芝加哥商業交易所 (CME) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CME Group's Second Quarter 2017 Earnings Call.

At this time, I would like to turn the conference over to Mr. John Peschier. Please go ahead, sir.

Good morning, and thank you all 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 are also here and will participate during the Q&A.

Before they begin, I'll read the safe harbor language. Statements made on this call and the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. 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. I'm going to make some initial comments, and then I'm going to turn the call over to John Pietrowicz. So as we look at our average daily volume during the second quarter, it grew by 9% to 16.5 million contracts per day. This is extremely impressive growth, especially considering the tough comps we had last year.

During the quarter, our total open interest hit record levels. We also experienced large open interest holders at record levels in several key products. We had double-digit volume growth in Q2 in our 2 largest segments, interest rates and energy. We believe we are well positioned long term in these products.

Within rates, we delivered strength across the board in Eurodollars treasuries, including the Ultra 10 and the Fed funds futures. This was driven by exceptional liquidity, capital efficiencies and continued innovation.

In Q2, the Fed elaborated on their plans to reduce their balance sheet over time. This will create another dimension for the trading community to consider.

Energy markets have been particularly dynamic. The U.S. has become the swing producer in the global crude oil market. It has been driven by increased domestic production and rising exports of WTI. This continued structural shift in the global crude market helped us achieve record levels of WTI trading, averaging 1.5 million contracts per day during the quarter.

We are also pleased with the continued growth of natural gas options on Globex. It has been one of our major initiatives this year. Electronic volumes grew 156% in June. We reached a record 52% electronic in June versus just 1% in June of 2015. Like WTI over the past 2 years, we believe our Henry Hub contracts will continue to rise in global relevance. This should be driven by increased U.S. shale gas production and increased U.S. exports of LNG or liquefied natural gas. This -- there is a clear trend, WTI and Henry Hub are being adopted as global benchmarks. This is reflected in the fact that 23% of our energy volume came from outside the United States, up from 18% in Q2 last year.

Within FX, we are performing well. We are starting to reap the benefits of our approach to expand our offering to one of the largest asset classes in the world. You see in terms of recent volume growth. We have also seen expanded participation from bank clients. In Q2, we saw a continued outperformance relative to the other 2 largest FX platforms in terms of trading activity. Large open interest holders in FX are up 11% year-over-year at CME Group. We're seeing early traction on our recently launched FX monthly futures targeted toward the $2.4 trillion per day FX swaps market. And so far, we have had 200 unique participants since launch.

In addition, in late June, we achieved an important step in our ability to provide clearing services for over-the-counter FX options by receiving a notice of non-objection from the CFTC for our margin model, which will enable us to supplement our non-deliverable forward offering.

Our metals volume continues to expand. We had our third consecutive record quarter in retail. It was driven by precious metals average daily volume, up 14%; and copper, up 15%. Both products substantially outperformed volumes in our peer exchanges.

Turning to options. We continue to gain traction with important business. Options are particularly useful for customers in low volatility environment. This is shown by strong growth in our equity options despite depressed levels of equity market volatility. Total options grew 21% to the same quarter last year.

We saw a surge in electronic options, up 30% to 2.2 million contracts per day. From a global perspective, we continue to see strong growth. We had record quarter in terms of ADV from both Europe and Asia. This led to a sizable jump in the percentage of total volume from outside the U.S. It also showed increased participation during non-U. S. trading hours. If you look across the 24-hour day, we saw a 33% growth during European hours to 1.4 million contracts per day during Asian hours, and we saw 22% growth to 430,000 contracts per day in that region. Our focus continues to be on maximizing our results. There are certain parts of our business we feel confident that we can control to accelerate growth, such as continuing to provide superior customer service and outreach, providing a robust reliable technology platform and consistently adding relevant new products.

In closing, earlier last month, we launched the Russell 2000 futures. We are pleased with the participation so far and are well positioned to expand that market. The Russell benefits our clients who want to manage risk in the important small-cap segment. Combined with our other equity products, it gives our customers access to all the major equity indexes on a single platform.

Before I turn it over to John, let me go back on one thing I said about the metals. I said that it was continuing to increase in retail. It's not -- that wasn't retail. It's continuing to increase overall, so I apologize for that misstatement.

