Good day, and welcome to the CME Group Second Quarter 2020 Earnings Call. At this time, I would like to turn the conference over to John Pesher. Please go ahead, sir.
Good morning, and thank you all for joining us. I'm going to start with the Safe Harbor language. Then I'm going to turn it over to Terry, Julie and John for brief remarks followed by questions. Other members of our management team will also participate in the Q and A. Statements made on this call and in the other reference documents on our website that are not historical facts are forward looking statements.
These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance can be found on our website. Also on the last page of the earnings release, you will find a reconciliation between GAAP and non GAAP measures.
With that, I'll turn it over to Terry.
Thanks, John, and thank you all for joining us today. My comments today will be brief, so we can spend the majority of our time directly addressing your questions. We released our executive commentary this morning, which provided extensive details on the Q2. As John mentioned, John, Sean, Derek and Julie Winkler have joined me today. In Q2, we averaged 17.6 1,000,000 contracts per day, which is down from 21,000,000 contracts per day a year ago and down from our strong start to the year in Q1.
The global exchange traded market has been challenged in many different product areas since the beginning of the pandemic, impacting us and many others in the trading industry. Clearly, the front end of the U. S. Rate curve has become impacted from a trading perspective. Also with the recovery of the price of oil back to the $40 range, the global crude oil market has stabilized with a fairly flat forward curve, leading to a reduction in the volatility back to more normalized levels as the market balances supply and demand.
While in the near term that reduces the need for some participants to manage risk with us and others, the competitive dynamic of trading volumes across different markets has not changed. However, with the global crude oil demand still depressed due to the COVID-nineteen, which we believe is a temporary situation, we expect to see market conditions improve as global oil demand returns. We are very fortunate to have a highly diversified business. We are looking forward to the integration of BrokerTec coming onto Globex by year end. We remain committed to achieving capital and operational efficiencies for our clients.
Through all of this, I assure you we remain very disciplined as it relates to expenses. What I'd like to do is turn the call over to Julie Winkler to provide some context on our sales outreach, what we are hearing from our customers and she will touch briefly upon our data business. And I look forward to answering your questions. Julie?
Thank you, Terry. Despite challenging circumstances, we are continuing to see positive momentum in our global client engagement. Similar to last quarter, many of our clients continue to work from home and our sales organization has excelled at their virtual outreach. During Q2, client engagement by our sales organization was up 66% versus the same period last year and year to date sales activity is up 81%. We are actively engaging with clients via virtual meetings, webinars, online events, email communication and chat to support the execution of our sales and go to market strategy.
Clients continue to express their appreciation for how highly responsive we have been through the peak of the crisis and our continued focus on delivering value added solutions across product lines. Clients in some areas are beginning to return to the office, which means we will take appropriate steps to adjust our coverage model where safe and appropriate. In Q2, we also saw an acceleration of our cross introduction and cross sell efforts to capitalize on the next acquisition. May represented a record high month with more than 300 cross introductions across our sales organization, which is more than the entire Q1 combined. A total of 500 cross introductions were made throughout Q2.
Additionally, we reinvigorated campaign selling to help bring key products and services to market. We are seeing great success with those campaigns, including the relaunch of our 3 year treasury product, which had more than 40 clients participating on day 1 of trading. Our active Trader Retail segment performance was strong in Q2 and year to date ADV is up over 70% driven by an overall increase in retail trading resulting from the lockdown. CME was well positioned prior to these events and its product mix, particularly the e micros, allowed it to take advantage of strong macro factors. Lastly, our Market Data business had a strong quarter.
Through the first half of twenty twenty, consolidated revenue was up 3%. The CME market data professional subscribers count was solid due to increased subscriptions as traders were migrating to work from home environments. We continue to see success with our data services strategy, which confirms the value of our data to our global customer base. I will now turn things over to John.
Thanks, Julie. In the first half of the year, in addition to navigating the challenging environment, we've been very active with the ongoing NEX integration. We remain on track to migrate from the legacy NEX trading systems to our Globex technology. We recently announced to our clients the cutover dates for BrokerTec. BrokerTec EU clients will begin trading on November 16 and BrokerTec Americas trading will commence on December 7.
With our progress on the integration, the remote working environment and our overall strong expense discipline, we finished the 2nd quarter with adjusted operating expenses, excluding license fees of $380,000,000 We are extremely focused on actively managing our costs. Based on our outlook for expenses for the rest of the year, our guidance for adjusted operating expenses excluding license fees for 2020 is being reduced from a range of $1,640,000,000 to $1,650,000,000 to approximately $1,595,000,000 This level of spending reflects reality of the current operating environment and we would expect a higher level of spending next year assuming the conditions improve from here. With that short summary, we'd like to open up the call for your questions. Based on the number of analysts covering us, please limit yourself to one question and then feel free to jump back into the queue. Thank you.
Thank Our first question comes from Rich Repetto with Piper Sandler. Please go ahead.
Yes. Good morning, Terry, John and Julie. I guess the first my question is on expenses and you made a solid reduction, John, in the expense guidance. But I guess the question is, the first half run rate is you're averaging somewhere around $383,000,000 in expenses ex the licensing fees. If you back into that full year guidance, it'd be an 8.5% increase in the back half.
And you got hopefully you get the 15,000,000 dollars of P and L expenses coming from the next synergies. So I guess the question is, can we go down if the current environment didn't rebound, say, in 2020, is there more room to cut expenses? Because I know there's some events have already been canceled and so forth.
Yes. Thank you, Rich. Thanks for the question. In terms of the first half versus the back half of the year, we do expect to have some increase in costs in the back half of the year as, for example, in depreciation as we migrate on to Globex and also we're in the process of data center consolidation effort and we have a build out of a data center in the New York, New Jersey area as part of the integration efforts that we're doing with NEX. Also, we do have planned for the back half of the year some opening of the some economies around the world where we would expect to see some more travel and marketing efforts as those economies open up.
So that is planned for sort of in the back half of the year. If that doesn't happen, obviously, we wouldn't expect those costs to come through. But in terms of our guidance, we did make some assumption that there would be a modest opening in Asia in particular, for example. In terms of our overall expense discipline, we are, as a management team, very focused on our expenses for this year and in planning for next year. So we have a laser like focus on our expenses and we're the entire organization is making sure that we spend every dollar as efficiently as we possibly could spend it.
