洲際交易所 (ICE) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the first-quarter 2007 IntercontinentalExchange earnings conference call. Today's call is being recorded. I would now like to turn the presentation over to your host for today's call, Ms. Kelly Loeffler, Vice President of Investor Relations and Corporate Communications. Please proceed.

Good morning.

To obtain a copy of ICE's first-quarter earnings release and investor presentation, please visit the Investor Relations section of our Web site at theice.com. The items will be archived and available for replay.

Please be aware that our comments may contain forward-looking statements. These statements represent our current judgment and are subject to various risks, assumptions and uncertainties as outlined in the Company's filings with the SEC. Actual results may differ materially from those expressed or anticipated in any forward-looking statement.

Speaking on the call today is Jeff Sprecher, Chairman and CEO, Chuck Vice, President and Chief Operating Officer, and Richard Spencer, Chief Financial Officer. Following our remarks, we will take your questions. We will conclude the call prior to the 9:30 market open.

While our discussion will include a brief update on ICE's proposal to merge with the Chicago Board of Trade, we are unable to further discuss the merger proposal process during the Q&A session, due to existing confidentiality obligations.

I'd now like to turn the call over to Jeff Sprecher.

Well, thank you for joining us today as we report on our record first quarter.

I will begin by highlighting the key financial and operating metrics, and then cover our diverse growth initiatives that we are busy implementing for 2007 and beyond. We will discuss the excellent progress we've made since closing on our acquisition of NYBOT, and we will offer some brief remarks on what we believe to be a superior proposal to merge with the Chicago Board of Trade.

ICE's recorded first-quarter performance in each of its three execution businesses produced record revenue, trading volume and net income. Importantly, we achieved these results while we were busy ensuring long-term value for ICE shareholders and enhancing our offerings for customers.

Starting on Slide 4 of our presentation, our consolidated revenues of $127 million represented a 152% increase in revenue in the first quarter when compared to $50 million in last year's first quarter. Our operating income more than doubled, increasing 188% to $80 million during the quarter, up from 28 million in the first quarter of '06.

We were disciplined on the expense line amid rapid growth. Our operating margin was 63%, an 8 percentage point increase over last year's first-quarter margin of 55%. We achieved this despite our acquisition of a much higher fixed-cost business. As a result, net income rose 183% to $56 million, compared to $20 million in last year's first quarter.

I'd also like to note that, excluding our NYBOT acquisition, first-quarter revenues in our energy execution business grew 105% compared to the first quarter of last year.

During the first quarter of 2007 and for the first time, ICE's average daily volume in our Energy Futures and over-the-counter market exceeded 1 million contracts with an average daily volume of 1.2 million contracts executed on our platform, solidifying our position as the leading electronic energy marketplace. This consistent performance has made ICE the fastest-growing major derivatives exchange today. Since 2005, ICE's rate of quarterly volume growth has outpaced the top four global derivatives changes.

2007 is off to a strong start. Our quarterly results and our April volumes announced today confirm that our high growth rate remains in place. This performance has resulted in industry-leading returns to shareholders for all of 2006 for the first quarter of 2007 and in the year-to-date period through April. This is a track record of growth and delivering on promises that we strive to uphold. To that end, I'd like to briefly recap some of the strategic accomplishments during the quarter and highlight some of our initiatives as we move ahead.

First, we just closed our transaction to acquire the New York Board of Trade in January, just four months after we announced the transaction in September of 2006. As a result, our global commodities marketplace has expanded to include not only derivatives on energy products but on soft commodities, foreign exchange and equity indices, together with a clearinghouse and with state-of-the-art technology. Today, there are only two derivative exchanges in the United States with all of these core clearing and technology capabilities in-house. And in just seven years since our inception, we've assembled the only U.S. derivatives exchange that has a comprehensive offering of both U.S. and UK-regulated futures execution, a growing clearing business, and a vibrant OTC electronic marketplace.

Earlier this week, we announced our global clearing strategy. We have established a team of clearing and technology experts in the U.S. and in Europe. We invested a significant amount of time this year evaluating various alternatives for building on our existing U.S. clearing business that would achieve maximum financial and strategic value for our shareholders. As many of you know, ICE has been a pioneer in this area already. By innovating new products through use of clearing, we spurred the formation of the OTC-cleared energy market way back in 2002. Today, our vision of clearing is even broader and reflects a global futures and OTC strategy across many product lines.

Slide 6 describes our clearing framework. We are now executing on a highly scalable clearing infrastructure that offers solutions to meet the unique needs of FCMs, broker-dealers and traders located in Asia, Europe, North America and beyond. We are in process of developing an advanced risk-management platform built on modern and efficient technology, and we believe we will offer benefits to shareholders and to customers through flexibility in developing new products and quickly addressing new opportunities. We're well on track to be the first major derivatives exchange in the world, to have regulated clearing houses and derivatives exchanges located in both the U.S. and the UK, operating under their applicable regulatory jurisdictions.

