CME GROUP INC. The following discussion is provided as a supplement to, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and notes in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 . References in this discussion and analysis to "we" and "our" are toCME Group Inc. (CME Group ) and its consolidated subsidiaries, collectively. References to "exchange" are toChicago Mercantile Exchange Inc. (CME), theBoard of Trade of theCity of Chicago, Inc. (CBOT),New York Mercantile Exchange, Inc. (NYMEX), andCommodity Exchange, Inc. (COMEX), collectively, unless otherwise noted. RESULTS OF OPERATIONS Financial Highlights The following summarizes significant changes in our financial performance for the periods presented. Quarter Ended March 31, (dollars in millions, except per share data) 2020 2019 Change Total revenues$ 1,522.1 $ 1,179.6 29 % Total expenses 562.2 548.6 2 Operating margin 63.1 % 53.5 % Non-operating income (expense)$ 29.4 $ 9.2 n.m. Effective tax rate 22.5 % 22.5 % Net income attributable to CME Group$ 766.2 $ 496.9 54 Diluted earnings per common share attributable to CME Group 2.14 1.39 54 Cash flows from operating activities 757.1 669.2 13 n.m. not meaningful Revenues Quarter Ended March 31, (dollars in millions) 2020 2019 Change
Clearing and transaction fees
111.8 96.9 15
Total Revenues $ 1,522.1 $ 1,179.6 29
Clearing and Transaction Fees
Futures and Options Contracts
The following table summarizes our total contract volume, revenue and average
rate per contract for futures and options. Total contract volume includes
contracts that are traded on our exchange and cleared through our clearing house
and certain cleared-only contracts. Volume is measured in round turns, which is
considered a completed transaction that involves a purchase and an offsetting
sale of a contract. Average rate per contract is determined by dividing total
clearing and transaction fees by total contract volume. Contract volume and
average rate per contract disclosures exclude trading volume for the cash
markets business and interest rate swaps volume.
Quarter Ended
March 31,
2020 2019 Change
Total contract volume (in millions) 1,674.8 1,136.6 47 % Clearing and transaction fees (in millions)$ 1,133.0 $ 810.9 40 Average rate per contract$ 0.676 $ 0.713 (5 ) 23
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We estimate the following net changes in clearing and transaction fees based on changes in total contract volume and changes in average rate per contract for futures and options during the first quarter of 2020 when compared with the same period in 2019. (in millions) Quarter Ended
Increase due to change in total contract volume
(42.0 )
Net increase in clearing and transaction fees
Average rate per contract is impacted by our rate structure, including
volume-based incentives; product mix; trading venue, and the percentage of
volume executed by customers who are members compared with non-member customers.
Due to the relationship between average rate per contract and contract volume,
the change in clearing and transaction fees attributable to changes in each is
only an approximation.
Contract Volume
The following table summarizes average daily contract volume. Contract volume
can be influenced by many factors, including political and economic conditions,
the regulatory environment and market competition.
