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CME Group Inc (NASDAQ:CME)
Q3 2019 Earnings Call
Oct 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen. Good day and welcome to the CME Group Third Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Peschier. Please go ahead, sir.

John Peschier -- Managing Director of Investor Relations

Good morning and thank you all for joining us. I'm going to start with the Safe Harbor language. Then I'll turn it over to Terry and John for brief remarks, followed by your questions.

Statements made on this call and in the other 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. 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 find a reconciliation between GAAP and non-GAAP measures.

With that, I would like to turn the call over to Terry.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, John. And as John said, I want to thank you all for joining us this morning. My comments will be brief so we can get right to your questions. We released our executive commentary this morning, which provided extensive details on the third quarter.

In Q3, average daily volume grew to more than 20 million contracts per day, up 30% compared to Q3 last year. Normally the months of July and August are slow. So we're pleased with the activity this year.We delivered record quarterly average daily volume in metals products, which rose 32%. Average daily volume and interest rates and equities were each up more than 35%.Our options business continues to perform very well. During the third quarter, our options volume reached 4.1 million contracts per day, or up 32%. We drove significant growth from customers based outside the United States. During the third quarter, volume originating from Asia reached a record level of 1.2 million contracts per day, up 61%. Volume from European based customers increased by 34% versus Q3 last year and was the third best quarter overall with records in metals and equities.

Lastly, the activity from Latin America has accelerated. We had 152,000 contracts per day during the quarter, the second highest in our history. We continue to deliver successful new product rollouts, our popular Micro E-minis ADV grew 35% sequentially from Q2 to Q3. We reached a monthly record in our new SOFR contract in September with 58,000 contracts traded and a daily record in mid September of more than 150,000 contracts traded.

New products announced recently include the E-mini S&P ESG futures, US liquefied natural gas export futures and also we developed the bilateral pricing agreement between CME and the Shanghai Gold Exchange.

Turning to the NEX integration. We are pleased with how it is progressing. We have made great progress, leveraging the joint sales teams to enable cross selling and to offer the full portfolio of products and services. We are also beginning to combine the office space around the world, which should assist with generating revenue synergies at a lower cost.

We remain laser focused on this very strategic transaction and look forward to keeping you updated on our progress. With that let me turn the call over to John to provide you with some additional comments.

John W. Pietrowicz -- Chief Financial Officer

Thanks, Terry. It was a tremendous quarter. Revenue reached almost $1.28 billion, the highest level we've seen this year during what is typically a seasonally slow quarter. Terry touched on the strength in our futures and options franchise. We also saw sequential growth in the NEX business including at EBS, BrokerTec and triReduce.

During the third quarter, our adjusted expenses excluding license fees, came in at $409 million, up slightly from the prior quarter. We remain highly confident that we will come in between $1.64 billion and $1.65 billion in adjusted expenses for the year which we reduced by $10 million last quarter. One final note. Earlier this year, proposed federal regulations were released related to the US tax legislation enacted in 2017. These regulations clarified whether a deduction would be available related to foreign customers service from our US operations. As a result of these regulations and the nearing completion of our 2018 tax returns, we've revised our income tax calculations for 2018 and 2019 to reflect the new guidance.

We recorded an $89 million tax benefit in the current quarter. Of this, approximately $52 million related to 2018 and was taken out this quarter in adjusted non-GAAP results. The remaining $37 million relates to the first three quarters of this year, resulting in an adjusted effective tax rate of 20.5% for the quarter.

Adjusted Q3 diluted EPS including this entry was $1.90. We expect the annual 2019 effective tax rate to be approximately 23.5%. With that short summary, we'd like to open up the call for your questions. Based on the number of analysts covering us, please limit yourself to one question and then feel free to jump back into the queue. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from Richard Repetto with Sandler O'Neill.

Richard Repetto -- Sandler O'Neill -- Analyst

Yeah, good morning, Terry. Good morning, John. I guess my...

Terrence A. Duffy -- Chairman and Chief Executive Officer

Good morning.

Richard Repetto -- Sandler O'Neill -- Analyst

Good morning, everybody is asking about the volume picture and I know, not to focus on short -- what you call short term things. But the volumes have across asset classes have dropped over the last 2.5 weeks. So I guess, any insight there. But I guess more importantly is the longer-term picture of interest rates are so much of the drive. So much of the complex and then transaction revenue. How would you talk -- think about the outlook for the interest rate volume, and the interest rate transaction revenue in a low rate environment going forward as well.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Well, Richard, I mean I think a lot of us would like to kind of jump in a little bit and give you snippets of what we think, but we've got to be careful because as you know, it's very hard for us to predict future volumes of what they may or may not be.

That being said, when you look at the volumes across especially the last period that you referenced last couple of weeks. They've been across, they've been down significantly in the ETFs and the cash markets and the equities all across the board you've seen a tightening of volumes going on.

So it's not just CME and then when it comes to interest rates. You look at all the -- we're at 90% service economy in the United States, 10% manufacturing roughly. And there are a lot of different borrowing cost at different levels that I think people continually need to manage that risk and regardless of what the, the Fed funds rate or the borrowing rate is by the Fed. There's a lot of people that don't give [Phonetic] that and we're going to continually look to have people manage risk throughout the curve. So I still think that there is uncertainty as it relates to what those rates are going to be and I think that the businesses that we know we're set up in a very good position to capture additional volatility.

There is no question. And then is undeniable that it has slowed down, it will be interesting to see what the Chairman, Paul [Phonetic] says coming up. So I'll let Sean to comment more, but I would not try to base a 12-month period on a 2-week cycle.

