CME Group Inc.

Greetings and welcome to DCME Group third quarter 2023 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. I would now like to turn the conference over to Adam Minnick. Please go ahead.

Good morning. I hope you're all doing well today. We will be discussing CME Group's third quarter 2023 financial results. I'll start with the safe harbor language, then I'll turn it over to Terry. Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures. With that, I'll turn the call over to Terry.

Thanks, Adam, and thank you all for joining us this morning. We released our executive commentary earlier today, which provides details on the third quarter of 2023. I'll make a few brief comments on the quarter and current outlook, and Lynn will summarize our financial results. In addition to Lynn, we have other members of our management team present to answer questions after the prepared remarks. Turning to the most recent quarter, average daily volume of 22.3 million contracts, was less than 1% off the record Q3 high set in Q3 2022, while our revenue grew 9% to $1.34 billion, which is the highest Q3 revenue in CME Group's history. As we've mentioned throughout this year, we are operating in an environment that unquestionably requires risk management. With so much uncertainty in the world we live in, We're continuing to work closely with our clients to help them navigate uncertainty and manage their risks. This is particularly true in the interest rate markets today. We see divergent market views around inflation, unemployment, monetary policy, and ongoing geopolitical tensions all impacting future interest rate expectations. Regardless of whether rates rise, fall, or hold steady, the shape of the yield curve and interest rate views continue to shift, and our customers need to manage that risk. As a result, we have continued to see growth on top of the record year in 2022 for our interest rate business. This was our highest Q3 for our interest rates complex, up 6% from the same quarter last year. We saw particular strength in the Treasury complex, which was up 16% in the quarter last and is off to a strong start in Q4 as well. Completing the successful migration of euro dollars to SOFR, we continue to list other products to complement our interest rate complex today. Our European short-term rate, or Ester, contracts traded a record 10,000 contracts per day in September. Our newly listed Treasury bill futures launched on October 2nd. and we have traded over 15,000 contracts in the first three weeks. This is one of the most successful launches of a rates product ever. Our broad product offering and focus on capital efficiencies, such as the enhanced cross-margining agreement with DTCC going live in January of 2024, continue to enhance the value proposition for our customers, using our products to manage their interest rate exposure. On the commodity side, third quarter 2023 volume was up 15% in total and included the highest ever Q3 volume for our agricultural products. Our energy complex also performed well with volume increasing 16% from last year. We believe the current environment for this asset class will continue to bring new clients as well as existing ones to manage their exposure in our global benchmarks. We believe the strong macro environment combined with our diverse set of asset classes and strategic execution across our growth initiatives positions us well for continued growth in 2023 and beyond. With that, I'll turn it over to Lynn to cover the third quarter financial results.

Thanks, Terry. During the third quarter, CME generated $1.34 billion in revenue, up 9% compared with a strong third quarter of last year. Clearing in transaction fees and market data revenue each grew 9% versus Q3-22. Expenses continued to be very carefully managed, and on an adjusted basis were $448 million for the quarter and $369 million excluding license fees, both lower than the second quarter this year. This quarter, our investment in the cloud migration was approximately $13 million. Our adjusted operating margin for the quarter expanded 66.5%, up approximately 240 basis points compared with the same period last year. CME Group had an adjusted effective tax rate of 22.8%, which resulted in net income of $818 million and adjusted diluted earnings per share of $2.25, each up 14% from the third quarter last year. Of the $110 million increase in revenues versus last year, we were able to drive 90% to the bottom line with adjusted net income up $99 million. As a result of the strong expense discipline throughout the firm, we are lowering our core expense guidance, including license fees, to $1.475 billion, a $15 million decrease from our original guidance of $1.49 billion. We are maintaining our guidance of $60 million for our cloud migration expense for a total expense guidance of $1.535 billion, excluding license fees. We continue to manage our capital expenditures effectively with an eye towards our move to the cloud. As a result, we are lowering our CapEx guidance to $85 million. For the quarter, our capital expenditures were approximately $18 million. CME paid out $2.8 billion of dividends so far this year, and cash at the end of the quarter was approximately $2.5 billion. Our strong financial results this quarter continue to build on the strength achieved in the first half of the year. This quarter, we delivered our ninth consecutive quarter of double-digit adjusted earnings growth. Our global benchmark, data, and strong focus on innovation and execution continue to address the needs of our clients and deliver results for our shareholders. Please refer to the last page of our executive commentary for additional financial highlights and details. We'd now like to open up 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 in the queue. Thank you.

Thank you. Ladies and gentlemen, on the phone lines, if you wish to register for a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, it is one four to ask a question. One moment, please. Once again, it is 1-4, ladies and gentlemen, on the phone lines, 1-4. All right, our first question is from the line of Dan Fennan with Jefferies. Please go ahead. Your line is open now.

Thanks. Good morning. Terry, a question for you on M&A. You've been vocal about your financial capacity to do additional transactions. I was hoping you could talk about kind of the scope and what you're looking at and also what In the context of the current environment, why now? Have valuations come in? Are your competitors distracted with other deals or other tasks? So curious about the current backdrop of what you're thinking about and really the scope and what that may look like.

