Welcome to the CME Group First Quarter 2024 Earnings Call. I'll now turn the conference over to Adam Minick. Please proceed.

Good morning, and I hope you're all doing well today. We released our executive commentary earlier this morning, which provides extensive details on the first quarter 2024, which we will be discussing on this call. I'll start with the safe harbor language, and 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 statement. 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. I'm going to make a few brief comments about the quarter and the overall environment. Following that, Lynne will provide an overview of our first quarter financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. Our performance in the first quarter was strong evidence of the ever-growing need for risk management globally. First quarter average daily volume of 26.4 million contracts was the third highest quarterly ADV in CME Group's history. The only higher quarters were the first quarter of 2020 at the onset of the pandemic and the first quarter last year, which was impacted by the significant bank turmoil in March and created a much tougher comparison for March 2024. Despite no specific macro event or change in Federal Reserve rates occurring in Q1, we had the highest January ADV to date, up 16% year-over-year, and a February that included the highest monthly interest rate ADV in our history of 17.2 million contracts, or up 6%. We achieved quarterly ADV records for both treasuries with 7.8 million contracts, and the overall options with 5.9 million contracts. Both equity index and energy options reached all-time high levels. Our non-U.S. ADV also reached a record level of 7.4 million contracts. This is driven largely by 38% growth in energy, 29% in ag products, and 7% in metals. In total, we delivered 14% ADV growth across our physical commodity products to 4.7 million average daily volume, which included 16% year-over-year growth for both energy and ag products. This strong first quarter activity across our business lines helped generate record-adjusted quarterly financial results, which Lynne will detail in just a moment. Activity so far in April has continued to build on many of these trends. Following the strong first quarter of our physical commodity asset classes, they are up 26% to date in April as of April 22. Metals ADV specifically is up 76%, and the complex reached its highest daily volume in history at 1.7 million contracts on April 12. On the financials side of the business, the CPI released on April 10 was a great example of how important every data point is for the market to adjust positions to manage risk. We reached nearly 44 million contracts traded that day, and the wide range of views around the health of the global economy and the nuances related to interpreting the many different economic indicators continue. As a result of the strong market dynamics, year-to-date through April 22, our ADV is up 4%, including year-over-year growth in all six of our asset classes. CME Group continues to provide deep liquid markets across global benchmarks to deliver the most operational and capital efficiencies to market participants. CME Group's multi-asset class offering is in higher demand today than ever. I'm now going to turn the call over to Lynne to review our financial results.

Thanks, Terry, and thank you for joining us this morning. During the first quarter, CME generated nearly $1.5 billion in revenue, up 3% from a very strong first quarter in 2023. Within the physical commodities asset classes, quarterly revenue was up 14% year-over-year and represented approximately one-third of clearing and transaction fees in the quarter. Market Data revenue reached a record level, up 6% to $175 million. Other revenue increased 37% to $104 million, largely due to the increased noncash collateral fee implemented in January. Continued strong cost discipline led to adjusted expenses of $462 million for the quarter and $374 million, excluding license fees. Our adjusted operating margin for the quarter was 68.9%, up from 68.2% in the same period last year. CME Group had an adjusted effective tax rate of 23%. Driven by the strong demand for our risk management products, we delivered the highest quarterly adjusted net income and earnings per share in our history at $911 million and $2.50 per share, respectively, both up 3% from the first quarter last year. This represents an adjusted net income margin for the quarter of over 61%. Capital expenditures for the first quarter were approximately $16 million and cash at the end of the period was approximately $1.7 billion. CME Group paid dividends during the quarter of approximately $2.3 billion, and we have returned nearly $25 billion to shareholders in the form of dividends since implementing the variable dividend policy in early 2012. We're very proud to deliver the best adjusted quarterly earnings in our history and are pleased to see this strong start continue into the second quarter. Year-to-date through April 22, 42, or more than half, of our trading days have been over 25 million contracts versus 28 days last year, demonstrating more consistent, higher demand for our products. At CME Group, we continue to focus on providing the risk management products needed by our clients and driving earnings growth for our shareholders. We'd now like to open up the call for your questions.

The first question in the queue is from Chris Allen with Citi.

I wanted to focus on the U.S. Treasury complex record activity in the quarter. Obviously, there was a lot of chatter out there where maybe somewhere peak rate activity does not seem to be the case. But maybe how you're thinking about the U.S. Treasury complex? What's driving it? Any color on the impact from the CME DTCC cross margining? And then also U.S. Treasury clearing, which you applied to clear cash U.S. Treasury. How are you thinking about that from a structural impact perspective, but also if there's any revenue opportunities around that? Sorry for the multipart question.

