Cboe Global Markets, Inc. (CBOE) Q1 2020 Earnings Report, Transcript and Summary

Hello, and welcome to the Cboe Global Markets 2020 First Quarter Financial Results. All participants will be in listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to your host today, Debbie Koopman. Please go ahead ma’am.

Thank you. Good morning, and thank you for joining us for our first quarter earnings call. On the call today, Ed Tilly, our Chairman, President and CEO will discuss the quarter and provide an update on our strategic initiatives; then Brian Schell, Executive Vice President and CFO will provide an overview of our financial results and provide updated 2020 guidance for certain financial metrics. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our Chief Operating Officer, Chris Isaacson; and our Chief Strategy Officer, John Deters. In addition, I would like to point out that the presentation will include the use of slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our SEC filings for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. During the course of the call this morning, we will be referring to non-GAAP measures, as defined and reconciled in our earnings materials. Today’s speakers are joining from different locations. So we would ask that you please be patient if there are any technical difficulties. Now I'd like to turn the call over to Ed.

Thank you, Debbie. Good morning. I would like to thank you for joining us and to extend my best wishes for your health and the health of your families and colleagues. The first quarter 2020 was a stunning period in the history, encompassing the nascent spread of the COVID-19 virus to a global pandemic, threatening lives, markets and economies. The growing spread of the virus fueled tremendous market uncertainty, as well as concern for the health of our employees, market participants and communities. Our first priority was to help mitigate the risk of potential exposure to our team members and trading floor community, while working closely with our regulators and customers to maintain continuous and orderly markets. We began transitioning employees to work from home ahead of government mandates and at March 16th, we made the very difficult, but necessary decision to temporarily close the trading floor for the first time in our 47 year history and transitioned Cboe Options Exchange to all electronic trading. Cboe’s hybrid trading system has always provided best-in-class liquidity and access through open outcry and electronic trading mechanisms. While the historic action of closing the floor proved to be a short-term distraction, thanks to the collaboration and input from our floor trading community and the responsiveness of our regulators, we were able to complete this transition in a two day period. The SEC’s collaboration and support was critical in enabling us to work quickly through the rule changes needed to close gaps through technology for a seamless transition. Although it remains unclear when and how we may reopen the floor, we are in discussions with our trading floor community and working through various scenarios, so we are well prepared for any eventuality. The health and safety of our trading floor community which includes market participants, and Cboe team members is our highest priority and will dictate when and how we reopen the trading floor. In the mean time, the electronic component of our hybrid system remains industry-leading and we are actively working on electronic solutions to replicate the benefits of floor trading in order to better response the demand for high risk and complex trades that are temporarily more difficult to satisfy. The recent market instability reconfirms the importance of transparent, accessible and regulated markets. Throughout this period of extreme market conditions, our exchanges performed without incident, processing dramatically increased volumes across all of our markets. Turning now to a look at the recent trading environment. The S&P 500 index touched record highs in mid-February with a variety of known unknowns on the horizon combined with initial concerns around the impact and severity of the Coronavirus, hedging was top of mind for most investors. As we have seen before, in the midst of extreme market uncertainty, the world turns to Cboe to leverage the utility of SPX index options and VIX futures to navigate market turbulence. This played out vividly in the first quarter 2020 with year-over-year increases of 43% in index options and 44% in VIX futures as investors repositioned and monetized hedges during the subsequent market sell-off. Higher trading volumes in the first quarter gave way to lower volumes across our proprietary products in April as we look across our diversified product line, we continue to see strong volume in multi-listed options and U.S. equities, as users of our index products dersisk or regrouped. Volumes will ebb and flow as uncertainty plays out. The extended disruption in the market has been colored by record levels in realized and implied equity volatility, while rates have collapsed and oil prices traded negative. Currently, as we have seen before during times of extreme market stress, investors derisk until the event is more clearly defined. When they are better able to assess risk, they reengage. Tragically, this is an ongoing crisis and we expect to see new permutations and volatility as it continues to evolve. No one can say with certainty how this situation will play out, but the path to recovery is unlikely to be linear. We expect investors to continue to deploy and redeploy our unique product set to trade their changing market views and hedge their positions as the crisis evolves. We remain focused on listening to our customers by delivering products and solutions tailored to help them reposition to better navigate this new and extraordinary environment. We are actively redefining how we approach investor education. Two new initiatives include virtual forms for industry experts to share the