What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-27 · 83 added, 91 removed, 525 unchanged (25% of the section changed)

50 unchanged sentences

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, 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.

3 unchanged sentences

Competition is influenced by our brand and reputation;

the efficiency and security of our settlement, clearing and support services;

the efficiency and security of our clearing.

settlement and support services;

depth and liquidity of our markets;

36 unchanged sentences

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

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.

Beginning in May 2021, open outcry trading is now limited to Eurodollar options and Secured Overnight Financing Rate (SOFR) options products following the permanent closure of most of our open outcry pits.

Beginning in July 2023, open outcry trading is now limited to Secured Overnight Financing Rate (SOFR) options products following the permanent closure of most of our open outcry pits.

Typically, customers submitting trades through our electronic platforms are charged fees for using the platforms in addition to the fees assessed on all transactions executed on our exchange.

30 unchanged sentences

The majority of our expenses do not vary directly with changes in our contract volume.

However, licensing and other fee agreements can vary directly with certain equity, energy and swap volumes, and the majority of our employee bonuses vary indirectly with overall contract volume, as bonuses are primarily based on our financial performance.

However, licensing and other fee agreements can vary directly with certain equity, energy and swap volumes.

Compensation and benefits.

4 unchanged sentences

The bonus component of our compensation and benefits expense is based on our financial performance.

Under the performance criteria of our annual incentive plans, the bonus funded under the plans is based on achieving certain financial performance targets established by the compensation committee of our board of directors.

Under the performance criteria of our annual incentive plans, the bonus funded under the plans is based on achieving certain financial performance

targets established by the compensation committee of our board of directors.

The compensation committee has discretion to make equitable adjustments to the cash earnings performance calculation to reflect effects of unplanned operating results or capital expenditures to meet intermediate- to long-term growth opportunities.

80 unchanged sentences

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.

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.

60 unchanged sentences

Increase due to change in total contract volume $ 174.7

Decrease due to change in average rate per contract (128.5)

Increase due to change in average rate per contract 287.6

Net increase in clearing and transaction fees $ 462.3

20 unchanged sentences

Electronic Volume as a Percentage of Total Volume 92 % 93 %

Interest rate, equity, and foreign exchange volatility were higher in 2022 when compared with 2021 as result of a change in market expectations and uncertainty regarding the Federal Reserve's interest rate policy amid higher than expected inflation levels.

The Federal Open Market Committee raised the Federal Funds rate by a total of 425 percentage points in 2022 and has indicated that it intends to further raise interest rates in the near future.

The Federal Reserve also began quantitative tightening in the second half of 2022 by reducing its holdings of U.S.

Treasury securities.

However, the geopolitical uncertainty between Russia and Ukraine led to risk aversion and reduced trading by market participants within the agricultural commodity and energy markets due to global commodity trade uncertainty.

We believe these factors led to the changes in contract volume during 2022, when compared with 2021.

Market volatility within certain financial markets remained high throughout 2023.

Interest rate volatility was higher as a result of higher inflation levels and market uncertainty following the collapse of two U.S.

regional banks as well as uncertainty surrounding the Federal Reserve ’s interest rate policy decision.

The Federal Open Markets Committee (FOMC) has raised the federal funds rate multiple times throughout 2023 and there was uncertainty regarding additional rate changes in the future.

In addition, the agricultural commodities and energy markets saw an increase in volatility as a result of more weather uncertainty in 2023 compared to 2022.

However, overall equity index volatility leveled off following higher volatility in early 2022 caused by tensions and geopolitical uncertainty between Russia and Ukraine.

We believe these factors contributed to the increase in total volume in 2023 compared with 2022.

Interest Rate Products

The following table summarizes average daily contract volume for our key interest rate products.

Eurodollar front 8 contracts include contracts expiring within two years.

Eurodollar back 32 contracts include contracts expiring within three to ten years.

We no longer offer Eurodollar contract trading as of June 2023.

Year-over-Year Change

5 unchanged sentences

SOFR futures and options:

Futures expiring within two years 1,479 145 n.m.

Futures expiring within two years 2,545 1,479 72

Futures expiring beyond two years 850 282 n.m.

4 unchanged sentences

Treasury Bond

Federal Funds futures and options 335 112 n.m.