No problem, Chris. We'll break that down and I'll ask Tim, Suzanne, and myself to address the different parts of your question. First, regarding whether we are at peak activity around treasuries, it's quite challenging to reach that conclusion given the current global and U.S. economic conditions. Therefore, I don't believe anyone can confidently state that we have reached the peak of this activity. If the Fed makes cuts, that would likely increase activity rather than merely relying on an upward trend to drive it. So, I would say we are not close to a peak in the treasury market activity. As for the DTCC and clearing, I'll let Tim and Suzanne provide insights on that.

Yes. Thank you very much, Terry, and thank you for the question. We do continue seeing increased participation in the cross margin program between ourselves and the fixed income clearing corporations. Some of those clearing members are seeing upwards of 75% to 80% in margin savings. And that's in addition to the portfolio margining program that we offer within CME between our interest rate futures, options, and swaps, which in the first quarter of 2024, continued delivering average daily savings of about $7 billion. So holistically, those capital efficiency solutions, I think, have been a great story for market participants in achieving record savings over time and continued consistent savings for the first quarter of this year.

Tim, do you have anything to add?

Chris, I think maybe just one thing to add on the treasury complex is when we look at the long-term growth of that complex, the volume and open interest continue to grow with the stock of outstanding treasuries. And over the last 10 years, the stock of that treasury has roughly doubled. And when we look out, the Congressional Budget Office also is forecasting it to double over the next 10 years. So when we look to where the total net issuance is currently occurring in Q1, while it was little changed from Q4 in terms of the net issuance, it was much more coupon heavy than previous quarters, and when we look at the treasury ramps up the notes and bonds to issue the finance these growing budget deficits, that plays very well into the complex of the products that we offer. And as Terry said in his remarks, furthering the growth that we've seen where the treasury complex had a record Q1 of 7.8 million contracts across futures and options and we expect the general issuance backdrop to continue to be a tailwind for that activity.

And Chris, let me just add to one thing that I was going to say at the beginning. But on the treasury complex to say that as it peaked, you know and everybody on the call knows that the different amount of opinions that's out there is related to what the Fed is going to do or not do is all over the map. And everybody has been absolutely, for the most part, wrong. So you had anywhere from six rate cuts predicted six months ago coming into '24 to three that was advertised by the Fed. Now people are going anywhere between zero, none and somewhere in between that. I have no idea what's going to happen, but there's a big difference of opinions out there, which had also generated a tremendous amount of activity. One of the things we don't talk about, and we haven't talked about since SVB failed, was their duration risk. And I'm not suggesting others are going to fall into this. But the longer that rates are higher, you have to think that others are watching this and need to make sure they manage that risk on duration. So I think that's an equation that most people that are sitting on these treasuries was not put down accounting for, say, just as little as three to six months ago.

Appreciate the color. Anything on U.S. Treasury clearing?

Regarding U.S. Treasury clearing, I announced that we are planning to file an application related to this. We are currently in the initial stages of completing that application. We expect to submit it for SEC review sometime in the fourth quarter. However, our mandate will not take effect until sometime in 2026, and we will be prepared to proceed if it aligns with the best interests of CME and its participants.

The next question in the queue is from Dan Fannon with Jefferies.

I was hoping to get a little more color on some of the activity in the commodities and metals markets. Maybe talk about the health of the customer, given the robust increase in volumes, has there been any change in position limits or other things that might potentially curtail some of the activity that's been happening?

Derek?

We've experienced a significant increase in our metals activity, which includes both precious and base metals. While Q1 was somewhat quiet, we saw a 4% rise in volumes for the quarter. There has been a notable shift in expectations surrounding gold's role in the market. Many have wondered why gold remained below $2,000 for an extended period. Recently, we observed a substantial increase in participation and growth, with healthy activity across all client segments. The market shows strong participation from both commercial and buy-side players, and this activity has been increasing. In Q1, our base metals business grew by 15%. There are many questions regarding global growth, especially concerning China and the electrification of grids worldwide, which is typically advantageous for markets like copper and aluminum. We are currently seeing record growth in aluminum. Overall, the growth in activity is robust across client segments and regions. Our options business set records not only for options but also for the entire complex in April. We are very pleased with both client and product growth across asset classes and regions.

And Dan, let me just add to what Derek said because I think it's really important. We talked a moment ago in our prepared remarks about how all six asset classes are achieving the levels that they are doing. I've talked to several people just recently as the metals run-up has happened, who I thought never traded metals anymore because of the price action, but are back in the marketplace now. So you asked, I think specifically about the customer, is the customer healthy, I don't know how you phrased it, but I will tell you that it's amazing, and this is a story that we've been telling for 22 years is when one asset class might quiet down, they go to another one. We're seeing a big divergence into these metals from people that used to participate that have gone other places. That's really fascinating for us to continue to see. But the bigger part of the picture is all six asset classes are humming along. So I think it's really healthy for a client across CME.

The next question is from Patrick Moley with Piper Sandler.

