CME Group Inc

NASDAQ:CME

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome to the CME Group Fourth Quarter and Year-End Earnings Call. This call is being recorded [Operator Instructions].

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

[John Peschier, Director, Investor Relations]

Good morning and thank you all, for joining us. I'm going to start with the Safe Harbor language. Then I'll turn it over to Terry and John for brief remarks and then we'll open it up for Q&A.

Statements made on this call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance can be found in our filings with the SEC, which are on our website.

Lastly, on the final page of the earnings release, you will find a reconciliation between GAAP and non-GAAP measures.

With that, I would like to turn the call over to Terry.

[Terrence Duffy, Chairman and CEO]

Thanks, John, and thank you all, for joining us this morning. We appreciate your interest in CME Group. We had strong tailwinds in Q4. We averaged more than 20 million contracts per day, which was up 31% compared to the prior year. For our full year, we have record volumes in four product areas, along with total options and electronic options volume. We made progress expanding, our volume from global market participants during the year. In Q4, we had 22% volume growth from participants based outside the United States totaling more than 4.8 million contracts per day. For the full year we were up 18%.

We launched a number of successful new product designed to solve customer needs during ’18. Many of the new products were detailed in the executive commentary that we provided earlier this morning but let me just highlight a few of them. First the FX link was launched in March of 2018 and won the Risk Magazine Award for innovation of the year. It is currently being facilitated by nine futures commission merchants and the client base is growing.

Liquidity is available across multiple currencies with clients noting that the prices often match or better FX swaps. FX Link had a record day of 24,000 contracts in January of ’19. As related to Sulphur it was launched in May of 2018 and average daily volume built steadily to 14,800 contracts per day in December, reached to 18,000 in January and is averaging 23,000 per day in February. Global participation has surpassed a 105 firms including major banks, buy side and proprietary trading firms.

In November we launched Physical West Texas Intermediate Houston Crude Oil Futures in conjunction with Enterprise Products Partners, the leader in crude infrastructure in the Houston area. The product has steady growth from November to February and we think this offering will be useful addition to our existing energy franchise.

We were pleased to announce the NEX Group acquisition in March and completed in early November. The markets in optimization business each performed well during the fourth quarter. Our teams are working in a really collaborative way and we have made good progress on the integration planning so far. In terms of the most important components of the integration we have let customers know that the BrokerTec migration to Globex will begin in 2020 and the EBS customer migration will begin in 2021.

Turning to this year volume has slowed across many global asset classes. We are averaging 17 million contracts per day this year. As I referred to earlier Q4 was an exceptional quarter and we saw high volatility. It's not unusual to see that the market pause following periods of elevated volatility. It is worth noting our open interest is currently sitting at a 129 million contracts. This is one reflection of the health of our business.

Our options business is averaging 3.8 million contracts a day so far this year. The important part about this is that they are comparable to the levels of all of 2018. Options as a percent of the total volume has increased from 20.5% for 2018 to 22% in 2019. These are valuable tools in this environment.

Several global issues are in the headlines as many of you know, which could have an impact on any market, including Brexit, various trade negotiations, uncertainty around another potential government shutdown or other government actions. As we know markets like clarity and we’re hopeful that some of these issues I just outlined will start to get resolved.

That being said we do look closely at how our products compared to other alternatives and we continue to be the leader. Our strategy has been very consistent overtime. We focus on maximizing activity and bringing in new market participants to manage their risk, launching new products and enhancing existing products. We are intensely focused on expanding the core business and integrating the valuable components of the recent acquisition of the NEX Group.

Expense discipline is something I have been very focused on along with my management team and we will continue to do so.

I would now like to turn the call over to John and look forward to your questions in a moment. John?

[John Pietrowicz, CFO]

Thanks Terry and good morning everyone. As Terry mentioned expense discipline is continued focus of the entire organization. Between 2016 and 2018 CME group’s revenue has grown by $580 million excluding NEX, while total adjusted expense increased only $55 million during that time. We have built a very scalable platform and we intend to operate the combined CME and NEX businesses efficiently.

We are very pleased with how the integration is progressing so far. The teams are working well together as we begin our synergy and customer outreach plans. Our goal is to provide increased benefits for our market participants who have been providing us helpful feedback along the way in terms of what they'd like to see.