In preserving competition and innovation, we also believe that we are preserving two drivers of growth from which this industry has benefited for the last several years. We anticipate taking this capability in-house next year, beginning in July of 2008.

I'd like to note that the incremental investment in developing complementary clearing houses in the U.S. and the UK is far exceeded by the revenue opportunity and positions us well relative to other derivatives exchanges. Our unique model, which includes two global exchanges, as well as the over-the-counter market, will allow us to fully leverage this structure. While the OTC market tends to be quite global, exchanges typically compete domestically, which is reflected in the structure of the clearinghouse and in the regulatory environment. Moreover, traditional exchanges have viewed the execution piece as the driver of enterprise value. However, we see clearing as a valuable platform for our future growth. This is particularly true as the execution venues consolidate.

We look forward to working with the global FCM community to ensure that ICE Clear establishes the modern standard of excellence in risk management. We are very grateful to LCH Clearnet for serving as our partner since our inception, and we will continue to work closely with LCH to ensure a smooth experience for our customers. Chuck will cover more details in his remarks on clearing and technology processes and development.

Turning to the NYBOT, I will direct your attention to Slide 7. This morning in our earnings release, we detailed our synergies for NYBOT operations. Our integration with the team at NYBOT has progress rapidly, and we are benefiting from the efforts by ICE and NYBOT staff to realize the full potential of this valuable exchange well ahead of schedule. In February, we quickly and seamlessly brought new technology and increased capacity to a business that we had owned for less than four weeks. We quickly developed an electronic interface to the clearinghouse into the clearing community, and we began introducing new users to NYBOT's products where previously no electronic market had existed. We immediately set volume records after we introduced our trading and clearing technologies. Following the unprecedented speed of this initiative, we began more fully integrating our two organizations in February.

Slide 8 details our updated NYBOT synergies. With regard to cost savings, our initial estimates were conservative, and this became evident as we began to integrate our operations following our joint efforts on the (inaudible) electronic launch. We are beginning to achieve significant cost reductions, including the areas of technology, marketing, compensation and benefits and overhead expenses. In 2007, expense synergies are now forecasted at 8 to $9 million with an expected annual run-rate expense saving of 13 to $14 million in 2008. We continue to seek additional ways to bring new NYBOT financial model more in line with ICE's by leveraging our respective strengths more efficiently.

We've also updated our revenue synergies to reflect between 14 million and $15 million in revenue synergies for the balance of 2007. I'd like to provide you with a bit more detail. Through the addition of electronic trading, we've seen that NYBOT will not only preserve its marketplace, but we believe that it will actually thrive. Though now we are only in the first inning, NYBOT has quickly shown solid growth following the introduction of electronic trading in February.

Slide 9 illustrates this early but excellent performance. Many volume records have been shattered following the addition of NYBOT's markets to the ICE platform. These include the all-time monthly volume records in February, which was then just exceeded in April. Today, we reported 16% year-over-year growth for April. This compares to a volume decline of 8% to during the month of January, prior to the introduction of electronic markets at NYBOT.

Clearly, electronic trading is making its contribution to the synergies, as we promised, and the following other drivers exist -- NYBOT's Board approved a structural fee change to be implemented as of June 1, increasing NYBOT's electronically traded soft commodity prices to reflect the value added through the direct market access of electronic trading. Beginning in June, we will offer NYBOT's valuable suite of products, including currency [payors], the U.S. dollar index and the Russell indices on the ICE platform. We've seen very solid demand for these products and we are eager to introduce them electronically.

Finally, our clearinghouse has begun developing a facility for handling OTC soft commodity products to complement NYBOT's existing futures contracts. These products are subject to CFTC approval. However, they will contribute to our new product pipeline over the next few quarters. Estimates for the contribution by these new OTC AGs have not been included in our revenue synergies.

In addition to expanding through our NYBOT acquisition, our organic growth numbers highlight the strength of our business. In each of our business segments, we set volume records in the first quarter. On Slide 10 at ICE Futures, average daily volume in the first quarter rose 89% to a record 531,000 futures contracts per day. Quarterly volume records were established in ICE Futures Brent, WTI and [gasso] products.

It's important to note that our crude futures markets continue to expanding. The growth in Brent, WTI and our open interests speak for themselves.

You'll note the strength of our global crude offering relative to that of Globex on Slide 11. We've maintained nearly 50% market share in global crude futures, compared to only 37% in January of '06. In addition, we're now at record open interests levels in crude futures. Our open interest today has risen to a record 48% market share compared to just 44% when NYMEX launched on Globex. These are powerful statistics, and we're working to ensure that we have profitable growth ahead regardless of day-to-day movements in market share and open interest.

As many of you may be following in the news this year, ICE Brent has gained an increasing recognition as being more reflective of the active price of the world crude oil, and it's now trading at a premium to WTI. The disparity in pricing appears to reflect structural changes in crude markets, including the supply, demand and transportability of oil. In a report by Lehman Brothers' Chief Economist in April, it was written that "Spot WTI crude oil prices no longer reflect international market dynamics. Rather, they represent local fundamentals for crude oil in the U.S. Midcontinent."

