CME Group - Q3 2024

Transcript

Operator (participant)

Welcome to the CME Group Third Quarter 2024 Earnings Call. At this time, I would like to inform all participants that your lines have been placed on a listen-only mode until the question-and-answer session of today's conference. I would now like to turn the call over to Adam Minick. Please go ahead.

Adam Minick (Head of Investor Relations)

Good morning. I hope you're all doing well today. We released our executive commentary earlier this morning, which provides extensive details on the third quarter, 2024, which we will be discussing on this call. I'll start with the safe harbor language, and then I'll turn it over to Terry. Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They 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 statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures.

With that, I'll turn the call over to Terry.

Terry Duffy (Chairman and CEO)

Thanks, Adam, and thank you all for joining us this morning. I'm going to make a few brief comments about the quarter and the overall environment. Following that, Lynne will provide an overview of our third quarter financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. Our record-breaking performance in the third quarter demonstrated the continued growing need for risk management globally. The third quarter average daily volume of 28.3 million contracts was the highest quarterly ADV in CME Group's history and increased 27% compared to the same period last year. This strong growth was broad-based. We achieved year-over-year growth in both volume and open interest across every asset class for the second consecutive quarter.

In aggregate, our financial products volume grew by 28%, and our Commodities sector volumes grew by 20%. This record volume was aided by the effectiveness of our volume tiers, including the 36% year-over-year growth in our interest rate complex to 14.9 million contracts a day, with all-time record volume levels for both SOFR futures, and Treasuries. We achieved this growth without lowering any fees or introducing any new incentive programs for these products. The lower RPC was driven by increased trading volume, and our focus on tiering allowed our incremental earnings growth, given the operating leverage in our model. Our SOFR complex traded over 5.9 million contracts per day in the quarter and 6.9 million per day in September, all while seeing the customer network broaden, with large open interest holders reaching a new record high in September.

As you know, we often hear the view that a rising Fed rate environment is best for CME's interest rate volumes. However, over the last year, there have been no Fed rate hikes and one rate cut, and our interest rate complex grew 17% over the prior year, which had six rate hikes totaling 2.25%. Opposing views of potential and actual Fed rate changes, combined with ongoing levels of issuance and deficit financing, should continue to provide tailwinds for interest rate trading. The uncertainty around the U.S. election and geopolitical events around the world also contribute to a growing need for liquid and efficient markets to manage these risks in interest rates and across all of our asset classes. Q3 was also a record quarter for our international business, where average daily volume reached 8.4 million contracts, up 29% versus last year.

This was led by a record 6.2 million average daily volume for EMEA, which was up 30%, and 1.9 million contracts per day in APAC, or up 28%. The record international volume was driven by growth in all six asset classes in both EMEA and APAC, with the highest volumes coming from interest rates and equity products. In addition to the impressive volume results, we delivered record financial results for the second consecutive quarter. With that short summary, I will now turn the call over to Lynne to review these results in more detail.

Lynne Fitzpatrick (President and CFO)

Thanks, Terry, and thank you all for joining us this morning. CME Group set all-time records for quarterly revenue, net income, and earnings per share in the second quarter this year and immediately surpassed each of those records this quarter. Starting with the highest-ever quarterly revenue at nearly $1.6 billion, up 18% from the third quarter in 2023. Clearing and transaction fee revenue increased 20% on our record quarterly volume. Market data revenue of $178 million increased 6% from the same quarter last year, and other revenue increased 29% to over $109 million. Our strong cost discipline led to adjusted expenses of $489 million for the quarter and $391 million excluding license fees. The resulting operating income of approximately $1.1 billion set a new quarterly record.

Our adjusted operating margin of 69.1% was up 260 basis points from 66.5% in the same period last year. CME Group had an adjusted effective tax rate of 22.3%. Terry talked about the strength of our international business. The strong growth coming from outside the U.S. has resulted in a lower effective tax rate. We expect this trend to continue in Q4, and we're lowering our tax rate guidance for the year to a range of 22.5%-23% as a result. Driven by the strong revenue growth and operating margin levels, we delivered the highest quarterly adjusted net income and earnings per share in our history, at $977 million and $2.68 per share, respectively, both up 19% from the third quarter last year.

This represents an adjusted net income margin for the quarter of 61.7%. Capital expenditures for the third quarter were approximately $30 million, and cash at the end of the period was approximately $2.6 billion. Our continued product innovation, new customer acquisition, and deep liquid markets across the six major asset classes has led to a consistent higher level of demand for our product. CME Group's daily trading volumes surpassed 25 million contracts on 55% of the trading days in the first three quarters of 2024, versus 35% of the days in the same period of 2023. Also, each of the last six months were monthly volume records, helping us deliver our best quarterly financial results in Q2, which were immediately surpassed by new records this quarter.

We're very proud of the team for their efforts to provide our clients with the technology and products they need for risk management, while driving earnings growth for our shareholders. We'd now like to open the call for your questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please ensure that your phone is unmuted, press star one and record your name clearly when prompted. If you would need to withdraw your request, you may press star two. Again, that is star one, if you'd like to ask a question. One moment for our first question. Our first question is from Dan Fannon with Jefferies. You may go ahead.

Dan Fannon (Managing Director and Research Analyst)

Thanks. Good morning. CME's had a long-standing capital return policy, and Terry, you've given some thoughts around M&A, but wanted to get your updated thoughts on both of those after you as you just highlighted, record quarter after quarter, and also a valuation that continues to compress versus peers, so curious about a buyback in the context of those two other things around the dividend policy as well as potential M&A.

Terry Duffy (Chairman and CEO)

Thanks, Dan. I think I heard you correctly. You're a little soft coming in, but you asked about buybacks and potential M&A? Did I get it right?

Dan Fannon (Managing Director and Research Analyst)

Exactly.

Terry Duffy (Chairman and CEO)

I think that's what you asked for. So on the capital return to shareholders, you know, I have said that we will always be monitoring this to see what is in the best interest of our shareholders at any given point in time. Our dividend policy over the last several years has suited the company extremely well in a zero-rate environment. You know, with the rates changing dramatically and other things happening throughout the world, you know, we always constantly monitor this, and we will continue to do so again with my board at its upcoming meetings. It doesn't mean we're doing anything, we're just continuing to monitor it. As far as M&A activity goes, Dan, you know, we've been very fortunate to put ourselves in a very strong position to be competitive around the globe with the transactions we've already done.

But at the same time, if there's something there that we think makes sense, we're not afraid to take a look at it. But right now, that's all I'll say about M&A.

Dan Fannon (Managing Director and Research Analyst)

Great. And then just I guess, as a follow-up, you know, last quarter, you gave us updates around the efficiencies that you provided to your customers, I think with both DTCC as well as more broadly. Can you update us on the number of customers as well as the U.S. dollar amounts around that, and ultimately just the conversations and how those are evolving given the, you know, the increased potential competitive backdrop that's out there today?

Terry Duffy (Chairman and CEO)

Yeah, Dan, that's great. Well, appreciate the question, and I'm gonna turn it over to Suzanne Sprague, who'll give you those, that data. Suzanne?