latest in risk management strategies and webinars covering a broad range of topics designed to increase awareness around the benefits of allocating to CBOE products. Further, we are positioned to assist our customers by offering customized trading resources that address the complexity of managing risk through periods of heightened and prolonged uncertainty. Silexx, Cboe’s proprietary order and execution management system continues to provide critical functionality throughout the challenges presented by the COVID-19 pandemic. In order to facilitate access to an all-electronic environment, we expedited development work on Silexx, which enables floor traders to replicate their work streams in both flex and listed options and remain active in the new virtual environment. In addition, we offered Silexx free to our floor trading permit holders through the end of May to help them adjust and provide continuous liquidity. By facilitating access to our market in an all-electronic environment, we help to ensure the continuation of a fair and orderly marketplace. Along with the growing need for robust customized tools, we saw increased demand for historical datasets and sophisticated analytics as the rule tries to make sense of the current economic environment and prepares for what lies ahead. By offering a comprehensive suite of data solutions, analytics and indices, we provide market participants tools for better understanding risk and accessing Cboe markets. Understanding risk has never been more important than now. It follows that portfolio risk and margin efficiency, rank at the top of what our customers need. This highlights the importance and timeliness of our recent acquisitions of Hanweck, a real-time risk analytics company, and FT Options, a portfolio management platform provider. Similar to our Silexx acquisition 2.5 years ago, our Hanweck and FT Options acquisitions were based on our ongoing commitment to investing in tools to grow the utility of our product suite. The value of these investments may not manifest immediately, but eventually market conditions make clear how these resources draw users to our markets and help us establish higher baselines or product volumes once participants reestablish their views on the market. We also support customers through product innovation that delivers value in a variety of market environments. For example, in our U.S. equities business, we are encouraged by the positive response we have seen to our new retail priority offering with steady increases in ADV each month and representing about 5% of shares executed on Cboe EDGX in April. On March 6th we launched Cboe market close, which enables us to tap into part of the closing auction market buy in, while benefiting the industry with an all exchange price competitive alternative. As expected. The market environment during the quarter limited customer uptake of CMC, but we expect uptake to increase based on recent customer outreach for certification and testing. Meanwhile, our post-close trading service in Europe, Cboe Closing Cross has begun to gain traction and we expect that volume to continue to build as well. In addition, Cboe BZX was the first exchange to list actively managed semi-transparent ETFs for trading, leading the industry and supporting our issues with the approval and listing of this groundbreaking ETF innovation. With other listings of this type in the pipeline, we are focused on establishing as the listing venue of choice in this arena. Turning to Europe. The close of our EuroCCP transaction remains on track and is currently expected to close in the next few months pending regulatory approval and other closing conditions. As we have mentioned, we would expect EuroCCP to enable us to grow our current European business to further diversify our revenue stream by enabling us to bring to market a European derivatives business that leverages our expertise in actively quoted markets to better serve our global customer base. EuroCCP is the central link in the PAN European equity market network and we value the business for the critical role it plays in settlement across Europe. Additionally, as an EU clearing house, we see EuroCCP as a strategic asset in light of the political and regulatory uncertainties surrounding Brexit and the future framework of European capital markets. We look forward to sharing additional details on our European derivatives launch plans in the coming weeks. As a global exchange operator, Cboe is deeply committed to providing orderly markets throughout this crisis. I would like to thank our trading community and regulators for their critical work enabling us to maintain robust and reliable markets during this critical time. I believe the highly collaborative efforts with our regulators throughout this crisis can serve as a model for productive collaboration going forward. Special thanks also to the Cboe team. Our associates are deeply experienced in the business of risk management, which requires prudence, knowledge, flexibility and composure, qualities in abundance across our team. Their collective experience and dedication enabled us to successfully navigate extraordinary short-term challenges, while continuing to execute strategic growth initiatives across all of our business lines. Good citizenship is one of Cboe’s guiding principles and we are also mindful of our role as a global corporate citizen with offices and customers around the world. The giving spirit of our team is inspiring. Our company-wide corporate giving and the generosity of our associates is focused on providing relief to those suffering from the crisis and to containing its spread. We believe the experience of our team, our diversified product line which includes, but extends well beyond our unique proprietary products and the expansion and growing utility of our customized trading resources leaves us well positioned to continue to deliver positive results for customers and investors as we move forward. With that, I will turn it over to Brian.

