of Europe, which is great to see.

In addition to the country of origin information that we share with you, we also track electronic volume throughout the 24-hour trading day. In Q3, our volume during European trading hours increased by 20% while activity during Asian hours is up 7%. The US trading hours volume is down 1% because of tough comps vis-a-vis August of last year.

Turning to our efforts in our options franchise, we remain the leader relative to other global exchanges in terms of total options volume traded. During the third quarter, options reached the highest percentage on Globex to date with more than 57%, and September exceeded 60%. A critical focal point has been our continued investment in our functionality and technology to enable increased adoption of Globex execution for complex option spreads. We are pleased to confirm that we hit a record of 50% of all option spreads traded electronically in September, up from less than 20% in 2012.

We continue to launch a number of exciting new product extensions. Our Ultra 10-Year Treasury contract reached 73,000 contracts per day compared to 61,000 in Q2. Open interest continues to build, and the bid offer spread is getting tighter.

Building on the success of our weekly equity options that expire Friday each week, we launch weekly equity options with Wednesday expirations about a month ago. Those are averaging 23,000 per day, and on one day we traded 45,000. In continuing to tailor contracts to meet specific client needs, we launched S&P 500 total return index futures and those have begun to trade in October. The other areas of focus related to the initial implementation of the uncleared margin requirements include some clear FX products like [NDS] and options, and potential new futures contracts primarily in interest rates, equity, and FX.

Moving on to our commodities portfolio, we had another strong quarter led by metals and energy, up 22% and 17%,, respectively, year over year. In addition to strong volume growth, we continue to expand and diversify our global customer base across all of our commodities asset classes. We reached an all-time high this month in the number of large open interest holders in energy, while ag's and metals large open interest holders have grown in the mid-single digits and remain near peak levels. This reaffirms that global customers continue to manage their commodities market risk exposure here at CME Group.

Our metals business has been our fastest growing segment this year, with volumes up 29% to date. Our precious metals business has performed extremely well despite the relatively flat volatility curve over the last year. With 74% of our metal options now trading electronically, we have been able to expand our global customer base by delivering futures and options liquidity all the way through the Asian and European trading days.

And in our industrial metals area, we continue to build on our success with our copper business up 17% year to date compared to LME's copper business, which is down 7%. We also continue to grow our copper open interest, with September month-end open interest up 17% year on year. We are particularly proud to have expanded our metals business with Asian clients by 45%, proving that we can effectively build business despite a challenging volatility environment.

Energy was particularly strong in Q3, average daily volume of 2.3 million contracts, which is up 17%. In Q3, crude was up 20%, natural gas rose 23%, and refined products increased 13%. Our natural gas options business has been a particular area of success, with September volumes increasing 40%, driven by the significant growth in electronic volume.

Within natural gas options during the third quarter, we set records for monthly ADV, a single-day volume record, as well as record levels of options trading on Globex at 44% for August, up from just 15% a year go. We believe that there are structural shifts taking place in both the crude and natural gas markets, driven by the US now becoming the swing producer in these markets, and we are well positioned to benefit from this shift. We have seen natural gas prices around the world begin to connect, which we believe bodes well for our physically settled Henry Hub contract over the long term. We see confirmation of global adoption of CME's benchmark energy products in our global customer growth with energy business in Asia up 104% in September.

Turning to financial products and starting with interest rates, average daily volume in Q3 was up 2%, and year to date we are up 5%. At the end of the quarter, our large open interest holders were very close to an all-time high. Our total open interest in rates at the end of September of about 55 million contracts was up 15%, with Eurodollars up 17% and treasuries up 10%.

Clearly, there is an increased focus on the front end of the yield curve, and our FedWatch tool is currently projecting a greater than 75% probability of a December move. Open interest in the first four quarterly Eurodollar futures contract reached 5.3 million contracts, which is a four-year high. Also, it is nice to see that our year-to-date fed funds futures average daily volume is up 70% to 134,000 contracts per day.

Within treasuries, we have increased our cash treasury penetration market share metric to the highest level to date, and have increased by more than 2 percentage points since the beginning of the year to more than 80%. Over the counter swaps revenue approached $17 million in total during Q3, up from $13 million in Q2. We reached all-time volume records in our Latin America interest rate swaps in September with $10 billion per day in Mexican peso and $5 billion per day in Brazilian real. In addition, we have begun to charge for interest-rate swap compression services, and have compressed over $2.2 trillion since the fees have been implemented.

