© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the CME Group's Second Quarter 2018 Earnings Call.
At this time, I would like to turn the conference over to Mr. John Peschier. Please go ahead, sir.
Good morning, and thank you all for joining us today.
I'm going to start with a safe harbor language, then I will turn it over to Terry and John for brief remarks, followed by questions. Other members of our management team will also participate in the Q&A.
Statements made on this call and in the slides on our website that are not historical facts, are forward-looking statement. 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. More 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 see a reconciliation between GAAP and non-GAAP measures.
With that, I would like to turn the call over to Terry.
Thank you. And thank you as John said, thank you for joining us today. We appreciate your interest in CME Group.
I hope you got a chance to read through the Q2 earnings commentary document we provided earlier this morning. We had a very strong second quarter. We had record volume quarter in our agricultural product line, and four additional asset classes grew double digits.
Average daily volume was up 12% to more than 18 million contracts per day in Q2, following the record volumes in Q1. We reached a peak trading day of more than 50 million contracts on May 29.
At the end of the first quarter, we announced the transaction with the NEX Group. As you know, the first order of business was the NEX shareholder approval which was completed on May 19 (sic) [May 18] (01:52). We have begun our high-level integration planning process and are working closely with the teams at NEX. We continue to target a closing in the second half of this year.
Global markets trading activity has slowed down during the month of July. July is historically one of the slower months of the year. Total ADV month to date at CME is down roughly 5%, but during this time period three of our product areas have actually grown while the other three are down.
When you add in the uncertainty of geopolitical issues and lower volatility which we are seeing, on top of a traditionally slow month, the 5% down isn't a surprise to me. As we all know, there are always ebbs and flows this time of year.
It is worth noting that our open interest as of this morning is roughly a 123 million contracts, which is up 10% versus this point a year ago, and has built nicely during the month of July. In addition, large open interest holder data across the six product areas remains very strong. And, to me, this is a better measurement.
With that, I'm going to turn it over to John to make a few financial highlights and we'll get into your questions. John?
Thanks, Terry. Revenue was up 15% this quarter driven by higher transaction fee revenue which was up 14%. We saw a positive product mix pushing the total RPC higher to $0.757 during the quarter. Market data rose 18% primarily driven by the screen fee increase, which went into effect in April. By maintaining our expense discipline, we delivered adjusted operating margins similar to our record first quarter of this year.
On an adjusted basis, total non-operating income increased 37% from $29 million in Q2 last year to $40 million during the second quarter this year, driven primarily by the performance of our joint venture with S&P and the earnings on cash held at the clearing house. However, sequentially, we saw a lower average cash balances held at the clearing house by participants in the second quarter, as customers rotated into treasuries, which offered a higher yield than holding cash. The net amount earned through managing cash was up 18% compared to Q2 of 2017, but was down from Q1.
With strong revenue growth and careful expense management, adjusted net income and EPS both grew over 40% during the quarter.
With that short summary, we'd like to open up the call for your questions and we'll start now.
Our first question comes from the line of Dan Fannon with Jefferies.
Thanks. Good morning. I guess, John, my first question is on market data. You highlighted in the prepared remarks about attrition as a result of the price increase. I guess, can you help us think about what historically that's been and maybe how to think about growth in that line item for the remainder of this year?
Yeah, thanks, Dan. We don't break out the components of our market data revenue. As you can see from our 20% sequential increase in revenues, the majority of the revenue comes from real-time fees and was impacted by our price increase that went in to effect in April. It's early to assess the impacts of attrition, the team has done a good job of telegraphing the increase, bringing the audit function in-house has helped to ensure compliance with our agreement and has helped mitigate those impacts. The team continues to work to soften any impact of the attrition. However, historically, as you can see from the times we've done price increases, that there is some rationalization that occurs.
Turn it over to Bryan to comment on what he's hearing from customers.
Quite frankly, this was a key period for the introduction of that fee increase, and as John alluded to, the attrition rates are very stable. We didn't see sizeable shift based on what we experienced in the past which is positive news to us. I think what's very important to note is the effects of the audits that we have been conducting, because what we are seeing is increased compliance. We're seeing more subscribers coming into play as a result of those audits, so we're correcting wrong behavior which is a positive. Also, a notable observation is significant increase in subscriber usage in the APAC region which, again, is another positive.
