Cme Group Inc. Q2 FY2023 Earnings Call

Greetings and welcome to the CME Group Second Quarter 2023 Earnings Conference Call. During this presentation, participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. It's my pleasure to turn the conference over to Adam Minick. Please go ahead.

Good morning. I hope you're all doing well today. We will be discussing CME Group's second quarter 2023 financial results. I'll start with the Safe Harbor language, then I'll turn it over to Terry. 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'll turn the call over to Terry.

Thank you, Adam; and thank you all for joining us this morning. As Adam said, we released our executive commentary earlier today, which provides details on the second quarter of 2023. I will make a few brief comments on the quarter and current outlook, and Lynne will summarize our financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. As we mentioned last quarter, 2023 is setting up to be an extremely favorable backdrop for risk management. The continued geopolitical uncertainty and the increasing cost of capital for businesses are just a couple of the things that have helped us deliver our financial results for the quarter. The benefit of CME Group's diverse product portfolio, spanning six asset classes, was on display. ADV across our commodities asset classes increased 20%, with 34% growth in Agricultural products, 27% growth in Metals, and 9% in Energy. Interest rates, average daily volume of 11.3 million was up 6% for the quarter and is up 11% compared with the first half of 2022. Despite a substantial decline in equity market volatility, our equity class delivered average daily volume of 6.2 million contracts during Q2. Our non-U.S. ADV was 6.3 million contracts for the quarter, including double-digit year-over-year growth in Ags, Metals, and Energy. Options again played a critical role in Q2, with ADV growth of 20% to 4.7 million contracts, including the highest quarterly Agricultural options ADV on record, up 32% from Q2 last year. Our product innovation in this area has driven strong growth with new participants and more product choices to precisely match risk as clients continue to look for ways to protect their portfolios in these uncertain times. As it relates to our rates market, expectations of short-term rate changes up or down and a divergent economic data continue to drive risk management. As we saw with the recent resolution of the debt ceiling, the treasury bill issuance increased dramatically. Over time, we expect that more coupon issuance and ongoing debt financing will contribute to greater hedging needs for years to come. On the commodities side, exports are increasing the demand for risk management using our benchmark, agriculture and energy products. With this favorable backdrop, we will continue to focus on opportunities to accelerate growth, including our recent announcement with DTCC to increase cross-margining opportunities for the treasury markets. Additionally, our ongoing focus on product innovation and data services continues to enhance trading opportunities for our clients. We believe the strong underlying environment combined with our strategic execution across growth initiatives positions us for accelerated growth in the coming years. With that, I'll turn the call over to Lynne for the second quarter financial results.

Thanks, Terry. During the quarter, CME Group generated $1.4 billion in revenue, up about 10% compared with a strong second quarter last year. Clearing and transaction fees grew over 9%, while market data revenue increased 8% versus Q2 2022. Expenses on an adjusted basis were $452 million for the quarter and flat versus the first quarter at $374 million, excluding license fees. This quarter, our investment in our cloud migration was approximately $15 million. Our adjusted operating margin for the quarter expanded to 66.8%, up over 250 basis points compared to the same period last year. CME Group had an adjusted effective tax rate of 23.3%, which resulted in adjusted net income of $836 million, driving diluted earnings per share of $2.30, both up 17% from the second quarter last year. In addition to our expanding margins, the strength of our operating model was evident this quarter as we delivered an increase of approximately $120 million in both revenue and adjusted net income compared to last year. Capital expenditures were approximately $22 million and CME Group paid dividends during the quarter of $400 million. Our ending cash balance was approximately $2 billion. As you can see with the current results, the entire team at CME Group is focused on growing the business. We have delivered double-digit adjusted earnings growth in each of the last eight quarters. Although it is challenging to predict volumes or market conditions over the short term, when you look at the last five, seven, or ten-year period we have grown our earnings by a compound annual growth rate of 10% to 12% per year despite multiple periods of zero interest rate policy and the impacts of the pandemic on the global economy. As Terry mentioned, we are in a favorable environment for risk management and we're taking a number of actions designed to accelerate our growth going forward through customer expansion, new product and service innovation, and enhancing capital efficiencies. Given this, our goal as a management team is to deliver growth in the coming decade above these historical averages. Terry, I’ll hand the call back to you.

Thank you, Lynne. We are very pleased with the continued strong financial performance of the company. Before I open the call for questions, I’d like to ask Tim McCourt and Derek Sammann to comment briefly on the recent trends that we’re seeing in short-dated options products. And I’ll go to Tim first. Tim?

Thanks, Terry. We are very pleased with the performance of our equity options on futures, which year-to-date drove 1.3 million contracts per day. Short-dated options, including zero days to expiry or zero DTE options remain a strong driver of our multi-year growth. Volume in our same-day expiring options is up 33% from last year and up 220% since 2021 and now make up 27% of our equity options volume. It’s important to also note that we are seeing volume and open interest growing across the entire maturity curve. Year-to-date equity options are up 6% compared to a record year in 2022, with particular strength in Nasdaq options and Russell 2000 options both up double digits. This strong growth story further demonstrates the value customers continue to derive from trading products on the most important equity indices at CME Group. And while short-dated options have been largely an equities story to date, we’re beginning to see expansion to other parts of the portfolio, which Derek will talk to you now.

