NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements consist of CME Group Inc. (CME Group) and its subsidiaries (collectively, the company), including Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX) and Commodity Exchange, Inc. (COMEX). CME, CBOT, NYMEX, COMEX and their subsidiaries are referred to collectively as “the exchange” in the notes to the consolidated financial statements. The clearing house is a division of CME.
The accompanying interim consolidated financial statements have been prepared by CME Group without audit. Certain notes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the financial position of the company at
September 30, 2018
and
December 31, 2017
and the results of operations and cash flows for the periods indicated. Quarterly results are not necessarily indicative of results for any subsequent period.
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in CME Group’s Annual Report on Form 10-K for the year ended
December 31, 2017
, filed with the Securities and Exchange Commission (SEC) on February 28, 2018.
2. Accounting Policies
Newly Adopted Accounting Policies.
In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard on revenue recognition that replaces numerous, industry-specific requirements and converges U.S. accounting standards with International Financial Reporting Standards. The new standard introduces a framework for recognizing revenue that focuses on the transfer of control rather than risks and rewards. The new standard also requires significant additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The company implemented this standard as of January 1, 2018 using the modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial adoption. Management recognized an
$8.7 million
reduction to the opening balance of retained earnings as of January 1, 2018, which it believes to be an immaterial impact to the consolidated financial statements. The adjustment to the opening balance of retained earnings primarily relates to a deferral of a portion of clearing and transaction fees revenue earned and recognized subsequent to the contract trade execution date. The on-going application of the new standard is not expected to have a material impact on the company's financial statements.
In January 2016, the FASB issued a standards update that changes how entities measure certain equity investments. It does not change the guidance for classifying and measuring investments in debt securities, loans and equity method investments. Under the new guidance, entities will have to measure many equity investments at fair value and recognize any changes in fair value in net income, unless the investments qualify for a practicability exception. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities previously classified as available-for-sale in other comprehensive income. For equity investments in privately-held entities that do not have a readily determinable fair value, our accounting policy is to utilize the measurement alternative for valuation of these investments, which permits the company to estimate fair value at cost minus impairment, plus or minus changes resulting from observable price movements. The company adopted this guidance on January 1, 2018. During the nine months ended September 30, 2018, the company recorded an increase to the fair values of some of its privately-held equity investments of
$70.0 million
and also recognized an impairment charge of
$3.7 million
, both of which are presented in investment income on the consolidated statements of income.
In November 2016, the FASB issued a standards update aimed at promoting consistency in the classification and presentation of changes in restricted cash on the statement of cash flows. Previously, there was diversity in practice as to whether the change in restricted cash was included in the reconciliation of beginning-of-period and end-of-period total cash amounts shown on the statements of cash flows. The amendments require that statements of cash flows explain the change during the period in the total of cash, cash equivalents, as well as amounts described as restricted cash on the consolidated balance sheets. This guidance was adopted on January 1, 2018 using the retrospective approach. The statements of cash flows show an increase in cash balances of $
1,123.7 million
for the nine months ended
September 30, 2018
and a decrease in cash balances of $
277.0 million
for the nine months ended
September 30, 2017
.