Got it. Thank you. And everybody, please stay safe and healthy.
You too, Rich. Thanks, Rich.
Thank you. Our next question comes from Dan Fannon with Jefferies. Please go ahead.
Thanks. Good morning. My question is on market data. Julie, you mentioned some of the strength. If you could kind of elaborate on the outlook for that business and how we should think about growth in the broader market data business for the remainder of this year and into next?
Sure. Thank you, Dan. Yes, as mentioned, we had a great Q2 with consolidated revenue in the market data business of 135,000,000 dollars which is up about 5% over the Q2 of 2019. And the majority of that was driven by those increased professional subscriber counts. So what has happened, right, is that in this work from home configuration, we're seeing modest demand in display devices.
And it's also just coupled with other licensing that we're doing across the business. And so we're continuing to closely consult with our data vendors and our clients to gather input. We have a really great channel partner base for our data distribution, which gives us really a wide range of very flexible ways to deliver our data and new products. As we kind of look at the outlook and what else we see, we still see increased need for our data in terms of automated trading solutions. And we also are seeing that in terms of using our data into product creation.
So that comes through as both, non display license revenue as well as derived data revenue. We are certainly focused on the Next Data integration, along with what we're doing on the Globex side. There also is a lot of Next Data that needs to be integrated, as well as continuing to create more flexible distribution channels in terms of what you saw us announce with our CME SmartStream and other new products. So this last quarter, we did the successful addition of the new 10 year treasury bond as well in our Next Data product. And that's just coupled with continued strength in our policy, our pricing and our audit functions and really making sure that our clients have that level playing field and access to our data, I think is contributing and as well as the outlook for our market data business.
Thank you.
We will next go to Alex Kramm with UBS. Please go ahead.
Yes. Hey, good morning. Yes, I know this is a difficult question to answer on the rate side, but everybody can obviously see the volume and open interest trends. But curious if there are any other data points you guys are looking at, anything in conversations with clients that gives you some confidence that we may have troughed here and that things can improve when certain events happen or if maybe people will stop putting more risk on etcetera? Like what are you looking forward to get comfort?
Why don't we Alex, thank you for that question. I'm going to ask Chantalay to give you his take on that, which he's been obviously briefing all of us his thoughts with his team. So, Sean?
Yes. Hi. Thanks very much for the question. A really good question. During, the March timeframe, we saw a very high volatility in interest rates.
And if we look more recently in the month of July, we've seen unprecedented low volatility across the entire yield curve from our eurodollar futures all the way out to our ultra bond futures. In fact, if you look at our 8th eurodollar future, this is the lowest volatility we have seen since the inception of the contract in 1987. Nonetheless, the level of uncertainty in economic numbers had never been higher. When seen from the perspective of the range of possible outcomes for numbers such as unemployment and GDP. While the Fed is currently doing everything possible to support the economy in the short run.
And during the month of March April, bought as much as 300 $1,000,000,000 a week worth of securities. And in fact, increased the size of its balance sheet from $4,200,000,000,000 to $7,200,000,000,000 or plus 29 sorry, or up $2,900,000,000,000 in a period of just over 3 months, including the purchase of $1,700,000,000,000 with our securities. Those actions obviously have dampened volatility tremendously. Nonetheless, if you look at what happened post the financial crisis when the Federal Reserve between 2,008 2014 purchased $3,600,000,000,000 they then later on proactively reduced the size of their balance sheet. In particular, they reduced the size of their balance sheet from $4,500,000,000,000 to $3,700,000,000,000 from January of 2018 to September of 2019, from which we did get additional volumes and volatility.
If you look at the unprecedented deficit this year, estimated at $3,700,000,000,000 now estimated potentially $2,000,000,000,000 of deficit next year, you're going to see the highest debt to GDP ratios that U. S. Government has seen certainly since World War II and possibly ever. You're going to see the highest levels of debt in the U. S.
Ever. If you look at the refunding announcements, so if you look at the refunding announcements we had in the quarterly refunding announcement by the U. S. Treasury in February versus the quarterly refunding announcement that we had in May, The growth in coupon issuance was 24% by the U. S.
Government in order to address that huge debt and deficit need. Next week, we're looking at the next August, the August quarterly refunding announcement. The growth in coupon securities, the growth in debt and deficits, once
the Federal Reserve
reduces its intervention in the market and once the pandemic recedes, the needs for hedging, the needs for our products are being much, much larger I think than ever before in history. So yes, July is very low volatility. However, the unprecedented debts and deficits and issuance of coupon securities means that the risk that is going to need to be managed on a go forward basis is going to be much larger than ever. I said earlier that the Federal Reserve was buying as much as $300,000,000,000 plus a week in securities, it's now reduced that to $20,000,000,000 a week. So we're already seeing significantly reduced activity by the Fed.
I hope that helps.
Thanks, Sean. Thank you. Thank you, Alex.
Thank you. Next, we will go to Brian Bedell of Deutsche Bank. Please go
ahead. Thanks very much. Just want to Sean maybe follow on those comments. I guess it is an interesting dynamic of the potential, like you said, in terms of the hedgeability or the hedgeable asset second, hedgeable treasury outstanding stock that will need to be hedged and speculated on. I guess what's your view on if the Fed stays in intervention mode for a prolonged period of time, is there anything you can do on your end at CME stimulate those rate volumes are really we're kind of dependent on that environment.
And then maybe just a second question tied to that. Maybe you can also talk about the equity index franchise. You've got a lot of new products coming on in terms of the options and the Taco offering as well, if you can talk about your efforts there and outlook for volume growth in those areas?
Yes, of course. Thanks very much. I greatly appreciate the question. We're very excited. As you know, innovation has been one of our mantras over the last several years, has always been part of CME Group's DNA.
But our innovation continues unabated and the results so far this year are extremely strong. If you look at the first half of twenty twenty, products launched since 20 10. This is data that we frequently update for you. Anyway, the first half of this year, we achieved 3,200,000 contracts ADV in new product launch since 2010. You'll recall that last year, those same products were just $2,100,000 ADV.
So we've seen 52% growth year over year in the ADV of those products launched since 2010. In addition to that, in the first half of this year, we earned $193,000,000 in revenues, likewise up annualized about 25% year over year. So the innovation continues on an extremely strong basis across all of our asset classes and is definitely a driver of growth. The single greatest product launch in CME Group history, as you will be aware by now, is our Micro E Minis. The Micro E Minis have achieved 1.6 $1,000,000 contract ADV so far this year.
