CME GROUP INC. - Annual Report: 2019 (Form 10-K)

---

---

•	increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities;

•	our ability to keep pace with rapid technological developments, including our ability to complete the development, implementation and maintenance of the enhanced functionality required by our customers while maintaining reliability and ensuring that such technology is not vulnerable to security risks;

•	our ability to continue introducing competitive new products and services on a timely, cost-effective basis, including through our electronic trading capabilities, and our ability to maintain the competitiveness of our existing products and services, including our ability to provide effective services to the swaps market;

•	our ability to adjust our fixed costs and expenses if our revenues decline;

•	our ability to maintain existing customers at substantially similar trading levels, develop strategic relationships and attract new customers;

•	our ability to expand and globally offer our products and services;

•	changes in regulations, including the impact of any changes in laws or government policy with respect to our products or services or our industry, such as any changes to regulations and policies that require increased financial and operational resources from us or our customers;

•	the costs associated with protecting our intellectual property rights and our ability to operate our business without violating the intellectual property rights of others;

•	decreases in revenue from our market data as a result of decreased demand or changes to regulations in various jurisdictions;

---

•	changes in our rate per contract due to shifts in the mix of the products traded, the trading venue and the mix of customers (whether the customer receives member or non-member fees or participates in one of our various incentive programs) and the impact of our tiered pricing structure;

•	the ability of our credit and liquidity risk management practices to adequately protect us from the credit risks of clearing members and other counterparties, and to satisfy the margin and liquidity requirements associated with the BrokerTec matched principal business;

•	the ability of our compliance and risk management methods to effectively monitor and manage our risks, including our ability to prevent errors and misconduct and protect our infrastructure against security breaches and misappropriation of our intellectual property assets;

•	our dependence on third-party providers and exposure to risk through third-parties, including risks related to the performance, reliability and security of technology used by our third-party providers;

•	volatility in commodity, equity and fixed income prices, and price volatility of financial benchmarks and instruments such as interest rates, credit spreads, equity indices, fixed income instruments and foreign exchange rates;

•	economic, social, political and market conditions, including the volatility of the capital and credit markets and the impact of economic conditions on the trading activity of our current and potential customers;

•	our ability to accommodate increases in contract volume and order transaction traffic and to implement enhancements without failure or degradation of the performance of our trading and clearing systems;

•	our ability to execute our growth strategy and maintain our growth effectively;

•	our ability to manage the risks, control the costs and achieve the synergies associated with our strategy for acquisitions, investments and alliances, including those associated with the acquisition of NEX;

•	our ability to continue to generate funds and/or manage our indebtedness to allow us to continue to invest in our business;

•	industry and customer consolidation;

•	decreases in trading and clearing activity;

•	the imposition of a transaction tax or user fee on futures and options transactions and/or repeal of the 60/40 tax treatment of such transactions;

•	our ability to maintain our brand and reputation; and

•	the unfavorable resolution of material legal proceedings.

---

ITEM 1.	BUSINESS

•	CME's product slate includes agricultural, equities, FX and interest rate products, including contracts for Eurodollars, Secured Overnight Financing Rate (SOFR) and contracts based on the S&P, NASDAQ-100 and FTSE Russell Indexes.

•	CBOT's product slate consists of agricultural, equities, energy and interest rate products, including contracts for United States (U.S.) Treasury futures, corn and other grains and contracts based on the Dow Jones Industrial Index.

•	NYMEX's product slate consists of energy and metals products, including contracts for crude oil, natural gas, heating oil and gasoline.

•	COMEX's product slate consists of metals products, including contracts for gold, silver and copper.

---

•	certainty of execution;

•	extensive capabilities to facilitate complex and demanding trading;

•	direct market access;

•	fairness, price transparency and anonymity;

•	convenience and efficiency;

•	connectivity through highly secure, resilient and low-latency network options; and

•	global distribution, including connectivity through high-speed international telecommunications hubs in key financial centers or order routing to our global partner exchanges.

•	BrokerTec is a global electronic platform for the trading of fixed income products, with a leading position in cash U.S. Treasuries, as well as activity in European government bonds and E.U. and U.S. repo fixed income instruments. It facilitates trading principally for banks and non-bank professional trading firms.

•

EBS is a global electronic platform for the trading of FX products across major and emerging market currencies. EBS offers anonymous and disclosed trading venues, which gives clients multiple execution and distribution options and the benefit of an established and far-reaching distribution network of liquidity providers and consumers. It also offers execution of non-deliverable forwards through a CFTC-registered Swap Execution Facility (SEF).

