Oct 27, 2016
Executives
John C. Peschier - CME Group, Inc.
Phupinder S. Gill - CME Group, Inc.
John W. Pietrowicz - CME Group, Inc.
Terrence A. Duffy - CME Group, Inc.
Kimberly S. Taylor - CME Group, Inc.
Sean Tully - CME Group, Inc. Derek L.
Sammann - CME Group, Inc. Bryan T.
Durkin - CME Group, Inc.
Analysts
Michael Roger Carrier - Bank of America Merrill Lynch Daniel Thomas Fannon - Jefferies LLC Chris Allen - The Buckingham Research Group, Inc. Richard Henry Repetto - Sandler O'Neill & Partners LP Kenneth B.
Worthington - JPMorgan Securities LLC Alex Kramm - UBS Securities LLC Patrick J. O'Shaughnessy - Raymond James & Associates, Inc.
Alexander Blostein - Goldman Sachs & Co. Kyle Voigt - Keefe, Bruyette & Woods, Inc.
Brian Bedell - Deutsche Bank Securities, Inc. Vincent Hung - Autonomous Research US LP Rob Rutschow - CLSA Americas LLC
Operator
Good day, and welcome to the CME Group third quarter 2016 earnings call. I would like to turn the conference over to John Peschier.
Please go ahead, sir.
John C. Peschier - CME Group, Inc.
Good morning and thank you for joining us. Gill and John will spend a few minutes discussing the results, and then we'll open up the call for your questions.
Terry, Bryan, Derek, Sean, and Kim are on the call as well and may participate in the Q&A session. Before they begin, I will read the Safe Harbor language.
Statements made on this call and 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 on our website.
Also on the last page of our earnings release, you will find a reconciliation between GAAP and non-GAAP measures. With that I'd like to turn the call over to Gill.
Phupinder S. Gill - CME Group, Inc.
Thank you, Mr. Peschier, and thank you all for joining us.
We have consistently talked about our focus on globalizing our business, growing our industry-leading options and futures franchise, and solving challenges our customers face through a number of innovative product extensions. We made progress across all of these areas during the third quarter.
Year-to-date, our volume is up 8%, as is our transaction revenue while earnings per share is up more than 10%. This morning, I will start with our secular drivers then I will shift to a few product highlights.
We have expanded our global footprint in spite of the challenging macro environment over the last five years. This quarter, we saw volume from Europe and Asia grow in the low single digits while the US activity was flat.
Energy, in particular, stood out in Asia, Latin America, and Europe. We also saw noticeable outperformance in FX during third quarter out of Europe, which is great to see.
In addition to the country of origin information that we share with you, we also track electronic volume throughout the 24-hour trading day. In Q3, our volume during European trading hours increased by 20%, while activity during Asian hours was up 7%.
The US trading hours volume is down 1%, because of tough comps vis-a-vis August of last year. Turning to our efforts in our options franchise.
We remain the leader relative to other global exchanges in terms of total options volume traded. During the third quarter, options reached the highest percentage on Globex to date, with more than 57%, and September exceeded 60%.
A critical focal point has been our continued investment in our functionality and technology to enable increase adoption of Globex execution for complex option spreads. We are pleased to confirm that we hit a record of 50% of all option spreads traded electronically in September, up from less than 20% in 2012.
We continue to launch a number of exciting new product extensions. Our Ultra 10-Year Treasury contract reached 73 contracts per day, compared to 61,000 in Q2.
Open-interest continues to build and the bid offer spread is getting tighter. Building on the success of our weekly equity options that expire Friday each week, we launched weekly equity options with Wednesday expirations about a month ago.
Those are averaging 23,000 per day, and on one day, we traded 45,000. In continuing to tailor contracts to meet specific client needs, we launched S&P 500 Total Return Index futures and those have begun to trade in October.
The other areas of focus related to the initial implementation of the uncleared margin requirements include some cleared FX products like NDS and options, and potential new futures contracts primarily in interest rates, equity, and FX. Moving on to our commodities portfolio, we had another strong quarter led by metals and energy.
up 22%, and 17% respectively year-over-year. In addition to strong volume growth, we continued to expand and diversify our global customer base across all of our commodities' asset classes.
We reached an all-time high this month in the number of large open interest holders in energy, while ags and metals large open interest holders have grown in the mid-single digits and remain near peak levels. This reaffirms that global customers continue to manage their commodities market risk exposure here at CME Group.
Our metals business has been our fastest growing segment this year, with volumes up 29% to date. Our precious metals business has performed extremely well despite a relatively flat volatility curve over the last year.
With 74% of our metal options now trading electronically, we have been able to expand our global customer base by delivering futures and options liquidity all the way through the Asian and European trading days. And in our industrial metals area, we continue to build on our success with our copper business, up 17% year-to-date compared to LME's copper business which is down 7%.
We also continue to grow our copper open interest with September month-end open interest up 17% year-on-year. We are particularly proud to have expanded our metal business with Asian clients by 45%, proving that we can effectively build business despite a challenging volatility environment.
Energy was particularly strong in Q3, average daily volume of 2.3 million contracts, which is up 17%. In Q3, crude was up 20%, natural gas rose 23%, and refined products increased 13%.
Our natural gas options business has been a particular area of success, with September volumes increasing 40%, driven by the significant growth in electronic volume. Within natural gas options during the third quarter, we set records for monthly ADV, a single day volume record, as well as record levels of options trading on Globex at 44% for August, up from just 15% a year ago.
