Cme Group Inc. Q4 FY2020 Earnings Call

Good day, and welcome to the CME Group Fourth Quarter and Full-Year 2020 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. John Peschier. Please go ahead.

Good morning and thank you all for joining us today. I'm going to start with the safe harbor language. Then 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 session. 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 statements. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures. With that, I would like to turn the call over to Terry.

Thank you, John and thank you all for joining us this morning. Our comments will be brief in time so we can get to your questions. I hope you and your families are all staying safe and healthy. We released our executive summary this morning, which provided extensive details on the fourth quarter and 2020. As John said, I have John, Sean, Derek, Sunil and Julie Winkler with me this morning, and we look forward to addressing any questions that you may have. 2020 was a challenge with low volatility in several asset classes, including the front-end of the rates curve and in our WTI contract for much of the year. We did see some very encouraging signs with some of our higher rate per contract products. Also during 2020, metals had its fifth consecutive year of record annual volume and is off to a strong start in 2021. We saw very strong activity in our agricultural commodities in the fourth quarter and they continue to rise in the first month of this year, up 36% versus last year. Soybean futures had its second highest quarterly ADV, including record volume out of both Europe and Asia. After the extreme volatility of the first quarter of 2020 as the pandemic began, the total volume came in at 15.6 million contracts per day in the third quarter and jumped to 16.2 million contracts per day in Q4. During this entire time, we have remained heavily engaged with our global customers. During 2020, our volume from clients outside the United States grew by 7%, reflecting the global relevance of our markets. I am encouraged by the January 2021 volume, which came in at more than 19 million contracts per day. We are very pleased with the progress we made integrating the NEX business during 2020, including back-office migrations to support finance and HR systems and the building of an integrated global sales team. Last week, we announced that BrokerTec has migrated U.S. Treasuries benchmark trading and EU government bond and repo markets onto Globex. With BrokerTec's dealer-to-dealer platform now a fully integrated part of CME Globex, clients have an enhanced suite of government bond trading offerings across listed derivatives, cash and repo markets on a common platform allowing greater operational and technological efficiencies when managing risk across cash and futures. We remain excited about the migration of EBS onto Globex by year-end and the ability to provide further efficiencies to our global customers in the FX market. During 2020 and the first quarter of this year, we have continued to innovate with several new products. We will begin trading global emission offset contracts referred to as GEO futures on March 1, and we just launched our new Ether futures earlier this week. We continue to work closely with our global customer base on solutions to help them manage their risks. These new products build on the globally relevant products we have delivered recently including: SOFR futures, E-mini S&P ESG futures, the South American Soybean contract, Cobalt futures, options on our popular Bitcoin futures, and the popular micro products across several of our asset classes. With that, let me turn it over to John, who will discuss the financial results. John?

Thanks, Terry. Throughout 2020, we navigated the difficult operating environment, executed on the integration with NEX, launched new and innovative products and actively managed our expenses. For the year, we delivered $4.9 billion in revenue, up slightly from the prior year, and with a strong focus on expenses, we achieved $6.72 in adjusted diluted EPS. During the year, we announced our annual variable dividend of $2.50 per share, and we recently announced a regular dividend of $0.90 per share for the first quarter of 2021, a 6% increase compared to the first quarter last year. In terms of fourth quarter revenue, our average rate per contract across the product areas were fairly stable with our micro contracts continuing to perform well across several asset classes. Market data revenue was very strong with an all-time quarterly high of $140 million and was up over 7%, compared to Q4 last year. We were intensely focused on expense management throughout the year. At the beginning of 2020, we provided guidance for adjusted operating expenses, excluding license fees, of between $1.64 billion and $1.65 billion. For the year, we came in approximately $90 million below the midpoint of that range and $80 million below 2019 levels at $1.557 billion. In terms of synergies, we had initially targeted $110 million in run rate synergies by the end of 2020 related to the NEX acquisition. By year-end, we had exceeded that target and achieved a total of $140 million in synergies. This is net of the additional costs that we are carrying to run parallel infrastructures as we continue to work on the migrations to Globex. We remain committed to our target of $200 million of annual run rate synergies by the end of 2021. Turning to guidance, for 2021, we currently expect full-year adjusted operating expenses, excluding license fees, to increase slightly from the already low 2020 levels to $1.575 billion. For capital expenditures, excluding one-time integration costs and net of leasehold improvement allowances, we expect to be in the range of $180 million to $190 million. In addition, we expect our 2021 adjusted effective tax rate to be between 23.2% and 24.2%. Finally, we are very excited about the recently announced joint venture with IHS Markit and the opportunities that it will provide our clients and our shareholders. The JV will be a leader in trade processing and risk mitigation services that offers the combined clients complementary services across the global OTC marketplace in interest rate, FX, equity and credit asset classes. We don’t anticipate any material change to earnings as a result of the JV. We will provide more information when the transaction closes. 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. Operator Instructions. We’ll take our first question from Rich Repetto of Piper Sandler. Please go ahead. Your line is open.

Good morning Terry, good morning John and I hope everyone at CME is safe and healthy as well. Hopefully we’re seeing some light at the end of the tunnel here.

Thanks Rich.

Thank you. So, my question is on the expense side. John, just trying to understand, you know you gave out that, I believe was $35 million, you expect to have the P&L impact of the synergies in 2021, can you tell us what the P&L impact the actual realized synergies in 2020 were? And also, what you’re assuming for the COVID environment I guess, that expenses and sales and everything stay restrained or restricted about the full-year? So, those are the two questions. Thanks guys.

