芝加哥商業交易所 (CME) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the CME Group Third Quarter 2017 Earnings Conference Call. At this time, I would like to turn the call over to Mr. John Peschier. Please go ahead.

Good morning, and thank you all for joining us. I'm going to start with the safe harbor language and then I'll turn it over to Terry for a few remarks and then we'll open it up for your questions. Other members of our team are here as well and will participate during the Q&A session. Statements made on this call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. 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 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 want to thank you all for joining us this morning. We appreciate your interest in CME Group. We made great progress during Q3. Broad-based volume growth coupled with expense discipline, drove double-digit net adjusted EPS growth. We also have several new initiatives in the works. We know many of you are incredibly busy during the earning season and often are juggling multiple calls. We are coming up on our 15th anniversary of becoming a public company and we decided to assess our earnings delivery process. We decided to create a quarterly highlight document that we made available 90 minutes ago with the press release. This will replace the normal scripted remarks.

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chance to look at it.

One of the notable financial metrics I would like to mention is when comparing year-to-date this year versus 2014, our revenue is up $473 million, our total expenses remain flat and nonoperating income is up $80 million. These results reflect a lot of hard work across the whole company as we focus on acquiring new global customers and being efficient. We intend to continue with this mindset.

With that, we'd like to open up the call for your questions. Given the number of analysts who cover us, we ask that you start off with one question so we can get to everyone. If you have another question, feel free to jump back into the queue. Thank you, and we look forward to your questions.

(Operator Instructions) Our first question today is from Dan Fannon from Jefferies.

Terry and John, I guess my first question is on M&A. There has been some activity within the industry and that remains ongoing so want to get an update on your outlook for that and your participation, if at all. And then also, you've been exiting noncore businesses. So curious -- or investments. So curious if there is anything else that you're looking or if that's a continuing evaluation process.

So I'll take the latter part of that question first, Dan, and when you look at what we've done over the last year especially, taking down our investment in Europe, getting out of the credit market -- credit business and getting out of the investment we had in Brazil, just to name a few, I think that we're pretty much where we need to be right now by taking down those investments. I'm a big believer in if they don't work after a while, you eventually have to call the question. And for Europe wasn't completely working. It's just that we built the liquidity here, U.S. here in Chicago around the clock, which made it much more efficient for the company to run. So that's really the reasons behind that. And the other investments, especially Brazil, I'm a big believer if the shareholders want us to invest their money, they can do it themselves, they don't need us to do it for them. And as it relates to credit, that was just a losing proposition for us and eventually needed to call the question. So those are a couple of the main ones that I think you're referring to. And I think that's pretty much where we want to be right now. We're analyzing some smaller incentive plans, things of that nature, but nothing that would move the radar. As far as other M&A activity, John, I'll let you comment on and then I'll.

Sure. Yes, the -- our view on M&A really, Dan, hasn't changed. We still believe that large scale cross-border exchange M&A is very, very difficult to get done, especially in this current environment. But we do keep our options open as it relates to mergers and acquisitions. If we find something that we think can create shareholder value and advance our strategy, we'll certainly execute on it. But we're right now sitting in a really strong position. So we can be -- we can approach things from a position of strength. So that's our view on mergers and acquisitions.

Moving on, our next question comes from Chris Allen from Rosenblatt.

I just wanted to touch quickly on the expense guidance for the full year and how to think about the sequential movement on -- in terms of 4Q. I know we should expect the big bump up in marketing spend. Pointing at some of the other lines, professional services, you've done a good job of managing them this year. So I'm just wondering how to think about the sequential growth there. And then moving forward, your CapEx has continued to decline every single year for the last 3 or 4 years, you brought it down again. How are you able to maintain the continuous decline and how to think about that from a longer-term perspective?

