ICE » Topics » Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, or if our expenses increase without a corresponding increase in revenues, our profitability will be adversely affected.

These excerpts taken from the ICE 10-K filed Feb 11, 2009.
Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, or if our expenses increase without a corresponding increase in revenues, our profitability will be adversely affected.
 
Our cost structure is largely fixed and we expect that it will continue to be largely fixed in the foreseeable future. We base our expectations of our cost structure on historical and expected levels of demand for our products and services as well as our fixed operating infrastructure, such as computer hardware and software, leases, hosting facilities and security and staffing levels. If demand for our current products and services declines, our revenues will decline. If demand for future products that we acquire or license is not to the level necessary to offset the cost of the acquisition or license, our net income would decline. For example, we have incurred significant costs to secure the exclusive license with the Russell Investment Group for listing Russell’s index futures, the costs of which will be amortized over the next several years. If our clearing and execution fees for the Russell index futures is not sufficient to offset the amortization costs, our net income will decrease. We may not be able to adjust our cost structure, at all or on a timely basis, to counteract a decrease in revenue or net income, which would result in an adverse impact on our profitability.


38


Table of Contents

Owning clearing houses exposes us to risks, including the risk of defaults by our participants clearing trades through our clearing houses, risks regarding investing the funds in the guaranty fund and held as security for original margin, and risks related to the cost of operating the clearing houses.
 
Operating clearing houses requires material ongoing expenditures and exposes us to various risks. We cannot assure you that our clearing arrangements will be satisfactory to our participants or will not require additional substantial system modifications to accommodate them in the future. Our operation of clearing houses may not be as successful and may not provide us the benefits we anticipate. In addition, our operation of these clearing houses may not generate sufficient revenues to cover the expenses we incur.
 
There are risks inherent in operating a clearing house, including exposure to the market and counterparty risk of clearing members, defaults by clearing members and providing a return to the clearing members on the funds invested by the clearing houses, which could subject our business to substantial losses. For example, clearing members have placed an aggregate of cash in ICE Clear Europe relating to margin requirements and funding the guaranty fund that exceeded $10 billion as of December 31, 2008. These funds are swept and invested daily by JPMorgan Chase Bank N.A. in accordance with our clearing house investment guidelines. ICE Clear Europe has an obligation to return margin payments and guaranty fund contributions to clearing members once the relevant clearing member’s exposure to the clearing house no longer exists, and further to provide an interest yield to clearing members in respect of margin and guaranty fund contributions lodged with the clearing house. If the investment principal amount decreases in value, ICE Clear Europe will be liable for the shortfall.
 
Although our clearing houses have policies and procedures to help ensure that clearing members can satisfy their obligations, such policies and procedures may not succeed in preventing losses after a counterparty’s default. We also have in place or plan to establish, as appropriate, various measures intended to enable our clearing houses to cover any default and maintain liquidity, such as deposits in a guaranty fund. However, we cannot assure you that these measures and safeguards will be sufficient to protect us from a default or that we will not be materially and adversely affected in the event of a significant default. Additionally, the default of any one of the clearing members could subject our business to substantial losses and cause our customers to lose confidence in the guarantee of our clearing houses.
 
Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, or if our expenses increase without a corresponding increase in revenues, our profitability will be adversely affected.
 
Our cost structure is largely fixed and we expect that it will continue to be largely fixed in the foreseeable future. We base our expectations of our cost structure on historical and expected levels of demand for our products and services as well as our fixed operating infrastructure, such as computer hardware and software, leases, hosting facilities and security and staffing levels. If demand for our current products and services declines, our revenues will decline. If demand for future products that we acquire or license is not to the level necessary to offset the cost of the acquisition or license, our net income would decline. For example, we have incurred significant costs to secure the exclusive license with the Russell Investment Group for listing Russell’s index futures, the costs of which will be amortized over the next several years. If our clearing and execution fees for the Russell index futures is not sufficient to offset the amortization costs, our net income will decrease. We may not be able to adjust our cost structure, at all or on a timely basis, to counteract a decrease in revenue or net income, which would result in an adverse impact on our profitability.