We believe that there are structural shifts taking place in both the crude and natural gas markets, driven by the US now becoming the swing producer in these markets, and we are well positioned to benefit from this shift. We have seen natural gas prices around the world begin to connect, which we believe bodes well for our physically settled Henry Hub contract over the long term.
We see confirmation of global adoption of CME's benchmark energy products in our global customer growth, with energy business in Asia up 104% in September. Turning to financial products and starting with interest rates.
Average daily volume in Q3 was up 2%, and year-to-date we are up 5%. At the end of the quarter, our large open interest holders were very close to an all-time high.
Our total open interest in rates at the end of September, of about 55 million contracts, was up 15%, with Eurodollars up 17%, and treasuries up 10%. Clearly, there is an increased focus on the front end of the yield curve and our Fed-watch tool is currently projecting a greater than 75% probability of a December move.
Open-interest in the first four quarterly Eurodollar futures contract reached 5.3 million contracts, which is a four-year high. Also, it is nice to see that our year-to-date Fed Funds futures average daily volume is up 70%, to 134,000 contracts per day.
Within treasuries, we have increased our cash treasury penetration market share metric to the highest level to date, and have increased by more than 2 percentage points since the beginning of the year, to more than 80%. Over the counter swaps revenues approached $17 million in total during Q3, up from $13 million in Q2.
We reached all-time volume records in our Latin America interest rate swaps in September, with $10 billion per day in Mexican peso, and $5 billion per day in Brazilian real. In addition, we have begun to charge for interest rate swap compression services and have compressed over $2.2 trillion since the fees have been implemented.
Turning to equities, compared to the same quarter a year ago, S&P 500 volatility dropped substantially with a more normal summer quarter. Our volume was down 12% but compared favorably to the majority of the other equity-related volumes traded elsewhere.
For example, we tracked the notional value of the E-mini S&P futures that we trade compared to the SPDR ETF. Last year, in the third quarter, the notional amount traded in our S&P futures was seven times that of the SPDR.
This year, in Q3, that ratio jumped to more than 10 times higher. When you think about the all-in cost to trade based on a tight bid offer spread and deep liquidity, we are considerably less expensive.
Lastly, within FX, we have seen decent year-over-year growth in volume in September and October, and we have outperformed other FX venues. Most importantly, within FX, we are pleased to see a new record number of large open interest holders in the most recent report in advance of the widely anticipated Fed meeting in December.
In summary, through the hard work of our staff, we continue to expand our global footprint and product offerings to create opportunities for our clients and our shareholders. With that, I'm going to turn the call over to John to discuss the financials.
Thank you.
John W. Pietrowicz - CME Group, Inc.
Thank you, Gill, and good morning, everyone. Our team has been intensely focused on driving global revenue growth, operating our business as efficiently as possible, and returning excess capital to our shareholders.
Despite volatility in many asset classes being down significantly from Q3 last year, which included a particularly volatile August in 2015, we were able to come in basically flat in terms of revenue and EPS during the quarter. Volatility by definition does not come in smoothly when comparing periods, and I am pleased to say that our adjusted EPS through three quarters has grown 10% to $3.39 per share.
Our adjusted operating expenses excluding license fees were down 1% compared to the third quarter of last year. Our adjusted operating margin expanded slightly from a year ago to almost 66%.
Our rate per contract for the quarter was $0.75, down from the prior quarter. This was primarily due to a member/ non-member shift in some of the asset classes that saw lower volatility, like equities.
Also, within energy, we had a surge in our lower priced natural gas options which created a negative venue shift. Moving to expenses, excluding license fees and adjustments, our total expense dropped 1% from the prior year to $257 million, and it was down 5% sequentially.
Compensation-related expense dropped 2% compared to the last year, and the compensation ratio in Q3 was 15.2%, down slightly from a year ago. Our non-compensation-related expenses were down less than 1% compared to the third quarter of last year.
Looking at the non-operating income and expense line, our ownership in the S&P Dow Jones joint venture drove $28.4 million in net earnings from unconsolidated subsidiaries, which was the highest level we have ever achieved. Turning to investment income, we received $2.7 million in dividends from BM&FBovespa.
In addition, our investment returns generated through the reinvestment of cash performance bonds and guaranteed fund contributions increased sequentially to $7.3 million from $5.2 million in Q2. This is a result of a higher average net return compared to the prior quarter.
For Q3 this year, we had an average net return of 13 basis points. Taxes for the quarter ended at an adjusted 36.6%, which is slightly above where we guided.
And now to the balance sheet. At the end of the third quarter, we had almost $1.6 billion in cash, restricted cash and marketable securities, up approximately $260 million from the prior quarter.
Earlier this month, we sold down our BM&FBovespa stake to approximately 2.4% and raised approximately $150 million. The brokerage costs were minimal, so the vast majority of that will be included in our cash balance and available when we determine the annual variable dividend.
We believe the steady return of capital has differentiated us from our peers, and we believe we are well positioned to continue to supplement our earnings growth with a healthy dividend for years to come. During the quarter, capital expenditures net of leasehold improvement allowances were $23 million.
The level of capital expenditures is impacted as we continued to leverage more software and infrastructure as a service, which is included in expense. I now expect CapEx to come in a bit below $100 million for the year, driven by the shedding of our real estate assets and the recent sale of our data center.
