芝加哥商業交易所 (CME) 2016 Q4 法說會逐字稿

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

Good morning, and thank you for joining us. Terry and John will make some initial remarks and then we will open up the call for your questions. Other members of our team will also participate during the Q&A. 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 statements. For 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 the earnings release, you will find a reconciliation between GAAP and non-GAAP measures. With that, I would like to turn the call over to Terry.

Thanks, John. Welcome, everyone, and thank you for participating today. Before going into the details of our performance, I want to start out with a few comments, then I look forward to spending time focused on your questions. As most of you know, I have been heavily involved in leading our growth strategy since we decided to go public in 2002.

I had the good fortune to lead the IPO and road show and have been involved ever since. In 2007 and 2008, I oversaw the acquisition of the Chicago Board of Trade and the New York Mercantile Exchange. These two transactions were a cornerstone of our growth strategy. They have led to the tremendous product diversity and deep liquidity that we provide our customers around the world today.

One of the things we're always focused on is meeting our clients' ever changing needs. This requires continued innovation and the development of new capital efficient solutions. One example of the benefits that our clients receive is having interest rate swaps and interest rate futures in a single clearinghouse. This has allowed for billions of dollars in margin saving for clients.

In addition, we are committed to reducing our day-to-day operating costs. This frees up dollars to spend on our growth initiatives. Bottom line as a Company, we are well-positioned to help our customers navigate today's unpredictable global environment, and in turn, deliver value to you, our shareholders.

Before I turn things over to John, I want to make a couple of comments about today's results. Fourth-quarter volume averaged more than 16 million contracts per day, up 24%. That included quarterly ADB records in interest rates, energy products and metals. As you know, we closely track our volume globally.

For example, in the fourth quarter, trading volume rose more than 50% during both European and Asian trading hours. At the same time, volume during US trading hours jumped 23%. In terms of the full year, we reached record levels of volume, averaging 15.6 million contracts per day. This was up 12% compared with 2015.

Our global growth was also impressive. Volumes from Europe and Asia were up 16% and 15%, respectively. Also we continue to expand our options franchise. In 2016, we had record annual average daily volume of 3.1 million contracts, or an increase of 14%.

Total revenue for the year rose by $268 million, at the same time expenses, excluding license fees, remained relatively flat. This drove double-digit earnings growth. Looking ahead, I'm more optimistic than ever about all the work we've done to position the Company for continued success. We believe the need for risk management will remain strong, especially as unprecedented political changes continue to unfold throughout the world.

It was very impressive to see our open interest in December exceed 122 million contracts. This reflects the continued growth of our customer base throughout the world. As I said earlier, we also will continue to work closely with our customers to drive valuable product innovation. Innovation is the lifeblood of every institution and I see it no differently.

I'm encouraged by the good start we have seen so far in 2017. I want to commend my team for their hard work as we continue to manage and grow our business. I look forward to taking your questions in just a few minutes, but for now, I will turn it over to John to discuss 2016 and our plans for this year. Thank you.

Thank you, Terry, and good morning, everyone. We are very pleased to finish off a tremendous year with a very strong fourth quarter. Our team continues to be intensely focused on driving global revenue growth, operating our business as efficiently as possible, and returning excess capital to our shareholders.

For the full year, ADB grew 12% from 2015 driving an 8% revenue increase for the year. Adjusted operating expenses, excluding license fees, grew by less than 1% and was below my original guidance for 2016. Global revenue growth coupled with strong cost management led to excellent operating leverage with adjusted diluted EPS growing 12% in 2016 to $4.53 per share. In Q4, we were able to grow revenue 12% and adjusted diluted EPS 18% to $1.14.

I will touch on the main details. Our rate per contract for the fourth quarter was $0.731, down from the prior quarter. This was primarily due to a higher proportion of overall trading in interest rates, as well as an increased proportion of activity from members during the quarter. Market data and access and communication fees were up $1 million and $2 million versus Q4 last year, respectively.

In addition, other revenue increased $6.5 million mainly due to a significant software sale. Moving to expenses. Excluding license fees and adjustments, our fourth quarter total expense increased 3% from the prior year to $290 million, which is where we guided to last quarter. We had the normal sequential quarter expense increase this year driven by marketing events, advertising, as well as project-related fees.

