芝加哥商業交易所 (CME) 2018 Q2 法說會逐字稿

Good day, and welcome to the CME Group Second Quarter 2018 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 today. I'm going to start with the safe harbor language, then I will turn it over to Terry and John for brief remarks followed by questions. Other members of our management team will also participate in the Q&A.

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. They 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 can be found in our filings with the SEC, which are on our website. Also, on the last page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures.

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

Thank you. And thank you -- as John said, thank you for joining us today. We appreciate your interest in CME group. I hope you got a chance to read through the Q2 earnings commentary that we provided earlier this morning. We had a very strong second quarter. We had a record volume quarter in our agricultural product line and 4 additional asset classes grew double digits.

Average daily volume was up 12% to more than 18 million contracts per day in Q2, following the record volumes in Q1. We reached a peak trading day of more than 50 million contracts on May 29.

At the end of the first quarter, we announced the transaction with the NEX Group. As you know, the first order of business was the NEX shareholder approval, which was completed on May 19. We have begun our high-level integration planning process and are working closely with the teams of NEX.

We continue to target a closing in the second half of this year. Global markets trading activity has slowed down during the month of July. July is, historically, one of the slower months of the year. Total ADV month-to-date at CME is down roughly 5%. But during this period 3 of our product areas have actually grown while the other 3 are down.

When you add in the uncertainty of geopolitical issues and lower volatility which we are seeing on top of a traditionally slow month, the 5% down isn't a surprise to me. As we all know, there are always ebbs and flows this time of year. It is worth noting that our open interest, as of this morning, is roughly 123 million contracts, which is up 10%, versus this point a year ago and has built nicely during the month of July. In addition, large open interest holder data across the 6 product areas remains very strong, and to me this is a better measurement.

With that, I'm going to turn it over to John to make a few financial highlights and we'll get into your questions. John?

Thank you, Terry. Revenue was up 15% this quarter, driven by higher transaction fee revenue, which was up 14%. We saw positive product mix pushing the total RPC higher to $0.757 during the quarter.

Market data rose 18% primarily driven by the screen fee increase, which went into effect in April. By maintaining our expense discipline, we delivered adjusted operating margins similar to our record first quarter of this year. On an adjusted basis, total nonoperating income increased 37% from $29 million in Q2 last year to $40 million during the second quarter this year, driven primarily by the performance of our joint venture with S&P and the earnings on cash held at the clearing house. However, sequentially, we saw a lower average cash balances held at that clearing house by participants in the second quarter, as customers rotated into treasuries, which offered a higher yield than holding cash.

The net amount earned through managing cash was up 18% compared to Q2 of 2017, but was down from Q1. With strong revenue growth and careful expense management, adjusted net income and EPS both grew over 40% during the quarter.

With that short summary, we'd like to open up the call for your questions, and we'll start now.

(Operator Instructions) Our first question comes from Dan Fannon with Jefferies.

I guess, John, my first question is on market data. You highlighted in the prepared remarks about attrition as a result of the price increase. I guess, can you help us think about what historically that's been. And maybe how to think about growth in that line item for the remainder of this year?

Yes. Thanks, Dan. We don't break out the components of our market data revenue. As you can see from our 20% sequential increase in revenue, the majority of the revenue comes from real time fees. And was impacted by our price increase that went into effect in April. It's early to assess the impacts of attrition. The team has done a good job of telegraphing the increase, bringing the audit function in-house has helped ensure compliance with our agreement and has helped mitigate those impacts. The team continues to work to soften any impact of the attrition. However, historically, as you can see from the times we've done price increases that there is some rationalization that occurs. I will turn it over to Bryan to comment on what he's hearing from customers.

Quite frankly, this was a key period for the introduction of that [FD] increase. And as John alluded to, the attrition rates are very stable. We didn't see a sizable shift based on what we've experienced in the past, which is positive news to us. I think what's very important to note is the effects of the audits that we have been conducting. Because what we are seeing is increased compliance, we're seeing more subscribers coming in to play as a result of those audits. So we are correcting wrong behavior, which is a positive. Also, a notable observation is significant increase in subscriber usage in the APAC region, which again, is another positive.