Thanks, Tim. As we’ve discussed in recent quarters, options have become a bigger part of global customers’ risk management and trading strategies. Year-to-date, average daily volume in our Options franchise across all asset classes is up 26%, driven by Interest Rates, Metals, and Equities, and our non-U.S. options business is up 33% through June. Within this larger growth story, we have seen growing demand for weekly options expirations across all asset classes, with weekly options volume up 21% year-to-date and growing to 26% of total options trading. In addition to equities, commodities traders have similarly embraced shorter-dated expirations, which allow our global customers to hedge specific event risks, such as crop reports and OPEC meetings. Agricultural weekly options were up 168% in the second quarter, which contributed to a record quarter for agricultural options overall. In Energy, our WTI weekly options grew 126% versus the second quarter last year, while our gold weekly options are up 33% year-over-year. The strength of our options franchise allows CME Group to uniquely deliver significant capital and operational efficiencies and meets our customers’ need for short-dated options to help them most effectively manage risk across their entire portfolio. And with that, we can now open the call for questions.

Thank you. Our first question comes from Benjamin Budish with Barclays. Please go ahead.

Hi, there. Thanks so much for taking the question. I wanted to go back to a comment that you made Lynne in your prepared remarks, just about sort of positioning the business to grow faster than the historical average over the next decade. If you could maybe unpack that a little bit, what are sort of like the key elements that you see, is it sort of a global increase in just need to manage risk, is it more customers, is it sort of increasing RPC, more volatility? How do you kind of think about what that looks like over the next decade as you indicated?

Sure. I'll start, and a number of my colleagues will want to jump in here. I think the growth story is one that we've been talking about for a while. A number of the levers that we look at is that new customer expansion, is that international growth, and new product innovation has been certainly a big focus, looking at the OTC alternative products, as well as looking at capital efficiencies. So, I don't know, Julie, if you want to comment on a few of those initiatives that are underway.

Certainly, the cross-margin initiative has generated considerable excitement among our clients, and we've discussed its delivery for several years. Enhancing capital efficiencies remains a top priority for them to enable greater capital deployment and increased trading at CME Group. The macroeconomic environment appears favorable across various asset classes. Our clients have expressed that they are utilizing our markets to hedge against rising risks, particularly with the anticipated increase in Treasury issuance, which will likely lead to more hedging activities from broker-dealers. Overall, there is a sense of optimism across the buy-side segments. As we continue to introduce more products, including the options mentioned earlier by Derek and Tim, we are providing our clients with a diverse array of instruments to express their market expectations. We believe our global support capabilities put us in a strong position for international growth, which we anticipate will benefit us in the future. Additionally, we are pleased with our data services business, achieving 8% growth and launching several new products, services, and analytics that our team is diligently working on, including items that were not previously offered to our customers based on our data insights. All these factors contribute to a positive outlook for the future.

Thanks, Julie; and thanks, Lynne. Ben, hopefully, that gave you some color on what we're thinking here at the exchange.

Yeah. Very helpful. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Thanks. Good morning. I wanted to follow up on your earlier points. You've experienced strong volumes in the first half of the year, but there are ongoing investor concerns about the sustainability of that performance and the possibility that the best is behind you. As you consider the growth opportunities you've mentioned, could you highlight one or two that seem most promising in the short term? Additionally, please elaborate on the DTCC partnership, including how it will be implemented, the timeline for rollout, and the potential impact of this agreement.

So, Dan, thank you for your question. You got a couple of questions in there. So the DTCC, we did put out the release with the DTCC just a couple of weeks back and we're waiting on regulatory approval, which we are expecting and hopefully, we will have that implemented going into the first quarter of 2024. We feel fairly confident about that now. So otherwise, we wouldn't have put out the release. So, we are looking at that. And again, I think you recall going back many quarters, a couple of years back when Sean Tully gave you some figures about what he expected as far as the efficiencies, what that agreement could mean once we acquired NEX, which we thought we'd be somewhere today around 20% and we thought that we could be 70%-plus, we still feel very confident that that is going to be the case once this gets fully implemented and put forward. So, that's the DTCC question. The other question was on a couple of drivers for the business, I think is what you asked on the out years. And I'll ask Tim to make a couple of comments as it relates to his business and Derek as well.

Sure. Thanks, Terry. As Terry mentioned in the opening remarks, there certainly are continued periods of uncertainty in front of us, which will provide a continued tailwind for CME as we continue to offer risk management solutions for our clients. I think drilling down a little bit, if we think about some of the various asset classes, if we look at the rates complex, where we successfully completed the transition from LIBOR to SOFR, that's not the end of the journey, but it's really the beginning of what's in front of us. To Julie's comments, if you think about coupling that with the macroeconomic backdrop on a tightening and the resolution of the debt ceiling, we're only in the early days of seeing some of those drivers factor into their risk management needs of our client. And what I mean by that is if we look at the recent Treasury issuance, most analysts were expecting $1.2 trillion to be issued now from June and year-end. Most of that issuance is going to T-Bills at present, instead of coupons. We look at the product offering CME at present; that is not something that we currently offer with respect to the risk management or accessing the T-Bills market. So as that issuance moves from T-Bills to coupons, that will be buttressing our treasury complex, both within our futures and options as well as BrokerTec. I think then, when you also look at the uncertainty in the rates market, with the FOMC meeting today, there's over a 99% chance of another 25 basis point increase. But if you look further out, they're expected to be somewhat range bound for the rest of the year, with possibly one more 25 basis point increase in 2023. But then, you're seeing the Fed predict a 51% chance of a reduction before March of 2024. So sort of this consensus view that rates to go up, stay the same or go down is going to be a tremendous backdrop for our clients' need to manage that uncertainty and have all the products to do so at CME across the various asset classes across futures, options, swaps, and the cash market.

