洲際交易所 (ICE) 2009 Q2 法說會逐字稿

Good day, everyone. Welcome to the IntercontinentalExchange second quarter 2009 earnings call. Today's call is being recorded.

I would now like to turn the presentation over to your host for today's call, Ms. Kelly Loeffler Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good morning. To obtain a copy of the Company's second quarter earnings release presentation, please visit the investor section of our website at theice.com. These items will be archived and our call will be available for replay. Before we begin, you should be aware that our comments this morning may contain forward-looking statements that represent our current judgment and are subject to various risks, assumptions and uncertainties as outlined in the Company's filings with the SEC including our Form 10-K and Form 10-Q, which we expect to file this week. For a description of the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to these filings. Actual results may differ materially from those that are expressed or anticipated in any forward-looking statement. We'll also discuss adjusted net income, adjusted earnings per common share and adjusted EBITDA. These are nonGAAP financial measures that exclude certain nonoperating charges and we believe that are not reflective of our normal operating performance. The reconciliation of these nonGAAP financial measures to the equivalent GAAP results and explanation of why we deem these nonGAAP measures meaningful appear in our earnings press release and presentation. 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'll now turn the call over to Scott.

Thanks, Kelly. Thank you all for joining us today. We are pleased to report solid second quarter results. While the economy and much of the financial services sector continue to grapple with fallout from a global recession, we remain focused on investing in the growth and development of our business. ICE once again achieved record revenues in the second quarter reflecting the strength of our diverse, global model and ability to consistently deliver value for our customers and shareholders. We've executed on a number of initiatives this year, and we continue to develop new opportunities to better serve our customers.

Starting with slide four, you'll see a summary of our second quarter results. We made excellent progress on our key strategic and operational initiatives including OTC clearing, new product launches and integration of our acquired businesses. During the quarter, ICE delivered record consolidated revenues of $250 million, an increase of 27% over last year's second quarter. Consolidated operating income was up 2% over 2Q '08 to $135 million and operating margin was 54%. I would note that the operating margin for our core nonbrokerred business was 62% during the quarter. As we stated in the earnings release this morning, we recorded an impairment related to our investment in the National Commodities and Derivatives Exchange of India or NCDE of $9 million pre tax. Excluding this impairment net income was $83 million and earnings per share were $1.12. Our second quarter tax rate was 38.8% which is higher than we've reported historically due to the NCDE writedown. Our cash metrics remain solid and we have very low debt and leverage levels.

Moving next to slide five, I'll discuss our consolidated financial and volume results for the first half of the year. For the first six months of '09, 233 million contracts were traded in our core futures and OTC market. These results, combined with our move to self clearing, hedged drive record revenue for the second consecutive quarter. We remain one of the most diverse exchanges globally in terms of customer mix, product, and geography. The chart in the lower right shows our product diversification. Second quarter transaction revenues were split about evenly between the futures and OTC segment and market data contributed approximately 10% of consolidated revenue. In addition, over a third of our revenues come from outside of the US driven by the global relevance of our product suite.

Turning now to slide six, I'll detail our consolidated revenues and expenses. Second quarter transaction revenues increased 34% to $223 million. This includes nearly $106 million from futures, $73 million from OTC energy and $45 million from OTC credit. Market data revenues were stable year to year at $25 million. On the expense side, consolidated operating expenses were $115 million compared to $64 million in 2Q '08. The increase was primarily driven by $35 million of expense related to Creditex. $7 million related to ICE trust and TCC $6.5 million related to our Russell index license. Though our Russell investment was profit neutral in the quarter it was once again cash accretive, despite generally sluggish volumes in cash equities and index products. And importantly, we succeeded in growing Russell's market share relative to the S&P 500 index during the quarter.

We are actively working with market participants in the equity trading to develop growth opportunities to take full advantage of the eventual market recovery.

Before we leave this slide, I want to emphasize one point, while we maintain our focus on growth, we constantly work to improve the cost structure of our acquired businesses to deliver improved operating margins and profitability. As an example, despite lower total revenues, we've improved operating margins at Creditex by nearly 20 points compared to the second quarter of 2008 prior to our acquisition of the business. During 2Q '09, Creditex was solidly accretive on a cash base and only modestly dilutive on a GAAP basis. We are pleased to report that the integration of all nonbroker functions into ICE is complete.

Moving to slide seven, you'll find details on our energy futures business. At ICE futures Europe we achieved transaction revenues of $62 up 29% year to year with average daily volume, or ADB of 606,000 contracts. The rate for contracts or RPC for energy futures was $1.61 up from $1.21 in 2Q '08. The increase in RPC was largely due to volume growth in higher revenue products as well as the inclusion of clearing fees. Second quarter volume growth was driven in gas, oil, as well as coal and emission futures.

Our European Brent crude contract volume also remains relatively strong due to the growing recognition of its importance as a benchmark for global oil prices. Open interest exchange wide has grown considerably over the first half of the year reflecting the strong demand from commercial customers in our market. And as reported this morning, July's numbers in our energy futures markets remain strong with ADB up 33% over last July, including European Brent ADB growth of 36%. The thee-month average RPC in July was $1.58.

Turning now to slide eight, you'll see detail on the second quarter performance of our agricultural and financial futures system. ADB was a record 421,000 contracts per day, up 46% year to year. A rebound in our largest agricultural contract, sugar, along with the addition of the Russell contract underpinned this growth. Agricultural RPC in the second quarter was $2.16 compared to $2.21 in 2Q '08. RPC for equity indexes and foreign exchange increased for the quarter averaging $0.84.

This morning, we reported July ADB for ICE futures US was up 41%. The three-month average RPC in July was $2.15 per ag and $0.86 for financial contract. Volatility in many of our ag products remains depressed and volumes are somewhat seasonally soft. However, we've seen stable to modestly improving open interest trends over the last several months and are confident in the long-term prospects for this business.

Now, let's discuss our OTC energy and credit derivatives business on slide nine. Total OTC transaction revenues rose 47% to $117 million in 2Q '09 compared to last year's second quarter. For the second quarter, average daily commissions or ADC in our OTC energy markets were approximately $1.1 million per day. Second quarter ADC declined 7% when compared to Q2 '08, largely as a result of reduced activity in our natural gas swaps market. Like last quarter, natural gas prices remain at multiyear lows as storage levels remain high setting a bearish tone for natural gas prices in the near to medium term. This coupled with mild summer temperatures for much of the country and an inactive hurricane season has resulted in a reduced need by traders to actively manage risk around the natural gas positions. We're encouraged however, that the market has remained relatively active given these current market dynamics.

