Cme Group Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to the CME Group Third Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. I would now like 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 third 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.

Thanks, Adam, and thank you all for joining us this morning. We released our executive commentary earlier today, which provides details on the third quarter of 2023. I'll 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. Turning to the most recent quarter, average daily volume of 22.3 million contracts was less than 1% off the record Q3 high set in Q3 2022 while our revenue grew 9% to $1.34 billion, which is the highest Q3 revenue in CME Group's history. As we've mentioned throughout this year, we are operating in an environment that unquestionably requires risk management. With so much uncertainty in the world we live in, we're continuing to work closely with our clients to help them navigate uncertainty and manage their risks. This is particularly true in the interest rate markets today. We see divergent market views around inflation, unemployment, monetary policy and ongoing geopolitical tensions, all impacting future interest rate expectations. Regardless of whether rates rise, fall or hold steady, the shape of the yield curve and interest rate views continue to shift, and our customers need to manage that risk. As a result, we have continued to see growth on top of the record year end 2022 for our interest rate business. This was our highest Q3 for our interest rates complex, up 6% from the same quarter last year. We saw particular strength in the treasury complex, which was up 16% in the quarter and is off to a strong start in Q4 as well. Completing the successful migration of Eurodollars to SOFR, we continue to list other products to complement our interest rate complex today. Our European short-term rate or ESTR contracts traded a record 10,000 contracts per day in September. Our newly listed treasury bill futures launched on October 2, and we have traded over 15,000 contracts in the first three weeks. This is one of the most successful launches of a raised product ever. Our broad product offering and focus on capital efficiencies such as the enhanced cost margining agreement with DTCC going live in January of 2024 continue to enhance the value proposition for our customers using our products to manage their interest rate exposure. On the commodity side, third quarter 2023 volume was up 15% in total and included the highest ever Q3 volume for our agricultural products. Our energy complex also performed well with volume increasing 16% from last year. We believe the current environment for this asset class will continue to bring new clients as well as existing ones to manage their exposure in our global benchmark. We believe the strong macro environment, combined with our diverse set of asset classes and strategic execution across our growth initiatives, positions us well for continued growth in 2023 and beyond. With that, I'll turn it over to Lynne to cover the third quarter financial results.

Thanks, Terry. During the third quarter, CME generated $1.34 billion in revenue, which is a 9% increase compared to a strong third quarter last year. Clearing and transaction fees, as well as market data revenue, each grew by 9% compared to Q3 2022. We are carefully managing our expenses, which on an adjusted basis were $448 million for the quarter and $369 million excluding license fees, both lower than in the second quarter of this year. Our investment in cloud migration this quarter was approximately $13 million. Our adjusted operating margin expanded to 66.5%, an increase of about 240 basis points from the same period last year. CME Group had an adjusted effective tax rate of 22.8%, resulting in net income of $818 million and adjusted diluted earnings per share of $2.25, each up 14% from last year's third quarter. Of the $110 million increase in revenues compared to last year, we were able to drive 90% to the bottom line with adjusted net income up by $99 million. Thanks to strong expense discipline within the firm, we're lowering our core expense guidance, excluding license fees, to $1.475 billion, a reduction of $15 million from the original guidance of $1.49 billion. We are maintaining our guidance of $60 million for cloud migration expenses, bringing our total expense guidance to $1.535 billion excluding license fees. We continue to effectively manage our capital expenditures as we transition to the cloud, leading us to lower our CapEx guidance to $85 million. For the quarter, our capital expenditures were approximately $18 million. CME has paid out $2.8 billion in dividends so far this year, and cash at the end of the quarter stood at about $2.5 billion. Our strong financial results this quarter build on the strength achieved in the first half of the year and mark our ninth consecutive quarter of double-digit adjusted earnings growth. Our global benchmarks, data, and strong focus on innovation and execution continue to meet our clients' needs and deliver results for our shareholders. Please refer to the last page of our executive commentary for additional financial highlights and details. We would now like to open the call for your questions. Thank you.

Thank you. Our first question is from Dan Fannon with Jefferies. Please go ahead. Your line is open now.

Thanks. Good morning. Terry, a question for you on M&A. You've been vocal about your financial capacity to do additional transactions. I was hoping you could talk about kind of the scope and what you're looking at. And also, in the context of the current environment, why now? Have valuations come in? Are your competitors distracted with other deals or other tasks? So curious about the current backdrop of what you're thinking about and really the scope and what that may look like?

Yes, thank you, Dan. I believe it's important for people to understand the complete context rather than just skimming the headlines. If one reads the entire statement, they would realize that my views haven't changed from what I've expressed for many years. I've simply pointed out that our capacity significantly surpasses that of others because we have maintained a disciplined and focused approach concerning our M&A activities. I noted that our EBITDA is lower than one times, in contrast to some competitors who have much higher multiples. When I was asked about potential deals, I mentioned that the CME is a prime place to consider offers. That doesn't imply that CME is actively seeking anything; it was merely a reference. My interest in pursuing deals remains unchanged. We have not identified any opportunities that have led me to conclude that we want to engage in a deal. I was reiterating my long-held position. Unfortunately, headlines can sometimes misinterpret that, but I can't add much more to it. Nonetheless, our commitment to our disciplined strategy has not wavered. If we identify opportunities that could benefit our users and shareholders, we will thoroughly evaluate them to continue growing our company. That was the essence of what I was conveying.

