Product Launch

Jul 2, 2020

Good morning, everyone, and welcome to the Cboe Global Markets European Strategy Conference Call. All participants will be in listen only mode. Those listening through the webcast may submit questions throughout the event by typing the question in the submit question box on the screen. Questions germane to the topic will be addressed after the prepared remarks have ended. Please note this event is being recorded. I would now like to turn the call over to Debbie Koopman, Vice President of Investor Relations for opening introductions. Please go ahead. Thank you. Good morning and thank you for joining us today to discuss our recently announced European derivatives launch plans and strategy. On the call today, Ed Tilly, our Chairman, President and CEO, will give a brief introduction and then hand it over to David Howzen, President of our European Operations, to provide an update on our planned strategic initiatives in Europe as it relates to the launch of Cboe Europe Derivatives. Then Brian Schell, our Executive Vice President and CFO, will provide some brief comments on the projected short term EPS impact of this initiative. Following their comments, we will open the call to Q and A. Also joining us for Q and A will be Adi Cordell, President of Cboe Nl, our Amsterdam based exchange. In addition, I would like to point out that this presentation will include the use of slides. We will be showing the slides and providing commentary on each. However, we will not be advancing the slides, so you will need to advance the slides, which are available either through the IR website. Again, a downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward looking statements. Please refer to our filings with the SEC and the slide presentation for a full discussion of the factors that may affect any forward looking statements. Also note that references made to the planned European derivative build out are subject to regulatory approval, all planned dates and timelines are subject to change without notice. We undertake no obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise, after the conference call. Today's speakers are joining from different locations, so I'd ask that please be patient if there are any technical difficulties. Now I'd like to turn the call over to Ed Kelly. Thank you, Debbie. Good morning. I'd like to thank you for joining us today, especially ahead of the holiday weekend here in the U. S. Yesterday, we announced the completion of our acquisition of Euro CCP, the leading pan European clearinghouse and our plans to launch Cboe Europe Derivatives in the first half of next year. Despite the challenges related to COVID-nineteen over the past few months, we were able to close the EuroCCP transaction on time and we are exceptionally proud of the teams at both organizations for making this happen. I am delighted to welcome the EuroCCP team to Cboe Global Markets. The completion of this acquisition marks a significant milestone for our European business. Full ownership of a leading equities clearinghouse not only enhances our current European equities business, but also provides opportunities to diversify our business into trading and clearing derivatives, which Dave Howsen, President of European Operations will explain in a moment. Both Cboe and EuroCCP are highly valued by market participants for their track records in providing exceptional client service and successful market innovation. We believe the complementary nature of our businesses will amplify those qualities going forward in equities and other asset classes. The acquisition of EuroCCP helps enable Cboe to execute our long term strategy to bring pan European derivatives trading to Europe to unlock the considerable potential we see for this market and to fuel its growth. Cboe is known for successful derivatives product innovation and for developing vibrant derivatives markets. We couldn't be more excited to bring expertise to the European marketplace. I'll now turn it over to Dave to walk us through our European business strategy and how we plan to leverage our derivatives expertise to grow our business in Europe. Thanks, Ed, and thanks to everyone who has joined the call today. This deal marks the beginning of the next chapter for Cboe Europe. And together with EuroCCP, we couldn't be more to further deliver on our pan European mission with the planned launch of Cboe Europe Derivatives. I'm pleased to have Adi Caudill on the call today as well. Adi joined Cboe Europe early this year and is overseeing our expansion into European derivatives. He has been appointed President of Cboe NL, our Netherlands based exchange, which will serve as the home to Cboe Europe Derivatives. Turning to Slide 6. Our European Equities business remains strong and we continue to be Europe's largest truly pan European Equities Exchange. Over the last decade, we've built a track record of delivering innovative products and services based on customer needs. These now include a suite of trading and reporting services, listings, market data and indices. We support a single European market that brings investors together in a robust market free from national legacy. And we believe efficient Pan European market infrastructure helps grow Capital Markets in Europe. From the beginning, we have been focused on improving market structure and transparency. We plan to leverage our successful equities blueprint to create a derivatives market designed