The CME Group held their Fourth Quarter and Year End 2023 Earnings Call, where they discussed their financial results and provided guidance for 2024. The call began with the operator welcoming participants and explaining the format of the call. The CEO, Terry Duffy, and CFO, Lynne, gave an overview of the company's performance in 2023, highlighting record average daily volume and growth in agriculture and interest rate products. They also mentioned that the company's executive commentary and SEC filings can be found on their website. The call was followed by a question-and-answer session with other members of the management team.

In 2023, CME Group saw record average daily volume across all asset classes, with a significant increase in non-US volume. The uncertainty in the market, particularly around inflation and interest rates, has led to a growing demand for risk management and capital efficiencies. Despite speculation that CME's interest rate business may face challenges due to potential rate decreases, the company has historically seen higher volumes during periods of uncertainty. This was evident in 2023, with a 16% increase in interest rate volume during four Fed rate hikes and a 24% increase in the six months following the Fed's decision to stop raising rates. Additionally, the dynamics in the crude oil market have also been noteworthy.

The paragraph discusses the relevance and growth of WTI or West Texas Intermediate as a primary reference price for crude oil globally. The company has invested in new contracts, such as CME Group's Argus Gulf Coast contract, which has generated significant commercial participation. The company remains focused on the growth of these contracts and creating efficiencies in their energy complex. The global economy, geopolitical tensions, and upcoming political elections create uncertainty, making risk management tools critical for clients. This is reflected in the company's strong start to 2024 with record-high January average daily volume. The call will now be opened for questions.

In 2023, CME Group saw record financial results with $5.6 billion in revenue, 11% growth, and a 66.9% adjusted operating margin. They also delivered $3.4 billion in adjusted net income and a 17% increase in earnings per share. In the fourth quarter, they generated $1.4 billion in revenue with a 19% increase from the previous year. Market data revenue grew 9% and expenses were carefully managed. For 2024, they expect adjusted operating expenses of $1.585 billion, capital expenditures of $85 million, and an adjusted effective tax rate between 23% and 24%. They also announced transaction fee adjustments effective February 1st.

The fee adjustments for futures and options transactions, market data, and non-cash collateral are expected to increase total revenue by approximately 2.5% to 3% in 2024. The company is proud of its 11% revenue growth and 17% adjusted earnings growth from the previous year. The company plans to invest $60 million in expenses, with $15 million for migration expenses and $45 million for core expense growth. The Google partnership is expected to contribute to revenue in 2024 and 2025, and Sunil and Julie will provide more information on this.

Sunil Cutinho and Julie Winkler discuss the progress on migrating to Google Cloud and enhancing data services for clients. They expect to roll out new data products in 2024 and have seen an increase in speed and delivery since moving core data to the cloud. During the Q&A, they also mention a 1.5% to 2% pricing increase on the future side.

The speaker, Lynne Fitzpatrick, discusses the recent price increase at CME and how it was determined. She mentions that the company considers different levers of pricing to balance the impact on different segments of their customer base. The next question is about the enhanced cross-moduling arrangement with DTCC and the initial feedback from clients. The President of the Clearinghouse, Suzanne Sprague, will answer the question and provide more information on the arrangement.

The CME Group has seen positive results from their recent launch of a new program, with eight clearing members already participating and achieving savings of 75-80%. This is higher than originally expected and the company continues to work on increasing participation. In regards to the energy market, the company sees Argus as a preferred crude contract and has seen shifts in business in this market. The addition of Midland to the Brent marker has also affected behavior. In natural gas, options and globalization are key factors driving the market.

The speaker, Sammann, is commenting on the gas and energy market, specifically the Argus contract and market share. He mentions that their contract is positively affected by commercial participation and has a large number of open positions. He also discusses the shifts in market behavior and market share in low-volatility environments. The speaker, Derek Sammann, adds that the WTI franchise is larger than just the CL contract and mentions the growth of crude grades contracts and the significance of WTI as a global benchmark.

The company is expanding its WTI options franchise, with 35% growth in crude and refined options business so far this year. They are also investing in micro contracts, which have attracted over 100,000 contracts and 50,000 unique traders. The company is also seeing growth in overall energy franchise and options growth of 87%. In terms of natural gas, the US has become a major producer and exporter, making Henry Hub a central benchmark globally. The company has seen significant growth in this market, with European nat gas volumes up 50% and commercial participation up 30% last year. Options continue to play a central role in volatile natural gas markets.

The speaker discusses how options are an important tool for the business and mentions that nat gas options have set a record. They also mention a globalized story and how they continue to engage with it. A question is asked about market data price increase and the development of trading volume from a DTC arrangement. The speaker directs the question to Lynne and Tim, who will provide further information on these topics.

The impact of the recent changes in subscriber count and product mix on trading volumes at CME will depend on various factors. The majority of products have seen an increase in the range of 3% to 5%. The question about data has been answered and now the discussion shifts to the expectations for volume improvement due to the DTCC arrangement. The company is cautious about making predictions, but the client base has shown positive reactions to the 75% to 80% efficiencies in margin portfolios. It is difficult to forecast the impact on trading volumes, but in the past, increasing capital savings has been a strong factor in driving business growth. An example of this is the growth in volume and revenues from portfolio margin savings and cleared interest rate swaps.

The speaker discusses the growth and benefits of owning both a cash platform and the largest listed business in the world. They mention the record open interest in their treasury complex and the futurization of products. They also mention the expansion of end-user client participation in the energy complex and potential increase in activity from existing clients in the rates side.