Great. Thank you.

Thanks, Dan.

Thank you. Our next question is from the line of Patrick Moley with Piper Sandler. Please go ahead. Your line is open.

Yes. Good morning. Thanks for taking my question. So Terry, I was hoping you can maybe just give us your updated thoughts on the outlook for volumes heading into year-end, just given some of the evolving yield curve dynamics we've seen in this heightened geopolitical uncertainty. And then coming into this year, you talked a lot about how great the setup was for CME's business. So maybe if you could just talk about how that compares now to how it's played out relative to your expectations, and how it maybe compares to the setup we're now looking at heading into 2024? Thanks.

Yes, I think it's really challenging to predict the future, and I try to be cautious. The situations we observed in 2022 and 2023 were so significant that they needed to be highlighted due to the geopolitical events and inflation concerns, especially with people debating whether inflation was transitory while $3 trillion was added to the American public's finances, indicating it wouldn't be transitory. I was pointing out the positive factors we were seeing fundamentally that seemed beneficial for all our asset classes, which indeed turned out well for us, as shown by a record year in 2022 and a strong quarter in 2023, marking our ninth consecutive quarter of double-digit revenue growth. Those are impressive statistics. I don't believe the current setup has changed much, and I anticipate 2024 will see some similarities, but it's difficult to predict the volumes associated with that amidst the substantial uncertainty. When we made our remarks in 2022 and 2023, we were not facing the unfortunate circumstances occurring in the Middle East today, adding another layer to the situation. Additionally, as I mentioned earlier, there are ongoing discussions in our energy sector concerning the need for increased production from the U.S., which Derek can elaborate on during the Q&A. Overall, I think this situation is favorable for CME’s products, but beyond that, I will be cautious with my comments.

All right. Great color. Thank you.

Thanks.

Thank you. Our next question is from the line of Alex Kramm with UBS. Please go ahead. Your line is open.

Good morning, everyone. On the regulatory front, it appears that the SEC is nearing a requirement for treasury clearing in the cash market. You already have an arrangement with DTCC effective from January, which puts you in a good position. I'm curious about your thoughts on how treasury clearing might impact the marketplace, particularly in terms of customer behavior and the possibility of attracting new customers on both the cash and futures sides. Any insights on how market structure could shift if this takes place would be appreciated.

Yes. No, thank you very much. And it's a great question because it's a great unknown too, what's going on out there. And what is being proposed and what may happen is still being hammered out. I'm going to ask Suzanne Sprague, who is the President of My Clearing House, to give you some comments on the reg side of it. She's working closely with her team as they're watching this. And then I'm going to turn it over to Tim McCourt from an opportunity perspective, what he's seeing as it relates to the complex if, in fact, some of these things happen or even if they don't. So maybe we'll give you a little two-part answer here, Alex, if you don't mind.

Yes. Thanks, Terry. We do think generally the benefits of central clearing will bring the marketplace into a strong position for things like our cross margining program with the Fixed Income Clearing Corporation. So you are correct to put those dots together that it will potentially enable higher participation in that program. We do today have the program that's eligible for common clearing members. And so the enhancements will benefit those common clearing members within the program and therefore, increased activity through clearing of treasuries generally should translate to more eligible activity that could benefit from cross margining between CME and the Fixed Income Corporation. So we generally believe the benefits of central clearings plus those enhancements to the cross margin program will position us and the industry well for taking advantage of more capital efficiencies in this space. I'll turn it over to Tim McCourt to add anything else as well.

Sure. And thanks, Alex, for the question. I think when we think about the opportunity why we remain excited and very optimistic that the cross margin agreement is finally coming online in January of next year is because this is something that we've seen before in our other markets. When you unlock the capital efficiencies of related products, it significantly increases the risk management capabilities of the marketplace and can lead to increased trading velocity in the product. While as Terry said, it's hard to predict the future. If we look at some of the other areas we've unlocked capital historically, portfolio margining of futures versus swaps is probably a pretty good analog to look at, and that's been in place since 2012. And since that's been put in place, the average daily savings have grown from $1 billion in 2013 to a little over $7.5 billion today in 2023. And at that same time, our rates volume grew 109%, and open interest doubled in the complex. And our cash market participation went from about 54% over 100%. So certainly unlocking capital is beneficial to the volume and the velocity of the complex, and we're optimistic about what we can do once this comes online early next year.

Hopefully, that gives you a little color to your question, Alex.

Very good. Thank you guys.

I appreciate it.

