洲際交易所 (ICE) 2009 Q3 法說會逐字稿

Welcome to the Intercontinental Exchange third quarter 2009 earnings call. This call is being recorded. I would now like to turn the presentation over to your host for today's call, Ms. Kelly Loeffler, Vice President of Investor Relations and Corporate Communications. Please proceed.

Good morning. To obtain a copy of the Company's third quarter earnings release and presentation, please visit the Investor Section of our web site at ICE.com. These items will be archived and our call will be available for replay. Before we begin, please be aware that our comments may contain forward-looking statements that represent our current judgments 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 today.

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 and any forward-looking statements. We may discuss adjusted net income, adjusted earnings per share and adjusted EBITDA in the call this morning. These are non-GAAP financial measures that exclude certain nonoperating charges that we believe are not reflective of normal operating performance. The reconciliation of these non-GAAP financial measures to the equivalent GAAP results and an explanation of why we deem these non-GAAP measures meaningful appear in our earnings press release and earnings presentation.

With us today are Jeff Sprecher, Chairman and CEO, Scott Hill, Chief Financial Officer and Charles Vice, President and Chief Operating Officer. At the conclusion of our prepared remarks, we will take your questions until 9:30 a.m. eastern time.

I will now turn the call over to Scott.

Thanks Kelly and thank you for joining us today. We are pleased to report strong third quarter results. We once again achieved record revenues in the third quarter reflecting broad demand for our markets, clearing houses and services despite on-going market challenges. These results show continued healthy trends in our core commodities business across Futures and OTC markets and were achieved while continuing to invest in several key growth initiatives including the launch of our European CDS clearing business.

Throughout 2009, ICE has taken a leadership role in delivering on important reform initiatives that are reducing systemic risk and enhancing market. We have made a substantial commitment in terms of capital, time, and human resources and we are confident that these investments will enable us to continue to out perform over the long-term.

Beginning on slide four, you will find the summary of our third quarter results. During the quarter, ICE achieved record consolidated revenues of $256 million, an increase of 27% over last year's third quarter. Consolidated operating income was up 17% over 3Q 2008 to $140 million and up 4% over this year's second quarter.

Operating margin once again improved sequentially to 55% in the third quarter. Importantly, operating margin for our non-CDS business was 65% during the quarter. Though our credit offerings remain in early stage investment, we are a global leader and established solid base for future growth without impacting profitability in the quarter or the year. We have continued our successful strategy of leveraging the profitability of our core business to invest in future growth, while generating solid current period returns for our shareholders.

Before leaving this slide, I want to focus you on our adjusted EBITDA metric on the lower left hand side of the chart. 3Q adjusted EBITDA was up 33% year-to-year to a record $154 million. For the first three quarters of 2009, this measure of financial performance is up 10%, despite the global recession.

We believe a good business produces strong results throughout market cycles and not just in periods of economic health or expansion. We also believe this a good business does not need to rely upon one time cost cutting to deliver strong financial results. Instead, it must be able to deliver solid returns even as it funds investment and future growth by executing on integration and cost efficiency initiatives.

Let me provide a few examples. Since we acquired NYBOT in January, 2007, we have more than doubled operating margins and quarterly revenue. Since acquiring Creditex one year ago, we have improved operating margins in a commission based business by nearly 20 points despite the soft CDS market. And, as noted previously, we've integrated acquired assets and leveraged existing resources to start an OTC derivatives clearing house that is already self funding in its first six months of operation. Each of these examples reflect our strategy to build a global exchange business that is well positioned to outperform in any environment.

Moving next to slide five, I will discuss our consolidated financial and volume results for the first three quarters of the year. As you can see, we are on track for a record year in many key financial metrics. Our customer, product and geographic diversification are key competitive differentiators. OTC revenues represented 49% of our consolidated revenues during the third quarter, Futures represented 40%, and Market Data contributed 10%. Further, over one-third of our revenues come from outside of the US driven by the global relevance of our market.

Turning to slide six, I will detail our consolidated revenues and expenses. third quarter transaction revenues increased 34%, to $229 million. This includes nearly $104 million from Futures, $82 million from OTC Energy, and $43 million from OTC Credit. Market Data revenues were stable year-to-year and quarter-to-quarter at $25 million. On the expense side, consolidated operating expenses were $116 million, compared to $82 million in 3Q 2008. The expense growth driven by a $27 million year-to-year increase related to the addition of our OTC Credit business and a $6 million increase in amortization relating to our rental license.

Moving now to slide 7, you will find detail on out Energy Futures business. At ICE Futures Europe we achieved record transaction revenues of $66 million, up 44% year-to-year, with average daily volume or ADV of 676,000 contracts. The rate per contracts or RPC for Energy Futures was $1.53 up from $1.22 in 3Q 2008. While RPC decreased slightly on a sequential basis, our average daily volume in our Brent and Gas Oil Futures revenues reached record levels during the quarter.

Open interest exchange wide has grown 33% this year reflecting the strong presence of commercial customers in our market and offering a solid base from which to grow in 2010. As reported this morning, October numbers in our Energy Futures markets remain strong with ADV up nearly 12% over last object including European Brent ADV growth of 11%. The three month average RPC in October was $1.52.

Turning now to slide 8, you will see the third quarter of our Agricultural and Financial Future business. ADV 386,000 contracts per day up 33% year-to-year. Strength in our largest agricultural contract, Sugar, along with the addition of the Russell contract, underpinned this growth. Despite continuing sluggish volumes in cash equity and index products, we saw record volumes in open interest in the Russell 1000 contract and continued to increase our Russell 2000 marketshare relative to SP500 Futures. Agricultural RPC in the third quarter was $2.08 compared to $2.22 in 3Q in 2008.