Yeah, thanks, Dan. I think that's the reason why people sometimes need to read the whole story and not just the headline. Because if you read the whole story, I haven't said anything different than what I've said, you know, for several years is I was only stating facts to the point where our capacity is much greater than everybody else's because, you know, we've stayed very disciplined and very focused as it relates to our M&A transactions that we've done. I was only referring to our EBITDA being lower than one times compared to some of our competitors were at multiples of that. When asked the question, if deals are to be offered, I made a reference to the comment that, you know, where else would you want to shop something but the CME? It doesn't mean that CME is interested, but that's all I was referencing. So my appetite for this hasn't changed a bit. We have not looked at anything that I, you know, to a point where I said, okay, we want to do a deal. I was only referencing what I've been saying for a number of years. And unfortunately, the headlines say what they're going to say. So There's not much more I can say about it than that, Dan. But, again, nothing has changed from our discipline. And, again, if we see something, and I said this publicly and I believe this, if we see something that benefits our users and benefits our shareholders, we will take a very strong look at it to build and grow this great company. That's all I was saying.

Great. Thank you. Thanks, Dan.

Thank you. Our next question is from the line of Patrick Molley with Piper Sandler. Please go ahead. Your line is open.

Yes. Good morning. Thanks for taking my question. So Terry, I was hoping you could maybe just give us your updated thoughts on the outlook for volumes heading into year end, just given some of the evolving yield curve dynamics we've seen in this kind of heightened geopolitical uncertainty. And then, you know, coming into this year, you talked a lot about how great the setup was for CME's business. So maybe if you could just you know, talk about how that maybe compares now to – or how it's played out relative to your expectations and how it maybe compares to the setup we're now looking at heading into 2024. Thanks.

Yeah, I think the good – and thank you, Patrick. I appreciate it. I think, you know, it's really hard to predict the future, and I try to be careful. But the setups that we saw in 2022, which you're referring to, and 2023 – where something so glaring that, you know, you had to call it out because of the geopolitical events, what was going on with inflation, where people were calling it transitory versus You know, you sprinkle $3 trillion into the American public's hands, you know that it's not going to be transitory. So I was only sprinkling out the favorable events that we were seeing fundamentally that I thought was good for every single one of our asset classes. And it was actually very good for us, as you know, with a record year in 2022 and an amazing quarter this quarter in 2023. And as Lynn said, our ninth consecutive year. uh quarter of double digit revenue growth so those are all very impressive numbers uh we will continue i don't think the setup has changed patrick when you look at what's going on right now that's going to be much different for 2024 i think we're going to see a little bit of the same but who knows it's hard to predict what the volumes would be associated with that but there is a massive amount of uncertainty out there when we made comments like we did in 22 In 23, we also didn't have the unfortunate situation we're seeing in the Middle East today. So there's another, you know, added component going on to that. And then we also have other situations, as I said earlier, as it relates to our energy complex, where people are looking for more production coming out of the U.S. And Derek can touch more about that throughout the Q&A. But, again, I think that bodes well for CME's products. But, you know, beyond that, I'll be careful what I say.

Thank you.

Thank you. Our next question is from the line of Alex Cram with UBS. Please go ahead. Your line is open.

Yes. Hey, good morning, everyone. Just quickly on the regulatory side, seems like the SEC is getting closer to mandating treasury clearing on the cash side. Obviously, you have your arrangement with DTCC now in place starting in January, so Good position there, I guess. But more broadly, just wondering how you think treasury clearing would change the marketplace, both on the cash side and maybe even on the future side, customer behavior, new customers, anything. I assume you have some thoughts on it. So anything would be helpful, how market structure may change if that happens.

Yeah, no, thank you very much. And it's a great question because it's a great unknown to what's going on out there and what's is being proposed and what may happen is still being hammered out. I'm going to ask Suzanne Sprague, who is the president of my clearinghouse, to give you some comments on the reg side of it. She's working closely with her team as they're watching this. And then I'm going to turn it over to Tim McCourt from an opportunity perspective, what he's seeing as it relates to the complex, if in fact some of these things happen or even if they don't. So maybe we'll give you a little two-part answer here, Alex, if you don't mind.

Yeah, thanks, Jerry. We do think generally the benefits of central clearings will bring the marketplace into a strong position for things like our cross-margining program with a fixed income clearing corporation. So you are correct to put those dots together that it will potentially enable higher participation in that program. We do today have the program that's eligible for common clearing members. And so the enhancements will benefit those common clearing members within the program and therefore increase activity. through clearing of treasuries generally should translate to more eligible activity that could benefit from cross-margining between CME and the fixed income corporation. So we generally believe the benefits of central clearing plus those enhancements to the cross-margin program will position us and the industry well for taking advantage of more capital efficiencies in this space. I'll turn it over to Tim McCourt to add anything else as well.

Sure, and thanks, Alex, for the question. I think when we think about the opportunity, why we remain excited and very optimistic that the cross-margin agreement is finally coming online in January of next year is because this is something that we've seen before in our other markets. When you unlock the capital efficiencies of related products, it significantly increases the risk management capabilities of the marketplace and can lead to increased trading velocity in the product. Well, as Terry said, it's hard to predict the future. If we look at some of the other areas we've unlocked capital historically, portfolio margining of futures versus swaps is probably a pretty good analog to look at, and that's been in place since 2012. Since that's been put in place, the average daily savings have grown from $1 billion in 2013 to a little over $7.5 billion today in 2023. And at that same time, our rates volume grew 109% and open interest doubled in the complex. and our cash market participation went from about 54% to over 100%. So certainly unlocking capital is beneficial to the volume and the velocity of the complex, and we're optimistic about what we can do once this comes online early next year.