Our next question comes from Christian Bolu with Bernstein.

On international, you're seeing really, really good growth out of Europe and Asia. I understand that some of this is pay up of investments you made in distribution. Well, can you just speak specifically as to what has changed structurally in those regions to drive growth? Have you targeted a new customer segment? Is it regulatory driven? I'm just trying to get a little bit more meat behind the -- what are very good numbers.

Christian, a little bit -- sorry, I've got a little bit of volume problem. I'm going to let Bryan touch more on this, since this is under his -- the people that report to him.

I mean, first of all, as you know that our international average daily volume now is up 14% year-on-year to $4.4 million of our overall contract volume, it's very positive from our perspective. We've seen a 30% increase in activity in Asia, we're averaging close to 900,000 contracts today coming out of Asia. We're getting about 3.4 million average EMEA. You know really, this has been a story of investment and focused activities from sales and marketing and having the people on the ground as we've represented in the past. You heard me speak about country specific planning and being able to target our focus across countries within each of these regions. And just to highlight, our customer segment year-on-year growth throughout international was led by the asset managers, up 42%. Commercials were up 35%. Banks were up 23%. Retail, nice growth, up 23%. Our overall nonmember growth was up 60% year-on-year in international.

And Chris, let me just add to what Bryan said, you mentioned regulatory, we don't think that's always a sustainable way to look at future growth. But I will tell you that when there is regulatory uncertainty, people migrate to where the certainty is at. In the United States where this Dodd-Frank act has already been passed and implemented many years ago and people understanding what the rules are, whether they like them or not is a different topic for discussion. But the point is, it's been done. And when you look at some of the European regions, obviously, they're not there yet. So that regulatory uncertainty does bring less of a volume there (inaudible) to the States.

The other point I would want to note is our focus on growing the volume during the regional hours. This is a story that we've been telling all of you for many, many quarters now. During Q2 2018, we saw a 34% increase in our activity during European trading hours. 45% during Asian trading hours. So if you look and I know you have those [dependencies], if you look at the overall volume that's occurring during their regional hours, a substantial portion of these activities are occurring during their [delaying] hours, it's very important to the growth story.

Great. One quick follow-up question. I -- Terry, you mentioned volumes have slowed in July, I do agree that is somewhat seasonal. The one that's a little surprising is just the ag volume, it seems even weaker than one would expect. Curious if the tariffs and things like that are having any impact? Or maybe any color on your end as to why you think volumes are slow -- really slow there?

Christian, I'm going to let Derek go ahead and talk little bit about the ag complex, he heads that up. And then I'll give a small opinion after [he's done it.] Derek, go ahead and talk about it.

Yes. Hi, Christian, it's Derek. And we actually had a series of records over the course of the -- this year in Q2. We had a monthly record -- total volume (inaudible) record of open interest record quarter on track for the -- for -- continue to push those directions. What we're also seeing is record large open interest holders in our market. And what's important, tying back the question that Bryan just answered is our non-U. S. growth story, with Trump announcing tariffs that are coming on board that has created a significant concern about price risk. That drove a lot of the volume into participation in our contracts. This is very much a risk-on environment as represented by the record volume and record open interest and large open interest holders. We're also seeing on the day that we saw record volumes overall in the [complex] back in June. Most important, we saw record levels of participation from non-U. S. participants. So as regulatory concerns come on board relative to tariffs or not, we're actually seeing people [pile in.] For example, with the announcement yesterday. Trump and Juncker meeting, that had a very positive impact. We've seen our ag volumes overnight roughly come in at twice the amount. As of 7 o'clock this morning, we had about 220,000 contracts in our ag contracts. We typically see a slowdown going into the summer months of Q3. We're coming from record highs in Q1 and Q2, and our ag volume also set a record over the course of Q2. So we're seeing some seasonal basis of slowdown. But right now we're, as Terry mentioned before, starting from record levels of open interest and global participation. So I think we feel good about what the balance of the year is going to bring. And we've seen immediate positive impact in our volumes based on the questions that have risen so far.

