CME Group Inc. (CME) Earnings Call Transcript & Summary

Welcome back, everyone, to Piper Sandler's Global Exchange and Fintech Conference. I'm very pleased to move to our next exchange and that being the CME and Terry Duffy, the Chairman and CEO. So we always have fun and interesting conversations. Thank you again for participating, Terry.

Thank you, Rich. Appreciate it.

We just got done talking about -- with Jeff talking about networks and how the electronic networks and how they spur trading and how investors value the networks. The CME gets a premium valuation. And again, this could be impacted by sort of cyclical ebbs and flows and so forth, but still, I think everybody looks at the CME as the -- an impenetrable sort of business model and network. So at least, I guess, the question is, why do you think investors view it like that? And why do you think investors view -- value your network so high, I guess?

Well, I think there are 2 different networks. Obviously, I didn't hear what Jeff had to say, as it relates to his. So I'm sorry I missed his presentation. But there are obviously 2 different networks. Ours is a vertical model that's got intellectual property and products that are embedded in that vertical model, where shareholders can look at that and assess what the value of that is to them in return. It's a global model in nature. We're fortunate. We have global regulators, not a centric regulator, which allows us to continue to grow our business around the world. Our product asset classes are whether they're derivatives of a derivative and there's smaller products associated with them, allows people to stay interested in certain asset classes while they participate in other ones. Example being, if energy is going full throttle and people don't want to liquidate, say, their equity positions because we have smaller micro contracts on some of our products, they can still participate in that product because the margin is much lower and yet, at the same time, focus where they think the action is, for lack of a better term, on that given day. So the network effect that CME has is truly global in nature. It's a pool of liquidity, an ecosystem that comes from everywhere. I think it's a very appealing network model. And so again, I'm not -- I will not disparage my friend's model, but I think ours is just that much different. And I think that's what is the value to the shareholders. They see that and hence, the value they put on CME.

Yes. You don't want to -- you think everybody thinks about the CME and the diversified products and again, that vertical clearing model that you spoke of, Terry. So when we last talked, I think it was in March, we were in a robust first quarter volumes over time, in fact, carried pretty much through to May. June were off a bit. But I guess there's ebbs and flows of volume and volatility. And I guess, how do you feel generally about the business as we go into the summer would be one thing. You've seen a return to the workplace for the big banks. We think we're going to see that in the summer. So what do you -- how are you feeling about the health -- we know the business is healthy, but volume and volatility sort of...

Yes, I think, Rich, I think volatility is a component of what we do. It's not the only thing that we do. People will need to manage risks. You look at what's going on in a daily basis, whether it's the Colonial Pipeline one day, whether it's another event the next day, people just need to manage risk. We live in a very difficult, different world than we did just as little as 10, 12 years ago. So I think the risk management is critically important. Now how does that resonate into revenues for the shareholders, in volumes as well as creating efficiencies for the marketplace. I outlined earlier our different asset classes that we have and you said it as well. But I really truly believe that it's an uncertain place and people need to manage risk. And the only way they're going to continue to manage risk, whether it appears to be a low-vol time is to do it at a cost-effective way. And I think that's one of the things that we've been very effective at, is creating capital efficiencies for the clients. So they can stay risk-balanced even when it appears that things are relatively calm. I always believe that in choppy market -- in crazy markets, and it's hard to manage. In calm markets, anybody can do it. The question is, even in the calmest of times, we get a number like we got today on CPI, the market shrugs it off a little bit, but how long can it really shrug these things off for. So I don't know, I'm not predicting markets, but we're seeing a lot of different fundamentals that could be adding up to more and more people needing to manage that risk because eventually, it will come home to roost.

I think, Terry, you expressed this managing of risk and with the CME's importance since I've known you. So that's a great point to highlight. CME has been great at international growth, I guess, over the past. And I know the workforce has been sort of reconfigured and you added products as certainly within the verticals, but also BrokerTec and EBS. So I guess, where do you see the growth opportunities? Is that continuing internationally? Do you think we're in the -- still in the early innings here, mid-innings, or what excites you about the growth side of the business?