I'll briefly cover the financial results for the fourth quarter, and then I'll provide some guidance for 2019. Let me start with CME standalone results. Our revenue is up 15% for the full year and up 23% for the fourth quarter. Our rate per contract was strong considering the amount of activity we saw during the quarter which tends to be impacted by volunteers.

Market data revenue grew $8 million sequentially and included $6 million of incremental audit revenue with very stable screen counts. The annual adjusted expense without license fees increased by a modest 2.8%, which was line with our original guidance. The increase was driven entirely by bonus and stock-based compensation during 2018 reflecting the company's strong results. Otherwise expense would have been flat for the year. Our incremental operating margin for the year approached 90%.

In the fourth quarter NEX contributed $134 million of revenue, the majority of which was in the clearing and transaction fee line and $88 million of expense, with more than half reflected in the compensation line.

Overall adjusted EPS including the two months of NEX results was up 58% in the fourth quarter, the highest quarterly growth rate we've seen in the last decade. For the full year adjusted EPS grew by 43%. During 2018 we declared dividends totaling $1.6 billion.

Turning to the guidance for 2019, we anticipate expense excluding license fees to be between $1.65 billion and $1.66 billion reflecting a full year with NEX and the P&L impact of $25 million of expense synergies, we expect to deliver primarily in the back half of the year.

We continue to target $50 million run rate synergies by the end of the year. CapEx is anticipated to be between $180 million and $200 million. Finally we expect the effective tax rate to be between 24.5% and 25.5%. Please refer to the last page of our executive commentary, where we provide additional financial highlights and details.

With that short summary, we'd like to open the call for your questions. Based on the number of analysts covering us please limit yourself to one question and then feel free to jump back into the queue. Thank you.

[Operator]

[Operator Instructions] We will take our first question from Richard Repetto of Sandler O'Neill. Please go ahead.

[Richard Repetto, Sandler O’Neill]

Yeah. Good morning Terry, good morning John. And I guess -- good morning. You know you talk about expense discipline but I guess what I was very impressed, the precision of the guidance is pretty amazing as well. So I guess the question is NEX -- and John you mentioned this I think it was in total $134 million in revenue. When we look at the expenses $87 million, so anyway the margin looked at you know in the mid-30 to 35% pretax for NEX. And I think that's a little bit stronger than what we had anticipated.

So could you talk about sort of the outlook for NEX in the margins, given that I guess right out of the gate, the strong contribution?

[Terrence Duffy, Chairman and CEO]

Sure, thanks Rich. Appreciate it. Yeah, couple of a couple of points you made there; first is, is the precision in terms of the guidance. We as a management team actively manage our expenses every day and you saw what happened over the last several years where we've been very close to the guidance we've been giving out. We do a bottoms-up build of the budget and then you know we manage it actively. So you saw this year we hit $1.105 billion and that was what we had guided to in the beginning of the year.

In terms of in terms of NEX's margin, there's a couple of points you know. Number one, the $88 million reflects two changes that are being made to the expenses, that impact NEX. The first is at the time of the acquisition internally developed capitalized software is included in purchased intangibles. So as we noted in the executive commentary, the NEX -- when you take a look at NEX's expense run rate that would go down by $5 million per month due to due to that treatment of that asset.

The second piece is again in capitalized software, as NEX rolls on to CME Group's policies we anticipate there to be less capitalization of wages and salaries. So that would mean less capitalized software and higher wages and salaries. And that we anticipate to be about $1 million per month.

So the net impact to NEX’s expense rate would be a decrease of about $4 million per month. So if you take a look at NEX’s margins, taking that depreciation impact into consideration, it's more in the 26% to 27% range if you're looking at it the way NEX previously treated those items.

So in terms of forward looking information, NEX is going to be following CME's business model. So in the future, some of NEX’s organization or many of NEX’s organizations we rolled into CME. So they'll lose the distinction of what is NEX’s expenses versus what is CME’s expenses because we run a very much a shared services model. And that's what's going to be able to generate the synergies that we anticipate generating in the next several years.

[Richard Repetto, Sandler O’Neill]

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

[Terrence Duffy, Chairman and CEO]

Thank you very much, Rich.

