芝加哥商業交易所 (CME) 2019 Q1 法說會逐字稿

Good day, everyone, and welcome to the CME Group First Quarter 2019 Earnings Call. At this time, I would like to turn the conference over to John Peschier. Please go ahead, sir.

Great. Thank you. Good morning, and thank you for joining us. I'm going to start with the safe harbor language, and I'll turn it over to Terry for brief remarks, followed by questions. Other members of our management team will also participate.

Statements made in this call and in our other reference documents 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, in 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.

Thank you, John, and thank you all for joining us today. We appreciate your interest in CME Group. My comments today, as John said, are going to be very brief so we can get right into your questions.

We released our executive commentary this morning, which provided extensive details on the first quarter. During our last call, I mentioned that we had strong tailwinds to finish the year. We had made the most of it also. Market conditions changed significantly from the prior quarter, and volatility did drop across virtually every asset class. Despite the change in the trading environment, we were able to post our third highest futures and options quarter in our history while we kept our expenses relatively flat. More importantly, we continue to execute on our long-term strategy to attract new clients and to launch new innovative products.

We had significant customer engagement. We ran strategic targeted campaigns, educating market participants on new noncore products and product extensions as well as cross-selling to all our product lines and into new cash markets and optimization services. During the first quarter, all 6 product areas had an increase in their business from outside the U.S.

We continued to launch innovative new products, tools and services to support customer needs and to create capital and operational efficiencies for market participants. In Q1, we had multiple volume and open interest records, including SOFR features, FX Link, Bitcoin futures, Treasury futures, invoice spreads, copper options and our new West Texas Intermediate Houston product. Within the NEX market business, the combined EBS and BrokerTec monthly revenues in Q1 came in fairly close to the Q4 results. This is despite, as I said earlier, much lower volatility.

On the core futures and options side, our open interest rose from 118 million contracts in mid-March to more than 134 million contracts last week. And today, it sits just north of 132 million contracts, which is not too far from our peak in 2018. We remain very excited about the opportunities in front of us.

With that short summary, we would like to open the call for your questions. And based on the number of analysts covering us, we'd ask you to limit yourself to one question and then get back in the queue. Thank you, and we'll take your questions.

(Operator Instructions) Our first question is from Rich Repetto from Sandler O'Neill.

I guess the first question has to do with the contribution from NEX. And when we're looking at the rate per contracts, the revenue per million, for EBS and BrokerTec, we're back into what appears to be declines quarter-over-quarter in the mid-double digits, around 15%. I just want to see whether that's accurate and just general color on the NEX integration as well. But first, the RPs -- the revenues per million, please.

Yes. Rich, this is John. I think what you need to look at when you look at the rate per million is in the BrokerTec business, the 2 primary drivers of the revenue are Treasuries and European repo. The U.S. repo is a small portion of the overall business at this time, so that's one thing to take a look at.

Also, the sensitivity to volume at BrokerTec is less than it is, say, at EBS or CME Group. But when you look at -- as Terry mentioned in his prepared remarks, when you look at the volatility environment in Q1 versus Q4, it is substantially lower in Q1 than in Q4. But when you look at the revenue for the quarter for the markets business, it held up remarkably well, and it was down only 3% sequentially. Sean?

Yes. And particularly, you need to look at the product mix, right? So you saw growth in the first quarter in European repo in particular, and the repo RPCs are much, much lower, as John mentioned, than the outright Treasuries, for example.

In terms of the integration question, Rich, we're very pleased with how the integration is progressing. We're on plan to achieve this year's synergy targets. We have a staffing event related to integration midyear along with a plan cutover for some administrative systems, which will support the consolidation of the internal functions. And we're also on track to combine office space in New York, Tokyo, Hong Kong and London by the end of this year, which will free up some leased space. And as we mentioned on the last call, we are targeting customer migration to Globex with BrokerTec in 2020 and EBS in 2021.

And anything on the -- the question was on the EBS capture as well.

In terms of the EBS capture, I think when you take a look at the activity, again it's a mix issue between the G10 activity and the rest of the business. So the more activity that occurs on spot, G10 tend to have a lower rate than CNH and the NDFs.

Our next question is from Dan Fannon from Jefferies.

I guess a follow-up on just kind of the overall expense profile. The first quarter showed some conservative or some -- a slow start versus your guidance. It sounds like the synergies are more back-end loaded so we should just expect to ramp here as the year progresses and I guess, characterizing the volume environment in April as still not being all that robust. I guess how should we think about kind of that build of expenses?