Yes, I think international is always interesting to talk about because it's not the biggest part of our business, but when you look at the way we've been able to shift, especially our sales force, Rich, from basically a U.S.-centric sales force to an international sales force, it shows you that we see growth in different parts of the world other than just the U.S., not that the U.S. can't grow, we think it can. So we are excited about that and with the cross-selling of BrokerTec and EBS by those folks internationally is important. And especially with EBS, we've got so many participants on EBS today that never traded futures a day in their life, that they're going to have exposure and access to all host of different risk management asset classes, especially the largest FX platform, regulated platform in the world, which are our FX futures. So the international growth side of this is pretty exciting, especially with the EBS as we continue to integrate that throughout this year. BrokerTec is done, as you know, and we've seen growth on that platform. So internationally, I'm excited about the business. I don't want to point out any one single region. I still believe, you referenced it a moment ago, back-to-office. We're out -- we're back out already. We're out doing sales calls already. The question is, are we doing it in Starbucks or a coffee shop, or are we doing it in offices? Well, a combination of both right now, depending on where people are at in their geographical area. So I think that's a healthy sign for all of us. At the same time, we've got a lot of people that are doing flex schedules and working from home that I think are very, very -- they're performing quite well and I think maybe surprising a lot of people how well they're performing. So that too is a benefit to the organization to get their productivity out of people that have been out of the office for over a year and some change now. So a lot going on, not just here domestically, but obviously, internationally, and I'm excited about that growth and again, just throughout the different regions.

Well, I hope you know, I still plan on trudging out in August for the summer time. So I hope...

You better be out here. I wouldn't know what to do with the summer without Repetto. So you better be out here.

I hope we don't have to do it, but I'll do a Starbucks and I don't care.

No. No, no. We're in the office here. We're good.

We'll be there. We'll be there. In fact, we've already made jokes about it earlier that we'll be in Chicago. And that is truly my goal.

Good.

You mentioned EBS and BrokerTec, and you sort of were the first to really bring in cash onto the same platform. We know the benefits of trading in the technology side. But you also mentioned the cross-margin efficiencies. And I guess, any more update on that? I know DTCC had to work with them. That, to me, is, what do you call it, is a true opportunity. It may take time. But do I get this right or...

No, you do. You do. You have it right. And I think when you look at the offsets between cash and futures, we already had, prior to even acquiring NEX in the BrokerTec business, we already had margin offsets at the DTCC with cash versus futures to some degree. Now as you know, Rich, those percentages were low, and they weren't actually even being utilized by the participants. When we acquired the firm, though, the people -- the participants started to use the margin offsets, were roughly in the 15% to 17%, maybe as high as 20% in the existing agreement. Now we have said that we can get those multiples higher of that working with DTCC and the SEC. I think DTCC has done a really good job. I talk to Mike quite often. I just spoke to him within the last month about getting some final details that needed to go to the SEC from them. I think Mike has gotten that done. So we're hoping to get approval from the SEC to work with our partner at DTCC to create the margin efficiencies upwards between 60% and 80% efficiencies on margin. That to me, as you suggest, it would be something very exciting. So we are really looking forward to getting that done. A lot of it's out of our hands. We're dealing with the government and the bureaucrats associated with government. And again, I'm not being disparaging towards them. It's just everybody's got to do their due diligence. We live in a different world today than we did 1.5 years ago. So I anticipate it has taken a little bit longer than it probably should have, but we are excited that, that is coming to fruition soon. And the clients will benefit. And hopefully, we'll see the back end rewards of the volume trading on the platform for clients.

Yes, that was really groundbreaking in putting it to cash and derivative futures on Globex. Another thing that the CME has moved very quickly are the -- would be retail futures as well and the partnership -- close partnership with TD Ameritrade, but also in developing products, I guess. So just trying to -- the retail mania is crazy out there. And I'm just trying to see what you're thinking about the opportunities for the CME in retail.