Let me make a couple of comments too, Dan, because I think it's an important question that you asked. And it's really tough for us to predict the future. But as you recall, at the beginning of 2022, I said it was going to be a very exciting year because a lot of things are setting up in favor of risk management. We think this is exactly the environment that we've been talking about for several years that we see going out for several more to come. So that's why we're really excited about some of these out years, some of the things that Tim just referenced. Risk management cannot be neglected for one moment for any businesses. We have multiple examples of failure, whether it's in small bank failures and others that continue to not manage risk that are going to be, we think, potentially have to manage that risk if they're going to stay in business. There's a whole host of factors that are coming to fruition that we think are a tailwind for CME Group. I'm going to let Derek make a few comments on his asset classes that I think this is an important question, not only that you're asking, but for all the analysts and investors to listen to.

Yeah. I think that we've already heard from Terry on the options and commodities growth. Just a couple of data points that I think underscore the breadth of the scale of the options growth. Not only is our non-U.S. options growing faster than our U.S. options, but options are growing faster than the franchise overall. But also if you look at the first half year volumes, every single asset class with our client segment, with the exception of banks, is up. This business is up 24% year-to-date. And what's most important is our buy-side client volume and options is up 38% year-to-date. So it speaks to the breadth and the scale and, I think, the attractiveness of our option solutions across the entire customer range. So this is not led by one asset cost, not led by one client segment. So it's really grown in scale across a lot of client segments. And then on the commodity side, you heard Terry talk a lot about the benchmark status of our products. We have built long and hard into expanding our portfolio of products. If you look at what we've done in our energy franchise, building out the crude grades contracts to both defend but also expand the success and the validity of our WTI market with that crude grades contract. We set an all-time record of open interest in over 500,000 contracts, open interest in those products. So as the world evolves, this has been a multi-year story of expansion of our benchmarks serving our clients as the world globalizes. In some cases, the world fragments. We have products for each of those scenarios. So that's what we do. We solve client needs, and we fill in parts of their portfolio that they need risk management, and we become their solution provider.

And as we said, Dan, we can't predict volumes. But as I said in my prepared remarks earlier, when you're looking at the largest asset class, the U.S. equity markets and equity markets around the world in basically a zero-vol environment right now, and we still traded at 6.2 million contracts a day. I think that goes to show you what can happen even when there's no volatility. When people say, where are the future volumes? I think we're just kind of giving you an example where we see there at even in low-vol situation.

Great. That’s helpful. Thank you very much.

Thanks, Dan.

Thank you. Coming up next, we have a question from the line of Kyle Voight with KBW. Please proceed with your question.

Hi. Good morning. Maybe a question for Terry. I mean, since early last year, you sounded more open to executing on M&A if the right opportunity presented itself. I guess given M&A announcements we're seeing from some of your peers domestically and internationally, can you just provide an update on the M&A environment? And given that you've not executed or announced any deals, are you not seeing the right opportunities in terms of checking the right boxes or has that been more price driven? And then also maybe a question for Lynne or you, Terry, do you think in terms of the next 10 years, as you mentioned, kind of accelerating the growth, should we think about M&A as being a larger driver of accelerating that growth over the next 10 years versus what we saw over the last 10 years?

Kyle, that's a great question. Looking several years into the future, many factors can influence our direction. One key element shaping CME's future is the technological advancements we're gaining from our partnership with Google, which will enable us to do things that our competitors may not be able to achieve. However, we don't need to rely on mergers and acquisitions to reach our growth objectives. From that perspective, we're in a strong position. Regarding M&A and the actions of our competitors, I prefer not to comment on their strategies or analyses, as I'm not privy to their discussions. We will pursue only those actions that we believe will be beneficial for our investors and clients. At this moment, our focus is on the growth of the company through various avenues. While I'm open to transactions, they won’t come as a surprise; it’s something we’re thoughtfully considering. Our competitors have their own paths, and we are committed to strengthening our franchise. Tim mentioned the initial stages of risk management in some of our products, and we believe that the distribution of our offerings, along with the technological developments and market data initiatives led by Julie and our work with Google, are exciting prospects for the future. While we may not need M&A, we won't hesitate to explore opportunities if they align with our investment strategies. Lynne, would you like to add anything?

Yeah. I think Terry covered it well. We're looking at the organic growth. And if there were opportunities out there, it's certainly something we look at, but we've been very disciplined in our approach to M&A, as you've seen over the years.