Thank you. Our next question is from the line of Owen Lau with Oppenheimer. Please go ahead. Your line is open.

Hi, good morning. Thank you for taking my question. So it's somehow related to the last question, but I think you talked about government budget deficit in the past leading to more treasury issuance, which could increase like more hedging activities. Could you please unpack a little bit more on that relationship? Are you saying when we see more treasury issuance that should like kind of induce higher trading activity? I think any more color would be helpful. Thanks.

Yes, Owen, it's Terry Duffy here. Historically, we've mentioned that when the Fed stops acquiring treasuries, the demand will shift elsewhere. The Fed does not hedge its treasury portfolio, unlike other entities that acquire government issuances and need to hedge them. Predicting the issuance is challenging, but typically, the buyers that take on this issuance, if it's not the Fed, are participants in the market that hedge these positions. This should be advantageous for CME. Tim, would you like to add anything further?

Yes. Sure. Thanks, Owen. When we look at the net issuance of treasury securities, they increased significantly in Q3 compared to Q2, up almost 80%. And that's not surprising if you remember, this is really looking at the replenishment of the Treasury General Account, which means a record low of just under $50 billion prior to the debt ceiling. And at the end of September, that balance stood about $672 billion. Now it's important to Terry's point to look at where that debt is being issued. And comments made previously, a lot of the issuance is going into T-bills on the short end of the curve. That's what we saw in Q1, Q2, and that pattern has not changed here in Q3. So with respect to how that can impact our complex in treasuries, one would assume that if we look back over historical distributions of how the treasury has looked to issue debt, there's only so much that can go into the front end of the curve. It was perhaps a little bit below the historical norms the last several years where the treasury has taken advantage of the lower rates further out the curve. So one can reasonably conclude going forward, they would look further out the curve to be more in line with their traditional or historical allocation where that's where our complex at CME has all the historical products. As Terry noted, the growing treasury complex from both a volume and an OI perspective, we would expect that issuance further out the curve in the coupons and bonds to increase the velocity as the marketplace looks to digest that issuance, hedge the related trading activity of it. And with the introduction of our T-bills earlier this year that's off to a great start, we now also have tradable products across the entirety of the curve and even better suited for that risk management needs of the marketplace as they find ways to absorb this increasing debt being issued to the market.

Got it. Thank you very much.

Thanks, Owen.

Thank you. Our next question is from the line of Brian Bedell with Deutsche Bank. Please go ahead. Your line is open.

Great. Thanks. Good morning, everyone. I have a couple of questions and will return for the second one. My first question pertains to the potential for increased regulatory scrutiny around basis trading within futures and treasuries. I would like to hear your perspective on any possible scrutiny and the merits of that trade. Additionally, if possible, could you provide insight into the impact on volumes? I understand that it can fluctuate significantly over cycles, so it might be challenging to quantify, but I wanted to get a sense of it.

Yes. And Brian, it's Terry. I'm going to turn it over to Tim, but sometimes there's problems looking for solutions as they say or solutions looking for problems. And this is government at its finest trying to introduce new legislation where there is no problem with the basis trade is something that will continue to move as well as it should, and the basis trade is actually what keeps the markets in line. So we feel very strongly that this is going to continue to keep the market efficient. And the more you explain that to regulators to show them what kind of potential chaos you could introduce if, in fact, you have additional regulation that takes people out of that trade which widens the basis, they may not like that outcome. So let me turn it over to Tim to give you a little bit more color. But I would be cautious to draw the conclusion that any kind of pending regulation is coming down the pike in the time zone.

That's correct. I think the one thing I would add is that the existence of basis between cash and futures market is not an isolated phenomenon to the treasury market. We see this in almost all of our asset classes here at CME. And the fact that you can independently trade the basis as a standalone risk parameter is an important key element to keep these markets aligned and arbitrage-free. It's something that we've seen is vital to the marketplace for this purpose. And it's something that we also see remaining in this market. It's not surprising with rates traversing the range that they have that you're going to see different behavior of the basis that we have in previous decades when we've seen similar activity. And it's something that we engage with the market. And the one thing I would note is that it's also important that CME also has the ability to trade cash treasuries on BrokerTec and the futures, which is also both leading price discovery mechanism. So we are the natural home for this trade to take place, and we continue to work with the marketplace. Now we can increase the efficiency of this trade going forward and work even more closely with market participants to make sure we unlock the value that still exists between bringing the BrokerTec and our futures business together at CME.

Thank you, Brian.

Thanks, Tim. Thank you.

Thank you. Our next question is from the line of Kyle Voigt with KBW. Please go ahead. Your line is open now.

Thanks. Maybe just a question on expenses. Good to see the lower expense guide today, but given the slightly higher kind of inflationary environment and still relatively tight labor market, just wondering if you could remind us how you think about steady-state organic expense growth on a medium-term basis for this business within the current macro backdrop? And then second part of that question, as we're approaching the end of the year here, can you also just remind us how the Google-related expenses are expected to unfold into 2024 versus 2023 level? So I think there was spend for the first four years, but just maybe give us an update on where you stand with that spend today and when that starts to wind down.

