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    CME Group Inc (CME)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$207.43Last close (Feb 13, 2024)
    Post-Earnings Price$210.50Open (Feb 14, 2024)
    Price Change
    $3.07(+1.48%)

    What went well

    • CME's equity options business is experiencing significant growth, with record volumes in 2023, including over 1.4 million contracts and continuous record months in Q4; January 2024 saw over 1.5 million contracts per day, indicating continued momentum and market share gains, especially in global trading hours.
    • Enhanced cross-margining arrangements with DTCC are delivering substantial capital efficiencies, with some clients achieving consistent savings of 75% to 80%, enhancing CME's attractiveness to clearing members and potentially increasing trading volumes.
    • Record open interest and volume growth in CME's interest rate products, driven by clients seeking risk management tools amid market uncertainty, with portfolio margin savings growing to about $7 billion to $8 billion of savings per day, indicating strong demand and positioning CME favorably for future growth.

    What went wrong

    • CME Group is facing competitive pressure in its equity options business from Cboe's 0-DTE options, leading to potential market share loss.
    • CME did not raise pricing on rate products in its November fee adjustments, which may limit revenue growth in that segment.
    • CME expects total adjusted operating expenses to increase by $60 million in 2024, including $15 million in cloud migration expenses, potentially impacting profitability.

    Q&A Summary

    1. 2024 Expenses and Investments
      Q: How will expenses and investments impact margins in 2024?
      A: CME expects expenses to increase by $60 million year-over-year, including $15 million in migration expenses related to their Google Cloud partnership. The remaining $45 million reflects core expense growth of about 3%, consistent with historical levels.

    2. Pricing Increases Impact
      Q: What is the effect of pricing changes on revenues?
      A: Clearing and transaction fees have been raised by 1.5% to 2%, collateral fees increased from 7 basis points to 10 basis points, and market data fees grew by 3% to 5%. Altogether, these changes are expected to boost total revenue by 2.5% to 3% while balancing the impact across different customer segments.

    3. DTCC Cross-Margining Benefits
      Q: How does the DTCC arrangement benefit clients and CME?
      A: The enhanced cross-margining with DTCC is live with eight clearing members, offering portfolio savings of 75% to 80%. This provides significant capital efficiencies for clients and is anticipated to support trading volume growth by unlocking capital for risk management.

    4. Energy Market Dynamics
      Q: What trends are seen in energy market share and products?
      A: CME's Argus crude contract has attracted large commercial participation with over 0.5 million open positions, reinforcing its role as a global benchmark. In natural gas, globalization has led to a 50% increase in European volumes in 2023, and options trading reached record levels, with volumes up over 100% in early 2024.

    5. Equities Business Competition
      Q: How is CME addressing competition in equity futures?
      A: Despite competitive pressures, CME's equity options on futures saw a record 1.4 million contracts daily in 2023, with growth continuing into 2024. Same-day expiring options volumes increased by 70% in Q4 2023, and CME remains a leader in non-U.S. trading hours by focusing on global client needs.

    6. Corporate Bond Futures Launch
      Q: Why is CME launching corporate bond index futures now?
      A: CME is introducing futures on Bloomberg's corporate bond indices for both high yield and investment-grade bonds, set to launch in summer 2024. This initiative responds to client demand for tools to manage credit risk amid an increasing rate environment and divergence between equities and rates markets.

    7. Impact of Spot Bitcoin ETFs
      Q: How do spot Bitcoin ETFs affect CME Bitcoin futures?
      A: The launch of spot Bitcoin ETFs has positively impacted CME Bitcoin futures, with January achieving a record average daily open interest of 23,600 contracts (approximately $5.1 billion) and a record daily volume of 67,000 contracts (around $6 billion). The futures remain central for ETF market makers and risk management.

    8. Post-Trade Services Growth
      Q: How is the OSTTRA JV progressing and competing?
      A: The joint venture with S&P Global, OSTTRA, leverages combined assets in FX, interest rates, and credit to offer scalable post-trade services. It provides efficiencies for banks seeking back-office solutions across major asset classes, establishing a strong foundation for future growth despite competitive challenges.

    9. Hedge Fund Basis Trade
      Q: How does the basis trade impact CME, and what if it unwinds?
      A: The basis trade is vital for efficient risk transfer between cash and futures markets, correlating with debt issuance levels. CME's robust margin and risk management systems mitigate potential risks, and while the impact of any unwinding is hard to quantify, CME remains focused on enabling clients to manage risk effectively.

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