Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

•	Executive Summary: Includes an overview of our business; current economic, competitive and regulatory trends relevant to our business; our current business strategy; and our primary sources of operating and non-operating revenues and expenses.

•	Critical Accounting Policies: Provides an explanation of accounting policies which may have a significant impact on our financial results and the estimates, assumptions and risks associated with those policies.

•	Recent Accounting Pronouncements: Includes an evaluation of recent accounting pronouncements and the potential impact of their future adoption on our financial results.

•	Results of Operations: Includes an analysis of our 2019 and 2018 financial results and a discussion of any known events or trends which are likely to impact future results.

•	Liquidity and Capital Resources: Includes a discussion of our future cash requirements, capital resources, significant planned expenditures and financing arrangements.

On November 2, 2018, we completed our acquisition of NEX Group plc (NEX). The following Management's Discussion and Analysis of Financial Condition and Results of Operations includes the financial results of NEX beginning on November 3, 2018.

References in this discussion and analysis to “we” and “our” are to CME Group Inc. (CME Group) and its consolidated subsidiaries, collectively. References to “exchange” are to 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), collectively, unless otherwise noted.

EXECUTIVE SUMMARY

Business Overview

CME Group, a Delaware stock corporation, is the holding company for CME, CBOT, NYMEX, COMEX, NEX and their respective subsidiaries. The holding company structure is designed to provide strategic and operational flexibility. CME Group's Class A common stock is listed on the NASDAQ Global Select Market (NASDAQ) under the ticker symbol "CME."

Our exchange consists of designated contract markets for the trading of futures and options contracts. We also clear futures, options and swaps contracts through our clearing house. Futures contracts, options contracts and swaps contracts provide investors with vehicles for protecting against, and potentially profiting from, price changes in financial instruments and physical commodities.

We are a global company with customer access available virtually all over the world. Our customers consist of professional traders, financial institutions, individual and institutional investors, major corporations, manufacturers, producers, governments and central banks. Customers include both members of the exchange and non-members.

We offer our customers the opportunity to trade futures contracts and options contracts on a range of products including those based on interest rates, equity indexes, foreign exchange, agricultural commodities, energy and metals. Through our cash markets business, we offer fixed income trading through BrokerTec and foreign currency trading through EBS. Our products provide a means for hedging, speculating and allocating assets. We identify new products by monitoring economic trends and their impact on the risk management and speculative needs of our existing and prospective customers.

Most of our products are available for trading through our electronic trading platforms. These execution facilities offer our customers immediate trade execution and price transparency. In addition, trades can be executed through privately negotiated transactions that are cleared and settled through our clearing house.

We also provide optimization services that deliver transaction lifecycle management and information services to help our customers optimize their capital, mitigate their risk and reduce operational costs. Optimization services includes Traiana, TriOptima and Reset.

Our clearing house clears, settles and guarantees futures and options contracts traded through our exchanges, in addition to cleared swaps products. Our clearing house's performance guarantee is an important function of our business. Because of this guarantee, our customers do not need to evaluate the credit of each potential counterparty or limit themselves to a selected set of counterparties. This flexibility increases the potential liquidity available for each trade. Additionally, the substitution of our clearing house as the counterparty to every transaction allows our customers to establish a position with one party and offset the

position with another party. This contract offsetting process provides our customers with flexibility in establishing and adjusting positions and provides for collateral and margining efficiencies. Certain BrokerTec and EBS contracts are cleared at third-party clearing houses.

Business Trends

Economic Environment. Our customers continue to use our markets as an effective and transparent means to manage risk and meet their investment needs. Trading activity in our centralized markets has fluctuated due to the ongoing uncertainty in the financial markets caused by the United States and European credit crises, fluctuations in the availability of credit, variations in the amount of assets under management as well as the Federal Reserve Bank’s interest rate policy and quantitative easing. We continue to maintain high quality and diverse products as well as various clearing and market data services which support our customers in any economic environment.

Competitive Environment. Our industry is competitive and we continue to encounter competition in all aspects of our business. We expect competition to continue to intensify, especially in light of ongoing regulatory reform in the financial services industry. Competition is influenced by our brand and reputation; the efficiency and security of our settlement, clearing and support services; depth and liquidity of our markets; diversity of product offerings including frequency and quality of new product development and innovative services; our ability to position and expand upon existing products to address changing market needs; efficient and seamless customer experience; transparency, reliability, anonymity and security of transaction processing; the regulatory environment; connectivity, accessibility, flexibility in execution methods and distribution; technology capability and innovation, as well as overall transaction costs. We believe we are very well positioned with respect to these factors. Our asset classes contain products designed to address differing risk management needs, and customers are able to achieve operational and capital efficiencies by accessing our diverse products through our platforms and our clearing house. We face competition from other futures, securities and securities option exchanges; clearing organizations; swap execution facilities; alternative trade execution facilities; technology firms, including market data distributors and electronic trading system developers; and others. As markets continue to evolve, we will continue to adapt our trading technology and clearing services to meet the needs of our customers. The competitive environment to which we are subject is discussed in "Item 1. Business" on page 9.

Regulatory Environment. Exchange-traded derivatives have historically been subject to extensive regulation. Developments in the regulatory environment have the potential to significantly impact our business. Compliance with regulations may require us and our customers to dedicate significant financial and operational resources which could adversely affect our profitability. The regulatory environment to which we are subject is discussed in "Item 1. Business" on page 10.

Business Strategy

Our strategy focuses on maximizing futures and options growth globally, diversifying our business and revenues, and delivering unparalleled customer efficiencies and operational excellence. This strategy allows us to continue to develop into a more broadly diversified financial exchange that provides trading and clearing solutions across a wide range of products and asset classes. Our strategic initiatives are discussed in "Item 1. Business" on page 7.

Revenues

Clearing and transaction fees. A majority of our revenue is derived from clearing and transaction fees, which include electronic trading fees, surcharges for privately negotiated transactions and other volume-related charges for exchange-traded and over-the-counter contracts. Because clearing and transaction fees are assessed on a per-contract or notional value basis, revenues and profitability fluctuate with changes in contract volume. In addition to the business trends noted earlier, our contract volume, and consequently our revenues, tend to increase during periods of economic and geopolitical uncertainty as our customers seek to manage their exposure to, or speculate on, the market volatility resulting from that uncertainty.

