洲際交易所 (ICE) 2006 Q2 法說會逐字稿

(OPERATOR INSTRUCTIONS). Daniel Goldberg with Bern Stearns.

Good morning. Can you talk a little bit what you've seen so far in July. Obviously you report your daily futures volumes. But on the over-the-counter side, can you talk – any trends you've seen there so far.

I think we obviously have to – we report our volumes monthly, as you know. I don't necessarily want to get in front of that. Generally speaking, we did mention that we wanted to give you a sense that these new contracts that we introduced in the cleared over-the-counter market, are contributing to our growth. They represented, as I mentioned in the prepared text, about 10% of the revenue in the over-the-counter space in the month of June. I think the interesting thing about what we're doing here is that by adding new products, we continue to enrich this offering that we have. In enriching the offering, we are bringing in more and more people and more and more attention to our screen in the over-the-counter space. These new products contribute to the existing products that we have. Above and beyond the discrete 10% that we are talking about, we think that those new products are also driving growth in what were our former core products and overall levering up the over-the-counter commissions. As you can see, it is a huge growing part of the ICE revenue stream. We think it is a market bigger than the futures market. We think that we are very uniquely positioned, given that we have futures and OTC on one screen and have them interplaying together with netting across margining in the clearinghouse.

In terms of pre-tax operating margins, obviously you saw a huge expansion to 64%. How should we think about that? I know you don't give guidance on that. How high can that go as your volumes continue to grow?

We've always been out there in the marketplace saying that we're comfortable in the 50% range. We see business increasing. I think again, we'll stick to what we've always said.

I would also reiterate that if you calculate our incremental margin for let's say the last quarter or even last month, you can come to your own conclusion on how leverage-able the platform is. We're trying to give you some guidance that our CapEx expenses continue to be in line with where we said we were going to be so that the investment that we've been making in improving the platform was already built into the numbers that we have been discussing with you. You can do the math from there, I suspect.

So assuming volumes continue to grow, it would be reasonable for us to have margins expanding within our model?

I would say we built a lot of capacity into the platform. That is part of what the day-to-day investment is so that obviously that thing can scale.

Lastly, as you look to diversify into other products, whether it's over-the-counter or exchange listed, what are your thoughts on some of the agricultural products like sugar, cotton, coffee, orange juice?

I don't think that we have a specific comment on those specific products. Let's say, generally where management is tending to focus is where we think that ICE has some advantage, where we bring something to the table that is new and unique. Largely we have this platform that relates over-the-counter markets and futures markets together and allows them to trade seamlessly and for the credit to be matched and supported. It is very unlike a futures trading platform. Outside of energy, you have seen us move into things like emissions and areas that are closely related to energy. You may see us continue to expand where we think the over-the-counter markets and the futures markets in other non-energy venues relate and would have a very sophisticated interplay on our platform. Because I think ultimately that is our strength.

Okay, great. Thanks a lot.

[Cameron Jossey]; Morgan Stanley.

Good morning. Congratulations on a good quarter. I have a quick question about the bifurcation liquidity on the WTI side. I've heard the arguments for bifurcation between the physically delivered and the financially settled contracts. Can you give some color on the customer composition in the WTI relative to your Brent contract.

First of all, I don't necessarily think we agree that we have bifurcated liquidity. We created a derivative contract that did not exist prior to ICE creating it. We started working on this contract three or four years ago. It has slowly built up a following and seems to be accelerating because of the design of the contract, which includes the fact that it is cash-settled, which includes the fact that it is 85% offset against Brent and provides tremendous advantages to the global crude oil community. As a result of that, we are very, very close to the energy community. They helped us start this Company to serve an unfulfilled need in the market. They have helped us design contracts. They helped us create this cash-settled WTI with strong offset margining traded electronically. I really see that this is not bifurcating liquidity, but it's appealing to a market that was not served before.

In that regard, we recently looked at the use of the WTI contract. This information is probably two weeks old to put it in context, but I suspect hasn't changed in the last two weeks. The biggest users of our WTI contract are the commercial interests. That is not that surprising to us because the oil companies and people in the energy industry have tremendous exposure to Brent and WTI as markers. Since two-thirds of the world's physical crude oils price is a derivative to Brent and one-third price is a derivative to WTI, pretty much the entire crude oil physical marketplace is exposed to those two. The oil companies and energy companies have billions of dollars of underlying physical business that is at risk that needs to be hedged. We have provided a very interesting hedging tool for them.

I think what you will see and what we are exploiting is that markets where there is a lot of commercial paper, as we like to call it, is very, very attractive to algorithmic traders, momentum traders, and other people that come in to trade on short-term volatility where the commercial players are doing business. I would expect that we will see some growth in that market segment as we go forward.

