Deutsche Boerse AG

XETRA:DB1

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG Analyst and Investor Conference Call regarding the Q3 2022 results. [Operator Instructions] Let me now turn the floor over to Mr. Jan Strecker.

[Jan Strecker, executive]

Welcome, ladies and gentlemen, and thank you for joining us today to go through our third quarter 2022 results. With me are Theodor Weimer, Chief Executive Officer; and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation. And afterwards, we will be happy to take your questions. The link to the presentation material for this call has been sent out via e-mail, and it 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, executive]

Thank you, Jan. Welcome, ladies and gentlemen. The times we are currently living in continue to be quite unprecedented. After the strong first quarter, we were expecting a Deutsche Börse normalization of activity throughout the year. But what we saw instead was an even acceleration of growth throughout the year 2022. In the end, the third quarter turned out to be our strongest quarter ever from a net revenue perspective.

The main driver for the 12% cyclical net revenue growth we have seen in the first 9 months is the beginning cycle of rising interest rates, in the United States, we have meanwhile reached a Fed target range of 3% to 3.25%. And in September, the ECB raised rates in Europe to a level that we last saw back in 2011. This has resulted in greater trading and hedging needs for our clients in almost all asset classes as well as growth of the net interest income of our Securities Services business, which had been depressed for so many years.

This is the new area, as we call it, and as I was referring to at our last Investor Day in June, which adds additional cyclical opportunities to our consistent delivery of secular growth. Combining the 2, we are now expecting organic growth rates of 7% to 9% on average per annum from this year onwards through the current cycle.

Organic growth will continue to be complemented by M&A with the same approach as previously. In the third quarter, the situation on European gas markets has continued to fuel the activities in commodities, but we are now also starting to see some negative effects of the market uncertainty in our European power product complex which saw declining activity.

Very encouraging to see is the continued strong secular net revenue growth, which amounted to 8% in the first 9 months. This is really the result of the many initiatives to win new clients and market share as well as introducing new products and services over the last couple of years. This also continues to be our top priority because the current strong cyclical tailwinds are not going to last forever.

The development in 2022 also underscores the quality of our business portfolio. The strong results are not just driven by single businesses, but by double-digit net revenue growth in almost all business lines. On the operating expense side, we are faced with an unusual combination of drivers that have resulted in higher cost growth compared to our initial guidance.

Foreign exchange effects have gotten stronger throughout the year and are expected to affect as well into next year. But this item is overcompensated by the positive FX impact on our net revenue. While we don't see headline inflation numbers in our overall operating cost yet, the 4% we are currently looking at are certainly an elevated level compared to past periods.

And finally, the favorable financial development and relative share price performance has resulted in an increase of the provisions for variable and share-based compensation. In total, net revenue in the first 9 months increased by 23% and amounted to more than EUR 3.2 billion. The EBITDA increased by 24% to around EUR 1.9 billion.

Since the overall development in the first 9 months so far exceeded our initial expectations for 2022, we are further increasing our guidance for the full year 2022. Our expectation now is to exceed EUR 4.1 billion of net revenue and EUR 2.3 billion of EBITDA. This might sound conservative to some of you. But you guys know us, we are all cautious management people and rather want to underpromise and overdeliver than the opposite.

With that, let me now hand over to you, Gregor, to present the financial results in greater detail.

[Gregor Pottmeyer, executive]

Thank you, Theodor. On Page 2, we showed the details of the results for the first 9 months. All segments have contributed double-digit growth rate to the overall net revenue development. 3 out of 4 segments even achieved organic net revenue growth rate of more than 20%. As part of the net revenue, the net interest income across the group has roughly tripled compared to the previous year. On the one hand, this was driven by much higher collateral levels in financial derivatives and especially commodities.

On the other hand, the net interest income of security services has started to meaningfully benefit from higher U.S. and now also European interest rates. The result from financial investments saw a small negative contribution from our FinTech fund investments in the third quarter and amounted to EUR 29 million for the first 9 months.

For the full year, we are now expecting any positive contribution but might see a further small decline.

In terms of operating costs in the first 9 months is on Page 3, we saw several different drivers. First, M&A effects, which declined compared to half year 1 and amounted to 5%. They were still mainly driven by the ISS acquisition.

Second, the FX effect from the stronger U.S. dollar increased and resulted in a 3% operating expense increase. But this was obviously also beneficial to the net revenue development, particularly in the data and analytics segment.

This brings us to the more meaningful constant currency organic operating cost growth of 8%. On the one hand, it was driven by inflationary effects from building operations, general purchasing and higher staff costs. On the other hand, we had to continue to increase the provisions for variable and share-based compensation in the light of the favorable financial development and relative share price performance.