And I think -- just to add to that, Christian, and I think that the real story here is not so much on what the volumes are, because as Derek said, we are the benchmark pricing mechanism for the agriculture throughout the world. I think it's just the overall price that the impact on the regional farmers here in the U.S. versus globally. So the difference between Brazilian soybean prices, U.S. soybean prices, that's really where most of the story is being told, but I do think that will be ironed out. Hence, when you saw, what Derek just referenced with, the conversations between Europe and the U.S., we're hopeful -- I'm hopeful for the U.S. farmers that it will go the same way with Asia.

(Operator Instructions) We'll take our next question from Brian Bedell with Deutsche Bank.

Maybe just -- let me just start with a couple of clarifications. For John, the -- if you could talk about the net rate that you're earning on those clients, cash balances held at the clearing house, and (inaudible) they were down on a -- on an average basis since 3Q so far. Maybe if you could talk about the net rate earned after the June hikes. So the 3Q [bat] earning rate. And then just a clarification on the market data. I think you guys raised the pricing on April 15, if I'm correct on that. And to what extent audit fees impacted that market data number in Q2?

Sure. Thank you, Brian. I'll walk you through, kind of, the Fed accounts and what occurred this quarter, then I'll hit the market data question. So in terms of the impact on the Fed accounts or the -- amounts that we earn for managing cash. In the first quarter, we had average cash balances of about $39.6 billion, that includes funds held at commercial banks as well as funds held at the Fed. In Q2, they went down to about $32.2 billion. So they were down on average $7.4 billion versus Q1. The main driver for the lower cash balances is that the U.S. Treasury has been increasing net issuance of treasury bills, which has pushed yields higher and made the T-Bills more attractive than the returns that could be held holding cash. So for example, 1-month treasury T-Bill yields a neighborhood of about 190 basis points. So that reduction in the overall average balances has reduced our take from managing the cash from about $28 million in the first quarter to about $25 million in the second quarter. So that should give you some color as to what occurred there. In terms of the audit findings. In the second quarter, audit findings were minimal. We had about little less than $2 million in audit findings in the second quarter impacting market data. I think, what Bryan said is the most important and that is, bringing that audit function in-house has allowed us to ensure that there's compliance with our agreements. Which has in turn gave us more confidence in terms of the numbers that are being reported, which obviously impacted going go forward amount that we bill -- associated with market data. So some pretty positive from a go-forward perspective with audits.

And sorry, it was April 15 that you started the price increase? Is that -- is there [a date on it]?

I think it was April 1.

Oh, it was April 1, okay. Okay, so it is a full quarter.

Yes.

And I'm sorry, then -- just the net rate for the third quarter on the client cash balances that you have at the Fed, after the June hike.

So at the Fed, we are -- what we give -- so basically, the overall rate is 195 basis points. 164 basis points go to the customers, 31 basis points we retain. And that's solely on the cash that's put up at the Fed for our F&O, for our futures and options. We have a different rate associated with the OTC, [we've put up] the OTC which is basically the Fed effective rate less 10 basis points, which is about 181 basis points currently going to our customers.

That's perfect. And then, just maybe on the development of the SOFR contract. Sounds like that's developing quite nicely. Maybe just your opinion of how you see given the potential changes in LIBOR? How do you see that developing versus your Eurodollar franchise over the course of the next several months and quarters?

Yes, this is Sean jumping in. So Eurodollar futures and options have done very, very well this year, right? We continue to see growth in open interest, growth in volumes and a very strong performance there. So we're very excited about that. In terms of SOFR, as you know, we've been one of the industry leaders, now for the last few years in terms of the new rate. Working very closely with the Alternative Reference Rate Committee and the entire industry. And we launched, as you know, the SOFR futures back in May. The uptake so far has been good. We've had more than 60 participants, we have more than 21,000 contracts in open interest, and we're seeing only about 3,000 contracts a day, but that's normal for a new contract. People are using our functionality in terms of the intercommodity spreads that we built between our hedge fund futures and our SOFR futures [have also --] [Euro futures] and our SOFR futures. So we're excited about it, we continue to market. We've had a number of marketing events, actually almost 1 a week in the last 3 weeks, and they are very well attended. Yesterday we held a webinar on SOFR in terms of the futures as well as interest rates swap clearing for SOFR, and we had more than 400 participants. In terms of the interest rate swaps, we do plan on launching SOFR-based interest rate swap clearing in September, and we're very excited about that as well. So we're looking forward to it. The next step for the industry is really to see issuance from corporate issuers. And we do have an announcement from one of the government agencies yesterday that they are going to begin issuing SOFR-based floaters soon. So that should help the market place to develop.

