Deutsche Boerse AG

XETRA:DB1

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding the Q2 2023 results. At this time all participants have been placed on a listen-only mode. And the floor will be open for questions following the presentation.

Let me now turn the floor over to Mr. Jan Strecker.

[Jan Strecker, Head of Investor Relations]

Welcome, ladies and gentlemen, and thank you for joining us today to go through our second quarter 2023 results. With me are Theodor Weimer, CEO; and Gregor Pottmeyer, CFO; and Theodor and Gregor will take you through the presentation today. And afterwards, we will be happy to take your questions.

The link to the presentation materials for this call has been sent out via e-mail and they can also be downloaded from the Investor Relations section of our website. As usual, the conference call is recorded and will be available for replay afterwards.

With this, let me now hand over to you, Theodor.

[Theodor Weimer, Chief Executive Officer]

Thank you, Jan. Welcome, ladies and gentlemen. Let me first comment on the strong financial performance in the first six months of the year. Afterwards, I will give you an update on the progress we've made with the SimCorp acquisition.

How is the business side the financial performance look like? To start off into the year turned out to be somewhat different from what we had initially expected against the high 2022 comparables. We expected more headwinds in our Trading & Clearing businesses, but volatility spikes in March and ongoing strong performance of our Commodities business resulted in further growth against a record year in that segment.

In addition, the net interest income in Securities and Fund Services is developing much stronger than expected. In our budget for the full-year, we originally expected a level of around €500 million. But interest rates have increased more than we expected in cash balances in the first half of the year, even increased modestly against last year. Therefore, we are now expecting a level of around €700 million net interest income in Securities and Fund Services for the full-year or potentially even more.

It was also very encouraging to see the continued strong secular net revenue growth in the first half of the year. This is due to the many initiatives to win new clients and market share as well as introducing new products and services over the last couple of years. As a result, the first six months this year look very much like the development last year. Secular net revenue growth of 6% was complemented by double-digit cyclical net revenue growth. Because of this strong start of the year and the positive outlook for the second half, we are increasing our guidance for the full-year. We now expect to exceed the upper end of our original net revenue and EBITDA guidance range. So net revenue of more than €4.7 million and EBITDA of more than €2.8 billion are the new guidance for the full-year.

This brings me to the SimCorp acquisition and the creation of the new Investor Management Solutions segment on Page 2. Early on, in our strategic journey, we identified secular trends in the broader data and analytics space as one of our key growth opportunities. Our starting point was stocks, a strong European index franchise, as you perfectly know. In 2019, we complemented it with Axioma, which added buy-side or in that portfolio and risk management tools. Based on the trend towards sustainable investing, the next logical step in our strategic trajectory was the acquisition of ISS institutional shareholder service in 2021, which added one of the global leading ESG providers to our group.

With SimCorp, we are now taking another leap forward. SimCorp offers an industry-leading front-to-back SaaS investment management platform and ecosystem. The acquisition will contribute significantly to our secular growth by helping us to address trends in the asset management industry. In addition, it will help us to further diversify our business mix, grow our buy-side exposure and increase our recurring revenues. Therefore, there is an extremely strong fit with our strategy.

Together with the combined ISS and Qontigo business, a leading ESG data and index provider meanwhile, we will transform our current Data & Analytics segment into the much broader Investment Management Solutions segment. This is expected to result in significant value creation from cross-selling opportunities and efficiency gains. In total, we expect run rate EBITDA synergies of around €90 million, of which around two-thirds are expected to come from the SimCorp acquisition.

During our Investor Day on November 7, we will dive deeper into those two businesses and the excellent growth opportunities. In addition, we will present our new strategy Horizon 2026 and provide you with our mid-term guidance. The event will take place at our headquarters here at Eschborn, and we are looking forward to welcoming many of you here.

Since the announcement of the transaction, at the end of April, we have made good progress as expected. The tender offer for the SimCorp shareholders under Danish law has started on May 25 and will remain open until after the last regulatory approval has been granted. We spoke to many of the SimCorp shareholders already and are expecting a high acceptance rate. But as usual, momentum in such process will only build closer to the final deadline.

