CME Group Inc.

And welcome to the CME Group fourth quarter and year-end earnings call. This call is being recorded. If you would like to ask a question during the call, please press star 1 on your telephone keypad. At this time, I would like to turn the conference over to John Peter. Please go ahead, sir.

Good morning, and thank you all for joining us. I'm going to start with the Safe Harbor language. Then I'll turn it over to Terry and John for brief remarks, and then we'll open it up for Q&A. Statements made on this call and in the slides 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 statements. More detailed information about factors that may affect our performance can be found in our filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will find a reconciliation between GAAP and non-GAAP measures. With that, I would like to turn the call over to Terry.

Thank you, John, and thank you all for joining us this morning. We appreciate your interest in CME Group. We had strong tailwinds in Q4. We averaged more than 20 million contracts per day, which was up 31 percent compared to the prior year. For a full year, we had record volumes in four product areas, along with total options and electronic options volume. We made progress expanding our volume from global market participants during the year. In Q4, we had 22% volume growth from participants based outside the United States, totaling more than 4.8 million contracts per day. For the full year, we were up 18%. We launched a number of successful new products designed to solve customer needs during 18. Many of the new products were detailed in the executive commentary that we provided earlier this morning, but let me just highlight a few of them. First, the FX Link was launched in March of 2018 and won the Risk Magazine Award for Innovation of the Year. It is currently being facilitated by nine Futures Commission merchants, and the client base is growing. Liquidity is available across multiple currencies, with clients noting that the prices often match or better FX swaps. FXLink had a record day of 24,000 contracts in January of 19. As it relates to SOFR, it was launched in May of 2018, and average daily volume built steadily to 14,800 contracts per day in December, reached 18,000 in January, and is averaging 23,000 per day in February. Global participation has surpassed 105 firms, including major banks, buy-side, and proprietary trading firms. In November, we launched physical West Texas Intermediate Houston crude oil futures in conjunction with Enterprise Products Partners, the leader in crude infrastructure in the Houston area. The product has steady growth from November through February, and we think this offering will be a useful addition to our existing energy franchise. We were pleased to announce the next group acquisition in March and complete it in early November. The markets and optimization business each performed well during the fourth quarter. Our teams are working in a very collaborative way and we have made good progress on the integration planning so far. In terms of the most important components of the integration, we have let customers know that the broker tech migration to Globex will begin in 2020 And the EBS customer migration will begin in 2021. Turning to this year, volume has slowed across many global asset classes. We are averaging 17 million contracts per day this year. As I referred to earlier, Q4 was an exceptional quarter, and we saw high volatility. It's not unusual to see a market pause following periods of elevated volatility. It is worth noting our open interest is currently sitting at 129 million contracts. This is one reflection of the health of our business. Our options business is averaging 3.8 million contracts a day so far this year. The important part about this is that they're comparable to the levels of all of 2018. Options as a percent of the total volume has increased from 20.5% for 2018 to 22 percent in 2019. These are valuable tools in this environment. Several global issues are in the headlines, as many of you know, which could have an impact on any market, including Brexit, various trade negotiations, uncertainty around another potential government shutdown, or other government actions. As we know, markets like clarity, and we're hopeful that some of these issues I just outlined will start to get resolved. That being said, we do look closely at how our products compare to other alternatives, and we continue to be the leader. Our strategy has been very consistent over time. We focus on maximizing activity and bringing in new market participants to manage their risks. Launching new products and enhancing existing products We are intensely focused on expanding the core business and integrating the valuable components of the recent acquisition of the next group. Expense discipline is something I have been very focused on, along with my management team, and we will continue to do so. I would now like to turn the call over to John. I look forward to your questions in a moment. John?