And if you look at the Q2, they achieved $1,900,000 If you look at other actually, in addition to that, we have recently announced on August 31, we will be launching micro options. So these are the smaller options that are the option equivalent of the micro e mini futures, which we're very excited about relative to the very significant uptake that we've had in Micros. You look at the micros, another thing regarding the micros that we've talked about through time is their RPC. When we launch a new product, we typically have higher incentives. So that net RPC is going to be lower.
As you know, in the Q2 of 2019, the RPC on the MicroE Minis was 0.0608 dollars We told you at the time that we would be reducing those incentives over time and that that RPC would increase. We're very happy to say that in the Q2 of 2020, they're about $0.125 per MicroE Mini, so nearly double the RPC of a year ago. In addition to that, we recently launched the new 3 year treasury future, relaunched
the new 3 year treasury future.
We did it as we always do in terms of having a product that delivers a lower total cost with in fact half of the minimum price increment of the previous contract that existed. We're very excited about our traction in the new 3 year future. On the 1st day of that contract, we had 40 participants. We've had more than 50 participants in total since launch as of today. We're achieving over 3,000 ADB a day.
On the 1st day, we achieved more volume on Globex in that contract than we did in our Ultra 10 year future. So we are very excited about participants there from banks, asset managers, hedge funds and about 5,500 contracts open interest, which shows that it's real end users that are trading the product. That gets me back to the previous
the previous,
I guess, all time great launch of Seemingly Group history with the Ultra 10 year future. I'm very happy to say that the Ultra 10 year future even in this environment, the ADV is 262,000 a day We're up about 21% year over year and its open interest is 977,000 contracts likewise up well over 20% year over year. So we continue to see innovation. So during COVID, we launched a very successful 3 year treasury. We've seen extremely strong growth in our Micro E Minis.
And products like our recently launched Ultra 10 year continue to thrive. I might mention our sulfur futures. Sulfur futures volumes are up 58% year over year, 45,000 contracts a day. ADV, we had a record open interest in March of 612,000 contracts. And again, huge growth with 3,200,000 contracts a day in ADV from the financials unit coming this year from innovative new products.
Thanks for the question.
Thank you.
Thanks, Brian.
Next, we'll move to Ari Ghosh with CME Group. Please go ahead.
Hey, good morning, everyone. Maybe just a quick one for Sean on the metals complex. It's a smaller revenue piece here, but could be facing some nice tailwinds given Fed intervention and the rounds of stimulus. And you've also launched a new Flex Delivery Gold contract. So just curious the level of interest you're seeing here, are you seeing interest build?
And then any color on broader customer trends out of Asia, where you've typically seen strong demand for both your metals and equity index products?
All right. Well, we're going to have Derek Salmon answer that, who heads up our metals complex. So, Derek?
Hey, Ari, yes, thanks for the question. It's Derek here. Yes, metals continues to be a big area of growth for us, not only just coming off the overall macro environment, it's very positive for gold and the points that you've made. We just recently have revisited the highs and come back to the highs of a little over $1900 that we just last re tested back in March. Now the business this year has been spectacular and to be honest, it's actually seen significant market share gains relative to the broader OTC market and the physical bullion market in London over the last 5 years as well.
From a client perspective, we put up record numbers in Q1, actually record first half numbers as well. And what's really interesting, what we like about the metals business and the precious particularly is the point you just made, our international growth continues to set the pace for the overall participation in our markets. When you look at the first half business this year, overall the business is up 18%. Our Asian business is up 30% and from APAC. What we like about the non U.
S. Business, as I think you're aware, is that our rate per contract associated with our non U. S. Customer base comes at a substantially higher rate than our U. S.
Franchise, primarily because they tend to be a lower percent of members and we also see folks in the retail bucket and kind of the buy side participant coming at higher RPC. So the overall macro trends for gold have been and continue to be very positive. The non U. S. Business continues to set the pace.
And I think one of the really interesting things that we've seen not only in the volume growth and participation from Europe and Asia is and not a lot of people pay attention to this. We are at all time record stocks of gold in We're up to a little bit north of 30,000,000 ounces right now. And that tells you not only the volume trends, the global participation and the growth in the non U. S. Business, but it also means when the depositories grow like that, clearly the market is voting with its feet to determine that Comex branded warehouse depository is the place where they want to have their metals and that's been driving broader participation.
So it becomes a virtuous cycle of volume growth, international participation, adding more materials into the warehouse. And that's been one of the major reasons why we've seen not just growth in the metals volumes overall, but continued high strong growth in our rate per contract as well. I think our total rate per contract in our overall metals complex is the highest RPC contract we have at about $1.46 Despite the fact that business is up 17%, 18% volume wise, we actually have an RPC that's drifting a little bit higher. I think it's about 1% up year on year. So strong growth in the non U.
S. Participant, strong vote in terms of the metals flowing into depositories, and that's reflected both in the volumes revenues and the higher rate per contract despite higher volumes.
Thanks, Kurt.
Great color. Thanks, guys.
Thank you.
We will next go to Chris Allen of Compass Point. Please go ahead.
Good morning, everyone. I appreciate the incremental color on the cross selling efforts. Wonder if you could give us any numbers in terms of how that's translating into whether it's volumes or open interest? And also if you can provide an update whether there's been any progress on the clearing front in terms of realizing any synergies between for customers between the CME and DTCC? And maybe just a refresh on what the expectations are in terms of the benefits once the technology migrations over to Globex are completed?
Thank you.
Thanks, Chris. I'm going to ask Julie Winkler to talk a little bit about the cross selling and then on clearing with DTCC on the margin benefits. Sean can address that question. So Julie, why don't you start?
Sure. Thanks for the question, Chris. Yes, we're really making outstanding progress as we think about how we've been able to integrate the sales team to support cross selling. As we kind of expected, right, there was a natural dip in those cross introductions in late March April as really the sales reps were focused on supporting those clients through this unprecedented volatility. But now what we're seeing is those efforts are really accelerating at a record pace.
So when you looked at Q2 and I mentioned it earlier, the 500 cross introductions, May was a new monthly high for us where we did 300 across our respective businesses. A little more insight on that. So nearly 70 percent of the cross introductions that have been made have occurred for the transactional based businesses in Q2. The FX franchise is really a cornerstone of that and is at the forefront of the cross introduction efforts. So that would be optimization or EBS or BrokerTec clients that are being referred into our futures and options or our core business.
