Cme Group Inc. Q2 FY2020 Earnings Call

Good day, and welcome to the CME Group Second Quarter 2020 Earnings Call. At this time, I would like to turn the conference over to John Peschier. Please go ahead, sir.

Good morning, and thank you all for joining us. I’m going to start with the Safe Harbor language, then I’m going to turn it over to Terry, Julie, 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 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 statement. More detailed information about factors that may affect our performance can be found 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'll turn it over to Terry.

Thanks, John, and thank you all for joining us today. My comments today will be brief so we can spend the majority of our time directly addressing your questions. We released our executive commentary this morning, which provided extensive details on the second quarter. As John mentioned, Sean, Derek, and Julie Winkler have joined me today. In Q2, we averaged 17.6 million contracts per day, which is down from 21 million contracts per day a year ago, and down from our strong start to the year in Q1. The global exchange traded market has been challenged in various product areas since the beginning of the pandemic, impacting us and many others in the trading industry. Clearly, the front end of the U.S. rate curve has been impacted from a trading perspective. Also, with the recovery of the price of oil back to the $40 range, the global crude oil market has stabilized with a fairly flat forward curve, leading to a reduction in volatility back to more normalized levels as the market balances its supply and demand. While in the near-term that reduces the need for some participants to manage risk with us and others, the competitive dynamic of trading volumes across different markets has not changed. However, with global crude oil demand still depressed due to COVID-19, which we believe is a temporary situation, we expect to see market conditions improve as global oil demand returns. We are very fortunate to have a highly diversified business. We are looking forward to the integration of BrokerTec coming onto Globex by year-end. We remain committed to achieving capital and operational efficiencies for our clients. Through all of this, I assure you we remain very disciplined concerning expenses. What I'd like to do is turn the call over to Julie Winkler to provide some context on our sales outreach, what we are hearing from our customers, and she will touch briefly upon our data business. Then I look forward to answering your questions.

Thank you, Terry. Despite challenging circumstances, we are continuing to see positive momentum in our global client engagement. Similar to last quarter, many of our clients continue to work from home, and our sales organization has excelled at their virtual outreach. During Q2, client engagement by our sales organization was up 66% versus the same period last year, and year-to-date sales activity is up 81%. We are actively engaging with clients via virtual meetings, webinars, online events, email communication, and chat to support the execution of our sales and go-to-market strategy. Clients continue to express their appreciation for how highly responsive we have been through the peak of the crisis and our continued focus on delivering value-added solutions across product lines. Clients in some areas are beginning to return to the office, which means we will take appropriate steps to adjust our coverage model where safe and appropriate. In Q2, we also saw an acceleration of our cross-introduction and cross-sell efforts to capitalize on the next acquisition. May represented a record high month, with more than 300 cross introductions across our sales organization, which is more than the entire first quarter combined. A total of 500 cross introductions were made throughout Q2. Additionally, we reinvigorated campaign selling to help bring key products and services to market. We are seeing great success with those campaigns, including the re-launch of our three-year treasury product, which had more than 40 clients participating on the first day of trading. Our active trader retail segment performance was strong in Q2, and year-to-date, ADV is up over 70%, driven by an overall increase in retail trading resulting from the lockdown. CME was well-positioned prior to these events, and its product mix, particularly the E-Micros, allowed it to take advantage of strong macro factors. Lastly, our market data business had a strong quarter. Through the first half of 2020, consolidated revenue was up 3%. The CME market data professional subscribers count was solid due to increased subscriptions, as traders migrated to a work-from-home environment. We continue to see success with our data services strategy, which confirmed the value of our data to our global customer base. I will now turn things over to John.

Thanks, Julie. In the first half of the year, in addition to navigating a challenging environment, we've been very active with the ongoing NEX integration. We remain on track to migrate from the legacy NEX trading systems to our Globex technology. We’ve recently announced to our clients the cutover dates for BrokerTec. BrokerTec EU clients will begin trading on November 16, and BrokerTec Americas trading will commence on December 7. With our progress and the integration, the remote working environment, and our overall strong expense discipline, we finished the second quarter with adjusted operating expenses, excluding license fees of $380 million. We are extremely focused on actively managing our costs. Based on our outlook for expenses for the rest of the year, our guidance for adjusted operating expenses, excluding license fees for 2020, is being reduced from a range of $1.64 billion to $1.65 billion, to approximately $1,595 million. This level of spending reflects the reality of the current operating environment, and we would expect a higher level of spending next year, assuming the conditions improve from here. With that short summary, we'd like to open up the call for your questions. Based on a number of analysts covering us, please limit yourself to one question and then feel free to jump back into the queue. Thank you.