Thanks, Dan. I think the -- when you take a look at our expense profile for the year, we are expecting to have a staffing event in the middle of the year. So we'll be updating our synergies target at that time. And also we'll -- like I've mentioned previously, we'll have some cutover of some systems, and we're going to be consolidating some office space. So we'll have better clarity in terms of the synergy capture for this year. As the management team looks at synergies, we're looking to accelerate the synergy capture as much as we possibly can.

In terms of the expense guidance, yes, we -- when you take a look, we did have -- the first quarter was lower relative to the rest of the year, but we will be having some ramp-up in work done on systems for the rest of the year. So it's really more timing around projects and -- as they get launched. But we'll be able to provide some more color with the second quarter call.

Our next question is from Ben Herbert from Citi.

Could you maybe just give us an update -- sticking with next year, just an update on the cross-sell efforts through particularly the non-U. S. channels?

This is Bryan speaking. The thing that we're really excited about is the ability to cross-sell the multitude of product offerings that we have, bringing together the strong markets capability along with the optimization services that we provide. I think what I'm most proud of right now is through this integration process, we are working together. We're not skipping a beat in terms of the seamless performance of these new platforms that we've acquired and -- as we're going through the integration process. The client base is very enthusiastic about what we have on the horizon in terms of the new capabilities and functionalities that will be associated with the cutover and migration onto Globex from the market's perspective. But I think even more important is we're able to solve issues and challenges today by bringing together the combined forces of what we've had under the historical CME Group, adding on the NEX components. As we look at improving capital efficiencies and addressing margin efficiencies, post-trade challenges the firms have been encumbered with, using and leveraging the capabilities that we have across CME Group is having a very positive impact with our client base.

And moving on, we'll hear from Brian Bedell from Deutsche Bank.

Just to go back to the expense guidance, I guess, right now it implies about a 3% to 4% quarterly increase in run rate from the very good 1Q level. Maybe if you could just touch on which areas you expect that to move up. I mean, John, you mentioned the staffing event midyear. If you can just talk about, in addition to that, what type of flexibility you might have if the volatility environment stays really light. And then also just one clarification on the new fee program on noncash collateral from 1 bps to 5 bps with the revenue impact on the quarterly run rate for that?

You got a lot in there, Brian. So let's talk about expenses first, and then we'll break down your other points.

So in terms of where we see the expenses coming in a little bit heavier in the quarter, it's really -- it's around when projects get implemented. So we've been staffing some contract workers so you see professional fees will tick up. Our professional fees, if you look historically, tend to be lighter in the first quarter, and then they tick up as projects get underway during the year. So I'd expect professional fees to go up a bit.

On the compensation line, you'll see that tick up a little bit. But then, like I mentioned, we'll be having a staffing event which will occur midyear so then that would come back down. And then also depreciation will be rolling in as systems get put into production, then it rolls out a work in process and gets amortized in the depreciation. So that's another line. And then obviously in -- our CME -- the legacy CME expenses tend to be heavier in the fourth quarter as we got a lot of customer-facing events that occur in the fourth quarter. So you'll see a tick-up in the fourth quarter. So that kind of gives you an idea of some of the breakdown.

Then when you look at the levers for us should there be a prolonged downturn in volumes, first off, I think if you take a look at CME Group over the last several years, I think it's safe to say that the entire organization has done an excellent job in managing the expenses and that mindset is continuing. Obviously, if there's a prolonged downturn in volumes, we will double down our efforts in terms of managing our expenses. We do have some discretionary costs that we can put a sharper lens to, things like travel and entertainment, marketing, spend that may not drive near-term results, but we obviously are not going to do anything that impacts the future growth trajectory of the business.

As I mentioned before, as a normal course of the integration, the entire management team is looking at ways we could accelerate the synergy capture where we can. So that's another thing that we're focused on. But to put it in perspective, we did have our third best volume quarter in our history. So I think it's a bit premature to talk about potential reductions in cost at this point, although we do have a strong view on cost containment and cost control.

Then you mentioned the change in the collateral fees. Yes, we -- the change in collateral fees will go into effect July 1. We're increasing the noncash collateral fees from 1 basis point to 5 basis points. We have approximately $100 billion in noncash collateral. Excess noncash collateral and guarantee fund contributions are not impacted by the fee increase, and that's approximately $20 billion. Now noncash collateral will fluctuate based upon trading activity and also based upon the mix of noncash collateral to cash collateral. But that kind of gives you some ideas around what we're looking at there.