Sure, Chris. This is John. Yes, you're correct. When you take a look at kind of the sequential growth in our expenses, it's a pattern that's been consistent over the years. Our fourth quarter tends to be significantly heavier than our third quarter. We do get a bump up in marketing and other because we've got some customer-facing events that occur in the fourth quarter. Also, when you take a look at the increase from Q3 to Q4 this year, we do have some catch-up on projects, so we do expect our pro services fees to go up a little higher. When you look at Q4 of last year versus Q4 this year, it's really about a $4 million increase. When you take a look at our average compensation cost over the first 3 quarters, it's up about $6 million a quarter. So our noncompensation-related expenses are actually going to go down a little bit, we're anticipating going into Q4. In terms of our expense guidance, this has been an entire CME-wide effort and the team has done a fantastic job of really managing our expenses well. As Terry alluded to in his remarks at the start, our expense level is below what it was in 2014 with regard to our total expenses, excluding license fees. So the team has really -- has a really strong mindset around managing costs. When looking at our CapEx on a year-by-year basis, the capital -- our CapEx spend is actually over the last several years, has decreased -- I'm sorry, has actually been in the range of between $70 million and $85 million. So our capital on tech only in 2015 was about $72 million. In 2016, it's about $86 million. The guidance we've given is between $80 million and $85 million. So it's roughly been in that range in 2016. What's really important is that we've been -- the tech team has done a tremendous job in terms of managing the -- managing and engineering our systems and utilizing new technologies like cloud-based services, which has allowed us to scale our business and handle significant market events with high availability around the clock, while being very efficient in our spending. We can handle 2 to 3x our current volume levels as needed. And really -- that was really demonstrated when you took a look at the U.S. elections and Brexit as examples. So we've got a very robust system. The team is leveraging new technologies and has really done a lot of great work in terms of engineering our systems.

Our next question today will come from Rich Repetto from Sandler O'Neill.

So I guess the -- well, one of the questions is the $150 million in capital from Europe, I believe that's the number. And I'm not sure whether that's completely freed up. And if it is, is that earmarked -- where would you -- is that likely to go to the annual variable dividend at year-end?

Thanks, Rich. This is John. Yes, we're very pleased with the amount of cash we've been able to build. We've got about $1.63 billion in cash and cash equivalents coming into the fourth quarter. Our typical Q4 build is between $175 million to $250 million excluding one-time items like Brazil and building sales. We're very pleased with our -- with the way we've been able to generate cash. Our expense controls and organic growth are really driving those balances higher. I think when we take a look at the level of the annual variable dividend, that's a Board decision. Certainly, a point of discussion will be around the capital freed up from our operations out of Europe. So that $150 million will be a point of discussion when we talk with the Board in the fourth quarter about the annual variable dividend.

And Brian Bedell from Deutsche Bank has our next question.

You guys talked a little bit about in the presentation on the uncleared margin rules for FX futures and how you're working with swap participants. Can you talk a little bit maybe about your growth outlook on FX futures? We're seeing a little bit of better volume, certainly on the roll months. But I was just trying to get a sense of whether you think that will create a pretty big step function in FX futures volumes from that activity alone over the next few quarters.

Sean?

Sure. This is Sean jumping in. We are excited about the FX business and we are working very closely with the marketplace in order to solve the market problems. Much in the same way that we did with the rates market over the last several years. The rates market over last several years, right, we facilitated declaring interest rate swaps and then the movement, a lot of folks from OTC space into future space, as the rules hit market participants. And we saw the futures role was the best way and lowest cost way to represent risk. So working with participants again in the FX market. We're very excited about that. We do offer nondeliverable forward clearing in the OTC space and we are looking to launch in the near future, OTC FX options clearing as well. In addition to that, we recently launched a monthly FX futures, which we're really excited about. The monthly FX futures give the marketplace an alternative, and particularly on the FX forward market, as well as the FX swaps market. And we actually had a day about 1.5 weeks ago, where we did more than 21,000 contracts in our new monthly -- in our new monthlies. These -- that's an important number. If we think about our FX complex does about 900,000 contracts a day, the 21,000 day in a new product is a significant portion. That day was almost 3% of our FX volumes. So we are seeing additional participants come in and we are seeing the uptick of these products. We also announced recently the launch of CME FX link, which we expect to launch actually in January of next year. With CME FX link, you're going to be able to trade on Globex, the spread between an OTC spot transaction and our futures contracts. So this will be against our front 3 contracts, the monthlies as well as the front quarterly. So we're very excited about that. For the first time, we'll have a listed, standardized equivalent for FX swaps and FX forwards. Why is it so exciting? Relative to the uncleared margin rules, the GSIB rules and even under MiFID II, the impacts on market participants that will have to post margin on these products, the standardized futures will be a lower-cost alternative. If you look at the FX forwards market and the FX swaps market combined, according to the most recent

