In Q1 2022, CME Group reported Total Net Revenues of $1.35 billion, which is 7% more than the year-ago period. This could mainly be attributed to slight growth in clearing and transaction fees.
CME Group is one of the largest financial derivatives exchanges, which derives more than 80% of its revenues from clearing and transaction fees. Due to the ongoing coronavirus pandemic and economic uncertainty, securities markets are witnessing high trading activity. This, in turn, means that the exchanges would generate more revenue in terms of clearing and transaction fees. However, CME Group's total contract volume in 2020 has decreased due to lower average daily volume (ADV) in interest rate contracts coupled with a slight drop in revenue per contract. This has resulted in a marginal decline in the transaction and clearing fees on a year-on-year basis. While the company’s results for Q2, Q3, and Q4 2020 saw some decrease, CME Group’s full-year 2020 results were marginally better than the previous year.
Moreover, The company reported a decline in Q1 and Q2 2021 revenues on an year-on-year basis, followed by a slight increase in the second half. Overall, the full year 2021 revenues decreased 4% y-o-y to $4.7 billion.
Below we look at key drivers which present significant upside or downside potential to our price estimate for CME Group.
The CME Group was the first publicly traded exchange in the world. The company operates futures and derivatives exchanges including the Chicago Mercantile Exchange, the New York Mercantile Exchange (NYMEX) and the Chicago Board of Trade, as well as the Dow Jones Index Services. The company provides a marketplace, back-end financial infrastructure for administrating and setting up futures contracts and options on futures contracts.
Futures and options provide hedging opportunities for individuals and institutions to hedge themselves from the market risks and potentially profit from it. Historically, the company has focused on agricultural products for farmers in the U.S. but has diversified into interest rates, foreign exchange, energy, metals, and other commodities.
A significant part of CME Group’s revenues are derived from clearing and transaction fees, which include electronic trading fees, surcharges for privately-negotiated transactions, and other volume-related charges for contracts executed through its trading venues. The fees are calculated on a per-contract basis, and the revenue generated from the fees fluctuates with the trading volume.
Other factors affecting revenues are rate structure, product mix, trading venue, and the percentage of trades executed by members vis-a-vis trades executed by non-members.
CME Group receives revenue from the dissemination of market data to subscribers. Its market data services are provided primarily through third-party distributors. Subscribers have access to real-time quotes, trading data, and summary market data for fees that are charged monthly on a per-screen basis.
Supported by the interest rates hikes by the Fed in 2015, 2016, 2017, and 2018, there has been a rise in its derivative volumes. With the expectation of fewer rate hikes in the future, the interest rate contracts will continue to be in demand, albeit at a slower pace.
Volumes generally increase during periods of geopolitical or economic instability, as this often results in volatility in oil prices. Accordingly, investors look to hedge their exposure (or earn profits on speculation). As we expect continued volatility going forward, energy contract volumes should increase substantially.
