Feb 5, 2015
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 John W. Pietrowicz - Chief Financial Officer Bryan T.
Durkin - Chief Commercial Officer Kimberly S. Taylor - President of Global Operations, Technology & Risk
Analysts
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Daniel Thomas Fannon - Jefferies LLC, Research Division Alex Kramm - UBS Investment Bank, Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Michael Carrier - BofA Merrill Lynch, Research Division Brian Bedell - Deutsche Bank AG, Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Kenneth B.
Worthington - JP Morgan Chase & Co, Research Division Christian Bolu Alexander Blostein - Goldman Sachs Group Inc., Research Division
Operator
Welcome to the CME Group Fourth Quarter and Year-End 2014 Earnings Call. [Operator Instructions] I will now turn the call over to Mr.
John Peschier. Thank you.
You may begin.
John C. Peschier
Thank you for joining us. Gill and John will spend a few minutes outlining the highlights of the fourth quarter and then we will open it up for your questions.
Terry, Bryan and Kim are on the call as well, and will participate in Q&A. 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 forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website.
Now I would like to turn the call over to Gill.
Phupinder S. Gill
Thank you, John, and thank you for joining us today. I'm very pleased with our team's efforts and our performance during 2014.
Further, the Q4 results we are going to talk about today were outstanding, and I'm proud of our staff for their hard work during some pretty difficult times. During the fourth quarter, our ADV reached almost 15 million contracts, up more than 30%, and it is our second highest volume quarter in our history during a normally slow time of the year.
We saw significant growth in every product area, ranging from 14% growth in metals to 41% growth in interest rates. Record options ADV increased 38%, and futures rose 29%.
Q4 revenue of $841 million was the second highest we have ever had. Most importantly, our earnings per share on an adjusted basis in the fourth quarter was up more than 50%.
Over the last 3 to 4 years, we have been investing organically in a very targeted way to broaden our global reach and to drive more core volume growth as trading conditions improve. I've spoken about this on every earnings call since I became CEO, and we are making progress.
During the quarter, we traded 3 million contracts per day from outside the United States, by far, the highest level we've ever seen. Revenue from outside the U.S.
accounted for approximately 30% of our Globex revenue and 24% of the volume. Our liquidity is building around the clock.
You certainly saw that on our record day in October, when a much higher proportion traded from outside the U.S. than an average day.
Fourth quarter electronic ADV from European clients was 2.4 million contracts, up 45% on a year-over-year basis, outperforming North America, which rose 31%. In Europe, we saw growth of 61% year-over-year in our interest rate business, and 32% growth in equities during the quarter.
About 3 years ago, we made a concerted effort to reach out to educate European clients about the product suite client-by-client. In 2014, we spent considerable time talking to these clients about our OTC rates offering and marketing how our Eurodollars, treasuries and other products can be utilized.
We also pointed that the interest rate curve was more dynamic in the U.S. and provided more opportunity for them than other alternatives.
Based on our efforts and market conditions, both hedgers and speculators from this region have ramped up the activity in our markets. The portion of our interest rate swap business coming from outside the U.S.
is increasing, particularly from European-based clients. This is surprising since the European mandate for clearing is still several quarters away.
We have successfully transitioned some businesses from these clients into futures, driven by superior capital efficiency relative to swaps. In Asia, our volumes rose 51% compared to the same quarter a year ago.
Our equities volume grew 96%, energy jumped 56% and the interest rates were up 54%. In Asia, in our view, we are at very early stages in terms of awareness and education and, ultimately, the conversion of new clients.
Many of our client meetings are about expanding the full breadth of our product offering and when we make progress, the discussion turns to connectivity through our training platform and establishing clearing relationships. Once we successfully engage, the ongoing trading activity tends to be fairly sticky.
Based on where we are at this point and the large number of potential clients, I anticipate this region will be the fastest-growing area for CME Group over the next 3 to 5 years. I will now shift to talking about a few of our product areas, starting with rate futures, options and cleared swaps.
Our OTC efforts continued to progress in the fourth quarter. We had the highest clearing revenue to date in Q4, which John will touch upon.
In interest rates swaps, during 2014, we overtook our competitor in D2C dollar-based clearing, moving from 32% market share in 2013 to 49% in 2014, including 55% in the fourth quarter. We recently have picked up market share as well in nondollar swap clearing, which you can see on Slide 9.
In addition to significant customer engagement, our unique portfolio margining value proposition is clearly drawing more U.S. and European clients our platform.
