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CME Group Inc
Earnings Call Analysis
Q2-2024 Analysis
CME Group Inc
In the second quarter of 2024, CME Group achieved record-breaking performance across various metrics, manifesting strong demand for its diversified benchmark products. The company reported the highest quarterly revenue in its history, exceeding $1.5 billion, marking a 13% increase compared to Q2 2023.
CME Group experienced substantial growth in average daily volume (ADV), which reached 25.9 million contracts, a 14% increase year-over-year, making it the highest Q2 ADV ever recorded by the company. Notably, non-U.S. ADV hit a record 7.8 million contracts, a 23% increase from the previous year. This surge in trading volume drove record adjusted quarterly earnings and significant gains in revenue from physical commodity products, amounting to $836 million, or a 16% increase year-to-date compared to the first half of the previous year.
The trading of commodities such as energy and metals saw double-digit growth, with energy products increasing by 16% and metals products by 42% year-over-year. Additionally, the treasury futures sector achieved a new daily volume record of 34.4 million contracts on May 28 and saw a 36% increase in treasury ADV to 8.2 million contracts.
CME Group reported an adjusted operating margin of 69.1%, which improved from 66.8% in the previous year. The net income margin for Q2 was 61%. The company's disciplined cost management resulted in adjusted expenses of $474 million for the quarter. CME Group also highlighted its unmatched capital efficiencies, with margin savings of nearly $20 billion per day for clients within its interest rates portfolio.
In a strategic move to foster innovation, CME Group announced an expanded partnership with Google Cloud to build a new private cloud region and colocation facility in Illinois. This initiative aims to support global trading with advanced cloud technology, ultra-low latency networking, and high-performance computing. The integration is expected to provide clients with enhanced connectivity options and faster product development, leveraging Google's artificial intelligence and data capabilities.
The company acknowledged ongoing geopolitical uncertainties, including tensions in the Middle East and the Russia-Ukraine conflict, as factors heightening the need for risk management tools. These global dynamics underscore the increasing demand for CME Group’s comprehensive risk management products.
CEO Terrence Duffy and other executives emphasized the company's focus on long-term customer needs and continuous innovation. They reiterated the commitment to delivering capital efficiencies and maintaining a leading position in the competitive landscape, with particular attention to future regulatory developments and market conditions.
As CME Group enters the second half of the year, it remains optimistic about sustaining its growth trajectory. The company continues to prioritize customer engagement and product innovation, ensuring it meets the evolving needs of market participants while delivering value to shareholders.
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Welcome to the CME Group Second Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Adam Minick. Please go ahead.
Good morning. I hope you're all doing well today. We released our executive commentary earlier this morning, which provides extensive details on the second quarter 2024 which we will be discussing on this call.
I'll start with the safe harbor language, and then I'll turn it over to Terry. Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures.
With that, I'll turn the call over to Terry.
Thank you, Adam, and thank you all for joining us this morning. I'm going to make a few brief comments about the quarter and the overall environment. Following that, Lynne will provide an overview of our second quarter financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks.
Our strong second quarter results again reinforced how the need for risk management continues to grow, and CME Group is where market participants turn to manage that risk across the most diverse set of benchmark products. We delivered record quarterly revenue, driven by year-over-year growth in both average daily volume, and open interest across every single asset class. This is the first quarter with this broad-based growth since 2010.
Second quarter average daily volume of 25.9 million contracts increased 14% and represented the highest Q2 ADV in our history, including a quarterly record for non-U.S. average daily volume of 7.8 million contracts or up 23% year-over-year. This robust activity drove record adjusted quarterly earnings, which Lynne will detail shortly.
We delivered 16% year-over-year ADV growth across all our physical commodity products to 5.2 million contracts, which included double-digit year-over-year growth for both energy and metals products at 16% and 42% growth, respectively. Importantly, our overall commodities portfolio has generated record revenue year-to-date in 2024, up 16% versus the first half of last year to over $836 million, representing 34% of our clearing and transaction fees revenue in the first half of the year.
Turning to our financials. Total ADV across the complex increased 13% from Q2 last year, including record treasury ADV of 8.2 million contracts were up 36%. Our U.S. treasuries set a new daily volume record of 34.4 million contracts during the quarter on May 28. The continuing high levels of issuance and deficit financing are tailwinds, even in the absence of Fed rate changes. Also, foreign exchange second quarter ADV grew 20% versus Q2 last year.
In addition to our impressive quarterly volume results, we continue to provide unmatched and I'll say it again, unmatched capital efficiencies for our customers. Within interest rates alone, these efficiencies resulted in margin savings of nearly $20 billion per day for our clients through the unique combination of offsets with our rates futures and options franchise. Our one-pot margining with CME cleared swaps and cross margin offsets versus cash treasuries offers clients the efficiencies, which no one else has the regulatory approval to provide, coupled with 13 million interest rate futures and options traded at our exchange on a daily basis, the liquidity, depth of book, capital savings and our interstate complexes is unparalleled.
While we are pleased with our quarterly results and our ability to consistently deliver quarterly earnings growth, we continue to innovate with an eye towards the long-term needs of our customers. Near the end of the quarter, we were particularly excited to announce a significant step forward in our partnership with Google Cloud. I have Ken Vroman in the room with me who will provide more detail during the Q&A period on the integration.
We plan to build a new private Google Cloud region and a colocation facility in Aurora, Illinois, designed to support global trading of our futures and options markets in the cloud with next-generation cloud technology, ultra-low latency networking and high-performance computing. This next-generation platform will build on the benefits we provide our clients today through a broader range of connectivity options and faster product development.
In addition to our state-of-the-art trading infrastructure, our clients will also be able to utilize Google's artificial intelligence and data capabilities to help develop, test and implement trading strategies to manage their risk more efficiently.
Finally, as we begin the second half of the year, looking at the uncertainty around the U.S. political landscape with the disparity of opinions and policies, the need to mitigate and manage risk has never been more paramount. On top of that, the ongoing uncertainty in the Middle East, coupled with unrest between Russia and Ukraine are continuing issues with no end in sight. That markets definitely need to manage. These are just a few of the geopolitical events that highlight the need for our risk management products. We look forward to working with our clients to make sure that they have the most liquid and efficient markets to manage these issues and all the others we encounter in this world.