Our adjusted compensation related expense increased by less than 1% compared to last year, and the compensation ratio in Q4 was 14.6%, down from 16.3% a year ago. In addition, the decline in our full-year comp ratio had a similar trajectory. Looking at the non-operating income and expense line for the fourth quarter, our ownership in the S&P Dow Jones Indices joint venture drove $28 million in net earnings from unconsolidated subsidiaries, up 12% from Q4 last year.

The compound annual growth rate on this contribution has been 13% since 2013. Turning to investment income, we received $3.7 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 $8.4 million from $7.3 million in Q3. Taxes for the fourth quarter were an adjusted 35.6% and were 36.2% for the full year.

And now to the balance sheet. At the end of the fourth quarter, we had approximately $1.95 billion in cash and restricted cash. We returned approximately $1.1 billion of that with our annual variable dividend of $3.25 per share in January. In 2016, we returned $1.8 billion of dividends to our shareholders.

During January, we sold down the remainder of our equity stake in BM&FBOVESPA. The total net proceeds are expected to be approximately $240 million. We will continue our strong and strategic relationship with them, and we have each decided that joint equity ownership is not required. During the fourth quarter, capital expenditures, net of leasehold improvement allowances, were $33 million, bringing the full-year to $92 million.

Overall, our annual spend is lower than previous years, partly because of our asset-light strategy of eliminating real estate and in 2016 selling our data center. From a capital perspective, we are primarily focused on our technology and clearing services, and we have invested approximately $12 million more in those activities in 2016 than last year. In terms of guidance for next year, we expect CapEx to come in between $100 million and $110 million.

Turning to operating expenses, we will continue to be as efficient as possible as we execute on our strategy. For 2016, we guided to and achieved only a 1% increase in adjusted expenses excluding license fees, and we expect to do the same in 2017. We anticipate adjusted total expense growth of approximately 1% to $1.09 billion excluding license fees in 2017. Included in the guidance are investments in organic market data growth and new product extensions and offerings.

Now to market data. As Bryan mentioned last quarter, we have been doing a comprehensive review of our data business and the opportunity to expand beyond our traditional screen-based real-time offering. Our plan is to increase the data sales team, focused on derived data, offer new services such as our cloud-based data platform which enables us to easily add new data content and also build out an audit function.

We expect to see approximately 5% to 6% organic revenue growth over the next few years with 2017 being back-end loaded. Finally, excluding any federal tax changes, we expect our tax rate next year to be approximately the same as this year at 36.3%. In summary, for the year, our revenue was up nearly $270 million and our incremental operating margin was 92%. Without license fees, that jumps to about 96%.

Our secular growth drivers continue to deliver results, our efficiency on expenses has been excellent, and we are excited about the prospects ahead. 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 in the queue if you have any further questions. Thank you.

Thank you.

(Operator Instructions)

Rich Repetto from Sandler O'Neill.

Good morning, Terry, good morning, John. Since we have one question, a broader question then. Terry, as you look at the potential regulatory rollbacks, and I know it's unclear what they exactly are, but I'm just trying to see, get your assessment on the net impact, whether it's positive or negative, and how you look at, say, if the banks do get more active in proprietary trading, because I know you've done well in also getting the firms that have been spun out of the big banks, as well?

Right. So Rich, let me take that in a couple different ways. First, on the regulatory rollbacks, if there's going to be any rollbacks at all. I actually believe that the market in general has shown that there already is rollbacks by doing nothing.

And I say that for a couple reasons. When you look at the existing law that was passed in 2010, the Dodd-Frank law, roughly 80% of the rules were passed at the CFTC, and something just shy of that at the SEC. I believe some of the rules that have yet to be proposed or written may never even happen.

And then you have other laws at the Fed, banking laws and things of that nature that are yet to still come out of some of the legislation. I think that's almost a little bit of deregulation by doing nothing at all. And I think that's what the market is seeing. I also think the market is seeing that we are not going to get a bunch of new laws.

You've got to look at today's compliance for regulatory matters is roughly $2 trillion. That's up significantly over the last 20 years. I think we are getting to a point where the market finally sees some clarity, that we have a lot of rules and laws on the books and no one is saying it's bad to have rules and laws, but I think that whether it's a rollback or not is yet to be seen and what it would be.

As far as the banks proprietary trading goes, I will talk about the Volcker, a little bit on that. One of the things that I think is a great opportunity right now, as you recall, the banks were able to proprietary trading cash Treasuries, but for some reason they omitted the futures contracts. I think that's one of the things that they will be able to -- we're hopeful that they will be able to participate in that market to create liquidity.