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

Yeah, hi. Rich, this is Sean jumping in. So for the last two weeks, certainly the volumes have been lower than they had been for the previous couple of months, but really not surprise relative to the ebb and flow of economic information and markets. If you go back a month or so ago, the probability of tightening at the Fed meeting, which is occurring this week was less than 50% and I'm sorry, easing, excuse me, the probability of easing was less than 50%. If you look at the probability today, it's running around 94%. So the market has gone from a highly uncertain situation relative to the FOMC meeting, excuse me, to a certain situation at least from a market standpoint.

When you do that, when you remove the uncertainty, then the marketplace volumes tend to fall, that's the volatility tends to fall because marketplace has come to a conclusion. So I think that that's a part of the drag in terms of the last couple of weeks. But that's the ebb and flow, no doubt, there will be high levels of uncertainty at FOMC meetings that are upcoming later this year as well as into next year. It's just a short-term event. In terms of the volumes themselves as well. If you look at our volumes, Terry indicated. If you look at the largest ETFs in equities, for example, comparable to our products are down much more in terms of volumes than our products and they're running down around 50%, ours are down substantially less than that.

We continuously look at making sure that our products are the most attractive of any products available in the marketplace and market participants come to us for managing their risk. So we are continuously as you know focused on adjusting our products in order to make them more attractive as well as innovating new products. For example. You will recall, we lowered the minimum price increments in our two year futures in January of this year and those are -- volumes are up substantially relative to the rest of the marketplace. Now versus where they were a year ago.

So our two year futures running at around 16% of our overall volumes of our treasury futures, whereas previously, they were running it more like to 12.7%. So an additional 150,000 contracts coming out of -- out of the two year notes on the back of that. We've also seen outside growth for example in our 10-year -- Ultra 10-Year futures, which you know are new just a couple of years ago. Recently, doing 267,000 contracts a day.

I'm very excited about SOFR. You've heard in terms of innovation. I'll talk about SOFR. In the month of September, the SOFR futures as Terry mentioned earlier had a record day of 152,000 contracts in a single day. Putting that in perspective, 670 billion [Phonetic] notional equivalent. It's an enormous day for the repo market, the fact that there is volatility in the repo market. Repo traders now coming to CME to manage their risk.

Recall that we only launched that product in May of the previous year. We now have more than $1.7 trillion in open interest in that product. So we are continuously innovating. In terms of the Micro E-minis, Terry mentioned that earlier on the call. We're currently at 565,000 contracts ADV more than 50,000 contracts trading, sorry, more than 50,000 accounts trading.

So huge growth in the contract. A huge number of new participants trading it. The average trade on that I will also mention is 2.65 contract. So far smaller than the E-minis and so very additive to our products, so whether it's the SOFR futures whether it's adjusting existing contracts, whether it's the Micro E-minis, we're continuously looking and make sure that we've got the absolute most innovative, most attractive price possible for our clients and we look to grow our complex in any interest rate environment or any market environment.

Terrence A. Duffy -- Chairman and Chief Executive Officer

And Rich, let me just add one more thing, so I think there's a bit of confusion sometimes when people look at rates. Our business is not driven off of making money, off of money. We have a very small part of our business that does that unlike some other businesses, our business is to manage risk for a whole host of interest rate fluctuations that have to come to our marketplace to mitigate that. So I think, when we look at rates at historical low levels that affects people who are trying to make money off of money versus what we do for a living.

Richard Repetto -- Sandler O'Neill -- Analyst

Understood, very helpful guys. Thank you.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thank you.

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

Thanks, Rich.

Operator

Thank you. Our next question comes from Dan Fannon with Jefferies.

Dan Fannon -- Jefferies -- Analyst

Hi, thanks, good morning. So, Terry, you mentioned the NEX integration and the potential kind of the meetings and potential revenue synergy opportunity. I guess could you be specific about kind of what's happening in the success you're having or meetings and progress. I think at the start, it was around some of the intermediary in the banks in Europe and Asia. So I guess, if there could be some more tangible kind of comments around what the progress you're having would be helpful.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Yeah Dan, that's a great question. I want to ask Bryan to chime in on this. To talk a little bit more about, because you've been leading this effort along with John. So Bryan, maybe you can chime in a little bit.

Bryan T. Durkin -- President

Thank you, Terry. We're -- we're not skipping a beat since our last chat on our last earnings call in terms of integrating the businesses. I think a very formidable part of this is the sales effort. So you heard Terry allude to earlier, how we really integrated our sales teams. We're speaking with one voice as we're able to go out and engage with our client base and help them drive solutions to meet their risk management needs across both the cash, the futures as well as the optimization services that we offer and that's resonating very strongly.

What's very exciting for us is the introduction into some other quadrants within the banking community, particularly in the regional banking sector, which is an area that we've not quite have the engagement on the core futures side of the business and that's offering up more opportunities, again across our entire portfolio.

So we're very excited about how the sales efforts have come together and how we're able to cohesively represent the offerings that we have.

Terrence A. Duffy -- Chairman and Chief Executive Officer

John.

John W. Pietrowicz -- Chief Financial Officer

Yeah. Thank you, Terry. Dan, it's interesting, we had a call just yesterday with the sales team. To give you kind of a tangible example, triResolve which is working on providing our clients help in terms of the initial margin calculations that they're going to have to do about 300 come due at this current year and followed by the following year with about 700 more clients between '20 and 2021 [Phonetic].

We are -- they were educating all the entire sales team about what this offering is so that our entire sales force and can help sell that product to all of our clients. So really, it's being able to sit down and talk about the entire suite of services. As Terry mentioned, we're about managing risk and we're able to then sit down and offer them whether it's, whether it's on the futures side providing risk management through the clearinghouse or whether it's on the cash side, offering risk management on the with our optimization business.

So it's really, it's kind of interesting as a great example. In terms of being on the call and having the -- them walk through this campaign that we're working on across the entire sales force, Sean?