Quarter Ended
March 31,
(amounts in thousands) 2020 2019 Change
Average Daily Volume by Product Line: Interest rates 13,813 10,314 34 % Equity indexes 6,498 3,161 106 Foreign exchange 1,079 885 22 Agricultural commodities 1,506 1,381 9 Energy 3,228 2,331 38 Metals 889 561 58 Aggregate average daily volume 27,013 18,633
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Average Daily Volume by Venue: CME Globex 24,582 16,576 48 Open outcry 1,281 1,284 - Privately negotiated 1,150 773 49 Aggregate average daily volume 27,013 18,633
45
Electronic Volume as a Percentage of Total Volume 91 % 89 %
Overall market volatility increased significantly throughout the first quarter of 2020 as compared with the same period in 2019, which we believe resulted from economic uncertainty caused by governmental and business response to the COVID-19 pandemic, including social distancing and stay at home orders. During the first quarter, theFederal Reserve made the unexpected decision to lower the federal funds rate due to economic concerns from the pandemic, which resulted in significant volatility within the financial and equity markets. In addition, heightened producer price competition within the oil markets combined with lower energy demands during the COVID-19 pandemic resulted in significant market volatility within the energy market during the first quarter of 2020. We believe these factors contributed to the increase in volume during the quarter. 24
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Interest Rate Products The following table summarizes average daily contract volume for our key interest rate products.Eurodollar Front 8 futures include contracts expiring in two years or less. Eurodollar Back 32 futures include contracts with expirations after two years through ten years. Quarter Ended March 31, (amounts in thousands) 2020 2019 Change
Eurodollar futures and options:
Front 8 futures 2,596 2,099 24 %
Back 32 futures 892 720 24
Options 2,384 1,720 39
U.S. Treasury futures and options:
10-Year 3,191 2,269 41
5-Year 1,699 1,373 24
2-Year 945 694 36
Treasury bond 638 459 39
Federal Funds futures and options 501 274 83
In the first quarter 2020 when compared with the same period in 2019, interest rate contract volume increased significantly due to an increase in volatility, which we believe was the result of financial instability caused by governmental and business response to the COVID-19 pandemic. In addition, there was heightened uncertainty surrounding theFederal Reserve's interest rate policy following theFederal Reserve's unexpected decision to make significant cuts to the Federal Funds interest rate during the quarter, which we believe contributed to an increase in contract volume. Equity Index Products The following table summarizes average daily contract volume for our key equity index products. Volumes below for the first quarter of 2020 include Micro E-mini contract volumes for each index beginning onMay 6, 2019 . Quarter Ended March 31, (amounts in thousands) 2020 2019 Change
E-mini S&P 500 futures and options 4,251 2,166 96 % E-mini NASDAQ 100 futures and options 1,293 491 163 E-mini Russell 2000 futures and options 310 150 107
In the first quarter of 2020, equity index contract volume increased
significantly when compared with the same period in 2019, which we believe was
attributable to significant volatility resulting from the economic impact of
governmental and business actions to combat the COVID-19 pandemic. Average daily
contract volume in the first quarter of 2020 also included approximately 1.4
million in Micro-E-mini equity index contracts, which have a notional size of
one-tenth of the traditional E-mini contracts.
Foreign Exchange Products
The following table summarizes average daily contract volume for our key foreign
exchange products.
Quarter Ended
March 31,
(amounts in thousands) 2020 2019 Change
Euro 285 239 19 %
Japanese yen 198 133 48
British pound 133 140 (5 )
Australian dollar 131 111 18
In the first quarter of 2020, overall foreign exchange contract volume increased
when compared with the same period in 2019. We believe the increase in volume
was driven by the economic impact of governmental and business actions to combat
the COVID-19 pandemic, which resulted in significant market volatility. In
addition, market participants looked towards safe haven currencies, specifically
the Japanese Yen, as it is traditionally viewed as a more stable currency.
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Agricultural Commodity Products The following table summarizes average daily contract volume for our key agricultural commodity products.
Quarter Ended
March 31,
(amounts in thousands) 2020 2019 Change
Corn 436 484 (10 )%
Soybean 289 231 25
Wheat 251 234 8
Overall commodity contract volume increased in the first quarter of 2020 when
compared with the same period in 2019. We believe the increase in soybean
contract volume was due to market optimism surrounding future trade following
the initial trade agreement between the United States and China . Corn contract
volume decreased due to lower price volatility, which we believe was caused by
large stock piles and lower demand.
Energy Products
The following table summarizes average daily contract volume for our key energy
products.
Quarter Ended
March 31,
(amounts in thousands) 2020 2019 Change
WTI crude oil 1,792 1,346 33 %
Natural gas 742 485 53
Refined products 497 382 30
Overall energy contract volume increased in the first quarter of 2020 when
compared with the same period in 2019, largely due to an increase in price
volatility. We believe the increase in crude oil contract volume was due to
volatility caused by the economic uncertainty due to governmental and business
response to the COVID-19 pandemic and heightened producer price competition
within the crude oil market. Overall demand for crude oil has declined, which
contributed to a large scale decline in crude oil prices. The increase in
natural gas contract volume is due to volatility caused by a decrease in global
demand during periods of strong natural gas production.