Thanks, Ed, and good morning, everyone. I do hope everyone and their families are remaining safe and healthy and I’d like to echo the thanks to Cboe team and everyone who make this call possible this morning. Let me remind everyone that unless specifically noted, my comments relate to 1Q 2020, as compared to 1Q 2019 and are based on our non-GAAP adjusted results. As Ed noted, we reported record financial results for the quarter underscoring the strength and resiliency of Cboe’s franchise and the utility of our products, particularly in times of market turbulence. Our net revenue increased 28%, with net transaction fees up 43% and non-transaction revenue up 7%. Adjusted operating expenses increased just 5%, which combined with our strong revenue growth resulted in an adjusted EBITDA growth of 42%, resulting in very healthy margin of over 74%. The adjusted EBITDA margin on incremental net revenue was 102%. And finally, our adjusted earnings per share increased 48% to $1.65. Consistent with our prior guidance, we grew our quarterly recurring revenue stream of proprietary market data and accessing capacity fees by 8%, compared to first quarter 2019. This increase includes over $2 million attributed to the acquisitions of Hanweck and FT Options in the quarter. Organic growth was 7%, which excludes these acquisitions and a shift of approximately $1 million and revenue reported in access capacity fees in 1Q 2019, which is now reported in transaction fees. The growth in proprietary market data and access to capacity fees continue to be driven by incremental subscriptions in units accounting for about 86% and 77% of the growth this quarter respectively. At our last call, we noted our expectation that these revenues would grow in the low to mid-single-digits organically, and mid to high-single-digits on a reported basis, which will be inclusive of the acquisitions of Hanweck and FT Options. Looking ahead, the reported growth rate for these non-transaction fees is now expected to be lower in the low to mid-single-digits purely due to the realignment of certain fees as a result of our move to all-electronic trading. Trading floor broker access capacity fees have been suspended due to the temporary floor closing. However, we have implemented comparable transaction-related fees in an attempt to achieve a neutral net revenue impact. All else remaining equal. Having said that, we remain optimistic about achieving the underlying organic growth target of the remaining proprietary and market data and access capacity fee category. This revenue shift will occur in second quarter, again in the form of higher transaction fee revenue associated with higher RPC of our index options and lower access and capacity fees. Now, a review of our segments. In our Options segment, the 36% or $50 million in increase in net revenue was driven by growth in net transaction fees, particularly in our index option where average daily volume declined 44% for the quarter and RPC grew 7%. The RPC lift reflects a mix shift by order execution in time, as well as pricing changes implemented during the quarter. Most notably, a fee increase for SPX options, as well as a fee decrease for VIX. In multi-list options, ADV increased by 55% and RPC fell by 21%, with the latter primarily due to a shift in customer mix, and higher volume rebates versus the first quarter of 2019. Turning to futures, the 36% or $11 million increase in net revenue primarily reflects a 43% increase in ADV and a 1% increase in RPC. The higher RPC year-over-year was primarily due to a mix shift with a greater percentage of volume coming from higher RPC order types including block trades. In U.S. equities, net revenue increased 14% or $11 million, primarily due to higher transaction fees with equities volumes benefiting from the return of volatility to the markets, shifting more trading to on-exchange venues versus off-exchange. More dogs barking in the background. Our market share increased year-over-year and sequentially and it’s been particularly shown on our Cboe BZX exchange where we have benefited from the rise in ETF trading, a key volume growth in U.S. equities. Net revenue for European equities increased 15% on a U.S. dollar basis and 17% on a local currency basis reflecting higher market volumes, and higher captures, offset somewhat by a lower market share. The higher capture resulted from continued strong periodic auction and LAX volumes. The net revenue increase reflects a 17% increase in transaction fees and non-transaction revenue. The growth in non-transaction revenue reflects increases in access and capacity fees, primarily due to incremental connections with the opening of our Amsterdam Networks in October of 2019. And other revenue which includes licensing and trade reporting revenue. The decline in market share was primarily the result of significant market profile shifts to the highly volatile market conditions in the quarter, which saw many participants recalibrate their models. Additionally, volumes were impacted by our loss of ability to offer Swiss securities for trading due to the Swiss equivalency matter. Net revenue for global FX increased 22% for the quarter, pinning a new all-time high reflecting a 19% increase in market volumes and a 3% increase in net capture with the latter reflecting a mix shift in volume by customer type. We maintained strong market share and set new ADV highs in our full amount offerings as well as on Cboe SEF for NDS. Turning to expenses, total adjusted operating expenses were about $99 million for the quarter, up 5% against last year’s first quarter. The key expense variant was in compensation and benefits, reflecting the net impact of a $5 million increase in incentive-based compensation resulting from higher bonus expense this quarter and forfeitures of unvested equity awards in 1Q 2019, a $2 million increase as a result of lower capitalized wages relating to software development and a $2 million decline in benefits due to the adjustment of deferred compensation paying assets. Note that there is an offsetting $2 million charge in other income resulting in no impact to earnings. This adjustment reflects the change in the valuation of certain deferred compensation paying assets and we do not attempt to forecast or include as a part of our overall expense guidance. Looking ahead to the remainder of 2020, while much uncertainty remains around how this pandemic plays out, we remain steadfast in our execution of prudent expense management. In light of the COVID-19 crisis, we have recalibrated our 2020 expense plan with a focus on deploying our resources to have the greatest impact. We are reducing our guidance for 2020, adjusted operating expenses by $16 million to a range of $419 million to $427 million, primarily reflecting lower compensation costs and lower expenses for travel and entertainment and marketing events resulting from the current environment. Expenses are expected to ramp up in the second half of the year as we plan to accelerate our existing growth initiatives and complete our Chicago headquarters build-out. This slide provides an update to the 2019 to 2020 expense bridge we provided in our last earnings call indicating, we now expect core expense growth to be flat to up 1% because of changes to our assumptions. As a result, this guidance does not include our plan. As a reminder, this guidance does not include our planned acquisition of EuroCCP and the build-out of PAN European derivatives trading in clarity. We’ve planned to incorporate that into our 2020 guidance after the acquisition closes, which we still expect to occur in the next few months subject to regulatory approval and other closing conditions. Turning to income taxes, our effective tax rate on adjusted earnings for the quarter was 27% at the low-end of our guidance range, but above last year’s first quarter rate of 25.4%. The year-over-year rate tax increase primarily was due to greater excess tax benefits associated with equity awards in the first quarter of 2019 versus 2020. We are reaffirming our 2020 full year tax rate on adjusted earnings, which is expected to be in a range of 26.5% to 28.5%. We are also reaffirming our capital spending guidance for 2020 to $65 million to $70 million. We are still on track to move into our new Chicago headquarters in early part of the third quarter. However, this could shift based on the availability of our current suppliers. Furthermore, we still expect depreciation and amortization to be $34 million to $38 million for 2020, which excludes amortization of intangibles of approximately $120 million in 2020. Turning to capital allocation, let me underscore, we remain focused on investing in the growth of our business to build upon our strengths, while returning excess cash to shareholders through dividend and share repurchases. Our financial position continues to be very strong. We have very good cash flow generation capability and a solid balance sheet. During the quarter we returned $120 million to shareholders through share repurchases and $40 million through dividends. And at March 31st, our share repurchase authorization available was $180 million. Our debt remains at $875 million and we have $250 million available and availability under our revolver if a short-term funding need arises. Our leverage ratio moved to one-times at quarter end, down from 1.2 times at the end of the year reflecting higher trailing 12 months of earnings and we ended the year with adjusted cash of $137 million. We expect to see approximately $25 million to $30 million of a liquidity benefit primarily from the immediate deductibility of leasehold improvements, expenses from our Chicago headquarters move, deferral of first quarter tax savings and political social security taxes as allowed by the U.S. Cares Act. We do not expect to maintain – we do expect to maintain a more conservative cash position in the near-term and evaluate funding alternatives opportunistically. In closing, these unprecedented times leaves us with many unknowns, but what we do know is, we just reported record quarterly financial results across almost every financial metric. Our technology infrastructure handled messaging volumes that were double prior peaks with no service disruptions. We work collaboratively with our regulators and trading floor community to migrate to an all-electronic exchange and our workforce converted to a work from home environment, all without skipping a beat. The underlying fundamentals of our business are strong and our philosophy of maintaining financial flexibility is in place for times like these. Regardless of marketing conditions, we remain focused on serving the needs of our customers and delivering sustainable returns to our shareholders while guarding the health and wealth of our associates. With that, I will turn over to Debbie for instructions on the Q&A portion of the call.

