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

All right, everyone. Welcome back to the 2024 Piper Sandler Global Exchange and Trading Conference. My name is Patrick Moley. I cover the exchanges, online brokers and trading companies here at Piper Sandler. Our next guest kicking us off this afternoon is CEO of CME Group. Terry Duffy, Terry, thank you so much for joining us.

Thank you, Patrick. Appreciate it.

All right. So I'll kick it off with a question on the environment, relatively strong start to the year for volumes against a pretty tough comp. Open interest is up 15% year-to-date. We're seeing rate uncertainty continue. We have a presidential election coming up. How are you thinking about the setup into the back half of the year? And what it means for your?

Hold that question for one second, because before I start, I just want to say congratulations to a few people. One is Doug Cifu and Vinnie Viola, for bringing their team to the Stanley Cup Finals. Somebody from our industry, having a team in the Stanley Cup is absolutely awesome. And Virtu is a big client of CME, but more importantly, Dougie and Vinnie are dear friends of myself and my family. So congratulations. I also want to thank the Chairman of the CFTC for some really strong comments you made at lunch. I thought it was an excellent interview to do with them Patrick. And when the side comments came along is he going to go take over the SEC, so we can have that throughout the whole world. I think Ross, I think your comments are very well received in your leadership as much appreciated by our industry. I'm a huge fan of regulation. I think it reads credibility to the marketplace. So thank you for all your efforts and your teams. Now I'll ask -- answer your question, it was around politics.

No. Just around the environment and what you're thinking into the second half.

Of the marketplace? I think it's going to be pretty fascinating. There are so many people looking from 6 rate cuts a year ago to 4 rate cuts 6 months ago to 3 rate cuts 5 months ago to -- I knew we weren't going to have about one rate cut this year all along. So the prognosticators, I should say, have really missed this one badly about what the Fed is going to do. And I think the Fed is really telegraphed what it wants to do all along. So it had a target out there and said, until it meets that target, it's not doing anything, and it hasn't. So what does that mean? I think there's a lot of people still upside down a little bit in the market. I think there's been some shorts that are getting a little beat up in the equity market, because they didn't see a rally coming with this type of environment that we're in, and there's other people on the other side of the market that are missing the bond trade. So I think it's kind of gone back and forth. So I think it's going to be very active going into the latter half of this year, because the election is going to play a lot to do with it. We have 60 major elections around the world that have an impact not only in their country, but could have an impact on ours, because we're a global business, and those people have to participate in U.S. marketplaces. So we'll see where that shakes out. And as far as our administration goes, I think it's anybody's ballgame. I mean, it's going to be a very close selection in light of the recent trials and tribulations, no pun intended, a former President Trump. So it will be interesting to see what happens in Chicago. If in fact, President Biden is the nominee, and there's still some speculation that he won't be the nominee. So I think that puts a lot of things into flux as far as what that means for business, what that means for regulations and how do people manage that risk going forward. So I think it will be very exciting in the marketplace next several months.

And that would extend in the energy markets as well?

Well, energy for a lack of a better term, has been stuck on stupid. So you look at the energy market, it's been in a $10 range for 1.5 years almost. And when you look at what's going on around the world, it's really hard to suggest that would be the case. You would think when tanks lined up on the border of Ukraine, that people would have thought maybe they're going to come in and they did and then oil move. Historically, the market would have moved when they saw the first tank. It's no different than when World War II started and the first reporter wrote a story about it because they saw a tank coming. And that's how the first story came out about Wold War II. So I think that oil being in this range is very surprising, Patrick, to be honest with you. I think that oil above $100 trades a lot more and below $50 trades a lot more. But in this range, it's doing nothing. And with the geopolitical events right now, we're just not moving the needle. And I think the United States has big capacity and people know that. I think people are betting on that if, in fact, President -- former President Trump gets in that the U.S. will be more self-sufficient on oil, and we'll have a lot more oil in the pipeline. And so I think that's the reason why we're sitting in this range today. Because of the politics are very close on this.

