What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-28 · 158 added, 156 removed, 442 unchanged (42% of the section changed)

11 unchanged sentences

• 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.

Includes an analysis of our 2020 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.

On November 2, 2018, we completed our acquisition of NEX Group plc (NEX).

The following Management's Discussion and Analysis of Financial Condition and Results of Operations includes the financial results of NEX beginning on November 3, 2018.

References in this discussion and analysis to “we” and “our” are to CME Group Inc.

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This flexibility increases the potential liquidity available for each trade.

Additionally, the substitution of our clearing house as the counterparty to every transaction allows our customers to establish a position with one party and offset the

position with another party.

Additionally, the substitution of our clearing house as the counterparty to every transaction allows our customers to establish a position with one party and offset the position with another party.

This contract offsetting process provides our customers with flexibility in establishing and adjusting positions and provides for collateral and margining efficiencies.

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Our customers continue to use our markets as an effective and transparent means to manage risk and meet their investment needs.

Trading activity in our centralized markets has fluctuated due to the ongoing uncertainty in the financial markets caused by the United States and European credit crises, fluctuations in the availability of credit, variations in the amount of assets under management as well as the Federal Reserve Bank’s interest rate policy and quantitative easing.

Trading activity in our centralized markets has fluctuated due to the ongoing uncertainty in the financial markets, fluctuations in the availability of credit, variations in the amount of assets under management as well as the Federal Reserve Bank’s interest rate policy and quantitative easing.

We continue to maintain high quality and diverse products as well as various clearing and market data services which support our customers in any economic environment.

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• rate structure;

• product mix;

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

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Our exchange and platforms are an international marketplace that brings together buyers and sellers mainly through our electronic trading as well as through open outcry trading and privately negotiated transactions.

Any customer who is guaranteed by a clearing firm and who agrees to be bound by our exchange rules is able to obtain direct access to our CME electronic platforms.

Any customer who is guaranteed by a clearing firm and who agrees to be bound by our exchange rules is able to obtain direct access to our electronic platforms.

Open outcry trading is conducted exclusively by our members, who may execute trades on behalf of customers or for themselves.

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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.

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 U.S.

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.

1 unchanged sentence

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 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 U.K., 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.

9 unchanged sentences

• 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.

• 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), Shanghai CFETS-NEX International Money Broking Co., Ltd.

and Dubai Mercantile Exchange.

• 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.

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The notes to our consolidated financial statements include disclosure of our significant accounting policies.

In establishing these policies within the framework of accounting principles generally accepted in the United States, management must make certain assessments, estimates and choices that will result in the application of these principles in a manner that appropriately reflects our financial condition and results of operations.

In establishing these policies within the framework of accounting principles generally accepted in the U.S., management must make certain assessments, estimates and choices that will result in the application of these principles in a manner that appropriately reflects our financial condition and results of operations.

Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to affect our financial position and operating results.

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We have categorized financial instruments measured at fair value into the following three-level fair value hierarchy based upon the level of judgment associated with the inputs used to measure the fair value:

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.

• 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, 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.

For further discussion regarding the fair value of financial assets and liabilities, see note 2 of the notes to the consolidated financial statements.

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The qualitative assessment of goodwill may rely on significant assumptions about forecasts of revenue growth, operating margins and economic conditions as well as overall market and industry-specific trends.

In addition, the carrying value of goodwill, as denominated in foreign currencies, is adjusted each reporting period as a result of movements in foreign currency exchange rates relative to the U.S.

Such foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss) within shareholders' equity.

We also review indefinite-lived intangible assets on a quarterly basis or more frequently when events and circumstances indicate that their carrying values may not be recoverable.

Indefinite-lived intangible assets may be tested quantitatively for

impairment by comparing their carrying values to their estimated fair values.

Indefinite-lived intangible assets may be tested quantitatively for impairment by comparing their carrying values to their estimated fair values.

Estimating the fair value of indefinite-lived intangible assets involves the use of valuation techniques that rely on significant estimates and assumptions.

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Intangible assets subject to amortization are also assessed for impairment on a quarterly basis or more frequently when indicated by a change in economic or operational circumstances.

The impairment assessment of these assets requires management to first compare the book value of the amortizing asset to undiscounted cash flows.

If the book value exceeds the undiscounted cash flows, management is then required to estimate the fair value of the assets and record an impairment loss for the excess of the carrying value over the fair value and annually challenge the useful lives.

The impairment assessment of these assets requires management to first compare the carrying value of the amortizing asset to its undiscounted net cash flows.

If the carrying value exceeds the undiscounted net cash flows, management is then required to estimate the fair value of the assets and record an impairment loss for the excess of the carrying value over the fair value.