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from the BIS, between the two of them, it's about $3.1 trillion. So we're offering a standardized equivalent and we are excited about working with market participants on that.

And just from the pace of that momentum, do you see that building more now, or I guess, in the fourth quarter and into next year? Or is that -- do you view this as much more of a longer-term project?

Probably longer term. I'm really not going to -- obviously, longer-term, and I'm not going to put our predictions. It's very hard to predict how much the transfer will be, but we want to be there to offer the lowest cost, most efficient alternative for the marketplace.

Right, and one of the few things also, it's Terry Duffy, is when you have a mandatory law such as Dodd-Frank that implements on a certain particular date, people prepare for that. When you have what's under the uncleared margin rules as relates to FX, it's economics that dictates the behavior of the participant. When the economics come in, they're actually almost -- much more powerful than a mandatory date. So without us trying to give any time line on when we think that's going to have an uptick one way or another, I think that you have to look at the differences and economics around these particular rules always seem to do very well.

Our next question today comes from Michael Carrier, Bank of America Merrill Lynch.

Maybe just one on the regulatory outlook. The treasury put out the capital markets report. There are a ton of recommendations in there across pretty much all areas. It seems like a lot of the comments on either the futures market declaring the CFTC in the industry has already been working on a lot of that stuff. But just wanted to get your take on any nuances that you saw in the report and how you see that progressing over the next few years.

Mike, I'll take -- make a comment on that. I had the opportunity to

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treasury along with Kim Taylor and other people in the organization and got a chance to go through the report and got a good summary as -- if you've seen the report, it's rather lengthy. But there's a couple of things in there that I will point out that the supplemental leverage ratio that the stance that the treasury is taking in their report is very positive. We think that they're spot on with their way of looking at that. As it relates to some of the other things in the report, I think for the most part, it doesn't have any adverse impact on CME Group or the businesses that we run. So from that standpoint, we're fine with the report. So the one thing that is in there, again, even though it's that supplemental leverage ratio. And Kim, if you want to comment any further on that report, but we...

The capital implication for our customers is the most important...

Right. So that's kind of how we look at that report, Mike.

And moving on, our next question comes from Ken Worthington from JP Morgan.

I'm going to try and sneak in two half questions. One on data. Data seems to have turned the quarter so much showing some modest sequential growth, any comments there? And then clearing revenue seems to be going the other way, continuing to decline modestly. Can you give us an update there?

So Bryan, why don't you go ahead and start on the data?

With respect to data, you know we've been working hard to add new resources to support our core market data efforts and business mainly focusing on new resources in our international commercialization of our data products. And also audits and derived data. With respect to our progress and insourcing the audit function, we've completed our resourcing efforts and we're overseeing this function now internally and we've commenced numerous market data audits, a couple of which are in the completion stage. On derived data, we continue to be pleased with demand for the pipeline that we have. We've closed a number of licensing arrangements and are on track to deliver more agreements over the course of the next several months. And I want to note that while a number of agreements were renewals of existing licensees, we're really pleased to see the strong pipeline of new requests that are under review and are in the process of being executed. We also recently announced an increase to the annual redistribution license from 12,000 per annum to 24,000 for real-time data and 12,000 to 18,000 for delayed data. With respect to the nondisplay market data registrants, we've also announced an introduction of a new category and requiring all of our licensees to provide information on these categories to specify more specifically, the field of use. So whether they're trading as principal facilitating client business using for order routing management systems, et cetera, getting this business intelligence will enable us to optimize our pricing structures and will provide our customers, I believe, with more future products and services aligned to their consumption and usage needs. So these reporting requirements will take effect in January. To note, as with other data providers, while we continue to see some attrition with respect to our professional data terminal usage base, we've also observed an increase in the nondisplay, nonprofessional (inaudible) categories. So we're currently reviewing those user profiles to confirm the appropriate pricing structures going forward.

