NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
CME Group Inc. (CME Group) offer the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities and metals. The company offers futures and options on futures trading across asset classes through the CME Globex platform, fixed income trading via BrokerTec and FX trading on the EBS platform. In addition, it operates one of the world’s leading central counterparty clearing houses. Through its clearing house, CME Group offers clearing, settlement and guarantees for all products cleared through the clearing house.
Chicago Mercantile Exchange Inc. (CME), the Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX) and Commodity Exchange, Inc. (COMEX), wholly-owned subsidiaries of CME Group, are designated contract markets for the trading of futures and options on futures contracts.
Effective November 2, 2018, CME Group completed its acquisition of NEX Group plc (NEX). NEX offers electronic trade execution platforms for the foreign exchange and fixed income over-the-counter markets as well as other services across the transaction lifecycle, including trade and portfolio management and portfolio compression. The financial statements and accompanying notes presented in this report include the financial results of NEX and its subsidiaries beginning on November 3, 2018.
CME Group and its subsidiaries are referred to collectively as “the company” in the notes to the consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the company and its subsidiaries. All intercompany transactions and balances have been eliminated.
Use of Estimates.
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts on the consolidated financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and assumptions management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.
Cash and Cash Equivalents.
Cash and cash equivalents consist of cash and highly liquid investments with a maturity of three months or less at the time of purchase.
Financial Investments.
The company maintains short-term and long-term investments, classified as equity method investments, equity securities, available-for-sale debt securities, and trading securities. Available-for-sale debt securities are carried at fair value, with unrealized gains and losses, net of deferred income taxes, reported as a component of accumulated other comprehensive income. Trading securities held in connection with non-qualified deferred compensation plans and equity securities are recorded at fair value, with net realized and unrealized gains and losses and dividend income reported as investment 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. Also, the company maintains long-term investments accounted for under the equity method, which requires that the company recognize our share of net income (loss) in the investee as an adjustment to the carrying amount of the investment each reporting period.
The company reviews its investment portfolio to determine whether a decline in fair value below the carrying value is other-than-temporary. If events and circumstances indicate that a decline in the value of one or more assets has occurred and is deemed to be other-than-temporary, the carrying value of the investment is reduced to its fair value and a corresponding impairment expense is charged to earnings.
Fair Value of Financial Instruments.
The company uses a three-level classification hierarchy of fair value measurements that establishes the quality of inputs used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial instruments is determined using various techniques that involve some level of estimation and judgment, the degree of which is dependent on the price transparency and the complexity of the instruments.
Derivative Investments.
The company uses derivative instruments to limit exposure to changes in interest rates and foreign currency exchange rates. Derivatives are recorded at fair value on the consolidated balance sheets. For those derivatives that meet the criteria for hedge accounting and are classified as effective cash flow hedges, changes in the fair value of the hedges is
deferred in accumulated other comprehensive income. Any realized gains and losses from effective hedges are classified within the same financial statement line item on the consolidated statements of income as the hedge risk. For any hedges no longer deemed effective or for which hedge accounting is not applied, changes in fair value of the derivative instruments are recognized in earnings immediately.
Accounts Receivable.
Accounts receivable are comprised of trade receivables and unbilled revenue. All accounts receivable are stated at cost. Exposure to losses on receivables for clearing and transaction fees and other amounts owed by clearing and trading firms is dependent on each firm's financial condition. With respect to clearing firms, our credit loss exposure is mitigated by the memberships that collateralize fees owed to the company. The company retains the right to liquidate clearing firm memberships to satisfy an outstanding receivable. The allowance for doubtful accounts is calculated based on historical losses and management's assessment of probable future collections.
Performance Bonds and Guaranty Fund Contributions.
Performance bonds and guaranty fund contributions held for clearing firms may be in the form of cash, securities or other non-cash deposits.
Performance bonds and guaranty fund contributions received in the form of cash held by CME may be invested in U.S. government securities, U.S. government agency securities and certain foreign government securities acquired through and held by a bank or broker-dealer subsidiary of a bank, a cash account at the Federal Reserve Bank of Chicago, reverse repurchase agreements secured with highly rated government securities, money market funds or through CME's Interest Earning Facility (IEF) program. Any interest earned on CME investments accrues to CME and is included in investment income on the consolidated statements of income. CME may distribute any interest earned on its investments to the clearing firms at its discretion. Because CME has control of the cash collateral and the benefits and market risks of ownership accrue to CME, cash performance bonds and guaranty fund contributions are reflected on the consolidated balance sheets. Performance bonds and guaranty fund contributions assets on the consolidated balance sheets can include reinvestments in U.S. Treasury and U.S. government agency securities. U.S. Treasury and U.S. government agency securities can be purchased by CME, at its discretion, using cash collateral.
Securities and other non-cash deposits may include U.S. Treasury securities, U.S. government agency securities, Eurobonds, corporate bonds, other foreign government securities and gold bullion. Securities and other non-cash deposits are held in safekeeping by a custodian bank. Interest and gains or losses on securities deposited to satisfy performance bond and guaranty fund requirements accrue to the clearing firm. Because the benefits and risks of ownership accrue to the clearing firm, non-cash performance bonds and guaranty fund contributions are not reflected on the consolidated balance sheets.
Property, Equipment and Leasehold Improvements.
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method, generally over
two
to
thirty-nine
years. Property and equipment are depreciated over their estimated useful lives. Leasehold improvements are amortized over the shorter of the remaining term of the respective lease to which they relate or the remaining useful life of the leasehold improvement. Land is reported at cost. Internal and external costs incurred in developing or obtaining computer software for internal use which meet the requirements for capitalization are amortized on a straight-line basis over the estimated useful life of the software, generally
two
to
four
years.
Operating Leases.
The company accounts for our leases of office space as operating leases. Landlord allowances are recorded as a reduction to rent expense on a straight-line basis over the term of the lease. For sale leaseback transactions, the company evaluates the sale and the lease arrangement based on the company's continuing involvement and recognizes the sale leaseback as either a sale leaseback transaction or under the financing method, which requires the asset to remain on the consolidated balance sheets throughout the term of the lease and the proceeds to be recognized as a financing obligation. A portion of the lease payments is recognized as a reduction of the financing obligation and a portion is recognized as interest expense based on an imputed interest rate.
Goodwill and Other Intangible Assets.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. The company reviews goodwill and indefinite-lived intangible assets for impairment at least quarterly and whenever events or circumstances indicate that their carrying values may not be recoverable. The company may test goodwill quantitatively for impairment by comparing the carrying value of a reporting unit to its estimated fair value. Estimating the fair value of a reporting unit involves significant judgments inherent in the analysis including estimating the amount and timing of future cash flows and the selection of appropriate discount rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for the reporting unit. If the carrying amount exceeds fair value, an impairment loss is recorded. In certain circumstances, goodwill may be reviewed qualitatively for indications of impairment without utilizing valuation techniques to estimate fair value.
The company evaluates the recoverability of indefinite-lived intangible assets at least quarterly by comparing the estimated fair value of the intangible asset to its carrying value. If the indefinite-lived intangible asset carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Estimating the fair value of indefinite-lived intangible assets involves the use of valuation techniques that rely on significant estimates and assumptions including forecasted revenue growth
rates, forecasted allocations of expense and risk-adjusted discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value for indefinite-lived intangible assets. In certain circumstances, indefinite-lived intangible assets may be reviewed qualitatively for indications of impairment without utilizing valuation techniques to estimate fair value.
Intangible assets subject to amortization are also assessed for impairment at least quarterly or 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.
Business Combinations.
The company accounts for business combinations using the acquisition method. The method requires the acquirer to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. The company may use independent valuation services to assist in determining the estimated fair values.
Employee Benefit Plans.
The company recognizes the funded status of defined benefit postretirement plans on its consolidated balance sheets. Changes in that funded status are recognized in the year of change in other comprehensive income (loss). Plan assets and obligations are measured at year end. The company recognizes future changes in actuarial gains and losses and prior service costs in the year in which the changes occur through accumulated other comprehensive income (loss).
Foreign Currency Translation
. Foreign currency denominated assets and liabilities are re-measured into the functional currency using period-end exchange rates. Gains and losses from foreign currency transactions are included in other expense on the accompanying consolidated statements of income. When the functional currency differs from the reporting currency, revenues and expenses of foreign subsidiaries are translated from their functional currencies into U.S. dollars using weighted-average exchange rates while their assets and liabilities are translated into U.S. dollars using period-end exchange rates. Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive income (loss) within shareholders' equity.
Revenue Recognition.
Revenue recognition policies for specific sources of revenue are discussed below.
Clearing and Transaction Fees.
Clearing and transaction fees include per-contract charges for trade execution, clearing, trading on the company's electronic trading platform, portfolio reconciliation and compression services, risk mitigation, and other fees. Fees are charged at various rates based on the product traded, the method of trade, the exchange trading privileges of the customer making the trade and the type of contract. The majority of our clearing and transaction fees are recognized as revenue when a buy and sell order are matched. Therefore, unfilled or canceled buy and sell orders have no impact on revenue. 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. When this information is corrected within the time period allowed by the the company, a fee adjustment is provided to the clearing firm. A reserve is established for estimated fee adjustments to reflect corrections to customer exchange trading privileges. The reserve is based on the historical pattern of adjustments processed as well as specific adjustment requests. The company believes the allowances are adequate to cover estimated adjustments.
Market Data and Information Services.
Market data and information services represent revenue earned for the dissemination of market information. Revenues are accrued each month based on the number of devices reported by vendors or over a straight line basis in accordance with the market data subscription contract term. The company conducts periodic examinations of the number of devices reported and assesses additional fees as necessary. On occasion, customers will pay for services in a lump sum payment; however, revenue is recognized as services are provided.
Other Revenues.
Other revenues include access and communication fees, fees for collateral management and fees for trade order routing through agreements from various strategic relationships as well as other services to members and clearing firms. Revenue is recognized as services are provided.
Concentration of Revenue.
One firm represented
10%
of the company's clearing and transaction fee revenue in 2018. One firm represented
13%
and another firm represented
12%
of clearing and transaction fees revenue in 2017. One firm represented
13%
and another firm represented
11%
of clearing and transaction fees revenue in 2016. Should a clearing firm withdraw from the company, management believes that the customer portion of that firm's trading activity would likely transfer to another clearing firm. Therefore, management does not believe that the company is exposed to significant risk from the ongoing loss of revenue received from a particular clearing firm.