Our first question comes from Rich Repetto with Piper Sandler. Please go ahead.

Good morning, Terry, John, and Julie. I guess my first question is on expenses. You made a solid reduction, John, in the expense guidance. But I guess the question is, the first half run rate, you're averaging somewhere around $383 million in expenses, excluding the licensing fees. If you back into that full year guidance, it would be an 8.5% increase in the back half. Hopefully, you get the $15 million of P&L expenses coming from the NEX synergies. So, I guess the question is, if the current environment didn't rebound, say, in 2020, is there more room to cut expenses, because I know some events have already been canceled and so forth?

Yes. Thank you, Rich. Thanks for the question. In terms of the first half versus the back half of the year, we do expect to have some increase in costs in the back half of the year. For example, in depreciation as we migrate onto Globex. And also, we're in the process of a data center consolidation effort. We have a build-out of a data center in the New York, New Jersey area as part of the integration efforts that we're doing with NEX. Also, we do have plans for the back half of the year, including some opening of some economies around the world, where we would expect to see more travel and marketing efforts, as those economies open up. So, that is planned for sort of in the back half of the year. If that doesn't happen, obviously, we wouldn't expect those costs to come through. But in terms of our guidance, we did make some assumption that there would be a modest opening in Asia, in particular, for example. In terms of our overall expense discipline, we are as a management team, very focused on our expenses for this year and in planning for next year. So, we have a laser-like focus on our expenses, and the entire organization is making sure that we spend every dollar as efficiently as we possibly can.

Got it. Thank you, and everybody, please stay safe and healthy.

You too, Rich.

Thank you. Our next question comes from Dan Fannon with Jefferies. Please go ahead.

Thanks. Good morning. My question is on market data. Julie, you mentioned some of the strengths. If you could kind of elaborate on the outlook for that business and how we should think about growth in the broader market data business for the remainder of this year and the next?

Sure. Thank you, Dan. Yes. As mentioned, we had a great Q2 with consolidated revenue in the market data business of $135 million, which is up about 5% over the second quarter of 2019. The majority of that was driven by those increased professional subscriber accounts. So, what has happened is that in the work from home configuration, we're seeing modest demand in display devices. And it’s also just coupled with other licensing that we're doing across the business. We are continuing to closely consult with our data vendors and our clients to gather input. We have a really great channel partner base for our data distribution, which gives us a wide range of very flexible ways to deliver our data and new products. As we look at the outlook and what else we see, we still see increased need for our data in terms of automated trading solutions. We are also seeing that in terms of using our data into product creation. That comes through as both non-display licensed revenue as well as derived data revenue. We are certainly focused on the NEX data integration, along with what we're doing on the Globex side. There also is a lot of NEX data that needs to be integrated, as well as continuing to create more flexible distribution channels in terms of what you saw us announce with our CME smart stream and other new products. We did the successful addition of the new 10-year treasury bond as well in our NEX data product. That's just coupled with continued strength in our policy, pricing, and audit functions, and really making sure that our clients have that level playing field and access to our data, I think contributes to the outlook for our market data business.

Thank you.

We will next go to Alex Kramm with UBS. Please go ahead.

Yes. Hey, good morning. I know this is a difficult question to answer on the rate side, but everybody can obviously see the volume and open interest trends. But curious, if there are any other data points you guys are looking at? Anything in conversations with clients that gives you some confidence that we may have troughed here and that things can improve when certain events happen, or if maybe people will start putting more risk on? What are you looking forward to get comfort?

Thank you for that question, Alex. I'm going to ask Sean Tully to share his insights, as he has been discussing this with his team. So, Sean?