And with that, let me turn it over to John.

Thank you, Terry, and good morning, everyone. We are very pleased to report another strong quarter. Our consistent steady results reflect the benefits of our balanced portfolio of diverse products and our continued efforts to operate our business as efficiently as possible. Our solid clearing and transaction fee revenue was driven by record activity in energy and metals and more than 20% volume growth in interest rates.

That, coupled with strong expense discipline, resulted in another quarter of record adjusted net income and earnings per share. Overall, our rate per contract for the quarter was $0.749, up 2% from the prior quarter. This was primarily due to a product mixed shift towards our higher-priced commodity products.

Market data came in at $96 million, relatively in line with Q1. As indicated on the last call, this will be the general range for 2017. Our additional data products and services beyond real-time sales are more of a 2018 driver.

Other revenue was down $4.6 million sequentially, the result of a few nonrecurring one-time items in recent quarters. Also our interest earning facilities investment income, which had previously run between $2.5 million and $3 million per quarter and is included in the other revenue section, dropped to almost 0 in Q2 as the vast majority of cash margin deposits have been migrated into the Fed facility, which has a higher rate of return. The revenue and expense is reflected in nonoperating results.

Moving to expenses. Our second quarter expense was $261 million, down 3% compared to the prior year, excluding license fees and adjustments. We are maintaining our 1% full year expense growth guidance, which excludes license fees based on expected back-half spending. Our adjusted compensation expense was up 3% compared to the same quarter a year ago, but down about $2 million sequentially. Our compensation ratio in Q2 was 14.5%, relatively in line with Q1 in the full year of 2016.

Looking at the nonoperating income and expense line for the second quarter. Our ownership in the S&P Dow Jones Indices joint venture is what drove the $32 million in net earnings among consolidated subsidiaries. This was the highest quarter we have seen and up 18% from Q2 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 $21.2 million, up from $12.2 million in Q1. The tax rate in the second quarter was an adjusted 36.5%, up sequentially as we had guided to last quarter. Given the recent announcement of an increase in the Illinois state income tax starting in July, we expect our tax rate to increase by 0.4% annually and 0.2% for the current quarter. For modeling purposes, I would suggest you use 36.8% for the second half or 36.5% for 2017.

And now to the balance sheet. At the end of the second quarter, we had approximately $1.45 billion in cash and marketable securities. We paid out $223 million in June through our regular quarterly dividend. It is worth noting we have returned approximately $8 billion to shareholders in the form of dividends since the implementation of the variable dividend policy in early 2012.

Finally, during the second quarter, capital expenditures net of leasehold improvement allowances totaled $16.5 million. For the year, we now expect $90 million to $95 million of CapEx.

In summary, we continue to execute well on our plans in an efficient and effective manner no matter the underlying environment. We continue to work closely with our customers. We aim to improve their experience and provide them with solutions to their challenges. We also are positioning ourselves to attract more new users from around the world to our deep liquid capital efficient markets.

For the quarter, our efforts resulted in record adjusted net income and earnings per share. We intend to continue moving forward along this proven path to drive long-term value creation for both customers and shareholders.

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

(Operator Instructions) And we will take our first question from Michael Carrier with Bank of America Merrill Lynch.

This is actually Sameer Murukutla on for Mike Carrier. So just a quick question on the expenses. I know you maintained operating expense guidance, but -- which means a leading -- meaningful increase in the back half of the year. Is it all going to be related to marketing comp? Or are there any other line items that we can expect to see the increase?

Sameer, this is John. As you know, we guided to [10 92] for the year, excluding license fees, and that's at the level below our 2014 spend. As you know, most of our expense lines don't move very much. The 2 lines I would expect to increase in the back half of the year are professional fees and marketing. Our professional fees fluctuate with timing around projects and project spending, and they were light in the first half, running about 17% below last year, and we don't expect that to continue. And marketing, as you know, is back-end loaded with our customer-facing event in the fourth quarter. We are continuing to manage our cost very carefully. And as you indicated, yes, we are not changing our guidance at this time and we're going to strive to do better than it.

And we will go next to Rich Repetto with Sandler O'Neill.