While volume has the most significant impact on our clearing and transaction fees revenue, there are four other factors that also influence this source of revenue:

•	rate structure;

•	product mix;

•	venue, and

•	the percentage of trades executed by customers who are members compared with non-member customers.

Rate structure. Customers benefit from volume discounts and limits on fees as part of our effort to increase liquidity in certain products. We offer various incentive programs to promote trading and clearing in various products and geographic locations.

We may periodically change fees, volume discounts, fee limits and member discounts, perhaps significantly, based on our review of operations and the business environment.

Product mix. We offer exchange-traded futures and options contracts as well as cleared-only interest rate swap contracts. Through our acquisition of NEX, we also offer foreign exchange spot and forward contracts and fixed income products. Rates are varied by product in order to optimize revenue on existing products and to encourage contract volume upon introduction of new products.

Venue. Our exchange and platforms are an international marketplace that brings together buyers and sellers mainly through our electronic trading as well as through open outcry trading and privately negotiated transactions. Any customer who is guaranteed by a clearing firm and who agrees to be bound by our exchange rules is able to obtain direct access to our CME electronic platforms. Open outcry trading is conducted exclusively by our members, who may execute trades on behalf of customers or for themselves.

Typically, customers submitting trades through our electronic platforms are charged fees for using the platforms in addition to the fees assessed on all transactions executed on our exchange. Customers entering into privately negotiated transactions also incur additional charges beyond the fees assessed on other transactions.

Member/non-member mix. Generally, member customers are charged lower fees than our non-member customers. Holding all other factors constant, revenue decreases if the percentage of trades executed by members increases, and increases if the percentage of non-member trades increases.

Clearing and transaction fees for cash markets business. Our cash markets business provides matching services whereby we match a buyer and seller of financial instruments to allow both parties to complete the trade bilaterally or through a third-party clearing house. We are not involved in the settlement of the contract but charge a transaction fee generally based on volume or notional value of the trade for providing the matching service. The cash markets business also includes BrokerTec Americas, which generates revenue from a matched principal business. This business serves as a fully matched counterparty to offsetting positions entered into by clients on its electronic trading platform to facilitate anonymity and access to clearing and settlement. Revenue is generated from this business generally on a transaction fee basis.

Other sources. Revenue is also derived from other sources including market data and information services and other various services related to our exchange operations.

Market data and information services. We receive market data and information services revenue from the dissemination of our market data to subscribers. Subscribers can obtain access to our market data services either directly or through third party distributors.

Our service offerings include access to real-time, delayed and end-of-day quotations, trade and summary market data for our products and other data sources. Users of our basic service receive real-time quotes and pay a flat monthly fee for each screen, or device, displaying our market data. Alternatively, customers can subscribe to market data provided on a limited group of products. The fee for this service is also a flat rate per month.

Pricing for our market data services is based on the value of the service provided and the price of comparable services offered by our competitors. Increases or decreases in our market data and information services revenue are influenced by changes in our price structure and incentive programs for existing market data offerings, introduction of new market data services and changes in the number of devices in use. General economic factors that affect the financial services industry, which constitutes our primary customer base, also influence revenue from our market data services.

Other revenues. Other revenue includes access and communication fees. Access and communication fees are connectivity fees charged to members and clearing firms that utilize our various telecommunications networks and communications services. Our communication services include our co-location program as well as the connectivity charges to customers of the CME Globex platform. Access fee revenue varies depending on the type of connection provided to customers.

Other revenues include revenues from our optimization services, which include fees for risk management and information services for the over-the-counter markets, including portfolio reconciliation and post-trade processing. Revenue earned from these services is typically generated through subscriptions or transaction fees.

Other revenues also include fees for post-trade services, fees for collateral management, equity subscription fees and fees for trade order routing through agreements from various strategic relationships as well as other services to members and clearing firms.

Expenses

The majority of our expenses do not vary directly with changes in our contract volume. However, licensing and other fee agreements can vary directly with certain equity, energy and swap volumes as well as the majority of our employee bonuses vary directly with overall contract volume.

Compensation and benefits. Compensation and benefits expense is our most significant expense and includes employee wages, bonuses, stock-based compensation, benefits and employer taxes. Changes in this expense are driven by fluctuations in the number of employees, increases in wages as a result of inflation or labor market conditions, changes in rates for employer taxes and other cost increases affecting benefit plans. In addition, this expense is affected by the composition of our workforce. The expense associated with our bonus and stock-based compensation plans can also have a significant impact on this expense category.

The bonus component of our compensation and benefits expense is based on our financial performance. Under the performance criteria of our annual incentive plans, the bonus funded under the plans is based on achieving certain financial performance targets established by the compensation committee of our board of directors. The compensation committee has discretion to make equitable adjustments to the cash earnings performance calculation to reflect effects of unplanned operating results or capital expenditures to meet intermediate- to long-term growth opportunities.

In general, stock-based compensation is a non-cash expense related to restricted stock and performance share grants. Stock-based compensation varies depending on the quantity and fair value of awards granted. The fair value of restricted stock awards and other performance share grants is based on either the share price on the date of the grant or a model of expected future stock prices.

Professional fees and outside services. This expense includes fees for consulting services received on strategic and technology initiatives; regulatory and other compliance matters; temporary labor as well as legal and accounting fees. This expense may fluctuate as a result of changes in services required to complete initiatives, handle legal proceedings and comply with regulatory and compliance requirements.

Depreciation and amortization. Depreciation and amortization expense results from the depreciation of long-lived assets such as buildings, leasehold improvements, furniture, fixtures and equipment. This expense also includes the amortization of purchased and internally developed software.

Amortization of purchased intangibles. Amortization of purchased intangibles includes amortization of intangible assets obtained in our acquisitions of CBOT Holdings, Inc., NYMEX Holdings, Inc. and NEX as well as other asset and business acquisitions. Intangible assets subject to amortization consist primarily of clearing firm, market data and other customer relationships.