In March 2017, the FASB issued a standards update that changes certain presentation and disclosure requirements for employers that sponsor defined benefit pension as well as other postretirement benefit plans. Defined benefit pension cost and postretirement benefit cost (net benefit cost) are comprised of several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to the employees. Under previous accounting guidance, those components were aggregated for reporting in the financial statements within compensation and benefits on the consolidated statements of income. The amendments in the update require that the service cost component is reported in the same line as
other compensation costs, whereas the other components of net benefit cost are required to be presented on the consolidated statements of income separately from the service cost component. This update was adopted as of January 1, 2018 with retrospective application to the earliest period presented. Total net pension expense remains unchanged upon adoption of the standards update. Following the reclassification, pension expense consists of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost recognized in compensation and benefits expense
|
|
$
|
4.7
|
|
|
$
|
4.6
|
|
|
$
|
14.3
|
|
|
$
|
14.0
|
|
Other components of pension expense recognized in other non-operating income (expense)
|
|
(2.2
|
)
|
|
(0.3
|
)
|
|
(6.7
|
)
|
|
(1.0
|
)
|
Total net pension expense
|
|
$
|
2.5
|
|
|
$
|
4.3
|
|
|
$
|
7.6
|
|
|
$
|
13.0
|
|
In February 2018, the FASB issued guidance that gives entities the option to reclassify to retained earnings the tax effects related to items in accumulated other comprehensive income (AOCI) that were previously stranded within AOCI as a result of applying the Tax Cuts and Jobs Act (2017 Tax Act). An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the change in federal tax rate for all items accounted for within AOCI. Entities can also elect to reclassify other stranded tax effects that relate to the 2017 Tax Act but do not directly relate to the change in federal tax rate. Tax effects that are stranded in AOCI for other reasons may not be reclassified. These amendments should be applied either in the period of adoption as a cumulative adjustment to the opening balance of retained earnings or retrospectively to each period in which the effect of the 2017 Tax Act is recognized. This guidance is effective for entities with fiscal years beginning after December 15, 2018. The company early adopted this guidance as of January 1, 2018, resulting in an adjustment of
$3.8 million
to reduce beginning retained earnings and increase AOCI. Tax effects from previously stranded items are released from AOCI when the entire portfolio of similar items is liquidated.
In August 2018, the FASB issued a standards update that modifies the disclosure requirements for fair value measurements of financial and nonfinancial assets and liabilities. Under the new guidance, entities must disclose the changes in unrealized gains and losses for the period reported in AOCI for recurring level 3 fair value measurements held at the end of the reporting period. In addition, entities must provide the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements. Entities are no longer required to disclose the amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy, as well as the valuation processes for level 3 fair value measurements. This standards update is effective for reporting periods beginning in 2020, with early adoption permitted for the eliminated or modified disclosure requirements. The amendments on changes in unrealized gains and losses, and the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements should be applied prospectively for only the most recent reporting period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The company has early adopted the disclosure requirements from this standards update in the third quarter of 2018.
Recently Issued Accounting Pronouncements.
In February 2016, the FASB issued a standards update that requires lessees to recognize on the balance sheet the assets and liabilities associated with the rights and obligations created by those leases. The guidance for lessors is largely unchanged from current accounting rules. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current accounting standards, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The update is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is on course to comply with the guidance by the effective date as the project team has completed the contract review phase. Adoption of the guidance in 2019 will result in the gross-up of the consolidated balance sheets to reflect the present value of the lease payments over the lease term and offsetting lease asset. Presentation of lease expense and the pattern of expense recognition on the consolidated statements of income are expected to remain materially consistent with existing lease accounting guidance.
In June 2016, the FASB issued guidance that changes how credit losses are measured for most financial assets measured at amortized cost and certain other instruments. The standard requires an entity to estimate its lifetime expected credit loss and record an allowance, that when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. This forward-looking expected loss model generally will result in the earlier recognition of allowances for losses. The standard also amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Severity and duration of the unrealized loss are no longer permissible factors in concluding whether a credit loss exists. Entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time. The standard is effective for reporting periods beginning after December 15, 2019. The standard’s provisions must be applied as a cumulative adjustment to retained earnings as of the beginning of the first reporting period in
which the guidance is effective. Early adoption is permitted for reporting periods beginning in 2019. The company does not believe that the adoption of this guidance will have a material impact on the consolidated financial statements.
In August 2017, the FASB issued a standards update that amends the existing hedge accounting model to enable entities to better reflect their risk management activities in the financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The company does not believe that the adoption of this standard will have a material impact on the consolidated financial statements.
In August 2018, the Securities and Exchange Commission (SEC) released guidance aimed at expanding certain disclosures while also eliminating outdated or duplicative disclosure requirements. Specifically, the guidance amends the interim financial statement requirements to require a reconciliation of changes in shareholders' equity in the notes or as a separate statement. This statement should reconcile the beginning balance to the ending balance of each component of shareholders' equity for each period where an income statement is required. As a result, entities will have to provide the reconciliation for both the year-to-date and quarterly periods and comparable periods in quarterly filings. The guidance is effective for quarterly filings beginning on November 5, 2018. In light of the timing of effectiveness of the guidance and proximity of effectiveness to the filing date for most filers' quarterly reports, the SEC would not object if the first presentation of the changes in shareholders' equity is included in its Form 10-Q for the quarter that begins after the effective date of the guidance. The company expects that adoption of this guidance will result in reduced redundancy of certain disclosures within management's discussion & analysis and the notes to the financial statements, as well as expanded disclosure within the consolidated statements of equity.
