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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day everyone, and welcome to the CME Group First Quarter 2019 Earnings Call. At this time, I would like to turn the conference over to John Peschier. Please go ahead, sir.
Great. Thank you. Good morning and thank you for joining us. I'm going to start with the Safe Harbor language. Then I'll turn it over to Terry for brief remarks followed by questions. Other members of our management too will also participate.
Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. For detailed information about factors that may affect our performance can be found in our filings with the SEC, which are on our website.
Also, on the last page of the earnings release, you will find a reconciliation between GAAP and non-GAAP measures.
With that, I would like to turn the call over to Terry.
Thank you John and thank you all for joining us today. We appreciate your interest in CME Group. My comments today as John said are going to be very brief, so we can get right into your questions.
We released our Executive commentary this morning which provided extensive details on the first quarter. During our last call, I mentioned that we had strong tailwinds to finish the year. We had made the most of it also. Market conditions changed significantly from the prior quarter, and volatility did drop across virtually every asset class.
Despite the change in the trading environment, we were able to post our third highest futures and options quoted in our history, while we kept our expenses relatively flat.
More importantly, we continue to execute on our long-term strategy to attract new clients and to launch new innovative products. We had significant customer engagement. We ran strategic targeted campaigns educating market participants and new non-core products and product extensions as well as cross selling through all our product lines and into new cash markets and optimization services.
During the first quarter all six product areas had an increase in their business from outside the U.S. We continue to launch innovative new products, tools and services to support customer needs and to create capital and operational efficiencies from market participants.
In Q1, we had multiple volume and open interest records including Sulphur futures, FX Link, Bitcoin Futures, Treasury Futures, Invoice Spreads, Copper Options and our New West Texas Intermediate Houston product.
Within the NEX market business, the combined EBS and BrokerTec monthly revenues in Q1 came in fairly close to the Q4 results. This is despite as I said earlier, much lower volatility.
On the core futures and options side, our open interest rose from 118 million contracts in mid-March to more than 134 million contracts last week. And today, it sits just north of 132 million contracts, which is not too far from our peak in 2018.
We remain very excited about the opportunities in front of us. With that short summary, we would like to open the call for your questions. And based on a number of our analysts covering us, we'd ask you to limit yourself to one question, and then get back in the queue. Thank you. And we’ll take your questions.
[Operator Instructions] Our first question is from Rich Repetto from Sandler O'Neill.
Yes. Good morning Terry. Good morning John and team. I guess the first question has to do with the contribution from my NEX and when we're looking at the rate per contracts, the revenue per million for EBS and BrokerTec, we're back into what appears to be declines quarter-over-quarter in the mid -- you know double digits around 15%. I just want to see whether that's accurate? And just general color on the -- on the NEX integration as well, but first the -- the revenue per million please?
Yes, hi Rich, this is John. I think what you would you need to look at when you look at the rate per million is in the BrokerTec business, the two primary drivers of the revenue are treasuries and European repo. The U.S. repo is a small portion of the overall business at this time. So that's one thing to take a look at. Also, the sensitivity to volume at BrokerTec is less than it is say at EBS or CME Group.
But when you look at as Terry mentioned in his prepared remarks, when you look at the volatility environment in Q1 versus Q4, it is substantially lower in Q1 than in Q4. But when you look at the revenue for the quarter, for the markets business, it held up remarkably well and it was down only 3% sequentially. Sean?
Yes. I mean in particular you need to get the product mix, right. So you saw a growth in the first quarter in European repo in particular and the repo RPCs are much much lower as John mentioned, than the outright treasuries for example.
In terms of the integration question Rich, we're very pleased with how the integration is progressing. We're on plan to achieve this year synergy targets. We have a staffing event related to integration mid-year along with a plan cut over for some administrative systems, which will support the consolidation of the internal functions.
And we're also on track to combine office space in New York, Tokyo, Hong Kong and London by the end of this year, which will free up some leased space. And as we mentioned on the last call, we are targeting customer migration to glow backs with BrokerTec in 2020, and EBS in 2021.
And anything on the, the question was on the EBS capture as well?
In terms of the EBS capture, I think when we -- when you take a look at you know when you take a look at the activity, again it's a mix issue between the G10 activity and the rest of business. So the more activity that occurs in spot G10 that tends to have a lower rate than CNH and the NDFs
Got it. Thank you very much, John.
All right. Thanks.
Moving on. Our next question is from Dan Fannon from Jefferies.