Federal Funds futures and options 442 335 32

not meaningful

In 2023 compared with 2022, overall interest rate contract volume increased as a result of higher overall volatility.

We believe this was due to higher than expected inflation levels, the Federal Open Market Committee's decision to increase the Federal Funds rate multiple times in 2022 as well as the Federal Reserve's quantitative tightening in the second half of 2022.

The increase in overall SOFR volume was also due to more market participants transitioning to the new reference rate away from LIBOR as well as incentive programs designed to encourage market participation in SOFR options trading.

We believe this was a result of fluctuating U.S.

Treasury yields following interest rate hikes by the FOMC.

We also believe the increase in interest rate volatility was due to market uncertainty regarding future FOMC rate changes in 2024 following improved market conditions the second half of 2023.

In addition, market uncertainty following the collapse of two U.S.

regional banks in the first half of 2023 also led to higher interest rate volatility.

The increases in Secured Overnight Financing Rate contract (SOFR) volumes and the corresponding decreases in Eurodollar volumes were due to market participants transitioning to the new reference rate and away from Eurodollar contracts, which are based on LIBOR.

The publication of the LIBOR rate concluded in the second quarter of 2023.

Equity Index Products

3 unchanged sentences

E-mini S&P 500 futures and options 4,154 4,535 (8) %

4,535 3,179 43 %

E-mini Nasdaq 100 futures and options

1 unchanged sentence

E-mini Russell 2000 futures and options 316 378 (16)

_______________

(1) Futures and options now include respective weekly Micro E-mini options that were previously separated under a unique product category.

Prior period amounts have been revised to conform to the current period presentation.

Equity index contract volume increased due to higher overall volatility in 2022 when compared with 2021.

V olatility within the equity indexes increased as a result of higher than expected inflation levels as well as the Federal Reserve's actions to increase the Federal Funds rate and quantitative tightening in 2022.

We believe these factors led to the overall increases in equity contract volumes.

Equity index contract volume decreased due to lower overall volatility in 2023 when compared with 2022.

Equity index v olatility was high in 2022 as a result higher than expected inflation, as well as rising tensions and geopolitical uncertainty with Russia and Ukraine.

We believe these factors led to lower overall equity contract volume in 2023 when compared with 2022.

Foreign Exchange Products

6 unchanged sentences

Australian dollar 106 106 —

Overall foreign exchange contract volume increased in 2022 when compared with 2021, which we believe is due to higher overall market volatility.

Market volatility increased in 2022 due to the global central banks' interest rate policy decisions as a result of higher than expected inflation.

Overall foreign exchange contract volume decreased in 2023 when compared with 2022, which we believe is due to lower overall market volatility.

Market volatility was higher in 2022 due to the global central banks' interest rate policy decisions as a result of higher than expected inflation.

Agricultural Commodity Products

5 unchanged sentences

Wheat 208 175 19

In 2022 when compared with 2021, overall commodity contract volume decreased, which we believe is largely due to risk aversion by market participants following price increases and global trade uncertainty resulting from the Russia and Ukraine conflict.

In 2023 when compared with 2022, overall commodity contract volume increased, due to higher overall market volatility.

We believe this is a result of continued weather uncertainty due to a drier than average 2023 growing season.

In addition, the first half of 2022 saw lower overall volatility within the commodities markets due to risk aversion by market participants following price increases and global trade uncertainty resulting from the conflict between Russia and Ukraine.

We believe these factors contributed to higher overall commodity volume in 2023.

Energy Products

5 unchanged sentences

Refined products 336 328 2

Overall energy contract volume decreased in 2022 when compared with 2021.

Participant trading activity slowed down largely due to concerns regarding high inflation and an economic downturn.

In addition, the sustained conflict between Russia and Ukraine continued to cause disruptions to the global energy markets.

We believe these factors led to the overall decrease in energy contract volume.

Overall energy contract volume increased in 2023 when compared with 2022.

We believe this is due to the uncertainty in the global energy markets caused by the continuing war between Russia and Ukraine and unrest in the Middle East.

In addition, uncertain weather conditions led to an increase in overall natural gas volume.

We believe these factors contributed to higher overall energy volume in 2023.

Metal Products

5 unchanged sentences

Silver 93 83 12

In 2022 when compared with 2021, overall metal contract volume decreased, which we believe was attributable to lower overall market volatility within the gold and silver markets.