Turning to equities, compared to the same quarter a year ago, S&P 500 volatility dropped substantially with a more normal summer quarter. Our volume was down 12% but compared favorably to the majority of the other equity-related volumes traded elsewhere. For example, we track the notional value of the E-mini S&P futures that we trade compared to the SPDR ETF.

Last year in the third quarter, the notional amount traded in our S&P futures was 7 times that of the SPDR. This year in Q3, debt ratio jumped to more than 10 times higher. When you think about the all-in cost to trade based on a tight bid offer spread and deep liquidity, we have considerably less expenses.

Lastly, within FX we have seen decent year-over-year growth in volume in September and October, and we have outperformed other FX venues. Most importantly, within FX, we are pleased to see a new record number of large open interest holders in the most recent report in advance of the widely anticipated fed meeting in December.

In summary, through the hard work of our staff we continue to expand our global footprint and product offerings to create opportunities for our clients and our shareholders. 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. Despite volatility in many asset classes being down significantly from Q3 last year, which included a particularly volatile August 2015, we were able to come in basically flat in terms of revenue and EPS during the quarter. Volatility, by definition, does not come in smoothly when comparing periods, and I am pleased to say that our adjusted EPS through three quarters has grown 10% to $3.39 per share.

Our adjusted operating expenses, excluding license fees, were down 1% compared to the third quarter of last year. Our adjusted operating margin expanded slightly from a year ago to almost 66%.

Our rate per contract for the third quarter was $0.75, down from the prior quarter. This was primarily due to a member/non-member shift in some of the asset classes that saw lower volatility, like equities. Also, within energy, we had a surge in our lower priced natural gas options which created a negative venue shift.

Moving to expenses, excluding license fees and adjustments, our total expense dropped 1% from the prior year to $257 million, and it was down 5% sequentially. Compensation-related expense dropped 2% compared to the last year, and the compensation ratio in Q3 was 15.2%, down slightly from a year ago. Our non-compensation-related expenses were down less than 1% compared to the third quarter of last year. Looking at the non-operating income and expense line, our ownership in the S&P Dow Jones joint venture drove $28.4 million in net earnings from unconsolidated subsidiaries, which was the highest level we have ever achieved.

Turning to investment income, we received $2.7 million in dividends from BM&FBovespa. In addition, our investment returns, generated through the reinvestment of cash performance bonds and guaranteed fund contributions, increased sequentially to $7.3 million from $5.2 million in Q2. This is a result of a higher average net return compared to the prior quarter. For Q3 this year, we had an average net return of 13 basis points. Taxes for the quarter ended at an adjusted 36.6%, which is slightly above where we guided.

And now to the balance sheet, at the end of the third quarter we had almost $1.6 billion in cash, restricted cash, and marketable securities, up approximately $260 million from the prior quarter. Earlier this month we sold down our BM&FBovespa stake to approximately 2.4%, and raised approximately $150 million. The brokerage costs were minimal, so the vast majority of that will be included in our cash balance, and available when we determine the annual variable dividend. We believe the steady return of capital has differentiated us from our peers, and we believe we are well positioned to continue to supplement our earnings growth with a healthy dividend for years to come.

During the quarter, capital expenditures net of leasehold improvement allowances were $23 million. The level of capital expenditures is impacted as we continue to leverage more software and infrastructure as a service, which is included in expense. I now expect CapEx to come in a bit below $100 million for the year, driven by the shedding of our real estate assets and the recent sale of our data center.

Last quarter I mentioned the subscription program that we made available for our members. We continue to work with our membership as they weigh the benefits of taking advantage of the program. The take-up so far has been relatively small. We booked about $170,000 in Q3, and with recent conversions we are approaching a run rate of $3 million per year of new revenue.

We recently announced our 2017 pricing schedule. In a targeted fashion, we adjusted the volume discount tiers, incentive plans, and the base rates. If volume comes in exactly as it has this year, we would expect transaction fees resulting from the change to increase by 2%.

