芝加哥商業交易所 (CME) 2017 Q1 法說會逐字稿

Good day, and welcome to the CME Group First Quarter 2017 Earnings Call. At this time, I'd like to turn the call 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'll open up the call for your questions. Other members of our team will also participate during the Q&A.

Before they begin, I'll read the Safe Harbor language. Statements made on this call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. 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 the earnings release, you'll find a reconciliation between GAAP and non-GAAP measures.

With that, I would like to turn the call over to Terry.

Thanks, John, and thank you all for joining us this morning. I'm going to make some initial comments, and then I'll turn it over to John, who will share the financial highlights.

Our overall volumes remained high during the first quarter even though there were pockets of low volatility and equity in energy markets. We delivered record average daily volume of more than 17 million contracts. This includes all-time highs in interest rates and metals average daily volume.

Activity from outside the United States remained strong. The volume averaged more than 3.5 million contracts per day. Within fixed income, we had broad-based strength across Eurodollars, treasuries and Fed fund futures during Q1. This has been driven by recent outsized growth from our buy-side customers. We continue to see strong performance in our Treasury futures relative to the cash treasuries market.

Our metals portfolio, which was our fastest-growing asset class in the first quarter, delivered outstanding activity with more than 510,000 contracts traded per day, driven by growth in both precious and base metals. Our performance in copper was particularly impressive, with 23% growth to almost 95,000 contracts per day during the quarter. Even more impressive considering that our primary competitor in copper saw their business decline 8% in that same time frame.

We continued to gain traction with our Options business. Here, we have taken an enterprise-wide approach by enhancing our technology, better equipping our sales force to engage with clients and launching some innovative new products. Last year, we generated a combined $552 million of transaction revenue in Options. This makes us the world's largest options exchange by that measure.

During Q1, we reached record average daily volume in both interest rate and equity options. In March, our Eurodollar options average daily volume grew 73% to 1.7 million contracts per day. Of that, 29% was electronic, the highest monthly percentage yet, and the April electronic percentage to date is even higher.

And in natural gas options, we grew our daily volumes 20% during the quarter, 40% of which traded electronically, helping us to achieve a market share of 70% in March.

New products and product extensions continue to perform well. Our Ultra 10-Year Treasury futures and options exceeded 100,000 contracts per day in Q1. This was nearly triple the activity from a year ago. We launched monthly FX futures recently and have had some early success there. In metals, we saw record volumes in open interest in our suite of aluminum premium products, which we launched last year, confirming global demand for these innovative risk management tools.

In equities, we have seen some traction in our S&P Select Sector Futures. In early April, we launched weekly E-mini S&P 500 Monday options. On the first expiration, we traded over 53,000 contracts during that day alone. Additionally, the E-mini S&P Wednesday weekly options we launched in September 2016 have achieved 51,000 contracts per day in 2017 so far. Combined, the Monday and Wednesdays are recently producing more than 10% of our total equity options trading. We think these short-dated products are very appealing and valuable to customers, especially given the geopolitical concerns and the uncertainty around European elections.

I mentioned last quarter that we are heavily focused on expanding our customer base by focusing on end-user customers. Our main objective is to identify potential clients that may be using less-efficient products and convert them to CME Group offerings. We are making progress. For example, we have record open interest, our large open interest holders, in 3 key areas. One is in our interest rate business, where we achieved an open interest record of over 74 million contracts, including records in Eurodollar futures, Treasury futures, Fed fund futures, driven in large part by asset manager.

The other is in our energy futures business, where we achieved new record levels of open interest during Q1 in our WTI, gasoline and heating oil futures. Additionally, we hit an approximate 4-year high in natural gas futures open interest and grew our ADV by 24%, while our competition shrunk 3%, allowing us to increase our year-to-date market share to 78% versus 75% in March of 2016. While our trading and FX was down during the quarter, we significantly outperformed the 2 primary competitive venues, and we are pleased to reach a record level of large open interest holders toward the end of February. More important, we saw banks reappear as our fastest-growing segment during the quarter in FX.

The other thing we are focused on is operational efficiency. We continue to ensure that we are allocating our time and resources in the best way possible. A few weeks ago, we announced that we will be closing our European exchange and clearing house by year-end. Our customers have clearly shown that they prefer to use our U.S. infrastructure to access our global products, deep liquidity and capital efficiency. We will maintain a significant operation based in London. However, it will be focused on direct sales of our core products.

While there are several positive trends in our business, one area I wanted to briefly touch on is market data. We outlined an ambitious plan last quarter to supplement our traditional real-time data business with several new data offerings. We referenced increasing the data sales team focused on derived data, offering a new cloud-based data platform along with building out an audit function rather than outsourcing it. We are currently augmenting our organization to capture these opportunities. Frankly, we underestimated the complexity of resourcing our team, which will not allow us to achieve the guidance we previously outlined. Therefore, we do not expect these initiatives to drive any incremental data revenue for this year.

