CME Earnings Preview: Derivative Trading Volumes In Focus

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CME Group (NASDAQ:CME) is scheduled to release its Q3 earnings on November 4. Last quarter, the company reported a 2.5% year-on-year increase in net revenue on 7.6% growth in clearing and transaction fees, which accounts for over 80% of total revenue. The other revenue streams, however, remained a drag as income from market data and information services declined by almost 28%. while revenue from access and communication fees dropped by nearly 9%. [1]

The increase in CME’s clearing and transaction fees last quarter was primarily due to higher transaction volumes, offset slightly by a decline in the average rate per contract. The trend seems to have continued this quarter, and is the reason why we believe the exchange’s performance in Q3 is likely to be similar to last quarter. Our price estimate for CME’s stock is around $62, which is almost 15% below the current market price.

See our full analysis for CME group

Transaction And Clearing Fees Likely To Remain Growth Driver

We already have the Q3 trading volume and pricing data for CME from its monthly reports. It shows that the total derivative contract volume on CME has remained above year-ago levels for most part of this quarter – volumes increased year-on-year by 4%, 18% and 10% in July, August and September, respectively. Much like last quarter, interest rate derivatives were the biggest driver of this trend with volumes increasing 28%, 29% and 32%, respectively.

Given the increase in trading volume, we expect CME to report an increase in revenue from transaction and clearing fees in Q3 as well. Although a decline in the average rate earned by CME per contract has remained a headwind for this kind of revenue for some time, we expect its impact to be limited, similar to last quarter. [2]

YoY % Increase In Average Daily Volume (ADV)

July 2013 August 2013

September 2013

Interest Rates

28%

29%

32%

Equities

-18%

19%

4%

Energy (including ClearPort)

10%

0%

-7%

FX

1%

2%

-20%

Commodities

-29%

7% -15%

Metals (including ClearPort)

16%

29%

-13%

Total

4%

18%

10%

Change in Rate per contract

($0.02)

($0.03)

NA

We also look forward to hearing from CME’s management about its future outlook on trading volumes. As evident from the table above, volumes in energy, FX, commodities and metal contracts dropped drastically in September. If this becomes a trend, it could offset any increase in interest rate contract volumes and stymie CME’s future growth.

Market Data Revenue To Remain Depressed

As mentioned above, CME’s market data and information services declined by almost 28% year-on-year last quarter. Although a decline in market data subscribers played its part, the decrease was primarily because the exchange sold its Credit Market Analysis (CMA) business to McGraw Hill and contributed its index business to the S&P/DJI venture in Q2 2012, causing market data revenue to drop significantly in subsequent quarters. ((10Q for Q2 2013, CME group, August 8, 2013))

Since the Q3 2012 figures did not include revenue from the CMA and index business, we expect the year-on-year decline in market data and information services in Q3 2013 to be much lower than last quarter. The decline in market data revenue this quarter is likely to be driven primarily by subscriber count, which remains under pressure due to ongoing cost cuts and retrenchments at client firms.

Expecting Management To Provide Update On European Derivatives Campaign

In order to benefit from the growing European derivatives market, CME is expanding across the Atlantic. It already has a clearing arm in Europe and has been working on launching a London-based futures exchange for some time now. The London-based exchange was originally scheduled to be launched on September 9, but the launch was recently postponed indefinitely, sighting technical issues that remain unsorted.

We discussed this delay in a previous article, CME Postpones Its London-Based Futures Exchange Again. In it, we mentioned that although it is not a major concern right now, a prolonged delay in launching the exchange could leave CME incapable of capturing the European derivatives opportunity. We see the upcoming conference call as a great opportunity for CME’s management to provide details and the expected launch dates of its London-based exchange.

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Notes:
  1. 10Q for Q2 2013, CME group, August 8, 2013 []
  2. CME Group September Volume, CME group, September 2013 []