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

Welcome, everyone, back to Piper Sandler's Global Exchange and Fintech Conference. It's my pleasure to have CME, and Chairman and CEO, Terry Duffy, and his team is scattered out there in the audience. I don't even have the year that you became CEO because you've been at the CME for so long. And it is very...

Right, I know. '02 Chairman; CEO and Chairman in 2016.

Yes. So my very first question is what do you think of Minjee Lee?

Minjee Lee, she is good. What else I can say? Very good golfer.

Just for the audience, Terry has been a big supporter of the LPGA and sort of the equality of them, female golfers getting equivalent pay. Minjee Lee won the USGA Open...

US Open.

US Open, this past week, won it by a number of strokes...

She won about a lot of money, too. $1.8 million for her, which was a record first price until our event comes in November, and that will be $2 million to the winner. So it's really good for women's sports, and it's really good to have the equality that we're trying to demonstrate, we've been doing it for years.

Well, I think when people look at women's sports, you will be, I don't know what they call, hall of fame. But you will be one of the people that said that moved women's sports, women athletics forward.

Well, hopefully, I'm doing more of that at the company as well because that's a big focus of mine to make sure I have the equality at the company because I think that's the balance of our customer base, which in return, I want my employee base to reflect that. So I think it's been working well.

Understood. So the last time I heard you speak was on the first quarter call, and great results, volatility, you were very bullish on the outlook. And I guess I don't know what has changed dramatically. Maybe they become -- some of these political, geopolitical crisis become more stable, if any. The question is, what -- how do you feel about the outlook now, 2 or 3 months later, volumes -- we're not going to talk about near-term volumes, but just the outlook where we are at?

Yes. But even the near term volume, if we look at May, we had a really good May. We did 24.5 million contracts a day in May. So that's an exceptionally large month for us in the month of May. So everything that we talked about in Q1 call has come to fruition so far. The geopolitical events, Rich, as you know, there are ebb and flows, and there's a lot of people that are very concerned. When markets start to go parabolic in one direction or another, people think they can't stop until there's a certain bit of news. Energy is a great example of that. So all of a sudden energy goes from minus $37.50 to $120 a barrel. We're talking not 20 years' time, we're talking 24 months' time. I mean that's truly amazing. April 20, 2020, crude oil was minus $37.50. So now all of a sudden, we're $119, $120 a barrel in crude oil. So things kind of went parabolic. So sometimes people back away from managing that risk because they think it will never change. And then when the news changes, which it can, very quickly, the trading activity sparks up quite a bit. We're seeing that through a lot of our asset classes. One of the ones what's old is new is wheat. When you look at some of the grain products, a lot of people never even talked about grains over the years because they just weren't that interesting. But all of a sudden, when you think about where is your next meal coming from? You think Jesus, it is kind of interesting all of a sudden. So now what's the price of that going to be? And so a lot of people that are in the production of wheat didn't have to maybe hedge as much because of, again, the parabolic nature of the pricing, but all of a sudden, it looks like the Port of Odessa was going to open. We saw 5% blip in the market overnight. So they all said, "Oops, got to hedge now." So the markets are part of that. So I would think that the geopoliticals are having a very sharp impact on short-term spikes and volatility, a lot and that goes across all of our asset classes.

So you talk about geopolitical, but then you also have the macro environment with, I don't know, I guess you can tell us how we got in this situation. But inflation, you got the Fed, the quantitative easing reversing, you get rate changes. So you get that as a backdrop as well.

Right. And that's interesting because we've said forever, and Sean Tully who heads up that business for me, has talked a lot about how the Fed doesn't have to hedge because their balance sheet can be endless, I guess. And they're starting to prove that it can be endless. Now they want to -- have to unwind it because of the situation we're in with inflation. Now that -- those trades need to go into other people's hands and do need to hedge. So we think that's a big bonus for us that we have not seen over the last several years. So the inflation issue, $0.25 on every dollar is part of the -- $0.25 on every dollar that is spent in America is from the United States government. So if you think of it that way, the trillions of dollars of stimulus has gone into that. So all the dollars are being spent, 1/4 of every dollar is government money. That's pretty frightening to think about that. So how could you not have runaway inflation. And the difference with inflation this time is, nobody -- a lot of people in this room have never seen inflation. Last time we had any inflation was 40 years ago. I remember Jimmy Carter, I remember quite well as a young trader. So we saw inflation, we knew how to trade both sides of the market. There a lot of people don't understand how to trade both sides of the market. So it's quite interesting what's going on here, and I don't think people ever believe they want to call it transitory because it was in their best interest to do so. And when you got some of the biggest numbers in history coming out on Friday, that anything -- a decimal point could make a huge difference in the market where these CPI numbers over the last couple of years, people have fallen asleep during, not anymore. So it's an interesting thing. I mean, if you look at -- I was reading on the way out here, you look at countries like Turkey who had -- and I said this several months ago, their supply of wheat coming from the Ukraine where they get their food was down to 4 months, that was 5 months ago. Their inflation rate is 75% today. I'm not saying that's the United States. But think about what some of these nations are going through, and it's a big issue as it relates to food. So inflation is really rearing its ugly head right now, and people don't know how to deal with it. So the 8.3% advertised number come Friday. Even if it's 8.2% or 8.0%, it's still a massive number compared to where the fed's at.