Thanks, Terry, and good morning, everyone. As Terry mentioned, expense discipline is a continued focus of the entire organization. Between 2016 and 2018, CME Group's revenue has grown by $580 million, excluding Next, while total adjusted expense increased only $55 million during that time. We have built a very scalable platform, and we intend to operate the combined CME and Next businesses efficiently. We are very pleased with how the integration is progressing so far. The teams are working well together as we begin our synergy and customer outreach plans. Our goal is to provide increased benefits for our market participants who have been providing us helpful feedback along the way in terms of what they'd like to see. I'll briefly cover the financial results for the fourth quarter, and then I'll provide some guidance for 2019. Let me start with CME standalone results. Our revenue is up 15% for the full year and up 23% for the fourth quarter. Our rate per contract was strong considering the amount of activity we saw during the quarter, which tends to be impacted by volume tiers. Market data revenue grew $8 million sequentially and included $6 million of incremental audit revenue with very stable screen counts. The annual adjusted expense without license fees increased by a modest 2.8%, which was in line with our original guidance. The increase was driven entirely by bonus and stock-based compensation during 2018, reflecting the company's strong results. Otherwise, expense would have been flat for the year. Our incremental operating margin for the year approached 90%. In the fourth quarter, NEXT contributed $134 million of revenue, the majority of which was in the clearing and transaction fee line, and $88 million of expense, with more than half reflected in the compensation line. Overall adjusted EPS, including the two months of NEXT results, was up 58% in the fourth quarter, the highest quarterly growth rate we've seen in the last decade. For the full year, adjusted EPS grew by 43%. During 2018, we declared dividends totaling $1.6 billion. Turning to the guidance for 2019, we anticipate expense excluding license fees to be between $1.65 and $1.66 billion, reflecting a full year with NEXT and the P&L impact of $25 million of expense synergies we expect to deliver primarily in the back half of the year. We continue to target $50 million run-rate synergies by the end of the year. CapEx is anticipated to be between $180 and $200 million. Finally, we expect the effective tax rate to be between 24.5% and 25.5%. Please refer to the last page of our executive commentary, where we provide additional financial highlights and details. With that short summary, we'd like to open the call for your questions. Based on the number of analysts covering us, Please limit yourself to one question, and then feel free to jump back into the queue. Thank you.

Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad. We will now take our first question from Richard Rapeto of Sandler O'Neill. Please go ahead.

Yeah, hi. Good morning, Terry. Good morning, John. Good morning, Richard. Good morning. You talk about expense discipline, but I guess what I was very impressed, the precision of the guidance is pretty amazing as well. So I guess the question is, NEXT, and John, you mentioned this, I think it was in total $134 million in revenue. When we look at the expenses, $87 million. So anyway, the margin looked at, in the mid-30s, at 35% pre-tax for NEXT. And I think that's a little bit stronger than what we had anticipated. So could you talk about sort of the outlook for next and the margins, given the, I guess, right out of the gate, the strong contribution?

Sure. Thanks, Rich. Appreciate it. Yeah, a couple of points you made there. First is the precision in terms of the guidance. You know, we as a management team actively manage our expenses every day. And you saw what happened over the last several years where, you know, we've been very close to the guidance we've been given out. We do a bottoms-up build of the budget, and then, you know, we manage it actively. So you saw this year, you know, we hit $11.05 billion, $1.105 billion, and that was, you know, what we had guided to in the beginning of the year. In terms of NEX's margin, there's a couple of points. You know, number one, the $88 million reflects two changes that are being made to the expenses that impact NEXT. The first is at the time of the acquisition, internally developed capitalized software is included in purchased intangibles. So as we noted in the executive commentary, the NEXT, when you take a look at NEXT's expense run rate, that would go down by $5 million per month due to that treatment of that asset. The second piece is, again, in capitalized software. As NEXT rolls onto CME Group's policies, we anticipate there to be less capitalization of wages and salaries. So that would mean less capitalized software and higher wages and salaries, and that we anticipate to be about $1 million per month. So the net impact to NEX's expense rate would be a decrease of about $4 million per month. So if you take a look at NEX's margins, taking that depreciation impact into consideration, it's more in the 26 to 27% range if you're looking at it the way NEX previously treated those items. So in terms of forward-looking information, you know, NEX is going to be following CME's business model. So in the future, you know, some of NEX's organization or many of NEX's organizations will be rolled into CME. So they'll lose the distinction of what is NEX's expenses versus what is CME's expenses because we run it very much a shared services model. and that's what's going to be able to generate the synergies that we anticipate generating in the next several years.

Thanks, and congrats on a strong year, Terry and John.

Thank you very much, Rich.

Thank you. We will now take our next question from Dan Shannon of Capris. Please go ahead.

Thanks. Good morning. I guess a two-part question here for you, John. So could you break down the expense guidance between what core CME is and what you're assuming for next in 2019? And then also, if you could talk about, I think you said it was, you know, it looks like it was accretive this quarter. Kind of put some numbers around what the accretion you think could be or contribution could be in total for 2019. Thanks, Dan.

