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Edited Transcript of CME earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 CME Group Inc Earnings Call

Chicago Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of CME Group Inc earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan Thomas Durkin

CME Group Inc. - President

* Derek Sammann

CME Group Inc. - Senior MD and Global Head of Commodities & Options Products

* John C. Peschier

CME Group Inc. - MD of IR

* John W. Pietrowicz

CME Group Inc. - Senior MD & CFO

* Sean P. Tully

CME Group Inc. - Senior MD and Global Head of Financial & OTC Products

* Terrence A. Duffy

CME Group Inc. - Chairman & CEO

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Conference Call Participants

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* Alexander Kramm

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers

* Benjamin Joseph Herbert

Citigroup Inc, Research Division - VP & Analyst

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Chinedu Bolu

Autonomous Research LLP - Research Analyst

* Christopher John Allen

Compass Point Research & Trading, LLC, Research Division - Analyst

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Jeremy Edward Campbell

Barclays Bank PLC, Research Division - Lead Analyst

* Kenneth William Hill

Rosenblatt Securities Inc., Research Division - Senior Research Analyst

* Kyle Kenneth Voigt

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Richard Henry Repetto

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Sameer Murukutla

BofA Merrill Lynch, Research Division - Associate

* Sheriq Sumar

Goldman Sachs Group Inc., Research Division - Business Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the CME Group Second Quarter 2019 Earnings Call.

At this time, I would like to turn the conference over to John Peschier. Please go ahead, sir.

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John C. Peschier, CME Group Inc. - MD of IR [2]

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Thank you. And good morning to everyone, and thank you for joining us.

I'm going to start with the safe harbor language, then I'll turn over to Terry and John for brief remarks, followed by questions. Other members of our management team will also participate.

Statements made on this call and in 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 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 our earnings release you will find a reconciliation between GAAP and non-GAAP measures.

With that, I will turn the call over to Terry.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [3]

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Thank you, John. And thank you all for joining us today.

My comments today will be brief so we can get right into your questions. We released our executive commentary this morning which provided extensive details on the second quarter.

In Q2, average daily volume grew to 21 million contracts per day, up 14% compared to last year. We had record quarterly average daily volume in agricultural products, as well as interest rate, agriculture and metals options. Open interest reached an all-time high, above 150 million contracts on June 13.

We continue to drive significant growth globally. During the second quarter, volume from outside U.S. totaled a record 5.4 million contracts. That included 28% growth from Asia and 22% growth in Europe. We continue to see success on the innovation front with the launch of our new Micro E-mini contracts, which began on May 6. During June, we averaged more than 400,000 contracts per day, making this the most successful new product launch in the history of CME. We are also pleased with how the NEX integration process is going so far. We have made great process combining our sales forces as they begin to jointly engage with clients. We remain laser focused on this very strategic transaction and look forward to keeping you updated with our progress.

With that, I'm going to turn the call over to John to provide some additional comments, and then we'll take your questions.

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [4]

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Thanks, Terry.

We reached a number of milestones this quarter as we continued the integration process. We've completed the first phase of staffing the combined business. We've moved the majority of the legacy NEX businesses to our administrative systems, which will enable the streamlining of internal support functions. We moved the legacy NEX employees to our new facility in London. We consolidated our Hong Kong offices and are on track to consolidate our offices in London and New York by year-end. We are actively working on data center consolidations; systems consolidations; and the customer migration of BrokerTec, which was announced will be in Q4 2020, and EBS in 2021, to Globex.

Based on our progress with the integration and our overall strong expense discipline, we are reducing our full year operating expense guidance by $10 million to a range of $1.64 billion to $1.65 billion.

With that short summary, we'd like to open up the call for your questions. (Operator Instructions) Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Richard Repetto from Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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I guess the first question will be more general, but I'm sure we've all heard about the LSC -- potential LSC and Refinitiv transaction. And I guess, Terry, I'm just trying to get your thoughts. It seems like these players are going after -- they don't have the dominant position that the CME has in derivative products and it looks like they're expanding with data, but I'm just trying to see what your thoughts are. Does it have an impact on the CME? And how does it affect the exchanges industry overall if there was a combination of LSC and Refinitiv?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [3]

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Thanks, Rich. And I'll make a few comments. And maybe John, Bryan or anybody else, Sean, may want to join in as well. I think that, listen, these are not new ideas, new products. I mean they've been out there for a while. They've been out there competing with different participants. We very -- don't compete a lot with them. We're a little bit on the fringes, so we're not overly concerned about the announced transaction. I think that when we talk about M&A activity, we always said cross-border transactions are very difficult to accommodate and to get done. I think there's a long way to go on this process, so we'll have to wait and see. As I said in my opening comments, we're laser focused on integrating the NEX business, and that's where our focus is going to remain. As far as other things that compete with CME, again, Rich, I just don't see it any different than it was prior to the announcement, but my colleagues may see it a little different. John?

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [4]

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No, I agree. This really doesn't change the competitive landscape for us. And there is a long time between when this potential transaction gets announced and gets done. So obviously, we'll be watching, but I think from our perspective it doesn't change the competitive landscape.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [5]

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Does that help at all, Rich?

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [6]

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Yes, it does. Got it.

