Deutsche Boerse AG

XETRA:DB1

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG analyst and investor conference call regarding Q4 and financial year 2017. [Operator Instructions] Let me now turn the floor over to Mr. Jan Strecker.

[Jan Strecker]

Welcome, ladies and gentlemen, and thank you for joining us today to go through our fourth quarter and full year 2017 preliminary results. With me are Theodor Weimer, CEO; and Gregor Pottmeyer, CFO. Theodor and Gregor will take you through the presentation. After the presentation, we will be happy to answer your questions. The presentation materials for this call has been sent out via email and can also be downloaded from the Investor Relations section of our website. As usual, the conference call will be recorded and is available for replay.Let me now hand over to you, Theodor.

[Theodor Weimer, Chief Executive Officer]

Thank you, Jan. Welcome, ladies and gentlemen, and good afternoon. I'm very glad being here today together with Gregor, our CFO, to present our 2017 results -- the full year results and the Q4 results for 2017 and to give a business outlook for the year 2018 and last but not least, I'm also happy to respond to your questions.Last year was not a particular easy year for Deutsche Börse. I'm not talking primarily about the failed merger of LSE and the Deutsche Börse, I'm rather talking about a very low volatility levels we have seen in many of our asset classes. Even so, interest rate related net revenues increased, overall cyclical net revenue declined by 2%. This is also why Deutsche Börse did not achieve its original financial targets.However, it is encouraging to see that net revenue from our secular growth initiatives increased as planned by 5% last year. This gives me confidence by the way regarding our future development.On balance. Net revenue in 2017 increased by 3% and amounted to around roughly EUR 2.5 billion. Adjusted operating cost decreased slightly and thus EBITDA increased by 6% year-over-year to around EUR 1.4 billion.In the fourth quarter, Deutsche Börse achieved its strongest quarter since 2008. This was primarily driven by the Clearstream segment. Overall, the Clearstream segment was up year-over-year, 11%. It was primarily driven, as I said, by the Clearstream segment, but the cash market and index business also contributed nicely to our growth.Against the background of these results, we are proposing to increase dividend per share for 2017 by 4% to EUR 2.45 per share. This would be equivalent to payout ratio of 53%, which is in line with our capital market -- capital management policy.After all I've been so far at Deutsche Börse, I'm feeling quite comfortable regarding our growth opportunities. For 2018, we expect further secular net revenue growth of at least 5% and no further overall declines of cyclical net revenues compared to 2017.In terms of cyclical growth, the start of the year has in fact been quite encouraging. Furthermore, an efficient management of our operating cost will help us to achieve full scalability of our business model. With that, I can summarize we expect the secular net revenue growth in 2018 of at least 5% to result in at least 10% net income growth for this year.To highlight areas of secular growth and further increase transparency, we have decided to introduce a new breakdown of our financial segment reporting from first quarter 2018 onwards. From currently 4 main reporting segments, we will move to 9 segments in future. This will increase the transparency of our results massively. Gregor will explain the details in a moment.With regards to our midterm opportunities, we are currently carrying out a top-down strategic review of the different organic growth opportunities as well as our operating efficiency. In parallel, there will be further personnel and organizational changes as well as improvements of business processes as we move along in order to increase our effectiveness further. We currently plan to present an updated road map and mid-term plan of our investors days -- of our Investor Day in March -- in May -- it's on May 30, where we'll cover this 3-year -- the 3-year plan.With this, I would like to hand over to Gregor to present details of our results. Thank you.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. Welcome, ladies and gentlemen. Let me start with the preliminary full year results on Page 2 of the presentation. Net revenue amounted to EUR 2,462 million. The increase of 3% was mainly driven by double-digit growth in the Clearstream segment. Adjusted operating cost, without depreciation, declined by 1%. This is a result of the efficiency improvement we achieved last year, which also helped us to offset inflation and higher share-based compensation.The adjusted EBITDA and net income increased both by 6% against the same period last year. The EBITDA margin stood at 58%. The reported net income benefited from the sale of the stakes in Bats Global Markets Incorporation in the third quarter and ICE US Holding Company LP in the fourth quarter last year. With this, the reported net income increased by 21%.With our secular initiatives, we generated around 5% net revenue growth last year, which was in line with our plan. The main contributors were custody, Investment Fund Services, new Eurex product, the index business, collateral management services and OTC clearing. This was partly offset by a 2% net decline in the cyclical part of our business. Main driver was the weaker development in index derivatives with a net revenue decline of around EUR 50 million.This brings me to the fourth quarter preliminary results on Page 4. Net revenue increased by 3% to EUR 639 million, which was the highest level since 2008. As part of net revenue, the net interest income across the group rose significantly to EUR 37 million.Operating costs, adjusted for exceptional items, were down 3% as a result of ongoing efficiency improvements. Exceptional items totaled