The CME Group Third Quarter 2023 Earnings Call began with the operator welcoming participants and explaining the format of the call. Adam Minick, followed by Terry Duffy, provided a safe harbor statement and discussed the company's financial results for the quarter. Lynne summarized the financial results, which showed a 9% increase in revenue and a record high for Q3. The company's management team was also present to answer questions. The company emphasized the importance of risk management in the current environment.

The company is working closely with clients to help them navigate uncertainty and manage risks in the interest rate markets. The yield curve and interest rate views are constantly shifting, but the company has seen growth in their interest rate business. They have successfully migrated Eurodollars to SOFR and have launched new products, resulting in a record number of contracts being traded. The company's focus on capital efficiencies and broad product offering has enhanced the value proposition for customers. On the commodity side, volume has increased and the company expects to attract new clients in the current environment.

CME Group reported strong financial results for the third quarter of 2023, with a 9% increase in revenue and careful management of expenses leading to a 66.5% adjusted operating margin. The company's investment in cloud migration was approximately $13 million and their adjusted effective tax rate was 22.8%. Net income and adjusted diluted earnings per share both increased by 14% compared to the same period last year. The company is lowering their core expense guidance and maintaining their cloud migration expense guidance, while also effectively managing their capital expenditures.

CME has had a strong financial quarter, with $2.8 billion in dividends paid out and $2.5 billion in cash at the end of the quarter. They have had nine consecutive quarters of double-digit earnings growth and their global benchmarks and focus on innovation have helped deliver results for shareholders. The company is open to potential M&A transactions, but their capacity is much greater than their competitors due to their disciplined and focused approach.

The speaker, Terrence Duffy, was asked about potential deals and clarified that he was not implying that CME was interested in any specific deals. He reiterated that the company's approach has not changed and they will only consider deals that benefit their users and shareholders. The speaker also discussed the outlook for volumes heading into year-end and compared it to their expectations at the beginning of the year. He acknowledged the difficulty in predicting the future.

The speaker discusses the regulatory environment and mentions that the SEC may soon require treasury clearing on the cash side.

The speaker is discussing the potential impact of treasury clearing on the marketplace. They mention that there is still uncertainty about what will happen, but it could lead to changes in market structure and customer behavior. The President of My Clearing House also adds that central clearing could benefit the marketplace and increase participation in cross margining programs.

The speakers discuss the benefits of central clearings and enhancements to the cross margin program, which will allow for increased capital efficiencies in the market. They also mention the success of similar initiatives in the past and express optimism for the potential impact on trading velocity and participation.

The speaker asks for clarification on the relationship between government budget deficits, treasury issuance, and hedging activities. The response explains that when the Fed stops acquiring treasuries, the demand for them will need to be hedged by other parties, potentially benefiting the CME marketplace. The net issuance of treasury securities increased significantly in Q3, mainly in T-bills on the short end of the curve.

The speaker discusses potential regulatory scrutiny around basis trading within futures and treasuries. They mention the impact on volumes and the potential size of this impact.

Terrence Duffy, CEO of CME, discusses the potential impact of new legislation on the basis trade in the treasury market. He believes that the basis trade is necessary for market efficiency and any regulation that interferes with it could cause chaos. Tim McCourt, Head of Equity Products at CME, adds that the basis trade is a common occurrence in all asset classes and is important for keeping markets aligned and arbitrage-free. He also mentions that CME has the ability to trade both cash treasuries and futures, providing a leading price discovery mechanism.

The speaker discusses the success of their business in facilitating trade and their plans to increase efficiency and work closely with market participants. They also address questions about their expenses and state that they have a strong track record of controlling expenses and investing in growth initiatives.

The speaker discusses the company's plans for the future and mentions their guidance for expenses related to the Google migration. They also mention the uncertainty of the rate environment and the opportunity for growth with regional banks. It is unclear who exactly is hedging their risk, but it is likely a mix of both regional and larger banks.

The speaker states that it is important for both new and existing market participants to engage with them in order to manage risk and uncertainty in the current rate environment. They have been actively engaging with clients to ensure that their products and services are able to handle any potential events in the industry. The duration risk seen in the market has not gone away and rates are expected to remain stubborn, so risk management is crucial for all banks, regardless of size.

The speaker discusses how they believe that the use of their treasury complex will increase due to a variety of banks utilizing it to manage risk. They also mention the average collateral balances and yields for cash and non-cash in the third quarter, as well as a fee change for non-cash collateral that will take effect in January. They then mention that they will be considering price increases for data and trading in 2024, following significant changes made in 2023.

The company typically announces changes to its clearing and transaction fees in late November. They take a bottoms-up approach, considering various factors such as market health, customer needs, and total cost of trade. They have recently increased non-cash collateral fees and made market data fee changes. The data revenue in Q3 was a record high and is expected to continue growing in 2024 through new product development, sales efforts, education, and enforcement. There were also some non-recurring revenue in this quarter. The company is continually evaluating the pricing of its data offerings and it is difficult to specify a specific increase for 2024.

