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Edited Transcript of CME earnings conference call or presentation 12-Feb-20 1:30pm GMT

Q4 2019 CME Group Inc Earnings Call

Chicago Feb 21, 2020 (Thomson StreetEvents) -- Edited Transcript of CME Group Inc earnings conference call or presentation Wednesday, February 12, 2020 at 1:30:00pm 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 William 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

* Arinash Ghosh

Crédit Suisse AG, Research Division - Research Analyst

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* 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

* David John Farnum

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Kwun Sum Lau

Oppenheimer & Co. Inc., Research Division - Associate

* Kyle Kenneth Voigt

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

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Richard Henry Repetto

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* 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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Please stand by. We're about to begin. Good day, and welcome to the CME Group Fourth Quarter and Full Year 2019 Earnings. Today's call is being recorded.

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

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

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Good morning, and thank you all for joining us today. I'm going to start with the safe harbor language. Then I'll turn it over to Terry and John for brief remarks followed by your questions. Other members of our management team will also participate in the Q&A session.

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 statements. For a 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 would like to 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. Thank you, John. Thank you all for joining us this morning. Our comments will be brief so we can get right to your questions. We released our executive summary this morning, which provided extensive details on 2019 and the fourth quarter.

Fourth quarter ADV ended slowly with 16.9 million contracts, down from an extremely active Q4 2018 period. We are very pleased with the work we did to integrate the NEX business during 2019, including back-office migrations to support finance and HR systems and the building of an integrated global sales team. Importantly, our Globex technology migration is on track for BrokerTec and for EBS.

During 2019, we had 40 trading days over 25 million contracts. That is up from 35 days the prior year. We had annual volume records in interest rates, metals and total options. We continue to position CME Group for the long-term by launching innovative new products, tools and services to support customer needs and to create capital and operational efficiencies for market participants. We drove significant growth from customers based outside the United States during 2019. During the year, non-U. S. trading volume grew 10% to almost 5 million contracts per day. During Q4, non-U. S. ADV expanded from 24% of the total volume to 27%, and the proportion increased year-over-year across all 6 product lines. So far in Q1, our business from outside the United States is up double digits in all 6 asset classes.

We continue to deliver successful new product rollouts during 2019. Our popular Micro E-mini ADV traded approximately 106 million contracts since its launch in May, with diverse participation from across segment and regional perspective. We gained traction in innovative products, including SOFR futures and CME FX Link, which just set a daily trading record in January of this year. Also, we are pleased to have launched E-mini S&P ESG futures as well as our new Bitcoin options product.

So far, in Q1, our markets have been fairly active with total volume up more than 10%. It's worth noting that activity in our higher-rate-per-contract commodity contracts is particularly strong, with metals, up more than 50%; energy, up 20%; and agricultural products, up more than 10%. Total open interest has increased from 113 million at year-end to more than 128 million contracts.

I look forward to answering any questions you have. But before I do that, I'll turn the call over to John to provide some additional comments. John?

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

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Thanks, Terry. We made a lot of progress during 2019 as we integrated NEX, attracted new customers and created innovative solutions. We delivered $4.9 billion in revenue and managed our expenses very carefully, which ultimately drove $6.80 in adjusted EPS. These strong results led to an annual variable dividend of $2.50 per share, and we recently announced a regular dividend of $0.85 per share, a 13% increase from last year. In the fourth quarter, we faced tough comparables to a very strong Q4 of 2018. Despite the headwinds, we continue to manage the business very well. Expenses were virtually flat with the previous quarter, and we delivered $1.52 in adjusted EPS.

One thing to note for the quarter. As you know, our business experiences mix shifts in product, venue and membership class. In December, we experienced an unfavorable mix shift with a higher proportion of member trading and a lower proportion of privately negotiated trades in our rates business, which reduced its rolling 3-month RPC for the month of December. Nonetheless, the rates RPC was up sequentially for the quarter and up year-over-year.

Moving to 2020. We will continue to execute on our strategy, integrate the businesses and migrate customers from the legacy BrokerTec system to Globex. In terms of our guidance for this year, I want to provide some background. We started 2019 with initial adjusted expense guidance of $1.65 billion to $1.66 billion. For the full year, we were $13 million below the low end of that range at $1.637 billion. For 2020, we currently expect full year adjusted operating expenses, excluding license fees, to be between $1.64 billion and $1.65 billion.

For capital expenditures, excluding onetime integration costs and net of leasehold improvement allowances, we expect to be in the range of $180 million to $200 million. By the end of 2019, we targeted $50 million in run rate expense synergies. And at the end -- at year-end, we exceeded that target and achieved $58 million in run rate expense synergies, plus another $6 million of subleasing revenue, for a total of $64 million. This is net of the additional costs that we are carrying to run infrastructures in parallel as we prepare for the migration to Globex for BrokerTec and EBS. At this time, we expect to be at $110 million of annual run rate expense synergies by the end of 2020.