Hi. Thanks very much for the question. A really good question. During the March timeframe, we saw a very high volatility in interest rates. If we look more recently, in the month of July, we've seen unprecedented low volatility across the entire yield curve from our Eurodollar futures, all the way out to our ultra-bond futures. In fact, if you look at our eighth Eurodollar future, this is the lowest volatility we have seen since the inception of the contract in 1987. Nonetheless, the level of uncertainty in economic numbers has never been higher when seen from the perspective of the range of possible outcomes for unemployment and GDP numbers. While the Fed is currently doing everything possible to support the economy in the short run, during March and April, they bought as much as $300 billion a week worth of securities, increasing their balance sheet from $4.2 trillion to $7.2 trillion, or up $2.9 trillion in just over three months, including the purchase of $1.7 trillion of our securities. Those actions have dampened volatility tremendously. Nonetheless, if you look at what happened post the financial crisis, when the Federal Reserve between 2008 and 2014 purchased $3.6 trillion. They then later on proactively reduced the size of their balance sheet, in particular, from $4.5 trillion to $3.7 trillion from January 2018 to September 2019, from which we did get additional volumes and volatility. If you look at the unprecedented deficit this year, estimated at $3.7 trillion, now potentially $2 trillion of deficit next year, you will see the highest debt-to-GDP ratios the U.S. government has seen since World War II, and possibly ever, as well as the highest levels of debt in the U.S. ever. If you look at the refunding announcements in February versus May, the growth in coupon issuance was 24% by the U.S. government to address that huge debt and deficit need. When the Federal Reserve reduces its intervention and the pandemic recedes, the need for hedging and our products will remain much larger than ever before in history. Therefore, we expect that the risk management demand will significantly increase going forward.

Thank you.

Thank you. Next, we will go to Brian Bedell of Deutsche Bank. Please go ahead.

Thanks very much. Just want to follow up on those comments. I guess, it is an interesting dynamic of the potential, like what you said in terms of the hedgeability on treasury outstanding stock that will need to be hedged and speculated on. I guess what's your view on whether that stays in an intervention mode for a prolonged period of time? Is there anything you can do to stimulate those rate volumes, or does it really depend on that environment? And then maybe just a second question related to the equity index franchise. You have a lot of new products coming on in terms of options and the telco offering as well, if you could talk about your efforts there and the outlook for volume growth in those areas?

Yes, of course. Thanks very much, I greatly appreciate the question. We’re very excited, as you know, innovation has been a major focus over the last several years. That has always been part of CME Group’s DNA. So, our innovation continues unabated, and the results so far this year are extremely strong. If you look at the first half of 2020, we achieved 3.2 million contracts on ADV from new product launches since 2010. You'll recall that last year, those same products were just 2.1 million ADV. So, we’ve seen 52% growth year-over-year in the ADV of those products launched since 2010. In addition to that, in the first half of this year, we earned $193 million in revenues, which is an annualized growth of about 25% year-over-year. The single greatest product launch in CME Group history is our Micro E-mini. The Micro E-minis have achieved 1.6 million contracts of ADV so far this year. And if you look at the second quarter, they achieved 1.9 million. If you look at our other products, we've recently announced that on August 31, we will be launching micro options. These are the smaller options that are the option equivalent of the Micro E-mini futures, which we're very excited about relative to the significant uptake that we've had in micros. The RPC for the Micro E-mini was 6.8 times last year, but we expect it to go up as we reduce incentives over time. In the second quarter of 2020, it was up about 12.5%. We're also very happy to report the success of our new three-year treasury futures, which had more than 40 participants on the first day, and we're achieving over 3,000 ADV a day. The ultra-10-year futures ADV is also up 21% year-over-year. Our silver futures have seen volumes up 58% year-over-year, and we continue to see innovation throughout the CME products.

Thanks, Brian.

Next, we'll move to Ari Ghosh with CME Group. Please go ahead.

Good morning, everyone. Maybe it's a quick one for Sean on the metals complex. It's a smaller revenue piece here but could be facing some nice tailwinds given Fed intervention and rounds of stimulus. And you've also launched new place delivery in gold contracts. So just curious about the level of interest you're seeing here. And any color on broader customer trends coming from Asia? We've typically seen strong demand for both the metals and equity index products?

Ari, we're going to have Derek Sammann answer that who heads up our metals complex. Derek?