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Operator [7]

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We will now move to our next question from Dan Fannon from Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [8]

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John, I guess my question is on kind of expenses and -- or also the integration. You've talked about all the things you've got done. You reduced expense guidance, but it looks like the revenue -- I'm sorry, the expense synergy number for this year is unchanged, so maybe if you could talk about that more broadly. Or what's driving the reduction in natural expenses versus the synergies? Then also kind of update us on the kind of potential revenue synergy opportunity with NEX. And you talked about the sales force integration, but maybe how that's going or any tangible kind of comments around some successes.

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [9]

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Yes, thanks, Dan. We are very pleased with how the integration is going. We have done a lot combining the businesses in the short time we've owned it, so we're very pleased with that. In terms of the synergy number, we've achieved about 60% of the $50 million in synergies, and most of that occurred right at the end of Q2. So we're continuing to work through it. To give you an idea, when we acquired NEX, there was not a very integrated business. So the integration process is complex and we're continuing to work through it. But -- we'll update you as we go, but we're very confident in terms of hitting the $50 million. And the entire management team is focused on running the business, our core business, as efficiently as we can; and running the integration process as efficiently as we can. And to the extent we can accelerate the synergies, we certainly will. And I think we've got a high degree of confidence going into the $50 million, and we continue to look at ways to accelerate that. Bryan, do you want to comment?

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Bryan Thomas Durkin, CME Group Inc. - President [10]

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I would just note that we're reaching out to the client base in the context of sticking to the time lines that we initially announced with the overall migration, particularly with BrokerTec. We've held client sessions now across the regions. We've received some great feedback in terms of the overall integration plan. We did a major BrokerTec code draft internally that allows our systems to interface with each other. That's a good indication of our ability to deliver on the time line that we committed to our client base and to all of you. So the initial feedback, the initial read in terms of the migration onto Globex has been very positively received.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [11]

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Sean, anything else to add to that?

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [12]

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I think I'd just -- just along with what Bryan said, right? The -- we're doing an enormous amount of education of the 2 sales forces to ensure that there's -- the cross-selling is happening. The EBS and BrokerTec sales forces have great contacts that are new in many cases for CME Group. We're educating them on our core products and we're getting that cross-selling process, and likewise in the other direction. In addition to that, as Bryan mentioned, we have had customer forums in regards to the migration of BrokerTec to Globex. We had one in New York, Chicago, London, Singapore and Hong Kong; and each of them were extremely well received. Clients are in general very happy with our outreach, very happy with the progress, very happy with the plan.

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [13]

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So just to circle back, Dan. You'd asked about the expense reduction and how much of that was relative to synergies versus the rest of the business. It's actually both that's allowed us to drive our expense guidance downward. If you recall, when we made the initial expense guidance at the beginning of this year, it already had a very low embedded expense growth rate and was in a very tight range. So it really shows excellent expense management across the entire business that allows us to lower the expense guidance.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [14]

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Does that help, Dan?

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [15]

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Yes.

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Operator [16]

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We will now move to our next question from Ben Herbert from Citi.

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Benjamin Joseph Herbert, Citigroup Inc, Research Division - VP & Analyst [17]

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My question is just on the NEX Group revenue declined sequentially, and it looked like it was maybe optimization- and mostly portfolio management-driven. Just wondering if you could give some underlying detail there around the drivers in that sequential decline.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [18]

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John...

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [19]

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Sure, yes, would be happy to do that. So if you take a look at the transaction fee line, the NEX was down about $2 million. It was primarily due to the Reset business. So it's the transaction revenue associated with the optimization business, and part of that is Reset. Reset has seasonality in its business. And the first quarter is traditionally the highest quarter of the year in terms of revenue for Reset, so that's what drove the sequential decline in the transaction revenue line. The other line, you see an additional couple-million-dollar decline there. That's primarily driven by the subleasing of space at the NEX headquarters building. We've since moved that -- the NEX employees to our new facility in London, so we're no longer subleasing that space. So that's what drove the decline in the revenue, and there was a corresponding decline in expenses associated with that. So that's about $2 million as well. So that accounts for the reduction sequentially in the NEX revenue. The -- if you look at the other revenue line, there's an additional $2 million sequential decline. And that was what we discussed last quarter, which was related to our inflation adjustment, it's done annually, with B3 or formally BM&FBOVESPA. So if you look at that: The entire sequential decline in the other revenue was down $4 million. $2 million was related to the subleasing revenue, and $2 million was related to the annual inflation adjustment that we talked about last quarter.

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Operator [20]

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Our next question is from Jeremy Campbell from Barclays.

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Jeremy Edward Campbell, Barclays Bank PLC, Research Division - Lead Analyst [21]

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Given the wild success here of Micro E-minis in the equity complex, I mean, have you given any thoughts on micro sizing other asset classes? And if so, any color you can provide around what types of asset classes might fit that bill? And a typical length of a product development and a go-to-market time line would be helpful.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [22]

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Yes. I'll let Sean comment, and maybe -- and Derek as well, obviously the 2 guys that run the 2 business lines. So Sean, you can start.