Volume was higher in 2021, as investors were using gold and other precious metals as safe-haven investments following the COVID-19 pandemic.

Overall metal contract volume increased in 2023 when compared with 2022, which we believe was attributable to higher overall market volatility within the gold and silver markets.

Market uncertainty following the collapse of two U.S.

regional banks and the Federal Reserve's interest rate policy decisions led to an overall increase in demand for gold and other precious metals as safe-haven investments.

In addition, copper contract volume increased largely due to an increase in demand for copper in China following the lifting of restrictions from the COVID pandemic.

We believe these factors led to the overall increase in metal contract volume.

Average Rate per Contract

The average rate per contract was lower in 2022 when compared with 2021.

The decrease in the average rate per contract was primarily due to a change in product mix.

Equity index contract volume increased by 5 percentage points as a percent of total volume, while agricultural commodity, energy and metal contract volume collectively decreased by 5 percentage points.

In general, equity index products have a lower rate per contract compared with the agricultural commodity, energy and metal contracts.

The average rate per contract was higher in 2023 when compared with 2022.

The increase in the average rate per contract was primarily due an increase in our fee structure that went into effect on February 1, 2023.

Cash Markets Business

1 unchanged sentence

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

In September 2021, we contributed the net assets of our optimization business to OSTTRA, our joint venture with IHS Markit.

Year-over-Year Change

2 unchanged sentences

EBS foreign exchange transaction fees 132.6 154.1 (14) %

Optimization transaction fees — 59.9 n.m.

not meaningful

The related average daily notional value for the years ended 2023 and 2022 for key cash markets products were as follows:

4 unchanged sentences

Spot FX 56.7 65.7 (14) %

Overall average daily notional value for the cash markets business increased in 2022 when compared with 2021.

The increases in European Repo and U.S.

Treasury transactions were largely due to increased volatility as a result of a change in market expectations regarding the Federal Reserve's interest rate policy, following higher than expected inflation levels in 2022.

Despite the increase in average daily notional value, transaction revenue for BrokerTec and EBS decreased slightly due to the tiered pricing structure and incentive rate programs.

Overall average daily notional values and transactions revenues for the cash markets business and spot FX business were lower in 2023 when compared with 2022.

We believe the decrease in U.S.

Treasury average daily notional value was due to a

reduction in treasury issuances during the year.

The decline in the spot FX average daily notional values was due to overall lower volatility in 2023 when compared with 2022.

Volatility within the European Repo and spot FX markets were higher in 2022 as a result of the conflict between Russia and Ukraine and uncertainty surrounding the Federal Reserve's interest rate policy.

Concentration of Revenue

1 unchanged sentence

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

One clearing firm represented at least approximately 10% of our clearing and transaction fees in 2022.

No clearing firms represented at least 10% of our clearing and transaction fees in 2023.

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.

8 unchanged sentences

Other revenues .

In 2022 when compared with 2021, the decrease in other revenue was largely attributable to the deconsolidation of the optimization business in September 2021 as part of the contribution of the business's net assets to OSTTRA, our joint venture with IHS Markit.

In 2021, the optimization business genera ted $115.1 million in other revenue.

In 2023 when compared with 2022, the increase in other revenue was largely attributable to higher custody fees as well as an increase in co-location and other connectivity fees.

Year-over-Year Change

9 unchanged sentences

2023 Compared With 2022

Operating expenses decreased by $41.0 million in 2022 when compared with 2021.

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

Operating expenses increased by $139.7 million in 2023 when compared with 2022.

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

(dollars in millions) Year-

2 unchanged sentences

2022 Expenses

Salaries, benefits and employer taxes $ (63.9) (3) %

Non-qualified deferred compensation $ 33.2 2 %

Employee separation and retention costs (25.0) (1)

Professional fees and outside services (14.3) (1)

Technology support services 29.7 1

Salaries, benefits and employer taxes 28.7 1

Currency fluctuation 26.1 1

Licensing and other fee agreements 83.1 4

Legal Fees 13.5 1

Employee separation and restructuring 10.3 1

Other expenses, net (1.8) —

Total $ 139.7 7 %

Overall operating expenses decreased in 2022 when compared with 2021 due to the following reasons:

• Salaries, benefits and employer taxes were lower during 2022 when compared with 2021 due to a net decrease in average headcount, including the contribution of employees from CME Group's optimization businesses to the joint venture with IHS Markit in September 2021.