While the IEA reported "Ultimately, it is unlikely that one bout of volatility will change the status of WTI, but repetitions of such events could spark a search for alternatives." This confirms what we've long asserted, that Brent is a more globally relevant contract, given its portability, and it's used as a pricing reference for other crude streams in the Middle East and Asia.

We are neutral on the choice of respective benchmarks. These structural changes point to the need to consider all of our products in the context of the longer-term needs of our industry. This is why we announced that we will soon offer a third crude benchmark on the ICE trading platform.

Last month, ICE Futures announced a new sour grade of crude oil set for launch on May 21. We believe that the new ICE Middle East crude sour crude future contract will prove to provide a number of benefits. First, like our Brent crude oil, our contract is cash-settled, which will provide increased flexibility for market participation. It will be based on the prevailing benchmark index long used for settling existing markets for OTC sour crude contracts, which include three highly relevant price streams, Dubai, Oman, and Abu Dhabi's Upper Zakum.

Third, the contract will be offered on our well-established exchange under FSA regulation with eligible U.S. customers receiving 60/40 tax treatment. In addition, our new contract will be listed as a differential to Brent and to WTI, two highly liquid, cash-settled contracts that trade on the ICE platform. The ability of our customers to trade all three crude benchmarks through one trading and clearing platform produces both capital and transactional efficiencies that are not available in any other energy market today.

Turning to Slide 12 to discuss our over-the-counter business, average daily commissions rose 98% to a record $755,000 per day for the quarter. This morning, we announced that April business grew 34% year-on-year as well producing a sequential increase over March. As you may know, the March/April timeframe has always been seasonally lighter. However, we've shown relative strength compared to our competitors. We've seen strong fundamentals as we enter the very important risk season as hedgers prepare for the volatile summer and fall seasons. Today, the largest participant group in our OTC markets continues to be commercial participants, but we are seeking to expand our markets to additional qualified financial traders. We are serving the hedging needs of commercial and financial traders alike with growing liquidity in our North American gas and power markets. We continue to see liquidity providers, such as funds, proprietary traders and algorithmic trading firms enter our marketplace. Commodities as an asset class remain in expansion mode. We now have more invisibility not only into energy but into soft commodities and foreign exchange to verify this trend.

Turning to our other announcement this morning, we would like to offer a sincere thank you to Richard Spencer, our long-serving CFO, for his contributions to ICE since 2001. Today, we announced his transition to the office of Vice Chairman, and we're pleased to welcome Scott Hill to the ICE management team as CFO effective May 14. Richard came to me about eight months ago expressing a desire to transition his role and explore his life outside the Company as an empty-nester with his youngest child heading off to college this year. We agreed that a transition involving his counsel would help achieve both of our objectives. Richard will serve as Vice Chairman of ICE through 2007, and he will continue in his role as the Vice Chairman and Board member of NYBOT through that date.

Scott is an experienced international finance executive from IBM, and we look forward to the valuable contributions that he will make to the ICE management team. We actually have Scott here in our office today, and he's ready to hit the ground running. We hope that you'll be hearing from him on our next earnings call.

Finally, with regard to the Chicago Board of Trade, we remain highly confident in our proposal. We clarified our original proposal to the Board of Trade last month and maintain the economics of our initial proposal. We believe that our proposed transaction provides superior current and long-term shareholder value, growth opportunities and a more favorable customer proposition. I'm very limited in what we can say here today, but we believe Chicago and the trading community would benefit from the presence of two strong, well-managed exchanges, with competition and innovation continuing to fuel growth, rather than an alternative of cost consolidation. We are certainly no less excited about our future prospects in the absence of CBOT. We have many initiatives that we are aggressively pursuing, and this will continue our expansion across all markets.

We now would like to turn over the discussion to Chuck Vice. He will provide an update on our clearing and technology platform, and he will give you an overview of some key initiatives that we've announced recently that relate to our over-the-counter businesses.

Thank you, Jeff. As always, I'd like to briefly highlight some recent technology enhancements and discuss our clearing initiatives.

ICE has repeatedly demonstrated its technology leadership and we were pleased to be recognized in March by Wired magazine, by been named to its coveted Wired 40 list of the world's most innovative companies. Increasingly, ICE's used unique systems have been lauded for their fast distribution and ability to scale, as well as the cost-effectiveness with which that scale has been achieved. Today at peak times, we've managed as many as 6900 simultaneous connections into our platform, which is up [in] peak connections of just 6500 just a few months ago. This translates into many more new customers connecting to what is today the most comprehensive and widely distributed trading platform for commodities.

On slide 13, we highlight some of our recent announcements. To serve our growing markets, we recently announced the relocation of our disaster recovery center from London to Chicago. By 2008, the Chicago facility will become our primary data center. This shift is part of our new global network strategy and will allow us to better serve the needs of our fast-growing Chicago customer base.