So Terry, for a few quarters now, you've expressed an openness to potential M&A as an avenue of future growth. So we're just hoping to get your updated thoughts on M&A and kind of the areas and asset classes that you're focused on when it comes to potential M&A opportunities.

Thanks, Patrick. I don't know if I've been open to discussing that. I think that I have said that CME is in a strong position if, in fact, the right transaction was to come along, and made sense for our shareholders and our clients. And so I'm not out looking for particular deals. I just said that we are in a strong position to do so if it were to arise. And again, that mindset has not changed. One of the things that we are obviously excited about is what I just said, all six asset classes are going at the same time that may open up different opportunities as it relates to some potential M&A activity if we see something. But again, we're not out shopping at the moment or anything, but we are always open to looking at something that's of value to our clients and shareholders. And what was the other part of your question, Patrick?

No, you hit on all of them. That was great.

The next question in the queue is from Alex Kramm with UBS.

Just a quick one on market data. You pointed out some kind of like one-time-ish episodic revenues here. I think one was audit, and I get that, but the other one was on derived data, and that was a bigger number. So maybe you can just remind us why that comes with sometimes episodic revenue. But then bigger picture, I think a few years ago, derived data was a big new initiative. And we would hope that there's maybe a little bit more of a stable revenue source at this point. So maybe you can just give us an update where we stand in particular, as it also pertains to what you're doing with Google on the market data side.

Thanks, Alex. I'll turn it over to Julie Winkler and I don't know if Sunil wants to chime in as it relates to derived data. Julie.

Yes, thanks for the question, Alex. The data services business had a strong quarter, generating $175 million in revenue, which is an increase of 6%. This follows a record year from last year. The significant growth is primarily driven by our professional subscriber revenue, which accounts for over 80% of that revenue. Regarding the more variable revenue from last quarter, we've previously highlighted the unpredictable nature of the audit. Derived data revenue consists of both an annual and a variable component, and we experienced some true-ups that contributed to more consistent revenue. These contracts are now up for renewal, indicating some level of repeatability with the subscriptions, although the two different components can lead to occasional spikes, which we observed this quarter. In terms of commercialization, we continue to collaborate with Google on our initiatives. Our data business has been a priority as we explore new ways to deliver our data and solutions. For instance, we have implemented transaction cost analysis, which is currently in production and being utilized by our business teams and clients to enhance decision-making. The upcoming broker tech changes, set to roll out in a few weeks, have been specifically designed using this tool, and we are eager to share it directly with clients. This exemplifies the innovation we are achieving through our partnership with Google.

The only thing I'll add is we have plans to add more data sets as risk management becomes a priority, as Terry has pointed out. So we'll be working with our clients on stress scenarios, historical scenarios, so they could use that in their risk management.

Thanks, Julie. Thanks, Sunil. Thanks, Alex. Craig, we have you listed as the next speaker. Are you there?

Terry, can you hear me?

I can now, Craig. Thank you. I apologize for the delay.

No worries. I was trying before, but nobody could hear me. So listen, guys, I know you planned to launch credit futures in June. There is an attractive capital efficiency component here with the margin offsets, especially against the rate product. How do you size up the TAM for this new segment? And how quickly do you expect volumes to ramp just given your conversations with key participants?

Yes. Good question, Craig. And I don't know if we can answer it fully because we haven't got the contract out yet, but that's always the multimillion dollar question, as I say. But let me turn it over to Tim to talk a little bit about the market and the potential opportunity and what it might mean for not only for the credit market but for markets that are correlated associated with it that she merely has today. Tim.

Great. Thanks. And Craig, I really appreciate the question. Ourselves and our clients are excited about the launch of credit futures on June 17, which will be index futures on the Bloomberg corporate bond indices and I think CME is uniquely positioned given our strength both in the interest rate and equity complex. Credit tends to be at a nice intersection of those other asset classes, but also offers a unique distinct market where when you look at the recent growth in credit markets, that has an addressable market of about $90 billion average daily volume in terms of notional across the fixed income ETFs, the CDX, the cash bond. And even the underlying market is becoming more and more electronic. So we think that the velocity of this market will continue, the needs to hedge this market will continue as people become increasingly aware of managing their credit risk and to your point, Craig, we expect to offer margin efficiencies, introducing capital efficiencies to enable our clients to manage their risk is something that is tried and true here at CME and early indications, which are always subject to change, we think there will be a 70% margin offset between the U.S. Treasury futures and the investment-grade credit future and 50% offsets against our E-mini equity benchmarks for high yield. Lack of the margin efficiencies in prior products and prior offerings is something that we believe and what we're hearing from customers was a key hurdle for some of the other offerings to become successful. So to Terry's point, while we can't necessarily predict the future, we are optimistic; we're hearing great things from clients given our ability to offer offsets against our asset classes in the base F&O fund and our unique leadership positions in the price formation of the associated asset classes, we certainly like to see what we can do with that coming June when this contract goes live.