Lastly, our April trading volume has remained strong during what is usually a slower time of the year. Volume is averaging approximately 16 million contracts per day, and we are seeing 20% growth month-to-date. We intend to build on our strong momentum by providing outstanding value to our customers.

In closing, I'd like to thank our employees for all of their hard work this quarter. With that, let me hand it over to John.

Thank you, Terry, and good morning, everyone. We are very pleased to start off the year with a strong 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.

We had an exceptional quarter, as we did in the first quarter of last year. As Terry mentioned, we had the highest quarterly ADV in our history, and we also had record net income and earnings per share on an adjusted basis. Our overall rate per contract for the first quarter was $0.731, the same level we had the prior quarter despite an almost 3% product mix shift toward our lower-priced interest rate products. Market data came in at $97 million, down from Q4, as several larger customers consolidated trading operations and their terminal usage.

Moving to expenses. Excluding license fees and adjustments, our first quarter total expense was approximately $267 million, in line with our original guidance. Earlier this month, we announced our intention to wind down a portion of our European operations by year-end. We expect the annual savings to be between $10 million and $12 million, which will primarily impact 2018 as it will take us some time to fully complete the process. Eventually, we also expect to free up over $150 million in capital related to these entities.

Additionally, because of the transfer of the Russell products in July as well as aggregate changes in our licenses, we would expect our license fees in the second half of this year to increase 10% to 15% versus the same period last year, assuming similar trading patterns.

Our adjusted compensation expense increased by 4%, primarily driven by normal cost of living increases as well as hiring additional technology staff in India and Belfast, which, over time, we expect will reduce higher-cost professional fees. Our compensation ratio in Q1 was 14.7%, about the same level as we had for the full year of 2016.

Looking at the nonoperating income and expense line for the first quarter. Our ownership in the S&P Dow Jones Indices joint venture primarily drove the $31 million in net earnings from unconsolidated subsidiaries. This was the highest quarter we have seen and up 15% from Q1 last year. The compound annual growth rate on this contribution has been 13% since 2013.

Our returns from investing cash on behalf of our customers increased sequentially to $12.2 million from $8.4 million in Q4. Concerning current cash positions, we expect the investment returns to increase again in Q2 as we will have the first full quarter impact of CME clearings approval to hold customer cash performance bond deposits in a Federal Reserve bank account.

The tax rate in the first quarter was an adjusted 35.5%. We expect the rate to be higher in the second quarter, and we expect an effective rate of 36.3% for the full year.

And now to the balance sheet. At the end of the first quarter, we had approximately $1.37 billion in cash and marketable securities, which includes $240 million of cash from our final BM&FBOVESPA stock sale in January. It is worth noting we also returned $1.1 billion in January through our annual variable dividend and approximately $220 million in March through our regular quarterly dividend.

Finally, during the first quarter, capital expenditures net of leasehold improvement allowances were $15.5 million.

In summary, it's been a great start to the year. We reached a peak level of volume, adjusted net income and adjusted earnings per share. We intend to remain very focused on efficiency, coupled with enhancing the value proposition of using our markets to attract new customers.

With that, we'd like to open up the call for your questions. Thank you.

(Operator Instructions). We'll take our first question from Rich Repetto with Sandler O'Neill.

I guess the question is on the market data, Terry, because just trying to -- so are you saying it was the guidance 5% to 6% up? And is the new guidance more flat for 2017? And could you give us a little bit more detail about the resourcing that you talk about that you need to augment?

John -- yes, I think, Rich, I'm going to let John discuss that a little bit, and then I'm going to have Bryan walk through some of the resources that I outlined in my opening remarks. And I think you'll get a little bit more color on that. So hopefully, we can answer your question. If not, go ahead and follow up with it.

Yes. Thanks, Rich. This is John. Yes, as we indicated in the prepared remarks, the opportunity associated with some of the items we outlined in the fourth quarter call are being pushed out into 2018 from 2017. I would say that the market data for this year is going to be range-bound, and we'll be able to provide some more color as we get closer to launching the opportunity in 2018.

Bryan, why don't you give a little color on the folks that we're looking to step up on?

Yes. Thanks, Terry. Quite frankly, Rich, we underestimated the level of time it would take us to get the staffing in place, particularly to help us with the opportunities associated with derived data. I think you've heard us speak quite a bit about where we see those opportunities, and we have much in our pipeline that we're getting through right now. But it is very labor-intensive and a very specialized source of talent that we're looking for to help us navigate through and capture those opportunities.