Great. Thanks Rich. Thank you very much. Yes, in terms of the synergies, we are anticipating achieving the $200 million run rate synergies by the end of this year. So, if you take a look at where we are at in terms of run rate synergies, we had originally targeted $50 million in the first year, we achieved $64 million. We had targeted $110 million by the end of this year and achieved $140 million; and we are planning on achieving the full $200 million by the end of this year. So, if you look at it on a year-by-year basis we overachieved in terms of run rate synergies by $14 million last year and overachieved by approximately $16 million this year in terms of run rate synergies. In terms of P&L, we anticipate our synergies being realized in our income statement in 2021 of $35 million and so that is what we expect to have in our P&L. This is being offset by additional costs that we anticipate having in terms of increased depreciation related to our migrations onto Globex. So, the way that works is that we do some programming that goes into work-in-process, and then it goes from work-in-process into production. And when it goes into production, then that's amortized over several years. We also are building out our data center in Disaster Recovery Center on the East Coast. So that's partially being offset by the synergy capture. And lastly, in terms of our impacts, we do anticipate having some improved environment in terms of operating environment towards the back half of this year, and we anticipate having about $20 million in additional costs that we didn't have this year that we are building into the back half of 2021, related primarily to travel, marketing, and events. So, that's the story for 2021.

Okay, thanks. Thanks very much, John.

Thanks, Rich.

We'll move on to our next question from Alex Kramm of UBS. Please go ahead. Your line is open.

Yeah. Good morning, everyone. Can you touch on real quick tech a little bit more now that the migration is complete, couple of things: one, what should we be expecting from this combination now to drive in terms of any sort of upside on either side? But then, I think Terry last quarter, you made a comment that, as you improve, kind of the offering to your clients, you know that obviously, you were not compensated for that. So, any details on any pricing changes you're contemplating or anything that should impact the financials more directly outside of more activity? Thank you.

Yeah. Let me go ahead and ask Sean to make some comments on that. And then the rest of course I might jump in as well Alex. So, thank you, Sean?

Yeah, thank you, Alex. And thank you, Terry. We are very excited about the migration of BrokerTec over to the Globex platform. I think I've spoken about before, but I’ll mention then now. We are very excited, particularly with the new technology of being able to offer new products and services, in particular, the new RV or relative value curve trading order type. So, we're broadly very excited about these curve trade spreads, very popular, especially in this market. And this new order type will allow you to reduce the risk of trading that order type by eliminating the need to leg transactions. One, two, we're going to reduce the minimum price increments, in the spreads relative to the outrights. And then three, we're going to have the CME Globex implied functionality, which means that when you have a spread order, let's say between two year notes, and five year notes, and you've got outright orders in two year notes, that then will imply related orders in five year notes. So we're very excited about the new RV technology, we're launching it in March. Shortly thereafter, we're also going to be reducing the minimum price increments on three year notes. We’ve got a total of seven different initiatives that we will be taking in order to make that platform more attractive relative to alternatives. And, you know, in terms of pricing, I guess I'm most focused on making sure that the platform is more valuable to our clients. And then we get more volume over our platform. And that's really our focus.

No. I think that answered. Alex, did that cover? I didn’t hear the other part of your question, if you have something on me?

No, I think you got both of it. Thank you.

Okay, great. Thanks, Alex.

We’ll now move on to our next question from Dan Fannon of Jefferies. Please go ahead. Your line is open.

Thanks. Good morning. So, market data was an area of strength in 2020. And I think in your prepared remarks you mentioned that the record – your sales pipeline as you kind of exiting the year. So, thinking – how could we think about growth in 2021, and potential pricing changes, as well as the demand side, which is about the build on the success you had this past year.

Thanks, Dan. Let me ask Julie Winkler, who runs that division to make some comments on market data. Julie?

Thanks for the question, Dan. Yeah, we did have a record year at data services, our revenue being up 5% year-on-year. And I think the work from home environment kind of further highlighted that need for real time data access, really across our global client base, as well as the need for historical data as customers evaluated the impacts of the volatile market conditions that we saw in Q2. We also made some investments in our business last year and so bringing that data business closer to our commercial capabilities. We established a data sales team. And we also supported a number of new products and services. And so that's where we really feel that continued investment certainly helped us to grow the data business and position it as we head into 2021. Those solid trends we continue to see in the professional subscriber device count was strong throughout the quarter. And with Q4, revenue was up 7%, compared to Q4 2019. So, I think it's a strong, definitely global demand, as well as trends on the drive data front that are really propelling the business. And this is just that longer-term trend that we've talked about on other calls, as customers use the technology and their trading strategies is increasing the need for our data through a number of these non-display use cases. So, we did have some minor fee adjustments that are being made in 2021 to really reflect how our customers are utilizing our data now, and also just the value of the data that we offer and the services that we have and how our market data customers are receiving and expecting to receive that data. So, there was a $5 increase to our real time data from $105 to $110 per DCM per month that goes into effect in April. And then we also had some pricing changes on the non-display and historical redistribution side. And those will kind of trickle in throughout the year, since there's certainly some licensing and implementation that will need to be done between ourselves and our customers. But we feel well that we're in a good position and as we onboard those customers that we're really going to be in a good position to continue to grow the business going forward.

Great, thank you.

Thank you.

We’ll now move on to our next question from Brian Bedell of Deutsche Bank. Please go ahead. Your line is open.

Great, thanks. Good morning, folks. Hope everyone is well as well. Questions on retail participation, obviously, we're seeing that increase in the market, especially in equities and options, but also in futures, you know Schwab talked about leveraging Ameritrade capabilities and futures to the Schwab client, maybe if you could just give us some perspective on into the portion of ADV or revenue that you think is coming from retail now, and some initiative where you can get might be going in 2021, an initiative that you're working on in terms of conversations with retail providers like online brokers and also, obviously, you've been developing the micro complex. Maybe if you can talk about other product extensions across the micro complex that could help that as well.

Thanks, Brian. And let me ask Julie to comment and then I would comment as well as it relates to what we think is going to go down and go forward basis. Maybe you can give an idea of some of the flows, Julie?