We have already received three out of four regulatory approvals so far, the U.S. antitrust approval as well as the foreign direct investment approvals in Italy and Denmark. The final outstanding review is the EU antitrust process. We are well on track and currently expect a decision at some point in September. The offer will close shortly thereafter.

Conditionally, upon closing, we have already locked in the interest rate of €2 billion of long-term debt at slightly above 3%. We have also already started with a combination of ISS and Qontigo and expect to complete the transaction around the time of the closing of the SimCorp acquisition.

In the fourth quarter, we then plan to launch the new Investment Management Solutions segment, as announced during the acquisition of SimCorp.

With that, let me now hand over to you, Gregor.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. Thank you, Theodor. On Page 3, we show the details of the results for the first six months. The financial performance throughout the first half year was very positive. The key drivers for the strong performance shifted somewhat during the period. In the first quarter, the development was partly driven by elevated market volatility. While in the second quarter, we saw the full benefit from higher interest rates.

The operating costs increased by 10% in the period. This is mainly organic growth, which is driven by a couple of effects. Slightly less than half of the cost growth is driven by inflationary effects from building operations, general purchasing and higher staff costs. The rest is a function of higher investments into growth and infrastructure as well as an increase in FTE to support the growth ambition of our organization.

For the rest of the year, we are currently expecting a decline of the organic cost growth rates. For the full-year, our current operating cost forecast is still broadly in line with our original budget of slightly above €1.9 billion. If the strong performance of the business continues in the second half, there might be a little bit upside to that number from variable compensation.

This brings me to the details of the second quarter results on Page 4 of the presentation. While the secular growth developed slightly above our expectation, cyclical tailwinds remained very strong. The cyclical growth was driven by the net interest income because of continued high cash balances and further increasing interest rates. This has more than offset lower volatility in some of the products in Trading & Clearing.

The explanations I just provided on the operating cost development for the full-year can generally also be applied to the second quarter. In addition, we increased the provisions for variable compensation in Q2 due to the strong business performance. This includes a retroactive effect for Q1. There were a few small one-off effects in different line items, which I will explain within the individual segments on the next couple of pages.

I'm starting with Data & Analytics on Page 5. The weaker U.S. dollar turned into a small net revenue headwind in the second quarter. Adjusted for FX, the net revenue growth of the segment amounted to 9%. After a very strong development in 2022, we already expected some normalization of ESG net revenue growth in our Data & Analytics segment in 2023. But the ESG Analytics business at ISS still saw good constant currency net revenue growth of 14% in the first six months. This is driven by continued client demand, especially for high quality ESG Data & Analytics.

Analytics benefited from a seasonal renewal of contracts of existing clients, which is encouraging and resulted in some point-in-time net revenues. The Index business was partly driven by an internal repricing of exchange license fees with our Financial Derivatives business, Eurex. The EBITDA in this segment was affected by a one-off valuation effect of a conditional purchase price component of €9 million as part of the ISS and Qontigo combination. Adjusted for this effect, the EBITDA increased by 11%.

Let me turn to Slide 6, the Trading & Clearing segment. After the spikes of volatility in the first quarter, we saw some normalization of activity in the second quarter. In Financial Derivatives at Eurex, the improving equity market conditions resulted in reduced demand for index derivatives. But the OTC clearing continued to perform very well with a net revenue increase of 33%.

In addition, we saw substantial growth in the Eurex Repo business. This was the result of much more frequently used money market transactions in the current interest rate environment and a further expansion into the buy-side directly. Net revenue in this business doubled compared to the last year and amounted to €22 million. This lower volatility, the collateral levels in the clearing house were down compared to last year and we saw a decline of the margin revenues to €21 million. Financial derivatives included a one-off effect in net revenue, which was a reimbursement of legal fees of €11 million from one of our insurances, which we booked in the other line item.

In Commodities, markets continued to recover from the energy crisis. Volatility has significantly declined, and prices across our markets have seen a healthy development. This translated into a strong upward trend in power, which suffered under uncertainty last year with net revenue increasing 31%.