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [23]

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Yes. We're very excited, obviously, about the Micro E-mini launch, the greatest launch in CME Group history. So as you're probably aware, May 6 was the launch date, 461,000 contracts ADV, over 40,000 Tag 50s, so over 40,000 individual registered traders, more than 130 countries. We've had trades from more than 27 million contracts. So we're very excited about it. In addition to that, more than 90% of the Tag 50s trade less than [10 lots] a day, which really means this is incremental revenue and incremental volume, incremental risk management on our platform. So we're very excited about it. So there's no question it's a great success and we're very excited about it. There's also no question, therefore, that we're looking at it very closely in regards to other asset classes. However, I think that equities is a unique asset class and that the opportunity there probably unique, one that we've worked on for a long time. But we are looking very closely at our other asset classes and what the other opportunities might be. And I would stay tuned, but I don't have any current announcements.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [24]

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Derek, anything on the ag side you want to comment on, or energy?

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Derek Sammann, CME Group Inc. - Senior MD and Global Head of Commodities & Options Products [25]

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Yes. I would say, picking up on Sean's point, I think that, when we're talking with clients about the desire or the need for a product that was more appropriately sized, given the increase in the overall equity market, that's a unique attribute of the equities contract that gets bigger as the market goes up. None of our other asset classes have a contract that scales that way. We actually have a micro gold contracts already. We did see a small lift in volumes up to, I think, 2,300 or 2,500 contracts there, but the unique drivers behind the need for customers to resize a contract for retail participants uniquely exists in equities. We have continued to engage with our retail partners and the intermediary customers. And at this point, we're continuing to make sure that we're focused on our core product and solving client need where there's any inhibitors to access in our market. So at this point, no, but we'll continue to talk to them.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [26]

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And let me just add one more thing, Jeremy. I think that these guys summed it up quite well, but all -- we're very careful about how we ascribe the valuations to all of our contracts and their sizes and what the needs are for risk management purposes. And we just don't want to start to create new contracts that we think are micro small. So we think there are a subset of people that would be attracted to them. We're driven by commercials. We do have retail participants, but they are professional in nature. We're not trying to attract somebody who's never traded futures before and has a day job. So the -- I think it's a little bit different when we talk about retail and these micro products versus what others might consider retail. So I think both Sean and Derek summed it up well. The equity markets makes complete sense because of the valuation. We don't see that in the other asset classes that would make that demand, pending imminent rate hike.

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Operator [27]

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Our next question now comes from Chris Allen from Compass Point.

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Christopher John Allen, Compass Point Research & Trading, LLC, Research Division - Analyst [28]

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I wanted to ask on market data. We've kind of seen a slide from 4Q, and it was about $136 million to $130 million last quarter, $128 million this quarter. You noted a decline in subscribers sequentially. I just wonder if you can give us any color on the magnitude there and also whether there was any audit fees included in this quarter.

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Bryan Thomas Durkin, CME Group Inc. - President [29]

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So first of all, when you reference the first higher quarter, there was higher audit fees associated with that quarter, and I believe that we spoke to that during that call. Audits is going to continue to be a very sporadic and chunky indicator for us, as we've said from the get-go. We had lower audits this year, this quarter, I have to say, but we have a number in the pipeline. And I can't speak further to that until those matters are resolved. With regards to the subscriber count, as you know, there's a strong focus on expense management across Wall Street. And we've seen a reduction in a number of our larger banks and some of our hedge funds. So we're monitoring the area very closely. I also, though, think you have to keep in mind the great growth that we've seen from a transactional perspective on the international side, where we utilize our market data very heavily, particularly for our growth throughout Asia as well as our retail base. So in summary, we're very pleased with the performance of some of the other portions of the market data business, particularly in our derived space, which we're continuing to see growth. And as I stated, we'll monitor the subscriber base very closely.

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Operator [30]

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Our next question is from Christian Bolu from Autonomous Research.

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Chinedu Bolu, Autonomous Research LLP - Research Analyst [31]

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Maybe this one is for Sean. So Sean, despite, I guess, the Fed looking to cut rates, open interest growth in your kind of rates business has been pretty strong. So maybe some color on what you think is driving growth there. Also, we have seen pretty high levels or record amounts of treasury inventory being held by the dealers. I'm curious if that is -- if that has been an incremental driver of demand for your products as well.

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [32]

