洲際交易所 (ICE) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the IntercontinentalExchange Third Quarter Earnings Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I will turn the call over to [Ms. Kelly Loeffler], Vice President of Investor Relations and Corporate Communications. Kelly, please go ahead.

Good morning. To obtain a copy of the Company's third quarter earnings release and presentation, please visit the Investor and Media section of our website at TheICE.com. These 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 that are expressed or implied in any forward-looking statement.

With us on the call today are Jeff Sprecher, Chairman and CEO, Scott Hill, Chief Financial Officer, and Chuck Vice, Chief Operating Officer. We'll follow the same format as on our last call, where Scott will begin with the review of ICE's financial performance and Jeff will provide an update of our growth initiatives. At the end of the prepared remarks, we will take your questions. I'd now like to turn the call over to Scott.

Thank you, Kelly, and thanks to everyone for joining us today. I'll begin by highlighting ICE's key financial and operating metrics for the third quarter, and then, we'll discuss a few of our key initiatives. Let's start on Slide 4 with an overview of ICE's third quarter results. I'm pleased to report that we delivered another solid quarter, including record consolidated revenues of $152 million, up 60% year-over-year. Our operating income increased 54% to $101 million during the quarter. Our operating margin was 66%. Net income for the quarter was $67 million, an increase of 53%. Earnings per diluted share were $0.93.

By virtually any measure, ICE remains a leader within the rapidly growing exchange sector. We ended the quarter with $193 million in cash and short-term investments, and $231 million in debt. Our debt level remains low. We have full access to our $250 million line of credit and we continue to generate strong growth in operating cash flows. All of this gives us the financial flexibility to be opportunistic within a dynamic industry. We've included a summary balance sheet in the appendix of the earnings presentation.

Next, on Slide 5, you'll see a breakdown of consolidated revenues. Transaction revenues comprised our European and two North American regulated futures exchanges and our global OTC segments. Transaction revenues totaled $131 million, up 56% year-to-year. These revenues accounted for 87% of our consolidated revenues in the quarter. Consolidated market data revenues increased 77% to $17 million and accounted for 11% of consolidated revenues.

Moving on to Slide 6, third quarter consolidated operating expenses were $51 million, up 74% compared to last year's third quarter. As with prior quarters this year, the largest driver of the increase was expense associated with the addition of ICE Futures U.S. to our consolidated results. We remain on target to achieve the increased synergies announced in the second quarter, and we continue to identify additional cost savings opportunities in our U.S. futures business. As a result, we expect further margin improvement over the next couple of quarters.

Operating expenses also reflect the investments we are making to expand our clearing operations. During the first three quarters of 2007, we've incurred approximately $2.6 million in clearing related expenses. This includes $1.2 million recorded in the third quarter. And we remain on track to open our European clearing house in July of next year.

Our third quarter expenses also include $1.5 million related to the Russell licensing agreement, which I'll detail in a few minutes. Finally, I want to mention that during the quarter, as part of a multiphase enhancement plan, we completed an upgrade of our technology platform. Jeff will expand on our technology initiatives later in the presentation.

Now let's turn to Slide 7, which highlights some of the key drivers of our performance. During the third quarter of 2007, ICE's average daily volume was a combined 1.5 million contracts for our futures and OTC markets. Volume growth in our core energy products remains strong as a result of new customers, increased electronic trading adoption, and new products. And we continue to make progress in ramping our electronic, agricultural, foreign exchange, and index market as a transition to the ICE platform.

Now if you'll flip to Slide 8, you can see that the average daily volume of contracts at ICE Futures Europe was 553,000, an increase of 34% over last year. Transaction revenues were $46 million, up 25% over last year's third quarter, and accounted for 35% of quarterly consolidated transaction revenues. Growth in our European energy futures segment was driven by record gas/oil volume in September, along with continued strength in our Brent and WTI crude futures markets.

During the month of September, our ICE Brent and gas/oil futures contracts set new average daily volume records. The ICE WTI contract recorded its second highest ADV ever. Rate per contract, or RPC, for ICE Futures Europe was $1.29 during the quarter, which was equal to the second quarter of this year.

Looking at ICE Futures U.S. and Winnipeg performance on Slide 9, ADV grows to 221,000 contracts per day, up 31% year-to-year. Transaction revenues were $27 million. Our North American futures businesses accounted for 21% of third quarter consolidated transaction revenues. During the quarter, we established new volume records for coffee [indiscernible], cocoa, cotton, the U.S. dollar index, and a number of other contracts. In the third quarter, RPC for agricultural commodities futures averaged $2.07, compared to $1.85 in the second quarter. September RPC was $2.18.

We're very pleased with the progress we've made in our agricultural commodity market. We see excellent growth potential for these and our financial products, such as the Russell Indices and foreign exchange contracts.

I'm sometimes asked about the growth rates we're experiencing at ICE Futures U.S. As most of you know, a primary driver of volume growth in a contract is the volatility of the underlying commodity. Despite uncharacteristically low volatility during the quarter in sugar prices, which is the largest contract for this segment, we've seen healthy volume growth year-to-date. In fact, since we introduced electronic trading in our U.S. Futures business just eight months ago, we've seen a 26% increase in average daily volume. This compares to the 21% increase in ADV at ICE Futures Europe during its first eight months of fully electronic trading. So we're pleased with our progress to date and with the potential for growth that lies ahead.

Another key initiative underway at ICE is the migration of the Russell Index Futures contract onto our platform. In June of this year, we took an unprecedented step when we made a long-term and meaningful commitment to entering the new asset class. As I mentioned, our third quarter results include $1.5 million of expense related to the Russell contract. We anticipate similar amounts in each of the next three quarters. The exclusivity period of this arrangement begins in the third quarter of 2008. We expect volumes to ramp during the first half of 2008, culminating in the completion of the transition to ICE in the third quarter.

The level of expense associated with the contract will also increase in the second half of 2008. We remain confident that this deal will yield a strong return over the long-term and will help us more rapidly expand into the equity index business. Please see our press release issued this morning or the appendix to this presentation for additional details.