Great. Thank you.
Thanks, Dan.
Thanks, Dan.
Thank you. Our next question comes from Christian Bolu with Bernstein.
Good morning, guys. On international, you've seen really, really good growth out of Europe and Asia. I understand that some of this is pay off of investments you made in distribution, but could you just speak specifically as to what has changed structurally in those regions to drive growth? Are you targeting a new customer segment, is it regulatory driven? I'm just trying to get a little bit more meat behind the what are very good numbers.
Christian, a little bit – it's Terry – got a little bit of all of the above. I'm going to let Bryan touch more on it since this is under his, the people that report to him. Bryan?
Thank you. I mean, first of all, as you note, our international average daily volume now is up 14% year on year to 4.4 million of our overall contract volume, it's very positive from our perspective. We've seen a 30% increase in activity in Asia. We're averaging close to 900,000 contracts a day coming out of Asia. We're getting about 3.4 million average from EMEA. Really this has been a story of investment and focused activities from sales and marketing and having the people on the ground as we've represented in the past. You've heard me speak about country-specific planning and being able to target our focus across countries within each of these regions.
And just to highlight, our customer segment year-on-year growth throughout international was led by the asset managers up 42%; commercials were up 35%; banks were up 23%; retail, nice growth, up 23%. Our overall non-member growth was up 60% year on year in international.
And, Chris, let me just add to what Bryan said. You mentioned regulatory. We don't think that's always a sustainable way to look at a future growth. But I will tell you that when there is regulatory uncertainty, people migrate to where the certainty is at. In the United States, with this Dodd-Frank Act already being passed and implemented many years ago, and people understanding what the rules are, whether they like them or not is a different topic for discussion, but the point is, it's been done. And when you look at some of the European regions, obviously they're not there yet so that regulatory uncertainty does breed less for volume there which brings (09:35).
The other point I would want to note is our focus on growing the volume during the regional hours. This is a story that we've been telling all of you for many, many quarters now. During Q2 2018, we saw a 34% increase in our activity, during European trading hours, 45% during Asian trading hours. So if you look, and I know you have those appendices, if you look at the overall volumes that's occurring during their regional hours, a substantial portion of these activities are occurring during your domain hours, it's very important to the growth story.
Great. One quick follow-up question. Terry, you mentioned volumes have slowed in July. I do agree that it's somewhat seasonal. The one that's a little surprising is just the ag volume. It seems even weaker than one would expect. Curious if the tariffs and things like that are having any impact or maybe any color on your end as to why you think volumes are slow, really slow there.
Chris, and I'm going to let Derek go ahead and talk a little bit about the ag complex. He has that up and then I'll give I think a small opinion afterwards. But I'll let Derek go ahead and talk about it.
Yeah, hi, Christian. It's Derek. We actually had a series of records over the course of this year. In Q2, we had a monthly record, total volume, we had record, open interest record quarter on track, so we're continuing to push those, the directions. What we're also seeing is record large open interest holders in our market. And what's important, tying back the question that Bryan just answered, is our non-U.S. growth story with Trump announcing tariffs that have come on board that has created a significant concern about price risk. That drove a lot of the volume into participation in our contracts. This is very much a risk-on environment, as represented by the record volume and record open interest and large open interest holders.
We're also seeing on the day that we saw record volumes overall in the complex back in June, most importantly we saw record levels of participation from non-U.S. participants. So as regulatory concerns come on board relative to tariffs or not, we're actually seeing people pile in. For example, with the announcement yesterday, Trump-Juncker meeting, that had a very positive impact. We've seen our ag volumes overnight roughly come in at twice the amount. As of 7:00 this morning, we had about 220,000 contracts in our ag contracts.
We typically see a slowdown going into the summer months of Q3. We're coming from record highs in Q1 and Q2, and our ag volumes also set a record over the course of Q2. So we're seeing some seasonal basis of slowdown, but right now, we're, as Terry mentioned before, starting from record levels to open interest, and global participation. So we think we feel good about what the balance of the year is going to bring, and we see immediate positive impact in our volumes based on the questions that have arisen so far.