Metal Products
The following table summarizes average daily volume for our key metal products.
Quarter Ended
March 31,
(amounts in thousands) 2020 2019 Change
Gold 608 340 79 %
Silver 125 85 47
Copper 121 105 15
Overall metal contract volume increased in the first quarter of 2020 when
compared with the same period in 2019. This was due to investors using gold and
other precious metals as safe-haven alternative investments due to high
volatility within other markets because of economic uncertainty.
Average Rate per Contract
The average rate per contract decreased in the first quarter of 2020 when
compared with the same period in 2019. The decrease was largely due to a higher
proportion of equity index contract volume, relative to other product lines.
Equity index products have a lower average rate per contract versus some of the
other product lines. The decrease in average rate per contract was also due to
the introduction of the micro-E-mini equity index contracts, which have a lower
average rate per contract compared with a standard E-mini contract. Micro-E-mini
equity index contracts have a notional size of one-tenth of the traditional
E-mini contracts.
Cash Markets Business
Total clearing and transaction fees revenues in the first quarter of 2020
include $124.4 million of transaction fees attributable to the cash markets
business acquired from NEX compared with $122.9 million in the first quarter of
2019. This revenue primarily includes BrokerTec Americas LLC's fixed income
volume and EBS's foreign exchange volume.
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Quarter Ended
March 31,
(amounts in millions) 2020 2019
BrokerTec
52.5 48.9
The related average daily notional value for the first quarter of 2020 were as
follows:
Quarter Ended
March 31,
(amounts in billions) 2020 2019 Change
U.S. Treasury $ 192.8 $ 172.4 12 %European Repo (in euros) 262.6 271.4 (3 ) Spot FX
97.9 81.5 20
Overall average daily notional value for the cash markets business increased in
the first quarter of 2020 when compared with the same period in 2019. The
increases in U.S. Treasury and Spot FX trading is largely due to overall market
volatility caused by economic uncertainty surrounding government and business
responses to the COVID-19 pandemic.
Concentration of Revenue
We bill a substantial portion of our clearing and transaction fees directly to
our clearing firms. The majority of clearing and transaction fees received from
clearing firms represent charges for trades executed and cleared on behalf of
their customers. One individual firm represented approximately 10% of our
clearing and transaction fees in the first quarter of 2020. Should a clearing
firm withdraw, we believe that the customer portion of the firm's trading
activity would likely transfer to another clearing firm of the exchange.
Therefore, we do not believe we are exposed to significant risk from the ongoing
loss of revenue received from or through a particular clearing firm.
Other Sources of Revenue
During the first quarter of 2020 when compared with the same period in 2019,
overall market data and information services revenue remained relatively flat.
The increase in market data and information services revenue from additional
market data distribution channels was partially offset by a modest decline in
screen counts due to cost-cutting initiatives at customer firms.
The two largest resellers of our market data represented approximately 35% of
our market data and information services revenue in the first quarter of 2020.
Despite this concentration, we consider exposure to significant risk of revenue
loss to be minimal. In the event that one of these vendors no longer subscribes
to our market data, we believe the majority of that vendor's customers would
likely subscribe to our market data through another reseller. Additionally,
several of our largest institutional customers that utilize services from our
two largest resellers report usage and remit payment of their fees directly to
us.
In the first quarter of 2020 when compared with the same period in 2019, the
increase in other revenues was largely due to an increase in custody fees in the
first quarter of 2020.