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Sure. Thank you for the questions. The interest rates business has done very well this year, and our innovation has continued to help to drive that growth. Our Ultra 10 Years, for example, now doing well over 200,000 contracts a day, recently had a record all-time volume day and a record all-time open interest day, with significantly faster growth than the overall complex. In terms of the environment, the Federal Reserve, as I'm sure you're aware, has gone from -- or the market expectations, I should say, of the Federal Reserve have gone from expecting tightening to expecting easing. So as you know, there's a Federal Reserve meeting happening today. And according to our FedWatch tool, which you can find on our website, there's a 78% chance of a 25 basis point tightening -- sorry, easing today. And then in addition to that, later in December or by the end of the year, it's expected that you could have a total of 75 basis points worth of easing by the Federal Reserve. That change in market expectations from expected tightening to expected easing creates a lot of volatility. It creates a lot of risks, and it creates a lot of need for risk management. And CME Group is where people go to manage their U.S. interest rate risk. So our Fed funds futures have seen enormous growth on the back of the changes in expectations about Fed policy, and so have our treasury futures. The treasury futures continue to grow. One of the things that we talk about is continuously making our futures complex the foremost place -- the foremost, excuse me, attractive place to manage risk. A change we made very early this year, for example, was in our 2-year note futures. In our 2-year note futures, we changed the minimum price increment. So we reduced by half the minimum price increment in those 2-year futures. We reduced therefore the cost to trade or the cost to cross that better offer spread by 50%. That was an extremely compelling move by market participants decreasing their costs as they have this increasing need to manage risk relative to the changing rate environment I just talked about. In terms of that, the -- our 2-year notes went from about 12.7% of our entire treasury futures complex to now almost 16% of our entire treasury futures complex, so a huge increase in the 2-year note relative to the rest of the complex, relative to improving our products on a continuous basis and making them more attractive. On that front, we've been very excited over the last several years. We've spoken to you many times over the last several years about our increasing penetration on our treasury futures. So if you go back several years ago, our treasury futures were running about 55% of the average daily volume of the treasury bond market, according to (inaudible) data. We're currently at an all-time record of 117%. So it continues to increase as we continue to launch new products, like the Ultra 10 Year future, which have been extremely successful; as well as adjust the existing products, like our 2-year notes. Last thing I'll mention on that front: We're very excited about our Silver futures launch. We’re currently doing this month about 38,000 contracts a day, 220,000 contracts open interest, over 770 billion from a notional standpoint, 184 participants in that marketplace. So we're very excited about our innovation. We're very excited about the market uptake and continuously improving our products. And yes, the environment has been positive with the expected rate changes by the Federal Reserve.

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Operator [33]

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We will move to our next question from Kyle Voigt from KBW.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [34]

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I'm just going to try one follow-up on the Refinitiv transaction. Could you comment whether this was a transaction that you've looked at? And if so, any reasoning regarding why you passed on the deal?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [35]

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Go ahead, John.

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [36]

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Yes. Kyle, we don't comment on M&A transactions. I think, as you probably are aware, we -- as a company, we obviously are a leader in the space. And we monitor the space, but we would -- not going to comment on any specific transaction. I think Terry hit it on the head when he -- in his prepared remarks. We are very focused like a laser on the NEX integration. And we're very excited about the transaction that we consummated and closed in November.

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Operator [37]

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Our next question comes from Alex Kramm from UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [38]

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Just wanted to quickly come back to the micro success and particularly around pricing. I don't know if you commented on this call, but obviously a month ago you disclosed kind of the RPC that business is running at. And it's obviously pretty low, as we expected, but I think on a risk-adjusted basis it's still lower than your core products. So I think the expectation was it's retail. It's small. It's going to be a premium product on a risk-adjusted basis, so maybe talk about the customer mix, kind of like how you're supporting that business with market-maker incentives and how quickly maybe that RPC can ramp as that product gains more traction.

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [39]

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Thank you for that, yes. So it might be helpful just to give you the [rack sheet] or the pricing sheet that's also available on our website. So our E-mini futures for members, we charge $0.35. Our micros, we charge $0.04. The micro contract is 10x the size. So on a risk-adjusted basis the micro is $0.40 relative to the $0.35 that we charge on E-minis. Likewise, for nonmembers, if you again look at our website, you can see that our Micro E-minis, we charge $0.20 a contract or the equivalent of $2 in terms of an E-mini, whereas the E-minis themselves are charged at $1.18. So you see that they are certainly charged at a significant premium. Nonetheless, with the launch that we had and wanting to make sure that our clients have the best possible customer experience on day 1, we do spend money on incentives for the first several months of a new contract. As you can imagine, we did incent market makers for the first several months. And we felt that, that was a positive and necessary investment, and I think it's shown that it's been a very good investment. However, clearly once the marketplace is up and running and it has its own momentum and critical mass, those market-making incentive programs will no longer be necessary. So you should see an improvement in the RPC in that product as we move forward.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [40]

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Did that help, Alex?

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [41]

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Yes. I mean, I guess, if there's any expectations on timing. I mean you never know when a marketplace is self-sustainable, but I mean is this a few more quarters? Or do you think it can ramp pretty quickly is, I guess, what I was really getting at.

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [42]

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Yes, I think I said months, right? So several months. So I would -- it's not an extended marketing program, likely.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [43]

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Yes. And I think we always reserve the rights to decide how the fundamentals of any markets are going and how we're going to consider programs, which we do on a daily basis around here, whether continuing adding to them, subtracting to them. So that's just part of our -- what we do on an everyday basis around here, Alex.

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Operator [44]

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We move to our next question from Chris Harris from Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [45]

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If the Fed cuts interest rates 2 to 3x before the end of the year, how should we be thinking about the impact on your nonoperating income?