Yes. And I think, Rich, people need to define retail better in the world that we live in today because I think people are lumping in it as one, and it's truly not the case. So if you look at retail at CME today, CME retail today is deemed as an active trader. It's not deemed as the GameStop participant or the Reddit participant or the Robinhood participant, and it's not deemed as the Draftkings participant. So now I've just promoted all the names of the people that are doing these different things. But the point is that that's a different retail, right? That's just the people looking for different exposures. So the question is, how do you want to define retail? I'm a big believer that retail is the shiny object in the room right now that everyone's talking about, just like we get on these different projects. And everybody does it throughout the world, where they focus on one thing, whether it's how you're going to grow in China or how you're going to grow in retail now. It seems to be the new topic of the day. So I am a big believer that we can continue to grow in retail. When you look at just the micro products that we've introduced throughout the years, those are not just for retail or the proprietary traders on a daily basis, you're looking at valuations [Audio Gap] of the S&P 500 going to levels that nobody ever thought we would see, so that's a very expensive contract. So even some institutions are trading some of these smaller contracts. So that, to me, is really exciting about some of the micro contracts. Now what does that do to transition into the retail participant? It's something I'm focused on, and I'm going to continuously focus on. I think there's something to be done with retail, as we described it earlier, which is more of the everyday people just wanting exposure. And I think what the everyday retail is showing is they want the same access as what they perceive as a large bank's access is to the marketplace. Now what that is or isn't and what they've perceived they're getting or not is maybe another thing. But I think there's ways to show and grow your retail business and still continue the integrity of the institution in the marketplace. And that to me is what's exciting. And I'm working on that along with my colleagues, and I think it's -- again, it's a project, but at the same time, we got to be careful of how you do it because anytime something is free and anytime you get a crowded trade, it doesn't seem to end very well. So I want to make sure we walk through this process in a meaningful, thoughtful way so we're not having to retreat. No different than when I first came out with Bitcoin, it was easy to say, list it, list it, but I wanted to make sure that I had the things in place for the protections, whether it was margin requirements or other things of that nature that we've felt protected the participants in the futures market. And then in return, we've been able to grow our business in that respect.

I guess a couple of things. First, I know you've thought out of the box about potential opportunities that reach retail people. So that's interesting to me. But we will save that for another conversation. The cryptocurrency thing, you don't have problems about Bitcoin futures. And the opportunity to expand into -- I think you launched Ethereum futures, but that is still -- wouldn't you say that's still from a -- predominantly from an institutional standpoint? Are you -- when will you be able to -- what do you think of the growth of these products? And is it your customer base? Or do you think there'll ever be, we can't say ever, maybe in the next 3 years, be a material volume contributor?

On the crypto?

Yes.

So when we listed the micro crypt -- Bitcoin, which is 1/10 of a Bitcoin compared to our existing contract, which is 5 Bitcoins per 1 contract, which is an extremely large contract, even at the $35,000 level, let alone the $60-plus thousand that hit not long ago...

Yes. I was going to say it was $65,000...

Right. So you can imagine, you multiply that times 5 and you think of the bucket value of a contract, $300-plus thousand, for 1 contract, our crypto was bit sporty for anybody. And now that we have this micro contract, we think it makes sense. So again, I think, for crypto, I don't think the currencies are going away. And I'm sure people will say, I'm old, and I don't understand the world. I do believe fiats will be there. The question will be, how do people transact their business, no different than when people were using gold or using cash, paper and then credit cards, and then wires and everything else. There's a payment methodology that I believe has been very, very successful. The question is when you continue to make it more and more efficient, no one carries cash anymore, so how does crypto fit into that? I'd like to see the government take a more aggressive stance and participate in crypto versus just with their concerns that crypto is being used for nefarious reasons. Fiat currencies have been used for nefarious reasons since day 1. So they -- I would hope they would open their eyes more, look at the efficiencies that the crypto business and the crypto world potentially has in order to move economies of scale forward along with the blockchain businesses. So we do have Bitcoin and we do have Ether, as you pointed out. And we're participating, we're not all in, obviously, but we're participating, and I think that's what you need to do in this world because I don't see it going away anytime soon or at all.