I'll now turn the call over to Lynne to review our Q2 financial results.
Thanks, Terry, and thank you all for joining us this morning. CME Group delivered the strongest earnings in our history this quarter, starting with the highest ever quarterly revenue at over $1.5 billion, up 13% from the second quarter in 2023. Quarterly revenue for our physical commodities asset classes grew 17% year-over-year and represented over 1/3 of clearing and transaction fees in the quarter at $444 million.
Market data revenue of $175 million increased 7% from the same quarter last year, and other revenue increased over 35% to $107 million. Continued strong cost discipline led to adjusted expenses of $474 million for the quarter and $388 million, excluding license fees. Our adjusted operating margin was 69.1%, up from 66.8% in the same period last year. CME Group had an adjusted effective tax rate of 23.1%. Driven by the robust demand for our risk management products, we delivered the highest quarterly adjusted net income and earnings per share in our history at $932 million and $2.56 per share, both up 11% from the second quarter last year. This represents an adjusted net income margin for the quarter of 61%.
Capital expenditures for the second quarter were approximately $17 million, and cash at the end of the period was approximately $2 billion. CME Group paid dividends during the quarter of $419 million, and we've returned over $25 billion to shareholders in the form of dividends and implementing the variable dividend policy in early 2012.
A consistent higher level of demand for our products continued in the second quarter, evidenced by 52% of our trading days being above 25 million contracts in the first half of this year compared to 34% in the first half of 2023. In addition, 4 of the first 6 months this year set all-time volume records, including all 3 months this quarter. We're very proud of the team for their efforts to efficiently our business, driving earnings growth for our shareholders while also focusing on the future and providing our clients with the risk management products and capital efficiencies they need as the industry continues to evolve.
We'd now like to open the call for your questions.
[Operator Instructions] Our first question comes from Patrick Moley with Piper Sandler.
I think it was the first time today that you disclosed that aggregate amount of daily margin savings of $20 billion. Can you maybe just elaborate or provide a breakout of how that splits between the buckets or the margin buckets, cross margining, portfolio margining? And then could you also maybe just help investors understand how that compares to what the competitor is offering and what type of moat that provides you when we think about your customers potentially looking elsewhere?
Patrick, thank you for your question. Sunil Cutinho is going to answer the first part, as Suzanne Sprague is out sick today. So Suzanne -- Sunil, as you know, headed up our clearinghouse for many, many years, who was very informed on that question. I will answer the latter part of that question as it relates to the competitor and what they offer because it will be a short one, but go ahead, Sunil.
The same clients trade both futures, options, swaps and cash products. So the rough split is around $12 billion for futures and options. $7 billion for swaps with futures and options and then $1 billion, including the cash flow.
And Patrick, if you're referring to a competitor such as people who have announced they're going to compete with less their efficiencies are exactly 0, they don't have any futures business, so they can't have any efficiencies to date. So I don't know what you want me to do is speculate on what you think they're going to get or not get. But the answer to your question, they have 0 efficiencies. Sunil?
The only other -- an additional thing I would add is our competition cannot provide any efficiencies relative to option either. .
Correct.
It's very unique to CME.
Okay. Great. And then maybe just one on the pricing increases you announced at the beginning of the year that you said you expected market data revenues increased by 3% to 5% and then 1% -- or 1.5% to 2% bump in futures revenues. Could you maybe just update us on how you're feeling about how you're tracking towards that? And with half the year behind us, you have a sense of where you can maybe come in directionally within those ranges?
Thanks, Patrick. Lynne?
Yes. So thanks, Patrick. So far, in the first half, we're very consistent with the guidance. So we said 1.5% to 2% on the clearing and transaction fees, 3% to 5% on the various data products, and then getting to a total revenue impact of somewhere between 2.5% to 3%. And I would say that we're tracking very well on each of those line items through the first half.
Our next question comes from Ben Budish with Barclays.
Maybe just following up on Patrick's first question. Can you give us an update on where you are with the DTCC cross margining program, how are efficiencies looking there versus what you've kind of been signaling? And then where are you in the process of getting to where you think you'll be getting to?
Thanks, Ben. Again, I'm going to turn it to Sunil with that answer. Sunil?
We have 10 clearing participants taking advantage of it. We have a few more in the pipeline that will be onboarded shortly. And as I mentioned before, we have grown to about $1 billion in savings, and we'll continue to grow that. We are also working on trying to provide efficiencies all the way to indirect participants, but that would require an approval with there.
So the savings then has gone up exponentially since we last reported out last quarter. So that number hitting a high watermark of next near $1 billion is a record for us.
Okay. That's very helpful. And maybe just a follow-up on the energy side. You posted a white paper talking about the increasing use of WTI and setting the price of Brent and how that you were seeing, I think, an increasing amount of WTI trading happening during European hours. Could you just unpack that a little bit? Are you seeing new customers joining the platform, is it taking share from existing customers that may have been previously trading on other exchanges? Any other color there would be helpful. .
Thanks, Ben. Derek?
Yes. Thanks, Ben. As you heard Terry mentioned at the top of the call we had a record revenue this year for the first half on the commodity side. Energy is a big part of that. Our overall energy volumes are up 16% this year to 2.4 million contracts. We've also seen our open interest growth, 20% as well.
When you look at our WTI business, as we've said, with record amounts of U.S. crude oil out in the market, both on production side and export side, that's creating net new exposures for non-U.S. customers on the WTI side. When you look at where this growth is coming from WTI complex, we actually see that our energy volume across EMEA is 53%. So European volumes from European customers up 53% this year.
Just on the WTI futures side, that's up 42% from European customer base. So as we expected, as physical U.S. oil hits the global market, we're expecting to see customers that were not directly exposed to U.S. crude oil imports in Europe now using WTI products to manage that risk. We're seeing that most acutely on the option side as well where WT options is up 23% this year.
