Cme Group Inc. Q3 FY2020 Earnings Call

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

Good morning and thank you all for joining us. I’m going to start with the Safe Harbor language, and I’ll turn it over to Terry and John for brief remarks, followed by your 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 in our filings with the SEC which are on our website. Also on the last page of the earnings release, you will find 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. I wish you all the best, you and your families during this challenging situation for many around the world. My comments today will be brief as John said 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 third quarter. Also as John referenced, I have John, Sean, Derek, and Julie Winkler with me this morning and we all look forward to answering your questions. We continue to see historically low levels of volatility in several of our asset classes, which began in the second quarter. During the third quarter, we averaged 15.6 million contracts per day down from 17.6 million contracts per day in the second quarter. We're fortunate to have a broad product portfolio. During the third quarter, we saw strength in our equity business, our higher rate per contract metals, and agricultural products delivered volume growth in Q3 and FX volume recovered, averaging 100,000 contracts per day, higher in Q3 than in Q2. Our market data business during the quarter had exceptional results with revenue of $139 million, the highest quarter in our history. We continue to launch innovative new products, and we have prepared for the cutover of BrokerTec onto Globex later this quarter. We remain committed to achieving capital and operational efficiencies for our clients. Clearly, the lack of volatility is impacting two of our largest asset classes, rates and energy. That is the current reality but not a permanent one. We have intensified our efforts on the expense side, which is something we can control. As John will discuss in a moment, we are reducing our 2020 expense guidance by $70 million from the initial guidance we provided in February. Realizing we are in a tough environment, we also plan to deliver very strong expense management going into 2021. With that short intro, let me turn the call over to John to talk a little bit about the financial results.

Thank you, Terry. With our strong expense discipline and the remote working environment, we finished the third quarter with adjusted operating expenses excluding license fees of $386 million, down 6% compared to the same period last year, and down 5.5% year-to-date. We are extremely focused on actively managing our costs as Terry mentioned. This expense level reflects the entire company effort to ensure that we are spending as efficiently as possible in the face of a tough operating environment. Our adjusted diluted EPS for the quarter is $1.38 and is $5.34 through three quarters which is up slightly from last year. Based on our outlook for the rest of the year, our guidance for adjusted operating expenses for 2020 excluding license fees has been reduced to $1.575 billion, down from $1.645 billion, which is the midpoint of our initial guidance at the start of the year, and down $20 million from our full year estimate we updated last quarter. Finally, we're beginning our budgeting process for 2021, and we expect the intense expense focus to carry over into next year. We recently let our employees know that we are deferring promotions for now, freezing wages going into next year, and we are looking at other opportunities to reduce discretionary spending. With that short summary, we'd like to open up the call for your questions. Based on the number of analysts covering us, please limit yourself to one question, and then feel free to jump back into the queue. Thank you.

Thank you. Our first question will come from Rich Repetto with Piper Sandler.

Good morning, Terry and John. I hope everyone is doing well. You mentioned the low interest rate environment, but there's also the migration cutover in the fourth quarter. Terry, aside from the expected savings, I'm curious about any anticipated behavioral changes. Do you have a clearer sense of the margin savings, and might we see shifts in behavior as a result? Additionally, I know the SEC has introduced new regulations regarding treasury trading platforms, recognizing them as ATS. Will this affect BrokerTec and the cutover?

Yes, thank you Rich, and I hope you and your family are well. I'm going to ask John to come up. But before I do that, I'll make a few remarks as it relates to what I perceive as potential behavior changes as the platform comes on to Globex. I am, like everybody around this organization, very excited about having BrokerTec onto the Globex platform to deliver the efficiencies that we've talked about when we first made the announcement of the transaction, I don't think you can underestimate the value of cash and futures on a single platform. So we really are against the liquid platform like futures, because we've never seen it before. So even though the rates, as we've discussed, are in a very disappointing place as far as the Fed policies go, it doesn't mean that people will stop managing their rates, we're still continuing to see a tremendous amount of issuance going, especially into the long end of the marketplace, we're going to see that. And we are excited by the BrokerTec integration onto that. So the behavior, I've heard a lot of positive things from the client base as how they're looking to manage risks, as it relates to the other questions around the SEC, and others that you asked, I’ll ask John to make a comment. But behaviorally, I think that the participants are excited about having this single point of contact to manage that risk.