•	Trade and portfolio management comprises portfolio and margin reconciliation, monitoring pre-trade risk and automating post-trade processing of financial transactions.

•	Financial resource optimization comprises portfolio compression, basis risk mitigation, portfolio balancing and derivative pricing and risk analytics.

---

•	Regulatory reporting comprises trade and position reporting (including licensed MiFID agent reporting to national regulators and the public), end-to-end multi-regime regulatory reporting, data normalization, enrichment, reconciliation, validation and cross-jurisdictional matching.

•	Trade Processing comprises end-to-end automation, from trade execution notification to trade confirmation of post-trade processing, in real-time to reduce operational risks and costs.

---

•	CME Clearing provides compression via coupon blending as well as CME CORE, an interactive margin calculator that enables clients to optimize their capital by providing insights on margin requirements prior to trading.

•	triReduce provides multilateral portfolio compression, which reduces notional outstanding exposure and line items in order to reduce operational resources and risks, minimize regulatory capital costs, and manage counterparty exposures.

•	Traiana provides various operational efficiencies and risk mitigation solutions to clients through bilateral and tri-party pre- and post-trade processing and credit risk management.

•	Reset provides risk mitigation services to clients looking to hedge short-term interest rate and options expiry exposure.

---

•	brand and reputation;

•	efficient and secure settlement, clearing and support services;

•	depth and liquidity of markets;

•	diversity of product offerings and frequency and quality of new product development and innovative services;

•	ability to position and expand upon existing products to address changing market needs;

•	efficient and seamless customer experience;

•	transparency, reliability, anonymity and security in transaction processing;

•	regulatory environment;

•	connectivity, accessibility, flexibility in execution methods, and distribution;

•	technological capability and innovation; and

•	overall transaction costs.

---

---

•

The potential impact of the adoption of EMIR 2.2 allowing for the direct regulation by the European Union of non-European Union clearing houses, like us, and resulting changes to the European Union equivalence and recognition regime on non-European Union clearing houses and exchanges with customers based in Europe. EMIR 2.2 became effective on January 1, 2020, and we are awaiting implementing regulations to determine its impact on our business and whether we will need to make any significant changes to how our clearing house operates. These potential changes could have negative implications for the markets we clear and our market participants by subjecting our clearing business to regulations that would conflict with the regulation imposed by U.S. law and the CFTC, prevent us from deploying our capital efficiently and increasing our regulatory costs. Further, ESMA could impose significant fines for non-compliance with their local European regulations, and we may have to consider material changes to certain of our risk management policies in order to reduce the risk of fines imposed under EMIR 2.2. A failure of our clearing house to retain its recognition may result in our clearing members and certain customers in Europe being subject to higher capital costs for participating in our markets, thus creating a disincentive to use our markets. The

---

•	The adoption and implementation of position limit rules, which could have a significant impact on our commodities business if federal rules for position limit management differ significantly from current exchange-administered rules.

•	Rules respecting capital charges under Basel III with respect to clearing members of central counterparties may have negative implications for the cleared derivatives markets. Additional risks could arise through inconsistent adoption of the Basel III capital charges globally, potentially leading to disparate impacts on our customers.

•	The potential for further regulation stemming from industry performance disruptions and residual concerns around electronic trading activity and, in particular, "high frequency trading."

•	The potential elimination of the 60/40 tax treatment of certain of our futures and options contracts, which would result in 60% of the gains being taxed at the short-term capital gain rate instead of the long-term capital gain rate. This would impose a significant increase in tax rates applicable to certain market participants, and could result in a decrease in their trading activity.

•

The implementation of a transaction tax or user fee in the United States, U.K. or European Union, or in the State of Illinois, which could discourage institutions and individuals from using our markets or products or encourage them to trade in another less costly jurisdiction. From time to time, the proposed Presidential budget request, including the currently proposed budget, has included a proposal to impose a user fee to fund the CFTC. Legislation to impose a financial transaction tax has again been proposed in both the U.S. Congress and Illinois General Assembly, as it has in previous sessions of Congress and the General Assembly.

•	The implementation of legislation in the European Union impacting how benchmark index prices are formed, including new requirements for price submitters, price aggregators and markets that list contracts that reference index prices.