Yes. That's about it. It looks like $40 million annualized, if it's 4 basis points of increase on $100 billion?

Well, it's -- you got to take out -- like I mentioned before, you got to take out the guarantee fund contributions and the excess collateral. And as I said, that's $20 billion.

And we'll go next to Alex Kramm from UBS.

Just wanted to come back to the NEX opportunity set that you addressed earlier. I mean obviously, it was talked about this in pretty big generalities for about a year now. And -- but now that you've owned this asset for 6 months or so, and clearly you're doing projects and talking -- the groups are talking to each other, maybe you can just help us by giving us maybe the single largest individual opportunity that you see and what the time line is so we can get a little bit more concrete here.

Alex, thanks. It's Terry Duffy. I'll ask Bryan and Sean both to comment on that because we think there's multiple opportunities that we're yet to talk about, but they can give you a little bit of a color what they're looking at today.

I'm going to take the optimization side, and Sean can speak to the markets, if that's all right.

On the optimization side of the equation, as you all well know, our marketplace and particularly our banking institutions have been challenged consistently with maintaining cost and capital efficiencies. Through the acquisition and the combination of our optimization services, along with our excellent clearing services and post trade capabilities, we're already, as we speak, as I alluded to earlier, operating as an integrated team of people working with our clients to find solutions for greater capital efficiencies. We're offering them streamlined connectivity and processing capabilities through the complement of the optimization services of triReduce, triBalance, triResolve, Traiana, and bringing those things together as a combined force and not necessarily operating them as independent businesses or silos. Just having the combined efforts along with Sunil's team to be able to work with and identify solutions for our firms real time has been a strong positive force, and it's being very well received by our clients. So when you think about having the potential for centralized risk management capabilities across the cash, across the list of futures that we offer and OTC products, our clients today are very excited and enthusiastic about the services that we're going to be able to provide by these combined forces.

Yes. Totally agree with Bryan. I might actually underline a couple of things in the optimization area. First and foremost, you have the uncleared margin rules, right, which have hit the largest banks but have not hit all the participants yet. So on September this year, we expect to see on the order of 50 new participants. They'll be hit by the, globally, they'll be hit by the uncleared margin rules. And then in September of the year after, it could be close to 1,000 different participants there potentially impacted. CME Group, with its optimization businesses and its existing clearing services, can address every single aspect of clients' needs around those problems. You've got triResolve, which can look at a margining of uncleared -- of the uncleared margins. So in other words, the sending out of the messages, the reconciliations of margin, et cetera. You can calculate with triCalculate the sim or those uncleared margin requirements. You can try to avoid having to post uncleared margins by reducing the outright margin that you have needed between the parties by using the triBalance service.

You can also use triReduce in order to reduce your notional outstanding in order to try and reduce the need to actually post margins.

On the other hand, just like it was with Dodd-Frank, you can then move people from uncleared space into cleared space. And you can move in particular their FX options as well as their NDFs from uncleared space to cleared space or you can move then directly into our futures complex. So we have the totality of solutions for the marketplace as you approach the increasing demand for solutions to the uncleared margin rule, in particular relative to services that we have launched previously and you've heard a lot about in terms of our portfolio margining between futures and swaps. In the fourth quarter, the savings that we were -- or the efficiencies that we were offering the marketplace was about $2.6 billion. Currently, we're saving the marketplace about $4.3 billion. So creating about $4.3 billion worth of efficiencies relative to portfolio margining. This has led to growth in things like invoice spreads. So invoice spreads, for example, the ability to trade CME Treasury future as a spread to a swap and to clear them both at CME, creating huge margin and capital efficiencies. That's grown from 89,000 contracts today -- or last year to potentially 134,000 contracts today in the first quarter and 118,000 contracts today so far this year at $1.92 RPC, a very nice add to our futures business.

If we move over to the market side, we're very excited. It's very early days in terms of our ability to do a couple of things. First of all, cross-selling the futures clients into the OTC products that we have as well as the -- our OTC clients or the EBS clients, for example, into our futures products. We see those 2 marketplaces as highly complementary.