Thanks. Good morning. I guess a follow up on just kind of the overall expense profile of the first quarter showed some concern -- some slow start versus your guidance. It sounds like the synergies are more back end loaded. So we should just expect a ramp here as the year progresses, and I guess characterizing the volume environment in April is still not being all that robust. I guess how should we think about kind of that build of expenses?
Thanks Dan. I think the -- when you take a look at our expense profile for the year, we are expecting to have a staffing event in the middle of the year. So we will be you know we'll be updating our synergies target at that time. I and also like I have mentioned previously, we'll have some cut over, some systems, and we're going to be consolidating some office space left. I have better clarity in terms of the synergy capture for this year. As the management team looks at synergies, we're looking to accelerate the synergy capture as much as we possibly can.
In terms of the expense guidance, yes we you know when you take a look, we did have, you know the first quarter was lower relative to the rest of the year, but we will be having some ramp up in in work done on systems for these -- for the rest of the year. So it's really more timing around projects and as they as they get launched. But we'll be able to provide some more color on with the second quarter call.
Got it. Thank you.
All right. Thanks, Dan.
Our next question is from Ben Herbert from Citi.
Hi, good morning. Thanks for taking the question. Could you maybe just give us an update sticking with next year. Just an update on the cross-sell efforts through particularly their non U.S. channels?
Hi, this is Bryan speaking. The thing that we're really excited about is the ability to cross-sell the multitude of product offerings that we have bringing together the strong markets capability along with the optimization services that we provide. I think what I'm most proud of right now is through this integration process, we are working together. We're not skipping a beat in terms of the seamless performance of these new platforms that we've acquired and as we're going through the integration process.
The client base is very enthusiastic about what we have on the horizon in terms of the new capabilities and functionalities that will be associated with the cut over and migration onto Globex from the market's perspective. But I think even more important is we're able to solve issues and challenges today by bringing together the combined forces of what we've had under the historical CME Group adding on the NEX components. As we look at improving capital efficiencies and addressing margin efficiencies post trade challenges that firms have been encumbered with using and leveraging the capabilities that we have across the CME Group is having a very positive impact with our client base.
Thank you.
And moving on we'll hear from Brian Bedell from Deutsche Bank.
Great. Thanks very much. Good morning.
Good morning Brian.
Thanks. Just to go back to the expense guidance. The -- I guess right now it implies about a 3% to 4% quarterly increase in run rate from the very good 1Q level. Maybe if you could just touch on which areas you expect that to move up and I know John you mentioned the staffing event at midyear. If you can just talk about in addition to that, what type of flexibility you might have if the volatility environment stays really late?
And then also just one clarification on the new fee program on noncash collateral from 1 bips to 5 bips with the revenue impact on the quarterly run rate?
You've got a lot in there Brian. So let's talk about expenses first and then we'll break down. We'll break down your other points. So, in terms of, in terms of where we see the expenses coming in a little bit, a little bit heavier in the quarter, really it's around, it's around when projects get implemented. So we've been staffing you know some contract workers so you see professional fees will tick up.
Our professional fees if you look historically tend to be lighter in the first quarter. And then they tick up as projects get under way during the during the year. So I'd expect professional fees to go up a bit. On the compensation line, you'll see that tick up a little bit, but then, like I mentioned, we'll be having a staffing event which will occur mid-year so then that would come back down.
And then, also, depreciation will be rolling in as systems get put into production, then it rolls out of work and process and gets amortized into depreciation. So that's another, another line.
And then obviously in our CME, legacy CME expenses tend to be heavier in the fourth quarter as we've got a lot of customer facing events that occur in the fourth quarter. So you'll see a tick up in the fourth quarter. So that kind of gives you an idea of some of the breakdown.
Then, when you look at the levers for us, should there be a prolonged downturn in volumes. You know, well first off I think, if you take a look at CME Group over the last several years, I think it's safe to say that the entire organization has done an excellent job in managing that, the expenses and that mindset is continuing. You know obviously if there's a prolonged downturn in volumes, you will double down our efforts in terms of managing our expenses. We do have some discretionary costs that we can put a sharper lens to things like travel and entertainment, marketing spend that may not drive near-term results. But, we obviously are not going to do anything that impacts the future growth, the trajectory of the business.
As I mentioned before, as normal course of the integration, the entire management team is looking at ways we can accelerate the synergy capture where we where we can. So that's another thing that we are, we're focused on. But to put it in perspective, we did have our third best volume quarter in our history, so I think it's a bit premature to talk about potential, potential reductions in costs at this point although we do have a strong view on cost containment cost control.