EUR 22 million, which among others included legal expenses, cost for M&A integration and restructuring charges.The adjusted EBITDA increased by 9% to EUR 338 million. Besides the exceptional cost items, the EBITDA was adjusted for the EUR 74 million gain from the sale of the stake in the U.S. ICE Holding Company. The adjusted net income increased by 8% to EUR 194 million, and the adjusted EPS amounted to EUR 1.04.I'm now turning to the quarterly result of the individual segments, starting with Eurex on Page 5. The Eurex development continued to be mainly driven by cyclically weaker activity in index derivatives in line with low equity market volatility we observed last year. In our commodity business, the power derivatives business still suffered from the impact of the price zone change. However, liquidity continues to return from OTC markets into the new product, and we expect to see these effects fading away over the next couple of months. In total, net revenue in the Eurex segment stood at EUR 251 million, adjusted EBITDA at EUR 122 million and EBITDA margin at 49%.In our cash market Xetra, we saw increase of the order book turnover by 14%. Therefore, net revenue in this segment rose to EUR 47 million. EBITDA on an adjusted basis improved to EUR 23 million and the EBITDA margin stood at 48%.At Clearstream, total assets under custody increased by 3% to EUR 13.6 trillion. The 2% decline in the ICSD business was compensated by a 3% growth at the CSD business and by continued double-digit growth of 17% in the Investment Fund service business.Outstanding and global security financing business continued to be negatively affected from central bank monetary policies, which reduced the need for secured money transactions. Due to more favorable business mix, with growth in the higher-margin securities lending business, GFS net revenue increased by 5%. The cash balances at Clearstream amounted to EUR 13.1 billion, slightly down against the previous year. In total, net revenue in the Clearstream segment amounted to EUR 236 million. The adjusted EBITDA came to EUR 129 million, and the adjusted EBITDA margin stood at 55%.Net revenue in the Market Data and Services segment increased by 5% year-over-year. This was mainly driven by 19% net revenue growth in the index business, i.e., STOXX. The major driver of this favorable development was a secular increase of assets under management in ETFs. Total net revenue in the Market Data and Service segment amounted to EUR 105 million. The adjusted EBITDA reached EUR 64 million, and the EBITDA margin was 61%.This brings me to our dividend proposal for 2017 on Page 9. As part of our longstanding distribution policy, the general aim to distribute 40% to 60% of the adjusted net income to shareholders in form of the regular dividend. Since the earnings of the group has been growing and we are expecting further growth, we are now targeting a payout ratio more in the middle of the 40% to 60% range. For 2017, the proposal of the executive board combines a slight reduction of the payout ratio to 53% with an increase of the dividend per share by 4% to EUR 2.45.Out of the EUR 1 billion proceed from the divestiture of ISE in 2016, we are currently implementing 2 share buyback programs with a total volume of EUR 400 million until end of 2018. We are planning to complete the first program at the end of the first quarter.The remaining cash at hand and the recurring free cash is going to be invested into growth opportunities. As Theodor has mentioned at the beginning, we are going to introduce additional financial reporting segments with the publication of the first quarter 2018 results in April.On Slide 10, you can see the pro forma view for 2017 with altogether 9 segments. Eurex, which will be reduced as a financial derivatives business of Eurex exchange. Commodities, which is now the EEX part of Eurex. Foreign exchange, which refers to 360T. Xetra, our cash market. Clearstream, which is from then on reduced to the settlement and custody of equities and bonds as well as net interest income. Investments Fund services, which comprises settlement and custody of fund shares as well as other fund services.Global security financing, which consist of collateral management and securities lending services. Index, which is primarily the STOXX business. And finally, data, which encompasses exchange data and the new regulatory parking services.We have already reported net revenue for all of these areas, but from this year onwards, we'll introduce an income statement down to the EBITDA line and some more details regarding business activity and net revenue development for each segment.The infrastructure services, which are included in the MD+S segment in last year's results, will be split among the Xetra and Eurex segment because they are largely related to those markets.Implications for your models should not be too big, as this is primarily a new breakdown and will provide you with additional details that will hopefully be helpful for your model and methods of valuing our business.This brings me to the last page of today's presentation and the outlook for 2018. We expect further secular net revenue growth of at least 5% this year. Major secular opportunities include Eurex OTC clearing, new Eurex products, Commodities, Foreign Exchange, Clearstream with T2S, and Investment Fund services as well as the index and data business. In addition, we expect no further overall decline of cyclical net revenue compared to 2017. The start of the year with normalized equity market volatility has been encouraging. And we also expect further saving from the interest rate environment.Ongoing efficient management of operating costs will help to ensure full scalability of our business model. Therefore, we expect at least 5% secular net revenue growth to result in at least 10% net income growth this year.This concludes our presentation. We are now looking forward to your questions.

