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

Okay. Welcome back everyone, to our 20th Annual Global Exchange and FinTech Conference. We've traveled around. We went -- we had Singapore, we've had London, but we are back to Chicago -- to the heart of exchanges in Chicago. But it's my pleasure to have as our last exchange speaker, the Chairman and CEO of CME, Mr. Terry Duffy, and I would say a good friend as well.So these market conditions -- we started off by asking everyone to give sort of their out -- what they have seen as regards to the market and what's the outlook? You've done a good job at this on your calls. But the CME is so diversified. I think that we pay more attention because you got more -- you got plenty of skin in the game, whether it's rates, energy, equities, et cetera. So I guess, Terry, your market outlook? And anything else you'd like to say.

Well, first of all, let me congratulate you on an amazing career. I know that you had a little reception yesterday. So congratulations. And I saw that you must be a big Carter Verhaeghe fan because they put #23 on the Repetto jersey. So for those of you who don't know, that's Carter Verhaeghe's number with the Florida Panthers. And -- so congratulations to you and my friend. And you've been a real friend to the industry. You've helped promote the industry. You brought awareness to it, and I think like nobody else I've ever seen, and I've been doing this for an awful long time. When I took CME public in '02, I don't think I've ever seen anybody with the depth of knowledge that you have. So congratulations on an amazing career to you, and thank you. And I think on behalf of your colleagues, thank you. So as far as the market goes, Rich, I think there's so much going on. I think a year ago, when we were on a call, you asked me what I thought was going to happen in 2022. And I think we kind of walked through a few scenarios and -- we kind of -- I don't want to -- you there say it was lucky or you could see some of this stuff coming, but it all came to fruition. And we, at CME, had a record year in 2022, and we were able to prosper from that. And then you asked me what I thought coming into '23? And I thought it would be a little bit more of the same at the end of 2022. And I think we'll start to see that as well. So that's playing out. I think the debt ceiling was something that gave people a lot of angst about what that means. I think we have just so much turmoil in Washington. And we're also interdependent upon what is going on in Washington, what you know. Nobody likes them anymore, but we all -- if you go there, you'll see more private jets there than you do at Teterboro, and that's not a good sign for the United States of American to see all those people there because they're there for one reason, either to change the law, make an amendment or put their hand out. So those are not good outcomes for business. So I'm concerned about what's going on in D.C. I would like to see some more comradery for a lack of a better term. And you do see it behind the scenes. When I go there, I do meet with both sides [ down ]. It's pretty amazing when you see those folks talk, but we're -- the polar opposites on the far right and far left are dictating a lot of the opinion right now, and that's hard to deal with. So I know Jeff was in here a moment ago. And I don't know if he was talking about his potential deal with Black Knight, but he's been in that for quite a bit now trying to fight through that process, and it's difficult. And it's difficult to get some things done. So the question will be, as you grow these industries, do you grow more organically? Or do you look to do bolt-on acquisitions or you look to do major deals? So I think that's really where not only our industry, but many industries around the United States are looking right now. Because there's a bit of tension. I mean if you look at Congress right now, they're sticking their nose into the PGA and the LIV golf. They're talking about antitrust issues there. These are two private entities, along with the DP World Tour, who are trying to come together. And all of a sudden, Congress is now making this a political issue. So you can see where this is kind of continuing to go. That doesn't bode well for business in my opinion. So hopefully, we'll get people away from this. And sometimes it's just Soup du jour in Washington. And I'm hopeful that's what it is today, and they'll move on. I know you're speaking with the Chairman at lunch, the SEC. Is he here or is he doing video?

Virtual.