As it relates to kind of the share and where that's coming from, we're seeing net new customer growth on the WTI side in Europe, but we're also seeing shares between our WTI and the competitors WTI basically flat going back 7 months now to December of last year. And actually in options, we're seeing our share increase to 89% from 86%. So we're growing in absolute terms. We're growing in relative terms, and we continue to see that growing.
Our next question comes from Simon Clinch with Redburn Atlantic.
I was wondering if you could circle back to the process of competition here. And I was wondering if you could expand on the levers you would consider pulling. And what kind of signals you'd be looking to as you respond to competitive FX going forward? Just maybe you can reference how that's been done historically because this has always been a competitive environment.
Simon, is your question is what we're going to do if they actually launch and what are we going to do if they actually get business? I'm confused what you're asking. .
No, it's more a case of what would you be looking for? And in terms of what they might do and how you might think about responding to those signals. Not that a will necessarily happen, but...
I made it perfectly clear on the last call that we have done a number of things over the last 8 to 10 years to put ourselves in the strongest position possible. I could not cite the numbers of $20 billion if we didn't make the investments we have made over a long period of time to create the efficiencies for our client base. And that is something that is unparalleled, as I've said, in the industry.
We are in a very strong position today. So to walk away from a potential $20 billion of margin savings on a daily basis to go to an unproven model seems to be a bit of a fiduciary stretch for people to direct business in that venue. So we are in a strong position today to compete with anybody, including the announced competitors. And so this is something that we've always been prepared for. We always are preferred prepared for. And I do believe competition always makes everybody better.
So I take everything seriously. We -- and that's the reason why we've made the investments we have for our clients along the way. That's what we've done and that's what we'll continue to do.
First part of this question -- those are additional steps. I have to wait and see what they're going to offer here. Let me be clear. There's no approval for anybody to list in the United States, foreign sovereign debt and clear that U.S. foreign sovereign debt in another legal jurisdiction outside of the United States. There's $27 trillion of outstanding debt in treasuries that the U.S. Treasury in the United States government depends on to run this country, under the rules of the United States, not under the rules of the United Kingdom or the Bank of England.
So we will wait and see how that proceeds if that offering goes anywhere. I think there's a lot of concern about giving up jurisdiction to a nation the size of Great Britain with some of the track records they've had with LME and some of the other issues they've gone forward with. So we'll have to wait and see, Simon. So I don't want to put the cart in front of the horse, but I think there's a long way to go before that's even been decided what you can and cannot do. That's why the efficiencies are 0 and they'll stay 0.
I appreciate that. Just as a follow-up question. Just going back to the pricing dynamics in futures and options. Could you just expand on what's really going on from a mix perspective from -- in RPC, particularly in rates? I just noticed that we're back to sort of year-on-year declines and despite what should ultimately be a positive mix shift towards the long-term rates within that franchise. And I'm just trying to piece that together.
I'll take the price increase. So -- so Simon, you're looking at the year-over-year rate RPC in total. That's your question.
Yes and the impact from rates as well with. Yes.
So if you look at rates on a year-over-year basis, they were up 14% volume-wise. So you are going to see some pressure -- downward pressure from the increased volume tiering. You also have a higher contribution of treasuries, which is a positive, but you do have higher members this quarter, and you do have a decrease in some of the block volume that we saw last year. So there's a number of factors at play there. I would say the most impactful is probably that a 14% uplift in volume, which is going to have that downward pressure on the RPC, but still a strong revenue growth number for the rates complex, given that volume growth.
Our next question comes from Dan Fannon with Jefferies.
Was hoping, Lynne, just to talk about expenses for a bit. First half run rate is tracking well below the guidance, typical seasonality of that building in the second half. So hoping you could flush out a bit of what you're spending on? And then also the new colocation facility that you announced in partnership with Google, just thinking about that in terms of what that means from an expense and/or investment perspective and versus the guidance that you've kind of talked about in terms of that Google partnership over time?
Sure, Dan. Happy to. So yes, the guidance, we are still comfortable with the full year guidance that would imply about a $60 million increase in the back half of the year versus what we saw in the first half, there's a few things to keep in mind. You mentioned the typical uplift in our marketing and event spend in the fourth quarter, that is going to continue, but you also have other items where we are spending more on things like some retail marketing as we're supporting some new brokers that are coming into that space.
Another piece of that increase is going to be around the Google migration. So some of the cloud consumption you will see increases in our technology line item. You're starting to see that in the past few quarters, you will continue to see that as we go through the balance of the year. As we move more applications into the cloud, you will see more of that consumption spend. Remember the offset is we are spending less on CapEx, and you're seeing that come out of depreciation as well.
The other things to keep in mind are some of the project-based work on things like the treasury clearing project that we've announced and the balance of that increase is going to be in compensation. So we remain comfortable with that increase, and it's a number of factors beyond just the typical marketing spend in the fourth quarter that we've seen in the past.
Jim, do you want to talk more about the market and the second part of you guide? .
You mean, Ken?
Ken, I'm sorry.
Yes. Maybe -- thanks, Terry. This is Ken Vroman. Maybe just a little bit of context on what's next with respect to Google. We're very excited about what we announced and Terry alluded to this one-of-a-kind purpose-built for CME facility that will provide scale and resiliency to our customer base. At the same time, allowing markets to operate in the cloud, not next to the cloud, in the cloud. And we think there is an innovative amount of engineering that went into delivering ultra-low latency capabilities in the cloud that will allow our customers to take advantage of that for both scale, efficiency, new products and new services.
So with respect to that, we're very excited about that. We've extended our relationship with Google that goes out as far as 2037 to ensure that we have plenty of time to burn in this capability. So for [ NEX ] for us, we are in a process. We're now reaching out and working with our customers to drive that iteration and make sure that we get the technology and the ecosystem correct as we build the facility out in Aurora.
At the same time, in parallel to that and related to some of the things Lynne's talking about, we are migrating our core business, our regular non-ultra low latency business to the cloud, we received approval from the CFTC to run clearing in the cloud. We expect to be running cycles shortly in the cloud with respect to our business and other non ultra-low latency applications will go there. We're about 2/3 of the way through that migration and continue to make great progress with respect to it.