Moving on to the OTC business, on Slide 10, you can see that this segment delivered record transaction revenues of $58 million, up 24% year-to-year. OTC revenues accounted for 44% of our third quarter consolidated transaction revenues. Cleared contracts grew to a record 38 million contracts in the quarter, representing 84% of our OTC business. For the third quarter, average daily commissions rose 21% to a record $890,000 per day. Despite the absence of volatile conditions traditionally associated with a typical hurricane season, we saw greater trading and hedging activity and increased liquidity during the quarter.

While our commercial customers, including gas and power utilities, distribution companies, and global energy majors, continue to increase their participation in these markets, so, too, do financial institutions and liquidity providers. As we've said before, we believe that we are early in the adoption of energy commodities as a traded asset class and our results demonstrate the growing demand for access to this segment of the market.

Finally, you'll find some additional financial guidance in today's earnings release, as well as in the appendix of this presentation. Please refer to that material for more information.

And with that, I'd like to turn the call over to Jeff.

Thank you, Scott. Now that you have the numbers, I'll update you on the strategy we're pursuing to ensure that ICE remains a growth leader. We've been aggressively pursuing both organic growth and expansion through mergers and acquisitions since our inception seven years ago, and we intend to continue to pursue both types of growth in the future. We've spent much of the past couple of years putting in place a diverse and unique product offering, as well as establishing a leading edge technology infrastructure to serve a global customer base. Today, we operate three futures exchanges, two clearing houses with the third one under construction, our own technology infrastructure, a global over-the-counter marketplace, and a rapidly growing market data and trade confirmation business.

We're constantly seeking ways to increase our reach, our products, and our value for customers and shareholders. This focus on growth is evidenced by the fact that year-to-date ICE has remained a leader in terms of growth in revenue, EPS, and volume. Importantly, we're working to sustain and build on this performance. Year-to-date we've completed five transactions and a number of strategic partnerships. The first acquisition was NYBOT, which is now called ICE Futures U.S., and that closed in January.

The second was our acquisition of the Winnipeg Commodity Exchange, which closed in August. Our OTC and market data businesses have been augmented by acquisitions of ChemConnect, Chatham Energy, and Commoditrak. And we have quickly and smoothly integrated these operations and are leveraging their unique assets together with our own strengths. ICE Futures U.S. is well on track to achieve expense and revenue synergies that we anticipated, and we continue to evaluate opportunities to increase operational efficiencies and identify additional synergies.

Most recently, in addition to expanding its clearing operations, we've begun to enhance the equity index and foreign exchange complexes that until very recently have only traded on the open Outcry trading floor. In November, we'll roll out the first tranche of currency pairs on the ICE platform. This is a very interesting market for us and it's one in which we believe we can unlock significant value despite the fact that it has been historically relatively small for ICE Futures. We look forward to rolling out more products to serve this market in the future.

In the next few quarters, our exclusive license for the U.S. Russell Index futures will take us into a very large addressable market for equity index futures. We introduced the Russell 2000 electronically in mid-August and the Russell 1000 in June. In addition to developing cross margining agreements and other incentive programs, we're building relationships with many of the key users who rely on Russell benchmarks. We believe these users are eager for a transition to take place and that there's a great deal of loyalty to the Russell benchmarks. The liquidity in traded Russell products has never been greater than it is today. Year-to-date the futures based on U.S. Russell Index products have exceeded 50 million contracts across both futures and options, and given the growth of Russell as a benchmark relative to other indices, we believe the potential for ICE to grow the franchise is excellent.

Our agreement recognizes the value of the Russell Indices and represents an important long-term commitment to expanding our presence in the equity index business and in growing Russell volumes from their current levels. We also demonstrated our appreciation for the value of other key indices by licensing, and many times on an exclusive basis, the rights to several important commodity indices, including those of NGI and Platts, with whom we cooperate in conducting the Platts Window on ICE. Earlier this year we announced a cross licensing agreement with the Natural Gas Exchange of Canada, or NGX, and in December we'll complete the transition of NGX products onto the ICE platform. Under this arrangement we've secured preferred access to the most widely used natural gas benchmarks in Canada for the purpose of clearing and settling key natural gas products.

In turn, NGX will provide contract delivery assurance and settlement for physical transactions through a physical clearing facility that is unique within the energy industry. And finally, from a strategic investment perspective, earlier this year we acquired an 8% stake in the National Commodity and Derivatives Exchange of India, or NCDEX. Recently, I accepted NCDEX's invitation and I will join their Strategy Committee. This is a special appointment which demonstrates our mutual belief in the long-term strategic value of our alliance. We think that there are key benefits from participating with local exchanges in emerging derivatives markets, expanding our reach into markets where regulatory or structural issues may prevent us from operating on a standalone basis.

On the technology front that Scott mentioned, during the first quarter we completed -- excuse me, during the third quarter we completed one of the final stages of a multiyear development project to enhance our technology platform. Roundtrip trades can now be executed in as few as seven milliseconds in our energy futures business and 12 milliseconds on a blended exchange-wide basis. To my knowledge, no other futures trading platform matches that speed today. In December, we'll finish another critical phase of enhancement to our technology platform to ensure that we stay ahead of the curve.

As a result of these and other enhancements, as well as the growing investor interest in the commodity asset class as a whole, we continue to see increased participation by funds, proprietary traders, and algorithmic trading firms. This is in addition to the commercial commodity market participants who already provide the markets with deep liquidity. In January, we expect to complete the move of our primary data center to Chicago to expand the size and the scale of our physical technology site. This move will help accommodate an expanding range of market participants, including high velocity traders who wish to co-locate with us.

Another area where we expect to see growth is through the expansion of our clearing business. In September, Tom Hammond joined ICE Clear U.S. as our President and his wealth of experience at the former Chicago Board of Trade and the Board of Trade Clearing Corporation will be invaluable to us. We've already made great progress in implementing our global clearing strategy as we move into the next phase of ICE Clear's development in Europe. Customers have shown a demand for more cleared products to support growth in their businesses, while ensuring efficient and secure risk management, whether it be in futures or over-the-counter markets.