Thank you, Kyle. Lynne, do you want to address both of those issues?

Yes, absolutely. Overall, our expense guidance indicates an increase of about 3.6% in our core expenses for this year, despite the inflationary pressures. Historically, we have maintained strict discipline and control over our expenses and constantly seek ways to enhance efficiency. This allows us to allocate more of our expenses towards growth initiatives that can positively impact our bottom line. Our track record supports this approach, averaging between 3% to 3.5% in past years. We intend to uphold this discipline moving forward and will provide updated guidance as we approach year-end. Regarding Google, we projected an increase in cash costs averaging $30 million per year for four years. This year marks the second year of our guidance, forecasting $60 million in expenses, which is offset by $20 million in cost savings from capital expenditures, resulting in a net expense of $40 million. Last year, our net expenses amounted to $30 million. We expect two more years of incremental expenses related to the Google migration before reaching a breakeven point and eventually achieving positive cash flow.

Great. Thank you very much.

Thanks, Kyle.

Thank you. Our next question is from the line of Benjamin Budish with Barclays. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking the question. Terry, in your comments, you talked about the kind of uncertain rate environment and ongoing need for participants to manage risk. Earlier in the year, you talked about the opportunity with regional banks. But maybe just at a high level, how do you see that opportunity more broadly? Is it kind of new participants that haven't been on CME's platform before? Is it more involved hedging from existing participants? How do you see kind of like the medium term TAM coming from that environmental need that you see? Thanks.

Yes. I think it's hard for us to describe if it's the regional banks or the bigger banks hedging. I mean, Suzanne can help me with more color on that as who the exact participants are because they come in to one of the bigger banks anyway, even the smaller ones do. So we're not quite sure which one is laying off the risk.

Yes. I would agree with that. It's generally appealing, I would say, for both of those groups of folks to engage with us on an ongoing basis, especially now with the uncertainty in the rate environment to think through the offerings that we have from a capital efficiency standpoint as well as a general risk management standpoint for ensuring that there aren't additional micro or macro events that will, I guess, circulate in the industry. SVB is one example of a lot of engagement that we've had leading up to and afterwards with clients about the way that we provide services and clearing solutions to allow people to manage risk as well as the product side. So, I think it is hard to specifically identify what portion of those participants might be new and existing, but we have been engaging pretty broadly in the marketplace around those events to make sure that the products and services as well as the way that the clearinghouse offers risk management services are accounted for and available for market participants more broadly to get ahead of any other events that might be circulating in the industry.

Thank you, Suzanne, for your great answer. To add to that, the duration risk that contributed to the challenges faced by SVB is still present. As we mentioned earlier, the government's upcoming issuance appears significant in order to cover its expenses, while demand has been somewhat weaker. Consequently, interest rates remain stubbornly high, irrespective of the Federal Reserve's actions. I’m not implying that there will be additional duration risks, but I do believe that managing these risks will become increasingly crucial. This applies to both large banks and mid-tier banks. In my view, the need for effective duration risk management is intensifying due to the overall fundamentals of the treasury market. Therefore, we anticipate a growing number of institutions, regardless of size, will seek to mitigate and manage risk through our treasury offerings. Does that help, Ben?

No. That was great. Thank you so much.

Okay. Thanks.

Thank you. Our next question is from the line of Chris Allen with Citi. Please go ahead. Your line is open now.

Good morning, everyone. I was wondering if you could provide color on the average collateral balances for cash, non-cash in the quarter and then with respect to the yields and then where they stand at present?

Lynne?

Sure, Chris. Happy to. So if you look at quarter three, the average cash balances were $91 billion. The yield on that averaged 36 basis points. For non-cash, we averaged $137 billion, yielding 7 basis points. If you look at October to-date, the cash balance has trended down. We're seeing average cash balances of $71 billion and a shift into the non-cash collateral, which is up to $152 billion. I would point out that on the non-cash collateral side, we did announce a fee change that takes effect in January where the charge on the non-cash collateral will be increasing from a blended 7 basis points up to 10 basis points. Just to give that a little sizing, if you apply that change to this quarter's average volume, that would have added $10 million to the revenue associated with the non-cash collateral, which rolls through other revenue.

Great. Thanks. Get back in queue.

Thanks.

Thank you. Our next question is from the line of Ken Worthington with JPMorgan. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking the question. As you go into year-end, maybe could you talk about how you're thinking about price increases in data and trading for 2024, particularly in the context of the fairly sizable changes you made in 2023?

Okay. Ken, thank you. I'm going to ask Lynne to start and then Julie Winkler, who heads up our data organization as our Chief Commercial Officer, will participate as well. So Lynne?