We continue to achieve processing times that put ICE among the leaders in platform technology. In March, we completed a major upgrade of our OTC matching engine to further increase throughput, reduce round-trip processing time, and enhance implied spreading functionality in our largest OTC markets. This month, we will begin migrating our futures markets to a new generation matching engine that we expect to cut current round-trip times in half while increasing capacity two to three times.

As we outlined earlier this week, we are also diligently implementing our global clearing strategy. The time line for expanding our clearing business is as follows. ICE Clear Europe is preparing an application to the FSA to become a recognized clearing house with approval anticipated by early 2008. Systems development is underway, and we expect to transition all of our energy customers for both futures and OTC by July 1, 2008 to ICE Clear Europe. NYBOT customers will continue to clear their business through ICE Clear U.S. under existing CFTC regulation.

The framework of our clearing platform is designed to meet the unique needs of our diverse customers and regulatory requirements. The dual clearing house approach is more customer-centric in that it enables us to market U.S.-based clearing services to U.S. markets and UK-based clearing services to European and Asian markets.

To accomplish our clearing house move and minimize any technology spend required of clears, we announced last month that we will make use of systems already in use at LCH. Specifically, we engaged Atos Euronext, the IT provider of our trade registration system used by ICE's European clear at LCH, to link to ICE Clear Europe. This approach allows us to shield clearing firms from technology changes occurring in the background and provides ICE with control and flexibility in managing what we believe will be a seamless move.

We also provided initial projections for 2008, including the realization of approximately 25 million to $30 million in incremental revenue in the second half of 2008. These estimates do not include NYBOT's existing clearing revenue and are projected using modest growth rate assumptions for 2008. Annual incremental run-rate expenses forecast at 9 million to $14 million to operate ICE Clear. I direct you to our press release dated April 30 for more details.

On a related note, we recently announced some important initiatives regarding key third-party indexes that are widely used to clear and settle swaps in the North American natural gas markets. First, we announced our technology and clearing alliance with Calgary-based Natural Gas Exchange, or NGX. Under this arrangement, we now own the licensing rights to the most widely used natural gas benchmarks in Canada for the purposes of exchange clearing and settlement.

Second, we also announced a purchase and leaseback agreement with Intelligence Press to acquire their natural gas indexes that are especially popular in the U.S. Midwest and West Coast markets. This arrangement gives ICE sole control of licensing rights and royalties from third-party exchanges or clearing organizations that use these indexes for clearing and settlement. Control of these key natural gas indexes, as well as ICE's own popular power indexes, gives us an important strategic advantage in competing to serve the exchange-clearing and settlement needs of the North American energy market.

Also as part of our agreement with NGX, which is the leading energy exchange in Canada, we announced a technology licensing agreement. In this agreement, NGX will transition its unique product offering and customer base to the ICE trading platform. In turn, NGX will provide its highly specialized settlement and clearing facility for physical natural gas and electric power transactions. This valuable service provides contract delivery assurance for physical transactions and is not available at any other exchange today. We will launch this initiative in the third quarter and believe that customers of both ICE and NGX will welcome having both markets accessible on the same platform.

Yet another initiative was development of the Platts windows using our technology to support increased access and transparency to the processes for assessing global, over-the-counter crude and refined oil products prices. Rollout of this service will begin this summer and leverage our global distribution to the oil community while providing functionality within the Platts window for traders and brokers alike.

Finally, ICE Futures was pleased to receive a revenue ruling from the IRS designating ICE Futures as a qualified board or exchange under Section 1256 of the Internal Revenue Code. This ruling affords U.S. market participants in ICE Futures markets the same tax treatment applied to contracts traded on U.S. futures exchanges. We believe this ruling will further enhance the attractiveness of trading at ICE Futures by U.S.-based customers.

Taken together, these diverse initiatives expand and improve services for our customers and add value for our shareholders. We will continue to update you as we reach new agreements, complete additional key initiatives, and roll out technology enhancements in the coming months.

I will now turn it over to Richard for more financial details.

Thanks, Chuck.

As noted in our release today, this is the first quarter that we began including NYBOT in our consolidated results. ICE closed on the transaction on January 12, and our financial statements exclude the first seven business days of the year when we did not own NYBOT.

Providing detail on the revenue line for the first quarter, as you can see on Slide 15, our consolidated revenue was driven the strong growth in each of our business segments. Consolidated transaction revenues, which comprise U.S. and UK futures and OTC segments, totaled $109 million for an increase of 153% and accounted for 86% of consolidated revenues in the quarter. Consolidated market data revenues increased $14 million, up 133% compared to the prior year's first quarter.

Transaction revenues for ICE's UK Futures segments were $44 million, up 133% over the first quarter of 2006. Our UK Futures segment accounted for 40% of our first-quarter consolidated transaction revenues. Rate per Contract on ICE Futures was $1.29 during the quarter, compared to $1.33 in the fourth quarter of '06. Also in the first quarter, NYBOT's rate for contract for soft commodities was $1.59 compared to $1.56 in the fourth quarter of last year.

OTC transaction revenues increased 95% to $47 million in the first quarter, compared to the same period in 2006. This was driven primarily by growth in cleared contract volume, which grew at 112% year-over-year to a record 34 million cleared OTC contracts for the quarter.