[Operator]

Thank you. We will now take our next question from Dan Fannon from Jefferies. Please go ahead.

[Daniel Fannon, Jefferies]

Thanks. Good morning. I guess it's a two part question here for you, John. So could you break down the expense guidance between what core CME is and what you're assuming for NEX in 2019? And then also if you could talk about, I think you said it was -- looks like it was accretive this quarter, kind of put some numbers around what the accretion you think could be or contribution could be in total for ’19?

[John Pietrowicz, CFO]

Thanks, Dan. Yeah, I think the way to look at it -- like I said at the start, we do a very much of a bottoms up build. So the way, the way one can look at is we took our expenses, which was $1.105 billion, and if you took NEX’s expenses, excluding license fees, and you take November, December, and you annualize that, add the two together and multiply it by a growth rate of 3% and then back out $25 million in P&L expense synergies that gets you right around 16.50.

So that kind of gives you an idea of how we approach from looking outside in. And really, the 3% reflects cost of living and escalators that we have in some of the service contracts that we have. So that's one way to look at it.

In terms of accretion, obviously out of the gate, we're cash accretive. We didn't give out any specific numbers around that, something that you can certainly calculate. We believe that as we phase in the synergies we’ll be very pleased with the amount of contribution NEX will provide not only to our earnings but also to our annual -- to our dividend policy or capital return policy.

[Daniel Fannon, Jefferies]

Okay, thank you.

[John Pietrowicz, CFO]

Thanks, Dan.

[Operator]

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

[Brian Bedell, Deutsche Bank]

Great, thanks, good morning folks. Maybe if you guys talk a little bit about the revenue synergy opportunities with NEX, and I appreciate if you can really forecast and that's usually difficult area to forecast, but maybe if you can talk about some of the things that now that there -- the deal is closed what areas you're specifically looking at, where you think you can enhance your both legacy NEX and CME revenues and sort of maybe just a little bit of a timeline of those areas.

[Bryan Durkin, President]

Thanks, Brian. This is Bryan Durkin. We're really excited about how well we've hit the ground running, since we've closed the transaction. If you look at the performance we’ll cover the market side first, looking at the BrokerTec activity, they had their largest quarter in almost, I think the history, up 25% and we're seeing continued drive towards that platform as it is the area of confidence that the market comes during uncertain time period.

When we look at the overall performance of the repo business, while slightly down in the U.S. repos, we're up to about 9% in our European repo business. And when we look at the foreign currency side of the market we've seen growth in terms of an increase in the client base accessing the platform it's up over 7%. So we’re excited about what that could mean to us in the context of bringing in other worlds two leading market places together, both in the foreign currency and the treasury market specter.

When you look at the optimization side of the business we’ve seen again continued growth in the services that are provided from TriReduce as well as TriResolve and TriBalance. Each of those areas are performing quite well. TriReduce has just rolled out some improvements to their platform, which allows the market participants to enjoy increased cycles in terms of their compression services and what we would call a low touch access to the platform to make it far more user friendly and far more accessible.

With respect to the overall efforts of TriBalance we’ve actually increased the number of clients by about 50% in the past year. So the post trade services continues to be, we think a wonderful area for us to grow not only within the U.S. but more so on the internationals here.

[Terrence Duffy, Chairman and CEO]

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

[Sean Tully]

Yes. That’s great. Thank you Terry so on the EBS side we’re very excited about -- and actually saw the growth base off last year. So huge growth for example in NDFs, our non-deliverable forwards, where in the fourth they had extraordinarily strong growth. As well, we had very deep penetration internationally, and in particular, very high growth in CNH, especially with the volatility in the markets between the U.S. and China. So, great business, great growth.

In terms of bringing the marketplaces together, Terry mentioned in the earlier remarks FX Link, where we're bringing together the OTC spot foreign exchange market along with our futures market and creating a clear, standardized, lower-totaled cost alternative to the FX swaps market, where we're seeing very good growth -- about 15,000 contracts a day so far this year.

So very excited about bringing two platforms together, much like we had already worked hard at FX Link, as well in order to cross sell. In terms of that international side EBS has very deep penetration in regional banks in Asia and regional banks in Europe. So we are very excited about cross selling the CME Futures products into the OTC market as well as the OTC products into the futures market place. And we see those market places as highly complementary.