In connection with this impairment assessment, management also challenges the useful lives of our definite-lived intangible assets on a periodic basis.

Revenue recognition.

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Clearing and transaction fees are recognized as revenue when a buy and sell order are matched and when the trade is cleared.

On occasion, the customer's exchange trading privileges may not be properly entered by the clearinrg firm and incorrect fees are charged for the transactions in the affected accounts.

On occasion, the customer's exchange trading privileges may not be properly entered by the clearing firm and incorrect fees are charged for the transactions in the affected accounts.

When this information is corrected within the time period allowed by the exchange, a fee adjustment is provided to the clearing firm.

An accrual is established for estimated fee adjustments to reflect corrections to customer exchange trading privileges.

The accrual is based on the historical pattern of adjustments processed as well as specific adjustment requests.

A reserve is established for estimated fee adjustments to reflect corrections to customer exchange trading privileges.

This reserve has historically been immaterial.

The reserve is based on the historical pattern of adjustments processed as well as management's estimate of future adjustment activity.

Income taxes.

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Internal use software costs.

Certain internal and external costs that are incurred in connection with developing or obtaining computer software for internal use are capitalized.

Certain internal and external costs that are incurred in connection with developing or obtaining software for internal use are capitalized.

We also enter into software hosting arrangements for software projects maintained in the cloud.

Software development costs incurred during the planning or maintenance stages of a software project are expensed as incurred, while costs incurred during the application development stage are capitalized and are amortized over the estimated useful life of the software, generally two to four years.

Amortization of capitalized costs begins only when the software becomes ready for its intended use.

In addition, software assets are assessed for impairment when events or circumstances indicate that the carrying values may not be recoverable or that a reduction in the estimated useful lives is warranted.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to note 2 in our notes to the consolidated financial statements for information on newly adopted and recently issued accounting pronouncements that are applicable to us.

Refer to note 2 in our notes to the consolidated financial statements for information on newly adopted accounting pronouncements that are applicable to us.

RESULTS OF OPERATIONS

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The following summarizes significant changes in our financial performance for the years presented.

For a comparison of our results of operations for the fiscal years ended December 31, 2018 and December 2017, see "Part II, Item 7.

For a comparison of our results of operations for the fiscal years ended December 31, 2019, see "Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 28, 2020.

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Market data and information services 545.4 518.5 5

Other 440.8 403.4 9

Total Revenues $ 4,883.6 $ 4,868.0 —

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Year-over-Year Change

2020 2019 2020-2019

Total contract volume (in millions) 4,820.6 4,830.0 — %

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Agricultural commodities 1,417 1,454 (3)

Energy 2,394 2,375 1

Metals 699 668 5

Aggregate average daily volume 19,054 19,167 (1)

Average Daily Volume by Venue:

CME Globex 17,977 17,182 5

Open outcry 410 1,205 (66)

Privately negotiated 667 780 (15)

1 unchanged sentence

Electronic Volume as a Percentage of Total Volume 94 % 90 %

During 2019, volatility spiked in mid-2019 following a shift in expectations surrounding the Federal Reserve's interest rate policies.

In mid-2019, the Federal Reserve began cutting interest rates following earlier indications that it intended to continue to slowly increase interest rates throughout 2019.

Uncertainty surrounding the United States' foreign trade policy also increased mid-2019 following the threat of additional tariffs.

By the fourth quarter, market volatility generally declined as uncertainty surrounding the Federal Reserve's interest rate policy subsided.

Uncertainty surrounding the foreign trade policy also diminished following a preliminary trade agreement between the United States and China at the end of 2019.

We believe the net result of these factors lead to overall volume remaining relatively flat in 2019 when compared with 2018.

In 2020 when compared with 2019, overall market volatility declined following a period of very high volatility in the first quarter of 2020.

During the first quarter of 2020, the Federal Reserve made the unexpected decision to lower the federal funds rate due to economic concerns from the COVID-19 pandemic, which resulted in significant volatility within the financial and equity markets.

However, interest rate volatility subsided following indication by the Federal Reserve that it did not intend to raise interest rates in the foreseeable future.

Equity market volatility remained high throughout 2020 as a result of the governmental and business response to the COVID-19 pandemic, as well as political uncertainty surrounding the U.S.

Presidential and Congressional elections in November.

In addition, heightened producer price competition within the oil markets combined with lower energy demands during the COVID-19 pandemic resulted in significant market volatility within the energy market during the first quarter of 2020.

However, this volatility subsided as oil prices stabilized and demand for crude oil remained low for the remainder of 2020.

We believe these factors led to the changes in volume in 2020 when compared with 2019.