Other expenses. We incur additional ongoing expenses for communications, technology support services and various other activities necessary to support our operations.

•

Technology expense consists of costs related to maintenance of the hardware and software required to support our technology. It also includes costs for network connections for our electronic platforms and some market data customers; telecommunications costs of our exchange, and fees paid for access to external market data. This expense may be driven by system capacity, functionality and redundancy requirements. It also may be impacted by growth in electronic contract volume and changes in the number of telecommunications hubs and connections which allow customers outside the United States to access our electronic platforms directly.

•	Licensing and other fee agreements expense includes license fees paid as a result of contract volume in equity index products. This expense also includes royalty fees and broker rebates on energy and metals products as well as revenue sharing on cleared swaps contracts and some new product launches. This expense fluctuates with changes in contract volumes as well as changes in fee structures.

•

Other expenses include occupancy and building operations expenses including rent, maintenance, real estate taxes, utilities and other related costs related to leased property in Chicago, New York, the United Kingdom, India as well as other smaller locations throughout the world. Other expenses also include marketing and travel-related expenses as well as general and administrative costs. Marketing, advertising and public relations expense includes media, print and other advertising costs, as well as costs associated with our product promotion. Other expenses also include litigation and customer settlements, impairment charges on operating assets, gains and losses on disposals of certain operating assets, and foreign currency transaction gains and losses resulting from changes in exchange rates on certain foreign monetary assets and liabilities.

Non-Operating Income and Expenses

Income and expenses incurred through activities outside of our core operations are considered non-operating. These activities include non-core investing and financing activities.

•

Investment income includes income from short-term investment of clearing firms' cash performance bonds and guaranty fund contributions as well as excess operating cash; interest income and realized gains and losses from our marketable securities; realized gains and losses as well as dividend income from our strategic equity investments, and gains and losses on trading securities in our non-qualified deferred compensation plans. Investment income is influenced by market interest rates, changes in the levels of cash performance bonds deposited by clearing firms, the amount of dividends distributed by our strategic investments and the availability of funds generated by operations.

•	Interest and other borrowing costs expense includes charges associated with various short-term and long-term funding facilities, including commitment fees on lines of credit agreements.

•	Equity in net earnings (losses) of unconsolidated subsidiaries includes income and losses from our investments in S&P/Dow Jones Indices LLC (S&P/DJI), Dubai Mercantile Exchange and Bursa Malaysia Derivatives Berhad.

•	Other income (expense) includes expenses related to the distribution of a portion of interest earned on performance bond collateral reinvestment to the clearing firms, gains and losses on derivative contracts as well as other various income and expenses outside our core operations.

CRITICAL ACCOUNTING POLICIES

The notes to our consolidated financial statements include disclosure of our significant accounting policies. In establishing these policies within the framework of accounting principles generally accepted in the United States, management must make certain assessments, estimates and choices that will result in the application of these principles in a manner that appropriately reflects our financial condition and results of operations. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to affect our financial position and operating results. While all decisions regarding accounting policies are important, there are certain accounting policies that we consider to be critical. These critical policies, which are presented in detail in the notes to our consolidated financial statements, relate to the valuation of financial instruments, goodwill and intangible assets, revenue recognition, income taxes and internal use software costs.

Valuation of financial instruments. Fair value is defined as the price 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, or an exit price. We have categorized financial instruments measured at fair value into the following three-level fair value hierarchy based upon the level of judgment associated with the inputs used to measure the fair value:

•	Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

•	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 are unobservable and reflect management’s best estimate of what market participants would use in pricing the asset or liability. Assets and liabilities carried at level 3 fair value generally include assets and liabilities with inputs that require management’s judgment.

For further discussion regarding the fair value of financial assets and liabilities, see note 19 of the notes to the consolidated financial statements.

Goodwill and intangible assets. We review goodwill for impairment on a quarterly basis and whenever events or circumstances indicate that its carrying value may not be recoverable. Goodwill may be tested 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 the use of valuation techniques that rely on significant estimates and assumptions. These estimates and assumptions may include forecasted revenue growth rates; forecasted operating margins; risk-adjusted discount rates; forecasted economic and market conditions, and industry multiples. We base our fair value estimates on assumptions we believe to be reasonable given the information that is available to us at the time of our assessment; however, actual future results may differ significantly from those estimates. Under certain favorable circumstances, goodwill may be reviewed qualitatively for indications of impairment without utilizing valuation techniques to estimate fair value. The qualitative assessment of goodwill may rely on significant assumptions about forecasts of revenue growth, operating margins and economic conditions as well as overall market and industry-specific trends.

We also review indefinite-lived intangible assets on a quarterly basis or more frequently when events and circumstances indicate that their carrying values may not be recoverable. Indefinite-lived intangible assets may be tested quantitatively for

impairment by comparing their carrying values to their estimated fair values. Estimating the fair value of indefinite-lived intangible assets involves the use of valuation techniques that rely on significant estimates and assumptions. These estimates and assumptions may include forecasted revenue growth rates, forecasted allocations of expense and risk-adjusted discount rates. We base our fair value estimates on assumptions we believe to be reasonable given the information that is available to us at the time of our assessment; however, actual future results may differ significantly from those estimates. Similar to goodwill, under certain favorable circumstances, indefinite-lived intangible assets may be reviewed qualitatively for indications of impairment without utilizing valuation techniques to estimate fair value. The qualitative assessment of indefinite-lived intangible assets may rely on significant assumptions about forecasts of revenue growth, operating margins and economic conditions as well as overall market and industry-specific trends.

Intangible assets subject to amortization are also assessed for impairment on a quarterly basis or more frequently 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.

Revenue recognition. A significant portion of our revenue is derived from the clearing and transaction fees we assess on each contract executed through our trading venues and cleared through our clearing house. Clearing and transaction fees are recognized as revenue when a buy and sell order are matched and when the trade is cleared. On occasion, the customer's exchange trading privileges may not be properly entered by the clearinrg firm and incorrect fees are charged for the transactions in the affected accounts. When this information is corrected within the time period allowed by the exchange, a fee adjustment is provided to the clearing firm. An accrual is established for estimated fee adjustments to reflect corrections to customer exchange trading privileges. The accrual is based on the historical pattern of adjustments processed as well as specific adjustment requests.

