Cme Group Inc. Q3 FY2024 Earnings Call

Welcome to the CME Group Third 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 third 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 third quarter financial results. Our record-breaking performance in the third quarter demonstrated the continued growing need for risk management globally. The third quarter average daily volume of 28.3 million contracts was the highest quarterly ADV in CME Group's history and increased 27% compared to the same period last year. This strong growth was broad-based. We achieved year-over-year growth in both volume and open interest across every asset class for the second consecutive quarter. In aggregate, our financial products volume grew by 28% and our commodity sector volumes grew by 20%. This record volume was aided by the effectiveness of our volume tiers, including the 36% year-over-year growth in our interest rate complex to 14.9 million contracts a day, with all-time record volume levels for both SOFR futures and treasuries. We achieved this growth without lowering any fees or introducing any new incentive programs for these products. The lower RPC was driven by increased trading volume, and our focus on tiering allowed our incremental earnings growth, given the operating leverage in our model. Our SOFR complex traded over 5.9 million contracts per day in the quarter and 6.9 million per day in September, all while seeing the customer network broaden with large open interest holders reaching a new record high in September. As you know, we often hear the view that a rising Fed rate environment is best for CME's interest rate volumes. However, over the last year, there have been no Fed rate hikes and one rate cut, and our interest rate complex grew by 17% over the prior year, which had six rate hikes totaling 2.25%. Opposing views of potential and actual Fed rate changes combined with ongoing levels of issuance and deficit financing should continue to provide tailwinds for interest rate trading. The uncertainty around the US election and geopolitical events around the world also contribute to a growing need for liquid and efficient markets to manage these risks across all of our asset classes. Q3 was also a record quarter for our international business, where average daily volume reached 8.4 million contracts, up 29% versus last year. This was led by a record 6.2 million average daily volume for EMEA, which was up 30%, and 1.9 million contracts per day in APAC, up 28%. The record international volume was driven by growth in all six asset classes in both EMEA and APAC with the highest volumes coming from interest rates and equity products. In addition to the impressive volume results, we delivered record financial results for the second consecutive quarter. With that short summary, I will now turn the call over to Lynne to review these results in more detail.

Thanks, Terry, and thank you all for joining us this morning. CME Group set all-time records for quarterly revenue, net income, and earnings per share in the second quarter this year and immediately surpassed each of those records this quarter, starting with the highest-ever quarterly revenue at nearly $1.6 billion, up 18% from the third quarter in 2023. Clearing and transaction fee revenue increased 20% on our record quarterly volume. Market data revenue of $178 million increased 6% from the same quarter last year, and other revenue increased 29% to over $109 million. Our strong cost discipline led to adjusted expenses of $489 million for the quarter and $391 million excluding license fees. The resulting operating income of approximately $1.1 billion set a new quarterly record. Our adjusted operating margin of 69.1% was up 260 basis points from 66.5% in the same period last year. CME Group had an adjusted effective tax rate of 22.3%. Terry talked about the strength of our international business. The strong growth coming from outside the US has resulted in a lower effective tax rate. We expect this trend to continue in Q4, and we're lowering our tax rate guidance for the year to a range of 22.5% to 23% as a result. Driven by the strong revenue growth and operating margin level, we delivered the highest quarterly adjusted net income and earnings per share in our history at $977 million and $2.68 per share, respectively, both up 19% from the third quarter last year. This represents an adjusted net income margin for the quarter of 61.7%. Capital expenditures for the third quarter were approximately $30 million, and cash at the end of the period was approximately $2.6 billion. Our continued product innovation, new customer acquisition, and deep liquid markets across the six major asset classes have led to a consistent higher level of demand for our products. CME Group's daily trading volumes surpassed 25 million contracts on 55% of the trading days in the first three quarters of 2024 versus 35% of the days in the same period of 2023. Also, each of the last six months were monthly volume records, helping us deliver our best quarterly financial results in Q2, which were immediately surpassed by new records this quarter. We're very proud of the team for their efforts to provide our clients with the technology and products they need for risk management while driving earnings growth for our shareholders. We'd now like to open the call for your questions.