Sure. I'm going to ask about some of the competitive dynamics in the industry. FMX is launching in September. There's a number of banks and market makers that have become strategic partners. This is something that's been tried in the past and failed a number of times, and CME is always prevailed in that case. What are your thoughts on FMX and how do you feel about your ability to defend the interest rate complex that you have?

Very good. I feel very good about our -- depending on complex, we've been doing it for over 100-plus years. Competition is good. But at the same time, I think our value proposition is something that's really hard to give up. When you look at what we've been able to accomplish by putting our portfolio of products of interest rates -- we did 34.5 million treasury contracts last week. It was the busiest day in the history of our treasury complex. That goes to show you that people are mitigating and managing risk in CME's products. Why? Because there's about a $7 billion to $7.5 billion of savings for the biggest G-SIBs that use our products today in savings and margin every single day against their swaps portfolio at CME and their futures portfolio. So I understand that the competition wants to list our product set and others will always wanted to do so. But when you start citing numbers about what you're going to accomplish, when you don't have one contract open yet, I think is a bit of a stretch and misleading. So I think there's been some misinformation being said about the people, who want to compete with us about what we have and what they supposedly have. So I guess, we'll let the customers make a choice for themselves. They raised $172 million is my understanding. I don't know any of the details of that or what people get out of that. I did see something in one of the handouts that he was going to buy back his own stock with that money. So I've gone that pretty fascinating that people gave them $172 million to buyback his own company. Not a bad deal.

I don't think that -- I think they've said they aren't going to do that.

Well they had it in their brochure that they are -- it was a public brochure, I don't know.

I just don't want to start any rumors. I don't know if that to be the case, and that wasn't what was told to me, but.

Well, I can but happy to show you. Anybody else wants, so I'll give it to you all, too.

So if we -- you talked there about some of the misinformation that's out there about what they're going to offer that you're not going to offer. Can you speak to some of those, because I think it's important for investors?

Well, here, I think when you base your future success on what you're doing today is a bit of a stretch. And when you base what happened in London with the German bond, the bund, and suggests that you can follow that same process to take market share from somebody else. But you have to talk about how did the German bund leave London. It was the banks in Germany that were government-sponsored owned banks of Germany who said, this is a critically important market to our country, Germany. It was a small market, and we didn't care that it was in London. Now it's critical to the infrastructure of our country of Germany. So they brought it back. They deliberately collaborated together to bring that back. So let's talk about how that happened. You can't say that the German participants just moved that liquidity because they had a better mouse trap. The participants or owned and sponsored by the government moved their contract. So that's a bit of a misdirection there about how you're going to have success. As far as margin goes, with the swaps, basing success on what LCH has in swaps today, the infrastructure after the Dodd-Frank rule passed was already in place in London with LCH with swap there and a few other things assets they already own. So they already had it there. So for us to get what we had by starting from scratch was a big move. So I think that basing it on that and saying that our margin was cheaper than the European margin is just not as ignorant and not even understanding margin, because our margin on 1-day gross is higher than 2-day net, which is in Europe. And it's a fact. You all have to do is do math, right? He likes to quote math. I already quoted math a lot today. So here's a little math thing for you, do the math. The margin at CME was higher than Europe, not lower, and we still capture [indiscernible] contrary there. So there's a lot of misinformation of uneducated people saying things that I think is just blatantly wrong. So I'll get your facts straight, do the math.

How big of a barrier and a moat do you think is the liquidity that you have on CME? And outside of liquidity, you mentioned a couple of things. What do you think puts you in the best position to come out on top of that?