As an update, we are now up to 36 firms utilizing portfolio margining, double the 17 we had at the end of 2013. We are currently providing $3.9 billion of savings versus $1 billion at the end of 2013.
We added 2 additional FCMs who are live with our clients and increasing the total to 9 FCMs. Trade count market share, which is most closely tied to revenue, jumped from 47% from 2013 to 51% in Q4 2014.
Lastly, we are currently at 64% of the open interest in terms of the global OTC clearing houses. We continue to market our interest rate futures and options to our more than 500 OTC clearing customers.
Clearly, this is one of the drivers of our 40-plus percent growth in rates volume during Q4 and almost 20% growth in 2014. Comparatively, the FICC businesses at banks, European rates, volumes and cash treasury volumes were all under pressure.
I wanted to share a couple of updates on statistics that we follow very closely. Large open interest holders in rates jumped by 15% during 2014 to 1,615 firms spread over our rate futures complex.
About half of this increase was in our Eurodollars, 2-year treasuries and Fed fund contracts, so we are seeing more focus on the front end now. Our treasury futures notional volume was -- as a percent of reported cash treasuries jumped to 75% for full year, up from 67% in 2013.
Lastly, block volumes are up 80% in 2014 for rate products, outperforming other venues. This is an indicator of large participants entering our markets and using futures for OTCs now trading.
Our focus is to continue to aggressively draw attention to the advantages of our products, and I would expect the debate about the Fed decision-making to remain in place. Because we list contracts up to 10 years, one of the nice things for us is we benefit financially prior to the actual first increase and then beyond.
Within treasuries, we have seen an increased volatility in market events recently. In January, treasury futures were up 25% and treasury options were up 31%.
Activity that is clearly hinged to both domestic and global events has us interconnected. Lastly, we are working to leverage our connectivity and relationships with credit trading clients to increase activity in our credit default swap business.
During Q4, our revenue exceeded $1 million for the first time and was up 67% sequentially, as we achieved the highest revenue market share yet. While the current revenue is fairly small, this is worth watching in 2015 as we expand our offerings.
Turning to FX. We had a challenging time during the first 8 months of 2014, with extremely low volatility and turmoil in the cash FX market.
Volumes averaged around 700,000 per day during that time. From September to December, we averaged 1 million per day, up 36% versus the prior year as volatility returned to normalized levels.
In January, our FX business rose more than 20% from the prior year. Our expectation is that market participants will continue to be drawn to the deep liquidity we have in FX and the safety and soundness of a cleared market.
Our trading and clearing processes functioned very smoothly during the Swiss Franc event that occurred a few weeks ago. We are pleased that we are at near-record open interest and continue to grow the number of large open-interest holders, which in a higher-trending volatility environment should support our volume growth.
We have seen a pick-up in our energy business, and our market share grew during the year in natural gas and crude oil. Volatility hit an all-time low in energy in the second and third quarters last year, and we have seen outsized activity as that has changed.
WTI prices were range-bound between $80 and $105 for a few years, and we have clearly rebased, which very few experts projected last June. Volatility now is back near historical norms.
And as we know, these markets are difficult to predict. Our team is heavily engaged with energy customers about our full suite of products and the unique possibilities in the marketplace.
We are increasingly focused on the European energy markets, where a large percentage of the business remains uncleared. As you all know, innovation has been a hallmark of our exchange, and we have certainly not slowed down on that front.
Recently, we calculated the volume and revenue from products launched since closing our mergers. In total, since 2010, we have driven 450 million new contracts traded and $380 million of incremental revenue from these products.
Over the last quarter, we have announced many other new product expansions, including palm oil swamps, iron ore futures, European natural gas, kilo gold futures and physically settled cocoa futures in Europe. We are working as closely as ever with both domestic and non-U.S.-based clients I mentioned, and they are looking for more alternatives from us.
In particular, our new European natural gas activity has exceeded our oil expectation during the first few weeks of trading, driven by commercial user participation. Finally, we made some important decisions in October to rightsize our company and to reorganize our structure.
The new accountability and structure has worked well and will help as we execute our goals in 2015 and beyond. We are completely focused on efficiency throughout the organization and meeting the demands of our customers in practically any environment.
Our focus is on driving operating margins, earnings and free cash flow higher, which is currently how our compensation targets are set throughout the firm. I thank my colleagues for their significant effort and engagement.
With that, let me turn the call over to John Pietrowicz to discuss the financials.