As you can see and Slide 16, first-quarter consolidated operating expenses totaled $47 million, up 108% compared to last year's first quarter. The inclusion of NYBOT increased our expenses, as did two costs, including the patent royalty and the non-cash compensation expenses. In the first quarter, the Wagner patent royalty payments were $1.7 million compared to $1 million in last year's first quarter. With the February 20 patent expiration, this expense is terminated for our energy business for future periods.

FAS 123R resulted in a non-cash compensation expense of $3.8 million compared to $2.2 million in the first quarter of '06. The increase primarily relates to performance-based restricted stock issued in December of 2006. Last year, we entered into an agreement to sell ICE Futures' disaster (technical difficulty) in London. This sale was completed in February (technical difficulty) and we recognized an after-tax gain of $5.8 million. As noted in our release this morning, this gain was recognized as Other Income in the first quarter and produced a diluted earnings per share of $0.08 this quarter.

As presented on Slide 17, our operating cash flow increased 59% from $19 million to $30 million in the first quarter of 2007. Capital expenditures totaled $10 million, and capitalized software development costs were $2.6 million in the first quarter, as we continue to expand our technology platform and begin to ramp up our in-house clearing capabilities.

Slide 18 presents our balance sheet. As of March 31, 2007, we had $177 million in unrestricted cash and investments and an additional $21 million in restricted cash under the regulatory requirements of ICE Futures. We have $250 million in long-term debt as a result of the NYBOT transaction, which included a $415 million cash component.

We've included an update on some of our expectations in our earnings announcement this morning, so to save time for questions, please refer to the earnings release for more information.

With that, I will turn it back to Jeff.

For what may be the last time on an ICE earnings call, let me say thank you, Richard.

You are welcome, Jeff.

Well, we are pleased to present these financial results and update you on the initiatives that we've announced today. As always, I'd like to thank our customers and our employees who helped achieve these results. We believe we are extremely well-positioned, and we look forward to updating your on our next call. With that, we would like to take your questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Mike Vinciquerra, BMO Capital Markets.

I know you guys touched on this a little bit in your prepared remarks, but just the clearing solution, the split between the two sites, can you go into a little bit more -- it sounds to me like you are saying the customers prefer, the European and Asian customers prefer to have a European clearing site. But can you go into that a little bit more? I'm not sure I quite understand that decision.

Sure. I guess, when we sit back and we think about how our business is globalizing and the fact that, as an exchange, we've got this global execution business with customers around the world, it doesn't seem to us like you should have everybody have a banking relationship with New York or Chicago or Atlanta and that the global execution business needs to be thinking about a global banking business that surrounds it. So, we saw an opportunity, really using technology and relationships that we have in Europe, to pretty easily bring the European community into our clearing house by hooking this TRS system that our clearers are already connected to in Europe to our existing clearing house. So, using technology, it's pretty easy to bring those people together in one clearing platform, if you will.

The nuance now is that our European clearing solution will be regulated by the FSA and our U.S. clearing solution will be regulated by the CFTC, and the bank accounts and the money, if you will, will stay in their respective continents, but that, from a technological standpoint, we will have both U.S. and European and ultimately Asian customers hooking to a common technology set that we will manage.

If I heard you correctly, it sounded like you think that the revenue opportunities, by having the two separated, far outweigh the incremental costs of having 2 facilities?

I think so. I think, again, it's a choice of bankruptcy law and contract law that customers feel comfortable putting their money in. We think that the FSA and the CFTC are both very highly regarded globally, but they're definitely our customers that have a familiarity or preference with one or the other of those.

I think I would add to that it allows us two specific examples. You know, in our existing ICE Futures business, we have some contracts like UK natural gas, like emissions that are -- European emissions that are almost exclusively traded, at this point, by European customers. So this dual approach allows us to allow them to continue to trade and clear -- or us to clear these products for them in that venue and jurisdiction and regulatory structure that they are used to. Those are examples of products that we have, but that aspect will also benefit us as we try to attract additional clearing business in Europe and Asia where trying to force that business back through a clearing house in New York is not an optimal strategy.

Okay, very helpful, thank you. Then just one question on the numbers. Is it -- are you guys planning on putting out any pro formas in your 10-Q regarding kind of year-over-year with NYBOT included in both periods?

Yes, you will see NYBOT broken out as a segment.

Including last year's first quarter?

Yes.

Okay, great. Thank you very much.

Ken Worthington, JPMorgan.

Good morning. First, can you discuss maybe some of the risks that you see in terms of achieving your clearing goals? For example, how easy is going to be to migrate the open interest from LCH to your new clearing house? What we've heard is that, unlike the U.S., it's not universally accepted that the exchange actually owns the open interest and can move it at will. So any comments there would be helpful.

Sure. Maybe one editorial comment -- I'm not sure it's accepted in the U.S. that the Exchange owns the open interest. I'm not sure it's accepted anywhere that the Exchange owns the open interest. I think history has shown that customers have followed exchanges as they make changes in clearing.