This brings me to the details of the third quarter results on Page 4 of the presentation. While the secular growth remained at high levels and slightly above our expectation, cyclical tailwinds have accelerated in the third quarter compared to the first half of this year. The cyclical growth was driven in particular by market volatility and hedging needs of our clients and financial derivatives, commodities and FX products.

In addition, and as expected, the net interest income has become a more material growth driver for security services. The M&A effect have again had minor impact in the third quarter since they were only driven by some of the smaller, more recent acquisitions. The explanation I just provided on the operating cost development in the first 9 months can generally also be applied to the third quarter, while the M&A impact on the operating cost has become smaller compared to previous quarters, the impact from variable and share-based compensation has increased.

Furthermore, we saw an increase of project costs and some additional IT investments in cloud technology. The result from financial investments in the previous year included a positive valuation effect of EUR 32 million from the minority investment in Clarity AI as a result of the financing [ around with ] SoftBank.

In the third quarter, depreciation and amortization included some one-off effects from software impairments. And the financial results included higher interest from our bonds outstanding, in particular, from the hybrid bond that was issued in March as well as some FX effects.

I'm now turning to the quarterly results of the segments, starting with data and analytics on Page 5. We saw good organic net revenue growth levels across all business lines in the segment. This was driven by the continuing trend towards ESG, new clients and higher market activity for the index licensing business. The other line, which is mainly the ISS Market Intelligence business, included some inorganic growth from the acquisition of Discovery Data. Most of our direct U.S. dollar exposure is in the data and analytics segment from the ISS and Axioma subsidiaries. But the constant currency net revenue growth in the third quarter was still very strong with 19%.

The EBITDA in the previous year's quarter included the gain of around EUR 32 million from the revaluation of the stake in Clarity AI that I mentioned before. Adjusted for this effect, the EBITDA has increased by 33%.

Let me turn to Slide 6 and the Trading & Clearing segment. The Trading & Clearing segment continued to benefit from higher volatility and increased client hedging needs. The financial derivatives business of Eurex was as strong as in the first quarter. This was driven by high growth in all product lines and in particular, by the increased margin fees. They amounted to EUR 34 million in the third quarter.

In commodities, we achieved another record quarter because of the increased trading and hedging needs of our clients in gas products and due to the higher margin fees. But at the same time, the situation in European energy markets increasingly became a headwind for net revenue with Power Products in Europe, they declined by 11%.

In the cash equity business, we saw headwinds from elevated levels of retail participation last year, which has normalized this year. In addition, one of our peers has increased liquidity payments this year, which resulted in some market share declines for all incumbents in Europe. As a result of higher volatility, the demand for foreign exchange products was significantly higher compared to previous quarters, and we achieved our far best quarter ever with a net revenue increase of 33%.

In the Fund Services segment on Page 7, the continued onboarding of new clients more than offset the cyclical headwinds from the market performance, especially in equity products. In addition, we saw the inorganic contribution of the Kneip acquisition which was closed at the end of March.

In the operating expense base of the segment, we saw a few one-off effects in the quarter. They're related to the integration of Kneip and the preparations for the carve-out of the Fund Service business from Clearstream. It's also encouraging to see that the momentum of new partnerships has continued. HSBC has chosen Deutsche Börse as its global partner for fund order routing, safekeeping, settlement and distribution for a very meaningful fund portfolio.

Our Security Services segment on Slide 8, saw a significant acceleration of growth in the third quarter. Headwinds from equity market performance and lower retail participation were overcompensated by solid levels of fixed income issuance activity. Some FX effects on assets under custody denominated in U.S. dollar and the collateral management business with a growth of more than 30%.

In addition, the net interest income has increased more than sixfold compared to last year. This was driven much by -- this was driven by much higher U.S. interest rates and for the first time in more than a decade increasing European interest rates. Furthermore, the cash balances have increased by roughly 30% compared to the previous year.

The last page of today's presentation shows our guidance for 2022. We have already increased our guidance twice this year. However, these increases were rather qualitative than quantitative. Since the third quarter developed significantly above our even more recent expectations, we have now increased our net revenue guidance to more than EUR 4.1 billion and the EBITDA guidance to more than EUR 2.3 billion. Depending on the cyclical development in the first quarter -- in the fourth quarter, those numbers look conservative, but we want to be on the safe side.

