'We want to grow our presence in Europe'
Euronext’s takeover of the Oslo Bors is one example of many recent mergers between exchange operators – including your acquisition of NEX in 2018. Do you see consolidation as necessary?
I don’t see it as a given. It should only be done if it makes sense, and first and foremost if it benefits customers. Dealmakers too often start off by promising the savings that a merger is likely to bring. That’s not the right way to approach external growth. It can only be beneficial for shareholders in the long term if it is beneficial for clients. This need to find efficiencies for our clients is what drove our acquisition of NEX last year. We are very complementary, notably for uniting CME Group’s futures markets and NEX’s cash market platforms, namely EBS for FX and BrokerTec for interest rates. NEX also offers a number of very relevant technologies related to clearing and risk management that we were partly already using. The Treasuries sector in particular has a strong potential for gains for our clients, which we’re still exploring because it necessitates some discussions with regulators on what we can offer under the same umbrella. For now, the deal has met our expectations, but it’s still too early to tell. It was only completed in November 2018. We’re just at the beginning of a three-year integration timetable.
Are you still on the lookout for acquisitions?
We always evaluate potential targets. But for right now, we’re focused on the integration of NEX. Even if it only represents about 8% of our current market cap, the business was still valued at $5.9 billion. I don’t think that the scope of CME’s business needs to be complemented/supplemented. We stayed on the sidelines of acquiring a cash equities business, and we would take an interest in it only if it made sense for our clients. However, we don’t currently have a license in the U.S. for clearing stock transactions. We had filed a request with the SEC seven years ago and then withdrew it after five years.
In your eyes, is regulation a necessary evil?
No. Good regulation is always useful for any market. In the U.S., there is often a tendency for the pendulum to swing too far at first with Congress passing strict regulations. We saw that happened with Sarbanes-Oxley in 2002. The way our process works, it is much harder to increase the level of regulation after a bill is passed than it is to adjust or reduce. That is why you often see it start in an extreme version that lessens over time. As for Dodd-Frank passed in 2010, I think that these regulations brought clarity to the marketplace and allowed our company to continue to grow. For us, they weren’t an undue burden. Others may see it differently.
About 30% of our revenue comes from outside the U.S
What are your ambitions in Europe?
We want to continue to grow our presence in Europe. Already, we’re not just an American company. About 30% of our revenue comes from outside the U.S., and that is relatively balanced between Asia and Europe. Our workforce is deployed all over the world, allowing us to never close our markets except for about 45 minutes each day to refresh our systems, and from Friday evening to Sunday morning. We don’t need to localize our platforms for each region: in 2017, we closed our London clearinghouse, CME Clearing Europe, which was in the red and very capital-intensive to maintain. Our decision in 2018 to delist our European wheat contract was in response to different logic – this product was already traded and cleared in Chicago, but global trading is done quasi-exclusively in dollar-denominated contracts. In Europe today, we don’t have another product registered other than BrokerTec’s euro-denominated repo (Editor’s note: repurchase agreements) which, incidentally, is cleared by a number of clearing houses including LCH SA, in France. We can thus benefit our clients and partners without having the urgent need for external growth. Our workforce in Europe is therefore mostly risk management and sales teams. There is still a lot of educational work to be done concerning the full scope of our services.
What results are you expecting this year?
I cannot make predictions about the full fiscal year, but after a record year in 2018 (Editor’s note: revenue +18% to $4.3 billion; operating profit +13% to $2.6 billion), this one is already off to a good start. Particularly for trading, which makes up 80% of our revenues, with an exchange average daily volume in May of 23.9 million contracts, up 19% compared to May 2018, representing the second most active month in our 170-year history. On June 11, we saw a record 150.4 million open interest – or open positions – including a new record of 109.1 million interest rate contracts worth $22 trillion in notional value. These figures demonstrate our capacity to be much more than a trading partner to our clients. In offering them solutions to manage risk, we are a risk manager in an interest rate environment that will not stay at its lowest indefinitely.