Virtual. So it will be interesting to see what Gary has to say. I mean he's got some really interesting news as it relates to what he's done, the recent announcements on Coinbase and Binance. So those are potentially businesses that are people believe that it's a big part of the future of finance. And all of a sudden, they're coming under massive scrutiny right now. So it will be interesting to see what happens. But again, I think there's so much uncertainty in the world. I don't see that going away. People talk about CME as a volatility play. I think volatility plays such a small role in what we do. So many businesses have so much inherent risk on everything they do. I always tell people, "If you try to manage risk after the event happens, it's way too late. You're either buying highs or selling lows because in the event, they're gone. So you can't hedge risk after the event." So people need to become more and more involved in managing their daily risks, and I think we're in a good place to do that, whether it's a swap transaction that we get to lay off in. So when you look at some of the third-tier banks, like SVB and Republic and those who don't traditionally do futures, they do swaps because of accounting laws. Those swaps normally transition into volume for CME because they doing what the banks and the banks do the layoffs with CME. So I would hope that they would continue to manage their risk more properly because it's in our best interest to not have just 4,300 banks in the United States coming down from 30,000 in 1950. So it was a big drop-off in the banking industry, not healthy. So these are -- it sounds all negative, but it really isn't. I think there's great opportunities when things like this happen. So CME is trying to position itself. We've always said that we kind of stay in our lane, but at the same time, we look at opportunities that can come outside of everything. But we're not trying to buy revenue streams. I always tell people, to my investors, you can buy your own revenue stream. That's not what you're looking for me to do for you. You're looking for me to grow my business. So I could take my 67% operating margins and continue to build on them and pay you. So that's kind of how I'm focused on it.

So you've been an advocate for risk management, what do you call published -- I don't know what to call it, editorial letter to the FT?

Yes.

So what triggered -- like why emphasis -- to me, it's obvious. We're in market times that are so uncertain, so volatile some time and maybe not volatile, but certainly uncertain. So what was like the trigger behind that? And how has it been received, I guess?

I guess it goes back to some of my earlier comments. I think I see -- you see a lot of people, especially in the marketplace today, that have never seen an event they didn't like. So the question is, if the market downticks, we just buy it because we'll always make money, the Warren Buffett way of making money. But in the meantime, if you're not Warren Buffett and you have a limited amount of money, you can't sit around forever because you can get blown out in a lot of these scenarios. And I just started looking at this where I said, "Risk is the new alpha." Meaning that people need to understand how they're going to manage risk. And they have to understand markets have two sides to them, and it's not just always up, hockey stick to the [ ride ]. And I think we got a little carried away a little bit with the cryptocurrency moves and people just got excited about anything. You had the meme stocks trading wildly like that. And so these whole new breed of traders coming into the market, really were uneducated on risk. And for me, it was more writing something that says, "Listen, there's a way that you have to understand risk, and it's a big deal." So understand both sides of the market. So that was more of the reason why. I had no idea that literally within a month, SVB was going to blow up. Signature Bank and Credit Suisse was going bye, bye. I mean I didn't know any of that was obviously going to happen. But again, I think that goes to the point where you have to manage your risk before these events ever could happen, and you hope they never happen anyway.

There's been a lot of talk about the banking crisis and what will result -- come from the banking prices. And I think the CME, if you're like the rest of us, is still trying to determine what potential regulatory changes can come out of it, who could it impact. But overall, I guess, can you just talk about, I guess, the risk management of this whole mid-tier banking system, whether it sets up to you afterwards, we'll see? But I think it does speak to risk managing to -- that none of these banks were hedged properly?

No, not even close. I mean when you sit in an environment of 14 years plus of 0 interest rate environment, you get an uptick or 2 in yields and people are sitting on piles of money and they think, "Okay, well, now I can make some money off that money." And they got into some [ longer dura ] -- we all know what happens. So I don't need to rehash that. But to think that people weren't going to ask for their money because they don't want to take your 1% or whatever you're sharing with them or less than that, and they want the full 5% because that's what the government is paying overnight and think that couldn't happen. I don't even know how you can run a business that way. I mean it's really irresponsible. So all they had to do is sell futures against that position and all would have been forgiven. I mean it would not even -- the $1.8 billion that SVB lost and the duration risk could have been offset easily in a quick futures position or a swap, and they didn't do either. What they did was they moved their risk parameters further out in their tolerance. So the red flags were not being shown. So they didn't appear to be a risk. I mean that reminds me a lot of what happened in '06 and '07, right? I mean everybody is -- we saw the movie. There's a lady dancing on a pole, and she owned five houses, right? And probably a bad idea. That was a movie. I didn't -- that was a movie. Not me, I didn't see. It's a big short. Blame Christian Bale for that one.