Since most of the operating expense drivers we have seen in the first 9 months are also expected to impact our cost base in the fourth quarter, we are currently expecting operating cost of slightly more than EUR 1.8 billion for the full year. This expectation is a result of the combination of the different operating cost drivers I've outlined before. We consider some of them to be more temporary in nature and would expect some easing of the cost pressure going into next year. This will also help us to address all sorts of potential net revenue scenarios next year against a tougher 2022 comparables.

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

[Operator]

[Operator Instructions] And the first question comes from Arnaud Giblat from BNP Paribas Exane.

[Arnaud Giblat, analyst]

My question is on interest income. Clearly, we all understand how it works at Clearstream, but it's a bit more obscure at how NII works at Eurex and EEX. I was wondering if you could spend a bit of time explaining the growth there. I mean is it entirely coming from increased cash balances and margining? And how sustainable is that increase in margining, I suspect, is certainly linked to the volatility, but can you hold a higher level of margin for some time? And could you talk about the net interest margin? Is that linked to short-term rates? I mean how does the NIM work for those businesses?

[Gregor Pottmeyer, executive]

Yes. Thanks, Arnaud, for this question. Obviously, the net interest income is an important line item now in our P&L and gets even more important in the future. So it's different in our Clearstream business compared to our Clearing business. So starting with Clearstream. Here, you have heard that the customer cash balances even increased to roughly EUR 18 billion. And this interest income, we achieved here with increased interest rates of Fed fund rate is 3% to 3.25% and will most probably further increase over the next weeks and months. So here you can basically multiply it.

So saying additional 1% on EUR 18 billion, it's another EUR 180 million NII at Clearstream. So that's the concept here. With regard to the 2 clearing houses, so Eurex Clearing and ECC, here, the model is different from a P&L perspective. So here, we get roughly a fee-based income on the margins, right?

So the margin at Eurex increased to a level of EUR 130 billion to EUR 140 billion, now it's much higher compared to previous year due to increased volatility and due to being successfully increasing of our OTC interest rate swap business. So here, we have an increased basis. And the same is basically true for the clearinghouse ECC, so for our commodities business at EEX. So here, we have seen in the past 1 or 2 years ago, it was EUR 5 billion roughly a margin requirement here and collaterals we had available and more than 90% is euro cash basically.

And that increased now to a level of EUR 50 billion, EUR 60 billion, so it's 10x higher. And obviously, here, we get also some fee income. So this is the concept. And the question, how sustainable is that now? So on the one hand side, I would say, at Clearstream. So we expect if the market does continue to increase wages for the Fed and even for the ECB, at least for the next months. So that will further strengthen our NII at Clearstream.

On the other hand side, if rates continue to increase, there's a higher probability that our customer cash balances will decrease, and we will see. So far, it did not decrease so far until end of September. But from a logical perspective, it should continue to decrease as there is a high incentive for the treasuries in the banks due to efficient cash allocation.

And with regard to the margins at [indiscernible] and ECC, they won't drop on a short-term basis. So that's much more stable for -- at least for the next months, right? I wouldn't say for the next years, but it's much more stable than potentially the customer cash balances could be a little bit more volatile.

[Operator]

And the next question comes from Michael Werner from UBS.

[Michael Werner, analyst]

Just a question following up on the cost in terms of the EUR 1.8 billion kind of targeted for this year. If we think about that, how much of that is kind of costs that are being brought forward from next year? And if you can just clarify just in terms of the last statements you made in your prepared remarks about how we should think about the cost base as we look out to 2023? I suspect the EUR 1.8 billion should allow you to still generate operating leverage next year. Is that how -- is that correct?

[Gregor Pottmeyer, executive]

Yes. Thanks, Mike. I think the cost topic is an important topic, it's good that we kind of a little bit elaborate on that. So I think this year is a very specific year. This effect, we hadn't even not planned for, right? So we had planned for this M&A, right, as we were aware for that. And that cost increase shouldn't be a surprise. So the FX impact to 3% or 3-plus percent I think that's a little bit of a surprise, but the good thing on a P&L perspective is this FX impact will be compensated by higher impact on the net revenue.

So [ FX, ] stronger U.S. dollar is positive for Deutsche Börse that shouldn't be a concern at all for all of us. So we are more focused on what we say the operating organic cost growth on a constant portfolio basis and constant FX basis. And so that's roughly the 8% we have to talk about. And here, we have 2 elements. So the one is the inflation. That's roughly 4%. I think that's even good because the [ general ] inflation is 8%. You are aware of that. So that's even below that level. But it's more than we originally expected when we made up our plan.

