CME Group Inc. (CME) Q1 2015 Earnings Report, Transcript and Summary

John C. Peschier - Managing Director of Investor Relations Phupinder S. Gill - Chief Executive Officer, Director, Member of Executive Committee and Member of Strategic Steering Committee John W. Pietrowicz - Chief Financial Officer and Senior Managing Director Derek Sammann - Senior Managing Director of Commodities and Options Products Sean Tully - Senior Managing Director of Financial & OTC products Bryan T. Durkin - Chief Commercial Officer and Senior Managing Director

Daniel Thomas Fannon - Jefferies LLC, Research Division Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Amanda Yao - JP Morgan Chase & Co, Research Division Michael Carrier - BofA Merrill Lynch, Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Brian Bedell - Deutsche Bank AG, Research Division Christopher J. Allen - Evercore ISI, Research Division Alex Kramm - UBS Investment Bank, Research Division Alexander Blostein - Goldman Sachs Group Inc., Research Division Christian Bolu Robert Rutschow - CLSA Limited, Research Division Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division Akhil Bhatia

Welcome to the CME Group First Quarter 2015 Earnings Call. [Operator Instructions] At this time, I will turn the call over to Mr. John Peschier. You may begin, sir.

Thank you for joining us this morning. Gill and John will spend a few minutes outlining the highlights of the first quarter and then we'll open it up for your questions. Bryan, Derek and Sean are on the call as well and will participate in the Q&A session. Terry is traveling today to meet with some clients, so he'll not be on the call this morning. Before they begin, I'll read the Safe Harbor language. Statements made on this call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. With that, I'd like to turn the call over to Gill.