38


Table of Contents

Owning clearing houses exposes us to risks, including the risk of defaults by our participants clearing trades through our clearing houses, risks regarding investing the funds in the guaranty fund and held as security for original margin, and risks related to the cost of operating the clearing houses.
 
Operating clearing houses requires material ongoing expenditures and exposes us to various risks. We cannot assure you that our clearing arrangements will be satisfactory to our participants or will not require additional substantial system modifications to accommodate them in the future. Our operation of clearing houses may not be as successful and may not provide us the benefits we anticipate. In addition, our operation of these clearing houses may not generate sufficient revenues to cover the expenses we incur.
 
There are risks inherent in operating a clearing house, including exposure to the market and counterparty risk of clearing members, defaults by clearing members and providing a return to the clearing members on the funds invested by the clearing houses, which could subject our business to substantial losses. For example, clearing members have placed an aggregate of cash in ICE Clear Europe relating to margin requirements and funding the guaranty fund that exceeded $10 billion as of December 31, 2008. These funds are swept and invested daily by JPMorgan Chase Bank N.A. in accordance with our clearing house investment guidelines. ICE Clear Europe has an obligation to return margin payments and guaranty fund contributions to clearing members once the relevant clearing member’s exposure to the clearing house no longer exists, and further to provide an interest yield to clearing members in respect of margin and guaranty fund contributions lodged with the clearing house. If the investment principal amount decreases in value, ICE Clear Europe will be liable for the shortfall.
 
Although our clearing houses have policies and procedures to help ensure that clearing members can satisfy their obligations, such policies and procedures may not succeed in preventing losses after a counterparty’s default. We also have in place or plan to establish, as appropriate, various measures intended to enable our clearing houses to cover any default and maintain liquidity, such as deposits in a guaranty fund. However, we cannot assure you that these measures and safeguards will be sufficient to protect us from a default or that we will not be materially and adversely affected in the event of a significant default. Additionally, the default of any one of the clearing members could subject our business to substantial losses and cause our customers to lose confidence in the guarantee of our clearing houses.
 
Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, or if our expenses increase without a corresponding increase in revenues, our profitability will be adversely affected.
 
Our cost structure is largely fixed and we expect that it will continue to be largely fixed in the foreseeable future. We base our expectations of our cost structure on historical and expected levels of demand for our products and services as well as our fixed operating infrastructure, such as computer hardware and software, leases, hosting facilities and security and staffing levels. If demand for our current products and services declines, our revenues will decline. If demand for future products that we acquire or license is not to the level necessary to offset the cost of the acquisition or license, our net income would decline. For example, we have incurred significant costs to secure the exclusive license with the Russell Investment Group for listing Russell’s index futures, the costs of which will be amortized over the next several years. If our clearing and execution fees for the Russell index futures is not sufficient to offset the amortization costs, our net income will decrease. We may not be able to adjust our cost structure, at all or on a timely basis, to counteract a decrease in revenue or net income, which would result in an adverse impact on our profitability.


38


Table of Contents

Owning clearing houses exposes us to risks, including the risk of defaults by our participants clearing trades through our clearing houses, risks regarding investing the funds in the guaranty fund and held as security for original margin, and risks related to the cost of operating the clearing houses.
 
Operating clearing houses requires material ongoing expenditures and exposes us to various risks. We cannot assure you that our clearing arrangements will be satisfactory to our participants or will not require additional substantial system modifications to accommodate them in the future. Our operation of clearing houses may not be as successful and may not provide us the benefits we anticipate. In addition, our operation of these clearing houses may not generate sufficient revenues to cover the expenses we incur.
 