As with our oil markets, while RPC for our Ag contracts was down, volumes were up a materially, especially in our benchmark Sugar contract which drove solid revenue performance. This is an important point in that we managed to maximize profitability rather than a single discreet metric. RPC for equity indexes and foreign exchange for the quarter averaged $0.89.

This morning we reported that October ADV for ICE Futures US declined 15%. The first full month of Russell trading occurred in October of 2008 and our volumes reflect the aforementioned difficulties in the index market. However, while industry volume is not where we what we want it to be nor where we expect it to be over the long-term, we are pleased with our relative performance. The three month average RPC in October was $2.05 per Ag and $0.86 per financial contracts. We continue to see improving open interest trends across the agricultural commodities complex. And, as we look to 2010, agricultural and financial products are poised to benefit from improving credit markets, increased share, and a return to more traditional equity market activity.

Our OTC segment performance is detailed on slide nine. Total OTC transaction revenues rose 39% year-to-year. third quarter average daily commissions or ADC in our OTC Energy markets were $1.25 million, up 12% from 3Q 2008 and up 11% sequentially from our second highest quarterly ADC on record. While natural gas prices have rebounded from the historic lows we witnessed in the second quarter, storage levels remain high due to weak US economy, mild temperatures and a uneventful hurricane season. However, the combination of the hedging and storage season and mixed expectations of an economic recovery, has resulted in increased price volatility in recent months.

Healthy OTC Energy performance reflect a second consecutive quarter of revenue records in OTC oil and power. It was also driven by the 150 new products we introduced for clearing since last November. These new products contributed $2.8 million in revenue or roughly $0.02 of earnings per share in the third quarter.

And reflecting the markets move in advance of regulatory and political calls for clearing solutions, 96% of our 3Q contract volume was cleared. Our OTC Energy business continued to perform well in October, with average daily commissions for the month of approximately $1.4 million, up from our third quarter average and up significantly from the prior year's period.

Turning to our credit business, revenues totaled $43 million, during the third quarter. This includes $30 million from Creditex, which was down roughly 27% over the third quarter of 2008 on a pro forma basis.

In addition to the seasonally slow volumes typical of the third quarter, the credit markets remained subdued as the industry recovers and focuses its efforts on standardization and clearing. However, while the traditional brokerage environment remains difficult our electronic offerings continue provide growth at attractive incremental margins. These electronic services include post trade processing, execution, and risk management, and accounted for 43% of our third quarter Creditex revenues. CDS clearing generated $13 million of revenue during the third quarter. And, as updated previously, we new expect full-year revenues to be at or above $30 million.

I would like to emphasize expect this initiative to be profit accretive in 2009 despite heavy investment typical of any start-up business. We worked with industry participants and regulators to establish a growing clearing solution backed by sound risk management regime and a dedicated guarantee fund. During the third quarter we began back-loading in Europe and continue to process those trades while adding the [onderin] index trades. In the US, backloading is largely complete, and like Europe we've added new clearing members. We continue to expect to launch our single name and by side clearing operations this quarter.

Our forward visibility in the CDS clearing revenues remain limited. However, we established ourselves as the global leader in this space and we are confident that this initiative will yield further revenue growth in 2010, even as cost decline as investment levels subside beginning in the fourth quarter. We will continue to provide updated guidance as our progress continues.

We are pleased with what we accomplished in the quarter and year-to-date. Our operational and financial performance continues to distinguish ICE from our peers. We have grown our top line, improved margins for three consecutive quarters added cash to the balance sheet, reduced leverage, integrated and improved margins in the voice brokerage business and built a global OTC derivatives clearing business from the ground up. We have a demonstrated track record of being consistently ahead of the curve which has allowed us to outperform in business context. And we believe we positioned ourselves to continue to outperform in 2010.

I will ask that you please refer to this morning's earnings press release for further details on our quarterly performance as well as updated guidance. We expect to file our 10-Q later today. And, of course, I will be happy to address questions during the q-and-a. Jeff, over to you.

Thank you, Scott. Good morning everyone. You have just are heard about the strong performance of our business,so I would like to take a few minutes to provide some context for that performance as well as outline larger opportunities.

There now have been several quarters that have followed since the global downturn in economic activity began. During that time, many of our market participants have come under financial pressure, and significant regulatory changes have been occurring in our business. Yet ICE has continued to grow throughout this period. Despite an extended global recession and the regulatory requirements added to our business over the past year, ice's net income in the most recent quarter was 34% higher than when the crisis began in the fourth quarter of 2007. And open interest in many of our major contracts in our clearing houses are at all time highs.

ICE remains one of the strongest performing exchange businesses globally. It's against this back drop that I would like to cover four key topics this morning. These include the legislation and regulatory activity, ICE's profitability product innovation, our move towards over-the-counter clearing, and the strength in our core commodity businesses. These are also detailed on slide ten and eleven of our presentation.

So turning first to the legislative and regulatory landscape, there has been a decided policy shift towards increased transparency and contract standardization around the world. These important transitions have been taking place since ICE first established its electronic energy markets in the year 2000. But obviously recent events have resulted in new and renewed focus by policymakers. Transparency promotes increased liquidity and inspires confidence in markets. And contract standardization allows market to be exchange traded and cleared. While many over-the-counter markets remain largely voice brokered ICE led the development of a liquid electronic market in over-the-counter energy.