But to really ensure that we are able to execute on this, we've done a couple of things that nuanced in our comments but I will highlight them. Obviously, first is we're going to make it technologically very easy for our European clearing customers to migrate to us so that they don't have significant costs in dealing with us using a technology that they are familiar with; that's this TRS system. Secondly, the clearing house, its main function is marking the positions to market and moving the money every day. We provide those marks to the London clearing house, and we will provide those marks to ICE Clear.

If you look at what ICE Clear -- if you look at our clearing footprint and the product sets that we have, generally there are five significant marks that we use, indices and physical delivery that are accommodated by ICE, indices by Platts, McGraw-Hill Platts, indices by NGI, indices by NGX, and publicly available settlement prices produced by NYMEX. Obviously, ICE has access to its own indices and operates the specifications under which we provide physical delivery.

We mentioned to you that we now have acquired access to NGI, NGX and McGraw-Hill Platts indices, and through litigation, we got access to NYMEX and provided (inaudible) to the London clearinghouse against that litigation. So because we control those indices, at the end of our contract with the London clearinghouse, we will cease to be providing those marks to the clearinghouse.

Beyond that, we've talked to the major end-user customers who hold open interest. Those customers are quite excited about the opportunity for ICE to continue to roll out new products and new initiatives related to clearing. You know, we have some credibility in this regard in the energy space, given that we really were at the forefront of creating OTC clearing back before you probably knew us but in that era where people didn't think it could be done, thought the execution risk was high, couldn't even understand the concept. Today, it's at the center of our industry. So, by having access to our own clearinghouse, it will allow us to roll out new products that can come out faster. That will help drive growth and manage risk and our customers like that.

So a combination of ease, the fact that we control the indices, and the fact that our major customers intend to move their business will make it I guess sort of technically impossible, if you will, to clear anywhere else other than where the Exchange goes.

Okay, that's helpful. Thank you.

Separately, and I hope I didn't screw this up, but you announced pricing changes to your Futures business in response to pricing changes at LCH Clearnet. Can you address how you're thinking about pricing in the OTC business?

Sure. I think, maybe again as a footnote, unlike Futures, the OTC business, we have a lot of various prices and we don't tend to make sort of public announcements about that pricing. That's part and parcel related to the fact that we compete against a whole [category] of brokers, many of whom have all kind of negotiated deals. That's sort of common in the over-the-counter space. So, we haven't made any forward announcements about how we intend to handle OTC pricing, but what we have said to you is that we do expect to receive synergies this year as a result of our clearing strategy. I think it's the competition and the innovation that we're bringing to clearing, but it's really helping to make LCH a better company; I think it's helping to make the industry look at what we are doing and think about these kinds of things. So, we view some of the changes in our relationship with LCH as really being directly accountable as early clearing synergies because of our acquisition of NYBOT.

Maybe one other question you didn't ask but it's buried in my prepared remarks was that we've also announced today, through the prepared text, that we're making some changes to fee structure at the NYBOT. While we don't have the details public yet, it will soon be posted on the NYBOT Web site. Again, we think that we've sort of mirrored and began to move the NYBOT into a cost and customer structure that would be similar to what the other AG businesses that we ultimately compete with do.

You know, that's a reasonable segue into my next question or final question. You've announced that you're changing prices at NYBOT. I guess ,when you originally bought NYBOT, you had talked about maybe $1 surcharge on the electric trades, and then when NYMEX rolled out their AG launch, you kind of pulled back on that $1 surcharge. Then I think, in the media, the floor brokers were upset about that. Is this change in any response to maybe appeasing those floor brokers? Is it a price change up? Is it a price change down? Like even if you can't give us details, can you give us direction and maybe the rationale?

Sure. Well, first of all, let me give you, again, a little background -- is that, in our original merger proposal, there was the concept of a pre-agreed upon $1 surcharge for electronic trading with a mechanism by which, if that surcharge in and of itself attracted electronic competitors, it would go away. Because it was a significant surcharge, it did have the impact of attracting electronic competitors, both in the form of NYMEX and (inaudible). And pursuant to the way the contract was written, it was removed.

The NYBOT Board of Directors and specifically the independent directors who continued from the original NYBOT Board, are solely responsible for the opportunity, if they wanted to avail themselves of it, of putting that $1 surcharge back on. So it's not ICE as was sort of widely reported in the press; it's really a decision up to the continuing NYBOT directors and the NYBOT directors have not chosen to reimplement that.

Now, separately and really distinct from the $1 surcharge debate that you saw play out, the Company, its business model is changing rapidly. You can see, by some of the graphs in our prepared presentation, there's a large electronic component as well as a large floor component. We are starting to try to mirror what other exchanges do in the AG business and really to put ourselves on sort of common footprint.