There are risks inherent in operating a clearing house, including exposure to the market and counterparty risk of clearing members, defaults by clearing members and providing a return to the clearing members on the funds invested by the clearing houses, which could subject our business to substantial losses. For example, clearing members have placed an aggregate of cash in ICE Clear Europe relating to margin requirements and funding the guaranty fund that exceeded $10 billion as of December 31, 2008. These funds are swept and invested daily by JPMorgan Chase Bank N.A. in accordance with our clearing house investment guidelines. ICE Clear Europe has an obligation to return margin payments and guaranty fund contributions to clearing members once the relevant clearing member’s exposure to the clearing house no longer exists, and further to provide an interest yield to clearing members in respect of margin and guaranty fund contributions lodged with the clearing house. If the investment principal amount decreases in value, ICE Clear Europe will be liable for the shortfall.
 
Although our clearing houses have policies and procedures to help ensure that clearing members can satisfy their obligations, such policies and procedures may not succeed in preventing losses after a counterparty’s default. We also have in place or plan to establish, as appropriate, various measures intended to enable our clearing houses to cover any default and maintain liquidity, such as deposits in a guaranty fund. However, we cannot assure you that these measures and safeguards will be sufficient to protect us from a default or that we will not be materially and adversely affected in the event of a significant default. Additionally, the default of any one of the clearing members could subject our business to substantial losses and cause our customers to lose confidence in the guarantee of our clearing houses.
 
Our
cost structure is largely fixed. If our revenues decline and we
are unable to reduce our costs, or if our expenses increase
without a corresponding increase in revenues, our profitability
will be adversely affected.



 



Our cost structure is largely fixed and we expect that it will
continue to be largely fixed in the foreseeable future. We base
our expectations of our cost structure on historical and
expected levels of demand for our products and services as well
as our fixed operating infrastructure, such as computer hardware
and software, leases, hosting facilities and security and
staffing levels. If demand for our current products and services
declines, our revenues will decline. If demand for future
products that we acquire or license is not to the level
necessary to offset the cost of the acquisition or license, our
net income would decline. For example, we have incurred
significant costs to secure the exclusive license with the
Russell Investment Group for listing Russell’s index
futures, the costs of which will be amortized over the next
several years. If our clearing and execution fees for the
Russell index futures is not sufficient to offset the
amortization costs, our net income will decrease. We may not be
able to adjust our cost structure, at all or on a timely basis,
to counteract a decrease in revenue or net income, which would
result in an adverse impact on our profitability.





38





Table of Contents







Owning
clearing houses exposes us to risks, including the risk of
defaults by our participants clearing trades through our
clearing houses, risks regarding investing the funds in the
guaranty fund and held as security for original margin, and
risks related to the cost of operating the clearing
houses.



 



Operating clearing houses requires material ongoing expenditures
and exposes us to various risks. We cannot assure you that our
clearing arrangements will be satisfactory to our participants
or will not require additional substantial system modifications
to accommodate them in the future. Our operation of clearing
houses may not be as successful and may not provide us the
benefits we anticipate. In addition, our operation of these
clearing houses may not generate sufficient revenues to cover
the expenses we incur.


 



There are risks inherent in operating a clearing house,
including exposure to the market and counterparty risk of
clearing members, defaults by clearing members and providing a
return to the clearing members on the funds invested by the
clearing houses, which could subject our business to substantial
losses. For example, clearing members have placed an aggregate
of cash in ICE Clear Europe relating to margin requirements and
funding the guaranty fund that exceeded $10 billion as of
December 31, 2008. These funds are swept and invested daily
by JPMorgan Chase Bank N.A. in accordance with our clearing
house investment guidelines. ICE Clear Europe has an obligation
to return margin payments and guaranty fund contributions to
clearing members once the relevant clearing member’s
exposure to the clearing house no longer exists, and further to
provide an interest yield to clearing members in respect of
margin and guaranty fund contributions lodged with the clearing
house. If the investment principal amount decreases in value,
ICE Clear Europe will be liable for the shortfall.