Thank you, John, and thank you for joining us today. I'm very pleased with the progress we have made since the beginning of the year in terms of our growth initiatives and our volume relative to market conditions. Also, our efforts on the expense side are clearly evident in our Q1 results and I applaud our team for their efforts. During the first quarter, our ADV reached almost 15 million contracts, which is the second highest volume quarter in our history. We had record energy volume, up more than 20% and interest rates and FX volume each grew by more than 10%. Some notable quarterly records included overall options ADV of 2.8 million contracts as well as records in WTI and Brent crude, gasoline and heating oil products. Energy volume has been very robust overall this year. We have had standout results with our WTI crude oil contracts relative to the other primary crude benchmark. Year-to-date, our WTI futures and WTI options are each up more than 60%. And combined, we have averaged 1.1 million contracts per day so far this year. Turning to FX. Activity has been impressive and FX volumes averaged about 725,000 per day in the first half of last year. That number jumped to about 875,000 in the second half, and we saw almost 1.1 million contracts per day in March of this year. In April, we are trending up about 40% compared to last year. Certainly, you have heard about positive trends in the FX activity on several of the large banks' earnings calls. Open interest in FX continues to run at peak levels. With the upcoming election in the U.K. and the ongoing debate about what the Fed will do, we expect to continue to see some interesting activity in our FX markets. Moving on to our interest rate quadrant. After a strong first quarter, we have seen a slowdown in activity since the dovish sentiment from the Fed meeting in mid-March, coupled with a normally slow April and Easter holiday period. Weaker economic data tends to push expectations of a Fed rate move further out, as evidenced in our Fed funds futures markets, while making the ebb and flow of the rate decision debate even more dependent on upcoming economic data in the spring and summer months. Volatility in rate products have dropped in April, which you can see in the slides. We are fortunate that we have a very diverse product set, which is important when volume fluctuates like it does every year. As I've mentioned last quarter, we are focused on 3 primary areas of organic growth: increased penetration of global clients, attractive flow from the swaps business through clearing and exchange-traded alternatives and driving options growth across the platform, which elevates futures volume as well. Volume from outside the U.S. continues to be impressive as we leverage our investments in global headcount, partnerships and product development. Our Q1 electronic trading volume out of Asia reached a record 570,000 contracts per day, up 22% from Q1 of last year. That was double the 10% growth we saw out of North America during the quarter. Energy volume led the way in terms of product line growth from Asia, followed by FX and equities, all up more than 40%. Clearly, Asian clients are comfortable trading and clearing directly with a U.S.-based exchange. Average daily volume from Europe grew by 14% to 2.3 million contracts, led by interest rates and energy products. In addition, I'm pleased to see our European exchange is starting to expand from a small base. On April 10, we traded 10,000 contracts for the first time with contributions from FX, European national gas and cocoa. Turning to Swaps clearing. Positive momentum continued in Q1 and we are very pleased to have a leadership position here. We continue to push on the innovation front. Relative to the other major global clearing houses in rates, we were first with coupon blending, which offers capital and operational efficiencies in a capital and a resource-constrained world. This significantly reduces the number of transactions and the notional outstanding required to maintain a given portfolio. Already, customers have reduced over 100,000 line items and over $8 trillion in notional using the service. In addition, we are also working with TriOptima to offer multilateral compression for interest rate swaps for FCM house accounts. We were also first, logically so, with portfolio margining, facilitating individual client risk reduction by as much as 85%. Since the end of last year, the number of end clients utilizing this solution has more than doubled to 43 firms through 11 live clearing members. In December 2013, we expanded our offering to include clearing for the Mexican peso swaps, making our IRS product scope the broadest available on any platform, with 18 currencies. We now have 37 clients voluntarily clearing these Mexican peso swaps, including both dealer-to-dealer and dealer-to-client, and it is our fifth largest currency. All of these efforts have helped us to gain market share in plain vanilla fixed versus floating swaps in both dollar and non-dollar currencies. We continue to market our interest rate futures and options to over 500 DME OTC clearing customers. During the quarter, Greenwich Associates published a total transaction cost analysis comparing the cost of swaps versus futures. Based on the detailed analytics from the 42 clients surveyed, it showed that futures are nearly always the lowest cost alternative. The Greenwich report is available on our website and we continue to educate market participants about this important comparison. Building on this, in March, we launched a new web tool in conjunction with ICAP and the Beast Apps called RapidRV. This robust offering provides over 15 different analytics that allow customers to explore relative value and comparative pricing of swaps, cash treasury markets and CME Group interest rate futures. With real-time pricing feeds, customers are able to view side-by-side pricing analysis and opportunity assessment across fixed income products. For some time now, we have provided updates on statistics that we follow very closely that are potential signs of OTC clients using futures. Many of you have asked for additional data points on this transition. Last quarter, I mentioned our treasury futures business reached the highest proportion ever of the cash treasury business at 75% of the size of the cash market. I'm pleased to say in March that number jumped to 77%. One new piece of data can be found in the slides. We have analyzed the activity of our top users of portfolio margining and we have seen futures trading growth rates almost twice that of the overall marketplace. The third area of growth I want to touch on is our options business. We eclipsed our prior peak options volume from Q4 to set a new quarterly volume record in Q1. This was driven by continued investment in our options trading functionality and bolstered by specific sales and marketing campaigns to draw new customers to our options markets. We saw double-digit growth in interest rates, approximately 50% of our options business is traded electronically with about 40% traded on the floor, and the remainder via privately negotiated transactions. In terms of our efforts to electronify options, we have made significant progress within Eurodollar options on Globex over the last year. The percentage of Eurodollar option volume traded on Globex has grown from 11% in 2013 to 13% in 2014, and almost to 20% in March and April of this year. This recent increase in electronic activity has been driven by growth from European participants trading in our overnight hours. In comparison, in our earnings slide deck, you can see how the electronification of treasury options, which are currently around 63%, has created meaningful growth. The referenced slide illustrate the same trend across our other product lines as well. You can see the power of this transition, most significantly, perhaps in FX options where the average daily volume is up ninefold since 2009, powered by electronic trading. Additionally, we continue to successfully grow our energy options volumes on Globex, with 41% of our total energy options trading in -- on Globex in Q1, up from just 28% in Q1 of last year. The point here is that options growth will drive activity in the futures markets, too, since both these products are on the same platform and combination trades can be executed. So overall, we have had a nice start to the year. We continue to focus on ways to expand our business while driving productivity improvements throughout the organization. With that, I'm going to turn the call over to John to discuss the financials. Thank you.