Thank you. Our first question is from Dan Fannon with Jefferies. You may go ahead.

Thanks. Good morning. CME has a long-standing capital return policy. Terry, you've shared some thoughts on mergers and acquisitions, but I'd like to hear your updated perspective on both of these topics following the record results we've seen quarter after quarter, alongside a valuation that continues to decrease compared to our peers. I'm interested in discussing a potential buyback in relation to these two factors regarding the dividend policy and possible M&A.

Thanks, Dan. I think I heard you correctly. A little soft coming in, but you asked about buybacks and potential M&A.

Right, exactly.

I think that's what you asked for. So, on the capital return to shareholders, I have said that we will always be monitoring this to see what is in the best interest of our shareholders at any given point in time. Our dividend policy over the last several years has suited the company extremely well in a zero rate environment, with the rates changing dramatically and other things happening throughout the world, we always constantly monitor this and we will continue to do so again with my board at its upcoming meetings. It doesn't mean we're doing anything, we just continue to monitor it. As far as M&A activity goes, Dan, we've been very fortunate to put ourselves in a very strong position to be competitive around the globe with the transactions we've already done. But at the same time, if there's something there that we think makes sense, we're not afraid to take a look at it. But right now, that's all I'll say about M&A.

Great. And then just, I guess as a follow up, last quarter you gave us updates around the efficiencies that you provided to your customers. I think both DTCC as well as more broadly. Can you update us on the number of customers, as well as the dollar amounts around that and ultimately just the conversations and how those are evolving given the increased potential competitive backdrop that's out there today?

Yes, Dan, that's great. I appreciate the question. I'm going to turn it over to Suzanne Sprague, who will provide that data. Suzanne?

Yes. Thanks for the question. So, in terms of our portfolio margining program that you mentioned, where we offer offsets between interest rate futures and options against interest rate swaps, we continue delivering average daily savings of about $7 billion to clearing members through that program. Most of that is from US dollar swap activity. And then in the cross margining program with FIC, we continue increasing the number of participants in that program. We currently have 12 clearing members participating in that program and have achieved upwards of $1 billion in average daily savings for that program as well. So we are still focused on growing both of those programs and we do continue working with FIC and engaging with the regulators to be able to expand that cross margining program to customers as well.

So our efficiencies, Dan, just to make sure we're perfectly clear, still averages between F&O and portfolio margining of close to $20 billion a day. So we just want to make sure they don't think that's changed one way or another.

Understood. Thank you.

Thanks, Dan.

Thank you. Our next question is from Chris Allen with Citi. You may go ahead.

Yes, good morning, everyone. I wanted to ask about new customer acquisition, which you called out in the deck for the first time. Any color just in terms of how much impact you're seeing in terms of volumes from new customer acquisition and where are these new clients coming from?

Thanks. We appreciate the question. I'm going to turn it over to Ms. Winkler to give you some color on that. But I think one of the things that I just want to highlight is really important is the numbers that came from outside of our US with the record volume. It's a big part of some of the new client acquisition that Julie and her team have been able to do globally. But Julie, I'll turn it to you.