Hey, Ari, thanks for the question. Metals continues to be a big area of growth for us, not only coming off the overall macro environment but also due to the positive factors for gold and the points that you've made. Recently, we've revisited highs, breaking above $1,900 that we last tested in March. This year, we've set record numbers in Q1 and first-half as well, with our Asian business up 30%. Our international growth continues to set the pace for overall participation in our markets. Record levels of gold in our depositories increased from about 9 million ounces in February to just over 30 million ounces currently. This indicates strong client demand for our metals and volumes. We are witnessing virtuous cycles of volume growth, international participation, and the addition of more stock into our warehouse, which influences positive movements for our product.

Thanks, Derek.

Great, color. Thanks, guys.

Thank you.

We will next go to Chris Allen of Compass Point. Please go ahead.

Good morning, everyone. I appreciate the incremental color on the cross-selling efforts. I wonder if you could provide any numbers in terms of how that's translating, whether it's volumes or open interest. Also, could you provide an update on any progress on the clearing front, in terms of realizing synergies and any changes for customers between CME and DTCC? And maybe just to refresh the expectations around the benefits once the technology migration to Globex is completed? Thank you.

Thanks, Chris. I'm going to ask Julie Winkler to talk about the cross-selling, and then on clearing with DTCC, Sean can address that question. So, Julie, why don't you start?

Sure. Thanks for the question, Chris. Yes, we are really making outstanding progress in how we've integrated our sales team to support cross-selling. As we expected, there was a natural dip in those cost reductions in late March and April, as the sales reps focused on supporting those clients through volatility. But now, those efforts are accelerating at a record pace. When we look at Q2, I mentioned earlier, the 500 cross introductions. May was a new monthly high, where we did 300 across our respective businesses. Nearly 70% of those cross introductions have been made for transactional businesses in Q2. The FX franchise has been at the forefront of these efforts. Other introductions have occurred with EBS and interest rates. The standout client segment we’re seeing momentum with is our commercial clientele across EBS and optimization product suite. We are making investments in our global sales force to provide them with the tools they need for effective cross-selling of our complete suite of products. It is still early to provide specifics on the revenue generated, but as we progress into these clients going live with these products, we will have more information on that. Thanks for the question. I'll turn it back to you, Terry.

Thanks, Julie. Sean, do you want to address the current benefits with DTCC that we’re working on?

Yes, absolutely. As you mentioned, we are working closely with DTCC on creating benefits and potentially increasing cross-margin between our treasury futures and cash treasury. Currently, benefits are 20% or 30% worth of offsets for a handful of clients taking advantage of them. We expect to get those offset percentages closer to 70% plus once the agreements are finalized and approved by regulators. We do not yet have announcements in that regard but I would like to mention that we are continuously working on efficiencies to deliver margin capital and total cost savings to our customers. Given the volatility this year, increases in required margins due to the more volatile products, we've seen a significant uptick in portfolio margining between our OTC swaps and interest rate futures. We added seven new clients this year, bringing us to 55 clients, and two clients who had previously stopped using the service have started again. This year, we achieved an average of $5.4 billion in margin savings for our clients, an all-time record. Additionally, we’re working on creating portfolio margining between our listed interest rate options and interest rate swaps, which will also add efficiencies to the marketplace.

Thanks, Sean.

Thank you, Chris. Thanks for your question.

Thank you. We will next go to Mike Carrier with Bank of America. Please go ahead.

Good morning, and thanks for taking the question. I think the bigger picture question, given the rate backdrop, I wanted to get your take on this cycle versus the prior one. Last time rates were here, you worked with clients and you were innovative in creating new products, which eventually played out, but it did take some time. Are you seeing similar trends in terms of demand for those contracts or even product innovation in this backdrop, or is it too early? Is the low rate backdrop impacting other product areas, similarly or not versus the last cycle?

Sean, you want to address that, and then I’ll jump in as well.

Sure. The volatility is indeed different across markets, as evidenced by our volume numbers. Volatility is something that is out of our control. Product innovation and client interaction are in our control, and we do that every day. The month of July saw all-time record low volatilities across the curve, and this environment has been significantly influenced by the actions taken by the Federal Reserve. Their aggressive bond-buying spree has created lesser interest rates across the yield curve. However, we’re also seeing significant demand for innovative products like three-year treasury futures. We've seen fantastic growth this year with product movements and new statistics validating that, with volumes up across multiple product lines, particularly in the bond market. We remain excited about our continued innovation within the CME family, focusing on creating more product opportunities to respond to the evolving needs of our clients in a lower-rate environment.