Thank you, Gill, and good morning, everyone. I'm pleased with our results this quarter with revenue up over 8% and expenses down 2% compared with Q1 last year, driving operating margins above 62% for the quarter, our best result in the last few years. Adjusted EPS came in at $0.98, up 18% for the quarter compared to a strong Q1 last year. We saw a nice performance in our core futures, OTC clearing and market data revenue. I'll start with some revenue details. The rate per contract for Q1 was $0.753, up from $0.731 last quarter. The main driver of the increase was a shift in product mix, with an increased proportion of total volume coming from higher-priced commodity products. Specifically, we saw an approximate 2% shift from equity to energy products. Our transaction fee increase went into effect in February, and we have 2 months at the higher level in our first quarter RPC. OTC swaps revenue totaled $20 million for the quarter, up 53% versus Q1 last year. During the first quarter, we captured $129 per IRS cleared trade, which is consistent with what we've seen in the past, but down from Q4. We cleared approximately 2,370 trades per day in Q1, the highest level we have seen so far. Market data revenue of $98 million was up 10% versus Q1 last year, driven primarily by the elimination of our fee waiver program, which we have discussed the last few quarters. As a reminder, we began charging $42.50 per month for professional traders, who are grandfathered. And we also captured $6 per month on average per screen for nonprofessional traders. In Q1, we accrued for approximately 150,000 new screens, with approximately 1/3 of those at the higher professional level and 2/3 came in as nonprofessionals. It will likely take a few quarters to get to a steady state in terms of market data revenue, and we may see a drop from those $98 million level this quarter as customers settle into the new pricing structure. Adjusted expenses in Q1 were $317 million, down $8 million from Q1 last year. We are very focused on driving efficiency throughout the organization, and eliminating redundancy to improve agility and customer responsiveness. Virtually every expense category came down with the exception of Technology Services and volume-related license fees. At the same time, we continue to rollout significant number of new offerings, which Gill outlined. At the end of Q1, we had 2,670 employees, down about 15 people from year-end and down 90 relative to this point last year driven by our October restructuring. Our compensation ratio for the quarter was 15.9%, down from more than 17% the last 2 years. Turning to taxes, the effective rate for the quarter was 36.6%. And now to the balance sheet. At the end of the quarter, we had nearly $1.8 billion in cash, restricted cash and marketable securities. During the quarter, we issued a 10-year bond totaling $750 million at 3%, replacing debt that was going to mature in 2018. We also upsized our revolving credit facility from $1.75 billion to $2.25 billion. During Q1, our interest expense totaled $31 million, which was higher than Q4 primarily due to the double carry. We paid off the 2018 bond in April, and our quarterly run rate for interest expense will drop to approximately $29 million by the second half of the year. If we adjust for the bond transaction we completed on April 8, we had approximately $1.1 billion of total cash at the end of Q1. That leaves $400 million above the $700 million we target in terms of a minimum cash level. So far this year, we've paid out over $800 million in total dividends. During the first quarter, capital expenditures net of leasehold improvement allowances totaled $27 million. In summary, the first quarter of 2015 demonstrated the leverage in our business model. The entire management team continues to focus on margin expansion with both top line growth and expense discipline. With that, we'd like to open up the call for your questions. Given the number of analysts who cover us, we ask that you limit yourself to one question so we can get to everyone. Please feel free to get back into the queue if you have further questions. Thank you.

[Operator Instructions] And the first question comes from Dan Fannon with Jefferies.

I guess, first just on the RPC improvement quarter-over-quarter, obviously you had the price increase to start. And then, Gill, you mentioned, some of the futurization dynamics. I'm just -- if you could help us think about the improvement and delineate between kind of the member, non-member mix as well as then what was actually just the function of the higher prices?

Sure. Dan, this is John. You're correct. We had the price increase impact which began in February and we achieved what we expected, which was approximately 1.5% increase in the RPC. The areas that really impacted us are product shift, where we had a heavier exposure to energy this quarter, which has a higher RPC. And then, as you could tell from RPC results, FX certainly was favorable with a -- again a positive member -- non-member -- I'm sorry, positive non-member proportion as well as the impact of the price increase.

Our next question comes from Rich Repetto with Sandler O'Neill. Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division: So if I only got one question, I'm going to use it on a regulatory issue. So Gill, I know this equivalence debate has been going on. It appears that there's -- it looks like a compromise or could be coming. I guess, the question, is this whole issue overblown? Are you taking it -- is it that serious that -- or will they just delay it? And then what would be the impact to CME if they -- on the extreme downside, if they didn't come up with some compromise between 1-day gross and 2-day net?

Rich, I think there is a lot of hope in both sides that we will get to an agreement. And I think Channing Massey [ph] is going to meet those European counterparts in a few days here. But I think the whole topic of equivalence has been taken very seriously by both sides. And I think the -- that the issue seemed to be centered around margining, customer margining, which is 2-day net versus 1-day gross. And I think when you're talking about the topic of equivalence, there will likely be a compromise. But I think, fundamentally, what Channing Massey [ph] said a few months ago, is the right point, that the U.S. is the gold standard. The U.S. exchange has helped create markets in London and all over the world. And so some of the things that we have in place, if you're looking at equivalence on a line-by-line basis, you have the U.S., for example, running full margin cycle twice a day. That does not happen in Europe. So if you're talking about margin period of risk, there are actually 2 margin periods of risk within a single day in the U.S. every single day, and that doesn't happen in Europe. And you cannot loan money to your clients. That doesn't happen in Europe. You have to collect money from your clients. That doesn't happen in Europe. But that debate seems to be centered on margin itself. And the levels of margin on the client side, which is the important side, on the client side in the U.S. on a gross margining basis, can be anywhere from 2x to 4x as large and then it would be on a net basis. We've heard some noise that it might be roughly equivalent. Roughly equivalent is not true. It's 2x or more. So we expect a compromise because we expect Channing Massey [ph] to make the same point that he made a few months ago, but I think just from of a factual base, there are a lot of differences there. The U.S. has fine-tuned their approach to customer protection far longer than anybody else.