Suzanne Sprague (COO and Global Head of Clearing)

Yeah, thank you for the question. So in terms of our portfolio margining program that you mentioned, where we offer offsets between interest rate futures and options against interest rate swaps, we continue delivering average daily savings of about $7 billion to clearing members through that program. Most of that is from U.S. dollar swap activity. And then in the cross-margining program with FICC, we continue increasing the number of participants in that program. We currently have 12 clearing members participating in that program and have achieved upwards of $1 billion in average daily savings for that program as well. So we are still focused on growing both of those programs, and we do continue working with FICC and engaging with the regulators to be able to expand that cross-margining program to customers as well.

Terry Duffy (Chairman and CEO)

So our efficiencies, Dan, just to make sure we're perfectly clear, still averages between F&O and Portfolio Margining, close to $20 billion a day. So we just want to make sure that you don't think that's changed one way or another.

Dan Fannon (Managing Director and Research Analyst)

Understood. Thank you.

Terry Duffy (Chairman and CEO)

Thanks, Dan.

Operator (participant)

Thank you. Our next question is from Chris Allen with Citi. You may go ahead.

Chris Allen (Managing Director and Senior Analyst)

Yeah, morning, everyone. I wanted to ask about new customer acquisition, which you called out in deck for the first time. Any color, just in terms of how much impact you're seeing in terms of volumes from new customer acquisition, and where are these new clients coming from?

Terry Duffy (Chairman and CEO)

Thanks, Chris. We appreciate the question. I'm gonna turn it over to Ms. Winkler to give you some color on that. But I think one of the things that I just want to highlight is really important is the numbers that came from outside of our U.S. with the record volume. It's a big part of some of the new client acquisition that Julie and her team have been able to do globally. But Julie, I'll return it to you.

Julie Winkler (Chief Commercial Officer)

Yeah, thanks for the question, Chris. You know, new client acquisition has certainly been really a core pillar of our commercial model and an area of investment for us over the last two years. You know, we're excited that those efforts are really yielding strong results. And we kind of think about this in two different buckets. One is our retail client base, and one is our institutional client base. We are outpacing our 2023 performance by over 3%. And then the new institutional client growth, you know, we're seeing that up almost 40% this year versus our three-year average, which is great. So-

... I'd say there's, you know, a couple things behind that. Certainly, we've done a lot to build out a new inside sales team, and they're really a dedicated tailored sales team that is focusing on prospecting, lead qualification, and growth around really our medium-size and high-potential accounts. They're leveraging data, they're doing automation, and this low-touch sales model really is helping us to drive greater efficiency and also scale in that outreach. We have seen a lot of launch of new hedge funds and really the rise of commodity-focused strategies that are also helping create some significant opportunities across our client base. CME Direct continues to attract a record number of new option traders. That was up 30% this quarter.

And so, you know, we see that all as really critical to the institutional model, as well as a lot of the new products that I'm sure we'll talk about on the call today, whether it's credit or TBAs. Those are really powerful opportunities for us to reach new clients and bring them into the CME ecosystem. On the retail side, you know, really what we're focused on, less about ADV and more about really how many accounts we're opening and how many new traders we're bringing into CME through our retail channels. In Q3, we welcomed over 176,000 new traders through our retail channels. That's sorry, year-to-date, and 60,000 in Q3 alone, and so that's a 30% increase year-over-year. That is pretty consistent as you, you know, among previous quarters.

What you see in the data that we released this time is really kind of the spread across regions, where we saw, you know, 53% of that growth coming from the U.S., and 16% within APAC and our 21% in EMEA. So where we're really focused there is on bringing our new-to-futures brokers into this ecosystem and also our existing partners, and this is a critical part of how we are continuing to drive NCA in this space, working with them on education, on marketing content. So where our distribution partners are successful, we have seen that success, too, and that's really what's bringing those new traders to CME. They're attracted by the products that we have and, you know, we expect that to continue in the year ahead.

Chris Allen (Managing Director and Senior Analyst)

And just a quick follow-up. You noted that, Plus500, Webull surpassed expectations, and obviously, Robinhood just launched last week on the futures trading. So when we think about Robinhood's account growth, is there any way to frame out how you would expect penetration of, I think it's like 23 million accounts they have right now, and how they may translate into volumes?

Julie Winkler (Chief Commercial Officer)

Yeah, I mean, we're working with, you know, all of those firms. You know, I'd say they have their own internal targets about the account openings. And I think, you know, with all of this, you know, Robinhood and the one in the launch last week, you know, they're gonna open up access on, you know, still a measured basis, right? And some of these are, you know, making sure they are testing, you know, these products out. They're working on the content. So I don't think we're going to see, you know, 23 million accounts trading futures immediately, but we really wanna work with them to make sure, right, that the products that we are introducing to them and those clients are ready to be trading futures.

And so, what we can see both with Plus500 and Webull is that adoption rate has happened even faster than what those firms have predicted. And so, you know, I'd say they're very advanced in their, you know, customer journey and analytics, and so that's all providing them, as well as us, information on how we can kind of support the active trader in their journey.

Terry Duffy (Chairman and CEO)

Chris, just to maybe add something to that, one of the things we have said historically, since I took CME public in 2002, is very difficult to predict future volume. When you're looking at new client acquisition and what their behavior may or may not be, it's still really difficult to pinpoint what that can transition into. But I do think when you look at the direct trajectory of our business over the last 20+ years as being a public company, you can see it's up and to the right, growing by customers and, of course, the new large open interest holders that I referenced earlier in my comments. Those are all good factors for new client acquisitions, but again, we can't predict future volumes.

Chris Allen (Managing Director and Senior Analyst)

Thanks. Goodbye with you. Thanks, guys.

Operator (participant)

Thank you. Our next question is from Ben Budish with Barclays. You may go ahead.

Ben Budish (Director)

Hi, good morning, and thanks for taking the question. I wanted to kind of follow up there. I know it's hard to predict new volumes, but, just thinking about, like, what retail trading activity may look like, can you just talk about the sort of P&L implications? You know, presumably, we would see, you know, lower rate per contract as people are trading more of, like, the minis, and some of the smaller products. But, but how do you think about what we might sort of be able to expect there? What are the implications from, like, an RPC and volume perspective? Again, I know it's hard to predict the volumes themselves, but just how should we think about interpreting results as we start to see a bigger contribution from retail?

Terry Duffy (Chairman and CEO)

So, Ben, let me make a couple comments here. Like I said, it is very difficult to predict, and every constituency that we have here is completely different. So when I talked earlier in my comments about the tiered pricing, how that incremental volume drops to the bottom line is a good thing, and that does take the RPC down a little bit with those higher tiers, that's still a good thing for us because of the increased volume. So when you're talking about retail in general, you don't automatically have to assume it's gonna be a lower rate per contract, because we changed the pricing on some of our products. As you may or may not recall, we didn't price them based off of a notional value in pricing them.

So when we did the E-mini or the micro or the mini Bitcoin contract, we didn't take the notional value and decide that's how the price should look. We priced it on the constituency of the client base and what they're getting for their value added that they are receiving from CME Group. So we look at pricing through many different lenses, and it doesn't have to be just the retail client constituency or the size of the contract or the institutional or the size of the contract. So I think it's really important that we continue to strike that balance with our client base to build a business, but it's hard to say that it'll be a lower rate per contract. It's hard to say it'll be a higher rate per contract.