Thanks, Sean. Mike, thank you for your question.

Our next question comes from Owen Lau with Oppenheimer. Please go ahead.

Good morning. Thank you for taking my questions. Would you be able to provide any more color on the Wells notice for your indices JV with S&P? But if not, can you talk more about ESG? Are there any ESG initiatives you would like to call out that CME is working on? Thank you.

John?

Sure. Thank you, Owen. This is John. In terms of the Wells notice, that is something we have been aware of, and it does not impact our trading business at all. Any questions regarding the Wells notice at the S&P Dow Jones JV should really be directed to S&P Global. I encourage you to contact them for further updates. In terms of our ESG products, we are involved in developing initiatives around ESG. We currently have an equity product related to S&P ESG. I'll turn it over to Julie, as she can talk about the work her research team is doing in the ESG space.

Yes, thanks, John, and thanks for the question, Owen. We introduced our first ESG report just weeks ago on our website, detailing CME Group's ESG strategy. A key part of that is our product-related strategy. We've made progress in terms of a cross-functional ESG product committee looking at products across our suite. There are great opportunities to adjust existing products and introduce new ones. There is a lot of client interest in Europe regarding our ESG initiatives and capabilities, particularly with our S&P ESG 500 index futures contracts. We believe this interest will help drive demand for other benchmarks that we look to introduce later this year.

Thanks, Julie. Thank you, Owen.

We will move to our next question that comes from Jeremy Campbell with Barclays. Please go ahead.

Hey, thanks. Sean, thanks for the macro color regarding the rates and the puts and takes of the outlook from here. I'm just wondering about the rate activity impacts after controlling for the number of users you've hooked into the CME futures ecosystem. Over the past six to eight years, since the previous zero rate environment, your user base has grown in both the U.S. and abroad, but your ADVs, excluding the first quarter of this year, are tracking more in line with 2012 to 2014 levels. I know volatility is crazy low, and maybe the Fed is crowding people out, but I would have thought the materially lower activity levels per user might have yielded a better overall activity level than the prior cycle?

Sean?

Yes, I think that's a very good question. Your supposition is correct. The volatility we're facing now is lower than we saw in October 2012, and indeed, we are experiencing a lower volume environment, even with the growth in our user base. We believe once the pandemic recedes, there will be increased need for hedging and interest rate management as well. I think we can expect higher demand for our products post-COVID, as evidenced by historical patterns.

Thanks, Jeremy.

We will move next to Chris Harris with Wells Fargo. Please go ahead.

Yes. I want to ask you a little about 2021. I know it's early, but what do you need to see in order for expenses to grow in 2021? Would there also need to be revenue growth? And then, related to that, there’s a decent amount of synergies expected to flow through next year. Can you flesh out why spending would exceed the synergies next year?

John?

Sure, Chris, this is John. Thank you for the question. In terms of our expense outlook, you're correct that it is an early stage to provide you some guidance. We're all hopeful that economies around the world can open up safely. If the environment improves, we’d expect a higher level of travel and marketing spend, intensifying client outreach. That would mean our expenses might be higher than the low-single-digit growth rates over the last several years. In terms of synergies, you're right. The bulk of the synergies from the integration will run rate capture moving forward. We exceeded a target of $50 million last year, hitting $64 million, and we’re targeting $110 million for this year. We anticipate a significant reduction in core expenditures due to synergies which will show up as lower expenses in 2021.

Thank you.

Thank you, Chris.

We will go to our next question, coming from Patrick O'Shaughnessy with Raymond James. Please go ahead.

Hey, good morning. I'm curious what should we read into BrokerTec’s U.S. Treasury’s market share losses accelerating during the second quarter?

Sean?

Yes. So, I haven't seen that specifically, but let me clarify. If you look at the central limit order book share of the dealer-to-dealer market, our share has actually increased over the past 12 months. You may be referencing the dealer-to-customer market plus the dealer-to-dealer market, which we don't compete in. We have seen a small drop in our share of the overall dealer-to-dealer market, since traction has emerged from relationship-based trading platforms. We're actively working on platforms like BrokerTec stream, with improved technology to enhance our trading capabilities. Main point is that within the dealer-to-dealer space, our share has grown. We need to stay competitive, and therefore, we're investing in technology that will help enhance your market.