John W. Pietrowicz
Thank you, Gill, and good afternoon, everyone. I'm very pleased with how we finished 2014 with a strong fourth quarter performance.
We continued to demonstrate the significant operating leverage in our business model. Looking at the adjusted results, revenue increased by $154 million or 22% compared to Q4 last year, and expenses increased less than 1%.
Most importantly, our adjusted earnings per share rose more than 50%. Now I'll turn to some revenue details.
The rate per contract for Q4 was $0.731, up from $0.725 last quarter despite higher volume. The main driver for the increase was a shift in the product mix, with an increased proportion of total volume from higher-priced commodity products.
OTC swaps revenue totaled $18 million for the quarter, up 16% versus last quarter. In Q4, we captured $148 per IRS OTC trade due to positive customer mix shifts this quarter.
We cleared approximately 1,780 trades per day in the quarter, up from prior quarters. In January, that has jumped to more than 2,000 per day.
Market data revenue is up 17% versus Q4 last year, driven primarily by our pricing change, but also bolstered by new paying customers. Lastly, other revenues is up sequentially, driven by approximately $3 million related to platform development with our partners in Brazil.
Also, we had higher compliance fines compared to the prior quarter, which was offset in other expense. Adjusted expenses in Q4 were $341 million, close to Q4 last year when we had elevated technology-related costs.
Based on the very strong volume in Q4 and higher-than-expected revenue, our license fees and bonus grew more than we projected during the last call. Total compensation was down $2 million sequentially despite the higher bonus, driven by recent staff reductions.
At the end of Q3, we had 2,825 employees and we ended the year at approximately 2,685, which is down approximately 5%. Turning to taxes.
The effective rate for the year ended at about 37% on a pro forma basis, down from last year's 37.6%, with the effective tax rate for this quarter of approximately 36.4%. And now to the balance sheet.
At the end of the year, we had more than $1,550,000,000 in cash, restricted cash and marketable securities. In January, we paid out $671 million in our variable dividend of $2 per share.
Following the dividend payout and the impact of strong fourth quarter as well as cash flow timing, we started the year with approximately $880 million of cash. We are extremely focused on providing a significant return of capital to our shareholders, including our recently announced 6% increase in our regular quarterly dividend to $0.50 per share.
During the fourth quarter, capital expenditures net of leasehold improvement allowances totaled $42 million, and for the year, we came in at $138 million. This is below guidance provided the last quarter, and the difference was driven largely by a shift in real estate-related timing.
Now I'd like to turn to our forward guidance for 2015. As you know, we don't provide volume or revenue projections.
We said last quarter that we would go through our budgeting process and that we expected to be able to keep expenses flat in 2015. After a thorough review, our expense guidance for 2015 is flat at $1.31 billion.
Based on the fact that variable expenses increase as transaction fees grow, we will be extremely focused on our discretionary and fixed infrastructure expenses to support this guidance at higher revenue levels than we saw in 2014. I'll provide some assistance in terms of the expense line items.
Compensation is likely to be higher in 2015, as normal merit promotion increases and some selective hiring more than offset the reduction from our October announcement. Our bonus at the target level in 2015 is approximately $70 million, which is similar to the actual payout this year, with obviously higher targets.
As information, the ceiling on the bonus is $105 million, and we would have to exceed our cash earnings target by 20% to reach that level. Turning to the license fee line, there are 3 product groups that contribute to virtually all of the expense.
The largest impact is in our equity business, where we have a profit share with our indexed joint venture, so as that business line changes, the payout will fluctuate. We capture approximately 7% of this in nonoperating income and expense due to our ownership stake in the joint venture.
The other 2 product areas which drive license fees are energy, based on ClearPort broker incentives; and our interest rate swaps revenue share with founding members. Volume in our core interest rates, FX, ags and metals futures products have very little impact on this line.
This means our license fees as a percentage of transaction fees is impacted by product mix. For example, in 2014, the ratio ranged from 4%, when interest rate volumes dominated in Q3, and that jumped to 4.8% in Q4, when we saw a surge in equities and energy volumes alter the mix.
In addition, in 2015, we plan to reduce marketing and other expenses by approximately $10 million. I know it is difficult for you to triangulate where our expenses would be at various revenue levels.
The management team is very focused on delivering expenses at $1.31 billion in 2015, and we all realize that variable expenses may be impacted at different revenue levels. We will do our best to reduce costs without impacting our growth plans, if volume grows significantly.