[Terrence Duffy, Chairman and CEO]

So Brian hope that gives you a little flavor where we’re going as far revenue synergies.

[Brian Bedell, Deutsche Bank]

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

[Terrence Duffy, Chairman and CEO]

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

[Brian Bedell, Deutsche Bank]

Okay, great, thank you.

[Operator]

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

[Ben Herbert, Citi]

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

[Terrence Duffy, Chairman and CEO]

Yeah, Ben it’s Terry Duffy. Let me just touch on that. I referenced to it earlier in my remarks this morning we had a 128,900,000 and some odd thousand, so just under 129 million so I think it rounded up to 129. But when you look at that it’s only in new commercial participants that are coming to our market.

As you know, a lot of daily traders who facilitate liquidity. Whether they're high-frequency or algorithmic traders, they don't normally carry large open-interest positions, but the commercials do, which is, as I said earlier, a great sign of health for our business. So, what I'd like to do is maybe have Derek and Sean comment on what they're seeing from their respective sides of their businesses as relates to the OI holders. Derek, maybe you could start..

[Derek Sammann]

Yeah thanks Ben, it’s Derek Sammann here, Yeah, as Terry said we’re seeing a continued growth in the participation and what we're most excited about is the growth of the non-U.S. participation that's growing both OI participation and continuing to grow our liquidity footprints out across time zones. In the energy market specifically, we see a continued narrative around the globalizing gas and crude oil market where we're seeing infrastructure builds, export facilities. In fact, the EIA, which is the Energy Information Administration, put out a report confirming the U.S. has now as of November 2018 become the single largest producer of crude oil in the planet.

So we're on track to deliver 11 million barrels a day in 2018. The expectation is that the U.S. is going to be producing 12 million barrels of crude oil in 2019. And natural gas is following that same path. What that means for participants using our Henry Hub Natural Gas contract or WTI crude oil contract, being a reinforcing of the global benchmark status that, that achieves is not only U.S. producing record amounts it's exporting record amounts.

So on the back of what was an energy all-time record quarter Q1 '18 an all-time record revenue year in 2018 as a whole, we're continuing to see not only out performance of our energy franchise but growth in open interest and large open interest was driven in the energy business specifically from participants in Asia. So continued strong growth there.

One of the things we are looking at the large open interest holders and it's important to note that given the government shutdown, the CFTC has delayed report. So the large open interest holder reports are only out through the first week in January. So we're looking for a backlog of those reports that come out. But I think what you see is a continue trend that tracks the growth of our business, the global footprints reflective of the global benchmarks status of our products across the asset classes.

So I'll turn over to Sean for financials.

[Sean Tully]

Yeah, we're always very excited about bringing new participants, especially large open interest holders and last year was a great success. So in November, we had an all-time record in rates, LOIH, and then in September, we had record LOIH both in equities and in foreign exchange.

In addition to that, we continuously look at making sure that our products are the lowest total cost relative to any alternative products where people can take similar risks, in order to bring in those participants. So we're always excited about outperforming the alternative products and bringing the participants into our markets.

[Terrence Duffy, Chairman and CEO]

Does that help, Ben?

[Ben Herbert, Citi]

Yes. Absolutely. Thank you.

[Operator]

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

[Alex Kramm, UBS]

Hey, good morning everyone. I think this is both an ask going forward and also a question for now. But John, you didn't break down the revenues in particular on the transaction and clearing side for NEX. They used to do that between FX and treasuries and things like that. So I guess the question for today is do you have some of those numbers so we can see how those revenues are actually tracking because we can obviously check the volumes?

And then two, can you actually start breaking it out on a more consistent basis, which will be really helpful from a modeling perspective? I guess that's the ask. Thank you.

[John Pietrowicz, CFO]

Yes. Thanks, Alex. Yes, let me let me break down some of the geography on the income statement with regard to the revenue because it's a bit different than what NEX reported. In the clearing and transaction fee line NEX contributed $91 million. The majority of that is related to their markets business, so that would be EBS and BrokerTec.

In terms of the market data NEX contributed $12 million in market data and we're putting all of the market data for NEX in that line. The majority of the market data comes from their markets business as you would expect.

