Oct 30, 2014
Executives
John C. Peschier - Managing Director of Investor Relations Phupinder S.
Gill - Chief Executive Officer, Director, Member of Executive Committee and Member of Strategic Steering Committee James E. Parisi - Chief Financial Officer and Senior Managing Director of Finance & Corporate Development Terrence A.
Duffy - Executive Chairman, President, Chairman of Executive Committee and Member of Strategic Steering Committee Kimberly S. Taylor - President of Global Operations, Technology & Risk Bryan T.
Durkin - Chief Commercial Officer
Analysts
Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Alex Kramm - UBS Investment Bank, Research Division Brian Bedell - Deutsche Bank AG, Research Division Kenneth Hill - Barclays Capital, Research Division Michael Carrier - BofA Merrill Lynch, Research Division Cory J.
Garcia - Raymond James & Associates, Inc., Research Division Jillian Miller - BMO Capital Markets U.S. Neil Stratton - Citigroup Inc, Research Division Robert Rutschow - CLSA Limited, Research Division Gaston F.
Ceron - Morningstar Inc., Research Division Alexander Blostein - Goldman Sachs Group Inc., Research Division
Operator
Welcome to the CME Group Third Quarter 2014 Earnings Call. [Operator Instructions] I would now like to turn the call to Mr.
John Peschier. You may begin, sir.
John C. Peschier
Thank you, and thank you, all, for joining us today. Jamie and Gill will spend a few minutes outlining the highlights of the third quarter, and then we'll open up the call for your questions.
Terry, Brian and Kim and John Pietrowicz are also here today. Before they begin, I'll read the Safe Harbor language.
Statements made on this call and in the slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and 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 may be found in our filings with the SEC and they're also available on the Investor Relations portion of our site.
Now I would like to turn the call over to Gill.
Phupinder S. Gill
Thank you, John. Good morning, and thank you for joining us today.
I will start by talking about the highlights of the third quarter, then I'll provide an overview of the recent leadership reorganization and staff changes. And lastly, I will provide an observation on what we are seeing so far in the fourth quarter before turning the call over to Jamie.
Our core business performed well during the third quarter, with average daily volume of 13.5 million contracts, up 12% compared with third quarter last year. In September, with a slight pickup in volatility across capital asset classes, our average daily volume grew 17%, and 5 of our 6 product areas grew on a year-over-year basis.
During most of the year, our growth has been driven primarily by our interest rate business, so it is nice to see a broadening of the growth across the board. Our options business was outstanding during the month of September with a record 3.1 million contracts traded per day, up 29% from last year.
This is bolstered by a record level of options open interest in September of 52 million, up 14% from 2013. Also, during the quarter, we achieved volume records in our weekly FX options, weekly E-mini S&P options, soybean options and 5-year treasury options.
Electronic options in September were up 46% versus the prior year. Specifically, electronic WTI options hit a record 71%.
We are driving this outsized options growth by innovating new products, focusing on our options technology and executing on our distribution initiatives to expand our global customer base. Our September volume record was short-lived, and this growth trend has continued into October with average daily volume of 3.6 million contracts per day to date, up 68%.
Two other important points about Q3, which illustrates some progress in our 2 primary growth initiatives. First, our volume from clients based outside the U.S.
was impressive and has been consistently performing well the last 4 months. Q3 electronic ADV from European clients was 2.1 million contracts, up 22% on a year-over-year basis, outperforming North America, which rose 13%.
In Europe, we saw growth of 28% year-over-year in our interest rates business and 33% growth in equities during the quarter. For comparison purposes, our 2 largest European-based competitors each saw a drop in their total volumes relative to Q3 last year.
One driver of the outperformance is a more dynamic environment in terms of our product set, which has drawn more hedging and speculation from European-based firms. Also, we have invested in a greater presence in London with customer-facing employees.
They have a lot to talk to clients about and are making some real progress for CME Group. Along the same lines, in Asia, our volumes rose 12% compared to the same quarter a year ago.
Our interest rates were up 23% and equities rose 36% in Q3 from Asia, offsetting a challenging global FX and metals trading volumes. Volume in Q3 approached 500,000 contracts per day, and that amount of volume is equivalent to what leading Asian exchanges trade on a daily basis.
Second, our OTC efforts continue to progress during the third quarter. We maintained our leadership position in open interest on the rate side at 20 trillion notional outstanding.
We hit a record of almost 180 billion ADV cleared in September and our trade count of almost 2,500 during September was more than 50% higher than any month to date. This translated into stronger revenue in Q3.
Within our rates franchise, we recently relaunched bundled futures as well as options on bundled futures, and we are encouraged by our progress. We plan to launch clearing for swaptions during the first quarter of 2015 pending regulatory approval.
Finally, CME Group is committed to expanding our CDS offering in order to be the #1 multi-asset class clearing house for buy side clients. We have invested in the development of a new risk framework, which provides a more holistic model of CDS portfolio risk.