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [46]

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Thanks, Chris. We haven't announced how we are going to handle the change in the -- in pricing relative to a Fed rate cut in terms of the capture that we have on the average balances, but as you've seen recently, we've passed-through any of the changes to the customers. So we haven't been increasing our share of the Fed -- of the rates. So a couple points: Number one, we have seen the Fed average balances that we have here at the -- cash balances that we have here at the exchange come down. So in the first quarter, we had about $28 billion in terms of average cash balances held at the clearinghouse. It's down to about $25.6 billion, so we did see a reduction in terms of the average cash balances. So one of the things that when we look at it, we're -- we think about how do we incent the average cash balances to increase here. Also I wanted to point out that beginning in the month of July, we did have a price change in terms of the noncash collateral or increased the charge from 1 basis points to 5 basis points. And that began at the start of July. Just to give you an update in terms of the noncash collateral that's held at the clearing house that's attributable to that, right now it's about $90 billion in terms of noncash collateral that will be impacted by the 4 basis point increase.

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Operator [47]

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We'll now take our next question from Ken Hill from Rosenblatt Securities.

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Kenneth William Hill, Rosenblatt Securities Inc., Research Division - Senior Research Analyst [48]

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I want to go back to market data for a second. I think during last quarter, you announced the new Global Head of Market Data Services. I was just hoping you could kind of elaborate a little bit more on that role, what kind of products might be coming and kind of any potential timing on that kind of improvement for that business.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [49]

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Thanks, Ken. Bryan?

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Bryan Thomas Durkin, CME Group Inc. - President [50]

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Yes. We installed Trey Berre, who oversees our market data and tech services, and he hit the ground running in the context of the engagement that he's been having with the broader client base. The focus has been really on continuing to build and grow on our subscriber business but, in addition to that, very much cultivating and developing our other services, particularly data mine and derived data services. Trey actually built up the derived data business, which has performed quite well for us over the last couple of years. We're very enthusiastic about his engagement and his reach globally as we work to continue to grow this business. He has very well integrated with our Global Head of Sales as well as our Chief Commercial Officer in taking a holistic view at the various data services, the development of new products and the integration of the NEX market data business into our overall data offerings.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [51]

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Does that help, Ken?

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Kenneth William Hill, Rosenblatt Securities Inc., Research Division - Senior Research Analyst [52]

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Yes, that helps.

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Operator [53]

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The next question now comes from Deutsche Bank, and it's Brian Bedell.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [54]

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Maybe you guys can talk about the FX futures and options business a little bit broadly, both from the perspective of any revised expectations on the uncleared margin rule. And the volumes have been kind of light recently. So maybe just if you can talk about whether there simply hasn't been any traction yet even though there is a good demonstration from, say, the -- for example, the Greenwich Associates report about the much improved efficiency of using FX versus other -- the futures, rather, versus other methods. But should we be expecting more of a step function and improvement in volumes after the uncleared margin rule comes through? Or do you think that will take a lot more time?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [55]

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Sean?

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [56]

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Yes. Thank you, Brian, very good questions. So no question that the foreign exchange environment has been a very challenging one. If you look at volatility, for example, realized volatility, in euro versus U.S. dollar in the second quarter, that's at the second percentile going back to 2007. So it is near-record low volatility going back more than a decade. Likewise if you look dollar-yen, you're at the sixth percentile in the second quarter going back to 2007. In fact, with the G7 realized volatility index that goes back to 1992, and you're near the lowest volatility for G7 foreign exchange, according to that index, going back to 1992. So with that extremely low volatility relative to the history of that marketplace, that obviously makes it much more challenging and lesser needs for risk management. Nonetheless, we've continued to improve our products on the foreign exchange side continuously, as we do with all of our products. So some of the things I might mention: We changed the strikes for our FX options on April 1, making them much more appropriate, and so adjusting them across the entire expiry spectrum, so making them much more attractive. In addition to that, back earlier this year, we changed the minimum price increment in our quarterly roll in our dollar-sterling. I mentioned earlier the great success that we had in reducing the minimum price increment in our 2-year notes. We've also had very good success in reducing our minimum price increment in our dollar-sterling contract in terms of the quarterly roll. And so that was a significant success, where we saw a very large increase during the roll period in volume. We also saw a very large increase in nonmember activity. In addition to that then, we've just recently announced that we're changing the minimum price increments in the quarterly rolls in our dollar-yen as well as our dollar-euro contracts. That's happening in early August; and that should make those products much more attractive, lowering the total cost. We're constantly focused on making that the most attractive possible from a total cost perspective. And as you mentioned, on June 15, Greenwich published a study showing that CME's FX options were as much as 70% lower cost than OTC FX options and will be especially attractive during the -- sorry, under the uncleared margin rules. So again, very attractive products, continuously improving them and getting external studies done that show that they're much more attractive. In fact, while the volumes have been hampered due, as I said, to the historically low volatility, our FX futures complex reached an all-time large open-interest-holder record on May 28 of this year in that environment. So we're very excited about that and the continuous improvement.