We're working to bring efficiency improvements in clearing, while introducing many new products to meet customer needs. And we're working with the FCM community to ensure that ICE Clear meets their needs in terms of financial safeguards, operational processes, and quality of services. We're on track to meet the key milestones for the formation of ICE Clear Europe. We've submitted our clearing application to the FSA on July 31, and we're engaged in a process of regulatory approvals. We've commenced the process of gaining U.S. regulatory approvals as well as a multilateral clearing organization with the CFTC.

Earlier this month, we named JP Morgan as our consolidation bank for ICE Clear Europe to provide transaction processing, investment management, and safe custody services. And earlier this month in London, we held the first meeting of the Technology and Operations Group where we provided an update to clearing firms on the technical and operational progress of the clearing house. The first meeting of the Chairman's Clearing Transition Advisory Group for ICE Clear Europe will take place on the first of November.

In both cases, the meetings have had solid representation from the FCM community. In addition, we're conducting meetings with customers and FCMs on a regular basis. We are very eager to launch this new business and we anticipate moving our clearing in-house for all of our business segments in the third quarter of next year, as previously announced. It's not only our new business ventures that show potential. We remain the fastest growing major derivatives marketplace on a year-to-date basis. We continue to see significant growth ahead in energy futures and in over-the-counter markets, which were the roots of ICE's formation.

It's been virtually impossible for anyone anywhere to ignore recent news regarding record-breaking oil prices. Geopolitical events, a weakening dollar, and growth in the BRIC countries have driven oil prices to all-time highs. While high oil prices may not always translate into increased trading volumes, we've experienced a positive impact as a result of strong volatility in these markets over the quarter and continuing into October. Particularly in this environment, our offering of both futures and over-the-counter markets on a single platform is valuable to customers seeking risk management capabilities and product diversity.

As Scott mentioned, we set records in our futures business and over-the-counter segment due to both increased participation and the need to hedge energy prices. Today, nearly half of the world's crude oil futures are traded by ICE Futures and recently we've seen consistent anecdotal evidence of continuing hiring and expansion within the commodity desks at banks and funds. We think that this point may help address any concerns that there could be disinvestment in commodities due to the issues in credit markets.

On an adjacent topic, I'd like to take a moment to offer our perspective on the ongoing discussions regarding U.S. regulation of the over-the-counter markets. We believe that there is a near-term opportunity to resolve this complex issue. We've worked for more than a year with a range of policymakers, regulators, and industry participants to develop a plan for regulation of the over-the-counter markets. Our goal has been to help shape effective regulation, without eliminating the significant economic and utility benefits that are provided by liquid and transparent markets that ICE has brought to the industry. Our innovation in these very large and global markets may have enabled increased hedging and risk management capabilities for commercial pledgers and they've drawn a host of new industry participants to ICE and to other exchanges.

Therefore, given the complexities inherent in the vast and varied over-the-counter markets, we believe the CFTC's announcement yesterday is an important step toward resolving the debate and providing regulatory certainty for trading platforms like ours and for our customers. Over the last few months, I spent time in Washington and I testified before various government entities expressing our support for many of the principles espoused yesterday by the Commission. The dialogue with all the parties has been very productive in identifying the key components for regulation. And much of what we've discussed is already in process.

Incidentally, it was one year ago this month that we began reporting positions on a daily basis to the CFTC, and during this one-year period we've expended -- we've experienced tremendous trading growth. I'd like to note that contrary to how this issue has been portrayed by some, regulation is not a negative for ICE. In fact, today we operate three regulated futures exchanges under the purview of three different regulatory authorities. Regulation in our over-the-counter markets would give us authority that we need to enforce key market principles and increase confidence in our markets for both market participants and consumers. As is true in futures markets, the presence of regulation does not impede the market growth or drive business models.

Turning to what we do think drives growth and business models, many of you have asked us about new product launches and this year there have been many. Today we offer five asset classes on the ICE platform, four of which we've added just this year. These include soft commodities and agricultural products, foreign exchange, equity indices, and chemicals. This is a dramatic increase in the addressable markets compared to our product suite when we began this year.

Within our existing businesses we continue to dive deeper. We're extending the reach of our over-the-counter markets from natural gas and power into the refined oil products markets with our launch of the Platts Window on ICE. As mentioned, at the end of the year we'll add Canadian markets for both energy and agricultural products through our NGX partnership and our Winnipeg Exchange acquisition. Therefore, by the end of 2007, we'll offer an additional 60 products on our platform, compared to the beginning of this year. These products range from cleared physical gas to canola and coffee, Russell Indices and currency pairs, as well as sugar, crude oil, and options on natural gas. This is on top of the growth that we're seeing in the dozens of products that we launched in 2006, including West Texas intermediate crude oil and several cleared OTC energy contracts.

Today the breadth and depth of our product line speaks to our ability to scale our markets and gives us a competitive advantage. We continue to see growth in each of our markets and we believe that each represents significant value-creating opportunities for ICE.

As always, I'd like to thank the ICE employees and our strong customer base for a very good quarter. As you can see, we continue to set an ambitious agenda that centers on the evolving need and the opportunities that exist in the derivatives markets.

This concludes our prepared remarks, and with that, we'd be glad to take your questions.

Thank you, sir. (Operator Instructions.) Our first question today comes from Daniel Harris with Goldman Sachs.

Good morning.

Over the past couple of weeks there were a couple of reports out indicating that there may or may not be a review of things that you guys are going to be doing down at the NYBOT in terms of the pits and keeping them open. And while clearly a lot of the volumes have certainly trended to the electronic screen, I'm just wondering if you can update us on your thoughts regarding that. And I know a lot of this has to go through the Board and be approved by a member vote. But I just wanted to hear what you're thinking at this point.