•	Concerns that European legislators will prohibit or restrict exclusive licenses for benchmark indexes, which might impact the profitability of several of our most popular contracts.

•	The FCA has indicated that it will no longer require banks to participate in the LIBOR panel after December 31, 2021. The possibility exists that the FCA may find LIBOR to not be representative of the underlying short-term interest rate pricing or unfit for such purpose, and thus may unfavorably impact our ability to list our existing suite of Eurodollar futures and options products.

•	The implementation of rules resulting in negative treatment of the liquidity profile of U.S. Treasury securities, including as qualifying liquidity resources, or any potential limitation on the use of U.S. Treasury securities as collateral could result in increased costs to us and our clearing firms.

•	The implementation of the final phases of uncleared margin rules across jurisdictions and implications on customers management of exposures.

---

---

•	economic, political and geopolitical market conditions;

•	legislative and regulatory changes, including any direct or indirect restrictions on or increased costs associated with trading in our markets or our clearing services;

•	broad trends in the industry and financial markets;

•	changes in price levels, trading volumes and volatility in the derivatives, cash and OTC markets and in their underlying markets;

•	shifts in demand or supply in commodities underlying our products;

•	competition;

•	changes in government monetary policies, especially central bank decisions related to quantitative easing;

•	availability of capital to our market participants and their appetite for risk-taking;

•	levels of assets under management;

•	volatile weather patterns, droughts, natural disasters and other catastrophes;

•	pandemics affecting our customer base or our ability to operate our markets; and

•	consolidation or expansion in our customer base and within our industry.

---

---

•	respond more quickly to competitive pressures, including responses based upon their corporate governance structures, which may be more flexible and efficient than our corporate governance structure;

•	develop products that are preferred by our customers compared to those offered by CME Group;

•	develop risk transfer products that compete with our products;

•	price their products and services more competitively;

•	develop and expand their network infrastructure and service offerings more efficiently;

•	utilize better, more user-friendly or more reliable technology;

•	take greater advantage of acquisitions, alliances and other opportunities that provide a competitive advantage;

•	more effectively market, promote and sell their products and services;

•	better leverage existing relationships with customers and alliance partners or exploit better recognized brand names to market and sell their services; or

•	exploit regulatory disparities between traditional, regulated exchanges and alternative markets that benefit from a reduced regulatory burden and lower-cost business model.

---

---

•	provide reliable and cost-effective services to our customers;

•	develop, in a timely manner, the required functionality to support electronic trading in a manner that is competitive with the functionality supported by other electronic markets;

•	maintain the competitiveness of our fee structure;

•	attract independent software vendors to write front-end software that will effectively access our electronic trading systems and automated order routing system;

•	respond to technological developments or service offerings by competitors; and

•	generate sufficient revenue to justify the substantial capital investment we have made and will continue to make to enhance our electronic trading platforms and other technology offerings.

•	unanticipated disruptions in service to our customers;

---

•	slower response times and delays in our customers' trade execution and processing;

•	failed settlement of trades;

•	incomplete or inaccurate accounting, recording or processing of trades;

•	financial losses;

•	security breaches;

•	litigation or other customer claims;

•	loss of customers; or

•	regulatory sanctions.

---

---

•	fluctuations in currency exchange rates;

•	complying with extensive and complex regulations and oversight;

•	difficulties in staffing and associated costs in managing multiple international locations;

•	general economic, social and political conditions;

•	protectionist laws and business practices that favor local businesses in some countries;

•	reduced protection for intellectual property rights in some countries;

•	language and cultural differences; and

•	potentially adverse tax consequences.

---

---

•	require us to dedicate a significant portion of our cash flow from operations to payments on our debt, thereby reducing the availability of cash flows to fund capital expenditures, to pursue acquisitions or investments, to pay dividends and for general corporate purposes;

•	increase our vulnerability to general adverse economic conditions;

•	limit our flexibility in planning for, or reacting to, changes in or challenges relating to our business and industry; or

•	place us at a competitive disadvantage against any less leveraged competitors.

---

---

ITEM 3.	LEGAL PROCEEDINGS

ITEM 4.	MINE SAFETY DISCLOSURES

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

---

---

(1)	Shares purchased consist of an aggregate of 132 shares of Class A common stock surrendered to satisfy employee tax obligations upon the vesting of restricted stock.