We also strengthened our position from a market share point of view. In power derivatives, we now account for slightly more than 60% of the market compared to OTC. Margin revenues from the commodities clearinghouse have come down sequentially, but still stood solidly above the level we saw in the second quarter last year. They amounted to €25 million.

To further grow our European Power business, we announced the intention to acquire and transfer NASDAQ's Nordic power volumes to our platform in June. This transaction is expected to be complementary early next year and could result in up to €20 million of additional net revenue.

In the Cash equity business, we saw a stabilization of market share levels at around 63%, but we are faced with headwinds from substantially lower equity market volatility. In addition, the net revenue of the prior year included a positive one-off effect of €13 million, resulting from the deconsolidation of Tradegate.

In foreign exchange, we also saw lower volatility levels. Therefore, the growth rate decelerated somewhat compared to previous quarters, but we still developed better than the markets.

In the Fund Services segment on Page 7, the continued onboarding of new clients and funds helped us to offset the ongoing cyclical headwinds and develop better than the market. Cyclical headwinds currently mainly arise from the trend away from active equity funds into passive funds and fixed income. Market valuation has been a broadly neutral driver in the second quarter.

With the new setup for Clearstream, the core businesses, Security Service and the Fund Services business have started to become more independent entities. We decided this to reflect differences of the service offering, the client focus as well as the regulatory framework. It will also increase our strategic flexibility. Therefore, we have launched a new entity in Luxembourg in April for our Global Funds businesses, Clearstream Fund Centre S.A. The new entity operates under a commercial banking license in Luxembourg and will provide fund execution, distribution and data management to the fund industry.

The second quarter still included some one-off effects related to the carve-out in the operating costs. In addition, there are some ongoing cost effects relating to duplication of some functions. The second quarter also included a small impact from a revaluation in our venture capital portfolio. Adjusted for that effect, the EBITDA increased 6% in the quarter.

Our Security Services segment on Slide 8 saw a further acceleration of growth in the second quarter. Custody continues to be positively affected by the ongoing high level of fixed income issuance activity. Fixed income assets under Custody in the second quarter increased by 8%, which is above the historic average. This is despite the slightly weaker U.S. dollar. Since fixed income assets account for almost 80% of the whole Custody business, issuance activity is a very important driver for us. We also expected an above-average development in this area going forward.

Within Custody, we also saw a strong performance of our collateral management business. Those are value-added services that help our clients to make more efficient use of their assets they are safekeeping with us. Net revenue in this business increased 12% in the quarter.

In the Security Services net interest income, we saw a further sequential step up to €178 million. This excludes the €16 million net interest income that are now reported in the Fund Services segment. Total cash balances on average amounted to €17 billion in the quarter, which is only slightly less compared to last year, despite significantly higher interest rates.

Since the market now does not expect many incremental hikes, the level of the net interest income in the second quarter is a good proxy for the rest of the year, and because we are expecting higher for longer, probably also for next year.

This brings me to the outlook on Page 9. Theodor already outlined our revised guidance for the full-year. We are now expecting net revenue of more than €4.7 billion and EBITDA of more than €2.8 billion. Main function for the outcome at the end of the year will be cyclical factors like the market volatility and the interest rate development.

In addition, we are expecting the consolidation of SimCorp in the fourth quarter. This will also affect our full-year guidance, because of the additional SimCorp contribution as well as one-off costs related to transaction and integration. We plan to update our guidance again with the release of the third quarter results at the end of October.

This concludes our presentation. We are now looking forward to your questions.

[Operator]

[Operator Instructions]. And the first question comes from Johannes Thormann, HSBC. Please go ahead with your question.

[Johannes Thormann, HSBC]

Good afternoon, everybody. I'm Johannes Thormann, HSBC. Two questions actually from my side. First of all, on the cash balances, which dropped to around €17 billion in the second quarter from €18 million in the first quarter. What is the current trend in July? Is there a slowdown due to summer trading or do you see stronger impact there? And then do you reiterate your sensitivity to rate hikes additional revenue contribution? Or would you lower this? Secondly, just on your statement of the 60% power market share or power derivatives market share. Is this Europe? Is this global? And how is the situation in the U.S.? Thank you.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. Thanks, Johannes, for your questions. The second question, the 60% or even more than 60% market share in the power derivatives business relates to Europe. The first question with regard to the cash balances, yes, there was a slightly drop from €18 million to €17 billion in the second quarter. In July, currently, we see the sustained level in so between €17 million and €18 billion. So no big changes here.