• A decrease in our non-qualified deferred compensation liability during 2022, the impact of which does not affect net income because of an equal and offsetting change in investment income, contributed to a decrease in compensation and benefits expense.

• Employee separation and retention costs were lower in 2022 compared with 2021 due to a lower reduction in workforce.

• Professional fees and outside services expense decreased due to one-time legal and other professional fees incurred in 2021 related to our joint venture with IHS Markit.

The decrease in professional fees was partially offset by an increase in consulting fees attributable to CME Group's partnership with Google Cloud, which was signed in November 2021.

• In 2022, we recognized a net gain of $13.2 million, compared to a net gain of $0.4 million in 2021, due to currency exchange rate fluctuations.

Overall operating expenses increased in 2023 when compared with 2022 due to the following reasons:

• An increase in our non-qualified deferred compensation liability during 2023, the impact of which does not affect net income because of an equal and offsetting change in investment income, contributed to increases in compensation and benefits expenses.

• The increases in expenses related to technology support services were primarily driven by higher software license fees and third party services to support the ongoing Google Cloud transformation project.

• Salaries, benefits and employer taxes expenses were higher during 2023 than 2022 due to increases in headcount during the year, which were primarily attributable to additional headcount in the company's international locations.

• In 2023, we recognized a net loss of $12.9 million, compared to a net gain of $13.2 million in 2022, as a result of currency exchange fluctuations and realized foreign currency translation from entity liquidations done to simplify the corporate structure.

Gains and losses from exchange rate fluctuations are recognized in the consolidated statements of net income when subsidiaries with a U.S.

dollar functional currency hold certain monetary assets and liabilities denominated in foreign currencies.

Increases in operating expenses in 2022 when compared with 2021 were as follows:

• Bonus expense increased in 2022 largely due to performance relative to our 2022 cash earnings target when compared with 2021 performance relative to our 2021 cash earnings target.

• Licensing and other fee agreements expense increased in 2022 due to higher volumes for certain equity products during 2022 compared with 2021.

• There was an increase in legal fees during 2023 related to our business activities and product offerings compared to 2022.

• Employee separation and restructuring costs increased year over year largely due to a reduction in force of 3% of employees during 2023.

Non-Operating Income (Expense)

1 unchanged sentence

(dollars in millions) 2023 2022 2023-2022

Investment income $ 2,198.4 $ 306.9 n.m.

Investment income $ 5,275.3 $ 2,198.4 140 %

Interest and other borrowing costs (159.4) (162.7) (2)

Equity in net earnings (losses) of unconsolidated subsidiaries 296.9 301.1 (1)

Other income (expense) (1,862.4) 342.6 n.m.

Other income (expense) (4,694.9) (1,862.4) 152

Total Non-Operating $ 717.9 $ 474.4 51

1 unchanged sentence

Investment income .

In 2022 when compared with 2021, there was an increase in earnings from reinvested cash performance bond and guaranty fund contributions due to a higher rate of interest earned in the cash accounts at the Federal Reserve Bank of Chicago following interest rate hikes in 2022.

In 2023 when compared with 2022, there was an increase in earnings from reinvested cash performance bond and guaranty fund contributions due to a higher rate of interest earned in the cash accounts at the Federal Reserve Bank of Chicago following interest rate hikes in 2022 and 2023.

In 2023 and 2022, earnings from cash performance bond and guaranty fund contributions were $5,073.9 million and $2,169.5 million, respectively.

The increase in income was partially offset by a decrease in net realized and unrealized gains on investments as well as a decrease in earnings on our deferred compensation plan, the impact of which does not affect net income because of an equal and offsetting change in compensation and benefits expense.

Equity in net earnings (losses) of unconsolidated subsidiaries .

Higher income generated from our S&P Dow Jones Indices LLC business venture contributed to an increase in equity in net earnings (losses) of unconsolidated subsidiaries in 2022 when compared with 2021.

We also recognized our share of net earnings on our investment in OSTTRA, our joint venture with IHS Markit that was formed in September 2021.

