Cme Group Inc. Q2 FY2024 Earnings Call

Welcome to the CME Group Second Quarter 2024 Earnings Call. At this time I would like to inform all participants that your lines have been placed on a listen-only mode until the question-and-answer session of today's conference. I would now like to turn the call over to Adam Minick. Please go ahead.

Good morning. I hope you're all doing well today. We released our executive commentary earlier this morning, which provides extensive details on the second 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.

Thank you, 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 second quarter financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. Our strong second quarter results again reinforced how the need for risk management continues to grow. And CME Group is where market participants turn to manage their risk across the most diverse set of benchmark products. We delivered record quarterly revenue, driven by year-over-year growth in both average daily volume and open interest across every single asset class. This is the first quarter with this broad base growth since 2010. Second quarter average daily volume of 25.9 million contracts increased 14% and represented the highest Q2 ADV in our history, including a quarterly record for non-US average daily volume of 7.8 million contracts or up 23% year-over-year. This robust activity drove record adjusted quarterly earnings which Lynne will detail shortly. We delivered 16% year-over-year ADV growth across all our physical commodity products to 5.2 million contracts, which included double-digit year-over-year growth for both energy and metals products at 16% and 42% growth respectively. Importantly, our overall Commodities portfolio has generated record revenue year-to-date in 2024, up 16% versus the first half last year to over $836 million, representing 34% of our clearing and transaction fees revenue in the first half of the year. Turning to our financials, total ADV across the complex increased 13% from Q2 last year, including record Treasury ADV of 8.2 million contracts or up 36%. Our US Treasuries set a new daily volume record of 34.4 million contracts during the quarter on May 28th. The continuing high levels of issuance and deficit financing are tailwinds even in the absence of Fed rate changes. Also, Foreign Exchange second quarter ADV grew 20% versus Q2 last year. In addition to our impressive quarterly volume results, we continue to provide unmatched, and I’d say it again, unmatched capital efficiencies for our customers. Within interest rates alone, these efficiencies result in margin savings of nearly $20 billion per day for our clients through the unique combination of offsets within our rates futures and options franchise. Our one pot margining with CME cleared swaps and cross margin offsets versus cash treasuries offers clients the efficiencies which no one else has the regulatory approval to provide. Coupled with the 13 million interest rate futures and options traded at our exchanges on a daily basis, the liquidity depth of book and capital savings in our interest rates complex is unparalleled. While we are pleased with our record results and our ability to consistently deliver quarterly earnings growth, we continue to innovate with an eye towards the long-term needs of our customers. Near the end of the quarter, we were particularly excited to announce a significant step forward in our partnership with Google Cloud. I have Ken Vroman in the room with me who will provide more detail during the Q&A period on the integration. We plan to build a new private Google Cloud region, and a co-location facility in Aurora, Illinois, designed to support global trading of our futures and options markets in the cloud with next-generation cloud technology, ultra-low latency networking and high-performance computing. This next generation platform will build on the benefits we provide our clients today through a broader range of connectivity options and faster product development. In addition to our state of the art trading infrastructure, our clients will also be able to utilize Google’s artificial intelligence and data capabilities to help develop, test and implement trading strategies to manage their risk more efficiently. Finally, as we begin the second half of the year, looking at the uncertainty around the US political landscape with the disparity of opinions and policies, the need to mitigate and manage risk has never been more paramount. On top of that, the ongoing uncertainty in the Middle East, coupled with the unrest between Russia and Ukraine are continuing issues with no end in sight that markets need to manage. These are just a few of the geopolitical events that highlight the need for our risk management products. We look forward to working with our clients to make sure they have the most liquid and efficient markets to manage these issues, and all the others we encounter in this world. I’ll now turn the call over to Lynne to review our Q2 financial results.

