The paragraph introduces the CME Group's Third Quarter 2024 Earnings Call, with Operator stating the call is in listen-only mode until the Q&A session. Adam Minick provides preliminary remarks, including Safe Harbor language emphasizing that forward-looking statements in the discussion may differ from actual results due to risks and uncertainties. Terrence Duffy highlights the record-breaking performance of CME Group in the third quarter, with an average daily volume of 28.3 million contracts, marking the highest quarterly average daily volume in the company's history and a 27% increase from the previous year. Lynne and other management team members will provide further financial details and answer questions.

The paragraph highlights the broad-based growth achieved by the organization, with year-over-year increases in both volume and open interest across all asset classes for the second consecutive quarter. Financial product volumes grew by 28% and commodity volumes by 20%, aided by effective volume tiers and without reducing fees or introducing new incentives. The interest rate complex, particularly SOFR futures and treasuries, saw significant growth despite a stable Fed rate environment. The global need for risk management amid political and economic uncertainties continues to drive interest rate trading. The international business also experienced a record quarter with a 29% increase in average daily volume.

The paragraph discusses CME Group's record-breaking financial performance in the recent quarter. It highlights substantial growth in average daily trading volumes in both EMEA and APAC regions, especially in interest rates and equity products. Lynne Fitzpatrick reports that CME Group achieved all-time quarterly records for revenue, net income, and earnings per share, with quarterly revenue reaching nearly $1.6 billion, up 18% from the previous quarter. Key revenue increases include a 20% rise in clearing and transaction fees, a 6% rise in market data revenue, and a 29% rise in other revenue. The company's adjusted expenses and strong cost discipline resulted in a new quarterly record for operating income of approximately $1.1 billion, with an adjusted operating margin improving to 69.1%. The company reports a lower effective tax rate due to strong international growth and projects a continued trend, adjusting its annual tax rate guidance down to 22.5%-23%.

The paragraph highlights CME Group's strong financial performance, reporting record high quarterly adjusted net income of $977 million and earnings per share of $2.68, both up 19% from the previous year. With a net income margin of 61.7%, the company noted significant product demand driven by innovation, customer acquisition, and active trading across major asset classes. Daily trading volumes surpassed 25 million contracts on a majority of trading days in 2024, contributing to consecutive record-breaking quarterly results. Capital expenditures were $30 million, with cash reserves of $2.6 billion. The management, proud of the team’s role in these successes, opens the floor for questions. Dan Fannon from Jefferies asks about the company's capital return policy, M&A prospects, and the potential for a buyback, given CME's compressed valuation compared to peers. Terrence Duffy acknowledges the question, addressing buybacks and M&A considerations.

In the paragraph, Terrence Duffy discusses the company's approach to capital returns to shareholders, highlighting the need for continuous monitoring due to changing global conditions. He mentions that the dividend policy has been effective in a zero-rate environment and will be reviewed with the board. Regarding mergers and acquisitions (M&A), Duffy expresses openness to potential opportunities that align with the company's interests. Dan Fannon asks for an update on the efficiencies provided to customers, particularly concerning DTCC. Suzanne Sprague responds, noting that their portfolio margining program yields daily savings of approximately $7 billion for clearing members, primarily through US dollar swap activity.

The paragraph discusses the expansion and success of a cross margining program with FIC, which currently involves 12 clearing members and results in over $1 billion in average daily savings. Terrence Duffy highlights that overall efficiencies, combining F&O and portfolio margining, remain consistent at around $20 billion daily. Chris Allen from Citi inquires about new customer acquisition's impact on volumes. Terrence Duffy emphasizes the importance of growth outside the US, attributing it to new client acquisition efforts led by Julie Winkler. Winkler explains that new client acquisition is a core part of their commercial strategy, with a focus on both retail and institutional clients, and is producing positive results.