Terry, this is Sean jumping in. Can you hear me? Yes. Yes, go ahead. Yes, so I'll jump right in then in. In terms of the migration to Globex. I'm very excited about the Globex technology, customers are very excited about the Globex technology and the significant increase in determinism that it offers to our client base. In addition to that, I'm very excited about the functionality that we're going to have available to us on Globex for BrokerTec cash markets that wasn't available previously on the previous technology. In particular, I'm very excited, we do plan on launching, shortly after we migrate BrokerTec to Globex, we will launch something called RV or Relative Value trading. This, for the first time, will allow Curve order types. It will allow you to trade the spread between different securities. So simultaneously buying and selling different securities such as two-5s, five-tens, tens-bonds. By doing that, actually, there is a number of different values that will be added to the market first. You'll no longer have to leg those spread trades. We believe that 10% to 15% of the Treasury market is probably done in curve trades. Although today on BrokerTec, they are done as legged individual trades. So first, you'll eliminate that legging risk. Secondly, by putting in a spread order type, we're going to have that spread order type at a much tighter minimum price increments than outright contracts. Third, we're going to use implied functionality on Globex, that has been extremely successful in our Eurodollar futures for example, where when you have an outright order, let's say two year notes, and you've got a spread order in twos versus fives that then implies an outright order in five, five year notes. So we're very excited about it, reducing risk in the trade, lowering the cost of the trade and enhancing the overall liquidity of the platform. So we are very excited about that. I might mention a couple of other things that we're investing at the same time. Now another platform we are investing in the EBS side is something we call QDM 2.0 or Quote Driven Markets to 2.0. This is a brand new technology, state of the art technology that will allow us to have much faster round trip times and much better technology overall, for the bilaterally traded foreign exchange market. So we're equally excited about that. We do expect that to be fully rolled out sometime next year, we have begun rolling it out now. Last maybe I'll mention before stopping. We're also very excited about new analytics that we are able to deliver to clients having both the cash and futures platforms that Terry mentioned earlier. So next week, we're going to be launching a new tool on our EBS Quant Analytics platform. EBS Quant Analytics is a total cost to trade or a transaction cost analysis for the foreign exchange market. It currently allows you to look at the bid-offer spreads and the depth of book in the bilaterally traded market on EBS that we're using your current chosen liquidity providers, it allows you to look at all the other liquidity providers that you are not currently using, it also allows you to look at the central limit order book. So we're in the process of adding futures to that analytical tool. In particular, we're going to be adding something called market profile. So this will show the great value of having both the futures liquidity pool and the cash liquidity pool. And it will show you the advantages of and really the need for anyone who transacts globally to trade in both liquidity pools in order to minimize the overall cost. So we're very excited about all of the technology investments that we're making and the growth that should provide the platform.

Thanks, Sean. Rich, I hope that provides some insight into our thoughts on the migration, the cutover, and the behavioral issues. I believe your other question was regarding the SEC. Sean, did you address that?

Yeah, I apologize. In terms of the SEC, the new regulations will in terms of Reg ATS on cash mortgage platforms, we already had adhered to most of the regulations. There are a number of platforms that do not. So while there are exemptions for U.S. Treasuries, certain exemptions under SEC rules for U.S. Treasury platforms, since historically, BrokerTec traded Canadian government bonds as well as mortgages. NEX and BrokerTec did not take advantage of those exemptions. So there may be some new adherence that is required. BrokerTec generally already adheres to the rules that we expect to be required.

Thanks, Sean.

Thank you. Thank you very much.

Thanks Rich. Appreciate it.

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

Thanks. Good morning. My question is on market data; obviously a good quarter you highlighted subscriber growth and kind of some of the demand trends. Can you talk about the type of customer that the incremental subscriber here and maybe the momentum or outlook for this business as we think about, heading into next year 4Q and into next year, please?

Sure, thanks for the question. Yes, we had a great quarter in Q3 revenue up to $139 million. And that was the majority of that was driven by a higher subscriber count for that real-time data. And so, what we're seeing there is that as many firms are continuing to be in a work-from-home environment, it is necessitating additional access to our real-time data. We're also seeing good demand, though for data being used in automated trading solutions, as well as more usage of CME data into the inputs into other financial products and services. So I think it's largely driven by this work-from-home environment but still continues to be strong. I think as we look forward, we are definitely focused on integrating the data that came over from NEX as well. We're continuing to build out our cloud-based distribution capabilities. We talked last quarter about CME Smart Stream. And we've been pleasantly surprised there. I would say about the interest from customers for that has exceeded our expectations. And I think it's about the scalability of putting data into the cloud; it being much easier for customers to access. And so we continue to have a good pipeline of clients coming into that. And we're also continuing to work on strengthening our market data policies and pricing, and also the enforcement related to those activities. And lastly, working on our benchmark business and that includes our participation in the ARC SOFR term rate RFP that's due later this month.

Okay. Thank you.

Thank you. Our next question comes from Alex Kramm with UBS.

Good morning. I have a quick question regarding expenses. The updated guidance seems to indicate a potential increase in the fourth quarter related to seasonality. Additionally, as we look ahead to 2021, can you remind us how much cost savings you experienced this year due to COVID, such as reduced travel and entertainment expenses, and what you expect to return next year? The timing is uncertain, but how should we consider the savings that won't occur next year because of COVID?

Hey thanks Alex, this is John, jumping in. Yes, Q4 has a historically higher level of spending. Marketing spend, some of which is contractual has been deferred from the start of the year and is picked up in Q3, and we anticipated increased spend in Q4, but still at a significantly lower level than the annual spend last year. We also anticipate additional expenses associated with systems being put into production associated with the migration on the Globex and with the data center consolidation efforts and the build-out of our New York, New Jersey data center. So based on the current forecast, I would expect to see depreciation and the other cost line as the biggest changes from Q3. However, we will still continue to look for additional synergies and cost reductions throughout the Q4. In terms of next year, it's a bit early in the process. And we're in the budget development process now. But the entire organization has done a tremendous job over the years in managing our costs, and we expect to do the same next year. As I mentioned in our prepared remarks, we've already taken action to manage our expense growth in 2021. Our objective is to be diligent in managing our costs but to be flexible should the environment change and opportunities present themselves.