Overall, our OTC energy revenues agree 8% sequentially from 1Q '09 largely driven by growth and record revenues in our North American electric power contract and the success of 100 new products that we've introduced for clearing just since the start of 2009. In addition, we established another quarterly revenue record in our global OTC oil market which are primarily Asian and European refine markets. Our cleared new products, produced more than $1.5 million in net revenue during the second quarter alone. As a result of continued demand for cleared contracts, 96% of our 2Q contract volume was cleared. We remain optimistic about the growth opportunities in our OTC market despite a climate that is more subdued than we've experienced in several years. Our OTC energy business continued to perform well in July with average daily commissions of approximately $1.1 million per day in line with 2Q ADC.

Turning now to our credit business, CDS transaction and clearing revenues totaled $45 million. This includes $39 million from our Creditex business, which is down roughly 5% over the second quarter of 2008 on a pro forma basis and up slightly from the first quarter 2009. Compounding the seasonally slow volumes typical of summer months, the credit derivatives market have remained soft relative to last year as the industry focuses its efforts on standardization and clearing among many other issues in the financial sector. However, while the traditional brokerage environment remains difficult, we continue to see growing contribution from our electronic initiative which delivered revenues at much more attractive incremental margins. In fact 51% of our second quarter credit revenues were derived from our key electronic initiatives which compares to 35% in 4Q '08.

On the clearing front, since the march launch of CDF clearing through ICE trust, our revenues and expenses have been in line with our prior guidance. We launched our European CDF clearing just last week and our single name in customer segregated funds offering are expected to launch in September and October respectively. Thus, given that our forward visibility of the revenues remains limited, we are not changing our prior guidance at this time. We will provide you with updated guidance as our progress continues.

In summary, we are pleased with our first half performance and believe that it distinguishes our Company among our peers. We grew revenues and established numerous volume and open interest records. We continue to generate solid operating income and cash and we have a strong balance sheet and financial flexibility. We are pleased with this start to the year but we are never satisfied, thus, we will continue to develop and deliver opportunities to position our Company to outperform as the economic climate improves.

Finally, I want to note that as mentioned in our earnings release today, the ICE Board of Directors has authorized up to $200 million for our stock repurchase program effective through February 2010. As always, we remain opportunistic in our use of cash, seeking to invest where we believe we can generate the best return for our shareholders. Please refer to this morning's earnings release -- press release for further details on our quarterly performance as well as updated guidance. We expect to file our 10-Q this week and I'll be happy to address any questions during the Q&A. Jeff, over to you.

Thank you, Scott. Good morning, everyone. Despite the dramatic changes in our economy, regulatory changes to our business and an ambitious set of strategic initiatives, we produced strong financial results for the quarter. Our second record revenues, operating margin increases and low debt levels speak to our focus on growth and our disciplined approach to managing strategic initiatives. This morning, I want to briefly focus on a couple of key topics, the first of which is the dramatic transformations that have taken place in the credit default swaps markets. In less than one year, and amid great deal of competition and change, ICE has invested in and assembled a complete credit derivatives infrastructure. Together with industry efforts to reform the CDS markets today there is unprecedented transparency and standardization in these previously opaque markets. As a result of our innovation and our expertise in OTC clearing and trade automation we've delivered global CDS clearing as we had promised. Our teams worked very hard to earn CDS clearing business by tailoring a solution for this vast, global market that operates across regulatory jurisdictions, currencies, instruments and customer types.

From our acquisition of Creditex in August 2008, we moved very quickly to establish ICE trust. Today, we're actively clearing North American CDS transactions an accomplishment that requires significant investment of resources by major market participants, by regulators, and by ICE. The cooperative effort across the industry have driven results with unprecedented speed and participation. Since March, ICE trust has cleared CDS indices totaling $1.7 trillion in notional value, and as of July 31, the cash portion of ICE trust US guarantee fund was $2 billion. This cash amount is above and beyond the margins that are deposited at ICE trust. Just to put that into context, we believe that this cash amount is larger than the amount in the cash guarantee fund held by CMEs clearing house, which supports nearly all US futures contracts traded today. In addition this $2 billion cash guaranteed fund exceeds that and the guaranteed fund held by LCH Clearnet which covers over half the global interest rates swaps markets as well as the European equity derivatives and like futures contracts.

So as a result, we believe ICE trust has the largest single product risk pool for any margin product and for any margin-based clearing house. The capital requirements that are involved in derisking the OTC credit default swap markets are significant and ICE has set up to manage this. We're also pleased with the tremendous speed and effectiveness in which we've delivered European CDS clearing in advance of the July 31, deadline that was set by regulators.

Our team worked really tirelessly to build a complete separate infrastructure within ICE clear Europe. We've developed a new rule book. We added new risk models, new technology, new activity, new members, new employees, and we capitalized an all new default fund and did that all in a matter of months. Each member contributed to our guarantee fund which is separate from our energy risk pool and we strongly believe that risk pools for CDS must be managed separately from traditional futures and over-the-counter markets in order to minimize systemic risks and the risks that could be transferred to traditional retail futures market participants.

As you may have seen in yesterday's announcement in our first week of clearing, the initial ten European members cleared European CDS indices totaling EUR6 billion in notional value. We have a number of additional efforts underway to further leverage our credit investments. We've developed a robust single main clearing framework which we expect to roll out in September in both the US and in Europe subject to regulatory approvals. As we announced last month, we're also moving towards the launch of our segregated fund solution in October. This important solution will allow buys side participation in CDS clearing. Our segregated fund solution is being designed in a dialogue with the buy side and with regulators, and it has the support of the dealer community. We're meeting regularly with the buy side to inform them of their efforts and for them to inform us of where to go. We want to insure a level playing field and access for all market participants.

These CDS markets are new and they're challenging, but they're also large with a potential to grow once these structural reforms take hold. The global CDS market serve a very valuable purpose and they play a key role in encouraging more lending and the extension of credit by allowing institutions to hedge and diversify their credit risk. So we continue to see opportunities in credit as well as in other OTC markets where we believe customers can do more business by managing risk effectively. Before I leave the topic of CDS I do want to recognize the clearing teams at ICE as well as the hundreds of staff within the global financial services industry who are pursuing change at an unprecedented pace in this market. And they're blazing new, important trails for risk management. The speed at which the reform and restructuring is occurring in the CDS market has exceeded that of any recent market initiative globally whether its futures or over the counter. While it's popular to demonize the banking sector these days, here at ICE we've seen a tremendous effort by the risk management and front office teams across the banking sector who are working to get the credit markets functioning again. This time with better risk management, with regulation and with transparency.

Let me turn to another important topic. I'd like to update you on the status of regulatory changes in the futures market. For over a century, markets have operated on the premise that speculators and hedgers must co-exist to uphold efficient price discovery. Despite the fact that numerous independent government and industry reports disproved the idea that speculation is behind recent price increases, it remains a focus of policymakers. Clearly, any regulatory or legislative debate that changes how markets work must be well informed and towards that end, last week, we participated in the US commodity futures trading commissions hearings regarding physician limits and hedge exemptions.

We believe that the issues being raised by the CFTC are very timely. These topics have not been revisited in many years and in that time, the physical and the financial markets have grown several fold, yet an outdated position of that regime has remained in place. It remains our view that excessively limiting market participation will only serve to increase market volatility, however, we recognize that the current political environment in the US renders changes to the current oversight regime very likely. So in accordance with requirements that are explicitly included in both ICE futures Europe's no action letter and are also applicable to ICE's significant price discovery contracts under the Commodity Exchange Act, ICE's US futures link contracts today are subject to physician limits that are established by the CME group without consultation with ICE. This is an untenable position in properly overseeing our regulated market as we have no view into the process for setting position limits for granting hedge exemptions.

Part of the CFTCs mandate specifically calls on the commission to quote, Seek to regulate the futures markets by the least anticompetitive means available, end quote. For this reason, we believe that the CFTC should take a central role in administering physician limits, physician accountability levels and hedge exemptions to level the playing field for exchanges. Despite their unfavorable press, the energy markets are a very positive example of the risk management benefits of moving more transaction into clearing houses which is one of the key objectives of the treasury's proposal for financial reform.

Within the energy markets, electronic futures exchanges, OTC platforms and clearing houses have substantially increased transparency and reduced systemic risk over the past decade, yet we've already seen situations where market participants have been required to curtail their transactions in regulated markets. The unintended results is that they're shifting away from regulated exchanges and clearing houses and into bilateral over-the-counter market transactions due to position limits. We've urged the CFTC to move cautiously in reforming the position limit regime in order to alleviate rather than exacerbate the risk position moving away from transparent clear markets and back into opaque bilateral markets. We believe that a reduction in the number of position held by clearing houses will meaningfully increase market opacity, systemic risk and volatility. Each of these outcomes is counter to the administration's stated objectives of market security and transparency.

One final note regarding regulation, over the last several years, ICE has taken on ever increasing regulatory obligations in all of our markets. At the same time, we've grown our business at among the fastest pace in the industry. As an exchange operator, regulation is a part of our mandate to ensure fairness and transparency in our markets. ICE's business model is neither based nor dependent upon market participants being allowed to carry excessively large speculative position. ICE built its markets primarily to serve commercial participants, as evidenced by a few of the following data points that I'd lake to share with you.

First of all, we've consistently shown over the last several years that commercial participation in our over-the-counter market is at least 50%. A very high percentage compared to most liquid markets. Secondly, as a result of our reporting to the CFTC through the commitment of trader report format, you can now see ICE's WTI crude oil futures market as is classified by the CFTC is over 72% commercial interest. This compares to 55% commercial interest in our competitor's WTI contract. Finally, while the flow of investment dollars in the commodity index fund has increased significantly in recent months, many commodity prices have not increased. In fact, the price of natural gas has declined 40% since the start of the year. This fact directly contradicts the assertion that passive index funds are somehow responsible for higher commodity prices.

Ultimately, we believe that changes implemented by the CFTC will be carefully and thoughtfully declined based on verifiable facts and we're actively participating in this regulatory dialogue. We would encourage you to read our testimony and our comprehensive analysis on ICE's website for more information on these topics. We're very proud of the global energy markets that we've developed. The innovation and transparency effectively serve the commercial and financial users of today's global market. Our marketplace could not be sustained without the confidence of our customers, and we believe that they make that vote of confidence every day by logging into and relying on ICE to hedge risks.

And last but certainly not least, I want to address our recent performance. ICE operates the largest cleared over-the-counter energy marketplace both in terms of volume and in revenue. Today we offered 200 cleared OTC energy contracts. This is a figure that has doubled from the number that we listed this time last year. And it's due to a successful move into the clearing business on a global scale. Scott gave you some impressive revenue contribution figures from our new energy contracts in the second quarter which demonstrates the importance of continued new product innovation. We anticipate that the contribution from new contracts will continue to be meaningful, and we have several more important new products to roll out this year. As evidenced by the success of these products, open interest in ICE's OTC energy markets has increased 24% over the past year from 9 million contracts at the end of last June to 11 million contracts at the end of this June.

Our energy futures markets continued to perform at or near record levels. Our Rotterdam delivered gas oil futures market has grown significantly over the past couple of years. This is largely due to the importance of gas oil in the middle distillate markets in Europe and Asia. An ongoing shift from gasoline to diesel usage in Europe has generated an increasing reliance on this contract by hedgers as has the contango condition which helps lift volumes for a physically delivered contract. In looking at the crude markets, our WTI volumes have remained relatively soft as a result of the storage issues at Cushing, Oklahoma and weak US demand. These factors have actually helped provide support for our flagship Brent European crude oil contract as have the tight supplies of European Brent in the physical spot market due to their lower production.

The changes in these physical supplies can result in increasing needs for risk management among commercial participants. We continue to hear from our customers that they view our European Brent futures contract as a consistent and reliable marker for the global price of crude oil. As we've dramatically grown our Company, one of the tenets that we've tried to instill in our culture is calculated risk taking coupled with ongoing self criticism. I want to mention one of the outcomes of this feedback group. A few years ago, we recommended the trend towards increasing volume of agricultural commodity trading as a part of the wealth effect and the demand for commodities in emerging markets. We responded by acquiring the New York Board of Trade, the Winnipeg Commodity Exchange and by acquiring a stake in the National Commodities and Derivatives Exchange of I India. While the first two acquisitions yielded good results, our NCDEX investment underperformed. Shortly after our acquisition of the 8% stake in the exchange, the Indian government banned the trading of key agricultural products so as to obscure rising prices from its population. The Indian government also sought to remove access by foreign exchanges into the Indian market and ICE is now required to sell a portion of its investment in these weak market conditions.

As Scott mentioned, this quarter, we're taking a noncash charge to reflect the diminished value of our NCDEX holding. While we're still bullish on the global commodities trading, it's clear that in light of the Indian government's action, we paid much too much for this opportunity. I mention this because we want investors to understand our focus on generating results. When we fall short, we carefully evaluate the issue, we admit our mistakes and we use this experience to improve our decision making in the future.

On a more positive note, I'd like to mention that we remain very optimistic about our positioning in the global market and the risk management sector. In the past year alone, we've built a new European futures clearing house. We've acquired a US clearing house. We've built new CDF clearing houses in both Europe and we've acquired a leading integrated CDS operation. Despite the market challenges, we've demonstrated he ability to build businesses for one of the largest underserved markets today and to facilitate automation and transparency within international regulatory frameworks.

I want to take this opportunity on behalf of the everyone at ICE to thank our customers for their business. We continue to appreciate your confidence. I also want to thank all my colleagues for their hard work in driving healthy results for our shareholders. For those of you on the phone, thank you for joining us this morning. I'll now turn to back to the operator who will moderate our question and answer session. Operator.

(Operator Instructions) We'll have our first question from Ken Worthington with JPMorgan.

Hi, good morning. First, can you talk about, like, are there structural advantages for those that clear CDS in the US with ICE to also clear CDS with ICE in Europe and vice versa? I don't think there's cross margining opportunities but are there other reasons that customers who clear in the US will also clear in Europe?

Ken this is Jeff. Thanks for the question. There is from a, I guess you would call it structural standpoint in that we're using essentially the same connectivity, the same risk models and technology in both places so we make it easy for a global market participant to trade however they normally trade, wherever they normally trade put that trade essentially on our network. And we will route it then to the appropriate venue. We have previewed for the regulators a view of global clearing of linking clearing houses which is something that is important to us, and it's partly at the root of our owning clearing houses in various locations around the world. But moving the actual moneys globally and offsetting risks globally is complicated simply because of differing bankruptcy regimes. One has to move quite thoughtfully and put in place a system of checks and balances and fire walls so that you can prevent contagious risk. So we're having that dialogue with regulators. We've actually been having that dialogue for a few years. I think over time it will evolve into a model where we are better able to manage risk globally.

As a follow-up, you created buy side clearing for ICE trust in the US. Are you doing the same thing or is the same thing possible to the buy side also in the U.K.?

I'd say, Ken, the solution that we've worked on, we believe can apply and will apply in the US and in Europe.

Thank you.

There's some subtle differences between the two, but we believe it largely applies to both.

Thank you.

And we'll go next to Daniel Harris with Goldman Sachs.

Jeff I think you -- or Scott, I think you mentioned that the new products in your OTC capability set you launched about 100 thus far in the year with about $1.5 million in revenues. Where are you seeing most of the uptake thus far? To some extent, when you think about the next 6 to 12 months, where do you see the opportunities for new products that you are not currently in today?

You've got the numbers exactly right. I want to make sure I'm clear that the $1.5 million are net revenue. That's revenue that drops straight to our bottom line and approximates nearly $0.02 of earnings for us. So we are pleased with the uptake and the contribution from those hundred products. We mentioned in our remarks that we continue to see strong performance in OTC and power, but with the new products, we've seen particular strength in our oil offering. As Jeff mentioned it's largely around European and Asian oil. That's been a particularly good contribution in terms of our new products from on OTC standpoint. With regards to where we go in the future. As we said many times in the past that's largely dictated by our customers' needs. I still think there are products in the oil set in the power space and in natural gas where we will continue to provide new products that our customers have demanded.

Okay. Great. Thanks, Scott. Then just as a follow-up, you know, one of the areas that looked like it's growing very nicely for you guys is your relationship with the climate exchange and emissions trading in general. I was hoping you could put some of your thoughts out there how you see that evolving in the US. Obviously we have got some bills outstanding which normally not drive a cap and trade. With here today, we've got the RGGI and we have SOX and NOX trading. So Jeff or Scott, how should we view the growth in the US excluding cap and trade, and then if you think your global relationship with CLE, I guess sort of broader thoughts on the emissions opportunity.

This is Jeff. Let me just historically tell you that years ago, Dr. Richard Sandor, who was very friendly with this Company approached us about working together, and we made a tactical decision that because emissions trading globally is very much tied to government actions that having good relationships with government and positioning yourself in the middle of that dialogue was really important. And Doc Sandor had put himself there. So we decided to approach the emissions business not directly but through a joint venture. That has worked out very well for us. We're very, very good at building trading system clearing houses, deploying technology on time and on budget. Dock Sandor and his team is very very good at being plugged into the political winds that pushing people to want to trade emissions.

You saw recently that a big block of his stock became available. That stock is traded in London on the AIM exchange. It's relatively small float and relatively illiquid stock. We took the opportunity to buy that block in order to continue to push us closer together and to increase the leverage of the economics for the ICE shareholders.

Specifically following up on your question with respect to the US, cap and trade, a US cap and trade bill, which I suspect will be put on the table late this year, possibly early next year and will be tied to a more broad energy bill with the idea that it may be able to garner votes if we do more offshore drilling and other things that are coupled with it. That may or may not pass based on what you read in the paper right now. Despite that fact, we have been partners with the Chicago climate exchange for years now working on a lot of regional initiatives that exist in the United States. Those regional initiatives are niche products in various regions that respond to various local demands, and they continue to branch out. There's a lot of new products that continue to come there. We find new ways of managing risk, we lever off of some of the ideas that we have, and in other markets, and then importantly, when we bought the clearing corporation, that was the clearing vehicle for the Chicago climate exchange, and so now in the US, we operate the trading platform in the clearing house and in Europe we operate the trading platform in the clearing house. And we're working with globally on some of the new technologies that ICE is rolling out to put those into the climate exchange as well. Very good close relationship that we think could be accelerated by a US cap and trade bill, but nonetheless is growing, due to all of the regional initiatives in the United States.

Just one point, Daniel. I'd also point out that as we look to provide more helpful transparency in our business, you mentioned the climate business has grown for us. In the volume press release this morning, that we put out for the first time, we've included exactly what those ECS volumes are and we'll continue to report on those as we move forward.

Great. Thanks a lot.

We'll go next to [Alex Graham] with Barclays Capital.

Good morning. Just wanted to come back to the CDS clearing opportunity that Ken talked about. When you talk about, I noticed that you didn't update your guidance for the CDS clearing. Now that you started in Europe, can you maybe help us a little bit with with some of the economics there? I think in the past you've said that Europe was already contemplated when you did the original deal with TTC, so maybe can you help us there a little bit, in particular as it relates to that 50% sharing that you have. Is that something that you have to do in Europe as well? Is it a completely new deal? How does this work?

Thanks for the question, Alex. You characterized it exactly right. This CDS initiative was originally envisioned as a global initiative. We struck a deal with the owners of the TCC business for a global profit sharing, and so owners such as Eurex and GFI and ICPA and some of the members of our clearing house will participate in the profit of our CDS business in the US and in Europe on that 50% basis. Just to clarify in my remarks, what I said was no new guidance . We had originally said that we would to 20 million to $30 million over the final nine months of this year. And we had said 6 million to $8 million of associated expense each quarter, and we basically believe those are still the right guidelines as we sit here today. As we've done historically as we get better visibility and as we progress our initiatives, we'll update that guidance as we have better

Alex, this is Jeff, if you let me just jump on your question and take advantage of it. Give me a minute to stand on a soap box. We have a lot of press that listen to this call. I want to make a point that seems to be reported inaccurately all the time, and it's the one that Scott made. That is that we own the US and European clearing houses. ICE owns those businesses full stock. We bought the clearing corporation in order to get technology for those companies, and the deal we did to buy the clearing corporation was cash and a royalty interest in the clearing business. The owners of the clearing corporation, the former owners of the clearing corporation are the ones that share in that royalty information. They are not owners, they are royalty holders. The largest holder of the clearing corporation was Eurex, not a bank. So it continues to be misreported that somehow there is ownership, which kind of then goes to imply governance and control of the US clearing infrastructure at ICE and now the European clearing structure and that is just patently false. So I hope for those that are listening that that will help clear up the relationship that we have out there. Back to you, Alex.

Great. Switching actually to the Creditex business, which you don't really talk about a lot, and I think, Scott, you mentioned that the base business is still pretty soft. I'm interested to hear a little bit more about what you see in that business, not really from a volume perspective but just in terms of competition. There's still a lot of interdealer brokers out there. Really a lot of competition and I guess brokers are looking to consolidate the relationships. At the same time, I think if you look at some of the bigger IDBs out there that offer other products, I think they're really pushing for enterprise solutions that ramp in other products which you obviously don't offer. So how are you faring versus those guys and how you continue to address market share and keep your pricing relatively stable?

This is Jeff. Let me try to tackle that. First of all, the credit default swap business is just as I've seen reported, and I'm sure you have, too, and that is volumes of transactions are down, spreads have widened, and so the brokerage business where we make money on volume has gone to low levels, and we've seen that at other IDBs. What has changed, though, however, is an increasing shift towards electronic trading in and straight through processing in more liquid products and also in the way that we run auctions that we help people get off risk from legacy trades and other kinds of things that we do with our electronic platform. So the business at Creditex strategically is operating just as we envisioned, which is an increased movement towards electronification that has higher operating margins. So our business has actually done very well from a profit standpoint because of that shift. I think you're right in that the IDBs broadly are searching for their business model in a world where products are going to become standardized so they can become more electronified. And where they're going to become cleared. The IDB brokerage model may follow the path in my mind that it followed in energy trading. If you look at the same people that you think of in other asset classes as they operate in energy, they have more customers. They tend to broker products that are further out the curve. They do more structured deals that rely on the foundation with standardized products. I'm less concerned about the enterprise deal because I think over time, you're going to have various clearing houses around the world with various product structures, and you're going to need brokers that have close customer relationships to help funnel the unique transactions.

Very good. Thanks.

Thank you.

And we'll go next to Rich Repetto with Sandler O'Neill.

Good morning, guys.

Good morning.

I guess, Jeff, my question is on the hearings, the CFTC hearings, the day after you testified, two dealers testified, and they made a proposal that the swap dealers should be some aggregate limit but the swap dealers, you shouldn't count their positions that they're holding and that they can document holding for commercial end users. It made sense to me, but I'm not into the details and know the intricacies of the market. The question is could you comment on that? Is that a workable solution? Is it actually executable? Do you think that that is a solution that could possibly come from this and what kind of impact it might have on you?

Rich, when I talk to swap dealers and we've talked to them now for years on building ICE around the energy markets, very few of them -- they tell us that they do not take directional risk. We have seen companies in the energy marketplace that have taken directional price risk. That works well for a number of years, and then somebody pulls the pin out of the grenade and it goes off. So dealers who are very well educated, very smart about these markets tend to take very hedged positions and not take directional risk. And I believe just by looking at the consistent results that many of the major dealers have had that they must be operating in that manner.

What that means is that they are writing long data swaps and other structured deals for their customers and then they are laying off that risk back-to-back in various markets. They're not taking directional risk around that. So I think the reason that you're seeing the swaps dealers arguing for looking through them to the customer is what they're effectively saying is that we are back-to-back with end user business and if you -- the CFTC will look through us, you'll see that. The complicating thing is that, the customer side of the traded technically is a structured deal and you've got very sophisticated risk management personnel and systems in swap dealers. So the CFTCs going to have to get up to speed both technologically and with increased personnel so that they can look through and see what's going on there. I know Chairman Ginsler made a point at the hearing that I was at that when we had people from congress in front of that they continue to need increased funding. The exchanges have supported increased funding for the CFTC and it's largely for that purpose. So yes it's workable, but it's not a button that you're going to push. It's going to have to evolve over time in order to really do that.

That's very helpful. My one follow-up, Jeff, you sort of emphasized the $2 billion cash guarantee fund. I'm looking at the balance sheet, and you can see the margin deposits and guaranteed funds have really increased this quarter, $17.8 billion from [$12.7] prior quarter and [$12.1] billion. I guess the question is what's going on here because the CDS US was launched earlier than quarter end. Is this margin deposits? What's driving the increase, Jeff or Scott, and then what's the impact to your income statement or is there an impact to the income statement?

Even though the business started prior to the quarter, Rich, as you know, what we did at the beginning is we established a $200 million guarantee fund basically the day before we started clearing. What you see at the end of the quarter is a guarantee fund of over $2 billion that reflects the $1.7 trillion that's moved through the clearing house and the nearly $200 billion of open interest that we have. And so it's just a natural buildup you would expect as you go from nothing in the clearing house to $200 billion of open interest. In terms of the income -- two things. First of all, there's no real balance sheet impact because those are due to -- it's an equal and offsetting asset liability. In terms of the income statement we pay out the interest we earn so there's no impact from an income statement as well.

I think, Rich, the reason I wanted to emphasize that point is this a lot of our competitors are trying to put these derivative businesses, OTC derivative businesses into futures clearing houses with the idea that they can lever off of their existing guarantee fund. If you really look at what it's going to take to clear these derivative businesses, those existing guarantee funds, in my mind, and I don't care that people make statements that they're uncorrelated with other asset classes, I think that the proper way to do this is to build proper guarantee funds dedicated to the specific buckets of risk, and that's what we've tried to do. That's how we differentiated our offering from that of other people, frankly. I think it's caught fire and caught on with the market participants given the amount of volume they're putting through. It also makes those businesses very, very nice from a regulation standpoint as, the Senate and the House will debate financial reform, there is some talk about the SEC potentially taking over the credit space, for example, and so that clearing house for us is portable as to its regulatory oversight, which tells us that we made the right decision by not trying to commingle that with regulated futures in the US that's overseen by the CFTC.

Got it. Thanks, guys. That's very helpful.

We'll go next to Howard Chen with Credit Suisse.

Good morning, everybody.

Good morning.

My first question, I guess, there are a lot of cross currents to this regulatory discussion, Jeff, and a lot of it's focused on energy and credit, asset classes. You and the team have always identified as higher growth and must mature. As you and the team lay out your strategic initiatives, your budgets for 2010, I'm curious how do you budget, how to you plan in the context of this regulatory landscape?

Well, let me just say that I think what the CFTC is crying to do and I suspect ultimately this may, their efforts may be looked at around the world as well, similar kinds of initiatives around the world. I think the c FTC is grappling with how do we prevent what they call excessive speculation? My view, frankly, is that if oil is going to go from $60 to $140, people are going to find a way to participate in that run-up and people have legitimate reasons to want to participate, to hedge not just jet fuel but potentially to hedge the risk of a portfolio of stocks or other things. So, and it's hard for me as a manager to say that it's more important to hedge jet fuel so that you and I can have a cheap airline vacation as opposed to hedge a stock portfolio so that retirees can actually live on their pensions. And as a result of that, I honestly believe that money will find its way into these markets. What CFTC is trying to do is create appropriate channels, I believe for that money to come in, try to avoid its concentration in any one fund or any one manager or any one company that will help syndicate risk. So from a budgeting standpoint, if you believe the premise that money will find its way into these markets, it may become more widely syndicated, there may be more innovation in the way that money finds these markets. I'm not sure it really affects us.

One thing, Howard, that I think's important for people to know is, we already invest annually a few million dollars in compliance and market oversight function. We have numerous resources that are dedicated to that. We've made investments throughout this year in improving our compliance technology and refining that technology. So, even as a regulation evolves, as the laws evolve, we've already got a very robust compliance and regulatory framework in place from which we would build.

I appreciate the thoughts, Jeff. I would love a vacation. My follow up, you highlighted the time, the resources, the Company has invested in CDS and you've had a lot of early success, so I'm curious, specific to CDS can you dig a bit deeper into your thoughts, you mentioned potential regulation into the asset class by the SEC rather than the CFTC. Also curious on the calls that one needs to own the underlying high grade to trade to CDS, and anything that you can highlight relating to the Company's exposure to the Department of Justice investigation? Thanks.

Sure. Well, CDS is kind of a hot button topic. It's kind of sad, I think, for the people that are using it as a credit syndication tool to somehow be linked to some of the bad things that have happened in this meltdown that we're really underpinned by mortgage syndication and not credit syndication. But nonetheless, as a result of that, Congress is going to talk about it, work through it. I've actually in my private conversations been very encouraged on the hill. I think that banks and other people that deal in credit are spending a tremendous amount of time educating members of Congress on the need for them to manage risk in order to get the lending markets going again. I think that is starting to shine through.

What people want to make sure of is that credit default swaps are not used in a nefarious manner to cause runs on banks to do some of the kinds of things that really threaten the global financial system. So there is some talk that maybe security related underlines should move to the SEC. And so that they can look at stock position and various security positions that an investor would have to sort of look at their motives and maybe put circuit breakers in place.

With respect to the Department of Justice, we know as much about what they're doing as anyone else who's read the papers. We have not received any communication from the Department of Justice. I understand that they're looking at the relationship of market and the clearing houses. It makes sense to me that that may go on, given that the Department of Justice reviewed all of our documents prior to the launch of our clearing house, and approved it as part of our -- which they had an opportunity to do, because we acquired the clearing corporation and went through HartScottRodino review. So the fact that, that they're following on and understanding how the market infrastructure works to me is not surprising. I don't know where it leads, I do expect that we will be contacted if that is the subject of their investigation, given the important role that we're playing now in credit clearing, but beyond that, don't really know anything.

Great. Thanks for taking the questions.

Great. Thank you.

And we'll go next to Mike Vinciquerra with BMO Capital Markets.

Thank you. I wanted to revisit the regulatory front one more time. You mentions, I think you guys initially put something out publicly that ETS and index funds are an immaterial revenue generator for ICE energy and then you mentioned, Jeff, that the swap dealer doesn't make -- it makes sense for them to be in place. Is there any prop trading at the dealers that would be separated from that and would there be potentially any impact if there's limits put on that type of trading?

Sure, Mike. I suspect there is prop trading that goes on with the dealers. What dealers are telling us is that over time they largely have largely been de-emphasizing that because of the high volatility in energy it's very hard for them to take directional positions that don't threaten the P&L. My sense is that if there's limits on prop trading globally, that people will fit within those limits. And to the extent that there's money that is coming from third parties into prop trading desks, I suspect that money will be syndicated elsewhere, so that people can comply with whatever limits may or may not be set.

I think, position limits were really started to prevent physical manipulation and delivery squeezes. And they've now, because of the name it it's catchy, it now takes on the idea of limiting a position, which somehow will limit price movements and limit volatility. In reality, putting limits on price expressions does just the opposite. It actually can increase price movements and increase volatility. So there's a lot of testimony that's going into the CFTC about that. Professor (inaudible) who has spent a career studying these things is testifying on the next panel. I'm sure he'll have some work on that that'll be interesting. For that reason, we get the sense that this CFTC is being very thoughtful. They're definitely involved in dialogue at a lot of places. I think they're definitely understanding how the market works. I take some comfort in the fact that at the end of the day they want to act rationally and help the markets and not hurt the markets. So we're quite supportive of that because we do think that some structural changes are needed.

Certainly, you can't say for sure but I'm getting a sense from your commentary that you're not overly concerned about negative impacts to your business from some of the things being talked about in Washington. Is that a fair statement?

It's fair to say that I am concerned that a competitor is setting limits on us. In the world putting limits on this Company, I would much rather trust the U.S. Government than have a competitor set them. I think, we have been privately talking to the CFTC for quite sometime about the need for an update and I think our voice among many other voices caused them go through this action. We've asked for these hearings and we've asked for participation and we've asked to make these views known, which so far has been quite positive.

Great. Thank you, Jeff.

We'll go next to Niamh Alexander with KBW.

I just wanted to understand where we said back in the US with respect to credit derivatives trading. I know the dealers are driving the bus with respect to changing behavior. You have got the systems, others have the systems but it seems to be primarily blind auctions right now still. How should I think about the catalysts to maybe start to see real change in behavior in the trading of the credit derivatives in the US?

This is Jeff. I think, what will happen naturally in this market in my view is that these products, as the big bang and the little bang have happened, the idea of trading very standardized CDS will start to make its way into the market. The market is struggling with this change right now. It's been hit with a lot of change in a very short period of time. The idea of having very standardized products that are cleared, I think, over time, people will want to take advantage of straight through processing, of technology that will be able to organize that market better. So I actually think it will be a natural phenomena. There may be government intervention or other things or buy side, sell side tension that will push it faster, but, I do think that it's likely going to evolve, whether anybody is pushing it or not.

If I could just understand then, for example, Creditex, which already has a system in place and with the buy side now from October being able to go directly to clear, could they also go directly in trade on Creditex or do you still need to go through a broker there?

Creditex is organized, it's electronic platform has an inner dealer platform. Certainly, the door could be open and let others on that platform. If that's the way the market wanted to evolve. Separately, ICE has its very robust futures and over-the-counter platform which is widely distributed. So we have that infrastructure as well. The clearing house is going to be open. We're right now building the APIs out so that people can connect various technologies to it. I think the next thing you'll see Niamh is our platforms and our competitor's platform hooking to the clearing house. That, again, will start to drive straight through processing and more velocity than in trading.

That's helpful. Thanks. Just to follow up could you clarify with respect to the emissions and the carbon trading, Jeff, your relationship with the Chicago Climate Exchange in the US, you're kind of upside is a little capped there, is it kind of a taxed licensing fee for the next few years or should I think about it as a volume-driven business?

I'm not sure we've actually put out the details of that relationship, but I would tell you is that it's not fixed. We do participate in volume growth.

Okay. I'll follow up later. Thanks for taking my questions.

Thank you.

And we'll go next to Don Vendetti with Citi.

Good morning.

Good morning.

Jeff, I had sort of a longer term question for you, I mean, energy served you very well, still a pretty high concentration of your revenues. As you look out sort of three to five years, do you see that changing, and would you do that just through growth and maybe OTC credit, and would there be acquisitions involved as well?

First of all, the great thing about energy is that it has natural volatility in it. It's so subject to supply and demand disruptions and weather events and political involvement that it has natural volatility. So it's volatility that I don't believe gets dampened by having more and more and more traders, it just has these natural forces of nature kind of events in it that keeps it interesting. So I suspect because more people don't necessarily solve those problems that there will be a demand to need to hedge that risk going forward, and it will continue to attract participants. So I'm quite still bullish on energy as a long-term growth vehicle. It also seems to be undertraded, frankly, relative to other asset classes.

But the big opportunity for ICE and other exchanges is to take some of these less organized, less standardized less transparent markets that exist over the counter and do what's happening in credit which is standardize, organize them and clear them. That opportunity set is bigger than the regulated futures market as it exists today. We have a very good relationship with a lost participants in these markets. We have demonstrated that we can deliver technology in clearing and what have you on time and on budget. So we have a seat at the table and the debate and dialog about how those markets move. There is a bit of a land grab going on right now. I think if you actually look at the way we're running our business, which may be frustrating for people that try to follow the stock on a day-to-day basis, we're actually doing very, very well in our core businesses and we're massively investing money in these new asset classes, in building clearing infrastructure, in building technology, in building option infrastructure in things that we think are going to be long-term drivers. We're spending a lot of money, a lot of time, and a lot of attention during this downturn on what we think is next. It's somewhat taking away from the bottom line right now. I think we would really be a star had we just ridden along and said we're going to use our current infrastructure for all these new assets. We don't believe our current infrastructure or the infrastructure of the futures business generally is the proper infrastructure. It's why we're spending so much.

Okay. Thanks.

And we'll have our next question have Mike Carrier with Deutsche Bank.

Thanks, guys.

Good morning.

If you look it at where the position limits have been sent by CME, and if you just assume that the CFTC continues with the same limits across all your customers, have you had the conversation with your customers to try to figure out would there be an impact, what they would do. If the CFTC was a little bit more stringent and lowered their position limits by 10%, if there's an impact there. I guess on the exemptions, not necessarily that they're at your exchange, but across the industry if they were done away with because I think from the CFTCs perspective, even though you can see the noncommercial exemptions being put in place for customer flow there's still that perception that if the swap dealers have the customer flow, then they can definitely take advantage of that knowing better than the market knows in terms of where the market's going on the prop side. So I guess if those were nullified, what the impact would be on your business? Thanks.

Sure. I don't want to necessarily get into detail hypotheticals but let me say broadly that we've always built this business on the backup commercial users because, frankly, we started in the over-the-counter markets, which were dominated in the year 2000 by the need for commercial hedging that wasn't being met by others. So that DNA that started in the Company continues today, and it's why you see that in our markets when you compare them to other people's markets there is very, very high commercial participation. It's hard to imagine that in any regime anywhere globally that regulators are going to try to prevent commercial users from hedging. I think it's a misconception that somehow the dealers are using information to make money. What the dealers do from the way we see them is that they are writing long dated swaps for, let's say, jet fuel which is a common one that people talk about. Because jet fuel is not listed or traded on an exchange, what they do is they buy crude oil because that's at the route of producing jet fuel. They may buy gasoline or our gas oil contract or heating oil or some other middle distillate or refined product because they can then through that capture the margins of refining by doing a swap trade or spread trade around refining margin. They also may do a foreign exchange transaction to hedge the collection risk if it's a foreign airline. They may buy a credit default swap or short the stock in order to put protection risk of the airline's failure.

So what they've ended up doing is deconstructing a jet fuel swap into various risk components and putting it into the market. They don't necessarily put it in at the exact moment in time as they write the jet fuel hedge. They have their own economists and they watch market conditions and they try to lock in the load and make money on the highs and continue to manage that position. I think that is fundamental. They're serving a fundamental need for the airline, and I just don't believe that regulators are going to want to disrupt that. And by people that can do that very well and have a view of the airline business globally and the refining business globally and the oil business globally, you can make money trading around those positions, not trading in front of them.

Okay. One follow-up for Scott. Just on the buybacks, is the $200 million in addition to the $200 million or was it a timing pushout in terms of when the authorization to be used?

The authorization for the original 500 from which we spent 300, so the 200 left would have expired on August the 6th. So that will expire and then we have a new $200 million authorization.

Thanks a lot.

And we'll have our next question have Chris Allen with Pali.

Hey, guys, can you hear me?

Yes, good morning.

On the buyback, how do we think about that versus growth opportunities going forward? Sounds like you guys are investing a lot on the new asset classes in the clearing side. I'm just trying to reconcile how to think about those things?

Chris, we look at it as I said in my prepared remarks, opportunistically. We go through and evaluate what the best use of our cash is to generate the best returns for our shareholders, whether it's an investment in the technology improvement Jeff talked about in a new acquisition target, a buyback and investment in something like this, the CLE< we make the determination of where we think we can put our cash to the best use. And the Board is simply giving us the continued flexibility to buy back our own shares if to the extent we view that as the best use of cash.

Thanks a lot guys.

We'll have our next question from [Rob Rushtau] with CISA.

I was just wondering if you could give us an update on what you're seeing in terms of the growth in the number of speculators in your energy markets. I know you talked a lot about what the commercial parts are doing. What are we seeing in terms of new hedge funds and high frequency traders there?

Let me start with a few data points? In the quarter in the Q that we'll publish tomorrow, you'll see that our commercial participants in OTC were once again above 50%. The mix underneath that between the banks and the liquidity providers is not that different than what you've seen historically. There's new information that we've been providing to the CFTC indicates, as I think Jeff mentioned in his prepared remarks that 72% in our participants in our energy futures market are commercial participants as defined by the CFTC. So we continue to have a very high percentage of commercial market participants in our market and as we've said on many occasions and I'd reaffirm it today, we do not have a situation where we have a single or any one position that dominates any of our markets. So they're very commercially oriented. The mix of the trading has not changed in the past frankly years?

This is Jeff. Let me reiterate something that we've -- information we tried to get out there which is these index fund traders tend to trade in the over-the-counter markets so we don't have to get any execution revenues from them. They then take those positions and they want to get off risk and they come into the clearing house. And we get compensated for clearing. But they come in, like one day a month, and they pay a fee and then they're parked there. So they don't have velocity or turn. They are not involved in the price discovery process on our platform. They therefore don't get involved with creating velocity with algorithmic traders or other traders and as a result of that, we're happy to provide a clearing business for them. It's not really the way we make money. We make money on velocity, on selling data, on having the interplay of bids and offers come together on our screens. Clearing is sort of the tail that's on that dog.

Thanks. Could you give us a real quick update on OTC ag activity and your recent exemption there?

That's still a market that we've got the exemption to pursue it. Frankly, right not the ag markets, as I mentioned in my remarks, are a bit sluggish. Volatility levels are very low. So that's a market we have an opportunity in in the future, not something right now that's yielding significant results to our earnings.

One of the points we've pointed out in our CFTC testimony, one of the things the CFTC is considering, is should it bring the agriculture position limit regime and just apply it to energy. That may work but those markets are very different, and one of the reasons is that hedging and agriculture tends to just be for one growing season, and hedging in energy tends to be in some cases very long dated. What the agricultural swaps market is trying to do is to get people in agriculture to think about doing longer dated deals. So that would mean deals that are tied to financings of investment in agriculture, things that are going to go over a long multiple growing seasons, not typically your farmer hedging. But typically your investment in corporate investment hedging. And that's a nascent market. It does exist to the extent that it existed it was bilateral, done with some of the major banks and dealers. We're now trying to get that market to have more velocity and to think about the fact that you can clear it and get off risk. I think it'll take some time for ag to grow, but the fact that you've got a risk management tool that will go long periods of time, I think ultimately we'll find a home for that.

Okay. Thank you.

That does conclude our question and answer session for today. I'd like to turn the conference over to Mr. Jeff Sprecher for any additional or closing remarks.

Thank you, operator. Thank you all for joining the call today. We look forward to talking to you next quarter.

That does conclude today's conference. Thank you for your participation.