ITEM 6.	SELECTED FINANCIAL DATA

---

---

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

•	Executive Summary: Includes an overview of our business; current economic, competitive and regulatory trends relevant to our business; our current business strategy; and our primary sources of operating and non-operating revenues and expenses.

•	Critical Accounting Policies: Provides an explanation of accounting policies which may have a significant impact on our financial results and the estimates, assumptions and risks associated with those policies.

•	Recent Accounting Pronouncements: Includes an evaluation of recent accounting pronouncements and the potential impact of their future adoption on our financial results.

•	Results of Operations: Includes an analysis of our 2019 and 2018 financial results and a discussion of any known events or trends which are likely to impact future results.

•	Liquidity and Capital Resources: Includes a discussion of our future cash requirements, capital resources, significant planned expenditures and financing arrangements.

---

•	rate structure;

•	product mix;

•	venue, and

•	the percentage of trades executed by customers who are members compared with non-member customers.

---

---

•

Technology expense consists of costs related to maintenance of the hardware and software required to support our technology. It also includes costs for network connections for our electronic platforms and some market data customers; telecommunications costs of our exchange, and fees paid for access to external market data. This expense may be driven by system capacity, functionality and redundancy requirements. It also may be impacted by growth in electronic contract volume and changes in the number of telecommunications hubs and connections which allow customers outside the United States to access our electronic platforms directly.

•	Licensing and other fee agreements expense includes license fees paid as a result of contract volume in equity index products. This expense also includes royalty fees and broker rebates on energy and metals products as well as revenue sharing on cleared swaps contracts and some new product launches. This expense fluctuates with changes in contract volumes as well as changes in fee structures.

•

Other expenses include occupancy and building operations expenses including rent, maintenance, real estate taxes, utilities and other related costs related to leased property in Chicago, New York, the United Kingdom, India as well as other smaller locations throughout the world. Other expenses also include marketing and travel-related expenses as well as general and administrative costs. Marketing, advertising and public relations expense includes media, print and other advertising costs, as well as costs associated with our product promotion. Other expenses also include litigation and customer settlements, impairment charges on operating assets, gains and losses on disposals of certain operating assets, and foreign currency transaction gains and losses resulting from changes in exchange rates on certain foreign monetary assets and liabilities.

---

•

Investment income includes income from short-term investment of clearing firms' cash performance bonds and guaranty fund contributions as well as excess operating cash; interest income and realized gains and losses from our marketable securities; realized gains and losses as well as dividend income from our strategic equity investments, and gains and losses on trading securities in our non-qualified deferred compensation plans. Investment income is influenced by market interest rates, changes in the levels of cash performance bonds deposited by clearing firms, the amount of dividends distributed by our strategic investments and the availability of funds generated by operations.

•	Interest and other borrowing costs expense includes charges associated with various short-term and long-term funding facilities, including commitment fees on lines of credit agreements.

•	Equity in net earnings (losses) of unconsolidated subsidiaries includes income and losses from our investments in S&P/Dow Jones Indices LLC (S&P/DJI), Dubai Mercantile Exchange and Bursa Malaysia Derivatives Berhad.

•	Other income (expense) includes expenses related to the distribution of a portion of interest earned on performance bond collateral reinvestment to the clearing firms, gains and losses on derivative contracts as well as other various income and expenses outside our core operations.

•	Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

•	Level 2— Inputs consist of observable market data, other than level 1 inputs, such as quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are directly observable.

•	Level 3—Inputs are unobservable and reflect management’s best estimate of what market participants would use in pricing the asset or liability. Assets and liabilities carried at level 3 fair value generally include assets and liabilities with inputs that require management’s judgment.

---

---

---

---

---

---

---

•	Compensation and benefits expense increased as a result of headcount added from the NEX acquisition in the fourth quarter of 2018.

•	Amortization of purchased intangibles related to the NEX acquisition accounted for the additional amortization expense.

•	Technology expense, specifically hardware and software maintenance expense, was higher largely due to the addition of our NEX operations.

•	During 2019, we recognized higher impairment losses on certain fixed assets and net losses on assets held for sale compared to 2018.

•	Occupancy and building operations expense increased due to the inclusion of leases for our NEX operations.

•	Bonus expense increased in 2019 largely due to the headcount added as part of the NEX acquisition.

•	Integration costs increased following the NEX acquisition in the fourth quarter of 2018. These costs primarily consisted of professional and legal fees incurred to support the post-acquisition integration efforts during 2019.