Income taxes. Calculation of the income tax provision includes an estimate of the income taxes that will be paid for the current year as well as an estimate of income tax liabilities or benefits deferred into future years. Deferred tax assets are reviewed to determine if they will be realized in future periods. To the extent it is determined that some deferred tax assets may not be fully realized, the assets are reduced to their realizable value by a valuation allowance. The calculation of our tax provision involves uncertainty in the application of complex tax regulations and we occasionally may consult with relevant tax authorities or engage third party expertise where appropriate. We recognize potential liabilities for anticipated tax audit issues in the United States and other applicable foreign tax jurisdictions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken or expected to be taken. If the actual obligation of these amounts varies from our estimate, our income tax provision would be reduced or increased at the time that determination is made. This determination may not be known for several years. Past tax audits have not resulted in tax adjustments that resulted in a material change to the income tax provision in the year the audit was completed. The effective tax rate, defined as the income tax provision as a percentage of income before income taxes, will vary from year to year based on changes in tax jurisdictions, tax rates and regulations. In addition, the effective tax rate will vary with changes to income that are not subject to income tax and changes in expenses or losses that are not deductible, such as the utilization of foreign net operating losses.

Internal use software costs. Certain internal and external costs that are incurred in connection with developing or obtaining computer software for internal use are capitalized. We also enter into software hosting arrangements for software projects maintained in the cloud. Software development costs incurred during the planning or maintenance stages of a software project are expensed as incurred, while costs incurred during the application development stage are capitalized and are amortized over the estimated useful life of the software, generally two to four years. Amortization of capitalized costs begins only when the software becomes ready for its intended use.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to note 2 in our notes to the consolidated financial statements for information on newly adopted and recently issued accounting pronouncements that are applicable to us.

RESULTS OF OPERATIONS

Financial Highlights

The following summarizes significant changes in our financial performance for the years presented. For a comparison of our results of operations for the fiscal years ended December 31, 2018 and December 2017, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 28, 2019.

										Year-over-Year Change
(dollars in millions, except per share data)		2019				2018				2019-2018
Total revenues		$	4,868.0			$	4,309.4			13	%
Total expenses		2,280.2				1,701.8				34
Operating margin		53		%		61		%
Non-operating income (expense)		$	101.8			$	170.2			(40	)
Effective tax expense rate		21		%		29		%
Net income attributable to CME Group		$	2,116.5			$	1,962.2			8
Diluted earnings per common share attributable to CME Group		5.91				5.71				4
Cash flows from operating activities		2,672.8				2,440.8				10

Revenues

										Year-over-Year Change
(dollars in millions)		2019				2018				2019-2018
Clearing and transaction fees		$	3,946.1			$	3,667.0			8	%
Market data and information services		518.5				449.6				15
Other		403.4				192.8				109
Total Revenues		$	4,868.0			$	4,309.4			13

Clearing and Transaction Fees

Futures and Options

The following table summarizes our total contract volume, revenue and average rate per contract for futures and options. Total contract volume includes contracts that are traded on our exchange and cleared through our clearing house and certain cleared-only contracts. Volume is measured in round turns, which is considered a completed transaction that involves a purchase and an offsetting sale of a contract. Average rate per contract is determined by dividing total clearing and transaction fees by total contract volume. Contract volume and average rate per contract disclosures below exclude trading volume for the cash markets business as well as interest rate swaps.

									Year-over-Year Change
	2019				2018				2019-2018
Total contract volume (in millions)	4,830.0				4,844.4				—	%
Clearing and transaction fees (in millions)	$	3,396.3			$	3,513.9			(3	)
Average rate per contract	0.703				0.725				(3	)

We estimate the following decreases in clearing and transaction fees based on a change in total contract volume and a change in average rate per contract during 2019 compared with 2018.

		Year-over-Year Change
(in millions)		2019-2018
Decrease due to change in total contract volume		$	(10.1	)
Decrease due to change in average rate per contract		(107.5		)
Net decrease in clearing and transaction fees		$	(117.6	)

Average rate per contract is impacted by our rate structure, including volume-based incentives, product mix, trading venue and the percentage of volume executed by customers who are members compared with non-member customers. Due to the relationship between average rate per contract and contract volume, the change in clearing and transaction fees attributable to changes in each is only an approximation.

Contract Volume

The following table summarizes average daily contract volume. Contract volume can be influenced by many factors, including political and economic factors, the regulatory environment and market competition.

								Year-over-Year Change
(amounts in thousands)		2019			2018			2019-2018
Average Daily Volume by Product Line:
Interest rates		10,349			9,951			4	%
Equity indexes		3,459			3,589			(4	)
Foreign exchange		862			1,004			(14	)
Agricultural commodities		1,454			1,480			(2	)
Energy		2,375			2,561			(7	)
Metals		668			639			5
Aggregate average daily volume		19,167			19,224			—
Average Daily Volume by Venue:
CME Globex		17,182			17,371			(1	)
Open outcry		1,205			1,168			3
Privately negotiated		780			685			14
Aggregate average daily volume		19,167			19,224			—
Electronic Volume as a Percentage of Total Volume		90	%		90	%

During 2019, volatility spiked in mid-2019 following a shift in expectations surrounding the Federal Reserve's interest rate policies. In mid-2019, the Federal Reserve began cutting interest rates following earlier indications that it intended to continue to slowly increase interest rates throughout 2019. Uncertainty surrounding the United States' foreign trade policy also increased mid-2019 following the threat of additional tariffs. By the fourth quarter, market volatility generally declined as uncertainty surrounding the Federal Reserve's interest rate policy subsided. Uncertainty surrounding the foreign trade policy also diminished following a preliminary trade agreement between the United States and China at the end of 2019. We believe the net result of these factors lead to overall volume remaining relatively flat in 2019 when compared with 2018.