And so usually, summer, there's a little bit less activity. So potentially, it could be a little bit lower. But overall, our assumption is that the Q2 run rate is now a good proxy also for Q3 and Q4. And your question with regard to the sensitivity, so that's basically unchanged here. So 50% is U.S. dollar denominated, 35% is euro, 15% is other currencies. And we depend on the rate development of ECB and Fed. So all is -- the far majority is short-term invested.

[Johannes Thormann, HSBC]

Okay. Thank you.

[Operator]

The next question comes from Mike Werner, UBS. Please go ahead with your question.

[Michael Werner]

Thank you. I have two questions as well, I apologize in advance. A quick question on the over-the-counter clearing. You indicated that you saw a good uptick, I think it was plus 33% for OTC Clearing and Trading & Clearing. The numbers I calculated in terms of new volumes that were cleared were actually down, I think about 3% year-on-year. So I was just wondering if you could help me better understand how the volumes translates into revenues and what other factors drive the revenues?

And then second, just a quick question. We've heard a lot of companies talking about artificial intelligence, AI, particularly generative AI recently. I know you guys have a stake in Clarity AI, but I was just wondering how you guys are investing or how you're incorporating or seek to incorporate AI into your operations? Thank you.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. So the first question is with our AI specialist here.

[Theodor Weimer, Chief Executive Officer]

I will respond to it, Mike. But go ahead.

[Gregor Pottmeyer, Chief Financial Officer]

Okay. So the first question with regard to the OTC Clearing. So overall, we are in the range of a 20% market share. And overall, we benefit from the market growth in general. And overall, we are quite happy with the situation we see here. So overall, from OTC Clearing, we expect to have this year more than €100 million net revenues. And really six years ago, we started from zero here, so quite a positive development.

And also the discussion from the EU perspective, when we talk about active accounts, so it will give also us some tailwind what we expect here. And so with the introduction of the new products or the STIR or the short-term interest rates we will cover now the full range of the interest rate curve. So overall, we are quite positive and optimistic that we continue to increase our revenues in that business segment.

[Theodor Weimer, Chief Executive Officer]

On the AI side, Mike, it goes without saying that AI is a new big topic, right? What we have seen on technology side a couple of years ago was the cloud, and now AI is coming into place, right? And generative AI is the name of the game. And as a technology company, we cannot afford not to try to become at the forefront of this technology per se.

Point number three, we are pretty advanced in terms of use cases. We use language-driven bots, right, called Albert and Ferdinand and all the stuff. We use an AI already right now on a use case basis, that's the third point I want to make. Point number four is what we are doing so far is predominantly driven to optimize the efficiency of the company rather than creating new revenue sources.

Point number five, we are, as you are fully aware, in a partnership with Google Cloud. And [indiscernible] and I, we have agreed that we will also extend our partnership into the field of AI. We are currently exploring how we can do that. Point number six, you will hear more about this on November 7 when we do our Capital Markets Day. But it goes without saying that's the next big thing, right? And on the cloud side, we have been a protagonist, and it's our explicit wish and our ambition, right, that we are not becoming a laggard in this field.

[Michael Werner]

Thanks, Theodor.

[Operator]

And the next question comes from Ian White, Autonomous Research. Please go ahead with your question.

[Ian White, Autonomous Research]

Thanks for taking the call and taking my questions. Just a couple of short follow-ups, please, on the net interest income. I just want to get my head around the numbers really for this quarter. So if I look at the total NII across Security Services and Fund Services, adjust for the bank quasi cash balances, it looks to me like the yield across the whole cash balance is about 500 basis points on an annualized basis, if I got my math right. And I'm just wondering kind of how you've generated that basically, given that the policy rates, the sort of three main central bank rates, were kind of all below that level in the second quarter.