Yeah, I think a way to look at it, like I said at the start, we do a very much of a bottoms-up build. So the way one can look at it is if you took our expenses, which was $1.105 billion, and if you took NEX's expenses, excluding license fees, and you take November, December, and you annualize that, add the two together, multiply it by a growth rate of 3%, and then back out $25 million in P&L expense synergies, that gets you right around $1,650. So that kind of gives you an idea of how it would be approached from looking outside in. And really the 3% reflects cost of living and escalators that we have in some of the service contracts that we have. So that's one way to look at it. In terms of... In terms of accretion, obviously out of the gate, you know, we're cash accretive. You know, we didn't give out any specific numbers around that, something that you can, you know, certainly calculate. You know, we believe that, you know, as we phase in the synergies, you know, we'll be very, you know, very pleased with the amount of contribution NEXT will provide not only to our earnings but also to our annual, you know, to our dividend policy or capital return policy.

Okay. Thank you.

Thanks, Dan.

Thank you. We will now take our next question from Brian Bedell of Deutsche Bank. Please go ahead.

Great. Thanks. Good morning, folks. Maybe can you guys talk a little bit about the revenue synergy opportunities with NextNet? I'd appreciate it if you can really forecast them. That's usually a difficult area to forecast. But maybe if you can talk about some of the things that now that the deal is closed, what areas you are specifically looking at where you think you can enhance both legacy NECs and CME revenues and sort of maybe just a little bit of a timeline of those areas.

Brian Durkin Thanks, Brian. This is Brian Durkin. We're really excited about how well we've hit the ground running since we've closed the transaction. If you look at the performance, we'll cover the market side first. Looking at the broker tech activity, they had their largest quarter in almost, I think, the history up 25%. And we're seeing continued drive towards that platform as it is the area of confidence that the market comes during uncertain time periods. When we look at the overall performance of the repo business, while slightly down in the U.S. repos, we're up about 9% in our European repo business. And when we look at the foreign currency side of the market, we've seen growth in terms of an increase in the client base accessing the platform. It's up over 7%. So we're very excited about what that could mean to us in the context of bringing the world's two leading marketplaces together, both in the foreign currency and the treasury market specter. When you look at the optimization side of the business, we've seen, again, continued growth in the services that are provided from TriReduce, as well as TriResolve and TriBalance. Each of those areas are performing quite well. TriReduce has just rolled out some improvements to their platform, which allows the market participants to enjoy increased cycles in terms of their compression services and what we would call a low-touch access to the platform to make it far more user-friendly and far more accessible. With respect to the overall efforts of TriBalance, we've actually increased the number of clients by about 50% in the past year. The post-trade services continues to be, we think, a wonderful area for us to grow, not only within the U.S., but more so on the international sphere.

Maybe I just add a little bit. This is Terry Duffy. On the EBS platform, I referenced earlier in my remarks about the migration of not only broker tech coming onto the platform starting in 2020 and then the EBS coming out in 2021. We think that is... something very exciting, especially from the EBS. I think maybe Sean can talk a little bit more, especially as it relates to the EBS on the cross-selling opportunities that we could potentially see great growth from. So, Sean, maybe you want to touch on that a little bit on a single platform.

Yeah, that's great. Thank you, Terry. So, on the EBS side, we're very excited about actually some of the growth they saw last year. So, huge growth, for example, in NDFs, or non-deliverable forwards, where in the fourth quarter they had extraordinarily strong growth as well. They've got very deep penetration internationally, and in particular, very high growth in CNH, especially with the volatility in the markets, you know, between the U.S. and China. So a great business, a great growth. In terms of bringing marketplaces together, Terry mentioned in the earlier remarks FXLink, where we're bringing together the spot or the OTC spot foreign exchange market along with our futures market and creating a cleared, standardized, lower total cost alternative to the FX swaps market where we're seeing very good growth, about 15,000 contracts a day so far this year. So we're very excited about bringing the two platforms together, much like we had already been working on FXLink, as well in order to cross-sell. In terms of that international side, EBS has very deep penetration in regional banks in Asia and regional banks in Europe. So we're very, very excited about cross-selling the CME futures products into the OTC market, as well as the OTC products into the futures marketplace. And we see those two marketplaces as highly complementary.

So Brian, hopefully that gives you a little flavor where we're going as far as revenue synergies.

Yeah, and to the extent you can get pricing benefits for customers, do you anticipate just getting more customers so that you have a net positive revenue synergy that would offset any kind of price reductions?