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

Yeah, I mean one specific, Dan, will be helpful. So SOFR. I talked briefly earlier and Terry talked briefly earlier about our great success in terms of SOFR futures, 58,000 contracts a day in the month of September about 50,000 contracts a day, so far this month. If you think about the BrokerTec business, it's a $260 billion [Phonetic] worth of US Repo every day. So our BrokerTec repo team is on the phone with those repo desk literally every day. Those are the same traders who needed to hedge their risk in SOFR during the month of September. So it was very easy to have that BrokerTec team who has the largest US repo business that exists, talk to their clients and sell them into our SOFR futures, which are now I think a very significant success.

If you look at the SOFR futures today, during the month of September, we ran at around 83% of the average daily volume and we're currently running 93% or 94% of the open interest of the marketplace. So it's a clear opportunity where we're already getting those opportunities in the synergies.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Dan. For your questions.

Dan Fannon -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Ben Herbert with Citi.

Ben Herbert -- Citigroup -- Analyst

Hi, good morning.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Good morning, Ben.

Ben Herbert -- Citigroup -- Analyst

I was just hoping that you could touch on the non-US volume strength in the quarter and kind of help us think through organic efforts to expand the high customer base versus just overall macro and geopolitical uncertainty.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Ben. Thank you for that question, I'll ask Bryan to again address that as he does head up the International business. Bryan?

Bryan T. Durkin -- President

You know, as we noted, this is one of our top quarters in terms of producing activity, volume, and revenues out of international. Our international activity grew by 40%. We're generating from this past quarter 5.3 million contracts of our total volume.

EMEA represented about a 34% increase of 3.8 million contracts a day and Asia, which we're very excited about 1.2 million contracts, their activity was up about 61%. As I've mentioned in past visits with all of you. We've really chartered our focus on our country planning, so that we can more deeply penetrate the activities across the quadrants within each of these regions and it's definitely resonating with the marketplace. I can break it down by product within financials, equities, commodities, where that activity is coming up.

And so, through those sales efforts, as we've indicated, having the boots on the ground, being able to offer is the broad array of asset classes. We're continuing to see great growth coming out of all of these regions, new clients coming into our existing products. One of the major drivers for the last quarter was our interest rates.

And so when we talk about our two year treasury complex for example, there is different segments that are driving that growth coming out of Europe versus coming out of Asia and that goes to the efficacy again of the sophistication of our sales team being able to reach out to those very specific segments and bringing them in, to these markets.

John W. Pietrowicz -- Chief Financial Officer

Just talk a little bit about the international growth as it relates to the tax deduction that we're taking. Really the -- it's another benefit to the strategy we have of growing globally. Our ability to take this tax deduction really is because we've chosen to service our foreign clients from the United States. So to the extent that we're continuing to grow globally and as Bryan indicated that that growth is faster outside the US and the -- then within the US, we're able to take advantage of this tax deduction. So it's another benefit to growing globally and also we're able to, as we grow globally, we're able to utilize our systems 24 hours a day and provide our clients better and better liquidity 24 hours a day. So it really, it's able to leverage all the infrastructure that we have and really allow us to create that liquidity, so when an event happens any time day or night, we are the place to manage that risk.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks for your question, Ben.

Ben Herbert -- Citigroup -- Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Brian Bedell with Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

Great, thanks, good morning, folks. If I may kind of link in the -- the combination of the sales forces question with some organic growth initiatives that you've got. And the question is your outlook of the potential for improving volumes from things like the FASB rules on MBS hedging, traction with your portfolio or I guess how the portfolio margining savings are resonating with clients.

And also the international traction. So linking that together with the combination of sales force, can you sort of potentially see sort of a, you know, an elevated, an improvement in volumes from those initiatives combined with the -- with the now combination of the two sales forces.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Brian, let me turn that to Sean. And then, Bryan, can add in a little bit. Sean, why don't you add them starting.

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

Yeah, I mean if you look at insurance companies overall there has been increased usage of our treasury bond futures in particular over the last couple of years. And as you know, we've seen great growth in our treasury futures complex and as well our treasury options complex.

In addition to that in terms of the portfolio margin, we are very excited about the significant increase in uptake over the last year. In October, we reached a new all-time record in terms of portfolio margining saving market participants $5.7 billion worth of margins.That help us to lead to very strong growth, as well in our OTC clearing.

If you look at our OTC clearing volumes. For example, this year. Overall, total volumes across all currencies in all products running about 136 billion [Phonetic] a day, up 29% from last year. So a very significant increase and again with a very large set of participants -- increased number of participants taking greater advantage of portfolio margining.

On the portfolio margining front as well. We've recently announced that we are enhancing -- enhancing our portfolio margining efficiencies. We will be doing that in the month of November.

In terms of that, that will make it even more efficient than it is today to trade Eurodollar futures as a spread -- as a spread, excuse me, to US dollar interest rate swaps. And so we continuously enhance all of our services. We've enhanced the efficiencies on OTC clearing, it is showing through as much greater growth and it takes time for participants to sometimes take advantage of all of the new products and services, all of the new enhancements that we create, but over time they do, and that's an example of where they are.

Bryan T. Durkin -- President

I'll just comment from the international perspective. Capital efficiency is of paramount importance to our user community, particularly on the banking sector as well as the buy side. Our activities throughout, EMEA and Asia, particularly looking at the interest rate quadrant. We've seen tremendous growth coming out of the banking -- banking sector as well as hedge funds. A lot of this has been driven out of Singapore, Japan and Australia. The same thing holds true in terms of on the EMEA side so throughout Europe.