The two largest resellers of market data represented approximately
41%
of market data and information services revenue in
2018
,
45%
in
2017
, and
40%
in
2016
. Should one of these vendors no longer subscribe to the company's market data, management believes that the majority of that firm's customers would likely subscribe to the market data through another
reseller. Therefore, management does not believe that the company is exposed to significant risk from a loss of revenue received from any particular market data reseller.
Share-Based Payments.
The company accounts for share-based payments at fair value, which is based on the grant date price of the equity awards issued. The company recognizes expense relating to stock-based compensation on an accelerated basis. As a result, the expense associated with each vesting date within a stock grant is recognized over the period of time that each portion of that grant vests. Beginning in 2017, the company recognizes expense for forfeitures of stock grants as they occur.
Marketing Costs.
Marketing costs are incurred for the production and communication of advertising as well as other marketing activities. These costs are expensed when incurred, except for costs related to the production of broadcast advertising, which are expensed when the first broadcast occurs.
Income Taxes.
Deferred income taxes arise from temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. The company accounts for uncertainty in income taxes recognized in its consolidated financial statements by using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken or expected to be taken. The company classifies interest and penalties related to uncertain tax positions in income tax expense.
Segment Reporting.
The company reports the results of its operations as one operating segment primarily comprised of the businesses of CME, CBOT, NYMEX, COMEX, and NEX. The remaining operations do not meet the thresholds for reporting separate segment information.
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 has not resulted in 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 other 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 2018, the company recorded an increase to the fair values of some of its privately-held equity investments of
$82.6 million
and also recognized impairment charges of
$4.7 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 a decrease in cash balances of
$528.8 million
for 2018, a decrease in cash balances of
$54.3 million
for 2017 and an increase in cash balances of
$165.2 million
for 2016.
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 on 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Service cost recognized in compensation and benefits expense
|
|
$
|
19.1
|
|
|
$
|
18.7
|
|
|
$
|
16.7
|
|
Other components of pension expense recognized in other non-operating income (expense)
|
|
(8.9
|
)
|
|
(1.4
|
)
|
|
(2.2
|
)
|
Total net pension expense
|
|
$
|
10.2
|
|
|
$
|
17.3
|
|
|
$
|
14.5
|
|
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 financial 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 company early adopted this guidance on October 1, 2018 and believes the impact upon adoption of this standard to be immaterial to the financial statements.
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 early adopted the disclosure requirements from this standards update starting in the third quarter of 2018 by updating the disclosures in the fair value measurements footnote.
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. The guidance is effective for SEC filings beginning on November 5, 2018. As a result, the company will provide a reconciliation of shareholders' equity for the quarter and year-to-date period and comparable periods beginning in the 2019 quarterly reports. The company has also adopted the disclosure requirements from this guidance as applied to disclosures within this annual report by eliminating some duplicative and outdated disclosure requirements.
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. Management is on course to comply with the guidance by the effective date as the project team has
substantially completed review of the lease agreements and implementation phases. Adoption of this guidance on January 1, 2019 will result in a gross-up of our balance sheet with both a lease asset and lease liability. 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 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. BUSINESS COMBINATIONS
On November 2, 2018, the company completed its acquisition of NEX and its subsidiaries in a transaction valued at
£11.28
per share (
$14.63
per share based on the CME Group share price of
$183.75
and the exchange rate of US
$1.30
:£1 on November 2, 2018), consisting of
£5.00
per share in cash and
0.0444
CME Group shares. The total equity value of the transaction is approximately
£4.3 billion
(
$5.6 billion
), including the issuance of
16.9 million
CME Group class A shares and
$2.5 billion
of cash consideration. As part of the acquisition, the company also assumed
$1.0 billion
of existing debt of NEX. The cash consideration was funded with
$1.2 billion
of net proceeds received from a debt offering of fixed rate notes in June 2018, borrowings from commercial paper and cash on hand. The company entered into this acquisition primarily as a means to expand its product base, further leverage its existing operating model, extend its presence in the over-the-counter market and better position itself to compete on a global scale.
Preliminary Purchase Price Allocation.
The preliminary purchase price has been allocated to NEX's net tangible and identifiable intangible assets based on their estimated fair values as of November 2, 2018. The allocation of the purchase price was based on certain preliminary valuations and estimates and assumptions are subject to change. The goodwill generated from the acquisition was primarily attributable to synergies expected to arise after the acquisition. The company expects to finalize its purchase price allocation within the first year. The preliminary purchase price allocation is as follows:
|
|
|
|
|
|
(in millions)
|
|
|
Cash
|
|
$
|
668.5
|
|
Identifiable intangible assets
|
|
3,288.9
|
|
Goodwill
|
|
3,236.3
|
|
Debt assumed
|
|
(1,029.1
|
)
|
Deferred tax liability on identifiable intangible assets
|
|
(671.0
|
)
|
Other assets and liabilities
|
|
136.0
|
|
Non-controlling interest
|
|
(45.3
|
)
|
Total Purchase Price
|
|
$
|
5,584.3
|
|
The preliminary fair values of identifiable intangible assets acquired were estimated as follows (in U.S. dollar equivalent):
|
|
|
|
|
|
|
(in millions)
|
Fair Value in USD
|
|
Estimated Useful Life
|
Customer relationships
|
$
|
3,032.3
|
|
|
11 to 19 years
|
Technology-related intellectual property
|
156.3
|
|
|
5 to 9 years
|
Trade names
|
100.3
|
|
|
3 to 9 years
|
Total
|
$
|
3,288.9
|
|
|
|
NEX maintains a
86.7%
ownership interest in Traiana Inc and its subsidiaries, resulting in nonredeemable non-controlling interests included in the company's consolidated statements of equity beginning on November 3, 2018.
4. MARKETABLE SECURITIES
We have equity securities and available-for-sale debt securities classified as marketable securities on our consolidated balance sheets. The amortized cost and fair value of these securities at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(in millions)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Corporate debt securities
(1)
|
|
$
|
18.2
|
|
|
$
|
18.1
|
|
|
$
|
20.0
|
|
|
$
|
20.8
|
|
Municipal debt securities
|
|
1.5
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
Asset-backed security
|
|
0.6
|
|
|
0.3
|
|
|
0.6
|
|
|
0.3
|
|
Equity securities
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Total
|
|
$
|
20.3
|
|
|
$
|
20.2
|
|
|
$
|
20.6
|
|
|
$
|
21.2
|
|
_______________
(1) The corporate debt securities are maintained for a non-qualified retirement and benefit plan under the COMEX Members' Recognition and Retention Plan (MRRP) (note 12).
Net unrealized gains (losses) on marketable debt securities classified as available-for-sale are reported as a component of other comprehensive income (loss) and included on the accompanying consolidated statements of comprehensive income and consolidated statements of equity. Changes in the fair value of equity securities are recognized within investment income on the consolidated statements of income.
The fair value and gross unrealized losses of the corporate debt securities and asset-backed security were
$12.9 million
and
$0.6 million
, respectively, at
December 31, 2018
. These corporate debt securities and the asset-backed security were in an unrealized loss position for more than 12 months at
December 31, 2018
and were deemed not to be other-than-temporarily impaired. The company does not intend to sell and is not required to sell these securities prior to maturity.
The amortized cost and fair value of the corporate debt securities, asset-backed security, and municipal debt securities at
December 31, 2018
, by contractual maturity, were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Amortized
Cost
|
|
Fair
Value
|
Maturity of one year or less
|
|
$
|
1.8
|
|
|
$
|
1.8
|
|
Maturity between one and five years
|
|
9.1
|
|
|
9.2
|
|
Maturity between five and ten years
|
|
4.0
|
|
|
3.9
|
|
Maturity greater than ten years
|
|
5.4
|
|
|
5.2
|
|
Total
|
|
$
|
20.3
|
|
|
$
|
20.1
|
|
The company maintains additional investments in a diverse portfolio of mutual funds related to its non-qualified deferred compensation plans (note 12). The fair value of these securities was
$52.7 million
and
$68.9 million
at
December 31, 2018
and
2017
, respectively.
5. REVENUE RECOGNITION
Revenue from Contracts with Customers.
The majority of revenue consists 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 and brokerage commissions, surcharges for privately-negotiated transactions, portfolio reconciliation and compression services, risk mitigation and other volume-related charges for trade 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 settlement 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. For cleared trades, 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 volume-based pricing tiers, customer 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.
Other.
Other revenues include access and communication fees, fees for collateral management, fees for trade order routing through agreements from various strategic relationships, as well as other post-trade services to customers and clearing firms. 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 and the associated fee revenue is recognized as billed. 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 on the exchange. 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 years ended
December 31, 2018
,
2017
and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Interest rates
|
|
$
|
1,201.0
|
|
|
$
|
995.4
|
|
|
$
|
944.5
|
|
Equity indexes
|
|
687.0
|
|
|
497.1
|
|
|
541.3
|
|
Foreign exchange
|
|
187.8
|
|
|
185.6
|
|
|
171.6
|
|
Agricultural commodities
|
|
470.0
|
|
|
436.0
|
|
|
438.6
|
|
Energy
|
|
744.2
|
|
|
716.2
|
|
|
699.5
|
|
Metals
|
|
223.9
|
|
|
200.2
|
|
|
179.2
|
|
Interest rate swap and credit default swap
|
|
61.9
|
|
|
68.1
|
|
|
61.7
|
|
Cash markets business
|
|
91.2
|
|
|
—
|
|
|
—
|
|
Total clearing and transaction fees
|
|
3,667.0
|
|
|
3,098.6
|
|
|
3,036.4
|
|
Market data and information services
|
|
449.6
|
|
|
391.8
|
|
|
406.5
|
|
Other
|
|
192.8
|
|
|
154.3
|
|
|
152.3
|
|
Total revenues
|
|
$
|
4,309.4
|
|
|
$
|
3,644.7
|
|
|
$
|
3,595.2
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
Services transferred at a point in time
|
|
3,561.5
|
|
|
3,052.1
|
|
|
2,991.6
|
|
Services transferred over time
|
|
738.8
|
|
|
579.9
|
|
|
592.1
|
|
One-time charges and miscellaneous revenues
|
|
9.1
|
|
|
12.7
|
|
|
11.5
|
|
Total revenues
|
|
$
|
4,309.4
|
|
|
$
|
3,644.7
|
|
|
$
|
3,595.2
|
|
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. In connection with the NEX acquisition on November 2, 2018, our contract liabilities balance reported an increase related to certain upfront billing arrangements for post-trade services. The contract liability balances during 2018 were not materially impacted by any other factors. The balance of contract liabilities was
$44.4 million
and
$3.9 million
as of
December 31, 2018
and
2017
, respectively.