In terms of our tax rate, last year, we guided to an effective tax rate of between 24.5% and 25.5%. I mentioned in Q3 that the new U.S. tax legislation would have a positive impact going forward. As a result, we expect our 2020 adjusted effective tax rate to be between 23% and 24%. Please refer to the last page of our executive commentary for additional financial highlights and details.

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) And our first question today, we'll hear from Rich Repetto with Piper Sandler.

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Richard Henry Repetto, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2]

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First, I just want to shout out to Bryan Durkin. I know with nearly 40 years in the exchange space, sorry to see him go. He is truly an exchange guy.

So with that, I guess, my question is, John, is around the cost and the synergies. And could you tell us, we ended up in what you actually realized in 2019, and then just trying to get a feel for what the underlying growth rate is ex the synergies that you get? Looks like it's going to be just slightly up on a net basis. But what -- how does the synergies impact? What have you realized so far? What will you realize next year?

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [3]

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Yes. Great. Thanks, Rich. I appreciate the question. So in terms of our realized expense synergies, we realized about $35 million in 2019 in terms of synergies. Like I mentioned in the prepared remarks, we exceeded our run rate synergy target. We originally targeted $50 million. We had $58 million in expenses plus an additional $6 million in leasehold or sublease revenue, so about $64 million all in. So really pleased with the performance in terms of the integration and synergy realization. This is a total company effort, and I think we did an excellent job.

So in terms of next year, the way to think about it is, if you take our -- our expenses for this year, excluding license fees of about $1,637 million, you add back in the realized synergies, and then you grow that expense base between 2.5% and 3%. That's about the upward pressure that we get on our expenses. Then you back out the run rate synergies that we had, which is about $58 million. And then you back out what we think we're going to realize in 2020, and that's about $15 million in realized synergies in 2020.

Now it's less than what we achieved in -- from a realized perspective, less than we achieved in 2019. And that's because as you know, we're going to be migrating customers onto Globex in the fourth quarter. So that's really kind of the target for us. And that gets you basically flat with this year, about $1,640 million to $1,650 million. So that's kind of the way to think about it.

We are going to accelerate the synergies in 2020 as much as we can. We're very comfortable with our target of $110 million, but to the extent we can accelerate the synergies, we will. But the company is really focused on making sure that we have a good and seamless transition from the legacy BrokerTec platform to Globex.

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [4]

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And Rick, let me just thank you for making the nice comments about all of our dear friend, Mr. Durkin, who is here.

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Operator [5]

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And move on -- we'll move on to Dan Fannon with Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [6]

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I guess, can you talk about the next integration a little bit more, and specifically, the migration over to Globex in 4Q? I think in the prepared statement, you talked about some of the client forms you've been holding. Maybe what you're hearing from clients? And as we think about that migration, what, if any kind of, uptick in volume might we anticipate?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [7]

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Bryan?

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Bryan Thomas Durkin, CME Group Inc. - President [8]

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Sure. Thank you. With respect to the integration, I think I've alluded to the last call that we completed our API releases, which makes it possible for our customers to begin mock trading in the test environment. We are pleased with the outreach to the clients to date in terms of their sign up for connectivity and for testing. We've had multiple forums, both domestically and internationally with our client base to get them situated and ready for testing. I think the rubber will really meet the road in the course of the next quarter in terms of the acceleration and making sure that we've got the clients in and actively testing in throughout Q2. We're excited about the capabilities and the functionality attributes moving over to Globex. The feedback that we continue to hear from the client base is very positive in terms of the switchover.

So that in conjunction with the talks that we're having with clients in prep for EBS as well. The clients feel like we're doing a very methodical job in terms of our outreach, in terms of the preparation, in terms of the planning and testing.

I think I've mentioned in the past, we have a fairly elaborate testing program in the context of ensuring that our clients have the ample time to acquaint themselves with the functionality in the platform switchover. But many of our clients, by the way, are very familiar with Globex.

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Operator [9]

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Next, move on to Brian Bedell with Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [10]

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Great. Just talk about maybe some potential -- the potential for RPC to move up a little bit in 2020 here. Maybe if John, you can talk about the impact of the adverse member mix shift in rates on fourth quarter? And then any planned pricing changes across the futures product suite in 2020? And also for market data, I know last time, I think you had a price increase on the monthly fees, I think, in 2018, sometimes you do that every other year. So just seeing if there's anything planned for 2020? And then I'll also just squeeze in just the non-U. S. has been growing nicely. Any commentary on the potential impact for the shift to outside the U.S. in that mix shift?