Thanks, Brian. At this point, we'd be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue and if time permits, we’ll take a second question. Turn it back to Keith now.

Yes, thank you. [Operator Instructions] And today’s first question comes from Richard Repetto with Piper Sandler.

Yes, good morning, Ed, and good morning, Brian. And I hope everybody – you and the Cboe team are all safe and healthy. Congratulations on the outstanding margins reported in the quarter. I guess, the question – my question is on proprietary trading volumes. And just trying to understand the impact of the foreclosures if you can quantify that, at least from the complex trading of the SPX option? And then, just to get more into what you talked about in the prepared remarks, have we seen a more pullback from either speculators or is it the true hedgers? And then, I am just trying to understand how equity volumes in multi-listed options remain elevated, but we seen the proprietary product volumes in April fall back, pull back quite a bit?

Rich, thank you and good morning. A great question. I like the way you combine that. Let me first answer the floor perspective. I think in the kerfuffle of moving to all-electronic, we, I think managed to satisfy the demand for the majority of our customer flow really well. But that said, the most complex trades, those are the most risky. We have not been able to fully satisfy and I think there is pent-up demand. I know, there is pent-up demand and a frustration with some of those more complex trades in their attempt to access the pool of liquidity that is the SPX. So, we are going to work on that. I am going to provide you some detail there. The second part of your question on speculation versus hedging, speculation is alive and well. The activity we see in single name product, I think goes right to that question. There are winners and there are losers in this incredible market move. And even today, with a 60 spool move, I anticipate there'll be a lot of speculative play and we’ll see that in multi-list options and including spiders. The SPX, you are right, institutional base, the hedging tool for hedging U.S.is exposure to the U.S. market period. So I think the hedges are on the sidelines to your observation as well. Let me get back to the question on how then to return the utility that is the floor of the SPX for the experience of those that are still frustrated by access in test backs. We have a two-pronged approach. One, we are preparing the open of the Cboe trading floor, it will be ready in and around June 1st. A safety first is going to be our guideline. We have our own members of the Cboe community going down back down to floor to service our trading community. So the health of both of those groups is first and foremost. We recognize the impact that we potentially going to have on the Chicago community if we act too quickly and recklessly. So it will be safety first, but will be ready operationally June 1 to go back to open outcry trading. The other – the path that we are pursuing is what electronic solutions can we offer to the marketplace that bridges the gap between the experience that was found on the trading floor. The utility that brokers provide, the ability for market makers to trade with market makers, how do we provide that solution electronically? We are well into the design of that technology solution and we’ll be wedding that with the SGC immediately. So, I would say, it’s a two-pronged approach, ready for open outcry June 1, parallel path on electronic solution, so we will return the experience for all of our users to what they are used to gaining access to the S&P 500 complex.

Thank you.

Thank you. And the next question comes from Ken Worthington with JPMorgan.

Hi, good morning. Thank you for taking my questions. Can you talk about the damage done to your clients in VIX this financial correction? While firms seem to be positioned very differently this time in VIX versus what they had – where they had been in 2018? There is still seems to have been damage done to those who are short volatility. So, and we see this in – may see this in the multi-year lows and open interest in futures. So, how would you compare the damage done at this time in 2020 versus what we saw in 2018? And to what extent are you seeing signs of recovery?

First I guess, I’d have to see damage done before I can see signs of recovery. I will say that the big volumes change that we see, I think I would point to most that is affecting the volume in VIX futures is the massive reduction in AUM and ETPs. And as a result, the lower required need to rebalance at the end of each and every night and VIX futures. So, most intense in the levered – in inverse ETPs where we are about a tenth of the AUM that we were pre-selloff. So, I don’t think that I would not categorize this at all in the parallel you are drawing to the last major spike in VIX where we did lose flow and strategy. I don’t see the same here and I certainly haven’t heard stories that resemble anything like we’ve seen a couple of years ago. So, I think this is normal. I think the rest of the VIX open interest, there was a great deal of monetization of hedging. So if you had VIX options positions on or if you had the right position in VIX. Not surprisingly, you reach expiration, you hold those positions to expiration. At a mid-30s VIX level is not where you would reengage. You let those options expire and we are at a higher level, we are at a flat line VIX. Right now, we’ve talked about this for years, we’ve seen the market go to flat line. The markets most indecisive when the volatility surface is flat. This does not surprises at all.