Yeah, sure. Thanks, Terry, and a lot of questions in there. So, I will start and then hand things back to Terry. So, you know, I really think and you mentioned that a couple of our broker partners in your question, and it's really because of that strong broker distribution network, the vast educational programs, and really the content that we support the diverse product mix that we were in a really good position to be able to take advantage of the increase in overall retail trading in 2020. We saw record levels of participation and revenue globally. And the number of retail traders that were active at CME Group last year increased over 50%. And so, the biggest gains were definitely on the equity index products side where, you know, the volatility there really led to a lot of increased trading opportunities. And we also saw great year-on-year gains in metals that were up over 20%, FX, as well as Ag. And that really speaks to, again, the diverse product mix and the fact that people are looking for different opportunities. We have been investing quite a bit in our sales and marketing staff overseas, both in APAC, and EMEA. And now they are playing also a large role as we've grown the business globally on the retail side. So, we saw both APAC and EMEA retail business was up double digits. Countries with strong growth continue to be Korea, Taiwan, and Singapore and then Germany and Switzerland in Europe. So, I think, the work from home environment has allowed the potential for even more retail customers to become active, and our digital outreach was also a real positive trend last year because we're able to just reach more retail and active traders than ever before. And so, the efforts through our education helped us reach over two and a half million new active individual traders throughout the broker partner digital events that we have that were focused specifically on CME Group products; the largest group in Asia. We had events where the number of events increased over 65% over 2019, so well over 400 events. And by going digital, we reached 15 times more active traders than we have in the past when more of those events were in person. And also, you know, we're seeing similar strong trends in North America where the firms there were growing their webinar output by 225%. So, we feel that this continued investment is leading us to have well-educated retail traders and that really helps position us for continued success. And with that, I'll maybe turn it over to Terry.

Thanks Julie. You answered a lot of the questions, let me just add a little bit. And I'm going to ask John to comment a little bit on the costs of some of these products too. It’s really hard for us to predict what we think 2021 future volumes are for any particular constituent of the market participant going forward. But it doesn't take the last several weeks for us to think about the growth of retail trading. So, I don't, that's not the reason why we talk about retail trading. As you know, we've been building on this business for a number of years. But it's becoming more and more clear that in my opinion that retail traders want to have to participate in all different forms of markets. We are looking at all different ways to allow them to come into our markets. As Julie referenced education is key though. You talked a little bit about the micros and the growth of them. We are looking at other ways to continually work with our partners to bring in more and more retail participants. It's just one of those things that's not going away. I don't believe it's going away. And I don't say that because of what happened with the run up in some recent equities, and/or even in what they perceive as running up into silver, you can talk about fundamental stories that are in silver versus not fundamental stories of some of the other products that had runs on them. But there's no question about it that the proliferation of social media, the proliferation of access to marketplaces is allowing people to participate more and more, and they want to do that. And I think it's extremely encouraging for more and more young people to have interest in financial services and financial markets. So, we want to take advantage of that with them and bring them along in a very thoughtful smart way, as Julie outlined. So, it's not only micro products that we have, we're going to rebuild, we're looking at new and innovative ways to continue to move forward with this growing constituency of clients. So, very excited by the growth of that, but at the same time, I don't want you to think that we're just putting all of our efforts into one basket, such as retail, because we're not. I mean, the institutional clients of this company are critically important. The commercials are critically important. So all the different parts that go into making a trade work are very important as we continue to move forward and grow this business, but we do not want to deny access to the retail participant in a good, thoughtful, smart way. I mean, we would like to talk a little bit about a couple of some of the fee changes associated with some of these micro products. And maybe I can ask John to do that.

Thanks Terry. As everybody here knows the micros have been a tremendous success not just in equities, but also in metals as well. When you take a look at the equity micros, you've seen our RPC steadily increase over time, it was around $0.114 in Q4 of 2019 and it hit approximately 2 million contracts a day in Q4 of 2020. And the RPC increased to $0.14. This year, we're taking a very targeted approach to pricing. And we're really focused on changes to the non-member fees in our micro products, with increases in micro equities of $0.05 per side, micro gold of $0.20 per side and micro silver of $0.40 per side, and those are for non-member fees. So, I think we're continuing to add value in that product, whether it's increasing liquidity, working with our intermediary partners through education and also launching new products with the options on our equity products for the micros. So, those are some changes that we'll be rolling through, beginning in February. Hopefully that gives you a little color. We'll wrap with that Brian.

Yeah. Thank you so much, that’s super comprehensive. Thank you.

Thanks Brian.

We’ll now move on to our next question from Ari Ghosh of Credit Suisse. Please go ahead. Your line is open.

Good morning, everyone. Just a quick one on the joint venture with IHS on the FullSlate, I was looking to talk about the market opportunity here, at least broadly given the large inflows and any thoughts around, you know, the potential size and growth of this business, just given the scale benefits that you'll enjoy in a stagnant market? And then any color on, you know, the customer base, the level of client overlap, versus perhaps more of the complementary portion of that that might be added to your overall client profile. So, any high level perspective would be great? Thanks.

Hi Ari. Thank you for the question. Yeah. We’re extremely excited about the joint venture with IHS Markit. For the customers and our shareholders, it'll be a leader in the trade processing and post-trade services. And it'll benefit customers by providing a more efficient access to services, and we think it'll be a great platform to launch new solutions across a broad set of asset classes, including interest rates, FX, equity and credit. This will allow us to innovate and bring to market analytics, workflow tools, and solutions that allow clients to manage their risk and process more efficiently. So, when you look at the client base there is a substantial overlap in terms of large global banks, utilizing the services, both of market serve, and our optimization businesses, but they're all across complimentary asset classes. So, the strengths of market serve are very complimentary to the strengths of our optimization businesses. So what does that mean for clients? That means a much more efficient way for them to access those services because a lot of the information going to those platforms are very similar. And by providing one point of access for that information, it will provide a lot of efficiencies for the clients and also reduce the amount of errors that could potentially occur as processes could potentially break down as you're accessing multiple platforms across multiple businesses. So, very, very excited about that. So, the added value we think we'll be able to provide, which I think will be very compelling for the clients is around additional analytics, additional workflow tools, and additional solutions that we're going to be able to offer clients, because we're going to be in a place where we're going to be able to provide our clients a window into a lot of their trade processing and post trade services across all those asset classes. So, we think it's going to be pretty exciting. A couple of quick points on it. It's going to be a 50/50 joint venture. So, we will be using the equity method of accounting and it will not be consolidated at CME Group. So, you'll see a shift in the geography of our income statement, the revenue and expenses will be netted in the equity in unconsolidated subsidiary line of our income statement, similar to our indexing joint venture with S&P Global. And as I mentioned, we don't anticipate any material changes to our earnings. One other point, just from a financial perspective is between now and close, you will be categorizing the optimization businesses as a held for sale asset in our 2021 financial statements. So, this will mainly impact balance sheet presentation. And there'll be minimal impact on our pro forma operating results. So, some change in presentation, but most importantly, very positive change for the business and a real positive for our clients.