And kind of right after FX, have been happening with EBS as well as interest rates. So for futures and options as well as Triana end market data. I'd say, the other probably standout client segment that we're seeing momentum with cross selling is for our commercial clientele. And that's really happening across EBS as well as our optimization product suite. And so this is really kind of based on the investment that we're making in our global sales force and providing them with the training and the tools that they need to effectively cross sell this holistic suite of products.
So still a little early days for specifics in terms of the revenue that those items are generating. Obviously, as we go these clients going live with these products, we'll have more information on that. Thanks for the question. I'll turn it back to you, Terry.
Thanks, Julie. Sean, you want to address the clearing benefits with DTCC that we're working on?
Yes, absolutely. So, as you mentioned, we are working very closely with DTC on creating benefits or working on increasing our benefits and the potential as a cross margin between our treasury futures and cash treasuries. Those benefits today for the handful of clients to take advantage of them typically get 20% or 30% worth of offsets. We do expect to get those offset percentages closer to 70% plus once the agreements are finalized and approved by the regulators, we are working very closely with them on that. We don't have any announcements in that regard yet though.
I would like to mention nonetheless
that in
terms of delivering margin capital, total cost efficiencies to our customers, this is something we work on every day and we have several initiatives. So for example, with the increased volatility this year and with therefore the significant increases in margins that are required in order to cover the more volatile product, we have seen a significant uptick in portfolio margining between our OTC swaps and our interest rate futures. We added 7 new clients this year, so up to 55 clients and 2 clients who had stopped using the service have started using it once again. So this year, on average, we've achieved $5,400,000,000 worth of margin savings for our clients, and that's an all time record new high in terms of the average for the year to date. In addition to that, we are working hard.
The clearinghouse is working hard on creating portfolio margining between our listed interest rate options and interest rate swaps as well. And that is another efficiency that we hope to launch in the next several months, which will also add unique efficiencies to the marketplace. So yes, we're working on the efficiencies of the DTCC. We're getting greater traction in our portfolio margin against OTC swaps and we're also looking to add portfolio margin against our listed interest rate options.
Thanks Sean. Thank you. Chris, thanks for your question.
Thank you. We will next go to Mike Carrier with Bank of America. Please go ahead.
Hi, good morning and thanks for taking the question. So bigger picture question, but given the rate backdrop, just wanted to get your take on this cycle versus the prior one. So the last time rates were here, you guys worked with clients and you were fairly innovative in creating new products, which eventually played out, but it did take some time. So in this backdrop, are you seeing similar trends in terms of demand for some of those contracts or even product innovation? Or is it too early?
And is the low rate backdrop impacting other product areas, look similarly or not versus last cycle?
Sean, do you want to go ahead and address that and then I'll jump in as well.
Sure. If you look at volatility, they're very different across the different markets. And you can see that in our volume numbers, right? So that's obviously volatility is something that is out of our control, the product innovation, the interaction with clients, the delivering additional value, that's all in our control and we do that every day, the volatility is outside of our control. As I said earlier, the month of July, all time record low volatilities across the curve from euro dollars all the way out to the ultravolumes.
If you look at the $8 future, the last time we've seen something like this, not surprisingly, the month of July looks to me a lot like October of 2012. And if you think about it, as I said earlier, the Federal Reserve has intervened by buying $2,900,000,000,000 worth of securities. So increasing their balance sheet by $2,900,000,000,000 right in a period of 3 or 4 months. That is almost as much intervention as they did during the entire financial crisis. During the entire financial crisis, their balance sheet grew by you know, we'd say $2,900,000,000,000 about $3,600,000,000,000 So they've already bought almost as many securities as they did back then.
So unprecedented speed. And I think that's why the dollar volumes look similar again to October 2012. In terms of innovation, we're very excited about the 3 year treasury future that I mentioned earlier. We're also very excited about growth that we've seen in our long end with the additional coupons even with the intervention by the Federal Reserve. If you look at, as I said earlier, the ADV of the ultra 10 year up more than 20% year over year, the bond future ADV, if you look at the full year, ADV is up 13% and that's the bond future and the ultra bond up about 16%.
So we continue to see more trading further out the curve. We had an email announcement out to our clients today reminding them about the great use of our bond and ultra bond futures in regards to the new 20 year issue. As you'll recall during that May refunding, there was the announcement of the new 20 year bond by the U. S. Treasury.
During the quarterly auction series, the 3 months, the treasury did issue $50,000,000,000 worth of those bonds. And we have seen very good growth in our ultra bond and our bond futures where those are being used as a hedged against that new 20 year issue. If you look at, for example, inter commodity spreads, the single most popular inter commodity spread in our rates complex today is now what we call the BOB spread or bond versus ultra bond. And this is specifically around that new 20 year issue and the dynamics there where during the WI period, when the new 20 year started trading, the new 20 year bond sits right at the center of the deliverable basket of our bond future. And the marketplace shows that it would trade in WI as a spread to the cheapest to deliver to our ultra farm future.
So we are seeing increasing use of our products further out the curve as the treasury is issuing more securities. We're constantly looking as well at things like lower minimum price increments. So you know that we had great success in lowering the minimum price increment on cash to your notes as well as to your note futures. You'll recall we did that at the beginning of 2019, and we saw approximately an extra 160,000 contracts a day additional volume in our 2 year note futures. That was one of the things that caused us to look to the 3 year with a lower minimum price increment matching the minimum price increment on a 2 year and half of the minimum price increment that that contract had previously and again with a successful start.
Whether it is in the cash treasury bond market where we now have BrokerTec, we are definitely looking there at the innovation, the possibility for lower and minimum price increments and what we can do there. And I'll also answer your question with BrokerTec. We are moving on very well in terms of the migration of BrokerTec from the BrokerTec existing platform today over to CME Globex. And we as John mentioned earlier, we do expect that cutover later this year. Next year, we will migrate EBS from its existing platform over to Globex.
Thanks, Sean. Mike, thank you for your question. I was going to add in, but I think Sean hit all the high points out of. So thank you.
Our next question comes from Owen Lau with Oppenheimer. Please go ahead.