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [11]

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Okay. Brian, that was quite a number of questions. So I'll do my best to hit them all. So first off, let's talk about our RPC. So in the month of November, and we talked a little bit about it -- I'm sorry, we talked a little bit about it in my prepared remarks. And so basically, what happened in the month of December, the rolling 3-month average for rates for the RPC was actually down compared to the rolling 3-month average in November. So really to understand why it went down, you really need to look at the activity that was occurring in December, which rolls into the calculation in September, which rolls out of the calculation. So when you isolate those 2 months of activity, in September, we had a higher amount of member trading activity plus a higher proportion of privately negotiated trades and that, really, caused -- those are higher RPC trading so that caused the RPC to actually decline rolling 3 months, November compared to rolling 3 month December. And it's really a change in mix between September and December. So that was what happened on the rate side.

In terms of 2020 and things that are impacting or could impact our rates, a couple of things to point out. Number one, if you take a look at our trading activity so far this year, very pleased with our volume being up 11% year-to-date. And what's interesting when you look at the mix of trading, we see energy, up 20%; we see ag, up 11%; we see metals, up 51%. All of them in the commodities area, which have a higher RPC than the financials. We also see very good, strong energy -- equity trading as well. Also, when you take a look at how we're performing overseas, EMEA is up 25% with all product areas up double digits so far this year. And then APAC is up about 34%. So very strong activity coming from international. As you know, international tends to have a higher RPC than the U.S. So when you look at the mix of commodities -- strong commodities performance and strong international performance, that should help in terms of the RPC.

Then you had a question around pricing. In general, we are always looking at our pricing schedules. And we take a look at everything that hits, impacts our RPC. So we'll look at the face rate, we look at the market maker programs and we look at incentive plans, and we do a very detailed product-by-product analysis. We take into consideration the market environment, the total cost of trade and other factors, and then we do -- and we do -- when we look at making any pricing adjustment, we do it with an eye towards not impacting volume. That's very critical.

In 2019, we didn't take any significant pricing actions. In 2020, we did make some adjustments that impact the RPCs and assuming similar trading activities to 2019, the impact would be in the range of past adjustments, in the range of about 1.5% to 2% of our futures and options transaction fees, and the majority of the changes begin at the start of February. So that was in response to your question on the pricing. And then market data, we've made some pricing adjustments in nondisplay data recently that went into effect. And then I think that's kind of the major point on market data. So I think that addressed all your questions.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [12]

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Yes. No, it's great. Just maybe what's the impact of the market data price increases from a revenue perspective?

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

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We didn't provide that on the market data.

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Operator [14]

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And next, we'll move to Mike Carrier with Bank of America.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [15]

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Just in terms of the growth outlook, you guys highlighted the strength in ADV, and we've seen that coming from outside the U.S.. And then even the new products, I think you guys mentioned that over the past decade, contributing about 10% of ADV today. So I guess, just on the international front, it looks like some of the products are contributing 25% today and some are in the 40s. Maybe where do you see that opportunity ahead, given either penetration potential or some of the initiatives that you have in place? And similar on like the new product launches, can you provide your -- some color or some context around maybe the pace of new launches or even the uptake that you're seeing over the past few years versus the past decade that drove that 10% contribution to ADV today?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [16]

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Yes. Mike, it's Terry. We are going to, kind of, go around the table a little bit here because I think there's a lot to that question, a lot of us could touch on it. But I'm going to ask Sean to touch a little bit as it relates to some of the launches that I referenced earlier, one being -- obviously, SOFR is not a brand-new launch, but it's out there and it's growing. So I think that is something that we can have a conversation about. And then obviously, we listed the ESG futures, which are new. So it's kind of hard to get a trajectory of how they're going to perform at such an early stage.

But Sean, I'll turn it to you on some of the new products. Then we could talk about the international growth.

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [17]

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We're constantly focused on both adjusting our existing products in order to make them more attractive to participants, especially relative to alternative products and listing new innovative products, addressing the needs in the marketplace. So SOFR, we're very excited about where we are there. We're currently running over 40,000 contracts a day. We have the equivalent of more than $1.2 trillion worth of open interest. Obviously, SOFR, a large and important initiative in addition to the futures side that I just talked about. We've now cleared more than $54 billion worth of SOFR interest rate swaps across 30 counter-parties.

On the future side, we now have well over 350 different firms trading on our SOFR future. So very excited about those developments. But if you look at each and every asset class in the financials, what you noted was, in our report, we said that we had more than 2.1 million ADV last year from new products launched since 2010. We had $310 million in revenues. This is across every asset class. We are continuously innovating. So if you look at equities, for example, over the last few years, we launched the BTIC, Basis Trade Index Close, which is -- got a very high RPC and enjoying very good growth and significantly adds to our revenues. In addition to that, we have the Total Return Futures, we have dividend futures. And then, obviously, you know very well about the Micro E-minis. Maybe just a brief update on the Micro E-minis. We're doing 647,000 contracts a day so far this year. That's up 37% from last year. In addition to that, we did tell you last year when we started in terms of the RPC. When we initially launch a product, we typically have heavy incentives to make sure that there's very high liquidity on day 1 so that everyone always has a good experience day 1. But we also promised you that we would be reducing those incentives over time. So if you look at the Q3 RPC, for example, on those Micro E-minis, they were $0.078. If you look at in Q4, that was $0.114. So a very significant increase in that RPC, while the product is growing very significantly.

