CME Delivers Record Volumes For February, Driven By Interest Rate Derivatives

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Global exchange operator CME Group (NASDAQ:CME) recently reported its monthly trading metrics for the month of February. After a solid end to 2014 with high trade volumes in Q4, CME has sustained growth in its trading metrics in 2015 thus far. CME’s trade volumes in Q4 stood at 14.8 million contracts traded per day, with October volumes (17.6 million contracts per day) contributing significantly to the high quarterly average. As a result, CME witnessed a 24% annual growth in clearing and transaction fee revenues to $713 million in the December quarter. ((CME Group Q4 2014 Earnings Call Transcript, Seeking Alpha, February 2015)) The growth spree has continued in Q1’15 thus far, with combined volumes in January and February averaging 15.7 million contracts per day, respectively, which is about 17% higher than the comparable prior year period. Interest rate derivatives and energy derivatives drove much of the growth in these two months. Below we take a look at CME’s February performance across key asset classes.

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Trading Activity By Asset Class

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CME’s combined trading volumes across all derivative classes – including interest rates, energy, equities, metals and foreign exchange products – in February were up by over 13% compared to prior year levels at 15.8 million contracts traded per day. [1] Trading volumes were also about 1% higher than January levels of 15.6 million contracts per day. These volumes are significantly higher than the December average of about 13.6 million contracts per day, with interest rate derivatives contributing significantly to the volume growth.

January and February have been solid months for interest rate derivatives, with an average daily volume of 8.2 million trades per day – up from 6.6 million contracts per day in the prior year period and 7.4 million per day in Q4’14. The rise in trading activity for interest rate derivatives began in August, as traders began to speculate when the Fed will start raising interest rates in 2015. This speculation led to a record 211 million interest rate contracts traded during the month of October at an average of 9.2 million contracts per day. At the end of October, the Fed announced that it was ending the QE program and has confirmed that interest rates will rise, though with no clear indication as to when. [2] Subsequently, interest rate derivative trading slowed down in November and December, with only about 6.4 million contracts traded per day during the period. However, the surge in interest rate derivatives trading seems to have regained momentum, as traders speculate on interest rates in Europe. We currently forecast CME’s interest rate derivatives trading volumes for the full year to be 6% higher than the prior year period at 7.4 million contracts per day.

Similarly, trading activity for energy products was high in the December quarter owing to the volatility across oil prices, which helped the exchange operator in terms of the trading of natural gas and oil contracts through the period. On average, about 1.8 million energy derivative contracts were traded on CME’s platform in Q4 – higher than the full year average of 1.6 million contracts per day. The surge in energy trading has continued through January and February, with an average of 2.3 million contracts traded per day. Furthermore, CME realizes a higher rate per contract from the trading of energy derivatives (~$1.30 per contract) compared to interest rates (~$0.48 per contract), equities (~$0.71 per contract) or foreign exchange (~$0.82 per contract). As a result, a higher mix of energy derivatives could help the company boost its trading-based revenues. Back in December, CME announced the launch of European natural gas contracts on its CME Europe in addition to the existing rise in trading volumes of energy contracts. [3] The contracts have been made available on both the Clearport and Globex platforms. The addition of European natural gas derivatives has clearly contributed to the growth in the energy segment. We currently have a conservative forecast the average daily volume of energy contracts on CME’s platform to rise from about 1.7 million contracts per day in 2015. In the long run we forecast energy contracts to average 1.9 million per day by the end of the decade.

Despite record combined trading volumes in February for CME, foreign exchange (FX) derivatives trading volumes in January and February were lower than Q4 levels at 879,000 trades per day. Comparatively, volumes were as high as 959,000 trades per day in Q4 mainly due to speculation among traders about possible changes in monetary policies from the Fed and the European Central Bank (ECB). [4] The ECB announced that it would reduce interest rates, which led the Euro to a one-year low in September. [5] Since the end of Q4, FX trading has somewhat subsided, but is still about 10% higher than the comparable prior year period. We forecast FX trading volume for the full year to be slightly higher than 2014 levels at about 820,000 trades per day.

Trade volumes through Q1 have been higher than Q4’14 levels thus far, with the exchange operator witnessing an average of over 15.6 million contracts per day. If CME can sustain this volume through the month of March as well, it could have a positive impact on its revenues as well as margins. We currently forecast CME’s adjusted EBITDA margin to improve by a percentage point over 2014 to 67.3% for the full calendar year 2015, and subsequently to rise to over 70% through the end of our forecast period. We have an $88 price estimate for CME’s stock, which implies a 10% discount to the current market price. CME’s market price has risen by about 13-14% since the company released its Q4 earnings in early February.

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Notes:
  1. CME Group Monthly Trade Metrics For February, CME Group Investor Relations, March 2015 []
  2. Yellen Says Rate Rises Could Increase Financial Volatility, Wall Street Journal, November 2014 []
  3. CME Group Announces the Launch of a Suite of European Natural Gas Contracts on CME Europe, Market Watch, December 2014 []
  4. CME Group FX Volumes Rise 20% as FED Speculation Reactivates USD Volatility, Forex Magnates, September 2014 []
  5. Daily currency volumes rise in August as volatility picks up, Reuters, September 2014 []