This new risk framework, coupled with our plan to launch iTraxx indices, will give us the opportunity to increase our market share in CDS clearing during 2015. Now I would like to spend a few minutes describing our efforts on the expense side, an area where our team was particularly active during the last few months.
First, we announced a new executive team and leadership structure in mid-September. I'll walk you through the main changes.
Fundamentally and essentially, we reorganized the company around our clients' needs and focused on the best way to meet those needs. The new organization structure also brings the individual business portfolio closer to the office of the CEO and enhances customer responsiveness.
First, we created a Chief Commercial Officer role, filled by Bryan Durkin. He is responsible for driving short-term and long-term revenue by harnessing our product sales team, research group, product marketing, business development and our global offices.
From a product perspective, Sean Tully, heads up our financial products and OTC areas, along with Derek Sammann, who's in charge of commodities and options overall. These 3 guys and their teams will be intensely focused on providing world-class customer service, expanding on an industry-leading innovation and enabling clients to navigate in a changed environment.
To summarize these changes, this is all about driving increased multi-year revenue growth across each of our 6 ecosystems. Our second goal in the reorganization was to drive more efficiency throughout the company.
That is to improve execution, agility and speed to market in terms of our significant operational backbone. With this goal in mind, we combined technology, clearing and global operations under Kim Taylor, and we believe with this structure, we will be able to streamline how we operate and reap the benefits of greater efficiency.
In addition, Bob Zagotta will head up strategy and execution and will be responsible for the development and execution of the company's corporate strategy. And finally, John Pietrowicz, when he takes over for Jamie, will work side-by-side with this team and all the others to ensure that we are appropriately focused on delivering shareholder value as we execute our plans.
And of course, both Kathleen Cronin and Hilda Harris Piell will continue in their current roles as General Council and Head of Human Resources. We expect to improve our agility, prioritization and efficiency, and the end results will be decreased cost and improved profitability as well as earnings growth.
Following the reorganization announcement, our teams went through a thorough process of streamlining the organizations, so we could be better positioned for growth. We reduced our workforce by approximately 150 people, primarily in technology, along with the elimination of mainly administrative functions.
Going forward, our leadership team is very focused on an ongoing review of how we can be even more efficient throughout our business. Lastly, let me make a few comments with regard to October.
Within the month, we have had 2 of our top 3 trading days in our history. It is an exceptional month even if we remove the 2 highest volume days, we have averaged more than 16 million contracts per day so far.
A couple of observations. During October, we have seen strong activity across the board with our fixed product lines up and the financial products each up more than 50% compared to October last year.
It's a reminder that markets tend to be interconnected in terms of volumes and volatility, particularly through interest rates. That appeared to be evident on Wednesday, October 15.
On that day, I was very pleased with our ability to handle such a large increase in activity from a technology and clearing prospective. Our teams worked hard to prepare for heightened activity, and this is an excellent time to assess our readiness for volumes, which were about 3x the norm.
If you have listened to our media campaigns over the years, you know we referred to CME Group as the place where the world comes to manage risk. You might be curious about where our volume came from on October 15, and Slide 16 on our presentation illustrates that.
A higher percentage of our business came from outside North America than we see in a normal day. We traded 26 million contracts electronically from North America.
We had near 9 million contracts traded from outside of the U.S., which is pretty large compared to what our largest peer’s trade on a normal day. We traded 7.4 million contracts from Europe, which is 3.5x the size of normal activity and $1.1 million from Asia, more than twice as much as a normal CME day in Asia.
There's a lot of discussion within the industry about innovation, much of which we have driven throughout the history of CME Group. In recent years, we have referenced a number of new interest rates products we have launched since 2010.
These contracts amounted for almost 700,000 contracts of ADV on October 15. Our innovation is unparalleled, and we are in a better position to innovate now more than ever before with the intersection of OTC and exchange traded markets.
And one final point. We traded more than 25 million interest rate contracts on October 15, the highest day ever by far and 3.5x our 7.2 million average daily volume in the third quarter.
Additionally, the interest rate swap market that they -- as measured by the aggregate dealer to customer cleared swaps business at CME Group and LCH, were below the recent run rate. This could suggest participants saw the value in turning to our liquid markets with the heightened volatility.
This was referenced in the few news articles, which basically referred to CME Group as the most cost-efficient way to trade you to liquidity and capital efficiency. We wholeheartedly agree.
Our open interest remains elevated, and as of yesterday, it's 104 million contracts, up from where we were on October 14. This suggests that there is heightened engagement as participants prepare for the future.
In summary, we have worked hard to position ourselves to create significant value for shareholders when this challenging cycle turns. While the concept of a Goldilocks environment can be debated, whether markets will vary from being too hot or too cold or just right, we intend to provide the more responsive customer service possible with as efficient a delivery structure as we possibly can.
No matter what happens, we continue to work to be the place where the world comes to manage risk. And finally, let me turn the call over to the man who has served us with distinction over the past 26 years, my business partner, Jamie Parisi, who is participating in his last earnings call here before turning the reigns over to the man that trained him.