Sure. I think generally speaking today, about 85% of the volume of the NYBOT futures complex is electronic and about 15% remains on the floor. That does not include options, which is still largely floor-based. The reason that these press reports have come out is that our management has been out talking to the marketplace to ask the market about the efficacy of the 15% that remains on the floor and whether or not it's an important component to the market. And more importantly, since we've acquired the NYBOT, we've rolled out a lot of new technology -- technology in addition to the obvious electronic trading platform -- that allows some of the kinds of things that were done on the floor to be taken upstairs.

So as a result of these conversations that our colleagues are having with the marketplace, we're trying to gather information and we're going to take the results of that to the Board of the NYBOT and see what kind of decisions come out of that. But generally speaking, there is a dialogue going on right now with the trade, and this includes people on the floor and brokers that are supporting floor operations, about their needs and wants and desires for continued floor-based trading.

I don't -- we don't have an exact answer to what's going to happen though because we're still in that dialogue. But the fact that we've hit this sort of 15% level has really stimulated a pretty broad dialogue within the industry about whether or not the rest of the business should move upstairs.

One thing I'd add, Daniel, is it's important to keep in mind -- and this has not gotten in the way at all of the cost synergies. As I mentioned in my remarks, we're on track to the increased synergies we talked about in the second quarter. As we look at the results in the third quarter, that business actually has doubled its operating margin and doubled its operating profit on a year-over-year basis, so we continue to make good progress there.

Yes, I completely would agree. Thanks for that. And then, just lastly here, Jeff, can you help me think about how your traders, both institutional, financial, and the underlying, have changed their trading strategy in this type of oil pricing environment? As oil really spikes up here, how do people think about hedging or taking advantage of that in both the near and -- near term and sort of further out the curve? Thanks very much, guys. Great quarter.

Thank you. I think one thing that you tend to see in trading of oil generally, but particularly so in times of high volatility, is that people are not necessarily trying to make a bet on the absolute price of oil, because it is so volatile. And as all of us know, something could happen elsewhere in the world while we're asleep at night that could dramatically affect the price of oil. So people tend to play oil trading with spreading and they tend to look at differences between months or differences between products, so that they effectively build in a hedge.

One of the things that is emerging around oil trading today that did not exist very much let's say at the time we started ICE is the increased uses of-- increased use of options as another way of building a hedging strategy around the price of oil. And that's why we have acquired Chatham Energy to try to get more options expertise in the company. And we've been pretty open about the fact that we've been building for quite some time an enhanced options trading platform that we're going to be rolling out here in the near future. And so, that's an area where we want to address.

That options market in energy is still a very interpersonal market. It's done largely over the telephone. And even to the extent that other futures exchanges have electronic options capability, a lot of that business is arranged upstairs and through dialogue before it hits the electronic system. So we're looking for ways to build efficiency into that, so that we can capture part of that business.

Thanks very much.

We'll go now to Howard Chen, Credit Suisse.

Good morning, everyone.

Good morning.

Jeff, it appears that there continues to be a widening gap between your over-the-counter revenues and that of your primary competitor. I guess in your mind, what's driving that widening gap and apparent growth in the over-the-counter market share for ICE?

A couple of things. One is we really do believe in this idea of having futures and OTC on one screen and cross selling products. And so, we have the benefit of ICE Futures Europe and their oil platform that's being distributed globally and we're able to expose these over-the-counter markets on ICE, which traditionally have been very U.S.-centric, to a global audience. And so, that gives us a bit of an edge.

Secondly, we have started to move into the options business, where we didn't have a presence before, so there was really a lack of competition in part of the space. And I think we intend to make good progress there. It's obviously an area where management's been putting a lot of attention. And I think we have been engaging the clearing community through the conversations about trying to build a global clearing strategy. And to the extent that a clearer can buy a customer trade, I think increasingly you see it coming our way and -- because I do think that some of the concepts that we're trying to put in place will ultimately be very beneficial for the clearing community. So I don't think it's any one thing, it's just a combination of going out every day and trying to address needs and problems. And the sum total of that seems to be doing well for us.

Thanks. That color is helpful. And then, Scott, a quick one on the numbers. Market data revenues continue to trend higher. Can you parse out the drivers of that strength? Is it more users, the impact of some fill-in acquisitions, like ChemConnect, other fee schedule adjustments that you did?

Well, the biggest driver of the year-over-year growth as you are aware is the addition of the New York Board of Trade, now the ICE Futures U.S. business. We continue to see trends also in our ICE Data business, which does come from additional users that we have. I may have the numbers a little off, but I think we're now above 7,000 connections overall and we started the year at roughly about 6,000. So those increases will also help drive our data fees.

And on the sequential quarter strength in particular, anything to speak of there?

It's really the same two drivers. As I stare at the data and look back over frankly the last six quarters, it really has been the increased ICE Data fees, and then the introduction or the inclusion of the ICE Futures U.S. business.

Okay, thanks. Congrats on the quarter. And best of luck with the water crisis.

Thank you.

Our next question is from Rob Rutschow with Deutsche Bank.

Hey, good morning.

Good morning.

I'm wondering if you might be able to give us a little bit more detail on the clearing build out in terms of how many employees you think you'll have when you launch in the third quarter and how much headcount growth you'll have related to increased regulatory requirements.

Chuck Vice, our President, is here. So I'll ask him to address that.

Yes. We are in the midst right now of recruiting and hiring out that organization. We've got it targeted somewhere between 12 and 16 employees that -- those are all London-based employees with the -- and that ICE Clear Europe will have a primary outsourcing arrangement with ICE, Inc., the parent. And so, we've -- part of the integration with NYBOT has been integrating the IT resources, the clearing IT resources, both the systems and the people in New York with those we have in Atlanta to support the ICE Clear Europe business unit, which as Jeff gave some details on it in his remarks, is on schedule for that July launch next year.