Expenses
Quarter Ended
March 31,
(dollars in millions) 2020 2019 Change
Compensation and benefits $ 207.5 $ 230.3 (10 )%
Technology 47.7 47.1 1Professional fees and outside services 41.7 39.4 6 Amortization of purchased intangibles 77.3 80.7 (4 ) Depreciation and amortization
35.3 32.9 8
Licensing and other fee agreements 73.9 40.5 83
Other 78.8 77.7 1
Total Expenses $ 562.2 $ 548.6 2
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Operating expenses increased by$13.6 million in the first quarter 2020 when compared with the same period in 2019. The following table shows the estimated impacts of key factors resulting in the change in operating expenses: Quarter Ended March 31, 2020 Change as a Amount of Percentage of (dollars in millions) Change Total Expenses Licensing and other fee agreements $ 33.4 6 % Intangible and fixed asset impairments 23.5 4 Salaries, benefits and employer taxes (3.2 ) (1 ) Marketing (4.9 ) (1 ) Foreign currency exchange rate fluctuation (11.2 ) (2 ) Non-qualified deferred compensation plans (14.7 ) (3 ) Other expenses, net (9.3 ) (1 ) Total increase $ 13.6 2 % Increases in operating expenses in the first quarter of 2020 when compared with the same period in 2019 were as follows: • Licensing and other fee agreements increased primarily due to stronger
volume across equity products.
• In the first quarter of 2020, we recognized impairment charges on certain
intangibles and fixed assets related to a subsidiary. These charges
contributed to an increase in other expenses during the first quarter of
2020.
Decreases in operating expenses in the first quarter of 2020 when compared with
the same period in 2019 were as follows:
• A decrease in our non-qualified deferred compensation liability, the
impact of which does not affect net income because of an equal and
offsetting change in investment income, contributed to a decrease in
compensation and benefits expense.
• Compensation and benefits expense also decreased as a result of lower
headcount throughout the first quarter of 2020 compared to the same period
in 2019.
• In the first quarter of 2020, we recognized a net gain of
primarily due to the decline in the British pound versus
exchange rate, compared with a net loss of
quarter of 2019 when the British pound appreciated versus the
Gains and losses from exchange rate fluctuations result when subsidiaries
with a
monetary assets and liabilities denominated in foreign currencies.• Marketing expense decreased in the first quarter of 2020 compared to the
same period in 2019 due to the timing of planned advertising and media
campaigns.
Non-Operating Income (Expense)
Quarter Ended
March 31,
(dollars in millions) 2020 2019 Change
Investment income $ 95.9 $ 178.7 (46 )%
Interest and other borrowing costs (40.9 ) (48.1 ) (15 )
Equity in net earnings (losses) of unconsolidated
subsidiaries 51.2 40.5 26
Other non-operating income (expense) (76.8 ) (161.9 ) (53 )
Total Non-Operating $ 29.4 $ 9.2 n.m.
n.m. not meaningful
Investment income. Investment income decreased in the first quarter of 2020 when
compared with the same period in 2019, largely due to a decrease in earnings
from cash performance bond and guaranty fund contributions that are reinvested.
This decrease in earnings resulted primarily from lower rates of interest earned
in the cash account at the Federal Reserve Bank of Chicago following significant
interest rate cuts during the quarter despite an increase in our average
reinvestment amount.