The balance with $31 million is in the all other line. And that is primarily all of the optimization businesses that NEX has excluding TriReduce, which is the compression business which is reflected up in the transaction -- clearing and transaction fee line. So that's the breakdown. We'll be looking at the appropriate level of disclosure going forward, as we spend some time with the businesses and determine what the right amount of information is that we should give out.

So we will be doing that going forward. Just some color around, as you're mentioning, we're giving out some of the volumes and we want to kind of give you a little bit of color there. So when you take a look at EBS. They're -- when you take a look at their revenue growth compared to their volume growth, is very much like CME Group in terms of that relationship, especially for their central limit order book. And then when you take a look at BrokerTec, their volume growth is higher than their revenue growth, is more pronounced because that's much more of a mature business and they have many more bespoke agreements.

So in terms of the overall business one of the things to take into consideration is that similar to CME Group, the types of our products that are being utilized. So for example, in EBS, if it's emerging markets versus G10 currencies, or if it's in BrokerTec, the amount of U.S. treasuries versus European repo have different revenue associated with that -- the type of transactions being done.

So whether it's central limit order book or bilateral trading impacts their revenue capture rate. And then finally the type of participant that trades also has an impact. So very similar to CME in terms of the impact on revenue growth versus transaction volumes. But we'll be looking at the appropriate level of disclosure, once we've had the opportunity to run the businesses for a little bit of time.

[Alex Kramm, UBS]

That's great. Thanks for the color and yes, the more you can give the better obviously. Thanks.

[John Pietrowicz, CFO]

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

[Operator]

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

[Sameer Murukutla, Bank of America Merrill Lynch]

Hey. Good morning guys, this is actually Sameer Murukutla on for Michael Carrier. Just a question on, I guess, capital management, as you move forward past this deal, you guys are not that levered. So I guess, can you give us an update on where you would like your leverage to fall to, maybe how aggressive are you going to be in lowering that levels versus raising cash or dividend? And I guess, Terry, what's your interest near term on any other transformative M&A. Thank you.

[John Pietrowicz, CFO]

Good morning, Sameer. Thank you for the question. So let me tell you kind of where we're at, in terms of our leverage. CME has about $4.4 billion in total debt and we have an approximately 1.3 times debt-to-EBITDA. We have given guidance that by 2020, by the end of 2020, we want to be a one-time debt-to-EBITDA. So in the first quarter NEX had some debt that we inherited of about $400 million in Euro denominated senior notes which matures in early March and then they have $170 million yen-denominated term loan that is up at the end of March.

So as those mature we will likely replace that in the near term with commercial paper, and then we'll be paying down that commercial paper over the next several quarters, into next year as we -- as we delever down to one times debt-to-EBITDA.

In terms of -- I just want to bring up, in terms of interest expense, as you look to model it, I would expect interest expense to increase from this quarter to next quarter, as we’ll bring on a full quarters impact of the acquisition financing. And that's going to be offset by some debt pay down that we did at the very end of Q4. And also there's a rate differential between the bonds and the term loan note versus the commercial paper.

So we should see a tick up, about 10% or so in terms of interest expense into the first quarter, then you'll see that come down over time as we de-lever.

In terms of the aggressiveness of de-levering, I think our actions reflect our sentiment in terms of how we're going to approach that. In terms of what we did in the fourth quarter we took a very balanced approach where in terms of how we approach the de-levering, we expect to do that this year. So we'll be very balanced in terms of the amount of de-levering versus the amount of capital return versus the amount of investment in the business.

[Terrence Duffy, Chairman and CEO]

So Sameer, let me just answer your latter question about M&A. Right now, I'll give you a very canned answer obviously, we're very focused on working on integrating the NEX transaction. I've been here a long time and one of the things I've been very focused on along with my management team is to create experiences that can benefit our clients. And if we see things that we can enhance the value of the client proposition, we think that's good for our business. Hence, the reason why we pursued the NEX transaction that we did. So we think that's ultimately good for the end user clients.

So that's a way of telling you that my focus, and we're not a company that does a deal a day, where we're very laser focused on creating value for the clients, because we know that will create value for the shareholders ultimately. And that's kind of how we approach this. So right now, that's what I'm looking at. I'm looking at completing the NEX integration and if there's things out there that make sense that would add value for the client, I am -- we're always willing to look at it. But right now, I'm focused just on the NEX integration.