Liquidity is critically important for everybody. It makes markets more efficient, the more participants, the better the marketplace. So that would be my theme of what I think is going to happen as far as the regs go. Does that answer your questions?

Yes, yes. Thank you.

And then, Rich, just on the energy, also, is something that -- I didn't touch on that but I will because it's a big part of our asset classes. And if Derek wants to jump in that's fine. But on the regulatory side of things, one of the things that we were seeing out of the past administration was position limits coming down and we didn't know what that was going to look like.

I think now, that's not off the table, but I would think that any kind of position limits that are going to come out of the new administration will be at a point we're making sure business can grow, commercials can grow and other [participation] will be able to grow. So I think that's also a net positive for our energy complex. I don't know if you want to touch on that, Derek, or if you want to wait till this other, questions about the product itself?

Yes, I'll very quickly follow-up on that participation side. Yes, I think, when you look at what happened over the last four years or so, Rich, you saw a lot of the banks step out of the physical commodities markets, mostly impacting the energy side. Now we filled that void. You see that we focused on bringing commercial customers in over the last two-and-a-half years and we are delivering not only record open interest but record levels of large open interest holders.

So to the point that Terry made, if there is a means by which the banks can reenter the principal business in the fiscal commodities markets, they are coming back into a market that's much more diversified and broader already. So we think that would be nothing but upside to the business.

Okay, thank you. Very helpful. I will get back in the queue.

Thanks, Rich.

Michael Carrier with Bank of America Merrill Lynch.

Hi, thanks a lot, guys. John, just maybe two clarifications. Just one on the market data growth outlook, I wanted to get a sense on maybe what's driving that, and is that like an annual growth rate? I know you said 2017 is more back half weighted, but I just wanted to get some kind of longer-term perspective. And just on the cash, I don't know if you can give us like an updated cash level, like post-distribution, and with the sale of the BM&F, but I just wanted to get a sense of where that stood?

Sure, thanks, Mike. In terms of the market data, after we have done an in-depth review of our strategy, we believe we have a plan that through investing and drive data sales, additional services including our cloud-based services, and a more robust audit function that we can deliver 5% to 6% annual growth in this business. And the 5% to 6% for 2017 will be, obviously, ramped towards the back end of the year. That's 5% to 6% annually over the next few years.

With regard to the cash, we had about $1.1 billion in annual variable dividend. That left us about, when you look at the end of the year balance sheet, left us about $850 million in cash on hand, which is slightly higher than the $700 million that we had targeted. But we had a very tremendous fourth quarter. In terms of BVM&F, we did complete the sale of our stake in BVM&F that netted us in the month of January about $240 million in cash.

Okay. Thanks a lot.

All right, thanks, Mike.

Brian Bedell with Deutsche Bank.

Great, thanks. Good morning, folks.

Good morning, Brian.

John, if you could just touch on the expense guidance, obviously, the cost control continues to be very good here. If you're not willing to give the volume assumptions under that, at least if I can propose something like, let's say, if we had a 15% increase in ADV in 2017 would you still be able to keep that expense growth at around 1%?

And then maybe, Terry, if you can just comment on the volatility backdrop, your view of what volatility in general may be for interest rates in particular in 2017 given the new administration and what you have seen versus past years? Thanks.

Sure. Brian, I will touch on the expense side. We have done a tremendous job across the whole organization. The entire team is focused on really driving our business as efficiently as we possibly can. Our guidance is 1% excluding license fees. License fees tend to be tied to equity trading volume.

That's the biggest impact to driving license fees. It tends to -- when you look at the ratio of license fees to our equity volumes, that's probably a good mechanic to use going forward in terms of your assumptions around volumes in the equity complex. If we tend have really a tremendous year this year, the area that would flex the most, excluding license fees, would be, obviously, the bonus.

The bonus would go higher relative to our performance. We would attempt to offset that through other mechanisms if it was necessary In fact, when you look at Q4, you could see that our bonus was higher as a result of our -- as a result of the activity, and we still met our guidance for the quarter.

Brian, I will touch a little bit on the volatility but, as you know, it is very difficult to predict. Volatility is just one of the components that people use our markets for to manage risk. There is a whole host of issues why the markets go up and down, obviously. But when I look at what's coming at us in 2017, which could create some volatility, I always like to look at prices of certain asset classes.

