VGI Partners - CME: Current Conditions Highly Favourable

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The pursuing conception was excerpted from this money letter.


CME is simply a business apt acquainted to you, being 1 we person owned successful our world strategy since 2008 and which was our largest VG1 position astatine nan extremity of 2022.

CME operates futures and derivatives exchanges, including nan Chicago Mercantile Exchange, nan New York Mercantile Exchange, nan Chicago Board of Trade, and nan Dow Jones Index Services. On apical of this, CME besides owns different cardinal assets related to overseas speech trading & infrastructure and a strategical shareholding successful Standard & Poor’s (S&P) Index business.

The cardinal driver of trading activity for CME is successful its liking complaint derivatives products, wherever it has an effective monopoly successful nan speech trading of liking complaint derivatives successful nan United States, pinch benchmark products crossed nan entirety of nan liking complaint curve. Demand for liking complaint derivatives is driven by volatility successful liking complaint markets, whose effect is compounded by nan number of bonds held by those looking to negociate liking complaint consequence and, by extension, marketplace liquidity.

The beneath floor plan of mean regular volumes of liking complaint derivatives and US Federal indebtedness held by nan nationalist illustrates nan highly beardown narration nan size of nan US Treasury marketplace and volumes growth, though location are deviations astir this chiefly astir Fed involution (for example, astatine nan commencement of nan pandemic, volumes were suppressed by an tremendous magnitude of Quantitative Easing (QE) and efficaciously zero liking rates which reduced nan request for hedging products).

Size of nan US Federal Debt Held by nan Public vs Average Daily Volume of CME Interest Rate Contracts

Size of nan US Federal Debt Held by nan Public vs Average Daily Volume of CME Interest Rate Contracts

Source: CME Group, Congressional Budget Office.

We expect nan maturation successful nan size of nan US Treasury market, peculiarly successful narration to privately held US treasuries arsenic nan Fed undergoes a equilibrium expanse unwind, to stay a powerful underpinning of CME’s liking complaint derivatives business.

As such, we are precocious condemnation that nan reversal of QE and nan normalisation of enslaved marketplace conditions will supply a important tailwind for CME’s trading activity successful nan adjacent term, while its nett liking separator should use from greater finance income connected separator collateral. Other derivatives complexes, including equity and energy, are apt to besides use from a normalisation of marketplace conditions and we statement that incremental futures contracts make an highly precocious drop-through complaint to rate net owed to CME’s beardown operating leverage arsenic a chiefly integer platform.

As a result, we judge existent conditions are highly favourable for CME’s liking complaint derivatives business, different derivatives complexes and nett liking separator and we spot important upside consequence to statement net and free cashflow estimates. At writing, CME is trading astatine a CY23 PE of 20x, free cashflow output of 6% and dividend output of 5%.


This newsletter is provided by Regal Partners Marketing Services Pty Ltd (ACN 637 448 072) (Regal Partners Marketing), a firm authorised typical of Attunga Capital Pty Ltd (ABN 96 117 683 093) (AFSL 297385) (Attunga). Regal Partners Marketing and Attunga are businesses of Regal Partners Limited (ABN 33 129 188 450) (together, referred to arsenic Regal Partners). The Regal Partners Marketing Financial Services Guide tin beryllium recovered connected nan Regal Partners Limited website aliases is disposable connected request. VGI Partners, is simply a business of Regal Partners Limited, which is nan finance head of VGI Partners Global Investments Limited (VG1).

The accusation successful this archive (Information) has been prepared for wide accusation purposes only and without taking into relationship immoderate recipient’s finance objectives, financial business aliases peculiar circumstances (including financial and taxation position). The Information does not (and does not intend to) incorporate a proposal aliases connection of sentiment intended to beryllium finance proposal aliases to power a determination to woody pinch immoderate financial merchandise nor does it represent an offer, inducement aliases committedness by VG1 aliases Regal Partners.

It is nan sole work of nan recipient to see nan risks connected pinch immoderate finance strategy contained successful nan Information. None of VG1, Regal Partners, their related bodies firm nor immoderate of their respective directors, employees, officers aliases agents judge immoderate liability for immoderate nonaccomplishment aliases harm arising straight aliases indirectly from nan usage of each aliases immoderate portion of nan Information. Neither VG1 nor Regal Partners represents aliases warrants that nan Information successful this archive is accurate, complete aliases up to day and accepts nary liability if it is not.

Past performance

The humanities financial accusation and capacity figures fixed successful this archive are fixed for schematic purposes only and should not beryllium relied upon arsenic (and are not) an denotation of VG1 aliases Regal Partners’ views connected nan early capacity of VG1 aliases different Funds aliases strategies managed by Regal Partners aliases its related bodies corporate. You should statement that past capacity of VG1 aliases Funds aliases strategies managed by Regal Partners aliases its related bodies firm cannot beryllium relied upon arsenic an parameter of (and supply nary guidance arsenic to) early performance.

Forward-looking statements

This archive contains definite "forward-looking statements" that are based connected management’s beliefs, assumptions and expectations and connected accusation presently disposable to management. Forward-looking statements tin mostly beryllium identified by nan usage of forward-looking words specified as, “expect”, “anticipate”, “likely”, “intend”, “should”, “could”, “may”, “predict”, “plan”, “propose”, “will”, “believe”, “forecast”, “estimate”, “target” “outlook”, “guidance” and different akin expressions. Indications of, and guidance aliases outlook on, early net aliases financial capacity are besides forward-looking statements. You are cautioned not to spot undue reliance connected forward-looking statements. Any specified statements, opinions and estimates successful this archive speak only arsenic of nan day of this archive and are based connected assumptions and contingencies and are taxable to alteration without notice, arsenic are statements astir marketplace and manufacture trends, projections, guidance and estimates. Forward-looking statements are provided arsenic a wide guideline only. The forward-looking statements contained successful this archive are not indications, guarantees aliases predictions of early capacity and impact known and chartless risks and uncertainties and different factors, galore of which are beyond nan power of VG1 aliases Regal Partners, and whitethorn impact important elements of subjective judgement and assumptions arsenic to early events which whitethorn aliases whitethorn not beryllium correct. There tin beryllium nary assurance that existent outcomes will not disagree materially from these forward-looking statements. No representation, warranty aliases assurance (express aliases implied) is fixed aliases made successful narration to immoderate forward-looking connection by immoderate personification (including VG1, Regal Partners, their related bodies firm aliases immoderate of their respective directors, officers, employees, agents aliases advisers). In particular, nary representation, warranty aliases assurance (express aliases implied) is fixed that nan occurrence of nan events expressed aliases implied successful immoderate forward-looking statements successful this archive will really occur. Except arsenic required by rule aliases regulation, VG1 and Regal Partners disclaim immoderate responsibility aliases undertaking to update forward-looking statements successful this archive to bespeak immoderate changes successful expectations successful narration to immoderate forward-looking connection aliases alteration successful events, circumstances aliases conditions connected which immoderate connection is based.

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