Let me turn the call over to Jamie.
James E. Parisi
Thanks, partner, and good morning, everyone. I'm very pleased with our performance this quarter.
It's nice to see some signs of strength as I prepare to pass the torch to John. One of the things I've talked a lot about over the last 10 years is the significant operating leverage in our business model and how that leverage cuts both ways, depending on the tailwinds and the headwinds we're facing.
Looking at the adjusted results, our revenue increased by $48 million or 7% compared to Q3 last year, while our expenses were down 1% to $318 million. The intensified expense focus I mentioned last quarter, coupled with a favorable trading environment, resulted in an incremental margin above 100%, and I expect it to be above 100% next quarter.
In a normal period, we are dropping roughly $0.80 to $0.90 of each new revenue dollar to the operating income line. Now I'll turn to some revenue details.
The rate per contract for the third quarter was $0.725, down from $0.749 last quarter. The main driver of the change was the 7% growth in total volume from Q2 to Q3, driven mostly by lower price financial products.
I was very pleased to see the September rolling 3-month interest rate RPC remained unchanged, compared with August, despite volume being up 8% from the prior month. The FX average rate dipped down 5% from August to September, but you should take note of the 19% increase in the rolling 3-month FX volume over the same period.
We saw the same thing in equities, with the rolling 3-month volumes up 8% from August to September, while the associated rate drop only 1%. I was also pleased to see the volume and revenue growth from outside the U.S.
with the highest proportion ever of non-U.S. electronic volume and revenue in Q3.
For the first time, the percentage of electronic trading revenue from outside the U.S. was above 30%.
OTC swaps revenue totaled $50 million, up 17% versus last quarter. In Q3, we captured about $132 per IRS OTC trade, and we cleared approximately 1,750 trades per day in the quarter, up significantly from prior quarters.
Our adjusted expenses were down $10 million sequentially and about $4 million compared to Q3 last year. The main driver was reduced professional fees and other expense.
We brought some development projects to completion, saw a waning at contingent consideration expense from prior acquisitions and reduced discretionary expenses like travel as promised last quarter. Our compensation was relatively flat sequentially despite higher stock-based compensation resulting from our annual grant in September.
We should see improvement in the compensation expense line in Q4 and beyond as a result of our recent restructuring. Two points on the nonoperating income line.
Our dividend income was approximately $5 million, down from about $9.6 million in the prior quarter when we received and recorded both the Q1 and Q2 dividends from our partner in Brazil. We also recorded a dividend from our investment in the Mexican exchange in Q2 with no dividend from them in Q3.
We had a slight uptick in interest expense from the prior quarter due to clearing line of credit cost. Turning to taxes.
The effective tax rate for the year has dropped to 37.3% on a pro forma basis from the prior 37.5%. The effective pro forma tax rate for this quarter was approximately 37%, including a catch-up adjustment for Q1 and Q2, and I expect Q4 to be approximately 37.3%.
And now the balance sheet. We had approximately $1.16 billion in cash and marketable securities at the end of the quarter.
In Q3, we had a significant cash outflows associated with an estimated tax payment, our regular quarterly dividend and the semiannual interest payment due on our debt securities maturing in 2023 and 2043. Lastly, during the third quarter, capital expenditures net of leasehold improvement allowances totaled $29 million, bringing us to $95 million through 3 quarters.
I want to provide a couple of points on guidance for Q4. I expect expenses to be approximately $332 million, driven by higher marketing-related expense, which we talked about before and sequentially higher license fee and bonus expenses based on a significant increase in revenue so far to start the fourth quarter, offset a bit by lower base compensation.
Based on that guidance, 2014 expenses should come in at about $1.3 billion at the low end of the range I previously provided. Also, my expectation for CapEx this year dropped to $155 million, down from our prior estimate of $175 million, primarily based on timing and reconfiguring our New York space stretching into 2015.
Lastly, on expenses. 2 weeks ago we reduced our workers by 15%, which Gill mentioned.
Phupinder S. Gill
5%.
James E. Parisi
5% by which Gill mentioned. As a point of reference, we ended the third quarter with headcount at 2,825.
We have been working on plans for several months, and we basically took a blank sheet approach to determine the best way to drive revenue higher while reducing expense. I personally appreciate the efforts of my colleagues to make the tough decision to better position our company for the long-term and wish our colleagues who left the best of luck in the next phase of their careers.
One last piece of guidance I want to provide is related to 2015 expenses. With pro forma expenses for 2014 expected to be $1.3 billion based on the compensation changes and other expense initiatives, our current estimate is that 2015 pro forma expenses will likely come in basically flat compared to 2014 at approximately $1.3 billion.
And there is some variability around that based on license fees and employee bonus. That excludes the impact of adding expense related to our pending transaction with GFI Group or other potential tuck-in acquisitions.
We will continue to refine this estimate as we finalize our 2015 budget, and John will provide you an update on the next earnings call. Since I mentioned our pending transaction, let me briefly comment that we are carefully assessing the current situation and filed our S-4 on October 16.