In August 2018, the FASB issued a standards update that modifies the disclosure requirements for employers that sponsor defined pension or other postretirement plans. The guidance clarifies certain existing disclosures and expands the requirements for others. Disclosures that are not considered cost beneficial are removed by the update. Also, there is a new disclosure requirement to include an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for reporting periods beginning in 2021. Early adoption is permitted. The company plans to update the disclosures for these changes upon adoption of the guidance in 2021.
3. Revenue Recognition
Revenue from Contracts with Customers.
The majority of revenue is comprised of clearing and transaction fees. The company accounts for revenue in accordance with “Revenue from Contracts with Customers,” which was adopted on January 1, 2018, using the modified retrospective approach. The new standard introduces a framework for recognizing revenue that focuses on the transfer of control rather than risks and rewards. The company recognized a one-time adjustment of
$8.7 million
within the opening balance of retained earnings as of January 1, 2018 as a result of adopting this standard. This deferral of revenue is primarily related to the outstanding performance obligations for clearing and transaction fees for longer-term cleared swap products.
Clearing and transaction fees
. Clearing and transaction fees include electronic trading fees, surcharges for privately-negotiated transactions, and other volume-related charges for exchange-traded and cleared swaps contracts. Clearing and transaction fees are assessed upfront at the time of trade execution. As such, the company recognizes the majority of the fee revenue upon successful execution of the trade. The minimal remaining portion of the fee revenue related to clearing activities performed after the trade execution is recognized over the short-term period that the contract is outstanding, based on management’s estimates of the average contract lifecycle. These estimates are based on various assumptions to approximate the amount of fee revenue to be attributed to services performed through contract settlement, expiration, or termination. These assumptions include the average number of days that a contract remains in open interest, contract turnover, average revenue per day, and revenue remaining in open interest at the end of each period.
The nature of contracts gives rise to several types of variable consideration, including incentive tiers, incentives associated with market maker programs and other fee discounts. The company includes fee discounts and incentives in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical experience, anticipated performance, and best judgment at the time. Because of the company's certainty in estimating these amounts, they are included in the transaction price of contracts.
Market data and information services.
Market data and information services represents revenue from the dissemination of market data to subscribers, distributors, and other third-party licensees of market data. Pricing for market data is primarily based on the number of reportable devices used as well as the number of subscribers enrolled under the arrangement. Fees for these services are generally billed monthly. Market data services are satisfied over time and revenue is recognized on a monthly basis as the customers receive and consume the benefit of the market data services. However, the company also maintains
certain annual license arrangements with one-time upfront fees. The fees for annual licenses are initially recorded as a contract liability and recognized as revenue monthly over the term of the annual period.
Access and communication fees.
Access and communication fees are charges to members and clearing firms that utilize various telecommunications networks and communications services. Fees for these services are generally billed monthly. These services are performed over time and revenue is recognized on a monthly basis as the customers receive and consume the benefit of the services.
Other.
Other revenues include fees for collateral management, fees for trade order routing through agreements from various strategic relationships, as well as other services to members and clearing firms. Collateral management fees are charged to clearing firms that have collateral on deposit with CME to meet their minimum performance bond and guaranty fund obligations. These fees are calculated based on daily collateral balances and are billed monthly. This fee revenue is recognized as billed as the customers receive and consume the benefits of the services. Pricing for strategic relationships may be driven by customer levels and activity. There are fee arrangements which provide for monthly as well as quarterly payments in arrears. Revenue is recognized monthly for strategic relationship arrangements as the customers receive and consume the benefits of the services.