The paragraph highlights the company's strong performance and growth in 2023, with a 3% increase in performance and nearly 40% growth in new institutional clients compared to the three-year average. This success is attributed to building a dedicated inside sales team that focuses on medium-sized and high potential accounts, using automation and data for efficient outreach. The rise of new hedge funds and commodity-focused strategies, along with record numbers of new option traders on CME Direct, are driving opportunities in the institutional model. On the retail side, the company is concentrating on expanding accounts and adding new traders, seeing a significant 30% year-over-year increase in new trader acquisition, particularly in the US, APAC, and EMEA regions. The strategy includes integrating new to futures brokers and existing partners into the CME ecosystem.

The paragraph discusses CME's partnership with distribution partners, focusing on the success of bringing new traders to CME through education and marketing. Chris Allen inquires about Robinhood's impact on trading volumes with its recent launch in futures trading, given its 23 million accounts. Julie Winkler explains that while immediate full account trading is unlikely, they are working with Robinhood to ensure readiness for futures trading. She notes that adoption rates have surpassed expectations for platforms like Plus500. Terrence Duffy adds that predicting future trading volumes is challenging.

The paragraph discusses the challenges in predicting new client acquisition and trading volumes, particularly with retail trading activity. Although it is difficult to forecast future volumes, the business has shown growth over the past 20 years. When retail trading increases, it could lead to lower revenue per contract due to the popularity of smaller products, but this is offset by increased trading volume overall. The tiered pricing structure could lower revenue per contract in higher trading tiers, but this is beneficial as it boosts overall volume.

The paragraph discusses the CME Group's approach to pricing their products, emphasizing that pricing is not solely based on notional value but also considers the client base and the value they receive. It states that pricing isn't fixed and varies depending on the customer constituency being attracted, such as retail or institutional clients. The focus is not on the rate per contract (RPC) but rather on growing overall revenue and earnings. The paragraph highlights the evolving retail market, influenced by new technologies like AI, and acknowledges the unpredictability of how these factors will impact revenue.

The paragraph discusses a rise in licensing fees, primarily due to high trading volumes and growth in the equity complex, which increased by 9% quarter-over-quarter and 17% year-over-year. Additionally, existing OTC clearing programs have shown strong growth, impacting the figures for Q3, although no new programs were introduced for the SOFR or treasury complex. The growth in futures and options has also bolstered the OTC IRS business, with significant volume increases in both Latin American and US dollar swap activities.

The paragraph discusses the significant portfolio margin savings in US dollar swaps within the SOFR swap complex, highlighting that over 90% of the $7 to $8 billion in savings comes from such swaps. It mentions the considerable margin collateral for swap activity, with 80% attributed to US dollar swaps, reflecting substantial buy-side and bank client activity. The text contrasts CME's focused margin and collateral with other CCPs, which include diverse currencies not benefiting similarly. Introductions reveal Mike Dennis as CME's new head of rates franchise and acknowledge his contribution. The conversation shifts as Ken Worthington from J.P. Morgan questions the impact of Bitcoin and Ethereum ETFs on CME's futures business and potential growth opportunities in the digital platform, particularly in the perpetual market compared to the calendar market. Tim McCourt is prompted to respond to this inquiry.

The paragraph discusses the growth and development of Bitcoin and Ether futures ETFs, highlighting their significant impact on the cryptocurrency ecosystem and the CME Group's futures complex. It notes substantial increases in trading volumes, with Bitcoin and Ether futures significantly up. The CME's futures are used for ETF strategies and provide efficient ways to create and redeem ETFs due to their connection with reference rates. The CME is emphasized as a leader in the regulated and transparent futures market, in contrast to unregulated crypto-native platforms outside the US. The paragraph underscores CME's commitment to providing tools for risk management in a reliable environment.

In the paragraph, Patrick Moley from Piper Sandler inquires about the competitive landscape after the recent launch of FMX's SOFR futures contract, which has seen modest volumes. Terrence Duffy acknowledges this and emphasizes that it's too early to draw conclusions about the competitor's performance. He highlights CME's strengths, noting their strong performance, client efficiencies, and the value of CME's products. Duffy mentions that the growth of CME's interest rate products did not require incentive plans, underlining their effectiveness and cost advantages in terms of transaction fees and bid-offer spreads compared to competitors. He then invites Mike to provide additional insights.