The bottom line is that if our expenses end up being materially higher than our guidance due the variable expenses because our revenue is so high, I will be happy, and I suspect our shareholders will be too. One final point on expenses.
We have traditionally guided to mid-single-digit expense growth for the company, and we were at that level during the last few years, even as we invested in new growth areas. With much of the infrastructure in place now, we are revising our expense outlook to low- to mid-single digit range for the next few years.
We will methodically look at our business to drive efficiencies. An example of that is the announcement last night concerning the closure of most of our futures pits and 2 of our options pits, which we anticipate completing in July.
As a result, we will reduce annual expense by approximately $10 million. We expect capital expenditures to be approximately $150 million in 2015, in line with where we have been the last few years, and that includes some of the real estate carryover from last year.
Our tax rate is expected to be 37%, assuming no change in Illinois income tax laws or any corporate tax changes at the federal level. In terms of market data, we are working with our intermediaries to help them appropriately categorize subscriber usage, and we will complete our first billing process in late February for those that operated under our now-expired market data electronic trading waiver.
Therefore, we will provide more color on the expected financial impact of the change on our Q1 earnings call. As a reminder, beginning in January 2015, we started to charge 50% of our monthly rate per screen to previously waived professional subscribers, which equates to $42.50 per month per CME Group exchange.
We have been working closely with our client base and provided the market a 2-plus year transition period before charging the full rate, which will take effect in January 2016. At that point, we will be in line with other exchanges that eliminated the market data waiver several years ago.
For now, the consensus estimate of $375 million of market data revenue is an appropriate placeholder. I look forward to providing you more clarity in a few months.
Finally, we adjusted transaction fee pricing across all 6 products in a targeted way, which went into effect earlier this week. We expect the transaction fee revenue to increase approximately 1.5%, assuming the same mix levels in 2015, and the largest percentage change will be in interest rates, primarily in treasuries.
Now for a brief comment concerning our transaction with GFI. As you saw, CME and GFI mutually terminated our merger agreement.
The battle that unfolded over the last few months was over the IDB business and was not our fight, which led to our decision to ultimately take a step back from the transaction. However, we will still have an agreement with JPI, GFI's largest shareholder, that limits their ability to sell their shares or vote their shares for an alternative transaction for 12 months.
Looking forward, we have been a part of the Trayport platform for some time, and we have a long-term commercial agreement with Trayport. We will continue to build our energy business through the platform.
As Gill mentioned, we recently launched European natural gas products, which are off to a good start. Activity in January continued to be robust.
We averaged more than 15.6 million contracts per day for the month, up more than 20%. Similar to Q4, we saw strength across the board, with all product areas up double digits and outperforming other multi-asset class derivatives exchanges.
With that, we'd like to open up the call for your questions. [Operator Instructions] Thank you.
Operator
[Operator Instructions] Our first question comes from Rich Repetto from Sandler O'Neill.
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division
And I guess if I got one question, it's going to be on the options. And you devote a number of slides on that.
You're also closing the pits, except for the options. And I guess, Gill, the question is, if we hit that and -- how close are we to this inflection point?
And I guess there is still a message that by keeping the options pits or certain option pits open that that's still vital in certain product areas anyway.
Phupinder S. Gill
Thanks for that question, which I will ask Bryan to add some specifics to what I'm going to say. But as far as this inflection point is concerned, I think you have reached there with respect to those contract that tend to trade in a front-month type of configuration.
But for those option contracts where the trading spreads across a curve or across multiple months, those are the options that continue to trade somewhat on the floor. So while overall, our options percentage is 52%, some of the pits have far exceeded that amount.
And for those that have not, those are the pits that will remain open. Now the option and the choices of many other folks that have shut the floor was to just force the thing onto a box.
That's not the way we have been running this because the integrity of the marketplace is paramount for us, and we want to make sure that when it transitions, it transitions in a way that we saw the futures do so. Bryan, you want to add?
Bryan T. Durkin
And just from an asset-class basis, we're really pleased with our aggressive penetration of the development of the options market across all of our asset classes. We've seen anywhere from a growth rate of 20% to 36%, and that's across all asset classes.
We're seeing that nice pickup occurring, both domestically and across all of our regional offices. So the expansion of distribution, the access to product, the development of product, particularly in the area of weekly options, is all adding to this growth trajectory.
Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division
And I mean, you're certainly doing everything you can here by closing the pit -- pits, as well as the price increase seemed sort of targeted at the pit -- what do you call it -- trading as well. So anyway, that's all I had.