[Sameer Murukutla, Bank of America Merrill Lynch]

Perfect. Thanks for the detail guys.

[Terrence Duffy, Chairman and CEO]

Thanks Sameer.

[Operator]

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

[Alexander Blostein, Goldman Sachs]

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

[Terrence Duffy, Chairman and CEO]

Derek, you want to comment on that?

[Derek Sammann]

Yeah, Thanks for the question. When you look at energy business. Yes, you have to bear in mind a couple of things in the context. In Q1 of 2018, we had an all-time going in record. In fact, we finished the year at all-time revenue record and we actually had come off November as a single month volume record as well. I think we put up 3.1 million ADV in the month of November and then within that on November 14 had a single day record of 5.1 million contracts.

So our comps versus what was in all-time record Q1 of '18 are tough and the success that we're having. What we are seeing is that in -- as we have built into the structural build of the energy market, I talked earlier about what we're seeing is continued infrastructure supportive of record generation and production of U.S. crude and natural gas. And now the infrastructure built around that with LNG facilities coming online in the Gulf this year, we're seeing an increased participation in NYMEX based products based on the U.S. benchmark.

So we are seeing a tough start to this year, along with most of our assets classes here. I think what we're focused on is what we've always done to Terry's point, how can we build a suite of products and functionalities and a product suite that best suits the needs of our commercial end user customer base. So coming off a record year, the number of innovations and builds that we're putting in place from Q4 into Q1, this year with things like our new Houston contract that we launched in November.

When you look at the growth of that contract, we launched that November 5, that launched we have doubled our volume in January versus November, December of last year a little over 1.1 just over 1,000 contracts today. Open interest is up to 4,000 contracts. And we're seeing that actually trade. What's interesting about the Houston contract is that contract actually trades as a spread sort of WTI contract.

So customers that are part of the emerging export infrastructure for global crude are using NYMEX space, Cushing WTI product and spreading that against the physically delivered Houston contract. That means a contract in our WTI is linked to a contract trade as a spread against HCL. So we're excited about the continued innovation growth there.

When you look at particular the open interest numbers you need to look at the benchmark products and the power figures are tiny, tiny contracts. We've removed those from the earnings information that we gave you guys on slide 8. So note the overall kind of OI in that in that contract as a whole is relatively flat over the last couple years.

So we're really focused on what we're doing with coming off record years and record months of 2018. The innovations with things like Houston crude, just reinforces the WTI benchmark. What we've announced in the crude options market first time ever providing commercial customers an ability to directly sell their crude products on a CME Group platform. The first option will go live in November 5, or excuse me, March 5, and that will continue to support the WTI franchise.

And when you look at the state of our franchise versus the other guy out there, we're actually seeing that our overall market share in all 2018 was about 57% of WTI versus Brent. We've actually built up to 60% in January and 62% in February. So you've seen us innovate and grow our product expand our client base, focused on outperformance when we have tailwinds and outperformance versus competitive products when we have headwinds as well. So that's what we're doing to solve customer problems and really focus on our end user commercial participants.

[Alexander Blostein, Goldman Sachs]

Got it. Thanks for the detail.

[Operator]

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

[Jeremy Campbell, Barclays]

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

[John Pietrowicz, CFO]

Thanks, Jeremy this is John. So yeah, if you take a look at C&E historically it’s been in the $80 million to $100 million in terms of our CapEx. NEX has been more in the 100 to 114ish range so that gives you kind of a range of a $180 million to $214 million in terms of the combine companies range.

And NEX is a different business than we are. So there’s more investments in some of their platforms, especially in optimization. So that’s been some of the investments they’ve been making. I would expect it’s come down overtime as we migrate their mortgage businesses on to Globex, but I do expect an elevated level of CapEx going forward but probably not at this level for the long run.

[Jeremy Campbell, Barclays]

Got it and then John I think you mentioned that RPCs are low this quarter because we’re hitting lot of volume tiers after a really good kind of volumes in fourth quarter is it kind of fair to think that like where volumes are tracking year-to-date that we might see RPCs coming closer to 3Q levels?