Thanks Terry and thank you all for joining us this morning. CME Group delivered the strongest earnings in our history this quarter. Starting with the highest ever quarterly revenue at over $1.5 billion, up 13% from the second quarter in 2023. Quarterly revenue for our physical commodities asset classes grew 17% year-over-year and represented over one-third of clearing and transaction fees in the quarter at $444 million. Market data revenue of $175 million increased 7% from the same quarter last year and other revenue increased over 35% to $107 million. Continued strong cost discipline led to adjusted expenses of $474 million for the quarter and $388 million excluding license fees. Our adjusted operating margin was 69.1%, up from 66.8% in the same period last year. CME Group had an adjusted effective tax rate of 23.1%. Driven by the robust demand for our risk management products, we delivered the highest quarterly adjusted net income and earnings per share in our history at $932 million and $2.56 per share both up 11% from the second quarter last year. This represents an adjusted net income margin for the quarter of 61%. Capital expenditures for the second quarter were approximately $17 million and cash at the end of the period was approximately $2 billion. CME Group paid dividends during the quarter of $419 million, and we have returned over $25 billion to shareholders in the form of dividends since implementing the variable dividend policy in early 2012. A consistent, higher level of demand for our products continued in the second quarter, evidenced by 52% of our trading days being above 25 million contracts in the first half of this year, compared to 34% in the first half of 2023. In addition, four of the first six months this year set all time volume records including all three months this quarter. We are very proud of the team for their efforts to efficiently run the business, driving earnings growth for our shareholders, while also focusing on the future and providing our clients with the risk management products and capital efficiencies they need as our industry continues to evolve. We’d now like to open the call for your questions.

Thank you. We will now begin our question-and-answer session. Our first question comes from Patrick Moley with Piper Sandler. Your line is open.

Yes, good morning. Thanks for taking the question. So I think it was the first time today that you disclosed that aggregate amount of daily margin savings of $20 billion. Can you maybe just elaborate or provide a breakout of how that splits between the buckets or the margin buckets, cross-margining, portfolio margining? And then could you also maybe just help investors understand how that compares to what the competitor is offering and what type of moat that provides you when we think about your customers potentially looking elsewhere. Thanks.

Patrick. Thank you for your question. Sunil Cutinho is going to answer the first part, as Suzanne Sprague is out sick today. So Sunil, as you know, headed up our Clearinghouse for many, many years, and is very informed on that question. I will answer the latter part of that question as it relates to the competitor and what they offer, because it will be a short one. But go ahead, Sunil.

You know, the same clients trade both futures, options, swaps, and cash products. So the rough split is around $12 billion for futures and options, $7 billion for swaps with futures and options, and then $1 billion including the cash.

Patrick, if you're referring to a competitor such as people who have announced they're going to compete with us, their efficiencies are exactly zero. They don't have any futures business so they can't have any efficiencies to-date. I don't know what you want me to do, speculate on what you think they are going to get or not get, but the answer to your question is they have zero efficiencies. Sunil?

The only other thing I would add is our competition cannot provide any efficiencies relative to options either.

Okay great and maybe just one on the pricing increases you announced at the beginning of the year. I think you said you expected market data revenues to increase by 3% to 5% and then 1.5% to 2% bump in futures revenues. Could you maybe just update us on how you're feeling about, how you're tracking towards that? And, with half the year behind us, you have a sense of where you could maybe come in directionally within those ranges. Thanks.

Thanks, Patrick. Lynne?

Yeah, so thanks, Patrick. So far in the first half, we are very consistent with the guidance. So we said 1.5% to 2% on the clearing and transaction fees, 3% to 5% on the various data products, and then getting to a total revenue impact of somewhere between 2.5% to 3%. And I would say that we're tracking very well on each of those line items through the first half.

Okay, great. Thanks for that. I'll hop back in the queue.

Thank you.

Thank you. Our next question comes from Ben Budish with Barclays. Your line is open.

Hi. Good morning and thanks for taking the question. Maybe just following up on Patrick's first question, can you give us an update on where you are with the DTCC cross-margining program? How are efficiencies looking there versus what you've kind of been signaling and where are you in the process of getting to where you think you'll be getting to.

Thanks, Ben. Again, I'm going to turn it to Sunil with that answer. Sunil?

We have 10 clearing participants taking advantage of it. We have a few more in the pipeline that will be onboarded shortly. And as I mentioned before, we have grown to about $1 billion in savings and we'll continue to grow that. We are also working on trying to provide efficiencies all the way to indirect participants, but that would require an approval with the RESI.

So the savings then has gone up exponentially since we last reported out last quarter. So that number hitting a high watermark of near $1 billion is a record for us.

Okay, that's very helpful. And maybe just a follow-up on the energy side. You published a white paper recently talking about the increasing use of WTI and setting the price of Brent and how you were seeing, I think an increasing amount of WTI trading happening during European hours. Could you just unpack that a little bit? Are you seeing new customers joining the platform? Is it taking share from existing customers that may have been previously trading on other exchanges? Any other color there would be helpful. Thank you.

Thanks, Ben. Derek.