Today, even transactions that are executed via voice brokers typically end up on exchange as swap dealers layoff their risk they manage on behalf of their customers . As evidence of this focus in the United States, two separate bills were advanced to the House Financial Services and Agricultural Committees in October. Each bill has a central tenant of ensuring that qualifying transactions are executed and cleared on exchange using standardized contracts.

Regulation encompasses many aspects of an exchange's obligation to the market, but position limits are the most recent area of focus by many of our stakeholders. ICE has advocated for CFTC established limits that take into consideration the overall size of the market should the Commission deem it appropriate to use their authority in this way. In the meantime, ICE has already instituted position limit regimes in our two largest US linked contracts, our WTI Crude Futures and our over-the-counter Henry Hub natural gas swap. We expect the position limits may apply to additional over-the-counter contracts as CFTC works through its obligations under the 2008 Farm bill. However, for our key revenue producing products, such measures are already in affect.

We believe that prudently set limits will lead to increased competence if properly functions markets and drive transaction growth as more hedging follows with the increased adoption of risk management practices. Our customers have been anticipating position management changes. We believe most are already acting to stay ahead of this regulatory trend. In fact, we can see this shift in our third quarter operating results. As more over-the-counter by lateral positions are migrating into ICE's clearing houses.

I would like to point out the resiliency of the markets in managing through this period of significant regulatory uncertainty. In addition to bringing transparency to the Energy markets we have seen great strides made in transparency in the credit derivatives markets. Credit derivatives markets are among the youngest major derivatives markets and were essentially spreadsheet based less than two years ago. As (inaudible) markets, credit products were not typically standardized and daily price transparency and clearing were not widely available. These issues were similar to those that we experienced in the over-the-counter energy markets when we began developing energy clearing for energy swaps.

Today, however, due to efforts by industry, regulators and companies like ICE we established electronic CDA solutions that support back office connectivity, realtime confirmations and enhanced price transparency. Each of these has helped the credit market become accessible and more accountable, and we are continuing to develop services to meet the expanding requirements of a restructuring market with strong potential.

I would next like to highlight ICE's demonstrated ability to innovate to drive top and bottom line growth. We put a premium on innovating to provide best-in-class service to our customers and in producing profitable growth for our shareholders rather than simply seeking to become a large exchange. As entrepreneurs, we have taken calculated risk and have made substantial investment in domain knowledge and assets to reach new markets rather than waiting for those markets to come to us.

As a result, we are delivering on our promises to more deeply penetrate the over-the-counter markets to grow through the business cycles. While it's human nature to be adverse to change, we look for opportunities that exist within change including changes in regulation, and demand for new products to serve emerging markets such as emissions and credit derivatives.

This leads me to the third area I would like to talk about today which is our progress in clearing the over-the-counter markets. We have made a significant investment of resources, capital and time to demonstrate our commitment to clearing the OTC markets. Over the past year we built a new European Futures clearing house and we have acquired a second US clearing house. At the moment in time when markets are demanding more clearing alternatives. With these assets, we launched a new OTC credit clearing business in March, which is already cash accretive, something virtually unheard of in the first six months of a major start-up business.

As a result, ICE is introducing a new standard for risk management globally. In fact, last week our clearing operations in the US and Europe were recognized by Futures and Options Week for their innovation in solving market challenges. The numbers are backing up our success.

Since March ICE has cleared CDS swaps totaling $3.5 trillion in notional value as noted on slide 11. As of October 31, the cash in ICE Trust US Guaranteed fund was $2 billion which we believe is the largest cash guaranteed funds of any global clearing organization. And it all supports just one single product, credit. In addition to providing the only large dedicated default fund for CDS, we believe we have the most stringent risk standards of any competing model and we are working with regulators to ensure the competing risk models are more consistent and adequate across all solutions.

During the quarter we expect to rollout additional phases within our derivatives clearing effort. We are operationally ready to begin by side and single named clearing. However, the regulatory reviews taken substantially longer than we expected. We have robust and tested single name clearing framework and we continue to expect to roll it out in November. As we announced last month, we are also expecting the launch of our segregated funds solutions shortly. Testing is underway with participants and we have made excellent progress in a very short amount of time. This important solution will allow the buy side to participate in clearing and we are eager to bring these systemically important services to market to meet the demands for clearing.

I would like to close out my remarks by addressing our core global commodities business. When we meet with many of our shareholders, we often spend more time on questions about clearing and global regulation. So I would like to take advantage of the captive audience that I have here today to discuss the subject that often gets very little mention and that is, how well our core business continues to perform.

Commodities markets play a central role in the global economy and our markets are vital to a growing number of customers. In the soft Ag commodities market a significant number of commercially participants were credit constrained, but volumes are now recovering with Sugar volume up 11% in October.

On the Energy side, historically high oil inventory are being offset by a resurgent in Asian demand, a redirection in refining capacity, and improving global economic indicators. Given these conflicting signals and the volatility they produce, our Energy Futures markets continue to perform at or near record levels.

ICE's European Crude and Refined Oil Futures have grown significantly over the past several years and this is largely due to the importance of rent and gas oil contracts in Europe and Asia. In fact, I will note that our European Energy products have already provided us with an important footprint in Asia that is unmatched by most other derivatives markets.