Thank you.

Thanks, Patrick.

We will go next to Kyle Voigt with KBW. Please go ahead.

Hi. Thanks for taking my question. Maybe it's a cleanup question for John on this net investment income. I think Q2 revenues there imply a bit higher than the 2 basis points yield you mentioned last quarter. Just wondering if you could give a 2Q average cash balances and the yield on that in Q2, and maybe how those balances and the yield on those have trended into the third quarter?

Sure, thanks, Kyle. Yes, when you look at our non-operating income and expense portion of our income statement, sequentially, it's down about $15 million, and that’s primarily three items. One, you're correct. When you look at the returns we earn on cash held by clients at the clearing house, it came down as we mentioned last quarter. The interest on excess reserves came down to about 10 basis points in March. With that move, we adjusted our rates accordingly that reduced our net returns from 19 basis points in Q1 towards 4 basis points in Q2, but we did offset that with higher average cash balances, which doubled to $83 billion. That led to an increase in yield from 2 to 4 basis points. Regarding our leverage, we hit our one-time debt-to-EBITDA target this quarter and paid off the balance of $100 million in commercial paper.

That's helpful. Should that 4 basis point yield be sustainable?

I would anticipate it to be higher than the 2 basis points currently. I can't forecast exactly, but I suspect it should remain higher than 2 basis points.

Alright. Thank you.

Thanks, Kyle.

We will take our next question from Ken Hill with Rosenblatt. Please go ahead.

Hey, good morning. I wanted to ask on the international front here. In Q1, I think the growth was strong in Asia and Europe, at 73% and 54%. It looks like Asia in Q2 was still slightly positive, but I didn't see a number for Europe. Can you provide that number for what Europe looked like in Q2? More broadly, how did the environment trend throughout the quarter? Did you see people coming back into the market as the pandemic eased in those areas? What are you seeing in those regions today as well? Thanks.

John, you will start, and I'll ask Julie to join in as well.

Yes, thanks, Terry. In terms of our international activity, year-to-date it continues to outpace U.S. performance. For the quarter, our international business faced tough comparables. Q2 of 2019 was our second highest quarter for international activity behind Q1 of this year. For the quarter, APAC grew about 1% year-over-year. Six out of our top 10 countries, including our top three countries of Singapore, Korea, and Hong Kong were up, and four of those were up double digits. In EMEA, it was down about 11% year-over-year, but we saw five of the top 10 countries there were up, and three of those were up double digits. The Netherlands, which is our second-largest country by volume was up triple digits. We did see some migration from the UK to the Netherlands in anticipation of Brexit, but we also saw very strong growth there too. So, our overall international activity for the quarter was in line with 2019 ADV, which was a strong year for us. I'll turn it over to Julie in terms of the customer experience.

Yes. Much of our international activity is driven by that active trader retail client segment. Equities and metals were the most significant products transacted by those clients. For Q2, we saw over 130,000 new accounts come into our market through that active trader segment, which was up more than 100% year-on-year. The volatility is there, and this work-from-home and lockdown environment is making that particular segment trade even more with us. I’d note that over 50% of new customers traded at least one of our four E-micro equity index products. About 20% had only traded an E-micro. We believe this trend in increased client acquisition through the E-micros will help drive demand for the upcoming E-micro options launch in Q3. We've seen new clients from over 166 different countries, so while the U.S. was strong, we continue to see strong participation from Taiwan, South Korea, Hong Kong, and China.

Yes. Thanks.

Thank you, Ken.

We will go to our next question from Kenneth Worthington of JP Morgan. Please go ahead.

Hi, good morning. Maybe just wrapping up on oil and gas trading. So, what is your perspective on the impact, if any, from the negative WTI pricing during the April delivery? Has there been any lasting impact on trading behavior or participation? And why do you think there might not have been greater acceptance of the Houston-based products? They seem like a great product, but they really haven't taken off, any views there?

Derek?