Is there something I'm missing there in terms of the investment strategy or the yield management that's helping you to achieve these much higher numbers. And also just a clarification on the guidance. Are you saying basically that, that sort of €194 million, I think was the total across Fund Services and Security Services, NII, that's the quarterly number we should expect for about the next six quarters, and I think you were saying sort of maintained at this level through 2024. But did I understand that correctly, please? Thanks.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. So thanks, Ian, for the potential here to clarify here, so the NII number. So obviously, you do not get 5%, right? So we do get exactly the rate for U.S., yes, it's 5%, obviously, right? But for Euro, it's a 3.5% what we get today. And for the other currencies, it's slightly a bit higher than the 3.5%. So it's the average of the different currencies.

So what is missing? So there are obviously some blocked accounts, right? So that's in the year €1.7 billion where we share of some of the revenues. And so we just keep a handling fee here for that level. So as this is a big number, it's €1.7 billion so that's the reason why we do not get exactly that number you calculated from a rate perspective.

So overall, when I see -- so the treasury side for Clearstream NII is close to €200 million in the second quarter, so adding up Fund Services and Security Services. So that's why we say that's also the run rate we expect for quarter three and four.

[Ian White, Autonomous Research]

Okay. Thanks very much. Maybe just to make sure I've understood on the first point. Is there anything on the investment strategy in terms of the treasury management that involves putting money out at longer tenors. Should I think of this as sort of three-month returns rather than overnight returns. Like it just seems difficult to square the numbers that you've actually delivered with the idea that you're depositing money overnight in these major currencies, perhaps I'm missing something else.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. So not going into details, obviously, but they are also in some own funds we have here in that range and the own funds we invest obviously more longer term than short term.

[Ian White, Autonomous Research]

Okay, thanks very much.

[Operator]

The next question comes from Bruce Hamilton, Morgan Stanley. Please go ahead with your question.

[Bruce Hamilton, Morgan Stanley]

Hi, thanks. Just if I could just ask one on a couple of revenue points. So I think you mentioned some point in time revenues in Data. Can you quantify those? And were those unusual in their quantum in the quarter?

And then on the kind of fee margin evolution in Equity derivatives, it look like revenues lower than volumes would have suggested. So anything going on there? And then second, just a follow-up on AI, and I realize we're going to get something more later. So -- but in terms of the most interesting use cases from your initial look, can you give us any sense in thinking through where those might be within the business? Thank you.

[Gregor Pottmeyer, Chief Financial Officer]

Okay. The first question with regard to point-in-time revenue in Data. So we do not want to disclose all the details. So obviously, we acquired new customers here. And obviously, there, according to the IFRS principles, we have to book something as point-in-time revenue and something as maintenance revenue, obviously. And yes in any time we make new contracts here or expand the contract, there's always a point-in-time revenue component, but we don't want to disclose all the details here.

With regard to the Eurex. So obviously, you have always to consider the product mix. So that's obviously one element where you see some deviation in the revenue per contract and the other is the 3% price increase we made in average over for this year 2023. So that also has a positive impact on the RPC. The product mix and price increase are the main driver for that.

[Theodor Weimer, Chief Executive Officer]

On the AI side, Bruce, it's way too early to calculate right, the efficiency gains out of AI as of today. And I strongly argue that we should not do this at all. Of course, we do currently an example, coach coding, right, where you use language models in order to improve the speed, right, of the coding. It's easier to train young people on the coding side and so forth, right?

But if you were to burden the new AI initiatives immediately with efficiency gains, right, guess what happens on the IT side and beyond? People were saying, why should I cannibalize myself, right? And therefore, I strongly educate not to do this. Let's wait. This will take, as we have seen on the cloud side, this will take 12 to 18 months or whatever, what do I know, and then it will come into play on the efficiency gain side. But you should not expect really meaningful numbers here short term.

[Bruce Hamilton, Morgan Stanley]

Got it, thank you.

