How Much Will CME’s Clearing And Transaction Fees Grow In The Next Two Years?

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CME Group

CME Group (NASDAQ: CME) has seen decent growth in recent years. The company’s revenue grew by slightly over 4% annually and its stock price increased by over 33% between 2015-2017. We attribute this performance primarily to the growth in the company’s trading segment, driven by increased volatility in the derivatives market including energy, interest rate, and metals. As a result, Clearing and Transaction Fees contribute almost 81% of the company’s overall revenue and grew by nearly 5% annually between 2015-2017. Further, CME’s sustained efforts in growing its global footprint, coupled with its varied product line to suit investor demand, bode well for its medium-term growth. Below we take a look at what to expect from the Clearing and Transaction Fee segment in the next two years.

Based on recent market trends, rate hikes, and the acquisition of NEX Group, we forecast CME Group to report 4-5% annual revenue growth in the next two years, from $3.6 billion in FY 2017 to about $3.8 billion in FY 2019. Of the estimated $226 million incremental revenues, we estimate that the Clearing & Transaction Fee segment will contribute just under 82%, or $186 million. We have summarized our expectations on our interactive dashboard on CME Group’s Clearing & Transaction Fees through FY’18 and FY’19. If you disagree with our forecasts, you can change the key drivers for the segment to gauge how changes will impact its expected revenue. Below we take a look at the key drivers for this revenue stream.

Interest Rate Hikes Under Fed Guidance Should Drive Growth In Near Term

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Interest rate derivatives have been the second-highest contributor in terms of trading volumes and revenue contribution, with around 10% and 7% annual growth between 2015-2017 in volume and revenue, respectively. The uncertainty around macro conditions and Fed’s indication of interest rate hikes should propel this segment in the near term, leading to sustained growth in volumes.

Volatility Across Energy, Metals, And Agricultural Products Should Drive Clearing & Transaction Fees 

The demand-supply gap led to increased volatility in the oil market throughout the last five years. Oil prices have continued to fluctuate due to OPEC’s stance on capping production. This propelled 14% and 7% annual growth between 2015-2017 in energy derivative volume and revenue, respectively. Since the outlook for the restricted production of oil remains uncertain, we expect the market volatility to sustain in the near term, thus leading to continued growth in trading volumes.

The continuous movements in gold and silver prices came as a result of a strengthening U.S. dollar and other economic and political factors in the U.S., which helped boost metals derivative volumes. As a result, the division’s trading volumes saw nearly 28% annual growth between 2015-2017. We believe demand for gold and other precious metal should sustain in the near term largely due to investors seeking safe-haven investments – due to volatility surrounding other products and further strengthening of the U.S. dollar.

Agricultural commodities volumes increased as a result of higher price volatility largely due to the uncertain weather conditions. This propelled over 3% annual growth between 2015-2017, in agricultural trading volumes. Further, the prices of grains & oilseeds should remain under pressure as a result of high production levels. However, adverse weather conditions across key regions could cause food prices to spike, resulting in increased price volatility in the near term. In addition, we expect the volatility to sustain in the near term, as a result of concern surrounding the U.S. foreign trade policies.

Looking Forward

CME’s proposed acquisition of NEX Group will not only improve its trading technology, but also broaden the offerings on its platform. Additionally, this acquisition further reinforces CME’s international momentum and expands its presence in the European and Asian markets. Further, the deal would enable CME to be more cost efficient and mitigate risks, which should improve its bottom line.

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