Let me just add to what John said. As you ask about COVID, and what do you think, how much do we save for 2020 through COVID? And what do we think 2021 will look like? I think that is still to be decided, because we're only one side of that trade. We can't just be sending people all over the country or the world if other people are not receiving them. So it will all depend on jurisdictions abroad and here in the U.S. about how meetings are to be taken place. So I am anticipating our travel schedule will be light again in 2021. And I'm going to encourage more people to do things from Zoom to make sure that we can realize those cost savings. So I can't give you an exact number and we are evaluating it now. But I do think it's important to realize that we do need to be in front of some people. There are others we don't. So we will make sure that we achieve those savings as it relates to the travel.

Sounds good, thanks, guys.

Thank you.

Thank you. Our next question comes from Jeremy Campbell with Barclays.

Hey guys, thanks for taking the question. Just wondering about that new water contract with NASDAQ. You guys have said to go live in December. Just wondering, did this new product kind of bubble up from potential users? Or are these potential future users a little different from your current user base, just kind of wondering if this could be the start of a user base expansion and/or product development around other natural resources or renewables going forward?

Sean, you want to talk a little bit about the agreement with NASDAQ kind of the water futures contract?

Sure. We were very excited; obviously, to extend the license with NASDAQ last year and the growth in NASDAQ futures have been a very big success this year. In addition to that, and as a part of that contract, we have access to other indices that they offer and we extended it out to the Veles Water Index. We are excited about growing the customer base. We do believe that this will have an interest by large industrial users, so manufacturers as well as farmers. Obviously the farmers already are customers of our products. Nonetheless, we do believe that municipalities, farmers, and industrial firms will be, in some cases new customers for these products. So, we are excited about it in terms of the product launch itself, innovative new products. But yes, it could lead to an expansion and should lead to an expansion of our customers. I don't know if Julie Winkler would like to comment on it at all?

Yes, Sean, Julie will and I will as well. Go ahead, Julie.

I think it's a good point. I think, in addition, right to the water contract, this fits within this broader context of ESG products. And the philosophy we're working with our clients around on that is that there's a suite of products that are completely new that Sean just talked about that are innovative, and they will help customers and their firms meet their very aggressive carbon goals over the longer term, while we have another set of initiatives to continue to modify, and make enhancements to our existing contracts, which may be things like certificates or ESG wrappers. And so we've got a pretty robust program in place doing product development around ESG. Since from the broader scope of things, ESG investment is really picking up. At the start of 2020, it was virtually the only class of funds that we've seen investment in flow. And so it's a major topic of conversation with our clients, primarily driven, I would say, in Europe, but increasingly in the U.S. as well as APAC. So we've got existing asset managers, banks, hedge funds, all showing a lot of strong interest, which is why you're starting to see those products rollout from CME Group. The cornerstone of that is certainly the S&P 500 contract that is going to be the foundation of what we build everything around. And again, this is client driven and certainly investment driven, we do believe that will help attract new customers.

I've been around for a long time, and we've consistently heard inquiries about the lack of a Water Futures contract. Until recently, there wasn't a significant reason to create one. However, with the developments discussed by Julie regarding the ESG program, managing water risk is becoming increasingly important. We are thrilled about our partnership with NASDAQ to launch this contract. Timing is crucial, and we believe this is an opportune moment due to the factors Julie mentioned. Considering the current state of the planet, where 80% of Earth is water and much of it is undrinkable, it's clear we face a pressing environmental challenge. There will be a need to manage this risk, and we see ourselves as the leading platform to address it. We are eager to collaborate with NASDAQ and the companies mentioned by Julie to bring essential risk management solutions to something vital for everyone.

Perfect. Thanks, guys.

Thank you. Our next question comes from Brian Bedell with Deutsche Bank.

Great, thanks. Good morning, folks. Just wanted to go back to the integration of BrokerTec to Globex platform. Just on both from John, if you can remind us of the cost savings that we'd expect and the 1Q 2021 run rate versus 4Q 2020 or even 3Q 2020 from that integration. And then on the revenue side, basically a big initiative of this has been looking at potential revenue synergies. And Sean, you talked about the value curve. Any way to kind of size, you know, what potential increase in interest rate volumes you think you might be able to get over the next say a year from having this relative value capability launched?

Yes, sure. Thanks. I'll take the first part and then toss it to Sean on the revenue question. We're very pleased with the progress we're making with the integration of the business on the Globex and our synergy capture. As a reminder, we overachieved our run rate energy capture last year when we targeted $50 million and achieved $64 million. We're on track with the achievement of our expense synergies, we are targeting $110 million run rate synergies by the end of 2020, so a $46 million increase in our run rate synergies. And also, as we mentioned previously, we anticipate exceeding our 2020 realized synergies from an anticipated $15 million to $25 million. So, ended the year last year at $64 million, end the year this year at $110 million, so a $46 million increase in terms of what we realized in our income statement. We targeted $15 million, we're going to achieve $25 million. So real pleased with that and it's been an entire Company effort. And with that, I'll turn it over to Sean to talk about the revenue side.