So, again, I think it's all depends on the constituency that we are attracting. And this new retail business, I have said it a million times over the last year or two, I think this is gonna become more and more blurred as we move forward with other institutional-type trading, and it's gonna be in a very exciting time with the proliferation of artificial intelligence, other technologies, accessibility into marketplaces, what retail can do. But again, it's really hard to predict what that's gonna return to in revenues. Lynne?

Lynne Fitzpatrick (President and CFO)

Yeah, I would just add, you know, our focus then is not on growth in RPC. Our focus is on growth in revenue and growth in earnings. So if it's new client acquisition of any type, we're focusing on how we drive that top and bottom line, and we're not focused on that RPC line in particular. It's really the overall picture and growth level.

Terry Duffy (Chairman and CEO)

So, Ben, I guess I'd like to tell you that we have a special formula, but we don't. And, I don't think you would want us to have a special formula because everybody's different as the market continues to grow. So it's exciting for us, and again, I think the one thing I can truly point to is the pricing change for micros that we did not do based on a notional basis, and that's the trajectory we're going as we look at the constituency.

Ben Budish (Director)

Got it. Now, that makes a lot of sense. Maybe one follow-up, just something kind of a little bit more nitpicky, but just curious, the licensing fees picked up this quarter. You know, I know you kind of exclude those from your core OpEx guidance for the year, but just any color on what we should expect from that line item, you know, the sort of drivers of the sequential step up and how we should think about what that looks like, you know, over the next couple of quarters?

Terry Duffy (Chairman and CEO)

Lynne?

Lynne Fitzpatrick (President and CFO)

Yeah, so we did see a step up in licensing fees, not surprising given the high volume levels and the growth there. As you know, a good portion of that, the majority, comes from our equity complex, which had nice growth, 9% up quarter-over-quarter and 17% year-over-year. The other item that you're seeing this quarter is we do have some existing OTC clearing programs that have been in place for a number of years. Given the strong growth in that business over the last year, it has an off-cycle measurement period, so the impact of that was seen in Q3. I would note, because we did get a couple of questions this morning, there were no new, license fee-related programs in our SOFR or Treasury complex.

Those two main items are gonna be the overall growth in the business and that those programs related to OTC clearing, which again, have been in place for many years. You know, Mike, do you have anything to add on the OTC side?

Mike Dennis (Senior Managing Director and Global Head of Fixed Income)

Yeah, just one thing to add on, overall futures and options growth continues to bolster our OTC IRS business. We saw double-digit volume growth year-over-year in both LatAm and U.S. dollar swap activity. I think the important figure to highlight, which Suzanne mentioned already today, is that out of the $7 billion-$8 billion in portfolio margin savings that we see in the overall SOFR, the overall swap complex, over 90% of that is in U.S. dollar swaps. We have about $40 billion in margin collateral for swap activity, and 80% of that is being attributed to U.S. dollar swaps. So we've had some considerable buy-side clients and bank clients put true risk with the CME in U.S. dollar swaps, hence the over $7 billion a day in portfolio margin savings.

I also think it's important to highlight that other CCPs have highlighted their margin and collateral levels. It's important to keep in mind that all the collateral at other CCPs is not specific to swaps and currencies that would enjoy any material margin savings for SOFR and Treasury products. Some of those swaps are related to Swiss, yen, Canada, sterling, and euro.

Terry Duffy (Chairman and CEO)

For those of you who are wondering who the hell that was, that's Mike Dennis. He's the new head of our rates franchise. So thank you, Mike.

Mike Dennis (Senior Managing Director and Global Head of Fixed Income)

Thanks, Terry.

Ben Budish (Director)

All right, guys. Well, thank you so much for the response. Appreciate it.

Terry Duffy (Chairman and CEO)

Thanks, Ben.

Operator (participant)

Thank you. The next question is from Ken Worthington with JPMorgan. You may go ahead.

Ken Worthington (Senior Equity Research Analyst)

Hi, good morning. Wanted to ask about the digital business. Can you talk about the launch of Bitcoin and Ethereum ETFs and the impact that they've had on your futures business? They would appear to have helped a good amount. And as you think about the opportunity to further grow the digital platform, the perpetual market still seems to be quite a bit bigger than the calendar market. Does the perpetual market present an opportunity for further growth at CME?

Terry Duffy (Chairman and CEO)

Tim?

Tim McCourt (Senior Managing Director and Global Head of Equities, FX, and Alternative Products)

Great. Thanks, Terry, and Ken, thanks for the question. Certainly the development of the ETFs, both in a spot-based and futures-based ETF structure for Bitcoin and Ether, have not only developed the ecosystem further for those products but also provided an opportunity for the futures complex to grow at CME. Like we've seen in a lot of asset classes, futures are at the center of these highly related interrelated ecosystems. And when we see the volumes in our crypto complex, you know, the futures ADV was up almost, you know, 285% to a record 102,000 contracts. And when we look at the micros, they're up even more, up with Micro Bitcoin up 470% and Micro Ether up 641%, respectively.

This is because our futures not only enable more common ETF strategies, such as trading ETFs versus futures or using futures to source inventory for stock loan in the ETF market. It's also our futures often provide a better, more efficient way to create and redeem the ETFs, with our ability to transact these against the underlying index close.

... The CME CF Bitcoin Reference Rate, where our reference rates also underlie seven of the eleven Bitcoin spot ETFs. So this is a growing ecosystem. We are certainly at the center of it here at CME, and we continue to be a leader in this space, offering that regulated, trusted, and transparent futures market. And Ken, going to the perpetual market, it's not necessarily an easy comparison because those perpetuals exist on more crypto-native platforms that are not regulated outside of the U.S. But we continue to engage with customers to make sure we're working with them to provide all the tools they need to manage risk in these uncertain times, whether that's in cryptocurrencies or other products. We'll continue to engage them to make sure they have all the tools they need.

But it's critically important that here at CME and for the marketplace, they can do it in a trusted, transparent, and a regulated manner, and that's what we offer with our crypto product here.

Terry Duffy (Chairman and CEO)

Did that give you some color on that, Ken? Any good?

Ken Worthington (Senior Equity Research Analyst)

Yep, that was great. Thank you.

Tim McCourt (Senior Managing Director and Global Head of Equities, FX, and Alternative Products)

Thanks, Ken.

Operator (participant)

Thank you. Our next question is from Patrick Moley with Piper Sandler. You may go ahead.

Patrick Moley (Senior Research Analyst)

Yes, good morning. Thanks for taking the question. So I had one on the competitive landscape in rates. Today marks the one-month anniversary since FMX launched its SOFR futures contract. Volumes have been modest, to say the least. So Terry, I was just hoping to get maybe a state of the union on the competitive landscape and just your updated feelings, since this competitor exchange launched.