And just to finish, Dan, on the expense piece of that, it doesn't have an impact on the current guidance, and we will layer in any impact in the out years as we give the guidance going forward. So no back yet on our financial guidance from the colo facility. .
Our next question comes from Owen Lau with Oppenheimer.
So it's a broad question and go back to Terry's comment about the upcoming election. I know you have many different asset classes, but I'm interested to hear more about how does the upcoming election and potential change in administration could impact CME over the next 12 to 24 months. Is it mainly because of volatility? Or is there some potential secular trend that we may not fully appreciate?
Owen again, this is speculation, so we have to be very careful here. Depending on who assumes the White House, is it the same policies that we've seen over the last several years? Or is it a new administration with President Trump come back in and putting his agenda in place.
You know what his agenda is, is for less regulation, less taxes, things of that nature, more security for the country, more domestic pay attention to more domestic issues to try to eliminate those. So the question will be what does that have to do with markets. I think regardless of who sits in the White House, the uncertainty, as I said in my opening comments, is there and markets are going to need to manage that risk because no matter what people say on the campaign trail and what they do once they assume office are normally 2 different things. And if you look at history, that will -- you'll find that to be a fact.
It's very difficult to follow through with some of the rhetoric that you say on the campaign trail. So markets get very skittish one way or another, get excited 1 day, not so excited as the next is President Trump going to sit on the Fed or make fun of the Fed like you did prior, the to tried to get them to take rates down? Or does the Fed stay independent like he has, which I think has done a great job of doing. So there's a lot out there about pressure in rhetoric. So we're going to have to wait and see. We've had a man. If he does have a change of administration, had 4 years in the office. And if he does reassume that office, I think you'll have a whole new cabinet and obviously a new cabinet with new people around him that could the advice might be completely different than the first 4. And if, in fact, the current Vice President assumes the office, we know where the administration has been.
And so I don't think there's any surprises there. So that's the best way I can look at it, and say that, I think, overall, the volatility issue with the markets because the U.S. is the dog that was the tail around the world is going to be very important. We saw what happened in France, a little a bit of a surprise. We saw what happened in the U.K., a little bit of a surprise, markets need to pay attention to this because it has long-term effects on it. So again, we've got to get rid of the rhetoric, see who wins, and then we'll move forward, but that's how the markets seem to manage it. Lynne?
Yes. And Owen, I would just add that regardless of that dynamic, we're seeing a lot of this volatility play through in our markets today. So we talked about the records in the quarter, the fact that all 6 asset classes were up in both volume and open interest. If you look on a year-to-date basis, we have that same trend. So July has continued to be strong, running 20% ahead of last July, trending towards an all-time record if these levels hold and we're continuing to see that year-to-date across all 6 asset classes, the volumes are up and the open interest is up, and that's something that's fairly unusual. Typically, it won't be such a broad-based use of our product, but we are seeing that people need this risk management in this current environment across all of the offerings that we have.
Got it. That's helpful. And then my follow-up about -- maybe about the stock. I mean the company continues to have record quarter, but the stock has been under pressure this year because of the interest rate and competition narrative. Do we change how you approach your capital allocation priority and acquisition strategy if the situation persists or not at all?
I think we got your question. It came through a little bit scrambled. But your question was about, I think, capital return. And then your question was the pressure on the market? Is it due to announced competition? Or is it due to Fed policy. Is that fair?
I would say the stock has been under pressure even though you continue to achieve record quarter. I mean company are -- it out that dynamic is dynamic change how you approach your capital option priority. I think that's your question.
Okay. So Lynne is going to go head start, and then I'll jump in.
Yes. So certainly, we have seen the disconnect between the record performance and the stock price. And certainly, we continue to do what we can on the performance side to help that equation. On the capital return policy, it's something that we consistently look at. It is something we are undergoing a new review on again. It's something that we do periodically as good stewards of the capital to make sure we're returning that capital to shareholders in the most effective manner.
So we'll be continuing to go through that process. And should anything change, we'll certainly communicate with both shareholders and the analyst community.
Our next question comes from Chris Allen with Citi.
I wanted to talk through some of the structural growth opportunities, specifically in energy around natural gas, expect there to be a material impact from AI-driven data center demand on natural gas over the next, call it, 5 to 10 years. I wonder if you could help us frame out the opportunities you see it what potential impact you could see on volumes? And any color just on whether data centers currently hedge energy exposure? And if not, any thoughts on why?
So before Derek answers on the natural gas, which we have a good story to talk about with natural gas and he will so. Are you suggesting that because of AI and the compute that it will take to run AI that natural gas will be more in favor or out of favor? I'm trying to understand your question. .
Yes. Our energy team here has done work around the incremental demand -- energy demand from data centers driven by AI. And 50% is expected to be filled by natural gas, a pretty material increase. So I see it as a positive catalyst. Just wondering how you guys are framing that out.
I just want to make sure we understood your question.
Yes. Chris, I think that the don't disagree with the premise that there's going to be increased demand for natural gas and AI. But frankly, that's just the energy transition story. So I mean, you're just seeing nat gas replace all other, I mean we're seeing coal reduced eliminated. We're seeing not a real adoption of nuclear. So natural gas is that solution.
We're already seeing that in the record results in our natural gas business now. When you look at the year we put up already this year, we set multiple records on a year-to-date basis and quarterly basis for both futures and options with nat gas up 29%, more important nat gas options up 54%. This is a global story as much as a domestic story because we're seeing our fastest growth in our Henry Hub compacts coming from outside the U.S.
So when you look at the EMEA business growth right now, we're seeing our 2024 year-to-date consumption of Henry Hub, up 78% year-on-year. We're setting records in terms of participation, globalization and options are a big part of that as well. So we see this as a broader story, not limited to energy being consumed by AI, but nat gas being not just a transition fuel, but a fuel for future. And that is a position that we're in -- we're 80% market share of that natural gas futures business, and we've increased our shared Henry Hub options business as well to about 69%.
So we feel good about that. We agree with the premise that we'll see natural gas be a bigger source of energy consumption over time, and we like our global position in Henry Hub there.