Then you mentioned the change in the collateral fees. Yes. That the change the collateral fees will go into effect July 1st. We're increasing the non-cash collaterals fees from 1 basis point to 5 basis points. We have approximately $100 billion in non-cash collateral, excess non-cash collateral and guaranty fund contributions are not impacted by the fee increase. And that's approximately $20 billion.
Now non-cash collateral will fluctuate based upon trading activity and also based upon the mix of non-cash collateral to cash collateral. But that kind of gives you some ideas around of what we're looking at there.
That's about it. It looks like $40 million annualized if it's 4 basis points increase on $100 billion?
Well, it's – you’ve got to take out like I mentioned before, you got to take out the guaranty fund contributions and the excess collateral. And as I said, that's $20 billion.
Got it. Great. Thank you so much. Super helpful.
All right. Thanks.
And we'll go next to Alex Kramm from UBS.
Hey, good morning everyone. Just wanted to come back to the NEX opportunity set that you addressed earlier. I mean, obviously we've talked about this in pretty big generalities for about a year now, and but now that you've owned this asset for six months or so and clearly you're doing projects and talking the groups that target each other maybe you can just help us by giving us maybe the single largest individual opportunity that you see and what the timeline is, so we can get a little bit more concrete here? Thank you.
Alex, thanks. I’ll ask Bryan and Sean both to comment on that, because, we think there's multiple opportunities that we're yet to talk about but they can give you a little bit of a color what they're looking at today.
I'm going to take the optimization side and Sean can speak to the markets if that's all right. On the optimization side of the equation, as you all well know our marketplace and particularly our banking institutions have been challenged consistently with maintaining costs and capital efficiencies through the acquisition and the combination of our optimization services along with our excellent clearing services in post trade capabilities. We're already as we speak, you know as I alluded to earlier, operating as an integrated team of people working with our clients to find solutions for greater capital efficiencies.
We're offering them streamlined connectivity and processing capabilities through the complement of the optimization services of triReduce, triBalance, triResolve, Traiana [ph] and bringing those things together as a combined force and not necessarily operating them as independent businesses or silos. Just having the combined efforts along with Sunil’s [ph] team to be able to work with and identify solutions for our firm's real time has been it's been a strong positive force and is being very well received by our clients. So when you think about having the potential for centralized risk management capabilities across, the cash across the listed futures that we offer and OTC products, our clients today are very excited and enthusiastic about the services that we're going to be able to provide by these combined forces.
Yes, I totally agree. Fine, I might actually say a couple of things in the optimization area. First and foremost, you have the uncleared margin rules right, which has hit the largest banks, but have not hit all the participants yet. So on September of this year, we expect to see on the order of 50 new participants. They'll be hit by the globally. They'll be hit by the unclear margin rules. And then in September of the year after it could be close to a thousand different participants that are potentially impacted.
You see any group with its optimization businesses and its existing clearing services can address every single aspect of client’s needs around those problems. You've got triResolve, which can look at the margin of uncleared -- of the uncleared margin. So in other words, the sending out of the messages, the reconciliations of margin etcetera. You can calculate, let's try calculate, the sim or those uncleared margin requirements.
You can try to avoid, having to post uncleared margins, or reducing the outright margin that they have needed between the parties, by using the triBalance service. You can also use triReduce in order reduce your notional outstanding in order to try and reduce the you know the need to actually post margins. On the other hand, just like it was the Dodd-Frank. You can then move people from uncleared space into cleared space, and you can move in particular their FX options, as well as you know the NDFs from unclear space to cleared space or you can move them directly into our futures complex.
So we have the totality of solutions for the marketplace as you approach the increasing demand for solutions to the unclear margin rules. In particular, relative to services that we have launched previously and you've heard a lot about, in terms of our portfolio marketing between futures and swaps.
In the fourth quarter, the savings that we were – or where the efficiencies that we were offering the marketplace was about 2.6 billion. Currently, we're saving the market about 4.3 billion, so clearly about 4.3 billion where the efficiencies relative to portfolio margin. This has led to growth in things like invoice spreads, so invoice spreads for example, the ability to trade CME Treasury Future as the spread to a swap and to clear them both the CME creating huge margin and capital efficiencies. That's grown from 89,000 contracts today last year to exactly 134,000 contracts today in the first quarter and 118,000 contracts a day so far this year at $1.92 RPC, a very nice add to our futures business.
If we move over to the market side, we're very excited. It's very early days in terms of our ability to do a couple of things; first of all, cross-selling. You know the future clients into the OTC products that we have as well as the our OTC clients or the EBS clients for example into our futures products. We see those two marketplaces as highly complementary.