The speaker discusses potential price increases for data products next year, which will depend on subscribers and non-recurring revenue. The next question is about potential competition in interest rate futures markets with FMX Futures entering the space and partnering with LCH. The speaker notes that it is hard to comment on the competitive offering without seeing all the details, but the announcement of DTCC and offsets will be a powerful benefit to marketplace participants. The speaker also mentions that FMX is currently not involved in futures trading.

The speaker discusses the strength and competitiveness of CME in the treasury complex market, highlighting their record open interest and capital efficiencies. They believe they have a compelling offering for clients and are not worried about potential competition from LSE. The addition of Tim McCourt adds further support to their unmatched position in the market.

The CME is reminding the marketplace about the potential for unlocking capital savings and efficiencies, with record open interest in their treasury and SOFR complexes and a large open interest holder population. They believe that their position in the futures market will become increasingly important in the future. They take all potential threats seriously, but believe their offering is compelling. The company is also looking into other steps to enhance capital efficiencies in the next three years. The regulators are proposing new capital rules for banks that may make off-exchange derivatives more capital-intensive.

The speaker is asked about the potential for bringing derivatives from the over-the-counter market to the exchange-traded marketplace. They mention that there is a focus on expanding the enhanced cross margin program to the client level, but there is no specific timeline for this. They also discuss the proposed Basel III regulations and mention that there is no consensus among regulators, which could make it difficult to move forward with the proposal. They believe that the markets should remain efficient and do not see a need for a capital hit associated with margin.

The speaker discusses the recent trend of vertical integration between exchanges and futures commission merchants (FCMs) in the market. He mentions the example of Coinbase MIAX and the implications of this trend for the ecosystem. He also mentions that CME has already registered as an FCM in response to FTX's move and asks about the updated objectives for this business.

Terrence Duffy discusses market structure and the need for companies to be prepared for change. He mentions the recent FCM application filed by CME and the potential conflicts of interest in vertically integrated models proposed by companies like MIAX and Coinbase. Duffy believes that rules should be written specifically for these models and not try to fit existing rules. He also notes that size should not be a determining factor in regulating these companies.

The speaker, Derek Sammann, discusses the impact of recent geopolitical events on the energy markets, particularly in North America. He notes that the U.S. is in a strong position due to its exports of oil and natural gas, and that this is proof of the structural shifts in the market. He also mentions that the U.S. is exporting record levels of both oil and natural gas, based on Henry Hub pricing.

The speaker discusses the success of CME's WTI franchise and its position as a global benchmark in the energy market. They also mention the strength of natural gas and crude oil options, which have seen significant growth in Q3 and October. They believe their position as the swing producer in these markets will benefit them in the long term. The speaker then addresses the transition from LIBOR to SOFR and notes that it has been successful, with no major changes in the marketplace or trading strategies. They see room for innovation in this area.

The speaker addresses concerns about the transition from Eurodollar to SOFR and explains that the uncertainty surrounding the change is the main reason for skepticism. However, they point out that there has been a significant increase in trading volume for SOFR products and new short-term interest rate products have been introduced, providing more opportunities for traders. The speaker also mentions CME's efforts in the SOFR market, including licensing and developing new products.

During a recent conference call, Alex Kramm asked about the positioning of SOFR and the rest of the rates complex heading into next year. Terrence Duffy responded, stating that the interrelatedness and spread strategies within the complex are all positive factors. A follow-up question was asked about RPC, to which Lynne Fitzpatrick and Derek Sammann provided answers. The RPC for the third quarter was down slightly due to a lower proportion of commodities products and a slight increase in member mix and micros. No specific asset classes were identified as outliers. The international business also saw a slight increase in RPC, which is typically higher than the traditional U.S. business. Options volumes in energy were up in October, according to Derek Sammann.

The speaker points out that on a year-over-year basis, there was a 12% increase in RPC due to a lower proportion of micro products, a rebound in commodities, and the impact of pricing changes. The non-U.S. business also saw strong growth, with a 7% increase in volume and a 31% increase in options volume. This was driven by efforts to expand internationally and cross-sell to existing clients. There was no particular asset class that saw a decrease in RPC, but rather a shift in the mix of member versus non-member clients.

CME recently launched WTI Crude Oil Monday and Wednesday Weekly options, which have seen great success, setting records for ADV and single day contracts. Adding additional maturity points has proven to be successful in managing risk, as seen in the equities market. Customers have adopted these options more broadly over time.

The speaker explains that the recent growth in options trading is primarily led by longer-dated contracts, although short-dated pieces are also contributing. He also addresses the potential impact of the approval of spot crypto ETFs on their crypto complex, noting that there has been significant volume and open interest growth in the third quarter.

The speaker discusses the success of their Bitcoin futures market, with a record high in open interest and being the underlying for many ETFs. They believe the recent increase in Bitcoin price may be due to speculation about ETF approvals. They also mention potential revenue opportunities from licensing their underlying index. They thank the audience for their questions and wish them a good day.

The speaker concludes the call and thanks the participants for joining. They ask everyone to disconnect their lines and wishes them a good day.

This summary was generated with AI and may contain some inaccuracies.