Appreciate all your comments. Thanks so much.

Yeah, thanks Ari.

We'll take our next question from Mike Carrier of Bank of America. Please go ahead. Your line is open.

Good morning and thanks for taking the questions. Given some of the pressure that you guys saw in short rates in WTI futures, yet in an improving economic and inflation outlook for the back half of this year, just curious if you're seeing signs of increased traction in some of these areas, either from conversations with clients, the more participants or nuances in kind of the trading activity that you're seeing?

Derek, do you want to take that?

Yeah, thanks Mike. I appreciate the question. Yeah, we've seen a lot of action actually just in the last six weeks. If you look at the run up of the activity over the last six weeks, you've seen crude recover; you've seen WTI and Brent actually move up in lockstep, there are a number of fundamental drivers as to what's going on. The market is generally responding to the increased expectation for economic activity with the vaccines rolling out, you've got significantly reduced stocks in Cushing. If you actually look at the drop in barrels, we've seen that a 14% reduction in the existing stock in Cushing. So, that reduction is meaningful. When you look at the uncertainty around U.S. Energy Policy and the Biden Administration and the increased flow of exports in the U.S., you're actually seeing the energy curve and WTI right now in backwardation, where the front-end of the curve is more expensive than the back-end of the curve. And why is that important? That's hugely important because that actually feeds into the narrative that we're seeing more broadly play out in both metals and particularly in ags with an overall price rising cycle. What that means is you've got folks piling in on the increase in expectation for growth in price. What impact does it have in the business? We actually saw one of our biggest days in WTI yesterday. We traded about 1.3 million contracts. If you look at our February ADV, it's about 1.1 million. That's up from 784,000 in Q4 of last year. The reason that's important is that that's actually driven us back to open interest levels that we haven't seen for over 2.5 years. We're about 2.45 million contracts open interest versus where Brent is at about right about 2.6 million. So, as you've heard us talk about Mike, as increasing economic activity takes place that's represented itself in the form of use of our crude benchmark globally. A lot of institutional investment flowing in, and there's broader talk of the overall commodity cycle resuming. You've got soybeans at $13.50, you've got corn at $5, and you've got oil at highs in over a year now. So, if the market is paying for economic recovery, you're seeing that reflecting both just below record levels of WTI activity, and record amounts of Ag and metals product go into the franchise as well. So, I think this is the place people are playing in that Global Reflation Trade, and that's where you're looking at low yields and WTI at 8%. So, institutional investors are looking for yield. This is the place to get it in this market right now.

And just continue along with that a little bit, Mike, let me ask Sean to talk just a little bit about some of the rate products, the long-end activity, maybe you can speak a bit about the back end of the Eurodollar especially Sean.

Thanks very much, Terry, greatly appreciate it. So there's no question we're seeing a much better market environment in the last couple of months across the rates businesses, a very exciting development and one that we've expected. And we are especially seeing that further out the curve. Some examples in terms of the market itself, if you look at the two-year versus three-year spread, that has widened out to 1.81% or 181 basis points. We haven't seen an environment like that since February of 2017. So, the market is expecting very strong growth, and that's a very good indicator of strong growth on a go forward basis. Also, just very briefly, in terms of the Treasury Inflation-Protected Securities or TIPS, if you look at the 10-year TIPS, they're now implying a consumer inflation rate over the next decade of 2.21%. That's the highest level we've seen in implied inflation since 2014; for a 5-year TIPS, it's even more impressive at 2.31% implied by the market for inflation over the next five years. We haven't seen anything like that since 2013. How is that impacting our markets? It's been a very big positive impact, especially in our long-end products. We've seen several new records this year in terms of open interest in our ultra 10-year futures in particular, we've also seen very good growth overall in the long-end of the Treasury Curve. So, if you look through January, the ultra 10-year ADV was up 44% year-over-year. The bond futures is up 13%, the ultra bond is up by 7%. If you look further out the curve, if you look at the back 32, the back 32 contracts in our Eurodollar futures, we've seen significant growth there in the fourth quarter, which was very positive results. In particular, the 2023 Eurodollar futures are running an ADV up more than 100% this year versus total year last year, and the 2024 Eurodollar futures likewise up more than 100% this year versus last year. The last thing I'll mention on the market side that is directly impacting this, if you go back to the third quarter of last year, the first implied tightening by the marketplace was in December of 2024. If you look at today's marketplace, they're implying a tightening in the summer of 2023. So you see the much improved market outlook with the impact on market pricing and a significant impact on our volumes. Large open interest holders have also seen a very nice bounce. Since December 1, our rates large open interest holders has increased by 9% and have recovered half of the losses that we saw during the recent crisis and are only 9% below the all-time highs in our rates large open interest. The first time we reached those peak levels was in 2018. So, we're seeing a big recovery there as well. Sorry, Terry.

That was very helpful. Sean, thank you very much. Thank you, Mike. Hopefully that answered your questions?

Yeah, no, it's great. Thanks a lot.

We'll now move on to our next question from Alex Blostein of Goldman Sachs. Please go ahead. Your line is open.