And this component, I would assume, will continue to be there also in next year. The other, let's say, 4% increase, share payments and specifically bonus, right? That is due to our very successful performance in this year. And so we pay higher bonus than originally planned. This is obviously not sustainable. So having a much more tougher year next in 2023, so most probably bonus could even go down compared to the plus 4%.

So taking these 4 components, so M&A, FX, inflation and compensation. So just the inflation part will continue to happen next year, all the other 3 could disappear. M&A, you will finally see, this really will disappear. But the variable compensation could be even lower. So it would be a decrease in next year. So to cut a long story short. So this 16% cost, what you have seen here. And our guidance, we expect a similar growth in Q4. That's why we say it's slightly above EUR 1.8 billion.

So for 2023, we do not expect at all double-digit cost. So it will be clearly single digit from today's perspective, where we just have to deal with this inflationary aspect and obviously, we are currently in the process of doing the budgeting and therefore, we have some scenario planning, and we are also able to deliver on a contingent cost base.

So I would -- from my perspective, overall, that's exceptional development in 2022 from a cost perspective, 2023 will come back to a level you are used to see in the past.

[Theodor Weimer, executive]

If I may add, Mike, Theodor here, right? Gregor is explaining now from a technical point of view, what happened this year and what can you expect next year? And I can fully underscore what Gregor said. From a strategic point of view, I always said, and I'll stick to this statement here today again, right. I always said, the cost growth rate should not be higher than the secular growth of the company. And as Gregor pointed out in his presentation, we are growing 8% secularly this year, and our cost rate -- organic cost rate increases exactly 8%, right?

And next year, there was a question what you can expect if the organic growth rate is in the range of 5%, 6% or whatever or 7%, right? Then you take it as a commitment of the CFO and CEO that we say, we stick to this commitment, right? Cost shall not overrun taking the FX side and the M&A side shall not overrun organic growth rates on the revenue side and secular growth rates on the revenue side.

[Operator]

The next question comes from Andrew Coombs from Citigroup.

[Andrew Coombs, analyst]

Just firstly, just to come back to the costs. You talked about some temporary costs that are dropping away next year. Can you just elaborate and quantify what those temporary costs are? Second question, when I look at your Eurex revenue per contract, that seems to have surprised positively. So perhaps you could talk about some of the pricing dynamics there, whether that was a change in pricing or whether that was just mix effect between the different asset classes and contracts?

[Gregor Pottmeyer, executive]

Yes, interesting. Thanks for the question. Yes, with regard to the temporary development of the cost, so I already elaborated when I answered Mike's question a little bit on that, but to be more precise here. So they are basically, I'd say easily 4x -- 4% cost increase. And so the variable compensation is definitely of temporary nature or it's related to this more than 20% top line and bottom line growth. And no one expects the same development next year having debt at higher starting point.

So most probably, the variable compensation will go down compared to this year's development. So out of this plus 4% or plus 5%, you will see minus something most probably, right? So that's why we say that's definitely temporary of nature.

Then the FX is temporary of nature because now [ FX ] as a starting point from a U.S. dollar perspective, as an average, slightly above parity. So yes, it could even go down a little bit further, but the big jump you have seen now. And therefore, the FX impact, if it does not completely disappear is much smaller compared to this year.

M&A, that depends whether we are doing additional M&A, yes or no. And so as a conclusion, only the inflationary impact will continue to happen next year.

With regard to your second question, Eurex revenue per contract. So that's obviously just depending on the product mix, right? So if they are traded more products where we have higher revenue levels, then that contributes, obviously, positive if you do an average calculation on Eurex. So a substantial change of the revenue per contract on product level does not happen.

[Andrew Coombs, analyst]

Okay. Just to [ pass ] point because I think what you're referring to is temporary -- some of the temporary growth factors around the temporary absolute cost contribution because unless FX rates change or unless you were to divest one of the businesses you've acquired, that's obviously here to stay going into next year. But perhaps I can push you on that variable compensation component, exactly how is that calibrated and calculated as a percentage of your revenue and EBITDA growth? And how much of your overall personnel expenses, does that account for?

[Gregor Pottmeyer, executive]

Yes. So overall, so bonus are in the level of 10% of our operating expenses, and so the level is definitely above the level we have planned for, right? So -- and if we exceed our plans, what we definitely do is -- if it is more than 20%, then obviously, the bonus level is much higher. And now it depends on the variability of the salary, obviously, the highest variability you see on the executive and on the management board level and the lowest you see on the staff level. So -- and in average, there's obviously a fluctuation of, let's say, 20% to 30% out of this number, whether we are able -- whether we are very successful or whether we are in line with our plan or even if we are below our plan.