Great. Just one other question. In terms of the opportunity to monetize your clearing business, it there a preference by you to either do that through a revenue-sharing agreement or potentially through an acquisition?

Let me contextualize your question a bit in that we have really done well by working with the London clearinghouse. We have found that it has been very positioned globally. As we've mentioned, much of our business is from outside of North America. The London footprint has really worked for us because it is a set of law and bankruptcy conditions that people in Asia and all throughout North America can come together and respect. The London clearinghouse has worked quite well for us.

Similarly we've had this tremendous uptake in WTI that we've talked about on the futures side, as well as the over-the-counter markets, which are largely North American type markets where we are sending these trades to London. A long-winded way of saying the London clearinghouse has worked really well for us to deliver what is probably one of the fastest-growing derivatives exchanges in the space.

With that being said, the only issue that one could have with our current model is that as we are growing tremendously, so is the spend that goes on in the Clearinghouse for clearing. We would love to participate in that. With that being said, we continue to look at ways to do that both internally and externally. We've put it in context of wanting to continue drive a lot of growth to our business and not necessarily upset what heretofore has been a very good thing. So there is the balance. So far, in trying to rollout 50 new cleared contracts and three new futures contracts in the first half of this year alone, it didn't seem like a particularly opportune time to make dramatic changes in what we do in Clearing.

Great. Thank you.

Chris Allen with Banc of America Securities.

Good quarter. A question in the OTC business. The new contracts accounted for 10% of June. Is the overlook business still predominantly North American natural gas?

I would say the business on ICE and probably the predominant business that is trading is gas and power swaps with some oil swaps mixed in, particularly now as the oil markets are going electronic really for the first time, unlike gas and power, which have largely been electronic, and then we've helped take electronic during the history of ICE. That being said, gas and power are very interrelated in North America. So they drive each other, if you will. Gas is the marginal fuel for power. In times like this when the whole North American continent is experiencing a heat wave you see both driving each other.

There are some rumors going around about the CFTC reauthorization – probably not even rumors – but that there are going to be some things attached to it related to the OTC energy markets. What are you hearing? What are your thoughts are on that front?

First of all, one of the things we mentioned in our prepared text was that I think was not well-known, but came to light during the recent hearings, was that we voluntarily agreed to create these large trader reports in the futures space and give them to the UK regulators so that they could be forwarded to the US regulator. Those two regulators put together information-sharing to talk about ICE. Against that backdrop what you see is that ICE has been very, very cooperative with both US and UK regulators as well as the other 41 regulators we deal with around the world. Because we do believe – we are believers that orderly markets and transparent markets and markets where people have trust and confidence ultimately benefit us. So the idea of more transparency, more knowledge in the over-the-counter space is not troubling to us. In fact, we are really bringing the over-the-counter space to light. It is partly what you see driving the data revenues as more and more people want to have a real-time glimpse at what is going on in the swaps business. Regulation per se or additional views or oversights or report writing – that does not trouble us.

What troubles us is when competitors try to single ICE out and create ideas that would try to drive volume away from ICE and into some other venue for solely competitive purposes. I would suggest to you that there has been a bit of that going on in this debate. That may be where rumors like you are referring to emanate, which aren't necessarily based in the reality of the relationship that we already have with the regulators.

Got it. While we're on the competitive landscape, are you hearing anything from your customers in terms of the fee waivers that Nymex is doing on the WTI – first on the Brent side and now on the WTI side of Brent spread?

No, in a word. But I would suggest to you, I think this will – you will see these kinds of things attract participants to the energy space that maybe had been reluctant to come here. There is a segment of people that trade interest rates and foreign exchange that are algorithmic traders – so-call [prop] shops that tend to be very fee sensitive because they trade hundreds, if not thousands of trades a day, but take no position home at night. So they tend to be big commission payers relative to the revenue opportunity that they are looking to capture. Those people may be interested now that one can hear about very low-cost or free trading. We love it when somebody comes into our space because we have shown – and you can see it in our now numbers – that when an entity starts to think about trading energy, we offer a really great market at a very good value. Those algorithmic and prop-shop-type traders can make money here paying our standard rate of $0.70 with no requirement to buy a seat given the deep liquidity that we have in these markets. Their models and their trading style work quite well with markets that have strong commercial paper. I think you'll see those kinds of things continue to drive volume and growth at ICE.

Is it fair to say that in your minds, even though you are going to be charging the $0.70 and Nymex is going to be waiving the fees, the difference in the membership costs at Nymex versus what you charge – I think it's 1,100 – that is enough to offset it for most of the algorithmic people who are your current customers?