Interest Rate Products

The following table summarizes average daily contract volume for our key interest rate products. Eurodollar front 8 contracts include contracts expiring within two years. Eurodollar back 32 contracts include contracts expiring within three to ten years.

						Year-over-Year Change
(amounts in thousands)		2019		2018		2019-2018
Eurodollar futures and options:
Front 8 futures		1,997		2,131		(6	)%
Back 32 futures		661		839		(21	)
Options		1,685		1,416		19
U.S. Treasury futures and options:
10-Year		2,324		2,363		(2	)
5-Year		1,358		1,285		6
2-Year		749		560		34
Treasury bond		467		484		(4	)
Federal Funds futures and options		356		259		37

In 2019 compared with 2018, overall interest rate contract volume increased slightly, particularly for short term contracts, due to volatility caused by continued uncertainty surrounding the Federal Reserve's interest rate policy. We believe volatility increased in the middle of 2019 due to a shift in market expectations at that time following the Federal Reserve's decision to initiate interest rate cuts as well as uncertainty surrounding the United State's future economic growth.

Equity Index Products

The following table summarizes average daily contract volume for our key equity index products. Volume below for the year ended 2019 includes Micro-E-mini contract volumes for each index beginning on May 6, 2019, which was the date the contracts were launched.

						Year-over-Year Change
(amounts in thousands)		2019		2018		2019-2018
E-mini S&P 500 futures and options		2,338		2,527		(7	)%
E-mini NASDAQ 100 futures and options		592		504		17
E-mini Russell 2000 futures and options		168		153		10

In 2019 compared with 2018, equity index contract volume decreased slightly due to lower overall volatility in the equity market in 2019, particularly in the fourth quarter. Volatility levels were higher in 2018 due to uncertainty surrounding the United States' foreign trade and other economic policies; however, the volatility leveled off at the end of 2019. The overall decrease in volume was partially offset by additional volume generated from the launch of Micro-E-mini equity index contracts in the second quarter of 2019, which have a notional size of one-tenth of the traditional E-mini contracts. Average daily contract volume in 2019 included approximately 317,000 in Micro-E-mini equity index contracts.

Foreign Exchange Products

The following table summarizes average daily contract volume for our key foreign exchange products.

						Year-over-Year Change
(amounts in thousands)		2019		2018		2019-2018
Euro		232		308		(25	)%
Japanese yen		139		159		(13	)
British pound		129		142		(9	)
Australian dollar		105		118		(11	)

In 2019 compared with 2018, overall foreign exchange contract volume decreased, which we believe resulted from lower overall volatility following periods of higher volatility in early 2018. We believe foreign exchange volatility decreased in 2019 following the indication by the Federal Reserve and other central banks to limit the number of interest rate changes in 2019. We also believe that the lack of a final resolution of a trade agreement between the United States and China and the delay in the United Kingdom European Union membership referendum contributed to lower volume.

Agricultural Commodity Products

The following table summarizes average daily volume for our key agricultural commodity products.

						Year-over-Year Change
(amounts in thousands)		2019		2018		2019-2018
Corn		525		482		9	%
Soybean		263		305		(14	)
Wheat		215		248		(13	)

Overall commodity contract volume decreased slightly in 2019 when compared with 2018. We believe the decline in soybean contract volume was due to lower U.S. exports of soybeans to China due to uncertainty surrounding trade policies between the countries. The decrease in wheat contract volume was due to lower volatility levels resulting from a surplus of global supplies in major growing regions around the world. Corn contract volume increased due to significant uncertainty surrounding crop yields for the 2019 growing season due to higher than normal precipitation levels.

Energy Products

The following table summarizes average daily volume for our key energy products.

						Year-over-Year Change
(amounts in thousands)		2019		2018		2019-2018
WTI crude oil		1,329		1,439		(8	)%
Natural gas		529		594		(11	)
Refined products		381		398		(4	)

Overall energy contract volume decreased in 2019 when compared with 2018, which we believe was due to lower price volatility within the energy markets throughout 2019 caused by greater price stability within the crude oil markets. In addition, expanded production of natural gas resulted in a reduction of price volatility in early 2019, which we believe contributed to a decrease in natural gas volume.

Metal Products

The following table summarizes average daily volume for our key metal products.

						Year-over-Year Change
(amounts in thousands)		2019		2018		2019-2018
Gold		433		375		16	%
Silver		107		103		3
Copper		98		131		(25	)

Overall metal contract volume increased in 2019 when compared with 2018 due to an increase in metals price volatility caused by investors using gold and other precious metals as safe-haven alternative investments to other volatile markets, particularly in mid-2019.

Average Rate per Contract

The average rate per contract decreased in 2019 when compared with 2018, which is largely due to a shift in product mix. Interest rate contract volume increased by 2 percentage points as a percent of total volume, while all other products collectively decreased by 2 percentage points. In general, interest rate products have a lower rate per contract compared with the remaining contracts. The decrease in average rate per contract was also due to the introduction of the micro-E-mini equity index contracts, which have a lower average rate per contract compared with a standard E-mini contract. Micro-E-mini equity index contracts have a notional size of one-tenth of the traditional E-mini contracts.

Cash Markets Business

Total clearing and transaction fees revenue in 2019 includes $483.0 million of transaction fees attributable to the cash markets business acquired from NEX compared with $91.2 million for the period November 3, 2018 through December 31, 2018. This revenue primarily includes BrokerTec Americas' fixed income volume and EBS foreign exchange volume.

(amounts in millions)		2019				2018
BrokerTec Americas' fixed income transaction fees		$	191.5			$	32.9
EBS foreign exchange transaction fees		191.8				37.5

The related average daily notional value for the year ended 2019 and the period November 3, 2018 through December 31, 2018 were as follows:

(amounts in billions)		2019				2018
U.S. Treasury		$	164.8			$	187.2
European Repo (in euros)		269.6				253.6
Spot FX		75.1				79.0

Concentration of Revenue

We bill a significant portion of our clearing and transaction fees to our clearing firms. The majority of clearing and transaction fees received from clearing firms represent charges for trades executed and cleared on behalf of their customers. No individual clearing firm represented at least 10% of our clearing and transaction fees in 2019. Should a clearing firm withdraw, we believe that the customer portion of the firm's trading activity would likely transfer to another clearing firm of the exchange. Therefore, we do not believe we are exposed to significant risk from an ongoing loss of revenue received from or through a particular clearing firm.