Good morning. Thank you for taking my questions. Would you be able to provide any more color on the wells notice for your indices JV with S and P? But if not, can you talk more about ESG? Is there any ESG initiatives you would like to call out that CMD is working on?
Thank you.
John? Sure. Thank you, Owen. This is John. In terms of the wells notice, that is something that we have been aware of and that is something that does not impact our trading business at all.
And any questions regarding the Wells notice at the S and P Dow Jones JV should really be addressed to S&P Global. So, I'd encourage you to contact them to get more updates. In terms of the ESG products, we certainly are involved in developing products around ESG initiatives. We currently have an equity product on the S and P ESG. I'll turn it over to Julie because she can talk a little bit about some of the work that her research team is doing regarding product development on the ESG space?
Yes. Thanks, John, and thanks for the question, Owen. We did introduce our first ESG report, just a few weeks ago on our website, which talks a little bit more broadly about Sammy Group's ESG strategy. And a key part of that is definitely our product related strategy and where the progress that we've been making in terms of cross functional ESG product committee has really been looking at this across our product suite. And we believe there's some great opportunities to adjust some of our existing products as well as some new product introduction.
And we are looking to get some of those rolled out before the balance of the year. There is a lot of interest from our client base, particularly in Europe, I would say a lot of investor interest and that's been a key part of the success of our ESG, 500 S and P index futures contracts. And we believe that that will also help drive some of the interest in these other benchmarks that we look to introduce later this year.
Thanks, Julie. Thank you, Owen.
We will move to our next question that comes from Jeremy Campbell with Barclays. Please go ahead.
Hey, thanks. And Sean, thanks for the macro color around the rates and the percentage of the outlook from here. I'm just wondering about the rates activity impacts once we control for the number of users you guys have hooked into the CME features ecosystem. Like I think over the past like 6 to 8 years since the prior year, right environment, your user base has grown in both the U. S.
And abroad, but you have ADVs excluding the Q1 of this year that are kind of tracking more in line with the 2012 to 2014 levels. So I know volatility is crazy low and maybe it's the Fed crowding everybody out a bit, but I would have thought even materially lower activity levels per user might have yielded a better overall activity level than the prior cycle.
Sean?
Yes. I think that's a very good question. And I think your supposition is a good one. The challenge that we're facing is that the volatility we're seeing in July is in fact lower than we saw in October of 2012, for example, which was the all time low for the 8th eurodollar future. So as I said earlier, the volatility in that $8,000,000 future, if you look at a continuous contract, is in fact the lowest it's ever been since the launch of the product.
So I agree with your supposition. The volatility environment is more challenging now than it was in 2012 in fact from that metric perspective. But again, with the unprecedented increase in the size of the debt and deficit as well as the unprecedented uncertainty around the in the future once the pandemic recedes. Okay. And then in the future once the pandemic recedes.
Great, thanks.
Thanks, Jeremy.
We will move next to Chris Harris with Wells Fargo. Please go ahead.
Yes. I wanted to ask a little bit about 2021. I know it's early, but what do you guys need to see in order for expenses to grow in 20 21? Would there also need to be revenue growth? And then related to that, I believe there's a decent amount of NEX synergies that should flow through next year.
So maybe you can flush out why spending would exceed the synergies
next year?
John? Sure, Chris. This is John. Thank you for the question. In terms of our expense outlook, you're correct.
It is early days to be able to provide you some guidance. We're all very hopeful that we can have the economies around the world open up safely. Should the environment improve, you would see, for example, a higher level of travel and marketing spend as we look to intensify our client outreach. So that would mean that our expenses might be higher than the low single digits as we are growing off an artificially low base. And when I say low single digits, that's really our core expense growth base growth rate.
So if you look over the last several years, our expense growth rate on the core side has been about 2.5 percent to 3%. As you can imagine, with sales and our in person marketing has been really curtailed. The sales efforts in terms of travel and entertainment and marketing has really been curtailed during the pandemic. And hopefully, as the economies open up, we'll see more intensified in person where we can experience for our clients. In terms of synergies, you're right.
The bulk of the synergies run rate synergy capture is in front of us. We targeted $50,000,000 last year. We exceeded that target and hit $64,000,000 We're targeting $110,000,000 in run rate synergies for this year and we're well on our way to achieving that $110,000,000 run rate. When you take a look at the amount of realized synergies that we have in our income statement in 2020, we anticipated that being approximately $15,000,000 and we've been able to accelerate that realized synergies to $25,000,000 And that was also something that was that we were able to use to help reduce our overall expense guidance for 2020. So really when you think about our expense growth going into next year, similar to the model that we used this year, we've got a core expense growth rate of 2.5% to 3%.
We would make any adjustments for any additional spending relative to coming out of the COVID. We would obviously reduce that for the amount of realized synergies in 2021 that we would get through the migration of EBS towards the back half of twenty twenty one. So we'd see synergy capture there. We'd also see a full year impact of the synergy capture when we migrate off of migrate BrokerTec off the legacy platforms onto Globex. So the puts and takes are in general core expense growth rate, any adjustments related to coming out of the COVID, and that's going to be offset by our synergy capture as we migrate off of the legacy NEX systems into our Globex platform.
But I mean, I think the long and short of it though is, we as a management team are laser focused on our expenses, going into this year and going into next year. This is something that we are going to have a strong eye on throughout the rest of this year and as we plan for 2021. So thank you. Thanks for the question, Chris.
We will go to our next question coming
I'm curious, what should we read into BrokerTec's U. S. Treasury's market share losses accelerating during the Q2?
Sean?
Yes. So I haven't seen that actually. So if you and let me actually clarify that, right? So if you look at the Central Limit order book share of the dealer to dealer market, our market share over the last 12 months has actually increased. When we look at market share, we look at the dealer to dealer market.
You may be looking at the dealer to customer market plus the dealer to dealer market, which we don't compete in the dealer to customer market. So that may be a difference there. We have seen a small drop in the overall in our share of the overall dealer to dealer market. And what I mean in that regard is there is some traction in dealer to dealer space coming from relationship based trading platforms. On that front, we are working hard on a few things.
First, we have launched BrokerTec Stream, which is our BrokerTec dealer to dealer relationship based trading platform, and we are making progress on that front. We also look to enhance that technology. So we are investing in technology that's already been planned to improve that technology, so that it becomes more competitive relative to alternative platforms. We also will offer unique benefits because we have the most significant central limit order book in dealer to dealer space. And once we have that better technology in the dealer in the direct trading dealer to dealer space.