Our company. Our company puts us in the best position. We have by far, in my estimation, and I've heard this from many of our participants. There's not a lot of market participants in the room. There's more of investor participants in here. Market participants demand a couple of things. They want efficiencies and they want customer service. One of the greatest compliments we got and it is from Ken Griffin and Ken's a dear friend, I like Ken, even though he joined the consortium. Ken said, there's one thing about CME. The train shows up every day on time, and that's critically important to what he does. To me, that is what makes CME different. Our customer service is second to none. Our attention to detail is second to none. So I think that's a very strong value proposition from the clients. And when you look at some of the investments we have made over the years, to put institutions together like the Board of Trade, the New York Mercantile Exchange, COMEX, NEX, doing the deal with Google, is all savings to those participants that we give the customer service to. That's a real good value proposition for any organization to have. And if you're going to compete with that and you're going to base your theory on a handful of market share that you have in the cash side, that's a bit of a -- that's your value proposition. So we'll see how it goes. And listen, I'm not taking anything for granted. We'll be very aggressive in what we need to do to protect our market. But we think we've already put those pieces of the puzzle in place today without doing anything. And those are efficiencies.

Switching gears, I want to talk about growth opportunities and specifically, the U.S. credit markets last month, you launched a corporate bond trading on BrokerTec, you're launching U.S. credit futures on June 17. How do you think about the opportunity in U.S. credit for CME? Is that something that you view as a big growth driver going forward?

Well, I think it's been a pretty dark market. As we know, it's been a back dealers market forever, and it's been efficient that way for whatever reasons. And some markets do better and more central limit order book participants. Some grow some don't, and some are -- there's a reason why there's block trades. There's a reason why they have what's called ex-pit trades. There's a whole reason why we have different codes or different trades because they are important constituency. Whether this is -- I'd like to tell people, I've seen a lot of people lose a lot of money being right, and I've seen a lot of people make a lot of money being wrong. It's all about timing. So we're looking at something right now that we don't just want things because it's a market, and we want to do it. We look at the timing of where we're at in the cycle of the market system market structure, a whole host of other things. And is the timing right. Well, you'll never know it perfectly, but I think it's important that you get that out there. It's no different than treasury clearing. And I don't know if you're going to ask that question, but we look at it in the same light. It's all about timing. So we are listing these products today. Now I wouldn't say that our success rate is going to be really big out of the gate here because, again, this market is mostly facilitated upstairs, and it's not really on a central limit order book. So we'll see how that plays out and how the participant wants to execute their trades, but they may like the central limit order book for this marketplace. We think they will ultimately, but maybe it's not -- the timing might be, you can't nail the [indiscernible], but we're trying.

On treasury clearing, you recently applied for an application to clearing those treasuries. I know you've been asked about this, but can you talk about the medium- to longer-term opportunity there? And do you think CME has a right to win in this space?

I don't know where anybody has a right to do anything. But I think when you look at the treasury clearing, we didn't make the rules, the SEC did. So we have a really good relationship with DTCC and FICC, and we create a lot of offsets for our clients. So we've got a strong partnership with the incumbent right now in that space. And I think that incumbent will probably prevail, ultimately, I think they will. They have the existing business today, and it will be hard to move it out of there. But again, if I decide to file an application come 2026, when the rule goes into place, it will probably be too late. So I don't ever want to forgo an opportunity and I told Frank this at DTCC as I'm not trying to compete with you, but I don't know what the world is going to look like in 1.5 years or 2. And I don't want to be sitting around waiting thinking I should have filed that application when I could have, because it takes time to go through this process. So we'll have the application in place, I assume we'll get it approved eventually. We hope to have the application deemed complete by Q3 -- end of Q3, early Q4 and we'll see where it goes. Again, I don't know what the ultimate opportunity is here. I do know there's an incumbent right now in DTCC and FICC that has all the business. But again, we'll see what it looks like in a couple of years from now. So I won't make any predictions other than we'll be prepared either way. And if, in fact, we go to this process and there is no -- they're there for us in that, it's no harm no foul, because we're not putting a ton into it. Anything we're tying up is red capital, which we still earn the income on that red capital that we have parked for other reasons for our business anyway. So it doesn't take anything out of our investors' pockets.