[John Pietrowicz, CFO]

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

[Jeremy Campbell, Barclays]

Thanks guys.

[John Pietrowicz, CFO]

Thanks Jeremy.

[Operator]

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

[Christopher Harris, Wells Fargo]

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

[Terrence Duffy, Chairman and CEO]

Well I'm going to go ahead and let Sean comment and then I might make a comment or two also Sean?

[Sean Tully]

Yeah, so thank you for that. You’re correct in terms of market expectations. But so while we’ve had a few tightening over the last few years, each year at the moment there are no tightening predicted for this year. Nonetheless we’re constantly focused on new product innovation, bringing in new clients and relatively to RPC question earlier lot of that new product growth has to do with innovation and adjustments to our product mix.

So I’ll give you some example. Actually, looking at the BrokerTec side -- I'll mention that for a moment -- back in November, BrokerTec reduced the minimum price increments in their two-year notes, and that caused very strong growth in the two-year notes relative to the rest of their complex, north of 5%. So, that product adjustment was taken very positively by the marketplace, making it lower cost to cross the bid offer spread on that platform, causing strong growth.

Similarly, in January, CME Group lowered the minimum pricing increment in our tier notes. So the tier note futures. And in terms of that, that likewise seeing an uptick of about 2.3% relative to the entire complex. So we’re seeing very strong growth in the tier notes relative to those changes to those products. But also talk a bit about penetration I spoke earlier we’re constantly focused on the futures side as well as the OTC side to make sure that we’ve got the lowest cost product relative to alternatives.

That’s a total cost product. So if you look at treasury futures in particular one things that we’ve talked in the last few years is our growth relative to the overall cash market place. We’re currently buying at a 116% our treasury futures versus cash treasury bond market. So we see continued strong growth. In addition to that invoice spreads, I’ve talked about that a number of times over the last couple of years.

Invoice spreads CME Group relative to portfolio margin illustrates swaps against our treasury futures offers a much lower total cost alternative to the soft spread market. That marketplace this year is running it over 100,000 contracts a day. That's grown from several years ago, about 8,000 contracts today to now well over 100,000. So a high RPC product, that RPC is around $1.90. So and we've grown it from about 8,000 to well over 100,000 a day this year.

In addition to that, I might talk maybe a little bit more about some of the other innovations and impact they've had. Sulphur futures continue to do very well. Our Sulphur futures marketplace is now running about 92,000 contracts open interest more than 105 participants. December, we did about 14,000 a day, January, about 18,000 a day and this month about 23,000 a day in terms of the contracts.

On the equity side, continued innovation there. Basis Trade Index Close, a very exciting results high RPC product, right about $2.60. That particular product last year, you may recall 2017 we did about 13,000 contracts a day, last year; we did about 40,000 contracts a day. This year, we're doing 44,000 contracts a day.

Last thing, I'd like to mention is a total return futures. Total return futures are a standardized listed lower total cost alternative to equity index swaps, Those OTC equity index swaps. This is important under the uncleared margin rules. And we're seeing very good growth there. So in December, we launched further out the curve in our S&P complex. So went from 18 months out to around 5 years in the futures.

We also launched NASDAQ, Dow and Russell total return features. That product, while it's only doing about 3,000 contracts a day, has an RPC of well over $5. So we continue to innovate, we continue to bring more clients, we continue to drive our total cost benefits.

[Terrence Duffy, Chairman and CEO]

Now, let me just add a little bit, I think Sean really hit on all the high points there and so it's kind of hard for me to add anymore, other than we've been able to grow our interest rate business over the last several years, especially in a zero interest rate environment, which I think is really impressive because the innovations that Sean and his team have outlined and brought forward.

But secondly, CME is not just an industry business. When you look at just this morning, you look at the President maybe going as far as extending the trade agreement with China for another 60 days, which on the pre-market rallied the market dramatically, which people needed to manage risk. A few moments after that you had retail sales come out with the biggest percentage drop since 2009. So people needed to manage the risk there. We have all the products to manage that risk. And so I think it's really important to note that CME business is not based just on a dovish or all hawkish bet.