The -- in terms of the uncleared margin rules. The uncleared margin rules, essentially the regulators have made a small adjustment to them. There was originally expected to be 4 tranches of requirements, where the last tranche in September of 2021 was -- or September of 2020, excuse me, was expected to be the last set of participants. The threshold there was moved to 50 billion outstanding, as opposed to, I think it was, 7 billion outstanding. So now they're giving essentially more time for that last set of participants to get ready for the uncleared margin rules. So there's just 1 additional year. So we expect the same impact that we would have had. It is giving participants a greater amount of time to adopt the uncleared margin rules. In terms of the uncleared margin rules themselves, CME Group has the most holistic solution available for every aspect of the uncleared margin rules. I think I may have mentioned we did a very successful webinar on our uncleared margin rules just a couple of months ago that showed our value proposition across all of our optimization businesses that we acquired through the NEX transaction as well as our OTC clearing and our listed products. So we are very excited about the holistic solution that we can present to our clients for the uncleared margin rules. We do expect that to be a positive tailwind for our business. We expect that tailwind to be gradual, and we expect it to happen over a longer period of time.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [57]

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Thanks, Sean.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [58]

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Okay. So over -- yes. So over the next year or so, I guess, given the extension, is that fair to -- rather than more of a step function, say, in the fourth quarter?

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [59]

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Yes. Again, the uncleared margin rules, as I said, the last set of participants are in September of 2021, so you've got from now until then in order for participants to adhere. Let me just -- let me say one other thing. So what we saw with the Dodd-Frank rules, okay, was a 2-stage process. When we saw Dodd-Frank -- and you saw the huge increase we had in interest rate futures usage during the Dodd-Frank rules. And what we did was we offered to participants OTC clearing. We've built now actually -- sorry, as long as I brought it up. We had an all-time record in June of 178 billion a day in our OTC clearing business, so we are very excited about that, but what we saw with Dodd-Frank was we first offered participants the opportunity to do OTC clearing so that they could adhere to the rules. We expect that, participants, their first port of call will be to adhere to the rules. Their second port of call will be to optimize once they adhere to the rules, so you will see some optimization, right, and some move into our cleared products and our futures products between now and when it's implemented, but we also expect that tailwind to continue afterwards.

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Operator [60]

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We'll now take our next question from Michael Carrier from Bank of America.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [61]

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This is actually Sameer Murukutla on for Michael. Terry, John, just a quick one on capital management. Given the lower rate outlook, how does it affect -- have any effect on our capital management philosophy? Are you willing to take on higher levels of debt? And what this could mean incrementally, I guess, in terms of your aggressiveness with the variable dividend this year.

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John W. Pietrowicz, CME Group Inc. - Senior MD & CFO [62]

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Sameer, thanks. Yes, in terms of our capital management, I think we've been very clear in terms of how we're approaching it. So why don't I give you kind of a highlight in terms of what our capital structure looks like right now? So CME has $1 billion in cash on hand. So that's $300 million above our $700 -- $700 million minimum. We have about $4 billion in debt, with about $635 million in commercial paper. And our debt-to-EBITDA is around 1.28x. We've paid down about $300 million in debt since the 1st of the year, and we are on track to achieve our 1x debt-to-EBITDA by the end of 2020. So we are very focused on meeting our commitments that we had made to the -- to our investors and to the rating agencies to be at the 1x debt-to-EBITDA by 2020, and we're on that path. In terms of the impacts to the variable dividend, we don't give out guidance in terms of what our annual variable dividend is, but I think you can take a look at how we approached it last year. We were very balanced in terms of how we approached the annual variable dividend, the paydown of the debt and the investments in the business.

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Operator [63]

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We'll now take a follow-on -- actually a question from Alex Blostein from Goldman Sachs.

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Sheriq Sumar, Goldman Sachs Group Inc., Research Division - Business Analyst [64]

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This is Sheriq filling in for Alex. Energy open interest have been tracking down versus the end of 2018. Can you help understand why it is that? And any color around the client participation, specifically in outside the U.S.? And specifically, how sticky are these volumes from the client base outside of U.S.?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [65]

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Derek?

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Derek Sammann, CME Group Inc. - Senior MD and Global Head of Commodities & Options Products [66]

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Yes, yes. This is Derek. Thanks for the question. A couple things: We talked last quarter about the stepping away from our power business. Our power contracts are extremely small-sized contracts, and they are a large portion or a large absolute number of our open interest contracts. What we've tried to do on our investor materials is separate those products out and show you the open interest on our core products. So when you just look at the headline overall energy complex, we tried to provide you that, the numbers for OI specifically just on the power side. So we're talking about contracts of tiny, tiny value and size. This is a business that we've run at probably flat in the last couple of years or down probably 10-ish million contracts, but these are tiny, tiny, little contracts, not core to our business. As it relates to the globalization of the business right now, we're actually seeking energy -- if you look at what the energy trading range has been with stock crude specifically, crude oil is effectively on a $5 trading range for the last month. It's been in a $10 trade range the last 6 months. What we're excited about is seeing that in even sideways and kind of flat markets, low-volume environments we're actually seeing that we are continuing to outperform the broader crude market. We are doing 1.25 million contracts a day in WTI. You're seeing about 900,000 contracts that are taking place in the Brett contracts. So we're seeing both the global merits of that expanding participation globally of WTI as the global marker expands. The marker of that in the materials we gave you which you can see, that 27% of our energy business now takes place with customers outside the U.S. That's up from just 15% back in 2014. That's up from just, I think, 24% even just a year ago. So we're continuing to see outsized performance of primarily commercial participants, so the comment Terry made earlier on the call, which is our focus point for non-U. S. customers for commercial participation. So I think the globalization of the crude oil market and now the nat gas market are indicative of the client base we are building, focusing on our sales force. And we're seeing that continued growth in participation from outside the U.S. as being the primary drivers for growth in the overall complex. So we're happy with where we are, continuing to be in a challenged macro environment, invest in the business on more global customers. And we're seeing that flow through in the metrics and the participation from outside the U.S.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [67]

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Thanks, Derek.