Regardless of even the seat costs, I think when you see a market that is incredibly tight and that has a lot of commercial participants on it, it is an excellent venue for an algorithm to operate. A black screen that has no business on it is not a particularly fruitful place for an algorithmic trader to operate. What you have seen – and you can see it in our numbers, and you can see it in the backlog of people that are rapidly trying to get in here and write to our FIX API – is that we've got a very interesting market we've created over a long period of time with a lot of commercial players because they are in there hedging their exposure in the over-the-counter and through the futures arenas in very complex products that we can attract them to.

We do not have a very good opportunity to offer a person who wants to trade on an open-outcry floor an alternative. But we have a great opportunity to offer somebody that wants to trade energy electronically, a place to come. That is what you see going on in our numbers.

Thanks a lot.

Rich Repetto with Sandler O'Neil.

Congrats on a great quarter. First question, Jeff. You've gone to fairly great lengths to talk about the differences in the WTI contract that you have launched and how that is different and even on the users that you commented on in a previous question. My question is, that appears like you have created new volume there. Has it also boosted your Brent volumes by launching an electronic WIT?

In a word, yes. You are seeing – to the extent that you model us – you are seeing we are now paying a lot more revenues under the so-called Wagner patent, which is for trades that emanate from the United States – because it is a US patent. So what is going on underneath that is, for the first time we're able to bring Brent, which was largely a European and Asian traded commodity to North America and expose it to people that may have come to us because of this headline we have called WTI, which is very well known in North America because it is the price of crude that we hear mentioned on the news every single day. It is engrained in people's minds.

When they come together, they find that these two markets operate very similarly. In fact, they are fungible. You can deliver Brent as WTI as well as a grade of crude called [40s] in Oseberg, which are also from the North Sea. Those two interplaying together seem to be driving tremendous growth for us and really exposing Brent to a new class of market participant that never before really even heard of it.

I would also mention that beyond Brent, the growth in our gas oil contract has been phenomenal. Most people in North America have never even heard the word gas oil. But it is a very interesting middle distillate market that is important in Europe and Asia. Again, it is being exposed in North America for the first time. It's a great market that's – a tremendous amount of commercial hedging going on. It has been very, very attractive for the prop traders and the algorithmic traders even though they had never heard of gas oil before. You are seeing that growth as well.

All of that – it is that whole combination together that we go out and sell. We've seen that a lot of these new classes of traders are relatively portable. They used to trade foreign exchange or fixed income. They can move those algorithms into energy and fine-tune them and find a market that is naturally volatile that appeals to them to the extent their algorithms are momentum-based.

I understand. A question for Richard – he is quiet over there. The eSpeed – the Wagner patent, when it does – the expiration is in February. Could you quantify – I know there is a variable. I know you are going to ramp-up by 600,000 for the 2 million increase because you are doing so much volume now. The question is, does it all stop in February of next year? And then quantify the impact, I guess.

It all stops. It is totally binary. That charge is no longer involved in the financial model that we have.

Any way to quantify that? I know you've got the 600,000 to amortize – or the 2 million between now and then. But the variable cost per contract is ----

The variable cost this quarter was $1.6 million. You can run that on your model on our growth curve. That will be your total quantified variable. Add in the 2 million we are amortizing till the end. That will be the gross impact that falls away on February of '07.

That 1.6 million applies to all contracts, both over-the-counter and the futures?

No. Only futures. And only futures generated in the US.

Where the trader has pushed the button from the US.

We can talk offline about it. That is more difficult of a number for us to come up with then. Anyway, the last question is a follow-up from an earlier one. You gave a hint, Jeff of where you might head and what you might look for as far as additional products that relate to the platform, but aren't exactly what you are trading right now and that might diversify. Ethanol keeps popping out to me. Might that be – I would think that would be of great interest to you – or products that might lead to ethanol – put it that way too.

Ethanol is obviously a very interesting thing right now, particularly in North America. You are seeing Brazil and other foreign countries move to an ethanol-based economy. That looks like a permanent shift to create worldwide ethanol demand. Yes, it's an interesting area. It's an immature market, not because the futures exchanges themselves haven't been trying to figure out a way to get into it. But because the underlying markets have a lot of government support. People are loath to take a long position in something where government could change the rules on any given day. It prohibits futures trading in the way we tend to think of very liquid growing contracts. But there is obviously a physical procurement market, an over-the-counter market, and other things that are going on around that. Those are the kinds of things that go on, on the ICE OTC platform.

Okay, that helps. Thank you.

This concludes the Q&A portion of the call. I would not like to turn the call over for closing remarks.

Thank you all for joining us today. We appreciate your attention and good questions. We look forward to seeing you on our next earnings call.

This concludes the presentation. You may all now disconnect. Good-day.