In addition, there was an increase in net realized and unrealized gains on investments as well as an increase in earnings on our deferred compensation plan, the impact of which does not affect net income because of an equal and offsetting change in compensation and benefits expense.

Other income (expense).

In 2022 when compared with 2021, we recognized higher expenses related to the distribution of interest earned on performance bond collateral reinvestments to the clearing firms in conjunction with higher interest income earned on our reinvestment during the period due to a higher Federal Funds rate in 2022.

In 2023 when compared with 2022, we recognized higher expense related to the distribution of interest earned on performance bond collateral reinvestments to the clearing firms in conjunction with higher interest income earned on our reinvestment during the period due to a higher interest rates in 2023.

In 2023 and 2022, expenses related to the distribution of interest earned on collateral reinvestments were $4,717.5 million and $1,889.7 million, respectively.

In 2021, we also recognized a net gain of $400.7 million on the deconsolidation and contribution of our optimization business to OSTTRA.

Income Tax Provision

2 unchanged sentences

Year ended December 31 22.3 % 22.9 % (0.6) %

The effective tax rate increased in 2022 when compared with 2021.

In 2021, we recognized a gain on the deconsolidation and contribution of our optimization business to OSTTRA, which was not taxable.

The impact of the gain in 2021 was partially offset by an increase to the statutory rate in the United Kingdom in 2021.

The effective tax rate decreased slightly in 2023 when compared with 2022.

The decrease was largely due to a higher deferred income tax benefit recognized in 2023 resulting from a change in our state and local apportionment factors.

LIQUIDITY AND CAPITAL RESOURCES

21 unchanged sentences

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

On February 2, 2023, the company declared a regular quarterly dividend of $1.10 per share for all outstanding

common and preferred shares.

On February 8, 2024, the company declared a regular quarterly dividend of $1.15 per share for all outstanding common and preferred shares.

The dividend will be payable on March 26, 2024 to shareholders of record on March 8, 2024.

8 unchanged sentences

Net cash provided by (used in) investing activities 20.9 (489.8) n.m.

Net cash provided by financing activities (25,381.7) 69,908.7 n.m.

Net cash used in financing activities (48,339.3) (25,381.7) 90

not meaningful

Operating activities

Net cash provided by operating activities was higher in 2022 compared with 2021, largely due to an increase in clearing and transaction fee revenue.

Net cash provided by operating activities was higher in 2023 compared with 2022, largely due to an increase in revenue resulting from fee increases and an increase in investment income on collateral reinvestment net of expense related to the distribution of interest earned.

This was partially offset by income tax payments which were higher in 2023 compared with 2022.

Investing activities

The increase in cash used in investing activities in 2022 compared with 2021 was largely due to the additional investment in S&P Dow Jones Indices LLC of $410.0 million.

In addition, we received $100.7 million from the OSTTRA joint venture transaction and additional proceeds from sales of investments in 2021.

The increase in cash provided by investing activities in 2023 compared with 2022 was due to higher proceeds on sales of investments in 2023.

Also contributing to the increase was the additional investment in S&P Dow Jones Indices LLC of $410.0 million in 2022.

Financing activities

1 unchanged sentence

In addition, there was an increase in dividends paid in 2023.

In 2021, we received proceeds of $ 965.0 million from the issuance of preferred shares in connection with our partnership with Google Cloud.

Debt Instruments

1 unchanged sentence

(in millions) Par Value

Fixed rate notes due May 2023, stated rate of 4.30% € 15.0

Fixed rate notes due March 2025, stated rate of 3.00% (1)

10 unchanged sentences

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

during the term of the agreements (and in no event greater than $2.0 billion in aggregate), multiplied by 0.65.

Under this facility, we are required to remain in compliance with a consolidated net worth test, which is defined as our consolidated shareholders' equity at September 30, 2021, giving effect to share repurchases made and special dividends paid during the term of the agreements (and in no event greater than $2.0 billion in aggregate), multiplied by 0.65.

We currently do not have any borrowings outstanding under this facility, but any commercial paper balance if or when outstanding can be backstopped against this facility.

36 unchanged sentences

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 additional contribution will be necessary in 2023 to meet our funding goal.

Based on our actuarial projections, we estimate that a $16.9 million additional contribution will be necessary in 2024 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 2024 and the December 31, 2024 discount rate.

15 unchanged sentences

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