Yes. So as you know, on the clearing and transaction fee side, we typically announce any changes there later in the year. It's typically around the late November timeframe. Our approach is the same as it's always been. It will be a bottoms-up approach, looking at all the different markets, looking at health of the market, the value we've created, the health of our customers and the total cost of trade, including not only clearing and transaction fees, market data fees, but also the cost of collateral and making sure that we don't do anything from a fee perspective that would impact volume or liquidity, given our high incremental margin. So as I mentioned, we have increased that non-cash collateral fee effective in January that runs through other revenue. And Julie has announced some market data fee changes, which take effect in January as well. Julie, do you want to walk through those?

Yes. I mean, Q3 was another record quarter of $167 million in data revenue, so up another 9% year-on-year. And I think the strong growth also is something that as we look into 2024, yes, there will be some fee adjustments, but we also are looking for continued new product development, active sales efforts, continued education and also our enforcement efforts. So it should be noted even in this quarter, we saw about $4.9 million in non-recurring revenue that was reflective of both those prior period activities from subscriber adjustments as well as that audit revenue that we sometimes talk about. And so similarly with the transactions business that Lynne just referenced, we're continually evaluating the pricing of these data offerings. We have a very large and diverse set of offerings. So it's difficult to really specify a specific increase to forecast for 2024. Many of our data products, however, will see price increases next year ranging from 3% to 5%, kind of reflecting that price-to-value approach. However, again, this is dependent on both subscribers as well as that non-recurring revenue that occurs in most quarters. So I hope that's helpful.

That was great. Thank you very much.

Thanks, Ken.

Thank you. Our next question is from the line of Alex Blostein with Goldman Sachs. Please go ahead. Your line is open.

Hi. Good morning, everyone. Thanks for taking the questions. I was hoping you can opine on some of the potential new competitive dynamics and developments and interest rate futures markets with FMX Futures potentially entering the space and partnering with LCH. Now we've seen this movie before, right, multiple times, and all these kind of attempts have been unsuccessful. So wonder whether or not this might feel different given LCH position as the largest pool of clearing in the swaps market. Maybe just a reminder of sort of the benefits that customers get by keeping everything in futures and the savings across the portfolio they can get versus the alternative of trying to kind of cross margin between futures and swaps? Thanks.

Thank you, Alex. I'm going to ask Tim and some of my other colleagues to share their thoughts as well. Regarding the FMX proposal, we don’t have all the details yet, making it difficult to comment on the competitive landscape beyond what you mentioned. I appreciate your insights. With DTCC's announcement and the offset capabilities we can provide to users, there will be significant advantages for marketplace participants. It's important to note that FMX is starting with no futures trading currently, while we are experiencing record open interest in treasury products and introducing new offerings, which positions us well against any competitor. Competition has been foundational to CME’s success, and we are committed to providing capital efficiencies across all asset classes. We are making progress in this area, which is crucial in a capital-intensive environment. Compared to new offerings by LSE, we believe our robust proposal significantly benefits our clients by reducing their costs. I'm confident in our position, and as you mentioned, we've navigated similar situations before. When LIBOR was phased out and there was a transition from Eurodollars to SOFR, we effectively moved our entire business to CME SOFR products due to our efficiencies, which span from back office to sales. I feel strong about our current situation, and we take all competitors seriously, but we also believe our offering is compelling for our clients. Tim, would you like to add anything?

Sure. Thanks, Terry, and thanks, Alex. I think just to add a little more color on that picture is when we look at the gravity of the complex at CME, Terry's point is unmatched. And the one thing I want to further remind the marketplace about is you can unlock a tremendous amount of capital savings and efficiencies at CME today, and the marketplace is doing it. In addition to the $7.5 billion-plus margin savings from our portfolio marketing portfolio, let's look at some of the numbers with respect to the open interest. With record average daily open interest in our treasury complex of just under 19 million contracts for the third quarter, a record average daily open interest in our SOFR complex of about 11 million contracts and with a record large open interest holder population of 3,175 participants, that is an enormous amount of gravity that although LCH may be the leader with respect to their interest rate swap clearing offering, I like the gravity and the size of the complex that's going to be unmatched about the capital efficiency can tap into with CME, the sheer function of our position on the future side, which we expect to only be more and more important to the marketplace as we head into 2024.

Hopefully, that gives you some insight on our thoughts, Alex. We take everything seriously, and I believe our offering, as Tim and I have mentioned, is very compelling.

Yes. Very helpful, guys. Thank you.

Thanks, Alex.

Thank you. Our next question is from the line of Michael Cyprys with Morgan Stanley. Please go ahead. Your line is open.

Great. Thank you. Good morning. Two-part question. Just following up on the capital efficiencies beyond the cross margining with DTCC. Just curious what other steps you might be able to take as you look out the next three years to further enhance that. And then the other part of the question is just around the regulators proposing new capital rules for banks that can make some bespoke off-exchange derivatives just more capital-intensive. Just curious of your take on that, where you see the biggest opportunity to bring derivatives from OTC to the exchange-traded marketplace.