Anyway, my question is, I guess, a little bit more detailed. But on the other revenue, you called it out, John, in the release, talking about how some was in the investment income line. I guess my question is, when you talked to us last quarter about $6 million to $7 million incremental nonoperating income from the Fed increase and -- excuse me, and the Fed deposit program, did that include the $2.5 million to $3 million or $2.5 million to $3 million now on top of it, that $6 million to $7 million? And also, how it applies to the June increase, I guess?

Sure. Thanks, Rich. Yes. The other revenue line was down about $4.6 million, and there's a number of small miscellaneous items that flow through that line. We had, in the first quarter, had some work that we're doing on the clearing side and services side that we had in revenue, and there's an adjustment related to that, again, in the second quarter. But the key thing is that our interest-earning facility fees, which historically have been in the $2.5 million to $3 million range and booked in other revenue is now down in our -- in the other income and expense line because folks have been shifting to the -- we have shifted to the Fed accounts. So it's down $2.5 million to $3 million in other revenue, but more importantly, it's better for our customers to have access to the Fed. And that's down the other income line, which now is running about $21 million, up from about $12 million last quarter. In fact, when you look at the other income and expense portion of our income statement for the first half of the year, it's around $44 million. And in 2014 for the first half of the year, it was 0. So we've been very pleased to be able to offer this to our customers. It's been very good for our customers and good for CME Group.

But I guess the question was, is that $2.5 million to $3 million is moving down, is that incremental to the $6 million to $7 million guidance that you said for the second quarter? And going forward, you said it would be $5 million for the next Fed increase.

Yes. Thank you, Rich. Yes, it was a $9 million increase from $12 million in other income and expense to $21 million, right? So it was an increase of $9 million. I would expect, going into next quarter, an additional $4 million on top of the $21 million because we'll have the full year impact of the Fed increase in -- that was done in June. Full quarter impact, I should say.

And we will take our next question from Alex Kramm with UBS.

More bigger picture, I guess. There's obviously been a lot of discussion and articles recently around what both the U.S. and Europe is proposing around alternatives to LIBOR. I think you have -- may have talked about this a little bit before, but given that there's some real timelines now, you're involved with some of that process. Maybe you could just give us your bigger-picture thoughts where are the opportunities, where the risks, how you see it today playing out?

Alex, we're going to turn that over to Sean Tully, who's on the committees for this, so he'll walk you through where we're at today. So Sean?

Yes. So thanks for the question, a very good question. CME Group has been very, very closely involved with the marketplace for their customers and with the regulators and with the oversight bodies. Just to note, CME Group is a member of the LIBOR Oversight Committee over at ICE. CME Group also is a member of the Alternative Reference Rate Committee that actually recently voted and determined that a broad treasury repo rate would be the best alternative reference rate. In addition to that, Kim Taylor is on the Board of Directors of ISDA, and CME Group has been working closely with the benchmark fallback working groups at ISDA in order to make sure that we are part of that process and make sure that we're fully in line with the rest of the industry. We actually announced last week -- on Wednesday of last week, we had a press release that we are going to be very closely engaged with our customer base in the entire marketplace over the coming weeks and months in order to design and launch the new futures contracts as well as the new interest rate swaps that would be driven by the new alternative reference rate. We'll be having a webinar on October 4, and we plan to launch futures on the new rates as soon as they're available. This should allow us to provide for the marketplace the natural home for these new products. The CME Group, as you know, we've got the largest U.S. dollar interest rate futures complex in the world across our Fed funds, Eurodollars and treasuries. That home offers enormous benefits for the new index in terms of the margin offsets, the guaranteed fund offsets and the efficiencies they can have from a capital basis. In addition to that, we plan, as soon as the rates are available from the Federal Reserve and the Office of Financial Research, we plan on launching the new products. And in terms of execution, we will also offer intercommodity spreads with our existing futures. So we see CME Group as the natural home for the new index. We see opportunity for basis trading of that new index against the rest of our complex, and we see CME Group as the most efficient home for it.

And we will take our next question from Kyle Voigt with KBW.

Just, I guess, one more follow-up on the net investment income and the increases going forward. I think you passed along about 80% of the benefit to your clients, at least in the customer-segregated funds. Is that a good way to think about the pass-through rate on all future U.S. hikes? And maybe you could just describe kind of that competitive dynamics or just more of the discussions with your clients around what the benefit that CME sees versus the clients.