Terry Duffy (Chairman and CEO)

Thanks, Patrick. And again, I think you're right. The volumes have been modest, but it's early, so I'm not drawing any conclusions to, as it relates to any competitor. We will continue to stay focused on the things that we are doing today, a lot of which, Patrick, you've heard us highlight over the last several months and years, and we highlighted again today, which is the efficiencies that we've been able to create for our clients in those asset classes that people are trying to compete with us in. So again, I think that's we feel very good about our strong performance. You know, I think there was some question about the growth of our interest rate products that we had to put incentive plans in. We clearly stated that we did not and still had the growth.

So I think that goes to show you the value of CME's products to its end users. And we also will go to the fact that still the cheapest cost to any participant is the transaction fee. The bid offer is extremely expensive when it gets wider. If you look at some of our competitors, and Mike can maybe add some more color to this, on the back end of their offering, their spreads are a lot wider than CME's, which the cost would be dramatically higher than any incentive program they could possibly pay or a transaction fee associated with that. So Mike, you give a little color, then I'll come back and finish up.

Mike Dennis (Senior Managing Director and Global Head of Fixed Income)

Yeah, sure. And thanks for the question, Patrick. Good morning. You know, what Terry's referencing, it's still early days, but what we see is our bid-ask spreads are on average a quarter tick tighter in front-month SOFR contracts and almost a half tick tighter as you move out the SOFR curve. As we all know, a half tick equates to $12.50 per contract in SOFR futures, which dwarfs the size of the transaction fee.

Terry Duffy (Chairman and CEO)

Or potentially whatever the incentive is to trade that market.

Mike Dennis (Senior Managing Director and Global Head of Fixed Income)

Yeah.

Terry Duffy (Chairman and CEO)

So anyway, Patrick, I think that, you know, we're, we're keeping a close watch on it, but we're staying really focused on our business and, and bringing the efficiencies. Suzanne referenced the $1 billion a day that we're achieving with FICC. We want to make sure we can continue to build and grow on that program. We think it's very beneficial. We got to get more firms signed up. There's a lot on firms' plates, so we're hopeful that they get signed up for that, and they're starting to see that they don't want to be left out of that potential $1 billion+ on a daily basis with the FICC arrangement. So you know, again, I think that's a... I like our position there, but I won't comment any further than that.

If you're referring to some of the local media that's been put out there as it relates to what I have said about Treasuries, or are you just referring to SOFR so I know what you're talking about?

Patrick Moley (Senior Research Analyst)

Just SOFR, but if there's anything that you have to say on Treasuries, I'd be happy to hear your thoughts on that.

Terry Duffy (Chairman and CEO)

I've said it, I've said it pretty loud and clear, publicly about how I feel about this, and I know that I keep getting rebuttals that monies from U.S. participants are held in U.S. banks, which is irrelevant. It could be held in Fort Knox, it wouldn't matter. We are talking about the resolution authority and the authority of who gets to make the decisions over a default, and that would be the Bank of England and the FCA, not the United States of America, if, in fact, those contracts were to be cleared there. So that has been our argument, and people keep dodging it. I know that they're a duly regulated clearing entity, but that's got nothing to do with our argument.

So I think that I have been to as many people as I possibly can and will continue to be loud about this and make sure people understand what could be the detrimental effect of having U.S. Treasuries not only being cleared overseas, but at the same time, having the resolution authority being overseen by a foreign regulator and not the United States government. So I will wait to see on that, but I'm not backing down from that argument. I think it's very legitimate, and if they want to move into the United States of America and compete with us here under our laws, as I've said to many people, I'll pull my chair back and walk out because my argument's over. But that's not the case.

Patrick Moley (Senior Research Analyst)

Okay, that's great color. Thanks for that. And then just to follow up on pricing, specifically in rates, there's been a lot of speculation recently about, you know, what you could potentially do in response to FMX launching. People talked about, you know, you possibly cutting rates, but, you know, given that what you've spoken about on this call and the value that you feel that you've provided your customers, you're coming off or you're on track for your third consecutive year of record interest rate ADV. I guess the question is, is it misguided for us to assume that rate or possible price increases in the rates complex is off the table at this point? Thanks.

Terry Duffy (Chairman and CEO)

... I think it's misguided for anyone to assume they know what we're thinking about how we're going to run the business going forward on pricing. As I've said, we adjust our tiers all the time. We do a whole host of different things throughout the years. It doesn't have to do anything with competition. It's got all to do with the marketplace. So Patrick, as I said earlier, I clearly stated that we did not put any new incentive plans in place, and we've had an incremental growth that's a record in this quarter for both SOFR and Treasury. So I think that speaks volumes to where we're at today.

Patrick Moley (Senior Research Analyst)

Okay. Thanks for that, Terry.

Terry Duffy (Chairman and CEO)

Thanks, Patrick.

Operator (participant)

Thank you. The next question comes from Alex Kramm with UBS. You may go ahead.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Yes, hey, good morning, everyone. Maybe in the context of new customer acquisition and what you focus on a lot, can we maybe go into the energy business in more detail here? I mean, there are clearly a lot of, you know, macro changes, structural changes that, quite frankly, from my perspective, seem to be the most interesting asset class in the next couple of years, given energy transition, everything that's going on. So, you know, you have a very U.S.-focused business, but obviously some of these changes are global. So just wondering what you're doing to maybe capture some of that structural excitement and, you know, what you're seeing in terms of new customer generation, maybe around the world, and what your customers are doing different already and how you're positioned. Thanks.

Terry Duffy (Chairman and CEO)

Thanks, Alex. Thanks for the question. I'm going to turn to Derek, but I think you raised a really good point about what this asset class can mean over the next couple of years, as we either transition out of it or continue to build on top of it. So I think there's a lot of verdicts yet to be read yet. So it's interesting with this asset class. So I think you're right to point it out. Derek?

Derek Sammann (Senior Managing Director and Global Head of Commodities Markets)

Yeah, thanks, Alex. I think you're seeing a lot of things that we're seeing right now. And number one, we are putting up a year-to-date record revenues in our energy business. We've put together another extremely strong quarter, with our volumes up about 21%, and actually, our Options business up 45%. That's a new record for us for the quarter across the energy complex as a whole. You asked a great question. We spent a lot of time digging into where the business growth is coming from, and I'll provide some color as I have on previous calls. When we look at the growth of the business, we look at the record year-to-date results of this business. That business is coming. We're seeing outsized growth coming from outside the U.S. That's what we're so excited about.

We talked about the new clients acquisition story that, Julie talked about, boots on the ground, engaging new customers that for the first time, with physical flows of WTI and Henry Hub hitting the shores of Europe and Asia, that's bringing new commercial and buy-side customers into our market. When we look at the numbers that, that underlie that, you look at our, buy-side business is up 26% this year. Our commercial customer business up 16% this year. Our bank business, up 13% this year. When you look at where the growth is coming from, from a geographical point of view, our European business this year is up 37%, our LatAm business up 30%.

So when we're looking at growth, it shouldn't surprise that when you see physical flows of U.S. benchmarks priced on NYMEX, and this is true on the Ags and metals side as well, those physical flows hitting the shores of Europe and Asia, that's driving new customer acquisition for us. They're not necessarily new customers to the energy complex, but they're customers that recently had only traded European or Asian products. They are now adding our global benchmark. So that is the import risk they're facing right now. So when you look at the results of the business, we're seeing that the physical flows are driving global participation. So the other couple of pieces I'd point to is that we're seeing growth across not just WTI. We're seeing significant and even faster growth on the natural gas side of the business.