And Chris, just to follow up on that. I think you guys are right. The question is, to Derek's point, I don't know if I would just use AI as your story. When you look at the grid system in the United States of America, the grids are down significantly and to continue to power them up, which you know as well as anybody, the grids today are powered by nuclear and fossil fuels and a handful of what they would call green energy, but that's 2% or 3%.
So natural gas needs to play a bigger role because we're running out of power in parts of the world today. We don't have the -- so not only computing AI, how about lighting our homes and powering our country. So there's a lot -- it's a lot bigger story than just AI, but we agree with your premise.
And just for a follow-up, wanted to dig a little bit on dealer relationships. I'm just wondering what areas there are ways to improve relationships with dealers. I would imagine price is always going to be top of their list. But I'm just wondering what other areas would dealers be asking for in terms of rooms for improvement in how they view the CME?
I think that the relationships are good, Chris, and maybe you heard something I didn't. But we worked very closely with them. I work with not only the CEOs of all the dealers, but up and down the street with the people who run the FCMs as does my team. And I think the way the relationships are always enhanced is by giving them return for their trading. And when you can invest over the years, like I hate to keep Harper on this, but give them basically $20 billion of savings on a daily basis in the capital-constrained world, you got to imagine that crosses a lot of bridges for them and makes them very pleased with what we are doing.
So I think the relationships are good. The dealer community does have a tendency to turn over a little bit more than the exchange community. So we're constantly working to bolster those relationships. But I don't see them as fractured in any way, shape or form. And I think that the guy that's out there promoting his 10 brands is trying to promote the fracture in there because of pricing and other things.
What you got to remember, and I think, Chris, you're smart enough to understand this, that the smallest cost of any transaction is the transaction cost. The spreads are what really affected the dealers and effective participants, and they know that. So the cost is not the issue. We bring a lot of value to it, and that $20 billion goes a long way on a daily basis.
Our next question comes from Craig Siegenthaler with Bank of America.
Can you guys hear me okay?
Yes, Craig. Go ahead. We got you now.
All right. Perfect. So we had a follow-up on the rates capital efficiency topic. So in the quarter, you held a call and disclosed that the capital efficiency of cross-margining CME futures with CME interest rate swaps was 20% to 25% less than CME future to future clearing. But given that your rate swaps business is heavily skewed towards Latin America would do that actually reduce the capital efficiency versus a business that was mostly SOFR based?
I'm not sure we call you're on, Craig. We didn't say that. So -- that is not true, and we're happy to have a follow-up as Sunil can walk you through it right now, but we did not say that.
We have deep and rich liquidity across all of our rates products. You're rightfully pointing out that we have significant market share in Latin American currencies, but our dollar market is very strong. And we are the only clearing house that provides capital efficiencies between futures, options, cash and swaps or dollar rate. So the growth has been very strong. The capital efficiencies in and of themselves are a function of the structure of the portfolio and the open interest. And as Lynne pointed out, the open interest has grown as well.
So Craig, I think what we were probably pointing out, maybe what you've heard is we're dominant in some of those Latin American rates swaps business clearing, but if you look at the swaps clearing against our future portfolio today, I assure you if anybody was giving up on portfolio margining, they would move their swaps to CME to get those offsets today. So everybody that's trying to achieve offsets is to bring this business to CME and that's the reason we got the $20 billion. So I think we were reporting the dominance we have in the Latin American Asians of their swaps clearing. Is that fair, Sunil?
That's fair. And then the most important metric here is we have over 3,300 large open interest holders. So they are ones who are carrying inventory every day. And as Terry pointed out, they have to fund those positions every day. So this $20 billion in capital efficiencies is material.
And that's an important number, Craig, and for the rest of the call, that 3,300 large open interest holders, they direct where they their trade to go because they're the ones driving the benefits of the $20 billion. So that's a lot of people to convince it's not convincing 10 people, 2 of which are proprietary trading firms.
Got it. I guess our worry was that CME may not have enough SOFR initial margin balance to provide total savings and that the portfolio margin benefit between U.S. rates futures and lots in interest rate swaps might not be as efficient as U.S. rate futures to U.S. rate swaps. So I don't know if you can provide any kind of high-level commentary efficiency between the 2, but that would be helpful.
Tim?
Craig, yes, I think what's interesting -- I think what you're trying to get at is there's various permutations and calculations of how those capital efficiencies can be extracted across the various product types. I think what the main takeaway should think about SOFR is right now, we have 100% of the silver open interest across futures and options. So we're the only ones who can actually afford that as a mechanic or a part of the calculation to unlock that saving. So SOFR could be used against OIS swaps on the cleared side that can be used against treasury futures. SOFR futures can be used against, SOFR options and with the improvements we made in January that can now be used against cash positions at FICC with the enhanced gross margin.
So the real takeaway here is not necessarily just a mathematical result. You have to look at the gravity of the risk pool that is here at CME with the large open interest holders, the growing open records across the rate complex, those are the more important things because that was the cornerstone of how clients access the capital efficiencies, not just the individual computation by any sort of one possible trade combination.
Does that help -- does that give more color for you, Craig?
No, that's helpful. .
Our next question comes from Kyle Voigt with KBW.
Maybe just a follow-up on the cloud announcement. I'm just wondering if you could expand a bit on how that might work in practice in terms of clients potentially migrating towards a Google infrastructure as a service offering versus utilizing a self-managed infrastructure.
And more specifically, I'm wondering if rolling out the new colocation facility and matching engine and the subsequent client migration will have any material impact, whether positive or negative, on CME's connectivity, colocation or low latency data feed revenue?
I'm going to let Ken answer that for you, Kyle, but I'm going to make one comment because I think it's important. We listen to our clients who use that facility. And one of their main concerns when we announced this deal in 2021 of where that cloud could potentially be, where would that data center be? How disruptive would it be? We've announced that, that cloud data facility is across the street. So there is no disruption from the client perspective. So we heard loud and clear and we worked with our partners at Google for them to build a one-of-a-kind bespoke facility for CME's clients. Ken, I'll turn it to you.