Interest Rate Products

7 unchanged sentences

Back 32 futures 633 661 (4)

Options 1,058 1,685 (37)

Treasury futures and options:

10-Year 2,026 2,324 (13)

5-Year 1,081 1,358 (20)

2-Year 517 749 (31)

Treasury bond 484 467 3

Federal Funds futures and options 207 356 (42)

In 2019 compared with 2018, overall interest rate contract volume increased slightly, particularly for short term contracts, due to volatility caused by continued uncertainty surrounding the Federal Reserve's interest rate policy.

We believe volatility increased in the middle of 2019 due to a shift in market expectations at that time following the Federal Reserve's decision to initiate interest rate cuts as well as uncertainty surrounding the United State's future economic growth.

In 2020 when compared with 2019, overall interest rate contract volume decreased.

We believe this was d ue to the Federal Reserve's decision to cut interest rates to near zero in early 2020 and its indication that it would not raise interest rates in the foreseeable future in response to the economic impact of the COVID-19 pandemic.

Equity Index Products

6 unchanged sentences

E-mini Russell 2000 futures and options 302 168 79

In 2019 compared with 2018, equity index contract volume decreased slightly due to lower overall volatility in the equity market in 2019, particularly in the fourth quarter.

Volatility levels were higher in 2018 due to uncertainty surrounding the United States' foreign trade and other economic policies;

however, the volatility leveled off at the end of 2019.

The overall decrease in volume was partially offset by additional volume generated from the launch of Micro-E-mini equity index contracts in the second quarter of 2019, which have a notional size of one-tenth of the traditional E-mini contracts.

Average daily contract volume in 2019 included approximately 317,000 in Micro-E-mini equity index contracts.

In 2020 when compared with 2019, equity index contract volume increased due to higher overall volatility in the equity market in 2020, particularly in the first and fourth quarters.

We believe the increase in volatility was attributable to uncertainty surrounding the economic impact of governmental and business actions to combat the COVID-19 pandemic, as well as political uncertainty surrounding the U.S.

presidential and congressional elections.

Average daily contract volume in 2020 also included Micro-E-mini equity index contract volume of approximately 1 .8 million per day compared to approximately 0.3 million per day in 2019.

Micro-E-mini equity index contracts have a notional size of one-tenth of the traditional E-mini con tracts.

Foreign Exchange Products

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(amounts in thousands) 2020 2019 2020-2019

Euro 237 232 2 %

Japanese yen 123 139 (12)

British pound 116 129 (10)

Australian dollar 107 105 2

In 2019 compared with 2018, overall foreign exchange contract volume decreased, which we believe resulted from lower overall volatility following periods of higher volatility in early 2018.

We believe foreign exchange volatility decreased in 2019 following the indication by the Federal Reserve and other central banks to limit the number of interest rate changes in 2019.

We also believe that the lack of a final resolution of a trade agreement between the United States and China and the delay in the United Kingdom European Union membership referendum contributed to lower volume.

In 2020 when compared with 2019, overall foreign exchange contract volume was flat, which we believe resulted from lower overall volatility.

In 2020, market volatility subsided in the second half of the year following very high foreign exchange volatility in the first quarter caused by significant uncertainty surrounding the economic impacts of governmental and business

actions to combat the COVID-19 pandem ic.

In addition, we believe foreign exchange trading declined slightly due to operational strains from stay at home orders and risk aversion by market participants during the COVID-19 pandemic.

Agricultural Commodity Products

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(amounts in thousands) 2020 2019 2020-2019

Overall commodity contract volume decreased slightly in 2019 when compared with 2018.

We believe the decline in soybean contract volume was due to lower U.S.

exports of soybeans to China due to uncertainty surrounding trade policies between the countries.

The decrease in wheat contract volume was due to lower volatility levels resulting from a surplus of global supplies in major growing regions around the world.

Corn contract volume increased due to significant uncertainty surrounding crop yields for the 2019 growing season due to higher than normal precipitation levels.

Corn 444 525 (15) %

Soybean 307 263 16

Wheat 220 215 2

Overall commodity contract volume was relatively flat in 2020 when compared with 2019.

Corn contract volume decreased due to lower price volatility, which we believe was caused by large stock piles and lower demand.

We believe the increase in soybean contract volume was due to an increase in demand for commodities from China.

Energy Products

3 unchanged sentences

WTI crude oil 1,255 1,329 (6) %

Natural gas 639 529 21

Refined products 366 381 (4)

Overall energy contract volume decreased in 2019 when compared with 2018, which we believe was due to lower price volatility within the energy markets throughout 2019 caused by greater price stability within the crude oil markets.

In addition, expanded production of natural gas resulted in a reduction of price volatility in early 2019, which we believe contributed to a decrease in natural gas volume.