So I'm looking at the equity markets which are, obviously, at an historic high, so something could give either way. If in fact, the administration does get the corporate tax cut it has been proposing, that maybe the market could potentially look cheap because of what that could mean for corporations to their bottom line, and if not, maybe it looks a little [lumpy]. So that could create some volatility. When you look at our other complexes, the energy complex is also interesting because of the potential conversation around putting a tariff on imported products, what that could mean for the price of energy, and Derek can touch on it as well, but that also could create some volatility between the TI and Brent spreads, that could be quite interesting for the energy complex.

I also think it was interesting for 2017 is something we saw in our own country this year which is some of the European elections that we're going to see in 2017. As you know, we get a tremendous amount of revenue coming out of Europe, and that is something that with the elections coming up, I believe, in Germany and France this year both, it could be another volatile situation. I'm not saying it will be the same as when President Trump was elected, but that's something that we can look at. I think geopolitical volatility could be definitely in the mix, and that will also affect our foreign exchange complex, as well, once you get that volatility moving. So, Derek, if you want to add to the energy component? That's where I see volatility.

Yes, I think that's right. I think our early read of what that border tax might look like is it will certainly be a boost in domestic production of the US, meaning that's a WTI over supply story. That's what our customers have been using our product for over the last two-and-a-half years showing out performance. One indicator of where we see people starting to take positions is we've got options on the Brent-WTI spread. We've seen that product kind of languish in the sub $100 to $500 a day contract volume, we are up to (inaudible) contracts today. So to Terry's point, we are out in front of customer needs providing solutions for them. As these evolve, we see this basically being a boost to WTI and this is where people hedge their energy risk through TI.

Does that answer your question, Brian?

Yes, maybe just a quick comment on rates given what we seem in November and all the repositioning?

Let me kick that over to Sean Tully and he can give his comments on the rates.

Sure, great. Thanks very much, Terry. Thanks for the question. As we know, the Fed's current range for the Fed's fund rate is between 50 basis points to 75. If you look at the expectations for the marketplace, there is an expectation of a tightening in June and then a second one in December.

If you look at our Fed funds futures and, actually our Fed watch tool is really the barometer that the marketplace uses in order to look at what the Fed is going to do. It is currently expecting around an NDO year, between 1% and 1.25% Fed funds rate. On the other hand, if you look at the Fed expectation, so the most recent survey by the F1C itself, their expectations are between 0.9% and 2.1%. So the Federal Reserve has a very large range, more than 1 percentage point of their expectations for the Fed rate at the end of the year.

There is a lot of opportunity for volatility. We did have a tightening in December. The other thing, I guess, I would mention is the Federal Reserve, likewise, in their survey of themselves, the FOMC, they expect PCE to be between 1.7% and 2% at the end of the year, and the unemployment rate between 4.4% and 4.7%. Those are down to their targets. They have a targeted 2% inflation and 4.5% to 5% unemployment rate. They are already at, or they will be at by year end their expectations for long-term equilibrium. There is the opportunity -- it depends on what happens with the economy, but it is an environment where you should see more Fed activity.

And I think just add to that, and, obviously, Sean is the expert, but when I look at some of the growth that we are seeing in this country, if you ever got some inflation because of the policies either set by administration or other folks that got a little bit over their skis on the buying power that they had the ability to do today, you could almost see in the Fed getting over reactive at the same point.

We haven't talked a lot about inflation over the last couple of years because it just has not happened with the price of energy being -- going down to $26 a barrel. But now if we see some of those changes, the inflation number might spark the Fed a little bit. I don't know, but that's one of the things I'm looking at.

Great, that's great color. Thanks so much.

Thanks, Brian.

Kyle Voigt with KBW.

Hi, good morning. Thanks for taking my question. Really just around corporate tax reform. If the US does lower the corporate tax rate, just wondering if you could provide some more color as to what you plan to do with any tax savings? If that would be all passed through to shareholders, or maybe if you wanted to reinvest some of those savings in certain areas of your business?

Hi, Kyle, this is John. Thanks for the question. It's still early in the process to understand the full impact, but based on the plans have been discussed, we believe we will be able to keep about 80% to 90% of any tax rate reductions.

When we look at the net income that will drop to the bottom line that goes into our cash pool that we can either use for further investment in the business or for our dividend. So it becomes part of the conversation as we look at our overall capital structure and investment policy. So it is available. We haven't specified where we would utilize that, but it's -- our view on our capital structure won't change relative to that.

Okay. Thanks, John.

Thank you, Kyle.

Dan Fannon with Jefferies.

Hi, good morning, guys.

Good morning, Dan.