Yeah, we haven't discussed price, Brian, to date. And I think the synergies really are what we outlined, what Sean just said. especially I'm referring to the EBS side for sure, because the ability to cross-sell, to have people trade both futures and cash on a single platform, we think there's a huge benefit there, and what the pricing of that exact product will be is yet to be determined. Okay, great. Great, thank you.

Thanks, Brian.

Thank you. Thank you. We will now take our next question from Ben Herbert. Please go ahead.

Hi, good morning. Thanks for taking the question. Just wanted to ask on the open interest build year to date, and if you could particularly talk about just large open interest holders and kind of the trend you're seeing there. I know it was, I think you said reached a high in November, but just wanted to ask about that year to date.

Yep.

Yeah, Ben, sorry to have you. Let me just touch on that. I referenced it earlier in my remarks this morning. We had 128 million, 900 and some odd thousand, so just under 129 million, so I think I rounded up to 129. But when you look at that, it's so many new commercial participants that have come into our market. As you know, a lot of daily traders who facilitate liquidity, whether they're high-frequency or algorithmic traders, they don't normally carry large open interest positions, but the commercials do, which is, as I said earlier, a great sign of health for our business. So what I'd like to do is maybe have Derek and Sean comment about what they're seeing from their side of their respective businesses as it relates to the OI holders. Derek, maybe you can start.

Yeah, thanks, Ben. It's Derek Salmon here. Yeah, Terry's right. We're seeing a continued growth in the participation, and what we're most excited about is the growth of the non-U.S. participation that's growing both OI participation and continuing to grow our liquidity footprints out across time zones. In the energy market specifically, we see a continued narrative around the globalizing gas and crude oil market where we're seeing infrastructure builds export facilities. In fact, the EIA, which is the Energy Information Administration, put out a report confirming the U.S. has now, as of November 2018, become the single largest producer of crude oil in the planet. So we're on track to – we did deliver 11 million barrels a day in 2018. The expectation is that the U.S. is going to be producing 12 million barrels of crude oil in 2019, and natural gas is following that same path. What that means for participants using our Henry Hub natural gas contract, our WTI crude oil contract, being a reinforcing of the global benchmark status that that achieves as not only is U.S. producing record amounts, it's exporting record amounts. So on the back of what was an energy all-time record quarter in Q1 of 18, an all-time record revenue year in 2018 as a whole. We're continuing to see not only outperformance of our energy franchise, but a growth in open interest and large open interest holders driven in the energy business, specifically from participants in Asia. So continued strong growth there. One of the, if you are looking at the large open interest holders, Ben, it is important to note that given the government shutdown, The CFTC has delayed reports, so the large open interest total reports are only out through the first week in January. So we're looking for a backlog of those reports to come out. But I think what you see is a continued trend that tracks the growth of our business, the global footprint, reflective of the global benchmark status of our products across the asset class. So I'll turn it over to Sean for financials.

Yeah, on the financial side, we're always very excited about bringing in new participants, especially large open interest holders. And last year was a great success, so In November, we had an all-time record in rates LOIH. In September, we had record LOIH both in equities and in foreign exchange. In addition to that, we continuously look at making sure that our products are the lowest total cost relative to any alternative products where people can take similar risks in order to bring in those participants. So we're always excited about outperforming the alternative products and bringing the participants into our markets. Does that help, Ben? Yeah, absolutely.

Thank you. Thanks, Ben.

Thank you. We will now take our next question from Alex Cram of UBS. Please go ahead.

Hey, good morning, everyone. I think this is both an ask going forward and also a question for now. But, John, you didn't break down the revenues in particular on the transaction and clearing side for NEXT. They historically used to do that between FX and treasuries and things like that. So, I guess the question for today is, do you have some of those numbers so we can see how those revenues are actually tracking? Because we can obviously check the volumes. And then two, can you actually start breaking it out on a more consistent basis, which would be really helpful from a modeling perspective? I guess that's the ask. Thank you.