We take a very long-term view on pricing changes. Our goal is to increase volumes, which reduces the overall cost to trade on our markets as we bring in more participants and enhance liquidity. With record volumes and open interest, and an expanding number of global participants, the value to our customers from transacting in our markets has never been greater.

We remain focused on being as efficient as possible. We have been reducing the core operating cost to free up expense dollars to deploy on growth initiatives. We are currently working on our 2017 budget and will report out on our plans next quarter.

Last quarter we adjusted our expense guidance excluding license fees for the second half of 2016 down to $548 million. The guidance remains unchanged, as we have a normal ramp in the fourth quarter for marketing events. We anticipate launching a new retail advertising campaign that will likely impact us in Q4, and we are expecting higher pro fees based on some growth-oriented projects that are under way. The guidance translates to less than 1% expense growth in 2016 on this basis.

In summary, so far this year revenue is up $169 million and our incremental operating margin is 94%. Without license fees, that jumps to about 100%. Our secular growth drivers continue to deliver results with or without volatility, our efficiency on expenses has been excellent, and since the first of the year we have returned $1.6 billion in dividends.

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 in the queue if you have any further questions. Thank you.

(Operator Instructions)

Michael Carrier with Bank of America.

Thanks, guys. John, maybe first one just on expenses. Obviously good in the quarter and when we look at the full-year guidance it looks like the fourth quarter -- I know there is seasonality, but there is a decent ramp I think even relative to maybe last year a bit higher, so just wanted to get a sense on what is already in the run rate meaning that you expect versus what would be volume based? And I know going into 2017 it is early, but when we think about what you guys have said kind of longer term in the low single-digit expense growth, just any color that you can give on how much of that is volume oriented, and so if revenues are strong you'll be at the top end of that range versus the bottom. And I know it's still early but any color there?

Sure, Mike, thank you. When you take a look at the increase in expenses from Q3 to Q4 really it's coming into primarily three categories. One is compensation, which similar to this quarter last year, included our annual adjustments to the estimates associated with stock-based compensation which will cause an increase quarter over quarter -- I'm sorry, sequential -- quarterly sequentially an increase in the fourth quarter. There is some timing related to professional fees related to organic growth initiatives between the third and fourth quarter, and the other line, which similar to prior years is seasonally higher in the fourth quarter and includes costs associated with marketing and customer-facing events.

So to put this into context, we anticipate only a 1% annual increase in organic expenses this year and we decided not to adjust our guidance. When you take a look at next year, we will update everybody in the fourth quarter's conference call, but we did say that we would be between the low and mid single digits with the higher end of the mid-single digits being due to higher revenue achievements. So the entire team here is extremely focused on expense discipline and we are carrying that forward into 2017.

Okay, thanks a lot.

Dan Fannon with Jefferies.

I guess, John, you kind of highlighted your commitment to the dividends but just want to talk about M&A with obviously industry M&A still happening. Can you talk about how you're thinking about maybe transactional versus non-transactional revenue in terms of that context or is it really just a focus organically for you guys going forward?

Sure, Dan. Thank you. So, there really is no change to our view on M&A. We look at M&A with an eye on creating long-term shareholder value. So we definitely pay attention to the marketplace and are constantly looking at opportunities and if we see something that is long-term value enhancing, we will act on it. With regard to whether or not it is transactional versus non-transactional in nature, really we look at it more from a point of view on creating long-term shareholder value, so if something does create value and we see that it fits in our business strategically, that is something that we will act on.

And just to add to what John said. I think given the nature of the business we have vis-a-vis other exchanges, we have six asset classes, we have benchmarks within those asset classes, and then you put the focus on client needs, I think it's entirely appropriate for us to, in line with what John said, look at adjacencies that might make sense to our clients. So our [lens] is across the ecosystems of the asset classes that we are engaged in with a view to bring more value to our client base.

Great, thank you.

Chris Allen with Buckingham.

Good morning, everyone. Just wanted to ask a question. I guess this is probably for Terry. There is been a bunch of headlines out of the EU in regards to transaction tax and there are clearly some worries in the US with the potential for the Democrats to gain more control about a transaction tax. So any kind of updated thoughts on that and what you guys are hearing maybe out of DC and how you are thinking about it moving forward?