Just a quick question here on the industry and M&A. I think in the long run there's expectations for continued industry consolidation, but with the current environment and the rise of populism do you see cross headwinds at this point for cross-border M&A? Or how should we be thinking about the opportunity over the near term versus long term?

I will start on that, and I will let John make a comment, and if Bryan wants to comment, as well, what he's seeing. On the cross-border M& A, it's very difficult to predict what's going to go on. I think when we are looking at the LACDB transaction everybody's focused on that at the moment.

So I don't know how the environment's going to be for M&A, but I will say that if there's opportunities, obviously, we are going to be looking at things if they make sense for our shareholders, if they're not then we just won't be pursuing them. I'm not certain that the new administration or the folks in Europe are going to change the equation as far as where it's at today as far as M&A activity goes being approved or not approved.

I'm not sure if I'm answering your question correctly, Dan? If you're looking for probabilities of M&A, or if you're looking for opportunities in M&A. I took your question as probabilities.

It's a combination, just in the sense that, I think there are expectations for potentially continued industry consolidation or maybe some opportunities. I think you're touching on, it's not so much near term, it's more about the longer-term picture. But I think we are kind of getting in that area.

Yes, just to be clear, I think when we look at M&A, our view is always, are we going to be able to create long-term shareholder value and how does it fit with our strategy. We pay attention to the marketplace and are constantly looking at opportunities, and when we see something that's long-term value enhancing we will act on it. I think Terry is right, I think the environment is challenging cross-border, but we are always investigating and looking at opportunities.

That's helpful. I'll get back in the queue. Thank you.

All right, thank you.

Chris Harris with Wells Fargo.

Thanks. Hey, guys. I wanted to ask another question on tax. As you guys know, there was an accounting change in and around the treatment of equity grants, and for some firms it's serving lower corporate tax rates. In looking at your guidance, it looks like, obviously, that's not the case. So just wondering if you guys could expand on perhaps why that is?

Yes, sure, this is John. I would be happy to take that. When you look at change in the accounting rules around equity grants, for us it represents a 0.2%, 0.3% impact to our effective tax rate, and that's been included in our guidance. Now as you know, this rule change, the impact on the tax is relative to the rule change is a function of the aggregate cost of the equity grants relative to our total income.

Our equity grant expense is a smaller proportion of our income than some of our peers. So the impact to us is less than others because of our -- of the size of our income relative to our equity grant expense. Now just to be clear, this is a non-cash item, so from a cash flow perspective it has minimal impact. Just keep that in mind as you're looking at the impacts.

Okay, thank you.

Thank you.

Alex Kramm with UBS.

Good morning, everyone.

Good morning, Alex.

Also a bigger question, big picture question for Terry. Obviously, as you noted, you have been involved in the Company for quite some time, but I think this is your first call as the CEO. So just wondering in terms of strategic priorities for you, anything that you would point out that you might change, or where you take a different view? Obviously, there's been a lot going on in the industry, but what do you think you will really focus on here and what do you think the Company might head a little bit of a different direction than previously? And I know someone has asked about M&A already, but curious if you think your views on M&A are any different from maybe the prior leadership team?

Let me take that in a couple pieces. First of all my focus, I don't think is any different than the leadership that's been around this organization for a long time, because the focus is really been around the client, and I've said that earlier. And I think that's the most important part of what we do is service our client.

What I'm looking at is looking for more ways to create capital efficiencies for our clients in order to bring them in here so they can, obviously, trade more. And then in return, if we can do that, we think the shareholders will be rewarded. We also have to continue to be innovative. Sometimes we rely very heavily on the asset classes we have and we get derivatives of a derivative. So we're always looking at new things that the world doesn't even know it needs yet today for tomorrow.

That's one of the things we're looking at, but what my focus is really doing things that drop to the bottom line and being decisive about them. I think we have to be very decisive. And one example of that is to liquidate the BM&F position. It wasn't because the relationship was not good or anything of that nature because the relationship was great. We did it because we, the commercial arrangements were basically done and we did not need to invest your money in that.

If you want to buy BM&F stock, the shareholders can do that themselves, so we acted very decisively on that and we exited that position. The other thing is discipline as far as new proposals go. If they don't work, we are going to be very disciplined on the expense side of it, and also on the timing of how we are going to let some of these things hang out there. I'm not sure if that completely answered your question. And then on the M&A stuff, I think you asked a question on M&A also, Alex?