So again, main messages. First, I think you may be looking at the overall treasury market, which would include dealer to customer, which we don't compete in, dealer to customer has grown relative to dealer to dealer. Within the dealer to dealer space, our share of market in terms of central limit order books has actually grown over the last 12 months. If you look at the overall dealer to dealer market, it has receded by my calculations by about 5 percentage points, maybe 6. And again, relative to the direct trading platforms, and we are building our own and looking to grow.
Thanks for the question. All right.
Thank you.
Thanks, Patrick.
We will go next to Kyle Voigt with KBW. Please go ahead.
Hi. Thanks for taking my question. Maybe just a cleanup question for John on this net investment income. I think 2Q revenues there imply a bit higher than the 2 basis point yield you mentioned last quarter. Just wondering if you could give the 2Q average cash balances and the yield on that in 2Q and maybe how those balances and the yield on those that's trended into the Q3?
Sure. Thanks, Terry. Thanks, Kyle. Thanks for your question. Yes, when you take a look at our non operating income and expense portion of our income statement, sequentially, it's down about $15,000,000 and that's made up of primarily 3 items.
1, you're correct. When you look at the returns, we earn on cash held by clients at the clearinghouse, it came down. As we mentioned last quarter, the interest on excess reserves came down to about 10 basis points in the middle of March. And with that move, we adjusted our rates accordingly. That reduced our net returns from net 19 basis points in Q1 to 4 basis points in Q2.
Now it's partially offset by higher average cash balances, which more than doubled to $83,000,000,000 So that's what drove the sequential reduction. Now, we did have higher investment returns from the 2 basis points to approximately 4 basis points, and that's because we were able to leverage some or I shouldn't say leverage, but invest in higher yielding instruments than at the Fed. So we were able to take advantage of some of that, which allowed us to increase our yield from about 2 to 4. In terms of the other items in that section, we did see a reduction in the earnings from the JV of about $2,000,000 It's important to note that year to date, this line is up about 18.6% compared to last year. And then we saw a small reduction in our corporate investing activities of about $1,000,000 In terms of our leverage, again, as I mentioned last quarter, we did hit our one times debt to EBITDA target and we paid off the balance of $100,000,000 in commercial paper this quarter.
So we have no commercial paper outstanding. So that would impact our interest expense, which would roll into this line. In terms of activity going into this Q3, when you take a look at the average so far in July, our average cash balance is about $71,500,000,000 that compares to the average in Q2 of $83,100,000,000 So that's a breakdown, Kyle. That's helpful. And should that 4 basis point yield be sustainable?
It's really that I would anticipate higher than the 2 basis points at this point. I don't have forecast in terms of interest rates getting to the 4 basis points. But right now, I would say it's going to be higher than the 2.
Got it. Thank you.
All right. Thanks,
Kyle. We will take our next question from Ken Hill with Rosenblatt. Please go ahead.
Hey, good morning. I wanted to ask on the international front here. In 1Q, I think the growth was pretty strong out of Asia and Europe, up 73 percent 54%. It looks like Asia in 2Q was still slightly positive, but I didn't see a number for Europe. So I was hoping you could provide that number for what Europe looked like in 2Q and then maybe more broadly comment on how the environment trended throughout the quarter.
Did you see people coming back into the market as the pandemic might have eased in those areas? Or what
are you seeing in
the regions today as well? Thanks.
So in terms of our international activity, year to date, it continues to outpace U. S. Performance. For the quarter, our international business faced really tough comparables. As you know, Q2 of 2019 was the 2nd highest quarter for international activity behind Q1 of this year.
For the quarter, APAC grew about 1% year over year. 6 out of our top 10 countries, including our top 3 of Singapore, Korea and Hong Kong were up, and 4 out of the top 10 were up double digits. Looking at EMEA, it was down about 11% year over year, but what we did see is we saw 5 out of the top 10 countries there were up, and 3 of those top 10 countries were up double digits. And the Netherlands, which is our 2nd largest country by volume, was up triple digits. Now we did see some migration the UK to the Netherlands in anticipation of Brexit, but we also saw very strong growth there as well.
So our overall international activity for the quarter was in line with full year 2019 ADV, which is a strong year for us in 2019. So I'll turn it over to Julie in terms of the customer experience.
Yes. As you know, right, much of our international activity is driven by that active trader retail client segment, equities and metals being products that were significantly transacted by those clients. And when we're looking across this space, Q2 was very strong in revenue for that segment. We saw over 130,000 new accounts coming into our markets through that Active Trader segment. That was up more than 100% year on year.
So obviously, the volatility is there, but also just this work from home and lockdown environment is really making that particular segment trade even more with us. And also just point out, as we think about those new customers, so over 50% of those new customers that I just spoke about, again, most of those being international, traded at least one of our 4 eMicro Equity Index products. And 20% of those new customers had only traded an eMicro. And so we continue to see that being a great new client acquisition driver for us in terms of the product suite and that we believe is also going to lend well to that eMicro options launch that we have coming up in Q3. Of those new clients, that came in from over 166 different countries around the world.
So while the U. S. Was strong, as John pointed out as well, Taiwan, South Korea, Hong Kong, China, we're definitely seeing those countries and participants within those countries work, trade more with us as well as the work that we're doing with our broker partners is really helping to drive some of those numbers. Hope that helps.
Yes, thanks.
Thanks, Ken.
We will go to our next question from Ken Worthington of JPMorgan. Please go ahead.
Hi, good morning. Maybe just wrapping up on oil and gas trading. So what is your perspective on the impact, if any, from the negative WTI pricing during the April delivery? And has there been any lasting impact on trading behavior or participation? And then why do you think there might have not been greater acceptance of the Houston based products?
They seem like a great product, but they really haven't taken off any views there.
Derek?
Hey, Ken. Thanks for the question. Yes, good question. The when you look at the impacts of both the extreme levels of high volatility and the price uncertainty driven by the huge demand destruction by the supply concerns as created by the Saudis and then some of the questions around storage. What we saw from the primary output from the negative pricing on April 20 was for those firms that had problems with their systems being able to handle negative pricing, we've seen brokers and intermediaries will largely update their systems in the anticipation that they need to be able to handle both pricing, but frankly, margining for their clients in case negative pricing happens again going forward.