And the only thing I'd add to that is we do have a few resources on board. We've said previously that there would be about $7 million to $10 million of transition expenses. We're still in that range. And then, on an ongoing basis, we had guided previously that we expected about $9 million to $14 million of ongoing operational cost. And what Chuck just talked about is an element of that guidance.

Okay. And you mentioned the data center relocation to Chicago. I'm wondering if you're going to have any additional costs related to that in the first quarter and whether or not there is going to be any change in the tax rate if you're transitioning revenues out of Georgia and into Illinois?

I didn't get the second part of your question. Could you repeat it?

The first part was any additional costs associated with the relocation, and the second part was any change in the tax rate due to a change in venue.

We've looked at both. And in terms of cost, we basically have been making the capital investment throughout this year to get that data center up and running. It's actually acting now as a backup facility for us while the primary center is here in Atlanta. So there won't be a lot of incremental cost because that capital has come in and it started to depreciate into the income statement. So you shouldn't expect as you go into the first quarter, second quarter of next year, to see any kind of spike in the expense due to that.

In terms of the tax rate, we did do a lot of work looking at that and actually there is an immaterial impact in terms of overall taxes from that action.

Okay. And that will allow you -- you have interest from algorithmic traders at this point that you think moving will benefit you there?

Absolutely. I mean, we have a much larger co-location suite, actually a separate suite there in that facility in Chicago, which happens to be -- in fact, one of the reasons we chose it is that it's so heavily occupied by the trading firms themselves already. So they're actually already there and it's a simple matter of just cross connecting to our suite, our cage there where our computers are.

Okay, great. Thank you.

Our next question will come from Rich Repetto with Sandler O'Neill.

Good morning, Rich.

Mr. Repetto, your line is open.

Yes. Can you hear me?

Yes. Hi.

Hi, Rich.

Rich, are you there?

Can you hear me now? Hello?

Yes.

Okay. The question is on the over-the-counter segment, I know you did answer one question already. But you did give us -- I'm just trying to see a little bit more color where the volume -- I'm looking through the slides and volume was up 4%, but you still saw a nice 21% increase in the average daily commissions. And still trying to -- even with a lack of major, major hurricane volatility. So is there anything -- and it is primarily driven by natural gas -- still -- it still -- there's no seems like answer or summary on this or how to wrap -- understand this more -- the growth I guess. Are the options being more reflected in the average daily commission?

Yes, Rich, let me take that one. So as we've looked at it, there are a couple of drivers. Number one is we saw good strength in the power business and the mix in that business and the rates associated with that business are good relative to some of the other products. And so, to the extent we see strength there, we see stronger revenues relative to simple volumes. We continue to see increases in the oil area, particularly as the agreement with Platt comes on line. And frankly, that's something that we think will stay with us. And also, just in terms of overall rates management. There was -- and I don't recall which quarter it occurred, but there was an adjustment in the clearing fee previously where we held our rate, so to some extent you started to see some of the transition of that revenue to our company. And those three things combined helped drive the revenue strength relative to the volumes at 4%.

Understood. That's helpful. And I guess my one follow up, Jeff, more of a broader exchange question. You saw the Middle East players get active in the exchange space this past quarter, very helpful to NASDAQ. And you've got to believe that they would be interested in energy. And I think you were right in predicting the sort of the failure of these what they call the sour crude contracts. Is there any activity or conversations or -- going on with the players out there that have these balance sheets that are starting to be -- starting to impact the exchange landscape globally?

Well, I'll avoid giving you any specifics about current conversations, but I will try to be somewhat responsive. We at the time of our IPO, which was in 2005, had thought that maybe some of these Middle East sovereign funds might be interested in our stock and we did as part of our road show reach out to them. And at that time, there was not really much interest. I mean, I think they were curious, but there wasn't specific interest in exchange investment. You've obviously seen through the actions around NASDAQ, OM, LSE that that view has been changing. And so, the one backdrop that I'd take away is that I think this phenomena of sovereign investment is probably something that's relatively recent. But there is clearly a large pool of capital that is coming out of many emerging nations that are looking to buy infrastructure. And one of the unique things about exchanges is that they still have symbolic importance to many countries, symbolizing that they are a financial center and that capital formation can happen in their country. So you can -- one can imagine that this may be the beginning of a trend given the volume of capital that's being accumulated by many emerging countries.

And it just seems like there's more agreements -- with the CMI yesterday -- well, I've already used up my follow up, but I guess that was to sort of understand what ICE might do, because you've got to believe that they'd be very, very interested in your help growing something over there. Anyway --.

Yes.

Thank you.

I think you used up your follow up, so --.

That's fair. Thanks.

Thank you.

We'll go next to Ken Worthington with JP Morgan.

Hi. Good morning.

Good morning.

I guess my question is kind of going to the liquidity provider stats that you provide in the Qs and Ks. So the question is kind of what is the process that algorithmic, black box, I guess the liquidity providers, what process do they need to go through to begin trading on ICE? How long does the process take? Is it different for futures in OTC? And given the new technology, would you expect their participation or their portion of your volume growth to be bigger? Because I think those stats have been stuck around 30% for a while. Like, should that be a bigger part of your business? That's basically it.

You have a couple of questions there. Let me do my best. First, a lot of -- to the extent that we're talking about liquidity programs around our European futures business, the FSA has some very strong views of how order flow is accumulated. And so, we put together very formal programs for liquidity providers. They tend to be limited as to the number of liquidity providers, so they tend to be somewhere around three, four, five, or six liquidity providers. You have to apply to become a member. They tend to have a short duration, so that it allows new applicants to apply and current participants to reapply, so that the mix of individual companies may change. And they don't necessarily allow payment for order flow, so these things tend to be volumetric commission discounts largely.

In our over-the-counter business, to the extent that we tend to look at targeted programs, we tend to look at our markets with a critical eye and try to figure out where we could use some liquidity. And it may be in a specific product or it may actually be in a specific part of the forward pricing curve on a product. And there we just through market conversation try to find market participants that will help interject liquidity. And again, those tend to take the shape of some kind of volumetric commission discount. And it's a bit more ad hoc.