And Kyle, I will make one more reference. And I think I said this on the prior call. We are in a very strong capital position. If, in fact, there was an M&A transaction to come our way where some of our so-called peers, as you referenced, they are getting heavily levered right now. And when assets get shopped, they're going to get shopped at people that can afford to pay for them no matter what they are. It does mean that we're going to acquire them, but we're in a strong position to look at a lot of things strategically that may or may not benefit our business. We'll make the decisions based on that.

Understood. Thank you.

Thank you.

Thank you. Our next question comes from the line of Simon Clinch with Atlantic Equities. Please proceed with your question.

Hi, everyone. Thank you for taking my question. Can we revisit what Lynne was discussing regarding the expanding product opportunities in the pipeline for market data, or perhaps what Julie mentioned? Could you elaborate on how much the Google partnership has influenced or accelerated this process, or if that impact is yet to be seen? Additionally, it would be great to get a sense of the pace of this innovation over the coming years.

Sunil or Julie, you want to touch on the opportunity on the market data, then the Google partnership.

I'll kick off, Terry, and then I'll have Julie speak to the commercial side. In terms of data platform, we have finally built it. And it's available with about 24 beta banks of data. We have developed a set of services that we are working on releasing to our clients. I will let Julie speak a little bit about the commercial opportunity in that area.

Yes, Simon. Why don't I just start for a minute just talking about the data services performance and then just quickly go into some of the product build-outs that we've been working on with Google. As I mentioned earlier, this quarter, we were up 8% versus where we were a year ago. And that is driven from high demand from our professional user base as well as our retail clients; we're seeing a steady increase in the number of those professional traders that are accessing our real-time exchange content and really seeing growth across all of those subscriber segments positive. In Q2, we did not see as many of those one-time true-ups as we saw in the first quarter. So we definitely still had positive growth. But if you remember, back to Q1, Lynne had mentioned some of those one-time payments. So those can come from everything, from audits, true-ups, and derived data audit fees, even true-ups, some real-time subscribers from accruals. So I just wanted to call that out as well. We continue to say those are sporadic revenue items, but it's worth calling that out this quarter. And again, we're feeling quite positive about where device usage is, as well as the new products that we've been able to introduce. As Sunil pointed out, for us being able to really get our data into Google Cloud at the magnitude that we're sitting at now has allowed us to accelerate the development of new products for our data business, including new analytics products as well. So we've been highly focused on how we're going to enhance the business. And then that is through making our data more available through APIs, increasing the flexibility in how we can package our data, how we distribute our data, how we're going to be able to price our data. All of this is just much better enabled once this is accessible through the cloud, as well as we believe, making it much easier for clients that don't access CME data today to be able to use these new services. The computation that you can do is just far enhanced from what we are doing in an on-prem environment. And so that's allowing us to create some new compelling trade execution analytics. We've been able to put that into production this quarter. And we'll be sharing that with our clients shortly. And so this is really us being able to leverage our own proprietary data and giving our clients this benchmarking activity and allowing them to really take action on that data and providing them with insights. And all of this just leads into how we are helping our clients better manage their risk. So we're also looking at some new opportunities on the clearing and the risk side. So we'll be seeing more of that rollout. And it's just the speed and efficiency, which with the cloud puts behind us, is allowing that new product production that we otherwise had not seen specifically within the data business. Hope that helps.

Thanks, Julie. Simon, hopefully, that gave you some color on that.

That's really thorough. Yeah. Thank you very much.

Thanks.

Thank you. Next question comes from the line of Alex Kramm with UBS. Please proceed with your question.

Good morning, everyone. I appreciate your insights on the equity franchise and the zero DTE. Some investors seem to be comparing your trends to those of your competitors. I've noticed that the micro percentage has significantly decreased. I'm not suggesting that this is solely due to a decline in retail, but I'm curious about what's happening there. Are those volumes shifting elsewhere, or is this a result of reduced REIT activity from your retail brokerage partners post-COVID? Additionally, as you discuss growth acceleration over the next decade, is retail still a part of that strategy, or do you view it as a unique opportunity from the past couple of years that has now shifted focus to larger initiatives?

Thank you for your question, Alex. Many people have insights on this topic, but I will let Tim kick things off, and then I will join him and the rest of the team. Go ahead, Tim.