to simplify cross border Pan European Equities derivatives trading. Turning to Slide 7. It is this existing vibrant Pan European Equities business ecosystem that will help enable us to create high quality derivatives products in a cost efficient manner. Our solid Equities Trading business creates robust market data, which is used to calculate our suite of Pan European indices. These indices are highly correlated and comparable with comparable benchmarks and will serve as the foundation for a successful European Derivatives business. Turning now to Slide 8. The acquisition of EuroCCP completes the missing piece of the puzzle by providing us with a clearing solution for our derivatives platform. We're happy to welcome EuroCCP to the Cboe family. While EuroCCP will become part of Cboe's overall European group, it will remain operationally managed by EuroCCP and its strong leadership team led by Cecile Negell. For EuroCCP customers, it's business as usual. EuroCCP will continue to support an open access model offering choice and competition in the clearing space, something that Cboe has long championed in Europe. As mentioned, we expect Euro CCP to enable us to grow our European business as well as further diversify our revenue stream by enabling us to launch Cboe Europe Derivatives. Additionally, as an in EU clearinghouse, we see EuroCCP as a strategic asset in light of the political and regulatory uncertainty surrounding Brexit and the future framework of European Capital Markets. On Slide 9, this slide outlines where we believe there is a great opportunity for Cboe to help grow the derivatives market in The first thing to highlight here is the size of the European economy versus the U. S. Economy. When you think about the U. S. Economy, which is effectively a $21,000,000,000,000 market and overlay that with the equity option market in the U. S, which are denoted by the green and blue bars, you see an obvious upward trend. The European economy is approximately $19,000,000,000,000 similar in size to the U. S. Economy, but the equity options markets in Europe and the U. S. Show striking differences. When you look at 2,009, you can see that Europe and U. S. Are on par. But in the years since, the U. S. Has grown rapidly and Europe stagnated and in some respects started to trend downwards. Moving to Slide 10. We ask the question, why do these two markets look so different? We believe that the lack of transparency and competition, particularly in the index products and the current market structure have hindered the growth of the European derivatives market and created suboptimal experience for customers. The current market structure is dominated by a prearranged block trading model with limited on screen liquidity. We believe this structure encourages OTC or off screen trading and lacks the technological and market structure design to support a lit market. Additionally, the market is fragmented and siloed, which creates inefficiencies for participants. In order to trade the key index products outlined on this slide, participants currently need to connect to 3 different venues with 3 different clearing houses, 3 different pricing structures and 3 different market models. On top of that, the contract design and specifications and index methodologies used to create these products are inconsistent across the markets, which creates additional inefficiencies. Our research shows that market participants are frustrated by the opaque market structure, low levels of liquidity and inefficient design of the market. We believe we have a better solution. Turning to Slide 11. We can see we see client demand for a vibrant on exchange market model similar to Cboe's U. S. Derivatives market that addresses inefficiencies in the European market. We believe a transparent, lit, quote driven market will attract a diverse range of market participants, including retail and institutional investors. Addressing transparency and market structure issues will help participants better see opportunities and fuel market growth. We plan to leverage our derivatives market expertise to promote transparency and deep on screen liquidity over block and pre arranged OTC transactions, which is currently status quo in Europe. Moving now to Slide 12. We plan to launch our venue in the first half of next year subject to technical and stakeholder readiness and regulatory approval from the Dutch AFM and DNB. And will offer trading in futures and options based on 6 Cboe Europe indices. These indices are managed under the same consistent, transparent rules used for Cboe indices and valued using Cboe's own market data. This is the first phase in creating a one stop shop for pan European derivatives trading. We plan to add futures and options on additional European benchmarks at a later date based on customer demand. Essentially, we have listened to the needs of market participants and designed our market from a pan European point of view, leveraging our global derivatives expertise, European equities footprint and world class technology to build a more efficient derivatives market. Moving on to Slide 13. Our pan European model will offer efficiencies not available in today's fragmented market and enable market participants to access a modern derivatives market through a single access point, creating efficiencies in trading and clearing. On the product design front, we expect to offer uniform contracts to create efficiencies for customers. Our goal is