Ken, this is John Deters. So, to Ed’s points on the ETP dynamics, just very, very different patterns from what we saw back a couple years ago, in particular, you can track when you look at shorts. One of the important things we look at is the short interest and the long ETPs. And where the short interest really accelerated was after the VIX level started to lift up. So, rather than people being caught short, they went short when VIX was sitting 70, 80. Now that where it’s 30, term structure flat, people don’t have views on where that’s going up or down. The shorts are out of the market. The longs are not back in and you can see that to the inflows, the asset inflows into the ETPs which is generally been negative. So, people are waiting to reestablish their view. That’s simply it.

Ken, let me give you a - just a reference point on the March expiry and kind of prove the point a little bit about not rolling and reestablishing. The expiry is at 69 level. So that’s not a roll level. I think it’s a wait and see and that’s exactly what we are observing today. But thank you, It’s a great question.

And the next question comes from Dan Fannon with Jefferies.

Thanks. Good morning. The derisking you highlighted across the customer base in, I guess, in March and in April, I guess, without clarity on the pandemic, reengagement is likely to be a bit delayed. But I guess, if you think longer term, the addressable markets for your products in terms of hedging through periods of volatility. Could you talk about kind of the new customers, the new opportunity and how the market might be more broader for the utility of your products kind of post events like the last few months?

Yes, it’s great. And what we are doing is, we told you, this was the year of organic growth. And the team is so fired up. We have the right people on the street with the right people in front of customers, the engagement was solid. And that is still going to be our story. But we are pushing that out a little bit. This is a back to basics. Our existing customers need more information that the volatility environment. And you are right, you cannot see the end of this pandemic yet. And that shows up in the flatness and the elevated nature of the curve right now. So it’s really difficult to look through. So the engagement has to be different. But we are engaging virtually, each and every day with the existing customers. And I’d say, if we were – our goal was, gosh, 60% in 2020 to engage with existing customers and 40% out in getting new, I would see we are probably at an 80:20 right now, reengaging within existing, while still trying to cultivate new. So, it is a bit more of a pivot back to the people we know or who needing more information in this environment and back to the growth story, I would hope by third and fourth quarter of this year.

Thank you. And the next question comes from Alex Kramm with UBS.

Yes, hey. Hello everyone. Wanted to just – I guess, a numbers question on what you outlined on the access fee and the price change there. Can you just give us a little bit more color, what the dollar impact is on access fees? And obviously, I guess, you are trying to get an offset on the transaction side. But is that basically a plan for one month now? You just said the floor may reopen in the beginning of June. And then maybe just related to that, I mean, how did you think about that pricing change? I mean, is there a situation where you are introducing higher transaction fee to some clients only who trade electronically. Anyways that you are implementing more friction into the marketplace at a time where you are desperately looking for more volume or how should I think about the puts and takes of the new pricing schedule?

Yes, Alex. Happy to provide a little bit more color there. So, the high-level number is about $1.5 million per month, roughly on that fee shift that you would see. And that RPC, like I said is something that we looked at and say, we are not trying to make more money as a result of the change. We are trying to just basically do a neutral offset and it’s not an exact science. But the goal would be to – it won’t be a 100% is that the same folks who would have paid that, call it the access fee would be seeing a slightly higher transaction fee on their trade is the way we tried to structure that. So it’s not across the entire complex. Obviously, it’s not exact, it’s not perfect the way fee schedules work, but I would say, the bulk of that – of what that RPC shift would be on those who are paying the access and capacity fee that I mentioned as far as the shift goes. As far as the – how long and everything else, Ed talked about a potential timing change as far as, obviously there is conditions there have made of local areas, lifting restrictions and a lot of things that go into that. What I was doing, and when we provided that guidance is, we don’t know exactly when that will shift. So, if it’s only a month, and more back, then it’s only a month and we’ll update the guidance. So I think that was a very good question for you to ask to kind of suck that out on a kind of a monthly basis of what we’d expect to see, because we would then go back to flip the fees back to where they were, pre-temporary foreclosure.

Great. Thank you.

Yes.

I think we lost the connection, Debbie.

I am not hearing anything.

I am sorry. The next question comes from Mike Carrier with Bank of America.

Excellent.

Hi, thanks guys for taking the question. Hey Brian, just a question on the expense guidance and understand things are so in flux, so it's probably tough to be too precise. But, typically, the range that you provide, that range constitutes a pretty kind of broad, like, outcome in terms of like the bonus and how that gets accrued. I guess, just given this year with the uncertainties on like the pits close versus going back and kind of reengaging and somewhat normal operations and travel. How much of that is included in the range, meaning in terms of it on hold versus going back. And then, I know, you mentioned EuroCCP is not included. I think initially you guys had something around $0.08 to $0.10 dilutive in year one. But then you have that change versus what you know as of now. Thanks.

