Surge In Interest Rate, FX, Energy Derivative Trading For CME
After a slowdown in trade volumes through April, CME Group (NASDAQ:CME) reported a 22% sequential rise in trade volumes to an average of over 14.1 million contracts traded per day in May. The global exchange operator had a solid start to 2015 with high average daily volumes (ADV) through the March quarter. As a result, the company’s net revenues in Q1 were up by 8% year-over-year to $843 million. Clearing and transaction fee revenues were up by nearly 9% y-o-y to $708 million, contributing significantly to the growth. [1]
The growth spree has continued in Q2’15 thus far, driven largely by elevated trade volumes of interest rate, foreign exchange and energy derivatives. Below we take a look at CME’s May performance across key asset classes. We have an $87 price estimate for CME’s stock, which implies a 10% discount to the current market price. CME’s market price has risen by about 7-8% since the beginning of the year.
See our full analysis for CME Group
Trading Activity Across Key Asset Classes
CME witnessed a slowdown in trade volumes through April with low ADV across various asset classes including interest rates and equity derivatives. Trade volumes dropped to 11.4 million contracts traded per day, which was over 6% lower than the comparable prior year period. However, trade volumes picked up in May to an impressive 14.1 million contracts traded per day. Volumes were over 8% higher than the year ago period. [2]
Interest rate derivatives contributed to over half the total contracts traded on CME’s trading platforms through 2014 and Q1’15. The ADV of interest rate derivatives fell by 20% month-over-month to 5.1 million contracts traded per day in April. This picked up significantly in May to 7.8 million contracts traded per day, with particularly high volumes observed prior to the Fed announcement confirming that interest rates will rise in late 2014. [3] Although trading activity subsided a little after the announcement was made, the ADV through the month (7.8 million contracts per day) was over 3% higher than the year ago period. More recently, the company has witnessed a spike in interest rate derivative trades in the first week of June following a statement released by the IMF suggesting that the Fed should hold off raising interest rates this year. [4] 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.
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. Subsequently, 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. [5] As a result of the addition of natural gas contracts and continued volatility in oil prices, high trade volumes for energy derivatives were observed through the March quarter, with an average of 2.1 million contracts traded per day. ADV through Q1 was about 25% higher than the comparable year-ago period. Although the average daily volume has subsided to about 1.7 million contracts per day through Q2’15 thus far, it is still over 20% higher than prior year levels. We currently forecast the average daily volume of energy contracts on CME’s platform to be about 1.7 million contracts per day for the full year. In the long run we forecast energy contracts to average 2 million per day by the end of the decade.
After suppressed foreign exchange (FX) derivatives trading volumes through the first three quarters of 2014, volumes picked up in the last quarter of 2014 due to the growing speculation among traders about possible changes in monetary policies from the Fed and the European Central Bank (ECB). [6] As a result, FX derivatives trading volumes stood at just under 1 million contracts traded per day in the December quarter. CME has witnessed a sustained period of high FX trading through 2015 thus far. The company averaged 954,000 trades per day in Q1, which was 17% higher on a y-o-y basis. The ADV for FX derivatives through April and May stood at about 860,000 trades per day, which is about 50% higher compared to the prior year period. We forecast FX trading volume for the full year to be about 10-15% higher than 2014 levels at about 880,000 trades per day.
High Trade Volumes Imply Healthier Margins
According to our estimates, CME’s adjusted EBITDA margin in Q1 improved by over 60 basis points over the prior year period to about 68.5%. Since most expenses incurred by exchanges are fixed in nature, the rise in trading activity translated to healthier margins for the exchange operator. If CME can sustain high volumes in the coming months 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 67.1% for the full calendar year 2015, and subsequently to rise to over 70% through the end of our forecast period.
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- CME Group Q1 2015 Earnings Call Transcript, Seeking Alpha, April 2015 [↩]
- CME Group Monthly Trade Metrics For May, CME Group Investor Relations, June 2015 [↩]
- Janet Yellen says interest rate hike ‘will be appropriate’ later this year, The Guardian, May 2015 [↩]
- IMF’s Christine Lagarde to Janet Yellen: Please don’t raise interest rates, Fortune, June 2015 [↩]
- CME Group Announces the Launch of a Suite of European Natural Gas Contracts on CME Europe, Market Watch, December 2014 [↩]
- CME Group FX Volumes Rise 20% as FED Speculation Reactivates USD Volatility, Forex Magnates, September 2014 [↩]