[Operator]

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

[Arnaud Maurice Andre Giblat, MD & Research Analyst]

A question on the OTC clearing, please. So could you tell us how much you made in OTC clearing in 2017? Also you helpfully reported a sevenfold increase in your OTC clearing volumes. Actually, when we tracked the volumes on a daily basis, we see that most of the -- we see that has continued into February. So -- but we're also noticing that the bulk of the volumes happens on a Tuesday, which could actually coincides with Reset and tpMatch compression runs. So my question is, is the significant uplift in volumes that you're seeing coming from mostly dealer activities? And if that's the case since the dealers are mostly on an all-you-can-eat basis, what should we be looking at in terms of incremental revenues?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. Thanks Arnaud for this question. So with regard to the OTC clearing revenues in 2017, we already achieved net revenues of EUR 10 million. With regards to the current development in January and February, where we communicated that we have now an ADB of EUR 35 billion and it even increased to EUR 40 billion. That's mainly in the dealer-to-dealer business, and it's on a short-term basis. But what you see here that our incentive program really worked. So we put in the right incentivation to do already in 2018 business with Deutsche Börse and specifically, this Eurex clearing. So the sharing of the economic and the sharing of the governance is really very interesting to see. And for us, it's really important that -- firstly, Eurex clearing is now a really competitive offer and it will be already offered from the bank side. And we are not just on the screen in parallel to ATH even much better. We get the same spread. So that's really encouraging, what we currently see here. Our estimation is still unchanged. So our target is to get a market share of 25% in the dealer to buy-side area. Still we are clearly not there, but it's steadily improved. And maybe with regard to the political dimension, Theodor, you want to add your clearing in general?

[Theodor Weimer, Chief Executive Officer]

Yes. We are basically applying on all a dual strategy here. On the one hand side, we do a lot of lobbying in Continental Europe in Brussels, in Berlin, of course, where we want to make sure that given the Brexit situation, we should do everything to ensure that there is outside London a euro clearing location. It cannot be that from a risk perspective from the banker side that they leave all the euro clearing in London. Therefore, we try to make the argument that there should be a euro clearing location in Continental Europe of the EU27 and nearly, of course, in Germany, in Frankfurt where we are quite egoistic, if I may say so. And since we do not rely -- we cannot rely on the support of the politicians, we came up with this partnership program, where currently 25 banks are participating, which is quite a success. As you indicated, [indiscernible] went up from EUR 5 billion in average dailies in end of 2017, now at EUR 35 billion to EUR 40 billion. So we have significant increase or we do hope even if we are not getting political tailwind here that we will establish with our partnership program a true alternative to the LCH euro clearing apparatus.

[Operator]

And our next question comes from Benjamin Goy calling from Deutsche Bank.