Thanks very much. In terms of the revenues, I'm not going to give any specific guidance regarding revenues. But I'm very excited about several different initiatives that we have available to us with the migration of the cash markets over to Globex as well as combining the advantages of having both the derivatives and cash markets under one roof. We are making several adjustments to the offering. First of all, we got the new technology, greater determinism, and new trade types that will be available on that new technology, which we're very excited about. We're going to be offering new analytical tools, which will show the benefits of trading both cash markets and derivatives markets. And then we're adjusting some of the existing products in order to make them more attractive, all in regards to creating greater efficiencies. At the same time, we're also working closely with the DTCC in order to bring to the market further down the road, increased or enhanced portfolio margining or cross-margining between futures and cash products. I've already spoken about the new trade type, the new RV trade type that we'll be launching shortly after we migrate to Globex. So we are very excited about that. I did mention earlier, as well, we are launching next week new analytical tool that will allow participants on the EBS analytics or quantitative analytics to have synchronized cash and futures data for the foreign exchange market showing type-of-book, depth-of-book and really guiding participants as to the best liquidity pool to use in regards to executing whatever they need to execute in whatever size they need to execute, in whatever currency they need to execute. We're very excited about that. The EBS Quant Analytics, for background, has about 600 users globally, that 300 users log on each and every day. These are regional banks across the U.S. but in particular, Europe and Asia. And this for the first time will allow them to see the value quantitatively of using both sets of products in their risk management. So we're very excited about that in terms of our cross-sell. We will be you know next year launching similar analytics for the Treasury market. I'll also maybe mention two additional things that we will be doing. We're going to be lowering the minimum price increments on the three-year notes in the first quarter, as you know, that had a significant positive impact on tier notes when we did it both on the cash platform as well as on the futures platform now almost two years ago. So again, we're adjusting existing products or initiating new trade types. We're offering new analytics and new technology. I mentioned earlier that we are in the process of rolling out something called QDM 2.0 or Quote Driven Markets 2.0 for the EBS platform, and in particular for EBS direct. This will make it a state-of-the-art direct trading platform. And we do plan next year on rolling that out as well for U.S. Treasuries. So we're very excited across each of the different initiatives that we've got up using a plan, I guess, I'd say for the next three months, but also the next 12 months.

And just to be more precise on timing. The timing of the cutover on the platform integration in the fourth quarter, and then the timing of the RV curve launch in 1Q.

Yes, the RV will be available as soon as it's on the Globex platform, but we'll probably do a significant launch in Q1.

And just the timing of the cutover, is that November or December?

We are doing Europe in November and the U.S. in December. That's what's currently planned. Yes.

Got it...

That's what's currently planned. Yes.

Perfect. Thank you so much for all the great color.

And Brian, Julie is going to give you a little reference on the other part.

Yeah, so in Q3 just to give you guys a little bit of an update. It was another quarter where we completed more than 500 cross introductions. And so that has put us over that thousand cross introduction mark for the year. FX continues to be the franchise kind of front end center on those, but interest rates is second there. But what I wanted to talk a little bit about is how as we've been able to now convert many of those cross introductions into sales opportunities with 150 new sales opportunities in a pipeline, and also realizing some sales wins from that. And so that's when we actually see and have proof that our clients have started to trade those new products and those services. So some few specific examples to your question as we've been able to bring a repo trading desk. So those are legacy BrokerTec clients onto our CME direct platform. And there they are beginning to trade; our listed interest rate futures and options franchise. Another relevant example is cross selling across the number of customers that were legacy BrokerTec clients and introducing them to Silver futures. And so these are the types of things that we can do as a combined sales organization in conjunction with the technology changes and migrations that are happening behind the scenes that we believe will be fruitful and continue to bring new revenue into the exchange.

Okay. That’s helpful. Thank you.

Thank you. Our next question comes from Mike Carrier with Bank of America.

Hi, good morning. Thanks for taking the question. Given just the muted backdrop for the industry in the energy complex with the Fed on hold and the COVID situation, just curious if you're starting to see more interest in certain categories given some hints of inflation. And then based on past periods, what may be some of the early signs of seeing demand picking up? Thanks.

John or Derek?

Yes...

Hang on, John. Let Derek go first, and then I’m going to make a comment or two and then we’ll give it to you.

Yes, sure. Just to be clear, Mike we're looking for a kind of catalyst of demand side of the equation in some of these markets.

Yes, and most of them we’ve seen the pressure with the fed on hold, but I'm just saying you kind of see some hints of inflation and how that could potentially maybe spur more activity, whether it's on interest rates or energy, just because those are typically correlated.