Sunil?

The way we think about this is as far as our futures and options complex is concerned, we pass through around 100 basis points, and we keep a little bit to cover our costs of the credit facility. So we still maintain a credit facility for the clearing house, there's a 364-day facility that we renew every year. And it is meant to cover our liquidity in the event of a default. So we -- in order to cover those expenses, we keep a little bit. So as we go forward, we will keep a little bit of the earnings to cover our costs and pass through the rest for our clients.

Okay. But, I guess, is that 80% rate in terms of the pass-through rate, is that a good way to think about the next few set hikes?

I think what we'll do, Kyle, is we haven't announced exactly what we're going to do going forward in terms of what we'll pass through. The way to think about it is these customers have alternative locations as to where to invest their money, and so we want to balance the amount that we return with their alternative choices in terms of investments. So really, what we want to do is to make sure that we offer them an alternative in terms of a risk-free Fed position that is good for them. And also, we would then earn on that as well. So it's really -- it's a function of, as Sunil indicated, covering cost. It's also a function of alternatives that our customers have in terms of where they can invest their funds.

And we will take our next question from Dan Fannon with Jefferies.

Just to follow up on the market data. I'm just wondering if you could kind of update us on what you guys have done, whether it's hiring or some of the investments you're making to kind of make the 2018 opportunity a reality or kind of with some -- maybe think about the numbers of the growth for that going forward and what you've kind of done year-to-date to prepare for that.

Bryan?

We're continuing to execute on our strategy to drive revenue through improved execution in our core market data business and updating our programs and policies accordingly. We've made really good progress in the resourcing of the team, focusing primarily on a newer revenue stream for us as I've alluded to in the past, which is derived data. What we're finding is not only we've made good progress in the development of this business, but it definitely represents an important revenue stream to us, and our team is well on its way in responding to and executing on the growing demand for our data IP. We've also instituted a strategy team, and this team is responsible for expanding our product offerings. And this is largely being driven by business intelligence efforts that are underway today so that we can have a better insight as to the consumers of our data and how that has changed. Data is not being utilized just strictly as we would think for trading terminal usage. It's being utilized for analytics, development of other products, and we're in the process of ensuring that the products and services that we offer are best positioned to commercialize those opportunities. We've also instituted our auto program to ensure that our consumers are actually consuming the data in accordance with their licensing arrangements with us and that we're receiving the appropriate fees. So we're pleased with the progress we're making in that regard.

And we will take our next question from Ken Worthington with JPMorgan.

I want to follow up on LIBOR and Eurodollars. So where might the risk be to CME kind of being able to successfully develop a new contract? It seems like you're by far the best position, given your existing presence. But where [might a savvy] ICE or Deutsche Börse be a possible threat? And then with that in mind, how might the pricing of the new product look? I don't know in the past, but like when you launch new products, are they -- do they tend to be priced lower or do they get a premium price because they're new and unique? Great.

Sean?

Yes, so Sean Tully here again. So I would presume that other platforms will launch alternative reference rate contracts. We will also launch alternative reference rate contracts. We will, as always, be very, very close to our customers in terms of designing the contracts. If you look at our Ultra 10, for example, we were very close to the marketplace in designing that new contract. And I'm happy to say, just 18 months in, that contract has traded over 30 million contracts or 400,000 open interest. At the same time, we continue to grow the open interest of our entire treasury platform. In fact, since we launched the Ultra 10, our -- the total open interest in our treasury futures and options has increased by 2.73 million contracts. So we work very closely with the marketplace. In addition to that, we have enormous offsets against our existing futures and options. So I don't think that another platform can offer the efficiencies. If you look at the Russell 2000, the reason the Russell 2000 is back at CME Group is because of the massive offsets that we offer against both the NASDAQ and the S&P futures. The Russell launch is going very well so far. Actually, last week, in third week in, we're already trading 12% of our competitors' volumes, so we're very pleased with the results there. So again, kind of in summary, I would assume that other platforms would offer the rate. However, we have the most efficient home in terms of the offsets against our existing products. And I'm talking here about the capital and the margins. Without question, I would expect we will have very high offsets in particular against our Fed funds futures. The -- it's an overnight index, will be the index that's chosen, again, it's an overnight broad treasury repo index, very closely correlated with our Fed fund futures. If you look at our Fed fund futures at CME Group, they're up 71% this year. In terms of the average daily volume, we had a record volume day recently of over 900,000 contracts. Putting that into perspective, that 900,000 contract day, that's a $5 million contract. We did over $4 trillion in Fed funds futures on that day. The Fed funds futures very highly correlated with the new index. So we expect to be the natural home. We do expect competition. The competition is good, but we will be extremely closely engaged with our customers, and we're quite sure that we'll have the right product.