And I think just to add...
Just...
Just to add to that, Christian, I think that the real story here is not so much on what the volumes are, because as Derek said, we are the benchmark pricing mechanism for the agriculture throughout the world. I think it's just the overall price, that the impact on the regional partners here in the U.S. versus globally, so the difference between Brazilian soybean prices, U.S. soybean prices, that's really where most of the story is being told, but I do think that will be ironed out; hence when you saw what Derek just referenced with the conversations between Europe and the U.S. we're hopeful – I'm hopeful for the U.S. farmers that it will go the same way with Asia.
Great. Thanks so much for all the color.
Thank you.
Thanks, Christian.
Thank you. We'll take our next question from Brian Bedell with Deutsche Bank.
Great. Thanks. Good morning, folks.
Good morning, Brian.
Maybe just – good morning. Let me just start with a couple of clarifications for John. If you could talk about the net rate that you're earning on those client cash balances held at the clearing house. They were down on an average basis in 3Q so far. Maybe if you could talk about the net rate earned after the June hikes to the 3Q earning rate. And then just a clarification on the market data. I think you guys raised the pricing on April 15 if I'm correct on that. And to what extent audit fees impacted that market data number in 2Q?
Sure. Thank you, Brian. I'll walk you through kind of the Fed accounts and what occurred this quarter; and then I'll hit the market data question. So in terms of the impact on the Fed accounts or the amount that we earn for managing cash, in the first quarter we had average cash balances of about $39.6 billion. That includes funds held at commercial banks as well as funds held at the Fed. In Q2 they went down to about $32.2 billion, so they were down, on average, $7.4 billion versus Q1.
The main driver for the lower cash balances is that the U.S. Treasury has been increasing net issuance of treasury bills, which has pushed yields higher and made the T bills more attractive than the returns that could be held holding cash. So for example, a one month treasury T-bill yields the neighborhood of about 190 basis points. So that reduction in the overall average balances has reduced our take from managing the cash from about $28 million in the first quarter to about $25 million in the second quarter. So that should give you some color as to what occurred there.
In terms of the audit findings, in the second quarter, audit findings were minimal. We had about little less than $2 million in audit findings in the second quarter impacting market data. I think what Bryan said is the most important and that is bringing that audit function in-house has allowed us to ensure that there's compliance with our agreements which is, in turn, gave us more confidence in terms of the numbers that are being reported, which obviously impacts the go-forward amount that we bill associated with market data. So some pretty positive from a go-forward perspective with audits.
And I'm sorry, was it April 15 that you started the price increase? Is that the date on that?
I think it was April 1.
Oh, it was April 1. Okay. So it is a full quarter. And I'm sorry, then, just the net rate for the third quarter on the client cash balances that you have at the Fed?
So at the Fed, we – our – what we give – so basically the overall rates of 195 basis points, 164 basis points go to the customers, 31 basis points we retain, and that's solely on the cash that's put up at the Fed for our F&O, for our futures and options. We have a different rate associated with the OTC, what is put up for the OTC, which is basically the Fed effective rate, less 10 basis points, which is about 181 basis points currently going to our customers.
That's perfect. And then just maybe on the development of the SOFR contract, it sounds like that's developing quite nicely. Maybe just your opinion of how you see given the potential changes in LIBOR, how you see that developing versus your Eurodollar franchise over the course of the next several months and quarters?
Yeah, this is Sean jumping in. So our Eurodollar futures and options have done very, very well this year, right? We continue to see growth in open interest, growth in volumes and a very strong performance there. So we're very excited about that. In terms of SOFR, as you know, we've been one of the industry leaders, now for the last few years. In terms of the new rate, working very closely with the Alternative Reference Rate Committee and the entire industry. And we launched as you know, the SOFR futures back in May and the uptake so far has been good. We've had more than 60 participants. We have more than 21,000 contracts in open interest and we're seeing only about 3,000 contracts a day, but that's normal for a new contract. People are using our functionality in terms of using commodity spreads that we've built between our Fed Funds futures and our SOFR futures but also Eurodollar futures and our SOFR futures.