When you look at the business this year, we're at a record level, over almost 780,000 contracts in our nat gas business. That's up 33% this year. This is a market where the U.S. is now producing and exporting record amounts of natural gas priced on Henry Hub, which is the market we own roughly 80% of. In a market share perspective, that business is flowing back into CME from European customers, adding Henry Hub pricing exposure to their overall portfolios. That's been a big driver of the record activity in our nat gas options growth as well, as these markets are extremely difficult to hedge on a flat price basis, so we're seeing increased activity on the option side. So hopefully that gives you some color from the client perspective, from the regional perspective, and from the underlying product perspective.

Terry Duffy (Chairman and CEO)

Lynne?

Lynne Fitzpatrick (President and CFO)

Yeah, and just to add a little bit to what Derek was saying, we have seen, with these new supply lines being drawn, the strong growth in both Europe and Asia in our crude business and Henry Hub. I think what we're also seeing as a longer-term trend, one of the limiters on the Henry Hub side is the ability to liquefy the natural gas to then export it internationally. We do expect, and we do see the build-out in multiple liquefaction facilities that are ongoing. These are multi-year projects, but there are a number that are meant to come online in the next couple of years. So increasing that capacity and that ability to export could also be a tailwind for our business as more international customers would then look to hedge back to that export point.

Terry Duffy (Chairman and CEO)

Thanks, Lynne. Thanks, Derek. Alex, did that get to your question?

Alex Kramm (Managing Director and Senior Equity Research Analyst)

I think it did. Great call, and I'll squeeze in one quick one here on the tax rate.

Terry Duffy (Chairman and CEO)

Right.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Clearly, you're suggesting the international growth is really helping that one. I mean, that's been really a multi-year trend. So if we continue this, for 2025, do you think this around 23% is a better tax rate to use? Is that in your plans?

Terry Duffy (Chairman and CEO)

I'm assuming you're referring to energy, Alex, again, on this international-

Alex Kramm (Managing Director and Senior Equity Research Analyst)

No, tax rate. Sorry, tax rate.

Terry Duffy (Chairman and CEO)

On the tax... I'm sorry.

Lynne Fitzpatrick (President and CFO)

Yeah.

Terry Duffy (Chairman and CEO)

I thought you said... Sorry, we have a bad connection here. It's hard to hear.

Lynne Fitzpatrick (President and CFO)

Yeah.

Terry Duffy (Chairman and CEO)

Go ahead.

Lynne Fitzpatrick (President and CFO)

Yeah, so Alex, we did lower it based on the outsized growth that we are seeing internationally. You know, certainly, we will provide tax guidance as part of our outlook and guidance for the coming years. We have seen that outsized growth for several years, as you noted. Obviously, there are a number of factors that will be in play, including things like changes in administration, potentially what's going to be the political dynamic and impact on taxes. So it's a little premature for us to take a position on that go-forward tax rate at this point, but we'll certainly follow up on that.

Terry Duffy (Chairman and CEO)

Thanks, Alex. Sorry for the-

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Thank you.

Terry Duffy (Chairman and CEO)

Didn't hear you properly on the tax issue.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

All good.

Terry Duffy (Chairman and CEO)

Thanks, bud.

Operator (participant)

Thank you. Our next question is from Kyle Voigt with KBW. You may go ahead.

Kyle Voigt (Managing Director and Equity Research Analyst)

Thanks for taking my question. Maybe just going back to a broader discussion on pricing. Over the past few years, you've announced pricing changes in the fourth quarter that go effective in 1Q. For changes that went effective in 2024, I think you got it to 1.5%-2%, assuming constant volumes of pricing change, and in 2023, I think that was 4%-5%. Can you just give us an update on how you're thinking about futures pricing over the medium term? And I guess, is there any reason to think that 2024's pricing change levels are not a good baseline assumption for 2025?

Terry Duffy (Chairman and CEO)

Well, Kyle, I think pricing, you know, we evaluate that throughout the entire year for the next year, and there's a lot that goes into it other than just see if we can increase it by 1% or 2%. One of the things I've always said, and I'm sure you've heard me say this, is there's got to be a good value add associated to our clients when we change pricing. We invested heavily with our Google transition. We're excited by the future of that, what it means for clients. So that could have an impact on pricing one way or another, maybe to their benefit, obviously. But again, I think when you look at just blanket pricing increases, that's not something that we do.

And I know some suggest that it was becoming a pattern, but it's because of what we were able to deliver to the marketplace over that time period, we were able to do price increases. But again, we evaluate that pricing throughout the entire year before we make any decisions and bring it to my board. Lynne, do you want to comment any further?

Lynne Fitzpatrick (President and CFO)

Yeah. The only thing I would add, Kyle, is that the 1.5%-2% you quoted, that was on the clearing and transaction fee. Just keep in mind that we do look at different levers as we're thinking about pricing changes. Those could include changes to the fee schedule. It could include things like incentive programs or other agreements there. There is the data component and also, things on collateral, so non-cash and cash collateral fees. So we did guide to 1.5%-2% this year on the clearing and transaction fee. We said 2.5%-3% on total revenue, given some of the changes we made on those other fee lines, and we've been tracking towards that, throughout the course of this year.

Kyle Voigt (Managing Director and Equity Research Analyst)

Great. Thank you. And then maybe for a follow-up, for Lynne on the expense trajectory. I think in 2023, you had $56 million of cloud migration expenses. That was expected to grow by $15 million this year. I guess, can you confirm whether that level of migration spend is still on track? And then can you remind us how we should think about the cloud migration expenses into 2025 and 2026? Will there be incremental spend needed in each of those years? And maybe address the interplay of that in the trajectory of D&A over that timeframe, too.

Lynne Fitzpatrick (President and CFO)

Yeah, sure. So if you, if you look at the migration spend for this year, the total spend is on target for our guidance of $90 million. Now, the difference between that and the $15 million increase, you do have some roll-off on existing, kind of business as usual expenses as we've been migrating to the cloud. So you see about $25 million in costs that are rolling off, which would get you to that differential or that increase of $15 million, year-over-year. So we are on track with our guidance on that expenditure. I think what we've also said is that we would expect incremental costs related to our migration for the first four years. We are in year three, so we do expect to still see incremental costs next year related to that migration.

I would note that the Google-related expenses were included in our overall expense guidance, so that 3.9% implied by our expense guidance did include that, that Google spend. So that has been trending down as we are starting to see some of the benefits of rolling off that, kind of on-premises operating expense.

Kyle Voigt (Managing Director and Equity Research Analyst)

Great. Thank you.

Terry Duffy (Chairman and CEO)

Thanks, Kyle.

Operator (participant)

Thank you. Our next question is from Brian Bedell with Deutsche Bank. You may go ahead.