[Operator]

The next question comes from Arnaud Giblat, BNP Exane. Please go ahead with your question.

[Arnaud Giblat, Exane BNP Paribas]

Good afternoon. If I could come back on the electricity market share, please, 60% market share across Europe. I think from memory, you disclosed a year ago that, that was at 40%. So that's quite a big step up in the space of a year. Is this linked to the near, I suppose, missing on margin calls when we had very, very heightened volatility of over-the-counter? Is this environment -- part environment, incentivizing people to move on exchange?

And I'm wondering where do you see that 60% market share go? I suppose, in more mature markets, typically 70%, 75% traded on exchange versus the rest of the counter. Is that sort of the go-to point for European electricity?

[Gregor Pottmeyer, Chief Financial Officer]

Yes. As you rightly mentioned, it's really remarkable that we increased our market share from 40% to more than 60% this year. And the main reason for that is the clearing solutions or the risk management perspective we offer here to the market. And as we have here a superior solution, so that's the main reason that -- and as you know, if you have exposure towards a CCP, at least if a bank is trading then you have just a 2% risk-weighted assets. If you do it on a bilateral basis, it's 20% and corporate is 100%.

So this risk management component is key, and that's the key success factor for continue to increase our market share here. I do not know where it ends, but 70%, 75% is not an unreasonable number.

[Arnaud Giblat, Exane BNP Paribas]

Maybe if I can just follow-up. I suppose if I think about the virtuous circle, what sort of level of activity on electricity markets come from various Quantech Funds algos? And how is that compared to other more mature markets?

[Jan Strecker, Head of Investor Relations]

In terms of the participants in commodities you mean, Arnaud?

[Arnaud Giblat, Exane BNP Paribas]

Yes.

[Jan Strecker, Head of Investor Relations]

Yes. Well, I mean, it's obviously a different product, right? And some of them are even physically settled. So if you're talking about the spot market. So I guess a lot of participants don't want to receive physical dry.

In derivatives, that's different. So that's cash settled so here, we have seen -- participants joining. But I would say, in the overall context, it's still a reasonably small and more supplier user-oriented market. So that might still gradually change over time, but we guess the nature of this market will not change and will never be comparable to, say, financial derivatives on Eurex.

[Arnaud Giblat, Exane BNP Paribas]

Thank you.

[Operator]

The next question comes from Tom Mills, Jefferies. Please go ahead with your question.

[Thomas Mills, Jefferies]

Good afternoon. You disaggregate your 18% year-on-year revenue growth for 1H as being 6% secular and 12% cyclical. And your disclosure suggests almost 17% of your year-on-year revenue growth relates to treasury income. So could you help me understand the nature of the treasury income that you are ascribing to secular growth? I guess some of it relates to OTC derivatives, but any other color you can provide would be helpful. Thank you.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. So thanks, Tom, for the question. So very easy answer. So the increase in the treasury result, we completely allocate in the cyclical growth in this 12% cyclical growth or the positive treasury results. NII effects are included on that side. And that's obviously very conservative as we could easily argue that hundreds of that NII is obviously not cyclical, and we will not disappear. But so far, we did in the most conservative way and included at 100% in the cyclical part.

[Thomas Mills, Jefferies]

Okay, thank you.

[Operator]

The next question comes from Kyle Voigt, KBW. Please go ahead with your question.

[Kyle Voigt, KBW]

Hi, thanks for taking my question. Theodor, it's been widely reported in the press that you will not pursue another term as CEO next year. Obviously, it's still a bit early, but I was wondering if you could provide any broad commentary regarding what the Board is looking for in a successor. Also, will the search be both internal and external? And is the search already underway? And if not, when do you anticipate that search will begin.

[Theodor Weimer, Chief Executive Officer]

Thank you, Kyle. And as you said, it's way too early. I've got another 18 months to go at least, right? And the situation was such there was too much speculation about, right, potential prolongation on my side. And I simply wanted to make sure that people understand, right, I'm turning 65 end of next year, right? And therefore, I wanted to avoid a deeper speculation here.