Phupinder S. Gill
Yes, Rich, just one point of clarification. The price increases that we put in place did not target the pit.
It was basically we targeted certain asset classes.
Operator
Dan Fannon from Jefferies.
Daniel Thomas Fannon - Jefferies LLC, Research Division
I guess, just a follow-up on that, on the price increases. Can you talk about the philosophy behind the products that you chose?
And if we go back to the last round of price increases, is there anything left that you haven't adjusted in the last couple of years with regards to the transaction on the futures side?
John W. Pietrowicz
Dan, this is John Pietrowicz. The largest increase this year is in interest rates, with the increase above the aggregate 1.5% level, with the main impact in treasuries.
We did make a move with Eurodollars, but they're already priced higher than many products, based on a price per unit of risk. FX was the second-highest percentage, with ags the least impacted.
And last year, when we did a 2% to 3% price increase, ags were the most impacted. So over the last couple of years, we've hit all of the asset classes, and we're always constantly looking at our pricing schedule.
Operator
Alex Kramm from UBS.
Alex Kramm - UBS Investment Bank, Research Division
Yes, real quick on the market data. I mean, I am -- I appreciate that you want to update us in a couple of months here, but can you at least give us some of the tools so we can run some scenarios?
I mean, like how many waive terminals do you have right now? So if we assume 50% are gone, we can do our own math here.
John W. Pietrowicz
Sure, Alex. This is John.
We think the ending of the market fee waiver program is an exciting opportunity for us, but to size the opportunity is difficult to predict. We have several hundred thousand waive terminals, and it's difficult to calculate how the customers will rationalize it when they have to pay for a service that was previously free.
And also, as I mentioned on the prepared remarks that we plan to charge the full fees in January of 2016. So that's -- so after we go through our first billing cycle, we'll be able to provide more clarity in -- on the Q1 earnings call in April.
Alex Kramm - UBS Investment Bank, Research Division
That several hundred thousand was all that I was looking for. If you can get a little more specific, that'd be great too, but I can leave it at that.
Bryan T. Durkin
Just to keep in mind, early after the announcement, we started getting an uptake in new registrants as a result of that waiver. We're continuing to see an inflow of new subscribers that, in the past, had fallen under the waiver.
It's a very good trajectory for us. We're seeing an increase of about $40 million in our revenue, and a good 1/4 of that is coming from new subscribers as a result of the elimination of this waiver.
Operator
Chris Harris from Wells Fargo.
Christopher Harris - Wells Fargo Securities, LLC, Research Division
So quick question on the oil complex. You guys highlighted market share gains you had in WTI relative to Brent.
I guess I'm wondering if you could give us a little color on what's happening in the market, what's going on there. And then in the past, there had seemed to be some evidence that users were switching from using WTI to Brent.
I'm just wondering if you're seeing any of those customers coming back now to WTI.
Phupinder S. Gill
I certainly think that you are, and I think a lot of the answers to your question can be seen on our Slide 14 that we put out there, where you see the growth in TI average daily volume. As importantly, the open interest is up more than 1 million contracts from the end of the year.
So to your point about who's adding the positions, if we look at the fundamentals of the contract itself, the gap between TI and Brent has been closed. If you look at the gradual easing of the band of exports, if you think directionally, I think TI has essentially solved a lot of the structural issues that they have.
And while the supply issue is still going to dog Brent for a while, we are very excited with respect to what we see, not just on the TI side, but both with respect to TI as well as Brent. I'll ask Bryan to add some specifics here to round up your answer.
Bryan T. Durkin
Yes, I would just add to that by saying the build-up in activity in Brent, at which we've now attracted close to 15% of the market, has definitely complemented our overall energy complex. WTI has been a beneficiary of increased open interest as a result of that build-up across Brent/WTI as well as our refined products.
You'll see quite an uptake and growth in our crack spreads, in particular. And it's the components of all of those that has added to this strong build-up in open interest across all of those products.
Operator
Michael Carrier of Bank of America Merrill Lynch.
Michael Carrier - BofA Merrill Lynch, Research Division
Just -- I guess, a question, both on the rates and then also on FX. You guys show some of the new users that you're seeing in the market on the rate side in terms of OTC.
Just curious in terms of the outlook. On the FX side, are you seeing like a similar trend?
And then on rates, it seems like -- I don't know if it was like last quarter, it seemed like you got the transition in the U.S. and then the expectation was that volume would kind of level off to some extent, in terms of on clearing side.