We've seeing triple-digit growth coming out of the hedge fund community in our rates as -- and almost triple-digit growth coming out of the banks that's being driven out of the UK, some areas, the Czech Republic, something very interesting. You've heard me talk about the country planning and highlighting the Netherlands and Switzerland. Those areas right now are number two and number three in terms of our drivers of growth coming out of EMEA. And again, that's driven out of the interest rate sector.

Brian Bedell -- Deutsche Bank -- Analyst

Okay, thanks very much. I'll get back in the queue for another one.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Brian.

John W. Pietrowicz -- Chief Financial Officer

Thanks, Brian.

Operator

Thank you. Our next question comes from Michael Carrier with Bank of America.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. And thanks for taking the question. John, just given some of the near-term volume concerns, yet obviously a solid quarter. Maybe can you just give us an update on how you're thinking about expenses in the near term, maybe areas of more flexibility, some of the weakness continues. And then any investment needs on the horizon. Thanks.

John W. Pietrowicz -- Chief Financial Officer

Thanks, Mike. I think, as we've always talked about, there is a couple of line items that really kind of fluctuate based on business performance. One of them is obviously our bonus -- our bonus fluctuates based on business performance, and then our license fees, you really are about three quarters of our license fees are attributable to the equity complex.

So sustained downturns in business performance and in the equities will impact our expenses, you know, as I said in when we had this call in April, when we had a bit of a slow period at that point, this is not a lever that we want to pull prematurely. So you know there is always ebbs and flows as we've talked about on this call in terms of volume. So we want to be very careful that we don't squeeze too tightly and impact future growth.

So we're always very focused on managing the business extremely efficiently. So we are always very careful with every dollar we spend but we don't want to impact future growth by prematurely squeezing even harder. You know, in terms of, in terms of our go-forward investment we're constantly investing in the business. We're investing right now in the build out of Globex to migrate from the legacy NEX infrastructure into our Globex infrastructure. So we are right now having a double carrying costs as we build out the test environment, build out the capacity and capabilities in Globex while running a production system for NEX and then once that ultimately is completed then, we'll be able to decommission the legacy NEX infrastructure.

So we're constantly investing in the business. We're investing in providing our customers the best experience, you know, as we move BrokerTec and EBS onto Globex, we can capture some of the revenue synergies that we've been talking about and also make sure that we're constantly giving our clients the very best trading and risk management experience.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

All right. Thanks for the color.

John W. Pietrowicz -- Chief Financial Officer

Thanks, Mike.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Mike

Operator

Thank you. Our next question comes from Kyle Voigt with KBW.

Kyle Voigt -- KBW -- Analyst

Hi, good morning. Maybe just, just one on this joint recommendation that was written by some large banks and asset managers last week. With respect to CCP management standards and one of the suggestions that was in the paper was around skin in the game. It feels like a topic that comes up every couple of years here, but the paper suggested, I think CCPs should put up 20% of the default fund, I know that number keeps fluctuating around.

But can you just talk about, can you just talk about the regulators and thinking about this topic and whether or not you think that the regulators have appetite or like how far up on their priority list would be releasing some new CCP management standards going forward.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Kyle, it's Terry. I'll comment little bit. And I'll ask Sunil and maybe Bryan to comment as well. We are -- we were a little surprised obviously to see that paper dropped the way it did. There's a lot of things in there that we've been discussing for a number of years going back probably to 2011, 2012.

There are a couple of new issues in there that we had never heard from the signatories about this before, especially on that the skin in the game percentages the way they put it in two different levels, as you know, CME has skin in the game and Sunil can explain it better than I, but we are first in the waterfall.

One of the things about skin in the game. We have to be very, very careful from -- we believe that people who introduce risk to the system should be putting in the money for the system. We are here to manage the risk, we don't introduce the risk. And so, those that are bringing the most of risk should be putting in money for the default fund. We don't want to have smaller participants that are trying to hedge their crops and do other business throughout the world.

Production be -- so get into a situation where they could get hurt because they're the smaller participants and the bigger ones introduce too much risk to the system, but don't want to put the money up.

So that's a bit of a concern for us, but it's also a bit of a moral hazard for lack of a better term, when you are the first line of defense with a large number of people could look at you as a moral hazard knowing that full well that you are the first line of defense on the default as the CCP.

We don't think that is good for risk management practices. So we don't subscribe to that. There were some other provisions in there. One on new products that I found very disturbing. I think when you look at new products. If there is not a new product the candidates [Phonetic] exchange without some kind of zero in front of it.

We create liquidity, we nurture it, we build it, we risk management quite differently. So I was surprised to see some of the, the rhetoric that came out in that paper associated with that.

The last thing that I'll comment on is as it relates to a vote that the participants would have to see if they want to participate. Once a default happens, we are very concerned because of their positions that they could have in the market and then having a vote associated with it. We think that it can be definitely an inherent conflict of interest for the other participants which I referenced earlier.

Your other question was do the regulators have an appetite to address this. It's not for me to speak for the regulators. You have to talk to them to decide what their appetite is. I have been in communication as has Bryan and other members of my team working with the Commission, explaining the -- the issues that I just explained to you or otherwise I wouldn't have said them to you right now in this call, so I have discussed everything I've said to you with the regulators and our concerns associated thereof. And I think they are very well aware of them, and that's all I can say, but I cannot speak for the regulators.

Kyle Voigt -- KBW -- Analyst

Thank you.

Bryan T. Durkin -- President

Sure.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Kyle.

Operator

Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Alex Blostein -- Goldman Sachs -- Analyst

Hello, good morning, everybody. Question for you guys around the equity futures business, definitely strong traction from some of the new -- new product. Can you talk a little bit about when the incentives are set to expire here and as we sort of think about the more normalized capture rates in these buckets again kind of holding maybe the mix of volumes constant, kind of where should the capture rate for the equity franchise, what should that sort of look like once these sort of fee waivers go away.