to encourage deep pools of liquidity through homogenous products, all constructed the same way. We've developed right sized index contracts with appropriately calibrated tick sizes for index futures and options contracts. Advancing to Slide 14. We have had requests from both U. S. And European market participants to bring a new derivatives market to Europe. Our aim is to attract new sources of algo flow from clients looking to transact European options on a deeper, more liquid order book. We have commitment from trading and clearing members to be there on day 1. To summarize, our mission is to create a modern and vibrant pan European derivatives market designed to grow and bring competition into the derivatives markets in Europe and truly unlock the potential of this market. We are not simply trying to take market share from existing exchanges. Rather, our aim is to grow the overall derivatives trading pie in Europe. We believe a robust, transparent Pan European market infrastructure, coupled with smart, holistic product design, will help provide efficiencies for customers while fueling growth of capital markets in Europe. Moving to Slide 15. You will see our planned launch timeline. As previously mentioned, we plan to launch the new venue in the first half of next year. We have been making very good progress on the technology and operations development and expect to have the platform ready for testing in the Q4 of this year. We are excited to launch this new venture and we look forward to building a better derivatives market in Europe. With that, I will turn it over to Brian for an update on the projected short term EPS impact from this investment. Thanks, Dave. I'll be brief here as we wrap up the call. We are reaffirming that we expect the acquisition of EuroCCP and our investment to build out Pan European Derivatives Trading and Clearing to reduce earnings per share by about $0.08 to $0.10 in 2020 2021. However, we now expect the impact to be at the higher end of the range, primarily reflecting slightly higher than originally projected facility fees associated with EuroCCP's new €1,500,000,000 backup line of credit. We were very pleased with the bank participation and our ability to execute on this line of credit without delay, despite the shifting market conditions in the midst of this pandemic. We're excited about the opportunity we see to grow the pan European market for derivatives trading and view this as a great investment in the long term growth of our business. Thanks, Brian. At this point, we would be happy to take questions to UroLTCP and the Pan European derivatives build out. We ask that you please limit your questions to 1 per person to allow time to get to everyone. Feel free to get back in the queue. And if time permits, we'll take a second question. At this time, I'll turn it over to the operator for instructions on submitting questions. Thank you. We will now begin the question and answer session. You. The first question comes from Ken Worthington of JPMorgan. Please go ahead. Hi. Thank you for taking my question. Can you give us a more robust history of the equity options business in Europe. You think there's an opportunity here. Can you describe maybe what others have tried in the past to develop a more robust options business and address some of the issues that you look to be addressing in your offering and maybe why those didn't succeed? Good morning. This is David Howson. So I'll start off and hand over to Adi, who has a great history in the equity drifters market in Europe. Many of the preceding initiatives that you saw come into play in Europe were predominantly focused on copycat market structures and the product sets as well as being driven predominantly by just looking to introduce cost reductions. The real differentiator here is the unique market structure that we're going to be bringing to Europe, which will really induce new flow and unlock latent demand that we see coming from international, systematic and quantitative funds around the globe. Adding to that, Dave, it's probably worth highlighting some things that happened in the past. And so from a European perspective, a lot of the exchanges, as I'm sure you understand, have grown up as being national champions. And so they typically concentrated on their own domestic products. With that, just thinking about the way market participants trade today, which is largely cross border pan European in nature in Europe today, actually very difficult to do that in the index option space. And so when we're looking at what other exchanges have done in the past, actually they largely haven't addressed this, which is why when you look back at the I think it's a slide that Dave was walking through earlier, where you can see the differences between the U. S. And Europe. In the index option space, there really hasn't been much competition amongst the exchanges. And so I think we're somewhat uniquely placed to be able to launch futures and options based on our own indices to actually address this given that we have a pan European exchange and we are truly pan European in nature. The next question is from Kyle Voigt of KBW. Please go ahead. Hi, good morning. Maybe just a question on, I think the plans originally or when it was talked about originally, were to kind of focus on these country specific benchmarks, which are obviously 5 of the 6 initial that you're rolling out are, but also you're rolling out a similar or look alike