We continue to expand our over-the-counter energy market cleared products offerings and today ICE operates the largest cleared marketplace for over-the-counter energy swaps both in terms of volume and revenue. Our new products in addition to our existing over-the-counter product sweep continue to attract the attraction of risk managers around the globe. In total, we offer more than 230 cleared over-the-counter energy contracts, a figured doubled from that time last yea which is a result of our successful move into clearing.

Scott also mentioned the contribution from these new OTC energy contracts and you can see the growing volume on slide11. This is very notable because generating meaningful revenues tends to be very challenging for products in our sector.

I will summarize my discussion of ICE's core business by reiterating our opening remarks this morning. ICE achieved record revenues coupled with the highest third quarter profit results in our history on the backing of strong commodity performance. And our continued outlook for growth remains strong.

On slide 11 you can see the healthy open interest increases we experienced since last October. 38% open interest growth in our over-the-counter markets. 20% open interest growth for Brent crude oil. 44% for gas oil. And open interest in our key soft Ag markets up 21%. You can also see that our emerging utilities and emission markets are truly a source of opportunity with open interest up 130% year-over-year.

Because open interest trends tend to support trading volumes in the future, we have a high confidence level in the health of our markets. In closing, drivers that are having a positive impact on our business are numerous. There are things like the ongoing shift towards clearing and execution in more transparent markets, innovation in financial services, the global reach of our model and the increasing reliance on commodities and derivatives markets for risk management. These are the transformative changes that are shaping ICE's results. The model that we pioneer in the over-the-counter markets over the past decade and our global footprint in commodities markets, positions us to meet the demand for global risk management around the world.

I would like to congratulate the ICE team on today's milestone. It's the one year anniversary of the launch of ICE Clear Europe. This successful clearing house has driven new revenue opportunity, including serving as a platform for the launch of ICE's European clearing services. On behalf of everyone at ICE, I want to thank our customers for their business during a quarter of great uncertainty.

Operator I will now turn it back to you to moderate our question-and-answer

(Operator Instructions) We will take our first question from Ken Worthington of JP Morgan.

Hi good morning. I would love to dive a little bit deeper into the financials around the CDS business. You spent a lot of money building up the CDS business and now that it's off the ground I would love to know if you could update us on the targeted return you expect on the investment. Even if you give us something like generic like IRR you expect in deals I would take that. I would love to figure out what needs to happen for you to get there. What we don't understand what is gravy and what is part of your expectations. So, for example, is buy side clearing gravy or part of what you need to make CDS really work for you from investment standpoint? Thanks.

Thanks for the question, Ken. We look at the overall credit investments we made the same way we look at any deal. We take a very disciplined approach. We look for returns that in excess of our weighted average cost of capital which is around 11 to 12%. We typically target deals that will yield at least the 12% return. You can think of that as the hurdle rate. And again, we are looking at the investments we made collectively across the credit acquisition and the ICE trust and ICE Clear Europe buildout as the investment upon which will deliver that return.

I think you would be hard pressed with any investment six months into say that it's exactly where you expected it to be. But I would tell you that we have established a global leadership position in the CDS clearing business. We cleared over $3 trillion, we are up to 13 banks in the US, excuse me, 13 clearing members in the US, 12 clearing members in Europe. We got the index clearing going in both places. We are in tests right now with the buy side solution, single name and we are operationally ready on both of those. I feel very good about the position we established.

The things that we need in order to make our return on the investment come to fruition are continued performance in index, we continue to add new clearing members, we continue to bring the buy side in through our customer segregation platform, we get single names launched, and, frankly, as we made the investment I don't think any of us envisioned the CDS market quite imploding the way it did the month that we did the Creditex deal. It's not something we seen before. It is the same thing that happened in the energy business. Our expectation is what will really drive the return on this invest is the CDS market recovery and people going back to viewing that product as a key place where they can hedge their credit risk and frankly treat the CDS almost as if they do equity today.

I think we got all of the elements in place that we expected to have in place. I think wee are very well positioned in terms of the leadership position we established. And I think we are well on our way to generating above hurdle rate return on the investment.

Thank you very much.

We will take our next question from Richard Repetto of Sandler O'Neal.

Good morning Jeff. Good morning Scott. I guess my question is more broad in general. If you look, your results have been good, on a beat, but across the trading companies whether it be equities, or inner dealer brokers or the agency or Creditex. The trading companies have under performed, to my knowledge every single one of them. I guess the question is, is there some explanation in this economic turmoil to explain this? And more specifically with you, the only trading company you have as Creditex and I seen the electronic portion of went down a bit. Is there a shift going on between exchanges and their customers or so.

Rich, let me just walk you back in time to the point of our IPO and when we first started talking to the public about our business. I think you will recall that we have always made a conscious effort to try to figure out where there are emerging asset classes where we can provide services and position ourself in those, basically set our sales in that wind to ride the growth. I think our exchange business has outperformed other exchanges because of decisions we made a long time ago.

That commodities were being globalized and that electronic trading was taking screens around the world and trading was moving 24 hour realtime risk management. And so if you think about ICE, in particular, we really targeted and very selectively targeted markets that are growing because of the growth of right now largely Asia and the brick countries.

Our exposure to energy, which is obviously global, but also soft Ags which are really non-US products, sugar and cocoa and coffee are non-US products these are products by emerging nations. We moved into the credit business because it's in our minds is the one asset class that is never electronified. It is - - the management of credit is a huge - - it is the banking industry, the global banking industry. Obviously the global banking industry has been turned down, but we expect it to recover like most . That industry has never risk managed using anything other than telephone. And so we think we have seen how global the inter-connected banks are and we think it's going to move off the telephone onto the to screen and going the be cleared. That's the position we made in the OTC market.