Generally speaking, what we've done or what the Board of NYBOT has done is reduced some of the floor charges, increased some of the electronic trading charges, and also begin to charge for so-called EFPs and EFSs, or off-exchange business that would be given to the clearinghouse for clearing and fungibility. I think you'll see that we've moved -- if you laid this fee structure down next to other exchanges, you'll see that the Board is trying to sort of replicate that common experience. But I think, from a financial standpoint, which is what you are interested in, it will be a net positive for the revenues of the Company. At the same time, what we're doing at the NYBOT is giving a net positive for the trading experience of our customers in the form of lower cost and tighter bid offer spreads.

Thank you very much.

Josh Carter, Goldman Sachs.

Thank you. Congratulations, Richard, and welcome aboard, Scott.

I wanted to just delve in a little bit more into the OTC business. You've clearly had tremendous growth there in the past. The growth rate is accelerating a little bit, but you spoke to the seasonal weakness that we see in these months. Could you give us a little more color on how the growth is looking there going forward, both in terms of new participants, increased participation going forward by newer algorithmic participants, new products? Maybe part of the algorithmic question would be what inning do you think we are in, in terms of algorithmic participation in the OTC business?

Well, I will try to answer that. I think the algos are slowly entering both our OTC energy markets and our NYBOT futures markets. I think they are both very early.

Two things we've done there I guess to comment on -- I mentioned we upgraded our OTC matching engine for higher performance. Now, for example, our Henry Hub natural gas market is our second-price quoted market after WTI, which is not surprising, given the higher volatility of natural gas related to crude oil.

Regarding algo, we are also -- I think it's material our comments about moving our primary data center to Chicago. Part and parcel of doing that is going into a facility where a lot of these guys are already located. It's much easier for them to connect to us. It's cheaper, easier and we will have larger, deeper colo capabilities there.

So we expect to continue to see algo growth. I don't know that, from a percentage of our business, we think the percent is going to dramatically change because we're seeing growth in all customer segments in the OTC markets, among the commercial and banks, but we certainly are getting more algo customers in.

In terms of just the OTC business generally, I think some of the initiatives we talked about, they are OTC-centric and they all will be accretive over time to our OTC revenues. Just to recap some of those, the Platts relationship for example, that's our first foray into the physical oil markets globally. That is a very big initiative and will take probably one to two years to fully roll that out across all of the global oil markets.

Certainly, our NGX relationship is a new stage of our business in Canada that we think will -- Canada being as large of a natural gas production area or larger even than the U.S. Gulf, so we think that's important going forward. Again, all will be accretive, all of these markets on the same screen, expanding, overlapping customer basis, so we are excited about all those things.

Thanks, Chuck. Just a little bit more on NYBOT -- you mentioned in your comments algorithmic traders our coming onto NYBOT. Is there still pent-up demand for that or would you say that the core base of new electronic participants is already linked in and starting to trade?

I would say it's very early with those guys coming in. I think we will see probably, the next stage, a big uptick in their participation when we launch these financials in June. The Russells, the currencies, the dollar index, those are things they are much more familiar with, have traded the same or similar products on other exchanges, so they are looking forward to the (inaudible) opportunities there. You know, we are excited about what's going on in NYBOT. I would say the volume make-up from a customer standpoint is not tremendously different yet. It's slowly changing.

One metric that I did notice, though, as we've gone side-by-side and we've added electronic component, we expanded trading hours pretty dramatically. 15% of the NYBOT volume now is coming in those hours outside of the traditional NYBOT hours. It's all coming electronically, of course, because the floor isn't open. But I don't think we've had enough time to look at that and say is that coming from Europe or Asia, but it certainly is business that NYBOT was not getting before.

Thanks. Then maybe just a final question for Jeff. You've clearly been staying extremely active on many fronts, but I would be curious if you could give us an update on your strategy in Asia and the opportunities that you see there, and how you see those playing out over the next 12 to 18 months.

Sure, a couple of things that maybe are not hugely obvious -- but one is the Middle East sour crude marker that we are launching is really a contract that's targeted at Asia and to some extent India. But the second thing is this Platts initiative that we are rolling out, the so-called Platts Windows, we're starting with that initiative in Asia. Platts has been actively marketing this system and training people and showing what we're going to do for about the past month in Asia with this anticipated launch this summer.

We've continued to -- we have an office in Singapore and we've continued to staff that and work on our sales initiative.

Then maybe lastly, I actually think quite highly of the Board of Trade's Jade initiative. It hasn't to date necessarily produced big results, but it's along the lines of the kind of things we've been talking about, which (technical difficulty). To me it's really a mechanism to have clearing in Asia through the Singapore exchange. That, hopefully, will be successful in that acquisition and we probably more highly view that than maybe the market does.

Thank you very much.

(OPERATOR INSTRUCTIONS). Rich Repetto, Sandler O'Neill.

Jeff, could you -- on this clearing thing, I just want to make sure. I guess the question is that the Europeans side of the clearing -- and I think you've made it clear -- but you could not have done any of this clearing on the European side. I guess it leverages basically the acquisitions of NYBOT and what you have in the U.S. clearing. Is that the case?

Then the other thing is the real value, like you've touched on it and you got real close, but I didn't hear that there is actually a link between a global clearing between the two, where the margins -- where the balances are actually treated as one from, say, a holding company like on a higher level.