Thanks, Bryan. So Sean, you want to deal with the clearing revenue question that Ken raised?

Sure. In terms of the clearing revenue on the interest rate side, we expect it to be flattish this year. So revenue will be fairly flat. As we mentioned earlier, right, we have decided to close our CBS clearing activity. And while the revenues were small, the net income was negative. So that also would have an impact on those numbers. But if you look at the interest rate swaps, flattish to slightly higher. We are -- I'm excited about the new offerings that we had. We had very good traction over the last 12 months, particularly in Mexican peso and Brazilian real. In those 2 currencies, we're running over 20 billion a day, and we have now over 170 participants. In fact, we've got an additional 50 participants in our Latin American interest rate swaps so far this year. We're also excited to say that we launched the Indian rupee and KRW. So the Korean won interest rate swap clearing. We've already done in those currencies, around 30 trades with 16 participants, which is very good traction for the very beginning. If you look at the Brazilian real, the Mexican peso, the Korean won and the Indian rupee, these are where we had a unique value proposition, especially with the Mexican peso when we first launched it and the traction that we got. And so in these currencies where we expect it to be devalue proposition relative to addressing the uncleared margin rules and adding that efficiency to the marketplace, that we will do much better than we have in the past. I'd add to that, actually, we recently had more than 30 trades executed in our Swaptions clearing. We've -- so while it's a relatively small business, we are getting traction in new products.

Thanks, John. Ken does that give you some color on your question?

A lot of color.

We'll hear next from Kyle Voigt from KBW.

Maybe one for John. Just wondering if we can get some updated thoughts around transaction pricing. You've seen really strong growth in a number of product complexes this year. And typically, you have the ability to adjust the pricing or volume tiers in a growing volume environment as you've done over the past few years. And I think we've gotten prior press announcements on or before the past third quarter earnings calls. So just wondering if you could read into that, that CME doesn't plan on making new pricing changes for 2018? Or is there still time left here?

Well thanks, Kyle. We are -- we take a look at pricing continuously and we're going through our budgeting process right now. So pricing is something that we do. We do take a look at relative to creation of the budget. We did have some pricing announcements recently in our Eurodollar options area that you might have seen in the report. And we think this is going to be important in terms of attracting more customers into the marketplace. Sean, you want to comment on that?

Sure. Over the last few years, everyone -- we talked about this a number of times, we worked very hard in terms of investments in our technology and investments in the ability to have very fast responses to strategies in our options marketplace to facilitate the electronification. So the Eurodollar options, as John mentioned, we've leveled the playing field between the different venues. In particular, 4 members, we did increase the fees from $0.09 to $0.15, if you're trading in the fifth. And then we lowered them on Globex in terms of the fees that CME gets from $0.24 to $0.22. So you can see there we've reduced the differential leveling the playing field in order to get more participants, in particular, international participants, and to continue our growth of our electronic markets. If you look at the success we've had there over the last few years, we're currently running at 40% electronic in our Eurodollar options. Last year we were about 25% in electronic, the year before that, about 15% in electronic. So very significant growth in our electronic markets. In addition to that, actually, over on the treasury side, we're currently running at around 80% electronic versus closer to 70% last year. So we're excited about the increasing electronification and the increasing volumes. If you look at those marketplaces, while our overall business is up about 15% year-over-year, our options businesses is growing much, much faster. Our Eurodollar options, in particular, are running up 19% year-over-year, and our treasury options, in fact, are up 41% year-over-year. So we see increasing participation, increasing participants, increasing volume. I think John and I have spoken many times in the past about as we electronify, we typically see much higher velocity of trade and that's definitely coming to fruition here.