So we are excited about it. We continue to market. We've had a number of marketing events, actually almost one a week in the last three weeks and they are very well attended. Yesterday, we held a webinar on SOFR in terms of the futures as well as interest rate swap clearing for SOFR and we had more than 400 participants.
In terms of the interest rate swaps, we do plan on launching SOFR-based interest rate swap clearing in September and we're very excited about that as well. So we look forward to it.
The next step for the industry is really to see issuance from corporate issuers, and we did have an announcement from one of the government agencies yesterday that they are going to begin issuing SOFR-based floaters soon. So that should help the marketplace to develop.
Okay. And just from a substitution perspective, I guess, versus the Eurodollar, do you that as a very futuristic event or do you think there will be some of that in the intermediate term?
So Sean, do we see – we lost you for a second.
I apologize, can you repeat?
Did you say it was from the future...
Yeah, just...
From the future past, I think is what he asked is will LIBOR still be a part of the Eurodollar complex or will SOFR eventually migrate? Is that correct, Brian?
Yeah. That's right. Yeah.
Well, we expect LIBOR to remain right in terms of our Eurodollar complex for a long time. So as you know, right, the FCA has gotten agreements from the panel banks to continue to post until the end of 2021, right? So we've got a long time for that transition to occur. But we do expect SOFR to grow at an alternative rates to LIBOR. And as issuance begins to develop, there will be more need to hedge, more need to trade and we expect to see much more volume.
So again, we continue to see very good growth in our Eurodollar futures in terms of volumes and open interest, and we are the natural home for the SOFR complex relative to being the lowest cost in terms of transacting with our intercommodity spreads between Eurodollars with the LIBOR-based product that exists in the marketplace, as well as the huge open interest that we have in our industry complex across Fed Funds, Eurodollars, and Treasuries, which allow the marketplace the optimal kind of post trade margin and capital efficiencies. So we are the natural home. We are excited about it. We see the two different rates coexisting for a long time.
That's great. That's very helpful. Thank you.
Thank you. Our next question comes from Kyle Voight with KBW.
Hi. Good morning. If I could ask one follow-up or clarification on the net investment income, I think in your regulatory fee filings after the June hikes, we calculated an incremental cap rate of 5 bps from that 25 bp June hike. Is that correct or was it something lower on a blended basis? And then if nothing else changes, I guess, would you expect continued pressure on those balances near-term? I mean, it just seems like they're ticking lower in the third quarter already.
Hi, Kyle. This is John. In terms of what we passed back to our customers, we kept zero and passed the entire rate increase to our customers. So in the first quarter, and this is at the Fed, it went from 144 basis points to 164 basis points, so that entire increase was passed to our customers.
So the Fed did make a change in IOER. The IOER rate increase is not the same as the Fed Funds target. So the Fed increased the IOER by only 20 basis points and we passed all the 20 basis points through to customers.
Yes. So in terms of – Kyle, in terms of current balances, they're roughly in line with last quarter. It's about – between $30 billion and $31 billion on average in terms of total cash balances here at CME Group through the first weeks of July. In terms of whether or not the cash balances returned to historical levels, really, it's up to the customers, and there are many factors that impact their decisions, including what collateral the customer has, the risks, exposures at the clearing house and the yield on alternative investments all play a factor in terms of whether or not the customers use cash or an alternative. And as we've mentioned previously in many of these calls, there are alternative investment vehicles for the customers to put their funds to work.
Great. Thank you for the clarity. And just one follow-up for me. Maybe a question for Derek on the oil markets. A competitor of yours recently announced a crude oil futures contract deliverable in Houston. Just want to hear your thoughts on the dynamics here and whether you've been hearing from customers that there's demand for a Houston-based oil contract? I know you offer some spread contracts today, but love to hear some updated thoughts on strategy. Thanks.
Yeah, Kyle. It's a great – thanks for your question. We're actually excited about Houston as a marker. As you mentioned, we actually already launched a Houston crude oil contract back in Feb of 2016, both an outright contract and a spread contract back to our WTI contract. We're actually very happy with the growth of the contract, that's trading between 3 and 4 million barrels a day and I actually continue to set open interest records, where we've seen about 145 million to 150 million barrels worth of open interest right now, sitting at the Houston point. So we're actually pleased with the performance so far, and we think it's a high complement to the Cushing contract.