Same thing with the audits. We are working right now aggressively on the augmenting our capabilities with some -- bringing in some outsourcing staff to help us as we ramp up our staffing for the auditing function. And then I'd say, lastly, in terms of the development of our business intelligence efforts, which will allow us to capture some of the other opportunities that I've outlined in the past, it's a highly specialized skill that we're looking for right now. And quite frankly, we're very aggressive in terms of what we thought our ability was going to be to get that staffing in place.

And let me just add a little bit to what Bryan said, Rich. When we first came out with historical and derived data and new opportunities to capture revenue, I think, frankly, we might have even underestimated the value of some of this market data. And I think in order for us to roll this out properly to the benefit not only of our shareholders, but the users who want to have this, we need to make sure we price it adequately, properly and distribute it adequately and properly through the direct channels and give Bryan the resources with his team to move it forward. So to me, I know it can look like somewhat of a negative on the guidance. But overall, we are very committed to this strategy, and we're looking forward to delivering on this.

Understood. And then one quick follow-up. John, you said that interest would likely increase from, I believe, the Fed deposit program in 2Q. Can you give us a little bit of a feel of how much that might be?

Yes, sure. I think we're really pleased with being able to offer the -- this to our customers -- this opportunity to our customers. When you -- if you'll recall, we had access to the Fed account for customers. It was kind of the middle of March is when it became available. So if you look at the next quarter, assuming that the same balance mix and the same level of balances as the end of Q2, which we've seen remain steady through April 24 of this quarter -- of this month, I should say, so we should have around $6 million to $7 million additional dollars in Q2, assuming those balances and mix remain constant.

We'll go next to Dan Fannon with Jefferies.

I guess my question is a little bit more broader on market data. You guys have raised prices last year and implemented pricing -- or costs on things you're giving away for free. Now you're looking to roll out enhanced components of the data. I guess, generally, how are your customers feeling about paying more for these services and the longer-term opportunity you think in market data as a revenue? Are you still as bullish about it or think it can be a growth area for you on a longer-term basis?

Let me start a little bit, then I'm going to turn it over to Bryan. Dan, it's Terry. Yes, we are bullish on market data. You got to realize, we're coming off of a 0 basis. We gave this away for many years to attract liquidity, which was critically important to the future of this company.

So -- then, we are still a low-cost provider as it relates to our competitors, as it relates to market data. So with our new offerings, this is not just the core business of trying to charge them more for our core offerings. This is new, derived -- new offerings in data. And like I've said earlier in my comments, I think it's important for us to understand what that true value of that data is by putting the analytics team in place, the sales team in place globally so we can distribute that and capture the revenue that's appropriate so we're not willy-nilly changing the pricing on historical and derived data constantly. So I think this is a process that -- as I've said in my comments, we may have underestimated a little bit how it's going to take to roll that out. But I do think I would say we are still very bullish, and I'll let Bryan comment more.

And to add onto Terry, we're taking a longer-term focus on this. Bear in mind, we have the broadest array of asset classes, 6 asset classes that we represent, and I would argue, the largest customer base. And so we're taking a very holistic global picture and making sure that that resourcing and capturing those opportunities across the globe, that we're best positioned. It's taking us a little longer to get there.

We'll go next to Alex Kramm with UBS.

Sorry to ask another question about market data, but I think you talked a lot about the outlook for kind of like the new stuff you're excited about. But can you just give a little bit more color in terms of what happened in the first quarter? I think John gave a couple of items here. But if you just think about it holistically, right, your volumes are going up. People are more interested in your markets. They should be -- there should new people, new firms consuming your data. So why was that down quarter-over-quarter?

And then related to this, I mean, you gave us -- you gave a pretty bullish statement in February. You've been to a couple of industry conferences, and you saw all of -- a lot of us in Boca in mid-March I think. It seems like very surprising that, that first quarter came in so light. So what happened there? Why was there not more visibility that you could have communicated?

Thanks, Alex. Yes, we -- our market data revenue for the quarter was $97 million. What we did -- what did happen was there was several larger customers that were doing some internal efficiencies themselves and consolidated their screens, which caused the first quarter to come in lighter than we had anticipated going into the first quarter.

And you didn't notice that until now? I mean, I'm just surprised how long it took for you guys to realize that. Sorry to harp on it.

No, no. That's fine. I mean, if you recall, the way this is done is we're about a month in arrears as we go through, and they submit the counts to us. So we don't have clarity on that until part of the way through the quarter. So that's fundamentally why. It's a sum that's recorded in arrears.

We'll go to Brian Bedell with Deutsche Bank.

Sorry to stay on the market data subject. But just in terms of the -- I guess as we move to the (inaudible), I appreciate you mentioned range-bound. Did you view the consolidation of some of the screens from some of those customers as sort of a onetime event? Or do you see the potential for that happening again during the year? And then just -- maybe just talk about the transition process of moving to the new data platform. I appreciate it's going to take a while, but is there any kind of friction as you do that? Or do you feel that will be a seamless handoff?