Overall energy contract volume was relatively flat in 2020 when compared with 2019, which we believe was due to periods of high volatility in early 2020 followed by periods of low volatility as a result of governmental and business actions to combat the COVID-19 pandem ic .

The increase in natural gas volume is the result of significant price declines in early 2020 followed by price increases in the second half of 2020 as a result of higher demand during the winter months.

This was partially offset by a decrease in crude oil volume due to a reduction in demand caused by the COVID-19 pandemic.

Metal Products

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(amounts in thousands) 2020 2019 2020-2019

Overall metal contract volume increased in 2019 when compared with 2018 due to an increase in metals price volatility caused by investors using gold and other precious metals as safe-haven alternative investments to other volatile markets, particularly in mid-2019.

Gold 456 433 5 %

Silver 123 107 15

Copper 98 98 —

Overall metal contract volume increased in 2020 when compared with 2019 due to an increase in metals price volatility caused by investors using gold and other precious metals as safe-haven alternative investments due to significant uncertainty within other markets caused by the COVID-19 pandemic.

Average Rate per Contract

The average rate per contract decreased in 2019 when compared with 2018, which is largely due to a shift in product mix.

Interest rate contract volume increased by 2 percentage points as a percent of total volume, while all other products collectively decreased by 2 percentage points.

The average rate per contract was substantially the same in 2020 when compared with 2019.

There was an increase in the average rate per contract due to a change in product mix.

Interest rate contract volume decreased by 12 percentage points as a percent of total volume, while all other products collectively increased by 12 percentage points.

In general, interest rate products have a lower rate per contract compared with the remaining contracts.

The decrease in average rate per contract was also due to the introduction of the micro-E-mini equity index contracts, which have a lower average rate per contract compared with a standard E-mini contract.

The increase in the average rate per contract was offset by the introduction of the micro-E-mini equity index contracts in mid-2019, which have a lower average rate per contract compared with a standard E-mini contract.

Micro-E-mini equity index contracts have a notional size of one-tenth of the traditional E-mini contracts.

Cash Markets Business

Total clearing and transaction fees revenue in 2019 includes $483.0 million of transaction fees attributable to the cash markets business acquired from NEX compared with $91.2 million for the period November 3, 2018 through December 31, 2018.

This revenue primarily includes BrokerTec Americas' fixed income volume and EBS foreign exchange volume.

Total clearing and transaction fees revenue in 2020 includes $447.4 million of transaction fees attributable to the cash markets business acquired from NEX compared with $483.0 million in 2019.

This revenue primarily includes BrokerTecs's fixed income volume and EBS foreign exchange volume.

Year-over-Year Change

(amounts in millions) 2020 2019 2020-2019

BrokerTec Americas' fixed income transaction fees

BrokerTec fixed income transaction fees

$ 173.2 $ 191.5 (10) %

EBS foreign exchange transaction fees

The related average daily notional value for the year ended 2019 and the period November 3, 2018 through December 31, 2018 were as follows:

179.3 191.8 (7) %

The related average daily notional value for the years ended 2020 and 2019 for key cash markets products were as follows:

Year-over-Year Change

(amounts in billions) 2020 2019 2020-2019

Treasury $ 125.9 $ 164.8 (24) %

European Repo (in euros) 264.4 269.6 (2) %

Spot FX 71.5 75.1 (5) %

Overall average daily notional value for the cash markets business decreased in 2020 when compared with 2019 due to expectations of potentially low interest rates for an extended period of time and economic uncertainty surrounding the COVID-19 pandemic.

Concentration of Revenue

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The majority of clearing and transaction fees received from clearing firms represent charges for trades executed and cleared on behalf of their customers.

No individual clearing firm represented at least 10% of our clearing and transaction fees in 2019.

Should a clearing firm withdraw, we believe that the customer portion of the firm's trading activity would likely transfer to another clearing firm of the exchange.

One clearing firm represented approximately 10% of our clearing and transaction fees in 2020.

Should a clearing firm withdraw, we believe that the customer portion of the firm's trad ing activity would likely transfer to another clearing firm of the exchange.

Therefore, we do not believe we are exposed to significant risk from an ongoing loss of revenue received from or through a particular clearing firm.

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Market data and information services.

In 2019 when compared with 2018, the increase in market data and information services revenue was attributable to the additional market data revenue generated by market data subscribers and distributors associated with the cash markets business subsequent to the NEX acquisition in November 2018.

In addition, fees for legacy CME basic real-time market data services increased to $105 per month from $85 per month for each device beginning in the second quarter of 2018, which also contributed to the increase in revenue in 2019 compared with 2018.

The increase was partially offset by a reduction in revenue due to modest declines in screen counts due to cost-cutting initiatives at member firms.

The two largest resellers of our market data represented, in aggregate, 37% of our market data and information services revenue in 2019 .