John W. Pietrowicz -- Chief Financial Officer

Sure. Thanks, Alex. This is John and then I'll pass it over to -- to Sean. We've been very, very pleased with the performance of the Micros far exceeded our expectations. In Q2, we had about 8% of the total trading volume was in our equity complex was related to micros that increased to about 16% this this quarter. So what does that mean in terms of the rate per contract and net that we had about a $0.05 downward pressure on our rate per contract related to the Micros in the second quarter and about $0.10 impact this quarter.

But the, the good, the positive thing is that this is all additive to our revenue. We don't think that there is any -- any cannibalization of our business. So this is really kind of new -- new revenue for us.

So very, very pleased with the performance. Sean?

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

The only thing I would add is that we did have a very aggressive incentive program initially, and that is waning off. And the incentives will be a bit lower starting next month.Even lower than this month, but only a bit lower.

So but we will keep some incentives in place in order to retain the very strong liquidity. So you're seeing probably now and you'll see in the next quarter, something more like the RPC or the net RPC that we expect in that product. Nothing to remind you of in terms of the cannibalization or and -- again, we believe that it's, it's not cannibalization. We're 50,000 accounts as I said earlier, trading the product, the average trade is 2.65 contract, so much smaller than -- and E-mini, recall that micros are one-tenth the size.

So the average trade is about 25% of an E-mini. So that tells you that this is additional -- in addition to that, on the pricing, just as a reminder. For members is $0.04 a contract. So on a E-mini equivalent that's $0.40 versus a rack rate for a member in our E-minis is $0.35, so a nice premium. In addition to that for non-members our E-minis trade at $1.18 per contract. Whereas these are $0.20 so multiply by 10, that's $2. So they're also priced at a significant premium on a risk adjusted basis.

John W. Pietrowicz -- Chief Financial Officer

Yes, Alex, this is John. So just to give you an idea. The average RPC for the E-minis has gone up from about $0.05 to about $0.08 currently. About Micro, I'm sorry, not the minis, but micros.

Alex Blostein -- Goldman Sachs -- Analyst

Right. Thank you.

John W. Pietrowicz -- Chief Financial Officer

Thanks, Alex.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thank you. Good question, Alex.

Operator

Thank you. Our next question comes from Ken Worthington with JPMorgan.

Ken Worthington -- JPMorgan -- Analyst

Hi, good morning . There was a Wall Street Journal article out this morning with regard to Eurodollars in data. Does quoted -- the quoting size issue highlighted impact all asset classes or was this just a Eurodollar phenomenon and does the data phenomenon have any impact on volumes. If so, which direction I couldn't quite tell. And if you could. Could you take a guess on magnitude.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Yeah, Ken, thanks. I assume like -- we're answering a lot of questions from the press these days, and there are articles they're written off. Bryan, why don't you go ahead and address the Eurodollar.

Bryan T. Durkin -- President

I'll address the messaging program and policy perspective in terms of you had asked if we have programs in place to address how our users utilize the technology and the access into our Globex platform. We do have a messaging policy that applies to all of our product complexes and it's calibrated based upon how these markets trade. We are very sophisticated in terms of our understanding of messaging and messaging ratio is to transactions. So it's a very transparent policy that we've had in place. We did see a -- a dynamic occur over the course of the last few weeks in terms of messaging increasing significantly.

We got on top of that. We addressed our policy, we had introduced an enhancement to the policy dealing with excessive messaging and that has addressed the conduct that we have seen.

So we're pleased with the actions that we've undertaken to ensure that behavior that's coming in, messaging that's coming into our system and our infrastructure is appropriate for the overall marketplace in general.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Ken, thank you for your question. And I think Bryan summed it up very, very well . I couldn't add much more to that, but I can't underscore enough that the policy change that we have made, including our market REC division is very important. We've talked with the participants in the marketplace, we've addressed these issues. They understand our concerns. It doesn't benefit anybody by people trying to circumvent with the messaging traffic. So I think that we're in a much better place than we were before. I don't believe our procedures, our policies in the past were flawed.

I just think that we -- you need to amend these things once in a while. And that's exactly what we did. So I think that's what the article was reflecting. So hopefully that answers your question.

Ken Worthington -- JPMorgan -- Analyst

Great, thank you.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Ken.

Operator

Thank you. Our next question comes from Jeremy Campbell with Barclays.

Jeremy Campbell -- Barclays -- Analyst

Hey, thanks, guys, and thanks for the color earlier around Rich's question around the absolute level of rates and the reset [Phonetic] of volumes, but I'm also getting some more specific questions from accounts about the impact of the Fed's Open Market bond purchases on OI and volumes in the rates business. Now I know that the recent kind of Quasi QE has been named at more stabilized in the repo market and there's been obviously a lot going on seven years to 10 years ago during the short grounds of QE from a regulatory macro context as well.

So, Terry and Sean, you talked earlier about risk management in the rates business, but at the current level of QE or if we get like an escalation of QE in the next couple of years. How should we, one, think about the need for risk management in a QE-driven lower rate evolve world. Two, maybe what the impact could be on OI and volumes and I guess, three, if there is any parallels, we can draw by looking at -- at what CME's kind of prior experience was during prior QE cycles.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Yeah it's great question, Jeremy. I want to turn it to John and then I'll jump in, when he is done.

John W. Pietrowicz -- Chief Financial Officer

Yes, thank you, Jeremy. In terms of the Fed's most recent activity, is purchase of T-bills as well as its entrants into the repo market. Clearly that is in order to stabilize the amount of liquidity available for overnight borrowing and lending, relative to the jump that the Federal Reserve, the marketplace experienced in September.