I think in terms of you looking at the energy brokers and other kinds of platforms, there is no question that in interest rates and in equities and in inner dealer services the velocity has slowed down. And banks themselves who have trading companies made a lot of money in this because they are doing a smaller number of trade with larger spreads. So those markets where you can capture the spread are doing well. That happens to be the bond market and some of the interest rate market if you happen to be a dealer.

But as you know, the platform business that we are in really is based on velocity and the number of trades because that's how we charge our commission. We avoided that because we haven't really been levered to the industries that turned down. Other than credit but we made a conscious decision that that is the one business that is still analog in a digital world. I think you will see long-term that taking a small piece of our effort and equity to get into the credit business will pay long-term results.

That's very helpful. Then my one follow up would be, I guess, more concrete. They talked, headlines about the Saudis moving away from the WTI benchmark and get your thoughts as I know you will be neutral and unbiased. you are actually not with (inaudible), but what are your thoughts on their move, I guess, and the impact of ICE and CME.

The Saudis have never used the exchange traded WTI Futures as a benchmark. They actually lack competence in the WTI market that we trade. So they have not been relevant per se.

I'm sure people of major oil company's that the Saudis do business with may have used the WTI market as a hedge, but the Saudis themselves have not. They are now - - we talked a lot about even on past earnings calls how the WTI market is really structurally flawed because there is no such oil anymore as west Texas intermediate crude that is particularly relevant. Pushing Oklahoma is not really the center of the oil industry any longer. So really what the Saudis are doing is because Cushing is hooked via pipeline for the gull of Mexico and really oil going into Cushing comes from Canada and from the gulf via pipeline, they are simply moving geographically closer to the gulf to get rid of the pipeline and storage constraint that exist at Cushing. That's probably a positive move for the exchanges because they will start hedging with a contract that is traded in the world now.

That is this differential contract between,and it's a differential locational differential between the gulf and Cushing, Oklahoma. I think we have seen that even though ICE talks about WTI as being a flawed marker, it's still a highly traded contract because people do hedge and speculate around those storage problems at Cushing because the pipeline do go through there. But I think accretive ultimately to the business. I should mention we have the rights to that license at Argus that they are going to be benchmarking to. We licensed that just recently in anticipation of this move.

We have relationship with the Saudis. We know and understand they their concerns. We built the product into its systems. We haven't announced its launch yet or exactly what we are going to do but we will be a player in that market as well. So net-net I think frankly you could think of it as a new contract that is going to provide a new differential to the market and that's probably a net positive for exchanges.

Okay. I'm assuming that Argus is not, what do you call exclusive, but I have no more questions so I won't ask.

Yes. They have a non-exclusive licence with us and with some of our competitors.

Got it. Thanks guys.

We will take our next questions from Roger Freeman of Barclays Capital.

Hi. good morning. Wondered if you could on CDS. Maybe Jeff, can you talk about a little about what some of the challenges have been on the single name side with clients. Has it all been regulatory or over the summer you were suggesting that there were some operational issues with the different ways the dealers margin require less margin than the clearing house does. Then tied to that, when you look at what CME is now announcing from a customer perspective. It seems like they are getting contraction because they are getting some traction because they take wider collateral than you do. Even more than treasuries and cash. Maybe have more efficient margins. Maybe you could address both of those.

Sure. There are a number of things that have gone on. This is a startup market so - -and it's changing behavior. What we are doing is building a clearing house that fits into the current work flow. In other words, any mechanism you use to do a trade today will make its way into the clearing house. We integrated with the DTCC warehouse which is where the trades ultimately go for accounting purposes and confirmation purposes and we have integrated with the ISDA master agreement which are the agreements that govern credit default swaps today. We have built a truly over-the-counter platform.

What we have not done is to try make these things look and smell and act like Futures. In Futures you don't necessarily connect to the DTCC warehouse. Y you use ISDA master agreements. You use your clearing agreements. In Futures, in the United States, all members of a US Futures clearing house must be a US FCM. There are capital requirements there. We have worked on a global frame work having a lot of non-US members in our clearing house. There are two different models out there.

These will ultimately converge, I suspect, if you look at what is going on in the bills that are making their ways through the house and from our conversation on what the Senate is intending to do. It is very, very unlikely that ultimately credit will be overseen by the SEC and CFTC in some regard with the Fed being involved in some systemic role. In other words, all the regulators are somehow going to be brought together for common oversight, which we support. I think over time the various models will, by regulation, merge together. k over time the various models will, by regulation, merge together. But we are starting from two different end points.

There is no question there are buy side people that would like to trade this like Futures. That would we would like to have a one stop shop to do everything as Futures. There is also a lot of people that want to keep this in the over-the-counter market, particularly because of the risk management and the way that prime brokerage works today. And all those eventually, I think, will come together somehow, but as we are mentioning at two different starting points.

The people that you hear - - the buy side you are probably referring to that are most vocal, many of them like the Futures model. I think, ultimately what they are going to realize is that they are going to get that, something like that, through regulation probably in 2010. So I'm not sure that making a decision today really matters because it is all going to converge by the time this gets rocking and rolling.

Roger, just to put a fine point on it. Despite all the challenges that Jeff mentioned that we will overcome, from a single named standpoint we are operationally ready on every single up with of those elements. So right now it is a discussion with the regulators to get (inaudible) similar on the buy side initiative. We are in test side right now and we expect to be operational ready in a matter of a couple of weeks. We have developed a solution that works the way the industry trades today, the way they traded yesterday, and we are operationally ready on al aspects in both areas.