Thank you for the question, Chris. Acquiring new clients has been a fundamental aspect of our business strategy and an area we've invested in over the past few years. We're thrilled to see that these efforts are producing strong results. We can categorize this in two ways: our retail client base and our institutional client base. We are exceeding our 2023 performance by more than 3%. New growth in institutional clients is up almost 40% this year compared to our three-year average, which is encouraging. There are several factors contributing to this success. We have established a dedicated inside sales team focusing on prospecting, lead qualification, and growth among medium-sized and high-potential accounts. They utilize data and automation, allowing us to implement a low-touch sales model that enhances efficiency and scales our outreach. We've observed a surge in new hedge funds and the growth of commodity-focused strategies, creating significant opportunities across our client base. CME Direct has seen a record increase in new option traders, rising by 30% this quarter. We see this as vital to our institutional model, along with the new products we will discuss on this call, such as credit and TBAs, which provide powerful opportunities to attract new clients to the CME ecosystem. On the retail side, our focus is less on average daily volume and more on the number of accounts we're opening and new traders we're bringing in through our retail channels. Year-to-date, we welcomed over 176,000 new traders through our retail channels, with 60,000 in Q3 alone, marking a 30% increase year-over-year. This growth aligns with previous quarters, and the data shows it is spread across regions, with 53% from the US, 16% from APAC, and 31% from EMEA. Our emphasis is on introducing new brokers to our futures ecosystem, as well as working with existing partners. This is crucial for driving new client acquisition in this space, as we collaborate with them on education and marketing content. Where our distribution partners find success, we see that reflected in our results, and this is bringing new traders to CME. They are attracted by our product offerings, and we anticipate this trend will continue in the upcoming year.

I just have a quick follow-up. You mentioned that plus 500 exceeded expectations and that Robinhood just launched future trading last week. Considering Robinhood's account growth, can you provide any insights on how you expect the penetration of their approximately 23 million accounts to translate into trading volumes?

Yes, we are collaborating with all those firms. They have their own internal goals regarding account openings. With the recent launch of Robinhood, they will gradually open access. Some of these firms are ensuring they test these products and work on the content. Therefore, we may not see 23 million accounts trading futures right away, but we are committed to working with them to ensure the products we introduce to them and their clients are ready for futures trading. We have observed that the adoption rate with Plus 500 has occurred even faster than they projected. They are quite advanced in their customer journey and analytics, providing both parties with valuable information on how to support active traders effectively.

So, Chris, just let me add something to that. One of the things we have said historically, since I took CME public in 2002, is it's very difficult to predict future volume. So, when you're looking at new client acquisition and what their behavior may or may not be, it's really difficult to pinpoint what that can transition into. But I do think when you look at the trajectory of our business over the last 20 plus years as being a public company, you could see it's up and to the right, growing by customers and of course, the new large open interest holders that I referenced earlier in my comments. So, those are all good factors for new client acquisitions. But again, we can't predict future volumes.

Thanks. Goodbye.

Thanks, Chris.

Thank you. Our next question is from Ben Budish with Barclays. You may go ahead.

Hi, good morning and thanks for taking the question. I wanted to kind of follow up there. I know it's hard to predict new volumes, but just thinking about retail trading activity, can you just talk about the sort of P&L implications? Presumably, we would see a lower rate per contract as people are trading more of like the minis and some of the smaller products. But how do you think about what we might sort of be able to expect there? What are the implications from like an RPC and volume perspective? Again, I know it's hard to predict the volumes themselves, but just how should we think about interpreting results as we start to see a bigger contribution from retail?

Well, Ben, I want to share a few thoughts. As I mentioned, it is very challenging to make predictions since each part of our business is distinct. When I referred earlier to tiered pricing, I don’t think it’s necessarily beneficial if the additional volume doesn’t translate to better profits, as that could reduce the RPC slightly with those higher tiers. However, the increased volume remains advantageous for us. Regarding retail in general, you shouldn't automatically assume it results in a lower rate per contract. We set the pricing for some of our products not based on a notional value. For example, with the E-mini, micro, or mini Bitcoin contracts, we focused on the characteristics of our client base and the value they receive from CME Group. We assess pricing from various perspectives, not limited to retail clients or contract sizes. It's crucial that we maintain a balance with our clientele to grow the business. That said, it’s difficult to assert whether there will be a lower or higher rate per contract; it really hinges on the clientele we attract. I've mentioned many times that the lines will continue to blur between retail and institutional trading as we advance, especially with the rise of artificial intelligence, technological advancements, and greater access to marketplaces. However, predicting the revenue outcomes from these changes remains challenging. Lynne?