•

In 2018, we recognized a net loss of $73.6 million primarily due to the decline in the British pound versus U.S. dollar exchange rate on $1.6 billion of restricted cash held for the acquisition of NEX, which was denominated in British pounds, compared to a net loss of $7.2 million in 2019. Gains and losses from exchange rate fluctuations result when subsidiaries with a U.S. dollar functional currency hold cash as well as certain other monetary assets and liabilities denominated in foreign currencies.

•	Transaction costs and transfer taxes incurred by CME Group related to the NEX acquisition resulted in additional expense in 2018.

---

(1)	The liability for gross unrecognized income tax benefits, including interest and penalties, of $441.8 million for uncertain tax positions is not included in the table due to uncertainty about the date of their settlement. It also excludes liabilities for lease

---

---

(1)	We maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 3.32%.

(2)	We maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 3.11%.

(3)	We maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable effectively became fixed at a rate of 4.73%.

---

---

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

•	a financial safeguard package for all futures, options and over-the-counter swap contracts other than cleared interest rate swap contracts (base package); and

•	a financial safeguard package for cleared interest rate swap contracts.

---

(1)	Our clearing house designates $100.0 million of corporate contributions to satisfy a clearing firm default in the event that the defaulting clearing firm's guaranty contributions and performance bonds do not satisfy the deficit.

(2)	Guaranty fund contributions of clearing firms include guaranty fund contributions required of clearing firms, but do not include any excess deposits held by us at the direction of clearing firms.

(3)

In the event of a clearing firm default, if a loss continues to exist after the utilization of the assets of the defaulted firm, our corporate contribution and the non-defaulting clearing firms' guaranty fund contributions, we would assess all non-defaulting clearing members as provided in the rules governing the guaranty fund. We could assess non-defaulting clearing members 275% of their existing guaranty fund requirements up to a maximum of 550% of their existing guaranty fund requirements as provided in the rules. Assessment powers are calculated to reflect the potential obligation that each clearing member could be called for in the event clearing member defaults exhaust the guaranty fund, however the total amount available would be reduced by the defaulted clearing members assessment obligations since they would no longer be able to satisfy their obligations.

(1)	Our clearing house designates $150.0 million of corporate contributions to satisfy a clearing firm default in the event that the defaulting clearing firm's guaranty contributions and performance bonds do not satisfy the deficit.

(2)	Guaranty fund contributions of clearing firms for interest rate swap contracts include guaranty fund contributions required of those clearing firms.

(3)

In the event of a clearing firm default, if a loss continues to exist after the utilization of the assets of the defaulted firm, our corporate contribution and the non-defaulting firms' guaranty fund contributions, we would assess non-defaulting clearing members as provided in the rules governing the interest rate swap guaranty fund. Assessment powers are calculated to reflected the potential obligation that each clearing member could be called for based on potential failure of the third and fourth largest clearing.

---

---

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

(1)

Trading products represent futures and options products acquired in our business combinations with CBOT Holdings, Inc., NYMEX Holdings, Inc. and The Board of Trade of Kansas City, Missouri, Inc. Clearing and transaction fees are generated through the trading of these products. These trading products, most of which have traded for decades, require authorization from the CFTC. Product authorizations from the CFTC have no term limits.

---

---

(1)	The company maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 3.32%.

(2)	The company maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 3.11%.

(3)	The company maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 4.73%.

(4)	The commercial paper is backed by the five-year multi-currency revolving credit facility.

---

---

---

---

---

---

---

---

---

---

---

---

---

•	Level 1 inputs, which are considered the most reliable evidence of fair value, consist of quoted prices (unadjusted) for identical assets or liabilities in active markets.

•	Level 2 inputs consist of observable market data, other than level 1 inputs, such as quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are directly observable.

•	Level 3 inputs consist of unobservable inputs which are derived and cannot be corroborated by market data or other entity-specific inputs.

---

---

---

---

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A.	CONTROLS AND PROCEDURES

---

---

---

---

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11.	EXECUTIVE COMPENSATION

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

ITEM 13.	CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES

---

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1)	Includes write-offs of doubtful accounts, foreign currency and additions to allowance for deferred tax assets through accumulated other comprehensive income (loss).

(3)	Exhibits

---

---

---

(1)	Management contract or compensatory plan or arrangement.

(2)	Confidential treatment pursuant to Rule 406 of the Securities Act has been previously granted by the SEC for portions of this exhibit.

---

---

---