Yeah, thanks, Ben. As you heard Terry mention at the top of the call, we set a record revenue this year for the first half in the commodity side. Energy is a big part of that. Our overall energy volumes are up 16% this year to 2.4 million contracts. We've also seen our open interest grow 20% as well. When you look at our WTI business, as we've said with record amounts of US crude oil out in the market, both on the production side and the export side, that's creating net new exposures for non-US customers on the WTI side. When you look at where those growths are coming from in our WTI complex, we actually see that our energy volume across EMEA is up 53%. So European volumes from European customers up 53% this year. Just on the WTI future side, that's up 42% from the European customer base. So as we expected, as physical US oil hits the global market, we are expecting to see customers that were not directly exposed to US crude oil imports in Europe now using WTI products to manage that risk. We're seeing that most acutely on the option side as well where WTI options is up 23% this year. As it relates to kind of the share and where that's coming from, we are seeing net new customer growth on the WTI side in Europe, but we're also seeing shares between our WTI and the competitor's WTI basically flat, going back seven months now to December of last year. And actually in options, we are seeing our share increase to 89% and 86%. So we are growing in absolute terms, we're growing in relative terms, and we continue to see that growing.

Thanks, Derek. Thanks, Ben.

Thank you.

Thank you. Our next question comes from Simon Clinch with Redburn Atlantic. Your line is open.

Hi. Thanks for taking my question. I was wondering if you could circle back to the process of competition here. And I was wondering if you could expand on the levers you would consider pulling. And what kind of signals you would be looking to as you respond to competitive FX going forward? Just maybe you can reference how that's been done historically because this has always been a competitive environment. Thanks.

Simon, is your question is what we are going to do if they actually launch and what are we going to do if they actually get business? I'm confused what you're asking. I made it perfectly clear on the last call that we have done a number of things over the last eight to ten years to put ourselves in the strongest position possible. I could not cite the numbers of $20 billion if we didn't make the investments we have made over a long period of time to create the efficiencies for our client base. And that is something that is unparalleled, as I've said, in the industry. We are in a very strong position today. So to walk away from a potential $20 billion of margin savings on a daily basis to go to an unproven model seems to be a bit of a fiduciary stretch for people to direct business in that venue. So we’re in a strong position today to compete with anybody, including the announced competitors. And so this is something that we've always been prepared for. We always are prepared for competition. And I do believe competition always makes everybody better. So I take everything seriously. That's the reason why we've made the investments we have for our clients along the way. That's what we've done and that is what we'll continue to do. As for additional steps, I have to wait and see what they are going to offer here. Let me be clear. There is no approval for anybody to list in the United States, foreign sovereign debt and clear that US foreign sovereign debt in another legal jurisdiction outside of the United States. There is $27 trillion of outstanding debt in treasuries that the US Treasury in the United States government depends on to run this country, under the rules of the United States, not under the rules of the United Kingdom or the Bank of England. So we will wait and see how that proceeds if that offering goes anywhere. I think there is a lot of concern about giving up jurisdiction to a nation the size of Great Britain with some of the track records they've had with the LME and some of the other issues they've gone forward with. So we will have to wait and see, Simon. I don't want to put the cart in front of the horse, but I think there is a long way to go before that's even been decided what you can and cannot do. That's why the efficiencies are zero, and they'll stay zero.

I appreciate that. Thanks very much Terry. Just as a follow-up question. Just going back to the pricing dynamics in futures and options. Could you just expand on what's really going on from a mix perspective from RPC, particularly in rates? I just noticed that we are back to sort of year-on-year declines and despite what should ultimately be a positive mix shift towards the long-term rates within that franchise. And I'm just trying to piece that together. Thanks.

I'll take the RPC point. So Simon, you are looking at the year-over-year rate RPC in total. If you look at rates on a year-over-year basis, they were up 14% volume-wise. So you are going to see some downward pressure from the increased volume tiering. You also have a higher contribution of treasuries, which is a positive but you do have higher members this quarter, and you do have a decrease in some of the block volume that we saw last year. So there is a number of factors at play there. I would say the most impactful is probably that 14% uplift in volume, which is going to have that downward pressure on the RPC, but still a strong revenue growth number for the rates complex, given that volume growth.

Okay, that's very useful. Thank you.

Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.

Thanks, good morning. Was hoping Lynne, just to talk about expenses for a bit. First half run rate is tracking well below the guidance, typical seasonality of that building in the second half. So hoping you could flush out a bit of what you are spending on? And then also the new colocation facility that you announced in partnership with Google, just thinking about that in terms of what that means from an expense and/or investment perspective and versus the guidance that you've kind of talked about in terms of that Google partnership over time?