If you think about total cost analysis and you think about what investors and the buy-side, sell-side accounts are all interested in, they're interested in the lowest possible total cost. And if you can -- to the extent that you can, and we are going to be focused on it, you give access to both liquidity pools, right? Or even in some sense, combine the liquidity pool experience and the FX market, for example. Think about what we can do. Your total cost -- the largest cost is your bid-offer spread. So to the extent that we can combine the liquidity pool of, call it, the 80 billion, 90 billion a day on EBS with a 80 billion, 90 billion a day in our FX Futures, by a -- you recall last year, we launched FX Link, which links those 2 marketplaces with the basis trade. When you start to combine those liquidity pools, what do you do? You tighten that bid-offer spread. You tighten that bid-offer spread because those 2 markets are quoted differently, number one. And number two, you deepen the book. So by tightening the bid-offer spread and deepening the book and cross-selling into a larger marketplace, it's a much more compelling better value proposition than we've ever had before in the foreign exchange market, and we're going to be able to access a much larger client base. It's early days, but that's the vision

So hopefully that gave you a little color on the optimization of the markets businesses and why we're so excited about it because of the opportunities that we see. And again, I think what both Bryan and Sean outlined is operational and cost efficiencies, which is exactly what you need to grow any marketplace, and that's exactly what we're doing by these acquisitions. So hopefully that gives you a little more color for what we were trying to achieve.

Yes. It was a little bit more than the one single largest opportunity, but I do appreciate the color.

Michael Carrier from Bank of America has our next question.

Just on the current environment and the current backdrop, when I look at the open interest overall, you show some of the data and some of the growth in the product areas. It seems like a lot of that has been driven by the rates complex. When we look at, say, like equity, energy, some of the other areas, you're seeing a bit of some softness. Just wanted to get some color. Obviously, you've got tough comps in '18, too. We've put that in perspective. But just in terms of the environment, what you're seeing in some of the product areas just given the divergence in open interest trends.

Yes. Michael, it's a good question. And instead of spending more time on the growth of the rates business, I'll let Derek talk about -- Derek Sammann talk about the energy markets and the agricultural open interest and where we're at there today. Derek?

Yes. Thanks, Michael. It's Derek. I appreciate the opportunity to talk about some of the other businesses. You're right, it's been a challenging first quarter, recognizing coming off an all-time series of records in Q1 of last year. In energy specifically, you're certainly looking at a softer market. You're seeing that market generally drift higher even in light of the news of the Iran sanctions coming, the waivers coming off. You saw only a couple of dollar increase in the price and the market quickly digested that and moved on. We are seeing softness and volatility.

We're seeing a slight reduction in open interest, both on our WTI contract as well as what we're seeing in Brent on the other side. We're both down to right about 2.2 million contracts opened, down for the -- by about 2.5 for each of us in May of last year. So not surprising to see a low volatility environment. I think we're seeing a resumption of the short vol carry trade. Folks are realizing that selling volatility in this environment has actually been positive for the returns, so we're seeing that being a little challenging for a breakout in volatility right now.

But when you look at the overall macro environment being challenging, we still posted our third best quarter ever. And on top of that, we're actually seeing that we're outperforming the other folks in the space right now. On the energy side, specifically WTI, we increased our market share from about 58% to about 59% of the combined crude market.

If you shift over and you look at the balance of the crude and refined space, our gasoline business, RBOB, is actually up 10% Q1 this year. People get lost in looking at the numbers when kind of looking at the crude piece. The overall strength of the overall portfolio is driven by the supporting pieces of the balance [that hereon] and RBOB as well. So a really good story on gasoline with volumes up 10% this year.

The other side of the shop on natural gas, another story, just continued low price environment. This was -- we had a spectacularly volatile gas season last year. This year was relatively quiet. We're seeing prices stabilize back lower again. That's another market in challenging macro trends. We're actually seeing us outperform in that market. That's a market where we're still -- we are actually up to 82% market share of the Henry Hub futures market, so we're pleased that in a challenging market, we're continuing to grow customer base and outperform and managed to retain those businesses.

Where we are seeing strength, and this has been a continued theme, the overall narrative of a structural change in a globalizing crude oil market and now increasingly globalizing natural gas market, that narrative is still strongly in place. You see that in our energy volumes are actually up 3% in Asia in the first quarter. You've heard us talk about the increased demand and the expansion of exports. The U.S. is now exporting 3.5 million barrels a day of crude oil, and you're seeing that reflect both in the Asian demand for our products and the growth of the innovative new products that we've put out there. For example, the Houston Physical Crude Contract Terry referenced at the top of the call, that's a market that we launched this back in November. And we got about a 72% market share of volumes and about a 65% market share of open interest, hitting regular volume and open interest records along the way. So in a challenged environment, we're focused on the end user customer, focused on the global participation. That's where we're seeing the opportunity. That's where we're putting our resources, and we're pleased with the results on the energy side.