6. PERFORMANCE BONDS AND GUARANTY FUND CONTRIBUTIONS
The clearing house clears and guarantees the settlement of contracts traded in the futures and options and interest rate swap markets. In its guarantor role, the clearing house has precisely equal and offsetting claims to and from clearing firms on opposite sides of each contract, standing as an intermediary on every contract cleared. In the U.S., clearing firm positions are held according to Commodity and Futures Trading Commission (CFTC) regulatory account segregation standards. To the extent that funds are not otherwise available to satisfy an obligation under the applicable contract, the clearing house bears counterparty credit risk in the event that future market movements create conditions that could lead to clearing firms failing to meet their obligations to the clearing house. The clearing house reduces the exposure through risk management programs that include initial and ongoing financial standards for designation as a clearing firm, performance bond requirements, daily mark-to-market, mandatory guaranty fund contributions and intra-day monitoring.
Each clearing firm is required to deposit and maintain balances in the form of cash, U.S. government securities, certain foreign government securities, bank letters of credit or other approved investments to satisfy performance bond and guaranty fund requirements. All non-cash deposits are marked-to-market and haircut on a daily basis. Securities deposited by the clearing firms are not reflected on the consolidated financial statements and the clearing house does not earn any interest on these deposits. These balances may fluctuate significantly over time due to investment choices available to clearing firms and changes in the amount of contributions required.
The clearing house marks-to-market open positions at least once a day (twice a day for futures and options contracts), and requires payment from clearing firms whose positions have lost value and make payments to clearing firms whose positions have gained value. The clearing house has the capability to mark-to-market more frequently as market conditions warrant.
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 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 cleared 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. During
2018
, the clearing house transferred an average of approximately
$3.2 billion
a day through the clearing system for settlement from clearing firms whose positions had lost value to clearing firms whose positions had gained value. The clearing house reduces the guarantee exposure through initial and maintenance performance bond requirements and mandatory guaranty fund contributions. The company believes that the guarantee liability is immaterial and therefore has not recorded any liability at
December 31, 2018
.
CME has been designated as a systemically important financial market utility by the Financial Stability Oversight Council and maintains a cash account at the Federal Reserve Bank of Chicago. At
December 31, 2018
and 2017, CME maintained
$24.7 billion
and
$34.2 billion
, respectively, 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 firms, at their option, may instruct CME to deposit the cash or securities held by CME into one of the IEF programs. The total principal in the IEF programs was
$3.1 billion
at
December 31, 2018
and
$1.1 billion
at
December 31, 2017
.
CME and The Options Clearing Corporation (OCC) have a perpetual cross-margin arrangement, whereby a clearing firm may maintain a cross-margin account in which a clearing firm's positions in certain equity index futures and options are combined with certain positions cleared by OCC for purposes of calculating performance bond requirements. The performance bond deposits are held jointly by CME and OCC. Cross-margin cash, securities and letters of credit jointly held with OCC under the cross-margin agreement are reflected at
50%
of the total, or CME's proportionate share per that agreement. If a participating firm defaults, the gain or loss on the liquidation of the firm's open position and the proceeds from the liquidation of the cross-margin account would be allocated
50%
each to CME and OCC. The company believes that the guarantee liability is immaterial and therefore has not recorded any liability at
December 31, 2018
.
In addition, CME has perpetual cross-margin agreements with Fixed Income Clearing Corporation (FICC) whereby the clearing firms' offsetting positions with CME and FICC are subject to reduced performance bond requirements. Clearing firms maintain separate performance bond deposits with each clearing house, but depending on the net offsetting positions between CME and FICC, each clearing house may reduce that firm's performance bond requirements. In the event of a firm default, the total liquidation net gain or loss on the firm's offsetting open positions and the proceeds from the liquidation of the performance bond collateral held by each clearing house's supporting offsetting positions would be divided evenly between CME and FICC. Additionally, if, after liquidation of all the positions and collateral of the defaulting firm at each respective clearing organization, and taking into account any cross-margining loss sharing payments, any of the participating clearing organizations has a remaining liquidating surplus, and any other participating clearing organization has a remaining liquidating deficit, any additional surplus from the liquidation would be shared with the other clearing house to the extent that it has a remaining liquidating deficit. Any remaining surplus funds would be passed to the bankruptcy trustee. The company believes that the guarantee liability is immaterial and therefore has not recorded any liability at
December 31, 2018
.
Each CME clearing firm for futures and options is required to deposit and maintain specified guaranty fund contributions in the form of cash or approved securities. In the event that performance bonds, guaranty fund contributions and other assets required to support clearing membership of a defaulting CME clearing firm are inadequate to fulfill that clearing firm's outstanding financial obligation, the base guaranty fund for contracts other than interest rate swaps is available to cover potential losses after first utilizing
$100.0 million
of corporate contributions designated by CME to be used in the event of a default of a clearing firm for the base guaranty fund.
CME maintains a separate guaranty fund to support the clearing firms that clear interest rate swap products. The funds for interest rate swaps are independent of the base guaranty fund and are isolated to clearing firms for products in the respective asset class. Each clearing firm for cleared interest rate swaps is required to deposit and maintain specified guaranty fund contributions in the form of cash or approved securities. In the event that performance bonds, guaranty fund contributions and other assets required to support clearing membership of a defaulting clearing firm for cleared interest rate swap contracts are inadequate to fulfill that clearing firm's outstanding financial obligation, the interest rate swaps contracts guaranty fund is available to cover potential losses after first utilizing
$150.0 million
of corporate contributions designated by CME to be used in the event of a default of a cleared interest rate swap clearing firm.
CME maintains a
364
-day multi-currency line of credit with a consortium of domestic and international banks to be used in certain situations by the clearing house. CME 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 of the collateral), or in the event of a temporary disruption with the domestic payments system that would delay payment of settlement variation between CME
and its clearing firms. 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. The line of credit provides for borrowings of up to
$7.0 billion
. At
December 31, 2018
, guaranty fund contributions available for CME clearing firms were
$7.4 billion
. CME has the option to request an increase in the line from
$7.0 billion
to
$10.0 billion
, subject to the approval of participating banks. In addition to the
364
-day fully secured, committed multi-currency line of credit, the company also has the option to use the
$2.4 billion
multi-currency revolving senior credit facility to provide liquidity for the clearing house in the unlikely event of default.
CME is required under the Commodity Exchange Act in the United States to segregate cash and securities deposited by clearing firms on behalf of its customers. In addition, CME requires segregation of all funds deposited by its clearing firms from operating funds.
Cash and non-cash deposits held as performance bonds and guaranty fund contributions at fair value at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(in millions)
|
|
Cash
|
|
Non-Cash
Deposits
and
IEF Funds
|
|
Cash
|
|
Non-Cash
Deposits
and
IEF Funds
|
Performance bonds
|
|
$
|
38,211.4
|
|
|
$
|
102,264.8
|
|
|
$
|
41,809.5
|
|
|
$
|
86,730.4
|
|
Guaranty fund contributions
|
|
1,185.9
|
|
|
6,935.9
|
|
|
2,281.2
|
|
|
6,102.4
|
|
Cross-margin arrangements
|
|
22.3
|
|
|
202.3
|
|
|
93.4
|
|
|
21.5
|
|
Performance bond collateral for delivery
|
|
35.9
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
Total
|
|
$
|
39,455.5
|
|
|
$
|
109,403.0
|
|
|
$
|
44,185.3
|
|
|
$
|
92,854.3
|
|
Cross-margin arrangements include collateral for the cross-margin accounts with OCC and FICC.
Cash performance bonds may include intraday settlement, if any, that is owed to the clearing firms and paid the following business day. The balance of intraday settlements was
$206.8 million
and
$111.0 million
at
December 31, 2018
and
2017
, respectively. Intraday settlements may be invested on an overnight basis and are offset by an equal liability owed to clearing firms.
In addition to cash, securities and other non-cash deposits, irrevocable letters of credit may be used as performance bond deposits for clearing firms. At December 31, these letters of credit, which are not included in the accompanying consolidated balance sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
Performance bonds
|
|
$
|
2,699.2
|
|
|
$
|
2,348.4
|
|
Cross-margin arrangements
|
|
—
|
|
|
59.5
|
|
Performance bond collateral for delivery
|
|
3,273.0
|
|
|
3,438.5
|
|
Total Letters of Credit
|
|
$
|
5,972.2
|
|
|
$
|
5,846.4
|
|
All cash, securities and letters of credit posted as performance bonds are only available to meet the financial obligations of that clearing firm to the clearing house.
7. PROPERTY
A summary of the property accounts at December 31 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
Estimated Useful Life
|
Land and land improvements
|
|
$
|
7.8
|
|
|
$
|
7.8
|
|
|
10 - 20 years
(1)
|
Building and building improvements
|
|
174.1
|
|
|
173.8
|
|
|
3 - 39 years
|
Leasehold improvements
|
|
215.6
|
|
|
180.5
|
|
|
3 - 24 years
|
Furniture, fixtures and equipment
|
|
371.6
|
|
|
309.9
|
|
|
2 - 7 years
|
Software and software development costs
|
|
440.7
|
|
|
404.3
|
|
|
2 - 4 years
|
Total property
|
|
1,209.8
|
|
|
1,076.3
|
|
|
|
Less accumulated depreciation and amortization
|
|
(761.1
|
)
|
|
(676.6
|
)
|
|
|
Property, net
|
|
$
|
448.7
|
|
|
$
|
399.7
|
|
|
|
_______________
(1) Estimated useful life applies only to land improvements.