This gets to my next question. This stuff, at least talks to me, tells me volatility volume positive for the CME. I guess the question is, is it things that make you cautious as well that you stay focused on even if volumes were going in. We've talked about margin rates before. We've talked about other areas that you've watched the clearing, but -- and we've talked about LME as well. So as we go into -- or in this period of high volatility, what -- again, is there anything that concerns you? And I know you monitor the clearinghouse super close when you get really well.

Yes. And it's always concerning. I mean I don't -- look, one of the things that we do, we take every day as it could be an exceptionally volatile day regardless of what's going to happen. And that's the way you have to treat it. And I think that's been the MO of my team for all the years that I've been doing this, and we're going to continue to do so because I've seen so many things happen over the years that nobody ever believed that could happen and it happened and they're starting to repeat themselves a little bit. So we are very focused on the risk and our margins have been a little bit higher. Some have said that, does that hurt liquidity? Does that hurt trading? Well, people need to realize that margins are set at the exchange at a certain level than the firms actually add on 2, 3, 4, 5x because they're concerned about their risk to the client as well. So -- but margins are a function of making sure that the system works for everybody in times of stress and during -- times of stress can pop up at any given moment in time.

Understood. We'll talk about other systems that are being proposed in 1 sec. But I do want to bring up the Google partnership. It's been, I think, well covered in general. But when you said to my question that how do you position it, we had some mega changes at the CME over the years in the electronic -- the conversion to electronics. And you said that it would be over time more impactful than Globex. So I guess, just as a review, the Google partnership and why you feel that strongly?

Well, I do only because I think that the Star Wars race of speed is getting to the point where it's over with. And now we need to have the efficiencies of a democratized market for all that can participate at all different levels. And listen, this is the way markets grow. They go from an open outcry environment to an electronic environment to a web-based system to a proprietary based system to a whole host of different technologies. And then all of a sudden, you get to a point where you get into this cloud environment, which we think is ultimately where it's going. It's much more cost effective. It reaches everybody around the world in the same time period. And we just think that's where it's going. And I think, they listen, all the prop traders, the HFTs, they can still participate every bit of where they're going at today. I think what we need to do is continually educate them on what exactly how it works for them because they know a certain way of the way they provide liquidity today and they want to make sure they can provide that liquidity tomorrow. And we think we can -- the reason why we put this on a couple of year time period and not try to do it overnight, we thought that would be irresponsible for a part of the market -- segment of the market. So we think we can work with them to get it to a point where it benefits everybody in the long run. So we're excited by this. Our run rate, as we talked about, is going to be $20 million to $30 million over the next 3 to 4 years. And then after that, we think it's going to be very much a positive for us. So we're excited about it.

Terry, we don't expect you to be in the wheat per se. but the partnership has started. And I guess, sort of the big picture of progress report, is it as expected? Is there anything new to update or...

No. I think we've already talked about it on the call. We're getting ready to get some of our market data in the cloud. We're doing some back-office stuff in the cloud. I said I want to put a market in the cloud, which I will, might not be a big one, but I'll get a market into the cloud for trading into something that's small, that's not latency-sensitive. So these are a couple of things that we look to have done by year-end as we advertise. So nothing really new to report from that side.

Okay. Wondering into regulation and first and sort of off the wall question. We had Chair Gensler speak virtually, and he made some significant announcements of a framework where he wants to go with equity market structure. We know that doesn't at all directly impact you, some of his either may impact BrokerTec, some of the stuff. But I guess the question is, how do you view a regulator, the CFTC being this principles-based regulator versus the SEC? And you've long told me there may come a day that the CME may or may not own something more significantly...