Yeah, thanks, Alex. Let me break down some of the – geography on the income statement with regard to the revenue, because it's a bit different than what Next reported. You know, in the clearing and transaction fee line, Next contributed $91 million. The majority of that is related to their market's business. That would be EBS and BrokerTech. In terms of the market data, Next contributed $12 million to in market data, and we're putting all of the market data for NEXT in that line. The majority of the market data comes from their markets business, as you would expect. The balance, or $31 million, is in the all other line, and that is primarily all of the optimization businesses that NEXT has, excluding TriReduce, which is the compression business, which is reflected up in the clearing and transaction fee line. So that's the breakdown. We'll be looking at the appropriate level of disclosure going forward as we spend some time with the businesses and determine what the right amount of information is that we should give out. So we'll be doing that going forward. Some color around, as you were mentioning, we're giving out some of the volumes and You know, we want to kind of give you a little bit of color there. So when you take a look at EBS, when you take a look at their revenue growth compared to their volume growth, it's very much like CME Group in terms of that relationship, especially for their central limit order book. And then when you take a look at BrokerTech, their volume growth is higher than their CME than their revenue growth is more pronounced because that's much more of a mature business and they have many more bespoke, you know, agreements. So, you know, in terms of the overall, you know, in terms of the overall business, you know, one of the things to take into consideration is that, you know, similar to CME Group, you know, the types of products that are being utilized. So, for example, in EBS, if it's emerging markets versus G10 currencies, or if it's in broker tech, the amount of U.S. Treasuries versus European repo have different, you know, revenue associated with that. The type of transactions being done, so whether it's central limited order book or bilateral trading impacts their revenue capture rate. And then, you know, finally, the type of participant that trades also has an impact. So very similar to CME in terms of the impact on revenue growth versus transaction volumes. But we'll be looking at the appropriate level of disclosure, you know, once we've had the opportunity to run the businesses for a little bit of time. All right. That's great.

Thanks for the color. And, yes, the more you can give, the better, obviously. Thanks.

Yeah, we're a very transparent organization, and we will definitely keep that in mind.

Thank you. We will now take our next question from Michael Carrier of Bank of America, Merrill Lynch. Please go ahead.

Hey, good morning, guys. This is actually Samir Murakutla on for Michael Carrier. Just a question on, I guess, capital management. As you move forward past this deal, You guys are not that levered, so I guess, can you give us an update on where you would like your leverage to fall to? Maybe how aggressive are you going to be in lowering debt levels versus raising cash for the dividend? And I guess, Terry, what's your interest near term on any other transformative M&A? Thank you.

Good morning, Sameer. Thank you for the question. Let me tell you kind of where we're at in terms of our leverage. CME has about $4.4 billion in total debt, and we have an approximately 1.3 times debt to EBITDA. We've given guidance that by 2020, by the end of 2020, we want to be at one times debt to EBITDA. So in the first quarter, NEXT had a debt that we inherited of about $400 million in a Euro-denominated senior note, which matures in early March. and then they have $170 million in the yen-denominated term loan that is up at the end of March. So as those mature, we'll likely replace that in the near term with commercial paper, and then we'll be paying down that commercial paper over the next several quarters into next year as we delever down to one times debt-to-EBITDA. You know, in terms of, I just want to bring up, in terms of interest expense, as you look to model it, I would expect interest expense to increase from this quarter to next quarter, as we'll bring on, you know, a full quarter's impact of the acquisition financing, and that's going to be offset by, you know, some debt pay down that we did at the very end of Q4, and also there's a rate differential between the bonds and the term loan note versus the commercial paper. So we should see a tick up about 10% or so in terms of interest expense into the first quarter, and then you'll see that come down over time as we delever. In terms of the aggressiveness of delevering, I think our actions reflect our sentiment in terms of how we're going to approach that In terms of what we did in the fourth quarter, we took a very balanced approach in terms of how we approach delevering. We expect to do that this year. So we'll be very balanced in terms of the amount of delevering versus the amount of capital return versus the amount of investment in the business.

So, Samir, let me just answer your latter question about M&A. Right now, I'll give you a very canned answer, obviously. We're very focused on working on integrating the next transaction. I've been here a long time, and one of the things I've been very focused on, along with my management team, is to create experiences that can benefit our clients. And if we see things that we can enhance the value of the client proposition, we think that's good for our business, hence the reason why we pursued the next transaction the way we did. because we think that's ultimately good for the end user client. So that's a way of telling you that my focus, and we're not a company that does a deal a day, we're very laser focused on creating value for the clients, because we know that will create value for the shareholders ultimately. And that's kind of how we approach this. So right now, that's what I'm looking at. I'm looking at completing the next integration. And if there's things out there that make sense, that would add value for the client. We were always willing to look at it, but right now I'm focused just on the next integration. Perfect. Thanks for the detail, guys. Thanks, Samir.

Thank you. We will now take our next question from Alex Blostein of Goldman Sachs. Please go ahead.