Yes. I would just add, our focus, Ben, is not on growth in RPC. Our focus is on growth in revenue and growth in earnings. So if it's new client acquisition of any type, we're focusing on how we drive that top and bottom line and we're not focused on that RPC line in particular, it's really the overall picture and growth level.

So Ben, I guess I'd like to tell you that we have a special formula, but we don't. And I don't think you would want us to have a special formula, because everybody is different as the market continues to grow. So it's exciting for us. And again, I think the one thing I can truly point to is the pricing change from micros that we did not do based on a notional basis. And that's the trajectory we're going as we look at the constituency.

Yes. So we did see a step up in licensing fees, not surprising given the high volume levels and the growth there. As you know, a good portion of that, the majority comes from our equity complex, which had nice growth, 9% up quarter-over-quarter and 17% year-over-year. The other item that you're seeing this quarter is, we do have some existing OTC clearing programs that have been in place for a number of years, given the strong growth in that business over the last year, it has an off-cycle measurement period. So the impact of that was seen in Q3. I would note because we did get a couple of questions this morning. There were no new license fee related programs in our SOFR or treasury complex. Those two main items are going to be the overall growth in the business and those programs related to OTC clearing, which again have been in place for many years. I don't know. Mike, do you have anything to add on the OTC side?

Overall futures and options growth continues to strengthen our OTC IRS business. We experienced double-digit volume growth year-over-year in both Latin America and US dollar swap activity. An important figure to note is that out of the $7 billion to $8 billion in portfolio margin savings within the overall swap complex, over 90% pertains to US dollar swaps. We have around $40 billion in margin collateral for swap activity, with 80% of that linked to US dollar swaps. Significant buy-side clients and banks have engaged in true risk with the CME in US dollar swaps, resulting in daily portfolio margin savings exceeding $7 billion. It's also essential to recognize that other CCPs have commented on their margin and collateral levels. However, it’s crucial to remember that the collateral at other CCPs is not exclusively tied to swaps and currencies that would benefit from notable margin savings for SOFR and treasury products. Some of these swaps are associated with Swiss yen, Canadian dollars, Sterling, and Euros.

And for those of you who are wondering who that was, that's Mike Dennis there. He's the new head of our rates franchise. So thank you, Mike.

Thanks, Terry.

All right, guys. Well, thank you so much for the response. Appreciate it.

Thanks, Ben.

Thank you. Our next question is from Ken Worthington with J.P. Morgan. You may go ahead.

Hi, good morning. I want to ask about the digital business. Can you talk about the launch of Bitcoin and Ethereum ETFs and the impact that they've had on your futures business, they would appear to have helped a good amount. And as you think about the opportunity to further grow the digital platform. The perpetual market still seems to be quite a bit bigger than the calendar market. Does the perpetual market present an opportunity for further growth at CME?

Tim?

Great. Thanks, Terry, and thanks for the question. Certainly, the development of the ETFs both in a spot-based and futures-based ETF structure for Bitcoin and Ether have not only developed the ecosystem further for those products but also provided an opportunity for the futures complex to grow at CME. Like we see in a lot of asset classes, futures are at the center of these highly related interrelated ecosystems. And when we see the volumes in our crypto complex, the futures ADV was up almost 285% to a record 102,000 contracts. And when we look at the micros, they're up even more, with Bitcoin up 470% and Micro Ether up 641%, respectively. This is because our futures not only enable more common ETF strategies such as trading ETFs versus futures or using futures to source inventory for stock loan in the ETF market. It's also our futures often provide a better, more efficient way to create and redeem the ETFs; our ability to transact fees against the underlying index close to CME CF Bitcoin reference rate, where our reference rates also underlie seven of the 11 Bitcoin spot ETFs. So this is a growing ecosystem. We are certainly at the center of it here at CME and we continue to be a leader in this space offering that regulated, trusted, and transparent futures market. And Ken, going to the perpetual market, it's not necessarily an easy comparison because those perpetuities exist on more crypto-native platforms that are not regulated outside of the US, but we continue to engage with customers to make sure we're working with them to design all the tools they need to manage risk in these uncertain times, whether that's in cryptocurrencies or other products. We'll continue to engage them to make sure they have all the tools they need, but it is critically important that here at CME and for the marketplace, they can do it in a trusted, transparent, and a regulated manner, and that's what we offer with our crypto product here.