The following table represents a disaggregation of revenue from contracts with customers for the quarters and nine months ended
September 30, 2018
and 2017:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Interest rate
|
|
$
|
242.0
|
|
|
$
|
227.0
|
|
|
$
|
869.3
|
|
|
$
|
760.8
|
|
Equity
|
|
128.0
|
|
|
121.9
|
|
|
480.4
|
|
|
369.6
|
|
Foreign exchange
|
|
44.2
|
|
|
48.7
|
|
|
144.4
|
|
|
139.0
|
|
Agricultural commodity
|
|
106.8
|
|
|
108.9
|
|
|
369.3
|
|
|
335.3
|
|
Energy
|
|
164.5
|
|
|
181.9
|
|
|
548.0
|
|
|
538.2
|
|
Metal
|
|
54.1
|
|
|
53.0
|
|
|
174.0
|
|
|
148.8
|
|
Interest rate swap and credit default swap
|
|
12.9
|
|
|
14.8
|
|
|
46.8
|
|
|
48.5
|
|
Total clearing and transaction fees
|
|
752.5
|
|
|
756.2
|
|
|
2,632.2
|
|
|
2,340.2
|
|
Market data and information services
|
|
110.7
|
|
|
96.9
|
|
|
319.4
|
|
|
289.8
|
|
Access and communication fees
|
|
26.2
|
|
|
25.7
|
|
|
78.4
|
|
|
74.9
|
|
Other
|
|
14.8
|
|
|
12.0
|
|
|
42.8
|
|
|
39.8
|
|
Total revenues
|
|
$
|
904.2
|
|
|
$
|
890.8
|
|
|
$
|
3,072.8
|
|
|
$
|
2,744.7
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
Services transferred at a point in time
|
|
741.8
|
|
|
743.9
|
|
|
2,590.2
|
|
|
2,296.2
|
|
Services transferred over time
|
|
160.3
|
|
|
144.2
|
|
|
475.8
|
|
|
439.5
|
|
One-time charges and miscellaneous revenues
|
|
2.1
|
|
|
2.7
|
|
|
6.8
|
|
|
9.0
|
|
Total revenues
|
|
$
|
904.2
|
|
|
$
|
890.8
|
|
|
$
|
3,072.8
|
|
|
$
|
2,744.7
|
|
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, and customer advances and deposits (contract liabilities) on the consolidated balance sheets. Certain fees for transactions, annual licenses, and other revenue arrangements are billed upfront before revenue is recognized, which results in the recognition of contract liabilities. These liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. For annual licenses and upfront fee arrangements, the company generally bills customers upon contract execution. These payments are recognized as revenue over time as the obligations under the contracts are satisfied. Changes in the contract liability balances during the nine months ended September 30, 2018 were not materially impacted by any other factors. The balance of contract liabilities was
$19.4 million
and
$3.9 million
as of
September 30, 2018
and
December 31, 2017
, respectively.
4. Performance Bonds and Guaranty Fund Contributions
Performance Bonds and Guaranty Fund Contributions.
CME has been designated as a systemically important financial market utility by the Financial Stability Oversight Council and is authorized to establish and maintain a cash account at the Federal Reserve Bank of Chicago. At
September 30, 2018
, CME maintained
$27.7 billion
within the cash account at the Federal Reserve Bank of Chicago. The cash deposit at the Federal Reserve Bank of Chicago is included within performance bonds and guaranty fund contributions on the consolidated balance sheets.
Clearing House Contract Settlement.
The clearing house marks-to-market open positions for all futures and options contracts twice a day (once a day for CME's cleared-only interest rate swap contracts). Based on values derived from the mark-to-market process, the clearing house requires payments from clearing firms whose positions have lost value and makes payments to clearing firms whose positions have gained value. Under the extremely unlikely scenario of simultaneous default by every clearing firm who has open positions with unrealized losses, the maximum exposure related to positions other than cleared-only interest rate swap contracts would be one half day of changes in fair value of all open positions, before considering the clearing house's ability to access defaulting clearing firms' collateral deposits.
For CME's cleared-only interest rate swap contracts, the maximum exposure related to CME's guarantee would be one full day of changes in fair value of all open positions, before considering CME's ability to access defaulting clearing firms' collateral. CME exited the credit default swap clearing business in March 2018.
During the first nine months of 2018, the clearing house transferred an average of approximately
$3.1 billion
a day through its clearing systems for settlement from clearing firms whose positions had lost value to clearing firms whose positions had gained value. The clearing house reduces its guarantee exposure through initial and maintenance performance bond requirements and mandatory guaranty fund contributions. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at
September 30, 2018
.