Hopefully that gives you a little color to your question, Alex. Very good. Thank you, guys. Appreciate it.

Thank you. Our next question is from the line of Owen Lowe with Oppenheimer. Please go ahead. Your line is open.

Hey, good morning. Thank you for taking my question. So it's somehow related to the last question, but I think you talk about government budget deficit in the past, leading to more treasury issuance, which could increase like more hedging activities. Could you please unpack a little bit more on that relationship? Are you saying when we see more treasury issuance that should kind of induce higher trading activity? I think any more thought would be helpful. Thanks.

Yeah, Owen, it's Terry Duffy. And one of the things that we have said historically And if you recall, some of the comments that our former colleague, Mr. Chantelli, made over the years that when the Fed no longer is acquiring some of these treasuries, that the demand for them will have to go somewhere else. The Fed does not hedge their treasury portfolio, as you know. The other people that acquire the issuances coming out from the government need to hedge those. So it's hard to predict what the issuance is going to be. But again, the parties that will be taking the issuance, if it's not the Fed, are traditionally people that hedge those in our marketplace. So that should benefit CME. So Tim, if you want to add any more to that.

Yes, sir. And thanks, Owen. When we look at the net issuance of Treasury securities, they increased significantly in Q3 compared to Q2, up almost 80%. And that's not surprising if you remember, this is really looking at the replenishment of the Treasury general account, which reached a record low of just under $50 billion prior to the debt ceiling. And at the end of September, that balance stood about $672 billion. Now, it's important to Terry's point to look where that debt is being issued. And comments made previously, a lot of the issuance is going into T-bills on the short end of the curve. That's what we saw in Q1, Q2, and that pattern has not changed here in Q3. So with respect to how that can impact our complex in treasuries, one would assume that if we look back over historical distributions of how the treasury has looked to issue debt, there's only so much that can go into the front end of the curve. It was perhaps a little bit below the historical norms the last several years where the Treasury has taken advantage of the lower rates further out the curve. So one can reasonably conclude going forward they would look further out the curve to be more in line with their traditional or historical allocation, where that's where our complex at CME has all the historical products. As Terry noted, the growing Treasury complex from both a volume and an OI perspective, we would expect that issuance further out the curve in the coupons and bonds to increase the velocity as the marketplace looks to digest that issuance, hedge the related trading activity of it, and with the introduction of our T-bills earlier this year, that's off to a great start, we now also have tradable products across the entirety of the curve and even better suited for that risk management needs of the marketplace as they find ways to absorb this increasing debt being issued to the market.

Got it. Thank you very much. Thanks, Alan.

Thank you. Our next question is from the line of Brian Bedell with Deutsche Bank. Please go ahead. Your line is open.

Brian Bedell Great. Thanks. Good morning, folks. I have a couple of questions. I'll get back in the queue for the second one. The first question I have is on, just on the, I guess there's some talk of more regulatory or potentially more regulatory scrutiny around basis trading within futures and treasuries. and just wanted to get your perspective on, you know, on how you view any potential scrutiny there or, you know, the merits of that trade. And I don't know if you're able to potentially size the impact on volumes. I know it can be, you know, can change quite dramatically over cycles, so it may be tough to do, but just wanted to get a sense.

Yeah, and Brian, it's Terry. I'm going to turn it over to Tim, but Sometimes there's problems looking for solutions, as they say, or solutions looking for problems. And this is government at its finest trying to introduce new legislation where there is no problem. The basis trade is something that will continue to move as well as it should. And the basis trade is actually what keeps the markets in line. So, you know, we feel very strongly that this is going to continue to keep the market efficient. And the more you explain that to regulators to show them what kind of potential chaos you could introduce if, in fact, you have additional regulation that takes people out of that trade, which widens the basis, they may not like that outcome. So let me turn it over to Tim to give you a little bit more color. But I would be cautious to draw the conclusion that any kind of pending regulation is coming down the pike ending that time soon. Tim?

That's correct, Terry. I think the one thing I would add is that the existence of basis between cash and futures market is not an isolated phenom to the treasury market. We see this in almost all of our asset classes here at CME. And the fact that you can independently trade the basis as a standalone risk parameter is an important key element to keep these markets aligned and arbitrage-free. It's something that we've seen is vital to the marketplace for this purpose, and it's something that we also see remaining in this market. It's not surprising with rates traversing the range that they have that you're going to see different behavior of the basis than we have in previous decades when we've seen similar activity. And it's something that we engage with the market. And the one thing I would note is that it's also important that CME also has the ability to trade cash treasuries on broker tech. and the futures, which is also both leading price discovery mechanisms. So we're the natural home for this trade to take place, and we continue to work with the marketplace. Now we can increase the efficiency of this trade going forward and work even more closely with market participants to make sure we unlock the value that still exists between bringing the broker tech and our futures business together at CMA. Thanks, Tim. Thank you, Brian.

Thank you.

Thank you. Our next question is from the line of Kyle Voigt with KBW. Please go ahead. Your line is open now.

Thanks. Maybe just a question on expenses. Good to see the lowered expense guide today, but just given the slightly higher kind of inflationary environment and still relatively tight labor market, just wondering if you could remind us how you think about steady-state organic expense growth on a medium-term basis for this business in the current macro backdrop. And then second part of that question, as we're approaching the end of the year here, can you also just remind us how the Google-related expenses are expected to unfold into 2024 versus 2023 levels? I think there was spend for the first four years, but just maybe give us an update on where you stand with that spend today and when that starts to wind down.