That give you some color on that, Ken. Are you good?

Yes, that was great. Thank you.

Thanks, Ken.

Thank you. Our next question is from Patrick Moley with Piper Sandler. You may go ahead.

Yes, good morning. Thanks for taking the question. So I had one on the competitive landscape in rates today marks the one month anniversary since FMX launched its SOFR futures contract. Volumes have been modest to say the least. So Terry, I was just hoping to get maybe a state of the union on the competitive landscape and just your updated feelings since this competitor exchange launched?

Thanks, Patrick. I agree that the volumes have been modest, but it's still early, so I’m not forming any conclusions about competitors. We will keep our focus on our current initiatives, many of which you’ve heard us discuss in recent months and years, and we reiterated today. These include the efficiencies we’ve created for our clients in asset classes where competition exists. We feel confident about our strong performance. There were questions regarding the growth of our interest rate products and the need for incentive plans, but we made it clear that we did not implement any and still achieved growth. This demonstrates the value of CME's products to end users. Additionally, the transaction fee remains the lowest cost for any participant, whereas wider bid-offer spreads can significantly increase costs. Some competitors have much wider spreads than CME, making their overall cost higher than any incentive program or transaction fee they could offer. Mike, please provide some additional details, and then I will conclude.

Yes, sure. And thanks for the question, Patrick. Good morning. What Terry is referencing, it's still early days, but what we see is our bid-ask spreads are on average a quarter tick tighter in front month SOFR contracts. Almost a half tick tighter as you move out the SOFR curve. As we all know, half tick equates to $12.50 per contract in SOFR futures, which towards the size of the transaction fee.

Or potentially whatever the incentive is to trade that market.

Thank you for the insights. I have a follow-up regarding pricing, particularly in relation to rates. There’s been a lot of discussion lately about your potential response to FMX launching, including the possibility of cutting rates. Considering what you've shared on this call regarding the value you provide to customers and the fact that you're on track for your third consecutive year of record interest rate average daily volume, is it unrealistic for us to think that rate or potential price increases in the rates complex are off the table at this point? Thank you.

I think it's misguided for anyone to assume they know what we're thinking about how we're going to run the business going forward on pricing. As I said, we adjust our tiers all the time. We do a whole host of different things throughout the years. It doesn't have to do anything with competition. It's got all to do with the marketplace. So, Patrick, as I said earlier, I clearly stated that we did not put any new incentive plans in place and we've had incremental growth that's a record in this quarter for both SOFR and treasury. So I think that speaks volumes to where we're at today.

Okay, that's great color. Thanks for that.

Thank you. The next question comes from Alex Kramm with UBS. You may go ahead.

Yes, hey, good morning, everyone. Maybe in the context of new customer acquisition and what you focus on a lot, can we maybe go into the energy business in more detail here? I mean, there are clearly a lot of macro changes, structural changes that quite frankly, from my perspective, seem to be the most interesting asset class in the next couple of years, given energy transition and everything that's going on. So you have a very US focused business, but obviously, some of these changes are global. So just wondering what you're doing to maybe capture some of that structural excitement and what you're seeing in terms of new customer generation maybe around the world and what your customers are doing different already and how you're positioned? Thanks.