So, I am not – I am going to try and interpret the first question on the bonus impact, I think broadly. So, I’ll try to answer that broadly and then on the EuroCCP, I’ll answer that one because, when we gave that guidance, that was, again meant to be, broadly, I’ll call it a - some of that was a bit of a 12 month perspective. So, if it was delayed, some of that could get shifted a little bit into outside of 2020 and then more into 2021 as we kind of roll that forward. So, it was – when we obviously when doing all of our modeling, look at the impacts, look at when the investment occurs, we have certain expectations of when that would hit in 2021- excuse me – then when that would hit in 2020. So, I would say, stay tuned for when we see that it does get closed and we’ll refresh that. We continue to, obviously, like the U.S. and in Europe, continue to engage those clients or continuing to be very strong interest in what we are doing there. And we haven’t seen anybody back away and say, we don’t want to do this, but realizing the environment we are in, we’ll have to evaluate the timing and whether expenses happen at the exact same time as we had initially indicated. But that’s kind of why we also then are waiting to update that guidance until that closes to get give everybody more clarity as far as the timing goes. On the bonuses and what that reflects, essentially sometimes, that compensation is a little – it basically has to have a full year perspective on it, because essentially, what firms are required to do is, forecast where they expect to make kind of – where they expect to make earnings for the entire year and book an accrual, based on kind we call one quarter of the way through it have expectations along the way. We’ve made what we think our conservative assumptions as far as how our year goes. We have different scenarios that we look at, evaluate the higher or lower volume impacts, and obviously any impacts of those expectations that occur, relative to what we’ve assumed, obviously can change the accrual for the bonus itself. But right now, we feel very comfortable that we are kind of in a solid range of where we are. And as I said I think that if that number goes up, it will be only due to higher volumes. And as it goes down and it’s not as where people – we might expect them to be – that guidance could come down a bit. So, I know you are probably looking for explicit number, but just know that overall, bonus and as you look at the expense structure, compensation is a big driver of the overall expense guidance.

All right. Thanks.

Mike, just a couple additional things on EuroCCP. To Brian’s point, the previous estimate in terms of EPS impact, it wasn’t an estimate in terms of timing, it was also an estimate in terms of where we thought those facility fees would come in and I think one thing that we’ve been pleased about over this period even through the market turmoil is we’ve been able to successfully make progress on the syndication . We now have signed commitments for the full facility, really just waiting for those final regulator approvals and fees have really come in right in the ballpark of where we anticipated even in this environment. So it’s terrific. And just in terms of the longer-term derivatives plan in Europe, we are as excited as ever some things may face delay here and there, but we are finding banks are really engaging with us. They are ready to participate. And we are also – I think in a position to apply some of the lessons we are learning in our markets here in the U.S. in terms of liquidity provision and new ways to electronically source liquidity supply that will really bear fruits in Europe, since we are obviously – I mean, Europe is not going to be a floor environment. But we can still apply some of the electronic lessons we are learning today there.

Thank you. And the next question comes from Chris Allen with Compass Point.

Good morning everyone. I wanted to revisit Rich's question a little bit, just the answer there. I was wondering if you could help us quantify, how much activity is driven by the complex trades, because what I was trying to parse out is, what level of decline has been driven by, you talked about the flatness of the VIX curve and the elevated VIX versus was what's been driven by the floor closure there. So any color there would be helpful. And also, how is your – the floor participants who are being impacted by the fee shift you just discussed. How did they receive that in terms of, particularly just given what is the likelihood there of lower levels of activity right now?

So, I’ll take them in reverse. Good question. As far as the fee level, look at it this way. It was just primarily SPX issue. If you were trading the at-the-money options before the move and it was $0.63 to $0.68. You are trading the at-the-money options today and it's $40 or $50 premium and there is another dime or so in fees. That is not the friction point. So, while no one wants their fees to go up relative to the options that you are trading. This is not the – this is not an issue, that is affecting at all from our opinion the volumes in the SPX. It is not why you wouldn’t trade the SPX. As for the complexity, I think you are on to it. If we look at the most complex trades with exposure to the S&P 500, or in multi-leg spreads and I define those, it’s the most complex – I think six legs and over, right? So, pretty simple to trade electronically a two leg spread, but if you get into six and over, it becomes more difficult. Before March, that was above 5.5% of the SPX volume and after the major move and we went to all-electronic, that’s about 2.3%, 2.4%. So, that is a massive amount of volume that is been frustrated by an all-electronic environment and it is exactly the benefit we think, we will gain when we return to either open outcry and/or an electronic solution that satisfies those most complex trades. And what we haven’t spent a lot of time on is, the market maker experience, not to entries, but in their ability to continue to reposition their own risk with fellow market makers that may or may not have the same exposure. That is very, very difficult to do in all-electronic environment. It’s very, very easy to do when the most liquid pool of liquidity that SPX pit allows you that interaction with other market makers leading to rebalance and reposition their own portfolios. We will need a solution for that electronically and we have that design. So, as I say, the parallel path we are chasing right now we will provide solutions both all-electronically and a return to open outcry trade.

Thank you. And the next question comes from Brian Bedell with Deutsche Bank.

Great. Thanks. Good morning, folks. Hope everyone safe and well. Just to come back on obviously the topic that you're on the floor. Just maybe different way, just in my own volume calculations here for quarter-to-date across SPX, VIX options and VIX futures, SPX volumes are down, little over 30% while the VIX options are down 60% and futures is 65%, maybe this is too simplistic. But from my understanding the SPX is more heavily – or it has a higher floor to participation where VIX has – traditionally has a higher electronic usage and of course, the futures does, as well. Is that contraction in SPX volume somewhat of a reasonable proxy for the contribution from the volume decline on the floor if we were to look at that way? And then, also on the development of the electronic complex order types that you are working on, I guess, how quickly do you think that would be effective? And then, would people continue to use that if that was effective to the extent that they would in the future be less active on the floor and rather you do electronic version?