Other Sources of Revenue

Market data and information services. In 2019 when compared with 2018, the increase in market data and information services revenue was attributable to the additional market data revenue generated by market data subscribers and distributors associated with the cash markets business subsequent to the NEX acquisition in November 2018. In addition, fees for legacy CME basic real-time market data services increased to $105 per month from $85 per month for each device beginning in the second quarter of 2018, which also contributed to the increase in revenue in 2019 compared with 2018. The increase was partially offset by a reduction in revenue due to modest declines in screen counts due to cost-cutting initiatives at member firms.

The two largest resellers of our market data represented, in aggregate, 37% of our market data and information services revenue in 2019. Despite this concentration, we consider exposure to significant risk of revenue loss to be minimal. In the event that one of these vendors no longer subscribes to our market data, we believe the majority of that vendor's customers would likely subscribe to our market data through another reseller. Additionally, several of our largest institutional customers that utilize services from our two largest resellers report usage and remit payment of their fees directly to us.

Other revenues. The increase in other revenues in 2019 when compared with 2018 is largely attributable to the additional other revenue contributed by the NEX acquisition. Other revenues from NEX primarily include optimization services such as portfolio management, analytics, and trade and regulatory reporting.

Expenses

										Year-over-Year Change
(dollars in millions)		2019				2018				2019-2018
Compensation and benefits		$	898.7			$	672.2			34	%
Technology		201.5				117.2				72
Professional fees and outside services		174.1				166.1				5
Amortization of purchased intangibles		314.7				130.0				142
Depreciation and amortization		158.6				118.7				34
Licensing and other fee agreements		172.2				170.6				1
Other		360.4				327.0				10
Total Expenses		$	2,280.2			$	1,701.8			34

2019 Compared With 2018

Operating expenses increased by $578.4 million in 2019 when compared with 2018. The following table shows the estimated impact of key factors resulting in the net increase in operating expenses.

(dollars in millions)		Year- over-Year Change				Change as a Percentage of 2018 Expenses
Salaries, benefits and employer taxes		$	210.0			12	%
Amortization of purchased intangibles		184.7				11
Technology		81.2				5
Net losses on fixed assets and assets held for sale		65.1				4
Occupancy and building operations		46.6				3
Bonus expense		45.8				3
NEX integration costs		29.4				2
Foreign currency exchange rate fluctuation		(66.4		)		(4	)
NEX acquisition costs		(107.8		)		(6	)
Other expenses, net		89.8				4
Total		$	578.4			34	%

Overall operating expenses increased in 2019 compared with 2018 due to the following reasons:

•	Compensation and benefits expense increased as a result of headcount added from the NEX acquisition in the fourth quarter of 2018.

•	Amortization of purchased intangibles related to the NEX acquisition accounted for the additional amortization expense.

•	Technology expense, specifically hardware and software maintenance expense, was higher largely due to the addition of our NEX operations.

•	During 2019, we recognized higher impairment losses on certain fixed assets and net losses on assets held for sale compared to 2018.

•	Occupancy and building operations expense increased due to the inclusion of leases for our NEX operations.

•	Bonus expense increased in 2019 largely due to the headcount added as part of the NEX acquisition.

•	Integration costs increased following the NEX acquisition in the fourth quarter of 2018. These costs primarily consisted of professional and legal fees incurred to support the post-acquisition integration efforts during 2019.

Decreases in operating expenses in 2019 when compared with 2018 were as follows:

•

In 2018, we recognized a net loss of $73.6 million primarily due to the decline in the British pound versus U.S. dollar exchange rate on $1.6 billion of restricted cash held for the acquisition of NEX, which was denominated in British pounds, compared to a net loss of $7.2 million in 2019. Gains and losses from exchange rate fluctuations result when subsidiaries with a U.S. dollar functional currency hold cash as well as certain other monetary assets and liabilities denominated in foreign currencies.

•	Transaction costs and transfer taxes incurred by CME Group related to the NEX acquisition resulted in additional expense in 2018.

Non-Operating Income (Expense)

										Year-over-Year Change
(dollars in millions)		2019				2018				2019-2018
Investment income		$	637.9			$	745.1			(14	)%
Interest and other borrowing costs		(178.0		)		(157.7		)		13
Equity in net earnings (losses) of unconsolidated subsidiaries		176.8				152.8				16
Other income (expense)		(534.9		)		(570.0		)		(6	)
Total Non-Operating		$	101.8			$	170.2			(40	)

Investment income. The decrease in investment income in 2019 when compared with 2018 was largely due to a decline in net realized and unrealized gains (losses). The decrease in investment income was also due to a decline in earnings from cash performance bond and guaranty fund contributions that are reinvested, which primarily resulted from lower average reinvestment balances as well as an overall decrease in the rate of return earned on our investments.

Interest and other borrowing costs. Interest and other borrowing costs were higher in 2019 compared with 2018 due to a full year of interest expense incurred on $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 issued in the second quarter of 2018.

Equity in net earnings (losses) of unconsolidated subsidiaries. Higher income generated from our S&P/DJI business venture and net earnings from investments acquired through the transaction with NEX contributed to increases in equity in net earnings (losses) of unconsolidated subsidiaries in 2019 when compared with the prior year.

Other income (expense). In 2019 when compared with 2018, we recognized lower net losses on various derivative contracts. In 2018, we recognized net losses on our foreign exchange option and forward contracts used to mitigate certain exposure to foreign exchange rate fluctuation on the currency required to facilitate the NEX acquisition as well as derivative contracts that we assumed in our acquisition of NEX. Expense related to the redistribution of income earned on performance bond and guaranty fund contributions was relatively flat in 2019 compared to 2018.