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Operator [68]

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We have a follow-on question from Richard Repetto from Sandler O'Neill next.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [69]

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Yes. The -- I guess my question is on the international or the volume that's coming from outside the U.S, it's just to me it's pretty amazing that it's as resilient as it is. And it's across product lines, as well the percentage. It doesn't -- like it doesn't -- it seems like tracing in line with the U.S. but more all the time. So I guess one question is could you just give us a little bit more color behind what's driving that? And is there anything on a -- a regulatory standpoint? I know open access is starting to come back into the conversation in Europe in 2020. Anything that you have on your foresight or vision going forward outside the U.S.?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [70]

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Bryan?

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Bryan Thomas Durkin, CME Group Inc. - President [71]

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Thank you, Rich, for that question. You've heard me comment in past calls what's been going on with our international focus over the last 5 years. In the last 4.5 years, we've seen tremendous growth, 81% growth, in average daily volume internationally. Breaking that down: EMEA is representing about 72% growth; APAC, 110%; and Lat Am, which you've seen in the last couple years, is about 150%. Now what's driven that? We've strategically placed our people in these various regions. As we've noted, we've invested in the sales force. You've heard me speak about country planning, which has been very, very important for us, covering over 70% of our top 10 countries throughout the world, has allowed us to drive and better focus our resources and attention across these asset classes. Deeply appreciate your recognition of the diversity of the asset classes and how those are performing very well across our various regions. We've been seeing that double-digit growth continuing to occur across the various asset classes that we represent.

When we talk about EMEA, for example, we've seen 22% growth there, largely driven by the financials, equities and agricultural, but also what we haven't mentioned is the tremendous growth in options that are occurring international, double-digit growth across those asset classes. As we look at Asia in particular, you -- traditionally we would focus on China and Hong Kong and more recently South Korea. Through these plans that we've instituted, we've gotten much broader coverage. We've made the investments, as we alluded to, throughout Hong Kong and Australia. And again, we're seeing wonderful double-digit growth in those quadrants. We're focusing more on Southeast Asia in terms of the development of those plans. And we have, although it's a lower base, seen some very nice double-digit growth across the Southeast Asia quadrant. When we look at Latin America, again, we're seeing some nice growth coming out of the Brazilian hedge fund community in particular. I think them having a -- very stable and modest interest rates in Brazil has helped us quite a bit in terms of our ability to further penetrate and grow those markets. With respect to EMEA, we're really pleased with the country planning impact that has allowed us to see, again, growth across Israel, the Netherlands, Germany and Scandinavia. And so it's that targeted focus. It's the diversity of the asset classes. It's our belief that we haven't as deeply penetrated the opportunities that exist across the globe, and we're going to continue that focus.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [72]

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And, Rich, let me just talk to you a little bit, and Sean can jump in as well. I think what -- I have not heard much about the open access language coming out of Europe, but I wouldn't be surprised if it's being bantered around. What I'm hearing more of is less about that and more about efficiencies for the client. And that's really what we're hearing not only coming out of Europe, we're hearing that globally because that is the theme, is more efficiencies. And when you look at just what we've been able to accomplish on that front taking the margin efficiencies with our interest rate portfolio going from -- Sean, you can give the numbers, about 2 billion to 5 billion roughly over the last year or so -- so I think those are the efficiencies that clients are really looking for. And then when you look at some of the other regulatory rhetoric that you may or may not be hearing, I think you had an unprecedented comment coming out of the United States Congress when you had the chairman of the oversight committee for our industry hold a hearing and then subsequently publicly say to the Europeans that "you will not regulate U.S. financial services." And it was very, very powerful statement coming out of that hearing. I was fortunate enough to testify in that hearing. And I don't know, in all the years I've been doing this, I've seen something like that. So I do believe you're hearing rhetoric coming out of Europe, and I think most of it is related towards Brexit and what's going to happen there, but in the meantime, they're trying to make it a global rhetoric. But I think our government has made it perfectly clear that we are deemed an equivalent society with our rule base the way we are operating today. And this is a global industry and it will not be disrupted. So I'm very confident in that aspect of it. I -- and again, on the open access provision, I'm not hearing much of that. I'm hearing more on the efficiencies. Sean, do you hear anything different?

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [73]

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No. Exactly that, Terry. As Terry said, we were delivering to participants approximately 2 billion, 2.5 billion worth of portfolio margining efficiencies last year. And in the second quarter, we peaked at a bit over 5 billion worth of efficiencies -- or portfolio margining efficiencies as we see a large number of participants continue to uptake that service. As I mentioned earlier in regards to the uncleared margin rules and in regards to Dodd-Frank, it sometimes takes participants time to adopt to the efficiencies that we offer in the marketplace. And we see continued increased adoption of portfolio margining. On that front, I think that is related to our all-time record U.S. dollar swaps, OTC clearing volume in June of 129 billion, our all-time record overall OTC swaps clearing of 178 billion in June. Second quarter was up 46% at over 150 billion. And finally, our invoice spreads. So invoice spreads specifically take advantage of that portfolio margining. This is U.S. Treasury future traded as a spread to an interest rate swap. And when they're both cleared at CME, you get up to 85% margin savings. And in terms of that, we're doing about 120,000 contracts a day this year relative to 89,000 contracts a day last year. So a very big increase in uptake of these efficiencies that we're delivering to the marketplace.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [74]

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Does that help, Rich?