Beyond that, we will not address any questions about the transaction as we covered thoroughly last quarter. As I step away, I'm highly confident in my successor, John Pietrowicz.
I expect all of you to really enjoy working with him as I have over the last 11 years. I wish you, all, well, and I have to say I've enjoyed getting to know and to work with many of you who are listening today.
I believe my interactions with you over the years definitely made me a better CFO. Even though I'm moving on to the next phase of my life by year end, I will continue on here as a shareholder, and I am highly confident in our teams and still believe this is truly a one-of-a-kind franchise to own.
And I'm excited about the future of CME Group. Thank you, all.
With that, I'd like to open up the call for your questions. [Operator Instructions]
Operator
[Operator Instructions] And our first question comes from Niamh Alexander with KBW.
Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division
Just help me think about the expenses as well as for the guidance for next year, and thanks so much for giving it ahead of time, a great finish for Jamie too. But if -- there are some variables on that, I guess, licensing is one of them, but is there -- what can you share in terms of the volume assumptions implicit in that?
Or what should we think about if volumes comes out to be much higher than we all think or you all think? Is it the bonus incentive?
What else might vary with that expense guidance?
James E. Parisi
Niamh, this is Jamie. We don't give out volume guidance, but you're right, there's a couple of items that do vary with volume, particularly our license and fee sharing line.
So there, I would look to whatever your assumptions are next year for growth around equity and our energy products in particular and our OTC businesses as we do have some fee sharing there as well fall into that line. And likewise, on the bonus, we typically have a target that's probably in the $60 million to $70 million range overall with a max that goes out to -- it maxes out at about $100 million-or-so, so it's capped.
So there's some variability there, but not huge variability. So more to come there, but John will keep you guys apprised of any updated guidance on the next call.
Operator
The next question comes from Rich Repetto with Sandler O'Neill.
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division
I guess, since I'm limited to one. On the annual variable dividend, is it going to be simply formulaic where it's the excess cash by year end, and you subtract the $700 million because we're coming up with something a little bit over $2?
Is there any other uses of cash or things that we should think about as we're sort of trying to project that number?
James E. Parisi
Yes. Rich, this is Jamie again.
So the way we look at it each year is to assess the cash that's sitting on our balance sheet relative to that minimum that we want to hold of $700 million. If we look back over the last couple of years, we didn't go all the way down to $700 million, we went to $900 million.
I would say in the first few years of doing this, we wanted to be very careful and not take it all the way down to $700 million. Over the coming years, as we get more comfortable with it, there is potential to tighten that up a little bit.
But yes, I think you have the general idea right. And with respect to any other cash outflows, nothing at this point that we've talked about.
And even with as far as GFI goes, we don't see that impacting the dividend either.
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division
So if we had to put a range, it would be the cash, then minus $700 million to $900 million to remain and then rest would be -- is that a fair sort of range?
James E. Parisi
Yes.
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division
And then we do expect you to report on your handicap every quarter as it comes down as well.
James E. Parisi
It can take a while to get that one down, but yes.
Operator
And the next question comes from Alex Kramm with UBS.
Alex Kramm - UBS Investment Bank, Research Division
First off, also, to Jamie, thanks for everything over the years and all the best going forward.
James E. Parisi
Thank you.
Alex Kramm - UBS Investment Bank, Research Division
I came on a little bit late so I don't know if Terry is on, but otherwise, it will be for Gill. But over the last few months, we've seen a lot more noise out there in terms of white papers and asset manager comments around clearing houses and the risk that's getting put in there and the capital requirements that clearing houses should have, stress tests, the living wills, a lot more noise recently.
So maybe just an update of what we're hearing in DC and from other regulators around the world when it comes to maybe having to put up or have more cost around the clearing house or maybe more capital, because obviously, that could drive some impact on the annual dividend over time as well.
Terrence A. Duffy
I am in the room. I'll let Kim probably comment, but I will say that I have not heard anything coming from the regulator as it pertains to us coming up with more capital to put in to it.
I think today, we put in roughly $370 million between U.S. and Europe of CME's capital towards a guaranteed fund.
Pardon me?
Phupinder S. Gill
A little bit more than that.
Terrence A. Duffy
Yes. I talked to [indiscernible] he said it was $370 so that's what I've heard.
Regardless, I have not heard anything there that should be coming from a legislative standpoint or regulative standpoint. Kim may want to talk a little bit more on the living will stuff, as it pertains to that.
But I have not heard whether they're looking in for us to put additional capital outside of a couple articles, one being written by PIMCO, one being written by JPMorgan.
Phupinder S. Gill
Alex, this is Gill. Let me just add to what the Chairman has to say, and then I'll ask him to also add a few more points here.
I think if you're looking at some of these comments that the banks and some of the buy-side guys have put out over the last few months, there's a central theme that the concern is that the CCP's would be, in general, the next too large to fail. And I think there's some important distinctions and we are going to put up a short paper on our own to point out what these distinctions are.