On the ag side, again actually, what we're seeing, all the markets down in every asset class. In Q1, Ag was our best performer, down the least. That's also a market when you look at our comps or CBOT/OE complex when compared to the combined bonds of Euronext and Minneapolis Grain Exchange, we also increased our market share there from 88% to 91%. Where we are seeing a lot of volatility, and Terry mentioned this at the top of the call, is livestock. You saw the hogs, cattle reacting very strongly to what we're seeing in terms of the continued trade talks and sanction in China and the swine fever around the livestock market. So when there are events and when there is risk, we continue to be the place that draws customers to manage their risk, and we saw a number of volume at open interest records in both cattle and hogs, futures and options over the course of the first quarter. So we'll continue to build and focus on our commercial customers there and do some innovative work around broadening our participation globally.

Does that answer your questions, Mike?

Yes. Thanks a lot.

Our next question is from Alex Blostein from Goldman Sachs.

A quick question around some of the licensing expense. It looks like because of the investment you guys are making with BTIC that, that as a percentage of kind of overall equity transaction revenues continues to tick up. I'm not sure if that's the best way to sort of think about the margin on the equity business, if you may. But maybe help us think through how that will play out over the next couple of quarters, maybe a year or so out as your equity business evolves there.

Sure. Thanks, Alex. So yes, when you take a look at our licensing fees, we don't give out specifics in terms of our license agreements. And each agreement is unique. So when you take a look at the license fees, there tends to be an annual adjustments to the fees paid to our IP providers. So that gets adjusted at the beginning of the year.

Also, it's important to note that while the majority of the license fee line relates to equities, it also includes fees related to other asset classes like energy and interest rates. So about 80% to 85% of the license fee line is related to equities. The balance is related to other asset classes.

So when you take a look at the relationship between the equity revenue and the license fee expense, you got to take that into account. Also, when you look at the interest rate component, the interest rate product component in that line, we did see a step-up in terms of the revenue share that we have with our partner banks. And it was our best volume that we'd had in the interest rate swaps since 2015. So that impacted that line as well.

We'll go next to Chris Harris from Wells Fargo.

I wanted to follow up on the commentary regarding the energy complex. The price differential between Brent and WTI has widened out now about $10. It's not as wide of a disparity as there was back in 2011 and 2012, but pretty wide. And I guess what I'm wondering is, does this create a potential problem for the complex? And the reason I say that is, is in the past, when we've seen a wide disparity like that, it ended up being a negative for WTI volumes relative to Brent and just wondering if there's a risk of that going forward if this price disparity continues.

Yes, Chris. It's Derek again. Thanks for the question. No, I think when you look at the market structurally back in 2000 -- kind of '11 to '14 versus where we are now, there are a number of different factors both in our own business and our own commercial focus as well as the broader market. I think what you saw back in 2000 -- kind of pre-2014 on our side, we had, had more of a focus on the financial players and we didn't have as strong a footprint with the commercial community. That was reflected in the kind of the open interest levels that we saw in WTI. We made a very specific focus pivot in 2014 to make sure that we are focused on the end user commercial customers and that we were very much making sure that we -- if we're focused on the end user commercial customers, the open interest producers and the holders, then that meant that we are in the best position to draw the financial players along the way.

The significant change on the structural piece I referenced just a moment ago was in December 2015 when Congress looked at the export ban. That, as you've heard us say, continually has put in place the narrative for a global oil market with WTI at the center of that. So when you look at the response to the participation and commercial participation in our market now at just under 2.2 million contracts open interest versus where we were kind of pre-2014, significantly higher, and a significant amount of our sales resources have been focused for the last 4 years now on those end user commercials and participants. We also had a much smaller proportion of our business that was taking place in Europe and Asia, driven by both our commercial focus and the structural shift that has really positioned WTI as the global benchmark.

So those are probably the 2 biggest drivers, the structural shift coupled with our commercial focus and the resource that we put into place. And Bryan I think can talk about some of the very specific areas on our international front that's driven the kind of outpaced performance in our energy business in Europe and Asia, Asia specifically that's up this quarter.