I would like to highlight two main points. First, regarding the metal market, the gold sector has been one of our fastest growing areas this year. The global growth of this product has significantly been driven by demand from Asia. This trend is largely attributed to gold and precious metal demand being viewed as a safe store of value, especially during times of inflation, which has been underscored by the Fed's comments opening the door to inflation concerns. As a result, we have seen a buildup in demand throughout 2000, reflecting a global trend for us. Our summary sheet indicates a range of records reached during the quarter, and in a relatively quiet Q3, we achieved several all-time highs in precious metals, especially gold and silver. The increase in demand has been robust as prices have risen, with strong participation from commercial, buy-side, retail, and sell-side customers. We are particularly excited about the focus on precious metals. Nearly 11 months ago, we launched a system through the clearinghouse allowing customers to use gold collateral or gold warrants as collateral. This initiative has led to $3 billion in capital efficiencies, enabling customers to utilize gold loans to secure assets on their balance sheets for trading across all our asset classes. We are creating a monetizable set of assets for our customers, which provides $3 billion of effective liquidity applicable across various asset classes. This is a significant development in ensuring we actively benefit our clients in an uncertain market while fostering growth in different segments of our business. With that, I will hand it over to Sean or Terry.

Yes, hold on Sean. Mike let me just make a couple of comments about the rate business because I do think they're important. And I think a lot of us forget, because of the policies that have gone on over the last seven, eight months during this pandemic. But if you look back just a year or so ago, we had a 10-year trading over 3% on the yield. The markets have moved dramatically during this pandemic. And I think people lose sight of how quickly things can change. I'm not saying they're going up, but I think you have to look at a few of the catalysts that are in front of us. One of the catalysts that I see in front of us and I'm not predicting markets, but I will tell you is the possibility of this when we're looking at November 3, and when we do not have a President elect come November 3, for a projected period of time. The government still needs to go through its processes of options and things of that of treasuries. The question will be, what will people be willing to pay for those options, not knowing what the makeup of our government could potentially look like. So you could see some kind of a lot of uncertainty around the marketplace. I'm not just reflecting on the price of equities, I'm looking at how people perceive the price of debt coming out around from around the world out of the United States, if we go into this contested election process. The 10 years trading roughly, the yield on the 10 years, roughly three quarters of a percent today. And so it's down dramatically just over 14, 16 months ago. So I do think on the rate story, there is something here that people need to be cautious about. And I'm not predicting that it's going to change dramatically. But I do think there's factors in the market that could make a swing. So those are the things that I'm looking at. And we are managing from a business perspective.

Great, thanks a lot.

So Terry, would you like me to jump in and share some positive signs that I'm noticing?

Yes, go ahead real quick.

Yes, so I think we already know, massive increase in Treasury issuance this year by the U.S. Treasury relative to the increased funding needs in the 3 trillion deficit this year, record all-time, records deficit, all-time records to debt. And we're approaching all-time record debt to GDP, so massive increases. In terms of the Federal Reserve and its long-term intent to increase inflation we are starting to see green shoots further out the curve. So specifically, to your question, if you look at the month of October, it is at the year-over-year growth month-to-date. The ultra 10 year is actually up 3% in terms of its average daily volume. The bond futures are up 10% in terms of their average daily volume, and the ultra-bond is up 20% in terms of its average daily volume. So we are starting to see as we would expect further up the curve, increases in activity relative to this environment that should, over time, move down the curve. Thanks.

Thanks, John.

Thanks Mike. Hopefully, that was helpful.

Thank you. Our next question comes from Chris Allen with Compass Point.

Morning, guys. I wanted to revisit expenses, specifically the guidance for fourth quarter, it implies about a 40 million for the full year, I'm sorry, it implies about a 40 million sequential increase in the fourth quarter. Normally, you see a bump in marketing and other below that's driven by your conference, which is not occurring. So is there any granularity around that increase? And then on the build-out of data centers and trading platforms, just kind of wondering, what's one-time in nature? What's going to be into the run rate for next year? And how much that's going to be offset by some of the savings as you shut down some of the BrokerTec and EBS over time.

Sure, Chris, this is John. I'll jump in on that. Yes. So as I mentioned previously, what we've seen is a push-out of our marketing spend from the first two quarters, and part of the third quarter into the back half of the third quarter and into the fourth quarter. And some of that marketing spend is contractual in nature. So you are correct that our customer-facing events that we normally have in the fourth quarter have been postponed, but some of that spend that we have in marketing is contractual and got pushed into the later half of the year. Also, as we migrate onto Globex and as we build out our data center, we are expecting that goes into work-in-process, and then when it gets turned on, and it goes into depreciation. So, where you're going to see the increase in spend relative to those items are in depreciation and in our technology expense, as we have to pay maintenance on some of the third-party software and on the equipment. So that's where you're going to see the costs go up into next year. Now what comes out is going to be the synergies that we have targeted for 2021. And we've got the majority of the synergies in terms of run rate synergies impacting next year. So we expect to end the year with run rate synergies of $110 million and we expect to end next year with $200 million in runway synergy, so our cost base would go down by that additional $90 million. Now the amount that we would realize in 2021, we're still in the process of determining through our budgeting process. But we have a very, very strong focus on our expenses going into next year. And we'll be looking to accelerate synergy capture, where we can in 2021. So that's what you should expect, Chris?

Just a quick follow up, I mean, how much do you usually see from promotions and raises in terms of impact in the comp line?

In terms of, if you take a look at our employees that we have now, and the amount of employees that have been notified that they will not be, that they will be leaving by the end of the year, I would expect that to be in the range of $20 million to $25 million of increased costs that we are avoiding next year.

Thanks guys.

Okay.