And now for successors, it's not on me. It's on the Board Chairman and it's the Board to decide. It's way too early. And I'm sure I can provide you with further color further down the road, but not now, quite frankly.

[Kyle Voigt, KBW]

Understood, thank you very much.

[Operator]

And the next question comes from Tobias Lukesch, Kepler Cheuvreux. Please go ahead with your question.

[Tobias Lukesch, Kepler Cheuvreux]

Yes, thank you very much. Also two quick ones, if I may. Firstly, would be very interested in your expectation with regards to the derivative business for the second half of the year and also especially on the commodities, power derivatives, which, again showed a lot of strength basically. And I was wondering if that is also seen for Q3 and Q4.

And secondly, quickly on costs. I mean, I know you do not want to go into detail with the segment. However, a top-down in the past, you guided secular growth should be also the cost growth number not more. We have the 6% secular growth and currently also kind of 6% cost guidance, up to 6%. I was wondering like how surprised should we be that cost might go above that 6%? Or are you very confident actually to stay within the 6%? Thank you.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. Tobias, thank you. So with regard to the costs, we explicitly mentioned that we are in the range of slightly above €1.9 billion cost, so that's basically in the 5% to 6% cost range. We always guided and we are quite confident to achieve that level even if you have seen in the first half year, a 10% cost increase.

So there is some seasonality in it. And latest in Q4, I expect that we could be even below the level of last year. So that's why we take always the full-year into account, and so far, without any SimCorp and transaction and these impacts, so on the basis of the business we are already today. So quite confident to achieve that 5% to 6% cost increase, what would be perfectly in line with our 6% secular growth.

With regard to your first question, what about the business development, Financial Derivatives and Commodities in the second half year. So obviously, specifically in the Financial Derivatives business, it depends on the market volatility. So we are quite optimistic with regard to our initiatives. We can influence or continue to have a 6% secular growth, and specifically also in The Financial derivatives area. But it's a little bit difficult to judge about overall what is the market volatility for the full second half year.

So far in July, it's obviously quite low. It's below 15%, though the volatility levels of 12%, 13%, 14%, in that range. But overall, we gave you the overall guidance what we expect so that we are above €4.7 billion, and therefore, we are quite confident to achieve that. With regard to the Commodities business in the second half year, so the roughly 25% revenue increase was a positive surprise also for us because, do not forget, last year, we grew 39% in the Commodity business.

And again, to have here a 25% revenue increase is obviously remarkable well. So to be a little bit on the cautious side, so I do not expect another 25% for the second half year, but it also depends on the volatility here. So therefore, it's difficult to judge or to give guidance on a specific segment level. But overall, I think we are quite confident to achieve now more than €4.7 billion revenues.

[Tobias Lukesch, Kepler Cheuvreux]

Thank you very much.

[Operator]

The next question comes from Enrico Bolzoni, JPMorgan. Please go ahead.

[Enrico Bolzoni, JPMorgan]

Hi, good afternoon. Thank you. Just if we comment on the decision on the European level of consolidated tape. I mean, they're finding some sorts of agreement. I just wanted to get some comment from you in terms of how do you interpret it, whether you think it's going to be beneficial for European equity markets overall and it maybe can lead to further homogeneity within the European market going forward.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. Thank you for the question. So with regard to the consolidated tape, maybe you are aware of our announcement that we built here a joint venture with other European exchange services Euronext, NASDAQ and so on and many others, I think, overall, it's 13 exchanges where we built a consortium and are in the bidding process. And from the EU, who is organizing the consolidated tape, how does it exactly work? So that's our stake what we have in here and it would be obviously very good and very positive for us if we would win the bid here so that we are able to operate here the consolidated tape.

So defining all the details, how does it exactly, is it post trading, is it real-time and all of these things. So that would be obviously good that we have some hedge here being part of that kind of joint venture. Overall, obviously, we expect some headwind out of that, right? But it's not in a material range, maybe it's a very low double-digit million Euro level for us. but it's definitely not material for Deutsche Borse.

[Operator]

Okay. We come to the next question here. Mr. Jochen Schmitt from Metzler. Please go ahead with your question.