A few things to remember, unlike other counterparties that have been tagged with this too large to fail, we run a matchbook, in other words, all the buy equals to all sales we run flat every day, we mark that match book to the market at least twice a day. None of the parties that have been described as too large to fail or too important to fail have similar characteristics.
So there's a little bit of concern about what have happens when so-called risk is concentrated. I think you should take -- make the distinction between the concentration of positions versus the concentration of risks.
And those are 2 important distinctions. So I think some of the noise that's been out there is a little bit misguided.
And some of the work that came in our folks are doing have the record straight there. Kim, if you want to add a bit.
Kimberly S. Taylor
I think Gill outlined it very well, that clearing houses are very disciplined at managing risk and run a flat book. And there are no exceptions made for margin policies or payment of daily mark-to-market based on the credit worthiness or the customer relationship status of the various clients.
So it is a very rigorous disciplined approach. And the way that CME looks at it, risk management is what we sell, and protection of the market is the only business that we have.
So this is something that the firm has a very strong risk management culture. One of the things that I have noticed about some of the papers that are out is they kind of try to talk about concentration of risk, and they kind of say the clearing houses need to put more of their own funds at risk, for example.
More skin in the game for clearing houses is one of the key topics that's being talked about. And actually, we have a lot of skin in the game.
Not every clearing house does. So I mean, the point could have some resonance around some of the other clearing houses that don't belong to a well-capitalized entities and don't have the ability to put significant amount of skin in the game.
So I put that to the side. But the other thing to remember is that clearing houses are only going to be affected ever by the default of a clearing member and the more significant and concentrated the exposure of the clearing member.
So the bigger the bank is, that failed, the bigger the exposure that the clearing house needs to manage. All of our risk tools are sized to cover that.
But one thing we are looking at is that all of our risk tools, the mutualization process is right now sized so that the market insures the entire market. And I think, one of the things that some of these papers are leading us to look at is whether or not there should be a more concentrated focus on the bigger the defaults are, the bigger the cost sharing that they put into the process.
So strengthening the defaulters paid element of the process for the very biggest defaulters is an area that we are looking at.
James E. Parisi
And just to sum all that up, we really don't expect any of this to impact our dividend that we would normally pay in early 2015.
Operator
Our next question comes from Brian Bedell with Deutsche Bank.
Brian Bedell - Deutsche Bank AG, Research Division
And Jamie, the best to you also. Great working with you over the years.
James E. Parisi
Thank you. And likewise.
Brian Bedell - Deutsche Bank AG, Research Division
My question is on the organic traction of the interest rate complex, particularly in the notion of the swap users. Gill, you had -- you mentioned on October 15, you saw a much better usage of interest rate futures versus swaps.
So maybe if you can talk a little bit more as we move into 2015, the growth trajectory that you envision of getting the swap users to convert to listed features. What is your force sales saying?
Are they seeing evidence of some of the sales efforts they have? And then also if you can comment on that same dynamic.
Outside the U.S., you mentioned obviously a very good traction, for example, on October 15, in that regard with the sales, the new customer penetration outside the U.S. as we look into 2015.
Bryan T. Durkin
It's Bryan, and I'll take that one. First of all, I think if you take a look over the last quarter or so, we've seen very nice uptake from, particularly, our asset manager community as well as our hedge fund community.
One of the parameters that we look at in terms of conversion into the future's complex is our assessment of large open interest holders. And during the past few months, if you take a look at that, we've increased the number of large open interest holders from 415 to 1,702.
We also measure our overall penetration of cash market itself and our treasury cash market penetration has reached the size 74% year-to-date. And that's an all-time high for us.
We also monitor closely the activity for our block transactions. And so reviewing blocks and EFR transactions, we've seen significant growth in both of those areas.
Our Eurodollar futures open interest has hit a record high of 13.5 million contracts. And we're seeing similar uptakes in our treasury open interest.
Looking at it from the international basis, again, we're seeing considerable positive trends similar to what I've just outlined.
Brian Bedell - Deutsche Bank AG, Research Division
And so your view into coming into 2015 on that, a lot more to go? Or do you feel you have made great strides so far and that pace of pickup will slow down?
Bryan T. Durkin
Well, I can't give any projections in that regard. There continues to be positive, I'd say, fundamentals in terms of the convergence of interest rate uncertainty, the convergence of OTC, the futures, we're continuing to aggressively sell to the various client segments, the opportunities that we present and the context of the full portfolio, a clearing, OTC interest rate swaps, portfolio margining, the liquidity of our interest rate complex and the capital benefits that are associated with that.
In addition, we keep introducing innovative products, and our emphasis is on building our global growth. So we see opportunities all the way around.
Operator
Our next question comes from Kenneth Hill with Barclays.
Kenneth Hill - Barclays Capital, Research Division
I just wanted to start on market data. It looked like you guys saw a couple of million dollar decline sequentially there.
I'm just wondering if you could give us an update on how demand is and how subscriber counts are, particularly on the back of some of the fee hikes you did earlier this year and the elimination of the fee waiver? And how we should think about that into next year as you start to put some of that -- those guys you were receiving fee waivers, start to chart the 50% rate there?