Our next question comes from Ken Worthington with JPMorgan. Amanda Yao - JP Morgan Chase & Co, Research Division: This is Amanda Yao stepping in for Ken Worthington. So on the energy side, CME continues to recover share in WTI, but has lost a little bit of ground in Brent. Can you talk about the competitive market in oil?

Yes, this is Derek here. If you actually look at what's going on globally in the energy market right now, it's an oversupply story. The oversupply story is very much a TI story. But when I actually look at the growth of our complex between ourselves and ICE, the overall story is being played out, an increasing market share of the world price discovery and certainly the question of price discovery taking place being driven by the Brent -- the TI side of the equation. If you look at the results between our energy complex versus their energy complex, I think ICE is up about 9% and we're up about 23%, 24% or so. In addition to kind of what we're seeing in the world focusing in on the TI side of the equation, we're also seeing out-performance of our options business. Our TI options, both in volumes and OI is increasing, not what you're seeing on the Brent side of the equation. So when we're actually seeing its volatile, clients tend to move their main products and we're seeing actually Brent participation down relative to TI. So we think that continues to play out and we think that the participation in our markets as we globalize our customer base has been very positive for us out of the story. And plus, if you look back at the trading, 95% of the days, TI trading is outpacing the volumes. They are trading on the ICE, Brent side. So we think that, that will continue. And we think that's a story that's very positive for our franchise as a whole.

Our next question comes from Michael Carrier with Bank of America Merrill Lynch.

I just had a question on the volume outlook. I mean, I know it's short term, but if we look at the current trends, things are weak and this is more broadly for the industry even year-over-year. I just wanted to get a sense, when you -- there's some chatter on the FCMs, given the Basel rules that there's some pressure on that part of the business, but there's still a debate going on. So what's the outlook there? And then on the flip side, you guys do a good job in terms of giving us the stats in terms of the new users and the penetration in the OTC market or users coming over to the futures market. But when you think about that opportunity set for CME, like, how far along are you in talking to those customers or bringing them on-board? Because, obviously, like Europe's not on-board, but you're seeing a shift earlier than I think a lot of people would have expected. So just trying to get a sense of what that kind of runway looks like.

Sure. This is Gill. I'll start and I'll ask both Sean and Derek to try and chime in here in their respective areas. I think this is one of the principal advantages you'll have when you have an exchange that has 6 asset classes, all of which that have benchmarks. So if one's down, the other one will pick itself up. There are a variety of fundamental reasons for the performance of both the rate side and the energy side. Derek touched on a few of them, but the marketplace that we have allows our clientele to basically hedge their risk and their exposures as they see fit. So you saw a lull in volume over the last week. But yesterday, late in the morning or early in the afternoon, there was more news from the Fed, and that led to a $16 million-odd day for us yesterday. This morning, we're off to good start with $4-plus million on the same lines of uncertainty that leads to hedging activity on our side. So the long-fund payroll numbers that come out tomorrow will be interesting for us to see. But what we're seeing here is exactly what we have talked about over the last few years, where the nature of the business is such that when there is uncertainty around when the Fed would take action and what kind of action they will take, our products will react as -- such as you saw yesterday, and you've seen for many days in the first quarter. Derek or Sean, anything to add?

Yes. I think -- this is Sean. We continue to see progress on the OTC side, both in terms of increasing number of clients, increasing volumes, increasing market share and as well the futurization. So on the futurization, Gill mentioned earlier, that we had, in the fourth quarter, record penetration of cash treasury market at 75%, and in April we saw 77%. So we continue to see progress on that front. In addition to that, another interesting statistic is we've seen a very big increase in a number of participants taking advantage of portfolio margining. And with the portfolio margining, we saw a doubling actually of the number of clients in Q1 using the portfolio margining versus a year ago, now running 43 clients being facilitated by 11 FCMs. An interesting front is not just having new participants enter our futures and options market with the big growth we've talked about before that we've had over the last couple of years in large, open-interest holders, but in addition to that we see that the participants who are trading both in our futures and swaps and who are taking advantage of portfolio margining, their growth rates in our futures complex runs about double that of other participants. So we're seeing an increasing number of participants in the futures as well as higher trading volumes by those folks taking advantage of our margin and capital efficiency. John?