Great, thanks. Good morning, everybody. Just wanted a clarification for me. I know you guys provided an incremental color around capture rates for E-mini and Gold and on the Micro side. I guess, you know, John, if you think about the current mix things, say I know you guys changed pricing on just the non-member side, but assuming the mix of volumes stays roughly the same. Can you give us a sense of what kind of performer capture rates for those buckets would look like in 2021, kind of performer for the changes in pricing?

Yeah, sure. I think when you're talking about the mix of micros and minis, that's what you're asking Alex? When you think about the capture rate, generally speaking, it's roughly an 80/20 rule — 80% of the volume coming from members, and then 20% coming from non-members. So, about 20% of the volume roughly will be impacted by the fee increase on the equity side. In metals, it's a little bit different. It’s a little bit heavier on the non-member side, a little bit higher than the 80/20 in terms of the non-members. One of the things that we've been doing over time is making adjustments in the incentive plans for micros. And also, as I just outlined, we made some fee adjustments. So, when you look at the changes that we're making, from an overall company perspective, they're relatively modest. But when you look at the micros, I think you'll see a more meaningful impact in terms of the revenue, and we don't think this is going to be impacting volume necessarily. We're providing a lot of value for the clients in a product that's highly liquid. So, we think from a volume perspective, not as impactful.

Great. That's helpful. Thanks.

All right. Great. Thanks, Alex.

We'll now take our next question from Owen Lau of Oppenheimer. Please go ahead. Your line is open.

Good morning and thank you for taking my questions. So, CME just launched the Ether futures, and the volume of the Bitcoin contracts has been quite strong. Could you please talk about the regulatory environment for digital assets, and how it will impact CME to launch more products in this space? And also one more point, I want to plan to launch something like E-mini or micro E-mini Bitcoin futures for retail investors. Thank you.

Thanks Owen. Yes, we have seen some upticks in our Bitcoin futures contract. Obviously, we're seeing a massive appreciation in the price; I think as of this morning it's around $46,000 a coin. So, we're seeing great appreciation there and of course, interest always follows those type of price improvement. Let me ask Sean to talk a little bit, not only about crypto, but I think you also referenced E-minis in your question as well. So, Sean?

Yeah. So, in terms of the new crypto contracts, in terms of Ether futures, on the first day, we traded 388 contracts, 55 unique accounts across 15 FCMs, and about 40% of that was customer activity. So, good starts to that; in terms of the Bitcoin doing more than 11,000 contracts a day, we are the largest risk transfer platform for Bitcoin in the marketplace. And we've got a significant RPC in around $4 a contract. So, both growing very nicely. We do have a number of participants trading Bitcoin futures. This also brings additional participants to our overall markets. I don't know if that answered the question.

That’s helpful. Thank you very much.

And Owen, did you have a question about E-minis or not?

Yeah, exactly. Like any plan to launch E-mini or micro E-mini Bitcoin futures for retail? Thank you.

Okay, thank you. So, the question was on the micro – potential micro E-mini on the Bitcoin contract. We've seen a great appreciation in the product and the price, but at the same time, the volume is still being nurtured, it's still growing. We want to be cautious about how many people are participating in this new asset class. We need to make sure that we're comfortable going forward. We've always said we're going to walk before we run when it comes to cryptos. I think with the launch of our new Ether contract, and people having the ability to trade one against another, we want to see how that starts to pan out for pair trading or spread trading for other terms. And I think that's important before we decide we're going to move forward with a smaller version of a crypto contract. So, this contract is not that old. It's relatively new; the options were just listed on it in the last several months. I'm a big believer you have to get a look at the options market along with your futures contracts, so you can continue to bring it to a broader audience. And that broader audience might be the people that we referenced in the earlier part of this call, which is more on the retail side. And they will obviously find it hard to participate in such a high value contract. So, smaller versions are something we're looking at, but we have no plans to make any announcements at a launch of something of that nature at this point.

Okay, thank you very much, Terry.

Thank you.

We'll move on to our next question from Chris Harris of Wells Fargo. Please go ahead. Your line is open.

Great. So another one related to the growth that's happening from retail investors. What do you guys think about the potential risk of increased regulatory scrutiny, the larger this business becomes, and related to that are there safeguards in place that prevent novice retail investors from trading futures?

Well, as far as regulatory scrutiny, we don't need retail traders to get regulatory scrutiny; you get that with all different participants. And that was one thing that I've said forever, which is a benefit to this organization, that we are a highly regulated entity. I believe regulation lends credibility to any business and allows us to grow globally. That's exactly what we've been able to do because of good, smart regulation. Now, the question might be this: do we invite different types of regulation because of the retail client entering into the marketplace? I don't believe so only because we've had a growth of retail over the years regardless. And I think when people have access to marketplaces, it's not like the SEC where the SEC's main mission is to protect the public from manipulation and fraud and other things — we have a global regulator that obviously is looking into those things as well. But I am very convinced that the retail participants will continue to grow. It doesn't mean you have to have additional burdensome regulation against them or against the entity that wants to house them, as long as your practices are in good housekeeping from your margin requirements to the money that you have on deposit for your FCM. So, the whole host of things that the smaller clients need to make sure that they understand remain in place. I'll ask Julie to make some comments on the retail globally and other places as well. Julie, do you want to comment a little bit about them? But I think on a regulation side, Chris, I don't believe because of the growth of this particular group that would invite new regulation. I think what you're seeing right now is a lot of headline regulation being discussed. It doesn't mean it's going to happen.

Thank you, Terry. I think he makes a very good point about the differences in market structure between equity markets and futures. The other thing I'll add is that our broker partners and intermediaries are critical in ensuring that the retail and active traders that are going to be trading futures are qualified to do so. We work with our partners throughout the globe to ensure that. Just because you're able to trade in the equity markets, that's not the same as having a futures account. There has to be an intentional opening of that account, and those restrictions vary by country. What we see is typically there's a graduation of retail and active traders from trading the equity markets into trading equity options, and then coming into the derivatives marketplace. That lends itself to a more sophisticated retail trader. That's part of what we work with our broker partners on the education front as well. So, they are well versed in what they're getting into when opening up accounts because they're ready to trade in our markets; we want to make sure they are well supported, and that we have a good customer experience for them and a diverse set of products for them to access.