Okay. And just from a substitution perspective, I guess, versus the Eurodollar, do you see that as a very futuristic event? Or do you think there'll be some of that in the sort of intermediate term?

So the -- Sean, do we see -- we lost you for a second.

I apologize. Can you repeat?

Did you say it was -- on the [future past,] I think what he asked is, will LIBOR still be a part of the Eurodollar complex [or will global] SOFR eventually [migrate?] Is that correct, Brian?

Yes. Yes, that's right. Yes.

We expect LIBOR to remain [right in] terms of Eurodollar complex for a long time. So as you know, right? The FCA has gotten agreement from the panel banks to continue to post until the end of 2021, right? So we've got a long time for that transition to occur. But we do expect SOFR to grow as an alternative rate to LIBOR. And as issuance begins to develop, there'll be more need to hedge, more need to trade, and we expect to see much more volumes. So again, we continue to see very good growth in our Eurodollar futures in terms of volumes and open interest. And we are the natural home for the SOFR complex relative to being the lowest cost in terms of transacting with our intercommodity spreads between Eurodollars with a LIBOR-based product that exists in the market place as well as the huge open interest that we have in our industry complex across Fed funds, Eurodollars and treasuries, which allow the market place the optimal kind of post trade margin and capital efficiencies. So we are the natural home. We are excited about it. We see the 2 different rates coexisting for a long time.

Our next question comes from Kyle Voigt with KBW.

If I could ask one follow-up, a clarification on the net investment income. I think in your regulatory (inaudible) filings after the June hike, we calculated an incremental capture rate of 5 bps from that 25 bp June hike. Is that correct? Or was it something lower on a blended basis? And then, if nothing else changes, I guess, would you expect continued pressure on those balances near term. I mean, just seems like they're ticking lower in the third quarter already.

Kyle. This is John. In terms of what we pass back to our customers, we kept 0 and passed the entire rate increase to our customers. So in the first quarter, and this is [at the Fed,] it went from $1.40 -- sorry, 144 basis points to 164 basis points. So that entire increase was passed to our customers.

So the Fed did make a change in IOER. The IOER rate increase is not the same as the Fed funds target. So the Fed increased the IOER by only 20 basis points. And we passed all the 20 basis points through to customers.

Yes. So in terms of -- Kyle, in terms of our current balances, they are roughly in line with the -- with last quarter. It's about 30 -- between $30 billion and $31 billion on average in terms of total cash balances here at CME Group through the first few weeks of July. In terms of whether or not the cash balance has returned to historical levels, really, it's up to the customers. And there are many factors that impact their decisions, including, what collateral the customers has, the risks, exposures at the clearing house and the yield on alternative investments all play a factor in terms of whether or not the customers use cash or an alternative. As we've mentioned previously in many of these calls, there are alternatives investment vehicles for the customers to put their funds to work.

All right. Thank you for the clarity. And just one follow up from me. Maybe a question for Derek on the oil markets, a competitor of yours recently announced a crude oil futures contract deliverable in Houston. Just wanted to hear your thoughts on the dynamics here and whether you've been hearing from customers that there's demand for a Houston-based oil contract? I know you offer some spread contracts today, but just love to hear some updated thoughts and strategy.