If you look then at the RPC on that Micro E-mini, there's more than 80,000 different, what we call, Tag 50s that are trading that. So a huge number of clients. We believe we penetrated tens of thousands of new clients, particular, larger retail traders. But the other thing I want to get to is just enormous growth in the product growth in the RPC -- sorry, the last thing I want to say is a very high premium relative to E-minis. So if you do that, the math, as you'll recall, the micros are 1/10 the size of an E-mini, that means risk equivalent, that's $1.10 a contract relative to -- you can see we reported in our equity indexes, $0.65 a contract is our -- as our RPC.

If you look then we mentioned in the prepared remarks, FX Link, a new record day in January. In addition to that, the other big thing I would mention in foreign exchange. In terms of innovations or adjusting the existing products, late last year, we adjusted the minimum price increments. It sounds technical, but it's actually very important. Adjusted the minimum price increments in the quarterly rolls, dollar-euros dollar-yen and dollar sterling. Those December rolls then were outstanding, I think, it's fair to say for each of those 3 products. So in each and every case, the roll volume was up tremendously. The percentage of the open interest that was rolled was up tremendously, and we saw a huge increase in interest from banks and from hedge funds. We did announce earlier this year that we are now going to likewise be reducing the minimum price increments in dollar Canada and Aussie dollar.

In addition to that, what impact does that have on our foreign exchange markets? Foreign exchange market volatility is incredibly low. If you look at the January volatility, it was the lowest volatility going back to 1992 for the G7 currencies. So incredibly low volatility. Nonetheless, last year, the number of large open interest holders in our foreign exchange business grew by 30%. And on January 28, we had a new all-time record high in large open interest holders in foreign exchange. So we believe these adjustments to our products, even in this very low volatility environment is having a very positive impact. So every asset class is seeing innovation, new product launches, I could keep mentioning them.

One last one I'll mention is we just launched in January also options on our SOFR futures. I could go on and on, but hopefully, that gives you enough color.

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

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Yes. Mike, let me just talk real quick about Asia and Europe, and I'll ask Bryan to comment a little bit about the growth throughout Europe because I think that was the second part of your question. And I'll touch just on a quick story about Asia. Last night, Julie Winkler, who is my Chief Commercial Officer, held an offsite, which she was scheduled to be with her entire team in Asia, but obviously, that was not going to be the case. So they held it here from Chicago. And we have over 200 salespeople today. We have a significant amount of those in Asia. We -- I actually participated in her presentation because I happened to be walking by. So I did participate for about the first hour. And it's quite fascinating to see the enthusiasm amongst the Asian sales folks because of, we are now able to leverage our broker tech mix to a treasury platform. These are things that sales folks never had before. That can hopefully increase the business throughout the region of Asia. We're having great growth through there. So we referenced it in our earlier numbers, and we're excited about the prospects of what the sales force can do by creating capital and operational efficiencies with the next transaction as they continue to sell those products throughout the region.

And I'll let Bryan talk about Europe.

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Bryan Thomas Durkin, CME Group Inc. - President [19]

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It's been a journey. You've walked along with us over the last few years. You've heard what we've done to build up to the ability to say that we have about 5 million of our volume now coming out of international. You're well aware of the liquidity programs that we've put in place over the years to build up that activity during the regional time zone. And I think that, that story is just continuing to unfold in a very positive way based on the diversity of the products, the asset classes that we represent, our global sales force that is very dedicated and attuned to the very specific client segments that do business at our institution.

Over the past 5 years, we've seen over 75% growth in our average daily volume internationally, and what that breaks down to is about 4 million contracts coming out of the EMEA region and around another 1 million contracts coming out of Asia. This is the first year that we were able to, on an average daily volume for the year really meet and, in some instances, exceed that $1 million -- 1 million contract level. You had mentioned that you'd seen double-digit growth occurring in various asset classes. Again, it's the beauty of the diversity of our products. So earlier quarters, you were seeing tremendous growth in the international side in Europe on the interest rate product. This last quarter, we saw a little bit of a slide in terms of interest rates in the European side of the equation, but that was offset by strong growth in terms of our commodities, particularly our gold futures, our platinum futures, our foreign currencies did well. With respect to Asia Pacific, we saw a bit of a downturn in our energy products, but that was highly offset by performance in our interest rate quadrant in our equities.