Brian Bedell (Director)

Great. Thanks. Good morning, folks. Thanks for taking my questions. Maybe just one quick one on back to the competitor on SOFR. And Terry, thanks very much for the commentary. They're very, very good and very, very detailed. On the pricing of the SOFR contracts and tiering, is that something you could use in the future? I mean, you know, comparative of, obviously, with the tick size and the wideness of the bid-ask spread dwarfing that, it would seem like you wouldn't need to do that. But is that something that you could do in the future in terms of pricing to certain members or using any incentives on that, should the, you know, market share increase from the competitor?

Terry Duffy (Chairman and CEO)

Yeah, Brian, appreciate the question, and as you can imagine, I'm not gonna comment on that because there's so many different levers that we have here to bring value to our clients, as I continue to say, and I'm not going to predetermine what I should or should not do on this call right now. We do a lot of theoretical game planning here at my team, and we look at certain things on pricing, we look at certain things on value add, but as I said, we did not put any incentives in for the last, and we had a record quarter, so we're pretty pleased with the way the market has anticipated our offering to date, so you know, it'd be foolish of me to try to suggest that we would do anything different at this moment.

Brian Bedell (Director)

Yep, totally, totally clear. And then maybe just Lynne, could you review the collateral balances and the rates paid for the quarter, and then, I guess, exiting September, given we had the rate cut in the month?

Lynne Fitzpatrick (President and CFO)

... Sure. So in Q3, our average cash balances were $72 billion, which was similar to the $73 billion we saw in the prior quarter. Our rates we earned on that remained consistent at 36 basis points. On the non-cash collateral side, we saw a slight increase to $165 billion for the quarter versus $161 billion last quarter, and we continue to earn 10 basis points on that non-cash collateral. So far in October, we've seen slight increases in both of those elements. The U.S. cash balances are averaging $73 billion in month-to-date, and the non-cash collateral is averaging $173 billion.

Brian Bedell (Director)

Okay. And is the spread the same, given the rate cuts, or is that different coming into 3Q?

Lynne Fitzpatrick (President and CFO)

Continue on the cash collateral, you have the 25 basis points returned to clients. The difference between the 36 basis points that we've been earning and the 25 basis points is our ability to optimize our returns using some other vehicles. So that did not change during the quarter. If rates continue to decrease, an ability to get those outsized returns might be pressured, but the overall rate that we're paying has not changed, and it's been at that same 25 basis points for quite a few rate hikes. Yeah, it's been since the IORB rate was at 1.65%.

Brian Bedell (Director)

Got it. Got it. Okay, so I'm sorry, so the spread is still 36 basis points. Is that right?

Lynne Fitzpatrick (President and CFO)

The spread is still 25 basis points.

Brian Bedell (Director)

25?

Lynne Fitzpatrick (President and CFO)

We're earning more because we're able to optimize those returns.

Brian Bedell (Director)

Oh, yes, I see what you're saying. Yep, okay, got it. Got it. Yep. Thank you.

Terry Duffy (Chairman and CEO)

Thanks, Brian. Anything else? We're good?

Dan Fannon (Managing Director and Research Analyst)

Yep, totally good. Thank you so much for all the answers.

Terry Duffy (Chairman and CEO)

Thanks, Brian. Appreciate it.

Brian Bedell (Director)

Okay.

Operator (participant)

Thank you. Our next question is from Craig Siegenthaler with Bank of America. You may go ahead.

Craig Siegenthaler (Managing Director)

Thank you. Good morning, everyone. Most of my questions were asked, but I wanted to try to ask them in a different way, so apologize if any repetition. But first one, we have a follow-up on Robinhood's futures and index options, launch this quarter. I was curious, which products do you expect to see the largest uptick in demand? You know, we're thinking SPY, WTI, and also, how do you think SPY will compete against its core competition, including SPX, given its tax efficiency? And we are curious what insight Webull's launch was able to inform you on this, just given Robinhood's differentiated clientele.

Terry Duffy (Chairman and CEO)

All right. Thanks, Craig. Appreciate the question. On the Robinhood and the product, I'll let Julie take that. On this SPX versus the SPYs, I'm gonna let Tim talk about that in a moment. So Julie, why don't you start?

Julie Winkler (Chief Commercial Officer)

Yeah, thanks for the question, Craig. You know, what we have typically seen in new retail clients coming to trade CME products is the first entry point is within our Micro-equity suite. You know, these active traders are often using this to hedge existing, you know, stock portfolios. They have typical experience trading, cash and cash equity options, and so this is a natural overlay to move into the derivative space in equities first.

What we have seen is, as you mentioned, the diversification that we then are quickly able to follow up on is an important part of our product suite for retail, where we are able to then work with our distribution partners to offer them, things like WTI and energy, as well as, you know, our metals complex has continued to see a lot of growth, too, with our Micro Gold. So I'll turn things over to, Tim to talk through a little bit of the competition side of things.

Tim McCourt (Senior Managing Director and Global Head of Equities, FX, and Alternative Products)

Great. Thanks, Craig, and appreciate the question. When looking at the S&P 500 ecosystem, it's important to note that these are highly interrelated. But just to clarify that when we look at the futures and options on futures products at CME Group, they are also efficient from a tax perspective. They are also a Section 1256 contract that enjoys the blended 60/40 capital gains tax. That is an index-based determination. That is something that we enjoy, other index products are also able to provide, that ETFs are not. And when we look at the way that our contracts will be not only distributed through Robinhood, but all of our partners, it continues to be an important tool for traders to manage their risk, to access that market.

And when we look at how we're doing against ETFs, I'm excited by the fact that more retail distribution partners are coming online, because even if we look at Q3, we've had very strong performance in terms of our futures versus ETFs as a product choice. And when we're looking at that, we're at the highest multiple in my 11 years here at CME, tracking it, with our S&P 500 futures at CME Group are out-trading the associated S&P ETFs by a factor of 15 to one for the third quarter. So optimistic about what even more distribution platforms offering our products alongside the cash markets and ETFs. So we think it'll be a great opportunity for the market to take not only advantage of the tax efficiencies, but all the capital efficiencies we offer here at CME Group.

Craig Siegenthaler (Managing Director)

Thank you.

Terry Duffy (Chairman and CEO)

Good, Craig.

Craig Siegenthaler (Managing Director)

No, that was great. Very comprehensive. Thank you. Just for my follow-up, we have a question on event contracts. A large online broker launched a political election and weather contract platform recently. It's been getting a lot of media attention, as I'm sure you're aware, given the upcoming U.S. election, and this is an example of a broker offering contracts, so some vertical integration. I'm wondering if there's an opportunity for CME to play a bigger role in this business, and if you think there is a large TAM for event, and political election contracts in the United States?

Terry Duffy (Chairman and CEO)

... So Craig, thanks for the question, and I will start and then let Tim go ahead and make a comment or two as well as it relates to that. So we've been asked, if I don't know if your question is being asked in a different way, are we going to list political event contracts? And the answer is, at this moment in time, no, but we never forgo any opportunity that we might see in the future. But at this given moment in time, we do not see that as an avenue that CME wants to partake in. I don't see that too dissimilar, though, to Bitcoin.