Thank you. Our next question comes from Owen Lau with Oppenheimer.

Thank you. Good morning. And thank you for taking my questions. Now could you please comment a bit on your conversation with your clients about the VOLQ futures? Is there any demand for other derivatives products around VOLQ in the future? And then quickly on the sales force, the client engagement has increased quite dramatically. What does it take to monetize that engagement and drive higher interest in trading volume? Thank you.

So Owen, this is Terry. Let me quickly comment on the VOLQ futures. That contract was just listed in partnership with NASDAQ, and we are excited about its potential. However, it’s still early in the launch to predict the success of that contract. We all know it can take time for certain contracts to develop. Timing is a significant factor in this business, making it challenging to draw any conclusions about the VOLQ futures at this stage. Sean can provide you with more details if needed, but there is considerable client interest from both the buy and sell sides in how they can utilize that product to offset or reduce some inefficiencies related to our other equity products. This is one of the advantages of our current suite of equity products, as it may lead to more savings as open interest begins to grow. However, until that happens, it’s difficult to reach any conclusions about the product right now. What was the second part of your question?

It was about the sales force; I think your client engagement has increased by over 100%. What does it take to monetize that engagement and drive higher open interest and trading party?

Yeah, we addressed the VOLQ question. Now let’s focus on the sales force.

Yes, thank you for the question, Owen. We had a busy Q3, as you mentioned. Client engagement was up about 145% versus the same period last year. And so what we're seeing previous to other quarters and we've still been in this work from home environment is that, that activity is being driven by increased client calls, emails, these virtual meetings, the cross-sell introductions that I talked about earlier. What we've been quite busy on in Q3 is actually supporting VOLQ and a number of other new products. And so, we've executed a number of high-profile sales campaigns, the Micro E-mini options launch, the three-year treasuries, Brazilian Soybeans, as well as we've had hundreds of client calls to prepare for the successful SOFR Basis Swap auction that we had earlier this month. So I think in terms of monetizing that, clients continue to point out to us just the attentiveness, responsiveness that the team has shown throughout this environment and a lot of these ongoing initiatives are there to deliver not just innovative new products but also efficiencies. And the other number I just want to point to is, this is an environment where people are capital constrained. And so, when you look at what we've been able to deliver for our clients in terms of portfolio margining of swaps and futures, to-date already in 2020, we've saved our clients $5.4 billion on average and that's up from $4.5 billion last year. And so as we continue to deliver those efficiencies and help them manage their risk, we believe that's going to be quite helpful in helping them and us navigate this uncertainty.

That's helpful. Thank you very much.

Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Hey, everybody. Good morning. I was hoping we could talk a little bit about dynamics in the WTI markets and recently softer oil trends. And what really I'm trying to get to, I guess, how much of that is related, you think to sort of lower volatility, which is obviously outside of your control versus maybe some of the lower production we're seeing in the U.S. So any way to kind of help us frame volumes kind of directly related to U.S. producers and bigger picture, if we get a blue sweep election, and that results in any sort of incremental curbs on U.S. oil production? How does that impact seeing this franchise, I understand the difficulties that are putting numbers around that, but just a framework of kind of how oil production translates to oil volumes to CME would be helpful? Thanks.

Hey Alex, this is Derek. That's a great question. For the last four and a half months, the oil market has been trying to find a short-term balance between supply and demand. In August, prices started to rise to the $41, $42, $43 range due to OPEC cuts, a decrease in oil stocks both in Cushing and globally, and a weakening dollar. However, we are still in a phase of demand destruction because of COVID. Whether we look at miles driven or jet fuel demand, which is still down by 75%, we aren't seeing a return to normal economic activity. Travel is still low, and we’re likely representative of many firms. The slight increases in pricing are being counterbalanced by weak demand. Currently, the market is trading within a $4 range for global crude, applicable to WTI, Brent, and Murban in the Middle East. The forward curve is flat, and the spread between WTI and Brent is stable at $2. In terms of global demand, it has broad effects on oil, not just in the U.S. We're seeing a reduction in U.S. production from a peak of 13 million barrels a day to about 10.5 million or 11 million. Exports haven’t decreased significantly, remaining around 2.5 to 3 million barrels a day, which has helped support our domestic production. As we see this global slowdown in demand, it affects all markets. The key question is when demand will pick up and how it will impact our volumes. Typically, when markets start trading sideways, we see a decrease in volume and slight underperformance in WTI, but we view this as temporary. As demand returns, we anticipate a rise in global volumes. However, a notable point in the energy market is natural gas. While it negatively impacts crude oil, our portfolio is strong in that area. Our high RPC business is performing well, with $1.15 RPC in futures and $1.52 RPC in options. This year, our Henry Hub futures business has grown by 26%, and our options business by 56%. This growth underscores Henry Hub's status as a global benchmark, as our non-U.S. volume participation has risen by 82%. Particularly, in Asia, our Henry Hub futures market saw 116% growth, and Europe is up by 69%. While we see crude oil trading sideways, our high RPC natural gas business is expanding and is expected to continue doing so. Regarding regulation, while there may be some pressure on fossil fuel businesses, natural gas’s role as a cleaner energy option continues to grow, and we believe we are well-positioned in that market, controlling 82% of it. With that, I'll hand it over to Terry.