And then you would get the transition in Europe and that would pick it up again, but it seems like the growth continues. So I don't know if it's being driven by new users, the products that are coming on that are non-U.S.
I just want to get some color on the outlook there, both on the OTC side, but then also on the FX.
Bryan T. Durkin
This is Bryan, and it's a combination of factors. I think, first of all, if you referred to what -- Gill's earlier on comments, 40% of the activity that we're seeing in the interest rates was actually coming from Europe, right?
And so when you look at the composition of that, those are new users that are coming, specifically out of Switzerland and London, that have not only started entering trades into clearing for interest rate swaps in a significant amount, but they're also bringing us business into our Eurodollar and our U.S. treasury products.
I think another thing that has added to the complement and the tremendous growth in interest rates is the uncertainty of what's happening in the marketplace in general. And by us having that full breadth of the yield curve, you're seeing a nice capability for the marketplace to be able to build up in terms of their expectations and closer to the front end of the curve.
If you recall, a couple of years back, we were really building up in the back 32 months of Eurodollars, and we've done a lot to build that activity, create open interest, and volume has occurred in respect to that. But we've also now seen some movement into the front 1/8 [ph] of that contract, which is also corollary to what we've seen in growth in Fed funds, tremendous growth in Fed funds, our 2-year treasury notes and our overall front-month of euros.
Phupinder S. Gill
To -- just to add to what Bryan just said, and I said this a short while ago. In Europe, we saw a growth of upward of 60% in our interest rate business in the last quarter.
And I think that can be attributed to a lot of the things that Bryan said. And also, we are seeing flow coming in, as Bryan told you, before the clearing mandate kicks in Europe.
And we think among other factors, the lack of opportunity for the trading community in Europe is bringing them here.
Bryan T. Durkin
And then on the foreign currency side of things, you had asked about the pickup in volume there. We were averaging around 700,000 contracts throughout 2014.
That has really up-ticked to over 1 million. We saw that at the fourth quarter, and that's carrying its way through into the first quarter of 2015.
What's particularly encouraging is the pick-up in the open interest, 2.4 million contracts. So that's indicative of new users, again, coming into those products.
Operator
Brian Bedell from Deutsche Bank.
Brian Bedell - Deutsche Bank AG, Research Division
A question on -- actually, a question for John on the -- what you're seeing -- or what you're thinking about for margins on -- operating margins on the incremental volumes. You mentioned, obviously, the $1.31 billion expense base that you're going to try to keep.
Obviously, if revenue's coming in or if volumes are tracking better than your forecast, expenses would go up. If you could maybe just talk a little bit about what you're seeing through -- or what you're thinking about for incremental margins across the different asset classes.
John W. Pietrowicz
Well, when you look at our incremental margins over the last couple of quarters, we've been averaging around 95%. Previous to that, we've been in the ranges of 80% to 90%.
Obviously, we're striving to get as close to 100% as we can. But that said, when you take a look, we're planning on keeping our expenses flat, and you have to kind of run your scenario around the revenue on that.
But we're feeling very good about how we're positioned in terms of our revenue. And then, when you keep your expenses flat, like we did this quarter, we're driving EPS growth of about 50%.
That, then, obviously leads to our dividends. So the management here is really focused on driving as much revenue to the bottom line as absolutely possible.
Brian Bedell - Deutsche Bank AG, Research Division
Okay. That's great.
And any major difference between asset classes? Or pretty much across the board?
John W. Pietrowicz
No, they're -- it's pretty much across the board.
Phupinder S. Gill
That would -- dated [ph] growth we are seeing across all asset classes.
Operator
Niamh Alexander from KBW.
Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division
Just over to the capital for a little bit. I think we asked last quarter as well, but just to get an update, there seems to be still some noise about maybe the exchanges putting a little bit more capital upfront in the waterfall system, or skin in the game, as some of the members are calling it, or dealers.
Help me just think about it. Is there something we should be thinking about?
Maybe more capital getting allocated here? Or you're pretty comfortable where you're at, and the debate doesn't really change anything?
Phupinder S. Gill
We are comfortable with where we're at. I'll ask Kim to address the rest of the question.
Kimberly S. Taylor
Yes, thanks. Niamh, the debate around skin in the game is certainly an interesting debate.
We believe -- we're big believers in the importance of people who bring risk into the system putting up the skin in the game to cover that risk. So we're really a little bit troubled by the way the debate is being handled in the industry now.