Great. Thanks, Alex. Thanks for the question. When we look at the micro E-mini complex at CME, certainly, we've seen some mean reversion in volume, which is not surprising given, as Terry mentioned in his comments, the volatility coming inbound from the equity markets as well as upward price trends in all the major indices. When those things coupled together, it tends to be a less attractive trade to the more active individual client that we see that prefers the Micro over some other products available, not only in CME, but in the ecosystem more broadly. But it's important to note, this is Micro volumes golfing a coming off of a phenomenal record 2022. If we look at the Micro S&P 500 as an example, the Q2 volume that we've seen this quarter, while down, is still on par with what we saw in 2020 and 2021 and actually is higher than that. And the same holds true for the Micro NASDAQ. So it's a tough relative comp, but it's certainly a very strong product with respect to its risk management and trading needs that it provides. The other thing that's interesting to note is the Micro launched in 2019, now a few years old, is really starting to mature as a product. And what I mean by that is even though some of the volumes have come down, from a revenue perspective, it is actually flat to last year or slightly up through H1. And that's a result of two things. One, the pricing actions we've taken with respect to the Micro E-minis, which continue to be at a premium versus the other risk-adjusted Micro regular E-minis. But the other is the member mix. So even in a lower volume environment, we're seeing larger non-member proportionality of that customer mix, which has increased the RPC about $0.10 since this time last year for Micro E-mini. So that is something that is important to remind people of is the revenue performance of Micro E-minis is different than the volume performance through H1 of 2023. And with respect to maturation, the other point is look at the open interest of Micro E-mini. If we look at the top 10 open interest days for the Micro E-mini complex at CME, all 10 are in June of 2023, with single-day open interest records in several of the Micro E-mini contracts. This is a statement that the Micro E-mini is becoming a risk management tool alongside a trading tool where more and more clients are holding them versus just intraday trading, which is a very positive development for the overall health of the market. The last point that I'll make on this is we can't look at Micro E-minis in isolation. They go hand-in-hand with their older sibling, the E-mini contracts. And when you look at the combined performance and the resilience of the E-minis, the futures conflict at CME for equity indices remains very strong relative to its most analogous product choice. And that is the ETF. And what I mean by that, if we look at the S&P, we out trade the top three S&P ETFs by a factor of 10.7:1. That, for Q2 of 2023. That is up from a factor of 9.4 one year ago in Q2 of 2022. Same thing for the NASDAQ. This quarter, we out traded the ETFs in our combined futures 9.7:1 versus 7.3 in 2022. And similar to the Dow, this quarter, we out traded the ETFs 23.3 times that of 16.2 times last year. So despite the slowing growth in Micro E-minis off of a record year, still a very strong equity futures offering here at CME.

Julie? Thanks, Tim.

Yeah. And as Tim pointed out, certainly, our equity portion of our retail business is the majority of that, but with equity ball hitting two-year lows, we would expect there to be some softness in the volume. However, our overall retail business remains extremely strong. We had a record setting year last year. And we're looking at just revenue being down slightly this year, which is very strong performance. We saw positive growth in both Europe, Greater LATAM, and also China in the second quarter. And one of the real barometers that we often mention on this call and for us is a key sign of the health of this marketplace for retail participation is the total number of retail traders, which was up 7% in Q2 over Q2 of 2022 and also just the number of new traders. So our firm's ability and CME's ability to continue to attract new people to the CME markets was also up 4% in Q2 of 2023. So I think from our signs, we certainly see the equity ball had some impact on things. But the fact that we have a diverse asset class, we saw increased activity in some of the other asset classes by our retail participants and feel we're still very well positioned for future growth quarters.

Yeah. And just to add a couple of data points to what Julie said specifically. When you look at retail in our metals complex, for example, retail volumes year-to-date are up 21%. And as you know, Metals are our highest rate per contract business at $1.50. Also, options growth has benefited from retail participation, up 8% this year. So the benefit of being able to walk into a customer, any customer or distribution partner and offer every major benchmark liquidity product to them means that when sector rotation happens, we're going to be the beneficiary of that. So we see strength in certain asset classes when they set to rotate, whether because you've got normalization of volatility over cost of capital, we're going to benefit from that. And we see that. That's the benefit of the story and the growth behind the franchise.

So Alex, you've heard a few comments. And I think hopefully, you find them all salient. One of the things that we talk about in retail, and we always have, is it's an ebb and flow situation for a lot of people. Our retail is described a little bit differently as more professional-type participants, as Ms. Winkler was pointing out. So when you talk about COVID and you talk about other factors, yes, that was in there. But our retail is classified as different than the average person trading on maybe a Robinhood platform or something of that nature. And what Tim had to say about how the competitors are performing against CME, you can clearly see that our volume share is not only not decreasing, but increasing against lookalike or competitive type products. So hopefully, those questions have been answered properly for you.

Yeah. Lots of great color. Thank you very much.

Thanks, Alex.

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please go ahead, sir.

Hi. Great. Thanks. Good morning, folks. Thanks for taking my question. Maybe if I can just go back to the options story. Obviously, that's been improving nicely. The numbers I'm looking at, I think options as a percentage of total ADV was in the mid to high teens over the last couple of years. Now you've sort of vectored above 20%. So I just wanted to sort of try to understand your confidence of that type of trends improving over the next year. And then maybe just talk about the RPC dynamics of the options business first into the future in terms of whether you think that's potentially accretive to RPC. And then you also mentioned on Page 3 of the quarterly earnings commentary about the direct front-end platform, helping stimulate trading of electronic options. Is that just in the energy complex, or is that set across the business?

Thanks, Brian. Derek and Tim, do you want to start, and then I'm going to...