And Chris, I've heard a lot of headlines and rhetoric about recent activity by some retail traders, with proposals like transaction taxes, wealth taxes, high frequency trading limitations, and payment for order flow restrictions. Just so we're all clear, what happened in the marketplace recently could have happened without any of those things being in place at all. So, it had nothing to do with those specific items, but people are picking their favorite regulatory solution to explain what happened. We'll always participate in hearings and regulatory conversations — our voice will be heard. Again, I think what you're hearing right now is mostly headlines from pundits about what they believe happened and how they believe they could have stopped it, and that's separate from the day-to-day regulation that governs the futures markets.

Got it. Thank you both.

Thank you.

Next we'll take a question from Ken Worthington with J.P. Morgan. Please go ahead.

Hey, good morning. I love to dig a bit deeper into the FX business in advance of the further integration with UBS. Your FX futures volume and OI growth has been maybe more stagnant over the last six years, despite being a global product at a time when you've been very successful in building up this global client base. So, what's been weighing on FX futures trading and OI growth over the intermediate-term, as well as more recently in low rates? And then I guess maybe more importantly, with the integration of NEX upcoming for FX, how did things change for the FX futures business? And how does the combination sort of jumpstart futures for CME?

Sean, you want to take that?

Sure, thanks very much for the question, greatly appreciate it. We're very excited about the developments and the success we've had recently in our FX futures marketplace. We have over the last few years been continuously reducing the minimum price increments across nine different instruments. We're excited actually: late last year we saw an all-time record open interest in our euro versus USD futures, which is really amazing given the fact that volatility has been at very low levels. If you look at last year across each of the major currency pairs, the volatility ranking was typically in the lowest decile going back the last 20 years. So, in other words, 90% of the time over the last 20 years, volatility was higher in each of the major currency pairs. Nonetheless, even in that environment, we saw record open interest in euro versus USD contracts. In addition to that, the changes we've been making to make our complex more attractive we've also seen recently good growth in block trades. In December we saw our largest ever U.S. dollar versus Sterling options block trades, equivalent to $2 billion in a single trade. Market participants are migrating more of their options activity towards the listed space, which could accelerate this year. Something we haven't spoken about in a while because it was delayed last year due to COVID, but we do expect there to be at least 100 new participants globally required to adhere to the uncleared margin rules in September of this year. That should drive more products requiring greater efficiencies, and in particular positively impact our FX options. In January we saw a record block size in Aussie dollars of 4 billion Aussie dollars. So, our FX futures last year actually outperformed some spot marketplaces, and we're seeing an uptick in the option space, particularly in blocks. Regarding integration and product enhancements, we are using the unique set of assets we have — now having EBS as well as the futures data — to bring greater analytics and tools to the marketplace and cross-sell futures through the EBS distribution channel. We launched an FX swap rate monitor late last year with more than 4,000 views and 3,000 users using our FX Link product. It's the first time ever where essential limit order book data is standardized and cleared, offering lower total cost alternatives for FX swaps to market participants. We're also rolling out technology enhancements later this year to make it easier to consume our products and we expect meaningful growth once that technology is released. We also released an FX vol converter tool that converts listed FX options into OTC equivalents, allowing OTC participants to see our FX options on futures like the OTC markets; that likely contributed to the record block trades. Our FX market profile tool synchronizes EBS spot FX and foreign exchange futures data to show relative liquidity and the benefits of using both markets simultaneously. We're investing in direct streaming technology and expect to roll that out later this year for FX, and once we do so we'll also roll it out in U.S. Treasuries. We're in a position to offer unique analytics and distribution to regional banks and other participants to attract new customers.

Great. Very, very comprehensive. Thank you so much.

Thanks Ken. Thanks Sean.

We’ll now move on to our next question from Simon Clinch of Atlantic Equities. Please go ahead. Your line is open.

Hi, there. Thanks for taking my question. I was wondering if I could get an update please on the agreement with DTCC regarding cross-margining, and whether that's already been submitted to the SEC, and in terms of timing of how long you think it might take for something like that to be approved, and when you might actually start to see the real benefits of that in your fundamental numbers?

Really good question, Simon. Let me turn it over to Sunil Cutinho, the President of our Clearing House to address that.

Thank you, Terry. Very quickly, I think very few participants know this, but we currently have a cross-margining agreement with DTCC. Our effort right now is to improve that cross-margining agreement and enhance the savings. So we are actively working with DTCC. It's very hard to handicap regulatory approvals. So, all we can say is, we anticipate completing the operational effort this year. And then the rest depends upon the approval timelines with the SEC and the CFTC.

Just to add to that, Simon, we're hopeful and Sunil has been working on this rigorously. We've talked a lot about efficiencies, and this is one of those efficiencies that we are very excited about once it gets put into place for our global client base trading in the rates business. As Sean has already pointed out, there are encouraging signs in rates, and this could be a huge benefit. We're really excited about creating more and more of these efficiencies. It's been one of our focuses over the last several years to bring clients efficiencies which we think will bring greater growth to our businesses, and this asset class is waiting for that. So, we're looking forward to getting that agreement done with DTCC and the SEC, and then going forward with the growth that Sean has already pointed out.

Okay, thanks both.

We will now move on to our next question from Jeremy Campbell of Barclays. Please go ahead. Your line is open.

Hey, thanks, guys. And I know we're getting into injury time here, but, Terry, maybe just a quick one on the emissions contract. I know we've discussed carbon offsets and other green contracts in the past. Just kind of wondering, what's changed on the demand side of the equation that led you guys to launch this contract? And can you characterize the competitive landscape and how big you think this might be over time?

Yeah, great question Jeremy. Let me turn to Derek who's been working on this and launched this contract for us. Derek?

