CME

CME Group Inc. (CME)

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CME Group (CME)

Q1 2014 Earnings Call

May 01, 2014 8:30 am ET

Executives

John C. Peschier - Managing Director of Investor Relations

Phupinder S. Gill - Chief Executive Officer, Director, Member of Executive Committee and Member of Strategic Steering Committee

James E. Parisi - Chief Financial Officer and Senior Managing Director of Finance & Corporate Development

Terrence A. Duffy - Executive Chairman, President, Chairman of Executive Committee and Member of Strategic Steering Committee

Bryan T. Durkin - Chief Operating Officer

Analysts

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Alex Kramm - UBS Investment Bank, Research Division

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Kenneth Hill - Barclays Capital, Research Division

Jillian Miller - BMO Capital Markets U.S.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Chinedu Christian Onwugbolu - Crédit Suisse AG, Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Neil Stratton

Gaston F. Ceron - Morningstar Inc., Research Division

Presentation

Operator

Welcome to the CME Group First Quarter 2014 Earnings Call. [Operator Instructions] At this time, I'll turn the call over to Mr. John Peschier. You may begin, sir.

John C. Peschier

Thank you, and thank all of you for joining us this morning. Gill and Jamie will spend a few minutes outlining the highlights of the first quarter, and then we'll open up the call for your questions. Terry and Bryan are here in the room also and will participate in the Q&A. Before they begin, I'll read the Safe Harbor language.

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

Now I'd like to turn the call over to Gill.

Phupinder S. Gill

Thanks, John. Good morning, and thank you for joining us today. I'm going to highlight CME Group's first quarter and then turn it over to Jamie to review our financials. We are pleased to announce solid results to start the year, highlighted by multiple records across our industry-leading diverse portfolio of products. The major driver of this performance was strong growth in short-term interest rate volumes throughout the quarter, further sparked by a report from the Federal Reserve in late March, indicating that the FOMC average estimate of the year-end Fed Funds rate in 2015 and 2016, had increased notably. The Federal Reserve also indicated that the definition of the "considerable period" during which rates would remain low beyond the end of quantitative easing may only be 6 months. The Federal Reserve Chair later softened this guidance on rates; nevertheless, the Feds Fund Futures Curve and implied estimate of when rates will rise, shifted upwards with the market expecting the Fed Funds rate to increase sometime in mid-2015. As you continue to see positive economic signs and an evolving desire within the Federal Reserve and extraordinary support measures are no longer needed, our interest rate option products, which allow for more sophisticated risk management of volatility and timing, have been rapidly growing. The market reacted positively in the first quarter 2014 to this momentum. Average daily volume for our core futures and options complex was up 9% compared to first quarter last year, mainly driven by strong growth in our 2 largest product areas based on volume, which are interest rates and equities. Our focus on building out and extending our options franchise continues to successfully grow this important part of our overall business. In total, first quarter 2014 options ADV was 2.5 million contracts, the second highest ADV in revenue quarter ever for options and was up 40% compared to last year.

Interest rate trading volumes rose 19% overall during the first quarter compared to the prior year period. Eurodollar futures and options grew 46% in the quarter, highlighted by a growth of 106% in options, as well as a new daily volume record in Eurodollar futures of 6 million contracts, which were traded on March 19. While treasury futures and options average daily volume was flat in the first quarter 2014 compared to last year, treasury options volume continued to perform well and was up 18%. In addition, momentum continues to build in our Ultra T-Bond futures and options product, which had record quarterly average daily volume of 104,000 contracts, which are up 22% compared to the first quarter last year. April is a very strong month for interest rate complex with average daily volume up almost 40% for the month versus the same period last year, highlighted by growth of more than 70% in Eurodollar futures and options for all the month. Our Eurodollar complex is the clear choice for the market to express its views of the FOMC's policy.

Over the last 12 months, open interest in Eurodollar options has doubled. The key driver here is the likely end of quantitative easing in the fourth quarter of 2014, which is already shifting attention to the next big policy decision, which is when and how much to raise the target at funds rate. With the rate decision coming into full focus, market participants have begun to adjust their risk management activities in the short end in the interest rate curve. Our interest rate swap over-the-counter complex has also benefited on the Fed's actions, as well as our continued efforts to add new capabilities. Open interest continues to trend upward, increasing over 50% from the end of the year to $13.7 trillion at the end of April. Over 440 global market participants have cleared at CME Group, taking advantage of the most capital efficient solution in the industry. 8 clearing members are now live with the service and over 30 customer accounts are already benefiting from this scalable solution. These clients using our portfolio margining service are saving on average over 40% through margin offsets, totaling close to $2 billion of efficiencies. Average daily notional volume cleared in the first quarter 2014 was $125 billion, with the new daily record of $264 billion cleared on March 20, 2014. Although, we've experienced fluctuations in market share for our dealer-to-customer IRS, notional volume cleared, we've experienced a steady increase in the amount of daily trades executed in our market from about 1,200 a day in Q4 last year to 1,500 in Q1 of this year at a level that was consistent with our primary competitor. The number of trades cleared has a much higher correlation to revenue than that notional value of clear trades. Jamie will explain this when he discusses the financials.

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