So, Brian, let me kick it over to Bryan for a second, then I'll make some comments when he's finished on the first part of your question. Bryan?

It's hard for us to estimate in terms of how firms might change some of their dynamics or usage. But in positioning ourselves for any changes in that direction, it's incumbent upon us to take the rich, vibrant database that we have and develop the new products that we've outlined to you. I think it's fair to say that we represented those new initiatives relatively recently, and we are staffing ourselves to be able to capture those opportunities. So it's not necessarily the same consumer of information or data that we're going after either. You have to separate the core from the derived and the historical. All of these represent different opportunities and consumers of that data.

Brian, let me just add to what Bryan said a little bit and talk about what do we see going down the road. One of the things we've said since we took this company public in 2002, and we've always said it: it's like volumes. Volumes are very difficult to predict, right, because we're beholden to a whole host of different activities, geopolitical, including that, and policies associated around the world.

So when you look at the growth of our business on the volume side, we're doing everything we can to create capital efficiencies, bringing new markets, new people that were not participants into our marketplace, which Alex referred to earlier in his comments, and we're back to that. We're going to continue to address new clients. It's a big focus of mine and the management team: to bring in new clients. And the longer we can continue to work hard to bring in new clients, that will then take care of the market data equation. So as something I like to say, I can't control the price of the stock. What I can control is trying to help run the business efficiently as possible, bring in new clients to create capital efficiencies (inaudible). And I think that will have a major reflection across the entire portfolio of our businesses, including market data.

So we should view the market data as fairly core. The current market data stream is fairly core, and then the initiative that you're working on as incremental to the core because of this, okay.

Right, yes.

Yes, absolutely correct.

We'll go next to Michael Carrier with Bank of America Merrill Lynch.

John, maybe just on the Fed accounts. Just wanted to get a sense where maybe the balances are, dealers, clients and then what maybe the potential longer-term opportunity and what kind of the puts and takes are as users are trying to determine where to put their balances? And then just real quick on the European thing. It sounds like expenses, that's more '18. The cash that's there, is that also most likely going to be '18? Or would that be a '17 event?

Sure, thanks. Thanks, Mike. Yes, the -- let's talk a little bit about the Fed account. As of quarter end, we had about $44.4 billion in performance bonds and guarantee funds on our balance sheet. Of that, $34.5 billion was at the Fed. $6.2 billion of the $34.5 billion were house accounts, and $28.3 billion was customer-related accounts at the Fed.

As a reminder, the Fed itself -- the customer cash came in about midway through March, so we didn't have a full quarter impact of having that available to our customers. What we did -- what we have seen, unlike in past quarters, is that the amount that's being held at the Fed has remained constant and steady through the month of April. So that's why we're mentioning that we -- assuming that the mix and the levels stay constant as of end of Q1, we should see an increase of $6 million to $7 million more in Q2.

In terms of how the Fed -- how customers will look at putting money at the Fed, I'll ask Sunil to comment on it. He's here as well, and he's president of our clearing house. The customers will do a calculation in terms of, number one, do they need the cash readily; number two, what the return is that they can get at the Fed versus other instruments they could hold in terms of collateral. Sunil?

Thank you. Thank you, John. Just to add to what John is saying, we actually provide a very flexible collateral program to our clearing funds to actually post either cash or securities to meet their margin requirement. And as John pointed out, one of the factors may be the return that they can get on their cash balances, but that is not the only factor.

And then in terms of your question regarding the European -- the things that we're doing in Europe, the amount of capital that we were able to free up, which is around $150 million, we'll be able to free that up once those enterprises are wound down. And so that will be late 2017, early 2018 is when we can get the cash back here to the States.

We'll go next to Chris Allen with Buckingham Research.

I just wanted to maybe touch a little bit on rate per contract. It was fairly resilient across most products in the quarter and a little bit surprised just given the volume trends. I'm guessing this may be due to continued electronic adoption of options trading and continued penetration of customer bases. But any granularity you can give us there will be helpful.

Sure, Chris. In terms of the RPC, yes, we've -- it was pretty resilient at $0.731. The realized benefits of our pricing actions plus lower volume discounts in equities and energy were able to offset that mix shift. It was 3 percentage point mix shift to our lower-priced interest rate products. I'll turn it over to Sean, and he could talk to a little bit about the options.

Sure. In terms of the innovation that we've done over the last few years, a lot of these new products that we've launched actually have a much higher RPC. For example, as Terry mentioned earlier, we're very focused on delivering the most capital margin and total cost-efficient product as possible. So our invoice spreads take advantage of portfolio margining between CME-cleared interest rate swaps and CME Treasury futures, for example. They traded $11 billion a day, over 80,000 contracts in the first quarter, a record number, up 62% year-over-year. So huge growth.