I'll start with your last question, Brian. You've heard us discuss CME Direct on previous calls. This is our proprietary platform that offers customers complete functionality, analytics, capabilities, and connectivity, including API access for both futures and options. Initially, it was designed to ensure we could deliver a comprehensive range of services to our global customer base seamlessly, connecting them to all we offer. This has now expanded across asset classes, not just energy. The growth we've experienced has been significant, and it has quickly evolved into the largest ISV provider for our options business, boasting the highest interest rate penetration. This is a vital component of our growth strategy. In the options analytics domain, we have created a comprehensive suite of tools, including pre-trade analytics and post-trade resources to assist customers in evaluating their positions and strategies. This new capability has been developed over the last four to five years, and as we enhance our tools, we're attracting more customers who are eager to trade options, creating a smooth experience through a single front-end system for all our asset classes, complete with a range of functional and analytical tools. We believe we are still in the early stages of developing these capabilities in collaboration with QuikStrike, and we are pleased with the growth in this area. This has also become essential for our futures delivery, with all blocks reported through this platform. Additionally, we've observed substantial growth from our buy-side participants and brokers on this front-end platform, which brings customers to our market and showcases the full array of services we provide. Regarding the percentage of options in total volume, it's worth noting that options are continuing to outpace futures, which is beneficial for our franchise since more options business correlates with increased futures hedging. As mentioned earlier, our options business is up about 24% year-to-date, with our non-U.S. options business growing even faster at 33% for the first half of the year. Considering growth opportunities and how our sales force is actively educating clients on options utilization and tool accessibility at CME Group, we see ample potential for further penetration in options, especially in Europe and Asia compared to the U.S. So there’s a lot to be optimistic about in this story.

So let me just accentuate a couple of points here, Brian, because I think it's really important. We're the largest futures exchange in the world. Our futures franchise is massive. One of the reasons it is what it is, is because of the growth of options. But the real growth is in the future for the out years. So our options business continues to be here better. It only bolsters our futures hedging business going forward. That's, to me, a real story for the future franchise of CME Group. So it's not just an option story like some people are talking about. They're different firms that they represent. We are a futures exchange with options and the options grow the future as well. And that point cannot be missed. I don't want you to think we're on only growing options in futures or not. So that's a very important point that we have to go forward.

That's super helpful. And just the RPC dynamics, I guess, of the options versus the futures?

Say it again?

Yeah. So the total RPC this quarter across our options complex was $0.666. So slightly down from what we saw overall. It does depend on asset class how that will compare and what is trading in terms of those options.

That’s great color. Thank you so much.

Thanks, Brian.

Thank you. And our next question comes from the line of Craig Siegenthaler with Bank of America. Please go ahead, sir.

Hey. Good morning, everyone. Our questions on pricing. Given your success with the larger-than-usual price hikes earlier this year, could we start to see larger price hikes again next year in 1Q '24 and then again in 1Q '25?

Sure, Craig. It's Terry Duffy. I'd like to comment on that. Price increases are a part of our operations, but they are not our main approach to growing the business. Everyone has incurred costs, and we are no exception. However, our focus is on expanding the business rather than just increasing our charges. We will continue to assess the situation on a monthly basis and make decisions accordingly. At this moment, we cannot specify what our pricing strategy will be in the upcoming years. Lynne?

And just to add to that. Craig, as you know, we do have a very bottoms-up build on that pricing strategy. This is not an approach where we have a target that we are looking to hit. It's really market by market, product by product, customer type. And we will determine what we think is the right adjustment, if any, for that market. So it's something that we evaluate in that time period. And we don't look at a multiyear pricing strategy. It really depends on the market environment, the health of the market. And what we ultimately are trying never to do is impact volumes because we want to see that velocity of trade moving through our systems given the high level of incremental margins that we earn on that trading.

Thank you.

Thanks, Craig.

Thank you. And our next question comes from the line of Owen Lau with Oppenheimer. Please proceed with your question.

Hey. Good morning. Thank you for taking my questions. So I have a quick two-part question. The first one is a follow-up to the market data question. It was up year-over-year, but down sequentially. How much was the one-time payment in the first quarter? And then the second one is about digital assets. I think CME launched Ether/Bitcoin ratio future soon. Could you please give us an update on the digital assets trading and institutional participation in CME? And how could the summary judgment from Judge Torres on the repo case potentially impact CME? Thanks.

So thanks, Owen. I'm going to ask Lynne to give you the first one on the market data question. Then Tim will touch on the digital assets.

Yeah. So Owen, in the first quarter, we saw about $4 million in one-time audit fee and catch-up payments that we didn't see in Q2. This quarter, we saw about $0.5 million in audit fees. So that really explains that differential Q1 to Q2.

Great and thanks. When we look at the cryptocurrency complex at CME, you're correct; we recently announced, which I think is an innovative and interesting product. And that is the Bitcoin/Ether ratio spread contract that will go live the weekend of July 29. That's interesting where it's effectively the price of Ether divided by the price of Bitcoin in one contract. That will trade alongside the other cryptocurrency products, including offsets for clearing at CME. When we look at the crypto composite, CME remains strong. Our value proposition remains salient with our institutional client base. We've seen continued adoption of our products in terms of both traders in the OTC space, as well as futures traders as well as the growing importance of our contracts as the underlying of some of the most popular ETFs out there in this space, which are continuing to grow, both creating volume and open interest. When we look at the volume that we're doing in the larger size Bitcoin and Ether contracts, that is up about 6% versus this period, H1 through 2022, and on pace for another strong year in crypto here at CME. When we look at our product development, we do stay currently in the Bitcoin and Ether lane for tradable products. We do have a multitude of reference rates. But with regards to your question about the Ripple case, it's really not in our position to comment on that case. Our mantra and the philosophy that we use is, we will continue to only deploy product as the regulated venue offering regulated products. And we'll wait for further regulatory clarity from the SEC and the CFTC before we introduce this additional product.