It seems to be defining skin in the game so very, very narrowly as just funds that the clearing house puts at the front of the waterfall. And if you think about the reason that the regulators pushed OTC clearing mandate after the crisis, it is for the very reason that clearing houses exist, to ensure that all participants who bring risk into the system appropriately pay for the risk that they bring.
So the skin in the game that market users and the clearing members bring to cover the exposure that they bear is the most important element of the system and an issue that we're very, very focused on, managing the concentration risk. We encourage you all to actually look at our paper that we put out about this to help to kind of broaden out the debate.
Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division
I guess, just to -- is there anything from the regulator perspective? There's no ongoing discussion or open comment period or anything like this that we should be watching or anything like that.
Is that fair?
Kimberly S. Taylor
No, there's nothing -- there's no active regulatory action about this at all.
Operator
Ken Worthington from JPMorgan.
Kenneth B. Worthington - JP Morgan Chase & Co, Research Division
So following up on the announcement of the closing of the pits, you mentioned that there was $10 million in annual savings. So if I read correctly, I think there's 1,200 traders in the pit.
I assume there's a lot of support. $10 million doesn't seem like there's a lot, maybe that's an initial number.
Does that $10 million in expense reduction kind of grow over time as maybe more support and infrastructure rolls off? And then, without the trading pits, do you need to be in your current building?
I think you lease some of the trading floor space. You own some trading floor space.
I was just looking at some rents there, but it would seem like the cost savings from the reduction in real estate would well exceed $10 million of savings. So what happens to the real estate side, and maybe the ties to the heart of Chicago without the trading floors?
John W. Pietrowicz
Ken, this is John Pietrowicz. When we take a look at the cost to run the trading floors, it's approximately $50 million annually.
We ended up reducing the number of pits for the futures side and 2 options pits, which accounted for approximately 5% of the volume, and we're taking out close to 20% of the costs. To give you an idea, the options business is a pretty good business for us.
Not pretty good, it's a very good business for us. We generate about $120 million to $150 million per year in revenue, so it's a very good margin business.
In terms of infrastructure, we own the trading floor building in Chicago and, obviously, we'd look at ways to monetize it as we've done monetizing other buildings that we've owned, should we ever reach that point.
Phupinder S. Gill
And Ken, just to address the heart of Chicago issue, what is at the heart of Chicago is innovation, not the places where innovation is actually put out. So what CME has been doing, have been very focused on meeting our client needs, very focused on organic growth.
Some of the contracts that we launched, some of the things that we've talked about in the past like swaptions are going to be new in the cleared world. Repo clearing, as you probably read, is an endeavor that CME Group, among others, are pursuing.
So our philosophy has always been -- and we've talked about this in the past, is on need, meeting our client needs. And we believe that if we met those needs, it will drive our earnings higher.
That's the heart of Chicago, though.
Operator
Christian Bolu from Crédit Suisse.
Christian Bolu
Just a quick question on the balance sheet. That continues to grow pretty significantly.
Performance bonds are now over $40 billion. Can you remind us exactly what kind of economics -- or how you are to charge economics for those assets?
And how much more you can get in a higher rate environment?
John W. Pietrowicz
With regard to the growth in the performance bonds, last year at 12/31, we had about $21 billion in performance bonds that grew to $40.6 billion of performance bonds. That's split between $22 billion in cash and $16.7 billion in treasuries, and then we have some other funds in there.
In terms of how we charge for that, we are working on ways to -- we're working on it and we're analyzing the situation. So right now, there's not much to talk about with regard to how we're charging for the performance bonds.
I would say that the significant increase is primarily related to our OTC business.
Phupinder S. Gill
Yes. And a lot -- as more and more cash comes into the clearing house, we have been having active conversations with our clients with respect to how to go about investing in those funds, and we will have something to talk about, hopefully, in a short while.
Operator
Alex Blostein from Goldman Sachs.
Alexander Blostein - Goldman Sachs Group Inc., Research Division
So question on some of the anecdotes. We're starting to hear more and more around growth in the ETF arena and how some of the investors are trying to use more and more of those as opposed to the futures, given some of the costs that the banks are passing onto them.
Just curious to hear, do you guys consider that as a reasonable -- as a meaningful threat or not? The equities futures business, obviously, the one that comes to mind where that's most relevant.
But just kind of curious to hear, broader, whether or not that is a potential threat for your business model, and what you're trying to do to address that, I guess.