Thanks, Tim. Thanks, Craig, for the question. Appreciate it.

Our next question is from Kyle Voigt with KBW.

Maybe a question for Lynne. I noticed that $750 million of debt moved into the short-term category this quarter due to its expiration coming in early 2025. You're below your historical target leverage level of 1x. I think you could even issue $1 billion of additional debt from current levels and still remain below that threshold. Would you consider increasing gross debt levels with upcoming refinancing to incorporate that cash as part of the annual variable next year? Or should we expect the debt to simply be refinanced at current levels? Also, could you remind us how you view maximum leverage if the right M&A opportunity were to arise?

Yes. Thanks, Kyle. So we do have our next maturity coming up in March of 2025. So it's certainly something we will be looking at over the course of this year. As you know, we don't have a strong need for debt financing, but we do try and keep some bonds out in the market just to keep our name in front of the investors and keep that credit work fresh. So we'll certainly be evaluating our approach for those bonds as we go through the course of the year. Certainly rates are higher now than when we did that issuance. So we will take that into account, but we haven't made any decisions on the level of refinancing or how we will do that at this point. In terms of the maximum target for M&A, we do value our strong investment-grade rating. So that's where we came out with that 1x target. Certainly, there is flex up in an M&A context, given the fact that we do generate a lot of cash and would be able to pay down that debt relatively quickly. I think it would all depend on the circumstance and the transaction if we were to execute how far we would go on the leverage. So I don't have an exact target for you, but it's something that we do try and balance the use of debt and equity in our transactions as you've seen historically.

Our next question Brian Bedell with Deutsche Bank.

Could you provide some insights on the portfolio margining in agreement with D2C and its impact on the strong volume growth in the treasury futures complex? Is it primarily a minor factor compared to other market dynamics? Additionally, I realize it's early to ask, but could this possibly lead to changes in the gross margining agreement with DTC? Lastly, I didn't notice the revenue figures for EBS and BrokerTec in the quarterly summary. Could you provide any updates on those for the first quarter?

Yes, Brian, we need to clarify a few things because I think I only caught about every third word you said for some reason. There were several times I couldn't hear you well. So let me break this down. You asked about our treasury business and you inquired about DTCC and the offsets, correct? Also, could you please summarize the other topics you mentioned?

Yes. Yes. Maybe this is clear. I was on my headset. Basically, the contribution from the portfolio margining in your treasury volumes. Just to sort of categorically, is it really helping? Or is it really more of the market dynamics? And then back to the treasury clearing question, maybe it's early days, but does your application complicate things with the DTC agreement?

That's the part I missed. We got it. I'm going to address your last question, but for the first couple, I'm going to have Suzanne Sprague, who heads up our clearing and risk, respond to those. Suzanne?

Yes. Thanks very much for the question. So just on the participation in the existing programs, we have seen some new clearing members take direct membership to be able to take advantage of the cross margin program that is currently in place for health accounts between ourselves and the Fixed Income Clearing Corporation. I think it's hard to quantify how much of that would be new activity versus activity that may have been cleared as clients through existing clearing members prior to that. Tim McCourt may be able to chime in a little bit on his thoughts there about the growth in that activity. But generally, our focus with the DTCC continues to be growing the participation in that program as well as extending that program to customers. So it's something that we've been working very closely as partners on and it's still important to us and thinking about the clearing mandate and bringing to market more efficiencies for those end clients that could be impacted by the current mandate as well.

Okay. Tim, you have anything to add?

I want to discuss our relationship with DTCC. One key point to mention is that when we evaluated the added value of the CME one-pot portfolio margin, where futures and options are aligned with swaps, we've seen significant growth over the years. While it’s challenging to establish a precise correlation, as Suzanne indicated, the margin savings have increased to $7 billion to $8 billion daily last year and around $7 billion daily this year. Additionally, our interest rate sector's volume and open interest have doubled. This suggests that if we concentrate on enhancing capital efficiencies for our clients and allowing them to manage their risk more effectively, we anticipate that any additional capital savings will produce similar results. Although predicting the exact growth factor is difficult, we view this as a positive influence for our operations. The more we can unlock these savings, the better our outcomes will be in transactions involving futures, options, and other CME products.

Thanks, Tim. I think that's really important. And let me just add, Brian, that on the relationship with DTCC as it relates to our treasury and clearing application, I have spoken to those folks before I said anything publicly about this. And what I also said publicly when we announced this is I do believe that DTCC has the most efficient offering in clearing of these products today. We didn't create the mandate that's coming at us in 2026. We have an obligation, as I've told my friends at DTCC that we have to go through with this application. We don't know what's going to happen in 2026 when the mandate kicks in, what the market structure is going to look like? Is it going to change? It couldn't be the same? But I can't wait until 2026 to file an application. So that's why we're doing it now. We are being prepared. And if we are going to use it, we'll use it, and if it's not necessary because the better offering comes out of DTCC, with the efficiencies for the clients, we will stay with DTCC. So that's really where we stand on the relationship and the application if that makes sense to you.