Kyle, then you want to address both of those issues?

Yeah, sure. So overall expense guidance, if you look at our estimate for this year, that's up about 3.6% on our core expenses, despite the inflationary environment. So I think what we've seen from us over the years is really tight expense discipline and expense control. We're always looking for ways to minimize the run the business expense and become more efficient so that we can have more of our expense base going through to growth initiatives and helping to grow the bottom line. So I think we have a strong track record there. If you look back in history, it's averaged between that 3% to 3.5% over the last several years. Certainly as we look forward, we'll continue that same type of discipline and we'll look to provide guidance as we get closer to year end. On the Google front, we did guide that we would have four years of incremental cash costs in the range of $30 million per year on average. So our expense guidance for this year, this is our second year, is $60 million in expense offset by $20 million in CapEx savings to get to a net 40. We had $30 million in net expenses last year. So we have two more years where we think there will be an incremental increase expense associated with the Google migration before we start to see break even and ultimately cash flow positive.

Great. Thank you very much.

Thanks, Carla.

Thank you. Our next question is from the line of Benjamin Budish with Barclays. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking the question. Terry, in your comments you talked about, you know, the kind of uncertain rate environment and ongoing need for participants to manage risk. You know, earlier in the year you talked about the opportunity with regional banks, but maybe just at a high level, how do you see that opportunity more broadly? Is it kind of new participants that haven't been on CME's platform before? Is it more involved hedging from existing participants? How do you see kind of like the medium term TAM coming from that environmental need that you see? Thanks.

Yeah, I think it's hard for us to describe if it's the regional banks or the bigger banks hedging. I mean, Suzanne can help me with more color on that as who the exact participants are because they come in to one of the bigger banks anyway, even the smaller ones do. So we're not quite sure which one is laying off the risk.

Yeah, I would agree with that. It's generally appealing, I would say, for both of those. groups of folks to engage with us on an ongoing basis, especially now with the uncertainty in the rate environment, to think through the offerings that we have from a capital efficiency standpoint, as well as a general risk management standpoint for ensuring that there aren't additional micro or macro events that will, I guess, circulate in the industry. SVB is one example of a lot of engagement that we've had leading up to and afterwards with clients about the way that we provide services and clearing solutions to allow people to manage risk as well as the product side. So I think it is hard to specifically identify what portion of those participants might be new and existing, but we have been engaging pretty broadly in the marketplace around those events to make sure that the products and services as well as the way that the clearinghouse offers risk management services are accounted for and available for market participants more broadly. to get ahead of any other events that might be circulating in the industry.

And just to add to that, Ben, thank you, Suzanne, because that's a great answer. But just to add to that, Ben, the duration risk that we saw take down SVB has not gone away. As we talked about earlier in our comments, the issuance that is coming out from the government seems quite large in order to run and pay our bills in this government. And the demand has been a little bit lighter. So in return, whether they like it or not, rates are continuing to be very stubborn, regardless of what the Fed does or does not do. So I think that we're not suggesting there will be more duration risk, but what I am suggesting is that people are going to have to manage that. And so whether it's the biggest of banks or the mid-tier banks, the risk management associated with duration Not only is it not going away, in my opinion, it's increasing because of the fundamentals of the overall treasury market in general. So from our standpoint, we think that will lend to more people mitigating and managing risk to our treasury complex from all different sizes of the banking world.

Did I lose you, Ben? No, that was great. Thank you so much. Okay, thanks.

Thank you. Our next question is from the line of Chris Allen with Citi. Please go ahead. Your line is open now.

Morning, everyone. I was wondering if you could provide color on the average collateral balances for cash, non-cash in the quarter, and then respective yields, and then where they stand at present.

Sure, Chris. Happy to. So if you look at quarter three, the average cash balances were $91 billion. The yield on that averaged 36 basis points. For non-cash, we averaged $137 billion, yielding seven basis points. If you look at October to date, the cash balance has trended down. We're seeing average cash balances of $71 billion and a shift into the non-cash collateral, which is up to $152 billion. I would point out that on the non-cash collateral side, we did announce a fee change that takes effect in January, where the charge on the non-cash collateral will be increasing from a blended seven basis points up to 10 basis points. Just to give that a little sizing, if you apply that change to this quarter's average volume, that would have added 10 million to the revenue associated with the non-cash collateral, which rolls through other revenue.

Great, thanks. Thank you.

Thank you. Our next question is from the line of Ken Worthington with J.P. Morgan. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking the question. As we go into your end, maybe could you talk about how you're thinking about price increases in data in trading for 2024, particularly in the context of the fairly sizable changes you made in 2023. Okay.

Ken, thank you. I'm going to ask Lynn to start, and then Julie Winkler, who heads up our data organization, is our chief commercial officer, will participate as well. So, Lynn?

Yes. So, as you know, on the clearing and transaction fee side, we typically announce any changes there later in the year. It's typically around the late November timeframe. Our approach is the same as it's always been. It'll be a bottoms-up approach, looking at all the different markets, looking at the health of the markets, the value we've created, the health of our customers, and the total cost of trade, including not only clearing and transaction fees, market data fees, but also the cost of collateral and making sure that we don't do anything from a fee perspective that would impact volume or liquidity given our high incremental margins. So as I mentioned, we have increased that non-cash collateral fee effective in January that runs through other revenue. And Julie has announced some market data fee changes which take effect in January as well. Julie, do you want to walk through those? Yeah.