Hey, guys. Good morning. I was hoping to go back to the discussion on kind of core CME franchise. you know, total open interest trends definitely hanging in there. What I was hoping to zone into a little bit more is the energy business, and it looks like the, you know, the volumes obviously could be all over the place, and I don't want to extrapolate the first quarter, but it looks like open interest with an energy is down 20% or so year over year, so I was hoping to get a little more granularity with what's behind that. Thanks.

Derek, do you want to comment on that?

Hey, Alex, it's Derek. Thanks for the question. When you look at energy business, yeah, you have to bear in mind a couple of things in the context. In Q1 of 2018, we had an all-time volume record. In fact, we finished the year at an all-time revenue record, and we actually had come off November as a single-month volume record as well. I think we put up 3.1 million ADV in the month of November, and within that, on November 14th, had a single-day record of 5.1 million contracts. So our comps versus what was an all-time record, Q1 of 2018, are tough in the success that we're having. What we are seeing is that as we have built into the structural build of the energy market, I talked earlier about what we're seeing as continued infrastructure supportive of record generation and production of U.S. crude and natural gas, and now the infrastructure build around that with LNG facilities coming online in the Gulf this year, we're seeing an increased participation in NYMEX-based products based on the U.S. benchmark. So we are seeing a tough start to the year along with most of our asset classes here. I think what we're focused on is what we've always done. To Terry's point, how can we build a suite of products and functionalities and a product suite that best suits the needs of our commercial end-user customer base? So coming off the record year, the number of innovations and builds that we're putting in place from Q4 into Q1 this year with things like our new Houston contract that we launched in November. When you look at the growth of that contract, we launched that November 5th. We have doubled our volume in January versus November, December of last year, a little over 1.1, just over 1,000 contracts today. Open interest is up to 4,000 contracts. And we're seeing that actually trade. What's interesting about the Houston contract is that contract actually trades as a spread to our WTI contract. So customers that are part of the emerging export infrastructure for Global Crude are using NYMEX-based Cushing WTI product and spreading that against the physically delivered Houston contract. That means a contract in our WTI is linked to a contract trade as a spread against HCL. So we're excited about the continued innovation growth there. When you look at particularly the open interest numbers, you need to look at the benchmark products and the power figures are tiny, tiny contracts. We've removed those from the earnings information that we gave you guys on slide eight. So note the overall kind of OI in that complex as a whole is relatively flat over the last couple of years. So we're really focused on what we're doing with coming off record years and record months of 2018, the innovations with things like Houston Crude, which reinforces the WTI benchmark, what we've announced in the crude auctions market, first time ever, providing commercial customers an ability to directly sell their crude products on a CME Group platform. The first auction will go live in March 5th, and that will continue to support the WTI franchise And when you look at the state of our franchise versus the other guy out there, we're actually seeing that our overall market share in all of 2018 was about 57% of WTI versus Brent. We've actually built that to 60% in January and 62% in February. So you've seen us innovate and grow our product, extend our client base, focused on outperformance when we have tailwinds and outperformance versus competitive products when we have headwinds as well. So that's what we're doing to solve customer problems and really focus on our end user commercial participants.

Got it. Thanks for the detail.

Thanks, Alex.

Thank you. We will now take our next question from Jeremy Campbell of Barclays. Please go ahead.

Hey, thanks, guys. So your CapEx guide of 180 to 200 versus your more typical kind of $100 million annual pace, I guess how much of that lift is kind of the long-term run right now with NEXT, and how much more Is it more of a near-term or one-time-y type function of items like tech enhancements, platform integration, and kind of a cost-achieve integration?

Thanks, Jeremy. This is John. So, yeah, if you take a look at CME, you know, historically it's been, you know, in the $80 to $100 million range in terms of our CapEx. Next has been more in the $100 to $114-ish range. So that gives you kind of a range of $180 to $214 million in terms of the combined company's range. And, you know, Next is a different business than we are. So there's more investment in some of their platforms, especially in optimization. So that's been some of the investment they've been making. I would expect it to come down over time as we migrate their markets businesses onto Globex. But I do expect, you know, an elevated level of CapEx going forward, but probably not at this level for the long run.

Got it. And then, John, I think you mentioned that RPCs were low this quarter because we were hitting a lot of volume tiers after really good kind of volumes in fourth quarter. Is it kind of fair to think that, like, where volumes are tracking year-to-date, that we might see RPCs coming closer to three key levels?

Well, I think it's safe to say that there's a couple of things that factored into the RPC this quarter versus previous quarters. One is obviously the amount of volume was tremendous in the fourth quarter. Also, we saw interest rates being a higher proportion of the overall volumes versus some of the other product lines. So definitely I would expect the RPC in aggregate to go higher to the extent that there's less volume, but it's also a function of market participants and also the types of products that are being traded.