Sure, Dan. Happy to. So yes the guidance, we’re still comfortable with the full year guidance that would imply about a $60 million increase in the back half of the year versus what we saw in the first half. There are a few things to keep in mind. You mentioned the typical uplift in our marketing and event spend in the fourth quarter, that is going to continue, but you also have other items where we are spending more on things like some retail marketing as we are supporting some new brokers that are coming into that space. Another piece of that increase is going to be around the Google migration. So some of the cloud consumption you will see increases in our technology line item. You are starting to see that in the past few quarters, you will continue to see that as we go through the balance of the year. As we move more applications into the cloud, you will see more of that consumption spend. Remember the offset is we are spending less on CapEx, and you are seeing that come out of depreciation as well. The other things to keep in mind are some of the project-based work on things like the treasury clearing project that we've announced and the balance of that increase is going to be in compensation. So we remain comfortable with that increase, and it is a number of factors beyond just the typical marketing spend in the fourth quarter that we've seen in the past.

Ken, do you want to talk more about the market and the second part?

Yes. Maybe a little bit of context on what's next with respect to Google. We are very excited about what we announced and Terry alluded to this: a one-of-a-kind purpose-built facility that will provide scale and resiliency to our customer base. At the same time, allowing markets to operate in the cloud, not next to the cloud, in the cloud. We think there is an innovative amount of engineering that went into delivering ultra-low latency capabilities in the cloud that will allow our customers to take advantage of that for both scale, efficiency, new products and new services. So with respect to that, we are very excited about that. We've extended our relationship with Google that goes out as far as 2037 to ensure that we have plenty of time to burn in this capability. For next steps, we are in a process where we are now reaching out and working with our customers to drive that iteration and make sure that we get the technology and the ecosystem correct as we build the facility out in Aurora. At the same time, in parallel and related to some of the things Lynne's talking about, we are migrating our core business, our regular non-ultra-low latency business to the cloud. We received approval from the CFTC to run clearing in the cloud. We expect to be running cycles shortly in the cloud with respect to our business and other non ultra-low latency applications will go there. We are about two-thirds of the way through that migration and continue to make great progress with respect to it.

And just to finish, Dan, on the expense piece of that, it doesn't have an impact on the current guidance, and we will layer in any impact in the out years, as we give the guidance going forward. So no impact yet on our financial guidance from the co-location facility.

Great. Thanks for taking my question.

Thank you. Our next question comes from Owen Lau with Oppenheimer. Your line is open.

Hi, good morning. And thank you for taking my question. So it's a broad question and go back to Terry's comment about the upcoming election. I know you have many different asset classes, but I'm interested to hear more about how does the upcoming election and potential change in administration could impact CME over the next 12 months to 24 months. Is it mainly because of volatility? Or is there some potential secular trend that we may not fully appreciate? Thanks.

Owen, again, this is speculation. So we have to be careful here. Depending on who assumes the White House, is it the same policies that we've seen over the last several years? Or is it a new administration with President Trump coming back in and putting his agenda in place? You know what his agenda is: less regulation, less taxes, more focus on domestic issues. The question will be what does that have to do with markets. I think regardless of who sits in the White House, the uncertainty as I said in my opening comments is there and markets are going to need to manage that risk because no matter what people say on the campaign trail and what they do once they assume office are normally two different things. If you look at history that will show that to be a fact. It is very difficult to follow through with some of the rhetoric that you say on the campaign trail. So markets get very skittish one way or another, get excited one day, not so excited the next. Is President Trump going to sit on the Fed or make fun of the Fed like he did prior, try to get them to take rates down? Or does the Fed stay independent? There is a lot of rhetoric. We will have to wait and see. We've had a man who had four years in the office. If he does reassume that office, I think he will have a whole new cabinet and obviously new people around him and the advice might be completely different than the first four. And if, in fact, the current Vice President assumes the office, we know where the administration has been. I don't think there are any surprises there. So that's the best way I can look at it, and say that overall, the volatility issue with the markets because the US is the dog that wags the tail around the world is going to be very important. We saw what happened in France, a bit of a surprise. We saw what happened in the UK, a bit of a surprise. Markets need to pay attention because it has long-term effects. So again, we've got to get through the rhetoric, see who wins and then we'll move forward, but that's how the markets seem to manage it.

And Owen I would just add that regardless of that dynamic, we are seeing a lot of this volatility play through in our markets today. So we talked about the records in the quarter, the fact that all six asset classes were up in both volume and open interest. If you look on a year-to-date basis, we have that same trend. July has continued to be strong, running 20% ahead of last July, trending towards an all-time record if these levels hold and we are continuing to see that year-to-date across all six asset classes, the volumes are up and the open interest is up, and that's something that's fairly unusual. Typically it won't be such a broad-based use of our product, but we are seeing that people need this risk management in this current environment across all of the offerings that we have.