8. INTANGIBLE ASSETS AND GOODWILL
On November 2, 2018, the company completed its acquisition of NEX. In connection with the acquisition, the company recognized goodwill and identifiable intangible assets. Amortizable intangible assets related to the acquisition include customer relationships, technology-related intellectual property and trade names. The values of goodwill and intangible assets are based on a preliminary purchase price allocation as of December 31, 2018.
Intangible assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
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
|
|
$
|
5,862.5
|
|
|
$
|
(1,065.6
|
)
|
|
$
|
4,796.9
|
|
|
$
|
2,838.8
|
|
|
$
|
(943.7
|
)
|
|
$
|
1,895.1
|
|
Technology-related intellectual property
|
|
179.1
|
|
|
(25.6
|
)
|
|
153.5
|
|
|
29.4
|
|
|
(29.4
|
)
|
|
—
|
|
Other
|
|
102.8
|
|
|
(3.1
|
)
|
|
99.7
|
|
|
2.4
|
|
|
(1.2
|
)
|
|
1.2
|
|
Total Amortizable Intangible Assets
|
|
$
|
6,144.4
|
|
|
$
|
(1,094.3
|
)
|
|
5,050.1
|
|
|
$
|
2,870.6
|
|
|
$
|
(974.3
|
)
|
|
1,896.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
|
450.0
|
|
|
|
|
|
|
450.0
|
|
Total Intangible Assets—Other, Net
|
|
|
|
|
|
$
|
5,500.1
|
|
|
|
|
|
|
$
|
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 CFTC. Product authorizations from the CFTC have no term limits.
|
The originally assigned useful lives for the amortizable intangible assets as of
December 31, 2018
are as follows:
|
|
|
|
|
Clearing firm, market data and other customer relationships
|
5 - 30 years
|
Technology-related intellectual property
|
5 - 9 years
|
Other
|
3 - 24.5 years
|
Total amortization expense for intangible assets was
$130.0 million
,
$95.5 million
and
$96.1 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. As of
December 31, 2018
, the future estimated amortization expense related to amortizable intangible assets is expected to be as follows:
|
|
|
|
|
(in millions)
|
|
2019
|
$
|
317.6
|
|
2020
|
317.6
|
|
2021
|
317.5
|
|
2022
|
316.9
|
|
2023
|
315.6
|
|
Thereafter
|
3,464.9
|
|
Goodwill activity consisted of the following for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balance at December 31, 2017
|
|
Business
Combinations
|
|
Balance at December 31, 2018
|
CBOT Holdings
|
|
$
|
5,066.4
|
|
|
$
|
—
|
|
|
$
|
5,066.4
|
|
NYMEX Holdings
|
|
2,462.2
|
|
|
—
|
|
|
2,462.2
|
|
NEX
|
|
—
|
|
|
3,236.3
|
|
|
3,236.3
|
|
Other
|
|
40.4
|
|
|
—
|
|
|
40.4
|
|
Total Goodwill
|
|
$
|
7,569.0
|
|
|
$
|
3,236.3
|
|
|
$
|
10,805.3
|
|
(in millions)
|
|
Balance at December 31, 2016
|
|
Business
Combinations
|
|
Balance at December 31, 2017
|
CBOT Holdings
|
|
$
|
5,066.4
|
|
|
$
|
—
|
|
|
$
|
5,066.4
|
|
NYMEX Holdings
|
|
2,462.2
|
|
|
—
|
|
|
2,462.2
|
|
Other
|
|
40.4
|
|
|
—
|
|
|
40.4
|
|
Total Goodwill
|
|
$
|
7,569.0
|
|
|
$
|
—
|
|
|
$
|
7,569.0
|
|
9. LONG-TERM INVESTMENTS
The company maintains various long-term investments as described below. The investments are recorded in other assets on the consolidated balance sheets.
Bursa Malaysia Derivatives Berhad.
The company owns a
25%
interest in Bursa Malaysia Derivatives Berhad (Bursa Malaysia), and accounts for its investment in Bursa Malaysia using the equity method of accounting. The company's investment in Bursa Malaysia was
$27.1 million
at
December 31, 2018
. The company and Bursa Malaysia have entered into several agreements including agreements to provide licensing, order routing and trade matching services.
DME Holdings Limited.
The company owns an approximate
50%
interest in DME Holdings Limited (DME Holdings), and accounts for its investment in DME Holdings using the equity method of accounting. The company's investment in DME Holdings was
$16.8 million
at
December 31, 2018
. The company and DME Holdings maintain an agreement for Dubai Mercantile Exchange futures contracts to be exclusively traded on the CME Globex platform.
S&P/DJI Indices LLC.
The company owns a
27%
interest in S&P/Dow Jones Indices LLC (S&P/DJI) and accounts for its investment in S&P/DJI using the equity method of accounting. The company's investment in S&P/DJI was
$987.7 million
at December 31, 2018. The company has long-term exclusive licensing agreements with S&P/DJI to list products based on the Standard & Poor's Indices and Dow Jones Indices.
10. 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 in November 2018.
On November 2, 2018, the company completed its acquisition of NEX. As part of the acquisition, the company assumed euro-denominated fixed rate notes, an outstanding balance on a revolving credit facility denominated in British pounds and U.S. dollars and a term loan denominated in Japanese yen. Prior to December 31, 2018, the company paid down the outstanding balance on the revolving credit facility and the facility was terminated.
Short-term debt outstanding consisted of the following at December 31 (in U.S. dollar equivalent):
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
€350.0 million fixed rate notes due March 2019, stated rate of 3.13%
(1)
|
|
$
|
400.7
|
|
|
$
|
—
|
|
¥19.1 billion term loan due March 2019, stated rate of 0.81%
(2)
|
|
173.5
|
|
|
—
|
|
Total short-term debt
|
|
$
|
574.2
|
|
|
$
|
—
|
|
_______________
|
|
(1)
|
The company maintains a cross-currency swap contract, which swaps a euro-based stated interest rate of
3.13%
for a pound-based interest rate of
4.40%
and a euro-based principal repayment for a pound-based principal repayment on
€250.0 million
fixed rate notes.
|
|
|
(2)
|
The company maintains a hedge contract to fix the exchange rate for the maturing principal and interest at a fixed British pound to Japanese yen exchange rate.
|
Long-term debt outstanding consisted of the following at December 31 (in U.S. dollar equivalent):
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
$750.0 million fixed rate notes due September 2022, stated rate of 3.00%
(1)
|
|
$
|
746.9
|
|
|
$
|
746.0
|
|
€15.0 million fixed rate notes due May 2023, stated rate of 4.30%
|
|
16.6
|
|
|
—
|
|
$750.0 million fixed rate notes due March 2025, stated rate of 3.00%
(2)
|
|
745.6
|
|
|
744.9
|
|
$500.0 million fixed rate notes due June 2028, stated rate of 3.75%
|
|
495.9
|
|
|
—
|
|
$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%
|
|
689.5
|
|
|
—
|
|
Commercial paper
(4)
|
|
389.9
|
|
|
—
|
|
Total long-term debt
|
|
$
|
3,826.8
|
|
|
$
|
2,233.1
|
|
_______________
|
|
(1)
|
The company maintains a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of
3.32%
.
|
|
|
(2)
|
The company maintains a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of
3.11%
.
|
|
|
(3)
|
The company maintains a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of
4.73%
.
|
|
|
(4)
|
The commercial paper is backed by the five-year multi-currency revolving credit facility.
|
Commercial paper with an aggregate par value of
$3.3 billion
and maturities ranging from
3
to
23
days was issued during 2018. The weighted average discount rate of commercial paper outstanding at December 31, 2018 was
2.54%
. The weighted average balance of commercial paper outstanding during the year was
$122.6 million
.
Long-term debt maturities, at par value (in U.S. dollar equivalent), were as follows as of
December 31, 2018
:
|
|
|
|
|
(in millions)
|
Par Value
|
2019
|
$
|
573.9
|
|
2020
|
—
|
|
2021
|
—
|
|
2022
|
1,140.0
|
|
2023
|
17.2
|
|
Thereafter
|
2,700.0
|
|
Commercial paper is considered to mature in 2022 because it is backed by the five-year multi-currency revolving credit facility, which expires in 2022.
11. INCOME TAXES
The company is subject to regulation under a wide variety of U.S., federal, state and foreign tax laws and regulations. Income before income taxes and the income tax provision consisted of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Income before income taxes:
|
|
|
|
|
|
|
Domestic
|
|
$
|
2,716.8
|
|
|
$
|
2,464.2
|
|
|
$
|
2,221.8
|
|
Foreign
|
|
61.0
|
|
|
62.1
|
|
|
65.8
|
|
Total
|
|
$
|
2,777.8
|
|
|
$
|
2,526.3
|
|
|
$
|
2,287.6
|
|
Income tax provision:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
524.8
|
|
|
$
|
783.7
|
|
|
$
|
684.4
|
|
State
|
|
154.2
|
|
|
85.7
|
|
|
118.6
|
|
Foreign
|
|
20.8
|
|
|
39.1
|
|
|
33.5
|
|
Total
|
|
699.8
|
|
|
908.5
|
|
|
836.5
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(9.3
|
)
|
|
(2,576.3
|
)
|
|
(95.4
|
)
|
State
|
|
127.8
|
|
|
130.8
|
|
|
10.0
|
|
Foreign
|
|
(4.2
|
)
|
|
(0.1
|
)
|
|
2.4
|
|
Total
|
|
114.3
|
|
|
(2,445.6
|
)
|
|
(83.0
|
)
|
Total Income Tax Provision (Benefit)
|
|
$
|
814.1
|
|
|
$
|
(1,537.1
|
)
|
|
$
|
753.5
|
|
Reconciliation of the statutory U.S. federal income tax rate to the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Statutory U.S. federal tax rate
|
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
4.5
|
|
|
2.1
|
|
|
3.7
|
|
Domestic production activities deduction
|
|
—
|
|
|
(1.0
|
)
|
|
(1.3
|
)
|
Increase (decrease) in domestic valuation allowance
|
|
—
|
|
|
(0.1
|
)
|
|
(4.7
|
)
|
Impact of revised state and local apportionment estimates
|
|
3.5
|
|
|
3.1
|
|
|
0.5
|
|
Reclassification of accumulated other comprehensive income
|
|
—
|
|
|
3.5
|
|
|
—
|
|
Impact of 2017 Tax Act
|
|
(0.2
|
)
|
|
(101.6
|
)
|
|
—
|
|
Other, net
|
|
0.5
|
|
|
(1.8
|
)
|
|
(0.3
|
)
|
Effective Tax Expense (Benefit) Rate
|
|
29.3
|
%
|
|
(60.8
|
)%
|
|
32.9
|
%
|
In 2018, the effective rate was higher than the statutory tax rate primarily due to the NEX acquisition impact on state tax expense.