Yes. One of the things just to build on that, a number of us were around for this, but when Globex was first developed, it wasn't as a replacement for the floor. It was put alongside the floor to enable new strategies, new business models, products and services. We think about this as the migration to cloud very similarly. We allowed our customers to choose and migrate over time.
So today, as we move forward with the cloud, our customers, because of what Terry said, because of the location, they will have the ability to choose. They can continue to do what they do today and manage their own gear or they can migrate into the Google managed solution and take advantage of the various capabilities there.
But ultimately, it was important for us to allow the migration to happen based on the pull of the value proposition, not us pushing it in a certain direction. So the facility out there in Aurora allows it to leverage the infrastructure they have today, leverage the infrastructure we're building for tomorrow and that migration will happen in a seamless manner because of that.
And so we can be both intentional and careful with our customer interest as we do that. And again, as I said earlier, we are in a process now where we're iterating on a daily basis with our customers' input to make sure that we get all that right.
So let me just clarify one thing my colleague said because it's important, Globex was not a floor product. Globex was a product -- that was an electronic product that was distributed outside of the trading plan. So it's not a floor-based product. Just want to make sure that, that's clear for all the layers that are listening.
Just to clarify one point there, though, but when the migration does happen or that pull does happen for those clients and they elect to migrate to the Google infrastructure. From a CME revenue perspective, is that a net positive or net negative or net neutral when you look at the connectivity, colo and kind of low latency data feed revenue bucket?
Yes. Kyle, there's a lot of moving pieces in that at this point. So once we get closer to that, we probably will have more guidance, but there's going to be a number of ways that you can access the facility. There's going to be a number of ways that you can excess data, there's going to be potentially new streams changes to existing streams. It's just too early to comment on that at this point.
Okay. And then just if I could just follow up on the discussion around just competition. Obviously, we saw the announcements on the bank and market maker partners from [ FMX ] in 2Q. But I guess my question is more so on the client side. CME has a large sales force, you're in constant communication with your end users of your futures products. I'm just wondering, at this point, if your sales team has been fielding more or any questions from kind of the end users, hedge funds, CTAs, asset managers, other buy-side firms about this FMX platform or any of the value proposition?
Yes. So Julie, you want to -- I'll let Julie Winkler, our Chief Commercial Officer, who deals with most of the end user clients want to rest us answer that.
Yes. No, thanks for the question. And certainly, this has been a great opportunity for our sales force to continue to engage with our customers, which is part of what we're doing each and every day. Our rates business is just continuing to demonstrate strength and resilience. This 15% surge in volume and record treasury futures ADV, it's giving us a lot to talk about with our customers.
And the feedback, we're -- a key part of what we do is listen to our customers. And as Terry pointed out earlier, transaction fees are one very small piece of the value proposition that is being offered. And so what we're really trying to do is make sure we understand the dynamics of what they're hearing but also being very focused on highlighting the key aspects of our value proposition, which is our liquidity, the capital efficiencies that we talked about on this call today and making sure that across our offering, both with BrokerTec and with our treasury futures complex as well as SOFR futures and options that people are well aware of all of those dynamics that we have, and that has been the focus of our conversation.
So we're not assessing or hearing anything that's from those constituents that you spoke to earlier that would concern us that people are extremely happy and have shown that with their trading volume on our exchange over the past quarter.
In the calls that I fielded from that call me Kyle, have been more of the business side of what we can do more together to continue to create these efficiencies. Those are the calls that I'm feeling, I'm not feeling anything about any other offering. So they're calling me about more efficiencies. Talking more about Basel III. What does that mean for the bottom line? How can we work together to continue to build their business and CME's business together. That's the calls that I'm talking to from the real business creating community. .
Our next question comes from Michael Cyprus with Morgan Stanley.
Just wanted to ask on the rates franchise as the Fed begins to cut rates expected in a couple of months. Just how do you anticipate that impacting the types of instruments that customers will trade as well as the level of activity. And then specifically, how might it impact the capture rate if investors, for example, maybe extend duration or even shift from options to future? Just how do we think about any sort of impact to the capture?
Thanks, Michael. Tim?
Yes. Thanks, Michael. I think what's interesting is when we look at the backdrop that our rate conflict continues to serve the needs of our clients in, as Terry said, the uncertainty is only increasing over the both near-term and long-term horizon. So the one thing that is important is that we have all those tools at CME to trade, whether you want to use SOFR on the short end of the curve or the true complex on the long end of the curve. We've already seen a tremendous amount of difference of expressions or reviews on what the Fed will do by the end of the year. We've gone from expecting 6 rate cuts across 2024 to maybe 1 now sort of the market is pricing maybe 2 by the end of the year, and we're well positioned to take advantage of that a product innovation perspective, where we've introduced things like T bills on the short end of the curve. We're continuing to invest and add expiries to our SOFR complex and the option side. We're also continuing, as Terry said, to figure out ways to unlock additional capital efficiencies around that.
How that sort of manifests into the capture rate or the RPC for the complex, that's tough to predict. As Lynne said earlier, the mix between stories and lectures is one element of the impact on RPC. It also is a function of what is being done on Globex versus ex pit or in the block trade also as well as member and nonmembers. So the fact that we have a very diversified healthy and robust community of traders as Sunil and Terry said earlier, over -- with a recent large open interest holder record of 3,370 large traders in that complex, that complex is growing. So we also need to factor in the growth rate of additional nonmembers coming online, additional increase in biocide participation, asset managers, insurance companies, all of these participants coming in. It's hard to forecast that it is important just to note that there is a difference, but it's more than just the volume itself, if the member, nonmember and participant mix that will also increase or impact the RPC going forward.
Great. And just a follow-up. Yes. Can you guys hear me?
Yes. Go ahead, Michael.
Just a follow-up question, Terry, to your point on the phone calls you're getting from customers asking for more efficiencies. Just curious how you're thinking about that, where there might be opportunities to bolster efficiencies for customers in the near term and also the longer term, what steps might be able to take there? And are there any ways for maybe any strategic actions to help with that?