So, let me answer the electronic version versus the open outcry a little different way. So, our position on the open outcry trading has not changed since we went hybrid. So, if you can think, 10 to 15 years ago, the expectation was the trading floor would close. Cboe has an electronic solution that should satisfy the majority of its users and no longer find utility in the pit. Our position has always been that when our customers tell us that there is no utility in the trading crowd, when brokers provide no service to their customers, the electronic solution will close the trading floor, not Cboe and not its management team. That position has not changed. We have been adding an improving technology from the moment hybrid was introduced. We’ll continue to do so. Now, in this instance, we have been able to isolate needs that have not been satisfied in an electronic environment with much more clarity. So the focus and the direction is clear. The design is already done and the interaction now will be with our regulators and timing of a launch in our phase one. That is not going to be the last phase. We will have multiple phases of adding technology and solutions to the experience that our customers have today using open outcry. So, I do think there has been an impact in SPX due to the frustration of not being able to get those most risky and most complex orders done. I am not sure if I answered all of your questions. So, please reengage with me if I left something else.

Brian, this is Chris Isaacson. I would just add here. This is a long history of making technological advancements to satisfy and provide the utility that our customers want including on the floor. So, we went to hybrids for the SPX monthly contract in 2018, massive integration effort to new technology in 2019. We pivoted on a dime when we were forced to close the trading floor. We are working very quickly to satisfy the utility we are trading for whether physically or in a virtual mode. And as I had said, we are all over this. The design is nearly done and subject to regulatory approval and working with them. We will be ready for any outcome here regardless of how COVID-19 progresses.

We would expect a recovery based on the work you are doing there and then secondarily what you mentioned to an earlier question as people put risk back on in the market, that's a whole other dynamic of that recovery, but that’s a little bit more in third – on the second quarter.

Agreed.

Yes, okay. All right. Thank you.

Thank you. And the next question comes from Ari Ghosh with Credit Suisse.

Hey, good morning everyone. So, Brian, just on Hanweck and FT Options. Can you remind us again what the revenue contribution look like in 1Q and the outlook for the remainder of the year? And then just more broadly on, I think about market data and access, additional subs, the new plans have been driving the growth of the year. So, please share any color on what you’ve seen thus far in April and expectation near-term around new client growth just given some of the continued market uncertainty and day-to-day business structure? Thank you.

Yes, sure. Thanks for the question, Ari. So, on the Hanweck and FT, we didn’t provide guidance on the acquisition. We just kind of – we’ll continue to let everybody know the incremental amount that’s in our numbers as it’s new, because we want to continue to highlight the organic growth that we’ve been able to experience and continue to drive going forward. So, stay tuned as we continue to report that. It’s about $2.5 million, I think we had in our slide deck. You’ll see that for the first couple of months for February and March in the quarter. As far as the underlying proprietary market data and the access capacity fees and what that looks like, we look at that pipeline. We are in communication with our business development team. Again, we still feel good about that organic growth. You are seeing the really, really strong numbers as far as newness and subscribers driving that growth versus any price changes. With respect the connectivity part of that that actually has probably surprises to the upside as far as strength goes, which is not surprising given the environment the additional need for capacity and the connectivity of it. That’s probably slightly higher than our expectations. And some of that also in line with – as the Amsterdam operations, like I mentioned earlier in prepared remarks have come online. With respect to the proprietary market data, again, if we look at kind of our – some of our, call it, three larger geographic areas of Europe, U.S., and Asia, we continue to see good pipeline. And we still feel good about those sales, granted the in-person contact has slowed, but the interest continues to be strong. And so, while we may have seen a little bit of acceleration than we maybe originally expected in access capacity fee, that’s more than offset than some of the growth that we’ve seen in the pipeline maybe pushed back a quarter or two relative to interest. But we still see a very strong healthy underlying environment for that category.

And Ari, to support that, these are not the proprietary datasets that we sell or not heavy in-person sales cycle type datasets. These are things that are taken electronically by market participants. We started immediately after we closed the Hanweck and FT Options deals. We started really the cross-sell efforts, it’s a very, very small minority of customers across those businesses and across our own existing proprietary part of businesses we are overlapping. And so, I think those efforts continue and we are very positive about the potential for new client uptake across the product sets of the three businesses.

Great. Thank you very much.

Thank you. And the next question comes from Chris Harris of Wells Fargo.

Thanks, guys. So, historically, when volumes move from open outcry to electronic, they tend to go up. Could that outcome happen with your electronic solution for complex orders? Or is there something maybe different about that that suggests that won’t occur? And if it does have that potential, why not move away from the floor entirely?