5. Intangible Assets
Intangible assets consisted of the following at
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(in millions)
|
|
Assigned Value
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Assigned Value
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Amortizable Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing firm, market data and other customer relationships
|
|
$
|
2,828.8
|
|
|
$
|
(1,011.6
|
)
|
|
$
|
1,817.2
|
|
|
$
|
2,838.8
|
|
|
$
|
(943.7
|
)
|
|
$
|
1,895.1
|
|
Technology-related intellectual property
|
|
22.4
|
|
|
(22.4
|
)
|
|
—
|
|
|
29.4
|
|
|
(29.4
|
)
|
|
—
|
|
Other
|
|
2.4
|
|
|
(1.2
|
)
|
|
1.2
|
|
|
2.4
|
|
|
(1.2
|
)
|
|
1.2
|
|
Total amortizable intangible assets
|
|
$
|
2,853.6
|
|
|
$
|
(1,035.2
|
)
|
|
1,818.4
|
|
|
$
|
2,870.6
|
|
|
$
|
(974.3
|
)
|
|
1,896.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
|
450.0
|
|
|
|
|
|
|
450.0
|
|
Total intangible assets – other, net
|
|
|
|
|
|
$
|
2,268.4
|
|
|
|
|
|
|
$
|
2,346.3
|
|
Trading products
(1)
|
|
|
|
|
|
$
|
17,175.3
|
|
|
|
|
|
|
$
|
17,175.3
|
|
|
|
(1)
|
Trading products represent futures and options products acquired in our business combinations with CBOT Holdings, Inc., NYMEX Holdings, Inc. and The Board of Trade of Kansas City, Missouri, Inc. Clearing and transaction fees are generated through the trading of these products. These trading products, most of which have traded for decades, require authorization from the Commodity Futures Trading Commission (CFTC). Product authorizations from the CFTC have no term limits.
|
Total amortization expense for intangible assets was
$23.7 million
and
$23.8 million
for the quarters ended
September 30, 2018
and
2017
, respectively. Total amortization expense for intangible assets was
$71.0 million
and
$71.8 million
for the nine months ended
September 30, 2018
and
2017
, respectively.
As of
September 30, 2018
, the future estimated amortization expense related to amortizable intangible assets is expected to be as follows:
|
|
|
|
|
(in millions)
|
Amortization Expense
|
Remainder of 2018
|
$
|
23.5
|
|
2019
|
94.2
|
|
2020
|
94.2
|
|
2021
|
94.2
|
|
2022
|
94.2
|
|
2023
|
94.2
|
|
Thereafter
|
1,323.9
|
|
6. Debt
In June 2018, the company completed offerings of
$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. The company used the net proceeds from the offering, together with cash on hand, to finance the cash consideration for the acquisition of NEX Group plc (NEX) in November 2018.
Long-term debt consisted of the following at
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30, 2018
|
|
December 31, 2017
|
$750.0 million fixed rate notes due September 2022, stated rate of 3.00%
(1)
|
|
$
|
746.6
|
|
|
$
|
746.0
|
|
$750.0 million fixed rate notes due March 2025, stated rate of 3.00%
(2)
|
|
745.4
|
|
|
744.9
|
|
$500.0 million fixed rate notes due June 2028, stated rate of 3.75%
|
|
495.8
|
|
|
—
|
|
$750.0 million fixed rate notes due September 2043, stated rate of 5.30%
(3)
|
|
742.4
|
|
|
742.2
|
|
$700.0 million fixed rate notes due June 2048, stated rate of 4.15%
|
|
689.4
|
|
|
—
|
|
Total long-term debt
|
|
$
|
3,419.6
|
|
|
$
|
2,233.1
|
|
|
|
(1)
|
In August 2012, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of
3.32%
.
|
|
|
(2)
|
In December 2014, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of
3.11%
.
|
|
|
(3)
|
In August 2012, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of
4.73%
.
|
Long-term debt maturities, at par value, were as follows at
September 30, 2018
:
|
|
|
|
|
(in millions)
|
Par Value
|
2019
|
$
|
—
|
|
2020
|
—
|
|
2021
|
—
|
|
2022
|
750.0
|
|
2023
|
—
|
|
Thereafter
|
2,700.0
|
|
7. Contingencies
Legal and Regulatory Matters.