Just sticking with some of these growth opportunities. If we take a step back, you've obviously benefited from macro tailwinds across the board. You've seen a significant increase in volumes over the last few years. As we look ahead, what are maybe the 1 or 2 things that you're most excited about and you think present the biggest growth opportunity, whether it's products, whether it's an asset class, whether it's a geography, what's that thing that's going to drive the next leg of growth outside of the macro for CME?

For me, I think it's the equity markets and I think we've had a lot of people focus on anywhere between 5 and 10 names in the equity markets, and I think that it will eventually get broader. And once it gets broader, that should increase our business dramatically on the future side. So I'm really excited by the participation coming forward, new participants coming into the market, not buying the same crowded 7 stocks. I think they'll be looking for other opportunities. And then in return, there's a hedging opportunity associated with that. And so that benefits us immensely. So I'm very excited about that asset class. And as far as that region goes, I think look at the U.S. equity market, it's looked at around the world as the market that people want to participate in. So they can lay off risk in U.S. equity markets against their own needs of their country, because the correlations can be somewhat anywhere between 60% and 90% correlated in equity. So you look at that and even emerging markets, we'll always look at the U.S. equity market. So I'm very excited about that, and I'm excited for the growth coming both out of Asia and China slowed down significantly on the retail side, but it doesn't mean the rest of Asia is slowed down. We're still getting a significant amount of business coming out of there, both in our equity complex and our energy complex. And I think that will maintain that going into Europe and the U.S. as well. So I'm excited about that.

And if we unpack that, this is mostly institutions that are utilizing your product set to offset risk using U.S. equity markets is that what I'm hearing. It's not so much the retail aspect, but it's more geographic outside of the U.S.

I think they're managing their own countries equity exposures in the U.S. equity markets, yes, institutionally. I wasn't referring to retail.

Sure. And do you think that with your current product set right now, I'm assuming index options, obviously, is what you're referring to, index futures. Do you feel with your current product set that that's enough to kind of like satisfy demand from some of these players overseas? Or is there other areas that you're looking at?

I think that again, I'm going to go back to what I started this conversation with. I think efficiencies are what they're going to demand. And I think you're going to have to continually look to offer other products even outside of your own comfort zone to create those efficiencies, whether it's on the cash side or others on the ETFs. I don't know what the ultimate answer is going to be. I think I have an idea. So I think that's going to be a push by the clients in order to drag those efficiencies out of the marketplace, because right now, there's inefficiencies in markets where people see that they can may have savings. So I think eventually, they'll get pushed more and more together.

And when you say cash markets, I'm assuming the way to have exposure to that would be through M&As. Is that what you're saying?

It doesn't have to be through M&A, but that's possibly a way of doing it. We did M&A. We're on the cash side when we did the deal with NEX, as you know, on the BrokerTec/EBS businesses. So that is a way to create the efficiencies against those assets against our futures complex, which has been very successful for us. But it doesn't mean that you have to do M&A, but you can.

Sure. Crypto. We have 2 spot ETFs now that have been approved. You have Bitcoin futures, you have a Ethereum futures. Can you talk about your product set now? Are you happy with what you've been doing? Is there more you can do? And how has demand maybe changed before and after the spot Bitcoin ETF approval?