If you think about total cost analysis and you think about what investors and the buy side, sell side accounts are all interested in. They're interested in the lowest possible total cost. And if you can to the extent that you can, and we are going to be focused on it, you give access to both liquidity pools right, or even in some sense combine the liquidity pool experience and the FX market for example. Think, think about what we can do? Your total cost, the largest cost is your bid off a spread. So to the extent that we combine the liquidity pool of call it the 80 billion, 90 billion a day on EBS with a 80 billion, 90 billion a day in our FX futures.
While you recall last year, we launched FX Link, which links those two marketplaces with the base history. When you start to combine those liquidity pools what do you do? You’re taking that bid off the spread. You’re taking that bid off the spread because those two markers are quoted differently. Number one and number two, you deepen the book. So by tightening the bid off the spread, and deepening the book, and cross-selling into a larger marketplace is a much more compelling, better value proposition than we've ever had before in a foreign exchange market. And we're going to be able to access a much larger client base. It's early days, but that's the vision.
Alex, hopefully that gave you a little color on the optimization of markets businesses and why we're so excited by it because of the opportunities that we see. And again, I think what both Bryan and Sean outlined is operational and the cost efficiencies which is exactly what you need to grow any marketplace and that's exactly what we're doing by those acquisitions so hopefully that gives you a little more color for what we're trying to achieve.
Yes. Thanks. It was a little bit more than the one single largest opportunity but I do appreciate the color. Thank you.
Well Sean is very thorough, so is Bryan.
Thank you.
Michael Carrier from Bank of America has our next question.
Good morning. Thanks for taking the question. Just on the current environment and the current backdrop, when I look at the open interest you know overall, you show some of the data and some of the growth in the product areas. It seems like a lot that it has been driven by the rates, complex. We look at say like equity, energy some of the other areas you're seeing a bit of a -- some softness. Just wanted to get some color, obviously you've got tough comps in 2018 into and we put that in perspective.
But just in terms of the environment, what you're seeing in some of the product areas. Just given the divergence in an open interest trend?
Mike, it's a good question, and instead of spending more time on the growth of the rates business, we’ll let Derek talk about, Derek Sammann talk about the energy markets and the agricultural open interest and we're right there today, Derek?
Yes, thanks Michael. It’s Derek. And I appreciate the opportunity to talk about the – some of the other businesses. You're right. It's kind a challenging first quarter recognizing coming off an all-time series of records in Q1 of last year. In energy specifically, you're certainly looking at a softer market. You're seeing that market generally drift higher even in light of the news of the Iran sanctions coming, the waivers coming off. You saw only a couple of dollar increase in the price, and the market quickly digested that and moved on. We are seeing softness and volatility. We're seeing a slight reduction in open interest, both on our WTI contract as well as what we're seeing in Brent on the other side. We're both down to right about 2.2 million contracts open that down for about 2.5 for each of us in May of last year.
So not surprising to see low volatility environment I think we're seeing a resumption of the shortfall carry trade. Folks are realizing that selling volatility in this environment has actually been positive for the returns. So we're seeing that being a little challenging for a breakout and volatility right now. But when you look at the overall macro environment being challenging, we still posted our third best quarter ever. And on top of that, we're actually seeing, we're outperforming the other folks in the space right now.
On the energy side, specifically WTI we increased our market share from about 58% to about 59% of the combined crude market. If you shift over and you look at the balance of the crude and refined space, our gasoline business are up was actually up 10% Q1 this year. People get lost in looking at the numbers and kind of look at the crude piece. The overall strength of the overall portfolio is driven by the supporting pieces of the balance here on or above as well. So really good story on gasoline with volumes up 10% this year.
The other side of the shop on natural gas, another story of just continued low price environment. This was, we had a spectacularly volatile gas season last year. This year was relatively quiet. We're seeing prices stabilize back lower again. That's another market and challenging macro trends. We're actually seen us outperform in that market. That's a market where we're still we are actually up to 82% market share of the Henry Hub Futures market. So we're pleased that in a challenging market, we're continuing to grow customer base and outperform and manage to retain those businesses, where we are seeing strength and this has been a continued theme.
The overall narrative of a structural change in a globalizing crude oil market and now increasingly globalized and natural gas market, that narrative is still strongly in place. You see that in our energy volumes are actually up 3% in Asia in the first quarter. You've heard us talk about the increased demand and the expansion of exports of the U.S. about 43.5 million barrels a day of crude oil, and you're seeing that reflect both in the Asian demand for our products and the growth of the innovative new products that we put out there, for example, the Houston Physical crude contract to reference at the top of the call. That's a market that we launched just back in November and we've got about a 72% market share of volumes and about a 65% market share of open interest hitting regular volume and open interest records along the way.