In 2020 when compared with 2019, the increase in market data and information services revenue was largely attributable to an increase in certain device fees, an increase in subscriber device counts and higher demand for CME Group data.

The two largest resellers of our market data represented, in aggregate, approximately 35% of our market data and information services revenue in 2020.

Despite this concentration, we consider exposure to significant risk of revenue loss to be minimal.

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Other revenues.

The increase in other revenues in 2019 when compared with 2018 is largely attributable to the additional other revenue contributed by the NEX acquisition.

Other revenues from NEX primarily include optimization services such as portfolio management, analytics, and trade and regulatory reporting.

The increase in other revenues in 2020 when compared with 2019 is largely attributable to an increase in custody fees due to a new rate structure put in place in 2020.

Year-over-Year Change

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Compensation and benefits $ 856.5 $ 898.7 (5) %

Technology 198.5 201.5 (2)

Professional fees and outside services 191.3 174.1 10

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Licensing and other fee agreements 244.9 172.2 42

Other 290.6 360.4 (19)

Total Expenses $ 2,246.2 $ 2,280.2 (1)

2020 Compared With 2019

Operating expenses increased by $578.4 million in 2019 when compared with 2018.

The following table shows the estimated impact of key factors resulting in the net increase in operating expenses.

(dollars in millions)

Operating expenses decreased by $34.0 million in 2020 when compared with 2019.

The following table shows the estimated impact of key factors resulting in the net decrease in operating expenses.

(dollars in millions) Year-

Change Change as a

Percentage of

2019 Expenses

Salaries, benefits and employer taxes

Amortization of purchased intangibles

Net losses on fixed assets and assets held for sale

Occupancy and building operations

Bonus expense $ (54.3) (2) %

NEX integration costs

Foreign currency exchange rate fluctuation

NEX acquisition costs

Intangible and fixed asset impairments (49.8) (2)

Travel and entertainment (25.0) (1)

Marketing (20.9) (1)

Stock-based compensation 11.1 —

Professional fees and outside services 17.2 1

Licensing and other fee agreements 72.7 3

Other expenses, net 15.0 1

Overall operating expenses increased in 2019 compared with 2018 due to the following reasons:

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.

Decreases in operating expenses in 2019 when compared with 2018 were as follows:

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.

Total $ (34.0) (1) %

Overall operating expenses decreased in 2020 when compared with 2019 due to the following reasons:

• Bonus expenses decreased in 2020 largely due to a reduction in headcount with legacy NEX businesses in conjunction with our planned integration, as well as performance relative to our 2020 cash earnings target when compared with 2019 performance relative to our 2019 cash earnings target.

• During 2019, we recognized higher impairment charges on certain intangibles and fixed assets due to the disposal of various businesses.

• Travel and entertainment expenses decreased as a result of the company's response to the COVID-19 pandemic, with the vast majority of staff working remotely during 2020.

• Marketing expenses decreased compared with 2019 due to a reduction in planned advertising, media campaigns and special promotional events.

Increases in operating expenses in 2020 when compared with 2019 were as follows:

• Licensing and other fee agreements expenses increased during 2020 due to higher fees related to revenue sharing agreements for certain equity contracts, which resulted from an increase in volume and an increase in license rates for certain products.

• Professional fees and outside services expenses increased due to higher legal fees compared to 2019, as well as professional and legal fees incurred in 2020 in connection with to our recently announced joint venture with IHS Markit.

• Stock-based compensation expense increased due to acceleration of certain grants and the impact related to our September 2019 and 2020 grants.

Non-Operating Income (Expense)

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Investment income.

The decrease in investment income in 2019 when compared with 2018 was largely due to a decline in net realized and unrealized gains (losses).

The decrease in investment income was also due to a decline in earnings from cash performance bond and guaranty fund contributions that are reinvested, which primarily resulted from lower average reinvestment balances as well as an overall decrease in the rate of return earned on our investments.

The decrease in investment income in 2020 when compared with 2019 was largely due to a decline in earnings from cash performance bond and guaranty fund contributions that are reinvested.

The decrease in earnings resulted primarily from lower rates of interest earned in the cash account at the Federal Reserve Bank of Chicago following significant interest rate cuts in early 2020 despite an increase in our average reinvestment amount.

Interest and other borrowing costs.

Interest and other borrowing costs were higher in 2019 compared with 2018 due to a full year of interest expense incurred on $500.0 million of 3.75% fixed rate notes due June 2028 and $700.0 million of 4.15% fixed rate notes due June 2048 issued in the second quarter of 2018.

Interest and other borrowing costs were lower in 2020 when compared with 2019, primarily due to lower borrowing costs on commercial paper issuances, as there were higher average balances of commercial paper outstanding during 2019 when compared with 2020.