contract to that 50. Can you just talk about the inbound client demand that you have been getting for those country specific index derivatives versus the kind of inbound demand you've been getting for a pan European benchmark and derivatives trading solution that's different than the one that exists today? And then I guess, do you have a view on whether there's more opportunity in that country specific bucket versus that broad Europe benchmark bucket? Okay. So on that, and so let's talk about the country specific first. From a domestic standpoint, one of the things that participants have told us is there used to be a lot more trading in the domestic or national indices, particularly from an index option standpoint. What they've noticed is that volumes have trended down over time. And secondly, new types of participants have come in who typically are largely technology driven, so be it quant funds, systematic funds, who typically want an order book traded product. These signs have typically struggled to execute business on a venue which is largely driven by block trades. And that's even more persistent in the country benchmarks than it is in the pan European benchmark. And so when we're attempting to address this, market participants also told us, we appreciate that the pan European product is also, certainly from a European perspective, looks liquid on the surface, and it is. But ultimately, for us to calibrate our algos and just look at the pattern of trading throughout the day, it's actually very difficult for us to do that because there's Can you actually Can you actually deliver something to the market, which one offers all of those products in one silo, firstly? And so we would like to trade the country benchmarks. We have capital to deploy in those countries, but also make sure it's an order book driven model similar to what you offer today in the United States. And so your Cboe platform in the U. S. Where we trade day in, day out, can you replicate that in Europe and actually have all of these products trading in that venue? And that's ultimately what we're going to deliver. The next question is from Chris Harris of Wells Fargo. Please go ahead. Thanks. So I guess with this initiative, you can have a better mousetrap, but if there's no liquidity, it seems to me that nobody is really going to use it. So I guess, how do you guys plan on building the liquidity at this new venture? I'm just a little bit confused by that. Great. Thanks very much for the question. There's a variety of stakeholders that are key to seeding a critical mass liquidity for any volume and this any venue, and this is no different. We've got great conversations going with all stakeholders covering the market making community, sell side community as well as the indirect clients, those end funds. And what we have is a great confluence of factors that bring together the critical mass liquidity from providing a market structure, which is interesting both to the market making side of the community as well as the sell side part of community as well as the index and macro hedge fund community. So with the market structure in place, it creates an environment where a liquid market can be ceded. But on top of that, there will also be the need for additional incentive schemes to help feed that marketplace. And these are factors which have been included in our plans and are subject to keen discussions that we are having with customers, both bilaterally and through the working groups, which we are initiating over the summer period. I'll hand on to Adi for potentially some more detail. Yes. So I guess a key differentiator between what we're doing and perhaps some of the initiatives you may well have seen elsewhere would be this. Think about what we've outlined. The key thing here is actually there's latent demand. And so you've got a frustrated group of investors, group of funds that actually want to deploy their capital in Europe and they're effectively saying, we can't do that today given the current market structure. Now this in some respects is actually the best problem to have if you're in our position. So you've got the demand side where participants actually got business to transact. Now the question that they pose to us is, will you be able to get market makers and liquidity providers to make two way prices on your venue? And the answer to that is yes. And so we have spoken to all the key market making firms that are active on other venues that are experts in index options that are able to make two way prices throughout the trading day, cross expiries, cross strikes and effectively describes exactly what we're trying to bring to market in the first half of next year. And they've effectively told us, if you can do this, if you can bring this to the market and you have this latent demand, we will be there. And so the feedback from market makers and the crude drivers has actually been outstanding. And so that's why we feel confident that we can launch this venue. Over time, it will grow, volumes will pick up and you'll get a variety of market participants coalescing around it. The key thing here is the latent demand. If there wasn't this latent demand, it will make it that much more difficult for us to do, but it's there. And so we need to make sure that we get the other side of the coin, which are the liquidity to provide us to make these two way prices. The next question is from Owen Lau of Oppenheimer. Please go ahead. Good