[Jochen Schmitt, Metzler]

Thank you. Good afternoon. One question on interest rate derivatives. Regarding the average rate per contract on Slide 13 of the presentation, you stated an improvement by 14% year-on-year in Q2. What's the driver for this in terms of product mix traded because the pure pricing effect was, if I got you right, around three percentage points. That's my question. Thank you.

[Gregor Pottmeyer, Chief Financial Officer]

Yes. Thanks, Jochen. Obviously, the main impact here is from our OTC clearing initiative and also from a repo perspective. So it's -- again, it's a product mix. And with regard to OTC Clearing, that is basically without having the contract but allocating the revenues here, and the same, including the Repo business. So these are the two drivers why the rate per contract increased for the overall interest of fixed income segment.

[Jochen Schmitt, Metzler]

Thank you.

[Operator]

And the next question comes from Benjamin Goy, Deutsche Bank. Please go ahead with your question.

[Benjamin Goy, Deutsche Bank]

Yes, hi. Good afternoon. Just one question left also on the proposal regarding a ban of payment order flow. So I was just wondering how this might impact your position in [indiscernible] and the market share and revenue development going forward after the three-year period? Thank you very much.

[Jan Strecker, Head of Investor Relations]

Yes. Like with all the other regulatory processes, it's obviously early stage and things might still change a lot. But generally, I would say that this could be modestly positive foreign exchange because potentially less order flow would be routed away to internalization, our retail brokers and so on. But looking at the overall size of the cash equity market, obviously, even if it's positive, then the impact for the group would probably be rather negligible.

[Benjamin Goy, Deutsche Bank]

Fair enough. Thank you.

[Operator]

And the next question comes from Andrew Coombs, Citi. Please go ahead with your question.

[Andrew Coombs, Citi]

Good morning. I just first want to come back to SimCorp. I think you previously said you plan to fund the acquisition €3 billion by debt. So anything on the time frame for that and coupon expectations, especially in light of movement of rates?

And then secondly, a big picture question. Obviously, huge cyclical strength coming through in your numbers. But if I look at the secular growth that you flagged, it's running at 6% for the first half, down from 8% this time a year ago. If I look at Q2 secular growth, it's a 5% year-on-year versus 7% in Q1. So it does appear to be slowing. So anything you can say just to put our minds at comfort on the secular growth trajectory? Thank you.

[Gregor Pottmeyer, Chief Financial Officer]

Yes, Andrew, with regard to your first question of the funding for the SimCorp transaction. So we guided now that we already hedged roughly €2 billion with this 3% interest rate level at the beginning when we signed the contract because we do not want to speculate whether rates and debt level will increase or decrease.

So we hedged roughly 3%. Don't forget, on top of that, we just hedged the interest rate, on top of that will be the spread. So the credit spread we have to pay when we do that term bond investments. So roughly €2 billion -- not roughly, exactly €2 billion we hedged. And the other up to €2 billion, depending on obviously the acceptance rate we create, we will use our cash on hand, even some short-term or even some medium-term. So we will finally decide when we know what is the result of the tender offer, so that we know exactly the amount we have to fund. So that's with regard to the SimCorp question.

With regard to the secular growth, so the 6%, you said it was 8%, was higher last year. So obviously, all the secular component, it's not a science here. But we have some rules and the rules are defined in -- specifically in the Trading & Clearing area is defined by product, right? And so as we say, if we created some new product and new kind of products that are two or three years so basically the MSCI derivatives, for instance or the total return futures, the dividend derivatives, so these products are classified as a secular growth element. And the NII, for instance, is defined as a product as a cyclical component. So we go through primarily on a product level. And therefore, it depends how the product develops here. So it's basically then a different product mix contribution, an increase or decrease.

[Andrew Coombs, Citi]

Very helpful.

[Jan Strecker, Head of Investor Relations]

All right. We don't have any further questions in the pipeline, so we would like to conclude today's call. Thank you very much for your participation. And if there's anything else, then please do feel free to reach out to us any time. Thank you.

[Theodor Weimer, Chief Executive Officer]

Thank you, guys. Bye-bye.