So again, it's the diversity of the products that we have, it's our ability to penetrate these client segments. You've heard me talk about country planning, which is a rather new phenomenon that we've introduced across our sales force in our international team. Over the course of the last 2 years, we're covering over 70%, I think, at the top 10 countries that are providing the revenues on the international time zone, where we have very, very specific deliverables for our sales force and our business lines and our international teams, and we track those accordingly.

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [20]

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Yes, just one last point. If we maintain this level of volume from international, this will be the largest month in our history since 2012 since we started tracking it. This will be our largest ADV month in the month of February.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [21]

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Hopefully, that gives you a little color, Mike.

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Operator [22]

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And next, we'll move to Alex Blostein with Goldman Sachs.

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Sheriq Sumar, Goldman Sachs Group Inc., Research Division - Business Analyst [23]

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This is Sheriq filling in for Alex. Can you talk about the transition to SOFR? And what sort of preparation have you made? And how should we think about the implications on volumes and the pricing for this product?

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

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Go ahead, John.

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [25]

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Sure. We've been a member of the Alternative Reference Rate Committee now for several years. And we were the leader in terms of introducing SOFR futures. I already mentioned earlier that we have about $1.2 trillion worth of open interest. We're doing over 40,000 contracts a day. If you look recently in terms of our SOFR futures, we are running 78% of the global volume in SOFR futures in terms of average daily volume. And we're right at 94% of the open interest. So I'd say very solid growth in terms of products. We see this as additive to the rest of our products in terms of the fed funds futures and the Eurodollar futures as well as treasury futures, obviously. This is an added product that we expect to grow side by side with our existing products.

In addition to that, I mentioned earlier on the interest rate swap side,, we cleared $54 billion worth of interest rate swaps. We have 30 participants now who have cleared interest rate swaps with us, and working very closely with the industry on developments. I did mention also earlier that we did launch SOFR options on our SOFR futures in January. Other things going on this year, later this year, we will be working with the industry, we will be changing the discounting on our interest rate swaps from fed fund over to SOFR. So I would say that there is a continuous increase in the adoption of SOFR buyer clients. And very goodly now ecosystem in terms of trading the SOFR futures. As I said earlier, it's actually, I think, more than 370 participants have been trading the product. I think it's a very healthy product area, and it's growing very nicely

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Sheriq Sumar, Goldman Sachs Group Inc., Research Division - Business Analyst [26]

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And anything on the pricing side as to how that would impact long term?

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [27]

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On the pricing side, I assume, in the beginning, when we launch new products, we want to ensure that they are extremely liquid. So in the beginning, we typically offer incentives in order to ensure that we have the liquidity. And with SOFR, I said this on previous calls, I think we are the natural home for the product. So we offer the most efficient place to trade, referring to commodity spreads between Eurodollar futures and the SOFR futures, the fed fund futures and SOFR futures. In addition to that, from a margin and capital perspective, we offer offsets between the SOFR futures, Eurodollar futures; SOFR futures, treasury futures; SOFR futures versus fed fund futures. So an extremely efficient place to trade. In the beginning, we do have incentives. We do have incentives today. And as I said, we have 94% of the global open interest in the product.

Over time, I would expect us to reduce those incentives, and I expect the pricing to look similar at some point to our Eurodollar futures. But at the moment, honestly, there are some incentives.

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Operator [28]

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And we'll move on to Alex Kramm with UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [29]

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Wanted to take some of the pricing questions that you got, and then maybe take them over to the next side. Can you talk about how you view pricing in those legacy business a little bit more, one, on the nontransaction side, but also on the transaction side? I think there's still a lot of legacy contracts that are fairly fixed. So do you think there will be opportunities as maybe some of that comes up as you maybe move to Globex to maybe restructure some of that? Or are you pretty happy to kind of keep the volume there no matter what and maybe not participate in the upside as maybe competition gets a little bit bigger in that space?

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [30]

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Alex, this is John. I'll start and then Sean could chime in. You're correct. When you look at the NEX -- the legacy NEX businesses, BrokerTec in particular has a large number of bespoke agreements. And they tend to vary less with volume than our futures business. When you look at EBS, it's more akin to our futures business in terms of volume activity versus revenue realization. So that's on the market side. On the optimization businesses, the nontransaction optimization business is much more of a subscription based or monthly-based fee for those services. Obviously, on the transaction side of the optimization businesses, that varies a bit with the amount of activity that's performed. So for example, this quarter, we saw a sequential increase in the amount of revenue generated from the transaction business of the optimization companies that we own. It was actually up about $4 million sequentially. That was primarily because there's more activity at triReduce.

In terms of our -- we haven't announced any long-term plans around pricing. We're very focused on the transition from the legacy NEX platforms onto Globex. But as we always do, we're always looking at our pricing, and we want to make sure that we're very -- got a very compelling offering and then we've got a very compelling platform for our customers to use.