Thanks, Chris. I think that this is one of those topics that I've heard forever since I've been here in the last 35, 36 years. People have said, and I've actually read a few reports, that if in fact Secretary Clinton is to prevail in the presidency and they also prevail in the Senate and the House and control all three branches of the government that it would be easier to pass a transaction tax. Well, I would say what happened in 2008 when that was the scenario when President Barack Obama became elected and the Senate and House both went Democrat, they didn't do anything.

We work very hard on working both sides of the aisle to educate people about how they would be putting a very, very large tax on a very small universe of people that provide liquidity for farmers to transfer risk, people to do mortgage hedging, people to do all different hedging in all the asset classes that Mr. Gill just referenced. And if those spreads widen, I have testified many times how you put forth a transaction tax of a couple hundred million dollars, let me show you how to cost the consumers several billion dollars by doing so. So I think as long as we act professional and continue to make the arguments, I am confident that we won't see such a nonsensical tax but at the same time, taxes are going to probably continue to go up in some way, shape, or form. I don't see it in the size of a transaction tax.

You have to remember that around the rest of the world there are transaction taxes, but not on pure futures, and the ones that do have it are so de minimis are losing business. So most of the transaction taxes are in securities-based products which people hold of a period of a lot longer and they have a much larger universe of participants. When you look at our participants and whatever the number is, I guarantee you as we get to the bigger participants that number is much, much smaller. So you would have a huge onus on a very small group of people, as I said earlier, and I just can't see even how our government would look at that, and that is one of the arguments that we have made historically and I think it resonates.

We've got to feed 9 billion people by 2050 with the same amount of acreage we have today and if in fact the cost of food goes up significantly because people can't manage risk, that's going to be a bad thing for the American people and I think even the Democratic side of the aisle understands that.

Thanks, guys.

Thank you.

Rich Repetto with Sandler O'Neill.

Yes, good morning. One comment. Well, I still don't understand the expense increase from Q3 to Q4, John. This isn't just a little ramp, this is almost double. If you look at the last three-year average from 3Q to 4Q, it's $18 million. You're guiding to a $34 million increase here this year. What makes this year different than the last three?

First off, the increase from when you take out license fees, the increase from Q4 last year to Q4 this year is a $10 million increase. We did have timing related some growth-oriented projects that shifted between Q3 and Q4. We also, as I mentioned in the prepared remarks, we've got an advertising program that we are expecting to launch in the fourth quarter, so that's impacting as well. As you've seen, from what Gill had mentioned, we've got an unprecedented number of new product launches and that's -- in part doing that requires some organic spend. So in total we decided not to adjust our guidance and, as I mentioned, it's really a 1% annual increase in expenses and in fact if you look at the last two quarters of 2014 and compare that to the last two quarters of 2016, we are flat.

Thanks.

Ken Worthington with JPMorgan.

Hi, good morning. Maybe for Kim. Wanted to see where CME was in the process of setting up the account with the Fed for the investment of non-house cash. I think a few months ago you thought it might be completed by now, so where does it's stand? And if it is completed or were completed, at this point in time how much non-house cash could be deposited if the account were in fact opened?

I think we've been talking more about house cash and I think the total house cash that we hold is kind of on the order of $20 billion. Fluctuates from day to day. We have our accounts open for the house cash with the Fed and we are going through kind of the last stages of the testing to make sure that everything will flow appropriately. And then we are still working with the CFTC and the Fed on the non-house cash or what we would call the customer cash as well.

Any timeline on the non-customer -- non-house cash side?

On the customer cash side the non-house, that timing is really in the hands of the Federal Reserve. It's not something that is very easy to handicap.

Great. Thank you very much.

Alex Kramm with UBS.

Good morning, everyone. Probably for Gill but maybe for some of the others, too. You mentioned, Gill, the unclear margin rules that came in September. Can you elaborate a little bit in terms of the discussions and what you have seen from clients in terms of -- I hear you on NDF but I think historically you have also talked about unclear margin rules would drive more uptick in futures. And just lastly, who is shifting so far? What kind of customers? Because I think the bigger group of clients coming on in March, so just curious if you think it's going to be a bigger bump and more dramatic change when those rules come in. Thanks.