The reason we set that up, we actually launched an outright and a spread contract at the same time, letting the market choose what it's wanted to adopt, and what the market has adopted is actually the spread contract back to WTI. So the market is very happy with the deep liquidity and the WTI contract on go-backs, the cash on spread contract back in Houston has provided exactly what the market wants which is a cash equivalent of the barrel delivered to the coast. So we're excited about the opportunity. We think it's actually validation of what we did two years ago and the market's got the best of all worlds which is deep liquid markets and the WTI and go-backs and then the ability to cash all that spread out to Houston with barrels at the water.
Thank you.
Thank you. Our next question comes from Chris Allen with Compass Point.
Good morning, guys. I just wanted to maybe get an update on how you're thinking about NEX Group and the opportunities there, talking to treasury market participants, the opportunities are clearly centered around margin and clearing and market structure evolution. I know you've kind of made some comments, there was no change to how you are thinking about that moving forward. I wondered if that's evolved at all as you move closer to deal closing.
On the market structure, Chris, as it relates to BrokerTec, we are not changing that one bit. So that won't change, our thinking hasn't changed, and it won't, so the market structures related to BrokerTec again, it's a very lucrative model and it's a very efficient model and we'll let the participants make a lot of those decisions as we move forward. As it relates to the other benefits of the margin, I'll ask Sunil and Sean to comment.
Hi, Chris. This is Sunil. We currently have a cross-margining program with a fixed income clearing curve, and we continue to work with the FICC to actually improve that model. So we believe we can bring a lot more benefits to market participants who trade both cash increase and our interest rate futures products.
Yeah. This is Sean jumping in. In terms of the excitement over NEX and it's as high as ever, we're constantly focused on making sure that we've got the most attractive products possible and the most attractive platform possible with the most efficient way of taking risk for market participants. So we're very excited about allowing market participants to more efficiently access both the cash markets and the futures markets across the rates and the foreign exchange world. And in addition to that, we are looking (26:44-26:50) combining these, the cash markets and the futures markets together and seeing, what we can do there to provide new efficiencies for the marketplace.
And in addition to that, as you know, (27:00) and that optimization business is all about the same thing that CME is, so creating new margin capital, total cost efficiencies for clients. (27:11) years for the global client base as uncleared margin rules go from affecting 26 participants today to expected more than 1,000 in a few years' time. So very excited overall in bringing the two firms together, very excited about the integration, and I'd say it is going very well.
Okay. Thanks, guys.
Did that answer your question, Chris?
Yeah, thanks, guys.
Thank you. Our next question comes from Rich Repetto with Sandler O'Neill.
Yeah, hi, guys. Can you hear me?
Yeah, Rick.
Yeah, I like the system here. So anyway. I just want to first ask about volumes. Your overall volumes were up 12% year over year, but option volumes were down 2%. So I'm just trying to understand what the dynamics have changed that would cause option volumes to drop off so much on a year-over-year basis?
So let's break it out into the two major sectors with Derek and Sean and then I'll kind of give you a little flavor to that. So Derek, why don't you start?
Yeah, Rich, appreciate the question. Overall, year-to-date volumes were up 14%, so little bit outpacing what the year-to-date overall franchise is up 12-ish-percent, 11%, 12% overall. We're actually seeing continued really strong growth in the electronification efforts. You've heard us talk about the investments we're making in our front end, relative to being able to capture more complex spread trading directly on go-backs, I'm happy to say that we've got our electronic percentage up at 64% year-to-date. There's somebody on the line?
Yeah. I think we're getting feedback through the line from the other operator. Go ahead.
Okay. So our electronic options traded about 64% of our total year-to-date so this year, that's up from 59% last year. The biggest gains there are with interest rates going from 45% to 51%, energy and metals each going up 5% as well. So we're continuing to make investments, to make it easier for customers to trade complex spread options on the box electronically.
We are seeing that energy options is the one place where we're seeing a downdraft five of six asset classes are up, energy options right now we're seeing record low – back at record low volatility levels in nat gas options so we're seeing a full back there, strong healthy growth across the board in the other five asset classes. It's been a return to lower levels of volatility in three of our asset classes and we're starting to see some seasonal dip back down in Q2 in some of the volatility levels.