Michael, both really good questions. The latter one is we've dealt with in 2017. I'm assuming you're referring to the Basel III that's being proposed on the second part of your question.

Yes.

Okay. So on the first part, on the capital efficiencies, I'm going to turn it over again to Suzanne Sprague, and she can touch on both, but I'll give you my thought process on the Basel III as well.

Yes. Thanks, Terry. So we do look forward to extending the enhanced cross margin program to the client level. We have had quite a bit of conversations with ourselves and the Fixed Income Clearing Corporation as well as clients on the importance of continuing to broaden that program. So we don't have any timelines to commit to at this point in time, but it is a focus of ours jointly to be able to expand those enhancements to the end client level, which I think will help even more with things we've already covered on the treasury mandate and needing more capital efficiencies to address things like increased capital costs under the Basel proposal. I think, Terry, I'll hit at a high level the Basel proposal.

Yes, let me just comment on the practicality, Michael, and I know that you've been there for a little while now at your firm and understand how this works. There is zero consensus amongst the regulators as it relates to some of these proposals in Basel III. Actually, there's really opposing views to that, which makes it very difficult to move something forward we have internally at a regulator not the same people supporting the proposal. The markets need to remain efficient. And I guess, again, another solution looking for a problem with Basel III, we have never had an issue under the margin that we're holding that needs to have a capital hit associated with it. We only think that would add to the lack of liquidity to the overall marketplace and make markets less efficient than they are today. And that's not healthy, especially as we laid out the fundamental places that we are in the world today and with the issuance coming forward. We need to manage this. There's risk in everything we do in this life, including the treasury issuance and who's using it or not. We think we have a very good platform, and we think that the rules that are in place right now make sense for the users. And if you want to just continue to add capital charges to everything we do. I guess we can constrict it to zero, and we won't have any more risk in the system, but we won't have any economies around the world either. So I do think it gets to a certain point. Again, like I said earlier, this was proposed in 2017, and it was not agreed upon then, and so we'll see where this goes. We are meeting with people in Washington now. My Washington folks are trying to explain the detriment this proposal could bring to the overall marketplace.

Great. Thanks so much. I appreciate it.

Thanks, Mike.

Thank you. Our next question is from the line of Craig Siegenthaler with Bank of America. Please go ahead. Your line is open.

Hi. Good morning, everyone. During the quarter, we observed another case of vertical integration involving an exchange, or more specifically, a DCM and an FCM. Now, we have Coinbase MIAX with a vertically integrated business model. First, I would like to understand your thoughts on what this implies for the ecosystem. Additionally, CME registered its FCM last year, likely in response to FTX's actions. What are your updated goals for that business now?

So Craig, I’ve been discussing market structure and how it always has a limited lifespan. We can’t anticipate what the next structure will look like, but we must remain prepared, which is what CME aims to do. We filed for the FCM application not just due to FTX, although that was part of the reasoning, but also in relation to market structure. With the proposed vertically integrated models like MIAX and possibly Coinbase, the conflict of interest for clients is significant. This concern would apply to us if we moved forward with an FCM, so we would need to be cautious. If these integrated models are pursued, appropriate rules must be created. My main issue with FTX was their attempt to adapt existing rules to fit their business model. If MIAX is entering the U.S. market with an integrated model, rules must be established to reflect this, as the Commodity Exchange Act from 2000 was designed with intermediaries in mind, not direct models. While there could be intermediaries in a direct model, the rules aren’t clearly defined for that. There's still a lot to address. I believe the lack of attention to these issues stems from their size, which is a mistaken viewpoint; their size shouldn’t determine their potential for growth. We never know what changes could happen. It’s essential to have rules in place so that we avoid situations like those in 2008 where businesses operate solely in their self-interest without considering the public good. CME has always served as a neutral facilitator for risk management and will continue to do so. We favor the intermediary model, yet the future remains uncertain. I am quite concerned about some current platforms, and the government must evaluate them and establish rules if they intend to permit them to operate.

Thank you, Terry.

Thank you.

Thank you. Our next question is from the line of Andrew Bond with Rosenblatt Securities. Please go ahead. Your line is open.

Thanks. Hi. Good morning One for Derek on the energy business. So energy markets, particularly natural gas markets, have experienced some structural shifts benefiting North American markets following the Russian invasion of Ukraine. More recently with the geopolitical events in the Middle East, are you seeing more of a continuation of these dynamics? And can you talk about the potential longer-term impact of the geopolitical events of late on your markets?

Andrew, thank you. We appreciate it. And Derek?