Interest and other borrowing costs were also lower during 2020 due to interest expense recognized on the €350.0 million fixed rate notes and the ¥19.1 billion term loan assumed as part of the NEX acquisition in 2018 and subsequently paid off during the first quarter of 2019.

Equity in net earnings (losses) of unconsolidated subsidiaries.

Higher income generated from our S&P/DJI business venture and net earnings from investments acquired through the transaction with NEX contributed to increases in equity in net earnings (losses) of unconsolidated subsidiaries in 2019 when compared with the prior year.

Higher income generated from our S&P/DJI business venture contributed to an increase in equity in net earnings (losses) of unconsolidated subsidiaries in 2020 when compared with 2019.

Other income (expense).

In 2019 when compared with 2018, we recognized lower net losses on various derivative contracts.

In 2018, we recognized net losses on our foreign exchange option and forward contracts used to mitigate certain exposure to foreign exchange rate fluctuation on the currency required to facilitate the NEX acquisition as well as derivative contracts that we assumed in our acquisition of NEX.

Expense related to the redistribution of income earned on performance bond and guaranty fund contributions was relatively flat in 2019 compared to 2018.

In 2020 when compared with 2019, we recognized lower expense related to a reduction in the distribution of interest earned on performance bond collateral reinvestments to the clearing firms due to lower interest income earned on our reinvestment.

In addition, a gain of $1.5 million was recognized on derivative contracts in 2020 compared with a net loss of $17.7 million in 2019.

Income Tax Provision

2 unchanged sentences

Year ended December 31 22.6 % 21.3 % 1.3 %

In 2019 when compared with 2018, the effective tax rate was lower due to the recognition of benefits from the Internal Revenue Code Section 250 deduction in 2019.

Proposed FDII Deduction regulations were released in 2019 and as a result, we have revised our income tax calculations to reflect the proposed guidance.

The benefit recognized in 2019 includes estimates for the deduction for 2018 and 2019.

In addition, we recognized higher deferred tax expense in 2018 due to the acquisition of NEX.

In 2020 when compared with 2019, the effective tax rate was higher due to the recognition of additional benefits from the Internal Revenue Code Section 250 deduction in 2019.

Proposed FDII Deduction regulations were released in 2019 and as a result, we revised our income tax calculations to reflect the proposed guidance.

The benefit recognized in 2019 includes estimates for the deduction for 2018 and 2019, whereas the benefit recognized in 2020 only includes the deduction for 2020.

LIQUIDITY AND CAPITAL RESOURCES

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We have historically met our funding requirements with cash generated by our ongoing operations.

However, as part of the funding for the NEX acquisition, we utilized our commercial paper program in late 2018 and throughout 2019 for short-term funding requirements.

While our cost structure is fixed in the short term, our sources of operating cash are largely dependent on contract trading volume levels.

However, as part of the funding for the NEX acquisition, we utilized our commercial paper program in late 2018 and through the beginning of the second quarter of 2020 for short-term funding requirements.

While our cost structure is generally fixed in the short term, our sources of operating cash are largely dependent on contract trading volume levels.

In addition to using our existing cash, cash equivalents, marketable securities and cash generated from operations, we may continue to utilize our commercial paper program to meet our working capital needs, capital expenditures and other commitments.

It is also possible that we may need to raise additional funds to finance our activities through future public debt offerings or by direct borrowings from financial institutions through our committed revolving credit facilities.

Cash will also be required for operating leases and non-cancellable purchase obligations as well as other obligations reflected as long-term liabilities on our consolidated balance sheet at December 31, 2019 .

These were as follows:

(in millions)

Debt Obligations

Liabilities (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

arrangements as well as liabilities that have uncertainty associated with timing of payments, including liabilities for benefit plans.

It also excludes liabilities that will not be settled in cash.

Leases include rent payments for office space in Chicago, New York and other smaller offices in the United States and in various foreign countries.

The lease for our headquarters in Chicago expires in 2032.

Annual minimum rental payments under this lease range from $14.0 million to $19.7 million .

We also maintain leases for datacenter space in the Chicago area, which expires in March 2031.

Annual minimum rental payments under this lease range from $ 16.9 million to $ 18.3 million .

The lease for our office space in New York expires in December 2028.

Annual minimum rental payments under this lease range from $ 14.3 million to $ 15.3 million .

Purchase obligations include minimum payments due under agreements for advertising, licensing, hardware, software and maintenance as well as telecommunication services.

Debt obligations include repayment of principal and interest associated with the debt obligations.

Future capital expenditures for technology are anticipated as we continue to support our growth through increased system capacity, performance improvements, integration of acquired platforms as well as improvements to some of our office spaces.