So, I do think it has the potential. But if you can – just, the image you need is, we have excess supply of liquidity. That’s not deployed in the market right now from our traditional market maker group who are global in nature, running their own – primarily running their own book. We have excess demand for access into the SPX that is global in its nature and wanting exposure to U.S. market and no better benchmark than the S&P 500. The frustration is in that the logistics of that pipeline in matching these buyers and sellers. That’s it. So, now can any solution will – we believe, show up in more volume when more buyers can meet more sellers. So, the potential is yes. The electronification in a number of different phases can prove to be show up in volumes that are greater than they would otherwise have been. But when you say when I just close the trading floor, it is the answer that I gave a bit ago, is because our customers haven’t found that satisfaction yet. And still have great utility in the floor. I can’t stress enough the value added by both the brokerage community that we have today, our members of the Cboe that are representing those global customers, and the liquidity providers who are making those lit markets each and every day. What we need to do? What we are challenging ourselves with this not reuniting them on the - just on the floor, but providing solutions that allow them to meet in a new electronic or virtual world.

Okay. Thank you.

Thank you. And the next question comes from Owen Lau with Oppenheimer.

Good morning. And thank you for taking my question. So, in terms of capital return, given where your stock is trading right now, how should investors think about, maybe regular dividend and a special dividend if it’s on the table, and share repurchases this year. And then for, real estate expense longer term, how does COVID-19 changed your operating plan, of your new headquarters and trading floor relocation, maybe in terms of the design and the need of the space, because more people may want to work from home going forward. Anymore color would be helpful. Thank you.

Yes, sure. So, I would say the capital allocation story hasn’t changed as far as what we do, what we prioritized and taking a look at that. You saw our activity of returning capital to shareholders in the first quarter and we’ve always said it was a priority to have a increase to the annual dividend and we’ve done that over the last several years. And obviously, we haven’t made a decision, the Board hasn’t made a decision on the dividends as we go forward and what that looks like, but it will continue to take a perspective of our entire capital structure and the preference to return capital. But we’ve always said it’s one of our goals and that the share repurchase once financial flexibility is established, the repurchase continues to be opportunistic. I did say in our prepared remarks that we are going to preference liquidity and credit right now, versus, being aggressive on a share repurchase opportunity. So I think that’s kind of where we are right now, as far as until the environment becomes a little bit more known. I would say that, it’s now a indication of what we think the value of the stock price is. So, we’ll make that clear and again, to make it clear that the dividend growth is continuous and always will be a priority for Cboe. As far as your question on operating expenses and what that looks like from real estate, you don’t expect – obviously, real estate over the long-term is variable and we will adjust accordingly. I think, shorter term, I would stick with our original guidance of where we were. We are actually going to see a slightly uptick during 2020 given the overlap in what we are doing. And the overlap that we have as we transition to a new headquarters. But I wouldn’t look for any significant change to that, what we’ve already guided in 2020, I guess, that over the long-term, if we see less space being used or we need to make it a little bit more efficient and there is more work from home which we all expect. We don’t expect that to see a significant change to our overall expense guidance that we have had. But, good question. Longer term, we expect that to come down over time, but short term, don’t expect to see a material change in what we’ve guided to.

Okay. Thank you.

Chris, maybe on the – operationally, the design question on returning to the floor and maybe in a new layout employing the best of safety and practice in social distancing and what our considerations are.

Yes, absolutely. Thanks. And so, on to your question there, when we do return to the office for the trading floor, we are obviously going to employ, everything we need to – or keep everyone safe from the very beginning of our COVID-19 response and now forward planning. It’s about the safety of our associates and our customers. So, when we come back to the trading floor, hopefully as early as June 1, we'll have social distancing in place and likely an alternating plan and more alternating plan with groups coming in to ensure the liquidity the floor can offer, but also the safety of the trading floor community. And then, there are associates of course, who are going to be very cautious in bringing them back to the office to ensure their health and safety also. So, it doesn’t have a long-term change really in our real estate expense as Brian mentioned or nothing notable at this point, but we are proceeding with caution to ensure everyone’s safety.

Okay. Thank you very much.

Thank you. And the next question comes from Kyle Voigt with KBW.

Hi, good morning. And maybe a follow-up for Brian on the expense guidance, I know, you are lowering the core growth rate from 4% to 5% to 1% in 2020 in the updated guidance. Just wondering as we look out to 2021, how should we think about the growth off of this new lower expense base in 2020? And I am just wondering if there will be elevated core growth in 2021 if some projects and other expenses are being pushed back into next year?

Yes, I would say that, that’s a very good question as far as the follow-up goes. The way we think about and the way that guidance is built is, as I hand it to and I hand to – I tried to lay out in the prepared remarks is that, we do expect a ramp up of expenses in Q3 and then more fully in Q4. And we – so, I would say that the modeling is likely going to be kind of – absent anything, one-time items or something like that, that would be a little bit more unusual in any one particular quarter. I would expect that the 2021 guide to be more based on a – kind of an annualized, more of a runrate off of Q4, as far as if we’re able to get – able to get more those initiatives up and running into the fourth quarter. You would expect that then to rerun forward, because certainly some of the discretionary expenses and I call them discretionary meaning that the marketing and the promotions, things like that, that just aren’t happening right now because of the events aren’t being done, the sponsorships aren’t there. Some of those are literally being pushed into the fourth quarter or deferring into the year. That’s likely more of a better runrate for 2021, looking at, again, more of the fourth quarter versus kind of an absolute percentage growth rate over the entire 2020.

It’s helpful. Thank you.

Thank you. And that’s lot of time we have for questions. Right now, I would like to return the floor for any closing comments.

Thank you. I want to thank everybody for their time this morning and I’ll let you know that we will be available for any follow-ups. So please feel free to contact me. Thanks and have a good weekend.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your phone lines.