So in a challenging environment, we're focused on the end user, customer focused on the global participation. That's where we're seeing the opportunity, that's where we put in our resources and we're pleased with the results on the energy side.
On the Ag [ph]. Yes on the Ag side, again that actually while we're seeing all the markets down in the asset class in Q1, the Ags was our best performer down the lease. That's also a market when you look at you know our comps, our CBOT, a weak complex when compared to the combined funds of Euronext and Minneapolis Grain Exchange.
We also increased our market share there from 88% to 91%, where we are seeing a lot of volatility. And Terry mentioned this at the top of the call, is livestock. You saw hogs, cattle reacting very strongly to what we're seeing in terms of the continued trade talks and sanctions China and the swine fever are on the livestock market.
So when there are events and when there is risk, we continue to be the place that draws customers to manage their risk. And we saw a number of volume and open interest records in both cattle and hogs, futures and options over the course of the first quarter. So we'll continue to build and focus on our commercial customers there, and do some innovative work around broadening our participation globally. Did that answer your questions, Mike?
Yes, thanks a lot.
Thank you.
Our next question is from Alex Blostein from Goldman Sachs.
Hey guys good morning. Quick question around some of the licensing expense, I mean, it looks like because of the investment you guys are making, would you take that, that as a percentage of kind of overall equity transaction revenues continues to tick up. I'm not sure if that's the best way to sort of think about the margin on the equity business if you may, but, maybe help us think through how that will play out over the next couple of quarters maybe a year or so out as your equity business evolves there?
Sure. Thanks. Thanks Alex. So when you take a look at our licensing fees, we don't give out specifics in terms of our license agreements and each agreement is unique. So when you take a look at the license fees there tends to be an annual adjustments to the fees paid to our IP providers. So that gets adjusted at the beginning of the year.
Also it's important to note that, while the majority of the license fee line relates to equities, it also includes fees related to other asset classes like energy and interest rates. So about 80% to 85% of the license fee line is related to equities, the balance is related to other asset classes.
So when you take a look at the relationship between the equity revenue and the license fee expense, you got to take that into the -- into account. Also, when you look at the interest, the interest rate component, the interest rate product component in that line. We did see a step up in terms of the revenue share that we have with our -- with our partner banks. And it was our best volume that we've had in the interest rate swaps since 2015. So that impacted that deadline as well.
Got it. That's helpful color. Thanks.
Yes. Thank you.
We'll go next to Chris Harris from Wells Fargo.
Thanks. So want to follow up on the commentary regarding the Energy Complex. The price differential between Brent and WTI has widened out now about $10. It's not as wide of a disparity as it was back in 2011 and 2012 were pretty wide. And I guess, what I'm wondering is, does this create a potential problem for the complex. And the reason I say that is, in the past when you when we've seen a wide disparity like that, it end up being a negative for WTI volumes relative to Brent and just, just wondering if there's a risk of that going forward if this price disparity continues.
Yes Chris, this is Derek again. Thanks for the question. Now, I think when you look at the market structurally back in 2000, kind of 11 to 14 versus where we are now there are a number of different factors, both in our own business, and our own commercial focus as well as the broader market. I think, what you saw back in 2000, kind of pre 2014 on our side, we had had more of a focus on the financial players and we didn't have as strong a footprint of the commercial community that was reflected in kind of the open interest levels that we saw in WTI. We made a very specific focus in it in 2014 to make sure that we were focused on the end user commercial customers, and that we were very much, very much making sure that if we were focused on the end user commercial customers, the open interest producers and the holders, and that meant that we're in the best position to drive the financial players along the way.
The significant change and the structural piece I referenced just a moment ago, was in December 2015 when Congress lifted the export ban. That as you've heard us say continually has put in place the narrative for a global oil market with WTI at the center of that.
So, when you look at the response to the participation and commercial participation in our market now at just under 2.2 million contracts open interest versus where we were kind of pre-2014 significantly higher and a significant amount of our sales resources had been focused for the last four years now on those end user commercials and participants.
We also had a much smaller proportion of our business that was taking place in Europe and Asia, driven by both our commercial focus and the structural shift that has really positioned WTI the global benchmark. So, those are probably the two biggest drivers. The structural shift coupled with our commercial focus and the resource that we put into place. And Bryan, I think had talked about some of the very specific areas on our international front, that's driven that kind of outpaced performance in our energy business in Europe and Asia. Asia specifically, that’s up this quarter.