It's worth noting that our ADV is down 8%, which is less than other exchanges. If you recall, there is a Good Friday this month so our actual total volume's only down 4%. And assuming current RPC trends and if you apply that to our volume this quarter -- or this month, I should say, our revenue would be roughly flat.

Michael, you used your one question per person quite effectively. I think you asked 3 or 4 things. And one of the questions you had asked was about the FCMs and how they're rationalizing their cost of the business. I think what you're seeing now is they're taking a very hard look across the cleared business and trying to figure out the effect of Basel and other capital charges that are being imposed on them, a rational way to pass these charges through. And I think one of the large banks recently announced a 75-basis-point charge on the collateral, that's being passed through to them as a way to offset some of these capital charges that they have. Now this emphasizes even more what Sean just talked about, which is portfolio margining. The more efficient a portfolio is, the less collateral that is required. The less collateral that we put that as required makes for less expensive proposition for the client base, and by extension, less of a capital charge issue that the banks might have.

Our next question comes from Niamh Alexander with KBW. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: If I could go back to the regulatory issues. They're popping up everywhere with the FCM and their capital and Rich's question earlier. But this is a skin in the game issue because it doesn't seem to going away and now we're starting to hear maybe a few more regulators pop comments into their speeches and whatnot about looking at maybe concentration of risk and whatnot. So if you could maybe give us an update? From what we can see, there's nothing -- no official process right now with respect to changing any of the liquidity or capital requirements on the clearing houses, but if you wouldn't mind updating us on that discussion.

Sure, Niamh. I think, the update -- this has been an extremely transparent issue that has been out in the press. So the update is, what you're reading in the press, there is a lot of call for skin in the game. And I think the education process began a few weeks ago, when we issued the white paper on who brings the risk to the table, who manages that risk, who has the skin in the game, where exactly is that skin in the game, what should change, why should it change, and what market conditions are driving the current skin in the game with respect to the guarantee fund. And if those market conditions occur and those eventualities occur, what are the things that regulators should be concerned about? Skin in the game would be one of them, but I would bet you it would be 100 on a long list of things you have to deal with because the whole argument behind the guarantee fund and being a SEDCO, a nearly defined SEDCO, we are systemically important and our requirements changed dramatically a few years ago from a cover 1 standard to a cover 2. So right now, we are talking about additional skin in the game for a smaller amount of skin in the game, when the largest 2 counterparties in the world have failed. That's amazing given some massive moves in the markets across the successive classes that we have. So it's an interesting debate, and we will continue to educate anybody that wants to be educated about this. And I think that the issues will play themselves out throughout the course of the year. Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division: You don't see anything, therefore, changing with respect to the liquidity or the capital requirements?

Very hard to say here, Niamh. I don't anticipate change, but it's very hard to say.

Our next question comes from Brian Bedell with Deutsche Bank.

Just continuing on the line of the swap to futures trajectory, and thanks very much for the additional analysis on that. But do you have any sense of -- or is there any way to potentially calculate what portion of either the ADV or open interest in your interest rate futures complex is coming from former swap user, so we can sort of get an idea of the trajectory there? And then, just on Slide 20, on the options usage similar type of question in terms of what do you think the multiplier effect is from when options or trading becomes electronified in terms of stimulating futures volumes?

So in terms of the moving OTC participants over into our futures, we've given a number of metrics. We don't have, on the business side, complete clarity into each and every account, and there is a Chinese wall. So the metrics that we've given, I think we have a very strong indication that we're seeing a number of things. We're seeing an increasing number of participants in our futures market that we believe are driven by our OTC sales activities. In addition to that those folks that are taking advantage of the portfolio margin, which we can't look through to, their growth rates in our futures complex is running around double that of the folks that are otherwise. So we continue to see increasing penetration of that. And the other thing I would say is I think that, that runway continues to be very large. If I can give you an example, the most popular trading strategy in U.S. dollar interest rate swap space is something called a swap spread. While there is no publicly available information on that particular trade, we believe that particular trade probably runs on the order $80 billion a day or on the order of 800,000 contracts a day in our treasury futures equivalent. At the moment, our EFRs in invoice spreads -- so kind of the equivalent in interest rate futures plus cleared interest rate swaps space relative to that swap spread market remains a small fraction of the swap spread market. We're running on the order of 60,000, 65,000 a day in our invoice spreads. So we continue to see a very large runway relative to that opportunity.