Now while the -- in our Treasury complex, 80,000-plus contracts, they may not seem very high. The RPC is about $2. So it's approximately 4x the RPC of our overall complex. In addition to that, if you look at our Basis Trade at Index Close, for example, in equities. Basis Trade at Index Close, remember, we launched a little over a year ago. This allows participants to trade our equity futures at a basis to the cash market close. Very efficient for cash options traders, but also very efficient for index managers wanting to eliminate any slippage relative to the management of their index funds. On the BTIC, actually, we had a record day on February 28. We had another record day on March 1. The BTIC, likewise, has an extremely high RPC of approximately $3 and doing about 10,000 contracts a day. So we've had, I'd say, an extremely high hit ratio on our recent successes, and a lot of those new products, with the efficiencies they provide, have a higher RPC.

Thanks, Sean. Maybe Derek can comment a little bit on his process as well.

Yes, Chris, and as Terry mentioned at the top of his comments, we had an all-time record quarter in our metals business. As you know, our metal contracts is our highest RPC contracts, and copper has been a particular area of strength. You couple that with the large open interest holders and open interest records we're having, coupled with the fact that energy and metals particularly is where we've seen our highest participation and fastest growth in the commercial participants, you got a combination of high RPC products and growth in our high RPC customer bases within those products as well. So we're helping to grow and diversify the growth across the exchange.

Great. And just a quick one, just on the guidance for the licensing fees up in the back half of the year. When did the escalators kick in? I would imagine it was early in the year. And what did that assume for Russell ADV? Is it at a similar level that we're seeing on ICE right now?

What we -- what I guided to was to -- kind of give you a perspective. When you take a look at the first half -- or I'm sorry, the second half of last year compared to the second half of what we're expecting the second half of this year, it's a 10% to 15% increase. And that is assuming similar trading patterns. It's not only the Russell, but also other changes that occur in our license fees. Many of them, you're right, started at the start of this year.

In terms of the level for the Russell, we're not kind of guiding in terms of the amount of volume. I will say that we're very excited about bringing the Russell on. The efficiencies that we can provide our customers and the distribution that we can provide our customers is really second to none. So Sean, do you want to comment on Russell?

Yes. We're very excited about the launch of the Russell 2000. So we're going to be launching those contracts. We're going to be launching both the futures and a full suite of options on July 10. We are very excited about that.

There will, however, be a 1-year period when those contracts are trading both on our platform and on our competitors' platforms. So there is some level of uncertainty as to when participants will move their open interest from one exchange to the other. We are working very closely with the market. We're very excited about it, and we're doing everything possible in order to make the transfer of open interest as easy as possible, as low-cost as possible, as minimum slippage possible for our participants. So we're excited about it, and -- but it will take some time in order to move the open interest.

Yes. To give you some perspective, in -- the last full year that we had the Russell was in 2007, and we were trading 240,000 contracts a day. In 2016, at the alternative platform where Russell is currently trading, it was 118,000 a day. So over that same period of time, it got cut in half. And then also, just so you know, that they cut the contract notional in half late -- early this year or late last year.

Late last year.

Late last year.

We'll go to Ken Worthington with JPMorgan.

So a forethought on the Fed. I assume that the customer ultimately makes the decision on where customer cash is placed. So maybe what percent of customer cash do you think will be placed with the Fed over time? And maybe as the interest rate environment normalizes, would you expect the utilization of the Fed window to kind of increase or decrease?

And then lastly, CME is taking a cut of that yield. And maybe to what extent are you getting pushback on the fees or the take that CME is getting on that Fed yield? And is there any reason for pushback to kind of increase or decrease there over time?

So Ken, let me kick it over to Sunil to tell you the mechanism of how clients make a decision on how they want to have their funds being held and where. So Sunil, why don't you go ahead, and I'll address the other part of our costs that are associated with the equities and how we're just recapturing some of our cost on the back end of it.

As we -- thank you, Terry. But as we said before, we provide our clearing from the flexibility to post cash or securities. When the cash is posted to us, we actually -- the cash for margin requirement is posted to us, we actually place that with Fed accounts, and we pass the return back to the clients.

So -- and as far as what we capture as it relates to the Fed accounts, I'm going to let John walk through some of the costs that we incur and what we get back to offset those.

Yes. Thanks, Ken. What we've been doing over the last several years is providing our customers, number one, access to the Fed that they don't have presently. And then secondly, we do incur a substantial amount of fees to support the clearing operations, liquidity fees, bank fees, other types of fees this helps to offset. So it's 2 things: One, it's giving our customers that availability; number two, it's to recoup some of the costs, which are not insubstantial for running our business.

Answer your question, Ken?