Each year, capital expenditures are incurred for improvements to and expansion of our offices, remote data centers, telecommunications network and other operating equipment.

Each year, capital expenditures are incurred for improvements to and modification of our offices, remote data centers, telecommunications network and other operating equipment.

In 2021, we expect capital expenditures to total approximately $180.0 million to $190.0 million, net of any leasehold improvement allowances and any one-time costs associated with the NEX integration.

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We intend to continue to pay a regular quarterly dividend to our shareholders, with a target of between 50% to 60% of the prior year's cash earnings.

The decision to pay a dividend and the amount of the dividend;

however, remains within the discretion of our board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, levels of indebtedness and other considerations our board of directors deems relevant.

CME Group is also required to comply with restrictions contained in the general corporation laws of its state of incorporation, which could also limit its ability to declare and pay dividends.

The decision to pay a dividend and the amount of the dividend, however, remains within the discretion of our board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, levels of indebtedness and other considerations our board of directors deems relevant.

We are also required to comply with restrictions contained in the general corporation laws of our state of incorporation, which could also limit our ability to declare and pay dividends.

On February 3, 2021 the board of directors declared a regular quarterly dividend of $0.90 per share.

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The board of directors also declared an additional, annual variable dividend of $2.50 per share on December 10, 2020 paid on January 13, 2021 to the shareholders of record on December 28, 2020.

In general, the amount of the annual variable dividend will be determined by the end of each year, and the level will increase or decrease from year to year based on operating results, capitalization expenditures, potential merger and acquisition activity and other forms of capital return including regular dividends and share buybacks during the prior year.

In general, the amount of the annual variable dividend will be determined by the end of each year, and the level will increase or decrease from year to year based on operating results, capital expenditures, potential merger and acquisition activity and other forms of capital return including regular dividends and share buybacks during the prior year.

Sources and Uses of Cash

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Net cash used in financing activities (2,458.2) (2,340.8) 5

_______________

not meaningful

Operating activities

The increase in net cash provided by operating activities in 2019 compared with 2018 is largely due to the incremental operating cash generated from the business lines acquired through our acquisition of NEX in November 2018.

Net cash provided by operating activities was relatively flat in 2020 compared with 2019.

Investing activities

The decrease in cash used in investing activities in 2019 when compared with 2018 was largely due to the cash consideration required for the acquisition of NEX in November 2018, net of cash received.

The increase in cash used in investing activities in 2020 compared with 2019 was largely due to a decrease in cash proceeds received on sales of certain privately-held investments.

Financing activities

Cash used in financing activities was higher in 2019 when compared with in 2018 due to a net reduction in outstanding debt in 2019 compared with issuance of debt in 2018.

The increase in cash used in financing activities was partially offset by a decrease in cash dividends.

Cash used in financing activities was higher in 2020 when compared with 2019 due to an increase in the amount of cash dividends paid.

The increase in cash used in financing activities was partially offset by a reduction in the amount of outstanding debt repayments in 2020 compared with 2019.

Debt Instruments

The following table summarizes our debt outstanding as of December 31, 2020:

(in millions)

(in millions) Par Value

Fixed rate notes due September 2022, stated rate of 3.00% (1)

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Fixed rate notes due June 2048, stated rate of 4.15% $ 700.0

Commercial Paper

_______________

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We maintain a $2.4 billion multi-currency revolving senior credit facility with various financial institutions, which matures in November 2022.

The proceeds from this facility can be used for general corporate purposes, which includes providing liquidity for our clearing house in certain circumstances at CME Group's discretion and, if necessary, for maturities of commercial paper.

As long as we are not in default under this facility, we have the option to increase it up to $3.0 billion with the consent of the agent and lenders providing the additional funds.

The proceeds from this facility can be used for general corporate purposes, which includes providing liquidity for our clearing house in certain circumstances at our discretion and, if necessary, for maturities of commercial paper.

as we are not in default under this facility, we have the option to increase it up to $3.0 billion with the consent of the agent and lenders providing the additional funds.

This facility is voluntarily pre-payable from time to time without premium or penalty.

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The facility provides for borrowings of up to $7.0 billion.

We may use the proceeds to provide temporary liquidity in the unlikely event of a clearing firm default, in the event of a liquidity constraint or default by a depositary (custodian for our collateral), or in the event of a temporary disruption with the domestic payments system that would delay payment of settlement variation between us and our clearing firms.

We may use the proceeds to provide temporary liquidity in the unlikely event a clearing firm fails to promptly discharge an obligation to CME Clearing, in the event of a liquidity constraint or default by a depository (custodian for our collateral), in the event of a temporary disruption with the domestic payments system that would delay payment of settlement variation between us and our clearing firms, or in other cases as provided by the CME rulebook.