Thanks, Dan. Thank you, Owen.

Thanks, Dan.

Thank you. And our next question comes from the line of Ken Worthington with JP Morgan. Please go ahead.

Hi. Good morning and thanks for taking the question. And the SEC has a number of proposals for centralized clearing in the rates markets for treasuries and repo. So a couple of questions here. I guess, first, Terry, which of the major parts of the clearing proposals are most likely to make their way into the final rules? Maybe second, how do you think these rules could impact rate liquidity and volatility and ultimately flow through CME rate activity? And then lastly, to what extent is participating directly in a clearing platform for treasuries and repo important or even a priority for CME?

Okay. Ken, there's a lot to address here, and I don’t have all the answers right now. The SEC and treasury market proposals you mentioned still have a long way to go before we know how they will be implemented. Regarding repo trading, Tim, if you’d like to comment on that. Speaking about the SEC proposals, Ken, I don’t see anything negative for CME in those proposals, assuming they go through as suggested. I believe it would be a net positive for CME. While I don’t want to make predictions about the outcome, it reminds me of the situation during the 2010 Dodd-Frank discussions about swaps clearing being valued at $1 billion to every clearing house, which turned out to be misleading and was not based on our input. So I want to be cautious about making any predictions for the future. However, as I’ve reviewed them, I don't see any negatives for CME in any of the proposals. Tim, do you want to add anything?

Sure. I think the one thing I would add is while we continue to evaluate the proposals and the various suggestions and regulatory reforms that may be discussed, we're certainly looking to participate in those conversations with our clients and with the regulators to see what makes sense from a risk management and a clearing perspective for our customers. As Terry said, very hard to predict what the final rules may look like. But I think broadly speaking, when we look at the totality and the gravity of the interest rate complex at CME across futures and options, cash market or BrokerTec and OTC bearing, we certainly are already in a position of strength to the ability to unlock capital efficiencies for our clients. We are averaging about $7.5 billion of savings across the portfolio margin in the rates complex today. So anything that would increase the velocity or the benefits of central clearing is certainly something that we're looking to engage. But it's important to note, not only with our portfolio margin, as Terry said earlier, with big gross margin on the horizon, with the expanded suite of products available to the clients across SOFR, the Ultra 10 notes, the Ultra treasury bond futures, is that we're already providing a lot of capital savings to clients, where these may be additive, but we'll have to wait and see how the final rules shake out.

Thanks, Tim. Thanks, Ken.

Great. Thank you.

Thank you. And up next, we have a question from the line of Michael Cyprus with Morgan Stanley. Please proceed with your question.

Hey. Good morning. Thanks for taking the question. I wanted to ask about capital management. If we look back over the past decade, you guys have returned a tremendous amount of capital through the dividend and primarily the special dividend. A lot of that was during a zero-rate backdrop, but with meaningfully higher rates today over 5%. Just curious how the rate backdrop is impacting your calculus and thought process around capital management? And to what extent might you think about evolving, shifting to policy and considering buybacks? Thank you.

Thanks, Mike. I'll let Lynne comment, and I will as well.

Yeah. So as you know, Michael, we've had that policy in place with our variable dividend since 2012. We've returned over $21.5 billion to shareholders in the form of dividends during that time. We do think a lot of our shareholders appreciate the transparency of that approach and the ability to track progress towards it as we move through the year. So we do like both the flexibility and that transparency. That being said, we always do look at alternatives to make sure that the way we are returning capital is the most attractive form for our investor base. And to date, we have found that, that dividend policy has been preferred.

And Michael, just so you know, I mean, as far as share repurchases, we've talked about that. We continue to talk about it. And as Lynne just referenced, we will do what we believe is in the best of the shareholders at that time. So we're not taking anything off the table, but right now, our dividend policy has proven out to be the right one for now.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Patrick with Piper Sandler. Please go ahead, sir.

Yeah. Good morning. Thanks for taking my question. So I wanted to go back to the expanded cross-margining opportunities with the DTCC. Terry, I know this is something that's been in the works for a little while now. So just wondering what maybe caused this to come to fruition now. And then assuming you do receive regulatory approval and launch in the first quarter, how quickly would you expect that to maybe ramp in terms of client utilization? Thanks.

Thank you, Patrick, and congratulations on your new role. I want to highlight a few points. The agreement with DTCC has been in development for quite some time, which has been somewhat frustrating. The timing is significant because we needed DTCC to be ready as well. They had other projects to complete, and everything tends to take longer than expected. We couldn’t dictate their timeline for finalizing this agreement, but we have now reached a conclusion with them. We aim to have this implemented as soon as it’s approved, hopefully by the first quarter of next year. I'm very excited about the potential impact this has on the marketplace, especially concerning risk management for the future and its importance for all products. Achieving capital efficiencies across products is crucial for business growth and efficiency for every client. We strongly believe that this cross-margining agreement will greatly benefit our clients by enhancing their capital efficiency, which in turn should significantly benefit CME. Tim, I’ll let you elaborate on the agreement based on Patrick's questions.