Yes. And just the last part of it. So in the interest rate environment, when interest rate -- before interest rates rose, you get a nice premium at the Fed versus what you could get in the open market. I assume that may change as interest rates go higher. Is there less of an incentive to actually go to the Fed window as rates rise?

Ken, I think that's pure speculation on what the (multiple speakers) having margin that CME Group will do. We have no idea what they're going to do. I mean, some people want to hold securities, some people want to hold cash. That could change dramatically on a rising rate environment, it may not. It's a wait-and-see program for us, so we don't want speculate on that.

And then last maybe, Terry, for you. CME has made a push to further rationalize its business. You've exited some noncore businesses, which appears to be really helping to boost efficiency, European clearing being an example. To what extent is there more low-hanging fruit in terms of rationalizing the business?

Well, I don't know if there's any low-hanging fruit. And I don't know if what we're doing in Europe is considered low-hanging fruit. But we're making some tough decisions about how we optimize this business, and we're going to continue to do so.

I mentioned earlier in my comments that it's about the client, and I'm not just saying the client in the United States. It's the client globally. So we are really focusing on going out and attracting new end users into our products to show them the benefits that they can derive by doing the risk management here at CME Group. It's all about cost efficiencies in the world that we live in today. Sean talked about it a little bit earlier. And we are going to continue to point out those cost efficiencies that CME Group can offer to its clients. So that's a big push that we have over the next 12 months, and we think we're very hopeful that it will pay major dividends for not only our shareholders but the opportunities for our clients.

Warren Gardiner with Evercore.

Maybe I missed it, but it sounded like the data business is going to require some further investment beyond what you guys were expecting. But it doesn't look like there was really much change to expense guidance or anything along those lines. Can you kind of just square that -- or square those 2 for us?

Yes, sure, Warren. This is John. As Terry has kind of mentioned, it's really about focusing the resources within CME Group. And some of the things that we talked about is as we rationalize some of the operations here, we're able to take some of those resources and put them towards growth initiatives. This is an example of that. We feel that in data, there's a tremendous opportunity with our 6 asset classes and the value of the options data that we have within our business, and we've got a large growing options complex. So it's really taking internal resources and reprioritizing them to our -- to the market data effort. There's lots of examples that I can give you on that. But it's really taking the focus of the business and putting it towards market data. Also, as Terry is indicating, I mean, we spend a lot of time growing the global client base, driving this -- accumulating all this volume. And now we're really focused on capturing the market data side of the opportunity for us.

And just to add to what John said, I'm very -- and what John and the rest of the team, we're very focused on the cost of running this business most efficiently as possible, so I don't see any incremental cost to adding to Bryan's group to go out and capture the revenue opportunities that we believe are in market data. So I don't see any reason to guide on any higher expenses as it relates to that product line.

We'll go next to Patrick O'Shaughnessy with Raymond James.

A quick question on energy. So ICE and Platts announced that in May, they're going to launch a U.S. LNG futures contract. Is that an area within energy that you think presents an opportunity for CME Group as well?

Yes. Thank, Patrick, it's Derek. Sorry for my froggy voice. I picked up something in China last week. When you look at the energy business, as Terry mentioned in some of his remarks, we're coming off a year -- or a quarter this year of record open interest in growth in WTI, heating oil, gasoline and nat gas. When you look at LNG, it's a growing market. It's an emerging asset class. We're going to be talking about a product that is now the result of what's changing both the dynamics here in the U.S as well as the global market. It's a physical market that is evolving. There's no established price points right now. When you look at the position that we got in the Henry Hub market in natural gas, we're at record levels of 70% market share. Terry referenced our outperformance growth versus ICE in nat gas options and nat gas.

So yes, we're looking at that as an additional piece of the growth pie relative to energy. We're very excited about that. We think the growth that we put up, and given the fact that we are now seeing commercial as the single-largest participant in our energy business, that, coupled with the large open interest orders and open interest rates, give you an indication as to where we're focused on the end user need. So as the liquid -- the LNG market evolves, we're working with the end users to make sure we're able to service them in the LNG market as we have in WTI as well as in the nat gas market.

If you look at Slide 11 in the deck that we sent you, you'll see the growth in open interest that we've actually then put up across each of these 4 major components of our energy business. So in the same way that we have attacked those client segments and be able to serve their needs, we'll do the same thing in emerging products like LNG.

Got it. I appreciate that. And then speaking of your slide deck, as we look at Slide 5 and showing your growth in Europe and Asia, it does look like that growth slowed a little bit, I guess, in the first quarter 2017 versus 2016. So from that, I infer that most of your volume growth in the March quarter came from U.S. clients. And I think you made some commentary about banks kind of getting more active. So if you can maybe expound on that a little bit.

Yes. I'll let Bryan and Sean touch on that a little bit about the expansion throughout the other regions. Bryan?