We'll strike that from the record.

No, leave it in. That's fine.

The -- when -- overall, that could present opportunities. Again, maybe you know -- I don't think -- or at least we don't know the exact parameters of the opportunity. But again, they didn't risk manage -- and there's going to be some regulation that's going to change things and try to help push risk management there where you least expect. So -- but I guess when you look at overall growth opportunity -- like you have -- I would say, I don't want to be disrespectful to the other, but the strongest product set, the most impenetrable, that's the word I'll use, structure. So how do you continue to grow the CME? You've done a great job with the SOFR, the SOFR transition. The energy products are going to be facing much easier comps after a little drought because people pulled them back from trading last year. So Terry, what do you see as good growth opportunities for 2023? And if you want to look out longer?

Yes. And I think you have to look at a little bit longer because I think one of the things that I've been talking about with my team, especially John and I, and his -- our new CFO, Lynne Fitzpatrick, is, what do we do as far as when we look at the overall markets and you look at the cash markets that are associated with the derivative markets? The cash market seemed very inefficient, and they're in a way that they've been kind of doing things the same way for 100 years, right? And I truly believe markets always evolved, and you don't have to just evolve and trading of equities or trading of futures. I think cash has to evolve as well. And I think it's got to become more modernized -- just more efficient. So I want to look at ways to continually work with the cash market participants and how we can make their markets more efficient and in return, I think that helps us with the futures market. Now you might say that might be good for all the exchanges. It could be, but, again, I'm a big believer in the ecosystem, which I'm okay if the other institutions grow as long as we go with them. I think we always will, and that's the beauty of it. I'm rooting -- like when someone said it would look what happened with LME, I mean why don't you go buy them now because they're underneath. I'm not happy about that. That's part of our industry. We don't want to see stuff like that happen. So I want to continue to work with the industry to grow it from all sides of the world. But I think focusing on cash and different products and how we can make that efficient only makes the derivatives even that much bigger, so we can continue to do that. And that plays into the prior question with the banks on the second and third-tier banks. I think there will be regulation coming their way. The question will be, what does that regulation look like? It never looks good from somebody who went through Dodd-Frank from start to finish and testified through that process. The pendulum is way over here. Walt was there and the pendulum gets -- you got to give it to the middle, but that takes years to do so. So I think that because they thought regulation or just didn't participate and this happened, they'll probably get regulation they don't like. So for us, it's more about showing the efficiencies in the marketplace to grow our marketplace. And I think we can do that in cash, do that with second and third tier banks and others.

So you've mentioned that -- I'm going to get to speak to Chair Gensler right after. And if anybody is connected, I know from my years of experience [indiscernible] is in touch with the regulatory environment and the legislative picture to you with the -- as part of, I think, stayed in good contact with how market structure is evolving down there. What's your view on what's gone on with the crypto industry? Nothing really impacts. Is it fair to say it's been a nonevent -- even if you have futures, but it's been a nonevent in regards to the impact that you're on the CME itself? But maybe the process of what's going on?