In 2013, the CFTC filed suit against NYMEX and two former employees alleging disclosure of confidential customer information in violation of the Commodity Exchange Act. NYMEX’s motion to dismiss was denied in 2014. Based on its investigation to date and advice from legal counsel, the company believes that it has strong factual and legal defenses to the claim.
In 2003, the U.S. Futures Exchange, L.L.C. (Eurex U.S.) and U.S. Exchange Holdings, Inc. filed suit in federal court alleging that CBOT and CME violated the antitrust laws and tortuously interfered with the business relationship and contract between
Eurex U.S. and The Clearing Corporation. On October 31, 2018, the Court granted CBOT's and CME's motion for summary judgment and dismissed the case in its entirety.
In the normal course of business, the company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry and oversight. These matters could result in censures, fines, penalties or other sanctions. Management believes the outcome of any resulting actions will not have a material impact on its consolidated financial position or results of operations. However, the company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential fines, penalties or injunctive or other equitable relief, if any, that may result from these matters.
In addition, the company is a defendant in, and has potential for, various other legal proceedings arising from its regular business activities. While the ultimate results of such proceedings against the company cannot be predicted with certainty, the company believes that the resolution of any of these matters on an individual or aggregate basis will not have a material impact on its consolidated financial position or results of operations.
No accrual was required for legal and regulatory matters as none were probable and estimable as of
September 30, 2018
and
December 31, 2017
.
Intellectual Property Indemnifications
. Certain agreements with customers and other third parties related to accessing the CME platforms, utilizing market data services and licensing CME SPAN software may contain indemnifications from intellectual property claims that may be made against them as a result of their use of the applicable products and/or services. The potential future claims relating to these indemnifications cannot be estimated and therefore no liability has been recorded.
8. Guarantees
Mutual Offset Agreement.
CME and Singapore Exchange Limited (SGX) have a mutual offset agreement with a current term through October 2019. This agreement enables market participants to open a futures position on one exchange and liquidate it on the other. The term of the agreement will automatically renew for a
one
-year period unless either party provides advance notice of their intent to terminate. CME can maintain collateral in the form of U.S. Treasury securities or irrevocable, standby letters of credit. At
September 30, 2018
, CME was contingently liable to SGX on letters of credit totaling
$285.0 million
. Regardless of the collateral, CME guarantees all cleared transactions submitted through SGX and would initiate procedures designed to satisfy these financial obligations in the event of a default, such as the use of performance bonds and guaranty fund contributions of the defaulting clearing firm. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at
September 30, 2018
.
Family Farmer and Rancher Protection Fund.
In 2012, the company established the Family Farmer and Rancher Protection Fund (the Fund). The Fund is designed to provide payments, up to certain maximum levels, to family farmers, ranchers and other agricultural industry participants who use the company's agricultural commodity products and who suffer losses to their segregated account balances due to their CME clearing member becoming insolvent. Under the terms of the Fund, farmers and ranchers are eligible for up to
$25,000
per participant. Farming and ranching cooperatives are eligible for up to
$100,000
per cooperative. The Fund was established with a maximum of
$100.0 million
available for distribution to participants. Since its establishment, the Fund has made payments of approximately
$2.0 million
, which leaves
$98.0 million
available for future claims. If, at any time, payments due to participants were to exceed the amount remaining in the fund, payments would be pro-rated. Clearing members and customers must register with the company in advance and provide certain documentation in order to substantiate their eligibility. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at
September 30, 2018
.