In this conversation, Mike Dennis and Terrence Duffy discuss the current state of the SOFR futures market, noting that bid-ask spreads are becoming slightly tighter, which impacts transaction fees. They are optimistic about continuing to grow their FICC program, which achieves transactions worth $1 billion daily, although they stress the importance of getting more firms involved. Duffy also mentions criticism he has received regarding his views on US treasuries being held by US participants in US banks, suggesting that the criticism misses the point. Patrick Moley is primarily interested in SOFR, but is open to hearing more about treasuries.

The paragraph discusses a debate about the authority over financial defaults, specifically highlighting that the Bank of England and the FCA should have decision-making power over such matters instead of the U.S. if contracts are cleared overseas. The speaker is committed to making this point clear, arguing against U.S. Treasuries being cleared abroad under foreign regulatory oversight. Additionally, there's a discussion involving Patrick Moley and Terrence Duffy about pricing strategies in response to FMX launching, with Duffy stating it's misguided to assume their future business decisions on pricing, as they regularly adjust their pricing structures.

The paragraph discusses a conversation during a company call focusing on strategies and results in the energy business. Terrence Duffy mentions significant growth and emphasizes that their success is driven by market conditions rather than competition. Alex Kramm from UBS queries about the company's efforts to capitalize on global structural changes in the energy sector, given its potential interest due to the energy transition. Terrence acknowledges the importance of this asset class and defers to Derek Sammann, who confirms strong year-to-date record revenues in their energy segment, indicating active engagement in capturing the sector's opportunities.

The company reported a strong quarterly performance, with a 21% increase in overall volumes and a 45% rise in its options business, setting a new record in its energy sector. The growth largely stems from outside the US, notably with a significant increase in business from Europe (up 37%) and Latin America (up 30%). This growth is attributed to new client acquisitions facilitated by the physical flows of WTI and Henry Hub to Europe and Asia, attracting new commercial and buy-side customers. The buy-side business has grown by 26%, the commercial customer business by 16%, and the bank business by 13%. The company also notes that these physical flows have driven a broader global market participation, extending beyond just WTI.

The paragraph discusses the significant growth in the natural gas business, highlighting a 33% increase in contracts to a record level of 780,000, largely due to increased activity from European customers seeking Henry Hub pricing exposure. It notes the challenges of hedging in these markets, driving growth in natural gas options. The paragraph also touches on new supply lines boosting growth in Europe and Asia, and the potential for further growth with the development of liquefaction facilities that will increase export capacity. International growth is also linked to beneficial tax impacts.

The paragraph features a conversation that primarily revolves around future tax rates and pricing strategies. Alex Kramm asks Terrence Duffy about potential future tax rates, suggesting a range of 20% to 23%. Lynne Fitzpatrick explains that due to international growth, it's too early to fix a future tax rate, as it will depend on factors like administration changes and political dynamics. The conversation then shifts to Kyle Voigt, who inquires about future pricing strategies, noting previous pricing changes announced in the fourth quarter. Terrence Duffy responds, indicating that pricing is evaluated throughout the year and isn't just reliant on percentage increases.

The paragraph discusses pricing strategies and expense trajectories related to a company's services. The company emphasizes the importance of providing value to clients when changing prices, particularly following their transition to Google, which may affect pricing positively for clients. They are cautious about blanket price increases and thoroughly evaluate pricing before decisions. Lynne Fitzpatrick clarifies that a 1.5% to 2% increase was on clearing and transaction fees but other price levers are considered, such as fee schedules and incentive programs. Total revenue is expected to rise by 2.5% to 3% due to these adjustments. Kyle Voigt inquires about expenses, specifically the $56 million cloud migration expense in 2023, which is expected to increase by $15 million this year. He seeks confirmation on this trajectory and future expectations for 2025 and 2026.