Thanks, Alex. Thanks for the question. I'm going to turn to Derek, but I think you raised a really good point about what this asset class can mean over the next couple of years as we either transition out of it or continue to build on top of it. So I think there's a lot of verdicts yet to be read yet. So it's interesting with this asset class. So I think you're right to point it out, Derek.

Thank you, Alex. You're noticing many of the same trends we are currently observing. First and foremost, we are achieving record revenues year-to-date in our energy business. We had another exceptionally strong quarter, with our volumes increasing by about 21% and our options business growing by 45%. This marks a new record for the quarter across the entire energy sector. You asked an insightful question, and we've dedicated considerable time to analyzing the sources of our business growth. As I have mentioned in previous calls, the impressive year-to-date results are largely attributable to substantial growth from outside the United States, which is very exciting for us. We have discussed the story of new client acquisition that Julie mentioned, with our team actively engaging new customers. For the first time, we are seeing physical flows of WTI and Henry Hub reaching Europe and Asia, which is attracting new commercial and buy-side clients into our market. Specifically, our buy-side business has increased by 26% this year, our commercial customer business is up 16%, and our bank business has grown by 13%. Geographically, our European business is up 37% this year, while our LATAM business has increased by 30%. Therefore, it’s no surprise that the physical flows of US benchmarks priced on NYMEX, which are also applicable to agricultural and metals markets, are leading to new customer acquisitions. These customers may not be new to the energy sector but previously only engaged with European or Asian products. They are now integrating our global benchmarks into their trading due to the import risks they face. Overall, the physical flows are encouraging global participation in our markets. Additionally, it’s worth noting that the growth isn’t limited to WTI. We are seeing even stronger growth in our natural gas business, currently reaching almost 780,000 contracts, which is up 33% this year. The United States is now producing and exporting record levels of natural gas priced on Henry Hub, where we maintain approximately 80% market share. This influx of business from European customers is adding Henry Hub pricing to their portfolios and has significantly contributed to the record activity in our nat gas options growth, especially since these markets are challenging to hedge on a flat price basis. I hope this provides you with a comprehensive view from our clients, regions, and underlying products. Lynne?

Yes. And just to add a little bit to what Derek was saying, we have seen with these new supply lines being drawn, the strong growth in both Europe and Asia in our crude business and Henry Hub. I think what we're also seeing as a longer-term trend, one of the limiters on the Henry Hub side is the ability to liquefy the natural gas to then export it internationally. We do expect and we do see the build out in multiple liquefaction facilities that are ongoing. These are multi-year projects, but there are a number that are meant to come online in the next couple of years. So increasing that capacity and that ability to export could also be a tailwind for our business as more international customers would then look to hedge back to that export point.

Thanks, Lynne. Thanks, Derek. Alex, did that get to your question?

I think it did. Great insights. I have a quick question about the tax rate. Clearly, you're indicating that international growth is contributing positively to that. This has been a trend over several years. If this continues into 2025, would you say that a tax rate of around 23% is more appropriate? Is that part of your planning?

I'm assuming you're referring to energy, Alex.

Sorry, tax rate, the tax.

I'm sorry.

Yes, so Alex, we did lower it based on the outsized growth that we are seeing internationally. Certainly, we will provide tax guidance as part of our outlook and guidance for the coming years. We have seen that outsized growth for several years, as you noted. Obviously, there are a number of factors that will be in play, including things like changes in administration, potentially what's going to be the political dynamic and impact on taxes. So it's a little premature for us to take a position on that go forward tax rate at this point, but we'll certainly follow up on that.

Thanks, Alex. I apologize if there were any issues in understanding the tax matter.

All good.

Thank you. Our next question is from Kyle Voigt with KBW. You may go ahead.

Thanks for taking my question. Maybe just going back to a broader discussion on pricing. Over the past few years, you've announced pricing changes in the fourth quarter that go effective in 1Q for changes that went effective in 2024. I think you guided to 1.5% to 2%, assuming constant volumes of pricing change. And in 2023, I think that was 4% to 5%. Can you just give us an update on how you're thinking about futures pricing over the medium term? And I guess, is there any reason to think that 2024's pricing change levels are not a good baseline assumption for 2025?