I mean, Q3 was another record quarter of $167 million in data revenue, so up another 9% year on year. And You know, I think this strong growth also is something that as we look into 2024, you know, yes, there will be some fee adjustments, but we also are looking for, you know, continued new product development, active sales efforts, continued education, and also our enforcement efforts. So it should be noted even in this quarter, you know, we saw about $4.9 million in non-recurring revenue last that was reflective of both those prior period activities from subscriber adjustments as well as that audit revenue that we sometimes talk about. And so similarly with the transaction-based business that Lynn just referenced, we're continually evaluating the pricing of these data offerings. We have a very large and diverse set of offerings, so it's difficult to really specify a specific increase to forecast for 2024. Many of our data products, however, will see price increases next year ranging from 3% to 5%, kind of reflecting that price-to-value approach. However, again, this is dependent on both subscribers as well as that non-recurring revenue that occurs in most quarters. So I hope that's helpful.

That was great. Thank you very much. Thanks, Ken.

Thank you. Our next question is from the line of Alex Blosten with Goldman Sachs. Please go ahead. Your line is open.

Hey, good morning, everyone. Thanks for taking the question as well. I was hoping you could opine on some of the potential new competitive dynamics and developments in interest rate futures markets with FMX futures potentially entering the space and partnering with LCH. Now, we've seen this movie before, right, multiple times, and all these kind of attempts have been unsuccessful. So I wonder whether or not this might feel different given LCH position as the largest pool of investors. clearing in the swaps market. Maybe just a reminder of sort of the benefits that customers get by keeping everything in futures and the savings across the portfolio they can get versus the alternative of trying to kind of cross-margin between futures and swaps. Thanks.

Thanks, Alex. And I'm going to ask Tim and maybe some of my other colleagues around the table to comment as well. But, you know, when we're looking at the FMX proposal, it's – We haven't seen all their details, and I think so it's really hard to comment on exactly what the competitive offering is going to be other than what you just referenced. I understand what you said. I think with the announcement of DTCC and the offsets that we are going to be able to supply to the users is going to be an extremely powerful benefit to the participants of the marketplace. And you also have to remember that FMX is coming from a position of zero futures trading today, where we are sitting on, as Tim has referenced, record open interest in treasury complex, listing new products, and listing the benefits thereof. We are ready and able to compete with anybody. And competition is something that has made CME what it is today. But the benefits that we continue to work on, you've heard me say this, for years that we are going to continue to look for capital efficiencies in each and every one of our asset classes. We are delivering on every one of those asset classes to deliver capital efficiencies. That does not go lost on the participants in a capital intensive world. So when you're talking about new offerings with LSE and what they could potentially offer versus what we have, we think we have a massive compelling offering for our clients that saves them additional funds. So, you know, I like our position, and I think we're in a position of strength. Again, I think a lot of people, Alex, as you know very well, when the LIBOR was going away and we everybody was going to convert from euro dollars us to sulfur that people thought it was a jump ball and we felt we were in a very strong position to transition a hundred percent of that business and into CME SOFR products, which we did because of efficiencies to everything we have to offer. And those go from the back office to my sales team, right across the entire organization that creates those benefits. So I like our position. Again, I think, you know, you said it at the beginning of your question. We've seen this movie before. I don't want to quote you wrong, but I think that's who you said. And we will continue to take every opportunity or that wants to compete with us very seriously, but at the same breath, we think we have a very strong, powerful, compelling offering for our clients. Tim, do you want to add to that?

Sure. Thanks, Terry, and thanks. I think just to add a little bit more color on that picture is when we look at the gravity of the complex at CME, Terry's point, this is unmatched. And the one thing I want to further remind the marketplace about is is you can unlock a tremendous amount of capital savings and efficiencies at CME today, and the marketplace is doing it. In addition to the $7.5 billion-plus margin savings from our portfolio margin portfolio, let's look at some of the numbers with respect to the open interest. With record average daily open interest in our treasury complex of just under 19 million contracts in the third quarter, a record average daily open interest in our SOFR complex of about 11 million contracts, And with a record large open interest holder population of 3,175 participants, that is an enormous amount of gravity that although LCH may be the leader with respect to their interest rate swap clearing offering, I like the gravity and the size of the complex that is going to be unmatched about the capital efficiency we can tap into at CME as a sheer function of our position on the future side, which we expect to only be more and more important to the marketplace as we head into 2024.

Hopefully that gives you a little color on how we're thinking about it, Alex. But again, we take everything seriously. But I think, again, our offering, as Tim has said and I said, is very compelling.

Yeah, very helpful, guys. Thank you.

Thanks, Alex.

Thank you. Our next question is from the line of Michael Cypress with Morgan Stanley. Please go ahead. Your line is open.

Great. Thank you.

Good morning.

Two-part question, just following up on the capital efficiencies. beyond the cross-margining with DTCC. Just curious what other steps you might be able to take as you look out the next few years to further enhance that. And then the other part of the question, just around regulators proposing new capital rules for banks that can make some bespoke off-exchange derivatives just more capital-intensive. Just curious your take on that, where you see the biggest opportunity to bring derivatives from OTC to the exchange-traded marketplace.