And Roger, just to finalize, you had asked about the regulatory interface. This is a very unique product, a single named CDS. It has a binary risk element to it where it can either expire workless or completely in the money. It can go from zero to hundred percent overnight. It is very complicated to figure out how to margin that without requiring full margin. Regulators are obviously aware of the a AIT problem where there was a lack of margin and want to make sure as we introduce the buy side that people are properly margin that we truly are breaking systemic risk.

Similarly, when we introduce the buy side, there is a sense it will provide liquidity in the market because the markets are right now somewhat stunted because we are in this interim period where the buy side knows it's going to move into clearing, but doesn't have everything in place yet. The regulators know once that is in place, the velocity of trading can increase. People like the SEC and others want to make sure they have transparency into the way the buy side is acting so to prevent any kind of trade that may ultimately result in the run on the bank by blowing out CDS spreads and pulling prime brokerage lines. Those kinds of things have happened around Lehman and Bear.

You can imagine from our vantage point, we are having to deal with various regulator about both trading and risk, and they all want to get that right before we unleash the gate. It's ust taking a while because it involve as lot of regulatory jurisdiction. In our offices today there are probably 14 regulators who are there full-time from various agencies. We have been working with the OCC, the FDIC, the New York Banking Commission, the Fed, the FCC, and the CFDC, and the FSA, all of whom are working together on this. It's quite a global regulatory fork that's going on right now.

That's very helpful and very thorough, thanks. Just a very quick follow up, what percent of dealer-to-dealer CDS volume, of new volume, is being cleared today?

Well the dealers have promised by the end of November that 95% of all eligible trades in other words the trades we offer for clearing will be cleared. I was with a group of dealers on Friday and they are close to making good on that commitment. It is a very high percentage right now that's going in.

Got it. Thanks.

We will take our next question from Daniel Harris of Goldman Sachs.

Hi. Good morning everybody. I would actually like to follow up on the comment, Jeff. So as you think about new trades coming in to the CDS clearing house and if I look at the open interest in the US it really ramped up through the end of August to about 190 billion that's been flat there. So would you anticipate that as if we just focus on the index for a second, does that grow from here or is that about the right level, i.e., that's the majority of clearable transactions that are occurring today and historically. And as I think about single names, how does that fit into the open interest and then to the guarantee fund given what you are talking about with the differences in requirements for margin looks like it is a little bit less than 1% given some of your data points earlier. Does that really grow much going forward?

Good questions. First of all, it's hard to get pure visibility into what is going on in the credit markets because it's under a lot of stress right now. It is not only the fact that credit is constrained. CDS will be very tied to new lending which obviously you need the banks unlocked and lending, which I expect will happen, but you do get the sense we are in a transition right now. You have the buy side that right now doesn't know whether they are going to go clear and how much each new trade is going to cost them.

There is some trepidation on entering into new trades knowing when they put them in the clearing house it may change their margin. So it's kind of stunted right now. But I'll give you anecdotally the banks are hiring in the credit space, in the derivative space. In fact, we hear there is tremendous competition to bring in qualified people into this space. There is a real anticipation from a staffing standpoint and a systems standpoint we have been working on that this market is going to recover and recover strongly. That's our best guess at how future looks.

When we bring in single names, we actually, frankly, clear the index business by deconstructing them. So if an index is an index of 125 companies, we actually have deconstructed them and clear them like 125 single names. As we add single names to that index business, there will be some people that will be getting offsets because they have hedged positions. There are some people that haven't yet put all of their index into our clearing house because they're keeping the hedge as a bilateral over-the-counter contract.

We don't exactly know how the default fund is going to rise or shrink and we don't know exactly how those offsets are going to look when we get them all in. I suspect, however, our early work that we did suggested that this clearing house was going to need in excess of $2 billion in the default fund. That was where we started earlier this year. We have reached that number and I suspect that we are going to be up in that range. And as I mentioned in my prepared comments, that's the amount of money to support the inner dealer market that exists in credit.

So that is reflective of the binary type of risk that these products have and that is why we decided to segregate this clearing house from Futures. Even in Europe we have a separate default fund and separate contracts that govern the default fund separate from our Energy business.

Daniel, the only thing I would add is you have to remember that the guaranteed fund in this case is a much more dynamic guarantee fund. And so you will have competing dynamics so as we add single name you could see some growth. But, as credit spreads are tightening you will see that number come down on a more dynamic base than you would in most clearing houses.

Thanks. That's actually really helpful. I will transition for another quick question on a different topic. Going back to what is on your slide, by what we track also, the Brent ADV year-over-year was up 20%, the WTI was up 3% in the third quarter. Just love to get your thoughts on that and thanks for the color.

It's really, I think, because Brent is used the price Asian oil and that's the long and short of it. There's just been a tremendous growth going on in Asia and our customers hedging their Asian exposure.

Thanks.

Whereas WTI is the US product and is reflective of the US economy.

We will take our next question from Howard Chen of Credit Suisse.

Good morning everyone. Thanks for taking my questions. First, growth in your core commodities business continues to be really solid. Jeff, you mentioned that. Scott, you highlighted how you have been able to balance margins, return and growth in deals such as NYBOT and Creditex. If I wrapped that all together, I know it is early, when you look at your business mix today, do you think you are able to restore margins returns to where your commodities - - where your core commodities business is and how do you broadly get there?