Yes, I don't think I would ever pass up an opportunity because of who is the regulator. I think that's really a bad way to think about how you want to grow your business. I think we've been able to work with regulators our entire career. So no matter who it is, it was the Ag Committee prior to the creation of the CFTC in the '73 and then so forth with the CFTC and then through the Modernization Act, working with the SEC as a public company. So I think you got to look for opportunities to grow your business and whoever the regulator is, you can't let that be a deterrent. So I listened to the Chair's remarks. I -- listen, I think there's a lot of valid points what he has in there. When you tell some people that the exchanges, NYSE and NASDAQ don't have the ability to price below a $0.01, but everybody else does, you would kind of have to ask yourself, why is that? How come everybody doesn't have the same playing field? So that seems like a legitimate thing to do. So why don't we just do it. So there's a couple of things there. Then Doug's Seafood, what I like a lot is that, he is a big client of ours. And I think Doug is right, there's $11 billion of savings, I think whatever Doug said as it relates to payment for order flow. And Doug is a very smart guy, and I think he's running a really good business. What I'd like to see is just a transparency. When I was talking to some guys at some of the discount brokers and I said, why don't you put it on the very front page that we sell your flow instead of put it on the very last page and then nobody cares. All you got to do is just disclose this stuff and then you can move forward. And I think a lot of the stuff from the Chairman and other people would be behind us. I mean right now, this is just a lack of transparency, and I don't think it's anyone's fault. It's just the way it's happened. So I think I'm a big believer in taking the initiative and just being transparent about it, showing the investors and showing people where their flow is going, what we're doing with it, who's taking it and then go from there because I do believe there's good arguments on both sides. That's out of my world, but I don't know I'd throw that in...

It's coming from, I would say, an informed source, to put it the way. You participate a lot with the governmental relations, with the relationships done in D.C. Where I'm getting to this non-intermediary model, we just discussed Sam Bankman-Fried will be here in an hour or so...

Nice young man. I'm telling right now. Nice young man.

So could you outline sort of what the CME stands and what do you feel is important for the infrastructure or the market structure of clearing houses in future's derivatives?

Listen, I think everything changes. We had 170 clearing firms 15, 20 years ago. We have 67 today. Some of the biggest participants in the world are being asked to leave, some of the biggest clearers in the world. So everybody's balance sheet is being tied up by their own cap -- their own needs or others because of regulatory rules that have come into place since Dodd-Frank. It's a changing business. So when I look at what Sam's proposed, I was very upfront with Sam prior to the hearing and everything else that I was going to oppose it for all the right reasons and not because for the wrong reasons. Listen, I think the market is going to change ultimately. What does it look like? I'm not sure. But you have to also think of it as a market structure issue, and it can't be just a crypto issue because even if Sam was to get it pass -- his margin amendment passed the way he would like it, then it doesn't prohibit him or anybody else from listing product under that regime which then the participants trading under that regime, whether it's treasuries, whether it's foreign exchange or anything else, may not completely understand how autoliquidation works and all the other factors that are associated with it. And it may not work for their world either. It may work just perfectly fine for crypto, but it may not work perfectly fine for equity indexes either. So I think the thing is going to change. I told Sam, we had dinner last night. We need to work together to figure out what's a good model that makes sense for the future. And if you can get to that point, you'll create great efficiencies and you'll have a sustainable system for many years to come. But you just can't rush it and you can't put it on -- you can't kick the can down the road like a government either.

Sure. And I think they had a round table. I think that to take one big thing, that's probably the most sensible thing is welcome innovation, you guys get it done some way sensibly, so you don't blow up the system.

Absolutely, absolutely.

If you had to highlight -- again, he's going to be here. If you had to highlight 1 or 2 points about this non-intermediary model that you would want to make sure was managed and handled properly, what might it be?

I don't know what they would be specifically, Rich, because I think you'd almost have to go asset class by asset class to make that determination, to make a generalized statement about what works good with a direct model versus what doesn't. I think you're just speculating at best. Now Sam believes that it works really well for crypto and what he's been able to accomplish over in Europe is actually not allowed here in the United States on the future set as we all know. I don't know the answer to that question. So it would be -- that's why I want to get in and work with him and his team to figure out what is the best model going forward for multiple asset classes, not just one. I know his argument on crypto, and I get it. That's a different world. Hedgers, commercials of food products, I mean, listen, I said this other day, there are 7.5 billion people on the planet, going to 9 billion, and we don't even have food. We got to take the food from the hungry and give it to the starving. I mean that's the situation we're in right now. This is a very frightening situation. Gary Cohn said something very profound, I said this to Bob Pisani when I saw him last week that we can find more fuel, you can't find more food overnight. And that's a very scary fact. And so listen, there's a lot going on right here, so we need to make sure that people have good, strong risk management because if, in fact, you look at the European Union today, the biggest producer of grain over there is France, and they're going to have a drought. And then you've got 2 countries fighting, Ukraine and Russia, the other big exporters of the bread basket. And then we got our own issues here in the U.S. We got to make certain that the producers and commercials of those products have a risk model that they can use to mitigate some of that offsets because you think inflation is bad now, what if they just start pricing in, multiples of this, because they don't know what's going to happen. And that's scary. So you got to be careful when you're talking about risk models and who they apply to. So I appreciate what Sam is trying to do, but at the same time, I think it's not a one-shoe-fits-all model.