Well, I'll be careful talking about strategic action, but there are some conversations going on as it relates to that, how we could be more strategic. I think when you look at what Sunil pointed out earlier, with $1 billion with the offsets against FICC, which is growing exponentially, bringing in new -- bringing in more and more clients into that is something that is very exciting for them.
These banks, these dealers need to continually look at ways to free up some of their balance sheet so they can continue on with their other activities. And this is just another way of continuing to do it. So our conversations are more focused on that. There are some strategic conversations going on with some of the dealer communities that I've had and with other entities. So I think it's around efficiencies. Let me be clear about that. They're mostly dealing with efficiencies and what we can or cannot do together. So it's a pretty exciting time for the marketplace and we'll have more to report as we continue to have conversations. But at the moment, that's where I can go with Michael.
Our next question comes from Alex Blostein with Goldman Sachs.
One slightly bigger picture question around the firm's kind of longer-term revenue growth algorithm that I was hoping to get your thoughts on. So -- over the years, CME rigs pricing across various parts of the business by, call it, low single digits, maybe 2% to 3%. And as you think and kind of thinking forward, whether it's due to competition or feedback you're getting from the market, is that sort of 2% to 3% still reasonable? And what part of the model do you think pricing increases can become more challenged? And kind of how are you thinking about offsetting that?
So first of all, Alex, we look at price increases all the time and how we do them and we don't believe in just raising prices because you can strategy. We do it because of value-add strategy. And I think that's what's long term and more lasting for our shareholders.
So working with our market participants, bringing them value strategically, we're thinking about different opportunities, different risk management tools. I can't emphasize enough what this Google AI can do for our clients going into test environments about what they can do to enhance their own books as it relates to risk and other opportunities for them that nobody else will be able to effectuate in such a quick way. This is an exciting time for our market participants.
So we look at those value-added proposals that we have with all of our clients across the spectrum, we don't just raise prices because of inflation or you can strategy. That's a bad strategy in my mind. So that's not what we do. We do it because of value. I'll let Lynne comment further.
Yes. I think Terry covered it. I mean it's always a bottoms-up approach. It's market by market, looking at customer health, market health, and where we've created value. So I think that strategy is still intact and it's something that we'll continue to do as we think about making any changes.
Our next question comes from Brian Bedell with Deutsche Bank.
Maybe just back on the Google Cloud. Maybe just if you can talk about the timing of when the new platform will become available? And any early expectations about how much faster it could be versus Globex and views on what portion of the client base would be migrating on that over time? And maybe when you think -- most people would migrate over to that new platform if it was superior.
Great question, Brian, and there's some information that we don't have fully baked yet. I'm going to let Ken give you as much as he possibly can right now to give you some color as it relates to the transition into the cloud as we move forward.
Brian, as you can imagine, we're actually building a physical building now. So that takes a little bit of time. And One of the things that's nice is that there is capability in Dallas. So you also heard us announce that our disaster recovery site will be in Dallas. And we will have our customers up in testing and playing around in that environment in early '21.
What we said about the longer time frame is more about making sure our customers and our ecosystem is prepared. And so we tend to talk that when we have more specifics about bringing the market migration online, we're going to give 18 months' notice at a minimum in order -- before we start migrating our markets. So that's really what we've said about timing.
And then as it relates to which customers will take advantage of which venue and how long that will take. Those are very early days in that process. And as I said before, we're providing choice and optionality to our customers. And as we get further iterating with them and they understand the value proposition and the things that are available and their ability to do, they will make individual decisions about their business models and what makes the most sense for them.
So I think it'd be premature to speculate on who's going to do what. But I will say that we're very excited about the engineering that has gone into this capability. We think it's innovative. We think it's differentiating and we think it will be enabling for our customers. And so we're excited about that, but a little too soon to give specifics.
And just to add on to what Ken said, Brian, when you referenced the latency to how you set it. As I've said since 2021, we will not go into the cloud, if, in fact, Google does not put forth a platform that is as good or faster than what we have today. and that has not changed 1 bit.
So we still have to make sure we see that platform before that ultimate decision can be made. We think they will get there, but the exciting part is what Ken said and the functionality associated with that speed. I don't know where markets are ultimately going to go on the speed. We're pretty much at that point right now where it's kind of hard to continually to make it any faster than it is. But what I think is impressive and important is the distribution, the functionality and the tools associated with Google Cloud that others will not be able to replicate.
That's great color. And maybe I could just follow up with Lynne on the collateral balances in terms of the rates that you're paying and the spreads you're getting exiting the second quarter coming into third quarter, both on the non-op line and the other fee line?
Yes. So for the same quarter, the cash balances averaged $73 billion and the noncash balances averaged $161 million. Both of those fairly similar to what we saw in Q1. So far in July, we've seen the total collateral is down a bit and we've seen both of those lines come down a little bit. So, so far, in July, the average cash balance is $69 billion, and the average noncash is $159 billion.
And the rates that you're paying out on this?
It was 36 basis points on the cash was our portion. And then we're paying out fee on the noncash is 10 basis points, rather 36 on the cash, 10 on the noncash.
Okay. Too early to say when the Fed cuts where you might go to at this stage? Or do you think you might be able to maintain the spread?
Yes. It's a bit early to say, but I would keep in mind that the spread that we're actually charging it's 25 basis points less than the IORB rate, and it's been at that level since last June. So it stayed at a consistent level since the IORB was at 165, if that's helpful. .
Our next question comes from Ken Worthington with JPMorgan.
I wanted to dig into CME's treasury clearing plans. Can you give us a more detailed picture of what you're planning to offer, what needs to be built out still and when it might be ready for launch? And are there any regulatory approvals that you'll need to get this up and running?
Yes, yes and yes there, Ken. A treasury clearing proposal we've announced, we're working with the SEC now. I did a call with the Chair and staff with -- my staff again on Friday, we feel very confident that all the information will be in the SEC by mid-September and then it will be in the hands of the SEC. They do need to go through -- they may complete and approve and they have an approval process which is public. So you'll see that, Ken.
As far as our plans, what products -- I'm assuming what you're asking, what will launch?
Please.