It's a great answer.

The total trading revenue for the quarter was $69 million, which is comparable to Q4, and the total revenue from cash markets, including data and some connectivity, was also consistent with Q4 at $92 million.

Right. Okay. And between EBS and BrokerTec were similar to Q4?

Yes. So if you break that out, BrokerTec was at $38 million in line with Q4 and EBS was at $31 million, that's just creating a consistent quarterly revenue from those segments.

Our next question now is from Alex Blostein with Barclays.

Question on the energy markets for you guys again. Definitely good to see momentum in overall volumes picking up here in April and over the course of the first quarter, but it looks like the market share trends between you guys and ICE and WTI continue to kind of move a little bit more towards ICE or those share gains have been relatively sticky. You gave us a bit of an update, I think, last quarter on like the underlying composition of the mix kind of what's been driving that. So hoping you can update that and give us a sense of whether or not you're seeing any shift in the kind of underlying producers, consumers, more kind of core user base there. And if CME's working on anything to kind of call some of the market share back.

Thanks, Alex. I want to address the first point regarding the first quarter and its relation to energy market share. There hasn't been a change in market share from Q3 or Q4 to Q1. Therefore, there is not an ongoing increase in market share. Our approach to calculating market share includes all our various products, including our Gulf Coast contracts, which may not have been clearly emphasized over the past few years. Thus, I do not see the market share changes you mentioned for Q1. For the other part of your question, I will ask Derek to respond.

Yes, thank you for the question, Alex. As Terry noted at the beginning of the call, the various aspects and size of our franchise are benefiting shareholders and offering diverse ways for customers to manage risk. We saw a strong performance in energy during the first quarter, with a 16% increase. The growth in this business is notably driven by our biostatic commercial customers, and we achieved record levels in overall options. Energy played a crucial role in our international growth, which was up 38% this year, driven by a nearly 60% increase in options volume. This contributed to a robust RPC of just over $1.33 in the energy sector. When comparing our WTI contracts to ICE’s, our market share in Q1 remained stable at approximately 74%, while our market share in WTI options grew from 86% to 89%. This indicates that in direct competition with ICE, we are either maintaining or expanding our market share. To illustrate further, as the U.S. produces and exports crude oil at record levels, we are seeing an increasing number of non-U.S. customers exposed to U.S. crude. Our non-U.S. WTI growth is up 30%, and commercial customer growth is 21%. Customers seeking exposure in energy markets are turning to CME to manage their risk. Additionally, our WTI franchise extends beyond futures and options to include our grades contracts, which have just surpassed 600,000 contracts in open interest, marking a nearly 50% year-over-year increase and setting a new record. It's noteworthy that 80% of this open interest is held by commercial customers engaged in the global export market. Turning to the Henry Hub market, we have also set a record for total Henry Hub volume in the first quarter and achieved record underlying options. Our market share for Henry Hub increased to 81% from 80% last year, up from 77% in 2022, while our options business also grew to 66% market share from 59% last year. In markets where we have competition, such as Henry Hub and WTI contracts against others, we are maintaining stable shares and growing open interest. With that, I will pass it back to you.

Thanks, Derek. Again, Alex, hopefully, that gives you some clarity.

Our next question now from Ken Worthington with JPMC.

I wanted to extend the competitive landscape question to rates, FMX is launching later this summer, do you see merits to the FMX value proposition? If so, which customer segments might FMX be best positioned to pursue and given that all have tried to compete with CME and rates in the past and have failed, what would you need to see to conclude that FMX might be different?

Ken, let me answer this in this way. First of all, I have sat here for 22 years as the Chairman and CEO of this company since we went public, and I've seen nothing but competition in my entire career. So this is no different. I take every single bit of competition seriously as I'm sure others do about CME as we continue to move our business forward. We have about as much information as everybody else does and what their offering is, which is zero. I don't know what their offering is. And I won't say that the party, but Tim just referenced our one pot margining that saves an additional $7 billion to $8 billion a day. We also have an additional offset with FICC, which we just got approved that numerous clients are using today that are exceeding 80% efficiencies using that service that we offer today. So we think we have a really strong offering going forward against whoever wants to compete in this product or any of our other asset classes. So we feel like we're in a good position. We believe that capital efficiencies are the name of the game and you have to have them. And if you want to just do a me-too strategy, then people will do that. It's a very attractive business. I get it. But again, I think you have to have the capital efficiencies. It's hard to walk away from $7 billion to $8 billion a day in efficiencies, and it's hard to walk away from an additional 80 plus percent that they are receiving associated with FICC now and our new offering that we just accomplished in the last several months. So I think that's very powerful, and that's all I'll say about what they're doing.

