CME Group Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2022, compared with the same 2021 periods. CME Group operates futures and options exchanges, clearing services, cash markets and market-data businesses. Management attributed higher trading activity primarily to increased interest-rate and equity-market volatility amid inflation, Federal Reserve policy changes and geopolitical uncertainty.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1,237.2m | $1,179.2m | $2,583.8m | $2,432.5m |
| Operating income | $749.7m | $674.7m | $1,608.8m | $1,399.8m |
| Operating margin | 60.6% | 57.2% | 62.3% | 57.5% |
| Net income attributable to CME Group | $662.5m | $510.3m | $1,373.5m | $1,084.7m |
| Diluted EPS | $1.82 | $1.42 | $3.78 | $3.02 |
| Operating cash flow | Not separately reported | Not separately reported | $1,416.7m | $1,102.5m |
- Q2 revenue rose 5%; clearing and transaction fees increased 10% to $1,024.6m, while market data revenue grew 4% to $151.7m. Other revenue fell 41% to $60.9m, mainly reflecting the 2021 contribution of the optimization business to OSTTRA.
- Q2 total contract volume rose 23%, while average rate per contract declined 7% to $0.647, primarily due to product mix and higher volume incentives. For the first half, volume rose 22% and average rate declined 4%.
- Q2 expenses declined 3% to $487.5m. Lower compensation and benefits were partly offset by a 53% increase in licensing and other fee-agreement costs, attributed mainly to higher equity-product volumes.
- Non-operating income was $117.0m in Q2 versus $51.4m a year earlier. Investment income rose substantially with higher interest rates and reinvestment balances; this was partly offset by higher expenses distributing interest earned on clearing-member collateral. The filing reports investment income of $286.9m and other non-operating expense of $217.3m for the quarter.
Financial position, liquidity and capital
- At June 30, cash and cash equivalents were $1.9bn, down from $2.8bn at year-end 2021. Operating cash flow for the first half was $1.42bn. Investing used $440.5m, including a $410m contribution to S&P/Dow Jones Indices LLC; financing used $21.45bn, largely reflecting a $19.52bn decrease in performance-bond and guaranty-fund contributions and $1.91bn of dividends.
- Performance bonds and guaranty-fund contributions were $138.4bn on both the asset and liability sides of the balance sheet. These customer/clearing-related funds are restricted and unavailable for company operations; they should not be treated as corporate liquidity.
- Total debt was approximately $3.44bn at carrying value, with no short-term debt at quarter-end; the $750m notes previously classified as short-term were repaid. The company issued $750m of 2.65% notes due 2032. It reported $2.3bn of unused general-purpose revolving capacity and no borrowings under that facility or its $7bn clearing-house facility. Debt covenants were reported as satisfied.
- Total shareholders’ equity was $28.0bn. Dividends declared during the first half were $2.00 per common and preferred share.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management noted that trading volumes depend on market volatility, economic and political conditions, regulation, competition, customer activity and product mix; it also cautioned that quarterly results are not necessarily indicative of future periods.
- Management cited higher interest-rate volatility and equity-index activity, while agricultural commodity volumes weakened amid risk aversion and global trade uncertainty. Energy trading eased in Q2 after heightened activity earlier in the year.
- A putative class action brought by Class B shareholders and members was certified as a damages-only class in December 2021; no trial date was set, and the company could not estimate a reasonably possible loss range. The company said it has strong defenses. No accrual was recorded for legal or regulatory matters because none were considered both probable and estimable; management did not expect other proceedings to materially affect results.
- CME guarantees cleared transactions and maintains substantial collateral and clearing safeguards. It reported an estimated nominal liability for its settlement guarantee and no anticipated future credit losses on performance-bond assets. It also disclosed $330m of letters of credit under its Singapore Exchange mutual-offset agreement and a related $350m line of credit.
- Management reported no material change in market-risk exposure or risk factors since the 2021 Form 10-K. Disclosure controls were effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- How much of the earnings increase reflects durable operating growth versus higher interest income and the associated pass-through expense on clearing collateral.
- Whether trading volumes and the lower average rate per contract sustain revenue growth, especially as market volatility and product mix change.
- The impact of OSTTRA’s deconsolidation and the $410m S&P/DJI investment on future revenue, earnings and cash returns.
- Corporate liquidity excluding restricted clearing funds, debt maturities and capacity under the committed credit facilities.
- Developments in the Class B damages action, regulatory matters and the company’s clearing, counterparty, technology and cybersecurity risks.