In Winnipeg, which we just acquired, they have had a longstanding program with a handful of liquidity providers. I think it's about five. And we just renewed that program to go into -- through the month of February of next year. The Winnipeg Exchange is going electronic in December of this year. So we'll have an opportunity to sort of look at the electronic market making capabilities around Winnipeg. With respect to ICE Futures U.S., or the former NYBOT, we have liquidity programs for various products and, again, they tend to be ad hoc. And we're going to -- the ag liquidity programs are slightly different than what you use for foreign exchange and equity indices, given the different nature of trade participants.

But anyway, when you step back and look at all of that, there's nothing particular exotic. It tends to be relatively limited in what we do. And at the heart of your question is what is the percentage that one can expect of those kinds of participants. And what we've seen is that they've been around -- I guess it's 30% or so of our market -- 25 to 30%. And that's come from this broad pool of hedge funds, algorithmic traders, and nontraditional players. But we're growing so fast that the absolute volume that these participants are putting into our market is actually growing, even though their market share is not. And one of the neat things about -- that we see about this is that as we've injected this additional liquidity in these markets, the amount of commercial user interest in the market has grown proportionately to keep the market share the same.

And we find that to be a very, very healthy trend and it allows us in our conversations with you to continue to reinforce the fact that there's a lot of commercial hedging use going on in our markets, and that's historically been where we have had strength. And I think it's an important part of the market. Because if you have the commercial users there it's pretty easy to attract liquidity providers. If you only have liquidity providers, it's not necessarily easy to attract the commercials.

Okay. Thank you. The question was poorly asked, but well answered. So thank you. The second question is just maybe picking on Russell a little bit. Can you just expand a little bit more about what you are doing and maybe other programs you -- or things you plan to do over the next couple of quarters to migrate that volume really away from the competition to ICE?

Sure. I think first of all, we are getting the products out there, getting them listed and getting them distributed, which is a whole new infrastructure for us. The second thing, and it's an important part of what we've been trying to do, is we're in negotiations with the Options Clearing Corp, the OCC, to put in a cross margining agreement that would allow equity options on Russell products to have offset against -- economic offset, if you will, against futures. And a lot of the people that trade equity options on the numerous equity options exchanges hedge their position using futures. So that's an important relationship that I think will be wound up relatively quickly. We're well along in that negotiation.

And then, really, it's just marketing. And we've been out talking to people and trying to build interest as to exactly when this transition sort of will take place in bulk. A couple of noteworthy facts is that obviously right -- the last few months there has been tremendous volatility in the equity markets and trying to move something in the middle of a chaotic market is difficult. So we're actually hoping for a little less volatility and it does seem and feel like we're certainly in a less volatile period this month than we were late summer. So we'll hope for a continued period where we can target that.

And then, the Russell actually reconstitutes the index, I think it's during the summer. And so, we want to try to avoid movement during that period because, again, there's -- there will be a bit of chaos, if you will, or uncertainty about the reconstituted index. So I think what -- if you -- Scott's remarks -- his prepared remarks had suggested that sometime next year in the first to second quarter we're going to make a concerted push to try to build liquidity on that product, so that it happens in advance of the reconstituted index and it also happens in advance of the loss of the license by the current competitor that has Russell trading.

Great. Thank you very much.

We'll go next to Mark Lane with William Blair and Company.

Good morning. Just a couple quick follow ups. First, on the over-the-counter business, kind of following up on Rich's question. Scott and Jeff, you both threw out a number of reasons for the growth and the apparent market share gains -- new products, new users, and higher rates, et cetera, et cetera. Can you put any detail around that just to give us any more transparency into that? It seems just sort of like the mosaic theory at this point.

Yes, I think it actually is. I wish -- it's not necessarily that easy to find any one driver. But one thing that has happened that you're quite aware of is that our competitor has taken their floor-based products onto the screen. And so, there's now the ability to arbitrage and lever electronically off of each other's markets, which historically we've found has driven growth in both venues. And so, I think that's a driver. We've been bringing in these algorithmic traders into the OTC markets. That's a driver. We've -- as Scott mentioned, there's been sort of mix shift around the OTC products that have traded. There is definitely more oil trading and power trading going on as we get deeper into new markets. And there was a small price increase I guess it would effectively be as we internalize some of the clearing savings that have gone on.

So all of that together is what's driven the performance. And all of those things I think continue. I mean, those were not one-time things. We haven't seen the trends -- any of those trends that we're talking about be abated.

And just to follow up on the regulatory question. The way that you positioned it was that increased regulation would not necessarily be a -- not a negative, but I mean, can it be a big positive, I mean, given the fact that so much of the over-the-counter market is opaque and if there is any part of the market that's transparent at all with the electronic format?

Yes. I'm an optimistic person generally and as a company we look for opportunities when there's change. And we've been really net beneficiaries of being at the center of a lot of change. And so, when you really step back and think about what's been going on, I've said repeatedly that I think as these markets become bigger and more transparent and broader, they're going to naturally attract more oversight. And what's going on in the debate in Washington is just a dialogue about what that means.

Given that for the last year we've given the bulk of our OTC trades in real time to the CFTC, the real debate is now, if there is a problem in these markets, who's going to take action and what should the action be. And that's kind of a natural extension of the fact that the data is being provided broadly to government and that there is more oversight. And so, what you're going to see and what we've said that we would embrace is that if the government wants us to take on more oversight responsibility, we're happy to do that. If the government wants to keep it itself, we're also happy to cooperate with them.

But given that we have three regulated futures exchanges, we certainly have the infrastructure here and the knowledge and the understanding and the platform is designed to produce the kind of reports that one would look for. And we've looked at our own markets with a critical eye over the last year. And we think that they are very, very properly functioning markets that are growing not because of some kind of regulatory arbitrage, but they're growing because of the need for hedging and the increased investment that's going on in commodities.