In 2017, the effective rate was lower than the statutory tax rate due to the remeasurement of the deferred tax liabilities as a result of the 2017 Tax Act. This decrease was partially offset by an increase in the state apportionment impact of the Illinois income tax rate change on deferred tax liabilities as well as the reclassification of income tax expense from accumulated other comprehensive income related to the disposal of BM&FBOVESPA shares.
In 2016, the effective rate was lower than the statutory tax rate largely due to the release of the valuation allowances related to the sale of BM&FBOVESPA shares. The decrease was partially offset by an increase in state tax expense and the state apportionment impact on deferred tax liabilities.
At December 31, deferred income tax assets (liabilities) consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
Deferred Income Tax Assets:
|
|
|
|
|
Net operating losses
|
|
$
|
42.1
|
|
|
$
|
13.0
|
|
Property
|
|
0.3
|
|
|
5.5
|
|
Accrued expenses, compensation and other
|
|
32.6
|
|
|
37.2
|
|
Subtotal
|
|
75.0
|
|
|
55.7
|
|
Valuation allowance
|
|
(10.7
|
)
|
|
(11.2
|
)
|
Total deferred income tax assets
|
|
64.3
|
|
|
44.5
|
|
Deferred Income Tax Liabilities:
|
|
|
|
|
Purchased intangible assets
|
|
(5,700.6
|
)
|
|
(4,902.2
|
)
|
Total deferred income tax liabilities
|
|
(5,700.6
|
)
|
|
(4,902.2
|
)
|
Net Deferred Income Tax Liabilities
|
|
(5,636.3
|
)
|
|
(4,857.7
|
)
|
Reported as:
|
|
|
|
|
Net non-current deferred tax assets
|
|
29.6
|
|
|
—
|
|
Net non-current deferred tax liabilities
|
|
(5,665.9
|
)
|
|
(4,857.7
|
)
|
Net Deferred Income Tax Liabilities
|
|
$
|
(5,636.3
|
)
|
|
$
|
(4,857.7
|
)
|
A valuation allowance is recorded when it is more-likely-than-not that some portion or all of the deferred income tax assets may not be realized. The ultimate realization of the deferred income tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions.
At December 31, 2018 and 2017, the company had domestic and foreign income tax loss carry forwards of
$226.0 million
and
$73.3 million
, respectively. These amounts primarily related to losses from the acquisition of NEX Group plc, Swapstream Limited and its affiliates, the acquisition of Pivot, Inc., losses incurred in the operation of various foreign entities and capital losses from the sales of securities. At December 31, 2018 and 2017, the company determined that it was not more-likely-than-not that deferred income tax assets related to the acquisition of Swapstream Limited and its affiliates and other deferred income tax assets created from the start-up of various foreign operations will be fully realized.
As a result, valuation allowances of
$10.7 million
and
$11.2 million
were recorded at December 31, 2018 and 2017, respectively.
The following is a summary of the company’s unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Gross unrecognized tax benefits
|
|
$
|
396.2
|
|
|
$
|
308.8
|
|
|
$
|
252.1
|
|
Unrecognized tax benefits, net of tax impacts in other jurisdictions
|
|
367.9
|
|
|
276.0
|
|
|
216.1
|
|
Unrecognized interest and penalties related to uncertain tax positions
|
|
63.5
|
|
|
34.0
|
|
|
32.7
|
|
Interest and penalties recognized on the consolidated statements of income
|
|
29.5
|
|
|
1.3
|
|
|
13.2
|
|
The company does not believe it is reasonably possible that within the next twelve months, unrecognized tax benefits will change by a significant amount.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Balance at January 1
|
|
$
|
308.8
|
|
|
$
|
252.1
|
|
|
$
|
206.9
|
|
Additions based on tax positions related to the current year
|
|
27.2
|
|
|
41.8
|
|
|
29.6
|
|
Unrecognized tax benefits acquired at date of acquisition
|
|
58.4
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
|
7.7
|
|
|
47.7
|
|
|
18.5
|
|
Reductions for tax positions of prior years
|
|
(0.3
|
)
|
|
(8.7
|
)
|
|
(2.8
|
)
|
Reductions resulting from the lapse of statutes of limitations
|
|
(3.1
|
)
|
|
(2.1
|
)
|
|
(0.1
|
)
|
Settlements with taxing authorities
|
|
(2.5
|
)
|
|
(22.0
|
)
|
|
—
|
|
Balance at December 31
|
|
$
|
396.2
|
|
|
$
|
308.8
|
|
|
$
|
252.1
|
|
The company is subject to U.S. federal income tax as well as income taxes in Illinois and multiple other state, local and foreign jurisdictions. As of
December 31, 2018
, substantially all federal and state income tax matters had been concluded through 2007 and 2006, respectively.
12. EMPLOYEE BENEFIT PLANS
Pension Plans.
CME maintains a non-contributory defined benefit cash balance pension plan for eligible employees. CME's plan provides for a pay-based credit added to the cash balance account based on age and earnings and includes salary and cash bonuses in the definition of earnings. Employees who have completed a continuous 12-month period of employment and have reached the age of
21
are eligible to participate. Participant cash balance accounts receive an interest credit equal to the greater of the one-year constant maturity yield for U.S. Treasury notes or
4.0%
. Participants become vested in their accounts after
three
years of service. The measurement date used for the plan is December 31.
The following is a summary of the change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
Balance at January 1
|
|
$
|
273.9
|
|
|
$
|
239.9
|
|
Service cost
|
|
19.1
|
|
|
18.7
|
|
Interest cost
|
|
10.5
|
|
|
10.8
|
|
Actuarial (gain) loss
|
|
(23.5
|
)
|
|
15.1
|
|
Benefits paid
|
|
(14.9
|
)
|
|
(10.6
|
)
|
Balance at December 31
|
|
$
|
265.1
|
|
|
$
|
273.9
|
|
The aggregate accumulated benefit obligation was
$240.9 million
and
$245.4 million
at
December 31, 2018
and
2017
, respectively.
The following is a summary of the change in fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Balance at January 1
|
|
$
|
348.0
|
|
|
$
|
238.8
|
|
|
$
|
217.5
|
|
Actual return on plan assets
|
|
(17.3
|
)
|
|
29.8
|
|
|
16.0
|
|
Employer contributions
|
|
—
|
|
|
90.0
|
|
|
15.0
|
|
Benefits paid
|
|
(14.9
|
)
|
|
(10.6
|
)
|
|
(9.7
|
)
|
Balance at December 31
|
|
$
|
315.8
|
|
|
$
|
348.0
|
|
|
$
|
238.8
|
|
The plan assets are classified into a fair value hierarchy in their entirety based on the lowest level of input that is significant to each asset or liability’s fair value measurement. Valuation techniques for level 2 assets use significant observable inputs such as quoted prices for similar assets, quoted market prices in inactive markets and other inputs that are observable or can be supported by observable market data.
The fair value of each major category of plan assets as of December 31 is indicated below:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
Level 2:
|
|
|
|
|
Money market funds
|
|
$
|
8.1
|
|
|
$
|
95.8
|
|
Mutual funds:
|
|
|
|
|
Fixed income
|
|
155.0
|
|
|
109.7
|
|
U.S. equity
|
|
94.4
|
|
|
83.6
|
|
Foreign equity
|
|
58.3
|
|
|
58.9
|
|
Total
|
|
$
|
315.8
|
|
|
$
|
348.0
|
|
At
December 31, 2018
and
2017
, the fair value of pension plan assets exceeded the projected benefit obligation by
$50.7 million
and
$74.1 million
, respectively, and the excess was recorded as a non-current pension asset in other assets.
CME's funding goal is to have its 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. Year-end
2018
assumptions have been used to project the assets and liabilities from
December 31, 2018
to
December 31, 2019
. The result of this projection is that estimated liabilities would not exceed the fair value of the plan assets at
December 31, 2019
. Accordingly, the company anticipates based on this projection that no additional contribution in
2019
will be necessary for it to meet its funding goal. However, the amount of the actual contribution is contingent on various factors, including the actual rate of return on the plan assets during
2019
and the
December 31, 2019
discount rate.
The components of net pension expense and the assumptions used to determine the end-of-year projected benefit obligation and net pension expense in aggregate are indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Components of Net Pension Expense:
|
|
|
|
|
|
|
Service cost
|
|
$
|
19.1
|
|
|
$
|
18.7
|
|
|
$
|
16.7
|
|
Interest cost
|
|
10.5
|
|
|
10.8
|
|
|
10.3
|
|
Expected return on plan assets
|
|
(22.1
|
)
|
|
(15.1
|
)
|
|
(15.7
|
)
|
Recognized net actuarial loss
|
|
2.7
|
|
|
2.9
|
|
|
3.2
|
|
Net Pension Expense
|
|
$
|
10.2
|
|
|
$
|
17.3
|
|
|
$
|
14.5
|
|
Assumptions Used to Determine End-of-Year Benefit Obligation:
|
|
|
|
|
|
|
Discount rate
|
|
4.40
|
%
|
|
3.70
|
%
|
|
4.30
|
%
|
Rate of compensation increase
|
|
5.00
|
|
|
5.00
|
|
|
5.00
|
|
Cash balance interest crediting rate
|
|
4.00
|
|
|
4.00
|
|
|
4.00
|
|
Assumptions Used to Determine Net Pension Expense:
|
|
|
|
|
|
|
Discount rate
|
|
3.70
|
%
|
|
4.30
|
%
|
|
4.60
|
%
|
Rate of compensation increase
|
|
5.00
|
|
|
5.00
|
|
|
5.00
|
|
Expected return on plan assets
|
|
6.50
|
|
|
6.50
|
|
|
7.50
|
|
Interest crediting rate
|
|
4.00
|
|
|
4.00
|
|
|
4.00
|
|
The discount rate for the plan was determined based on the market value of a theoretical settlement bond portfolio. This portfolio consisted of U.S. dollar denominated Aa-rated corporate bonds across the full maturity spectrum. A single equivalent discount rate was determined to align the present value of the required cash flow with that settlement value. The resulting discount rate was reflective of both the current interest rate environment and the plan's distinct liability characteristics.