Hey, Ken. Thanks for your question. Yes, let's look at the impacts of the extreme levels of volatility and price uncertainty driven by the huge demand destruction and supply concerns. The negative pricing we witnessed in April created challenges for some firms in managing their systems, leading to brokers updating systems to handle negative pricing for margins. This initially pulled some brokers from allowing retail customers to trade in the spot market for WTI and Brent, impacting self-directed trading volumes. However, that business is returning now as brokers have updated their systems. The biggest change we've seen from April is the normalization of supply and demand dynamics in the global crude oil market. OPEC announced decisions to rollout agreed cuts, helping address some of the supply concerns. With the price of crude oil stabilizing around $40, trading has shifted to a less interesting landscape for some financial players. We've delivered both record Q1 and first-half energy revenues, with European revenues for the first half up 25%. Our non-U.S. customer base is helping us maintain growth. In terms of the Houston-based contract, while it was launched for those involved in the export chain, we've seen some declines in production, with exports dipping. Thus, demand for that product has declined accordingly. We're committed to innovating and discussing ways to enhance that contract, but its future performance will hinge on the recovery of the export market.

Thanks, Derek.

Great, color. Thanks, guys.

Thank you.

We will next go to Chris Allen of Compass Point. Please go ahead.

Good morning, everyone. I appreciate the incremental color on the cross-selling efforts. I wonder if you could give us any numbers in terms of how that's translating, whether it's volumes or open interest. If you could also provide an update on any progress on the clearing front regarding realizing synergies and any changes for customers between CME and DTCC, and a refresh on expectations for benefits once the technology migration to Globex is completed? Thank you.

Thanks, Chris. I'm going to ask Julie Winkler to talk about the cross-selling, and then Sean can address clearing with DTCC. Julie, can you start?

Sure. Thanks for the question, Chris. Yes, we are making outstanding progress on our cross-selling. As we expected, there was a dip in cost reductions in late March and April as sales reps focused on helping clients manage volatility. Now those efforts are accelerating. In Q2, we achieved 500 cross-introductions, with May reaching a new monthly high of 300. Nearly 70% of those have occurred in transactional businesses this quarter, particularly in FX and EBS. Our commercial clientele is also seeing strong growth, driven by our focused investment in the global sales force. It remains early for specific revenue figures, but as clients go live with new products, we will have more data on revenue impacts.

Yes, absolutely. As you mentioned, we’re closely working with DTCC to deliver benefits and potentially increase margins on our treasury futures and cash treasuries. Today, we can offer 20% to 30% for clients who leverage our services. Once finalized and approved by regulators, we expect to push those figures closer to 70%. We are continuously working to find efficiencies for our clients in this environment. In terms of the portfolio margining, we’ve already brought on seven new clients this year, totaling 55; we've seen an average savings of $5.4 billion for our clients in margining this year. We're also focused on creating portfolio margining between our listed interest rate options and swaps too.

Thanks, Sean.

Thank you, Chris.

Thank you. We will next go to Mike Carrier with Bank of America. Please go ahead.

Good morning, and thanks for the question. Given the backdrop, I wanted to get your perspective on this cycle versus the last one. Last time rates were low, you worked closely with clients to innovate and create new products, which did take time to play out. Are you observing similar demand trends now, or is it early to tell where product innovation is heading in this low-rate backdrop?

Sean, do you want to address that question?

Absolutely. The volatility landscape is highly variable, and this is reflected in our volume rates. While the current environment has dampened activity, we are definitely focused on delivering innovative products to build client relationships for the long-term. As clients respond to this low-rate backdrop, we're prepared to adapt our offerings, focusing on usage patterns and how we plan to serve their evolving needs. Innovations like three-year treasury futures reflect the adaptability of our offerings amidst changing market dynamics.

Thanks, Sean. Thank you, Mike.

Our next question comes from Owen Lau with Oppenheimer. Please go ahead.

Good morning, thank you. Would you be able to provide any more color on the Wells notice regarding your indices JV with S&P? If not, could you speak about any ESG initiatives that CME is currently developing?

John?

Thank you, Owen. Regarding the Wells notice, that is something we've been aware of and it does not impact our trading business. Any questions regarding the Wells notice or S&P Dow Jones JV should be directed to S&P Global for more information. In terms of ESG products, we are actively developing various products in the ESG space. We recently introduced our first ESG report, detailing CME Group’s ESG strategy and our plans for several ESG-related product rollouts going forward.