You touched on the topic that I know you'll find a little bit humorous. But you've dealt -- I know you've dealt with -- personally with Chair Gensler and with the time...

Yes.

At the CFTC, the 5 years he was at the CFTC and deeply involved in Dodd-Frank and really, I think, things that I think benefited the CME, swap, clearing and so forth...

I worked on Dodd-Frank with the Chairman. We've tested it by many times. He wanted to know why I opposed the mandatory clearing of swaps. And I said I don't oppose the mandatory clearing of swaps, I just thought that we should be economically incented to clear swaps, not mandated by the government. So that was one of the big differences we had. Otherwise, I worked with the Chairman very closely on Dodd-Frank, and -- but I did believe that the banks should not be mandated to do certain things, but I believe that they should be economically incented to do them. And I thought that was a better approach. So that was really the only difference. So I've known Gary for a long time. I think he is a very diligent guy. His -- he did an interview yesterday, as I'm sure some of your clients saw, on payment for auto loans and talked about a couple of other topics as it relates with your friend, Bob Pisani. And Bob did a great job on the interview. And it's going to be interesting. It seems like he wants to -- he's convinced that there is an inherent conflict of interest and payment for order flow. So it feels like he's going down that path right now, so he'll be focused on that issue right now. As you know, Rich, we don't have payment for order flow in the futures industry. So it'll be -- I'll be curious to see how that plays out. I also thought Doug Cifu did an excellent job in his response to that afterwards. So we're going to have to wait and see how this all plays out. But the Chairman is an aggressive guy, without a question, and you know that. So -- but it seems to be that's where he's going to stay focused.

And that's really -- I just wanted to -- as someone who has dealt mano a mano, so to speak. Just in real quick, we got a few minutes. But you compare that to the CFTC, it seems like a pretty benign regulatory environment for the -- maybe that's not the right word, but...

Yes, I wouldn't call it benign. No. I would -- when you look at the CFTC, Rich, I think most of your clients understand, as I said earlier, it's a global regulator. It has global agreements with regulators around the world. The SEC is a centric, retail-essentially regulator here in the U.S. And so there's quite a bit of difference there. So I think the mandate between the rules that -- the rules-based SEC versus the CFTC is a big difference, so they're principles-based. And that has benefited the growth of our industry immensely. And at the same time, it hasn't hurt the credibility of the institutions because it's not for a lack of regulation. So we're still regulated. We have good smart regulation, which I'm a big believer in. I think that lends to the credibility of a marketplace. So I do not want to be unregulated. I like the regulation. And I think as long as you could be part of the process and help craft it, like Dodd-Frank and other things, along the way over the last 40-plus years, as CME has been doing this in the regulatory field, it's a good thing because the outcomes are better versus having a knee-jerk reaction and having something that you cannot do your business. And especially, you won't be able to compete internationally, and you have to be able to compete internationally to be successful at home.

Yes. I think you hit the nail on the head, the principles-based versus the rules-based, so it allows a different philosophy, so to speak, of regulation. Last question for you. I appreciate your time. But I guess this is sort of the big last question, is you guided -- there's been plenty of cyclicality even -- there's even been cyclicality, it appears, in many cycles over the last 15 months, the interest rate movements, et cetera. You continue to launch new products. You get branding in so many products as well. New products integrate, so the EBS -- not EBS, but BrokerTec and with EBS coming up. So you guided the -- and we look at the CME as, I don't know what the word, but a big strong battleship, say, through the waves. And then, I guess, so the question is, what has guided you, what have you learned over the past? Because this has been a, for most people, a pretty crazy period. What have you learned doing all these things at the same time? And how long are you going to do it for?