Yeah. Thanks, Jeremy. It's an exciting space. I think what you're seeing right now is an absence of mandates globally; the existing emissions markets tend to be very regional in nature. What we're excited about working with CBL Exchange on this product is that these carbon offset futures represent a contract that is an offset, not limited just to the energy markets. Imagine a farmer that wants to manage his carbon footprint, imagine an aluminum company that wants to adhere to voluntary standards or regional standards and emissions credits. This is a product that is capable of extending outside of the traditional space in energy and have an application across a full range of our commodities participants, even non-commodities participants. The feedback that we've got in both the validation stage of going out to the market and assessing interest, and actually since we've announced, has been bigger and more overwhelming than we had anticipated. So, it is important to remind everybody that this is a voluntary emission offset based on standards that the market participants are agreeing to. The competitive space is open right now. We can look at the position that we're in in our commodities markets — we are the largest metals market, the largest energy market, the largest agricultural products market — so the application of these offset products extend well beyond the energy space. We think this is going to be a process of not just dealing with fossil fuels market in transition. Most company charters right now are trying to adhere to ESG standards that apply to their carbon footprint. So, this is broadly applicable to a lot of different market participants. The feedback validates that. We're excited to get this out. We've got a whole host of market makers and market takers lined up on this. We're excited about what this could mean. This is a slightly different product than what you're seeing in existing products that are regionally focused. We think this is early days and extensible out to the range of benchmark markets that we run, and where we run the majority liquidity. We think this will be a great service to customers looking to extend their ESG credentials and manage their carbon footprint in new and unique market-oriented ways.

Thanks, Derek. Thanks, Jeremy.

We'll take our next question from Kyle Voigt of KBW. Please go ahead. Your line is open.

Hi, thanks for squeezing me in here. Just wonder if you can update on your thoughts around M&A? You're in the final stages of the NEX integration, you’re at your leverage target, and as we look around the exchange sector, many of your global peers have just recently closed large transactions. So, I guess, are you seeing attractive opportunities out there? And what are you looking for strategically in terms of what that asset might add to CME? Is it improvement revenue growth within the different asset classes, adding non-transaction businesses? Just wondering what the strategic priority is? Thank you.

Hi, Kyle. This is John. There hasn't been any change in terms of our M&A strategy. We are always looking for opportunities to create shareholder value. As you've heard across the call, we focus on creating efficiencies and opportunities for our clients. The recently announced joint venture with IHS Markit is a great example of that: we're taking our assets, combining them with assets of a partner, and creating value by providing more efficiencies for clients and using that as a platform to provide other services. That's our primary focus. I wouldn't say we're necessarily looking specifically for a type of revenue whether transactional or subscription. We're focused on optimizing the revenue based on the industry that asset is in. We are very focused on completing the NEX integration. We're targeting $200 million in run rate synergies by the end of this year, we're well on track, and we've exceeded our synergies each of the last two years. So that's our point of view.

We'll move on to our next question which comes from Chris Allen of Compass Point. Please go ahead. Your line is open.

Yeah. Good morning, everyone. Just a real quick one from me. You talked about price increases in the market data and on the micros; have you enacted any other price increases in the other products that we should contemplate for this year?

John?

Thanks, Chris. In 2020 we made a number of adjustments across all of our asset classes with an expected revenue impact of 1.5% to 2% in futures and options transaction fees, and we did achieve that objective. Going into this year, we're being very targeted in our approach, and the main ones we've announced are adjustments to the micros and selective adjustments to our market data business, including increasing the screen fees for real-time data and non-display data. Those are the ones we've announced thus far. This year will be flexible in our approach and a lot depends on how the year plays out. We'll always be looking at creating value for our clients and charging appropriately for that value.

Thanks, Chris. Thanks, John.

We’ll take our next question from Patrick O'Shaughnessy of Raymond James. Please go ahead. Your line is open.

Good morning. What's your assessment of the competitive landscape in cash U.S. Treasury trading, particularly in light of the pending sale of NASDAQ fixed income to Tradeweb?

Sean, you want to address that?

Yes. We embrace competition and continuously look to make our platform and services more attractive to participants. We're very excited about moving BrokerTec over to Globex. That improved technology will allow us to create more attractive products and services like RV technology. Our implied functionality on RV is unmatched by other technologies. We also have a unique data set — the ability to synchronize our treasury futures data along with our cash treasury data. In addition to the more than $100 billion in cash Treasuries traded on BrokerTec every day, we do around $400 billion a day in treasury futures. That combination provides unique analytics and efficiencies for execution. We're investing in BrokerTec Stream for direct streaming of U.S. Treasuries and combining that with a central limit order book. We have the strongest dealer-to-dealer central limit order book in the world and are building our direct streaming business dealer-to-dealer. We believe this combination and unique data advantages will make our platform the most attractive place to execute risk in U.S. Treasuries. We welcome competition and aim to continue innovating.

Thanks, Sean. Thank you, Patrick.

We'll move on to our next question from Alex Kramm of UBS. Please go ahead. Your line is open.

Yeah, hey. Just a couple of quick follow-ups here, and I apologize if this has been mentioned before. One, on other revenue, John, did you mention what drove the strength this quarter? And how do I think about the sustainability of that line item or what seasonally may change here over the next few quarters? And then just a quick follow-up to the question just now on the treasury business. I don't know if you've talked about this in the past, but I think it was in the prepared deck, the dealer-to-customer repo offering that you have within BrokerTec now or NEX now. Have you talked about this before why you're doing this? And also, does that mean that you're maybe willing to play a little bit more in that dealer-to-client space, historically it's been really dealer-to-dealer? So, any quick comments there would be appreciated. Thanks.

Okay. Let me ask John to comment first and then I'll turn it to Sean. Before Sean makes a comment, let me reference something about the dealer-to-client and the dealer-to-dealer structure with BrokerTec.