The basis for determining the expected rate of return on plan assets for the plan is comprised of three components: historical returns, industry peers and forecasted return. The plan's total return is expected to equal the composite performance of the security markets over the long term. The security markets are represented by the returns on various domestic and international stock, bond and commodity indexes. These returns are weighted according to the allocation of plan assets to each market and measured individually.
The overall objective of the plan is to achieve required long-term rates of return in order to meet future benefit payments. The component of the investment policy for the plan that has the most significant impact on returns is the asset mix. The asset mix has a minimum and maximum range depending on asset class. The plan assets are diversified to minimize the risk of large losses by any one or more individual assets. Such diversification is accomplished, in part, through the selection of asset mix and investment management. The asset allocation for the plan, by asset category, at December 31 was as follows:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Fixed income
|
49.1
|
%
|
|
31.6
|
%
|
Money market funds
|
2.5
|
|
|
27.5
|
|
U.S. equity
|
29.9
|
|
|
24.0
|
|
Foreign equity
|
18.5
|
|
|
16.9
|
|
The range of target allocation percentages for
2019
is as follows:
|
|
|
|
|
|
|
|
Minimum
|
|
Maximum
|
Fixed income
|
50.0
|
%
|
|
50.0
|
%
|
U.S. large-cap equity
|
10.0
|
%
|
|
40.0
|
%
|
U.S. mid-cap equity
|
5.0
|
|
|
13.0
|
|
U.S. small-cap equity
|
5.0
|
|
|
10.0
|
|
Foreign developed equity
|
—
|
|
|
20.0
|
|
Foreign small-cap equity
|
—
|
|
|
5.0
|
|
Emerging markets equity
|
—
|
|
|
5.0
|
|
At times, the company may determine that it is necessary to place some assets in cash equivalent investments in order to pay expected plan liabilities. Given this, the actual asset allocation for the plan may not fall within the target allocation ranges from time to time.
According to the plan's investment policy, the plan is not allowed to invest in securities that compromise independence, short sales of securities directly owned by the plan, securities purchased on margin or other uses of borrowed funds, derivatives not used for hedging purposes, restricted stock or illiquid securities or any other transaction prohibited by employment laws. If the plan directly invests in short-term and long-term debt obligations, the investments are limited to obligations rated at the highest rating category by Standard & Poor's or Moody's.
The pre-tax balance and activity of actuarial losses for the pension plan, which are included in other comprehensive income (loss), for
2018
are as follows:
|
|
|
|
|
|
(in millions)
|
|
Actuarial
Loss
|
Balance at January 1
|
|
$
|
60.2
|
|
Unrecognized net loss
|
|
16.0
|
|
Recognized as a component of net pension expense
|
|
(2.7
|
)
|
Balance at December 31
|
|
$
|
73.5
|
|
The company expects to amortize
$4.6 million
of actuarial loss and prior service costs from accumulated other comprehensive income (loss) into net periodic benefit costs in
2019
.
At
December 31, 2018
, anticipated benefit payments from the plan in future years are as follows:
|
|
|
|
|
|
(in millions)
|
|
|
2019
|
|
$
|
18.5
|
|
2020
|
|
19.5
|
|
2021
|
|
20.7
|
|
2022
|
|
21.5
|
|
2023
|
|
22.1
|
|
2024-2028
|
|
120.3
|
|
Savings Plans.
CME maintains a defined contribution savings plan pursuant to Section 401(k) of the Internal Revenue Code, whereby all U.S. employees are participants and have the option to contribute to this plan. CME matches employee contributions up to
3%
of the employee's base salary and may make additional discretionary contributions.
In addition to the plan for U.S. employees, the company maintains defined contribution savings plans for employees in international locations, including employees for NEX beginning on November 3, 2018.
Aggregate expense for all of the defined contribution savings plans amounted to
$13.8 million
,
$11.8 million
and
$11.3 million
in
2018
,
2017
and
2016
, respectively.
CME Non-Qualified Plans.
CME maintains non-qualified plans, under which participants may make assumed investment choices with respect to amounts contributed on their behalf. Although not required to do so, CME invests such contributions in assets that mirror the assumed investment choices. The balances in these plans are subject to the claims of general creditors of the company and totaled
$52.7 million
and
$68.9 million
at
December 31, 2018
and
2017
respectively. Although the value of the plans is recorded as an asset in marketable securities on the consolidated balance sheets, there is an equal and offsetting liability. The investment results of these plans have no impact on net income as the investment results are recorded in equal amounts to both investment income and compensation and benefits expense. The non-qualified plans include the following:
Supplemental Savings Plan.
CME maintains a supplemental plan to provide benefits for employees who have been impacted by statutory limits under the provisions of the qualified pension and savings plan. Employees in this plan are subject to the vesting requirements of the underlying qualified plans.
Deferred Compensation Plan.
A deferred compensation plan is maintained by CME, under which eligible employees and members of the board of directors may contribute a percentage of their compensation and defer income taxes thereon until the time of distribution.
COMEX Members' Retirement Plan and Benefits.
COMEX maintains a non-qualified retirement and benefit plan under the COMEX MRRP. This plan provides benefits to certain members of the COMEX division based on long-term membership, and participation is limited to individuals who were COMEX division members prior to NYMEX's acquisition of COMEX in 1994. No new participants were permitted into the plan after the date of this acquisition. All benefits to be paid under the MRRP are based on reasonable actuarial assumptions which are based upon the amounts that are available and are expected to be available to pay benefits. There were no contributions to the plan in 2018 and 2017. Total contributions to the plan were
$3.0 million
in 2016. At
December 31, 2018
and
2017
, the obligation for the MRRP totaled
$16.5 million
and
$18.6 million
, respectively. Assets with a fair value of
$19.2 million
and
$21.6 million
have been allocated to this plan at
December 31, 2018
and
2017
, respectively, and are included in marketable securities and cash and cash equivalents on the consolidated balance sheets. The balances in this plan are subject to the claims of general creditors of COMEX.
13. COMMITMENTS
Operating Leases.
CME Group has entered into various non-cancellable operating lease agreements, with the most significant being as follows:
|
|
•
|
In connection with the NEX acquisition, we assumed the leasing arrangements associated with office space in New York and London. The New York office lease expires in October 2032, and includes options for lease term extension as well as space expansion to other floors within the building. For the two London offices, Broadgate expires in April 2019 whereas the London Fruit and Wool Exchange lease expires in April 2038, subject to a renewal option.
|
|
|
•
|
In March 2016, the company sold its datacenter and leased back a portion of the property. The sale leaseback transaction was recognized under the financing method and not as a sale leaseback arrangement. The operating lease, which has an initial lease term ending in March 2031, contains
two
consecutive renewal options for
five
years.
|
|
|
•
|
In November 2013, the company sold a building in New York and leased back a portion of the property. The operating lease, which has an initial lease term ending on December 31, 2028, contains
two
consecutive renewal options for
five
years.
|
|
|
•
|
In April 2012, the company sold two buildings in Chicago at 141 W. Jackson and leased back a portion of the property. The operating lease, which has an initial lease term ending on April 30, 2027, contains
four
consecutive renewal options for
five
years.
|
|
|
•
|
In January 2011, the company entered into an operating lease for office space in London. The initial lease term terminates on March 24, 2026, with an option to terminate without penalty in January 2021.
|
|
|
•
|
The company maintains an operating lease for its headquarters at 20 South Wacker Drive in Chicago. In January 2018, the company signed a lease extension. The new lease expires in 2032 and contains
two
consecutive renewal options for
five
years each.
|
|
|
•
|
In August 2006, the company entered into an operating lease for additional office space in Chicago. The initial lease term ends on November 30, 2023. The lease contains
two
5
-year renewal options beginning in 2023.
|
At
December 31, 2018
, future minimum payments under non-cancellable operating leases were payable as follows (in millions):
|
|
|
|
|
Year
|
|
2019
|
$
|
82.5
|
|
2020
|
76.6
|
|
2021
|
74.4
|
|
2022
|
78.7
|
|
2023
|
76.0
|
|
Thereafter
|
586.2
|
|
Total
|
$
|
974.4
|
|
Total rental expense, including equipment rental, was
$48.1 million
in
2018
,
$41.7 million
in
2017
and
$47.9 million
in
2016
.
Other Commitments.
Commitments include material contractual purchase obligations that are non-cancellable. Purchase obligations relate to advertising, licensing, hardware, software and maintenance as well as telecommunication services. At
December 31, 2018
, future minimum payments due under purchase obligations were payable as follows (in millions):
|
|
|
|
|
Year
|
|
2019
|
$
|
24.7
|
|
2020
|
19.6
|
|
2021
|
14.4
|
|
2022
|
10.2
|
|
2023
|
8.0
|
|
Thereafter
|
—
|
|
Total
|
$
|
76.9
|
|
14. 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. Eurex has appealed this decision.
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 December 31, 2018 and 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.
15. 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 its intent to terminate. CME can maintain collateral in the form of U.S. Treasury securities or irrevocable, standby letters of credit. At
December 31, 2018
, CME was contingently liable to SGX on irrevocable 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
December 31, 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 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 has an aggregate maximum payment amount of
$100.0 million
. Since its establishment, the Fund has made payments of approximately
$2.0 million
, which leaves
$98.0 million
available for future claims. If payments to participants were to exceed this amount, payments would be pro-rated. Clearing members and customers must register in advance with the company 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
December 31, 2018
.
16. CAPITAL STOCK
Shares Outstanding.