Last quarter I mentioned the subscription program that we made available for our members. We continue to work with our membership as they weigh the benefits of taking advantage of the program.
The take up so far has been relatively small. We've booked about $170,000 in Q3, and with recent conversions, we are approaching a run rate of $3 million per year of new revenue.
We recently announced our 2017 pricing schedule. In a targeted fashion, we adjusted the volume discount tiers, incentive plans and the base rates.
If volume comes in exactly as it has this year, we would expect transaction fees resulting from the change to increase by 2%. We take a very long term view on pricing changes.
Our goal is to increase volumes, which reduces the overall cost to trade on our markets, as we bring in more participants and enhance liquidity. With record volumes in open interest and expanding number of global participants, the value to our customers from transacting in our markets has never been greater.
We remain focused on being as efficient as possible. We have been reducing the core operating costs to free up expense dollars to deploy on growth initiatives.
We are currently working on our 2017 budget and will report out on our plans next quarter. Last quarter, we adjusted our expense guidance excluding license fees for the second half of 2016 down to $548 million.
The guidance remains unchanged, as we have a normal ramp in the fourth quarter for marketing events. We anticipate launching a new retail advertising campaign that will likely impact us in Q4, and we are expecting higher pro fees based on some growth oriented projects that are underway.
The guidance translates to less than 1% expense growth in 2016 on this basis. In summary, so far this year, revenue is up $169 million, and our incremental operating margin is 94%.
Without license fees, that jumps to about 100%. Our secular growth drivers continued to deliver results with or without volatility.
Our efficiency on expenses has been excellent, and since the first of the year, we have returned $1.6 billion in dividends. With that, we'd like to open up the call for your questions.
Given the number of analysts who cover us, we ask that you limit yourself to one question so we can get to everyone. Please feel free to get back in the queue if you have any further questions.
Thank you.
Operator
And we'll take our first question from Michael Carrier with Bank of America. Please go ahead.
Michael Roger Carrier - Bank of America Merrill Lynch
All right, thanks, guys. Hey, John, maybe first one just on expenses, so, obviously good in the quarter, and when we look at the full year guidance, it looks like the fourth quarter – I know there's seasonality, but there's a decent ramp, I think even relative to maybe last year – a bit higher.
So I just wanted to get a sense on what's kind of already in the run rate, meaning that you expect, versus what would be, like, volume based. And I know going into 2017, it's early, but when we think about what you guys have said, kind of longer term in like the low single digit expense growth, just any color that you can give on how much of that is, like, volume oriented, and so if revenues are strong, you'll be at the top end of the range versus the bottom.
And I know it's still early, but any color there.
John W. Pietrowicz - CME Group, Inc.
Sure, Mike. Thank you.
When you take a look at the increase in expenses from Q3 to Q4, really, it's coming in primarily into three categories. One is compensation, which, similar to this quarter last year, included our annual adjustments to the estimates associated with stock-based compensation, which will cause an increase quarter over quarter – or, I'm sorry, quarterly sequentially, an increase in the fourth quarter.
There's some timing related to professional fees related to organic growth initiatives between the third and fourth quarter. And the other line, which, similar to prior years, is seasonally higher in the fourth quarter and includes costs associated with marketing and customer-facing events.
So to put this into context, we anticipate only a 1% annual increase in organic expenses this year, and we decided not to adjust our guidance. When you take a look at next year, we will update everybody in the fourth quarter's conference call, but we did say that we'd be between the low and mid-single digits, with the higher end of the mid-single digits being due to higher revenue achievement.
So the entire team here is extremely focused on expense discipline, and we're carrying that forward into 2017.
Michael Roger Carrier - Bank of America Merrill Lynch
Okay. Thanks a lot.
John W. Pietrowicz - CME Group, Inc.
Thanks, Mike.
Operator
And we'll take our next question could from Dan Fannon with Jefferies. Please go ahead.
Daniel Thomas Fannon - Jefferies LLC
Thanks. Good morning.
Phupinder S. Gill - CME Group, Inc.
Hey, Dan.
Daniel Thomas Fannon - Jefferies LLC
I guess, John, you kind of highlighted your commitment to the dividends, but just want to talk about M&A with, obviously, industry M&A still happening. Can you talk about how you are thinking about maybe transactional versus kind of non-transactional revenue in terms of that context?
Or is it really just a focus organically for you guys going forward?
Phupinder S. Gill - CME Group, Inc.
Go ahead.
John W. Pietrowicz - CME Group, Inc.
Sure, Dan, thank you. So there really is no change to our view on M&A.
We look at M&A with an eye on creating long-term shareholder value. So we definitely pay attention to the marketplace and are constantly looking at opportunities, and when we see something that is long term value enhancing, we'll act on it.
With regard to whether or not it is transactional versus non-transactional in nature, really, we look at it more from a point of view on creating long-term shareholder value. So if something does create value and we see that it fits in our business strategically, that's something that we will act on.
Phupinder S. Gill - CME Group, Inc.
Dan, just to add to what John said, I think given the nature of the business we have, vis-a-vis other exchanges, we have six asset classes, we have benchmarks within those asset classes and when you put the focus on client needs, I think it's entirely appropriate for us to – in line with what John said, look at adjacencies that might make sense to our clients. So our length is across the ecosystems of the asset classes that we are engaged in with a view to bring more value to our client base.
Daniel Thomas Fannon - Jefferies LLC
Great. Thank you.