[Benjamin Goy, Research Analyst]

Benjamin Goy from Deutsche Bank. On your 2018 guidance, at least 5% net revenue growth and at least 10% net profit growth. I mean, this basically implies there is no cost inflation. I'm just wondering whether this requires another major program or there's a number of smaller initiatives which you basically have already in the bag and can be relatively cheaply executed to ensure scalability of the business model.

[Theodor Weimer, Chief Executive Officer]

The guidance we provided Benjamin for 2018 is to be specific at 5% growth on the top line as secular growth in Greece. So we are not talking about possibly additional growth coming from the cyclical side. So a minimum 5% is coming from the secular growth, why do we focus on this? We do focus on secular growth because this is -- these are new products, these are initiatives which we can managerially steer. And on the cyclical side, we are dependent on the volatility and reactions of the market participants. And therefore, if we grow 5% on a secular side, if you do assume higher volatility structurally, this year 2018 compared to 2017, so we will get a higher total growth for the year 2018. And if we also are determined to work on our structural cost blocks, and we'll come up with certain ideas, which we'll show to you on the 30th of May, right. So we do even more than on the growth side, we will also address the cost side. This is not something which is very revolutionary, what we do here, we are not planning to lay off people. This is not necessary, but we have lots of structural cost blocks, starting from events, ending up with the marketing side, right, where we can address cost structures. We also have too many MDs, right, and we can also tackle this kind of issues.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. And with regard to the cost management perspective, I think, you are aware that we have here a continuous improvement process in place, where every line manager has a task to achieve efficiency at least by 2.5% or to cover inflation and salary increases, so that's already implemented. And in principle, we brought on automatization -- on standardization of our process, using digitization in a more advanced way. So we are already here on way to do proactive cost management to be prepared to achieve flattish costs if it would be necessary.

[Operator]

The next question comes from Kyle Voigt calling from KBW.

[Kyle Kenneth Voigt, Associate]

Just maybe a strategic question for Theodor. You've got similar revenue and net income growth as set out under the Accelerate program. But just strategically speaking, your predecessor was very active in M&A, both small and attempted large-scale M&A. Could you talk about your approach to M&A and maybe weaknesses the group may have and you may look to fill through M&A? And just more broadly, your thoughts on the feasibility of large-scale M&A?

[Theodor Weimer, Chief Executive Officer]

Thank you, Kyle, for this questions. I'm a trained M&A banker, was part of Goldman Sachs on the M&A side. So I think I'm quite familiar with M&A topics per se. And given my background, I know that large transformational deals need to be feasible, right. And right now, we have 3 stock exchanges which are significantly larger than we are. They are somehow out of reach for us, that is CME, ICE and Hong Kong Stock Exchange. They're completely off the table for us. LSE didn't work out. And I am realistic enough to see that nothing is going to happen here for us over the next couple of years, and I'm very open and outspoken here. And given the situation, right, we can look at smaller exchanges. We can look on M&A string-of-pearls approach, which we will do, right. We are covering quite broadly and nicely the full value chain. We have probably the most and the broadest setup on the stock exchanges from the pre-trading to trading to the post-trade business. And we see ample opportunities for us in each and every segment of our value chain, be it data, be it FX, be it commodity side, be it the fund services side, which is a very profitable and very nicely developing business, global securities lending, we talked about euro clearing. So we are currently doing an exercise where we go in a really very robust way through the alternatives of growth which are in front of us. And the longer I look into it, the more I'm getting convinced that we can grow organically this 5% structurally secular growth and on top M&A is feasible. And I'm determined to grow externally as well. We're in the business where we have high fixed-cost apparatus, and therefore, the more business we are pulling -- putting on our machine, the higher the margins. And we're in the business we need to keep margin high ideally even further increasing the margin.

[Operator]

And next question comes from Daniel Garrod calling from Barclays.