Having a more regulated market will do a couple of things for us. One is, I'm hoping that it will bring more confidence to the smaller commercial user. These would be municipal utilities and gas and power utilities that are really the people that are concerned that there may be hedge funds that are overly dominating the markets. And so, getting their confidence and moving them into the over-the-counter markets will be a net positive for us. They traditionally avoid OTC markets and to the extent they've been hedging have been doing it on regulated futures.

The second thing is, and I've been open about this with government, is that this kind of regulation is going to increase the barriers to entry for other market participants that are seeking to organize up electronic markets. I don't necessarily think it is a good thing for the United States. But as the CEO of ICE, I do believe it will create a bigger barrier for those that are thinking of entering this market, which is probably a good thing for us from a competitive standpoint.

One of the good things, Mark, that's happened, and the reason we came out publicly around the report that the CFTC put together and published yesterday, was their involvement of the President's Working Group. And the President's Working Group is comprised of the Acting Chairman of the CFTC, Chairman Cox of the SEC, Chairman Bernanke, and Treasury Secretary Paulson. Those individuals are looking at these markets from a global competitive standpoint. They are wanting to make sure that we don't have regulation that's going to drive business offshore and what have you. And their voice entering this debate has really been helpful and I think will bring confidence to legislation that will move forward to put the right kinds of things in place that will not drive business overseas.

Again, we have many overseas businesses and we could adapt if that were the case, but as an American citizen, I personally am hoping that their influence will continue to keep balance here.

Lastly, just I think that it's going to be hard to get something passed this year. But I'm optimistic. I was in Washington all day yesterday. There is a movement to try to get a consensus piece of legislation together and to possibly try to move it quickly. And I think ICE is getting behind it and NYMEX potentially getting behind a piece of legislation along with the CFTC could go a long way. So we're all dialoguing and trying to see if we can develop a consensus view that would help move this along. And my interest in having it move along is simply that I don't really want the market to be overly concerned about our position in the market, and I also don't want our customers to be concerned about regulatory uncertainty.

Okay. I appreciate your thoughts. Thanks.

Hey, Mark, just to go back to your first question and give you and Rich a data point for the mosaic, underneath the 4% OTC ADV growth, it's about 6% for total volume, and power grew 20% underneath that. So that's some of the mix shift that you see.

Thank you.

We'll go next to Jonathan Casteleyn with Wachovia Securities.

Hi. Good morning.

Good morning.

Listen, Jeff, I really always appreciate your detail and historical perspective on your strategy. I'm just trying to boil it down to your top three growth initiatives. Is there any way you can just rank and file those for me?

Sure. I think first it is clearing. It probably won't be an immediate benefit, but I think structurally my view is that this part of the market is going to become increasingly more important. So it is an expense that we're incurring ahead of revenues. Secondly, I think moving into equity indices and foreign exchange, given that we're coming on from almost a zero base in those markets, will be very, very important. As you know, those are very big markets. Foreign exchange has a lot of electronification already and is sort of a disjointed market. So I think there's room for new entrants into that market as opposed to many other asset classes.

And then, lastly, I do think that the over-the-counter markets as we move into this more regulated type environment will attract new market participants. And you couple that with the fact that we're doing this Canadian deal with NGX and that we're doing a global oil deal with Platts and we have ChemConnect. And so, I think while none of those individually is revolutionary, together I think they continue to be evolutionary. And I do think you will continue to see growth in the OTC part of our business.

Great. And thank you for that. And then, for Scott, $193 million in cash. I'm just wondering what is the amount of cash or liquidity needed to run the business to support working capital and also provide a potential backstop for the clearing house as you get in there in the back half of '08?

We're still doing the analysis on what will be required in terms of the liquidity as you go into the ICE Clear Europe. But I'd tell you as I've looked at it I think $75 million to $100 million is a comfortable cash and short-term investment balance in terms of running the day-to-day business. I think given the strong cash generation of this business you could dip down below that for a while because you'd come back fast. And just to give you a sense, we're sitting with $193 million of cash right now, which is only down slightly from a year ago, and that's after $164 million spent on the New York Board of Trade, it's after $50 million spent on Russell, it's after nearly $50 million spent on Winnipeg. So I don't think you need a large cash balance in order to run the business.

I think what we do have though with $193 million in cash, with full access to the line of credit, is we've got tremendous flexibility to act opportunistically as we see right investment opportunities which will help us grow the business.

Understood. Great. Thank you very much.

Thank you.

We'll go next to Chris Allen with Banc of America Securities.

Hey, guys. Nice quarter.

Thank you.

I just wanted to ask quickly about your take on the CME and BMNF transaction just given CME's ag business and then BMNF's -- I mean, just the Brazilian economy to focus on sugar. Do you regard this as somewhat of a competitive threat or do you see it as potential essentially additive to the future pie as we've kind of seen with other products?

Well, I mean, just generally speaking, I think we have the handy grow view around here that only the paranoid survive, so we view everything as a competitive threat. But I will say that I think it was a very good investment for the CME and I did reach out yesterday and call Chairman Duffy to congratulate him, because I think it was -- that is a very unique asset and an opportunity to work together.

So in terms of direct competition, we're -- I guess we've always been kind of the underdog. And so, we don't shy away from that. And maybe more importantly, I think that when you have multiple venues that trade--you create trading opportunities and actually drive growth, and we've seen that with our West Texas intermediate crude oil contract and what have you. So I think that it's possible that over time Brazil could get more drivers coming out of sugar, maybe ethanol, given their economy. And I think those will be symbiotic with what we're doing at NYBOT and together the two will drive growth. So it's not--the paranoia has not reached the level that we feel that we have to do something really novel.

Great. Thanks, guys.

We'll go next to Edward Ditmire, Fox-Pitt Kelton.

Hey, guys. I just have a quick bookkeeping question. The Russell expense guidance that you guys gave in the release for the second half of '08, the 6 to -- $6.3 million to $7.8 million per quarter. The difference between that and both the current rates and what you guys talked about on the last call, is that all volume related?