Sure. Thank you, Terry. So our global business remains very strong and robust. You're correct that I'd say early on, January, February was somewhat muted in comparison to the prior year. However, as we look into March, we've seen a tremendous growth, particularly in our rate, jumped 50% from March of last year, which is a tremendous sign. And our European activity overall was up substantially in comparison to the U.S. Again, it goes to the diversity of the product line because even as we saw some slowing down in the interest rate and equity complexes in January and February, that was well offset by our activities in our ags, metals and our FX complex. So again, it goes to the diversity of the product line and the very surgical approach we're taking to developing new client opportunities and bringing in new clients and the development of products as Sean has outlined.

Sean, maybe you can touch a little bit about the European interest rates versus ours and where you saw that in the first quarter.

Sure. In terms of European interest rates -- actually, in terms of our U.S. rates complex, I think we mentioned it clearly in the documents. But record number of large open interest holders, record open interest, record Q1 volumes. So we're very excited about what we were able to achieve in the first quarter.

As Terry mentioned, in terms of innovation, our Ultra 10-Year, reaching 103,000 contracts a day. So we're very excited about what we've done there. In terms of our European penetration specifically in our interest rate products, to put things into perspective, we did 1.488 million contracts a day out of Europe. So we did almost 1.5 million contracts a day. Think about that relative to the size of our competitors, and they're global, actually, businesses. So we've gotten an extremely high penetration. We're going to continue to get increased penetration.

If you look on our charts on Chart 6 -- Slide 5, 6, you see here how we had great, actually, traction in our Eurodollar futures and options, our Treasury futures and options. We had over 100% growth in our Fed funds contracts, and we continue to increase penetration of the cash market. So we're very excited about our rates market. Then actually on slide -- you can see our innovation on Slide 9. We're looking at the -- several new innovations that we've launched in the marketplace and the terrific traction that we're getting there.

You can see on Slide 10, for example, the record number of large open interest holders, where we've had a new leg up in that marketplace. In terms of banks and the growth that we're seeing in foreign exchange, we're very excited there. There are a lot of times when we're doing things that may seem extremely technical, but they actually have very big impacts on market structure and helped us enormously. So one of the things I talked about last year was the fact that we had reduced our minimum pricing increments on 4 of our large FX contracts. So we halved the minimum price increment on our euro versus dollar. We halved it on the yen versus dollar, the dollar versus the Canadian dollar and the dollar versus the Mexican peso.

What that means now is for the electronic algorithms within the banks, because we've got a much more competitive product with a much tighter bid-offer spread, much better liquidity, we're getting a much higher volume. So interesting, in the first quarter, our volume with banks was up by 15% in our foreign exchange marketplace even though our overall volumes were down because of much lower volatility. At the same time, the 2 largest OTC platforms that publicly offer foreign exchange, they -- we significantly outperformed their volumes.

So just to add to what Sean said, I think he summed it up very well, but there's always ebbs and flows not only to our U.S. participants, but also to our European and Asian participants. So that's, I think, just what we're seeing a little bit here, and there's nothing more than that. And I think with the initiatives that we've outlined with the capital efficiencies, the innovation in our interest rate complex, you might see some trading in different venues. But ultimately, people are migrating to our products as the numbers dictate.

We'll go next to Kyle Voigt with KBW.

Just one on market data again. I believe the prior 5% to 6%, the growth guidance excluded pricing changes. So can you just give us an update on the pricing moves -- or potential pricing moves? And maybe do you have any plans to increase pricing over the next 12 months?

Yes. We do not have any pricing planned this year. So we are always looking at our products and adding new products and augmenting additional customers, but we don't have any planned price increases thus far.

And as I alluded to earlier, this is targeting other consumers of the data than what you would view as your core market data participant. So it's actually a new pipeline of activity that we're driving towards, and they'll be paying for those services.

And this is -- let me answer this in a broader way. One of the reasons it gave us the opportunity to do the things we're doing to create the efficiencies is because we were able to build liquidity around the clock on our Globex platform. We don't want to disrupt that liquidity. So on the market data side, to Bryan's point, we don't need to attack or add on additional cost to our core participants who are providing that around-the-clock liquidity, but we go out for these new forms that people are coming to us and we're going to them. That's really where the incremental revenue is going to come from on market data.

Okay. And then just if I could just have one follow-up maybe for Sean on the rates business. You're seeing stronger year-on-year growth in futures open interest in rates than you've seen in quite some time. And one of the questions from the investment community is really around the sustainability of this growth in a rising rate environment, where most of the activity in hedging and repositioning actually happens ahead of the rate moves and at just as rates start to move. I guess could you help us understand what users are coming in to build the open interest, really, just over the past 2 quarters that's driven the really significant open interest growth? And then how sustainable do you believe that is going forward?