9. Accumulated Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss), including current period other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Investment Securities
|
|
Defined Benefit Plans
|
|
Derivative Investments
|
|
Foreign Currency Translation
|
|
Total
|
Balance at December 31, 2017
|
$
|
0.6
|
|
|
$
|
(36.1
|
)
|
|
$
|
58.0
|
|
|
$
|
(8.2
|
)
|
|
$
|
14.3
|
|
Other comprehensive income (loss) before reclassifications and income tax benefit (expense)
|
(0.9
|
)
|
|
1.7
|
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(0.1
|
)
|
|
2.0
|
|
|
(0.9
|
)
|
|
—
|
|
|
1.0
|
|
Income tax benefit (expense)
|
0.3
|
|
|
(0.9
|
)
|
|
0.2
|
|
|
—
|
|
|
(0.4
|
)
|
Net current period other comprehensive income (loss)
|
(0.7
|
)
|
|
2.8
|
|
|
(0.7
|
)
|
|
(0.8
|
)
|
|
0.6
|
|
Impact of adoption of standards update on tax effects related to accumulated other comprehensive income
|
0.1
|
|
|
(8.2
|
)
|
|
11.9
|
|
|
—
|
|
|
3.8
|
|
Balance at September 30, 2018
|
$
|
—
|
|
|
$
|
(41.5
|
)
|
|
$
|
69.2
|
|
|
$
|
(9.0
|
)
|
|
$
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Investment Securities
|
|
Defined Benefit Plans
|
|
Derivative Investments
|
|
Foreign Currency Translation
|
|
Total
|
Balance at December 31, 2016
|
$
|
(19.5
|
)
|
|
$
|
(37.8
|
)
|
|
$
|
58.9
|
|
|
$
|
(15.7
|
)
|
|
$
|
(14.1
|
)
|
Other comprehensive income (loss) before reclassifications and income tax benefit (expense)
|
30.1
|
|
|
0.5
|
|
|
—
|
|
|
10.3
|
|
|
40.9
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(89.1
|
)
|
|
2.1
|
|
|
(0.9
|
)
|
|
—
|
|
|
(87.9
|
)
|
Income tax benefit (expense)
|
77.7
|
|
|
(1.9
|
)
|
|
0.3
|
|
|
(2.9
|
)
|
|
73.2
|
|
Net current period other comprehensive income (loss)
|
18.7
|
|
|
0.7
|
|
|
(0.6
|
)
|
|
7.4
|
|
|
26.2
|
|
Balance at September 30, 2017
|
$
|
(0.8
|
)
|
|
$
|
(37.1
|
)
|
|
$
|
58.3
|
|
|
$
|
(8.3
|
)
|
|
$
|
12.1
|
|
10. Fair Value Measurements
The company uses a three-level classification hierarchy of fair value measurements for disclosure purposes:
|
|
•
|
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.
|
Level 1 assets generally include investments in publicly traded mutual funds, equity securities and corporate debt securities with quoted market prices. In general, the company uses quoted prices in active markets for identical assets to determine the fair value of marketable securities.
Level 2 assets and liabilities generally consist of asset-backed securities, privately-held equity investments and long-term debt notes. Asset-backed securities were measured at fair value based on matrix pricing using prices of similar securities with similar inputs such as maturity dates, interest rates and credit ratings. The fair values of the equity investments were based on quoted market prices for similar assets and long-term debt notes were based on quoted market prices in an inactive market.
Level 3 liabilities include a foreign exchange forward contract. The company is using the foreign exchange forward contract to mitigate certain exposure to foreign exchange rate fluctuation related to the acquisition of NEX. The forward contract was
measured at fair value based on assumptions made by management regarding expectations on the settlement date as well as directly observable market inputs, including GBP forward rates, spot rates and discount factors. Significant changes in these observable inputs may have a material impact on the fair value of the forward contract as these amounts affect the timing and extent of cash flows under the contract. Changes to the settlement date assumption do not have a material impact on the fair value of the forward contract. Under the valuation model, the estimated fair values ranged from
$21.3 million
to
$24.8 million
, depending on assumptions used. Changes in fair value of this contract were recognized within other non-operating income (expense) on the consolidated statements of income. Level 3 assets also include certain intangible assets, fixed assets and privately-held equity investments that were impaired.
Recurring Fair Value Measurements.
Financial assets and liabilities recorded in the consolidated balance sheet as of
September 30, 2018
were classified in their entirety based on the lowest level of input that was significant to each asset and liability's fair value measurement. The following table presents financial instruments measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets at Fair Value:
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
18.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18.4
|
|
Mutual funds
|
|
64.0
|
|
|
—
|
|
|
—
|
|
|
64.0
|
|
Equity securities
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Asset-backed securities
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Total Marketable Securities
|
|
82.5
|
|
|
0.3
|
|
|
—
|
|
|
82.8
|
|
Total Assets at Fair Value
|
|
$
|
82.5
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
82.8
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contract
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
21.4
|
|
Total Liabilities at Fair Value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21.4
|
|
|
$
|
21.4
|
|
The following is a reconciliation of the level 3 liability valued at fair value on a recurring basis during the first nine months of 2018:
|
|
|
|
|
(in millions)
|
Forward Contract
|
Fair value of liability at December 31, 2017
|
$
|
—
|
|
Unrealized losses included in other non-operating (income) expense
|
21.4
|
|
Fair Value of Liability at September 30, 2018
|
$
|
21.4
|
|
Non-Recurring Fair Value Measurements.