I just think about where we were at a year ago in this room. I was sitting here with you. The gentleman coming in behind me was say [indiscernible]. I was sitting right there where your colleague is sitting. And we were in -- you know what, match over what he was trying to effectuate in Washington. And the industry has gone through so many different iterations. And when you look at what -- when Chair Gensler announced the charges against Coinbase and Binance the other day. And then you saw what the -- my son, who is interning with me in our crypto division with Tim McCourt, said, "Dad, why is Bitcoin rallying?" I said, "Because Bitcoin is not under investigation, Coinbase and Binance, not the product." So -- but everybody took the product and decided to dump it. If you saw the first $2,000 of trade and Bitcoin was down to 25,000. The next trade was 27,000, literally that fast. And so I think the whole cryptocurrency is starting to evolve that world into a couple of currencies. And this is kind of what we thought was going to happen all along. That's why we've stayed with Bitcoin and Ether because we felt that those would ultimately be the successors in a best use case scenario. So I think that's where the market is shaping up to. The markets are pricing in that. You get through as much bad news as you wanted this. And it seems like those two seem to be holding on. The rest of the 10,000 different currencies that people come up with are lingering, and they're going to continue to linger and go bye bye. So I think that's kind of where the industry is shaping up, too. And then I think the whole Blockchain argument about how you deploy this, other industries are looking at that, and they're also looking at it with artificial intelligence from the medical industry to other industries about how they can make it more efficient. So I think it's quite fascinating what's going on right now. And I don't mean just in crypto, but I mean in the technology that's used on crypto. But I think it's down to a couple of the currencies of Bitcoin and Ether that are going to prevail for the next several years anyway.

Yes. I mean it's -- the process there has been pretty interesting as well. But...

Yes. And when you look at what Chair Gensler is trying to do and what Chair [indiscernible] is trying to do about the regulation of that, and the only one that's not being argued about is Bitcoin and Ether because they've already been decided that they're derivatives. And they'll be registered -- they'll be regulated by the CFTC. So everybody has agreed to that. So when you get certainty of regulation, people will migrate to those products quicker. When you have all the uncertainty, is it a security? Is it a derivative? And people are trading things and they don't know if they're in violation of a regulation, it's a little bit difficult if the fiduciary is running money to put money into something that you might be violating and be part of a lawsuit, like people are right now with Coinbase. So they got to get clarity there.

It's -- I think that's probably -- the only unanimous thing is we need clarity. And it's just a...

And it's hard to get.

Yes, and it doesn't -- you know the political process -- legislative process, 10x better than I, but it doesn't seem like anything is coming quickly. Anyway, back to the CME, just a couple more questions. The -- you mentioned cash products. You own a cash treasury platform now. And you sort of hinted at how it plays a role on how you look at the derivative markets as well. So is that a potential area of expansion to the CME more on the cash side?

I think it's more of a potential of efficiencies for CME. So when you look at -- are we trying to get into other cash platforms like we did with BrokerTec and ABS? No, we're not seeking those out. But if they come our way, we would evaluate them. But I think what we're looking to do is how do we work with them to make the markets more efficient. Meaning, how do we get more of the margin offsets? How do we get -- make capital efficiencies more useful for the client base? Capital is becoming very intense. With the cost of money today, it's even more intense than it's ever been. So you need to be efficient with it. So I truly believe if we're going -- if people are going to grow in this world, they have to work with both sides of the trade, and that means cash derivatives and others that have an affiliation with them, whether it's ETFs or whatever it may be. So I'm a big believer. That's how we're going to make -- we can grow our derivative business. We have a great franchise, as you pointed out at the beginning. I think we'll be part of solutions as it continues to go in the efficiency game. And I think that's where the world is going to go. It's going to continue to seek efficiencies through technology, through partnerships, through offsets. And CME sits in a very strong position to be a part of all of those. So that's where I think it goes.

I think you just stole my wrap up right here. You just sort of gave the vision. But I guess where -- I am going to wrap up and say that Terry has been not only a force to CME, but also -- and I get all choked up about this last year, but in other things is, developing other leaders at the CME is one area, but even away from that, women's equality with what you've done with the LPGA. So you've taken what I would say is a platform that gives you a chance to be a spokesman and for you could say, societal changes, while people aren't aware of that. That's what Terry is doing in November and throughout the year as well.