And this is Derek on the option side. A couple of things: you've heard us point to the areas in which we're making investment to grow participation in our options markets, investing in functionality to accommodate some more complex spreads, increasing our sales, marketing and education and analytics tools, we're putting out there to bring more people to our market. To answer your question, the reason that we feel so strong that the investments and options drives our core is that for every options that trade, we think there is roughly between 2 and 2.5 futures the trade related to that option, traditionally, because there are a number of participants that come in the trade-offs in delta neutral. They will hedge their position in options with our futures and then dynamically reestablish and maintain those hedges and change them as price action goes on. Secondly, we are unique in that -- in every major asset class that Gill referenced. We have a referenced benchmark options business associated with that asset class. So we are bringing both the futures and options together, so we're dynamically bringing key participants to our markets. And finally, the growth in electronification, as you've seen in the futures story, continues to spot an increase of velocity with trading, both in options and our futures. So you've seen these breakdowns in the deck. Despite the fact that we're about 49% to 50% electronic, if you go inside these figures each one, you'll see that the treasury options on the following slide is close to 65% electronic. Inside the energies business, you'll see our Brent options is close to 70% electronic. And nat gas, which is in a different market structure state right now, is probably close to 5% or 10% electronic. So these investments we're making are both bringing new participants to us, creating a unique value proposition for the future and the option to hedge in the same clearing house for significant margin efficiencies, and the electronification trends has been a virtuous cycle of increased participation both on the futures and options side.

That's really helpful. And the 2 to 2.5 is for the whole complex or just for the rates of spread?

That's across the entire complex.

Our next question comes from Chris Allen with Evercore.

Just wanted to talk a little bit about expenses. If we analyze the first quarter run rate, it comes in at about 3% below last year's levels and you guys have been guiding to flat. And given the strength in the revenue side, I was a little bit surprised on the bonus accrual for the quarter and also curious on marketing and other. So I guess, if you could talk about kind of the expense outlook, maybe what flexibility you have if current volume trends for April, which I know it's only one month, but if they continue, what are the flexibility you may have on the expense side going forward?

Sure, Chris, this is John. We are very happy with the Q1 results on expenses. We have really been focused on driving margin expansion and expense discipline in key areas that don't impact growth are a focus of ours. As it relates to kind of the back half of the year just in terms of expenses, we anticipate both depreciation and marketing coming in a little bit heavier towards the back half of the year, and so that's something that we're keeping our eye on. In terms of the impact on volumes and if volumes decrease, what you could do on the expense side, again, we would take a look at being very selective in our hiring. Obviously, the variable cost, both on the bonus side and on the license fee side, would come. And then, we will also take a look at any other kind of discretionary expenses and keep those in check. Just in terms of the guidance, we'll look forward to talking a little bit more about that in the second quarter as we get another quarter under our belt here.

And just -- I mean, just quickly on the bonus, I mean the target was $70 million annualized this quarter to $67.6 million even with strong revenues. I mean, any color on that?

No. I mean, I think the key thing is the bonus level is based on -- based not only on performance, but also on the number of participants in the bonus pool. And as you saw, we're down 15 people since year-end, and down 90 versus last year. So we are being extremely selective in our go-forward hiring, which will impact the bonus level.

Our next question comes from Alex Kramm with UBS.

I came in late, so hopefully this wasn't asked. I wanted to talk a little bit about structural pressures in the business. It seems like over the last few years, that question has come up off and on, how capital changes and Dodd-Frank and things like that will impact the business? And it seems like we haven't seen much, but more recently, I think the noise has gotten much bigger in terms of the big banks talking about having to raise clearing fees to make RE, prime brokers costs are going up, some FCMs are exiting the business, and some companies are even firing clients because they're not profitable anymore. So I know, to some degree, this probably helps you in terms of futurization and things like that, but I'm wondering to what degree it is actually impacting your business, how and if? Because some of your peers are starting to acknowledge it so we would love to hear your comments?

Yes, Alex. This is Gill. I think to your point, a lot of that turmoil that you are seeing in the marketplace is specific to OTC futures -- to OTC swaps and not futures, excuse me. So -- and as you said, it, on the one hand, helps the futures marketplace, but on the other hand, where the futures marketplace is truly complementary. It may have the potential to actually hurt. Our viewpoint, though, as we have developed futures contract with more and more flexibility built into them such as the swap deliverable futures that we rolled out, the differences are becoming less and less. And so the help to futures will continue on. I think that will be a net positive for us. The issue that the banks and the others that are providing services are facing right now is the initial mispricing of the business. It's how I would say it. And I think this is one of the things that no one knew where the pain points were going to be. Capital increases were not taken into account. I think on the net, when you take these things into account, what's emerging now is a rationalization of the true cost of clearing OTC which cannot be ignored. And so those banks that have decided to get out of the business, I think it's specific to the OTC side. And so that's on the one hand, concentrates, which will be a concern that we should have. The concern that we have here, the exchange is a concentration risk where OTC is being cleared in the hands of very few folks. And the regulator should be concerned about that, too, which leads them to higher capital charges, less participation, which was not what Dodd-Frank had intended, which is a broader participation in the marketplace. So on the whole to sum up what I'm saying, and John has a few things to add here is it helps the futures marketplace. It allows us to innovate more and create more flexible futures contract that meet those marketplace needs without the expense associated with it. And the regulators would still have to start to look at the concentration issues that come about, and this leads them to the guarantee fund issues and all those other fun things. John?