[Operator]

Next up is Benjamin Goy from Deutsche Bank.

[Benjamin Goy, analyst]

Question on EEX and the European commodity clearing in particular. Maybe you can speak a bit more about the stress you see in the system? Are we past the peak after the government supports various government's measures? So maybe a bit in the short term. And then what does it mean for medium to long term? Do you think this issue of counterparty risk is a real accelerator for your market share or more steady continuously structured story of taking market share from OTC players?

[Gregor Pottmeyer, executive]

Okay. What we currently see is that we past the peak, right? So we have seen in the peak times and the margin, the collateral, I think, is the best indicator for that. It was in the range of EUR 100 billion. And today, it's more in the range of EUR 50 billion to EUR 60 billion. So -- and you see that -- and the reason for that is that you have seen over the last weeks that gas and power prices decreased, significantly decreased, right? So people think now that we are able to manage the next winter at least, right? So that's why the prices are going down. And that's obviously good. So that the stress out of the system is decreasing here, and hopefully, that will continue to happen.

I think for us, it's -- and we are proud that we are really able to manage even in that stress, the duration, our exchange and our clearinghouse here at EEX, and we were able to work together with all the market participants and the market participants were able to deliver the necessary collaterals and even with the German government and even on the European level, we are in close discussion and they are strongly supportive to help that markets are open and that they have a clear market-led solution here.

And even if you see some discussion around pricing cap and so on, so the basic logic still is that if government or EU commission would like to see a cap that this will be compensated by the government, so the delta between the market price and the cap price. And so that helps us to continue to help here -- the market solutions here.

With regard to the medium to long-term aspect, so currently, we see due to that stress in the system that our market share even increased. So in the European power derivatives market, it's currently 58%. So a year ago, it was 40% or 40 plus or something like that. So it's now 58%.

But what we also see is that the trading volume is going down. I told you that the power derivatives revenue in Q3 decreased adjusted trading fees by 11%. And it's going down. And the reason for that is, yes, if you have to put in a lot of collateral and margins, obviously, your flexibility to trade a lot is certainly limited at that point of time.

What we expect for the mid- to long-term view that this will recalibrate. So we expect that our margins and collateral requirements will go down and that the trading activity will continue to increase. And the secular growth drivers from our perspective are all intact. So with regard to renewables and carbon certificates, and hydrogen markets and so on. So that's all positive for us. So for the mid- to long term, we expect this will come back to a normal situation. Then trading activity will increase, margin will go down, the fee income on the margin will go down. And overall, we think we are well prepared without this extraordinary impact today to grow double-digit also for the next year.

[Operator]

The next question comes from Kyle Voigt from KBW.

[Kyle Voigt, analyst]

So obviously, there's very strong revenue growth of 30% in the quarter. Just wondering, could you more specifically provide the FX in the third quarter? And how much FX added to the revenue growth? And you also disclosed 8% secular revenue growth for the third quarter, specifically in your financial statement. Can you clarify whether any of that secular growth includes an FX benefit or is that purely constant currency as well?

[Gregor Pottmeyer, executive]

Yes. So the second part is quite clear. So the secular growth is without FX impact. So the FX impact we include in the cyclical cost. Your first question, what is the FX impact on our revenues? So on our cost side, it's roughly 3%. And on our revenue, it's in the range of 1% to 2%, so 1.5%, something like that.

[Kyle Voigt, analyst]

Okay. And that was for the third quarter specifically, Gregor?

[Gregor Pottmeyer, executive]

Yes. It's considerably also true for the third quarter.

[Operator]

The next question comes from Bruce Hamilton from Morgan Stanley.

[Bruce Hamilton, analyst]

I guess just thinking about M&A activity, clearly, looking into 2023, it looks like after a banner year this year, it's going to be a little bit more challenging potentially from a cyclical standpoint. So does that mean -- does that likely accelerate some of your M&A plans? I mean obviously, there's some notable sort of valuation decreases in the fund platform space, for example.

So perhaps if you could outline where you think looks kind of most interesting on this sort of nonorganic side? And then just remind us where you are in terms of your sort of current balance sheet leverage and therefore capacity to do deals from sort of balance sheet as of today or year-end?

[Theodor Weimer, executive]

Thank you, Bruce. Let me take the first one and the capacity shall be taken then by Gregor as always. Let me share with you a couple of observations which are certainly new to the majority of you -- on the M&A side, it's very clear. The M&A market has changed fundamentally over the last 12 months, not only on the tech side, but particularly in the tech and data side where we are particularly interested in, right. Point number one. Everybody understands that the interest rates have increased the capital cost, right, and therefore, per se, every day, you have to be even more selective.