Our next question from Owen Lau with Oppenheimer.

So just a quick one on the expense guidance. First quarter adjusted expense was lower than our expectation but you maintained the full year guidance. Is there any investment that you paused in the first quarter that you expect to incur over the next few quarters? Or is there some conservatism picking here?

Thanks, Owen, for the question. So we do have some project-based work that we do expect to ramp up over the course of the year for things like the Google migration, securities clearing that we've mentioned on the call previously. You'll also see a ramp-up in terms of the consumption. So in the technology line as we're moving more into the cloud, we will see that grow over the course of the year. So we do see some of those items growing as we move forward. And then we do typically see that higher spend related to marketing events in the fourth quarter. So there wasn't a particular pause. I just think it's timing on some of these project-based spend that we still expect to come through in the course of the year, making us comfortable with our guidance.

Our next question from Michael Cyprys Morgan Stanley.

Just wanted to ask a question on the cash rate, BrokerTec business, and interest rate swaps. Both of those have seen a bit more limited growth. I was just hoping you could unpack some of the drivers and moving pieces there that you're seeing. Maybe you could touch upon the competitive landscape, how you see that evolving? And what sort of potential uplift could we see to the BrokerTec business and interest rate swaps business from the cross margining benefits that you have noted here on the call? And then maybe you could speak to some other initiatives that can help accelerate growth as you look out over the next year or two.

Thanks, Michael. I'm going to ask Tim to start, and I might join in as well and see where he goes. Tim.

Great. Thanks, Terry. Thanks, Michael. Certainly, when we look at our BrokerTec business, volatility has come in since the start of the year and that tends to favor the internalization of flow with less being sent to our club. And that's what we've seen in Q1. So not necessarily surprising in that regard. We still do get some of the risk layoff and the risk recycling into the club. So given the backdrop, not surprising where we are, but it's important to note that when we look at the U.S. Active club, that's only one part of the story for BrokerTec. U.S. repo had a strong quarter where that year-to-date ADV is just about $300 billion per day. That's up 5% year-over-year. And also the value prop of the BrokerTec platform remains extraordinary. It's important that we focus on the totality of the risk management capabilities, myself and the team look forward to engaging with all of you in the other parts of our business to better understand and showcase things like repo and BrokerTec quote, which is now up to an impressive $45 billion to $50 billion per day. When we look at the interest rate swap business here at CME, still having a very strong quarter here in Q1, so seeing all sort of near record levels in the major three Latin American currencies that we clear. That is a growth story, but it's really important to Terry's earlier comments, these are all pieces of how we approach the totality of managing risk for the interest rate complex and the needs of our clients. These things go together. It's important that when we look at what we've been able to achieve in OTC markets, what we've been able to do in providing continued risk management for BrokerTec, that's alongside record futurization in the treasury complex where our futures and options at CME remain the leading center of price discovery and risk management. The treasury future is now at a record 113% of the cash market in terms of the value being traded every day. So you really have to look at all of the pieces of the puzzle together to understand the breadth of the offering here at CME.

Thanks, Tim. You said what I was going to say. So that was very good. Not all, but I didn't have all. Michael, hopefully, that addressed your question as it relates to BrokerTec and what we're doing and where we look at from the percentages with others.

Our next question now is from Simon Clinch with Redburn Atlantic.

Most of my questions have been answered already, but I was wondering if you could provide an update on the long-term progress with the Google Cloud migration. I'm also curious about the innovations you're developing in partnership with Google to address the backend aspects of this migration, particularly in moving the rest of the business to the cloud and managing your co-location clients. It's more long-term, but the numbers are quite interesting.

I'm going to hand it over to Sunil and Simon, but in response to your question, we will wait until the work is finished. Are you referring to the markets transitioning to the cloud?

Yes, that's right.

We are still finalizing the data centers and the overall plans. As I've mentioned from the beginning, I will not move CME's markets to the cloud or any other platform unless it proves to be better and more efficient than our current offerings. Once we have that assurance, we will make a final decision. However, we have not yet seen the product. Sunil and his team are currently working on it, so we can't provide an answer to that part of the question just yet. Sunil can address the initial part of your inquiry.

I'll answer two aspects of that question. One is related to migration of the nonmarket workloads. And there, we are making very good progress. We intend to migrate our clearing regulatory services and business intelligence services this year subject to regulatory approval, of course. And then the second aspect of it is the data platform. We spoke a little bit about it. What we've done is we stood up our data platform. We have over 26 petabytes of rich historical information that includes our market data, instantaneous order book. So this information will be available for monetization in the future. We are adding to it risk information as we are migrating our clearing workloads and the risk information will be risk scenarios. And I spoke to that later as far as monetization of those in future cycles.