Phupinder S. Gill - CME Group, Inc.
Sure.
Operator
And we'll take our next question from Chris Allen with Buckingham. Please go ahead.
Chris Allen - The Buckingham Research Group, Inc.
Morning, everyone. I just wanted to ask a question, I guess this is probably for Terry, there's been a bunch of headlines out of the EU with regards to a transaction tax and there's clearly some worries in the US with the potential for the Democrats to gain more control about a transaction tax.
So any type of updated thoughts on that and what you guys are hearing maybe out of D.C., and how you are thinking about it moving forward.
Terrence A. Duffy - CME Group, Inc.
Thanks, Chris. I think that this is one of those topics that I have heard forever since I have been here, in the last 35 years, 36 years.
You know, people have said – and I have actually read a few reports that if, in fact, Secretary Clinton is to prevail in the presidency and they also prevail in the Senate and the House and control all three branches of the government, that it would be easier to pass a transaction tax. Well, I would say what happened in 2008 when that was the scenario, when President Barack Obama became elected and the Senate and the House both went Democrat, they didn't do anything.
We work very hard on working both sides of the aisle to educate people about how they would be putting a very, very large tax on a very small universe of people that provide liquidity for farmers to transfer risk, people to do mortgage hedging, people to do all different hedging in all the asset classes that Mr. Gill just referenced, and if those spreads widened, I have testified many times how you put forth a transaction tax of a couple hundred million dollars, let me show you how it'll cost the consumer several billion dollars by doing so.
So, I think as long as we act professional and continue to make the arguments, I'm confident that we won't see such a nonsensical tax, but at the same time, taxes are going to probably continue to go up in some way, shape or form. I don't see it in the size of a transaction tax.
You have to remember that around the rest of the world, there are transaction taxes, but not on pure futures. And the ones that do have it are so de minimis, are losing business.
So most of the transaction taxes are in securities-based products, which people hold for a period of a lot longer and they have a much larger universe of participants. When you look at our participants, and whatever the number is, I guarantee you, as we get to the bigger participants, that number is much, much smaller.
So you would have a huge onus on a very small group of people, as I said earlier, and I just can't see even how our government would look at that, and that's one of the arguments that we have made historically, and I think it resonates. Listen, we've got to feed 9 billion people by 2050 with the same amount of acreage we have today.
And if in fact the cost of food goes up significantly because people can't manage risk, that's going be a bad thing for the American people, and I think even the Democratic side of the aisle understands that.
Chris Allen - The Buckingham Research Group, Inc.
Thanks, guys.
Terrence A. Duffy - CME Group, Inc.
Thank you.
Operator
And we'll take our next question from Rich Repetto with Sandler O'Neill. Please go ahead.
Richard Henry Repetto - Sandler O'Neill & Partners LP
Yes, good morning. I just – one comment.
Well, I still don't understand the expense increase from 3Q to 4Q, John. I mean this isn't just a little ramp, this is almost double.
If you look at the last three-year average from 3Q to 4Q, it's $18 million. You are guiding to a $34 million increase here, this year.
What makes this year different than the last three?
John W. Pietrowicz - CME Group, Inc.
Well it's, first off, the increase from – when you take out license fees, the increase from Q4 last year to Q4 this year is a $10 million increase. We did have timing related, some growth oriented projects that shifted between Q3 and Q4.
We also, as I mentioned in the prepared remarks, we've got an advertising program that we're expecting to – that we're expecting to launch in the fourth quarter. So that's impacting as well.
So as you have seen from what Gill had mentioned, we've got an unprecedented number of new product launches and that's – and part of doing that requires some organic spend. So in total, we decided not to adjust our guidance, and as I mentioned, it's really a 1% annual increase in expenses, and, in fact, if you look at the last two quarters of 2014, and compare that to the last two quarters of 2016, we're flat.
Richard Henry Repetto - Sandler O'Neill & Partners LP
Thanks.
John W. Pietrowicz - CME Group, Inc.
Thanks.
Operator
And we'll take our next question from Ken Worthington with JPMorgan. Please go ahead.
Kenneth B. Worthington - JPMorgan Securities LLC
Hi, good morning. Maybe for Kim.
Want to see where CME was in the process of setting up the account with the Fed for the investment of non-house cash? I think a few months ago, you thought it might be completed by now.
So where does it stand? And if it is completed or were completed, at this point in time, how much non-house cash could be deposited if the account were, in fact, open?
Kimberly S. Taylor - CME Group, Inc.
I think we have been talking more about house cash.
Kenneth B. Worthington - JPMorgan Securities LLC
Yep.
Kimberly S. Taylor - CME Group, Inc.
And I think that total, the total house cash that we hold is kind of on the order of $20 billion, fluctuates from day to day. We have our accounts open for the house cash with the Fed, and we're going through the last stages of the testing to make sure that everything will flow appropriately.
And then we're still working with the CFTC and the Fed on the non-house cash or what we would call the customer cash, as well.
Kenneth B. Worthington - JPMorgan Securities LLC
Any timeline on the non-customer – non-house cash side?
Kimberly S. Taylor - CME Group, Inc.
On the customer cash side, the non-house, that timing is really in the hands of the Federal Reserve and it's not something that is very easy to handicap.
Kenneth B. Worthington - JPMorgan Securities LLC
Okay, great. Thank you very much.
Operator
And we'll take our next question come from Alex Kramm with UBS. Please go ahead.