Let me add a few points, particularly regarding a potential blue sweep, as I find it quite interesting. First, let's recall who lifted the ban on oil exports. It was the administration of President Barack Obama, a Democratic administration that aimed to support the United States as an oil exporter. The current political rhetoric often relates to environmental issues, and the Democratic nominee seems to be facing challenges reconciling his past statements on fracking with his current stance, particularly concerning some of the Eastern seaboard states. That doesn't surprise me at all. I anticipate looking for more straightforward opportunities, like taxes, which could be an area of focus, though it's still uncertain whether it will be corporate, personal, or both. Addressing energy production in the same way the Obama Administration did by lifting the oil export ban seems ambitious. I'm sure that some Republicans will remind their Democratic colleagues about the significance of this issue for the safety and integrity of the United States. However, political dynamics often shift in Washington, so I wouldn't place too much emphasis on that either. Much of what we're hearing now seems to be political speech. The reality is that getting things done is challenging; we've only seen three significant pieces of legislation over the last 19 years: Sarbanes-Oxley, Dodd-Frank, and the ACA. Everything else has been a series of continuing resolutions. The lifting of the oil ban also came through a continuing resolution meant to keep the government functioning. There will certainly be plenty of arguments for energy production in the United States against Democratic opposition. That said, factors like ESG considerations that Julie mentioned will still be crucial, and actions will continue to take place. In the short term, however, I think it will be tough to curtail oil production in the United States until we have a feasible alternative available for broader use. It's not practical to have only 2% of vehicles be electric while the rest lack access to that technology. The political conversation is intriguing, but I wouldn't rely on significant changes over the next 12 to 24 months.

Great. Thanks very much.

Thank you.

Thank you. Our next question comes from Ken Worthington with JPMorgan.

Hi, good morning. Thank you for taking my questions. The Democrats are proposing changes to the tax code, including the doubling of the dividend tax rate for the wealthy, which according to the Federal Reserve, around about 50% of stocks and mutual funds in the U.S. Where the dividend tax to be doubled as proposed, how would that impact your thinking on the payout of nearly all your excess cash to shareholders in the form of a dividend? And does your capital management strategy make as much sense in a much higher dividend tax environment? And then I guess related, in 2012 you brought the payment of your annual recurring dividend to the fourth quarter when there were concerns over changes to the tax code. If the tax outlook changes after elections next week, would you again consider pulling forward that payment into the fourth quarter?

So Ken, it's Terry Duffy. Your question is quite speculative since no one really knows. Regarding the possibility of taxing dividends, I believe there will be other avenues for tax incentives. Dividend-paying companies are generally held by individuals who supported those in office. They are not the volatile stocks that some may think will generate significant revenue. I find it hard to believe that a proposal to double the dividend tax will move forward. It would be surprising if that happened. Our capital return policy, however, will be adaptable to ensure we return capital to shareholders in the most tax-efficient manner that favors their bottom line. While we've discussed share repurchase programs before, I'm not indicating we're pursuing that path right now since we don't currently have one in place. That doesn’t mean we can’t explore many other options for returning capital. However, we won't consider capital returns at the highest dividend tax rates that may emerge. I still think it would be quite challenging for Democrats to impose such a tax on dividends, and I don't see it happening since it wouldn't impact the companies they're aiming to target.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Simon Clinch with Atlantic Equities.

Hi, guys, thanks for taking my question. I was wondering if you could just flush out with the collateral savings that like one 4 million, I think it is that you've saved your clients this year? Could you give us a sense of how your client redeploy that capital? How that might have happened historically, and how you'd expect that going forwards in terms of spreading that across into other areas of your business?

Okay. Thank you for that, Simon. I'll ask maybe Sean, and then Julie to comment a little bit. And John also if you'd like. John you’d like to talk about that?

It's challenging to specify exactly how much is reinvested into our marketplace. However, we believe it enhances our platform's attractiveness compared to alternatives. We're particularly excited to begin testing portfolio margining of Eurodollar options against interest rate swaps this week. This introduces a new margining opportunity that we are enthusiastic about, in addition to the existing margining between interest rate futures and swaps. We've observed significant growth, both in terms of savings and the number of participants taking advantage of it. When we present new portfolio margining opportunities, our growth relative to other platforms generally increases. This is not the only area where we're seeking efficiencies. For instance, just over a year ago, we launched compression for our listed equity options business. I'm pleased to report that we've conducted 27 compression runs since then, resulting in a reduction of outstanding contracts by 8.3 million, thereby enhancing efficiencies for our customers. We are continuously striving to create new efficiencies across all our sectors, including equity and rates. In our foreign exchange business, we've significantly decreased the minimum price increments for foreign exchange futures, which reduces costs for participants when executing trades. Recently, we achieved an all-time low open interest record in our Euro USD futures and saw record loans held by asset managers in our FX futures, as reported by the CFTC. We are thrilled about the growth of these products as a result of these efficiencies. While we see growth when we provide such efficiencies, it’s difficult to precisely quantify the impact of portfolio margining on revenues. Julie, would you like to add anything?