Yes, I think this is kind of proof positive of what we've been talking about for the last couple of years that structurally, the U.S. is in an incredibly strong position, given the position we have, both in crude oil as well as natural gas. As you know, we're currently exporting record amounts of oil from the U.S. at 4.6 million barrels a day. We're also exporting record levels of natural gas while based on Henry Hub pricing record levels from our U.S. capacity point of view. So as we've talked about, that structurally positions CME's WTI franchise as kind of the leader in that space and certainly positions WTI as a global benchmark as the U.S. continues to export the marginal barrel outside the U.S. with challenges everywhere else. Natural gas, as you pointed out, has been a really, really strong point for the energy franchise overall. When you look at what's going on from an uncertainty point of view, options continue to be a significant proportion of our customers' client behavior. So we like our position in both natural gas and crude oil when you look at the volume and growth of both futures and options, strong in Q3. More importantly, we continue to see that strength in October with our energy options up 81% overall, energy up 26% in October. So really strong year this year, continuing really strong year into Q4. And the position that we have as the swing producer, both in natural gas and crude oil, I think positions us well long term in what we think is a potentially multigenerational energy shift.

Thank you.

Thanks, Andrew.

Thank you. Our next question is a follow-up from Alex Kramm with UBS. Please go ahead. Your line is open.

Yes. Hello again. Just a quick one on the interest rate business again. You guys, Terry mentioned the LIBOR, SOFR transition. Obviously, that's now behind us and successful. But just maybe looking back on that, I think early on, there were some concerns that SOFR would not be the best replacement for Eurodollar and that maybe it won't meet certain trading strategies. So now that we're sitting here, I don't know, six months after the real cutoff, is the marketplace different at all? Are you seeing certain strategies not being applied anymore? And is that still room for innovation for you or SOFR, Eurodollar basically now the same thing as it always was? Thank you.

So I'm going to let Tim answer as well, Alex. But I will say the following that the reason why people believe that SOFR might not be as good as your Eurodollar is because of pure uncertainty. When you know a certain way for so many decades of how you're going to price short-term interest rates and all of a sudden, the governments say you have to change them, it's the uncertainty of the marketplace for starters. As far as it goes to the strategies, I think Tim already outlined the open interest in trade and SOFR. So you would have to say the answer to question number two, are people not doing certain strategies is no. So question number three is, is there opportunity for people, I think was the last thing you had asked for the SOFR versus what was not in the LIBOR, and I'll turn that to Tim.

Yes. Thanks, Terry, and thanks, Alex, for the question. I think what's interesting is when we see several months after the transition, we look at the SOFR complex at CME year-to-date through Q3, I believe we're already about 14% above the best year in Eurodollar previously. And we still have a whole quarter to go, which is exciting. So certainly adopted, certainly being integrated. We're seeing similar strategies with respect to the various option strategies, the futures, the outrights, the spreads. So we're really pleased with how the ecosystem is coming along. But the one thing I would add is we also have new additional short-term interest rate products that can be spread against SOFR. When we look at the introductions of T-bills, and as Terry said in his opening comments with respect to us leading and taking really strong roots in the ESTR market overseas, these are all new things that are additive to the ecosystem that didn't exist when Eurodollars are around. So very optimistic for the future and further buttressed by our efforts on the CME term SOFR front with respect to licensing and the IP and the gravity that we're lending to that complex. These are all great things that continue to position not only SOFR, but the rest of our rates complex, given the interrelatedness and the spread strategies that exist as we head into next year.

Excellent. Good to hear. Thanks.

Thanks, Alex.

Thank you. Our next question is a follow-up question from the line of Brian Bedell with Deutsche Bank. Please go ahead. Your line is open.

Thanks for taking my follow-up. It's regarding RPC. You mentioned some drivers in the third quarter, specifically member mix and product mix. It seems that the product mix between asset classes played a significant role. Could you provide insights on any outliers within the asset classes that had a notable impact on RPC? Additionally, it appears that the non-U.S. geography showed a slight sequential increase, which is interesting since it typically correlates with a higher RPC. Could you comment on that? Lastly, could you clarify the differences between options and futures? I recall you mentioning that options volumes in energy, particularly, saw a nice increase in October.

Yes, Brian, your question has two parts. I will ask Lynne to discuss the RPC first, and then I'll ask Derek to share insights on the international business, which, as you noted, has a higher RPC compared to some elements here in the U.S. Go ahead, Lynne.

Yes. So if you look at the overall RPC of $0.707 versus the prior quarter of $0.724, so down $0.017. The drivers for that were really lower proportion coming from commodities products was about 18% this quarter, down from about 19.5% last quarter. We did also see a slight increase in member mix and the contribution from micros overall. In terms of the specific asset classes, I wouldn't call anything out as unusual per se. I would just point you to if you look at the year-over-year basis, on very similar volume, we saw a 12% uplift on RPC. That's driven by a couple of things. You do have a lower proportion coming from micro. You have an increase in the commodities as we've seen that rebound in this year, and you are seeing the impact of that pricing change rolling through.

Thanks, Lynne. Derek, do you want to talk a little bit about the non-U.S. business as it relates to the RPC?