Sure, Alex, this is Sean jumping in. On the unclear margin rules, September 1 was the date US, Japan, Canada implemented them. The CFTC had no action relief until October 3. The biggest impact, according to the BIS reports, are in rates and foreign exchange. In terms of rates, the biggest new offering that we have out there that we think could help relieve some of the challenges that the market faces are swaptions clearing. On swaptions clearings we currently have seven clearing members who have been approved by the risk committee, two new clearing members in the last couple of months, and we are excited that that is a great place to relieve a lot of the unclear margin requirements in the rates area.

Then if you look at the FX market, as you said the NDF market, we have an NDF offering out there. We also clear cash settle forwards, but in addition to that, we have begun working very hard on OTC FX options clearing and we believe the combination of all of those products together would be very attractive to market participants. We are working very closely with a set of market participants on that.

In terms of equities, equities according to the BIS reports, kind of third after those other two asset classes in terms of the impacts on the market place. We launched in late August a total return S&P 500 futures that would nearly replicate the economics of a total return swap, so the OTC equity swaps market. With the no action relief until October 3, we didn't see any trades in that until the week of October 3, but that week immediately we had several participants trade in that first week, about 3,500 contracts, so you're talking about $3.5 billion approximately, and they traded in blocks of about 500 million each. So you had very large participants testing the pipes relative to the equity futures, the equity total return futures.

In terms of the next four years, it's only the top 21 institutions in the world that are affected today. Over the next four years the expectation is that will become over 2,000 firms. So we do expect relative to our focus on it, relative to the new products and services that we are offering that will -- there will be a lot of pain out there that we can help relieve with the new cleared products as well as with futures products.

Very good. Thank you.

Patrick O'Shaughnessy with Raymond James.

Good morning. So the dealers keep bringing up the topic of the skin in the game and the clearinghouses and how much capital that CME puts up in terms of the waterfall. What are your current views in terms of maybe additional money that you will need to put in the clearinghouses? And what sort of leverage do the dealers have to try to impact your behavior there?

I'm not sure and I'll ask Kim to join in. I am not sure about the leverage that the dealers would actually have, but we are actually focused on the skin in the game issue itself. As you may or may not know, we pioneered the concept in the late 60s and they are comfortable with skin in the game. We think it is necessary to have, but we also are very much in tune with respect to the moral hazard issue here. And if you look at our skin in the game and what the amount is, there are tons of views out of there, all the ad hoc views with respect to what that amount should actually be.

From my own perspective, at the $500 million or so level that we have across the board, it's about the average contribution of each author's firms, right. And we have affirmatively said that we strongly believe that those that bring risk should be the ones that fund the guaranteed fund. We manage the risk that they bring and we are ultra comfortable with the levels that we have. Anything to add, Kim?

I would just expand a little bit on the moral hazard point. I agree with Gill that we are very big believers in skin in the game from the clearinghouse. The clearinghouse needs the alignment of incentives with the clearing members, but the clearing members are very important participants in any kind of default management situation and the mutualization of risk across clearing mechanisms is part of the reason why clearinghouse mechanism works so effectively. Turning too much of that to the contribution of the CCP up front could change the dynamics of the risk mechanisms that support a good default management. So the moral hazard is very real and shows up in multiple ways in the process.

Great. Thanks for the color.

Alex Blostein with Goldman Sachs.

Hi, guys. Good morning. So just thinking through the dividend policy and I guess the trade off between increasing the recurring dividend versus a bigger special as we are thinking out over the next year or so. Just curious to get your update on that.

We feel very strongly that we've got very good dividend policy between the regular dividend and the annual variable dividend. As you saw this year, we adjusted our regular dividend up 20% to create more of a balance between the annual variable and the regular dividend. So we are very committed to the policy. And as we mentioned in the prepared remarks, there will be some positive increases in terms of the amount of cash going into the fourth quarter related to our sell down of our stake in BM&F, so that freed up about $150 million in cash that can be used when determining the annual variable dividend.

I was just thinking that is the increase in the quarterly something we should expect every year from you guys or was the event this year kind of one-time?

It's really it's a Board decision, but if you take a look at our past, we've had a policy of consistently increasing our regular dividend, but it's really a Board decision and it is something that we will be analyzing in the fourth quarter along with the annual variable dividend level.

Great, thanks.

Kyle Voigt with KBW.