And just on pricing, how does that look? New products priced premium or price discount?

In terms of pricing, I'm not going to comment on the pricing yet. I'm going to be designing the product, closely engaged with the marketplace and making sure that CME Group has the single most efficient, lowest total cost offering available anywhere in the market.

And we will take our next question from Alex Blostein with Goldman Sachs.

Just a quick follow-up around the Fed window. I think last quarter, you guys gave us balances. I wanted to circle back on that. I think it was $34.5 billion, which was [fitting] with the Fed in customer balances last quarter. Possible to get an update on what it was averaging kind of over the course of 2Q? And if there's anything sort of left to move over into the window or from here? [Is this going to be] largely a function of the effective Fed funds rate?

Sure, I'll give you the 2 points and then I'll turn it over to Sunil on what he's seeing in terms of kind of the averages. But at the end of the first quarter, the total amount at the Fed was $34.7 billion. The end of the second quarter, it was $38.6 billion broken into 3 components in the second quarter, roughly $5 billion in OTC, about $4.6 billion in-house and $29.1 billion in customer funds were at the Fed. Sunil?

In terms of average for the quarter, I think the amount were around [$34.8 billion]. What John referred to was end of the quarter. As far as the forward-looking, we don't see broad fluctuations, but it is all the decision of the customers and it is driven by their activity and other alternatives they have at their disposal for cash.

Yes. If you take a look through the month of July, it's been roughly between $37 billion and $38 billion. As Sunil indicated, it's a function of trading activity and how much margin needs to be put up at the clearing house. It's also a function of where they can get better returns. And right now, the Fed is offering the best returns for our customers.

And we will take our next question from Brian Bedell with Deutsche Bank.

Can you maybe comment on your views on what some of the impact from some of the FASB hedging rule changes might be? Maybe some -- if you can talk about early conversations with your customers and the potential and sort of timing of increased MBS hedging? And also the ability to hedge commodities more precisely. What kind of impact do you think that could have on your volumes maybe as early as the back half of this year and then [anything in between]. And do you think that could actually have a bigger impact than the Fed balance sheet wind down over all in your complex over the next couple of years?

Yes. Thanks, Brian. I'll comment on the hedging then turn it over to some of the guys here who can comment on the customer impacts. But basically, the current hedge accounting rules, it's fairly technical, but the current hedge accounting rules are very prescriptive and onerous. So the new rules aim to reduce that complexity and allow for more hedging and risk management strategies to qualify for hedge accounting. So this flexibility should potentially make our products more attractive for those that want to use hedge accounting. So we would expect that the rules would go into effect going into '19. And the rules, from what we understand, it will be coming out in the back half of this year. Derek, do you want to comment on the kind of the customer impact on commodities in particular?

Yes. I think there's an opportunity here potentially to work with our dealer partners in terms of allowing the use of standardized futures and options to be included in the packages of bespoke hedges that were typically only part of OTC solutions for very, very bespoke reasons. As John referenced, the hedge effectiveness test under the FASB rules disallowed a lot of hedges that were standardized because of the basis risk. So that does give us an opportunity to partner with our dealer customers and enable them to use our products to actually service their customer needs. As you remember, there was a shift in the banking model from principal to agency, so dealers actually increasingly facilitate an access to futures and options markets, the products that we offer. So being able to partner with our banks and marketing to their customers, CME Group products and solutions get them benchmarked [or cleared] that we have. It's exciting for us as an opportunity. This will take years to play out, but to the extent that it really opens opportunities to probably the big corporate customers out there. We're excited, but it's a longer term play.

Brian, do you want to add?

