CME’s Performance Driven By Interest Rate Products Yet Again

February 6th, 2014 by Trefis Team
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CME Group (NASDAQ:CME) released its quarterly earnings for Q4 2013 on February 4. The company’s Q4 revenues were up 4% from the same period in 2012, though full year revenues of $2.9 billion were flat over the prior year. As expected, CME’s top line growth in the quarter was driven by a surge in trade volumes leading to a 6% growth in the company’s core transaction business. While interest-rate contracts were traded nearly 30% more in Q4 2013 than the year-ago period, the trade volumes of all other derivatives remained nearly flat during the quarter. A similar trend was observed for the full year as well, where around 5.9 million interest-rate contracts were traded daily, compared to 4.8 million in 2012. Other derivatives combined -including FX, energy, metals and agricultural commodities – remained nearly flat at around 6 million trades per day. [1]

Accounting for the reported year-end figures, we have revised our price estimate for CME’s stock to about $70. Our price estimate is slightly below the current market price.

See our full analysis for CME Group

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Interest Rate Products Drive Revenues Yet Again

The 30% increase in trading volumes of interest rate products since April propelled overall transaction volumes for the third consecutive quarter. This was partially due to government-mandated regulations that made the trading of over-the-counter (OTC) derivatives more transparent, leading to a better market sentiment. [2] The company also believes that the QE tapering initiative by the government contributed to the rise in trading volumes, specifically of interest-rate derivatives. CME is likely to see continued benefits of high trade volumes in its clearing and transactional fees revenues, on the back of government regulations and the tapering initiatives. [3]

In addition, management indicated that high-frequency trading shops and other high-turnover players are not likely to contribute to CME’s interest-rate products trading volumes yet. They believe that these players are waiting for the easing program to end and should contribute in the latter half of 2014.

Impact Of Rising Volumes Offset By Average Prices And Mix

Overall derivatives trading volumes in Q4 were up by 11% year-over-year, mainly due to interest-rate product trading, which constitutes nearly half of CME’s total trade volume. [4] Despite high trading volumes and improving results in 2013, CME expects transaction fees to increase by only 2-3% this year, primarily due to the 6% decline overall average revenue per contract (RPC) last year.

Two main causes for the RPC decline:

  1. The mix of low-RPC interest-rate products has increased since trading of all other derivatives has been nearly flat.
  2. Average revenues of high-RPC derivatives such as metals and energy contracts have gone down, further contributing to a low overall RPC.

Consequently, the overall RPC, of all derivatives reduced by 6% in Q4 from the year-ago period. See the chart below for a clearer picture.

Derivative Average Daily Volume In ‘000 Revenue Per Contract (RPC) in $
Volume Q4 2012 Volume Q4 2013 RPC Q4 2012 RPC Q4 2013
Interest Rates 4,094 5,274 0.49 0.50
Equities 2,532 2,471 0.69 0.70
Energy 1,489 1,571 1.49 1.28
Foreign Exchange 767 705 0.83 0.83
Agricultural Commodities 982 992 1.30 1.32
Metals 324 317 1.71 1.62
Total 10,188 11,331 0.83 0.78

Declining Market Data Revenues Recover Slightly

In the first two quarters of 2013, CME reported a nearly 30% decline in revenues from its market data and information services segment due to a diminishing subscriber count. The company attributed the drop in subscriber count to cost-cutting initiatives at customer firms and institutions. However, in the last two quarters, the market data segment contributed $155 million to net revenues, which is only about 4% lower than in the same period in 2012. Going forward, the company has announced a hike in its customer fees, from $70 per month to $85 per month, applicable from January. Moreover, the company expects to retain its subscriber base despite the price hike, leading to slight growth in this segment.

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Notes:
  1. CME Quarterly Figures, CME Press Release, February 2014 [↩]
  2. The OTC Interest Rate Derivatives Market In 2013, BIS Quarterly Review, December 2013 [↩]
  3. CME Group Q4 Earnings Call Transcript, Seeking Alpha, February 2014 [↩]
  4. CME Monthly Volume Reports, CME Investor Relations, January 2014 [↩]