Just to reinforce Derek's point, and I think you've been hearing me speak to this over the last probably 1 year, 1.5 years in terms of the tremendous growth we're seeing in the energy complex, particularly out of the Asia Pacific region. We're very proud of that continued trend this past quarter. So Derek alluded to the crude oil being up I think approximately 15% alone, and that's its third highest record out of Asia Pacific. We're seeing nice growth coming out of Hong Kong, South Korea as well as China driving the demand for that product. He alluded to earlier also the growth that we've seen in RBOB futures. It's up about 9%. And we're seeing again nice growth coming out of our commercials. Commercials are up, for our crude oil, up about 9%. Commercials are up about 22% for RBOB. So as we're driving to those end users, reaching out to them, we have the benefits of the export capabilities coming into these regions. This will be a continued area of emphasis for us and growth.

And just let me just pile on a little bit here for good measure. Derek said something earlier, which I think is really important. When you look at the open interest of the different crude products, they basically are down identical numbers. So if, in fact, the volume numbers are different, you'd see a bigger skew in that particular number and you're not seeing it. And just to reemphasize, I think that when you're calculating volumes from spreads that happened several years ago and the factors that have changed from today, this being a global market, it's really hard to make them applicable to today's marketplace. So I think hopefully that was a good color for you to see that you can't use the same measures that you used a few years ago when these spreads widened.

Our next question is from Chris Allen from Compass Point.

Just wanted to ask real quick on other revenues. If you back out the NEX-related revenues, it's about a $5 million jump up and kind of $40-ish million run rate we saw the CME for the 2018. And then the NEX revenue saw a nice jump for 4Q annualized levels to the $51 million this quarter, almost like $5 million as well. There's a lot of moving parts in there. I'm wondering if you can give us any color on that.

Sure, Chris. This is John. I'll start. In terms of the -- if you take a look at -- NEX was up about $5 million. CME Group was up about $5 million in that line. There were 2 items that I wanted to point out. One was on the NEX side, there was about a $2 million relocation of rent revenue. It used to be at NEX netted in -- rent netted with rent expense and now it's being -- that rent revenue is being booked in the other revenue line, and that's about $2 million.

And then when you take a look at the CME side, every year, we got an adjustment to the -- our contract with BM&F. It's an inflation adjustment. It gets recorded at the beginning of the year and resets the baseline for the following year, and that was about $2 million. So that's about $4 million of the $10 million adjustment that you're seeing -- increase that you're seeing on that line.

The balance of the increase really is amongst a whole host of different businesses that are in there. And particularly excited about the way the optimization businesses have performed, excluding the market, the transaction fee-related businesses, which are in the markets line. So I'll turn it over to Bryan to make a comment there.

I would just say on the optimization side of the equation, we had very strong performance across our triResolve, our reset and our Traiana businesses, which again goes to the commentary that both Sean and I referenced earlier. There's a strong demand for these capabilities, and we're excited about the robust diversity of product that we offer. Going back to John.

Yes. So one thing I did want to point out, Chris, and Bryan talked about it at a question earlier in the call, and that's the collateral fee line, the collateral fee change. I did want to make a point that the collateral fee change that's going to go into effect in July will be booked in other revenue, not in investment income. So I just wanted to make that point. So you'll see this line get adjusted midyear.

So this is a good run rate going forward from here and then adjust for any growth we expect in kind of the optimization businesses and obviously the collateral change coming in 3Q. Is that fair?

Yes. Yes. I would say the one thing, the adjustment I talked about from the inflation, that's an annual adjustment so that would increase the run rate about $400,000 per quarter going forward rather than the $2 million that was adjusted this quarter. Makes sense?

Yes.

Our next question is from Kyle Voigt from KBW.

There's been some recent press in Bloomberg and other publications regarding the reduction in capital allocated to trend following strategies and some meaningful outflows from CTAs in 2018. Do you believe that this is having any impact on the softer volume start to 2019? And then secondly, is there any way you could help frame the approximate size of CTAs and trend following strategies in context of seeing this total volume or total revenues?

I would just speak to the breadth of the products that we offer. As we look at the buy-side community in particular and the opportunities and challenges that they face with their strategy, it's incumbent upon us to be able to provide them with the products and solutions and the opportunities from a liquidity perspective that they need to shift their trading strategies into other venues. And having the broad swath of product that we represent, I mean, I continue to look at, we see growth continuing across all of our regions particularly across that buy-side community within our hedge funds as well as our asset managers. So it will be a continued focus.