Sure. In terms of the rates of foreign exchange and equities complex, in particular, I talk about rates, Greenwich Associates published a study now or a few years ago where they looked at total cost, total cost analysis of implementing risk hedging in CME's interest rate futures. They looked at, in particular, the Eurodollars and treasuries relative to the OTC swap market, and they found, across the board, CME's future products are always the lower-cost way to implement any hedging strategies. So that allowed us to do an enormous amount of futurization, in particular, relative to the requirements to clear. If you look, just as a reminder, in 2012, CME's treasury futures, for example, traded 55% approximately of the cash government bond market volumes. Today, actually, I'm happy to say that we are now at new record levels at almost 85% of the cash government bond market. That's on the back of, again, our futures complex being the best lowest cost -- total cost alternative relative to the OTC marketplace. So a lot of folks, as Derek mentioned, corporates in particular who've been constrained by these accounting rules and have been forced in some sense to use the OTC market will now be able to use our entire interest rates complex much more easily for their hedging purposes. So we do expect a continued increase, and we will be working closely with participants in order to facilitate that.

And just on the timing of that, I know you can adopt it, I think, much earlier than 2019. Are you having -- in your conversations with customers and clients, or is there a sense that they'll do that and you'll have the more immediate benefit from that? Or is this much more of a longer term than that?

I think that's uncertain. I'm not going to make any predictions around that, but we're working closely with participants in regards to it.

I think there is an option to early adopt the requirements ahead of the -- requirements. I think for us, it is going to take some time for corporates to adopt, to learn about our products. And as the team said here, they're working very closely with their clients and, obviously, this will nonmember activity for us.

Great. And if had to frame this versus the Fed balance sheet reduction in terms of magnitude, which would say is the better opportunity for you?

Yes. I'm not going to compare the two. Both highly uncertain. Both -- in terms of balance sheet issue, as long as you brought it up, right? We know the current Fed balance sheet around 4.5 trillion. And the marketplace believes that starting September likely, I mean, who knows when's going to happen, but likely September, the Fed will begin to reduce the size of this balance sheet. The Fed, as a reminder to folks, has been buying about $600 billion a year worth of securities. They are price insensitive. And once they start to reduce the size of their balance sheet, those securities will have to be bought by price-sensitive participants, which use our futures in order to hedge their positions. So we're looking forward to that opportunity. In fact, actually if you look at that in the month of July, our treasury options, ADV, was up 53% year-over-year, we think in reflection of the greater interest in the Fed balance sheet activity.

And we will take our next question from Vincent Hung with Autonomous.

You're showing continued progress in growing volumes in Europe and Asia. Can you just talk about the types of users driving the growth this quarter?

Sure. This is Bryan. We're particularly pleased to see the growth in liquidity that's happening there in the regional hours, as we alluded to earlier. This is definitely drawing more and more participation from the broader segments within those zones. When we talk a bit earlier about the growth in energy and interest rates that we've seen throughout Europe, that growth is being driven by a variety of sectors. We're seeing nice growth from hedge funds, asset managers in particular as well as some of our corporate clients. So that's a very good trend from that perspective. On the Asia-Pacific side of things, again, the growth trajectory is being driven largely from our hedge fund community and our asset managers. Another area that we are pleased to see is a pickup in the activity that we're seeing from the banking sector. So I think the efforts that we've undertaken to make sure that, that activity is really building up during their regional hours. For example, 33% up in Q2 in Asia representing -- I mean, in Europe, representing 1.4 million contracts. That's a substantial growth trajectory that is driving that local demand and net interest. Same thing in Asia. We're up 22%, representing about 434,000 contracts out of around 650,000 in total.

And we will take our next question from Ben Herbert with Citi.

Could you just provide me some more color around the CapEx guide and then what we might look for in '18 or '19?