Point number three, from my point of view, some 12 months ago, even less, right, the market -- M&A market has been a pure sellers' market, right? So the sellers basically said, I'm willing to sell if and then they demand it and [ address with ] high numbers. This has also fundamentally changed. We're now seeing clearly a buyer's market. And the fact that we are potentially a very sought-after strategic buyer, we received lots of inbound calls. But -- and that's point number four, from my point of view, you need to differentiate between private and public market developments.

On the public market side valuations, as you said, Bruce, have come down significantly already. On the private side, I don't know what happens. But as you can imagine, some of the holders of the private side, private asset side, there's still dream of the good old days, some 8 to 18 months ago. So they have not -- some of them might not have realized that valuations have changed that the market has fundamentally changed.

And therefore, what we currently see is lots of opportunities, right? But I need to state also very clearly, we can become and we are even more selective given the situation that we are -- and you listen to what we have said today, we can look back and also look forward to the next quarter. We have pretty strong results, financial results. Nobody right is forcing us to be very aggressive on the way. And last but not least, with regards to certain areas you were mentioning, hinting in a certain direction. Of course, we do not comment on any specific M&A targets, but you can be assured we will -- we are very reasonable. We are not under pressure. We are highly selective and determined to do if you do deals. We do good deals. And if you simply look in what happened on the data side, especially on the ISS side, that's a big, big positive right of what we can report here for the year 2022.

[Gregor Pottmeyer, executive]

And your second question with regard to the balance sheet. Obviously, you are aware that, that S&P just confirmed our AA rating because we are able to come back to the grid threshold at year-end without doing further M&A. So that was positively confirmed also from S&P. Here, you can see that we are back in a situation to have financial flexibility because we are very cash generative every year, more than EUR 1.5 billion cash we generate every year. So funding is not a limitation or refinancing is not a limitation for our M&A activity. So we have enough headroom here available from a cash perspective, from a debt -- additional debt perspective or on even some equity perspective, where we have treasury shares and authorization.

And also from a structuring and M&A deal, there's not always a need that we need additional cash. So we can also bring in some assets doing some joint venture or partnerships as we have done for instance, there is Qontigo in our stock business. So overall, from a funding refinancing perspective, there are no limitation for M&A deals.

[Operator]

The next question comes from Philip Middleton from Bank of America.

[Philip Middleton, analyst]

Just to round out the cost discussion. Entirely understand how you're segregating the cost between some things which are obviously going to drop away like the variable comp and some things which should happen that are outside your control of the inflation. But are you saying that there's a cap at the rate of inflation, which is your organic growth? Or -- because you used to talk about operating leverage sort of being built into the model. And if you -- is that still the case? Or how should we actually think about operating leverage in the current environment?

[Gregor Pottmeyer, executive]

Yes. Thanks, Philip for specifically asking that, that operating leverage topic. So overall, we show on our existing portfolio, strong operating leverage, right. If you take, for instance, our Eurex business and -- or even our Trading & Clearing business and doing -- and comparing the EBITDA margin last year compared with this year, then you see a nice increase.

So for the existing business, we are able to show operating leverage. And the old formula for whether we trade EUR 15 million or EUR 10 million contracts a day, there are no additional costs with regard to that. So we are able to show that even in sometimes with a little bit more inflation. So that's a clear commitment of us as a management team.

When you do this operating leverage on a group level, so there are additional aspects why we are not able to show an increased EBITDA margin. So first is that we're currently doing M&A in an area where we achieve -- so for instance, with regard to ISS in the range of EBITDA margin of 30% to 35%. So it's clearly above the [indiscernible] what you see as an average. So this dilutes basically our M&A margin.

And secondly, last year, we had a strong equity result of some EUR 85 million. And this year, so far, it is roughly EUR 30 million. So here, we also lose some on a group level perspective. But from an operational perspective, we are strongly committed to continue to show operating leverage in our existing business.

[Operator]

The next question comes from Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, analyst]

Yes. One on the secular growth, the 8% you pointed out in Q3. Could you elaborate bits on it again, maybe also allocating a share to Eurex especially, I mean, overall you guided for a kind of 5%, you demonstrated that over the past 3 years, year-to-date, you achieved 6%. So how should we think about the 8%? And how much is really coming from Eurex and not the other growth segments that we were talking about?