We did see some brokers initially pull out of allowing customers, primarily in the retail side from being able to trade from trading in both WTI and Brandt, and that did impact some of the self directed trading volumes. We are seeing some of that business come back online now that most of those brokers, if not all, have updated their systems. Really the biggest change that we've seen from April, high degrees of volatility, I think we saw front month WTI spike up to close to 160% volatility. The biggest change over the last 3 months as we've actually seen the normalization of the overall supply and demand dynamics in the global crude oil market. You certainly saw OPEC out there announcing their decisions to roll out agreed cuts.
We've seen that roll into addressing at least some of the concerns around the supply side of the equation. The demand side of the equation is still in flux right now. What we actually see is with the price of crude oil globally rebounding to kind of the current $40 level on or thereabouts, we're actually seeing a fairly flat forward curve in both WTI and Brent with a fairly static $2 to $2.5 Brent TI spread. So this has frankly created a less interesting market for some financial players and we're seeing that in reduced volumes and volatility in both June July. You look at the year to date results overall, we did deliver both record Q1 and first half energy revenues as a whole, and we talked about the strength in some of the business we're seeing out of Europe and Asia.
And if you actually look at the European revenues, European revenues first half were up 25 percent. So we continue to expand our non U. S. Customer base and that's really helped us maintain healthy overall growth. If you look at the energy revenue, despite the overall volumes being up 20%, our rate per contract in energy as a whole has been almost static, I think down maybe 0.5¢ despite the 20% growth overall.
One of the really interesting parts of the overall energy franchise, we don't talk about nearly as much as natural gas. Natural gas is a business that has been following that same globalization path that we've been seeing and been talking about and have been investing in both in crude oil and in what we've seen in the natural gas market. Year to date, our natural gas futures business is up 46%. Natural gas options are up 71% and that continues to be a huge part of our overall energy story. And this is a market also that we need to remember, we've maintained that 82 percent market share and this has been a boost to our overall energy business because our rate per contract in nat gas futures and options is higher than what we've seen in crude oil.
So that's helping the upward pressure on MVP or excuse me, on the overall RPC as a whole. Very quickly on the Houston contract, it's a great point. We launched that contract back in November of 2018, explicitly focused on those folks involved in the export chain. So remember what that Houston physical contract references, it's to allow customers that if you're involved in the export chain, you need to price for on the water Houston based delivery as oil flows out of Cushing down to Houston goes on barges and ships out to Europe and U. S.
Well, what we saw in the first half of this year was overall continued production ramps up in the U. S. Up until about February. We were producing, I think, in the U. S.
About 13,000,000 barrels a day, of which about 3,000,000 were going to export. And we did see that business in HCL, the Houston based system contract, grow, but it's in the maybe 500 to 800 contracts a day sort of a volume. What we saw following the implosion of the both supply and demand story was not only U. S. Production pull back to about 10,000,000, 10.5000000 of barrels a day, we're actually seeing exports out of the U.
S. Decline as well. So as exports decline, demand for an export focused product had declined. So it's still out there. We're actually continuing to still innovate it, talk to our commercial customers about what we can do to enhance that contract and we've got some conversations going into how to make that more interesting.
But that will really be a function, Ken, of what the export situation in the U. S. Looks like. The other point that I probably want to touch on very briefly is we continue to see strong growth in the Argus assessed contracts, primarily in Midland and in Houston. And as you remember, trade about 7000 to 8000 contracts a day, but have close to 350,000 contracts open interest.
And those are additional contracts that allow customers involved in both the domestic market, but also the export market to use those contracts. They trade as a basis against WTI and those are contracts that allow physical participants to manage their risk out into Midland, out into Houston. And so those contracts you've had that for a number of years, but it takes a long period of time for customers to adapt, particularly the commercial customers to using those products. And we see that strong continued growth and significant holdings in OI as potentially path for how we see that Houston HCL contract evolve. But that will be a function of how we see the export market regain its footing here as the COVID demand impacts start to level out.
We start to see miles flown and miles driven increase again. So I hope that answers your questions, Ken.
Yes. Great. Very comprehensive. Thank you.
Thank you. We will move next to Alex Kramm with UBS. Please go ahead.
Yes, hello again. Sorry for dragging out the call.
Just a couple of follow ups.
One coming back to the rates franchise, any updated thoughts on the floor? I know you're reopening, I think, the Eurodollar pit in August, but or in a couple of weeks or so. Any updated thoughts of how that may impact the overall trading markets again? I mean, have you looked at data a little bit more closely, how maybe the floor being closed has had a negative impact on the trading markets overall? And then different topic, and I guess it's coming back to the oil question just now, but just one quick follow-up.
I mean, I keep on reading more headlines around oil production in the U. S. May never see peaks like we had in the past. So with that backdrop and kind of like that underlying commodity really not growing anymore long term, can you still grow your oil franchise? Or is this outside of what you just said, Derek?
Why don't I go ahead and start and then Derek can talk a little bit about oil, but I don't believe the demise of oil is here just yet. So I would say, Alex, that we've heard this before, and then we saw prices either drop precipitously or rise exponentially. So every time someone counts out any particular product or an asset class, it seems to move. So I would not just count it out just yet. There's still I think what we're seeing right now is there's so much uncertainty on the supply demand equation as it relates to the COVID because it's not in one central location, it's around the world.
So I would not again count that asset class out as not being able to move up or down. And Derek can give you more color in just a second. But on the trading floor, I don't believe that not having the floor has impacted the trading business. As you know, we've been able we've spent many of years with our technology being able to replicate transactions that have been done historically on the trading floor. So I don't see that as anything that's inhibited our business growth, especially as it relates to the Eurodollar contract.
I think what Sean referenced is really the most important component of the fundamentals of the Eurodollar contract, which is the levels of volatility are at not just historic lows, but at contract lows since inception. That is that's a big statement that could have the impact. We are excited to have the floor come back. That being said on August 10, as you referenced. So the business, as you know, was still roughly fifty-fifty as it relates to the floor and the screens.
So we'll see if the participants when they come back, if they can be able to continue to facilitate that business in the world that we live in today. But we don't believe it's been impacted just by the floor closure. So with that being said, I'll turn it over to Sean or to Dirk.
Yes. Thanks, Alex. A great question on the oil side. Listen, I think Terry is exactly right. I think there's cyclicality to the oil market.