No. I'm going to try and make it an easy answer, but it's a fairly complicated topic, so I apologize going in. Fundamentally, what we've done is we've created the $50 million upfront payment and the present value of the future minimum payments that we've agreed to. And we'll begin the process of amortizing that into our income statement. It started this quarter. But what we've done is we've looked at this as if it were two assets. One is a nonexclusive asset over the first year, and the second is an exclusive asset over the subsequent six years. And as you would imagine, the value of the nonexclusive element is de minimis. The value of the exclusive element is the most significant portion.

And when you do this, when you take the present value, the difference between that and the expected payments is an imputed interest. And so, you're going to see two components. When you look at our income statement this quarter and for the next three quarters, the $1.5 million I talked about is all going to look like interest expense. So there'll be very little up in the depreciation and amortization line. As you get into the third quarter of next year, and then for every quarter for the following six years, you'll see about $6.2 million give or take of amortization, and then a slowly dwindling amount of interest expense as that asset comes into the income statement.

Okay. Can I just ask a simple question? I know that the Russell has strategic implications and what not. But on a standalone basis, what kind of volumes do you guys think you need to break even on this thing?

I haven't really looked at it, but this is a rare circumstance where we know the types of volumes that occur today. We can look at the volumes that are trading and I don't know what the latest figures are, but it's somewhere in the 220,000 to 250,000 contract per day range. And that's how we've looked at it. Our expectation is that over -- as Jeff and I talked about a little bit in our prepared remarks, that we'll start to see some of that volume move in the first and second quarter of next year. It will all have moved by the time we get to the third quarter of next year. And then, we're working with customers and working with Russell to take today's volume and grow it.

And so, the way I've looked at this, and we did look at it as a business case, is when we get the volume that we've seen historically to our platform, and when we take the actions necessary to grow it, what does that look like in terms of a financial return, just as if it was M&A, and it's a very attractive return. In the near term, as you saw this quarter, we had very little Russell related revenue. It will probably be modest to minimal in the fourth quarter as well, but we'll have this bit of expense. Our expectation is the volume and the expense will start to ramp in the back half of next year.

Okay, thanks a lot.

We'll take our next question from Mike Vinciquerra with BMO Capital Markets.

Good morning.

Good morning.

Jeff, can I follow up on this on the Russell. You had mentioned you had discussions with the OCC in looking for cross margining. That goes to the bigger question about portfolio margining in general. Is that topic being broached in your discussions as well, or do you see this being more of a product-by-product discussion because futures -- equity futures connect more fully with options on the same equity?

Yes. I don't -- we definitely are having broader discussions. And one of the things that's going on around here is that we've brought in two really top notch clearing experts in Tom Hammond in the U.S. and Paul Swann in Europe. And I asked them to think outside the box and let's put together -- let's be a leader in driving change around clearing that -- and which is kind of an oxymoron, because obviously, clearing is managing risk and so it needs to be dealt with very, very delicately and with a lot of thought and foresight.

So I think the kinds of broad sweeping changes that may come through clearing are things that are going to be evolutionary, not revolutionary, and they're going to take time because you are dealing with risk and you are dealing with the infrastructure of our industry as you broach these things.

We definitely have a pretty broad mindset here and we have the--I guess we have the license to do that as being kind of the younger company entering this business and looking for opportunities.

You made it sound as though the timeframe might be relatively soon in this. Is it at the next couple of quarters? Is it even sooner than that?

I don't want to get into--I don't want to give you any guidance in that regard because these--there are all kinds of discussions and conversations going on with lots of various parties, and they may or may not be fruitful, and they may or may not be meritorious when you boil it all down. But I think it's fair to say that we're looking at what can we do to improve the business - improve it for our customers, improve it for the clearing community, and improve it ultimately for our shareholders. And I think clearing has been an under invested asset in our industry and maybe the most important asset in our industry. So it's with that kind of mindset that we're looking at these things. Beyond that, I don't want to give you anything specifically.

No, that's fine. Thank you, Jeff. And then, just one question for Scott. On the RPC in the U.S. Futures, I think, Scott, you mentioned it was 2.18 in September and continues to expand. Is there something that--is it just a mix shift? Is there something in particular that will allow that rate potentially to stay at those levels or even go higher?

Well, I mean, clearly there is mix at play. If you look at the trends over the last couple of quarters, we were at 1.85 in the second quarter. That was up from 1.59 in the first quarter. And it's 2.07 for this quarter. You may recall that we had the fee increase that we introduced June 1 I believe was when we put that fee increase in place, which helped with the Q2 rates, helped with the Q3 rates. And then, clearly, from a month-to-month standpoint, mix can impact the rates. What we looked at and what we're going to talk about as we move forward is really the three-month rolling average - that's the 2.07 for the quarter - and I think that's the way you ought to think about rates.

I will say that we're so early in the electronic migration of that business that just the power of electronification is bringing new customers into the business. At some point I'm sure as management we'll sit down and look at the rate structure there and look at do we need more aggressive market maker programs or do we need to look at the mix and put new things in there. And it's just so new and so young and there's still so much going on with the migration of trading that we haven't really played around too much with that.

So in terms of what does the long-term rate structure look like, it may change, but if it does, it will probably be because management believes that we can increase revenue by putting a mix change in there. And then, obviously, we'll signal that to you if we ultimately do put some programs in place.

The thing I've found really remarkable about the performance for this business in the quarter, if you set the rate aside, is we had 23% growth in ICE Futures U.S. ADV, and that was in a world where we had the lowest volatility that we've seen in sugar in about a year and a half. So with a product that represents 45 to 50% of our total contract volume, with slow to minimal growth, we grew the overall volumes about 23%. So I think that's a good news story we wouldn't want to miss for the quarter.

Great. Thanks for the detail, guys.

And having no other questions in queue, Mr. Sprecher, I'll turn it back to you for closing remarks.

Well, thank you all, again, for your attention and for following us. And I appreciate the provocative questions. We'll look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference and you may now disconnect your phone line.