Got it. That's helpful. And then my follow-up about maybe about the stock. The company continues to have record quarter, but the stock has been under pressure this year because of the interest rate and competition narrative. Do we change how you approach your capital allocation priority and acquisition strategy if the situation persists or not at all? Thanks.

I think we got your question. It came through a little bit scrambled. But your question was about capital return. The pressure on the stock—whether due to announced competition or Fed policy. Is that fair?

Yes. So certainly, we have seen the disconnect between the record performance and the stock price. And certainly we continue to do what we can on the performance side to help that equation. On the capital return policy, it's something that we consistently look at. It is something we are undergoing a new review on again. It is something that we do periodically as good stewards of the capital to make sure we're returning that capital to shareholders in the most effective manner. So we'll be continuing to go through that process. And should anything change, we'll certainly communicate with both shareholders and the analyst community.

Got it. Thanks.

Thanks Owen.

Thank you. Our next question comes from Chris Allen with Citi. Your line is open.

Good morning everyone. Thanks for taking the question. I wanted to talk through some of the structural growth opportunities, specifically in energy around natural gas, expect there to be a material impact from AI-driven data center demand on natural gas over the next, call it, five to ten years. I wonder if you could help us frame out the opportunities you see and what potential impact you could see on volumes? And any color just on whether data centers currently hedge energy exposure? And if not any thoughts on why?

So before Derek answers on natural gas, which we have a good story to talk about, are you suggesting that because of AI and the compute that it will take to run AI that natural gas will be more in favor or out of favor? I'm trying to understand your question. Is that your question?

Yes. Our energy team here has done work around the incremental energy demand from data centers driven by AI. And 50% is expected to be filled by natural gas, a pretty material increase. So I see it as a positive catalyst. Just wondering how you guys are framing that out.

Chris, we don't disagree with the premise that there’s going to be increased demand for natural gas from AI. But frankly, that's just the energy transition story. You're seeing natural gas replace coal and natural gas is that solution. We are already seeing that in the record results in our natural gas business now. Year-to-date and in the quarter we've set multiple records for both futures and options with natgas up 29% and natgas options up 54%. This is a global story as much as a domestic story: our fastest growth in Henry Hub is coming from outside the US. When you look at EMEA business growth right now, our 2024 year-to-date consumption of Henry Hub is up 78% year-on-year. We're setting records in terms of participation, globalization and options are a big part of that as well. We see this as a broader story, not limited to energy consumed by AI. Natural gas is both a transition fuel and a fuel for the future. We are in a strong position—about 80% market share of natural gas futures business, and we've increased our share of Henry Hub options to about 69%. We like our global position.

And Chris, to follow up on that, the grid system in the United States and in many places needs reliable power. Natural gas plays a larger role because we are running out of dispatchable power in parts of the world. It's not just supporting compute for AI; it's also about powering homes and industry. So the story is broader than AI, but we agree with your premise that natural gas demand will increase and we like our position in Henry Hub.

Thanks. And just for a follow-up, wanted to dig a little bit on dealer relationships. I'm just wondering what areas there are ways to improve relationships with dealers. I would imagine price is always going to be top of their list. But I'm just wondering what other areas would dealers be asking for in terms of rooms for improvement in how they view the CME?

I think the relationships are good, Chris. We work very closely with them. I work with the CEOs of many dealers and with those who run the FCMs, and my team does as well. Relationships are enhanced by giving them return for their trading. When you can offer something like $20 billion of daily savings in capital efficiencies, that goes a long way and makes them very pleased. So the relationships are strong. Dealers do have turnover and we are constantly working to bolster those relationships, but I don't see them as fractured in any way. The smallest cost of any transaction is the transaction fee—the spreads really impact dealers and participants. We bring a lot of value and that $20 billion goes a long way on a daily basis.

Thanks guys.

Thank you. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open. Craig your line is open. You need to unmute yourself.

Hi, good morning. Can you guys hear me okay?

Yes, Craig. Go ahead. We got you now.

All right. Perfect. Good morning everyone. So we had a follow-up on the rates capital efficiency topic. In the quarter, you disclosed that the capital efficiency of cross-margining CME futures with CME interest rate swaps was 20% to 25% less than CME future-to-future clearing. Given that your rate swaps business is heavily skewed towards Latin America would that actually reduce the capital efficiency versus a business that was mostly SOFR-based?