I'd say on the commodity side, what -- one of the important -- the most important way that we can attract business that are looking to get fund inflows in the commodity side is making sure that our businesses, as we grow our volumes in open interest, that has a direct impact on the weightings that they have in the various commodity indices at the Bloomberg Commodity Index, MSCI, et cetera.

So as those get re-weighted every year, the continued growth that you hear us talk about, both in absolute but equally importantly for the indexes on the relative side as well that re-weights our products at a higher percent of the total proportion of those indices, so the trend followers and then kind of the CTA community you're talking about that might not be directly in futures. A pile in the index as that index backs to the -- our footprint in those respective products. So the growth and focus on growing our volumes in open interest puts us in a higher weighting proportion of the CME Group products in those indices, which ends up getting us those traded hedge volumes back into our futures. So we can't directly control for it. But as we see those flows increase, we put ourselves in the best position by getting our products re-weighted at a higher percent in each of those indices.

Our next question is from Ken Worthington from JPMorgan.

In terms of the investment income, can you indicate how the [SGM] and clients are changing allocations and collateral between cash and noncash at CME? Maybe also highlight which is more profitable for CME, cash or noncash? It seems like cash, I think, is much more profitable. And then can you talk about where the spread earned on customer collaterals to this quarter versus last?

Sure. Ken, this is John. I'll walk you through kind of what we've seen over the last couple of quarters in terms of the average cash balances that we have at the clearinghouse. So we saw in the first quarter of '18 about $39.6 billion in average balances. It's gone down to around $28 billion in the first quarter of '19, so it trended downwards. The return that we receive on those average cash balances has gone from about 28 basis points in first quarter of '18 to about 33 basis points in the first quarter of '19.

You are correct, the noncash collateral, we earned less on the noncash collateral than we do have on the cash collateral so that -- but that when you take a look, we are making that adjustment in July, which will have an impact on the amount that we earn on that collateral. So if you take a look at our take on the return, in the first quarter of 2019, it was about $23 million. That's the net earnings that we received on the cash collateral. And as we talked about previously, the noncash collateral will be adjusted in July.

And we'll take a follow-up question from Brian Bedell from Deutsche Bank.

Maybe just a couple questions on products. So just in the equity indices, obviously, that's been weak with low volatility in the market. Maybe some perspective of to what extent you think (inaudible) that are starting to launch can meaningfully impact or meaningfully boost the equity industry trends if (inaudible)remains light. And then within interest rates, just some perspective on what kind of RPC capture you're getting on the new SOFR volumes. And also the invoice spreads, obviously, really rich capture there, whether you see that continuing to trend. And you made some comments earlier in the Q&A on that.

Sean?

Sure. Brian, great question. Thank you very much. We're very excited about the May 6 launch of our micro E-mini futures. And as a reminder to folks, this is across the 4 major indices. So across the S&P, Dow, NASDAQ and Russell 2000 indices.

Why are we excited about this? We currently have about 50,000 accounts utilizing the E-mini futures. So this will give them greater granularity. So contract is 1/10 the size of our existing E-minis, giving them greater granularity in order to optimize their exposures to the futures contract relative to CTAs. And the question earlier, this will also allow them to optimize their exposure to those marketplaces with a much finer contract size than they've had in the past. If you think about the E-minis, they were launched in 1997. So since then, since the indices have grown dramatically, the size of the contract has grown, and this will allow us to better penetrate those accounts.

In addition to those 50,000 existing E-mini accounts, there are approximately 250,000 current dormant CME futures accounts. We do believe that some significant portion of those users, a contract size may have gotten too large for them, and this will allow us to better penetrate them.

Much more importantly, if you look at external numbers in the marketplace that are available, in terms of active retail traders, there are on the order of 10 to -- actually we've seen numbers as high as 14 million active retail traders globally. So we are very hopeful that dividing the contract size by 10, that we will see very good uptake. We've had very positive feedback from all of our retail distribution channels. We are working with 80, 8-0, different introducing brokers as well as retail brokers. And we believe that on the order of 90% of them will be ready in week 1 to start offering the product to their clients. So we are very excited about the opportunity. I won't size it right now, but we think it's a great idea. We're seeing very, very positive feedback from those distribution channels, and we're expecting a very positive launch.

In terms of other innovations that we've launched, we're about to hit our 1-year anniversary of our SOFR futures. We're very excited there about that contract. We recently had a record of 83,000 contracts traded in a single day.