Thanks, guys.

Thanks, Jeremy.

Thank you. We will now take our next question from Chris Harris of Wells Fargo. Please go ahead.

Thanks, guys. So we've got a more dovish Fed all of a sudden. What do you think that implies for the growth of CME's business over the near term? I think that would be a negative on the margin, but I'd like to hear your thoughts.

Well, I'll go ahead and let Sean comment on that, and I might make a comment or two also, Sean.

Yeah, so thank you for that. You are correct in terms of the market expectations. So while we've had a few tightenings over the last few years, each year, at the moment, there are no tightenings projected for this year. Nonetheless, we're constantly focused on new product innovation, bringing in new clients. And relative to the RPC question earlier, a lot of that new product growth has to do with innovations and adjustments to our product mix. So I'll give you some examples. Actually, looking at the broker tech side, mention that for a moment. Back in November, BurgerTech reduced the minimum price increments in their two-year notes, and that caused very strong growth in the two-year notes relative to the rest of the complex of north of 5%. So that product adjustment was taken very positively by the marketplace, making it a lower cost to cross the bid-offer spread on that platform, causing strong growth. Similarly, in January, CME Group lowered the minimum price increment in our two-year notes, so the two-year note futures And in terms of that, that likewise is seeing an uptick of about 2.3% relative to the entire complex. So we're seeing very strong growth in the two-year notes relative to those changes to those products. I'd also talk a bit about our penetration. I spoke earlier, we're constantly focused on the future side as well as the OTC side to make sure that we've got the lowest cost product relative to alternatives. That's a total cost product. So if you look at treasury futures in particular, one of the things that we've talked about for the last few years is our growth relative to the overall cash marketplace. We're currently running at 116% our treasury futures versus the cash treasury bond market. So we see continued strong growth. In addition to that, invoice spreads. I've talked about that a number of times over the last couple of years. Invoice spread CME group relative to portfolio margining of interest rate swaps against our treasury futures offers a much lower total cost alternative to the soft spread market. That marketplace this year is running at over 100,000 contracts a day. That's grown from several years ago, about 8,000 contracts a day to now well over 100,000. So a high RPC product, that RPC is around $1.90. And we've grown it from about 8,000 to well over 100,000 a day this year. In addition to that, I might talk maybe a little bit more about some of the other innovations and impacts they've had. SOFR Futures continue to do very well. Our SOFR Futures marketplace now running about 92,000 contracts, open interest, more than 105 participants. December, we did about 14,000 a day. January, about 18,000 a day. And this month, about 23,000 a day in terms of the contracts. On the equity side, continued innovation there. Basis trade index close. You know, very exciting results. High RPC product running about $2.60. That particular product, Last year, you may recall, 2017, we did about 13,000 contracts a day. Last year, we did about 40,000 contracts a day. This year, we're doing 44,000 contracts a day. Last thing I might mention is total return futures. Total return futures are a standardized, listed, lower total cost alternative to equity index swaps, those OTC equity index swaps. This is important under the unclear margin rules, and we're seeing very good growth there. So in December, we launched further out the curve in our S&P complex. So we went from 18 months out to around five years in the futures. We also launched NASDAQ, Dow, and Russell total return futures. That product, while it's only doing about 3,000 contracts a day, has an RPC of well over $5. So we continue to innovate. We continue to bring in more clients. We continue to drive our total cost benefits.

Let me just add a little bit. I think Sean really hit on all the high points there, and so it's kind of hard for me to at any more other than we've been able to grow our interest rate business over the last several years, especially in a zero interest rate environment, which I think is really impressive because of the innovations that Sean and his team have outlined and brought forward. But secondly, you know, CME is not just an interest rate business. When you look at just this morning, you look at the president maybe going as far as extending the trade agreement with China for another 60 days, which on the pre-market rallied the market dramatically, which people needed to manage risk. A few moments after that, you had retail sales come out with the biggest percentage drop since 2009, so people needed to manage their risk there. We have all the products to manage that risk, and so I think it's really important to note that CME's business is not based just on a dovish or a hawkish fit.

Is there another question?

Thank you. We will now take our next question from Ken Worthington of JP Morgan. Please go ahead.

Hi, good morning. Brokertech went down in early January, and it seems to have had a bigger impact on trading than, say, when we see in equities the New York Stock Exchange or NASDAQ go down. What reaction have you experienced from regulators and dealers in And to what extent do you think there might be any longer-term implications from the shutdown and the impact it had on the market?