I'm not sure we're calling you on, Craig. We didn't say that. So that is not true. We are happy to follow up as Sunil can walk you through it right now, but we did not say that.

We have deep and rich liquidity across all of our rates products. You are rightfully pointing out that we have significant market share in Latin American currencies, but our dollar market is very strong. We’re the only clearing house that provides capital efficiencies between futures, options, cash and swaps in dollar rates. The growth has been very strong. The capital efficiencies are a function of the structure of the portfolio and the open interest. As Lynne pointed out, the open interest has grown as well.

If anybody was giving up on portfolio margining, they would move their swaps to CME to get those offsets today. So everybody that's trying to achieve offsets is bringing this business to CME and that's the reason we got the $20 billion. We are dominant in some Latin American swaps clearing, but the swaps clearing against our futures portfolio today offers material benefits and that's why clients are moving here.

The most important metric here is we have over 3,300 large open interest holders. These are the ones who are carrying inventory every day. As Terry pointed out, they have to fund those positions every day. So this $20 billion in capital efficiencies is material.

That's an important number. Those 3,300 large open interest holders direct where their trade goes because they are the ones driving the benefits of the $20 billion. That's a lot of people to convince.

Got it. I guess our worry was that CME may not have enough SOFR initial margin balance to provide total savings and that the portfolio margin benefit between US rates futures and Latin interest rate swaps might not be as efficient as US rate futures to US rate swaps. Do you have any high-level commentary on efficiency between the two?

All right. Tim?

Hi, Craig. I think what's interesting is there are various permutations and calculations of how those capital efficiencies can be unlocked across product types. The main takeaway should be that SOFR is now fully present across our futures and options open interest and we are the only ones who can use that as a mechanic to unlock savings. SOFR can be used against OIS swaps on the cleared swap side and can be used against treasury futures, SOFR futures can be used against SOFR options and with the improvements we made in January that can now be used against cash positions at FICC with enhanced gross margin. The real takeaway is not just a mathematical result — you have to look at the gravity of the risk pool at CME with the large open interest holders and the growing open interest across the rate complex. Those are the cornerstone elements by which clients access capital efficiencies, not just individual computations by any one trade combination.

Does that help give more color for you Craig?

Yes, that's helpful. Thank you guys.

Thank you. Our next question comes from Kyle Voigt with KBW. Your line is open.

Hi, good morning. Maybe just a follow-up on the cloud announcement. I'm just wondering if you could expand a bit on how that might work in practice in terms of clients potentially migrating towards a Google infrastructure as a service offering versus utilizing a self-managed infrastructure. And more specifically, I'm wondering if rolling out the new co-location facility and matching engine and the subsequent client migration will have any material impact, whether positive or negative on CME's connectivity, co-location or low latency data feed revenue?

I'm going to let Ken answer that, but one comment: we listened to our clients about where the cloud data center should be. They were concerned about disruption. We've announced that that cloud data facility is across the street, so there is no disruption for the client. We worked with Google to build a bespoke facility for CME's clients. Ken?

One of the things that's important is that when Globex was first developed, it wasn't a replacement for the floor; it was put alongside the floor to enable new strategies, new business models, new products and services. We think about this migration to cloud similarly. We allow our customers to choose and migrate over time. Today, as we move forward with the cloud, because of the location, customers will have the ability to choose. They can continue to manage their own gear or migrate into the Google managed solution and take advantage of capabilities there. It was important for us to allow migration based on the pull of the value proposition, not us pushing it. The facility in Aurora leverages infrastructure for today and tomorrow and that migration will happen seamlessly. We are iterating daily with our customers to get it right.

Just to clarify, Globex was an electronic product distributed outside of the trading floor, not a floor product.

Just to clarify one point there, though—when the migration does happen and clients elect to migrate to the Google infrastructure, from a CME revenue perspective, is that a net positive or net negative or net neutral for connectivity, co-location and low latency data feed revenue?

Kyle, there are a lot of moving pieces at this point. Once we get closer, we will have more guidance, but there will be a number of ways to access the facility, a number of ways to access data. There could be new streams or changes to existing streams. It is too early to comment with specificity at this point.

Okay. And then just a follow-up on the discussion around competition. CME has a large sales force and is in constant communication with end-users of futures products. I'm wondering if your sales team has been fielding more questions from end users—hedge funds, CTAs, asset managers, other buy-side firms—about the competitor platform or its value proposition?

Julie, do you want to answer? She handles end user clients.