So the Federal Reserve, if you recall, prior to the financial crisis was very active on a daily basis in the repo market in order to make sure that it has the right level of reserves in order to target the Fed funds rate. If you look at all of these recent actions in terms of Federal Reserves entering the overnight repo, the term repo and the purchase of T-bills. This is also they can target the overnight rate. That's not changing and it really does not impact the long part of the curve. It doesn't impact anything but their ability to target the overnight rate. If you think about it. With the advent of the financial crisis and the huge quantity easing that they did during the financial crisis, it grew their balance sheet tremendously and a lot of uncertainty from the Federal Reserve on how to get that overnight rate into the time zone that they want it.

So these are additional tools that they're using, just to make sure that that overnight rate is about where they want it, it doesn't change the volatility in the FOMC in terms of changing their target rate, it doesn't change that whatsoever, which is really what a lot of our products go to.

So I don't see it having a big impact. In terms of previous experience. If you look at. Yes. From the very early part of the financial crisis and the early part of Zero Interest Rate Policy, our volumes were challenged, no question, probably from '09 to '12 relative to the implosion of bank balance sheets.

For example, however, if you look at our experience since 2012 even during Zero Interest Rate Policy, we grew our interest rate business tremendously and I think, I can underline tremendously. If you look at today. For example, we're running and this is statistic, you've heard me talk about on earnings calls for last few years back in 2012. We were running about 45% of the average daily volume of the US treasury cash market in terms of our treasury futures.

Today, I'm happy to say, we're a new all-time record of 121% in terms of our treasury futures relative to the cash treasury bond market. So we, we've shown right that we can continue to grow, we grew our open interest. We grew the number of large open interest holders. We grew our volumes relative to the underlying cash market throughout Zero Interest Rate Policy.

And will -- and again, I think I said earlier, my job and I know Derek. Derek feels the same way. Our jobs are to grow our complexes in any market environment, now through innovation are making our products more attractive.

Terrence A. Duffy -- Chairman and Chief Executive Officer

You know, I will just add a little bit. I think, Sean summed it up very, very well. But, I think when we look back at '08, '09 and '10, when we were creating and Sean and his team were creating new products to mitigate risk and rates, a lot of people, so what are you doing? Everybody else thought the geopolitical fundamental factors in the marketplace, they waited for that to change for their business to grow. That's not what we did.

So even during all the quantitative easing and these rates going to historic lows, we grew the business that Sean pointed out with all the new products he introduced. So I'm quite confident that with the trillions of dollars of exposure that's out there and the whole host of different durations associated with lending today that we have to continue to innovate and that's exactly what we did the last 10 years, to give the numbers that Sean just raised a moment ago.

So that's the way I look at the next several years. We'll continue to look at what the needs of the market are to mitigate their risk, no matter what the price of the Fed lending rate will be because we know there's trillions of dollars out there that needs to be managed. So I'm quite optimistic about that business. Thank you.

Jeremy Campbell -- Barclays -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Owen Lau with Oppenheimer.

Owen Lau -- Oppenheimer -- Analyst

Good morning and thank you for taking my questions. So you announced the divestitures of some businesses like NEX Exchange, NEX Treasury and so could you please size the revenue and expense impact of those business for us. And do you have any timing of the sale or you are still in the process to look for buyers. And additionally, you also expect to realize $30 million expense synergy this year up $5 million, but maintain the run rate at $50 million. What was driving that acceleration of the expense synergies realization. Thank you.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks. Thanks, Owen. I'll let John go ahead and address that.

John W. Pietrowicz -- Chief Financial Officer

Yeah, thanks, Owen. Yeah. Let's talk about kind of the businesses that that we've acted on. ENSO closed at the beginning of the -- of October. NEX Exchange and NEX Treasury, we anticipate closing in the fourth quarter and then we have [Technical Issues], which is a platform in Italy that we are winding down.

So when we look at the forecast for 2020. The impact on revenue was about $15 million. The impact on direct costs were about $25 million. So those are at a forecasted loss of around $10 million. So those are -- those we've all, we've acted on -- on all of those businesses. With regard to the -- with regard to the synergies, we did increase our -- the amount we realized in terms of synergies this year and really, it's a function of the great work that you know that the management team has done in terms of managing the integration. We were able to make some of the office moves faster than we had originally anticipated, which allowed us to capture some of those synergies earlier than we anticipated.

So we actually realize more synergies this year and we're well on track for achieving the $50 million run rate synergies by the end of this year and that's net of, as I mentioned previously, we do have a double carry in terms of infrastructures, where we have a, the NEX legacy infrastructure as well as the Globex infrastructure running in parallel in anticipation of that migration of BrokerTec in and EBS. So really as Terry indicated in his prepared remarks. very, very pleased with the way the integration has been going and really excited about kind of the future of our business with NEX.

Owen Lau -- Oppenheimer -- Analyst

That's very helpful, thank you very much.

John W. Pietrowicz -- Chief Financial Officer

Sure. Thanks, Owen.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Owen.

Operator

Thank you. Our next question comes from Chris Harris with Wells Fargo.

Chris Harris -- Wells Fargo -- Analyst

Thanks guys. Can you talk a little bit about your expectations for the next-gen EBS platform and then how is this platform different from Globex?

Terrence A. Duffy -- Chairman and Chief Executive Officer

Right. Why don't we have Sean and Bryan discuss that real quick, Sean?

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

Sure. Very briefly in September, we did announce that we will be launching over the next 18 months, we'll be migrating clients from the current EBS Direct platform to what we call EBS QDM 2.0. The primary differences are much, much faster speed and much greater bandwidth. So these platforms are direct trading platforms between counterparties. And so the faster speed, the greater bandwidth gives -- that gives much more efficient trading at much lower latency, which is very attractive to market participants. The other thing I will remind you. And so, again that's a rollout over 18 months, it's going to take time, but at the moment, participants are consuming the data over the platform.