Yes, Kyle, it's Derek. Thanks for your question. Yes, we're actually very excited about Houston as a marker. As you mentioned, we actually already launched a Houston crude oil contract back in Feb of '16, both an [outright] contract and a spread contract back to our WTI contract. We're actually very happy with the growth of the contract. It's trading between 3 million and 4 million barrels a day. And it actually continues to set open interest records where we've seen about 145 million to 150 million barrels worth of open interest right now sitting at the Houston point. So we're actually pleased with the performance so far, and we think it's a high compliment to the Cushing contract. The reason we set that up, we actually launched an outright and a spread contract at the same time, letting the market choose (inaudible) they wanted adopt and what the market has adopted is actually the spread contract back to WTI. So the market's very happy with the deep liquidity and the WTI contract on [Globex.] The cash-owned spread contract back in Houston is providing exactly what the market wants, which is a cash equivalent of the barrel delivered to the coast. So we're excited about the opportunity. We think it's actually validation of what we did 2 years ago and the market's got the best of all worlds, which is deep liquid markets in the WTI and Globex and then the ability to cash all of that spread out to Houston [when] barrels that hit the water.

Our next question comes from Chris Allen with Compass Point.

Just wanted to maybe get an update on how you're thinking about NEX Group and the opportunities there? Talking to treasury market participants, the opportunities there are clearly centered around margin and clearing and market structure evolution. I know you've kind of made comments there was no change in how you're thinking about that moving forward. I'm wondering if that's evolved at all as you move closer to the deal closing.

On the market structure, Chris, as it relates to BrokerTec, we are not changing that one bit. So that won't change, our thinking hasn't changed and it won't. So the market structure has a ways [build the deck]. Again, it's a very lucrative model. And it's a very efficient model. And we'll let the participants make a lot of those decisions as we move forward. As it relates to the other benefits of the margin, I'll ask Sunil and Sean to comment.

Chris, this is Sunil. We currently have a cross margining program with a fixed income clearing corp. And we continue to work with the FICC to actually improve that model. So we believe we can bring a lot more benefits to market participants who trade both cash treasuries and I mean -- and our interest rate futures products.

Yes, this is Sean jumping in. In terms of the excitement over NEX, it's as high as ever. We're constantly focused on making sure that we've got the most attractive products possible and the most attractive platform possible with the most efficient way of taking risk for market participants. So we're very excited about allowing market participants to more efficiently access both the cash markets and the futures markets across the rates and the foreign exchange world. In addition to that we are looking forward

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combining these -- the cash markets and the futures markets together and seeing what we can do there to provide new efficiencies for the marketplace. In addition to that, as you know,

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and that optimization business is all about the same thing that CME is. So creating new margin capital [total] cost efficiencies for clients. We're very

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years for the [goal of] client base as [uncleared margins rules] go from -- affecting 26 participants today to expected more than a 1,000 in a few years’ time. So very excited overall in bringing the 2 firms together. Very excited about the integration and I say, it's going very well.

That answers your question, Chris?

Yes.

Our next question comes from Rich Repetto with Sandler O'Neill.

Can you hear me?

Yes.

Yes, Rich.

Yes, I like the system here. So anyway, the -- I just want to first ask about volumes. Your overall volumes were up 12% year-over-year, but option volumes were down 2%. So just trying to understand what the dynamics have changed that would cause option volumes to drop off so much on a year-over-year basis.

So let's break it down into the 2 major sectors, with Derek and Sean -- and then I can kind of give you a little flavor for that. So Derek is going to start.

Yes, Rich, I appreciate the question. Overall, year-to-date volumes are up 14%. So a little bit outpacing what year-to-date overall franchise is up 12-ish percent, 11% , 12% overall. We're actually seeing continued really strong growth in electronification efforts. You've heard us talk about the investments we're making in our front-end relative to being able to capture more complex spread trades. We're actually on Globex. I'm happy to say that we've got our electronic percentage up at 64% year-to-date. Is there somebody on the line?

Yes. I think we're getting feedback through the line from the operator, go ahead.

Okay. So our electronic [officers] traded about 64% of our total year-to-date so far this year. That's up from 59% last year. The biggest gains there are with interest rates going from 45% to 51%. Energy and metals each going up 5% as well. So we continue to make investments, make it easier for customers to trade complex spread options on the box electronically. We are seeing that energy options are the one place where we've seeing a down drop, 5 of 6 asset classes are up, energy options right now. We're seeing record low -- back at record low volatility levels in net gas options, we're seeing a pull back there. Strong healthy growth across the board, the other 5 asset classes. It's then -- it return to lower levels of volatility in 3 of those asset classes. And we're starting to see some seasonal dip back down in Q2 and some of the volatility level. So with that, we're seeing good strong growth across most of the franchise. Nat gas options the one outlier. WTI options are flattish with nat gas down a bit. So I can hand it over to Sean on some of the details on the financial side.