morning. Thank you for taking my question. Could you please talk about if you need like high AUM linked to your Cboe indices to make your options and futures products relevant? And if yet, can you talk more about your plan to license your Cboe indices to more ETFs? And then you also talked about your aim is to grow the pie on Page 9. How much do you expect you can grow? Thank you. Okay. So I think on assets under management, that's something will grow over time. And so if you think about our products at the moment, so these are products that have been around for a number of years. But ultimately, this is the first time that market participants will actually be able to have viable futures and options to actually hedge any exposure they have to products that they'll make available. And so on an AUM or let's say an ETF listing standpoint, I'll take that further down the road. Key thing here is get the futures and options available, get those trading, get those liquid, get market participants coalescing around that. And then ultimately, what we'll see is a series of new products that, 1, will be referencing the Cboe indices and 2, they'll be able to actually hedge in the exposure that they have with our futures and options as opposed to going on to other venues to do that. And so this is it's a I would call it a work in progress for gathering assets that were referenced these products. Ultimately, at the moment, this is a derivatives led initiative, which will ultimately lead to then more products being listed, referencing these placebo industries going forward? I think it's important to point out on this at Tilly, we understand the ecosystem of having first a vibrant institutional size futures contract, options on those futures, the demand then from smaller either active retail like we see in the States and ETFs, then volatility indices on those futures and options and then ultimately a tradable volatility product. So it is a roadmap that we're very familiar with, very confident and the feedback as Adi outlined, from liquidity providers and buy side interest reaffirms that this is the first phase of a multiyear expansion into a model that we're picking up right from what we've done here in the U. S. The next question is from Mike Carrier of Bank of America. Please go ahead. Hi, good morning and thanks for taking the question. Brian, you gave the EPS impact over the next 1 to 2 years, which makes sense. I guess just when you guys are thinking about kind of the longer term opportunity of the investment, maybe different scenarios and how this plays out over years, say 3 to 5. Just trying to get a sense on you guys typically do analysis on the financial impact, the return on investment. So just any details on like how you think you get there? Obviously, there's a revenue component, maybe some of the investments start to slow. And I know the further out it gets, it's a little bit tougher to try to predict, but any color around that would be useful. Thanks. Yes, that's a good question and it's something we can that we actually are very comfortable with that model. And as we think about that because return on investment is a very important key metric that we look at internally as we evaluate all of our investments. But I think that just again, the guidance we give you right now is that we've said that this initiative requires an upfront investment, so it's all going about making sure that we build the right capabilities. You heard Adi and Dave talk about, I'll call it, the market participant demand and the liquidity that market participants want to provide and participate with the structure that we can bring. So I think the 1st couple of years are about building that infrastructure, making sure we're making that available to them to be able to utilize the products. And then really it is, as to your point, it becomes a revenue game. It is we start building that base and leveraging that infrastructure. I think you know Cboe that we're fairly efficient with our spend, but that doesn't mean it's not done at a world class level. It just means it's a very efficient spend that's done very well. And so we hope to be able to leverage that over time. So it's like I said, the true progress of measuring any return on investment calculations in my mind is more of a 3 to 5 year timeframe. And for that to obviously happen the way we think, the meaningful progress on seeing those higher returns isn't going to be until that, call it, that 3, 4, 5 years when the revenues really start kicking in and we're leveraging that expense base. That expense base, we don't think will continue to ramp up that doesn't ramp up like it does in the 1st couple of years. So you'll have the benefit of expenses going down in those later years or not ramping up and you have hopefully what we think we're building here is a revenue basis increasing from this activity. Got it. Thanks. The next question is a follow-up from Ken Worthington of JPMorgan. Please go ahead. Hi. Thank you for taking the follow-up. It seems maybe like the competition here is not the European listed market, but rather the OTC market. So maybe can you better describe how big the European OTC options market is relative to the listed market? Are there examples since the exchanges have been public for profit entities where they've launched new products that take market share from the OTC markets? And then how do you price versus the OTC market? I think the complaint we hear from traders