[Gregor Pottmeyer, executive]

So Eurex is also in the range of 8%, like the average on group level. So how do we calibrate the secular growth? So in principle, we consider secular growth if we are able to increase our market shares, if we win new market segments, if we build up new products. And here, we've done from with regard to new products, we don't say just a new product out of this year because of product side, let's say, 5 to 7 years. So we go back 5 to 7 years and say, what are the new products here.

And we consider still for instance, at Eurex, but just to give you some examples that we say our derivatives on MSCI level as [ just ] said, such a product or total return futures, we define as a new product or still dividend and volatility derivatives. So just to give you a few examples.

So all the revenue increase we are able to achieve in this new product category. So this we show as a secular growth. And that's basically true for all the other segments. So we have here a clear distinction what we say, that's basically more a sustainable level, this is 8%. And when you say the 12% on a cyclical basis. So that is just specifically linked to the specific situation this year with this higher volatility, and that depends basically what we will see in the next year. But the secular growth is defined as a sustainable growth rate also for the future.

[Tobias Lukesch, analyst]

And given the fact that you were also emphasizing new clients and also market share gains in the various segments. Is it fair to assume that this kind of 8% secular growth is something you're not worried about over the next quarters? Or it could even be accelerated? I mean what is your kind of view on that development?

[Gregor Pottmeyer, executive]

Yes. So you are aware that on our Investor Day, end of June. So we guided at least a 5% secular growth rate, right? So -- and that's what we're definitely targeting for and what we are committed to deliver also for the next year. But this 8% is above our average here. And my guess would be even in Q4, we would have good chances to deliver this 8%, but for the next 3 to 5 years, things like that. So our commitment is to achieve at least 5% cyclical.

[Operator]

And the next question comes from Johannes Thormann from HSBC.

[Johannes Thormann, analyst]

Some follow-up questions, please. First of all, on the NII dynamic. What do you think are -- as you have given a broad range between EUR 5 billion to EUR 50 billion margin calls? What is a normalized collateral or margin level in an energy business? And at what point in time in Clearstream, do you think you have to share upcoming rate hikes with the customers? And regarding the M&A pipeline or your thoughts on the change in the market, just it would be great to know if the dynamic has hinted talks and postponed talks? Or have they actually intensified discussions?

[Gregor Pottmeyer, executive]

So I'll start with the first question and Theodor will take the M&A question. So with regard to NII, what is the right level at our clearing -- our commodity clearinghouse ECC. So it's difficult to judge, I think. So yes, I told you 2 years ago, it was EUR 5 billion and now it's EUR 50 billion, EUR 60 billion. I don't think that it will come back to the EUR 5 billion, right it. But it's difficult to get whether for the next 3 to 5 years, right? What is the right number here? I think it will be a double-digit and EUR 1 billion a month because we continue to grow but it's really difficult to judge.

But on a short-term basis, it won't go down sharply due to the EUR 5 billion. So that's what we not expect and the situation in gas and power is obviously not solved, even it's currently a little bit relaxed, but it's by far more soft, and you will see high volatility also in 2023. So I don't think that the margins will go significantly down.

Your second question with regard to sharing NII results at Clearstream that -- we will see that. So the higher the amount we will achieve, the more we have also to consider to talk to our clients. So far, up to now, we do not share, but at a certain point in time, I think there will be the need also to share.

[Theodor Weimer, executive]

And Johannes on the M&A side, [ whether it's an answer ] -- whether the overall environment is hindering discussions. I can be very, very, very smart and refer it to the M&A market globally as such, right? Particularly M&A shrink significantly. But I would say without saying anything beyond what I'm saying, right, on our side, it's rather such that the level of inbound calls, the level of ideas, which we are getting is rather enhanced.

[Operator]

And next up is Ian White from Autonomous Research.

[Ian White, analyst]

Just a couple of follow-ups from my side, please. First up, I think earlier you said, there is a sort of a one-off software impairment that's impacting depreciation and amortization this quarter. Could you just call that out for us, please, in terms of how much that was? Sorry if I've missed it in the presentation or the release, but that would be helpful.

And just secondly, on M&A, I think you said on the call earlier this year, you were perhaps less focused on fund services M&A due to sort of strong organic progression there. Am I right to take from your earlier remarks on this call that you might be more open to inorganic growth in Fund Services now? And how does the carve-out of the Fund Services business from Clearstream help to enable M&A if at all, please?

[Gregor Pottmeyer, executive]

So the first question is very easy. So this one-off software is roughly EUR 5 million. And the second question with regard to M&A. I think you are aware of this carve out in our investment Fund Service business. So that's continuing to be right on track, right? So we are able to deliver what we want to achieve. So 2023 is the year where we are able to achieve our targets. And therefore, we would be also prepared to do partnerships in that way when we want to.