James E. Parisi
Great question. So basically, what we saw in the quarter was a small decline in terminal usage.
We are going to see variation from quarter-to-quarter as desks -- trading desks open and shut and try to become more efficient, that sort of thing. But when I look at the decline in terminal so far this year, it's really -- the decline is really starting to taper off.
We're down 2% to 3% in terminals this year. If I look back over the last several years, we're down on average about 7% each of those years.
And as you know, we put some policies in place this year that I think are having a positive impact in helping to mitigate that loss and eventually, hopefully will turn the corner. We implemented the fee increase earlier this year, which is a 15% fee increase, which is also helping us out in positive relative to the small decrease in terminals.
The other thing that we did is that we are starting to eliminate waivers of fees on trading terminals. And we stopped new waivers starting in March.
So we think that's helping to mitigate that decline in terminals. And then next year, we'll begin to charge for those who have been grandfathered in on the waivers, we're going to charging half of our normal rack rate per month per terminal.
We don't know what the impacts of that are going to be exactly, because the number of wave terminals may not be indicative of the end demand when people have to start paying. So we'll have to see how that plays out.
But I do think these are all positive going forward for this particular income line.
Bryan T. Durkin
I just like to add to that with the waived terminals. Once that policy took effect in March.
We've had several dozen firms actually register with us and that indicates either several users in the past that have not been paying market data.
Operator
Our next question comes from Michael Carrier with Bank of America Merrill Lynch.
Michael Carrier - BofA Merrill Lynch, Research Division
Just a quick question on FX. If you look at kind of the first half of the year, your FX is pretty muted in terms of volumes and then you obviously is going to pick up for a lot of reasons.
But the things that were weighing on FX in the first half of the year, whether its investigations and stuff like that versus the pickup that we've seen, do you see more like sustainability, meaning when you look at the users that were in the market and you look at where the open interest stands, do you feel like we're going to be getting into an environment, like some of the stats that you've given on interest rates, meaning the user base increases, because it obviously fluctuated quite a bit?
Phupinder S. Gill
Again, this is Gill. I'll start first, Mike, and then I'll pass it on to Bryan.
But with the activity in the FX that you saw until October or until the third quarter when we saw a significant pickup in FX, both futures as well as options has been largely tied to the increased volatility, the elections in Brazil, and then there has been some activity in the Mexican peso too. And so a lot of these things had to do with that.
The options pickup in particular has been encouraging for us, particularly as you saw volatilities start to pick up. And all of it has been done on the Globex platform.
Bryan T. Durkin
Which is -- we're seeing a nice trajectory if you look at Q1, Q2, and then more recently, the trend that's been occurring these last few months has been in a positive direction. One of the barometers, as Gill alluded to, is the levels of open interest, particularly in our options contract.
And we've hit records in that OI. And we think that, that's indicative of a positive trend in terms of a regrouping of interest in new participants coming into the market and participants that have pulled away from the markets coming back in.
Operator
Our next question comes from Patrick O'Shaughnessy with Raymond James.
Cory J. Garcia - Raymond James & Associates, Inc., Research Division
This is Cory on for Patrick. My question is, so you guys have been picking up market share and energy versus your closest competitor in recent months across crude, natural gas and refined oil products as well.
To what do you attribute these market share gains? And do you think you're at the point now where you can maybe start charging for Brent trading?
Bryan T. Durkin
This is Bryan again. We're pleased with the progress that we've been making in terms of the broad complex.
Our position is both medium- and long-term trends are good within the product set that we offer. We're looking to provide a holistic complement of products, both in the crude and refined area.
As you've alluded to, we picked up some nice market share across each of those asset classes. We're particularly pleased with the performance on our WTI and our Brent efforts.
There's a great deal of debate that's out there regarding changes to export restrictions that could help us in the longer term. But overall, our CME energy products are up 7% in October, excluding Brent futures, and our competitor is flat.
Also in Q3, we've outperformed in energy versus our competition. So we feel really good about the strength of the complement of the product base.
Terrence A. Duffy
This is Terry Duffy. Let me just add a little something here.
I think what's important here is we are getting paid. We're not getting paid on the Brent, we're getting paid on the return of our share of the West Texas Intermediate has gone from 25% or 30% when we acquired NYMEX in 2008, down along 14% or 15% whereas it's at today.
So if you look at that, we may be given Brent away for free or creating an arbitrage for Brent against TI, but we're building our TI business and getting paid for that. So I think there is a lot of pluses to what we're doing with the Brent complex today.
Operator
Our next question comes from Jillian Miller from BMO Capital.
Jillian Miller - BMO Capital Markets U.S.
And Jamie, congrats on the retirement. You'll definitely be missed.
So on the expenses, I just want to go back there. I know you're hoping to keep expenses flat given your efficiency program in 2015.