[Operator]

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

[Ken Worthington, JPMorgan]

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

[Bryan Durkin, President]

Thank you. It's Brian Durkin I mean, first of all, yes, we had an unfortunate incident that occurred during that session, and it was attributable to internal operational error that we were able to identify quickly resolve. And we put in the remediation steps to ensure no future current in that regard. And explaining to our marketplace, what had taken had taken place, the market responded very understandably, and very appreciative of I think, the immediacy with which we handled the situation and the responsiveness that we were able to provide to the marketplace in terms of recovery resolution and moving forward.

And I just would like to note that December in that period was our all-time high in terms of our overall activity, which again goes to the efficacy of the platform overall. The continuity of performance that has been enjoyed and will continue to be enjoyed going forward.

[Ken Worthington, JPMorgan]

Okay. And the regulatory response?

[Bryan Durkin, President]

As we normally would, we just communicated what had transpired and the remediation steps that we took to prevent future occurrences.

[Terrence Duffy, Chairman and CEO]

That's very common what we do in all these situations, right.

[Ken Worthington, JPMorgan]

Okay and no implications you think?

[Bryan Durkin, President]

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

[Ken Worthington, JPMorgan]

Okay, thank you.

[Operator]

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

[Kyle Voigt, KBW]

Hey, good morning. Most of mine have been answered but just maybe this one on the cash treasuries market, the market structure I think remains relatively bifurcated in that business the client dealer and dealer to dealer space with NEX mostly playing in the dealer to dealer space. I guess, one for maybe for Terry or Sean I just wanted to hear your long term view in terms of the market structure evolution in that cash treasuries market and how that’s going to unfold or maybe out CME is going to play a role in that looking forward?

[Terrence Duffy, Chairman and CEO]

Kyle, thanks. I’ve said this from the moment we announced the NEX transaction and I am passionate about this we did not acquired NEX to change the market structure as it relates to BrokerTec. We believe in that market structure, we believe the market participants who are utilizing that platform which are the largest banks and biggest platforms around that there’s going to be change they’re going to be the probably the ones influencing that change.

We like the transaction because we think it’s complementary to derivatives business. That’s why we like BrokerTec so much. But on the market structure standpoint I and nobody around this institution is looking is to change any of the market structure as it relates to BrokerTec. I don’t know that Sean or Bryan you might want to make a comment but that’s where we are at with this transaction today. And listen I think that this acquisition of NEX and I think the components that it has especially BrokerTec EBS and others are very valuable for the clients.

As I have said earlier my focus and the team’s focus is on how do we create an experience that could help benefit the clients whether they’re trading cash or futures. And that to me is what critically important for us is the market structure so we’re staying away from that component.

[Kyle Voigt, KBW]

Yeah, fair enough, and then John if I can ask the same question as an earlier caller here when you said that 10% uptick you expect for interest expense in 1Q I just want to clarify that is that versus the adjusted interest expense number of the $44 million this quarter?

[John Pietrowicz, CFO]

Yeah, that’s correct. I mean as I said we’re going to have a full quarter’s impact of the acquisition financing that only included two months. So you get a full quarter’s impact and then you’ve got full quarter’s impact of having NEX’s debt on our books and then you also will have some offset or some reductions to interest expense.

As I said we had a paydown towards the very end of Q4 and then also you’ve got rate differential between NEX's debt and the commercial paper that will replace their debt with in the short term. So that’s why you see it’ll be a tick up in the first quarter and then you’ll see it go down in overtime. We expect the majority of the pay down for this year to occur in the back half of the year.

[Kyle Voigt, KBW]

Okay, great, thank you.

[Terrence Duffy, Chairman and CEO]

Thanks Kyle.

[Operator]

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

[Chris Allen, Compass Point]

Good morning guys. I think most questions have been answered. And I guess just one quick one any update on the DTCC clearing link and the progress you guys are making there in terms of customer uptick and how you hit thinking about clearing opportunities long term?

[Terrence Duffy, Chairman and CEO]

Bryan?

[Bryan Durkin, President]

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

[Chris Allen, Compass Point]

Thanks guys.

[Terrence Duffy, Chairman and CEO]

Yeah, thanks, Chris.

[Operator]

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

[Terrence Duffy, Chairman and CEO]

Let me thank all of you for joining us this morning. We appreciate your interest in CME Group and we look forward to talking to you all soon. Thank you very much.

[Operator]

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