Alex Kramm - UBS Securities LLC
Yes, good morning, everyone. Probably for Gill, but maybe for some of the others too.
You mentioned, Gill, the uncleared margin rules that came in in September, can you elaborate a little bit in terms of the discussions and what you have seen from clients in terms of, you know, I hear you on NDS, but I think historically you've also talked about uncleared margin rules would drive more uptick in futures. And then, just lastly, who is shifting so far?
What kind of customers? Because I think the bigger group of clients coming on in March, so just curious, if you think that's going to be a bigger bump and more dramatic change when those rules come in.
Thanks.
Sean Tully - CME Group, Inc.
Sure, Alex, this is Sean jumping in. On the uncleared margin rules, September 1st was the date U.S., Japan, Canada implemented them.
The CFTC had a no action relief until October 3rd. The biggest impact, according to the BIS reports, are in rates and foreign exchange.
In terms of rates, the biggest new offering that we have out there, that we think could help to relieve some of the challenges that the market faces are swaptions clearing. On swaptions clearings we currently have seven clearing members who have been approved by the risk committee, two new clearing members in the last couple of months, and we are excited that that's a great place to relieve a lot of the uncleared margin requirements in the rates area.
Then if you look at the FX market, as you said, the NDF market, we have an NDF marked offering out there. We also clear cash settled forwards.
But in addition to that, we've begun working very hard on OTC FX options clearing, and we believe that the combination of all of those products together will be very attractive to market participants. We are working very closely with a set of mark participants on that.
In terms of equities, equities according to the BIS reports, is kind of third after those other two asset classes in terms of the impact on the marketplace. We launched on August, late August, a Total Return S&P 500 futures that would nearly replicate the economics of a total return swap.
So the OTC equity swaps market. With the no-action relief until October 3rd, we didn't see any trades in that until the week of October 3rd, but that week immediately, we had several participants trade in that first week, about 3,500 contracts.
So you are talking about $3.5 billion approximately. And they traded in blocks of about 500 million each.
So you had very large participants testing the pipes relative to the equity futures, the equity total returns future. In terms of the next four years, it's only the top 20 or 21 institutions in the world that are affected today.
Over the next four years, the expectation is that will become over 2,000 firms. So we do expect it, relative to our focus on it, relative to the new products and services that we are offering that there will be a lot of pain out there that we can help relieve with the new cleared products as well as with futures products
Alex Kramm - UBS Securities LLC
Very good. Thank you.
Operator
And we'll take our next question from Patrick O'Shaughnessy with Raymond James. Please go ahead.
Patrick J. O'Shaughnessy - Raymond James & Associates, Inc.
Morning. So the dealers keep bringing up the topic of the ""skin in the game"" in the clearinghouses and how much capital that CME puts up in terms of the waterfall.
What are your current views in terms of maybe additional money that you will need to put in the clearinghouses? And what sort of leverage do the dealers have to try to impact your behavior there?
Phupinder S. Gill - CME Group, Inc.
I'm not sure, and I will ask Kim to join in. I'm not sure about the leverage that the dealers would actually have, but we are actually focused on the "skin in the game" issue itself.
As you may or may not know, we pioneered the concept in the late '60s and we are comfortable with "skin in the game", we think it's necessary to have, but we also are very much in tune with respect to the moral hazard issue here. And if you look at our "skin in the game" and what the amount is, there are tons of views out there of the ad hoc views with respect to what that amount should actually be.
From our perspective, at the $500 million or so level that we have across the board, it's about the average contribution of each of those firms. All right?
And we have affirmatively said that we strongly believe that those that bring risk should be the ones that fund the guarantee fund. We manage the risk that they bring, and we are ultra-comfortable with the levels that we have.
Anything to add, Kim?
Kimberly S. Taylor - CME Group, Inc.
I would just expand a little built on the moral hazard point. I mean, I agree with Gill, that we are very big believers in "skin in the game" from the clearinghouse, the clearinghouse needs the alignment of incentives with the clearing member.
But the clearing members are very important participants in any kind of default management situation and the mutualization of risk across clearing mechanisms is part of the reason why clearinghouse mechanisms work so effectively. And turning too much of that to the contribution of the CCP up front, could change the dynamics of the risk mechanisms that support a good default management.
So the moral hazard is very real and shows up in multiple ways in the process.
Patrick J. O'Shaughnessy - Raymond James & Associates, Inc.
Great, thanks for the color.
Operator
And we'll take our next question with Alex Blostein with Goldman Sachs. Please go ahead.
Alexander Blostein - Goldman Sachs & Co.
Hi, guys, good morning.
John W. Pietrowicz - CME Group, Inc.
Good morning, Alex.
Alexander Blostein - Goldman Sachs & Co.
So just thinking through the dividend policy, and I guess the tradeoff between increasing the variable – increasing the recurring dividend versus a bigger special as we are thinking out over the next year or so. Just curious to get your update on that.
John W. Pietrowicz - CME Group, Inc.
We feel very strongly that we've got a very good dividend policy between the regular dividend and the annual variable dividend. As you saw this year, we adjusted our regular dividend up 20% to create more of a balance between the annual variable and the regular dividend.
So, we are very committed to the policy, and as we mentioned in the prepared remarks, there will be some positive increases in terms of the amount of cash going into the fourth quarter related to our sale down of our stake in BM&F, so that freed up about $150 million in cash that can be used when determining the annual variable dividend.