And so it's -- from an M&A perspective, it's difficult to judge what customers would like to do because customers have always 3 opportunities to work together with Deutsche Börse Investment Fund Services. So they can easily connect to our platform, they can outsource. So these 2 elements we show as an organic growth.

And thirdly, they can sell the business, right? So with regard to HSBC, that was basically an outsourcing contract, right? So very, very successful, have won that with regard to Kneip, there was a decision that we [ don't ] want to buy the business or and the Kneip asset owner wanted to sale. So that's why we say, in principle, fund services is of high interest of Deutsche Börse, whether it's organic, inorganic partner approach. So therefore, we are open and flexible. And with regard to preparing all until year-end and fulfilling that in 2023, this carve-out for this fund service business, we are even more flexible to do partnerships.

[Operator]

And now we're coming to the next question, and it comes from Haley Tam from Credit Suisse.

[Haley Tam, analyst]

Quick follow-up on costs, if I may. And then a question about the cash equities market. In terms of costs, can I just pick up? I think you said earlier that you had a 4% impact of inflation in the 9 months so far and you noted that was lower than the current rate of inflation. So we should interpret this to mean that you are expecting there to be further inflationary impact in your organic cost growth next year and that will be within the perimeter when you're thinking about the comparison to secular revenue growth. So I just wanted to check on that.

And any comments you might have there in terms of wage inflation, in particular, I guess would be particularly interesting to me. In terms of the cash equities market, you did note there that you had seen some loss of market share as had all other market participants due to a competitor stepping up the liquidity payments. And I just wondered whether you considered a one-off shift in market share or whether you are actually considering any plans to match those payments to win back share?

[Gregor Pottmeyer, executive]

Yes. So with regard to your first question of cost and this year, 4% in inflation, so -- and my comment that inflation will not disappear is not to understand in the way that it will increase next year, right? But it won't go down. So we all do not know what are the final outcome and to specifically with regard to the wage increase. And that we are in the process and just started that process to talk about with our workers council and so on. So no decisions are made. But in principle, this 4% inflation most probably will not increase next year, but you will see a comparable number also in 2023. And whether these are triggered by one-off payments to people or whether to regular increase. So that we will see how the final decisions will end, but I don't expect that the inflation will increase, at least not the 4% overall on personnel costs, nonpersonnel costs and in average for Deutsche Börse across all locations.

The second question with regard to the cash equity business. Yes, there's one aggressive competitor currently in Europe underway, and they make attractive liquidity program. So they invest basically to win market share. And -- you can be sure that we obviously monitor that situation that we are not happy with the development. And so that we are currently in the process to implement counteractive measures to stop that and you will see that in the next weeks and months.

[Haley Tam, analyst]

The cost answer was very clear. And if I could be cheeky just in terms of those counteractive measures, we should keep a close eye on your revenue yield then, would that be the right interpretation?

[Gregor Pottmeyer, executive]

It depends how the countermeasures look like, right? So -- is it about processes, functionality? Is it about the market model? Is it about a temporary liquidity program. So it really depends on the [ single ] concrete countermeasures, but you can be sure that it won't accept that situation.

[Operator]

The follow-up question comes from Michael Werner from UBS.

[Michael Werner, analyst]

I appreciate the follow-up. You guys have been highlighting you expect about 1% tailwinds to revenues coming from pricing power. I was just wondering if you're thinking about that has changed. That was in a low inflation environment. Now that inflation has picked up. Have you changed your thoughts about pricing as we look out over the next couple of years?

[Operator]

We cannot hear you right now.

[Gregor Pottmeyer, executive]

Oh! So sorry, I was muted. So sorry. [ Not to be clear. ] So from a pricing perspective, so the impact you currently see on the revenue this year and next year, so the pricing impact is more than 1% currently. And so also, we use the opportunity to increase prices, but we don't do it always straightforward, let's say, on trading fees. So we talk about volume rebate schemes and [indiscernible] or introducing service fees and so on. So there are different ways how to do that. But the current impact is higher than the 1% you have seen in the past.

Looking forward, medium to long term, our focus is still unchanged. Our focus is having attractive liquidity platform. So having lowest spread as possible being benchmarked. So our focus is on winning market shares, winning liquidity and not using the pricing power. So even if the pricing mechanism is currently higher than the 1% on a mid- to long-term basis, I would expect to keep that 1% level.

[Jan Strecker, executive]

All right. This was the last question for today. Thank you very much for your participation. If there is anything else, then please feel free to reach out, and have a good day.