Thanks for the question. This has been a great opportunity for our sales force to engage with customers, which we do each day. Our rates business is continuing to show strength and resilience—this 15% surge in volume and record treasury futures ADV gives us a lot to talk about with customers. We listen to customers. Transaction fees are one small piece of the value proposition. We're focused on highlighting deeper aspects: deep liquidity, the capital efficiencies we've discussed, and ensuring that across our offering—BrokerTech, treasury futures complex, SOFR futures and options—people understand the full set of dynamics. The focus of our conversations has been on those strengths. We are not hearing feedback that concerns us; customers are extremely happy and have shown that with their trading volume on our exchange over the past quarter.

In the calls I'm getting, they're about what we can do together to create more efficiencies. Those are the calls I'm getting, not calls about any other offering. They want to work with us to build more efficiencies and that's encouraging.

Okay. Thank you very much.

Thank you. Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Hi, good morning. Thanks for taking my question. Just wanted to ask on the rates franchise as the Fed begins to cut rates expected in a couple of months. How do you anticipate that impacting the types of instruments that customers will trade as well as the level of activity? And specifically, how might it impact the capture rate if investors for example extend duration or shift from options to futures? How do we think about any impact to the capture?

Thanks, Michael. Tim?

Thanks, Michael. Our rates complex continues to serve clients' needs. The uncertainty is increasing on both near-term and long-term horizons. We have all the tools at CME for clients whether they want SOFR on the short end or the treasury complex on the long end. We've seen market expectations change a lot this year about the number of cuts, and we are well positioned to take advantage with product innovation—T-bills on the short end, additional expiries to our SOFR complex and options. We're also continuing to unlock additional capital efficiencies. How that manifests in capture rate or RPC is difficult to predict: the mix between trades, the venue (Globex versus block), member versus non-member, and the mix of participants all matter. Importantly, we have a diversified and growing community of traders with many large open interest holders. That participant mix also impacts RPC.

Great. And just a follow-up: Terry, you mentioned calls from customers asking for more efficiencies. How are you thinking about that—where there might be near-term opportunities to bolster efficiencies and any strategic actions you might take?

There are conversations ongoing about strategic steps and efficiencies. For example, Sunil pointed out the $1 billion in savings via offsets with FICC, which is growing quickly. Bringing more clients into those frameworks is exciting for the dealers who need to free up balance sheet. Our conversations are focused on efficiencies and on what we can and cannot do together; there are strategic conversations with dealer communities and other entities. We'll have more to report as those progress, but right now it's about expanding efficiencies for clients.

Great. Thank you.

Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Hi, everybody. Good morning thanks for the question as well. One slightly bigger picture question around the firm's longer-term revenue growth algorithm that I was hoping to get your thoughts on. Over the years, CME raises pricing across various parts of the business by, call it, low single digits, maybe 2% to 3%. As you think forward, whether due to competition or feedback from the market, is that sort of 2% to 3% still reasonable? And what part of the model do you think pricing increases can become more challenged? How are you thinking about offsetting that?

Alex, we look at price increases all the time and we don't believe in just raising prices because you can. We do it because of value-add. Working with market participants and bringing them value is long-term and more lasting for shareholders. The Google Cloud and AI capabilities enable clients to develop and test strategies faster than before. We focus on value-added propositions across the spectrum, not raising prices for inflation alone. That's a bad strategy. We raise prices when there is clear value to the customer.

Yes. Terry covered it. It's a bottoms-up approach: market by market, looking at customer health, market health and where we've created value. That strategy is intact and we'll continue to make changes in that disciplined manner.

Okay, thanks.

Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Great. Thanks good morning – thanks for taking my question. Maybe just back on the Google Cloud. Can you talk about the timing of when the new platform will become available? Any early expectations about how much faster it could be versus Globex and views on what portion of the client base would be migrating over time? When do you think most people would migrate if it is superior?

Good question. Ken will give more detail.

Brian, we are actually building a physical building now so it takes time. We also have capability in Dallas for disaster recovery. We will have customers testing and experimenting in that environment in early 2026. Regarding market migration, we plan to give at least 18 months' notice before migrating markets. As for which customers will take advantage and how long it will take, it's early days. We provide choice and optionality to customers and will iterate with them to understand the value proposition and what makes sense for their business models.

Brian, one more point: we will not move into the cloud unless the platform is at least as fast or faster than what we have today. That requirement has not changed. We think Google can get there, but we need to see the platform. The exciting part is the additional functionality and distribution that Google offers which others won't be able to replicate easily.

That's great color. And maybe a quick follow-up on collateral balances. What were the cash and non-cash balances in Q2 and how have they trended into July? And what rates are you paying?