We did not participate in that for many, many years until we thought it was mature enough for us to list it and make sure that the product was not readily manipulable under the core principles of the CFTC. I'm not suggesting that the product that's being listed today is, but we need to know more about it and watch some cycles before we decide to jump into something like that. So I don't know if your question was, are we gonna get into that or not? So I wanna make sure that was perfectly clear that at this moment in time, no, but we never forego potential opportunities if we think that they're right. But timing is always everything for me and my team, so we'll see how that works out. On the other part, I'll let Tim address.

Tim McCourt (Senior Managing Director and Global Head of Equities, FX, and Alternative Products)

Sure. Thanks, Terry. I think the one thing I would say with respect to our offering of event contracts here at CME Group is it's important for us to offer those products to the market in a way that leverage the other futures contracts that we have at CME. So our approach to event contracts are they have a underlying associated future that also trades at CME Group, which is a key part to our product offering. We've also looked at, you know, longer-dated, year-end event contracts on the equity indices. We'll continue to work with market participants to figure out if there are additional types of products that they want in the marketplace.

Like I said earlier, that holds true for all of our asset classes, but for event contracts, it's key to us right now to focus on transposing the liquidity we have in their sort of older sibling contracts in a new form, offering more ways to trade those same markets. But we'll continue to engage with the market to see what else we should be doing next.

Terry Duffy (Chairman and CEO)

Thanks, Tim. Thanks. Craig, did that address your questions?

Craig Siegenthaler (Managing Director)

No, that was great. Thank you, guys.

Terry Duffy (Chairman and CEO)

Thanks, Craig. Appreciate it.

Operator (participant)

Thank you. Our next question is from Owen Lau with Oppenheimer. You may go ahead.

Owen Lau (Senior Analyst)

Good morning, and thank you for taking my question. So I have a quick question on your expense guidance. If I look at the first three quarters of last year, your comp ratio was about 14% on average. This year, for the first three quarters, your comp ratio, it's only about 13.1%, based on my math. But your revenue this year is much stronger than last year. So is there any, is there any change, on your full year comp expense this year versus last year? And should we expect a big true-up of your incentive comp in the fourth quarter? Thanks.

Terry Duffy (Chairman and CEO)

Thanks, Owen. Lynne?

Lynne Fitzpatrick (President and CFO)

Yeah. So, Owen, we do have true-ups for our incentive comp throughout the year as we look at incentive-based or performance-based compensation, that will flow through in the various quarters. So I would say what you're seeing is some of the operating leverage in our business. So to drive that revenue, it's not a direct relation to us adding additional headcount. So I think you're just seeing the benefits of that model rolling through this year.

Owen Lau (Senior Analyst)

So we should expect like a bigger true-up in the fourth quarter? Is that what we should think about?

Lynne Fitzpatrick (President and CFO)

No.

Owen Lau (Senior Analyst)

From a modeling perspective?

Lynne Fitzpatrick (President and CFO)

No, so the true-up happens over the course of the year. So if there is any outperformance or underperformance, you will see that in each of the respective quarters. So it's not a large true-up on incentive comp in the fourth quarter. And our expectations on compensation are built into our expense guidance for the year.

Owen Lau (Senior Analyst)

Okay.

Terry Duffy (Chairman and CEO)

So, and I think what Lynne is saying, yes, we're growing revenue with the same amount of people that we have in place, with the same cost expense that we have because of the operating leverage model that we have. So that, that's why the math is off on yours to our figure.

Owen Lau (Senior Analyst)

All right, got it. That's it for me. Thanks a lot.

Terry Duffy (Chairman and CEO)

Thanks, Owen.

Operator (participant)

Thank you. The next question is from Mike Cyprys with Morgan Stanley. You may go ahead.

Mike Cyprys (Managing Director)

Hi, good morning. Thanks for taking the question. Maybe one for you, Terry, just coming back to your earlier comments on Treasury futures clearing abroad. Just curious, in your conversations with regulators, what level of receptivity are you hearing to your arguments that Treasury futures should not be cleared abroad, and what actions might we see, if any, taken? And then, if a competitor were to set up a U.S. clearinghouse to clear Treasury futures here in the U.S., what would be the scope for them to sort of access netting benefits from a related clearinghouse in London?

Terry Duffy (Chairman and CEO)

That's a great question, Mike. I mean, one of the things that I am going and talking to about Treasury futures clearing is, and I'm getting some traction on, is I don't think people realize the size of the derivatives market that it is today, which is 13% larger than the cash market on an annual basis of ADV of notional trade. So you have a new law on cash Treasury clearing, but the exclusivity of that particular law on cash Treasuries being cleared under the guidance of, and regulation of the SEC, not any joint guidance. I think people start to realize that there are these products, Treasury futures, Treasury cash, potentially ETFs, are a huge part of the ecosystem that make that market work. So I think people are realizing that now.

Again, I don't think people realize the size of the derivatives market and the importance thereof, I think everybody understands. So I think people are starting to take notice of it. I cannot predict what the outcome is going to be one way or another, but I will tell you that there's been, you know, inquiries coming from the Hill to the regulators. I know there's been responses from the regulator back to the Hill, that they're taking this very seriously, and they are trying to analyze what it means for a cross-border clearinghouse to be clearing foreign sovereign debt and futures. And how does that work as it relates to potentially the MOUs that are under they have today, which have been amended, which nobody's talking about either.

As you may or may not know, the Bank of England changed their bankruptcy laws, and they no longer have U.S. participants no longer have protection under the bankruptcy laws of the U.K. The U.K. is now the Bank of England is the default for all bankruptcies as it related to systemically important institutions, and that is different from what was in the original MOU with the CFTC when they became registered in both U.S. and the U.K. So I think there's a lot of changes, so people are understanding that. We're explaining that to them, the importance of it, and what does it mean if they were to come open up a clearinghouse in the U.S. as a second part of your question, I believe. And they did have that. London LCH, under LSE, had a U.S. clearing entity, which is now dormant.

I don't believe it's up and running at all for any products. If, in fact, they decided to reconstitute that clearinghouse here in the U.S., the offsets would not be what they suspect they would be in London, so they would lose the offsets against the portfolio. I guess I would have to ask, what's the benefit of them doing it and the cost associated for the London Clearing House to reconstitute that clearinghouse in the United States to do so? I'll turn it to my colleague, Suzanne Sprague, to clean up anything that I said improperly.

Suzanne Sprague (COO and Global Head of Clearing)

Yeah, just to the second part of your question on the ability to achieve the offsets between clearinghouses in different geographies. You know, it's hard to speculate on how the regulators would look at that today, but our own experience in the past has shown that it is very expensive to do so. So the regulators had basically required the clearinghouses to hold capital in the amount equal to the margin savings you give your participants.

So the clearinghouses basically still have to be fully capitalized in each jurisdiction to recognize the benefit of the margin offsets that you give to customers, and the reason for that really has been, back to Terry's point on the resolution regime, given that the domestic regulator would be the one overseeing the resolution of each clearinghouse. The domestic regulators have wanted to be fully capitalized, even in spite of any margin efficiencies that you are able to give between clearinghouses. So we had not been able to get over that hurdle in the past. I would, I would anticipate that would hold true in the future as well.