Just curious, if you think your views are different then the prior leadership team. And since you just talked about the initiatives, does that include things like the European business? Can you be any more specific around -- anything that might be on the chopping block that wasn't before? And I'll let it go at that.

I'm not going to comment on that because we're always analyzing our investments that we have, whether in London or other places. So we will continue to analyze that. There's been no decisions made either way on some of these investments in Europe. But as far as M&A goes, I'm not looking at it any different than what John said earlier, I believe, to Chris, or to Dan, and that is we're going to look for things that make sense for us, and if we can get to that point, I'm going to be very supportive of it.

I'm not a big fan of one-off smaller type acquisitions that are in the pipeline that people believe that anything could add value. I think that you have to really -- you can't throw everything against the wall and expect it to work. So we are going to be very focused and targeted on what we think could add value to our clients, and that's where we're going with this. Sometimes I'm a little bit more direct than my predecessors, but I'm going to be more direct because I think it's important for you and for our shareholders to hear that from me.

Excellent. Thank you.

Chris Allen with Buckingham Capital.

Good morning, guys. I may have missed this, and I apologize if I did, just on the market data guidance, does this build in any price increases at all?

Hi, Chris, this is John. Relative to market data, no, we have not announced any pricing actions for 2017.

Okay. And forward guidance is not baked into your thinking, or is that just more driven around sales, new products?

What we're really focused on in addition to our real-time data offering is investing in drive data sales. Offering additional services including our cloud-based services for our customers so they can get more types of data, easily more accessible, and building out a robust audit function. Bryan can comment, it's his area.

Just one more point, Chris, is we are being far more targeted and focused in how we go about segmenting our customers and our consumers of data. We're able to do so with greater level of granularity, and we really view that opens up opportunities for us to drive more business and revenues in that regard.

Got it. And then just a quick one, the software sales, the $6.4 million, is that just a one-time kind of event?

Yes, the software sale is an unusually large item, so we wanted to highlight it for you, it was approximately $5 million.

Got it. Thanks, guys.

Thanks, Chris.

Vincent Hung with Autonomous.

Hi, good morning. Can you provide an update on the retail trading push you started to make at the end of last year?

Sure.

What did he say? The retail push, yes.

The retail push is an interesting one, Vincent. Right now we are new at the game of retail, for lack of a better term, what we would call retail. Retail is basically participants that are already active in the marketplaces in all different types of securities including trading derivatives. So we have a very small part of that, but the revenue is starting to grow significantly.

When you look at, I believe we have roughly 4% of the retail trade that we deem is retail, of the 14 million active accounts that are retail, so there's another 13.5 million roughly accounts out there that could potentially be using our products. So we are getting more and more aggressive at targeting these folks who are already participating. I think what's important here is, we are not targeting people who have never traded before or participated in the marketplace.

These are professionals that are already in the marketplace. A lot of them are trading ETFs, a lot of them are trading equity options, and, obviously, they have the ability to trade futures. If you saw what I believe our friends at TD Ameritrade made some comments during their call that they had a lot of participants picking up their activity and trading from there. So those are the type of participants we're looking at, and it's been quite a successful campaign.

But it's one of those ones that it takes some time. When you look at the products that they are looking to participate in, energy, FX and gold seems to be the three things that they like to participate in. These are very household, every day products that we talk about. So that has been one of the big upticks we've seen from the retail in those three asset classes. Bryan, do you want to comment further?

Thanks, Terry. We are also seeing excellent growth coming out of the international Time Zone. We can put it in perspective about 50% of our retail activity is coming out of the US, greater than 30% now is coming out of international. And within those product scopes that Terry outlined, we just see it as a tremendous opportunity to further penetrate those regions with the diversity of the products.

And also, what's interesting is options. You're seeing a really nice uptake with options. In the past, it would be one in every 15 trades would be done by a retail participant in options, and now they are becoming more and more sophisticated. A lot of it through our educational efforts and partnering with our channel partners. It's about one in five now.

Great. Thank you.

Thanks, Vincent.

Rob Rutschow with CLSA.

Hi, good morning, everybody.

Good morning, Rob.

You've done a very good job of holding the line on expenses, helped by move to close floors and move people overseas and consolidate real estate, et cetera. You, obviously, guided expense growth to 1% in 2017, which is also good.

I guess, looking ahead it would be helpful to know how much in savings you think those actions provided in 2016? And what the impact might be for 2017? And, I guess, what I'm trying to get at is, what do you view your organic growth rate in expenses to be? And additionally, do you see any move that you can take going forward that might help mitigate that organic growth rate?