During the second quarter of 2018, the company recognized mark-to-market increases in fair value of
$70.0 million
related to certain privately-held equity investments based on observable market price changes for an identical or similar investment of the same issuer. The fair values of these investments totaled
$75.4 million
and were considered level 2 and nonrecurring.
During the third quarter of 2018, the company recognized impairment charges totaling
$9.5 million
on the intangible assets and certain fixed assets related to our operations of Pivot, Inc. The fair value of the intangible assets and the fixed assets were estimated to be zero at September 30, 2018. During the third quarter of 2018, the company also recognized impairment charges of
$3.7 million
related to one of its privately-held equity investments. The fair value of the investment was estimated to be zero at September 30, 2018. Both assessments were based on qualitative indications of impairment. The fair values of the intangible assets, fixed assets and privately-held equity investment are considered level 3 and non-recurring.
Fair Values of Long-Term Debt Notes.
The following presents the estimated fair values of long-term debt notes, which are carried at amortized cost on the consolidated balance sheets. The fair values, which are classified as level 2 under the fair value hierarchy, were estimated using quoted market prices. At
September 30, 2018
, the fair values were as follows:
|
|
|
|
|
(in millions)
|
Fair Value
|
$750.0 million fixed rate notes due September 2022, stated rate of 3.00%
|
$
|
739.5
|
|
$750.0 million fixed rate notes due March 2025, stated rate of 3.00%
|
722.0
|
|
$500.0 million fixed rate notes due June 2028, stated rate of 3.75%
|
500.9
|
|
$750.0 million fixed rate notes due September 2043, stated rate of 5.30%
|
875.5
|
|
$700.0 million fixed rate notes due June 2048, stated rate of 4.15%
|
698.5
|
|
11. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of all classes of CME Group common stock outstanding for each reporting period. Diluted earnings per share reflects the increase in shares using the treasury stock method to reflect the impact of an equivalent number of shares of common stock if stock options were exercised and restricted stock awards were converted into common stock. Anti-dilutive restricted stock and performance share awards were as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Restricted stock and performance shares
|
335
|
|
|
438
|
|
|
337
|
|
|
438
|
|
Total
|
335
|
|
|
438
|
|
|
337
|
|
|
438
|
|
The following table presents the earnings per share calculation for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net Income (in millions)
|
|
$
|
411.8
|
|
|
$
|
308.6
|
|
|
$
|
1,576.7
|
|
|
$
|
1,124.2
|
|
Weighted Average Number of Common Shares (in thousands):
|
|
|
|
|
|
|
|
|
Basic
|
|
339,586
|
|
|
338,771
|
|
|
339,453
|
|
|
338,557
|
|
Effect of stock options, restricted stock and performance shares
|
|
1,449
|
|
|
1,558
|
|
|
1,454
|
|
|
1,557
|
|
Diluted
|
|
341,035
|
|
|
340,329
|
|
|
340,907
|
|
|
340,114
|
|
Earnings per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.21
|
|
|
$
|
0.91
|
|
|
$
|
4.64
|
|
|
$
|
3.32
|
|
Diluted
|
|
1.21
|
|
|
0.91
|
|
|
4.62
|
|
|
3.31
|
|
12. Subsequent Events
The company has evaluated subsequent events through the date the financial statements were issued. The company has determined that there were no subsequent events except as noted below:
The company closed its acquisition of NEX on November 2, 2018 in a transaction valued at
£11.28
per share (based on CME Group’s Class A common stock closing price of
$183.75
per share and the exchange rate of US$
1.30
:£1), consisting of
500
pence in cash and
0.0444
CME Group shares. The total equity value of the transaction is approximately
$5.6 billion
. Approximately
$1.6 billion
of the cash consideration portion of the purchase price was paid from restricted cash as presented within other current assets on the consolidated balance sheets. The remainder of cash consideration was funded through issuances of commercial paper and by cash on hand.