The next question comes from Jeremy Campbell from Barclays.

Just as we look ahead here and potentially for getting another rate hike at the December Fed meeting, can you just remind us about what you guys might pass through to clients as far as rate increases and what you might be able to keep with yields?

Thanks, Jeremy. This is John. We haven't announced how we're going to handle another Fed move. But to give you some color about how we're thinking about it. We want to be competitive with the returns our customers can get with other investments versus what they can get at the Fed. And we want to do this in order to attract the cash balances to the Feds. So we haven't announced that. But the way we're thinking about it really is, our returns that we can offer by putting money in the Fed versus alternative investment vehicles. So more to come on that once a -- once the Fed moves.

But I think -- is it safe to say that you're going to get a little bit of benefit? You're not passing through 100% of that?

We're not going to comment on it. It's too early and it's unknown exactly when the Fed is going to move. So we don't want to -- we'll comment on that once the Fed makes the rate change.

And Ben Herbert from Citi has our next question.

Could you just provide some color on market share gains and all those competitive dynamic there? And maybe then maybe what you're doing to protect recent gains?

Sure. It's Derek here. We're very excited about the growth and numbers we've been able to put forward. I mean, what we've developed over the last, specifically, 3 years, was a diversification story to ensure that our COMEX metals franchise extends beyond the precious metals business where we have a global 95% market share, which has actually increased year-on-year, primarily due to our gold and silver business but platinum and palladium as well. What we've done primarily in the metals side on precious, is to continue to electronify our options business, extend liquidity out to the curve and we're seeing significant participation outside the U.S. Between WTI and gold, those are the 2 most popular products with the retail population, particularly in Asia, that's helped us drove, I think, Q3 metals non-U. S. volumes up 45% year-on-year. Q3 '17 versus '16. So globalized participation in our markets, electronifying our options market, we actually had a record level of electronification in metals options. I think we went from 39% to 46% electronic there. So we're continuing to see extensive gains on the electronic side. On the other side of the franchise, we put a specific focus in place in 2014 to build the industrial metals side of the business. So the market share gains you've seen us make primarily in copper, saw us take that business from about a 12%, 13% market share in 2014 to close to 27% year-to-date this year. The way we've gone about that is really talking to our customers and making sure that we're building not just participation in globalize use in our copper business, but ensuring that we have the balance of the portfolio of the other industrial metals products they need primarily around aluminum, lead and zinc. So these are very different client bases, precious metals tends to trade more like a financial product. We see growth trends there along the lines of FX and fixed income. It's really a financial product side of the business came at a point in time when we're seeing infrastructure conversations in the U.S., which is a direct correlation to growth in bonds in participation in our copper contract and globalizing participation. So we've seen strong market share gains there. We've been able to do that without any pricing cuts, we're competing with better product, better liquidity and electronic access to the European and Asian markets. So we're pleased with the progress we've made, we'll continue to build on those market share gains and certainly the industrial metals portion of that business as and when we global recovery, we believe we'll continue to see growth we've developed and built the base for. And we think that we can continue to grow participation globally there.

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

So we've seen a nice reacceleration of your international volume growth and it looks like a lot of that is European customers trading your energy products. What is it specifically that is really catching on? Is it focused on WTI? Is it more broad-based and why a lot greater European growth than U.S. growth in that product group right now?

So Patrick, we're going to have Bryan comment a little about the growth and then Derek will talk about the products. So Bryan?