Sure. This is John. Our CapEx expenditures are on track for the same -- about the same amount of spending that we had done in last year. Over the last several years, you've seen our capital expenditures go down for 2 primary reasons. One is we've reduced the amount of our real estate footprint in terms of buildings and the like, so that reduced our capital expenditures. Also, we now are -- had sold our data center and are leasing that back. So that's reduced our capital expenditures relative to our data center and it also took us out of those investment cycles that we need to do with fixed real estate. Also, with the ability to lease has given us the ability to flex in terms of our real estate footprint. Then on the technology side, really, we've done a couple of things. The technology team has done a great job in terms of moving more to software as a service, which no longer is a capitalized expenditure rather flows through our expenses. And the way we've designed the systems, we're constantly upgrading our systems. And so as you can see like on large days like Brexit or the U.S. elections, we were able to handle these large days and it's because our technology team has done a great job in terms of keeping our systems up and providing that kind of capacity and that kind of speed. So again, it's a reducing of our fixed real estate footprint. It's utilizing new technology and it's constantly upgrading our systems. So we've been in this $90 million to $100 million range over the last couple years, and we would expect -- I would expect to do something similar in the future.

And we will take our next question from Chris Harris with Wells Fargo.

On the data revenues, they're coming in right where you guys had said so it's not really surprising as it relates to that. But I guess what is a little surprising is to see them down so much on a year-over-year basis. You guys have good volume growth. You're presumably attracting a lot more customers internationally. Can you guys talk a little bit qualitatively as to what's driving the decline in data? And I know we're a little bit more optimistic for 2018, but just some thoughts around this year.

So as I represented earlier, we're really actively engaging in our business intelligence efforts to have a deeper understanding of how that data is being consumed, and we're looking at this a bit differently in the context of data terminals for real time versus other reasons for how that data is being consumed. As we gather more of that information, I feel that it's going to help us better position our value and our commercial proposition as we continue to grow with that business. In essence, the data is being utilized and consumed in a broader array of purposes than what you would traditionally think of as terminals.

And we will take a follow-up question from Alex Kramm with UBS.

Just I think one topic real quick that we haven't discussed. Since the U.S. election, I think, there was a lot of excitement about financial services regulation maybe easing a little bit. I think, Terry, this is primarily for you. I think we've heard some things like the treasury have put stuff out, obviously the CFTC as their Project KISS, the President has an Executive Order, but obviously, nothing tangible yet. So Terry, I assume you're involved to some degree in some of these discussions so anything you can add that we may not be seeing around things like SLR, Volcker that you're focused on and maybe any sort of timing updates?

I think like everybody else, the timing is very difficult to predict, especially with the administration right now. As far as the agencies go, they seemed very engaged to get things done on the regulatory front. So when you look at the Treasury Secretary, the comments that he put out just recently, especially on leveraged supplemental leverage ratio, we thought that was very beneficial for the clients that use our products to take that out the -- away from the supplemental leverage ratio. The Volcker rule, I testified on that multiple times and I've spoken to people in the administration recently how that rule was a flawed rule from the beginning only because it excluded certain products when it never should have. So I think that rule definitely will be revisited. The question is on timing. But as I said before, when this President got elected, I think we had deregulation just by no more new regulations coming forward. So that in and of itself was deregulation. Right now, I'm looking at tax policies that the administration is going to push hard for between now and the end of the year. That could be a great benefit for a lot of the corporation, especially since we get our taxes raised here in Illinois. So that's one of the things that I'm following closely right now, but some of the other rules, especially on Volcker, supplemental leverage ratio, I do think those will also get done. But outside of that, it's kind of a jump ball right now. We need to get a full complement of commissioners at the regulator. We're sitting there with 2 and he's an acting chairman. And obviously, he's been nominated to be chairman, but we still need to get him confirmed in that position. And hopefully, he can work with other agencies that will create benefits for our business, but I think it's pure speculation right now, Alex, about what's going to happen and the timing thereof just because of the players. So what I'm focused on also is not only the U.S., but watching what's going on throughout Europe to make sure that business doesn't get impacted, and I'm very confident that we're doing all the right things there.

And we will take a follow-up question from Brian Bedell with Deutsche Bank.

Just on the expenses, if we are in a weaker -- obviously, we're starting the summer off with a weaker volume backdrop, but we would expect that to increase as we get later into the fall. But in the event that we do have a sort of a tepid volume backdrop in the second half, what's the kind of flexibility to, say, keep expenses flat or presumably reduce that 1% increase guidance? And then just maybe sort of a view on '18, I know [you're going to do your] budget later in the year for 2018 expenses, but if you can just sort of give us a flavor on what you view as sort of normalized expense growth for 2018, inclusive of the -- I think you're saving the [10 million-plus] on the Euro clearing closure.