Thank you. It's Brian Durkin. I mean, first of all, yes, we had an unfortunate incident that occurred during that session, and it was attributable to internal operational error that we were able to identify, quickly resolve, and we put in the remediation steps to ensure no future occurrences in that regard. In explaining to our marketplace what had taken place, the market responded very understandably and very appreciative of, I think, the immediacy with which we handled the situation and the responsiveness that we were able to provide to the marketplace in terms of recovery resolution and moving forward. And I just, you know, would like to note that December and that period was our all-time high in terms of our overall activity, which, again, goes to the efficacy of the platform overall, the continuity of performance that has been enjoyed and will continue to be enjoyed going forward. Okay. And the regulatory response? As we normally would, we just communicated what had transpired and the remediation steps that we took to prevent future occurrences.

That's very common what we do in all these situations. Right. Okay. And no implications, you think?

No. From the perspective of the user base and where we are with moving forward, no, we're very confident in terms of the controls that we have in place.

Okay, thank you.

Thank you. We will now take our next question from Kyle Voigt of KBW. Please go ahead.

Hey, good morning. Most of mine have been answered, but I guess maybe just one on the cash treasuries market. The market structure, I think, remains relatively bifurcated in that there's this decline to dealer and dealer-to-dealer space with next mostly playing in the dealer-to-dealer space. I guess one for maybe for Terry or Sean, I just want to get your long-term view in terms of the market structure evolution in that cash treasuries market and how that's going to unfold and maybe how CME is going to play a role in that moving forward.

You know, Kyle, thanks, but I, you know, I've said this from the moment we announced the next transaction and I am passionate about this. We did not acquire next to change the market structure as it relates to broker tech. We believe in that market structure. We believe the market participants who are utilizing that platform, which are the largest banks and biggest prep firms around that if it, when there's going to be changed, they're going to be probably the ones influencing that change. We like the transaction because we think it's complimentary to our derivative business. That's why we like broker tech so much. But on a market structure standpoint, I and nobody around this institution is looking to change any of the market structure as it relates to broker tech. I don't know if that, Sean or Brian, you're more than welcome to make a comment, but that's where we're at with this transaction today. And, you know, listen, I think that this, acquisition of Next, and I think the components that it has, especially BrokerTech, EBS, and others, are very valuable to the clients. As I've said earlier, my focus and the team's focus is on how do we create an experience that could help benefit the clients, whether they're trading cash or futures. And that, to me, is what's critically important versus the market structure. So we're staying away from that component.

Okay, fair enough. And then, John, if I could just ask a quick question, giving up towards the end of the call here. I think you said a 10% uptick to expect for interest expense in one Q. I just wanted to clarify, is that versus the adjusted interest expense number of the $44 million this quarter?

Yeah, that's correct. I mean, you know, as I said, you're going to have a full quarter's impact of the acquisition financing. That only included two months. So you get a full quarter's impact, and then you've got – full quarters impact of having NEX's debt on our books. And then you also will have some offsets or some reductions to interest expense. As I said, we had a pay down towards the very end of Q4. And then also you've got a rate differential between NEX's debt and the commercial paper that will replace their debt with in the short term. So that's why you see it'll be a tick up in the first quarter, and then you'll see it go down over time. We expect the majority of the pay down for this year to occur in the back half of the year.

Okay, great. Thank you.

Thanks, Kyle.

Thank you. We will now take our next question from Chris Allen of Compass Point. Please go ahead.

Good morning, guys. I think most questions have been asked and answered. I guess just one quick one. Any update on the DTCC clearing link and any progress you guys are making there in terms of customer uptake and how you're thinking about clearing opportunities longer term?

Thank you. We're continuing to work closely with the DTCC in terms of trying to enhance what currently is available with the 2-POP margining capabilities and and seeing what opportunities exist now that we have these wonderful assets as a part of CME Group, what we can do to extend that further. We're very excited about the opportunities in front of us in that regard. Our goal is to really assist our clients in terms of enhancing their capital efficiency, and we'll hopefully have more to report down the road.

Thanks, Chris.

Hey, thanks, Chris.

Thank you. This concludes today's question and answer session. I would like to turn the conference back to the speakers for any additional or closing remarks.

Well, let me thank you all for joining us this morning. We appreciate your interest in seeing the group and we look forward to talking to you all soon. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect. I