The following table presents information regarding capital stock:
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Class A common stock authorized
|
|
1,000,000
|
|
1,000,000
|
Class A common stock issued and outstanding
|
|
356,824
|
|
339,235
|
Class B-1 common stock authorized, issued and outstanding
|
|
0.6
|
|
0.6
|
Class B-2 common stock authorized, issued and outstanding
|
|
0.8
|
|
0.8
|
Class B-3 common stock authorized, issued and outstanding
|
|
1.3
|
|
1.3
|
Class B-4 common stock authorized, issued and outstanding
|
|
0.4
|
|
0.4
|
CME Group has no shares of preferred stock issued and outstanding.
Associated Trading Rights.
Members of CME, CBOT, NYMEX and COMEX own or lease trading rights which entitle them to access open outcry trading, discounts on trading fees and the right to vote on certain matters as provided for by the rules of the particular exchange and CME Group's or the subsidiaries' organizational documents. Each class of CME Group Class B common stock is associated with a membership in a specific division for trading at CME. A CME trading right is a separate asset that is not part of or evidenced by the associated share of Class B common stock of CME Group. The Class B common stock of CME Group is intended only to ensure that the Class B shareholders of CME Group retain rights with respect to the election of six members to the board of directors and approval rights with respect to the core rights described below.
Trading rights at CBOT are evidenced by Class B memberships in CBOT, at NYMEX by Class A memberships in NYMEX and at COMEX by COMEX Division Memberships. Members of CBOT, NYMEX and COMEX do not have any rights to elect members of the board of directors and are not entitled to receive dividends or other distributions on their memberships or trading permits.
Core Rights.
Holders of CME Group Class B common shares have the right to approve changes in specified rights relating to the trading privileges at CME associated with those shares. These core rights relate primarily to trading right protections, certain trading fee protections and certain membership benefit protections. Votes on changes to these core rights are weighted by class. Each class of Class B common stock has the following number of votes on matters relating to core rights: Class B-1,
six
votes per share; Class B-2,
two
votes per share; Class B-3,
one
vote per share; and Class B-4,
1/6
th of one vote per share.
The approval of a majority of the votes cast by the holders of shares of Class B common stock is required in order to approve any changes to core rights. Holders of shares of Class A common stock do not have the right to vote on changes to core rights.
Voting Rights.
With the exception of the matters reserved to holders of CME Group Class B common stock, holders of CME Group common stock vote together on all matters for which a vote of common shareholders is required. In these votes, each holder of shares of Class A or Class B common stock of CME Group has
one
vote per share.
Transfer Restrictions.
Each class of CME Group Class B common stock is subject to transfer restrictions contained in the Certificate of Incorporation of CME Group. These transfer restrictions prohibit the sale or transfer of any shares of Class B common stock separate from the sale of the associated trading rights.
Election of Directors.
The CME Group Board of Directors is currently comprised of
21
members. Holders of Class B-1, Class B-2 and Class B-3 common stock have the right to elect
six
directors, of which
three
are elected by Class B-1 shareholders,
two
are elected by Class B-2 shareholders and
one
is elected by Class B-3 shareholders. The remaining directors are elected by the Class A and Class B shareholders voting as a single class.
Dividends.
Holders of Class A and Class B common stock of CME Group are entitled to receive proportionately such dividends, if any, as may be declared by the CME Group board of directors.
CME Group Omnibus Stock Plan.
CME Group has adopted an Omnibus Stock Plan under which stock-based awards may be made to employees. A total of
40.2 million
Class A common stock shares have been reserved for awards under the plan. Awards totaling
24.2 million
shares have been granted and are outstanding or have been exercised under this plan at
December 31, 2018
(note 17).
Director Stock Plan.
CME Group has adopted a Director Stock Plan under which awards are made to non-executive directors as part of their annual compensation. A total of
625,000
Class A shares have been reserved under this plan, and approximately
383,000
shares have been awarded through
December 31, 2018
.
Employee Stock Purchase Plan.
CME Group has adopted an Employee Stock Purchase Plan (ESPP) under which employees may purchase Class A shares at
90%
of the market value of the shares using after-tax payroll deductions. A total of
500,000
Class A shares have been reserved under this plan, of which approximately
282,000
shares have been purchased through
December 31, 2018
(note 17).
17. STOCK-BASED PAYMENTS
CME Group adopted an Omnibus Stock Plan under which stock-based awards may be made to employees. A total of
40.2 million
Class A shares have been reserved for awards under the plan. Awards totaling
24.2 million
shares have been granted and are outstanding or have been exercised under the plan as of
December 31, 2018
. Awards granted generally vest over a
four
-year period, with
25%
vesting one year after the grant date and on that same date in each of the following three years.
Total compensation expense for stock-based payments and total income tax benefit recognized on the consolidated statements of income for stock-based awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Compensation expense
|
|
$
|
96.8
|
|
|
$
|
58.3
|
|
|
$
|
66.4
|
|
Income tax benefit recognized
|
|
27.5
|
|
|
42.6
|
|
|
38.6
|
|
At
December 31, 2018
, there was
$138.3 million
of total unrecognized compensation expense related to employee stock-based compensation arrangements that had not yet vested. The total unrecognized expense is expected to be recognized over a weighted average period of
2.0
years.
Stock options have not been granted since 2012. The following table summarizes stock option activity for
2018
. Aggregate intrinsic value is in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2017
|
|
572,976
|
|
|
$
|
58
|
|
|
2.7
|
|
$
|
50.3
|
|
Exercised
|
|
(175,224
|
)
|
|
66
|
|
|
|
|
|
Cancelled
|
|
(525
|
)
|
|
84
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
397,227
|
|
|
55
|
|
|
2.0
|
|
53.0
|
|
Exercisable at December 31, 2018
|
|
397,227
|
|
|
55
|
|
|
2.0
|
|
53.0
|
|
The total intrinsic value of options exercised during
2018
,
2017
and
2016
was
$17.8 million
,
$20.4 million
and
$19.9 million
, respectively.
In
2018
, the company granted
334,634
shares of restricted Class A common stock and
7,696
shares of restricted stock units. Restricted common stock and restricted stock units generally have a vesting period of
two
to
four
years. The fair value related to these grants was
$59.2 million
, which is recognized as compensation expense on an accelerated basis over the vesting period. Dividends are accrued on restricted Class A common stock and restricted stock units and are paid once the restricted stock vests. In
2018
, the company also granted
171,447
performance shares. The fair value related to these grants was
$31.1 million
, which is recognized as compensation expense on a straight-lined basis over the vesting period. The vesting of these shares is contingent on meeting stated performance or market conditions.
The following table summarizes restricted stock, restricted stock units, and performance shares activity for
2018
:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at December 31, 2017
|
1,559,231
|
|
|
$
|
116
|
|
Granted
|
513,777
|
|
|
176
|
|
Vested
|
(449,012
|
)
|
|
103
|
|
Cancelled
|
(262,768
|
)
|
|
108
|
|
Outstanding at December 31, 2018
|
1,361,228
|
|
|
144
|
|
The total fair value of restricted stock, restricted stock units, and performance shares that vested during
2018
,
2017
and
2016
was
$76.6 million
,
$66.0 million
and
$59.8 million
, respectively.
Under the ESPP, eligible employees may acquire shares of Class A common stock using after-tax payroll deductions made during consecutive offering periods of approximately six months in duration. Shares are purchased at the end of each offering period at a price of
90%
of the closing price of the Class A common stock as reported on the NASDAQ Global Select Market. Compensation expense is recognized on the dates of purchase for the discount from the closing price. In
2018
,
2017
and
2016
, a total of
22,249
,
19,936
and
19,858
shares, respectively, of Class A common stock were issued to participating employees. These shares are subject to a six-month holding period. Annual expense of
$0.4 million
for the purchase discount was recognized in
2018
,
$0.3 million
was recognized in
2017
and
$0.2 million
was recognized in
2016
.
During 2018, the board approved an increase in non-executive director compensation. In 2018, non-executive directors received a pro rata annual award of Class A common stock with a value equal to
$115,000
. Non-executive directors also could elect to receive some or all of the cash portion of their annual stipend, up to
$75,000
, in shares of stock based on the closing price at the date of distribution. As a result,
16,640
shares,
19,736
shares and
26,439
shares of Class A common stock were issued to non-executive directors during
2018
,
2017
and
2016
, respectively. These shares are not subject to any vesting restrictions. Expense of
$2.6 million
,
$2.5 million
and
$2.4 million
related to these stock-based payments was recognized for the years ended
December 31, 2018
,
2017
and
2016
, respectively. Beginning in 2019, non-executive directors will receive an annual award of Class A common stock with a value equal to
$120,000
and also may elect to receive some or all of the cash portion of their annual stipend, up to
$80,000
, in shares of stock.
18. 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 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 before reclassifications and income tax benefit (expense)
|
(0.8
|
)
|
|
(15.3
|
)
|
|
0.9
|
|
|
(2.5
|
)
|
|
(17.7
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
2.6
|
|
|
(1.2
|
)
|
|
—
|
|
|
1.4
|
|
Income tax benefit (expense)
|
0.2
|
|
|
3.2
|
|
|
0.1
|
|
|
—
|
|
|
3.5
|
|
Net current period other comprehensive income
|
(0.6
|
)
|
|
(9.5
|
)
|
|
(0.2
|
)
|
|
(2.5
|
)
|
|
(12.8
|
)
|
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 December 31, 2018
|
$
|
0.1
|
|
|
$
|
(53.8
|
)
|
|
$
|
69.7
|
|
|
$
|
(10.7
|
)
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 before reclassifications and income tax benefit (expense)
|
30.2
|
|
|
0.3
|
|
|
—
|
|
|
10.4
|
|
|
40.9
|
|
Amounts reclassified from accumulated other comprehensive income
|
(89.5
|
)
|
|
2.9
|
|
|
(1.2
|
)
|
|
—
|
|
|
(87.8
|
)
|
Income tax benefit (expense)
|
79.4
|
|
|
(1.5
|
)
|
|
0.3
|
|
|
(2.9
|
)
|
|
75.3
|
|
Net current period other comprehensive income
|
20.1
|
|
|
1.7
|
|
|
(0.9
|
)
|
|
7.5
|
|
|
28.4
|
|
Balance at December 31, 2017
|
$
|
0.6
|
|
|
$
|
(36.1
|
)
|
|
$
|
58.0
|
|
|
$
|
(8.2
|
)
|
|
$
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Investment Securities
|
|
Defined Benefit Plans
|
|
Derivative Investments
|
|
Foreign Currency Translation
|
|
Total
|
Balance at December 31, 2015
|
$
|
(95.0
|
)
|
|
$
|
(36.6
|
)
|
|
$
|
59.6
|
|
|
$
|
(8.8
|
)
|
|
$
|
(80.8
|
)
|
Other comprehensive income before reclassifications and income tax benefit (expense)
|
170.0
|
|
|
(5.1
|
)
|
|
—
|
|
|
(8.2
|
)
|
|
156.7
|
|
Amounts reclassified from accumulated other comprehensive income
|
(48.7
|
)
|
|
3.2
|
|
|
(1.2
|
)
|
|
—
|
|
|
(46.7
|
)
|
Income tax benefit (expense)
|
(45.8
|
)
|
|
0.7
|
|
|
0.5
|
|
|
1.3
|
|
|
(43.3
|
)
|
Net current period other comprehensive income
|
75.5
|
|
|
(1.2
|
)
|
|
(0.7
|
)
|
|
(6.9
|
)
|
|
66.7
|
|
Balance at December 31, 2016
|
$
|
(19.5
|
)
|
|
$
|
(37.8
|
)
|
|
$
|
58.9
|
|
|
$
|
(15.7
|
)
|
|
$
|
(14.1
|
)
|
19. 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, other than level 1 inputs, such as quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are directly observable.