[Daniel R. Garrod]

Daniel Garrod, Barclays here. I had a question on the secular growth opportunities that you outlined in the guidance. 5% revenue growth at least you talk off would be at least sort of EUR 120 million, EUR 130 million. There is a whole host sort of initiatives that you mentioned. I wonder if you could provide any more color about specific sort of ranking within those and greatest contribution to that sort of size of revenue. And then, I think, over the 3-year -- old 3-year plan, you'd spoken previously of sort of secular revenue opportunities between EUR 400 million and EUR 600 million. I wonder that still stood and whether that suggested that there was more of a phasing towards 2019 of that original plan?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Thanks, Daniel, for the question. I think in general, we benefit from the general trend from moving from OTC to on-exchange. And therefore, all our asset classes, obviously, we talked about OTC clearing and the interest rate swap area where we have now this clearing obligation, where we gave the guidance that we expect to get 25% market share with EUR 50 million to EUR 70 million additional net revenue. So that's still unchanged here. The next level where we see that is in the commodities and in the FX space in the commodities. So we expect double-digit growth here over the next years. First, we have a lower base level 2017 as we lost you know these pricings [indiscernible] Germany. Austria, I think this will fade out now in the next weeks and months. So here, we really expect this trend to continue from OTC to on-exchange. Specifically, the gas business is strongly performance with clearly double-digit growth. The same on the FX side where we have built now the central limit order book functionality in the first quarter. We will go live with our clearing in the second quarter. And then, we will benefit here from the structure trend on the FX side too. So Eurex, commodities, FX, no doubt there should be the chance to grow that double-digit within the next year. Index business already growing since years double-digit on net revenue basis. There is a trend to purchase an investment strategy that's still unchanged. And therefore, also a strong business case here. Even Clearstream is -- in 2017, you have seen 11% growth. And out of a combination of cyclicality what refers to the net interest income, but also structurally, we will benefit from the target towards securities development as we own the biggest liquidity toward this 40%, so we can bring the biggest advantages to our customers. Investment Fund services really double-digit growing business. You've seen that in 2017. And there is no reason to believe that it should not continue into next years. So it's a relatively broad portfolio. There's different opportunities. That is why we're also are at this point of time give this guidance that we should at least grow on a secular basis with 5% and with regards to the cyclical opportunities, you all have your own models. We learned that last year as a feedback from you. Therefore, we do not give specific guidance here for 2018. You will do your own assumptions, but the first 6 weeks are -- looks quite encouraging.

[Theodor Weimer, Chief Executive Officer]

Daniel, we have internal debate whether the NII growth potentials which we are having, whether they are at least semi or semi-secular, right. Because we are living off quite nicely of the increase of the interest rate in 2017 helped us quite nicely. We improved our NII by EUR 70 million roughly in 2017, and we expect to come more. So the NII business is probably semi or it's a hybrid of secular growth and cyclical growth.

[Operator]

Our next question comes from Johannes Thormann calling from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes Thormann, HSBC. First of all, a follow-up question. Did you say how much revenues you made in OTC clearing? Did I miss this or don't you want to comment on this in 2017? And secondly, in terms of your net income from banking, could you break down the current cash balances by currency, the EUR 13 billion? Could you update us on the sanctions as well which influences business? And last, but not least, is the guidance of EUR 15 million revenue for each 25 bps interest rate increase still valid?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. So with regard to OTC clearing the net revenue of 2017, the number is EUR 10 million.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Okay.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

With regard to the NII, so the EUR 13 billion customer cash balances. So roughly EUR 7 billion are U.S. dollar denominated where we get the higher increase although it's more than 50%. Roughly 30% is euro and the rest is other currencies like British pound, Austrian, Aussie dollar, et cetera, where we also get higher rates already today. With regards to the guidance EUR 15 million, so what are you exactly referring to? So I didn't get that.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Historically, you said every 25 bps interest rate increase, you're guiding for EUR 15 million additional revenues. Is this guidance still valid? Has this changed?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

No. Our view is that if you have the EUR 13 billion customer cash balances, so a 1% increase overall as an average would increase our EBIT by EUR 130 million.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Okay.

[Theodor Weimer, Chief Executive Officer]

But this assumes, Johannes, that we could keep -- in a scenario of higher interest rate, we could keep, right, the EUR 30 billion, right, with us. And there is normally a certain, let's say, a decrease if interest rates are going up, we do lose normally a bit of our total balances here.