So with that, we're seeing good strong growth across most of the franchise, nat gas option is the one outlier, WTI options are flattish with nat gas down a bit. So I can hand over it to Sean on some of the details on the financial side.
Yes, on the financial side, I'll break it up in to two pieces. I'll talk about the Eurodollar options and then the long-dated or the Treasury options. In terms of the Eurodollar options, as you know over the last four or five years, we've seen enormous growth so the comps relative to last year are very, very difficult. If you look at our Eurodollar options complex is doing more than 1.5 million contracts a day. So with the massive growth that we've seen, it's a little bit tougher to grow as fast as we have been. But still, the Eurodollar options is up about 3.8% year-over-year. On the other hand, our Treasury options doing much, much better at up 27% year-over-year and basically in line or slightly ahead of our futures complex. So I think on the Eurodollar options side, specifically a tough comp.
And I think what we're most excited about is kind of on the theme of electronification and globalizing our business is our – non-U.S. options growth year-to-date is up 19%. We're seeing outpaced volumes, Europe was up 19%, Asia and U.S. were up 13%. That's the reflection of the growth investment we're making in our infrastructure and the ability to put complex spreads on the boxes, allowing us to capture net new clients trading electronically in their time zones. So we're excited about the growth and the trajectory of the options business overall and, again, the theme here is we are globalizing the business and increasing participation from outside the U.S.
One last thing I might add is I should have mentioned it earlier, we are innovating, we continue to innovate. So we did launch a fifth quarterly Mid-Curve option on our Eurodollars earlier this year. We also recently launched new Term Mid-Curve options, so that allows you to take very short-term, one, two, three-month options on our whites or front four contracts. So those even though they were recently launched, we've traded well over 400,000 contracts. So we continue to innovate. We continue to see growth. But tougher comps.
So Rich, I hope that answers your question, but I think you got a good flavor. So a little bit tougher comps on the financial side and a little bit of cyclical and just ebbs and flows as it relates to the gas side of the business. So all in all, a healthy, healthy complex.
Got it. And I guess another question is, this question on attrition and market data going forward, I guess we've had four months of the price increase here now, so could you tell us what the attrition is now, like, to get a feel for what it potentially – and why do you feel it will pick up after four months of the price increase?
Go ahead, Bryan.
Rich, we do track this very closely and I can just say that our subscriber counts have maintained a very stable level over these last several months since the price increase took effect. What I think is more interesting and more indicative is we've seen a deceleration actually in the banking sector which was an area where we were seeing a lot of attrition in past years. I think a lot of that is tied to the audit function, again, that we've been performing. As we're in the field and we're building up those relationships, we're seeing a correction in behavior in the reporting of the screen counts. So we're going to look at this obviously very closely. And in terms of audits as well, that's a lumpy area, as I mentioned. What we're most interested in is making sure that we have correct behavior. And that's reflecting itself in these numbers.
Got it. I got it. I guess last thing is, Terry, a prominent publicly traded company out there has talked about just exploring strategic alternatives for its post trade services business. This service, basically wraps trades and then they legally wrap it and then they report the trades to exchanges, clearing houses; I'm sure you're well aware of this service. I guess the question is how interested are you in these type post trade services?
Rich, from our standpoint right now, as I said earlier, the announcement of NEX, the shareholder vote of NEX being completed, the integration process on the way, waiting for the authorities to go ahead and approve both in the U.S. and in Europe, in the UK. Until we get that done, our focus is on NEX and nothing else right now, and that's the way our strategy is. So I really don't want to comment on anything further, because for that we have to look at the post trade services as we start to integrate the NEX business, but we can't do that until we close, so that's the only answer I could possibly give on that.
Got it. Thank you.
Thank you.
Thank you. Our next question comes from Chris Harris with Wells Fargo.
Thanks. Hey, guys. So the growth in Asia has obviously been very good, yet we've seen the stock market in China correct. Economic growth in that part of the world seems to be slowing but obviously still quite good. My question is I guess, is there a risk to those volumes, do you think, if the economic situation in China gets worse or do you feel like the volumes you're getting from over there are going to be pretty sticky?