For Q2 cash balances averaged $73 billion and non-cash balances averaged $161 billion, both fairly similar to Q1. So far in July total collateral is down a bit: average cash balance is $69 billion and average non-cash is $159 billion. The rate we are paying on cash was 36 basis points and on non-cash is effectively 10 basis points.

Too early to say where that might go when the Fed cuts?

It's a bit early to say, but remember our spread is 25 basis points less than the IORB rate and it has been at that level since last June.

Thanks Brian.

Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Hi, good morning. I wanted to dig into CME's treasury clearing plans. Can you give us a more detailed picture of what you're planning to offer, what needs to be built out still and when it might be ready for launch? Are there any regulatory approvals you'll need to get this up and running?

Yes, and there are approvals. We are working with the SEC. I had a call with the Chair and staff; we feel confident that all the information will be in the SEC by mid-September and then it will be in the hands of the SEC to deem it complete and approve. They have a public approval process and you'll see that. As for plans and products to launch, Tim will give more detail, but I want to be clear: FICC today is a dominant incumbent and we respect their offering. We don't know where the market will be in 2026 when the mandate kicks in, so we will be prepared. The offsets we've achieved with FICC to $1 billion in a short period are a powerful tool for clients today. We'll be ready in any scenario but are not dismissive of FICC's position.

To reinforce Terry, our offering will satisfy the mandate with respect to US Actives as well as repo clearing. We're engaging with clients to make sure the solution is complementary and additive to existing activity and services. Client notice and partnership will be critical. We're working towards the approval timeline this year and looking to be ready to test in the second half of next year such that we can meet the January 2026 deadline for US Actives and the June 2026 deadline for Repo. Stay tuned for more details.

Okay, great. Thank you. And just on the Google facility, do you have a dollar cost of the investment? Will CME be paying for the facility or Google? What's the payback expectation?

We won't own the facility and we won't be building it. There will be some costs associated down the road for our usage, but it's not a build that we are undertaking.

They are paying for building it.

Perfect. Thank you.

Thank you. Our last question comes from Craig Siegenthaler with Bank of America. Your line is open.

Good morning. This is Eli Abboud from Craig’s team. Thanks for taking the question. You onboarded a couple of large retail brokers earlier this year. Can you share any details around the incremental volume you're seeing from these clients? I know you said some records in certain micro contracts this quarter. To what extent would you attribute this to these new clients?

Thanks, Eli. Julie, then Derek, please.

Thanks, Eli. Q2 was a really strong quarter for our retail business. We saw growth in both number of retail participants as well as revenue. This growth was driven by a few factors. One was focus on new-to-futures channel partners that are distributing CME futures for the first time. We saw strong client interest in our dollar-denominated equity index offerings and a very diverse product offering, strong results in metals and options. New brokers that are offering our products have benefited from our marketing and educational partnerships, bringing significant new clients in Q2. This is early success and promising for future growth; it sets a blueprint for additional brokers we hope to bring online in the second part of the year. On the APAC retail side, there has been a lot of interest in dollar-denominated equity index products, which are strong for us—resulting in over 20% growth in mini and micro NASDAQ suites. That outpaced competitors even with low volatility. Lastly, when volatility increased and gold futures prices hit records, we saw great results in metals activity among retail clients, with strong revenue and penetration in options internationally. Overall it was a combination of these factors setting us up for future growth.

Thanks, Julie. Derek?

Quickly on gold and metals, we saw significant growth in participation this year. Q2 metal volumes were up 42%. Retail in the second quarter is at 70% of that growth. This reflects having the right product size for the right participants and risk appetites. We saw records in micro copper, micro silver and micro gold, and increased participation and open interest across a broad set of market participants.

Thanks Derek, thanks Julie. Eli?

Thanks. If I could squeeze in a follow-up. You mentioned you'll be giving clients access to Google's AI capabilities. Can you give any more details on what use cases you are envisioning and which market participants you would be targeting? Buy side, FCMs, market makers?

AI is one piece of it. We're focused on data and analytics capabilities. As AI relates to that, some of the things we'll work on with customers and unveil over time will enable their risk management and trading strategies. It would be premature to go into deep detail about specific clients or use cases at this early stage—clients are figuring out AI in their own ways and we'll collaborate with them as we build capabilities.

Got it. Thank you.

Well, we want to thank you all for joining us for today’s call. We’re very thrilled about our record results. We are going to continue to work hard to bring efficiencies to the marketplace and bring value to our shareholders. So thank you very much for joining us. We look forward to following up with you.

Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.