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [75]

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Very much.

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Operator [76]

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We have a follow-on question from Kyle Voigt from KBW next.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [77]

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So if we look at your total open interest, I think a large majority of the increase year-on-year is due to the extremely strong growth we're seeing in the Euro-dollar options franchise, but if we look on the Euro-dollar futures side, we're seeing a lot of down year-on-year. Just wondering if you can comment on what's driving such strong uptake in that Euro-dollar options business. And then, I guess, any explanation for why we aren't seeing that growth in the Euro-dollar futures side of the complex as of yet?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [78]

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Sean?

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [79]

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Yes. So we've seen -- we're very excited about the futures growth that we've had in the Euro-dollar options. And as we said earlier, the interest rate environment changed dramatically from last year to this year, where you went from the expectations of Federal Reserve tightening to the expectations of Federal Reserve easing, with the Federal Reserve meeting happening today. As you can see, the expectation's live on our FedWatch tool. So in that environment, yes, we've seen people reduce their open interest in the futures contracts relative to the reduced expectations of tightening, but the huge increase in options use is relative to the increase in risk in the environment. So we're very excited about it. I would expect the interest rate complex to continue to grow, right? And it continues to be the place where the marketplace goes to manage risk. We're very excited we had an all-time record open interest in interest rates, as you're mentioning, in June of over 110 million contracts. I think it's based on the continuous improvement that we make in those products relative to alternatives in order to manage risk.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [80]

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And just from my past, I will tell you that, when you're -- from a trading perspective, people will look when the fundamentals of any marketplace, especially something that has an impact on so many different products such as interest rates -- when you have a policy of tightening that has been broadcast for several years and then all of a sudden gets flipped to an easing process, it -- people will migrate to the options on the futures to manage that risk only because they want to mitigate some of the exposures associated with it. So it's just a way -- I think it's more a little bit of a fundamental confusion in the overall marketplace because a policy has appeared to be changing. Is that fair, Sean?

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [81]

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Yes.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [82]

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And that's not a bad thing from our perspective either. And I just want to make sure we're clear on that. We're very bullish on our options franchises, as -- throughout all of our asset classes, and I think that's one of the reasons why you're seeing our business grow the way it is. There are a lot more people are -- managing their risk in our options across the asset classes, and that's a healthy sign for this industry, not a negative one.

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Operator [83]

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And we'll take our last follow-on question from Alex Kramm from UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [84]

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Just as we were talking about regulation earlier, I know you were more focused on Europe, but maybe, Terry, this is your domain. Maybe talk a little bit more about U.S., obviously new CFTC Chairman, I'm sure, you've met plenty of times. We hadn't heard publicly a lot from him, other than that op-ed the other day. There wasn't much detail, but one of the things that I thought was interesting was the whole risk created by -- in CCPs since the financial crisis. So any thought in terms of agenda, any change in direction? I know it's early days, but what are you focused on, I guess, with the change in leadership there?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [85]

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So I have met with the Chairman since he's assumed the role of Chairman just recently. And I had the opportunity to work with him when he was over at Treasury as well. I think he is a terrific young man, and I think he's going to be very good for the industry. As I told him, this is one of the most dynamic industries in the United States in financial services. And he's the guy that is sitting in the right place at the right time. I think his focus right now is going to be to make certain what I said earlier, to make sure that the United States is not disenfranchised by anybody around the world from a regulatory, arbitrage or an overreach of regulatory on U.S. participants or what the CFTC should be doing. Secondly, on his op-ed that he penned, I think -- I do believe they put out a comment afterwards as it relates to CCP risk. I don't think the Chairman was trying to draw attention to CCP risk. He was just making some points in his op-ed. Then he had a clarification statement sent up by the commission right thereafter. So all in all, I am very pleased with the new Chairman. I think that he will be good for the industry globally, and I think that's a healthy thing. As I said earlier, this is a global business. And there's a lot of people counting on that ecosystem to continue to mitigate and manage their risk. And disruptions are not good, and clarity is even worse -- no clarity is even worse. So I think the Chairman understands that and he's working with his counterparts to make sure that we can have a well-functioning futures and options worldly globally. So that -- I'm very excited by Chairman Tarbert and his leadership.

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Operator [86]

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Ladies and gentlemen, that now concludes our question-and-answer session, so at this time, I'd like to turn the conference back to Mr. Peschier for any additional or closing remarks.

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John C. Peschier, CME Group Inc. - MD of IR [87]

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I'd just like to thank all of you for participating, and have a great day. Thank you. Bye.

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Operator [88]

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Ladies and gentlemen, that now concludes today's conference call. Thank you for your participation. You may now disconnect.