This is Bryan. I'll start. We really do feel that the volumes that we've been able to generate are going to continue to perform as well as they've been these last few quarters, and it's really attributable to the outreach and the targeted planning across each of these countries.
China does represent a significant portion of our Asia-Pacific revenue, but I think it's important as well to keep in mind that we target our efforts across a multitude of countries. We're able to look at, for example, the top 10 countries within Asia-Pacific. We have plans in which we do outreach across the product sectors and the client sectors and those numbers are continuing to bear fruit.
I think if you're jumping on the product-specific side, what we're actually seeing is where we have structural changes that provide unique opportunities for us to service a client base that is now open to us with structural changes like the energy market, WTI is now a waterborne global benchmark. So when you look at the growth in our business in just volumes alone, our Asian business is up 43%, and a large piece of that is the energy business that we're pushing out in terms of WTI utilization. So part of this is yes, tied to economic cycles, but we're paid to make sure that we can build franchises and portfolios that are going to thrive, regardless of the shape of the yield curve, volatility curve or industrial cycles.
What we are seeing is when products become more relevant to global participants we're in the best position to make sure that we're addressing that opportunity and that growth. And so we're happy about the product selection and to Bryan's point, we've put a lot of effort into training, education, and the ability to access our markets through intermediaries, and that's showing through in some of the strong growth, 43% revenue growth in our energy's franchise in China, for example. So we think the product set and client mix are coming together and we think that that's a – a structural shift is positive for us in the long-term.
And it's really difficult to say, as Derek just outlined about any particular part of any one's economic growth around the world, but I will tell you and they touched on this, but I don't think to enough extent, is the sales effort that we're putting into place globally.
Historically, CME has never been much of a sales organization. We have bolstered the sales organization. We've got new initiatives globally to get new clients that we believe are completely on untapped that have never used our markets, that will be able to use our markets so we're excited by that. The infrastructure that we're putting in different parts of Asia such as market regulation, are the things to make sure people really understand our markets. So we're sending people over there to again educate and make sure people understand what the U.S. marketplace is all about and we're finding quite an excitement, and I do believe that the client base is really untapped over there. So even though there could be economic downturns, I think we have an opportunity to go after additional subset of clients throughout the Asia community.
Thank you. Our next question comes from Michael Carrier with Bank of America.
Hey. Good morning, guys. This is actually Sameer Murukutla on for Michael. Just a quick question on the expense guidance and the second half expenses. Usually you would expect expenses to grow faster in the back half of the year, but given the unchanged guidance, it kind of seems like the second half would only grow around 2% to 3% year over year. So I just wanted to get details on maybe what expenses you might have put forward into the first half. I think you guys called out compensation and bonuses. And maybe what other segments you might hold expenses back there. Thanks.
Hi. Good morning, Sameer. Thanks for the question. Yeah, let's put this into a perspective here for the first half of the year. So compensation, as you indicated, is our largest growth in terms of expenses. It's up about $28 million first half of this year versus first half of last year. 60% of the increase in the compensation line is incentive comp, so that is bonus and stock-based compensation. The balance is – in base compensation is primarily driven by cost of living increases and we did have some increase in head count.
So if you exclude incentive-based compensation, our total adjusted expenses grew only 1.5% for the quarter and on a year-to-date basis adjusted expenses were flat with last year if you exclude incentive-based compensation.
So looking into the second half of the year, so rolling it forward, I would expect the pattern of our spend to remain similar with the fourth quarter heavier than the first quarter, but I would expect the fourth quarter to be less than 3%, 3% growth, compared to last year. And so what you're seeing is for the first half of the year we've been able to offset our incentive compensation growth through really, I think, great expense management across the entire organization. And rolling into the second half of the year, I would expect professional services and other expenses and marketing to be lower which will still allow us to achieve our targeted expense guidance of up 3%.
Is there any other questions?
At this time, we have no further questions in the queue. I would like to turn the conference over to company management for closing remarks.
Well, we want to thank all of you for the opportunity to address your questions today and your interest in CME Group. We look forward to talking to you out in the next quarter. Thank you.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.