Sure. Thanks, Rob. The entire team here has, I think, done a fantastic job of really looking at our infrastructure, making sure we are spending every dollar as effectively as we possibly can. This includes a lot of benefits for our customers, in fact.

When we reduce management layers, it has made us more agile, made us more responsive. We've been -- we've got staff overseas so we can also be able to handle client business better 24 hours a day, and develop all the liquidity that we have on our systems 24 hours a day, and service those customers 24 hours a day. Some of the actions we've taken, although have been cost effective, but they've also been customer effective.

Now going forward, into this year, a lot of the work that we've done in 2016 is carrying over in 2017. So things like we will continue to sublet office -- excess office space. We're closing the trading floor in New York this month. We have done that, and then we will continue to benefit from the technology work we've done in terms of utilizing more software as a service, as well as we've consolidated our data center and are working with our partner at CyrusOne, which is making us more effective in terms of cost relative to our data center usage. So I think when you look past 2017, excluding license fees, I would say that although single-digit expense growth is what I would see going past 2017.

Okay. Thanks, that's helpful.

Thanks, Rob.

(Operator Instructions)

Alex Kramm with UBS.

Yes, hey, guys. Just a quick follow-up for John primarily here. First off, on the investment income line, how should we be thinking about that going forward now that the BM&FBOVESPA is out? Maybe remind us what else is in there? And considering that some of that is now driving by the margin driven income, I guess, with the Fed just doing the hike in December is there another tick up, like how are you thinking that (inaudible) is going to come in?

Thanks, Alex. We've been really focused on driving as much income as we can. In fact, when you look at that other income and expense area, from 2014 it's gone from an expense of $400,000 to $31 million in 2016 for the full year. It is something that is very meaningful.

When you look at it, the components that are in there, one is our S&P-Dow Jones joint venture. And for the quarter, it was about $28 million, and this has had a CAGR of about 13% since 2013. We've got our interest expense, and then we've got investment income. When you look at the investment income, you could think of it in four components.

The first is the investment we do on behalf of our clients, and that's generated about $21.1 million in income for the quarter. And then a couple lines down, you could see that we rebate a large portion of that back to our clients, and that's on the other expense line. That was about $12.7 million. That gives is a net of $8.4 million for the quarter, up from last quarter of $7.3 million.

Then we invest our corporate cash, and we've got other investment gains, and that was about $2.8 million for the quarter. And then the last component is the dividend income that we received from BM&F this quarter, and that was $3.7 million. Obviously, since we sold off our stake we are not going to have that going forward. So with regard to the Fed, the Fed account -- the Fed was available for house accounts. It was open and operating in the fourth quarter.

We had average daily balances of about $2.3 billion for the quarter, and that was about $6.5 billion at year end. We capture about 15 basis points net for house funds that are put up at the Fed, our house participants receive about 60 basis points. Now the non-house customers currently don't have Fed access, although we are working with the Fed to attempt to make that happen. So going forward, until we have some clarity around access for the non-house accounts, we've been in approximately the $7 million to $10 million range for that investment income.

All right, that's helpful. And then just maybe secondly, real quick, just coming back to market data, you said back end loaded. If you think about the next couple quarters, I guess, the core business before some of these initiatives take hold. Maybe you mentioned this before, but should this trickle down further, or do you see stability right now in your core subscription base?

We see a stable trajectory with the core business. A number of these things are going to be implemented over the course of the next couple of quarters. We will be able to say more at the next one.

Sounds good. Thanks again.

Thanks.

Dan Fannon with Jefferies.

Good morning, guys. Just as a follow-up, you've given some really good color around expense growth and how you're thinking about expenses. But what about, perhaps, the opposite side of that coin? What I mean is that is there perhaps, since the business is doing so well at this point, is there perhaps an opportunity to maybe have incremental investment that maybe, just take a few more chances or roll the dice on a few more things that maybe you might not during, if times were a little bit leaner, wouldn't that now be the time to do that, or how should we be thinking about these other opportunities that maybe you guys are foregoing at this point?

John will comment, and then I will too. But I will say that dice rolling is not in our business plan.

Thank you, Terry. Yes, I think when we look at our spend, we are very disciplined with how we approach expenses, but our focus really has been to optimize our infrastructure so we can free up dollars to spend on growth initiatives. So when you take a look at what we've done over the last several years, we are -- had an unprecedented number of new product offerings that are meaningful and additive to our bottom line.