This is -- just underscores the efforts that we've undertaken in the last few years in terms of our sales efforts and outreach and it's showing its impact across these asset classes. Energy in particular, and Derek can get into the mechanics more so, but in terms of the activity, the volatility, the recognition of that product as the benchmark has definitely taken major traction within EMEA across, I would say, all of our client segments, by the way, huge uptick on the commercial side, particularly driven out of EMEA, solid commercial participation continuing out of Asia, which is a new dynamic that we've seen in the last year and is continuing to build. I was just there just a couple of weeks ago, and the reviews in terms of our energy suite and the robustness of that energy suite have resonated loud and clear with that community. So you can expect more efforts in that regard because I really don't even believe we've scratched the surface in terms of opportunity. Asset managers, hedge funds, banks, all are very aggressively trading these products. In multiple asset classes, biggest drivers in terms of cross product is asset managers, hedge funds and corporates and commercials.

So Patrick, a little color from the product side. The -- if you look at the top of Page 2 in the document that we circulated for the earnings call particularly, you will see we call that use of the asset classes and the growth there. And you see that energy non-U. S. business is up 65%. We attribute that largely to the continued growth and globalization of the U.S. crude benchmark in WTI, not that it's a waterborne benchmark. We are seeing participation there in our markets skyrocket. You're absolutely right, pointing to the European and particularly the Asian participation growth there as well. What we're excited about there is not only the fact that we're seeing volumes growth, but in the Appendix material we sent you on Page 20, you will see the large open interest holders we've set records over the course of this year and we're setting just below a new open -- large open interest holder record there as well. So to the points Bryan made, we're seeing broad-based participation, accelerated growth in Europe and Asia, that's on the crude side. What we're really excited about is actually we're starting to see a natural gas market that is beginning to follow a similar path in globalizing that we've seen in WTI over the last couple of years. So we' starting to see Henry Hub, which has always been the U.S. benchmark rise to the global benchmark status. We have continued to expand asset market that we've taken from 68% market share to 80% market share in the last 24 months. As you are starting to see liquefaction facilities come online in the U.S., which is actually a transportable version of U.S. natural gas connects natural gas markets, that places Henry Hub as the center of the global gas market. So we're starting to see an early uptick and we're seeing broader participation and increase in action too from European participants particularly, in light of some of the regulatory changes they're facing locally being a path that we've been able to develop for the growth in WTI, we see a similar path to unfold over time relative to the nat gas development. We see this as a multiyear process. We don't see this happening overnight. There's one liquefaction facility online now in Sabine Pass, but 3 more facilities come online in the next 2 to 3 years. Though you will see this a growing, building participation base, you will see this follow a similar path to globalizing use of WTI and with us at 80% market share in the Henry Hub futures market, we think we're well positioned to serve that global use and make sure that our energy business is at the core of the global nat gas business going forward.

And we'll take a follow-up question from Rich Repetto from Sandler O'Neill.

I got a real-time question here. Would the CME be interested in the Deutsche Börse now that Carsten Kengeter is stepping down by year-end. I'm kidding, Terry. But that -- I'm not going to ask you that question. But that is the news, it just broke. But I do have a question around M&A. You've been focusing generally on CFTC-regulated entities. Futures, large acquisitions have been the CBOT and NYMEX. As you look forward, Terry, would you necessarily need to say within those boundaries? Would you look at some of the entities out there now have -- are regulated by both? Are you more open to something like that going forward given the maturity of the markets, et cetera?

Rich, the only thing I'll say and I'll follow up to what John said earlier, and that is, we're going to look and continue to look and because we put ourselves in the position to analyze so many different transactions of what is going to add value to the clients. I said a year ago when I took over as CEO, my major focus was building the end-user client and that's what we're continuing to do. So we freed up a lot of capital, we're continuing to do new client acquisition. And if there is a potential transaction that makes sense that will add to the bottom line for our clients, I truly believe that's the formula that will, in return, deliver value for our shareholders. So that's the path that I'm going down, and as far as the regulation goes and who regulates that particular product if we go after it, we'll take that under consideration, but I will not shy away from something that I think will deliver value from the company just because of who regulates it.

And that does conclude today's question-and-answer session today. At this time, I'll turn the conference back to management for additional or closing remarks.

Well, we want to thank you as I said at the outset, for your participation in CME and your interest and we hope you have a good day and thank you very much.

And that does conclude our conference today. Thank you for your participation. You may now disconnect.