Hi. Good morning. Just on the energy slide, comparing your WTI versus ICE's Brent contract. I think if we look at futures open interest specifically we aren't seeing necessarily the same shift, so can you help us understand the variance there between open interest and ADV, and I guess what is driving the increased volume and activity rates in your WTI contract? Thank you.

Hi, Kyle. It's Derek. Thanks for your question. We are actually very excited about the growth rates that we've been able to unlock in our energy complex, and that's a number of factors both that we are controlling for in terms of our ability to both roll out product, acquire new customers, position our benchmark products, and what is a market that is shifting structurally in favor of our benchmark products that, whether you look at the lifting the export ban in crude back in December of 2015, creating a water-borne product that is WTI, we now have a product that the market is increasingly adopting as a global benchmark.

As Gill referenced in his earlier comments at the top of the call, our growth in Asia, particularly in our energies franchise, is up in excess of 100%. So adoption and participation in our markets globally is increasing as we are leveraging Bryan's teams on the ground in Europe and in Asia to get access and bring new customers on board. And when we actually think about the energy complex as a whole, we're thinking about well beyond just the crude story, we are talking about nat gas as well. So as we talk about the overall franchise on slide 9 of the deck that we sent you guys, in the same structural shifts we talked about that are beneficial to our crude business favoring WTI over Brent, we are also seeing some reconnecting of the global nat gas market.

On slide 9 on the right-hand side we've got a graph of what we are showing as a reconnecting of the prices of the US nat gas really driven by our physical Henry Hub products between the prices both in Asia and Germany, and when you look at the market share that we've grown to, we are now 76% market share of the global Henry Hub futures market. That is up from 73% in 2015 and 68% in 2014. So we're excited about as markets converge the role that the Henry Hub futures complex, the physical part that we launch, will play as benchmark product pricing in the global nat gas market as those prices disconnect from the crude market and reconnect globally.

Also, the open interest levels over the course of this year we have reached not only record levels of open interest in nat gas, but we are hovering right at all-time highs in our large open interest holders on the future side. And on the options as we talked about previously, record levels of electronification in nat gas options and continued growth, our nat gas options business is up over 30% this year.

Thanks.

Brian Bedell with Deutsche Bank.

Great, thanks. Just staying on the energy theme. Can you comment, Derek, about NASDAQ's NFX effort, whether that is actually enhancing your volumes given the arbitrage between markets and if that program is expanded over time, is that a net benefit for your or do you see that actually eventually being sort of a headwind on the incumbent's market shares?

When you look at the progress that we've made relative to the business we've developed, we've got a nice problem. We've got a market that's up over 30% in September volume-wise. As I mentioned, the market share increasing 70% on the futures side. Our market share relative with the nat gas options is still around 64%, 65%, but what we've really done is we focused on electronifying the nat gas options business. When you look at what the other offerings are out there, this is a market that has typically been brokered, and we are the ones that have gone from less than 10% electronic in nat gas options to a record of over 40%, as Gill mentioned at the top of the call. And as you have seen us do across products over time, when you focus on functionality and electronic access to your options market, bringing people into the transparent central and order book we tend to see the velocity of transactions increase and more importantly we can access our global customer base. That's really hard to do in a block market.

So we are excited about the progress we've made. The large open interest holder record levels that we are touching on is really a reflection of the increased global adoption of our product set, so we are excited about the multiple records we have hit in nat gas options, ADV, single-day record, large open interest holders, as well is the deferred liquidity that we have built and focused on over the last 12 months as well. Our open interest in months 6 through 12 is up 36% as we're focusing on the commercial end user customers to bring them into our market, and those are the physical users that are using our product.

I would just add to that, particularly out of Asia, which has been a bit of a struggle in the past in terms of the adoption of our energy products, the leader in terms of growth throughout greater China, Hong Kong, Taiwan as well is within Korea has unquestionably been in the energy. Those that had traditionally favored the alternative to our WTI have been increasingly adopting our crude and they have been very noticeably active in the natural gas and very pleased to see the greater transparency associated with that. So we are going to continue driving that progress within those regions. Same holds true for within greater Europe.

Great. Thanks for the color.

Vincent Hung with Autonomous.