[Operator]

Next up we have Owen Jones calling from Citi Group.

[Owen E Jones, Analyst]

A point of clarification, I think, to start with just the euro clearing ambition. Is that euro clearing done by Continental European customers or is that of the total euro clearing activity that is done in Europe inclusive of the U.K.? The second o the follow-up would be what are the implicit assumptions to that 25%? Because if there is a scenario in which the U.K. accepts a higher level of oversights then perhaps that 25% becomes more ambitious. And obviously, the reverse of that is that if activity does have to move away from London, then that 25% becomes very achievable and therefore quite low in that context. So just any comments that you could provide as to what the assumptions are around that 25%, please, would be useful.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. So far -- when we talk about the euro clearing then we just refer to the currency euro. So the bigger part is still in U.S. dollar and also in British pound. So our best guess estimation is that the euro business is roughly 30% of the overall OTC currency -- overall currencies. And our 25% is specifically referring to the dealer to buy-side business. So not the dealer-to-dealer business where we still would assume that the far majority will be with ATH. But interestingly to see and generally, we already got some market share, specifically in the dealer-to-dealer business. So maybe there are some chances too. But our focus is on the dealer to buy-side business what just started here. And our base case assumption with regard to the 25% comes also from the experience in the U.S. market as CME was able to get roughly that kind of market share, though it started with 25%, maybe it's closer to 20% currently. So that's our assumption based on what happens in the U.S. market. And in principle, it just makes sense to put not all eggs in 1 basket from a customer perspective. So if I would be CEO or Chief Risk Officer of a bank, so it purely makes sense from a systemic perspective not to have all your exposures towards 1 CCP. Therefore, we still think it makes even from a systemic point of view perfectly sense to always have a good alternative and, obviously, Deutsche Börse is by far the best alternative to get that. Well, that's basically our base case assumption with regard to the 25% what we want to achieve, and we are convinced to get this without any political decisions regarding potential relocation of business. Obviously, then the upside is more.

[Owen E Jones, Analyst]

Okay. Just a very quick follow-up, if I may. What does that 25% equate to as a euro billion amount in today's market? Do you have that figure?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. So overall, the daily volume is EUR 1,000 billion. So currently, we do some EUR 40 billion. So -- now you can calculate the 25%, but it really depends on what is the dealer-to-dealer business, what is the dealer to buy-side business, what is the business mix here. So that's a little bit difficult to analyze in a more detailed way. But in principle, it should be a 3-digit billion number to achieve that kind of more than 20% market share. And this 25% market share, just to mention that, we do not expect to get the full market share already in 2018. So our base case assumption is we still are in the connectivity process of some buy side customers like the big asset managers like BlackRock et cetera. So that's still not finalized. So we expect to get that kind of market share in 2019.

[Operator]

The next question comes from Philip Middleton calling from Merrill Lynch.

[Philip David Middleton, Analyst]

I wonder if you can tell us a little bit more about what's been going on inside the CSD-ICSD business in Clearstream? Because that came in a very strong performance in Q4. And in particular, is that sort of yield that, that business is generating something we can think of as being replicated in the coming few quarters?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. We still believe that growth is sustainable what you have seen here in Q4. On the one hand side roughly 1/3 out of that growth comes from NII. And here, you have your own medals -- models. So the basic assumption of the market is that in fact will do 2 or 3 steps in 2018. So the net income could grow further on and that's what we also expect. So we will get some tailwind here. Investment Fund service business is really strongly performing. We have a clear customer pipeline where we can show on a monthly basis which customer will now transfer to our platform and do additional business, so the double-digit growth here, we're really convinced that this will happen. With regard to securities lending in our GFS business, we see strong support to get HQLA, so high-quality liquid assets. There is a strong demand here, and we can deliver on that basis. And with TARGET2-Securities, I think, that's more a midterm approach where we currently preparing ourselves to gather additional market share in markets where we're not covered today. So -- but with the 3 years horizon, we also expect here that we get additional market share here.

[Philip David Middleton, Analyst]

Okay. So but you're saying that effective Q4 revenues, in particular, from the CSD ICSD are at a sustainable level for next year, are you?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. That's our understanding.