Yes. On the financial side, I'd -- I'll break it up into 2 pieces. I'll talk about the Eurodollar options and then the long dated or the treasury options. In terms of the Eurodollar options, as you know, over the last 4 or 5 years, we've seen enormous growth. So the comps relative to last year are very, very difficult. If you look at our Eurodollar options complex doing more than 1.5 million contracts a day. So with the massive growth that we've seen and a little bit tougher growth very -- as fast as we have been. But still, the Eurodollar options up about 3.8% year-over-year. On the other hand, our treasury options doing much, much better at about 27% over year -- year-over-year. And basically, in line or slightly ahead of our futures complex. So I think, on the Eurodollar option size, specifically, a tough comp.

And I think that what we're most excited about and this will tie into the theme of electronification and globalizing our businesses, is our non-U. S. options growth year-to-date is up 19%. We're seeing outpaced volumes. Europe is up 19%, Asia and U.S. are up 13%, [both -- that fit --] the reflection of the growth investment we're making in our infrastructure and the ability to put complex spreads on the box has allowed us to capture net new clients trading electronically in their time zones. So we're excited about the growth and the trajectory of the options business overall. And again, the theme here is we are globalizing the business and increasing participation from outside of the U.S.

One last thing I might add is, I should've mentioned it earlier. We are innovating, we continue to innovate. So we did launch a fifth quarterly mid-curve option on our Eurodollar, earlier this year. We also recently launched a new term mid-curve options. So that allows you to take very short-term 1-, 2-, 3-month options on [our whites or fund 4] contracts. So those -- even though they're very recently launched, we've traded well over 400,000 contracts. So we continue to innovate. We continue to see growth, but tougher comps.

So Rich, I hope that answers your question. But I think you got a good flavor, so a little bit tougher comps on the financial side and a little bit of cyclical and just ebbs and flows as it relates to the gas side of the business. So all-in-all a healthy, healthy complex.

Got it. And I guess, another question is -- this question on attrition and market data going forward. I guess, we've had 4 months of the price increase here now. So can you tell us what the attrition is now? Like to get a feel for what a -- and why do you feel pick up after 4 months of the price increase?

Go ahead, Bryan.

Rich, we're -- we do track this very closely, and I can just say that our subscriber counts have maintained a very stable level over these last several months since the price increase took effect. What I think is more interesting and more indicative is we've seen a deceleration, actually, in the banking sector, which was an area where we were seeing a lot of attrition in past years. I think a lot of that is tied to the audit function, again, that we've been performing as we're in the field and we're building up those relationships, we're seeing a correction in behavior in the reporting of the screen count. So we're going to look at this, obviously, very closely. And in terms of audits as well, that's a lumpy area, I mentioned. What we're more interested in is making sure that we have correct behavior. And that's reflecting itself in these numbers.

Got it. Got it. I guess, last thing is, Terry, a prominent publicly traded company out there has talked about, just exploring strategic alternatives for its post-trade services business. This service basically wraps trades and then, they legally wrap it and then they report the trades to exchanges, clearing houses, I'm sure you're well aware of this, [sir.] I guess, the question is how interested are you in these type post-trade services?

Rich, from our standpoint, right now I would -- just as I said earlier, the announcement of NEX, the shareholder vote of NEX being completed, the integration process underway. Waiting for the authorities to go ahead and approve both in the U.S. and in Europe and U.K. Until we get that done, our focus is on NEX and nothing else right now. And that's the way our strategy is, so I really don't want to comment any further because for that we have to look at post-trade services as we start to integrate the NEX business, but we can't do that until we close. So that's the only answer I could possibly give on that.

Our next question comes from Chris Harris with Wells Fargo.

So the growth in Asia has obviously been very good. Yet, we've seen the stock market in China correct economic growth in that part of the world seems to be slowing, but obviously, still quite good. My question is, I guess, is there a risk to those volumes, do you think if the economic situation in China gets worse, or do you feel like the volumes you're getting over there -- from over there are going to be pretty sticky?