Yes, thanks, John. We have a cross-functional committee working on product initiatives in the ESG arena, reflecting our commitment to evolve our offerings to meet client demand in this area. We believe that introducing ESG-focused benchmarks will drive interest and engagement across our trading platforms and ultimately contribute to meaningful market advancements.

Thanks, Julie. Thank you, Owen.

We will move to our next question that comes from Jeremy Campbell with Barclays. Please go ahead.

Thank you, and thanks for the macro commentary on rates. I’m curious about how rate activity is impacted further post-trends in user growth in your CME network. You've expanded substantially over past years yet are tracking below prior higher ADVs, which is surprising given the new user growth.

Sean?

Yes, you're correct in your observation. While we've experienced significant growth in our user base, we're also facing unprecedented low volatility rate dynamics. The volumes we see are influenced by current market conditions, and we believe this will change once economic activities normalize post-pandemic. Historically, we've seen volatility levels return, leading to increased rates in participant involvement.

Thanks for your insights, Sean. Thanks, Jeremy.

We will move next to Chris Harris with Wells Fargo. Please go ahead.

I have a question about your outlook for 2021. What will determine whether expenses grow next year? Is revenue growth necessary for that to happen? And can you elaborate on the extent to which synergies may offset spending next year?

John?

Sure, Chris. It’s early for guidance on expenses for next year. We are hopeful that we can see solid improvement in economies around the world as they begin to open up safely. If conditions improve, a significant ramp-up in marketing and travel expenses will occur, leading to potential growth. Synergies from our transitions will help balance core expenses, which have seen a growth rate of 2.5% across our historical expense patterns.

Thanks.

Thank you, Chris.

Thank you. We will now go to Patrick O'Shaughnessy with Raymond James. Please go ahead.

What do you attribute to the growth or decline in BrokerTec's U.S. Treasury market share this past quarter?

Sean?

Our market share in the dealer-to-dealer space, specifically, has seen slight declines as we face increasing competition from relationship-based trading platforms. However, we have maintained our market share within the central limit order book. The trade execution space is dynamic, and we’re focused on not only maintaining but also expanding our market presence through continual investments in technology.

Thank you.

Thank you, Patrick.

We will now go to Kyle Voigt with KBW. Please go ahead.

Can you provide the average cash balances for 2Q and their yields along with how those trends have progressed into Q3?

For Q2, our average cash balance was about $83 billion, yielding between 2 to 4 basis points. These trends have held steady into Q3, where cash balances have reduced to about $71.5 billion while maintaining yields above 2 basis points.

Thanks for that update.

Thank you.

We will take our next question from Ken Hill with Rosenblatt. Please go ahead.

Can you discuss any significant growth trends you’ve seen in Asia and Europe during Q2?

John will start and Julie can add to it.

In Q2, growth in Asia stands at 1%, with some countries experiencing double-digit increases. EMEA, however, was down around 11%. That said, significant growth in the Netherlands showcased promising trends.

I can speak to our active traders segment and client engagement. We experienced a notable influx of new accounts, significantly boosting trading activities in these markets. The volatility has driven retail engagement and heightened interest across numerous product areas, positioning us remarkably.

Appreciate that.

Thank you, Ken.

Finally, we will take our last question from Alex Kramm with UBS. Please go ahead.

What are your thoughts on the impact of reopening the Eurodollar pit?

Sean?

Reopening the floor is exciting, but it will remain to be seen how it affects volumes on the screen. We will ensure efficient operation regardless, maintaining a balance with those who prefer floor trading alongside electronic trading. Transition and adaptability are essential as we move forward.

Thanks, Sean.

Thank you. This concludes today's question-and-answer session. Mr. Duffy, at this time, I will turn the conference to you for any final remarks.

Thank you. I appreciate it very much, and I know the team does as well. We live in interesting times, and we truly believe that managing risk will be critically important as we continue evolving from COVID, along with other topical issues impacting the entire world. For the reasons Sean, Derek, Julie, and John explained, we feelvery optimistic about our position. As a focused team, we remain committed to driving innovation, solid client outreach, and emphasizing capital efficiencies and integration of NEX. We are significantly mindful of our expense discipline as we operate the business. Thank you for your time this morning, and we look forward to our next interactions. Please stay safe and healthy.

Thank you, and thank you all for your attention. This concludes today's conference. You may now disconnect.