Look , Howard, what I point you to are the trends that you have seen. Our margins in the fourth quarter of 2008 were 47%. They were 55% in the quarter. We have increased them three quarters in a row. We have improved the margins in a labor based, commission based business by nearly 20 points.

I don't think there is any question that relative to what volumes and revenues do, we are have taken actions and continue to take actions to expand our margin. We are not going to take the Creditex brokerage business and turn that into a 65% business. It's not the nature of the business. But as our Futures business and OTC business and our clearing businesses grow, we will mix towards those higher margins and you will continue to see us expand margins

Howard, I would like the point out that we enter Creditex through a voice broker business and we are trying to manage it on behalf of our customers and our shareholders. We've really done some things with our broker. We have gotten rid of low performing brokers and we have seen those people immediately being hired by competitors. We are getting away from trying to give these big guarantees that take the margins down in bad times.

We are trying to incent people with stock based compensation, and other things that align our interest with our shareholders. We are trying to give those brokers electronic tools that increase their productivity and the Company shares in that margin increase.

So I'm quite proud of the people that we have working in our brokerage business. I look at some of our competitors and I am dumb struck at how they continue to operate in the bad times as if they were the good times. That's not something that we are going to do. So long-term I hope we can sustain that. It's building a lot of loyalty in that brokerage team. I think that team realizes the changes is afoot and they want to be - - and the people that are really excited about being was are people that want to be on the front of that change. They embrace using technology to increase their own earnings and they like the idea of having the upside of stock based compensation.

Thanks, that's helpful color and makes sense to me. Jeff, on a follow up, looks like you got a lot of your plate organically. Part of the DNA of ICE is doing strategic deals. What's the current appetite to do a transaction? What's the landscape look like in your mind?

Well, amazingly, Scott has done a great job of managing our balance sheet, and really giving us the tools that we have - - the currency that we need to do deals. Our lending group has actually been coming to us wanting to lend more money to us and doing that in the bank market, not in the other debt markets. And our stock has now been performing better as people get more visibility into the regulatory landscape and our own performance globally. We do have the capacity to do it. I do not just want to get big.

Even when we went after after the Board of Trade, you will recall the reason we did that is we thought we would could use to it as a vehicle to get over-the-counter clearing markets for interest rates and other derivatives. We found a different way into that market, nonetheless. It wasn't that - - that acquisition was never about scale.

In fact, were very open that we would not really be able to grow the Treasury complex. In fact, I'm glad we avoided it because the Treasury complex was so highly levered to the securitization business which maybe in trouble for quite some time.

So it's not about scale but it's about finding areas we can really provide growth with our technology DNA that we have in the Company. And there are numerous opportunities out there and other business leaders and entrepreneurs that have actually approached us.

One thing, Howard, we created a vehicle here where a lot of the entrepreneurs that built their businesses are still with us. And as a business builder myself, I know how important it is to cater to people that need more resources and need a bigger scale but still want to be involved in their businesses. We done a very good job with. That they, in turn, have given the results to our shareholders. There are a lot of those out there and we have increasingly we are seen as that type of acquirer.

And Howard, that disciplined approach, I would encourage you to take a look at any measure of return. Return on invested capital, return on assets, return on equity, us versus our competitors and consistently we are two to three times the return because of the disciplined approach we follow to picking the right acquisitions, acting on them, and then executing our integration strategy to bring them into us.

Thanks for the color and congrats on the quarter.

We will take our next question from Chris Allen from Pali Research.

I just wanted to follow up on Jeff's comments on the core commodity, particularly on over-the-counter energy where we have seen nice growth in natural gas and electricity. Scott mentioned some of the catalyst there, but Jeff if you could comment in terms of the environment for the natural gas business right now, whether the storage issues will hold back activity levels going forward. What might be positive catalysts that might drive to business forward that would be great?

What is interesting and I think you are aware of it, that our business does well when there is a lot of volatility. Volatility gets people to start to think about hedging in order to avoid that volatility in their own P&L. And it attracts the speculators that want to interface with the hedgers who have a view on where markets are going to go.

There was a period earlier this year where there was a lot of talk about decommissioning natural gas wells. People that do technical analysis could see how much were being produced and how much was being stored and what demand projections were. They had a hard time understanding how many rigs were going to go offline. That was part of the the equation.

I think now that pricing bottomed and in the 2-dollar and something range and natural gas has increased in price. People now have a better understanding of how many rigs are going to leave the market. It allows the technicians to look at supply and demand again and you see them coming into hedging. We feel pretty good about where the market is.

There is a lot of basis trades, as you know, different delivery points for natural gas. And as the market is evolving, you see growth in these various delivery points. One of the great things about our business is that we used to be very much about the Henry Hub natural gas law. Increasingly people are trading other delivery points and getting domain knowledge in how the local markets work and are hedging locally. That's driving a lot of growth.

Just to put a point, Chris, on your first part of your question is our power business in the quarter was nearly double what it was in the year-ago quarter and our oil business is nearly four times larger. Even as we starting to see the natural gas business pick up, power and oil continue to be very strong performers in our OTC business.

Great. Thanks a lot guys.

We'll take our next question from Michael Carrier of Deutsche Bank.

Thanks, guys. Just a follow-up on that question. When you look at the drivers of growth, in the Energy OTC business, you got a lot of the new products that you launched. You have the normal usage and volatilities, then you got the trend of more and more of the volume that's in the over-the-counter markets going from bilateral to the clearing side. When you see the products in the markets that you are in, and you are looking at what's away from you, meaning not occurring at ICE or not being cleared. Any way to size up the opportunity? What will drive more of those players on to ICE's platform?