Michael, both really good questions. The latter one is, you know, we dealt with in 2017 – I'm assuming you're referring to the Basel III, what's being proposed on the second part of your question. Okay, so on the first part, on the capital efficiencies, I'm going to turn it over again to Suzanne Sprague, and she can touch on both, but I'll give you my thought process on the Basel III as well.

Yeah, thanks, Terry. So we do look forward to extending the enhanced cross-margin program to the client level. We have had quite a bit of conversations with ourselves and the Fixed Income Clearing Corporation as well as clients on the importance of continuing to broaden that program. So we don't have any timelines to commit to at this point in time, but it is a focus of ours jointly to be able to expand those enhancements to the end client level, which I think will help even more with things we've already covered on the Treasury mandate and needing more capital efficiencies to address things like increased capital costs under the Basel proposal. I think Terry will hit at a high level the Basel proposal.

Yeah, let me just comment on the practicality, Michael, and I know that you've been in there for a little while now at your firm and understand how this works. There is zero... consensus amongst the regulators as it relates to some of these proposals in Basel III. Actually, there's really opposing views to that, which makes it very difficult to move something forward where you have internally at a regulator not the same people supporting the proposal. The markets need to remain efficient. And I guess, again, another solution looking for a problem with Basel III. We have never had an issue under the margin that we're holding that needs to have a capital hit associated with it. We only think that would add to the lack of liquidity to the overall marketplace and make markets less efficient than they are today. And that's not healthy, especially as we laid out the fundamental places that we are in the world today and with the issuance coming forward. We need to manage this. There's risk in everything we do in this life, including the Treasury issuance and who's using it or not. We think we have a very good platform, and we think that the rules that are in place right now make sense for the users. And if you want to just continue to add capital charges to everything we do, I guess we can constrict it to zero and we won't have any more risk in the system, but we won't have any economies around the world either. So I do think it gets to a certain point. Again, like I said earlier, this was proposed in 2017, and it was not agreed upon then, and so we'll see where this goes. We are meeting with people in Washington, and now my Washington folks are trying to explain the detriment that such a proposal could bring to the overall marketplace.

Great. Thanks so much. Appreciate it.

Thanks, Mike. Thank you. Our next question is from the line of Craig Sigenthaler with S&P. Bank of America, please go ahead, your line is open.

Hey, good morning, everyone. So in the quarter, there was another instance of vertical integration between an exchange or actually technically a DCM and an FCM. So now we have Coinbase MYACs with vertically integrated business models. So first, I want to get your perspective on what this means for the ecosystem. And also, CME already registered its FCM last year. I think partly in reaction to FTX's move. So what are your updated objectives for that business now?

So, Craig, again, you know, I've been also talking a lot about market structure and how Market structures always have a shelf life, and we don't know what the next one's going to look like, but we all need to be prepared for it, and that's what CME will always do. We'll be prepared for anything that comes our way. That's one of the reasons we filed for the FCM application, not just because of FTX, but not to say you're wrong because that was part of the reasons why, but it was, again, around market structure. I think with these vertically integrated models that is being proposed, such as MYEX, and I think Coinbase is the other one you referenced. You know, the conflict of interest question for the clients is huge, and it would be big for us, too, if we decided to go ahead and deploy an FCM. So we would have to be very careful about that ourselves. But at the same breath, I think that if they're going to go down this integrated model, they need to write rules associated with it. This was my entire complaint around FTX, that they were trying to make – existing rules fit for their business proposal. So if, in fact, we're going to have integrated models of what my ex is proposing today and go into business in the United States, you need to write rules with them because the Commodity Exchange Act clearly states in the year 2000 that those rules were written with intermediaries in mind, not on a direct model. So not saying you couldn't have intermediaries in the direct model, but the rules are not clear on that. So I think there's a long way to go. I think one of the reasons they're not getting much attention today on that is because of their size, which I think is wrong to look at it that way. It shouldn't matter their size. Who's to say they can't get bigger tomorrow? Who's to say we can't do something different tomorrow as well? So I think there needs to always be rules, and the rules of the road need to be applied. applied so people understand them. We do not need situations like 08 and other ones that we could all describe because of people trying to advance businesses that they think is in their best interest without having the public's interest at heart. So, again, we've always been a neutral facilitator of risk management. We will continue to do so. We like the intermediary model. And, again, but we don't know what the future is going to hold. But I do, I am very concerned about some of these existing platforms, and the government needs to look at them and write rules for them if, in fact, they're going to allow them to stay in business.

Thank you, Terry. Thank you.

Thank you. Our next question is from the line of Andrew Bond with Rosenblatt Securities. Please go ahead. Your line is open.

Thanks, Haig. Good morning. One for Derek on the energy business. So energy markets, particularly natural gas markets, have experienced some structural shifts benefiting North American markets following the Russian invasion of Ukraine. And more recently with the geopolitical events in the Middle East, are you seeing more of a continuation of these dynamics? And can you talk about the potential longer-term impact of the geopolitical events of late on your markets?

Andrew, thank you. We appreciate it. And Dirk?