Alexander Blostein - Goldman Sachs & Co.
Sure, I was just thinking, that you know, is the increase in the quarterly something we should expect every year from you guys, or was the event this year kind of one time?
John W. Pietrowicz - CME Group, Inc.
It's really – it's a board decision, but if you take a look at our past, we've had a policy of consistently increasing our regular dividend, but it's really a board decision, and it's something that we'll be analyzing in the fourth quarter along with the annual variable dividend level.
Alexander Blostein - Goldman Sachs & Co.
Great. Thanks.
John W. Pietrowicz - CME Group, Inc.
Okay. Thanks.
Operator
And we'll take our next question from Kyle Voigt with KBW. Please go ahead.
Kyle Voigt - Keefe, Bruyette & Woods, Inc.
Hi, good morning.
John W. Pietrowicz - CME Group, Inc.
Morning, Kyle.
Kyle Voigt - Keefe, Bruyette & Woods, Inc.
Just on the energy slide, comparing your WTI versus ICE Brent contract, I think if we look at futures open interest specifically, we aren't seeing necessarily the same shift. So can you help us understand the variance there between open interest and ADV?
And I guess, what is driving the increased volume and activity rates in your WTI contract? Thank you.
Derek L. Sammann - CME Group, Inc.
Yeah. Hey, Kyle, it's Derek.
Thanks for your question. We are actually very excited about the growth rates that we've been able to unlock in our energy complex, and it's a number of factors both that we are controlling for in terms of our ability to both roll out product, acquire new customers, position our benchmark products in what is a market that is shifting structurally in favor of our benchmark products that, whether you look at the lifting of the export ban in crude back in December of 2015, creating a waterborne product that is WTI – we now have a product that the market is increasingly adopting as a global benchmark.
As Gill referenced in his earlier comments at the top of the call, our growth in Asia, particularly in our energies franchise, is up in excess of 100%. So adoption and participation in our markets globally is increasing as we are leveraging Bryan's teams on the ground in Europe and in Asia to go access and bring new customers on board.
And when we actually think about the energies complex as a whole we're thinking about well beyond just the crude story. We're talking about nat gas as well.
So as we talk about the overall franchise on slide nine of the deck that we sent you guys, in the same structural shifts we talked about that are beneficial to our crude business favoring WTI over Brent, we're also seeing some reconnecting of the global nat gas market. On slide nine on the right-hand side, we've got a graph of what we're showing as a reconnecting of the prices of U.S.
nat gas, really driven by our physical Henry Hub products, between the prices both in Asia and Germany. And when you look at the market share that we've grown to, we are now 76% market share of the global Henry Hub futures market.
That's up from 73% in 2015 and 68% in 2014. So we're excited about as markets converge, the role that the Henry Hub futures complex, the physical part that we launched, will play as a benchmark product pricing in the global nat gas market as those prices disconnect from the crude market and reconnect globally.
Also, the open interest levels over the course of this year, we've reached not only record levels of open interest in nat gas, but we're hovering right at all-time highs in our large open interest holders on the futures side. And on the options, as we talked about previously, record levels of electronification in nat gas options and continued growth, our nat gas options business is up over 30% this year.
Kyle Voigt - Keefe, Bruyette & Woods, Inc.
Okay. Thanks.
Operator
And we'll take our next question from Brian Bedell with Deutsche Bank. Please go ahead.
Brian Bedell - Deutsche Bank Securities, Inc.
Great, thanks. Just staying on the energy theme, can you comment, Derek, about NASDAQ's NFX effort, whether that's actually enhancing your volumes, given the arbitrage between markets?
And if that program is expanded over time, is that a net benefit for you, or do you see that actually eventually being sort of a headwind on the incumbent's market shares?
Derek L. Sammann - CME Group, Inc.
When I look at the progress that we've made relative to the business that we've developed, we've got a nice problem. We've got a market that's up over 30% in September volume-wise.
As I mentioned, the market share increasing up 70% on the futures side, and our market share relative of the nat gas options is still around 64%, 65%. But what we've really done is we've focused on electronifying the nat gas options business.
When you look at what the other offerings are out there, this is a market that's typically been brokered, and we're the ones that have gone from less than 10% electronic in nat gas options to a record of over 40%, as Gill mentioned at the top of the call. And as you've seen us do across products over time, when you focus on functionality and electronic access to your options market, bringing people into the transparent central and order book, we tend to see the velocity of transactions increase, and more important, we can access a global customer base.
That's really hard to do in a block market. So we're excited about the progress we've made.
The large open interest holder record levels that we're touching on is really a reflection of the increased global adoption of our product set. So we're excited about the multiple records we've hit in nat gas options – ADV, single day record, large open interest holders, as well as the deferred bump (39:49) liquidity that we have built and focused on over the last 12 months as well.
Our open interest in months 6 through 12 is up 36%, as we are focusing on the commercial end user customers to bring them into our market, and those are the physical users that are using our product.
Bryan T. Durkin - CME Group, Inc.
I would just add to that, particularly out of Asia, which has been a bit of a struggle in the past in terms of the adoption of our energy products, the leader in terms of growth throughout greater China, Hong Kong, Taiwan, as well as within Korea, has unquestionably been in the energy. Those that had traditionally favored the alternative to our WTI have been increasingly adopting our crude, and they've been very noticeably active in the natural gas, and very pleased to see the greater transparency associated with that.