So, on that point, I think what is really hard to do is, it's hard for us to quantify, for sure. But what we have seen historically and the multiple billions that Julie referenced earlier, actually it's a little bit north of the $5.4 billion because there's other part in the swaps market that has achieved benefits as well. We have traditionally seen them deploy a lot of that capital into managing risk into a whole breadth of asset classes that we have here at CME. And again, that's a historical perspective but it's really hard for us to quantify on a day-to-day basis of how they're deploying that capital. But that's what historically we've seen.

Great, thanks. I would like to follow up with a housekeeping question. When analyzing revenue per contracts across your different segments, it seems that most have decreased sequentially. I understand there are many factors to consider. Could you provide some insight on how to approach revenue per contract moving forward, especially regarding the impact of shifting interest rates on longer-term contracts and the influence of E-mini and Micro E-mini futures on these figures?

Yeah, thanks. And before John does that, would you like to share something? Okay, John, go ahead.

Thank you, Simon. That's a great question. The rate per contract reflects a variety of factors. Generally, face rates do not decline, so it's really about the mix of products, customers, and venues. There are many different combinations at play. Our business thrives because we offer a wide range of products and cater to diverse customer types. As market dynamics shift, different products attract various customers, which is reflected in our rate per contract, primarily driven by these mixes. Regarding your two specific questions: comparing the long end of the curve to the short end, the short end, specifically Eurodollars, tends to be about 14% lower than the average interest rates, while treasury rates are typically higher than average in the interest rate category. Therefore, we see a higher RPC on the longer end and less on the shorter end. In terms of micros, they have achieved significant success mainly within our equity and metals asset classes. In equities, sequentially, they grew to nearly 2 million contracts a day for the quarter, accounting for about 36% of the total equity volume in Q3, up from 34% in Q2. Additionally, the RPC for micros increased from $0.125 in Q2 to $0.1302 in Q3. Particularly for equities, alongside the performance of micros, a higher proportion of member trading activity and a lower share of trading activity with a higher RPC also contributed. I want to highlight something Sean mentioned regarding the impact on NASDAQ trading, which has positively influenced our equity RPC, as NASDAQ trading rose about 24% sequentially, and the NASDAQ contract has a higher blended RPC. Focusing on RPC in equities: as previously mentioned, the micros RPC reached $0.1302 in Q3, up from $0.078 in Q3 last year. Excluding micros, equity RPC increased to $74.09 in Q3 compared to $71.02 in the same period last year. Hence, both micros and mini RPCs have shown growth compared to last year, demonstrating that it’s a mixed scenario. In metals, we see a similar trend in RPC. Metals were our strongest asset class sequentially at CME Group, with a 59% increase. A key consideration for analyzing RPC has been the rise in micro activity, which has excelled in metals, reaching nearly 160,000 contracts a day, growing over 110% sequentially. Micros represented about 19% of total volume this quarter, compared to 14% in Q2. The Micro Gold RPC for this quarter is approximately $0.32, rising from $0.27 in Q3 last year. Thus, this has significantly influenced the mix shifts in metals. We are very pleased with the success of our micros, and I reiterate that our RPCs primarily reflect a mixed story.

Thanks, John.

Thank you. Our final question comes from Kyle Voigt with KBW.

Hey, thanks for squeezing me in at the end here. Just a question on pricing really quick. You made a number of pricing adjustments over the past several years in the futures business. But I also think in the past, you've stated that typically these pricing adjustments come during periods of volume growth. Just given the volume headwinds you're facing this year, I'm just wondering how you're thinking about pricing for futures more broadly and whether you still see the potential for pricing increases or adjustments in certain products as we head into next year.

Kyle, it's Terry and I'll let John comment as well. You're right that we aim to ensure a value-added proposition. Whenever we implement any tier or pricing changes, they are linked to our business. This does not limit us from capitalizing on price increases in other growing areas of our business. However, we remain very aware of the overall situation, and we always consider various factors when it comes to pricing, including market fundamentals both domestically and globally. We will maintain a firm stance on our pricing and what we believe is appropriate moving forward. It's a complicated process, and I won’t pretend that managing pricing is straightforward. Nevertheless, I've always believed in the importance of enhancing value. I communicate to my clients that we need to present a value-added proposal when adjusting pricing. The ongoing integration of BrokerTec and the upcoming EBS are examples of initiatives that enhance the client experience. We'll address pricing when the time comes, and we won't ignore it, but there are many factors to consider. John, would you like to add anything?

We invest significant time and effort into our pricing plans. As we go through the budgeting process, we take a close look at our pricing. It is essential for us to maintain a high level of activity on the platform at all times. This increased liquidity benefits us financially and is also very valuable to our customers. Therefore, we are very cautious when adjusting our pricing. We evaluate multiple factors to ensure we create a strong and effective marketplace for our clients while focusing on enhancing our liquidity.

Thank you very much.

Kyle, just to add to that without going into too much detail, we are currently experiencing one of the most unusual periods in our country's and the world's history over the past seven or eight months. Therefore, it is challenging to establish a pricing strategy that works during normal times. As we gradually move past this period, we are continuing to adapt, and we hope to see a positive shift in the performance of our business. Thanks, Kyle.

Thank you. That concludes today's teleconference. You may now disconnect.