Yes. And I'll let Tim go ahead and reference that. But again, I think we're really focused on getting our approval and getting the structure of the new clearing facility up and going. And I think what's even more important is, I've said this publicly before, and I'll say it again, that the FICC offering today is a dominant offering. They are the incumbent. We don't know where the world is going to be come 2026, when the mandate kicks into place. So we will be prepared and ready if, in fact, we need to.
But at the moment, I got to be honest with you. When you just take your savings with FICC up to $1 billion in a very short period of time with those offsets, that's a very powerful tool to offer your clients today. So again, we'll be prepared, but I don't want to be dismissive of my colleagues over at DTCC and the FICC offering because they've done a good job, and we'll see how they progress as long side-by-side with us. Tim?
Yes. Thanks, Terry. Again, just to reinforce, Terry is absolutely right. We have a long-standing partnership with FICC that unlocks a tremendous amount of savings to clients and market participants. And when we're looking at our offering that we will be building, part of it is to satisfy the mandate both with respect to the U.S. active treasuries as well as repo clearing. When we're engaging with clients, we want to make sure that we're looking at this from a complementary fashion, how can we work with market positions to not only bring the service to market, but in a way that deals with some of the issues presented whether it's on done away trade or how is it additive to some of the activity and services are providing.
It's also important when we look at it, we know notice and partnership with our clients is going to be of the utmost important as we look to bring the solution to market. As Terry said, we're working towards the approval time line for this year, and we're looking to be ready to test in the second half of next year, such that we can meet the January '26 deadline for U.S. actives and the June '26 deadline for repo. Stay tuned for that, but that's the broad strokes we've provided for.
Yes. And just on the Google facility, do you have a dollar cost of the investment? Like is this all being paid for by you? Is it be paying for Google? And what's sort of the payback you would expect on your investment?
Are you referring to the facility itself, Ken? Are you referring to the commercial arrangements we have -- what are you referring to?
The facility itself, the new announcement, I guess, today with the colocation facility in Illinois.
Yes. Yes. I want to make sure we're fair on that, Lynne.
Yes. So we won't own the facility and we won't be building it. So there will be some costs associated down the road for our usage, but it's not a build that we are undertaking.
They are paying for the building to put it more clear. .
Our last question comes from Craig Siegenthaler with Bank of America.
This is [indiscernible] from Craig team. You onboarded the -- yes, can you hear me?
Yes. Go ahead.
Okay. You onboarded a couple of large retail brokers earlier this year. can you share any details around the incremental volume you're seeing from these clients? I know you said some records in certain micro contracts this quarter. To what extent would you attribute this to these new clients?
Thanks, Gil. It's a great question. I'll let Julie and then if Derrick wants to jump on as well with some of the contracts, but Julie.
Yes. I mean -- thanks for the question. Certainly, Q2 was a really strong quarter for our retail business. We saw growth in both number of retail participants as well as revenue. Those are -- this growth was really kind of driven by a few factors. One of them was the one that you mentioned, and that is the focus that we've had on these new to futures channel partners that are distributing CME futures for the first time. We saw a lot of strong client interest in our dollar-denominated equity index offerings and also just the fact that we have a very diverse product offering and a really strong quarter for metals as well as options.
So as we looked at the new brokers that are offering our products, really what we've seen is the support from both our marketing and education partnerships, they have delivered a number of significant new clients in Q2, they're experiencing that success with our [ vocational ] content that they're able to deliver on their website and also have told us about the strong customer engagement that they're seeing.
So we'd say definitely early success, and we believe that, that is promising for the future growth and really sets a blueprint for some additional brokers that we hope to bring online in the second part of this year.
In terms of the second one and the APAC retail clients, again, I think this is one where there seems to be a lot of interest in dollar-denominated equity index complex, which we are extremely strong. So that resulted in a big uptake over 20% in our mini and micro NASDAQ suites. And this is where we were able to outpace our competitors in terms of ETFs and other products out there. This is even with low volatility.
So I think it speaks to the power of our complex as well as the investments that CME has made in long-term access to that intellectual property. And then just the last point, when volatility is up, where gold futures prices were at record levels, we saw some really great results, I would say, in metals activity among our retail client base. Revenue there up significantly in Q2 and as well as some good penetration, I would say, in getting brokers, particularly internationally, having options access for the first time ever to our retail clients.
So I think it was a combination of all of those factors that is certainly setting us up in a strong way for future growth. So we're excited about those new brokers that we brought on and also the additional ones that we expect to come online this year.
Thanks, Julie. Derek, do you want to wrap it up.
Yes. Just very quickly on the gold side, as Julie touched on, we saw significant growth in participation on the gold market this year. When you look at our Q2 volume in metals overall 42%, retail in the second quarter is at 70%. This is a function of having the right product size for the right participants in the right risk appetite. So when we look at that growth, we saw records with both micro copper, micro silver and micro gold, and we saw as prices pushed up, we have the right products for those customers. So this is a function of serving customer needs for intermediaries and users, and that's led to a growth not in the volume but open interest and a broad main set of market participants as well.
If I could squeeze in a follow-up. You mentioned you'll be giving clients access to Google's AI capabilities. I was just wondering if you could give us any more details on what use cases you're envisioning? And which market participants you'd be targeting? Is this for buy side, FCMs, market makers?
Yes. We'll be careful on disclosing what market participants we always are on that, but Ken can give a little bit more color as it relates to that.
Yes. I think AI is just one piece of it. Certainly, we're focused on data and analytics capabilities. And as AI relates to that, I think some of the things that will be working with our customers on and unveiling over the coming years will be very interesting to them and hopefully enable both their risk management and their trading strategies. So Beyond that, I think it'd be a little bit premature to talk about too much more depth about which clients would do what with AI, is they're all figuring it out on their own in their own ways, frankly. .
And we have no further questions at this time. I'd like to hand the call back to management for closing remarks.
Well, we want to thank you all for joining us for today's call. We're very thrilled about our record results. We are going to continue to work hard to bring efficiencies to the marketplace and bring value to our shareholders. So thank you very much for joining us. We look forward to following up with you.
Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.