Does that answer your question, Simon? Okay. I think we lost Simon. But Simon, thank you very much for your question.

Our next question is from Benjamin Budish with Barclays.

Maybe just following up on the last point on the market data side. Can you maybe talk about how you think about the longer-term growth potential of that offering? So it sounds like there's plenty of other opportunities to kind of increasingly add value to the package there. What about in terms of the client base? How do you think about the penetration of potential subscribers versus opportunities to kind of enhance what you're adding?

Thanks, Ben. Good question. I'll turn it over to Ms. Winkler for a response.

I think I will start where Sunil was talking. I mean I think as it relates to being able to have our consolidated data sets for cloud integration. So as we think about easing onboarding to those tools and analytics, being able to offer these guys. These are new opportunities that we otherwise did not have. And I think the ability to really facilitate access to customers more data. We're seeing a lot of interest in customers as well for more explainability of market models, and this supports our business. We're here to manage risk, and our ability to be able to provide them data and insight much faster, we believe, will help our data business, but also be additive to our transactional business. We continue to see strong demand on the professional subscriber side, driving data, as we talked about earlier, putting those one-time activity aside from the first quarter, and we're still seeing strong plan, and that is really a product and benchmark that price discovery that we're providing. I'd say the participation regionally has also been extremely strong. And I think, selectively, we have to continue to provide data set offerings and to access to it but how are we leveraging our insights to make that more attractive as part of the package? We had record cross-selling across various products in the last couple of years to really make sure we are selling data and those services alongside our existing relatable products.

We now have a question from Alex Kramm with UBS.

Just I wanted to pop back in for a model cleanup. Can you just, unless I missed it, give us an update on cash and noncash collateral rates you've realized, et cetera, stuff that I often ask anyways?

Lynne?

Sure, Alex. So for the quarter, we averaged U.S. cash balances of about $76 billion, and we earned about 36 basis points on that cash. On the noncash, the average balances for the quarter were about $159 billion, earning 10 basis points.

Any update how that's trending? I think cash seems to be trending a little bit softer, but maybe a quick update. I know it's only been 3 weeks.

Yes. In April so far, our average U.S. dollar cash balance is approximately $73 billion, and the noncash balance is averaging between $160 billion and $163 billion, which is consistent with what we observed in the first quarter.

Our next question from Eli Abboud with Bank of America.

This is Eli Abboud from Craig's team. Given the prospect of new competition, I was hoping you could speak to the size of your network and interest rate futures. And maybe more specifically, how many unique firms are providing liquidity in rates futures on a daily basis? And when you look at the top handful of market makers, what proportion of liquidity provision are they accounting for?

Yes. Thanks, Eli. I'll let Tim go ahead and answer it, and I'll also add my comments.

Thank you, Eli. We do not provide details on the exact number of firms supplying liquidity in a particular market at a specific time, nor on the participants in various provision programs. The anonymity in the cloud is crucial for the effectiveness and efficiency of risk transfer and price discovery at CME. However, I can confirm that our network is robust for interest rate futures. While liquidity providers play an essential role in this ecosystem, they are just one component. We have a diverse group of customers with varying trading and risk management needs that enable efficient risk transfer when required. Our complex or treasury futures and options are experiencing substantial growth, with nearly 8 million contracts traded daily. We have also reached a new record of over 33 million in daily open interest in our rate futures complex, with 3,300 large traders recorded earlier this month. Additionally, the capital efficiencies we discussed highlight the strength of our global network, which is crucial for our participants in managing their risk effectively.

Thanks, Tim. Thanks, Eli. I appreciate your question.

Our next question from Brian Bedell with Deutsche Bank.

My name is associated with the cash collateral, but I would like to ask one more question about rates, if possible. Can you share your perspective on how basis trading may evolve throughout the year? There's clearly significant value in the arbitrage process. Additionally, Tradeweb's acquisition of a systematic trade rates, do you view that as increasing activity in basis trading or having the opposite effect?

Thanks, Brian. Tim, do you want to continue?

Sure, Brian. I think certainly, when we look at the basis trading, it's a trade that has persisted in the market now for several years. When we look at the combination of trading futures alongside cash, that's certainly something CME is uniquely positioned in our ability to help facilitate that. But it is important to note that basis trading does change some of the characteristics of how participants may be trading or the size they may be trading in and the different modalities they use. So it's important for us to make sure we're working with all of the participants, whether they're banks, hedge funds, market makers, or even other providers such as Tradeweb that you mentioned, they're all connecting to CME on the future side of the transaction, so that's something that when we combine these assets together for BrokerTec and CME, that's a very hard thing for the marketplace to replicate. So it's an important trade. It's continuing, and it's something with the rate environment we're in, we do expect it to continue, but hard to say if it will continue to grow or shrink from here. The important part is when clients need to manage that risk, we have both tools here at CME for them to be able to keep up.