Clearing firm guaranty fund contributions received in the form of cash or U.S.

Treasury securities as well as the performance bond assets of a defaulting firm can be used to collateralize the facility.

At December 31, 2019 , guaranty funds available to collateralize the facility totaled $8.5 billion .

Treasury securities as well as the performance bond assets (pursuant to the CME rulebook) can be used to collateralize the facility.

At December 31, 2020, guaranty fund contributions available to collateralize the facility totaled $8.0 billion.

We have the option to request an increase in the line from $7.0 billion to $10.0 billion.

Our 364-day facility contains a requirement that CME remain in compliance with a consolidated tangible net worth test, defined as CME consolidated shareholder's equity less intangible assets (as defined in the agreement), of not less than $800.0 million.

Our 364-day facility contains a requirement that CME remains in compliance with a consolidated tangible net worth test, defined as CME consolidated shareholder's equity less intangible assets (as defined in the agreement), of not less than $800.0 million.

We currently do not have any borrowings outstanding under this facility.

On May 1, 2019, we amended and extended the agreement, which will expire on April 29, 2020.

The indentures governing our fixed rate notes, our $2.4 billion multi-currency revolving senior credit facility and our 364-day multi-currency revolving secured credit facility for $7.0 billion do not contain specific covenants that restrict the ability to pay dividends.

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The following table summarizes our credit ratings as of December 31, 2020:

Rating Agency

Standard & Poor’s

Moody’s Investors Service

Rating Agency Short-Term

Debt Rating Long-Term

Debt Rating Outlook

Standard & Poor’s A1+ AA- Stable

Moody’s Investors Service P1 Aa3 Stable

Given our cash flow generation, our ability to pay down debt levels and our ability to refinance existing debt facilities, if necessary, we expect to maintain an investment grade rating.

If our ratings are downgraded below investment grade due to a change of control, we are required to make an offer to repurchase our CME Group fixed rate notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest.

Off-Balance Sheet Arrangements

As of December 31, 2019 , we did not have any off-balance sheet arrangements as defined by Securities and Exchange Commission rules and regulations.

If our ratings are downgraded below investment grade due to a change of control, we are required to make an offer to repurchase our fixed rate notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest.

Liquidity and Cash Management

Cash and cash equivalents totaled $1.6 billion at December 31, 2019 and $1.4 billion at December 31, 2018 .

The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy and alternative investment choices.

Cash and cash equivalents totaled $1.6 billion at December 31, 2020 and December 31, 2019.

The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our corporate investment policy and alternative investment choices.

A majority of our cash and cash equivalents balance is invested in money market mutual funds that invest only in U.S.

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government agency securities and U.S.

Treasury security reverse repurchase agreements.

Treasury security reverse repurchase agreements, and short-term bank deposits.

Our exposure to credit and liquidity risk is minimal given the nature of the investments.

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Our practice is to have our pension plan 100% funded at each year end on a projected benefit obligation basis, while also satisfying any minimum required contribution and obtaining the maximum tax deduction.

Based on our actuarial projections, we estimate that no contribution will be necessary in 2020 as we exceeded our funding goal by $32.7 million in 2019.

However, the amount of the actual contribution is contingent on various factors, including the actual rate of return on our plan assets during 2020 and the December 31, 2020 discount rate.

Based on our actuarial projections, we estimate that an additional contribution may be necessary in 2021 to meet our funding goal.

However, the amount of the

actual contribution is contingent on various factors, including the actual rate of return on our plan assets during 2021 and the December 31, 2021 discount rate.

Regulatory Requirements

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Our DCMs are in compliance with all DCM financial requirements.

BrokerTec Americas LLC is required to maintain sufficient net capital under Securities Exchange Act Rule 15c3-1 (the Net Capital Rule).

BrokerTec Americas LLC is required to maintain sufficient net capital under Securities Exchange Act of 1934, as amended (Exchange Act), Rule 15c3-1 (the Net Capital Rule).

The Net Capital Rule focuses on liquidity and is designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand at all times to satisfy claims promptly.

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By law, both of these rules apply to the activities of registered broker-dealers, but not to unregistered affiliates.

The firm began operating as a (k)(2)(i) broker dealer in November 2017 following notification to the Financial Industry Regulatory Authority and the SEC.

A company operating under the (k)(2)(i) exemption is not required to lock up customer funds as would otherwise be required under Rule 15c3-3 of the Securities Exchange Act.

The firm began operating as a (k)(2)(i) broker-dealer in November 2017 following notification to FINRA and the SEC.

A company operating under the (k)(2)(i) exemption is not required to lock up customer funds as would otherwise be required under Rule 15c3-3 of the Exchange Act.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis