洲際交易所 (ICE) 2008 Q1 法說會逐字稿

Good day and welcome to the ICE, InterContinental Exchange, first quarter earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Kelly Loeffler. Please go ahead.

Good morning. To obtain a copy of the company's first quarter earnings release and presentation, please visit the investors and media section of our website at www.theice.com. These items will be archived and our call will be 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 statements. Please refer to our filings with the SEC, including our most recent Form 10-K for a description of the risks that could cause our results to differ materially from those described in the forward-looking statements. With us today are Jeff Sprecher, Chairman and CEO, Scott Hill, Chief Financial Officer, and Chuck Vice, President and Chief Operating Officer. At the conclusion of the prepared remarks, we'll take your questions. I will now turn the call over to Scott.

Thanks, Kelly. Good morning, everyone. We're pleased to have the opportunity to update you on our record first quarter. We achieved many financial milestones while ramping up several key growth initiatives related to new products, M&A, technology innovation, and clearing. We will discuss each of these in greater detail this morning. During the first quarter, 130 million contracts were traded exchange wide, the first time we've exceeded 100 million contracts in a quarter. In futures, average daily volume reached a new milestone by exceeding one million contracts in the quarter. And we established another first with OTC average daily commissions exceeding $1 million.

Now let's dive into some of the details of our strong start to the year by moving to slide 4, which highlights ICE's key financial and operating metrics for the first quarter of 2008. Amid a challenging financial markets environment, ICE delivered record operating results across the board. Consolidated revenues of $207 million were up 64% over last year's first quarter, which was the first quarter that ICE Futures U.S. was included in our results. Operating income was up 81% to $144 million, and our operating margin was 70% with the integration of ICE Futures U.S. largely complete. Net income increased 66% to a record $92 million and diluted EPS was $1.29. First quarter operating cash flow rose to $79 million, an increase of 157% versus $31 million in last year's first quarter. We ended 1Q '08 with $277 million with unrestricted cash and short term investments. Our debt ratios remain low, We continue to have access to our revolving line of credit. This healthy capital structure compared with strong growth and solid cash generation gives us excellent financial flexibility. A summary balance sheet is included in the appendix of this presentation.

Next, on slide 5, I will discuss our consolidated revenues. Our transaction revenues are derived from our futures segment and our global OTC segment. First quarter transactions revenue totaled $177 million, up 62% year to year, and accounted for 86% of consolidated revenue. Market data revenues increased 76% to $25 million, and accounted for 12% of consolidated revenues.

Moving now to slide 6, first quarter consolidated operating expenses were $63 million, up 34% compared to last year's first quarter. It growth in expense was partially driven by noncash compensation which was $7.9 million in the first quarter compared to $3.8 million in the first quarter 2007. Our operating expenses also reflect $2.1 million of costs relating to the closure of the futures pit at ICE Futures U.S. These costs were primarily recorded in the compensation line and reduced ICE's reported EPS by $0.02 per share. The closure of the futures pit was an important step in enabling us to deliver the $18 million to $20 million in committed synergies related to ICE Futures U.S. this year. Depreciation and amortization expenses increased $4.4 million to $10.9 million in the first quarter. This was primarily the result of technology investment and a $1.5 million increase in amortized intangible assets related to acquisitions. Operating expense also reflect $2.3 million invested in the continued development of ICE Clear Europe versus only $500,000 in 1Q 2007. So as you can see, the growth in our expense was consistent with prior guidance and directly supports the keys to our continued success, a pay for performance culture, new products, improved efficiencies at ICE Futures U.S., a flexible technology infrastructure, and the development of ow newest clearing house.

Now moving to slide 7, we have included some volatility data. While volatility is only one factor that influences volume, you can see the significant change from March to April. Our volumes across many of our products benefited from increased volatility in the first quarter. As the level of volatility declined on a relative basis in April, so did growth across some of our product. While volatility can influence relative level of growth in the short term, it is new products, technological innovation, new customers and increased interest in commodities investment that will enable growth over the longer term.

Now let's flip to slide 8, where you'll find an overview of our first quarter volume performance. Total average daily contract volume across all futures and OTC markets was a record 2.1 million contracts, up 49% over the prior first quarter. Volume growth remains healthy as a result of new customers, and increasing demand for commodity products, the transparency of electronic trading and addition of new products and mark. As Jeff will discuss, we continue to monitor the market activity for any signs of liquidity issues, but we have not seen any to date. In fact, we see indicators such as record levels of trading IDs and system connections, and the continued build-out of commodities debt that give us confidence that our markets are attracting new customers and are well positioned to continue to expand.

Turning now to slide 9, the average daily volume of contracts for ICE futures Europe was $616,000, an increase of 16% versus 1Q 2007. First quarter rate per contract, or RPC for energy futures, was $1.25. This compares to fourth quarter RPC of $1.27. Growth in our energy futures segment was driven by continued strength in our crude oil futures market, with our market share of light sweet crude futures holding steady at a very healthy 50%. During the first quarter, we set a new exchange wide single-day volume record. We also posted record average daily and total volume marks during the month of March for both ICE Brent and ICE WTI Crude Futures contract. ICE Gas Oil growth was also solid, exceeding 200,000 contracts on a single day for the first time. Finally, we reported April monthly volume this morning and ADV at ICE futures Europe was 570,000 contracts, up 15% year to year and the rolling three-month RPC was $1.24.

Moving to slide 10, you can see the first quarter performance of our U.S. and Canadian futures exchanges. RPC for agricultural commodities futures in the quarter averaged $2.14 compared to $2.03 in the fourth quarter of 2007. ADV was 389,000 contracts per day, up 77% year to year. We made significant progress in ramping trading volume as our agricultural futures contracts completed the rapid transition to fully electronic trading. We set new volume records for sugar, cotton, coffee options, Russell, and the U.S. dollar.

Also, today we recorded a three-month rolling average RPC for our U.S. agricultural futures of $2.16. Our April ADV at ICE Futures U.S. was 280,000 contracts and at ICE Futures Canada it was 15,000 contracts. Our Canadian futures exchange continues to perform well, and we're pleased to welcome Brad Bannon as the new President of ICE Futures Canada. The potential for continued growth in our agriculture futures market is excellent, driven by long-term secular fundamentals as well as the successful transition to electronic trading. In fact, since we introduced electronic trading at our U.S. futures business just 14 months ago we've seen a 57% increase in ADV. While it remains very early, and we just transitioned to all electronic trading in March we see continued long-term interest by new market participants who are joining these vital markets. This is not it dissimilar to what we have seen as our energy markets transitioned to the screen over the past three years. We believe algorithmic traders, banks, and commercials alike will continue to enter these markets based on the pipeline we're seeing today

Let me now wrap up on slide 11 with our global OTC business, which has had a tremendous start to the year including record transaction revenues of $80 million in the first quarter, up 69% year to year. OTC revenues accounted for 45% of first quarter consolidated transaction revenues. Clear contracts grew to a record 60 million contracts in the quarter and represented 89% of OTC contract volume. This performance demonstrates the value that central clearing can bring to the over the counter market. However, we do not believe these benefits are unique to energy and are confident that we can bring these same benefits to OTC markets outside of energy. For the first quarter, average daily commissions rose 70% to a record $1,280,000 per day. Also this morning, we announced April average daily commissions of $1.3 million per day, almost double the commissions achieved in April 2007. Though we often see a shoulder month level of trading, which tends to feature less volume in the March to May period, we have not yet seen this occur this year. We continue to see increased trading and hedging activity and deep liquidity in our OTC market. Our recent acquisitions and partnerships, including Chatham, ChemConnect, MGS, and Flat, are making solid contributions. While our commercial customers, including gas and power utilities, distribution companies and global energy majors, continue to be our primary participants in these markets, we also see healthy growth from proprietary traders and algorithmic customers. Our OTC customer mix in the first quarter was essentially in line with the customer mix we reported for 2007.

So as you can see we achieved a number of key milestones in the first quarter both financially and operationally. While we do not believe our first quarter numbers reflect any evidence of a credit-induced slowdown, we do believe that where possible, traders are better their overnight positions due to higher margining cost with the effect of dampening open interest leaves. In crude oil for example, the presence of record prices has caused banks and oil majors to think about new hedging strategies. We don't see the need for risk management abating in the near term, However, we do see market participants thinking about the price direction of oil and other commodities and adjusting their behavior accordingly. As we've said before, the key driver of volume is volatility, not extremely high or low prices.

Before I hand it over to Jeff I would like to point out the additional financial guidance in today's earnings release, as well as in the appendix of this presentation. In particular, Please note the amortization of expense related to the Russell agreement will now begin in September in conjunction with the start of exclusive trading in ICE futures market, thus the third quarter amortization expense related to the Russell contract will only be roughly $700,000, which is a decrease from the guidance of roughly $6.5 million that we gave you on our last call. Beginning fourth quarter and continuing in subsequent quarters, we expect $6.5 million in quarterly amortization expense. Please refer to the earnings release or the appendix of this presentation for additional guidance. I will now turn it over to Jeff.

Thank you, Scott. Good morning. I would like to start off my comments this morning with an update on our European clearing house. Our global clearing strategy is innovative and it's exciting, and it's an initiative that all of us at ICE are involved in to ensure its success. While we await the final approval for ICE Clear Europe, we understand that both the Financial Services Authority, or FSA, and the Office of Fair Trading, known as the OFT, have submitted their recommendations to Her Majesty's Treasury. We are told the treasury will issue a final recommendation shortly. We have become actively engaged with the FSA with regard to the post recognition operational requirements that are needed for our July launch. We view this ongoing dialogue positively, and we continue to work closely with clearing firms and outside vendors alike. Importantly, we continue to receive the active cooperation from our clearing firms. Our trading customers who value the breadth and depth of ICE's global markets have been supportive of our efforts, and look forward to the completion of the transition. We have built a world-class team of clearing professionals supported by one of the best technology teams in the financial services industry.

As a result of these factors, we are confident that we will achieve success in building the first new major derivatives clearing house in London in more than a century. While we announce plans to establish our own clearing house in Europe one year ago, you may be aware our goal to establish a European clearing house extends back for many years. Through our approach to product development, customers, and third-party relationships, we've long held innovation as a vital aspect of our business. Once we receive regulatory approval it will allow us to formalize our clearing membership, enabling the transfer of open positions in ICE contracts to ICE clear Europe. We are on track to complete this transition in July 2008. We're focused on providing what we believe to become one of the most modern, secure, and efficient clearing houses in the world. To give you a more detailed picture of where we stand today in the development of this clearing house, I'd like to turn it over to Chuck Vice,our President.

Thanks Jeff. Good morning, everyone. To recap our progress to date in the formation of ICE Clear Europe, last July, we provided 12-month notice of termination to LCH for clearing both our European futures and OTC businesses. The same month, we filed our application with the FSA for recognition as a U.K. clearing house. While working through the regulatory process, we have been engaged in extensive discussions and systems testing with our clearing firms. We have achieved numerous milestones as we approach the launch date, as you can see on slide 13 of the presentation. I will highlight some of the key operational aspects for you here. In terms of staffing our clearing leadership team, we've added some of the top people in the space. Paul Swan, a 20-year veteran of the clearing industry, is leading our clearing effort in Europe. Paul joined our Head of Legal, Patrick Davis, and our Head of Regulation, Dee Blake, who was previously with the FSA. Working with Paul are Marcus Khans as Head of Risk, and Stewart Bailey, Director of Risk. Prior to ICE Marcus served as risk manager for Eurex Clearing, and Stewart was Manager of Risk at LCH.

Francois Leparte has joined us as head of operations from Calyon Financial, and heading up banking and treasury is Camille Janmat who previously headed operations and account management at Casbank. This is just part of the dedicated experienced team that comprises ICE Europe. This team with support of ICE staff in Atlanta and New York has been leading and managing among other things the necessary technology integration. At this point tests of all trade registration, clearing, banking, and billing systems have been completed by over 40 clearing firms. On the regulatory front, our recognition process began with the application to the Financial Services Authority last year. The FSA has now completed many points of work examining governance, risk, and operational aspects of our proposal. Concurrently thE Office of Fair Trading was evaluating whether the formation of our proposed clearing house would be anticompetitive. As Jeff mentioned, both have submitted reports to Treasury for final recommendation.

From a governance standpoint, ICE Clear Europe has installed an independent board led by Sir Bob Reid. We have a solid operating structure to provide for both independence and clearing firm input this includes a technical and operations working group, a risk working group, and legal and regulatory group. These groups are composed of clearing firms who currently clear ICE's markets at LCH together with ICE staff. Working together, they have developed policies and procedures for the clearing house including among other things the clearing member agreement, guarantee fund structure, large position monitoring, and the clearing rule book. The risk management systems and processes are in place to provide the most sound, well capitalized clearing house we can offer. The default fund will include a substantial contribution by ICE, expected to be approximately $100 million, which will help mitigate the contribution required by clearing firms. Importantly, ICE is offering clearing members above-market returns on both their guaranty fund and margin deposits. ICE clear Europe intends to provide third-party default insurance of $100 million. In terms of clearing fees, the fee structure will be competitive with the industry. Based on the significant progress, the membership pages which include the complete ICE clear rule book, financial and governance structures and the membership standards have been completed. Because our working groups were extensively involved in the development of many of these processes and documents, the prospective members are already familiar with this documentation.

In summary, over the next two months prior to the transition our goals are to complete the test of fiscal delivery he systems with clearing members and third-party service providers, complete internal operational tests, sign the clearing membership agreements between ICE clear and the clearing firms and establish the guarantee fund. In just a few short months we will be in the position to offer more services and efficiencies to the energy marketplace. Back over to you, Jeff.

Thanks for going through those details. I'd now like to turn your attention to slide 14, and provide an update on another near-term initiative, which is the exclusivity on the U.S. Russell index futures. We're approaching the transition of the Russell index futures and options complex to our markets. Today we are seeing volume growth in these products, and earlier this week we set our fourth daily volume record during April. As we approach the exclusivity period, liquidity in the Russell index futures contracts traded across existing markets has never been greater. Average daily volume for the Russell 2000 E-mini contracts is trading elsewhere is over 250,000contracts. Volume today is over 30% higher than when we signed this deal last year. As such we are confident in the value of this long-term agreement. We're focused on our entry into the equity derivatives market and on the introduction of new market participants to ICE.

As we have been out with customers, we believe some participants are looking to transfer Russell business to ICE during or before the June roll. This will provide continuous act to the index during its annual reconstitution period at the end of June. We are working closely with customers to ensure that they are technically prepared for the transition and are not the last ones out of the contract during its final roll elsewhere. ICE participants are already seeing very tight markets in the Russell 2000 mini contract due in part to 20 market makers who are already active in our Russell markets. Importantly, given the proprietary trader participation in Russell markets, ICE offers a fast trading platform from which customers can benefit. Round-trip transaction times in our futures market today is an unparalleled three milliseconds, a key selling point to that community. We continue to update you on Russell issues and as we go forward, we hope that volume growth will speak for itself. Moving on I would like to address questions that we continue to get about the de-leveraging in global markets. Just as we said for the last several quarters, we have not witnessed any material liquidity changes in our markets despite the credit market issues that began last summer. In fact, the participation and liquidity in our market has only grown since then. We are very aware of the issues impacting certain participants in equities and the bilateral OTC markets for credit. But these have not impeded growth or the liquidity in commodities.

The fact that we have clearing in place for both futures and for the OTC markets has tremendously enhanced the health and desirability of our marketplace. These comments aren't intended to down play the global credit issues, however, we believe that the secular trends in the commodities issues are actually overwhelming any recent credit market dislocations. If you step back and look at secular trends, you will see an increasing to discuss on com mod teats. For example, global growth continues to fuel the need for diverse range of market participants to both buy and hedge energy related commodities. With regard to energy, the U.S. has historically been the largest consumer of energy and crude oil products. But as countries such as China and India continue to grow, they will likely soon become the largest consumers of energy in the world. Today China is building one coal-fired power plant every seven to ten days. Not only will coal demand continue to grow, but China already consumes more coal than the U.S. Compounding this demand for basic commodities is the fact that India is not far behind China in terms of development.

Factors such as these led to us our agreement with Global Coal to launch a new suite of coal futures contracts that are designed specifically to serve the Asian markets. There is also much talk about rising agricultural commodity prices. A significant driver of the demand for agricultural commodities is the emerging middle class in emerging economies. This new middle class is driving increased demand for products such sugar and cotton, which are traded on ICE. I believe the demand for commodities will only increase during our lifetime as this new middle class develops. I do want to cover M&A just briefly.

As you know I can't be too forward-looking on this topic. We're very focused on a number of opportunities in new and underserved markets This year we acquired Yellow Jacket, which is a tremendous addition to our OTC option strategy, and a technology that we believe is next-generation in nature. We are leveraging the acquisition of Chatham that we completed last year, combining their experience with Yellow Jacket's technology. We intend to announce more detail on our plans for leveraging Yellow Jacket in the second half of this year. During the quarter we also began executing on our agreement with the natural gas exchange of Canada, also known as NGX. In February we completed the transition of NGX customers to the ICE platform. NGX is now providing contract delivery assurance and settlement for ICE's OTC physical natural gas transactions. Physical clearing was successfully launched at the first three U.S. delivery hubs during the quarter. The results have exceeded both ours and NGX's expectations. This represents the first physical clearing initiative in the U.S. that has attracted solid liquidity. Commercial market participants are our primary OTC customers and it is this type of innovation for which they have come to rely upon our markets for the procurement of natural gas and power across North America.

We've spent much of the last eight years at ICE building a solid diverse exchange model that extends across OTC and futures. As the most global derivatives exchange today, and a leader in electronic market s, we will continue to enhance our three exchanges, our clearing capability ,and our substantial OTC footprint to drive growth. In concluding my prepared remarks, I would like to thank our customers and my colleagues on the ICE team for a very strong quarter. Now, operator, we're ready to start the question-and-answer session.

(OPERATOR INSTRUCTIONS). We do ask that you limit yourself to one question and one follow-up. We will pause for a moment to give everyone an opportunity to signal. Howard Chen with Credit Suisse.

Thanks for the update on where the European clearing house launch stands. While you mentioned you expect Her Majesty's Treasury approval shortly can you discuss what date does not having that formal regulatory approval in hand potentially push out the July launch date?

Sure. Technically we need the approval on the day we launch. So that's really -- there is nothing magic. I think one of the reasons, Howard, we wanted to go through a lot of detail is we may have given an impression that we needed to get an approval and then we needed to do a bunch of things post approval. And the reality is the way this process has worked, I think largely because we're in the middle of a global credit crisis and there's been a lot of attention paid on new clearing infrastructure generally in Europe, we have been working side by side with the FSA and the OFT and building out the clearing house, the infrastructure, the contracts, the relationships, the board, and the governance, as part of that recognition process, so that it -- ultimately what it turned out to be was a process that was contemporaneous with the build-out.

I know your company's focus has been more energy and commodities over the past decade, I'd be curious, how do you see this market evolving, how do you see ICE fitting into that conversation?

Thank you. We began as a company saying clearing was not going to become just a back-office service but a real business a few years ago. I think you can see that the need for clearing exists in many of the OTC markets. In fairness to the dealers and people that are active in those markets, I think they want solutions that will help them with risk issues, but continue to allow the markets to grow and continue to allow the dealers to make money. So they naturally, to me, over the counter markets. They have not yet risen to the level of being exchange traded futures. So I think that as I think your question indicates, there's more of an opportunity in some of these asset classes to provide clearing clearing, back office settlement service, even OTC confirmation matching and risk management services as opposed to listing these things as futures, which is why you haven't seen us do that. I'd like to think that we have a good relationship with the dealers specifically since we were effectively a dealer consortium when we started and we do continue to dialogue about various various parts and pieces that we have to conserve that market and some of the other emerging market where we have parts and pieces. Beyond that I don't want to get too specific other than to say I think it validates what's going on validates some of the moves we started to take years ago and to move into the clearing business.

Great. Thanks. I'll hop back in the queue.

We'll go next to Daniel Harris with Goldman Sachs.

Good morning. Wanted to -- you guys have got three or so facilities on-line now with relationship with the N G X fiscal clearing, of course it seems like the Henry Hub is obviously the biggest. Can you give me sort of an indication of how that's progressing, Henry Hub versus first two you put on line, any other locations you anticipate coming on-line over the next half year to year?

On the second part, we will be bringing other hubs on line. We work close well NGX on this who has to put the pipeline nomination processes in place, arrange for back stop service from gas supply providers at that hub. They are doing that at a number is hubs as we speak, and I think in the second quarter I fully expect us to roll out some additional hubs. I think we've seen the early trading there. The take-up not unlike the take-up with clearing of swaps where initially people begin using it in situations where they don't have credit with or don't want to extend further credit to particular counter parties. Remember, we're able to offer bilateral and clear trading in a single price stream and we do that in these physical gas markets as well. It so the system allows you best of both worlds really to use your bilateral credit where you want to with those counter parties and use clearing with other counter parties where you want to. What we have typically seen over time in other clear mark than we expect here as well although it may take a little longer is for that presence of clearing to allow some nontraditional players to enter those markets which brings additional liquidity and lower transaction costs and over time the opportunities to trade with those parties enables more clearing and eventually the multilateral capital efficiency effects of doing more cleared transactions in a particular mark tend to outweigh they resistance someone may have to the small additional costs to clear transactions.

How many major hubs are there?

Roughly 100.

As my follow-up, want to clarify what happens in July, launch of ICE clear Europe, is it accurate to say that clients that want to trade on ICE will have to hold their open interests and their clearing arrangement with you guys or are they going to be able to in the short-term have multiple clearing arrangements? Thanks a lot.

The short answer is we don't know how to, nor have we ever seen in the world some kind of interoperability between multiple clearing houses on complex derivatives. And certainly I can tell that you as a part of our application approval process, that risk has never been studied or looked at. So it's not something that we're planning for. I think customers, they have a choice today. There are multiple venues now to trade energy on regulated exchanges where there are clearing, and I think that people that we deal with are sophisticated traders that tend to have a relationship with all those venues, so they're used to holding positions in various clearing houses, in various jurisdictions and I don't see anything that would change that. In fact, you'd be amazed at how sophisticated as we've been evolving as an exchange, how sophisticated the FCM and credit intermediary market has been to really take capital out of that system for traders and provide various services in netting down positions at various clearing houses. So I think it's going to organically happen and continue to operate the way it is operating.

Thank you.

We'll go next to Jonathan Casteleyn with Wachovia.

You mentioned exporting OTC to other product. Just wondering what those new product suites could be. I know you saw some uptake in oil liquid over the quarter. If you can give us a new percentage of oil liquid in the OTC market.

Sure. On your first question I don't want to be too specific other than we're trying to innovate and look where others aren't looking in the OTC space. We do have really good relationships with a lot of senior people and I've spent a lot of my time over the last nine months or so during the credit crisis talking to very senior people including a lot of CEOs on Wall Street about their needs and how to help enhance their businesses and they've given us some -- they've dropped some bread crumbs that we're following. And so I do think that you should assume that we're active out in the space, looking for new opportunities. We do well, I think, in finding, you know, niches and using our services, particularly. I've found that Wall Street is increasingly becoming impressed with our technology capabilities, our abilities to deliver on the promises that we have made on the time frames that we have made them and do them low cost. So that, I think, is serving us well in those conversations. On the natural gas, let me turn it over to Scott.

Jonathan, to give you some rough numbers, if I look at NGL, Across and also NGX, across those three, they contributed two or three points to our growth in the quarter.

Great. Interesting. Just on European pricing, I know it's very hard to predicts. You have never given guidance on it. Can you comment on the direction of pricing? I want to make sure from a long-term perspective if I have an understanding of where you think that might go.

We obviously have to be competitive. I think you are aware of areas where we compete. I think has we are introducing the second major clearing house in London so one would think that there will be competition for new initiatives which is really part of what I think the office of fair trade was looking at in reviewing our application. That will keep prices reason anal. It's not that the absolute cost of trading is high. The reality is the value that most of the global exchanges have brought over the last five years to trading in moving the markets more electronic have been tremendous savings for customers that far outstrip these little transaction costs. The market does want to know there's competition and that we're finding, you know, value for them. So the symbolism of that and active robust competition is out there. I am always amazed when we look at our market share numbers, particularly in global crude oil where we continue to hover around 50% and there's? Reason that it shouldn't be 30 or no reason it shouldn't be 70 other than I really do believe that major Mark Parr ties pants like to keep liquidity in multiple places and one of the reasons that they do that is for competition. So, you know, net-net we are going to be competitive. I don't think, as I've said, that that necessarily is a race to the bottom, because we have found maybe more than most that customers are willing to really compensate us if we're willing to provide back to them new technologies and new innovative things that lower their overall costs of trading. And we've been quite good at that, and some of the things we've done by reinvesting in our businesses, buying things like yellow Jack, coming up with -- yellow jacket, coming up with physical clearing, building E-confirm system, our customers are sophisticated enough to know that those costs money and are willing to pay for those. If you look at how we've operated we've continued to try to reinvest in those kinds of things on behalf of our customers.

Understood. Thanks a lot.

We'll go next to Ken Worthington with JPMorgan.

good morning. Two follow-ups on other people's questions. First, on Howard's question, and F S A approval. I appreciate your comments from a technical perspective that you can get the approval kind of the day before. But maybe you can help me on a practical matter. I was under the impression that you did want the F S A approval kind of obviously before the day of, and an indication of that is that we were hearing that some of the members or a lot is the members weren't signing their commitment letters because they were waiting for F S A approval, and that you wanted the member commitment letters to be signed because I thought there was some final areas of testing that couldn't be or wouldn't be completed until those commitment letters were signed. Am I off here? Am I being misguided? Is there some merit to that argument?

I would never say you're being misguided.

Okay.

No, I think what you've seen, Ken, is, you know, I stand by the statement that we only need it on the day we go live, but as a practical matter, when we entered this, there are actual statutory deadlines for over in the U.K. for various jurisdictional bodies to review and complete things. And we were able to add up those statutory deadlines and when we started this process, a little more than a year ago, thought that we would have the approvals in the first quarter. In the intervening time, we went into a global credit crisis and the department of justice in the U.S. made further comments and we've seen further merger activity of some of the large players so the space has been dynamic. As those new fact have come to bear, regulators have been wanting to, you know, look at our clearing initiative in that context, and so the process evolved. And we decided that, you know, rather than try to be hard about holding people to deadlines, let's -- you know, we have a very meritorious effort here. Let's try to work through the issues, make sure that people's concerns are mitigated. And so what we've done is, a lot of the work that we had really thought bass going to be post approval we did as part of the approval, and the approval process really expanded to look at things like how is the -- who exactly is going to be on the board of directors and what are their resumes or CVs, and do they have the kind of knowledge that can help manage through potential future credit crises, exactly how are some of these risk systems going to work and have they been tested and can we demonstrate various scenarios to the regulators. So we built a system out alongside this approval process. I think we got finally to the point where we decided let's go ahead and design all the documentation for the various clearing firms, and we did in that these working groups that were heavily attended, I think pretty much everybody, at most every meeting, and we worked through a lot of the details as issues were rising up. So there's no lack of familiarity with what we're trying to do or what's needed at this point, which we thought would be the case when we started this initiative really about a year and a half ago. So it's been an evolutionary process, to specifically answer your question. We feel comfortable with where we are. We are confident that things have gone well, and frankly the process has driven a lot of discipline to resolve a lot of issues. And I think we emerge as a very, very strong clearing house from this process.

Thank you. And then the second question, OTC volumes have experienced fantastic growth for you. So kind of two parts. If you can explain maybe what is industry and what is not, I think that that was a follow-up on someone else's question but I wanted to make sure I got it asked my by. Second, your insights, Jeff, into O.T. R volumes versus list -- OTC volumes versus listed derivatives. Insights would be great.

Let me take the second first, then ask Scott to give you market share numbers and customer mix. What's happening when we look at our numbers, and it was really apparent this last quarter, is a massive broadening of volumes in our OTC markets. When we really started ICE's OTC products and started clearing them, it really was limited to a NYMEX natural gas look-alike contract, and the bulk of our volume was concentrated there. What you have seen now really I think as a result of these -- the various deals that we've done is a broadening of the market so the growth is actually happening outside of that particular product suite in other things that we do. And it's the second order effect. While Scott mentioned in the absolute number, some of these bolt-on acquisitions that we've done have contributed to solid growth but haven't been the overwhelming growth that you have seen. The second order effect that they've had in continuing to bring people and keep them sticky and then the efforts that we've had to widen the market participation as we've done more clearing have helped.

You have to remember, and you may not have seen this as we were a public company, but we had some very serious limitations in our ability to roll out cleared products. That caused us to be late to some of these market, and we had a competitor that was able to roll things out much faster, and so being a first mover in some of this is important, and we didn't have that option. So what did we do? We came in late because of technology issues. We then decided to go out and these were third-party technology issues with our clearing systems, and we then went out and did a daily with NGX, NGI,Class Natural Gas Exchange, Chatham, Yellow Jacket, ChemConnect. All of these things were small efforts to incrementally try to claw back business that we thought we should have had to begin with. Now that we've done all those, there's a tremendous momentum building in broadening the OTC markets which for us as managers is really rewarding, because it's seeing some of these moves play out and also building what I think will be a sustainable trend as we continue to do more clearing and broader market participation.

Just to give you a few numbers around the dynamics that Jeff talked about, really has been a phenomenal growth story. If you look at the overall OTC business, in Q1 of last year, it doubled versus the prior year, and in this year we grew nearly 70%. And if you look underneath the covers, the growth is really broad-based. We continue to see strong growth in gas, which was up well over 50% year to year, strong growth in power, which was up nearly 80% on a year-over-year basis, and as Jeff mentioned, although individually none of them add a tremendous amount, if you look at class, Chatham, NGLs, we are looking in the neighborhood of six to eight points of growth we're getting from those acquisitions. So it's the core product that have built over time, plus acquisitions, that are all contributing to the growth that, as you saw in April, continued with nearly 100% growth on a year-over-year basis in April.

Great. Thank you very much.

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

We're certainly beating this clearing thing to a death. But one clarification. Have the actual commitments or agreement letters been sent and I know you are saying that the members are aware of it, because we're in the working group, but have they actually been given incent to them?

They're all in draft form and there have been numerous drafts that have been reiterated as these working groups have worked through. They are not available to signature because one of those things that's in there is an actual calculation of the -- of the contribution to the risk pool and, let me say client-specific issues per agreement, and out of fairness to the regulatory process, you know, we want to make sure that all of that has been bought off on, which we believe it has. And before we actually have people execute. But in terms of -- if you're thinking about timing, these agreements all exist in various places, and many general counsels in these offices were providing us with lots of feedback as you can imagine, so we expect that they can be executed relatively quickly.

That's exactly what I was trying to understand, because I know what you said before, that you didn't really want to front-run the regulators.

Right.

my follow-up questions would be, with other product, and looking at the Russell, and the licensing fee -- I assume the 0.7 expense in 3Q just has to do with timing, because it is going at 6.5 in the next quarter. So I'm trying to understand what the buildup in volume prior, is it sort of like getting your cake and eating it, too? You're getting the volume beforehand, before you even get the exclusive license? And that's part of, in the category of other products, and then I saw option volume in ag doubled. Did you split the contract yesterday or what? Just May 1st.

Let me answer the Russell question quickly, Rich. As you look at it, the most significant value out of that relationship is obviously in the exclusivity period. So as we got better visibility into wins that exclusivity period would begin in September. The adjustment in third quarter expense is very simply matching up the expense when the exclusivity period starts in September versus prior view that would it start earlier in the quarter. So that just really the accounting to match the amortization with the exclusivity period. Clearly, we're not going to wait until the exclusivity period begins. As Jeff mentioned, we set a record for Russell trading yesterday, and that was a record. We set a couple records as we went through the month of April in our Russell volume. Our prices that you see on our Russell products are equally as good as what you see on the other exchange. We brought on board some sales leaders who know this space and know these customers. We're working on market-making programs and joint marketing initiatives to get the trading moved to the platform in June. So the guidance is to give an update on where we think the accounting will handle but more importantly, we've got a number of initiatives in place to get more of the volume in June, and then to build on that volume and get a good solid running start as the exclusivity begins in the middle of September.

On options, Rich, I guess I would make two points. One is tremendous relative volatility in the first quarter in the ag complex. Anyone reading the papers will see that to the point that it potentially started riots in some countries over food shortages. So a lot of volatility in the first quarter and a lot of the ways that people play that volatility in ag is through the options. The second thing, and this is something we inherited. I don't really fully understand the reason for it, but at least in North America, the ag products have limits and stops on them when they have certain price movements, and so exchanges like ours have to hold pricing, hold the market price, at certain levels as brakes when there's trading going on in the flat price futures. And a lot of the way that customers deal with actual price discovery when exchanges are limit up or limit down is by trading in futures -- in options on the futures, which have separate limits in our case. So you do see some portability between flat-price futures and options trading during these sort of extreme periods. And I think we were limit up on many of our products in the first quarter.

Okay. That's very interesting. Thanks, guys.

Thank you.

Thanks, Rich.

Our next question is from Rob Rutschow with Deutsche Bank.

I guess I have a sort of set of questions related to yellow jacket and the OTC. The first part being was there any impact in the first quarter from that acquisition, and the second part maybe more generally, wondering if they've tried to establish positioning outside of the OTC -- outside of the energy markets, and, whether they've been successful, and then more broadly what your feeling is in terms of the OTC markets. Do you need, you know, the futures contracts to be successful and creating OTC products to trade on your exchange?

Okay. Well, first, in terms of revenue impact, it was immaterial, I would say, to us in the first quarter, in terms of actual financial impact we've been investing a lot in Yellow Jacket. We have a technology team dedicated to integrating yellow jacket more intimately with our platform, and ultimately, because we're one of the few exchanges that have our own front end, and because it's widely used in the industry, we want to be able to roll yellow jacket out incredibly broadly to customers that would like to use it so we have that capability and are building that out technologically. So there's an expense impact. Again, probably not material, but nonetheless, give you a sense on what we're doing there. Yellow Jacket has tremendous applicability outside of energy, and that's partly why we wanted to buy it, as on offensive move to help us move into other asset classes. As a defensive move, so we didn't wake up one morning and find that somebody else had moved into asset classes that we had wanted to. I think Yellow Jacket right now, its broadest distribution and broadest use is actually in weather. Weather is highly related to energy, because people that run power plants, for example, really have their dispatch tied to whether we're using heating and air conditioning. So we have a lot of common customers that -- and I think that's why Yellow Jacket started to focus on energy itself as a way of continuing to diversify. I think it has some knock-on effects that we'll talk more about as we roll them out but it's got very good security systems, very good recording systems that increasingly major banks and Wall Street firms are demanding from systems that they use.

So for an OTC, sort of a free form OTC market, it brings a number of things to a manager. One of the issues that people face is that in the world today a lot of people have instant messenger IDs, and those really belong to the person, and they use them when they go home, and more importantly, when they quit and go to a competitor, they continue to use these instant messenger IDs. And so if you're security engineer at one of the major banks, you've got to try to lock that down a bit. Yellow Jacket has a number of technologies that we're talking to banks about rolling out broadly. We had I think one customer came to us and ordered 400 Yellow Jacket screens recently, and it was for security issues that drove that. So we're quite bullish on it. We think it's a next-generation technology, and as I think I said in prepared remarks, we'll talk more about it as we go forward.

Rob, one data point put in our guidance, we did add 18 employees with the Yellow Jacket transaction. That would give you a rough idea of the expense.

Thanks. My follow-up is, you talked about the Asian markets and the growth there. Just wondering if you can give us a little bit more color on how you tap into those markets and capitalize on the growth there and how you view the competitive landscape in terms of some of the smaller local exchanges.

Sure. Last week we held a cocktail party in Tokyo for 150 of our clients, so one way we tap into it is by entertaining people. But we have a couple of very interesting things. First of all, we benefit from the fact that prior to ICE's existence, the oil industry really located its trading hub in Singapore, which gave it access to various venues in Asia, and so we've been able to get access into essential business that's related to China, business that's related to Japan, and other far eastern countries and economies through Singapore, and we have an office in Singapore and many colleagues there. And so we have a jumping off point, if you will, in moving into these other areas. The two things that we've done as managers to try to drive more volume there is, number one, we did this deal with Plats where -- and we rolled it out first in Asia where there was tremendous demand for Plats' physical settlement price discovery for Asian petroleum product. And that has been -- that was the first place we rolled out our Plats relationship. It's had a huge up-take, been very well received. As a result of that we're now moving into Europe with Plats and ultimately globally.

The second thing we did is this global coal relationship where we're going to launch Asian call markers, global call is a consortium of coal companies, and again, it's more than just a license. We're going to I want to work together similar to what we do with NGX and with Plats and jointly market and get penetration of our screen. So we've done some very kind of novel things. Sort of the other or near eastern investment we made was in an exchange called N C Dex, which is in India. We did that because India is a closed market to western exchanges, so we have a relationship there. We spend a lot of time with them helping them to develop their markets, levering off of some of the experiences and things that we've done, and New York board of trade, which has physical coffee, cocoa, cotton, sugar, the expertise that our people and colleagues have in the warehousing delivery issues that surround though, we have been trying to help import into India. So I think it's why ultimately ICE has customers now in 55 countries. We benefited from a few of the things that we've done here as managers. That okay, thank you.

We'll go next to Mike Vinciquerra with BMO.

Can you comment on NYNEX's efforts with LCH in Europe?

We don't know a lot about them because a lot of the major issues we haven't seen laid out publicly. Certainly we take any competitive offerings seriously but we're very focused on our plans, and I ultimately believe that ICE and NYMEX will coexist in the world, and that our customers want us to, and take various things from both of us, but it's why market share is really so evenly split. So I think this is, in our world as managing ICE this is the fifth or sixth attempt I think by NYMEX to try to build Brent oil volume, so it goes from launching electronically, building exchange in Dublin, building exchange in the U.K. only to shut it down, now only to go back in and do another one. So we're sort of used to the competitive noise that we deal with in the space, but we're very, very focused on what we're doing. We've got a lot of people working on this initiative, both inside ICE and inside all these clearing firms, and customers who would like to us roll out more clear product that are more exotic, and there are things has we really feel we need to control the technology and investment in that technology to do. It's that inertia that I think ultimately will lead us to be very successful.

Back to your point, it doesn't make sense to you that there would be open interests sitting in multiple clearing houses for similar products?

There is right now. There's open interest in NYMEX, in Isis' third-party clearing house, in Tocom and in Dubai for all of these various energy products, and there's reasons that the various exchanges have been successful in various markets, and I don't see anything that's changed that. If you look at who the users are of all those markets, it's all the same firms. It's major oil companies, major energy producers. We really have not broadened the energy market participation to the point that we have a lot of retail customers, or in the case of ICE, Brent is not the speculative oil contract, so it's not -- it tends to be WTI, so we don't really have the exchange traded funds and some of the commodity advisers that are really focused on that product, and so I think the natural users of Brent like the way we've been handling the market. They certainly have followed us through a tremendous amount of change, and we've been quite aggressive in driving change in those markets, and I think we've earned their respect, and we certainly collaborate with them on everything that we're doing. So the biggest issue for them is they want to make sure that clearing house is secure, they want to make sure that it's got technology, they want to see that it's going to bring them security and that's what we've been out marketing and demonstrating to them.

One for Scott. Scott, the other revenue category was up about 50% sequentially. Can you just remind me what runs through that and what was the driver in the quarter?

Yeah. A lot it of things run through it. None of them individually are material. It's things like fee for the services we provide around cotton deliveries, it's things like direct services fees for connections in the data centers. I guess it's probably, again, not a huge number, but one that we look it at a lot and is important. Our ECX and CCX fees also run through there. Those were up pretty significantly. ECX performance recently has been really successful. That does have a knock-on effect which is recorded in our other revenue so it's a lot of things that help drive that.

Okay. Think you, guys.

And there are no further questions in the queue, and that does conclude our conference for today. Thank you for your participation. You may now disconnect.