So we are going to continue driving that progress within those regions. Same holds true for within greater Europe.
Brian Bedell - Deutsche Bank Securities, Inc.
Okay, great. Thanks for the color.
Unknown Speaker
Thanks.
Operator
And we'll take our next question from Vincent Hung with Autonomous. Please go ahead.
Vincent Hung - Autonomous Research US LP
Hi.
Phupinder S. Gill - CME Group, Inc.
Hi, Vincent.
Vincent Hung - Autonomous Research US LP
I just wanted to get your take on the FSB paper on CCPs and what global regulators are doing in respect to the systemic risk of CCPs. So where do you expect regulation to go, if anywhere at all?
Phupinder S. Gill - CME Group, Inc.
This is Gill, I'll answer that, and I'll ask Kim to add if she has anything to add. I think the FSB, like all the other regulators, are concerned about CCP resiliency, just as Chan and Massad at the CFTC is, and I think the authorities such as the CFTC are familiar with TCPs, familiar with the risk that TCPs bring, and they are comfortable, I think, with the framework that they have been overseeing for decades.
I think the FSB, which includes some of the central banks of the world, that don't necessarily – have not necessarily overseen CCPs are coming to grips to what those mean. They're looking at various and sundry scenarios.
And this is all part and parcel of the knock-on effects of the crisis of 2008. On our part, we're working very hard to educate to the extent that we can, and also contribute to the debate, to the extent that we are allowed to.
Kimberly S. Taylor - CME Group, Inc.
Yeah, I would just add a couple of things. Gill mentioned the kind of varying perspectives of different regulators, and one of the things – part of our advocacy is to help educate regulators that are newer to the regulation of clearinghouses or CCPs.
Because although the G20 and the regulation have pushed products into clearing mechanisms because clearing mechanisms worked in the crisis, the interesting thing is that now they are thinking about slightly changing the way clearing mechanisms need to work. So we want to make sure that clearing mechanisms maintain their effectiveness, and our advocacy is in that regard with respect to flexibility and crisis management, and the ability to have strong risk management programs.
Vincent Hung - Autonomous Research US LP
Thanks.
Operator
And we'll take our next question from Rob Rutschow with CLSA. Please go ahead.
Rob Rutschow - CLSA Americas LLC
Hi, good morning.
John W. Pietrowicz - CME Group, Inc.
Good morning.
Phupinder S. Gill - CME Group, Inc.
Morning.
Rob Rutschow - CLSA Americas LLC
Just a question on RPC. You mentioned in the press release a negative mix shift in equities and energy.
Is that purely just mix in terms of customers, or are you seeing end customers take actions to try to reduce their RPCs? And in addition, the advertising you mentioned in the fourth quarter, is that geared towards trying to drive more non-member activity?
John W. Pietrowicz - CME Group, Inc.
Sure, this is John. I'll take it, and I will ask Derek to comment specifically on the energy side.
So within equities, we had a higher proportion of member trading. And in energy, we had two factors.
One is we had a larger proportion of member trading than last quarter, with member volumes up 19% and non-members up 15%. We also saw a large increase in the use of our electronic natural gas options, which are lower priced than ClearPort.
And Derek, if you want to comment on what you're seeing in terms of options trading, that would be great. But before we do that, I will just mention, in terms of the advertising campaign, yes, it's geared towards more retail and non-members.
So with that, I will hand it over to Derek on the options.
Derek L. Sammann - CME Group, Inc.
Yeah, on the nat gas side, as John mentioned, there's two things going on. Number one, you have seen us build into sustainable growth and options markets by making sure that we can build those marks electronically.
So we can market that liquidity globally. We've faced a market structure in nat gas options a year ago that was 95% brokered, less than 5% traded on screen.
So every time we shifted businesses from a brokered market onto the screen we have done that because our experience has shown that you create a sticky ecosystem of user participants by bringing them into the central of an order book. The downside of that is you end up giving up our block surcharge, when we charge people an excess amount for dealing outside of the central of an order book.
So it's been a very disciplined approach to move that business on screen. So we are finding a great deal of success moving from less than 10% electronic, to a record of 44% electronic earlier this year, I think in August and September.
So it's a shift that we have anticipated, a shift we've undertaken in other markets as we've globalized and electronified them, and with the business up 31%, typically you also start to move through volume tiers as well. So we consider this a first world problem relative to volumes growth and a disciplined move on to a central order book.
Rob Rutschow - CLSA Americas LLC
Great, thank you.
Derek L. Sammann - CME Group, Inc.
Thanks.
Operator
And we have a follow-up question from Alex Kramm with UBS. Please go ahead.
Alex Kramm - UBS Securities LLC
Yes, hey, hello, again. I guess a couple of follow-ups.
I will start on market data. I don't think you have mentioned it, but I think you've given some guidance in the past there, it was down sequentially.
Any updated views of how that should be trending in the next quarter, maybe even 2017, as people trade in their memberships, and things like that? Or their screens rather.
Bryan T. Durkin - CME Group, Inc.
Hi, it's Bryan. First of all, just to give you a little color since the elimination of the electronic fee waiver has been effect for almost a year, wherein all of our professional users are paying the full market data subscribers fee, our revenues and our subscribers remain stable.