Well, Kyle, I think pricing, we evaluate that throughout the entire year for the next year, and there's a lot that goes into it other than just see if we can increase it by 1% or 2%. One of the things I've always said, and I'm sure you've heard me say this, is there's got to be a good value add associated to our clients when we change pricing. We invested heavily with our Google transition. We're excited by the future of that, what it means for clients. So that could have an impact on pricing one way or another, maybe to their benefit, obviously. But again, I think when you look at just blanket pricing increases, that's not something that we do. And I know some suggest that was becoming a pattern, but it's because of what we were able to deliver to the marketplace over that time period, we were able to do price increases. But again, we evaluate that pricing throughout the entire year before we make any decisions and bring it to my board. Lynne, do you want to come any further?

Yes. The only thing I would add, Kyle, is that the 1.5% to 2%, you quoted, that was on the clearing and transaction fee. Just keep in mind that we do look at different levers as we're thinking about pricing changes. Those could include changes to the fee schedule. It could include things like incentive programs or other agreements there. There is the data component and also things on collateral, so non-cash and cash collateral fees. So we did guide to 1.5% to 2% this year on the clearing and transaction fee. We said 2.5% to 3% on total revenue given some of the changes we made on those other fee lines, and we've been tracking towards that throughout the course of this year.

Great. Thank you. And then maybe a follow-up for Lynne on the expense trajectory. I think in 2023, you had $56 million of cloud migration expenses that was expected to grow by $15 million this year. I guess, can you confirm whether that level of migration spend is still on track? And then can you remind us how we should think about the cloud migration expenses into 2025 and 2026? Will there be incremental spend needed in each of those years and maybe address the interplay of that and the trajectory of D&A over that timeframe too?

Yes, sure. So if you look at the migration spend for this year, the total spend is on target for our guidance of $90 million. Now the difference between that and the $15 million increase, you do have some roll-off on existing kind of business as usual expenses as we've been migrating to the cloud. So you see about $25 million in costs that are rolling off, which would get you to that differential or that increase of $15 million year-over-year. So we are on track with our guidance on that expenditure. I think what we've also said is that we would expect incremental costs related to our migration for the first four years. We are in year three. So we do expect to still see incremental costs next year related to that migration. I would note that the Google-related expenses were included in our overall expense guidance. So that 3.9% implied by our expense guidance did include that Google spend. So that has been trending down as we are starting to see some of the benefits of rolling off that kind of on-premises operating expense.

Great. Thank you.

Thanks, Kyle.

Thank you. Our next question is from Brian Bedell with Deutsche Bank. You may go ahead.

Good morning, everyone. Thank you for taking my questions. I have a quick follow-up regarding the competitor in relation to SOFR. Terry, I appreciate your detailed commentary. Regarding the pricing of SOFR contracts and tiering, is that a possibility for the future? Considering the tick size and the extent of the bid-ask spread, it seems it might not be necessary right now. However, is there a chance you could implement different pricing strategies for certain members or offer incentives if market share increases due to competition?

Thank you for your question, Brian. As you can imagine, I won't comment on that because there are many different factors we can leverage to deliver value to our clients. I won't determine what actions to take during this call. My team engages in extensive theoretical planning, considering various aspects of pricing and value addition. However, we did not implement any incentives recently, yet we still achieved a record quarter. We're quite satisfied with how the market has responded to our offerings so far. Therefore, it would be unwise for me to suggest that we would pursue a different strategy at this time.

Yes, totally clear. And then maybe just Lynne, could you review the collateral balances and the rates paid for the quarter and then I guess, exiting September given we have the rate cut in the month?