Thanks, Gill. I'll just -- Alex, a couple of quick points to expand on what Gill is saying. As you're aware, the -- as customers come to the futures markets because they get better capital efficiencies, we have an opportunity to monetize the amount of collateral that they put up into our clearing house because they're able to generate value by putting their positions on in our markets. So as you look at our balance sheet, you'd see that our cash and performance bonds have increased from about $40 billion to about $45 billion. We were able to monetize that in 3 different ways: one, through IEF fees; second, through earning money on the cash float; and we've also implemented a new custody fee. So we were able to charge about $8.6 million net in Q1, which is up from net $7.2 million in Q4 for an increase of about 20%, and that's just another way we're able to help our customers get better capital treatment and then also to CME to benefit as well.

Our next question comes from Alex Blostein with Goldman Sachs.

Another one bigger picture question, I guess. We're starting to hear more and more about this kind of switching from futures to ETFs. BlackRock was pretty adamant about it recently attributing some of the growth in their ETF product to folks switching from futures to ETFs. Do you see that on your end at all? And I know there have been a couple of studies in the past which are somewhat outdated now in terms of the benefits of ETFs versus futures and the other way around. So maybe just kind of updated thoughts on that front and whether any of the capital requirements at the banks are partially the driver for the switch?

Alex, this is Gill. I'll start and I'll ask Sean to tell a bit about it. It's very important to stick to the facts here in terms of the total cost of ownership. There was an interesting article, that I alluded to a short while ago that's on our site. And this is actually a continuation of what was done by some Goldman Sachs analysts and JPMorgan analysts, some years back comparing the efficiency of ETFs to -- in [ph] futures, for example. So Sean, do you want to talk about the findings?

We published the paper now a couple of months ago. It is available on our website, that looks at the costs of ETFs relative to representing a risk versus the cost of using our futures complex. And all of the data is in there, the calculations are very, very clear. Without any question, under nearly every scenario, depending upon the type of user as well as the length of time that the user uses the products. So it's also about the strategy whether you're going long or short. Under nearly every scenario, our futures are the lower-cost alternative relative to ETFs. And we have found that very much resonating with the marketplace. In terms of liquidity, our futures complex is far, far larger, far more liquid than the ETF market. And if you look at our S&P futures for example, we tend to trade on the order of 7x the notional volume of the equivalent ETFs. So we are getting our message out there relative to the lower cost alternative, which is the futures complex.

Our next question comes from Christian Bolu with Crédit Suisse.

So just on portfolio margining, you spoke quite a bit about the benefits of that product. I believe LCH recently launched its own version of portfolio margining. So that offering might likely be just part of the course going forward in the industry. Curious as to how you think your offering is superior? And if you think your offering will have any impact at all on your penetration in that business?

Sure, Christian, I'll be very happy to answer that. Portfolio margining announcing it, but not having anything to spread against is going to be an issue. So at CME, we've got our swaps portfolio, that is portfolio margined against our Eurodollars and treasuries, that leads to the 85% number that I have. The LCH -- I think they had the LIBOR and they don't have it anymore, it's an ICE. So the swaps that they are taking in has to be offset against something. And I'm not sure what that something is for LCH at this point. So I think that's about it. I hope I answered the question that you have.

Our next question comes from Rob Rutschow with CLSA.

So in the past, you've provided the breakdown of activity by client type. I'm wondering if you might be willing to provide us with an update on that metric? And specifically, I'm interested in the amount of activity you generate from firms that have a bank charter. And whether the decline that we've seen in the notional amount of derivatives they have on the balance sheet that's mirrored to the client in the futures for that client base?

Rob, I don't think we have provided this.

Not since Q1 '10.

Yes. And the last time we provided it, Rob, was in 2010 and we think it's about the same. And banks are about less than 10% of the revenue.

This is Sean. I'll jump in for a second as well. For the banks, the supplemental leverage ratio is usually important. So things like our coupon blending service, which allows the banks to represent the same portfolio with a much, much lower notional outstanding, allows them to continue to trade similar volumes to the volumes they have in the past, but it would show up as a much lower balance sheet item helping them with their Basel III concern. So as we said earlier, we've assisted in coupon blending over 100 -- the reduction of over 100,000 line items over $8 trillion in notional, yet you've seen we had enormous growth in our OTC average daily volumes, which drive our fees in the first quarter.