Yeah, thanks. We didn't cover other revenues earlier. When you take a look at our other revenues, it's up about $10 million sequentially between Q3 and Q4, and there are a number of puts and takes. But the primary driver of the increase is our annual adjustment based on exchange activity paid by our partner in Brazil for software that we licensed them. There was also a termination fee related to our agreement with the Korean Exchange. Both these agreements concluded in the fourth quarter of 2020. So, you will not see that $10 million step-up between Q3 and Q4 going forward.

Sean, why don't you address the dealer-to-client repo question?

Thanks very much, Terry. We do see the opportunity and we are executing on a dealer-to-client repo platform, both for Europe and we've recently launched it in the United States. We see it offering huge operational efficiencies to market participants, especially between dealers and customers relative to that transactional handshake. There are also opportunities to leverage the dealer-to-dealer platform in combination with the dealer-to-customer platform in repo. In the dealer-to-customer space, we are seeing near all-time record European repo volumes on our dealer-to-dealer space recently. So, we are engaged in that space. We believe we can add electronic operational efficiencies to that space and so far have seen good uptake from our customers. To be clear, we have not changed the structural nature of our dealer-to-dealer platform as it relates to BrokerTec; these dealer-to-client offerings are complementary.

Okay. Thanks, Alex.

Thank you.

We'll now move on to our next question from Rich Repetto of Piper Sandler. Please go ahead. Your line is open.

Yeah. Thank you. And Terry, first, thanks on sort of level-headed comments on equity market structure. We'll see whether regulators and lawmakers follow that sort of level-headed approach on February 18. So, following that line and thinking up from a regulatory standpoint, you mentioned the margin efficiencies from DTCC to the CME Clearing House. And I know you bring benefits from a technology side, from a data side, but maybe this is like just top off the whole promise of trading cash and futures on the same platform adding to those other benefits. If there is an offset that's clearly present between cash and a future why has this been a long process and what makes it more difficult? I guess that's the question.

Yeah. Good question, Rich. Let me ask Sunil to comment a little bit. But you are absolutely correct. One of the great benefits of the transaction with NEX was doing the integration of BrokerTec on Globex to create efficiencies. We completed that and are excited about EBS migration. Let me ask Sunil to comment a little bit on the risk and efficiency side on the margins.

Thank you, Terry. Rich, just to give you a simple answer, we currently have a cross-margining agreement and there are participants who are taking advantage of the offsets between cash and treasury futures. We started this in 2003 and we continue to provide that service. What we are doing right now is enhancing that. We are actively working with DTCC. Given that it is two clearing houses and they are regulated by different regulators — one by the CFTC and the other by the SEC — we need to work through the process to get any enhancements approved. That does take time, and it's hard to give a precise regulatory timeframe, but we continue to work actively on improving the margin efficiencies between the two clearing houses.

And again, Rich, we can't control the bureaucracy of the SEC or the CFTC. But clients are pressing for these efficiencies because they know the benefits and there's no added risk to the system if done properly. In a margin-sensitive world, especially with low interest rates, these efficiencies are important. We're hopeful we'll get this completed and start seeing benefits go to clients because that's exactly what they need to run their businesses more efficiently.

Okay. Got it. Thank you very much.

Thanks, Rich.

We will now move on to our final question from Brian Bedell of Deutsche Bank. Please go ahead. Your line is open.

Great. Thanks so much for taking my follow-up. Just want to clarify — following up on the retail question I had earlier, are you disclosing the proportion of either revenue or ADV that's coming from retail? I think you did that a while back. And then maybe it's a question for Sean also on LIBOR for 2021 in terms of how you see that developing for SOFR, the CME SOFR contracts versus the Eurodollar contracts. Whether you think that transition is really going to take a lot longer and therefore that switchover to SOFR will be much more gradual?

Let me ask John and Julie to comment on your first question. I'll make a comment around LIBOR and kick it to Sean to wrap it up.

We don't currently disclose the revenue from retail. In general, in the fourth quarter we had about a million contracts a day from what we call the Retail or Active Trader segment. The member/non-member mix comment and the adjustments we made to pricing earlier should help model it out. I'll pass it to Sean on LIBOR and SOFR.

Before Sean responds, I want to emphasize that we believe we're in a strong position to benefit from whatever outcome occurs around LIBOR transition. We've seen growth in the back 32 of the Eurodollar contract and growth in SOFR — both positions favor our rate franchise, where we have efficiencies and deep liquidity. Sean?

Thanks so much. Several points. In terms of the back 32, between Q4 2019 and Q4 2020 ADV in Eurodollar futures grew by 36%, which is very positive. We've also seen very good growth in SOFR futures. 2020 was a record year for SOFR futures volumes at 51,000 contracts; so far this year we're trading more than 100,000 contracts a day. In January we saw an open interest record of 727,000 SOFR futures, and a record number of large open interest holders at 175. We have more than 500 participants trading SOFR futures. Globally, in futures, we have about 80% of average daily global volume so far this year and roughly 92% to 93% of global open interest. So SOFR is growing strongly and we are the dominant global platform. At the same time, the back-end Eurodollar futures are growing strongly as well. Both are useful for participants. No one else can match the combination of execution and clearing efficiencies across these instruments. We also offer SOFR interest rate swaps and LIBOR-based interest rate swaps and there are substantial portfolio margin offset opportunities between futures and swaps. We already offer portfolio margining between Eurodollar options and interest rate swaps since December of last year; customers taking advantage of that have seen meaningful margin efficiencies. Finally, we have the single largest U.S. Treasury repo platform, which is critical because SOFR is substantially based on repo transactions. We provide the transactions that make up SOFR every day, alongside futures and swaps, and that gives us a unique position in the market.

Thanks, Sean. Thanks, Brian. Hopefully that gave you a little color.

Yeah, super helpful. Thank you so much.

Thank you.

It appears there are no further questions at this time. I'd like to turn the conference back to management for any closing or additional remarks.

Thanks, John. We appreciate it very much. We appreciate you taking time out of your busy day to participate in our call today. And we wish you and your family continued safety and health. So, thank you for dialing.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.