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [31]

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I think underlining what John said, this is Sean. Our primary focus now is transitioning the businesses onto Globex so both BrokerTec this year and EBS next year onto Globex. And secondly, making sure that we have the single most attractive platform for anyone to trade in terms of our products. So creating new link between the cash and the futures markets that hasn't existed before because we have both sets of products. So we are really focusing on the transition onto Globex, one; two, making sure we have the single most attractive products possible; three, creating new efficiencies that the marketplace has never seen before; and four, cross-selling. So the cross-selling is the thing that we've already -- that we're already heavily into. In terms of that cross-selling, maybe just a couple of points. In particular, we started tracking, what we call, cross-referrals and cross-introductions between the cash and futures businesses. And to date, we are now tracking more than 400 cross-interactions, where we are having the cash market salespeople introduce clients to our futures folks as well as our future sales team, introducing clients over into the cash markets businesses. The large portion of those are -- as we had expected and as we talked about when we launched the transaction, the highest portion is coming from foreign exchange customers in the cash markets as well as the futures markets, looking at the cross-sell opportunity, particularly in Europe. The number 2 category is in interest rate. So we're really very focused on the client experience.

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Operator [32]

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And we'll move on to Chris Harris with Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [33]

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With the news out there regarding ICE's interest in eBay, can you give us an update on your thoughts regarding M&A? And specifically, hoping you could address whether you'd consider somewhat out-of-the-box transactions?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [34]

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Well, we won't comment on what was talked about with Intercontinental. As far as our M&A strategy, Chris, as you've seen, we're very deliberate and diligent in how we approach it. And we try to be, obviously, opportunistic if something arises that we think is right for the value of the shareholders and can increase the value for the clients. So we have a long history, and I'm not going to go through all the history of what our integration -- our transactions have been. We're focused on the next integration. We have 2 years left on that integration process to get both BrokerTec and EBS on the platform. It's a big part of what we're trying to accomplish. So that's our strategy for now. And obviously, we always look at things. But at the same time, we're laser-focused, as I've said before, on completing the integration of this transaction.

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Operator [35]

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And next, we'll move to Kyle Voigt with KBW.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [36]

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Maybe a couple of questions on market data. It looks like the NEX market data revenues were down $5 million sequentially. Anything to call out there that drove the decline? And I suppose that implies there was some good sequential growth in CME's core data revenue, just what drove that? Was that the pricing moves? And then maybe really just an update on the drive data initiative and the kind of sales progress there?

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [37]

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All right. Kyle, this is John. When you take a look at our market data line, from a revenue perspective, it was actually up about $500,000 sequentially from Q3 to Q4. And really, when you peel it back, our market data performed very well in the fourth quarter. In Q3, we had $1.1 million more in audit findings. And as you know, those audit findings can vary quarter-to-quarter depending on, as those audit findings get realized. So really, if you strip out the audit findings, our market data is actually up $1.5 million. And that's really a function of 2 things: one, we had a pricing change that we discussed in our nondisplay data; and also, we've seen a stabilization on the attrition which has been helpful. So the core market data, excluding audits is up about $1.5 million. And from a NEX perspective, the market data is relatively flat Q3 to Q4.

Bryan, do you want to talk a little bit about the...

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Bryan Thomas Durkin, CME Group Inc. - President [38]

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No. I mean, you covered the pricing. But on the drive side of it, we continue to be very pleased with the demand from the client base in terms of having access to our products for them to be able to build structured products based off of our data. That business continues to grow and evolve and the interest and the demand is coming from a variety of different client sectors.

What I'm most pleased about is our engagement with the consumers of this data, whether it be our core customers, customers being the consumers of the data for trading. So you got to think about this outside the box of subscribers, the traditional subscribers, but those looking at it from the perspective of using data to complement both their trading, development of products that they can sell in-house as well as demand for historical data that they use for a variety of reasons. And so we've really been trying to more deeply engage with the client base. The audits, quite honestly, that we started almost a couple of -- I think it was a couple of years back, in earnest, has really allowed us to capture a much deeper insight into how the variety of client segments utilize our data. That's brought us much closer to the client base itself and the consumers. The other thing that we look very closely at is the distributors of the data. So really drawing a much closer alliance and relationships with the vendors and how we go about pricing that information for them to be able to redistribute our data. So we're very excited about the foundation and the programs that we've put in place over the last couple of years to help us really grow each of these variety of data offerings.

When you look at NEX. As you can appreciate, we had to get into this more deeply this past year in terms of looking at the -- maybe the esoteric nature of how that data is utilized by EBS as well as BrokerTec. And so we have a number of plans on the horizon, working closely with Sean and his team in terms of how we can better structure and package that information for consumption.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [39]

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And John, I apologize, the $5 million sequential decline I was looking at was actually for the NEX other revenue. Could you just provide any clarity on that? I'm sorry.