But I'm just trying to get a gauge for whether the efficiency measures are more like a onetime thing or a signal that you might be shifting your longer-term thought process around cost? Like after the program, after 2015, then do we go back to your prior long-term expense growth guidance of about 5% annually?
Or are we entering new efficiency mode where maybe in 2016, 2017, we should be thinking about 3%?
James E. Parisi
Yes, I really -- the way I look at this is when we talk about restructuring, it's not just a look at our human capital and how to best deploy that, it's also looking across the business and how best to deploy the remainder of our capital. And really we did take a white sheet approach.
And I think that there's still some opportunity there, we'll continue to look for ways to improve the business, we're looking at things like data center consolidation, for example, where we're becoming more tight on some of the marketing expenditures that we'll have in the coming years. So I would -- we can't decrease expenses forever, we have to get back to a normal kind of growth rate at some point in time.
That's going to be in the low to mid-single digit I think, going forward. But I do believe going forward, we still have this very strong focus on expense discipline, but more importantly, a very strong focus on the margin, the operating margin and net income margin of the exchange to ensure that we're growing that as best we can.
Phupinder S. Gill
Jillian, this is Gill. When we very seriously contemplated the reorganization a few months ago, it was with respect to changing the way that the company thinks.
It was with respect to shifting the mindset of the organization into exactly the lines that Jamie just talked about, significantly increasing or pushing the operating margin philosophy down into the firm, understanding what each of the cost drivers of the firm was -- is. And then also, understanding where the innovation was going to take us to the point that, Terry just made a shot a while ago, giving away something for free doesn't mean you’re giving away everything for free.
It forms part of the portfolio that brings in higher income across the board for us. So that change in philosophy occurred a few months ago.
That change in mindset occurred a few months ago. And that change is what we will bring forward on a going-forward basis here.
Operator
Our next question comes from Neil Stratton with Citi.
Neil Stratton - Citigroup Inc, Research Division
I just wanted to ask a question on OTC clearing, and that continues to exhibit quite strong growth. Just what inning do you think we're in, and how should we think about that for 2015?
Phupinder S. Gill
This is Gill. I think when the mandate to clear became mandatory here in the U.S., it has not kicked in Europe yet, and the mandate to execute has not been fully implemented here nor even contemplated across the pond yet.
So you decide what inning we are in. I don't play baseball, but I think it's still very early days.
And I think a lot of conversation has gone on about the futurization of the marketplace, although we are seeing that along the lines of what Bryan talked about. Please bear one thing in mind that these markets are very complementary.
On October 15, people turn to the futures, because the liquidity that was there, the liquidity that could be seen was a source going forward. And so I think the market evolves on both sides as was intended by the regulation, and you would start to see a change that occurred.
And the important point for us at the very least is that we are positioned well for the change. On the one hand, we're very happy that we started in the U.S.
I think we have built through the clearing and the IT mechanisms a bunch of credibility that we carry to Europe.
Terrence A. Duffy
Just to add, and I know Kim is probably more equipped to say this than I, but in 2013, we have basically nothing in OTC interest swaps clearing. And now we have 22 trillion roughly in our clearing house today, so we've been able to grow.
I think what's really interesting about how you put a marker on what inning you're in, it goes back to what Kim said earlier. There's been white papers out there, there's been a bit of misinformation out there, it's both in the buy-side and the sell-side.
We're going to continue to educate why we're doing things differently. People are looking at should we put skin in the game, we have skin in the game, do they know that?
These are all educational things that we've been doing since we've launched our OTC initiative, and we'll continue to do so, so that will help give us a ballpark of the innings that we're in. But you got to look at where we started, it's just a very short while ago and where we've come to today.
Bryan T. Durkin
And if I could add one additional point. From a client perspective, we're really heartened to be garnering more business into our services that had chosen other facilities in the past, and that's largely attributable to Kim and her team's efforts to listen to the client and be able to deliver tools such as coupon blending, compression services, portfolio margining.
All of those complements are really bearing fruit and taking traction with the client base for them to see our offering as a differentiator and providing them on significant savings using our OTC facilities and complementing that with the derivatives portfolio as well.
Kimberly S. Taylor
I think Bryan hit the nail on the head of the driver for growth for the next phase of OTC is going to be capital efficiency. It started out as a mandate compliance type of activity, at least with the U.S.
participants and the people who trade with them. And now it has become a quest for most a capital efficient way to obtain this protection.
And clearly, we stand out as the most capital efficient place for people to obtain their protection.
Operator
Our next question comes from Rob Rutschow of CLSA.
Robert Rutschow - CLSA Limited, Research Division
In terms of the expenses, it appears the guidance is for flat expense growth despite the cost cuts that you're doing in terms of headcount reduction. So the question is, do you feel like you're going far enough with the expense reduction, particularly considering that the expenses are up about $100 million in the last 2 years?
James E. Parisi
I think that we are doing a really very good job. I will say, over the past several years, we do view ourselves as having run fairly lean, we took a new approach and are trying to be ever more efficient.