Yes. Thank you, Brian. Yes. We're looking -- we're constantly looking at our expenses and managing them as efficiently as we possibly can. When you take a look at July, yes, we've had a tougher volatility backdrop. Although we've got a good mix in terms of product going into -- in the month of July. So we feel that would be positive from a revenue perspective because, obviously, the commodity products are a higher-priced product for us. In terms of managing our expenses, obviously, license fees is an area where we'll see it come down a little bit due to lower volumes. Also, from a bonus perspective, that will be impacted as well if we have a longer -- long protracted low volume scenario. But I think what we're -- we'll also be focused on a lot of these kind of adjustable expenses or discretionary expenses as any company would when they're in a challenging environment. So things like travel and marketing and the like. We are -- it's a little too early for guidance for '18. I think kind of a longer-run guidance, excluding license fees would be in the kind of the low single-digit area in terms of expense growth.

And then the Euro clearing helps that -- the closure of that helps that a little bit for 2018, is that correct?

Yes. Yes, the closure of our European operations will be a 2018 primarily impact.

Great. And can I ask another follow-up question? Or should I get back in the queue?

Go ahead.

Go ahead, Brian.

Okay. So just, yes, just one more on the LIBOR benchmark changes. Just if you think about the timing of that switch. Obviously you've got hundreds of trillions of dollars that are linked to the LIBOR benchmarks in both securities and loans. It's not expected to be shut down till 2021. How do you see the customer shift happening over sort of -- is it a multiyear development mostly? Or do you think it will be sort of front-end loaded or back-end loaded? And then with just the difficulty of changing the securities and loans, 2 different benchmarks, if you think that's going to cause any friction?

Yes, this is Sean Tully again. The transition, I think, will take a number of years. To be very clear in terms of Andrew Bailey, last week, at the FCA, the Chairman of the FCA. He indicated that -- the banks have indicated that they are going to be very happy and willing to submit to the LIBOR process through the end of 2021. So that's at least 4.5 years. That also, at that time, the banks may decide to continue to submit. So there is no end date whatsoever, but we do know that LIBOR will be very healthy and robust for at least 4.5 years. And again, we're working very closely with the marketplace. In particular, we're working very closely with ISDA on potential fallbacks. One thing I will also mention maybe, Eurodollar futures many years ago were actually not determined by LIBOR, but instead CME Group itself, determined its own benchmark rate that derived or drove the settlements of the Eurodollar futures. So there are many potential outcomes, but we are -- again, we believe we're the natural home relative to the margin in capital benefits. The ability to have intercommodity spread, so extremely efficient spread trading between all of the existing LIBOR products and the new indices. And we're engaged with every aspect of the community, again, including the regulators, right? Through the Alternative Reference Rate Committee. ISDA, through the Benchmark Fallback Working Group as well as on the Board of Directors and the ICE LIBOR Oversight Committee. So we're very close with the situation, and we will be launching new products on the new index.

And do you think that might be even more -- maybe it's tough to predict, but more sort of front-end loaded in terms of the transition or more -- people will wait sort of more like the last minute?

I'm really not going to predict that. What I know is that we will be very closely working with the community and we will be the best home for everyone to the extent that the folks decide to use the new index.

And we will take another follow-up question from Kyle Voigt with KBW.

Just another one on the back half of the year, just as a quick question on the annual variable. I know you previously stated that the closure of the European operations or the clearinghouse would free up, I think, about $150 million in capital, which you'll repatriate either at year-end or early 2018. Just wondering, now that we're a bit closer, do you think this is going to come back in time to be included in annual variable that will be paid out early next year? Or is that going to be in a future annual variable?

Thanks, Kyle. The progress we're making in terms of the closure of our operations, the CME Clearing Europe and CME Europe, is moving along as scheduled. It's a little early to know whether or not the funds will get back in time for the annual variable dividend plus it's a board decision with regard to how much that we'll be issuing in terms of the dividend. But it's something we definitely will be taking into consideration as we get closer to the end of the year. We usually determine that in kind of the November time frame.

And it appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

We want to thank you all for participating. We appreciate your interest, and we look forward to talking to you in next quarter. Have a good day. Thank you all.

And ladies and gentlemen, that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.