They're not actually transacting and they're doing that in order to test the performance of the system before it is used for actual trading and the performance results so far very pleasing relative to both their and our expectations. The other thing on that platform that we have that you should be well aware of is the analytics that allow customers to continuously revise the way they execute their trades and to optimize it for lower costs.

So we're very excited about the enhancements that we are making to the EBS technologies as well as the other technologies that we are -- that we inherited from the NEX businesses. Bryan?

Bryan T. Durkin -- President

Major value driver of all of this is moving all of these markets and to Globex without a doubt and engaging with our client base and the most active users of EBS. There is a great deal of enthusiasm and the migration to the Globex platform. I think, it's fair to say that the EBS platform was due for some substantial upgrades prior to our acquisition and so the ability now to have the benefits of infrastructure that they're already used to being able to migrate now these markets onto that platform and as we're doing it, we're enhancing functional attributes that they need it and want it for some time.

We're also reducing the complexity in terms of how order messaging comes into the platform and how those orders are received by the matching engine. So it's very important for us to be actively engaged with the client base as we're going through this integration process. The feedback that we're getting so far is extremely positive.

Chris Harris -- Wells Fargo Securities -- Analyst

Thank you.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks for your question, Chris.

Operator

Thank you.. Our next question comes from Brian Bedell with the Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

Great, thanks for taking my follow-up. Just one clarification on the tax rate. John is that 23.5% is that a good run rate to consider also for 2020?

John W. Pietrowicz -- Chief Financial Officer

Yeah. Great, great question, Brian, it's a function of what we think the business is going to be looking like in 2020. But really, the tax benefit that we're getting this quarter, we anticipate that continuing until -- until 2025, where it gets you know, decreases by about a third. So we're anticipating a tax benefit of 40 -- between $45 million and $50 million per year, obviously subject to any potential tax law changes is subject to the finalization of the regulations, which we don't anticipate changing.

So this benefit that we're getting in terms of servicing our international customers outside of the US from within the US is an ongoing benefit for us and we'll provide the effective tax rate guidance going into our fourth quarter call in February. So very, very, very pleased with our international growth and international expansion. Our strategy of growing globally again is benefited through our tax situation.

Brian Bedell -- Deutsche Bank -- Analyst

Okay, that's helpful. And then maybe if I could just throw in on one aspect of my -- of my first question and that was just the, your guys view or maybe Sean could comment on this, on the FASB hedge accounting rules. And I think Bryan, you mentioned, regional banks are now, you've been able to penetrate the regional bank community, a little bit better with the combined sales force. So just thinking about what banks may do in particular. Now that the hedge accounting has been relaxed, which I think allows MBS hedging -- more MBS hedging, if I'm right on that.

John W. Pietrowicz -- Chief Financial Officer

Yeah the -- certainly the action that the FASB has taken has really made it certainly much more easier and efficient from a financial reporting perspective to for utilization of our products. I think really, this is really I think more on the margins than it is a kind of a major driver of activity because at the end of the day, it's really the economic impacts that people are concerned about rather than the financial reporting, which does have some impact, but I think, it's more on the margins. I don't know, Sean, do you.

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

Hi John, I don't think I have much to add there, I mean in addition to that Brian, it's, we wouldn't be able to track what impact that's having very closely, probably, again a small positive marginal benefit.

Brian Bedell -- Deutsche Bank -- Analyst

Okay, great. Thanks very much.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thank you, Brian

John W. Pietrowicz -- Chief Financial Officer

Thanks, Brian.

Operator

Thank you. Our next question comes from Kyle Voigt with KBW.

Kyle Voigt -- KBW -- Analyst

Hi, thanks for taking my follow-up, just curious if you could, if you could give us an update on the net investment income line. Just the total cash collateral like average in the quarter and your basis point fee, you're generating on that. And then if we get another cut from the Fed, and just how that net fee rate will likely move going forward.

John W. Pietrowicz -- Chief Financial Officer

Yeah. Great. I'm glad you asked because I have been studying this so. So anyway, Kyle. So taking a look at the non-operating portion of our section, you could -- of our income statement, you can see that, it's gone up about $5 million and really, it's a function of a couple of primarily two things, one is we did have a sequential increase of about $2 million related to cash on deposit at the -- at the Clearinghouse and that was partially offset by lower returns that we got on those balances and the balances increased about on average, the average balances increased about $3.8 billion, so it went from about on average $25.6 billion in the second quarter to about $29 billion, up $29.5 billion in the third quarter, the amount of return we got went from about 34 basis points to 32 basis points from Q2 to Q3.

So in total, it was a sequential increase of about $2 million. We did have a change in our -- in the amount we charge for non-cash collateral, which is in the other income section of our -- I'm sorry, the other revenue section of our income statement and that increased sequentially about $10 million.

So that's not in the other income section but up of another other revenue. The other main driver of the non-operating section of our income statement is lower interest expense. That's down about $2.3 million and that's really a function of, that's really a function of lower -- lower balances, lower debt balances, we've been focused on paying down our debt. So those are the two main drivers in the other non-operating income section of our income statement.

I do want to point out, we did have a reclass from investment income of about $3 million to equity and non -- equity earnings and non-consolidated or unconsolidated subsidiaries and that is really related to legacy NEX investments. So that will now be recorded in equity earnings and unconsolidated subsidiaries. So those are the main drivers.

Kyle Voigt -- KBW -- Analyst

That's great, thank you. If I could just ask one more, just on your balance sheet. I think you have about $400 million of CP outstanding right now. If I'm calculating that correctly. Do you anticipate paying down that commercial paper completely by the end of the year, or maybe just timing there. I'm just trying to get a sense of how much of your -- your cash flow would be available for the annual variable dividend this year. Thanks.