So I think that we have done a nice job. As Gill was saying earlier and I was saying earlier, we're going to continue to really keep a focus on that area amongst -- in addition to the top line obviously and try to drive as much margin as we can going forward.
When you look at the impacts on the coming year, if I look at what the analyst estimates for our expenses were prior to our announcement of restructuring, they're probably at about $1.360 billion, and we're seeing the $1.3 billion now. So that's a pretty large decrease, I would say, in the years’ time.
And don't forget, we do have a decent sized expense base, so there's inflationary pressure on that just as there is with anyone.
Phupinder S. Gill
Rob, this is Gill. Let me just add to what Jamie said in the context of the $100 million over the last 2-year comment that you made.
Keep in mind where growth has come from for us and where we have spent the funds in growing the expenses come from outside of the U.S. We talked about what Europe did a few weeks ago, we talked about the growth rate in Asia, that's a direct result of the expenses that we put on the ground there.
And we've gone from essentially a futures and options exchange to a financial services company, running 6 ecosystems. In other words, we spent a lot to build an ecosystem that is able to not just clear futures and options, but also list and clear OTC products and the innovation that comes with that.
So we've built a lot of infrastructure over the last few years, and a lot of our growth has been based upon that, that we have built, that you have seen come to life in the last few weeks.
Operator
Our next question comes from Gaston Ceron with Morningstar Equity Research.
Gaston F. Ceron - Morningstar Inc., Research Division
I just -- I'm sorry, I just want to go back over the expense issue again. So I mean, I hear what you're saying about how we analysts were viewing kind of the 2015 expenses before the staff actions that you're taking.
But I guess, if I just look at the guidance, I mean, so you're projecting, it just seems like you adjust on an adjusted level, operating expenses are going to be flat year-to-year, right? So I'm just curious, what is the offset to the lower compensation expenses that you'll have from cutting 5% of the staff?
Where else are expenses ticking up that -- so that the ultimate number will be flat?
James E. Parisi
Gaston, this is Jamie. Remember, as I was saying, we -- for the expense base, there's going to be inflation on that every year, right?
So, for example, we pay merit increases to our staff each year. In some of the tough years, we decided not to do that, you can't do that every year, because you have to reward the people who are really doing the hard work to get us to where we've gotten to.
And that's probably about 3% to 4% on our -- on those expenses. And because we're consuming a lot of professional services, we're subject to increases there and the increases that they have to pay their people as well.
And we are growing our international footprint a bit, so our occupancy expense, for example, around the globe will be a bit higher in the coming year. So those are kind of the key areas.
Also, to the extent that we see strong volumes or stronger volumes than we see currently or that we saw in this year, you can see some increase in license fees and fee sharing. So there's just natural areas of expense increase that you're going to -- that we're going to get hit with from year-to-year-to-year and really we're trying not to mitigate that with what I believe is a very meaningful reduction in expenses.
Operator
Our final question comes from Alex Blostein with Goldman Sachs.
Alexander Blostein - Goldman Sachs Group Inc., Research Division
A quick question for you guys on the interest rate complex in light of some of the changes that have taken place on the buy-side over the last couple of months, with the departure both Bill Gross and the flow pressure I think that PIMCO has seen. I mean, I guess, PIMCO has been obviously very vocal around using futures as a substitute for some of the other product, and I'm just wondering whether or not do you think this could potentially have an impact on the complex.
Or do you think this activity could kind of just transfer out other institutions?
Bryan T. Durkin
Looking at our interest rate complex overall, the indicators have actually been positive in terms of the overall performance of the complex, both within the Eurodollars and the interest rates alone. And I think that's been complemented by additional new products that we've introduced.
And we're seeing, again, a very positive trajectory. If you look at our Ultra Bond, now Deliverable Swap Futures performing extremely well.
This is where the marketplace comes to manage and hedge their risk. And affirmation of that effect was what occurred on October 15, where we've executed more than 3x our average volume in those complexes.
We're seeing a very nice pickup as well on the international side of the equation. So both within Europe as well as in Asia, our interest rate complex is up 28% in Europe and by comparable levels within Asia.
I think that, that goes to the intensified sales effort and focus. People come to these products because of the diverse customer base as well as the deep liquidity that we offer.
So we're not reliant on any particular segment within these markets. And again, I think it's attributable largely to the investments we've made in our sales efforts to broadly develop our hedge fund complement, our asset management complement as well as the other clients' segments.
No major customer, I think, is a very important point to note, no major customer brings concentration into any of these products.
Operator
Thank you. And at this time, I'm going to turn the call over to Jamie Parisi.
James E. Parisi
All right. Before we sign off, I just wanted to say, thanks, again, for all the great memories, having spent a lot of time with many of you over the years.
I count this as some of the highlights of my professional career. It's been really wonderful, and I hope to stay in touch with many of you.
If I don't see you before the year ends, so long, and I wish you the best.
Phupinder S. Gill
Thank you very much.
Operator
Thank you. And this does conclude today's conference.
We thank you for your participation. At this time, you may disconnect your lines.