Interest and other borrowing costs. Interest and other borrowing costs were
lower in the first quarter of 2020 when compared with the same period in 2019,
primarily due to interest expense recognized on the €350.0 million fixed rate
notes and the ¥19.1
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billion term loan assumed as part of the NEX acquisition in 2018 and subsequently paid down during the first quarter of 2019. Interest and borrowing costs on commercial paper issuances were lower in the first quarter of 2020, as there were higher average balances of commercial paper outstanding during the first quarter of 2019 when compared with the same period in 2020. Equity in net earnings (losses) of unconsolidated subsidiaries. Higher income generated from ourS&P/Dow Jones Indices LLC business venture contributed to an increase in equity in net earnings (losses) of unconsolidated subsidiaries in the first quarter of 2020 when compared with the same period in 2019. Other income (expense). Other expenses decreased in the first quarter of 2020 when compared with the same period in 2019. We recognized lower expenses in the first quarter of 2020 related to the distribution of interest earned on performance bond collateral reinvestments to the clearing firms due to lower interest income earned on our reinvestment. In addition, a gain of$1.5 million was recognized on derivative contracts in the first quarter of 2020 compared to a net loss of$14.4 million during the first quarter of 2019. Income Tax Provision The following table summarizes the effective tax rates for the periods presented: 2020 2019 Quarter ended March 31 22.5 % 22.5 % The overall effective tax rate in the first quarter of 2020 remained flat compared with the same period in 2019. In the first quarter of 2020, we recognized an increased benefit from the IRC Section 250 deduction compared with the same period in 2019. In the first quarter of 2019, we recognized tax benefits related to the recognition of certain tax assets that were previously reserved. Liquidity and Capital Resources Sources and Uses of Cash. Net cash provided by operating activities increased in the first quarter of 2020 when compared with the same period in 2019 largely due to the increase in contract volume. Net cash used in investing activities remained relatively flat in the first quarter of 2020 when compared with the same period of 2019. Cash used in financing activities was higher in the first quarter of 2020 when compared with the same period in 2019 due to an increase in cash dividends. Debt Instruments. The following table summarizes our debt outstanding atMarch 31, 2020 : (in millions) Par Value
Fixed rate notes due
€ 15.0
Fixed rate notes due
$ 100.0
_______________
(1) We maintained a forward-starting interest rate swap agreement that
modified the interest obligation associated with these notes so that the
interest payable on the notes effectively became fixed at a rate of 3.32%.
(2) We maintained a forward-starting interest rate swap agreement that
modified the interest obligation associated with these notes so that theinterest payable on the notes effectively became fixed at a rate of 3.11%.
(3) We maintained a forward-starting interest rate swap agreement that
modified the interest obligation associated with these notes so that the
interest payable effectively became fixed at a rate of 4.73%.
We maintain a $2.4 billion multi-currency revolving senior credit facility with
various financial institutions, which matures in November 2022 . The proceeds
from this facility can be used for general corporate purposes, which includes
providing liquidity for our clearing house in certain circumstances at CME
Group's discretion and, if necessary, for maturities of commercial paper. As
long as we are not in default under this facility, we have the option to
increase it up to $3.0 billion with the consent of the agent and lenders
providing the additional funds. This facility is voluntarily pre-payable from
time to time without premium or penalty. Under this facility, we are required to
remain in compliance with a consolidated net worth test, which is defined as our
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consolidated shareholders' equity atSeptember 30, 2017 , giving effect to share repurchases made and special dividends paid during the term of the agreements (and in no event greater than$2.0 billion in aggregate), multiplied by 0.65. We currently do not have any borrowings outstanding under this facility, but the outstanding commercial paper balance is backstopped against this facility. We maintain a 364-day multi-currency revolving secured credit facility with a consortium of domestic and international banks to be used in certain situations by the clearing house. The facility provides for borrowings of up to$7.0 billion . We may use the proceeds to provide temporary liquidity in the unlikely event of a clearing firm default, in the event of a liquidity constraint or default by a depositary (custodian for our collateral), or in the event of a temporary disruption with the domestic payments system that would delay payment of settlement variation between us and our clearing firms. Clearing firm guaranty fund contributions received in the form of cash orU.S. Treasury securities as well as the performance bond assets deposited by defaulting clearing members can be used to collateralize the facility. AtMarch 31, 2020 , guaranty funds available to collateralize the facility totaled$8.9 billion . We have the option to request an increase in the line from$7.0 billion to$10.0 billion . Our 364-day facility contains a requirement that CME remain in compliance with a