Late Surge In Trade Volumes Leads To Profitable Quarter For CME
CME Group (NASDAQ:CME) announced its Q4 earnings on Thursday, February 5, reporting a 22% rise in net revenues to $841 million for the quarter. Growth was largely driven by an increase in trading activity in Q4 due to which clearing and transaction fee revenues grew by 24% y-o-y to $713 million. Furthermore, market data revenues registered 17% growth over the prior year quarter to nearly $90 million in Q4. [1] As a result of a strong Q4 performance, net revenues generated by CME for the full year rose by 6% over 2013 to $3.1 billion. Clearing and transaction revenues grew by over 6% to $2.6 billion in 2014, while market data and information services revenues grew by 13% to $356 million.
According to our estimates, CME’s adjusted EBITDA margin in Q4 improved by almost 7 percentage points over the prior year period to nearly 63%. Since most expenses incurred by exchanges are fixed in nature, the surge in trading activity translated to healthy margins for the global exchange operator. Similarly, low revenues in the second quarter resulted in margins that were almost 5 percentage points lower than Q2’13. As a result of a solid Q4 performance, CME’s full year adjusted EBITDA margin for 2014 improved by about 45 basis points over the previous year to 64.3%.
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Trading Volumes Surge In Q4
CME witnessed a decline in combined trading volumes across all derivative classes including interest rates, energy, equities and foreign exchange, both sequentially (-4.5%) and annually (-13.2%) in the second quarter. However trading activity picked up in Q3, as trade volumes rose by over 12% y-o-y to 13.5 million contracts traded per day as traders began to speculate when the Fed will start raising interest rates. Volumes surged in Q4 to 14.8 million contracts traded per day, with a rise in volumes across all asset classes. [2]
Interest rate derivatives constituted over half of CME’s overall volumes at 7.4 million trades per day in Q4. This was over 40% higher than the comparable prior year quarter. The company witnessed significant growth in interest rate derivatives trade volumes outside the U.S, with trade volumes in Europe and Asia rising by 61% and 54%, respectively. October was a record month for interest rate derivatives, with average daily volume of 9.2 million trades per day. At the end of October, the Fed announced that it was ending the QE program and confirmed that interest rates will rise. [3]
Foreign exchange (FX) derivatives trading volumes were suppressed in the first half of 2014, with CME’s average daily trades down by almost 30% compared to the prior year period at 700,000 trades per day. FX trading picked up in September, with the number of contracts traded per day crossing the 1 million mark for the first time since 2012. The rise in volumes was attributable to growing speculation among traders about possible changes in monetary policies from the Fed and the European Central Bank (ECB). [4] The Fed announced the end of the QE program, which could help increase Treasury yields. On the other hand, the ECB announced that it would be reducing rates, which led the Euro to a one-year low. [5] FX derivatives trading volumes stood at just under 1 million contracts traded per day in the December quarter, compared to about 700,000 contracts traded per day in Q4’13.
Similarly, trading activity for energy products was also high through the quarter. The volatility across oil prices helped the exchange operator in terms of the trading of natural gas and oil contracts through the month. On average, over 1.8 million energy derivative contracts were traded on CME’s platform in Q4, compared to 1.5 million contracts traded per day in the year-ago period. Trading activity for energy derivatives in Asia rose by 56% y-o-y during the quarter, while management mentioned that the company gained share for crude oil and natural gas products during the year.
Market Data And Information Services Sustain Growth
At the start of the year, CME revised its annual market data subscription fee from $70 per customer last year to $85. CME announced that it signed a strategic agreement with the China Financial Futures Exchange (CFFEX) in October, which should enable CME to distribute CFFEX market data outside mainland China. CFFEX is the only derivatives exchange in mainland China, and it aims to extend its global reach with the help of this agreement. This will establish CME as the middleman between the Chinese markets and a vast array of global customers that want access to these markets. [6]
Market data and information services contributed nearly $90 million to CME’s top line in Q4 – 17% higher than the comparable year ago period. As a result, full year revenues stood at $356 million, which was in line with the company’s expectation. CME management expects a moderate 5% growth in market data and information services in 2015.
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- CME Group Q4 2014 Earnings Call Transcript, Seeking Alpha, February 2015 [↩]
- CME Monthly Volumes, CME Investor Relations, January 2015 [↩]
- Yellen Says Rate Rises Could Increase Financial Volatility, Wall Street Journal, November 2014 [↩]
- CME Group FX Volumes Rise 20% as FED Speculation Reactivates USD Volatility, Forex Magnates, September 2014 [↩]
- Daily currency volumes rise in August as volatility picks up, Reuters, September 2014 [↩]
- CME Group and CFFEX Sign Market Data Agreement, Yahoo News, September 2014 [↩]