And I would just add to the color in terms of where we're seeing the growth across the various client segments. I mean, if you look across the asset classes, the trend for the growth has been positively noted amongst our proprietary firms, our hedge fund, the asset manager community. And something interesting that we were seeing within our international side of the equation is quite an uptake in volume and the activity from the bank sector, both within EMEA as well as Asia Pacific. So we're seeing, again, the penetration across all these clients segments in the investments that we're making from that perspective paying off in terms of the outreach in growth across the various segments and across our diverse asset classes.

Our next question comes from Patrick O'Shaughnessy with Raymond James. Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division: So my question is with NASDAQ announcing that they're going to be launching an energy exchange, what's your level of concern? Because there already seems to be some pretty robust competition between yourselves and ICE. They seem to think there's a market need for a third party. How do guys view the landscape right now?

Yes, thanks. Great question. We've -- we take every one of these competitive threats very seriously. We start with the customers, and our focal point, if you heard from us over many of the last quarters' calls has been servicing our customer base, understanding their pain points and addressing that with product capital efficiencies, upper efficiencies, et cetera. We have had no shortage of exchanges come in and try to look at sort of a me-too approach to copying our list of products and our competitor's list of products. What we have found is that unless you're solving a specific customer problem, unless you're creating a solution for a pain point or bottleneck in the operational margin side of the equation, then there's -- it's a -- you've got tough haul. In addition to that, you're seeing a move into an asset class to your point was 2 very robust competitive dynamic market participants already. So what we have found in the feedback from customers is the only value prop we have heard is we're cheaper. Now we've seen that before. We've seen no product differentiation, no technology differentiations, no margin efficiencies. So we're talking to our customers and saying, "If we're continuing to serve your needs, we will continue to move into new areas of service for you." So we take every one of these competitive threats seriously, but we're in the process of solving customer approaches. There is an analog here relative to a scene where NASDAQ went after a similar market, Anilex in Europe, thinking that there was an opportunity to bring together disconnected parts of the market with 2 already entrenched participants, and I think you've seen them really struggle. And there were a lot of stipends put out there to create a significant amount of volume. When those stipends disappeared, the volume disappeared. So this will keep us on our game, no question. We saw those volumes drop from over 100,000 ADV down to about 6,000 or 7,000 ADV. So we know this game. We understand the competitive threat. We take it as a form of flattery that we've got folks coming in thinking we've got fabulous products that they want as well. So we're focused on moving into servicing our clients in new ways. We're moving into new developing markets with new unique solutions like we're doing with our NBP and TTF products in CME Europe and other ways to serve our customer base. So that's -- we are absolutely acutely concerned about it. We've seen this before for the NYPC and other attacks, so we're taking it seriously.

Our final question comes from Chris Allen with Evercore.

Just wanted to follow-up -- I wanted to ask you on the outlook for market data, I mean, have you -- anything that you've seen so far in the second quarter in terms of maybe reduced screens? Kind of give some color in terms of potential impact that you kind of alluded to in the slide deck?

Chris, it's Bryan. I think the methodical approach that we've taken since we eliminated the waiver over the course of the year is having its intended effect. We're pleased with the results that we've seen thus far while we're early into the stages in the context of those users fully absorbing the impact. The trend has been very positive. There's been some shift in terms of pro versus non-pro, but we're monitoring that very closely. And the next quarter will hopefully validate the good work that we've done across the globe in terms of getting our end-users to adapt to the change.

So the metrics you gave us before, of the 150,000, 1/3 professional, 2/3 non, those have been static through April?

We haven't seen April yet. That's coming a little later. So it's been fairly consistent through the first couple of months that we looked at, right.

We do have another final question that came in from Akhil Bhatia with Rosenblatt Securities.

Just another follow up on the market data. So I appreciate the additional color on the levels moving down from the $98 million you posted this quarter. But last quarter, you talked about an annual level of about $375 million. Can you address if that's still a good level or if we should be moving off of that as well?

Yes. I mean, if you look at a look it, it certainly would move higher than the $375 million. Again, as we indicated, we had 50,000 pro screens and 100,000 non-pro screens. And just as a reminder that the 50,000 screens that are pro will double beginning in next year. And also, another key point is that any new participants are going to be charged at $85.

This time, I'm showing no further questions.

Thank you, all, for joining us on this, our 50th earnings call. And we look forward to talking to all of you on the 51st. Thanks.

Thank you.

Thank you. This does conclude today's call. We thank you for your participation. At this time, you may disconnect your lines.