Income Tax Provision

The following table summarizes the effective tax rate for the periods presented:

	2019			2018			Year-over-Year Change
2019-2018
Year ended December 31	21.3	%		29.3	%		(8.0	)%

In 2019 when compared with 2018, the effective tax rate was lower due to the recognition of benefits from the Internal Revenue Code Section 250 deduction in 2019. Proposed FDII Deduction regulations were released in 2019 and as a result, we have revised our income tax calculations to reflect the proposed guidance. The benefit recognized in 2019 includes estimates for the deduction for 2018 and 2019.

In addition, we recognized higher deferred tax expense in 2018 due to the acquisition of NEX.

LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements

We have historically met our funding requirements with cash generated by our ongoing operations. However, as part of the funding for the NEX acquisition, we utilized our commercial paper program in late 2018 and throughout 2019 for short-term funding requirements. While our cost structure is fixed in the short term, our sources of operating cash are largely dependent on contract trading volume levels. In addition to using our existing cash, cash equivalents, marketable securities and cash generated from operations, we may continue to utilize our commercial paper program to meet our working capital needs, capital expenditures and other commitments. It is also possible that we may need to raise additional funds to finance our activities through future public debt offerings or by direct borrowings from financial institutions through our committed revolving credit facilities.

Cash will also be required for operating leases and non-cancellable purchase obligations as well as other obligations reflected as long-term liabilities on our consolidated balance sheet at December 31, 2019. These were as follows:

(in millions)		Leases				Purchase Obligations				Debt Obligations				Other Long-Term Liabilities (1)				Total
Year
2020		$	80.7			$	25.3			$	133.3			$	—			$	239.3
2021-2022		159.9				24.4				1,016.5				—				1,200.8
2023-2024		150.4				8.0				237.6				—				396.0
Thereafter		510.5				—				4,214.8				—				4,725.3
Total		$	901.5			$	57.7			$	5,602.2			$	—			$	6,561.4

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(1)	The liability for gross unrecognized income tax benefits, including interest and penalties, of $441.8 million for uncertain tax positions is not included in the table due to uncertainty about the date of their settlement. It also excludes liabilities for lease

arrangements as well as liabilities that have uncertainty associated with timing of payments, including liabilities for benefit plans. It also excludes liabilities that will not be settled in cash.

Leases include rent payments for office space in Chicago, New York and other smaller offices in the United States and in various foreign countries. The lease for our headquarters in Chicago expires in 2032. Annual minimum rental payments under this lease range from $14.0 million to $19.7 million. We also maintain leases for datacenter space in the Chicago area, which expires in March 2031. Annual minimum rental payments under this lease range from $16.9 million to $18.3 million. The lease for our office space in New York expires in December 2028. Annual minimum rental payments under this lease range from $14.3 million to $15.3 million.

Purchase obligations include minimum payments due under agreements for advertising, licensing, hardware, software and maintenance as well as telecommunication services. Debt obligations include repayment of principal and interest associated with the debt obligations.

Future capital expenditures for technology are anticipated as we continue to support our growth through increased system capacity, performance improvements, integration of acquired platforms as well as improvements to some of our office spaces. Each year, capital expenditures are incurred for improvements to and expansion of our offices, remote data centers, telecommunications network and other operating equipment. In 2020, we expect capital expenditures to total approximately $180 million to $200 million, net of any leasehold improvement allowances and any one-time costs associated with the NEX integration. We continue to monitor our capital needs and may revise our forecasted expenditures as necessary in the future.

We intend to continue to pay a regular quarterly dividend to our shareholders, with a target of between 50% to 60% of the prior year's cash earnings. The decision to pay a dividend and the amount of the dividend; however, remains within the discretion of our board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, levels of indebtedness and other considerations our board of directors deems relevant. CME Group is also required to comply with restrictions contained in the general corporation laws of its state of incorporation, which could also limit its ability to declare and pay dividends. On February 5, 2020 the board of directors declared a regular quarterly dividend of $0.85 per share. The dividend will be payable on March 25, 2020 to shareholders of record on March 10, 2020. Assuming no changes in the number of shares outstanding, the first quarter dividend payment will total approximately $300 million. The board of directors also declared an additional, annual variable dividend of $2.50 per share on December 11, 2019 paid on January 15, 2020 to the shareholders of record on December 27, 2019. In general, the amount of the annual variable dividend will be determined by the end of each year, and the level will increase or decrease from year to year based on operating results, capitalization expenditures, potential merger and acquisition activity and other forms of capital return including regular dividends and share buybacks during the prior year.

Sources and Uses of Cash

The following is a summary of cash flows from operating, investing and financing activities.

										Year-over-Year Change
(dollars in millions)		2019				2018				2019-2018
Net cash provided by operating activities		$	2,672.8			$	2,440.8			10	%
Net cash used in investing activities		(152.6		)		(1,889.6		)		n.m.
Net cash used in financing activities		(2,340.8		)		(1,080.0		)		117

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n.m. not meaningful

Operating activities

The increase in net cash provided by operating activities in 2019 compared with 2018 is largely due to the incremental operating cash generated from the business lines acquired through our acquisition of NEX in November 2018.

Investing activities

The decrease in cash used in investing activities in 2019 when compared with 2018 was largely due to the cash consideration required for the acquisition of NEX in November 2018, net of cash received.

Financing activities

Cash used in financing activities was higher in 2019 when compared with in 2018 due to a net reduction in outstanding debt in 2019 compared with issuance of debt in 2018. The increase in cash used in financing activities was partially offset by a decrease in cash dividends.

Debt Instruments

The following table summarizes our debt outstanding as of December 31, 2019:

(in millions)	Par Value
Fixed rate notes due September 2022, stated rate of 3.00% (1)	$	750.0
Fixed rate notes due May 2023, stated rate of 4.30%	€	15.0
Fixed rate notes due March 2025, stated rate of 3.00% (2)	$	750.0
Fixed rate notes due June 2028, stated rate of 3.75%	$	500.0
Fixed rate notes due September 2043, stated rate of 5.30% (3)	$	750.0
Fixed rate notes due June 2048, stated rate of 4.15%	$	700.0
Commercial Paper	$	304.0

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(1)	We maintained 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)	We maintained 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)	We maintained a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable effectively became fixed at a rate of 4.73%.