Yeah, thanks, Andrew. Yeah, I think this is kind of proof positive of what we've been talking about for the last couple of years, that structurally the U.S. is in an incredibly strong position given the position we have both in crude oil as well as natural gas markets. As you know, we're currently exporting record amounts of oil from the U.S. at 4.6 million barrels a day. We're also exporting record levels of natural gas, well, based on Henry Hub pricing, at record levels from our U.S. capacity point of view. So as we've talked about, that structurally positions CME's WTI franchise as kind of the leader in that space and certainly positions WTI as a global benchmark as the U.S. continues to export the marginal barrel oil outside the US with challenges everywhere else. Natural gas, as you point out, has been a really, really strong point for the energy franchise overall. When you look at what's going on from an uncertainty point of view, options continue to be a significant proportion of our customers' client behavior. So we like our position in both natural gas and crude oil. When you look at the volume and growth of both futures and options, strong in Q3. More importantly, we continue to see that strength in October with our energy options up 81% overall, energy up 26% in October. So really strong year this year, continuing really strong year into Q4, and the position that we have as the swing producer, both in natural gas and crude oil, I think positions us well long-term in what we think is a potentially multi-generational energy shift.

Thank you.

Thanks, Andrew.

Thank you. Our next question is a follow-up from Alex Crum with UBS. Please go ahead. Your line is open.

Yes. Hello again. Just a very quick one on the interest rate business again. You guys, Terry, mentioned the LIBOR-SOFR transition. Obviously, that's now behind us and successful. But just briefly, Maybe looking back on that, I think early on there were some concerns that SOFR would not be the best replacement for Eurodollar and that maybe it won't meet certain trading strategies. So now that we're sitting here, I don't know, six months after the real cutoff, is the marketplace different at all? Are you seeing certain strategies not being applied anymore? And is that still room for innovation for you? Or is SOFR and Eurodollar basically now the same thing as it always was? Thank you.

I'm going to let Tim answer as well, Alex, but I will say the following, that the reason why people believe that SOFR might not be as good as your old dollars is because of pure uncertainty. When you know a certain way for so many decades of how you're going to price short-term interest rates, and all of a sudden the governments say you have to change them, It's the uncertainty of the marketplace, for starters. As far as it goes to the strategies, I think Tim already outlined the open interest in trade and SOFR. So you would have to say the answer to question number two, are people not doing certain strategies, is no. So question number three is, is there opportunity for people, I think was the last thing you had asked, for the SOFR versus what was not in the LIBOR? And I'll turn that to Tim.

Yeah, thanks, Darian, and thanks, Alex, for the question. I think what's interesting is when we see several months after the transition and we look at the SOFR complex at CME, year-to-date through Q3, I believe we're already about 14% above the best year in euro dollars previously, and we still have a whole quarter to go, which is exciting. So certainly adopted, certainly being integrated. We're seeing similar strategies with respect to the various option strategies, the futures, the outrights, the spreads. So we're really pleased with how the ecosystem is coming along. But the one thing I would add is we also have new additional short-term interest rate products that can be spread against silver. When we look at the introductions of T-bills, and as Terry said in his opening comments with respect to us leading and taking really strong roots in the ester market overseas, these are all new things that are additive to the ecosystem that didn't exist when Eurodollars were around. So very optimistic for the future. and further buttress by our efforts on the CME term SOFR front with respect to licensing and the IP and the gravity that we're lending to that complex. These are all great things that continue to position not only SOFR, but the rest of our rates complex given the interrelatedness and the spread strategies that exist as we head into next year.

Excellent.

Good to hear. Thanks.

Thanks, Alex.

Thank you. Our next question is a follow-up question from the line of Brian Bedell with Deutsche Bank. Please go ahead. Your line is open.

Great. Thanks for taking my follow-up. It's on RPC. Some of the drivers in the third quarter that you mentioned were member mix and product mix. I think that was mostly on the product mix side between asset classes. I was wondering if you could comment a little bit about you know, were there any outliers within the asset classes that, you know, significantly impacted the RPC? And then it looks like geography-wise or non-U.S. was actually up a little bit sequentially. And I thought that was a, you know, usually it's typically higher RPC. So maybe just some comments on that. And then also just on options versus futures, if you can remind us on the differentials there. I think, Derek, you mentioned the options, volumes, and energy in particular were up nicely in October.

Yeah, Brian, two parts to your question. So I'm going to ask Lynn to comment on the RPC and then ask Derek to comment on the international business, which you're correct, does carry a higher RPC than the traditional, some of the stuff here in the U.S., but go ahead, Lynn.

Yeah, so if you look at the overall RPC of 70.7 cents versus the prior quarter of 72.4, so down 1.7 cents. The drivers for that were really lower proportion coming from commodities products. It was about 18% this quarter down from about 19.5% last quarter. We did also see a slight increase in member mix and the contribution from micros overall. In terms of the specific asset classes, I wouldn't call anything out as unusual per se. I would just point you to, if you look at the year-over-year basis, on very similar volume, we saw a 12% uplift on RPC. That's driven by a couple of things. You do have a lower proportion coming from micros. You have an increase in the commodities as we've seen that rebound in this year. And you are seeing the impacts of that pricing change rolling through.

Thanks, Len. Derek, do you want to talk a little bit about the non-U.S. business as it relates to the RPC?