People are calling for the demise of this market and Terry knows because he was sitting in front of Senate talking about the market $140 a barrel and there were a lot of prognostications as to what that would lead to. And we then have seen the other end of the spectrum fluctuations and a lot of diverse opinions out there about what OPEC is going to do, what Russia is going to do, the U. S. Capability, what certainly the U. S.
Has done having lifted the export ban back in 20, end of 'fourteen, 'fifteen and what we seen that mean to U. S. Energy independence has been nothing but positive in terms of job creation and certainly in terms of the U. S. Ability to ramp up production from 4000000 to 5000000 barrels a day up to that 13 peak that we hit earlier this year and exporting in excess of 3,000,000 barrels a day.
We expect that, that will continue to come back. That is a pure function of the demand side of the equation. The more shut ins we have, the more states that are locking down down, the more countries that are disallowing travel. That's just a cap on demand right now. So once we start to move into economies opening, once you start to move into vaccines, for us, we see that the lever of growth that we have pulled hard working in conjunction with Julie's team on the international sales side is continuing to grow our non U.
S. Participation. It has been the hallmark of our growth. We are early markets penetration into Europe and Asia right now. And I think the numbers you see that we continue to talk about certainly validate that.
And the growth in our sales organization that Julie has built over the last couple of years with our focus in Europe and Asia continues to unlock opportunities for us. So we don't see this as a static market that has to be split up based on kind of who's in the market and what product they're choosing. We see this very much as our ability to access a growing demand customer base in Europe and Asia. And I think it's far too early to call sort of a peak oil conversation here in 2020 when I think you've got the significantly artificial cap on global demand really coming from the COVID situation and coming from the economic growth. So that's how we think about it.
And Alex, the way we continue to invest in the business as a whole, internationalizing our business, expanding WTI as a global benchmark, growing our options business and then expanding education out into Europe and Asia for those customers to continue to grow high margin business for us. So hopefully that puts a little extra color on top of what Terry was talking about earlier.
Yes, very good. Thanks again.
Thanks, Alex.
Thank you. We will now go to our final question from Brian Bedell with Deutsche Bank. Please go ahead.
Great. Thanks for taking my follow ups and thanks for extending the call. Just two quick follow ups. Just John, back on the expenses on the synergies, just wanted to verify, we're exiting at $110,000,000 of synergies at year end after the BrokerTec conversion. Should that be should we be considering that at like an $85,000,000 tailwinds to the expenses reducing expenses given the $25,000,000 I think you talked about for 2020, that's the first question.
The second question was just to go back to what Julie said about retail. I'm not sure if I missed it, but the proportion of volumes from retail in the second quarter versus the Q1? And do you see is it just is it all concentrated in equities and metals? Are you seeing any in energy? And then just along those lines, the RPC dynamic going into the Q3, obviously, it's a headwind on the equity side, but we've also seen really good RPC build in energy.
Do you see that sustainable into 3Q?
Hi, Brian. This is John. I will I'll take the integration question and then I'll mention kind of what we're seeing in the equities RPC, which I think will be helpful for you as you think about the Q3. So in terms of the in terms of our integration, we had a target of $50,000,000 in terms of run rate synergies at the end of last year. We hit $64,000,000 We've got a target of $110,000,000 at the end of this year, and we're on track to meet that $110,000,000 Obviously, the organization is focused on exceeding it, but we're well on our way to achieving the 110.
So going into next year, we would have a $46,000,000 reduction in our cost base, the difference between the $64,000,000 that we ended last year and the 110 $1,000,000 that we've got targeted this year. So that $46,000,000 would be what would allow us to reduce our costs going into next year and that would give us $110,000,000 run rate synergies based on what we had projected or forecasted with the acquisition of NEX. So that's on the integration side. Then when you look at the RPC side, I think it's really important on the equities to really understand the product mix. So it's a product mix story for equities this quarter.
As you guys know, our micros products are tremendous success and sequentially, the trading is up 30%. Now it's a premium price product from a risk adjusted perspective, but has a lower RPC than our e minis. In Q1, Micros were 22% of our total volume and in Q2, they were 34% of our total volume. Now a couple of things to note, and Sean touched on this a little earlier, but I'll reiterate it. The micros RPC increased from $0.112 in Q1 to $0.125 in Q2 and they're up from $0.608 the same quarter last year.
When you look at the equity RPC excluding micros, that RPC increased from $0.76 in Q1 to $0.84 in Q2 and it's up from $0.73 from the same quarter last year. That's increasing because we did make some pricing adjustments in our equity complex, but also we find our clients are using higher price products like BTEC, like our dividend futures and like the total return futures. So the equity in our equity complex, the RPCs are increasing. It's really it's just it's a mixed shift story in our equities. So that those were the 2.
And I think I'll turn it over to Julie for your 3rd question.
Sure. So on the product mix with our active Trader segment, you are correct there that we did see some declines as Derek pointed out earlier, given the access on the brokers to that providing to clients for the WTI. We saw some declines year to date. We're still up on energy as well as up significantly with our equity index and our metals business as well as FX and our ag and interest rates is pretty flat. We've also seen a trend particularly from our APAC clients of transitioning from WTI into natgas and that is something that is definitely positive across the energy product mix for this segment.
So that's something that we are watching as well.
And then just the overall mix of retail within your, ADVs in 2Q versus 1Q across
the franchise?
John, do you have that number?
I will
it. I can follow-up later. It's
fine. I can follow-up later. Thanks so much for all the detail. I really appreciate it.
Thank you.
Thanks.
Thank you. This concludes today's question and answer session. Mr. Duffy, at this time, I will turn the conference to you for any final remarks.
Thank you. And thank you all. I appreciate it very much and I know the team does as well. We live in very interesting times and we truly believe that managing risk will be critically important as we continue to evolve not only from COVID, but other issues that are affecting the entire world. For all the reasons that Sean and Derek and Julie and John explained, we will feel very optimistic about our position.
We as a team, I will tell you that we remain laser focused on innovation, client outreach, the things we talked about, capital efficiencies, the integration of NEX. And I'll stress this again, we are laser focused on expense discipline. We will continue to be disciplined as we run this business on everyone's behalf. So we thank you, for your time this morning. We appreciate your questions and we look forward to talking to you soon and we wish you and your families all the health and safety.
And thank you very much.
Thank you. And thank you all for your attention. This concludes today's conference. You may now disconnect.