Thanks, Tim. Thanks, Brian. Appreciate the question.

Our next question from Owen Lau with Oppenheimer.

I know it's not material to your financials, but it's getting much attention recently. If the SEC were to defer security, how would CME respond to it?

Yes. Thanks, Owen. On the crypto, Tim?

Thanks, Owen. It's certainly something that we've heard customers talk about markets whether or not either will become security. However, it's important to note our primary regulator, the CFTC as said unequivocally that either is a commodity. Based on that clarity, we have listed this product for years under the CFTC's exclusive jurisdiction. The SEC did not have jurisdiction when we listed the contract, but that will be the path we take forward until we learn otherwise with respect to our other futures and options here at CME Group.

But the way you asked your question is correct. This is not that material to CME. We are in this asset class, but we are not all in on this asset class. I think that's important. We're in the crypto space, but our focus is really on the transactions and the clearing associated with contracts.

Our last question today from Michael Cyprys with Morgan Stanley.

I wanted to circle back on the Google Cloud migration and your migration of clearing services and market data to the cloud. Just curious how you think about new services that you could provide customers over time as well as new revenue monetization opportunities over time. And if you look out five to ten years, I guess how do you see the evolution of your business as more of it over time will be moving to the cloud?

I will answer the capabilities, and then Julie Winkler will talk a little bit about the commercialization of them. So what we've done over the last two years is we've made margin calculation services available on the cloud. There are two types. One is your current margin calculation that was the first to be released following that we allowed clients to actually calculate historical calculations. Now we are allowing our clients to actually compute margin intraday so as you can see, we are progressing to give clients increased visibility into risk in a highly scalable way in far more real time. The next thing we are going to introduce for our clients is optimization. We've talked a lot about portfolio margining. We've talked a lot about portfolio margining with multiple risk pools. Optimization is the ability to give clients the tools to move positions between these risk pools to get the best margin treatment. And we are speaking in that way. We're one of the clearing houses that provide fee services. So we are making that available on Google Cloud as well towards the end of this year as we migrate more services to the cloud. Following that, we are releasing a few APIs to some of our services that can be accessed by our clients, our FedWatch API, which gives clients the ability to participate in Fed actions that in our markets is now available. We have clients taking advantage of that. So I'm going to forward that now to Julie to talk a little bit about the commercialization.

I think Sunil touched on a few of the items that we have in process. There's certainly a distribution component to this, right? We have an extremely large market data distribution network today, and being able to offer our data in the cloud gives us another avenue to do that. And it also allows us to do different data packaging than what we do today. We can provide much more customization. For example, with the offering that we have today being live for a number of years with Google. Customers can come to us if they just want, say, crypto data as one particular example. So it's a lot more flexibility, I would say, in the data packaging and the offering and the distribution. It allows us to also package that data in a way that it's much more consumable for our clients. And we're working with our technology piece also to find ways where we can create cloud environments where customers are taking the data for many different sources. So can we create, say, secure environments where they can bring in CME data and use it alongside their existing data? We believe there's some commercialization opportunities among that as well. And as I mentioned earlier, if you think about analytics and APIs, there will be commercial opportunities there, some of that building on analytics that we already offer, but also how we're going to look to build new things that are going to take a little bit of time. And so I think I would think about that more of a slow burn as we set up those commercialization opportunities. Ultimately, it's about how we have this data reinforce both the insights that we're providing to our customers and also our transaction-based businesses.

Lynne, do you want to add?

Yes. Just one thing to add there, Michael. How we commercialize these opportunities is still to be determined. These may be tools that we want to get in the hands of as many people as we can because they might lead to more growth and trading opportunities and just overall scalability of access to our market. So we could see benefits of this coming through trading and clearing fees. We could see specific products that we want to monetize through subscription-type fees. But that's to be determined where you will see that incremental revenue.

Michael, that gives you some clarity.

This is the operator. I apologize for the technical difficulties experienced. Thank you very much for your patience. Now I'll hand it back to management for closing remarks.

Thank you. I appreciate that. And let me just say, I appreciate everybody that participated in today's call and those that can't. We look forward to continually communicating with you. I want to say one thing before we close, I think it's really interesting to look at CME. We've talked about all six of our asset classes being up in Q1. That is a great sign. We've got a question about the health of the client. I think that points to the health of the client and the expansion of the client and Julie Winkler and her sales team are out there creating new opportunities and people are managing the risk. And we're saying that because open interest year-to-date is also up across all six asset classes. This is exactly what we've been talking about over the last 1.5 years as we talk about risk and needing to manage that risk. They're doing it across the board and new participants are coming in. That's a very expected outcome for CME Group. That being said, I want to thank each and every one of you for participating again today, and be safe.

As we have concluded, again, thank you for your participation. Please disconnect at this time.