Yeah, thanks, Fred. We are seeing some continued really strong growth and building on the back of what was a record 2022 for non-U.S. business. We're building on that again. Our Q3 international volume was up 7% this year, and that was led by some of the higher RPC products. Our ag non-U.S. business was up 32%, energy up 30%, rates were up 16%, metals up 10%. Also, what you saw, and I think you might have mentioned this, our non-U.S. options continues to grow extremely strongly as well. So our non-U.S. options volume is up 31%, while the overall options is up 21%. So good strong story within a good strong story. So we saw EMEA be a particular standout there relative to the volumes, and I think we're The efforts we put into place, boots on the ground, you heard us talk about the investment we're making in the majority of our sales force now being outside the U.S., is accelerating both our new clients' acquisition opportunities as well as reinforcing and cross-selling into our existing customer base. So our non-U.S. business continues to be a source of strength and new client growth for us. And I think we'll see that we're on track for another record year for that side of the business cross asset classes. And we like our position going into 24.

So just to sum that up, Frank, I think it's a really important question. Not a particular asset class where there's degradation in the RPC so much. It was more, you know, the mix of member versus non. And then we have some of these really outliers, not outliers, but some higher rate RPCs and some of the energies, as Lynn referenced. And it's a very sensitive tool, so that can move it a little bit, and that's what you saw.

That's great. And can you remind us on the RPC of options versus futures in general?

Yes. The total RPC for options this quarter were $0.658. Got it.

Got it. Okay. Perfect. Thank you so much for that really complete answer. Thank you.

Thanks, Brian.

Thank you. Our next question is from the line of Owen Lau with Oppenheimer. Please go ahead. Your line is open.

Thank you for taking my follow-up question. I think CME recently launched the WTI cool oil Monday and Wednesday with the options. I'm just wondering how much incremental opportunity and demand for these kind of ZODTE products, not just in energy, but in the whole CME platform. Thank you.

Thanks, Owen. Dirk? Yeah, so on the weekly stuff, yeah, we have had really great success across the entire franchise of launching additional points in the maturity curve. We've recently launched Mondays and Wednesdays in energy, particularly in WTI. We've actually set a number of records there. We had an all-day record ADV of about 43,000 contracts on the 1st of September, and that was after the addition of the Mondays and Wednesdays was set a single-day record on the same day of about 15,000 contracts. When you look at that opportunity for us, we've talked about this before, certainly in a world with as much risk as we see on any given day on any particular asset class, adding additional maturity points and granular levels of risk management have proven to be successful. You know, we sort of plumbed that path with equities. We've incrementally rolled out asset classes. And I think over time, we found our customers have adopted those more broadly. Those are additive to the OI pool. Those have created more opportunities for spreading across maturities. But I would also note that our record options growth is accelerating not just on the front end of the curve, but across the entire maturity curve. So we're seeing growth there where the short-dated pieces are additive to the growth, but it's actually being led by farther out across the curve. So we see those as additional tools and nice additive pieces of growth. but not the primary source of growth.

Got it. Thank you very much. Thanks, Owen. Thank you, Derek.

Thank you. Our next question is a last question from a follow-up from Craig Signandola with Bank of America. Please go ahead. Your line is open.

Hi, this is Eli from Craig's team. Thanks for taking my question.

Can you speak up just a little bit, Eli? I think it was Eli, not Craig on the phone.

Yep, this is Eli from Craig's team. Thanks for taking the question. I was wondering if you could give us a sense of the potential impact of approval of the spot crypto ETFs on your crypto complex. What proportion of volumes do the futures-based ETF managers contribute to that complex today? And if we see like a migration from the future-based vehicles to spot, would that threaten the viability of that complex?

Good question, Eli. Thank you. Tim? Thanks, Eli, and thanks, Terry. Certainly a pressing question given the recent moves that we've seen in Bitcoin. I think one thing to note is that before we dive into the nuances of the ETF, we've also seen tremendous volume in OI growth here in the third quarter for our crypto complex. Just this week, we saw over 130,000 contracts trade for about $7.6 billion. That's our largest day in the crypto complex since the wake of the FTX collapse a little over a year ago. So when we saw also a record OI in our Bitcoin futures, over 20,000 contracts, which is equivalent of more than 100,000 Bitcoin. And this really speaks to the fact that we are a institutional-grade offering for the crypto community. So it's not surprising that we're the underlying for a lot of the futures-based ETFs, which has done phenomenally well in terms of serving the marketplace to date. Certainly, there's a belief that some of the upwelling of price to almost 35,000, 36,000 we've seen this week is on the belief of spot-based ETF approvals. I'm not necessarily here to comment on whether that's going to happen, but what I can tell you is that we do see the introduction of additional structural products, whether they be spot or other underlying base in the crypto community, will be added to our complex at CME on two fronts. One, these markets are highly interrelated, where futures will not only be the underlying for some of these products, they will also be the hedge mechanism for market makers, as well as market participants looking to hedge their digital or ETF-based holdings. And the second thing to always keep in mind is we also have the CME CF Bitcoin reference rate, which is the underlying for a lot of these ETFs coming to market. So not only will it be additive to our futures-based volume, as we've seen in other asset classes such as equity, it's also to keep in mind that these products take root and grow in the market. There will be additional revenue generation opportunities from the licensing front as a function of AUM and derived license fees here at CME as the IP owner of the underlying index.

Got it. Thanks, guys. Thanks, Eli.

Thank you. And there are no further questions. I'll turn it back over to management for closing remarks.

I want to thank you all very much. Excellent questions today. We appreciate it very much, and we wish you a good day, and everybody stay safe. Thank you.

Thank you, ladies and gentlemen. That does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.