2016 Annual Report

Photo of CME Group Chairman and Chief Executive Officer Terrence A. Duffy, sitting at a desk, with his hands folded.
Terrence A. Duffy Chairman and Chief Executive Officer

Our record 2016 performance reflected our ability to meet clients'€™ increasing demand for risk management in a year marked by financial market surprises, including Brexit, the U.S. presidential election, oil price volatility and concern about growth in China. These and other events marked some of the moments that clearly defined the growing importance of CME Group products to customers'€™ hedging and investment strategies worldwide. Our volumes surged in response, driven by participants in financial, energy, agricultural and metals markets globally -€“ demonstrating that CME Group is where the world comes to manage risk.

Full-year 2016 annual average daily volume reached a record 15.6 million contracts, including records in interest rates, energy, agricultural commodities, metals, total options and electronic options. Annual revenue increased 8 percent compared with 2015. This, coupled with operating expenses being up only 4 percent, drove net income of $1.5 billion, up 23 percent compared with 2015, and diluted earnings per share of $4.53, up 23 percent.

Our strong results in 2016 are validation of the effectiveness of our operational discipline and growth strategy in an era of accelerating change.

€œ"In 2016, approximately 24 percent of our electronic volume, which translated to more than 30 percent of our trading revenues -€“ as well as 50 percent of our market data revenue -€“ were reported as coming from outside the United States."

Maximizing core business growth globally

In a world swept by unpredictable economic and geopolitical changes, the global demand for our diverse risk management products and services continues to increase. The backdrop for our interest rate product line has become more interesting as the U.S. Federal Reserve becomes more active. Structural changes in the energy markets have helped fuel growth across our energy complex. Further, the regulatory environment in the United States is improving while there is still regulatory uncertainty in Europe.

In this environment, the global relevance of our products, the ability of our customers to access our markets around the clock, and the continued electronification of our industry-leading options franchise have supported growth outside the United States at a faster rate than within. Both here and abroad, we have worked more collaboratively with our market participants to launch meaningful products that solve customer challenges.

In particular, our most successful new product ever has been Ultra 10-Year Treasury Note futures, which launched in January 2016 and traded more than 17 million contracts over their first year. Product extensions with significant impact were the S&P 500 and E-mini S&P 500 Wednesday Weekly options, which averaged more than 50,000 contracts per day in just one quarter since launching in late September.

We also launched CME Bloomberg Dollar Spot Index futures, S&P 500 Total Return Index futures and S&P 500 Carry Adjusted Total Return Index futures. Further, we began clearing the first interest rate swaptions trades, which are designed to help transform the interest rate swaps markets by offering customers greater capital efficiencies.

In addition, our international product suite was expanded with regionally specific products such as European wheat, aluminum futures and E-mini FTSE emerging index contracts, which appeal to risk management needs unique to particular geographies.

In 2016, approximately 24 percent of our electronic volume, which translated to more than 30 percent of our trading revenues - as well as 50 percent of our market data revenue - were reported as coming from outside the United States.

Diversifying our business and revenue

In addition to our core derivatives business, we have another key segment that offers clients a variety of market data services for futures, equities and cleared swaps markets. This includes our S&P joint venture with McGraw-Hill - combining the capabilities of the index businesses of S&P and Dow Jones.

Further, in 2016 we launched E-mini Russell 1000 futures, and are planning to launch Russell 2000 futures in 2017. This is the result of a licensing agreement we have with FTSE Russell to better help investors around the world manage equity index exposure. By developing a range of equity index products based on FTSE Russell'€™s key benchmarks, we offer the margin efficiencies of trading multiple indexes on one platform and through a single clearing house.

"At year-end 2016, 40 unique marketplace participants utilized CME Group'€™s portfolio margining services, with capital savings of more than $3 billion."€

Delivering capital and cost efficiencies

Regarding the regulatory environment that directly impacts the futures industry, it is clear that present levels of regulation have made U.S. markets attractive worldwide. Because of Dodd-Frank, transactions in over-the-counter (OTC) markets that were formerly private have been pushed onto cleared platforms like ours at CME Group. Looking ahead and considering current trends, we expect less regulation in the future.

Since the OTC clearing mandates began in 2013, there has been greater customer participation and a gradual increase in the number of firms holding large exposures in futures. We expect capital efficiencies and centralized clearing to continue to be important for our clients globally.

As an essential part of our efforts, we continue to introduce tools and services to assist customers with portfolio margining. At year-end 2016, 40 unique marketplace participants utilized CME Group'€™s portfolio margining services.

One example of a new tool is CME CORE, which is an interactive margin calculator that enables clients to optimize their capital by providing insights on margin requirements prior to trading.

Also during 2016, CME Clearing partnered with clearing member firms to increase usage of compression services, which reduces notional outstanding and, therefore, facilitates more efficient use of capital.

Further, within the past five years, we introduced multilateral compression for our cleared swap customers through a partnership with TriOptima, a NEX Group company. We also have added trade reporting services in the United States, Europe, Canada and Australia. During 2016, we cleared swap transactions with a notional value of more than $29 trillion.

We are pleased that, in recognition of our ability to meet the rapidly evolving risk management needs of our customers, we were named "€œExchange of the Year"€ in 2016 by GlobalCapital as well as "€œBest Futures Exchange"€ by both Markets Media and Risk Magazine.

"All of our efforts are designed to increase the returns to shareholders of CME Group..."

Focusing on innovation, enhanced execution and returning capital to shareholders

Through CME Ventures, we have made minority investments in emerging technology companies. Over the long term, their innovative products or services could have an impact on CME Group'€™s key business drivers and the broader financial services ecosystem.

Innovations in new products and services, in operational structures and systems, and in business execution have helped extend CME Group'€™s overall success and accelerate earnings growth and cash flow. All these strengths, plus expense discipline, supported our ability to return capital to shareholders.

We declared dividends during 2016 of $1.9 billion, including the annual variable dividend for 2016 of $1.1 billion, which was paid in January 2017. We are continuing to move forward, and announced a 10 percent increase in our next regular quarterly dividend to 66 cents per share. Cumulatively, the company has paid a total of more than $7.5 billion in quarterly and variable dividends since adopting the annual variable dividend structure in the beginning of 2012.

All of our efforts are designed to increase the returns to shareholders of CME Group by expanding strategically, operating even more efficiently and continuing to serve our customers worldwide as they navigate uncertainty and pursue opportunities for growth.

Terrence A. Duffy's signature Terrence A. Duffy
Chairman and Chief Executive Officer
March 10, 2017