I think the reason why I enjoy talking to you as well as Jeff is that what's going on in the business is one thing, but you also look at implications that are up higher. Last sort of topic and we've joked about this or talked about this, but you've re=upped your contract or...

Stupid.

Provides, I'm sure, a stable force at the CME for -- is it 2.5 year to 2024.

End of '24.

End of 2024. So I guess the question is the CME and rightfully or justifiably, so has stayed in its lane, so to speak, like you've built upon a strong future and made it the most dominant exchange in the world. So why not build upon that with the NYMEX, with CBOT. You also have added the NEX Group, which did bring in some cash products. So I guess the question is, we know we're going to re-up in 2024 as well for another 2.5 years for ages. But what does -- give us some hints of what the future in this -- again, it's probably -- I think even Jeff would ignore the most the dominant business model in the future. How do you expand it from the technology side. You've given us sort of an indication there. But where do you see the CME going in the 2.5 plus years?

From my standpoint, I shook up my management team a little bit not because I didn't like them because I thought it was time to bring in younger people to mentor them into the jobs that I think will be a big part of the future. So we made some different changes. I'm a big believer in the progression within an institution, and if it doesn't work, then you're going to have to go outside and bring in other people. I like having people in there having the ability to work their way up and that's what we've done. So the time came when we did it. I talked with John, and John and I had a good discussion about what we want to do. I'm not ultimately knowing what I'm going to do at the end of 2024 yet, obviously. That will be up to my Board to decide and see how I'm doing, but I want to have things in place to make sure that this company is on a glide path for another 100 years that can continue to be successful. I think new ideas are good. That's why I applaud, guys like Sam Bankman-Fried and what he's trying to do. And I don't want to just radically oppose everything because it's not the way things happened 20 years ago. I think that's a mistake. So I want to have people coming in with new ideas, fresh ideas, thinking about how do we deploy models and how do we continually build this business. It's a wonderful business, and it really is. It's so mainstream, and I'd love to tell the story when I'd had the ability to meet the late, great Milton Friedman, and I was sitting in the room with him and Milton said, he goes, "You know, Terry, I got to tell something. If we didn't have futures today, we would need to invent them in order to proceed, in order to grow economies." And I found a very profound coming from supposedly one of the smartest men ever to live on the planet. I mean, really a smart guy. So he was -- that was a very profound statement, and that's always carried with me over this period of time. So I tried to instill that in my management team and throughout the organization, we want to be customer focused. We want to be appreciative of what people bring to us, their ideas and not be dismissive. So I think it's important that you constantly have good mentorship and turning over to new or younger people. So we'll have to wait and see. But I don't think there's any opportunities that we're not going to take a good strong look at, Rich, to build our business. And again, I'll reemphasize it. You can't be afraid of a regulator, you can't be afraid of doing new things either, as long as you do it in a good, smart way.

We'll be watching. One last push on this, no more questions. But on the golf thing, every female golfer knows who Terry Duffy is because that's the impact you've had, on equality...

Was that a statement or a question?

Statement.

Nice, nice. But now they're wonderful people. Listen, this is great. This is -- it's not just about women's golf. This is about equality, and that's the bigger part of it. And I can't stress that enough. And I think my shareholders and my clients and my employees love the ability to interact and see that we're all the same, and let's move forward. So I hate bigotry, I hate bullies, I hate people of that nature. And I grew up in a very rough South Side Chicago neighborhood, and I saw all that. And I won't be a part of that. And I want to make sure that we can allow people to grow, and I'll do my part to do that. And then living in Chicago right now, I like to be part of the solution, not part of the problem. So not saying that women's sport is the ultimate way to go. But there's a whole host of things that we all need to do to make it better. So that's what we're trying to stay focused on is a good corporate civic citizen.

I think that's exactly what it represents to me because I've had the opportunity to play with some of the players. They look -- again, this is one sport, one little isolated segment of society, but they look at it as, this big organization, led by you gives us the opportunity to play.

Yes, for sure. Well, it's great to be here with you, Rich, and congratulations on another successful conference. It's really good to be back in person. I mean this is -- is it your first back in person or it was last year.

Yes.

First year. So it's good to be back, even though you got a roadblock that Bob Pisani is using as a backrest right now. But otherwise, this is really a great setup. Again, congratulations on your conference.

Thank you. And it's all because People like Terry take the time to participate.

I always will, never miss it.

Thank you.