[Operator]

The next question comes from Anil Sharma calling from Morgan Stanley.

[Anil Kumar Sharma, Equity Analyst]

Actually 3 questions. The first one. Theodor, I think you mentioned in your remarks you can make some personnel and management changes. And I think in answer to one of the questions you felt the firm had too many MDs. So just wondering if you could elaborate a bit more. Is this a continuation of some of the programs that Carsten was doing or is there something different that you've kind of seen, now that you've been there for a little bit? Second one was just in terms of financial segment reporting. I was hoping Gregor, if you could give us some about the profitability of some of these segments, because I couldn't see in the release today. And then the final one, just to clarify on the OTC revenues, EUR 10 million. Gregor, I think you said it was net revenue. So I'm assuming this after the pay away to the banks. So if the volumes continue to grow as they have been and -- everyone can kind of see the data year-to-date, is that a linear relationship so the pay away to the banks goes -- it doesn't change as the volumes change is what I'm trying to understand.

[Theodor Weimer, Chief Executive Officer]

Okay. I'll take the first one, Anil, on the management side. Indeed, what we're doing right now is not follow on of what Carsten did in the past. It is currently as such when I took over the helmet when I was asked to take over the helmet of Deutsche Börse, I specifically asked the chairman of Deutsche Börse board that I have certain degree of freedom, and we have 2 management board members which are close to the retirement age and therefore asked them specifically to stay with us for another year or so. And I'm looking for succession in this regard. This is one area. And the second area is the number of MDs, which you were referring to, Anil. Indeed, our structure is, given the size of our exchange, it's over-structured and therefore, we need to maybe get more effective and little bit more leaner as well. And take example of communication, we have in the communication department currently when I started we had 3 MDs and as of now we're simply 1 MD. It is completely enough. And therefore, we go through the whole organization, and my focus is particularly, we need to become more commercial. I'm completely right following on what Carsten was doing. We need to work on the client side. We need to become more commercial. We need to overcome the silos, and this stuff doesn't necessarily mean that we cannot save some structural cost here, right, and that's what I was referring to. On the EUR 10 million.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. Second question is with regard to the segment reporting profitability. So we did prepare some restated 2017 numbers to you that you -- when you do the modeling that you are prepared to do. So we're in the process to deliver all these additional information. But with this approach, I think, it will be easier for you to do the modeling. Because now you don't have to take the [ blend ] of taking market data and services where we are basically some close to 70% EBITDA margin business like the index business and you combine that with a 30% EBITDA margin in the infrastructure service business. So splitting these now up, doing the exact cost allocation to the different segment, I think, it should be easier to do all your comparisons with other exchanges or with other providers of this services. And you will be prepared by this kind of information in short time. With regard to OTC clearing net revenue. Yes, that is the EUR 10 million we show on our books, though it's basically our after sharing of the economics. Your question is it linear or not, it's not linear. As there are some thresholds defined and there is some fixed cost what we firstly have to cover, and then later on, it's linear. So you can't do it immediately taking the volumes so that's not a linear function.

[Anil Kumar Sharma, Equity Analyst]

Okay. So just, can you just help me get some idea. So if the volumes double, you're clearly saying the revenue don't double, but did they go up 50% or 25%? How do I think about it?

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. So our basic assumption for 2018 is that we get EUR 25 million net revenues out of OTC interest rates for business.

[Anil Kumar Sharma, Equity Analyst]

Okay. And then, by 2019, that grows to EUR 50 million.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes, exactly so.

[Operator]

The next question comes from Mike Werner calling from UBS.