In the discussion, Lynne Fitzpatrick outlines that the company is on target with its guidance for migration spending, with a total of $90 million expected this year. She explains that while there's a $15 million year-over-year increase, it is offset by $25 million in costs rolling off due to the cloud migration. The company anticipates incremental migration costs for the first four years and is currently in year three, with another year of costs expected. Google-related expenses are accounted for in the overall expense guidance, which reflects a 3.9% increase, and these expenses are decreasing as on-premises costs decline. Brian Bedell from Deutsche Bank then asks about the competitive strategy regarding pricing and tiering of SOFR contracts. Terrence Duffy appreciates the detailed discussion but notes that the bid-ask spread's magnitude suggests that tiering might not be necessary.

In the conversation, Terrence Duffy refrains from detailing future pricing strategies or incentives, emphasizing the company's focus on delivering client value through strategic game planning rather than making immediate changes, given their recent record quarter performance without added incentives. Lynne Fitzpatrick reports on the firm's financials, noting stable cash balances of $72 billion from Q3, consistent earnings of 36 basis points, and a slight increase in non-cash collateral to $165 billion. Looking into October, both cash and non-cash balances have risen slightly. Despite rate cuts, the cash collateral spread remains at 25 basis points to clients.

The paragraph is an excerpt from a financial discussion involving Brian Bedell, Lynne Fitzpatrick, Terrence Duffy, and Craig Siegenthaler. Brian Bedell confirms details about an unchanged rate of 25 basis points, despite optimizing returns. Craig Siegenthaler shifts the discussion to Robinhood's recent launch of future and index options, asking about which products are expected to see increased demand, specifically mentioning SPY and WTI. He also inquires about how SPY will compete against its core competition, such as SPX, given its tax efficiency and insights from Robinhood's unique clientele. Terrence Duffy responds by directing Julie Winkler to address the Robinhood product questions and Tim to address the SPX comparison.

The paragraph discusses the entry of new retail clients into trading CME products, often starting with the micro equity suite to hedge existing stock portfolios. These clients are experienced in cash and cash equity options, making derivatives in equities a natural progression. The paragraph highlights CME's product diversification, including offerings in WTI, energy, and metals like micro gold. Tim McCourt emphasizes the advantages of CME's futures and options, notably their tax efficiency as Section 1256 contracts with favorable capital gains treatment. The distribution through partners, including Robinhood, is crucial for managing risk and market access. The performance of futures compared to ETFs has been strong, with more retail partners coming online, particularly in Q3.

In the paragraph, a discussion takes place between Craig Siegenthaler and Terrence Duffy regarding the CME Group's position on event and political election contracts. Siegenthaler mentions a large broker launching a political election and weather contract platform, suggesting a growing interest in such products. Duffy responds by clarifying that CME Group currently does not plan to list political event contracts. However, he leaves the door open for future opportunities if the market evolves, similar to their cautious approach with Bitcoin, which they only listed once it was mature enough and met regulatory standards.

In the paragraph, Terrence Duffy discusses a cautious approach to exploring new product opportunities, emphasizing the importance of timing and understanding the product cycles before making any commitments. Tim McCourt mentions that the CME Group's strategy for offering event contracts involves integrating them with existing futures contracts, specifically focusing on equity indices. He highlights the importance of leveraging liquidity from older contracts and continually engaging with market participants to explore new product demands. Craig Siegenthaler appreciates the response to his question, and the discussion transitions to Owen Lau, who inquires about the expense guidance.

In the discussion, Owen Lau questions Terrence Duffy and Lynne Fitzpatrick about the company's compensation ratio, noting a decrease from last year despite stronger revenue. Lynne explains that the incentive compensation adjustments, or "true ups," occur throughout the year based on performance, rather than in a large adjustment in the fourth quarter. This is a result of the company's operating leverage, where revenue growth does not necessarily require additional headcount. Terrence Duffy emphasizes the company's ability to grow revenue while maintaining the same cost base due to their efficient business model. The operators then move on to the next question from Mike Cyprys.