We maintain a $2.4 billion multi-currency revolving senior credit facility with various financial institutions, which matures in November 2022. The proceeds from this facility can be used for general corporate purposes, which includes providing liquidity for our clearing house in certain circumstances at CME Group's discretion and, if necessary, for maturities of commercial paper. As long as we are not in default under this facility, we have the option to increase it up to $3.0 billion with the consent of the agent and lenders providing the additional funds. This facility is voluntarily pre-payable from time to time without premium or penalty. Under this facility, we are required to remain in compliance with a consolidated net worth test, which is defined as our consolidated shareholders' equity at September 30, 2017, giving effect to share repurchases made and special dividends paid during the term of the agreements (and in no event greater than $2.0 billion in aggregate), multiplied by 0.65. We currently do not have any borrowings outstanding under this facility, but the outstanding commercial paper balance is backstopped against this facility.

We maintain a 364-day multi-currency revolving secured credit facility with a consortium of domestic and international banks to be used in certain situations by CME Clearing. The facility provides for borrowings of up to $7.0 billion. We 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 for our collateral), or in the event of a temporary disruption with the domestic payments system that would delay payment of settlement variation between us and our 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. At December 31, 2019, guaranty funds available to collateralize the facility totaled $8.5 billion. We have the option to request an increase in the line from $7.0 billion to $10.0 billion. Our 364-day facility contains a requirement that CME remain in compliance with a consolidated tangible net worth test, defined as CME consolidated shareholder's equity less intangible assets (as defined in the agreement), of not less than $800.0 million. We currently do not have any borrowings outstanding under this facility. On May 1, 2019, we amended and extended the agreement, which will expire on April 29, 2020.

The indentures governing our fixed rate notes, our $2.4 billion multi-currency revolving senior credit facility and our 364-day multi-currency revolving secured credit facility for $7.0 billion do not contain specific covenants that restrict the ability to pay dividends. These documents, however, do contain other customary financial and operating covenants that place restrictions on the operations of the company that could indirectly affect the ability to pay dividends.

At December 31, 2019, we have excess borrowing capacity for general corporate purposes of approximately $2.1 billion under our multi-currency revolving senior credit facility.

At December 31, 2019, we were in compliance with the various covenant requirements of all our debt facilities.

CME Group, as a holding company, has no operations of its own. Instead, it relies on dividends declared and paid to it by its subsidiaries in order to provide a portion of the funds which it uses to pay dividends to its shareholders.

To satisfy our performance bond obligation with Singapore Exchange Limited, we may pledge CME-owned U.S. Treasury securities or U.S. dollars in lieu of, or in combination with, irrevocable letters of credit. At December 31, 2019, we had pledged letters of credit totaling $260.0 million.

The following table summarizes our credit ratings as of December 31, 2019:

Rating Agency		Short-Term Debt Rating		Long-Term Debt Rating		Outlook
Standard & Poor’s		A1+		AA-		Stable
Moody’s Investors Service		P1		Aa3		Stable

Given our cash flow generation, our ability to pay down debt levels and our ability to refinance existing debt facilities, if necessary, we expect to maintain an investment grade rating. If our ratings are downgraded below investment grade due to a change of control, we are required to make an offer to repurchase our CME Group fixed rate notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest.

Off-Balance Sheet Arrangements

As of December 31, 2019, we did not have any off-balance sheet arrangements as defined by Securities and Exchange Commission rules and regulations.

Liquidity and Cash Management

Cash and cash equivalents totaled $1.6 billion at December 31, 2019 and $1.4 billion at December 31, 2018. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy and alternative investment choices. A majority of our cash and cash equivalents balance is invested in money market mutual funds that invest only in U.S. Treasury securities, U.S. government agency securities and U.S. Treasury security reverse repurchase agreements. Our exposure to credit and liquidity risk is minimal given the nature of the investments. Cash that is not available for general corporate purposes because of regulatory requirements or other restrictions is classified as restricted cash and is included in other current assets or other assets on the consolidated balance sheets.

Our practice is to have our pension plan 100% funded at each year end on a projected benefit obligation basis, while also satisfying any minimum required contribution and obtaining the maximum tax deduction. Based on our actuarial projections, we estimate that no contribution will be necessary in 2020 as we exceeded our funding goal by $32.7 million in 2019. However, the amount of the actual contribution is contingent on various factors, including the actual rate of return on our plan assets during 2020 and the December 31, 2020 discount rate.

Regulatory Requirements

CME is regulated by the CFTC as a U.S. Derivatives Clearing Organization (DCO). DCOs are required to maintain capital, as defined by the CFTC, in an amount at least equal to one year of projected operating expenses as well as cash, liquid securities, or a line of credit at least equal to six months of projected operating expenses. CME was designated by the Financial Stability Oversight Council as a systemically important financial market utility under Title VIII of Dodd-Frank. As a result, CME must comply with CFTC regulations applicable to a systemically important DCO for financial resources and liquidity resources. CME is in compliance with all DCO financial requirements.

CME, CBOT, NYMEX and COMEX are regulated by the CFTC as Designated Contract Markets (DCM). DCMs are required to maintain capital, as defined by the CFTC, in an amount at least equal to one year of projected operating expenses as well as cash, liquid securities or a line of credit at least equal to six months of projected operating expenses. Our DCMs are in compliance with all DCM financial requirements.

BrokerTec Americas LLC is required to maintain sufficient net capital under Securities Exchange Act Rule 15c3-1 (the Net Capital Rule). The Net Capital Rule focuses on liquidity and is designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand at all times to satisfy claims promptly. Rule 15c3-3, or the customer protection rule, which complements rule 15c3-1, is designed to ensure that customer property (securities and funds) in the custody of broker-dealers is adequately safeguarded. By law, both of these rules apply to the activities of registered broker-dealers, but not to unregistered affiliates. The firm began operating as a (k)(2)(i) broker dealer in November 2017 following notification to the Financial Industry Regulatory Authority and the SEC. A company operating under the (k)(2)(i) exemption is not required to lock up customer funds as would otherwise be required under Rule 15c3-3 of the Securities Exchange Act.