We look at things like our Ultra 10-year, you look at things like the weekly equity options. Those are meaningful products that we've launched that are helping to drive our bottom line. That all has been done through being able to optimize our infrastructure, free up the dollars so we can do those kind of launches. Repo is another example of something that we've been investing in for the last couple of years towards new products.

Now that all said, we will not forego spending if we believe we have an opportunity in front of us. So there's not a point where we say we're not going to do something when we think there's going to be an opportunity ahead of us. A couple examples, and maybe Sean could comment on it. In the OTC side of the business, we've had several really important launches that are unique to us that we've been able to launch that have been additive.

Yes. So interest rate, thank you, John. In the interest rate swap clearing, for example, we had huge traction last year in Latin American currencies. We now offer more currencies for clearing interest rates off than any other platform globally.

If you look, growth last year, for example, in Brazilian real and Mexican peso interest rate swaps we had enormous growth. In the month of January, we had a record day where we cleared in a single day over MXN1 trillion worth of Mexican interest rate swaps, or $47 billion. We're going to leverage that in the coming months and years. This summer we are expecting to add additional currencies. In particular, we are focused there on Asian currencies. We do hope to launch two additional currencies there later this year.

In February, we are looking to launch, hopefully, by the end of February additional monthly foreign exchange futures. So the innovation continues. As John mentioned, the Ultra 10, which we launched in January last year, trades approximately 100,000 contracts a day today. The Wednesday weekly options in the S&P 500 trades approximately 50,000 contracts a day.

We will continue to innovate, continue to grow, continue to take advantage of, as Terry mentioned, the opportunities to provide much greater capital and margin efficiencies for our clients in order to grow both our core, as well as into the adjacent market.

So, Dan, just to comment on the dice throwing comment, which I couldn't help myself but to say that.

Sure, just as a clarification. I guess part of the question was how loose are the purse strings now versus maybe if the times were tighter?

Well, here, let me say it this way and differently. One of the things that we have done, and we are continuing to do, is to put a discipline in place so we can continually be in the good position that you just outlined a moment ago, when times are good, and then times can always change, you don't know what is going to happen.

But opportunity that I've always seen in my career happens when times are uncertain. So when you look at what's going on throughout the European Community, and I will use that as an example, don't think we're going that way but, this is an example. With Brexit, that could be two to three years before there's any clarity on what's going to happen over there. In my mind, that creates uncertainty which creates opportunity. But you cannot take advantage of the opportunity if you're not being disciplined with the way your handling your business today.

Yes, we could look at different things going forward, new products, new opportunities, and maybe take a -- we will use your phrase, roll a dice or two -- but they will be very calculated and they will be in a position of strength, not a position of weakness, no matter what the market conditions are.

Just a final point on it, Terry mentioned at the start, we're very customer oriented, very customer focused. So a lot of the new products come from dealing closer with our customers which has allowed us to be very responsive, allows us to make change right away as we hear new products or services that they want. And also it allows us to be in a position of strength when we offer the product.

So we don't have to do a lot of incenting because of something that they want, it's something that they value. It drives our revenue from the bottom line right away because it's value add for them and value add for us.

Very helpful. And then just one really quick short question here, a couple of years ago there was a little bit of elevated discussion around the Omani crude oil contract. Any additional color or update there?

Yes, this is Derek. That's a good growth story. It's a market where it's really split between -- what that (inaudible) benchmark looks like. We've got the Omani sour crude listed on DME, we are a majority owner of that, that's a business that has acquired about 35% of that market. It's about a 20,000 contract-a-day business.

That's a business that's break-even for us, so we're very pleased with the growth there. In fact, we just hit in January on DME all-time open interest record and delivery record. It's a physical contract, which is what the market asked us to deliver out there. So we are very pleased with the growth and we're seeing increased uptick in the product, primarily from commercials, which has been our focal point out there. We are seeing that in a world that is both globalizing and regionalizing, an opportunity to provide a physical product in market, in businesses that are break-even for us, we think, our opportunities to build clients and extend our product footprint.

Very good. That's it for me, guys. Thank you so much.

Thank you.

We have no further questions in queue. I would like to turn the call back over to management for any additional or closing remarks.

I want to thank everyone for participating this morning. I know many of you I've had the opportunity to spend some time with, for those who I have not I look forward to it. And, again, I thank you very much and have a wonderful day.

And this does conclude today's conference call. Thank you all for your participation. You may now disconnect.