Just to reinforce Derek's point, and I think you've been hearing me speak to this over the last probably year, year and a half. In terms of the tremendous growth we're seeing in the energy complex, particularly out of the Asia Pacific region. We're very proud of that continued trend this past quarter, so Derek alluded to the crude oil being up. I think, it's approximately 15% alone, and that's its third highest record out of Asia-Pacific. We're seeing nice growth coming out of Hong Kong, South Korea as well as China driving the demand for that product. He alluded to earlier also, the growth that we've seen in our futures. It's up about 9% and we're seeing again nice growth coming out of our commercials. Commercials are up for our crude oil, up about 9%. Commercials are up about 22% for RBOB.
So as we're driving to those end users, reaching out to them, we have you know the benefits of the export capabilities coming into these regions. This will be a continued area of emphasis for us and growth.
And just let me -- just pile on a little bit here for good measure. Derek said something earlier, which I think is really important. When you look at the open interest of the different crude products, they basically are down identical numbers. So, if in fact the volume numbers would be different, you'd see a bigger skew in that particular number and you're not seeing it. And just to reemphasize that, I think that when you're calculating volume from spreads that happened several years ago and the factors that have changed from today as being a global market is really hard to make them applicable to today's marketplace.
So I think hopefully that was a good color for you to see that you can't use the same measures that you used a few years ago when your spreads widened.
That’s helpful. Thank you.
Your next question is from Chris Allen from Compass Point.
Morning guys. Just want to ask real quick on other revenues if you back out the NEX related revenues. It's about a $5 million jump in kind of the 40ish million dollar run rate, we saw at the CME for the 2018. And then the NEX revenues had a nice jump for 4Q annual – if you annualize 4Q levels to the $51 million this quarter, almost like five million as well. The -- as a lot of moving parts in there, wonder if you give us any color on that?
Sure. Chris, this is John. I'll start. In terms of the -- if you take a look at NEX was up about $5 million, CME Group was up about $5 million in that line. There were two items that I wanted to point out. One was on the NEX side. There was about a $2 million relocation of rent revenue. It used to be netted in rent – netted with rent expense, and now its being – that rent revenue is being booked in the other revenue line. And that's about $2 million. And then when you take a look at the CME side, every year we've got an adjustment to the -- our contract with BM&F and inflation adjustment it gets recorded at the beginning of the year and it resets the baseline for the following year. And that was about $2 million. So that's about $4 million to $10 million adjustment that you're seeing, increases that you're seeing on that line.
The balance of the increase really is amongst a whole host of different businesses that are in there. We're particularly excited about the way the optimization businesses have performed excluding the market the transaction fee related businesses which are in the market line. So, I’ll turn over to Brian to make a comment there.
I would just say on the optimization side of the equation we had very strong performance across our triResolve, our Reset and Traiana businesses which again goes to the commentary that both Sean and I referenced earlier. There's a strong demand for these capabilities and we're excited about the robust diversity of product that we offer. Go back to John.
Yes. So one thing I did want to point out, Chris and Bryan talked about it. I had a question earlier in the call and that's a collateral fee line, the collateral fee change. I didn't want to make a point that the collateral fee change that's going to go into effect in July will be booked in other revenue not in investment income. So, I just want to make that point. So you'll see this line, you'll get adjusted mid-year.
So this is a good run rate going forward from here and then adjust for any growth we expect in kind of the optimization business and obviously the collateral change coming in 3Q. Is that fair?
Yes. I would say, the one thing, the adjusted I talked about from the inflation, that's an annual adjustment. So that would increase the run rate about $400,000 per quarter going forward rather than $2 million. That was adjusted this quarter. Does it make sense?
Makes sense.
Yes. Thank you.
Our next question is from Kyle Voigt from KBW.
Hi. Good morning. There's been some…
Good morning, Kyle.
Good morning. There’s recent some recent press in Bloomberg and other publications regarding the reduction in capital allocated to trend following strategies. And some meaningful outflows from CTAs in 2018; do you believe that this is having any impact on the softer volume start to 2019? And then secondly is there any way you can help frame the approximate size as CTAs and trend following strategies in context of seeing these total volume or total revenues?
I would just speak to the breath of the products that we offer as we look at the buy side community in particular and the opportunities and challenges that they face with their strategies. It's incumbent upon us to be able to provide them with the products and solutions and the opportunities from a liquidity perspective that they need to ship there their trading strategies into other venues and having the broad swath of product that we represent. I mean, I continue to look at. We see growth continuing across all of our regions particularly across that buy-side community within our hedge funds as well as our asset managers. So it will be a continued focus.