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John William Pietrowicz, CME Group Inc. - Senior MD & CFO [40]

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No worries. No worries, Kyle, Yes. So really the primary driver of the $5 million reduction in the other revenue is, as you recall, in the third quarter, we announced that we had completed the sale of the ENSO business. So the majority of the $5 million decline was related to that sale.

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Operator [41]

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We'll move on to on Owen Lau with Oppenheimer.

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Kwun Sum Lau, Oppenheimer & Co. Inc., Research Division - Associate [42]

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So I wanted to touch on the commodities and metals a little bit. So the ADV and open interest of commodities and metals were up quite nicely year-over-year at the end of January. Could you please talk about some of the drivers of the strength there. So are you taking shares from other exchanges internationally. Is that continued migration from cash to derivatives? Or is it mainly driven by, like volatility events, like coronavirus? How should we think about the contribution of each driver and the sustainability of the strength for the rest of this year?

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

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Thanks, Owen. I'll give that to Derek.

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Derek Sammann, CME Group Inc. - Senior MD and Global Head of Commodities & Options Products [44]

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Thanks, Owen. Yes, it's been a good run. It's actually -- there are 3 different businesses that some are operating in conjunction with others, some are actually quite decorrelated when you look at the impact of coronavirus, African swine fever and the Phase 1 trade deal that we've seen unleash. As Bryan had mentioned, we've seen particular strength in the commodities businesses, all 3 of these, most especially our metals business out of Europe and Asia. I think that's a business that over the last 4 or 5 years, not only have we positioned our COMEX gold and silver contracts as the global benchmarks, you're seeing that as more business shifts out of the bilateral swaps market, primarily the London physical market, the bullion market into all markets. We actually regressed our volumes back 20 years. And if you go back over 20 years ago, COMEX represented 10% of the total physical and cash combined businesses of futures and cash. Fast forward to today, and COMEX now represents 50% larger volumes than what we've seen in the LBMA business. So we're seeing that bullion market adopt very much the capital and operational efficiencies of COMEX gold, so we've gone from 1/10 of that physical market to 50% bigger than that cash market.

So the significant growth in uptake is largely driven by U.S. and actually, Asian and European customers. We see that on the competitive numbers. We see that in the overall numbers. The business referred to so far this year, we're up 50%. We see that our Asian business in metals is up 56%. It's up 58% as well in APAC. So we expect that, that business continues to grow. That is both metal and particularly gold as a preferred commodity in uncertain markets in which we operate. And I think us better positioning the futures market is the best solution and product for delivery of that market.

Flipping over to our energy business. I think it was referenced earlier in the call, Terry talked about the strong growth we've seen so far this year in our energy business. Globally, energy business is up 20%, and we're seeing that actually up significantly in Europe as well. And what we're seeing there is after a year of basically a $10 trade arrangement in oil and natural gas sitting at around $2.5, we've seen significant impacts to concerns of global growth and 2 ways in which the market expresses a view on concerns of global growth is effectively the price of oil. So we've seen that -- as that downdraft has actually taken place. We saw WTI go from 62 to 52 in the span of 2 weeks on growth concerns. We've seen our business so far this year absolutely take off. So not surprising to see that the preference for global crude trading taking the place in the form of WTI. It's a global crude oil market story that we've been talking about for the last 3 years, and we see that play very much intact.

And I would say even more strongly in natural gas, our business and natural gas is up 40% so far this year, and our market share has gone to an all-time record of 84% of natural gas futures, Henry Hub in the U.S. So again, when you're seeing markets break out below levels driven by growth rate concerns globally, there's an article that just came out 20 minutes ago on global growth concerns, putting downward pressure on energy prices, the market is coming to CME to use our energy prices to manage that risk.

Lastly, on the ag side. This is a business that's close to $0.5 billion business to the firm. This is a market where we saw a record dairy and livestock volumes last year. So as you have concerns about Africans swine flu, in Asia the concerns about coronavirus, we saw that risk being managed here at CME Group. Most particularly with the Phase 1 trade agreement now announced, we've seen a resumption of our volume, went a little bit sideways in grains and oil seeds last year. We're seeing our ags business up so far 11% this year. And most notably, when you see where that growth is taking place, we're seeing the business so far up 33% in Europe and up, gosh, 51% in Asia. So again, when the market experiences volatility, uncertainty and breakout ranges, you're seeing the market continue to adopt CME Group global benchmarks. And we're seeing that not just during the U.S. time zone, but the point Bryan has made, I am sure he referenced Serbia and outsized proportion of new contracts position in Europe and Asia.

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Operator [45]

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And next, move to Ari Ghosh with Crédit Suisse.

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Arinash Ghosh, Crédit Suisse AG, Research Division - Research Analyst [46]

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And apologies if you've already hit on this, but I just wanted to touch on a couple of items that could be incremental to volumes looking forward. So first, just hoping you could give us an update on conversations you're having with clients around navigating UMR and potential cost saves from your FX feed. And then just moving on to Bitcoin, you continue to see solid volumes and new account growth around the Bitcoin as well. So just curious how the institutional ecosystem here is evolving around Bitcoin and your competitive positioning in this emerging asset class as well?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [47]

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Thank you. Sean?