consolidated tangible net worth test, defined as CME consolidated shareholder's equity less intangible assets (as defined in the agreement), of not less than$800.0 million . We currently do not have any borrowings outstanding under this facility. The indentures governing our fixed rate notes, our$2.4 billion multi-currency revolving senior credit facility and our 364-day multi-currency revolving secured credit facility for$7.0 billion do not contain specific covenants that restrict the ability to pay dividends. These documents, however, do contain other customary financial and operating covenants that place restrictions on the operations of the company that could indirectly affect the ability to pay dividends. AtMarch 31, 2020 , we have excess borrowing capacity for general corporate purposes of approximately$2.3 billion under our multi-currency revolving senior credit facility. AtMarch 31, 2020 , we were in compliance with the various financial covenant requirements of all our debt facilities.CME Group , as a holding company, has no operations of its own. Instead, it relies on dividends declared and paid to it by its subsidiaries in order to provide the funds which it uses to pay dividends to its shareholders. To satisfy our performance bond obligation with Singapore Exchange Limited, we may pledge CME-ownedU.S. Treasury securities in lieu of, or in combination with, irrevocable standby letters of credit. AtMarch 31, 2020 , the letters of credit totaled$310.0 million . The following table summarizes our credit ratings atMarch 31, 2020 : Short-Term Long-Term Rating Agency Debt Rating Debt Rating Outlook Standard & Poor's A1+ AA- Stable Moody's Investors Service P1 Aa3 Stable Given our cash flow generation, our ability to pay down debt levels and our ability to refinance existing debt facilities if necessary, we expect to maintain an investment grade rating. If our ratings are downgraded below investment grade due to a change of control, we are required to make an offer to repurchase our fixed rate notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest. Liquidity and Cash Management. Cash and cash equivalents totaled$0.9 billion and$1.6 billion atMarch 31, 2020 andDecember 31, 2019 , respectively. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy and alternative investment choices. A majority of our cash and cash equivalents balance is invested in money market mutual funds that invest only inU.S. Treasury securities,U.S. government agency securities andU.S. Treasury security reverse repurchase agreements. Our exposure to credit and liquidity risk is minimal given the nature of the investments. Cash that is not available for general corporate purposes because of regulatory requirements or other restrictions is classified as restricted cash and is included in other current assets or other assets in the consolidated balance sheets. OnMay 5, 2020 ,CME Group's board of directors declared a regular quarterly dividend of$0.85 per share payable onJune 25, 2020 to the shareholders of record as ofJune 10, 2020 . AtMarch 31, 2020 , the cash performance bonds and guaranty fund contributions on the consolidated balance sheet was$100.4 billion compared with$37.1 billion atDecember 31, 2019 . The increase in the balance was due to an increase in margin requirements. Regulatory Requirements. CME is regulated by the CFTC as aU.S. Derivatives Clearing Organization (DCO). DCOs are required to maintain capital, as defined by the CFTC, in an amount at least equal to one year of projected operating expenses as 30
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well as cash, liquid securities, or a line of credit at least equal to six months of projected operating expenses. CME was designated by theFinancial Stability Oversight Council as a systemically important financial market utility under Title VIII of Dodd-Frank. As a result, CME must comply with CFTC regulations applicable to a systemically important DCO for financial resources and liquidity resources. CME is in compliance with all DCO financial requirements. CME, CBOT, NYMEX and COMEX are regulated by the CFTC as Designated Contract Markets (DCM). DCMs are required to maintain capital, as defined by the CFTC, in an amount at least equal to one year of projected operating expenses as well as cash, liquid securities or a line of credit at least equal to six months of projected operating expenses. Our DCMs are in compliance with all DCM financial requirements.BrokerTec Americas LLC is required to maintain sufficient net capital under Securities Exchange Act Rule 15c3-1 (the Net Capital Rule). The Net Capital Rule focuses on liquidity and is designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand at all times to satisfy claims promptly. Rule 15c3-3, or the customer protection rule, which complements rule 15c3-1, is designed to ensure that customer property (securities and funds) in the custody of broker-dealers is adequately safeguarded. By law, both of these rules apply to the activities of registered broker-dealers, but not to unregistered affiliates. The firm began operating as a (k)(2)(i) broker dealer inNovember 2017 following notification to theFinancial Industry Regulatory Authority and theSEC . A company operating under the (k)(2)(i) exemption is not required to lock up customer funds as would otherwise be required under Rule 15c3-3 of the Securities Exchange Act. Recent Accounting Pronouncements Refer to Note 2. Accounting Policies in our notes to the consolidated financial statements for information on newly issued and recently adopted accounting pronouncements that are applicable to us.
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