Now as we continue to advance our market data and IP growth opportunities, we have been performing a holistic assessment of our current program, and our assessment indicates that there are opportunities to extract additional value and revenues from our assets. So, for example, in 2017, we expect that the manner in which we charge for our core market data services will be modified to tailor our fees in a more targeted fashion.
Our approach to charging trading and non-trading participants will be modified to address the global nature of this business, and the various subscriber profiles that are consuming our data. So we believe our current pricing schema does not fully capture the value Alex described to these different user segments.
And just to give you a recent example of our targeted approach, I think I referenced at the last call, that we are increasingly commercializing our derived and historical market data offerings. So with respect to derived data, there are increasing opportunities and there's a significant pipeline of demand for our data IP, as the demand for the development of external product continues to increase.
Now, this clearly has been an area of revenue opportunity for us that we plan to drive greater growth, and it's been typically referenced in the past as core market data. So we will be separating that out increasingly, and going after those opportunities on a derived basis.
I think you also may be aware of our recent announcement of our new historical market data platform, which we just recently introduced in conjunction with TickSmith. To the usable, data needs to be instantly accessible and we have done that with our recent introduction of TickVault.
Data users now can browse a data catalog, subscribe to the content needed and access it via the web interfaces and APIs almost instantaneously. So this is making data access easy, and it's responsive to the global demand that we've been hearing.
So we see more opportunities to extract more value in that regard. So that just gives you a taste of how we are relooking at the assets from the market data and IP perspective.
Alex Kramm - UBS Securities LLC
Sorry, go ahead.
John W. Pietrowicz - CME Group, Inc.
Sorry. Just one more point on that.
When I'd look at the fourth quarter, I think market data will be in the neighborhood of $100 million.
Alex Kramm - UBS Securities LLC
All right great. That was more color than expected, so thanks for that.
I guess just moving on, since we are in follow-up mode here. On the membership, new membership opportunity, I think you said it's a little bit disappointing relative to what you expected.
So can you just talk about the feedback that you have gotten? Is it basically people saying your stock is a good value, we like the dividends, we'll keep it?
Or any other reasons why maybe the take up has not been as high as you expected?
John W. Pietrowicz - CME Group, Inc.
Sure. I wouldn't say it wasn't as high as we expected.
I think we're right now at about a $3 million run rate per year in terms of – in terms of the amount that we had anticipated – that we gave out in terms of take up. So although it's only 173 – $170,000 for the quarter, we are at a $3 million run rate.
So, it does take times for firms to make these decisions, as you indicated. They are weighing the annual variable dividend that they get in the fourth quarter by – or into the first quarter as – for holding our shares, so they take a look at that.
Also, we think it's beneficial for new members coming in, especially those from overseas, that were holding CME stock and having that amount of capital is prohibitive. So, that takes time to work through the system.
So, in terms of the overall opportunity being about $40 million, we're at roughly 10% of that and it's only been out for just a couple of months. So, for us, this is really nothing but upside for us.
Alex Kramm - UBS Securities LLC
And then, just one last one. Apologies in advance.
But, you mentioned the retail advertising. Any particular reason why you are so focused on retail right now?
I mean, can you just remind us how big retail is for you? Is this a global campaign?
Is this just a US campaign and why now? Why do you think there's an opportunity in retail?
Bryan T. Durkin - CME Group, Inc.
Definitely a global campaign. And we have been working towards this for the past several years cultivating opportunity and growth from this retail segment.
And to give more focus on it this past year, we actually separated it out as a distinct client segment line, headed up by a gentleman that's been leading it for a number of years on our behalf, Mark Omens. Now, as we see the growth happening across our asset classes, it's representing a very significant revenue stream for us, looking at it from the non-member perspective as well.
And we see that across all of our asset classes. It's one of the fastest growing segments that we've seen.
Terry?
Terrence A. Duffy - CME Group, Inc.
Yeah, no, I agree with that. I think that when you look at a revenue coming out of our traditional retail, the way we measured it basically next to nothing, and then putting in roughly a couple hundred million dollars I think last year alone and coming from the retail side of the business the upside is just extraordinary.
We have I think somewhere in the neighborhood of 4% of the retail trade globally, and if we could just double that, you can imagine what the revenue could do for this company. So, we are taking a strong look at that.
I think what's important is here we are not targeting the mom and pops on the street. When we call retail, we are talking about participants that are in the market today, trading anywhere from 10 contracts to 20 contracts a day already.
And we are trying to harness that into the business. What I think is also fascinating is when you look at some of these discount retail equity brokers traditionally, they are starting to merge together, the ones that offer futures.
So that only bodes well for us to concentrate just more among people that are already offering these products.
Alex Kramm - UBS Securities LLC
All right, thanks. I was here plenty of time, thanks.
John W. Pietrowicz - CME Group, Inc.
Thank you.
Operator
And it appears we have no further questions so I would like to turn the conference over to our speakers for any additional or closing remarks.
John C. Peschier - CME Group, Inc.
Thank you very much. And for some closing remarks, the entire team at CME is focused on maximizing our secular drivers and taking advantage of the structural changes in our markets.
We are operating the business as efficiently as possible. Let me illustrate that for you.
When you compare the first three quarters of 2014 with the first three quarters of 2016, we have grown the top line over $400 million and our adjusted expenses are down $23 million, while continuing to innovate and launch many successful new products. So thank you very much for joining us today and we look forward to speaking with you next quarter.
Thank you.
Operator
This does conclude today's conference. You may disconnect at any time, and have a wonderful day.