This is Bryan. I'll start. We really do feel that the volumes that we've been able to generate are going to continue to perform as well as they have been these last few quarters. And it's really attributable to the outreach and the targeted planning across each of these countries. China, does represent a significant portion of our Asia Pacific revenue. So I think it's important as well to keep in mind that we target our efforts across a multitude of countries. We're able to look at, for example, the top-10 countries within Asia Pacific. We have plans in which we do outreach across the product sectors and the client sectors, and those numbers are continuing to bear fruit.

I think if you jump in on the product-specific side, we're actually seeing is where we have structural changes that provide unique opportunities for us to service a client base that is now open to us with structural changes, like the energy market, WTI is now a waterborne global benchmark. So when you look at the growth in our business in just volumes alone, our Asian business is up 43% and a large piece of that is the energy business that we're pushing out in terms of WTI utilization. So part of this is, yes, tied to economic cycles, but we're paid to make sure that we can build franchises and portfolios that are going to thrive whether -- regardless of the shape of the yield curve, volatility curve or industrial cycles. What we are seeing is when products become more relevant to global participants, we're in the best position to make sure that we're addressing that opportunity and that growth. So -- and so we're happy about the product selection, and to Bryan's point, we put a lot of effort into training, education and the ability to access our markets through intermediaries. And that's showing through in some of the strong growth, 43% revenue growth in our energy's franchise in China, for example. So we think product set and the client mix are coming together, and we think that that's -- a structural shift that is positive for us in the long term.

It is really difficult to say, as Derek just outlined, about any particular part of anyone's economic growth around the world. But I will tell you -- and they touched on this but I don't think to enough extent is the sales effort that we are putting in place globally. Historically, CME has never been much of a sales organization. We have bolstered this sales organization. We have got new initiatives globally to get new clients, that we believe are completely untapped, never used our markets that will be able to use our markets, so we're excited by that. The infrastructure that we're putting in different parts of Asia such as market regulations, other things that make sure people really understand our markets. So we're sending people over there to, again, educate and make sure people understand what the U.S. market place is all about. And we're finding quite an excitement, and I do believe that the client base is really untapped there. So even though there could be economic downturns, I think we have an opportunity to go after additional subsets of clients throughout the Asian community.

Our next question comes from Michael Carrier with Bank of America.

This is actually Sameer Murukutla on for Michael. Just a quick question on the expense guidance and the second half expenses. Usually, you would expect expenses to grow faster in the back half of the year, but given the unchanged guidance, it kind of seems like the second half would only grow around 2% to 3% year-over-year. So I just want to make up some details on maybe what expenses you might have pulled forward into the first half. I think you guys called out compensation and bonuses. And maybe, what other segments you might hold expenses back.

Sameer, thanks for the question. Yes, let's put this into perspective here for the first half of the year. So compensation, as you indicated, is our largest growth in terms of expenses. It's up about $28 million first half of this year versus first half of last year. 60% of the increase in the compensation line is incentive comps so that is bonus and stock-based compensation. The balance is in [bank] compensation, is primarily driven by cost of living increases. We did have some increase in headcount. So if you exclude incentive-based compensation, our total adjusted expenses grew only 1.5% for the quarter and on a year-to-date basis adjusted expenses were flat with last year if you exclude incentive-based compensation.

So looking into the second half of the year, so rolling it forward, I would expect the pattern of our spend to remain similar with the fourth quarter heavier than the first quarter. But I would expect the fourth quarter to be less than 3% growth compared to last year. And so what you're seeing is for the first half of the year, we've been able to offset our compensation -- incentive compensation growth, through really, I think, great expense management across the entire organization and rolling into second half of the year, I would expect professional services and other expenses and marketing to be lower, which will still allow us to achieve our targeted expense guidance of about 3%.

So any other questions?

At this time, we have no further questions in the queue. I would like to turn the conference over to company management for closing remarks.

Well, we want to thank all of you for the opportunity to address your questions today and your interest in CME Group. We look forward to talking to you on the next quarter. Thank you.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.