I think the areas that we're focused on and obviously competitors are focused on is options. Just like in the equities market there is an increased use of options for controlling risk in commodities. And so we have been working now for years in really increasing our technology and the domain knowledge that we have for the options business including acquiring a company called Yellow Jacket which has technology that we are now using for traders to input options trades into the clearing house.

The other thing that's going on, and Scott mentioned it, is that the oil business which is really a global business, has largely been uncleared. It's largely been traded. The couple of benchmark oil Futures contracts with the rest of the market being done bilaterally. There are a lot of things that come out of a barrel of oil, things you never think of. All of which are some kind of basis trade and exist in the swaps mark. Owning our own clearing house now and having the domain knowledge and control of technology , we are putting more and more of that basis business in there.

Lastly, when we started the Company, both Chuck Vice and I came out of the power industry and we really started ICE as a power company in the United States. That market continues to evolve as there is continued deregulation. Deregulation in the sense that utilities are increasingly being responsible for managing P&L and not being able to pass it through to rate payers. So there is continued hedging in the power markets. We continue to buildout a lot of unique functionality for power. It really is at the heart of where we started the

Interestingly, it is not just in the OTC business where we are seeing some of this happen. We are also seeing it on the Futures side. If you look at the UK natural gas contract, we have seen volumes grow significantly this year in our ICE Futures Europe business for UK natural gas as people want to bring those positions out of a traditionally bilaterally traded world into a cleared solution.

Thanks. Scott, on the nonoperating items, anything unusual in there? Seemed like the expense was a little lower.

There are a couple of dynamics we have below the operating income line. First thing was the tax rate was a little higher than we seen in the last couple of quarters as we had to react to some recent state law changes and clean up around acquisitions. And that was mitigated somewhat by the fact that we had a currency help this quarter versus we had a currency hurt last quarter. And we also had some interest expense reductions around some 1048 tax reversal. A bunch of noise. If you look at taxes and and other expenses combined, it was basically net neutral and leaves you staring right back at operating results which were tremendous.

Okay. Thanks.

We'll take our last question from Jonathan Casteleyn of Susquehanna.

Hi. Good morning. Just wondering if there was anyway to establish any market share in OTC Energy, any way to scale your 1.25 million per day versus the broader analog business. I know it is difficult information to get ahold of, but just wondering from your vantage point if there is anyway to provide that information?

We have the same difficulty you do, which is very hard to size those markets. So we can only do it anecdotally by talking to our customers about what their business is. Frankly, when we talk to customers not everyone wants to volunteer their position to us. We piece together information.

We know that the oil business is big and it's global and it is largely uncleared for any over-the-counter space. We know that the options business is big and it's global and it's largely uncleared in all commodities. So it's just really sticking our finger in the wind and saying let's go to where the bigness is. But it is very, very difficult. That's why I could never be a good equity analyst and you guys have a challenge on your hands.

But what we do have visibility to, Jonathan, are our volumes, our key competitors volumes. And then some visibility into the bilateral world. We look at that share on a monthly basis and the trends across the product . Power and oil, particularly, have all been up. We posted share gains across a lot of our OTC products, I think contributed to by the 150 new products launched this year. So, share trends across OTC product have generally been on a upward bias for the

Follow up question, very quickly, is there any direct benefits to the Creditex brokerage from the ownership of the clearing house or is more of an industry benefit? and then just longer term, is there a way to think about the growth rate for creditex brokerage revenues?

First of all, the clearing house is open. I don't want to alarm any competitors of ours. We take trades from any venue. We run that as a separate business. We have, But we certainly have tremendous domain knowledge that we get by having people who are dealing directly with clients. We can see where things are trending. We can see where there are seemingly large products that we think are actually going to shrink in the long-term. It helps us position ourselves by having that knowledge.

I think the business - - frankly, what we are trying do with our brokers is give them electronic tools to increase their productivity. That's not so much related to clearing as its related to the fact that at the core of this Company we really are technology Company. And the bulk of our employees are computer programmers. We have really built our business by helping to electronify and make markets transparent and standardized and cleared. It's putting some of the tools that we have from other venues and things that we know work in other markets into the hands of those brokers to empower them.

I will tell you I made a conscious effort to reach out to other brokers and provide the same kinds of things to others. We have a much better relationship with the inner dealer space. Even though we compete with many of them now through Creditex.

In a weird way it has given us visibility into what the challenges are in that market and we have embraced some of our competitors where we can and are working with them. You can see it in the growth in our over-the-counter clearing business in energy and other commodities that we done a pretty good job of changing the dynamic of our relationship with our competitors.

I won't give you a number, John, but I think what Jeff said earlier is important. Customers are telling us they are hiring. Our brokers are starting to see more activity. And the industry is now a good solid six months through its transition to the more standardized different CDS contract that they are now trading. The trends certainly point to a positive as you look to 2010. Putting a number on that right now is still difficult.

Understood. Appreciate the time, thank you.

Unfortunately we have a hard stop and we have to leave. I think there are definitely people on the phone that wanted to ask us questions. Let me apologize to you that have been hanging on the phone for not getting to you. We will try to make a note of who we didn't get to and take your calls on the next earnings call.

Thank you all very much for attending. We look forward to another good quarter. Thanks, again, to our customers for hanging with us during these difficulties. Again, congratulations on my colleagues on a really successful first year at ICE Clear Europe.

That concludes today's conference. Thank you for your participation