Sure, I appreciate the opportunity. So think about it, we grew our marketplace even during 0 interest rate policy with new product innovations, new product extensions, and we've been growing the open interest for quite some time. If you think -- here's an interesting point, for example. During the 0 interest rate policy, we focused a lot on liquidity further out the curve, in our greens, in our blues and further out, so the third year and the fourth year of Eurodollar futures.

One of the things that you're seeing come to fruition now is in 2011, we launched a third year of quarterlies in our Eurodollar options. In 2013, we launched for the first time in CME Group's history a fourth year of quarterlies in Eurodollar options. Those options that we launched in 2013 are now defunct. So for the first time, we've been able to have 4 years' worth of accumulation of open interest in existing contracts in our options complex. So I don't see anything -- any ceiling of any sort. If you look at penetration of the cash market, we've grown it very substantially from on the order of 20 -- sorry, from on the order of 55% of the cash market, our Treasury futures in 2012, to now 82%. If you think about our S&P futures and if you look at our S&P futures penetration of the cash market, we actually traded in our S&P futures on a daily basis a larger risk amount than all of the cash exchanges combined. So there is no ceiling. In the case of S&P, our penetration is over 100%, so I don't see any ceiling on that growth.

We'll go to Vincent Hung with Autonomous.

Sorry, maybe I missed this, but is $97 million the quarterly run rate for market data revenue for the year now?

We haven't provided any guidance. I would say that it's range-bound.

Okay. And you highlighted your strengths in options and futures. Can you maybe talk about the attractiveness of options and futures? And any sense as to why your peers aren't doing more to catch up with you?

Yes, Vincent, it's Derek here. I think if you look at the -- we provided some slides here, and you've seen these before relative to both our growth and our penetration. The unique position that we find ourselves in is we are the largest derivatives engine in the world with the broadest asset class perspective. So we've got -- this year today, I think we're actually doing over 4 million contracts a day in April. So we're continuing to go from strength to strength, but being in a position whereby we've got core benchmark liquidity across every major asset class. What we focus on is building out the options associated with those futures. And the infrastructure, the technology, the position we put ourselves in relative to expanding the franchise at the enterprise level uniquely allows us to scale our technology investments in ways that others that are maybe just an energy exchange or just an equities exchange are going to struggle to put that kind of investment behind. So as we globalize our business, as we pour our liquidity electronically -- Sean mentioned before the growth in Eurodollar options electronically were up to 32% electronically. That's the growth of our global participation in Europe and Asia. Questioning what others are doing or not doing, I couldn't tell you. But what I can tell you is we're focused on client need. Giving them the most capital-efficient way to trade all of their risk and futures and options in a unique way in which we can provide both electronic delivery of that actionable liquidity alongside the capital efficiency of providing the underlying hedge with the option on the same platform and the same clearinghouse is unparalleled elsewhere.

And we'll have a follow-up from Alex Kramm with UBS.

Just one quick thing. Maybe this was addressed already. But on the whole interest income from the clearinghouse with the Fed window and so forth, can you just remind us how the mechanics will work as rates move higher? I think you've said something about 80% for the customer and you keep 20%. Is -- do I remember this correctly? So if there are further rate hikes, do you basically capture 5 basis points with every rate hike? And then just in general on those line items, I think that kind -- is there any way you guys can present us a little bit better the balances of the investment income? I feel like it kind of gets lost below the line here a little bit. And I mean, this has a potential to offset some of this market data weakness, and I think it gets completely lost. So just wondering if you can do a better job of presenting this going forward.

Okay. Thank you, Alex. Yes, I -- a couple of things. First off, we have not said what we're going to do with the next rate hike. As you look at our Fed funds futures contract, it implies kind of a June move. But we have not said what we're going to do in terms of the amount we're going to rebate back to our customers.

This is an important service that we provide our customers, so it's something that we want. To your point, I think it's something that we -- is core to what we do, and we want to make sure that we're highlighting it as effectively as we can. And we probably should highlight it more, especially when you take a look at what we've been able to do, where we're taking our nonoperating earnings from an expense -- a $9 million expense in the first quarter 2014 up to where we're at today of $16 million -- or $15.6 million in income. So it is -- it's this offering that we offer our customers. And also, it's the S&P joint venture index business that we have with S&P Global that's also performing extremely well and producing around $30 million in earnings for us. So when you take a look at that line, it's something that, certainly, the investing community should be aware of because these are 2 things that, although are not in our direct operating expenses, are important for our overall business. So that's a couple of points that we wanted to highlight.

As there's no further questions, I'd like to turn the call back to management for closing remarks.

Well, let me thank all of you for participating today. We appreciate the opportunity to address your questions and we look forward to talking to you next quarter.

And that does conclude our call for today. Thank you again for your participation. You may disconnect at this time.