Well, I think that, first of all, I'm a big believer that if you don't -- the product doesn't have a use case, you have to make a decision on what you're going to do with it. Because otherwise, if it doesn't have a use case, it can be deemed readily manipulable under the Commodity Exchange Act. And the last thing I'm ever going to do is want to follow the Commodity Exchange Act. And I don't want to have something that could be deemed readily manipulable. So I'm not -- I applaud the Chairman's comments earlier about crypto. It's not about whether I like crypto or not. The question is, I hate to hear that half of his enforcement cases are against crypto. And to me, that's troublesome. So I don't know where the growth of this is. When I listed futures in 2017 on this, I absolutely put so many restraints on it. I didn't think anybody would trade at on lot. I swear to God, I didn't think they would trade. I had close to 40% margin. I had functionality or stop logic functionality on there, velocity logic functionality on there. I had limits associated with it completely contrary to where the cash markets were trading. And it's still a decent amount of trade. But we are not even in the jogging stage of crypto at CME. I need to see a better use case. I think no matter what comes of crypto, the regulation, you're going to have a good part of the population upset. You cannot have dominant people in financial services that are well respected. I don't care if you like them or not. I happen to like them. Jamie Dimon. I think Jamie is a really smart guy. And I think he carries a lot of weight. And when people say that he just doesn't understand these product sets and that they're being driven up on pure speculation, it's hard to argue with it. They're not driven up on pure speculation. Why is it that coin base listed a gold contract, a nano gold contract. Isn't that the antithesis of crypto. They're both supposed to be a store of value that crypto was going to replace gold and now they list a nano gold contract. So I find this kind of amusing to all the crypto buffs out there what's going to be. So unless we can all use it in a way that's comfortable and it's got a great use case. I think the lifespan of this could be a little bit shorter, because I don't think you can only have a handful of people using it. And 40% or 50% of the cases at the agency on enforcement are in that division of crypto. That's a tough sell for the people.

I think we have time for one more question. So I always love hearing your thoughts about market structure, Terry. So if we look out over the next decade, decade plus, we've heard a lot about AI this today, what do you expect to be some of the biggest themes that will be influencing market structure over the next decade?

I think it's going to be fascinating. I know that Chair talked about this earlier in his comments about -- a little bit about market structure, you asked them. I actually think that institutional and retail are going to blur. I don't think you're going to be able to recognize the difference between the 2, and it's going to be due to basically because of technology. So if artificial intelligence allows me to have the same information as Ken Griffin, which is -- I used Ken for the second time. I hope he's not listening to this. But I appreciate everything you do for us, Ken. But it now will make people -- these younger generation wants to be in control of their own destiny. They're going to be hard-pressed to say, okay, I've made up some money and I'm going to give it to a bank to run for me. When they have all the tools as they've been growing up, they do it themselves. Artificial intelligence is going to give these people the ability to have information they never had before. So they can compete against Ken Griffin. And it doesn't mean they're going to be successful like Ken, because Ken might have different strategies associated with it. But for the information that artificial intelligence, if it's done properly, we'll give it to us all at the same time, spin. So now it's up to us to determine what we're going to do with it. And I think there'll be a big population of the retail that will embrace these younger people that are now in their 20s and going into their 30s, who will be our next market participants will be deploying this and I think it's going to be a fascinating way to do it. So what does that mean for market structure? Do exchanges need to be more direct, I don't know. The FCM is going from 176 to -- I think it's right around 50, it's on the lower end is concerning. There's clients today. There's clients today that can't even open up an account at an FCM because they don't want them. So the banks don't want anything to these people because -- so what are we eventually going to do? We can't -- if the interest rates go down to a certain point, we're not going to even maintain the 50 because they're living off the big. So it will be very difficult, we'll lose more FCM. So market structure conversations need to be talked about. When Sam Bankman-Fried and I argued with him because I had different feelings about him, but I never argued what he was trying to do. I argued against the way he was doing it. And it's a different ideology. So his idea of our market structure, I didn't have an issue with. I had an issue with him trying to implement that market structure into a rule set that had nothing to do with what he was trying to do. So he's trying to put a square peg into a round hole. And I thought that was wrong, because the Commodity Exchange Act today specifically says futures commission merchant in its rule book, and he was trying to subvert that and I felt that was wrong. So it doesn't mean that the structure that he was thinking about is wrong. So I think that we're going to continue to evolve. We're going to have conversations with participants, regulators and all because we have to come together to figure out what that structure is going to look like. I think everything has a shelf life. Everybody has an expiration date. Mine is getting closer, I'm 65. But I really believe that the market will change, because people will demand -- people want access and they're not going to be shut out. And right now, they are shut out. So that's what I think, that's why you see us coming on time. But you don't want to wait until it's too late. You want to work and put good smart rules and regulations in place so people know the rules of the road as we go forward.

Terry, I think we're out of time, but Thank you so much. This has been great.

Appreciate it.