Sure. So in Q3, our average cash balances were $72 billion, which was similar to the $73 billion we saw in the prior quarter. Our rates we earned on that remained consistent at 36 basis points. On the non-cash collateral side, we saw a slight increase to $165 billion for the quarter versus $161 billion last quarter, and we continue to earn 10 basis points on that non-cash collateral. So far in October, we've seen slight increases in both of those elements. The US cash balances are averaging $73 billion in months to date and the non-cash collateral is averaging $173 billion.

Okay. And is the spread the same given the rate cuts or is that different coming into 3Q?

Continue on the cash collateral, you have the 25 basis points return to clients. The difference between the 36 that we've been earning in the 2025 is our ability to optimize our returns using some other vehicles. And so that did not change during the quarter. If rates continue to decrease and ability to get those outsized returns might be pressured, but the overall rate that we're paying has not changed and it's been at that same 25 basis points for quite a few rate hikes. Yes, it's been since the IRB rate was at 1.65%.

Got it. Okay. I'm sorry, so the spread is still 36 basis points. Is that right?

That is still 25%.

25%.

We're earning more because we're able to optimize those returns.

Thanks, Brian. Anything else? Good?

No, yes, totally good. Thank you so much for all the answers.

Thanks, Brian. Appreciate it.

Thank you. The next question is from Craig Siegenthaler with Bank of America. You may go ahead.

Thank you. Good morning, everyone. Most of my questions were already answered, but I wanted to rephrase them a bit. I apologize for any repetition. First, I have a follow-up regarding Robinhood's future and the index options launched this quarter. I'm curious about which products you expect to see the highest increase in demand. We're considering SPY and WTI. Additionally, how do you see SPY competing against its main competitors, including SPX, given its tax efficiency? I would also like to know what insights the launch could provide you, especially considering Robinhood's unique clientele.

Thank you, Craig, for the question. Regarding Robinhood and the product, I'll have Julie address that first, and then Tim will discuss the SPX comparison. So, Julie, please go ahead.

Yes. Thanks for the question, Craig. What we have typically seen in new retail clients coming to trade CME products is the first entry point is within our micro equity suite. These active traders are often using this to hedge existing stock portfolios. They have typical experienced trading cash and cash equity options. And so this is a natural overlay to move into the derivative space in equities first. What we have seen is, as you mentioned, the diversification that we then are quickly able to follow up on is an important part of our product suite for retail, where we are able to then work with our distribution partners to offer them things like WTI and energy as well as our metals complex has continued to see a lot of growth too with our micro gold. So I'll turn things over to Tim to talk through a little bit of the competition side of things.

Great. Thanks, Craig, and appreciate the question. When looking at the S&P 500 ecosystem, it's important to note that these are highly interrelated. But just to clarify that when we look at the futures and options on futures products at CME Group, they are also efficient from a tax perspective. They are also a Section 1256 contract that enjoys the blended 60-40 capital gains tax. That is an index-based determination. That is something that we enjoy; other index products are also able to provide that ETFs are not. And when we look at the way that our contracts will be not only distributed through Robinhood, but all of our partners, it continues to be an important tool for traders to manage their risk to access that market. And when we look at how we're doing against ETFs, I'm excited by the fact that more retail distribution partners are coming online because even if we look at Q3, we've had very strong performance in terms of our futures versus ETFs as a product choice. And when we're looking at that, we're at the highest multiple in my 11 years here at CME tracking it with our S&P 500 futures at CME Group are out trading the associated S&P ETS by a factor of 15 to 1 for the third quarter. So optimistic about what even more distribution platforms offering our products alongside the cash markets and ETFs. We think it will be a great opportunity for the market to take not only advantage of the tax efficiencies but all the capital efficiencies we offer here at CME Group.

Thank you.

Thanks, Craig. Appreciate it.

Thank you. And that was our last question. I'll now turn the call back over to management for any closing remarks.

We thank you all for joining us this morning. Appreciate it very much. Look forward to communicating with you throughout the quarter and talking to you again next quarter. So thank you. All be safe.

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