Sure. First of all, let me start with that. You know, I think the way regulation works today, clearing is really locally regulated. So, on Day One, we've got a UK-regulated FSA-regulated exchange and a U.S. CFTC-regulated exchange and each with a similarly regulated clearing house.

But you've watched ICE. I know you've seen this where, with respect to last year, the CFTC and the FSA have come to a common agreement under which the really oversee ICE and they oversee particularly our WTI contract. We provide data and information to both regulators and the nuance there is that they agree to cooperate so that one regulator is not telling us to turn left and the other regulator telling us to turn right, which is really the essential problem with the dual-regulatory structure.

So we hope that we can continue to work under that agreement and with the good faith that surrounds it to continue to try to bring commonality to clearing. But it doesn't exist today, just like the execution didn't exist last year. But with the rate of change going on in the globalization of our markets, the regulators are very aware of this and you see sort of a moving regulatory landscape.

When we can bring that and what would be required and whether or not it's even really available, those are all things to be sorted out in the future. But it leads into my answer to the first part of your question, which is could we have brought that UK business to the U.S.? Our thinking is sure, we could have. I mean, a lot of what goes in there is North American gas and power executed business and North American-executed WTI business. But those people over time with ICE have gotten comfortable sending those positions to Europe so that they can be offset and netted with things like Brent and gas oil, which are really largely European and Asian products.

If you look at our industry, the major players in our space are global players. The center, much of the center of the energy business is really out of London because of its access to the U.S. time zones and the Asian time zones, and so it tends to have a big trading footprint for most of our larger customers. As a result of that, it seems to be the right jurisdiction to try to keep energy initially.

I guess that's helpful, Jeff. The follow-up, on a different topic\ -- you mentioned the 60/40 tax treatment. I believe it was mentioned in regards to Dubai, but also I think I thought I saw another (inaudible) it sort of went with all the news that's going out over the last month here in the exchange base. But is there more to the 60/40 treatment than just Dubai? Could you explain that a little bit, the potential impact here?

Sure. The backdrop is that normally 60/40 tax treatment, which is the ability to take 60% of your gains as short-term capital gains and 40% as long-term capital gains, even if you hold the position for a very short period of time, is very relevant to futures, to those people that tend to file an individual return, a 10-40 tax return, which can also include partnerships and CTAs and other people that manage money where the tax benefits are spun out to the investors. It's not so relevant to corporate investors who tend not to file 10-40 tax returns.

But with that backdrop, that 60/40 treatment is available to futures exchanges that are regulated in the U.S. We were able to go to the IRS after putting together this agreement that I mentioned to you, where the FSA and the CFTC had agreed to cooperate in the way they oversee ICE, and whereas you recall we agreed to provide these so-called large trader reports to the CFTC and continue to allow input to the CFTC in overseeing us.

We went to the IRS and made the argument that we were regulated like a U.S. futures exchange. The IRS agreed with us after talking to the CFTC and investigating this. ICE Futures, which is the UK exchange, received so-called 60/40 tax treatment. What that means is any contract that ICE Futures launches that's traded by a U.S. trader will receive the so-called 60/40 tax treatment. So the new Dubai contract or Middle East sour crude, in our case, anyone who trades that, because it's an ICE Futures contract, they will receive 60/40 tax treatment in the U.S. That's effectively a large fee discount to U.S. traders.

Christopher Allen, Banc of America Securities.

Can you give us some color around the opportunity from over-the-counter AG products in terms of how big the market is? Is it a multiple of the futures markets?

It's hard to say right now. There's definitely a meaningful OTC market for the NYBOT AGs, largely cash-settle look-alikes of the futures and options contracts that are trading there now. One attribute of them is that many of these swaps go out far beyond the two-year curve that NYBOT futures are currently available.

As you may or may not know, the regulation around OTC cash-settled AG trading is differently than futures, so what we're looking at providing there is not the online execution of it but clearing services to that market where, regardless of how it's executed, whether it's directly between OTC participants or through a voice broker, that they can give that trade up to the NYBOT clearing house as these global AG commodities, sugar, coffee, cocoa -- as you might guess, these are global players, commercials, trade, industry companies, many of which are not well-known and not that good from a credit standpoint. So a lot of the big players in these markets are anxious to get that counter-party credit risk off of their books and would look forward to giving up to the NYBOT clearing house. So we're working on that as we speak. As Jeff said, we need CFTC approval of that. All of those applications are being put in place.

From a smaller opportunity standpoint, I would also add that we are exploring the OTC physical AG markets. There are some unique opportunities there possibly to add commodities to our platform or to acquire, bolt-on, some other small businesses that would be complementary to I think both our cash-settled NYBOT AGs as well as our physical OTC energy platforms.

Great. Well, this concludes our call, as we want to get off before the market opens, but we appreciate your patience with us today. Thanks for listening to all the initiatives that we have. Hopefully, we will have an opportunity to talk to you before the next quarterly call with additional things that we're working on.

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.