Let’s say, on the commodity side one of the important is most important way that we can attract business that are looking to get fund inflows into the commodity side is making sure that our businesses as we grow our volumes in open interest that has a direct impact on the weightings that they have in the various commodity indices at the Bloomberg commodities Index, MSCI et cetera. So as those get re-weighted every year the continued growth here is talk about not an absolute but equally importantly for the indexes on the relative side as well that reweights our products at a higher percent of a total proportion of those indices.
So the trend followers and then from the CTA you're talking about that might not be directly in futures the pile in the index as that index back to the arm footprints in those respective products. So the growth and focus and growing our volumes in open interest puts us in a higher weighting proportion of CME group products in those indices which ends up giving us those traded hedges volumes back into our future. So, we can't directly control for it, but as we see those flows increase we put ourselves in the best position by getting our products reweighted at a higher percent in each of those indices.
Our next question is from Ken Worthington from JPMorgan.
Hi. Good morning. In terms of the investment income can you indicate how the SGM and clients are changing allocations in collateral between cash and non-cash at CME? Maybe also highlight which is more profitable for CME cash or non-cash. It seems like cash, I think is much more profitable. And then can you talk about where the spread earns on customer collateral stood this quarter versus last? Thank you.
Sure. Ken, this is John. I'll walk you through kind of what we've seen over the last couple of quarters in terms of the average cash balances that we have at the clearinghouse. So, we saw in the first quarter of 2018 about $39.6 billion average. Balances, it's gone down to around $28 billion in the first quarter of 2019, so it trended downwards. The return that we receive on those average cash balances has gone from about 28 basis points in the first quarter of 2018 to about 33 basis points in the first quarter of 2019.
You are correct, the non-cash collateral we earned less on the non-cash collateral than we do have on the cash collateral. So that -- but that when you take a look we are making that adjustment in July which will have an impact on the amount that we earn on that collateral, so if you take a look at our take on the return in the first quarter of 2019 it was about $23 million, that's the net earnings that we received on the cash collateral. And as we talked about previously the non-cash collateral be adjusted in July.
Great. Thank you very much.
Thanks Ken.
And we'll take a follow-up question from Brian Bedell from Deutsche Bank.
Great. Thanks very much. Maybe just a couple of questions on product. So, just in the equity indices obviously that's been weak with low volatility in the market. Maybe some perspective of to what extent you think these [Indiscernible] that are starting to launch meaningfully impact – or meaningfully boost the equity indices trends if volatility remain light?
And then within interest rates just some perspective on what kind of RBC capture you're getting on the new Sulphur volume and also the invoice spreads obviously really rich capture there whether you see that continue to trend up. I know you made some comments earlier in the Q&A?
Sure, Brian. Great question. Thank you very much. We're very excited about the May 6 launch of our micro e-mini futures. For as a reminder to folks this is across the four major indices. So across the S&P, Dow, NASDAQ and Russell 2000 indices, and why we’re excited about this. And we currently have about 50,000 accounts utilizing the e-mini futures. So this will give them greater granularity. So contract is one-tenth o the size of our existing e-minis. I’ll give them greater granularity in order to optimize their exposures to the futures contracts relative to CTAs.
And the question earlier this will also allow them to optimize their exposure to those marketplaces with a much finer contract size than they've had in the past. If you think about the e-minis that were launched in 1997; so since then -- since the indices have grown dramatically the size of contract has grown and this allow us to better penetrate those counts. In addition to those 50,000 existing e-mini accounts there are approximately 250,000 currently dormant CME Futures accounts.
We do believe that some significant portion of those users that contract site may have gotten too large for them and this will allow us to better penetrate them. Much more importantly if you look at external numbers in the marketplace that are available in terms of active retail traders there are on the order of 10 to actually We've seen numbers as high as 40 million active retail traders globally. So we are very hopeful that dividing the countryside by 10 that we will see very good uptake.
We've had very positive feedback from all of our retail distribution channels. We are working with eight zero different introducing brokers as well as retail brokers. And we believe that on the order of 90% of them we'll be ready in week one to start offering their product to their clients. So we are very excited about the opportunity. I won't size it right now but we think it's a great idea. We're seeing very very positive feedback from those distribution channels and we're expecting a very positive launch.