in the listed markets today, both cash equities and options, is the pricing. And we see more people going to the OTC markets because of the complaints we're hearing in the pricing of the listed markets. So how do you price it so you compete with the OTC markets? Thanks. Okay. So the key thing here is this. So I think at the outset, we said something, but I believe it's in my answer to your first question, which is the European landscape, particularly for options, exchanges typically delivered products and services that competed with the OTC market. However, it doesn't mean that our offering, some 10 to 15 years after what the other exchanges have done, doesn't mean that our offering is going along the same line. So our offering is very much based on the U. S. Model, which is an onscreen model, very much lifted, and this is not about competing with the OTC market, not at all. This is about getting market participants who want to trade on screen today, but effective just aren't trading the European markets. So they're trading in the U. S. Markets, that market continues to grow. They've got capital to deploy. They want to deploy it in Europe. They're doing some business, but they're not doing as much as they could because of the market structure. And so they would like a lit order book similar to the U. S. Markets and that's what we have on Cboe in the U. S. And they'd like something like that in Europe. And so this semi hour initiative is not listed versus OTC game. This is very much a latent business, can be executed in Europe if you have the right market model, if you have the right sort of venue for that business. Ultimately, we want to build that venue and be that exchange where this comes to. We then believe what will happen is the European market, the gap between the European market and the U. S. Market will actually it will reduce over time. So I think it's 5 to 7x larger in the U. S. Versus Europe. Clearly, that gap should actually get smaller as the European market starts to grow, starts to move away from this downward trend, starts to trend upwards similar to the venues that you see in the U. S. And so it's absolutely not certainly from our initiative, this is not a lifted versus OTC game. And I think just further to that point, Adi, I think it's important, Ken, to recognize when you talk about cost of OTC versus cost of transaction listed, That's measured in a number of ways. If it's transaction only, you can make a case that OTC may look less expensive on the surface. If it's in asking 1 single counterparty for a price, that is a completely different cost to trading OTC versus asking the deep pool of liquidity that we see here on the States and that we're anticipating we'll see in a very lit market in Europe. And then further, the cost of capital, margining, cross margining, index against index, country exposure against country exposure in 1 CCP, the ability to trade in and around those open positions becomes way more economical and cost effective when you look at the entire package. So cost is measured in a number of different ways. We're conscious of that. And the model in the U. S. Is one that brings those efficiencies to the marketplace. That's what we're trying to replicate in the market in Europe. Thanks. Great question, Kevin. Thank you. The next question is from Reeve Hamilton of Morgan Stanley. Please go ahead. Hi. Thank you for taking my question. Thanks for the presentation. One question, just to understand the importance or not of sort of open access to clearing. I know your model is based on or Euro CCP's model is open access, which has had success. And presuming really that, that would be part of the opportunity to provide some netting benefits as you extend into derivatives. But I'm just trying to understand the importance and if Open Access is delayed or even changed. I mean, what's your view on the likely outcome on that? Because it does seem as though some parts of Europe are pushing back on this, perhaps because of risk for their own sort of exchanges potentially. Can I just mention your thoughts there? Absolutely. Certainly, we've always been, as well as with EuroCCP, huge proponents of the open access guidelines in MiFID II. As you mentioned, there's been a 12 month delay in the implementation of those in Europe. For this initiative, however, it makes little to no difference at all to the launch time lines or the efficacy of the business plan because we are launching products based upon the data from our European Equities Pan European Equities venue, which are used to calculate our own indices, which will then be traded on our own derivatives platform and cleared through Euro CCP. So the Open Access progression is certainly of keen interest to us as a business and for the Pan European Capital Markets. But for this particular initiative, it doesn't create any particular impedance. And indeed, when open access does come to fruition, if it does come to fruition, would be an opportunity, of course, for Euro CCP as well to broaden its offering of clearing services. Thanks. That's helpful. This concludes our question and answer session. I would like to turn the conference back over to Debbie for closing remarks. Thank you. This completes our call this morning. We appreciate your time and continued interest in our company. And for those of you in the U. S, we wish you a happy 4th July celebration. Thank you for your time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.