Hi. I just wanted to get your take on the FSB paper on CCPs and what global regulators are doing in respect to the systemic risk of CCPs. So where do expect regulation to go, if anywhere at all?

This is Gill. I will answer and then I will ask Kim to add if she has anything to add. I think the FSB like all the other regulators are concerned about CCP residency just as Chairman Massad of the CFTC is. I think the authority such as the CFTC are familiar with CCPs, familiar with the risks that CCPs bring, and they're comfortable I think with the framework that they have been overseeing for decades. I think the FSB, which includes some of the central banks of the world that don't necessarily -- have not necessarily overseen CCPs are coming to grips to what those mean and they are looking at various and sundry scenarios. And this is all part and parcel of the knock-on effects of the -- that the crisis of 2008. On our part, we are working very hard to educate to the extent that we can and also contribute to the debate to the extent that we are allowed to.

I would just add a couple of things. Gill mentioned the kind of varying perspectives of different regulators and one of the things -- part of our advocacy is to help educate regulators that are newer to the regulation of clearinghouses or CCPs because although the G20 and the regulation has pushed products into clearing mechanisms because clearing mechanisms worked in the crisis, the interesting thing is that now they are thinking about slightly changing the way clearing mechanisms need to work, so we want to make sure that clearing mechanisms maintain their effectiveness and our advocacy is in that regard with respect to flexibility and crisis management and the ability to have strong risk management program.

Thank you.

Rob Rutschow from CLSA.

Good morning. Just a question on RPC. You mentioned in the press release a negative mix shift in equities and energy. Is that purely just mix in terms of customers or are you seeing end customers take actions to try to reduce their RCPs. In addition, the advertising you mentioned in the fourth quarter, is that geared towards trying to drive more nonmember activity?

Sure. This is John. I will take it and I will ask Derek to comment specifically on the energy side. So within equities we had a higher proportion of member trading and in energy we had two factors, one is we had a larger proportion of member trading than last quarter with member volumes up 19% and non members up 15%. We also saw a large increase in the use of our electronic natural gas options which are lower price than ClearPort. Derek, do you want to comment on what you're seeing in terms of options trading that would be great. But before we do that, I will just mention in terms of the advertising campaign, yes, it's geared towards more retail and non members. With that, I'll hand it over to Derek on the options.

Yes, on the nat gas side, as John mentioned, there are two things going on. Number one, you've seen us build into sustainable growth and options markets by making sure that we can build those markets electronically so we can market that liquidity globally. We faced a market structure in nat gas options a year go that was 95% brokered, less than 5% traded on screen. So every time we shifted businesses from a brokered market onto the screen we have done that because our experience has shown that you create a sticky ecosystem of user participants by bringing them into the central limit order book. The downside of that is you end up giving up our block surcharge when we charge people an excess amount for [dealing] outside of the central limit order book.

So, it's been a very disciplined approach to move that business on screen, so we're finding that great deal of success moving from less than 10% electronic to a record of 44% electronic earlier this year, I think in August and September, so it's a shift that we have anticipated, a shift we have undertaken in other markets as we've globalized and electronified them, and with the business up 31% typically you also start to move through volume tiers as well. We consider this a first-world problem relative to the volumes growth and a disciplined move on to a central limit order book.

Great, thank you.

(Operator Instructions)

Alex Kramm with UBS.

Hello, again. A couple follow-ups. I will start on market data. I don't think you have mentioned it but I think you have given guidance in the past there was down sequentially. Any updated views of how that should be trending in the next quarter, maybe into 2017 as people trade in their memberships and things like that? Or their screens, rather?

Hi, it's Bryan. First of all, just to give you a little color since the elimination of the electronic fee waiver has been in full effect now for almost a year where in all of our professionals users are paying the full market data subscriber fee, our revenues and our subscribers remain stable. Now, as we continue to advance our market data and IP growth opportunities, we have been performing a holistic assessment of our current program, and our assessment indicates that there are opportunities to extract additional value and revenues from our assets.

So, for example in 2017, we expect that the manner in which we charge for our core market data services will be modified to tailor our fees in a more targeted fashion. Our approach to charging trading and non-trading participants will be modified to address the global nature of this business and the various subscriber profiles that are consuming our data. So we believe our current pricing schema does not fully capture the value, Alex, ascribed to these different user segments. And just to give you a recent example of our targeted approach, I think I referenced at the last call that we are increasingly commercializing our derived and historical market data offerings.