[Michael Joseph Werner, Executive Director and Equity Research Analyst]

Two questions here. First on the 360T platform. You mentioned the rollout of some new functionalities in Q1 and Q2 of this year. Is this something we can expect to see in terms of revenue growth this year? Are there any specific targets you have for this business as you do include it within your secular growth drivers? And then the second question just, I guess, a follow-up to Phillip's question on the Clearstream ICSD and CSD business. We saw a substantial increase in revenues from Q3 to Q4 from EUR 132 million to EUR 150 million. I was just wondering if you can provide a little bit more granularity as to what drove that increase Q-on-Q.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes, with regard to the 360T platform introduction in Q1 and Q2. So again, in Q1, it's a trading so it's a standard limit order book functionality what will go live and in Q2 it's a clearing functionality. It will be a slow start. We have to be realistic here as there is no obligation to use our platform. So it's different with regard to the interest rate swap. Therefore, we expect a slow start. So it's on us to find some liquidity provider, some market providers who would support us. And then obviously we can start here. So it's a smaller 1-digit million euro amount what we expect out of that in 2018. But it's on us to get the awareness, to get the traction, and as we're the first one in the market, we are convinced that for the next 3 to 5 years, it could be really an attractive market with some more than EUR 50 million out of additional FX trading and clearing revenues. But it will take a little bit more time. With regard to what are the drivers in Q3 and Q4, first of all, it's increased settlement activity as a main driver where you see double-digit growth here. Then we were also able on the pricing side, so you are aware that we changed our pricing model after TARGET2-Securities though we increased basically the custody revenues to offset the settlement revenues. We have constant discussion around rebates, volume rebates on Clearstream side, and there are also some smaller effect in Q4 where we could even release some of the price rebate where we're able to defend our position. And that's obviously good news.

[Operator]

The next question comes from Martin Price calling from Crédit Suisse.

[Martin Price, Research Analyst]

Just a couple of quick questions for me, please. First on the share buyback. I was wondering if you could just confirm the stock you are repurchasing this year has been held in treasury rather than being canceled or there has been a change in policy there. And second, you have a large bond due to expire next month. I was just wondering if you could confirm the plan is to refinance that rather than simply roll it off.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

Yes. You are right. A bond of EUR 600 million matures end of March, and we are currently in the process to simply replace it. And that's what we're preparing, and our target is to do that until end of March. With regard to share buyback, in principle, it's our idea of these additional shares that we buy back that we cancel that.

[Operator]

Next up, we have Jochen Schmitt calling from Bankhaus Metzler.

[Jochen Schmitt, Research Analyst]

Just one question summarizing your remarks on expenses. Would it be rather conservative from today's perspective to expect operating expenses to increase roughly in line with inflation? That's my question.

[Gregor Pottmeyer, CFO & Member of the Executive Board]

In principle, it's our idea to compensate exactly that kind of inflation as I mentioned, this continuous improvement that's the task of every line manager. So we want to make sure that you can see the scalability of our business model, and I don't want to give now specific operating expense and guidance. So we say, revenues and again structural and net revenue growth of at least 5%, and as a consequence, at least 10% net income growth and cyclicality comes again on top of that. It's not our target. Our focus is top line growth, obviously. And then, we have to consider what is the cost increase also looking on our revenue opportunities. And we should be also a little bit more flexible if we see some good ideas or basically new technology that when it makes sense that we're also ready to invest here. So overall, you will see the scalability of our business model, and we don't want to give now specific OpEx guidance.

[Operator]

Next up we have Roland Pfänder calling from ODDO BHF.

[Roland Pfänder, Research Analyst]

Could you provide us with an outlook on the net interest income in the Eurex segment? You have there any positive impacts from your OTC clearing initiatives going forward?

[Jan Strecker]

No. The net interest income in the Eurex segment is based on the amount of cash collaterals that are held, so you can deposit securities collaterals and some cash collaterals but first of all, it depends on that mix. And secondly, yes, if we see volume growth in our business either from the traditional Eurex products, from new product or from OTC clearing activities, then we would expect that the amount of collateral is increasing and thus also the Eurex NII will increase. At the moment we're collecting the 10 basis point admin fee on those cash collaterals. If interest rates turn positive, so if there's market development, that might increase somewhat. So that is an opportunity. And in our business case in terms of the OTC clearing activities, this elements of additional collaterals from OTC clearing also factors into the Eurex OTC clearing revenue, so that's a component in terms of the business case and the way we're showing those revenues. All right. If there are no further questions in the pipeline, we would like to conclude today's call. Thank you very much for your participation, and have a good day.