And if you look at the 1-year anniversary, this is one of the fastest-growing products we've ever had in the interest rate complex and I think anywhere at CME Group. So putting it in perspective, we've had about 3.2 million contracts traded in the first 12 months. That equates to about $6.1 trillion worth of notional. And in the month of March, we reached a new all-time monthly record of 38,000 contracts with more than 130 different participants. So we're very excited about the continued traction there.

I could keep going on relative to our innovations. Total Return Futures, we adjusted those products on the equity side back in December, right? So Total Return Futures, you may recall, this is a company focused on margin capital efficiencies, the changing regulatory environment and how to help clients. So those are being offered to the marketplaces and alternative to total return equity swaps, especially under the uncleared margin rules. It is considered the third largest category of pain point after rates and foreign exchange. We've seen very good uptake there. We saw a record recently of 280,000 contracts open interest. And we -- in addition to that, the growth this year, we had about 1,600 contracts a day last year. We've seen about 2,600 contracts a day this year. So very nice growth. I think actually the actual growth rate is 47% year-over-year.

And in addition to that, with the extensions that we made in December, particularly we took the S&P's, we only had them out 5 quarters. We now go out 5 years. And when we go out 5 years, that RPC is over $5 a contract. So we're constantly innovating. We're constantly looking at attracting new clients.

Another thing I might bring up, it's not just the new product innovation, but we're continuously optimizing the existing contracts.

And another thing I just might note is our 2-year note futures as well as the 2-year note cash. So back in November, BrokerTec reduced the minimum pricing from -- in the 2-year note cash. And in January, we took a similar action in our 2-year note futures. Why is this important? This is important because while we're in a difficult volatility environment, actually there's a Fed research paper that was published about 1.5 weeks ago saying that the reduction in those minimum price increments massively increased the health of those marketplaces and increased volumes. So if you look at the increase in volumes, on both the BrokerTec side as well as the CME side, the 2-year notes went from being about 13% -- and I'm approximating here, about 13% of the overall Treasury complex on each platforms to about 16%. On the futures side, that equates to an additional about 122,000 contracts a day. So a very positive result there.

Invoice spread, as I said earlier, seeing very good growth. From 89,000 contracts today last year to 118,000 so far this year, $1.92 RPC. And this is really again taking advantage of the portfolio margining that I also mentioned earlier, where we're seeing huge growth in people adopting and taking advantage of that.

And we have another follow-up question from Alex Kramm from UBS.

Just 2 quick follow-ups on the things that were asked before. On the other revenue line, just to clarify, you said the run rate is good, but we don't have any sort of quarterly history. So is there any seasonality in that kind of optimization business that we should be aware of, customers doing more in a certain quarter or the beginning of the year? So just anything to call out there? And then on the expenses I think that was asked earlier. Do you actually -- I don't know if you gave the kind of incentive comp or bonus target for the year. Can you just give us a little bit of the range there? And what it would take to be at the low end and the high end given that volumes obviously get bounced around and performance can bounce around?

Yes. Thanks. In terms of -- just to be clear, we talked a little bit about the other revenue. The information or the revenue that goes into that line on the NEX side tends to be more subscription-based. So it should be less volatile than the transaction-based revenues. So when you're thinking about that line, it tends to be a much more stable line.

As I did mention, there are a couple of things that are going to be rolling in there. One is the change in the collateral fee, which will impact that line. Also, there is -- as we move our staff into a consolidated office space, we'll be suddenly seeing that office space, there will be some impact in that line as well. So that's a couple of points to think about as you model out the other revenue line.

In terms of the expenses, when you look at the compensation specifically on the CME side, there is a range of outcomes when it comes to the bonus. Really when we look at it, we look at bonus plus stock-based compensation as being kind of performance-based comp. So to the extent that there is a cap and there is a cliff in terms of our bonus, so we don't hit a certain targeted -- we call it AIP or cash earnings target, that bonus can go all the way down to 0 depending on how we do. And we don't -- obviously, we don't disclose that range, although in the proxy, you can see what it has been in the past.

So that is -- that's what can happen in terms of the bonus. Obviously, stock-based compensation is relative to our margins compared to a peer set and also our total return compared to the entire S&P 500.

And that's all the time we have for questions today. Speakers, I'll turn the conference back to you for additional or closing remarks.

We appreciate very much the opportunity to answer your questions today. We look forward to talking to you in the next quarter. Thank you.

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