|
|
|
•
|
Level 3 inputs consist of unobservable inputs which are derived and cannot be corroborated by market data or other entity-specific inputs.
|
Level 1 assets and liabilities generally include investments in publicly traded mutual funds, equity securities, corporate debt securities and certain debt notes 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.
Assets and liabilities included in level 2 generally consist of asset-backed securities, derivative contracts, certain privately-held equity investments and debt notes. Asset-backed securities are 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. Derivative contracts, including a foreign currency cross-currency swap on euro-based debt and a hedge to fix the exchange rate on maturing principal and interest payments for the Yen-based debt, were measured at fair value using standard valuation models with market-based observable inputs including forward exchange rates and interest rate curves. 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. The derivative contracts outstanding are recognized within other current assets and other current liabilities on the consolidated balance sheets.
Level 3 liabilities include contingent consideration. The contingent consideration liabilities are considered level 3 liabilities because management used significant unobservable inputs, including discount rates of
4%
. The fair value of the liabilities are determined using a discounted cash flow model to calculate the present value of the expected future payouts. Significant changes in these observable inputs may have a material impact on the fair value of the contingent consideration liabilities as these amounts affect the timing and extent of cash flows under contract. Changes to the discount rate assumption do not have a material impact on the fair value of the liability. Under the valuation model, the estimated fair values ranged from
$0.4 million
to
$17.5 million
, depending on assumptions used. Level 3 assets also include certain intangible assets, fixed assets and privately-held equity investments that were impaired. Changes in the fair value of the contingent consideration flow through the income statement.
Recurring Fair Value Measurements.
Financial assets and liabilities recorded at fair value on the consolidated balance sheets as of
December 31, 2018
and
2017
were classified in their entirety based on the lowest level of input that was significant to each asset or liability's fair value measurement.
Financial Instruments Measured at Fair Value on a Recurring Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets at Fair Value:
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
18.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18.1
|
|
Municipal bonds
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Mutual funds
|
|
52.7
|
|
|
—
|
|
|
—
|
|
|
52.7
|
|
Equity securities
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Asset-backed securities
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Total Marketable Securities
|
|
72.6
|
|
|
0.3
|
|
|
—
|
|
|
72.9
|
|
Derivative Contracts
|
|
—
|
|
|
37.7
|
|
|
—
|
|
|
37.7
|
|
Total Assets at Fair Value
|
|
$
|
72.6
|
|
|
$
|
38.0
|
|
|
$
|
—
|
|
|
$
|
110.6
|
|
Liabilities at Fair Value:
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
—
|
|
|
$
|
6.7
|
|
|
$
|
—
|
|
|
$
|
6.7
|
|
Contingent consideration
|
|
—
|
|
|
—
|
|
|
6.7
|
|
|
6.7
|
|
Total Liabilities at Fair Value
|
|
$
|
—
|
|
|
$
|
6.7
|
|
|
$
|
6.7
|
|
|
$
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets at Fair Value:
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
20.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20.8
|
|
Mutual funds
|
|
68.9
|
|
|
—
|
|
|
—
|
|
|
68.9
|
|
Equity securities
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Asset-backed securities
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Total Marketable Securities
|
|
89.8
|
|
|
0.3
|
|
|
—
|
|
|
90.1
|
|
Total Assets at Fair Value
|
|
$
|
89.8
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
90.1
|
|
There were no other level 3 assets or liabilities valued at fair value on a recurring basis during
2018
and
2017
.
Non-Recurring Fair Value Measurements.
During 2018, the company recognized mark-to-market increases in fair value of
$82.6 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
$92.6 million
and were considered level 2 and nonrecurring.
During 2018, the company recognized impairment charges totaling
$13.4 million
on the intangible assets and certain fixed assets related to our operations of Pivot, Inc as well as other software assets. The fair value of the intangible assets and fixed assets were estimated to be zero at the impairment date. During 2018, the company also recognized impairment charges of
$4.7 million
related to some of its privately-held equity investments. The fair values of the investments were estimated to be zero at the impairment date. All of these 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 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 below that are classified as level 1 under the fair value hierarchy were estimated using quoted market prices. The fair values below that are classified as level 2 under the fair value hierarchy were estimated using quoted market prices in inactive markets. The fair values of debt facilities that were classified as level 3 under the fair value hierarchy were estimated based on assumptions made by management regarding expectations of future settlement of the debt.
At
December 31, 2018
, the fair values (in U.S. dollar equivalents) were as follows:
|
|
|
|
|
|
|
|
(in millions)
|
|
Fair Value
|
|
Level
|
€350.0 million fixed rate notes due March 2019
|
|
$
|
402.6
|
|
|
Level 1
|
¥19.1 billion term loan due March 2019
|
|
173.5
|
|
|
Level 3
|
$750.0 million fixed rate notes due September 2022
|
|
746.6
|
|
|
Level 2
|
€15.0 million fixed rate notes due May 2023
|
|
19.0
|
|
|
Level 2
|
$750.0 million fixed rate notes due March 2025
|
|
726.0
|
|
|
Level 2
|
$500.0 million fixed rate notes due June 2028
|
|
504.7
|
|
|
Level 2
|
$750.0 million fixed rates notes due September 2043
|
|
881.3
|
|
|
Level 2
|
$700.0 million fixed rate notes due June 2048
|
|
711.0
|
|
|
Level 2
|
Commercial paper
|
|
389.9
|
|
|
Level 3
|
20. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of shares of all classes of 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 stock options and stock awards were as follows for the years presented:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Stock options
|
—
|
|
|
—
|
|
|
171
|
|
Stock awards
|
79
|
|
|
104
|
|
|
138
|
|
Total
|
79
|
|
|
104
|
|
|
309
|
|
The following table presents the earnings per share calculation for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Net Income Attributable to CME Group (in millions)
|
$
|
1,962.2
|
|
|
$
|
4,063.4
|
|
|
$
|
1,534.1
|
|
Weighted Average Common Shares Outstanding (in thousands):
|
|
|
|
|
|
Basic
|
342,344
|
|
|
338,707
|
|
|
337,496
|
|
Effect of stock options and stock awards
|
1,393
|
|
|
1,519
|
|
|
1,470
|
|
Diluted
|
343,737
|
|
|
340,226
|
|
|
338,966
|
|
Earnings per Common Share Attributable to CME Group:
|
|
|
|
|
|
Basic
|
$
|
5.73
|
|
|
$
|
12.00
|
|
|
$
|
4.55
|
|
Diluted
|
5.71
|
|
|
11.94
|
|
|
4.53
|
|
21. QUARTERLY INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year to Date
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,109.0
|
|
|
$
|
1,059.6
|
|
|
$
|
904.2
|
|
|
$
|
1,236.6
|
|
|
$
|
4,309.4
|
|
Operating income
|
|
740.9
|
|
|
666.9
|
|
|
549.9
|
|
|
649.9
|
|
|
2,607.6
|
|
Non-operating income (expense)
|
|
47.8
|
|
|
89.9
|
|
|
11.9
|
|
|
20.6
|
|
|
170.2
|
|
Income before income taxes
|
|
788.7
|
|
|
756.8
|
|
|
561.8
|
|
|
670.5
|
|
|
2,777.8
|
|
Net income attributable to CME Group
|
|
598.8
|
|
|
566.1
|
|
|
411.8
|
|
|
385.5
|
|
|
1,962.2
|
|
Earnings per common share attributable to CME Group:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.76
|
|
|
$
|
1.67
|
|
|
$
|
1.21
|
|
|
$
|
1.10
|
|
|
$
|
5.73
|
|
Diluted
|
|
1.76
|
|
|
1.66
|
|
|
1.21
|
|
|
1.09
|
|
|
5.71
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
929.3
|
|
|
$
|
924.6
|
|
|
$
|
890.8
|
|
|
$
|
900.0
|
|
|
$
|
3,644.7
|
|
Operating income
|
|
600.9
|
|
|
605.2
|
|
|
567.6
|
|
|
536.9
|
|
|
2,310.6
|
|
Non-operating income (expense)
|
|
106.1
|
|
|
32.1
|
|
|
39.7
|
|
|
37.8
|
|
|
215.7
|
|
Income before income taxes
|
|
707.0
|
|
|
637.3
|
|
|
607.3
|
|
|
574.7
|
|
|
2,526.3
|
|
Net income attributable to CME Group
|
|
399.8
|
|
|
415.8
|
|
|
308.6
|
|
|
2,939.2
|
|
|
4,063.4
|
|
Earnings per common share attributable to CME Group:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
1.23
|
|
|
$
|
0.91
|
|
|
$
|
8.67
|
|
|
$
|
12.00
|
|
Diluted
|
|
1.18
|
|
|
1.22
|
|
|
0.91
|
|
|
8.63
|
|
|
11.94
|
|
22. 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 that require disclosure.