John W. Pietrowicz -- Chief Financial Officer

Yeah, sure. Yeah, we don't. We don't give out guidance on that. So just to kind of walk down our capital structure, we had about $1.3 billion cash on hand -- was comfortable with the $700 million minimum cash balance, we're comfortable at that -- that level. We have $1.3 billion cash on hand. We've got $3.9 billion in total debt of which we have $435 million in commercial paper and we're currently sitting at a 1.2 times debt to EBITDA as we paid down about $0.5 billion in debt since the first of the year.

In terms of when you look at modeling the fourth quarter, generally. We do have one of our larger cash builds. Obviously, it's subject to business performance in the fourth quarter. We don't have pension funding as we pre-funded that in 2017. So if you look at historical cash trends, we usually have a pension funding, but like I said, we mentioned -- we pre-funded that in 2017. So we will not have one in 2019.

We anticipate lower than historical tax payments. As a result of the tax change. So that will have a fairly significant impact in terms of the cash flows in -- then in the fourth quarter, which will be a benefit in terms of cash generation in the fourth quarter.

We do have a bond interest payment in the fourth quarter and AP tends to be higher in Q4. And we also have a dividend in December. So those are some kind of puts and takes to help in terms of modeling the cash flow in the fourth quarter.

In terms of the actual pay down of the commercial paper, we're not giving any guidance on that.

Kyle Voigt -- KBW -- Analyst

Okay, thank you.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Kyle.

Operator

Thank you. Our next question comes from Richard Repetto with Sandler O'Neill.

Richard Repetto -- Sandler O'Neill -- Analyst

Yeah, hi, Terry and John, just one quick last follow-up. The retail e-brokers went to zero commissions on the equity and ETF trades, and I know the futures trades are still a premium. I guess in retail, I think it's been a good part of your volume and you mentioned that before. I think it was 10% or somewhere around there.

But anyway, do you expect to see any impact, I know, you offer some, what you call benefits to futures trading on for that retail account. You can't get in equities as well. So how do you see the balance and that the zero commission impacting your, the retail side of your business.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thanks, Rich. I'll let Bryan touch on that and then I'll give a comment.

Bryan T. Durkin -- President

Thanks, Rich. Our retail partners continue to look to us for products, education, sales and our marketing efforts to help them grow and expand their client opportunities, we've developed some very strong partnerships in this regard over the last several years and it's been very fortuitous in terms of a growing segment, as you well know business for us. They look to us for one, liquidity in the products that we offer. The margin efficiencies and leverage offered in our futures versus the other alternatives. And then our 24/7 global access to our liquidity. That in concert with the education efforts that we've undertaken with them has allowed us to help them grow their user base significantly in terms of focusing them toward certain asset classes and products.

Through these efforts, I appreciate through Julie Winkler's sales team and her marketing effort. We've been very dedicated to our retail growth efforts. We've been successful in generating over 90,000 new retail futures traders in this year alone. Just to break that down a little bit. Our retail average daily volume today is about 734,000 contracts in Q3, which is up 34% and out of this. We're very excited to say 49% growth coming out of EMEA and 26% of this is coming out of Asia. When you look at the product innovation perspective, we rely heavily on this Group as well in terms of addressing their increased demand for example for the Micro E-minis and the efforts that have come out of that.

It's one of our most successful product launches as Sean and Terry have outlined. And on the education front, we continue to work very collaboratively in providing education and marketing efforts to grow that knowledge base of our products. And our most recent success area. It's been an area of consistent focus for the last two years is in options.

Our options growth through from this community has been tremendous. So when you take a look at the total cost of trade from perspective given all of the above that I've just outlined. We're very confident in our retail clients and our partner firms and that will continue to look to our offerings.

Terrence A. Duffy -- Chairman and Chief Executive Officer

And Rich, just to add to that. I think Bryan summed it up quite well. But if you look at what some of the biggest retail brokers are saying that use our products today, they are saying, they are with some of their most valued clients that they have today. I think that that's an important statement that they're making, that's not us making it, it's that them making it, I don't want to reference it, in case, I don't mean to say their name, but at the same time, I don't want. I would not want to see retail brokers trying to push people into derivatives or futures that don't have a good understanding of them.

That's not what we're all about when we talk about retail, we talk about sophisticated participants. And I think, that's a lot what these discount brokers have. So we'll continue the educational process, working with the retail brokers into our product line. But at the same time, because their business model may have shifted a little bit on zero commissions. We don't want to just pushing them into our markets so that they are not accustomed to.

Richard Repetto -- Sandler O'Neill -- Analyst

Got it. Very well prepared answer, Terry and Bryan.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Thank you.

Bryan T. Durkin -- President

Thanks.

Operator

Thank you. At this time we have no further questions, so I will turn it back to management for closing comments.

Terrence A. Duffy -- Chairman and Chief Executive Officer

Well we thank you all very much. We look forward to talking to you over the next several weeks and we'll see you in next quarter. That were my question today.

John W. Pietrowicz -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

John Peschier -- Managing Director of Investor Relations

Terrence A. Duffy -- Chairman and Chief Executive Officer

John W. Pietrowicz -- Chief Financial Officer

Sean Tully -- Senior Managing Director, Global Head of Financial and OTC Products

Bryan T. Durkin -- President

Richard Repetto -- Sandler O'Neill -- Analyst

Dan Fannon -- Jefferies -- Analyst

Ben Herbert -- Citigroup -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Kyle Voigt -- KBW -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Ken Worthington -- JPMorgan -- Analyst

Jeremy Campbell -- Barclays -- Analyst

Owen Lau -- Oppenheimer -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Chris Harris -- Wells Fargo Securities -- Analyst

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