Thank you, Terry. We are thrilled to announce that we will be bringing this to market early next year. We see significant benefits for our clients, particularly with the expansions of our products now qualifying for the cross-margin agreement. This includes our SOFR futures, Ultra 10-year U.S. Treasury note futures, and Ultra treasury bond futures. Additionally, the fit clearing of treasury notes and bonds, along with repo transactions with maturities over one year, will also be eligible. This is a key development in unlocking these benefits. As we mentioned in earlier earnings calls, we believe our current clients are taking advantage of these changes, but typically only about 20% to 30%. We aim to increase that to around 70% or slightly higher. This is just the initial step. A crucial part of these agreements is our commitment to work closely with clients to enhance capital efficiencies following this rollout. We are actively engaging with clients to further expand the program and provide them with these efficiencies, along with the common proprietary accounts. There are many exciting developments ahead that we will continue to explore in the coming years beyond the initial rollout early next year.

Thanks, Tim. Thanks, Patrick.

Really helpful. Yeah. Thank you.

Thank you. And we now have a question from the line of Chris Allen with Citi. Please proceed, sir.

Yeah. Good morning, everyone. I was wondering if we could get an update on the collateral balances, both cash and non-cash, during the quarter related to revenues to generate during the quarter where they currently stand for July?

Thanks, Chris. Lynne?

Sure. In the quarter, the average cash balance was $120.1 billion, an increase from $109.6 billion last quarter. The average non-cash balance was $109.4 billion, up from $99.2 billion in the first quarter. We earned $107 million from the cash balances this quarter and just under $20 million from the non-cash balances, which is reflected in the other revenue line. So far in July, the average cash balance has decreased to about $100.9 billion, while the non-cash balances this month are at $127.9 billion.

Great. Thanks. Thanks, Chris.

Thank you. And we now have a question from the line of Andrew Bond with Rosenblatt Securities. Please go ahead.

Hi. Thanks. Good morning. So energy open interest is beginning to trend upward from the longer-term decline. Can you talk a little bit about the overall health of the energy business, the drivers here structurally? And if the geopolitical environment is still impacting current trends in natural gas and oil? Thanks.

Thanks, Andrew. Good question. And Derek?

I think we've observed a strong return to more typical levels of volatility, which has led to a normalization in the margin required for trading. We've seen some business return, particularly with financial players reentering the energy sector after stepping back last year. You're correct to highlight the trends in both open interest and volumes. The primary drivers include both cyclical and structural factors. We're positioning ourselves to be significant beneficiaries of the cyclical trends. Notably, the global natural gas franchise, centered around Henry Hub, remains robust. Natural gas exports from the U.S. are at record levels through our LNG facilities, which are currently operating at maximum capacity, with additional facilities expected to come online in the next five years. CME Group's Henry Hub is the key pricing point for global natural gas. We are experiencing substantial growth in client acquisition, particularly from our European customers in the natural gas sector. This is not unexpected, given the challenges posed by the Ukraine War, which have disrupted fuel supplies for both crude oil and natural gas. The demand for natural gas from Europe is especially strong, and we are also witnessing significant growth in options in this area. A similar structural shift is occurring in crude oil. In June, Platts added a Midland WTI marker to the Brent basket, further solidifying WTI as the primary global benchmark for oil pricing due to its significant influence. Over time, as I mentioned in the last call, WTI is becoming the global physical benchmark. We have been actively working to expand our Gulf Coast crude grades contracts, which specifically connect our physically delivered WTI contract to the export market, as the U.S. has reached over 4 million barrels a day in exports, a record level. These contracts now have over 500,000 in open interest, which complements the nearly 2 million contracts in open interest for WTI. The structural changes in both Henry Hub, where we hold an 82% market share, and the WTI market, where we have a 90% market share, will remain crucial to not only the energy transition but also the overall growth of our business across all client segments.

Andrew, let me just say one more thing because you referenced it, and I talk about this a lot too, is geopolitical. I think geopolitical has got a factor in every single trade and every single asset class going forward. I mean, the tensions around the world are just amazing when you look at not only what's going on between Ukraine and Russia and the rest of the world being involved at the potential of what's going on between China and Taiwan. I mean, the tensions are so high all over the world. The geopolitical has a factor in every one of these markets, and risk management is critical to it. So I think you're spot on for raising the geopolitical risk, but it's not only associated with LNG; it's across the board.

Thanks, Terry and Derek.

Thanks, Andrew.

Thank you. And our final question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Great. My questions have been answered. Just one clarification. What is the rate earned on the cash collateral balances in the second quarter and the rate that you're paying out to the clients?

The rate on the Fed accounts remains at 25 basis points, where it has been for the last eight rate hikes. In the second quarter, we earned about 34 basis points, which is a slight increase from what we saw in the first quarter.

Okay. Great. Thank you.

Thanks, Brian.

Thank you. I will now turn the call back to the management for their closing remarks. Please go ahead.

Let me thank all of you for participating in the call today. We appreciate your questions and the opportunity to answer them. Have a nice day and we look forward to speaking to you soon. Thank you.

Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day.