Mike Cyprys (Managing Director)

Super. Thank you for the comprehensive answer there. And just to follow up, if I could, on interest rate swap clearing. I thought I heard reference to a $40 billion dollar margin of swap collateral. Just curious, how much of that was on the U.S. interest rate side? And maybe you could just elaborate a bit on what sort of growth you're seeing across your interest rate swap clearing business, how much that's contributing overall today. Seems like this could be a growth opportunity for you, given the larger clearinghouse overseas. What steps might be able to take to convince customers to move their swap clearing business over to you? How might you increase that appeal and reduce some frictions and make it more seamless for customers to move more activity over?

Terry Duffy (Chairman and CEO)

Suzanne and Mike, you guys wanna address that?

Suzanne Sprague (COO and Global Head of Clearing)

Yeah, sure. Thanks for the question. So in terms of the amount of U.S. dollar swap margin as a percentage of that total, it is the majority. That tends to fluctuate, I think, between about 75% and 80% in terms of the amount of total margin requirement that we have coming from the swap activity. I will reemphasize again, just the point of the efficiencies that are gained in the portfolio margin program. I think that is a primary driver to the level of activity that we see in our swaps offering. Capital efficiencies in that space have been a large focal point, really, since the onset of the clearing mandate for swap clearing, especially because the regulations require a five-day margin period of risk for those products.

There is even more focus on being able to offer efficiencies within the swaps complex and across other asset classes or other complexes within the interest rate asset class, like futures and options. I'll pass it over to Mike for anything else you wanted to add there on the competitive landscape.

Mike Dennis (Senior Managing Director and Global Head of Fixed Income)

Yeah, Mike, thanks for the question. Good morning. You know, for me, you know, being here a short period of time, my first order of business was to meet with all the dealers and kind of talk exactly about what you're highlighting, is our margin efficiencies between SOFR futures, Treasury futures, and our swap portfolio. Obviously, a general theme on the street right now is, you know, Basel III Endgame, challenges with capital, tightness of liquidity, and how this is all gonna impact the balance sheet. So we're definitely in front of clients. We're definitely explaining this value proposition. We've seen a little bit of renewed interest in sending portfolios to us to do some what-if scenarios and some portfolio calculations. So we do think, to your point, that it is a good area of growth for us.

Mike Cyprys (Managing Director)

Great. Thank you.

Terry Duffy (Chairman and CEO)

Thanks, Mike.

Operator (participant)

Thank you. Our next question is from Bill Katz with TD Cowen. You may go ahead.

Bill Katz (Senior Equity Analyst)

Okay, thank you very much for taking the question this morning. Just, maybe on expenses, just you reiterated your guide of $1.585 billion for the year, which would assume some seasonal, well, pickup into the fourth quarter. So how much of that is seasonal versus more structural? And then as you think about the business conceptually, you're operating at a very high level of profitability, 69% margin. How do we think about that going forward? Is there a natural governor to the margin, or would you let that drop to the bottom line? Thank you.

Lynne Fitzpatrick (President and CFO)

Yeah, Bill, this is Lynne. So on your first question, one thing to keep in mind is we typically have some of our larger marketing events in the fourth quarter, so it's not unusual for us to see an increase in that quarter related to that spend. So you will see, if you look back at 2023-

... the Q3 to Q4 expense growth was $40 million. That is the same growth that would be implied by our guidance of this Q3 to Q4. So the majority of that is gonna be that outsized marketing spend. Some of it also will go to things like the joint support for some of the new retail FCMs that have come online, so kind of capitalizing on some of that opportunity for revenue growth. And then you will continue to see some of that ramp up in our cloud migration expense, that growth in the technology line. As we've moved more applications to the cloud, you will see that grow, and we've seen some of the offsetting declines in depreciation rolling through. But all of that was anticipated in our guidance, that as we continue on that migration path, you would see that amount move up.

In terms of a margin, we don't target an operating margin, kind of similar to the question on RPC before. We're focused on how we drive that earnings growth. If there are opportunities for us to invest in new opportunities or new growth initiatives, we certainly are going to do that, not focusing instead on what our target operating margin would be. We're focusing on driving growth. So, you know, obviously, we have enjoyed very nice margins, and it relates to the ability of us to return a lot of cash to our shareholders. But that is, you know, that's part of the beauty of our model and the cash-generative nature of the business, but it's not something where we have a specific target in mind for a margin level.

Bill Katz (Senior Equity Analyst)

Okay, thank you. Just as a quick follow-up, just going back to the rise of the retail opportunity broadly, given that sort of an ongoing opportunity, how do you think about the, for those clients that may be on the platform already, let's say, a year or so, or just whatever the appropriate seasoning point would be, what kind of uplift do you tend to see in terms of that volume growth? And is there any way to sort of think about what that is as a percentage of your total ADV? Thank you.

Terry Duffy (Chairman and CEO)

Thanks, Bill. I'll let Julie touch a little bit on the retail growth, and, I think you did a lot of it already, but maybe you can just add a little bit more detail.

Julie Winkler (Chief Commercial Officer)

Yeah, I mean, as Terry mentioned earlier, difficult to kind of predict revenue. And again, you've got to remember, across our distribution partners, they also have slightly different businesses, right? So we have some of our distribution partners that are futures-only firms. We have others that have a broad product portfolio and are initially coming to us as existing CFD providers. For example, some of these distribution partners that we're working with in Europe, as well as just the you know, the account size that each of these different players are targeting as well. And so it's difficult to kind of give a more sweeping or generalized view into what that ADV growth can be, which is really why we're highly focused on bringing net new traders into the marketplace, as well as our education and our content opportunities across that.

So, you know, we work with each of these distribution partners. We have well over a hundred of them around the globe, and really try to fine-tune with each of them, you know, what content is most appealing to them, and also what else we can be doing in terms of hosting joint events with them, both online and in person. This still continues to be a great way of how we see acceleration of their revenue growth, is to help educate them, and bring in other people that are third-party influencers that also just talk about what some of their trading strategies are in the space. So it is really, I'd say, a multifaceted approach in order to bring volume.

And clearly, right, when I spoke earlier about, you know, their initial interest in equity, you know, they're going to trade what also is moving, right? And so, you know, we often are making sure that we are working with our partners to provide product information to those contracts that are, you know, at that point in time, seeing higher volatility. And that's where, again, our diverse product portfolio really plays into that, where if equity vol is down, we can very much switch to talking to them about WTI and Micro Gold, which is really what we saw with, you know, micro volume up, right, 35% year-on-year already.

So, this is part of, really our strong offering and, you know, continuing to look at some other new product opportunities in the retail space with our partners for next year, too. So we're excited about that.

Terry Duffy (Chairman and CEO)

Thanks, Julie. Thanks, Bill. And just to add to what Julie said, the beauty of this quarter, again, as in the last one, all six of our asset classes were up. It wasn't just one that was moving. All six were up at the same time, which is really amazing for us. So thanks for your question, Bill.

Bill Katz (Senior Equity Analyst)

Thank you, all.

Operator (participant)

Thank you, and that was our last question. I'll now turn the call back over to management for any closing remarks.

Terry Duffy (Chairman and CEO)

We thank you all for joining us this morning. Appreciate it very much. Look forward to communicating with you throughout the quarter and talking to you again next quarter. So thank you all. Be safe.

Operator (participant)

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.