Phupinder S. Gill
Alex, thank you, I've -- we have seen some of the so-called white papers that have come out from some of the buy-side firms as well as the sell-side firms. What's interesting to note among the papers is they make a note that is not a -- they're not taking a fact-based approach.
And the entire approach as to the cheapness of ETFs seems to be driven by the cost of carry, which is embedded in futures. And so on an apples-to-apples basis -- I believe it's a Goldman analyst who points out that S&P E-minis are still a far more efficient product than the ETF.
So now I bring everybody back some years ago, when both JPMorgan as well as Goldman Sachs issued some papers to their clients talking about why, on a fact basis, ETFs are more expensive than futures. Those facts have not changed.
And so we are in the process of educating our clients or, in some cases, reeducating our clients with respect to all of the facts. And case in point, we have been -- we are up 20% this year, itself, on the S&P, and we had a very high growth rate last year.
And if you look at the liquidity in the contracts themselves, it's 6x more liquid in the S&P than it is in the ETF and the corresponding ETFs.
Alexander Blostein - Goldman Sachs Group Inc., Research Division
Yes, makes sense. Thanks for that clarification.
And then, the second question I have for you guys is just around energy business. I think in the slides, you mentioned that you're reducing the rebates on Brent by about 20%.
At what point of time do you think you'd feel comfortable around the volumes that you have been able to track to, sort of turn that into a profit area for you guys? I know you look at it as more as a kind of bundled approach with WTI, but do you ever envision yourself going into a more profitable zone with Brent?
Phupinder S. Gill
Absolutely. This is one of those things and it's -- Brent is not unusual in this sense.
We do this with the -- with any launch of a new contract that we have. And what you see us do is we encourage the volume to come on in.
The value proposition that we have because of the DME is a unique one. And so what we have seen then is some active trading.
And if these were truly just simply guys making market and being flat at the end of the day, you would not see the 760,000 open interests that we have grown. And the most important point here is something that we have stressed to our clients.
And the open interest back [ph] -- that's backed out. That they are now -- we are committed to this approach, and it is an energy-complex approach.
I mean, not selective. We just want to meet all of our client needs.
Operator
Brian Bedell of Deutsche Bank.
Brian Bedell - Deutsche Bank AG, Research Division
Great, just a follow up. On the closing of the floors, do you expect any revenue impact, either positive or negative for that?
And then, the $10 million, just to be clear, is that -- that's an annual number? And is that in the cost guidance for 2015?
John W. Pietrowicz
Sure. This is John.
I'll take the second part of that question. The $10 million is an annual number, and it is included in our $1.31 billion guidance.
Phupinder S. Gill
I didn't catch the first question, the first part of the question.
Brian Bedell - Deutsche Bank AG, Research Division
The first part was what -- do you expect any revenue impact from closing the floors, either positive or negative from a, say, volume shift over to electronic?
John W. Pietrowicz
Oh, sorry.
Phupinder S. Gill
We -- the volume that's in the pit is very small in 1% -- is 1% and, in many cases, less than that. And so we -- another fact is many -- most, if not all, of the traders that are trading on the floor also have access and use the electronic platform.
So you would expect some of them to continue to trade on the platform alone and you -- some of them might decide not to trade anymore. But I stress again, it's so small.
It's less than 1%.
John W. Pietrowicz
Yes, and also, we'll be having terminals on the floor for them to access as well, so we don't anticipate there being any revenue leakage.
Phupinder S. Gill
Keep in mind, the floors are not closing. It's just some of the pits that are closing.
So all members will continue to have access to our floor.
Brian Bedell - Deutsche Bank AG, Research Division
Great, okay. And maybe just one last one.
Just on the market-maker incentives on the Brent, the 20% reduction. Do you expect that to improve the energy RPC in the first quarter versus 4Q?
Bryan T. Durkin
Slightly. This is Bryan.
But I think you just need to keep in mind that, over time, we have reduced the level of those incentives. We're seeing the nice pickup in activity in -- particularly from the aspect of commercial users coming into the product.
That has added to our strong buildup of the 600 -- 760,000 plus in open interest.
Operator
I'm showing no further questions. I'd like to turn the call back over to our presenters.
Phupinder S. Gill
Thank you, all, for being with us this afternoon, and we look forward to talking to you in the next quarter. Thank you, guys.
John W. Pietrowicz
Thank you.
Operator
Thank you. That does conclude today's conference.
Thank you for your participation. You may now disconnect from the audio portion.