So with respect to derived data there are increasing opportunities and there is a significant pipeline of demand per our data IP as the demand for the development of external product continues to increase. Now this clearly has been an area of revenue opportunity for us that we plan to drive greater growth, and it's been typically referenced in the past as core market data. So we will be separating that out increasingly and going after those opportunities on a derived basis.

I think you also may be aware of our recent announcement of our new historical market data platform which we just recently introduced in conjunction with TickSmith. The usable data needs to be instantly accessible and we've done that with our recent introduction of TickVault. Data users now can browse a data catalog, subscribe to the content needed, and access it via the web interfaces and APIs almost instantaneously. So this is making data access easy and it's responsive to the global demand that we've been hearing, so we see more opportunities to extract more value in that regard. So that just gives you a taste of how we're looking at the assets from the market data and IP perspective.

Great.

Just one more point on that. When I look at the fourth quarter, I think market data will be in the neighborhood of $100 million.

Great. That was more color than expected, so thanks for that. Just moving since we are in follow-up mode here. On the membership -- new membership opportunity, I think you said it's a little bit disappointing relative to what you expected. Can you just talk about like the feedback you've gotten? Is it basically people saying your stock is a good value, we like the dividend, we will keep it? Or any other reasons why maybe the take-up has not been as high as you expected?

Sure. I wouldn't say it wasn't as high as we expected. I think we are right now at about a $3 million run rate per year in terms of the amount that we had anticipated -- that we gave out in terms of take-up. So although it's only $170,000 for the quarter, we're at a $3 million run rate, so it does take time for firms to make these decisions. As you indicated, they're weighing the annual variable dividend they get in the fourth quarter by -- into the first quarter for holding our shares so they take a look at that. Also, we think it is beneficial for new members coming in, especially those from overseas, that were holding CME stock and having that amount of capital is prohibitive. So that takes time to work through the system. In terms of the overall opportunity being about $40 million, we are at roughly 10% of that and it's only been out just for a couple of months. So for us it's -- this is really nothing but upside for us.

Just one last one, apologies in advance, but you mentioned the retail advertising. Any particular reason why are you are so focused on retail right now? Can you just remind us how big retail is for you? Is this a global campaign? Is this just the US campaign? And why now? Why do you think there is an opportunity in retail?

Definitely a global campaign. We've been working towards this for the past several years cultivating opportunity and growth from this retail segment. And to give more focus on it this past year, we actually separated it out as a distinct client segment line headed up by a gentleman that has been leading it for a number of years on our behalf, Mark Omens. As we see the growth happening across our asset classes, it is representing a very significant revenue stream for us, looking at it from the non member perspective as well, and we see that across all of our asset classes. It is one of the fastest-growing segments that we've seen. Terry?

I agree with that. I think that when you look at our revenue coming out of our traditional retail the way we measured it basically next to nothing, and then putting in roughly a couple hundred million dollars I think last year alone coming from the retail side of the business, the upside is just extraordinary. We have I think somewhere in the neighborhood of 4% of the retail trade globally and if we can just double that, you can imagine what the revenue could do for this company. So we are taking a strong look at that.

I think what's important here is we are not targeting the mom-and-pops on the street when we call retail. We are talking about participants in the market today trading anywhere from 10 to 20 contracts a day already, and we are trying to harness that into the business. What I think is also fastening is when you look at some of these discount retail equity brokers traditionally, they are starting to merge together the ones that offer futures. So that only bodes well for us to concentrate this more among people that are already offering these products.

Thanks. I was here plenty of time. Thanks.

And it appears we have no further questions. I would like to turn the conference over to our speakers for any additional or closing remarks.

Thank you very much. And for some closing remarks, the entire team at CME is focused on maximizing our secular drivers and taking advantage of the structural changes in our markets. We're operating the business as efficiently as possible. Let me illustrate that for you.

When you compare the first three quarters of 2014 with the first three quarters of 2016, we have grown the top line over $400 million and our adjusted expenses are down $23 million while continuing to innovate and launch many successful new products. So 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 conference. You may disconnect at any time and have a wonderful day.