Thanks, Brian. We've experienced continued strong growth following what was a record 2022 for our non-U.S. business. Our Q3 international volume increased by 7% this year, driven by some of the higher RPC products. Specifically, our ag non-U.S. business rose by 32%, energy by 30%, rates by 16%, and metals by 10%. Additionally, our non-U.S. options have shown remarkable growth, with volume increasing by 31% compared to an overall options increase of 21%. EMEA stood out particularly regarding volumes. The efforts we've made, including having more of our sales force outside the U.S., are enhancing our ability to acquire new clients and strengthen cross-selling opportunities with our existing customers. Thus, our non-U.S. business remains a key area of strength and new client growth for us, and we are well-positioned for another record year across asset classes as we head into 2024.

So just to sum that up, Brian, because I think, it's a really important question. Not a particular asset class where there's degradation in the RPC so much. It was more the mix of member versus non. And then we have some of these really outlier, not outliers, but some higher rate RPCs and some of the energies as Lynne referenced. And it's a very sensitive tool. So that can move it a little bit, and that's what you saw.

That's great. And then just can you remind us on the RPC of options versus futures in general?

Yes.

Yes. So the total RPC for options this quarter were $0.658.

Got it. Okay. Perfect. Thank you so much for that really complete answer. Thank you.

Thanks, Brian.

Thank you. Our next question is from the line of Owen Lau with Oppenheimer. Please go ahead. Your line is open.

Thank you for taking my question. I think CME recently launched the WTI Crude Oil Monday and Wednesday Weekly options. I'm just wondering how much incremental opportunity and demand for these kind of 0DTE products, not just in energy but in the whole CME platform? Thank you.

Thanks, Owen. Derek?

Yes. Regarding the weekly options, we've experienced significant success across our entire franchise by introducing additional points on the maturity curve. Recently, we've launched trading on Mondays and Wednesdays in energy, particularly in WTI, which has led to several records being set. On the first of September, we achieved a daily record average volume of about 43,000 contracts. Additionally, on that same day, following the launch of the new trading days, we set a single-day record of around 15,000 contracts. This expansion provides an opportunity for us, as we've previously mentioned, especially in a market filled with risks related to various asset classes. Adding extra maturity points and detailed risk management has proven effective. We've explored this approach with equities and progressively rolled out new asset classes. Over time, our customers have broadly adopted these offerings, which have contributed to the open interest pool and created more opportunities for spreads across maturities. It's also important to highlight that our record options growth is accelerating, not just at the front end of the curve but along the entire maturity curve. We view these as valuable tools that complement our growth, although they are not the main drivers of growth.

Got it. Thank you very much.

Thanks, Owen. Thank you, Derek.

Thank you. The next question is a follow-up from Craig Siegenthaler at Bank of America. Please go ahead. Your line is open.

Hi, this is Eli from Craig's team. Thanks for taking my question. I was wondering if you could provide some insight into how the approval of spot crypto ETFs could impact your crypto complex. What percentage of the volumes in the futures-based ETFs are currently contributed by managers in that complex? Additionally, if we observe a shift from futures-based vehicles to spot ETFs, would that pose a threat to the viability of that complex?

Yes. Good question, Eli. Thank you. Tim?

Thanks, Eli. Thanks, Terry. Certainly, a pressing question, given the recent moves that we've seen in Bitcoin. I think one thing to note is that before we dive into the nuances of the ETF, we've also seen tremendous volume in OI growth here in the third quarter for our crypto complex. Just this week, we saw over 130,000 contracts trade, worth about $7.6 billion. That's our largest day in the crypto complex since the wake of the FTX collapse in a little over a year ago. So when we saw also a record OI in our Bitcoin futures over 20,000 contracts, which is equivalent to more than 100,000 Bitcoin. And this really speaks to the fact that we are an institutional-grade offering for the crypto community. So it is not surprising that we're the underlying for a lot of the futures-based ETFs, which has done phenomenally well in terms of serving the marketplace to date. Certainly, there's a belief that some of the uploading of price to almost $35,000, $36,000 we've seen this week is on the belief of spot-based ETF approvals. I'm not necessarily here to comment on whether that's going to happen. But what I can tell you is that we do see the introduction of additional structured products, whether it be spot or other underlying base in the crypto community will be additive to our complex at CME on two fronts. One, these markets are highly interrelated, where futures will not only be the underlying for some of these products, they will also be the hedge mechanism for market makers as well as market participants looking to hedge their digital or ETF-based holdings. And the second thing to always keep in mind is we also have the CME CF Bitcoin reference rate, which is the underlying for a lot of these ETFs coming to market. So not only will be additive to our futures-based volume as we've seen in other asset classes such as equity, it's also to keep in mind as these products take root and grow in the market, there will be additional revenue generation opportunities from the licensing front as a function of AUM and derived license fees here at CME as the IP owner of the underlying index.

Got it. Thanks guys.

Thanks, Eli.

Thank you. And there are no further questions. I'll turn it back over to management for closing remarks.

I want to thank you all very much. Excellent questions today. We appreciate it very much and we wish you a good day, and everybody stay safe. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.