Terry Duffy, CEO of a financial institution, is seeing more participation from new institutions engaging in risk management behavior. This is due to the futurization of the marketplace and people trading more futures contracts. This trend is expected to continue, especially in the energy sector where there has been a significant increase in commercial participation. Overall, this growth in new clients is a positive reflection of the health of the marketplace.

The speaker and her colleague discuss the exciting growth of new clients in their marketplace, specifically in the buy side and commercial segments. They saw double-digit growth in asset managers and hedge funds, who are interested in CME's products due to regulatory environment, liquidity, and capital efficiencies. The most popular products were interest rates and commodities. The commercial segment also saw double-digit growth, particularly in revenue and ADV, as companies looked to hedge their physical positions. This trend highlights the transparency, efficiencies, and well-regulated futures markets offered by CME. In Europe, there was strong performance and interest in short-term interest rates, commodities, and FX.

In the paragraph, Terry Duffy and other executives discuss the strong performance of the company in 2020 and their plans for the future. They highlight the significant savings in margin efficiencies for their largest clients in the rates business, which has been a major growth driver for the company. They also address the competitive dynamics between their equity contracts and those of Cboe, and discuss their efforts to narrow the gap in market share.

The equity options on futures market at CME had a record year in 2023, with consecutive record months in Q4 and over 1.5 million contracts traded per day in January. While there are changes in the market due to same-day expiring options, the overall growth story at CME remains strong. These same-day expiring options only make up 26% of the volume and the open interest is up between 20-24% outside of zero DTE. CME has gained market share since the summer and remains the leader in global trading, especially outside of US trading hours. The various facets of CME's business continue to grow and serve an important role in risk management for clients.

The CME Group is planning to launch US Corporate Bond Index futures this summer and believes that the timing is right for this product. They have partnered with Bloomberg for this venture and are seeing strong customer demand for the product.

The speaker discusses the importance of introducing credit products in the current market environment and notes that this will provide clients with additional tools to manage risk in their portfolios. They also mention the benefits of partnering with Bloomberg and tapping into a well-established ecosystem around these products. The speaker emphasizes the positive feedback received during the validation process and encourages listeners to stay tuned for more details. The interviewer adds that timing is crucial for product launches and uses the example of the T-Bill contract. The speaker agrees and mentions that timing is also important for the corporate bond market.

The speaker is discussing the joint venture between CME and S&P, called OSTTRA, which was created three years ago. They mention the growth and penetration of the offering and potential growth opportunities in post-trade services. They also touch on the competitive landscape and how the JV was part of CME's strategy when they acquired NEX.

The speaker discusses the importance of being able to cover multiple asset classes in the financial industry, particularly in terms of back office services. They mention the competition in this space and the need for efficiency. The recent acquisition of a business has allowed for expansion in cash markets and post-trade services. The questioner asks about the impact of the hedge fund basis trade and its potential unwinding with changes in Fed policies.

The speaker, Simon, discusses the importance of the basis trade in keeping markets in line and efficiently transferring risk between cash and futures markets. He mentions that the size of the trade has increased, but it is proportionate to the debt outstanding and issuance in the treasury markets. The basis trade is an efficient risk management tool and the speaker reminds listeners that there are risk management systems in place for both the treasury futures and cash sides. He also notes that it is difficult to speculate on the impact of an unwind or the current QT cycle in the rates environment.

The speaker discusses the growth of the commodities portfolio, with energy, ags, and metals all showing strong growth. They note that there is a blurring of lines between energy, ags, and metal traders, with traders from one asset class moving into others. This is due to the adoption of benchmarks and the benefits of having a single platform. Record volumes have been seen in the commodities portfolio as a whole.

CME Group has seen strong participation from buy-side and commercial customers in ags, energy, and metals. Buy-side client growth was up 30% and commercials were up 15% last year. The company attributes this success to having the right products in the right market circumstances, including benchmarks, liquidity, futures and options, leading technology, and capital efficiencies. They also highlight their existing customer base and network across these asset classes, which will be beneficial as market lines continue to blur. In regards to the November pricing schedule update, CME Group did not increase pricing on rates due to the recent transition of a benchmark from LIBOR to SOFR and wanting to let the market continue to mature. They currently have 99.9% of the market at CME.

The speaker discusses the decision to not raise prices on mature products in the rates business, citing the importance of letting the benchmark continue to mature and not wanting to disrupt the momentum of cash moving into futures. The decision was made with the team and was influenced by the maturity of the SOFR futures contract and associated options. The speaker also mentions that there have been natural pricing increases as incentives for the SOFR product have rolled off over time. In response to a question, the speaker clarifies that the impact on RPC (revenue per contract) from the pricing changes is spread out across the pricing schedule.

The speaker states that equities in agriculture were higher than other asset classes. They also discuss the fluctuations in cash balances at the Clearinghouse, with the average being $91 billion in Q3 and $75 billion in Q4. They mention that it is hard to predict the floor of these balances due to the constantly changing nature of the market.

The earnings on the cash balance were consistent with last quarter, while the non-cash side saw an increase in Q4 and Q1. The average fee eligible non-cash balance was $160 billion in the early part of Q1. The approval of spot-based Bitcoin ETFs has had a positive impact on the CME Bitcoin futures and futures ETF, with strong growth in open interest and volume. January was the best month ever for average daily open interest, reaching a record of almost 23,600 contracts.

The CME futures suite reached a record high in January, driven by the launch of a spot Bitcoin ETF. The micro suite for crypto products also saw a four-fold increase in September. CME remains the top Bitcoin futures exchange and expects continued growth in the ecosystem. The CEO, Terry Duffy, believes that futures and ETFs are not competitive and that the ecosystem is strong. The company is excited about the quarter and expects a busy year ahead.

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