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Sean P. Tully, CME Group Inc. - Senior MD and Global Head of Financial & OTC Products [48]

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Yes. So in terms of the uncleared margin rules, that's something we've been very focused on now for a number of years, and that'll continue to be a tailwind for us over the next couple of years with the extension of the dates by regulators relative to compliance. So we do expect that September of this year, another very large portion of clients will be forced into those uncleared margin rules. Relative to that, we do see an opportunity to offer clients listed FX options, in particular, but also use our FX futures as alternatives to forwards. We added, as you'll recall, a couple of years ago now, monthly futures in addition to our quarterly futures in order to help facilitate that as well as FX Link in order to make that transition from the OTC market over to the futures market -- listed market much easier.

As you're rightly pointing out, something that we point out, we've pointed out for years now, right, is that if you're affected by the uncleared margin rules, you have a 10-day margin period of risk. If you move to an OTC product, and we do now clear both nondeliverable forwards as well as cash settled forwards, so the G7 currencies. So we are clearing FX forwards, cash roll FX forwards in the OTC market as well. So the uncleared 10-day margin period of risk clear to see simply a 5-day margin period of risk. We've actually now cleared about $59 billion worth of NDFs and CSFs in our OTC FX business, relatively small but increasing. But the most efficient place is in futures and listed options, which is typically the 1-day margin period of risk. So we do see that to be a continuing tailwind. In addition to that, our optimization services are very focused on having a holistic solution that no other marketplace can offer in terms of optimization of portfolios as well.

So in terms of UMR, we can see a continued benefit there. And I think you had a second question? Oh, Bitcoin? It continues to operate well. We're doing around 10,000 contracts a day. And we did launch options on Bitcoin, which are doing well. But honestly, it's a very small part of our market.

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Operator [49]

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(Operator Instructions)

And next, we'll take a follow-up question from Brian Bedell with Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [50]

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Just wanted to offer -- to say my appreciation for Bryan Durkin's help over the years and your great answers on these earnings calls.

And most of my other question were asked really, but just are there any plans to fill the President role? Or are you eliminating that position.

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

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Brian, it's Terry Duffy. I'm going to look at that over a period of time. Bryan is committed to being here through May and then help advising me thereafter. So -- and he's also joining our Board of Directors, which will also be a benefit to the -- not only the shareholders, but the employee base as well, which he has a big part of now. So I haven't made a decision about how we're -- I'm going to move forward with that particular role right now. I'll work with Bryan and others as we continue to evolve, and Bryan starts this transition into his next life.

So let me instead just echo your comments at the beginning, he does give great answers. And not only that, he works wonderful with clients and his knowledge will be around for a long time to come. So that is greatly appreciated.

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Operator [52]

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(Operator Instructions)

And next, we'll move to Patrick O'Shaughnessy with Raymond James.

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David John Farnum, Raymond James & Associates, Inc., Research Division - Senior Research Associate [53]

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It's actually David Farnum on for Patrick. I was wondering, for the international business, I was wondering if we could dig into the drivers of your growth across the various regions. So can you speak to your sales headcount ramp over the last few years. Where are we kind of right now across the various regions. Where was it, say, 5 years ago? And as we look forward, would you anticipate further headcount growth to continue to capitalize on the international opportunity? Or do you feel like you're at the correct point right now?

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [54]

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David, it's Terry Duffy. Right now, our headcount in sales has gone up close to 200 of the CME workforce today and spread throughout the world fairly evenly. Obviously, the big part of it's here in the U.S., but in Europe and Asia as well and other parts. Listen, if, in fact, the business is growing, and I continue to see the benefits, which I have seen by increasing the sales force over the last several years, I remember about 7 to 10 years ago, that number was probably about 10 to 15 people in sales, and now we're sitting at 200. And you can look at the chart up into the right of the growth of the business, and you can correlate that. The new count, acquisitions that Julie Winkler and her team have been doing along with the sales folks. And as long as we can continue to offer a solution that's more cost benefit to the -- to participants, we're going to continue to add our sales folks to do so. It's one of those things you don't want to be a company full of salespeople. But if they are continuing to deliver value, I have no problem increasing the size of that staff as long as the business is reflective of what they are producing.

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Operator [55]

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And that will conclude today's question-and-answer session. I would now like to turn the call back over to the management for any additional or closing remarks.

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Terrence A. Duffy, CME Group Inc. - Chairman & CEO [56]

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Yes, we appreciate it very much, and we look forward to speaking with all of you next quarter. Have a nice day. Thank you.

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Operator [57]

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And that will conclude today's call. We thank you for your participation.