Well, here, the battleship analogy is a good one, Rich, because when you're 184-year-old institution, people can look at you as maybe a bit of a Luddite in a big battleship, and maybe you're doing really well, but boy, you cannot change with the times. One of the things that I have stayed focused on is still maintaining that battleship, but I want to be able to spin it around in the Chicago River without hitting anything. And that's what we've been able to do. So yes, we are -- have a great business model, vertically integrated, intellectual property products. We're very proud of the work we've been able to do to create the efficiencies, whether going back to some of the M&A activity we've done to unlock value, whether it's clear interest rate swaps, return billions of dollars of excess margin to the biggest dealers on The Street that they didn't need because they were offset against our futures products. Those are all really important things that we've been able to accomplish. And I can list a bunch of things over the last 20-plus years that we've been able to do. One of the most important things is we kept the battleship, but we can now turn the battleship on a dime. And I think that's critical. And when you look at, especially the last 1.5 years, I don't know anybody that's going to tell you that they were able to manage this without a hitch. There's hitches and because no one's ever seen this before. And when you're dealing with a financial crisis, we can all understand math. When you're dealing with a pandemic, we all can't become doctors and scientists, even though we all try to be because we read what's the latest blip on the Internet. So I think it's been a difficult process for everybody, not only -- not just for people in CEO roles, but I think for people working throughout institutions around the world. Whatever the business may or may not be, it's been a tough, tough time for them. And I think it's important for all of us to understand that and to bring us back together in a thoughtful way. That's what will make value for shareholders down the road. So I'm not a big knee-jerk reaction person. So I'm committed to staying through my contract, if that was your question, which goes through the end of 2023. I think it's really important. And then we'll evaluate it from there. I'm not a kid. I'm 62. I've been doing this for a long time. Still got a lot of step going forward. But I enjoy it and because I like where the direction it can go, Rich. So how much longer am I going to do this? That will be up for my Board to decide. But right now, I'm committed to my contract.

It was really a joke question...

I'm sorry, I thought it was...

No. But I'm glad you answered it. It at least gave us some insight. We always have fun, Terry. I -- just to wrap, I watched Lexi Thompson, the LPGA player, just very sorry to see her -- she lost the whole...

Well, you know what? I talked to Lexi afterwards, and I told her I was extremely proud of her because when she handled herself the way she did versus the way some people could, young people cannot look up to somebody like that with admiration saying, okay, she -- they understand the feat and how you get better. So I told her I was quite proud of her in a role model that she is not only for the LPGA, but for young girls all throughout the world. So I thought that was an important moment for her, the way she displayed herself. So as sad as it was for me to see her not win that, I'm happy for the winner, but I'm also even more excited about the future of young people today when you see someone like Lexi Thompson showing that kind of class and moving forward. So that was exciting for me to see that.

And for the audience, Terry and the CME are big -- are supporters of the LPGA. So we hope we can go back to the [ GFL scene ].

You'll be back this year, buddy. Come on now, we're going to have a great time. We're going to...

Even the August trip is second. We want to go definitely do that in November...

No. And I'll rig it so you can win the Pro-Am this year. I'll give you a couple of [ hitters ] outside of the LPGA people. I'll get you a couple of tour pros that can be in your group this year, Rich.

They're going to have be the top pros to get me...

You're a good golfer.

Yes. It's great speaking to you. We look forward to seeing you, whether it's August or November or both. And I appreciate your time, that you take to do this every year. So thank you.

Always a pleasure. Thank you, Rich, for everything you do. And may God bless you and your family, and all the folks that are watching, thank you. Stay safe. Stay healthy.

Thank you. That ends our session. And next is with NASDAQ, and that will start promptly at 11 a.m. Thanks, Terry, again. Talk to you soon.

Thanks.