Throughout the year. And we know we're fortunate at CME. We were a partner with St. Jude Children's Research Hospital. And I'm convinced that they're going to eradicate children's cancer over the next several years. They continue to work hard at it. And if you really believe and you really care about a future, you should care about the kids, and I do. At 64 years old, people would say, "Geez, what are you getting involved with this for?" I think it's really important that we all participate in the future. Because people could talk about that all they want, but put your money where your mouth is at. Now when it comes to women and sport, I did a panel yesterday. I'm branding in Chicago, and we talked about this a little bit. I was on with Mollie Marcoux Samaan, the Commissioner of the LPGA, and they asked me about equality and things like that. How do I feel about the announcement would LIV in the PGA? What was my first reaction? And Mollie said that she was surprised. They asked me what my first reaction was? I said, human rights. And I don't mean that pejoratively in a way that the Middle East is bad or it's good. I just -- that was the first thing that came to my mind. If you're going to have a partner that is basically affiliated with a global game, but it seems primarily a U.S. and European game. Now accepting a partner from Middle East, how does that work? Well, we have $189 billion to $190 billion of trade with Saudi Arabia today. Is anybody raising good flags about that? What about all the things that are going on in China that are unacceptable? But yet we get all of our antibiotics from there to save our lives as people are protesting about that, to some degree, yes. So we either have to try to be part of a solution or not, but I don't think golf is, but mine was more human rights, and I'm concerned that women's equality continues to get put to the side. So if there's going to be a pot of $3 billion or $4 billion coming into this country, I told Mollie yesterday, I said, "You better have a d*** hand up, because those women deserve it as much as the men do." And at CME, we got two people doing the job, one's a male, one's a woman. We don't pay them any different. We're paying the same, and that's the way it should be. So we have a very diverse workforce. We have an even more diverse client base. And when you're in 200-plus countries around the world, you know everybody doesn't look like you that's participating in your marketplace. So you make sure that you understand everybody has different scenarios.

I think it was the principle of this equality thing that definitely -- that I see every year in that tournament. One last question. What's -- as we've talked about this, but the development of leaders, what's next -- whenever that day, whether it's 2025 or '27 or 2030, but the development of leaders at the CME, I know you made a number of management changes?

Yes. We're getting old.

Tell me about it. But anyway, so what -- your contract goes to 2024?

Yes.

Hopefully, you extend, but how...

I might have to run for Mayor in Chicago. I mean that place is just [indiscernible].

Firstly, I think Senator from Illinois might be just...

No, no, no. I don't want to be one of 100. I want to be 101.

I think that would be a good role. I think you're a high level of that, but I'll -- that's just...

No, I mean for myself, I've been doing this for 43 years now, and it's hard to believe I started in this business at 20, 21 years of age. Became a member of CME when I was -- just turned 22. Traded for 23 years, and I've been doing this for the last 21. So it's been a long role in this business, and I've seen so much change. And I'm one of those people that I always tell folks, always look at the exit, how to get out of something before you get into it. And these are some of the things that I'm trying to teach some of my younger management team. Anybody can find a deal and say, "Okay, let's get in that. That sounds good." How do you get out of it? Understand how to get out of something before you ever get into something. So I'm always trying to remind people how to do that. And I think John and I, George and I have had a good working relationship all these years. So we're trying to transfer that wealth of knowledge about how you move the company forward. And until that day, we feel confident about that. That's one of the reason I asked John to stay on longer to help mentor Lynne to get more involved in that. I want to do that for our next CEO, whoever he or she may be, and I want to make sure that they understand that you need to have some of those principles because it's so easy, Rich, to get -- throw out a spaghetti against the wall and see what sticks. And then that's not -- I always tell people, hope is not a strategy. Hope is something that I use in my prayers at night, but it's not a strategy. So we'll see what happens. Right now, my Board has asked me to continue. And I said, I'll stay until we have the right replacement.

And I think the CME is in good hands to at least 2000 -- end of 2023 and beyond that as well, as you prepare the next level of leadership. And it could be you longer.

No, I'm old.

Anyway, we're going to wrap up here. I thank you for the friendship.

Thank you.

And watching the leadership of a great organization.

Congratulations to you.

A great enterprise over the years.

You're the best.