In this paragraph, Terrence Duffy discusses the conversations with regulators about treasury futures clearing and highlights the increasing understanding of the derivatives market's size and significance. He emphasizes that the derivatives market is larger than the cash market, and there's a new law involving cash treasury clearing under SEC regulation. Duffy notes that there's growing awareness among regulators and lawmakers about the importance of treasury futures and the potential implications of cross-border clearinghouses handling foreign sovereign debt futures. Although it's unclear what the final outcome will be, Duffy acknowledges that inquiries and analyses are ongoing.

The paragraph discusses changes in bankruptcy laws by the Bank of England, which impact US participants by removing their protection under UK bankruptcy laws. It highlights that the Bank of England now acts as the default authority for bankruptcies of systemically important institutions, differing from previous arrangements with the CFTC. This leads to complexities and considerations for opening a clearing house in the US, as existing UK entities like LCH under LSE might not find it beneficial due to lost offsets in the US. Suzanne Sprague adds that achieving offsets between clearing houses in different regions is costly, with regulators requiring significant capital holdings for margin savings offered to participants.

The paragraph discusses the requirement for clearing houses to be fully capitalized in each jurisdiction despite margin efficiencies provided to customers, due to domestic regulators overseeing resolution regimes. This challenge has persisted and is expected to continue. Michael Cyprys inquires about interest rate swap clearing, specifically a $40 billion margin and its growth potential. Lynne Fitzpatrick responds, indicating that 75-80% of the swap margin is attributed to US dollars and highlighting the importance of portfolio margin program efficiencies as a key driver of swap activity.

The article discusses the focus on capital efficiencies in the swaps clearing space, particularly due to regulations requiring a five-day margin period of risk. Mike Dennis emphasizes the importance of optimizing margin efficiencies between different products like SOFR futures, treasury futures, and swaps. The conversation also touches on challenges from Basel III Endgame, capital constraints, and liquidity issues affecting balance sheets. Mike notes increased client interest in portfolio analysis for potential growth. Terrence Duffy, the host, then directs the conversation to a question from Bill Katz, who inquires about the company's expense guidance of $1.585 billion for the year and seeks clarification on whether this is due to seasonal factors or structural changes. Katz also questions the sustainability of the business's high profitability margin of 69% moving forward.

In the paragraph, Lynne Fitzpatrick addresses a question from Bill Katz regarding the company's operating margins. She explains that the company typically experiences increased expenses in the fourth quarter due to larger marketing events, as seen in previous years. These expenses are linked to marketing, new retail opportunities, and technology growth, such as cloud migration. While the company does not have a specific target for operating margins, it focuses on driving earnings growth and is willing to invest in new opportunities. The business model allows for strong cash generation and shareholder returns, without a fixed margin target.

The paragraph discusses the challenges of predicting revenue and growth in retail opportunities for their platform, particularly due to the varied nature of distribution partners, which include both futures-only firms and those with broader portfolios. Julie Winkler emphasizes the difficulty in generalizing average daily volume (ADV) growth, noting that the company is focused on attracting new traders and enhancing educational and content offerings. They collaborate with over 100 distribution partners globally to tailor content and host joint events, both online and in-person, to meet the diverse needs of their partners.

The paragraph discusses strategies for accelerating revenue growth by educating clients and involving third-party influencers to discuss trading strategies. It highlights the importance of a multifaceted approach to increase trading volume, emphasizing the significance of providing product information on contracts with high volatility. It mentions the diverse product portfolio's advantage, where the focus can shift between products, such as equity and commodities like WTI and Micro Gold, based on market conditions. Terrence Duffy adds that all six asset classes showed growth this quarter, and the paragraph concludes with expressions of gratitude and an invitation for future communications.

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