Now in terms of other innovations that we've launched, we're about to hit our one year anniversary of our Sulphur futures, very excited there about that contract. We recently had a record of 83,000 contracts traded in a single day. And if you look at the one year anniversary this is one of the fastest growing products we've ever had in the interest rate complex and I think anywhere at CME Group. So putting it in perspective we've had about 3.2 million contract trade in the first 12 months. That equates to about 6 1 trillion worth of notional.
And in the month of March we reached a new all time monthly record of 38,000 contracts with more than a 130 different participants. So we're very excited about the continued traction there. I could keep going on right relative to renovations, total return futures we adjusted those products on the equity side back in December, right. So total return futures you may recall, this is – company focused on margin capital efficiencies, the changing regulatory environment and how to help clients. So those are being offered to the marketplace as an alternative to total return equity swaps especially under the uncleared marginals, it was considered the third largest category of pain point after rates and foreign exchange.
We've seen very good uptake there and we saw a record recently 280,000 contracts in open interest. And we -- in addition to that the growth this year we had about 1600 contracts a day. Last year it was about 2600 contracts a day. This year, so very nice growth I think actually the actual growth rate is 47% year over year. And in addition to that with the extensions that we made in December particularly we took the S&Ps and we only had in our five quarters. We now go out five years. And when we go out five years their RPC is over $5 as a contract.
So, we're constantly innovating. We're constantly looking at attracting new clients. Another thing I might bring up is not just the new product innovation, but we’re continuously optimizing the existing contracts. Now nothing I just might note is our two-year note futures as well as the two year note cash. So back in November, BrokerTec reduced the minimum price increments in the two year note cash. And in January we took a similar action in our two year note futures. Why is this important? This is important because while we're in a difficult volatility environment actually there is a Fed research paper that was published about a week and a half ago saying that the reduction in those minimum price increments massively increase the health of those marketplaces and increase volumes.
So if you look at the increase in volumes on both the BrokerTec side as well as the CME side the two year notes went from being about 13%, I’m approximating here about 13% of the overall Treasury complex on each platforms to about 16% on the future side that equates to an additional about 122,000 contracts a day. So, a very positive result there Invoice spreads, as I said earlier I'm seeing very good growth from 89,000 contracts a day last year to 180 – 118,000 so far this year a $1.92 RBC and this is really again taking advantage of the portfolio margin. As I also mentioned earlier we're seeing huge growth and people adopting and taking advantage of that.
Thanks John. Very helpful. Thank you.
Thank you.
And we have another follow-up question from Alex Kramm from UBS.
Hey. Thanks again. Just very two quick follow-ups with the things that were asked before. On the other revenue line just to clarify, you said the run rate is good, but we don't have any sort of quarterly history. So is there any seasonality in that kind of optimization business that we should be aware of, customers doing more in a certain quarter or the beginning of the year, so just anything to call out there?
And then on the expenses, I think that was asked earlier. Do you actually -- I don't know if you gave the kind of incentive comp or bonus target for the year? Can you just give us a little bit of the range there and what it would take to be at the low end and the high end given that volumes obviously can bounce around and then performance can bounce around? Thanks.
Yes. Thanks. In terms of – and just to be clear, we talked a little bit about the other revenue. The information or the revenue that goes into that line on the NEX side tends to be more subscription based. So, it should be less volatile than the transaction based revenue. So, when you're thinking about that line it tends to be a much more stable line. As I did mention there are a couple of things that are going to be rolling in there. One is the change in the collateral fee which will impact that line.
Also there is -- as we move our staff into a consolidated office space we’ll be sub leasing that office space. There will be some impact in that line as well. So that's a couple of points to think about as you model out the other revenue line. In terms of the expenses when you look at the compensation specifically on the CME side there is a range of outcomes when it comes to the bonus, really when we look at it, we look at bonus plus stock-based compensation is being kind of performance based comp. So to the extent that there is a cap and there is a cliff in terms of our bonus, so we don't hit a certain targeted we call it AIP or cash earnings target that bonus can go all the way down to zero depending on how we do.
And we don't you know obviously we don't disclose that range. Although in the proxy you can see what it has been in the past. So that is -- that's what can happen in terms of the bonus. Obviously the stock based compensation is relative to our margins compared to a pure set and also our total return compared to the entire S&P 500.
All right. Thanks for clarifying. Take care.
Thank you.
And that's all the time we have for questions today's. Speakers, I'll turn the conference back to you for additional or closing remarks.
We appreciate very much the opportunity to answer your questions today. We look forward to talking to you in the next quarter. Thank you.
And that does conclude our conference today. Thank you for your participation. You may now disconnect.