 



Although our clearing houses have policies and procedures to
help ensure that clearing members can satisfy their obligations,
such policies and procedures may not succeed in preventing
losses after a counterparty’s default. We also have in
place or plan to establish, as appropriate, various measures
intended to enable our clearing houses to cover any default and
maintain liquidity, such as deposits in a guaranty fund.
However, we cannot assure you that these measures and safeguards
will be sufficient to protect us from a default or that we will
not be materially and adversely affected in the event of a
significant default. Additionally, the default of any one of the
clearing members could subject our business to substantial
losses and cause our customers to lose confidence in the
guarantee of our clearing houses.


 




The
derivatives and energy commodities trading industry has been and
continues to be subject to increased legislative and regulatory
scrutiny, and we face the risk of changes to our regulatory
environment in the future, which may diminish trading volumes on
our electronic platform.



 



Providing facilities to trade financial derivatives and energy
products is one of our core businesses. In 2008, given the high
price of energy, crude oil and other commodities, the
U.S. Congress held numerous hearings regarding the proper
regulation of energy trading and, in particular, the potential
impact of speculation on energy prices. In addition, the
U.K.’s Treasury Select Committee has also held a hearing on
this issue. In addition, hearings were held on the role that
financial derivatives may have played in the broader financial
market crisis. There are currently legislative proposals
outstanding, and additional bills may be introduced in the
future, that target futures and OTC market participants. In the
U.S. Congress, legislative proposals have recently been
introduced that would (1) eliminate the OTC bilateral
market by forcing OTC trades to be cleared;
and/or
(2) eliminate derivatives trading except for trading on
futures exchanges. Finally, we anticipate that the
U.S. Congress and the President will propose major changes
to the financial regulatory system. These changes could include
merging the CFTC and SEC, a merger of financial regulators into
a “super” regulator similar to the UK’s Financial
Service Authority, or the creation of new regulatory body or
bodies that would regulate by activity, not product.


 



Further, the Energy Independence and Security Act of 2007 has
given the Federal Trade Commission, or FTC, additional authority
to investigate and prosecute manipulation in the petroleum
markets. In August 2008, the FTC released a proposed rule
stating that it would exercise its authority in the petroleum
futures markets, which would include participants on ICE Futures
Europe and our OTC markets. The standard of proof relating to
manipulation proposed by the FTC is less stringent than the
standard currently used by the CFTC and could deter participants
from our markets.





39





Table of Contents






We currently operate our OTC markets as an “exempt
commercial market” under the Commodity Exchange Act. As
such, our markets are subject to anti-fraud, anti-manipulation,
access, reporting and record-keeping requirements of the CFTC.
However, unlike a futures exchange, we are not a self regulatory
organization that undertakes regulatory oversight of OTC
trading. In May 2008, Congress passed legislation as part of the
Farm Bill to increase regulation of OTC markets. The new
legislation requires and grants authority to OTC electronic
trading facilities to assume self regulatory responsibilities,
such as market monitoring and establishing position limits or
accountability levels, over contracts that serve a significant
price discovery function. This legislation requires us and our
OTC participants to operate under heightened regulatory burdens
and incur additional costs, including recordkeeping and
reporting costs, to comply with the additional regulations, and
could deter some participants from trading on our OTC platform.
In December 2008, the CFTC proposed rules to implement the Farm
Bill. In addition to requirements outlined by the Farm Bill, the
proposed rules would require the exempt commercial market to
impose limits on bilateral trades executed on our platform. This
could provide an incentive for market participants to execute
these transactions off exchange. Our OTC Henry Hub natural gas
contract, which comprised 75.2%, 73.4%, and 81.6% of our OTC
energy transaction volumes and 24.9%, 21.4%, and 30.1% of our
consolidated revenues in the fiscal years ended
December 31, 2008, 2007, and 2006, respectively, would be
considered a “significant price discovery contract.”
It is possible that the CFTC will deem additional OTC contracts
traded in our markets to be “significant price discovery
contracts.” One bill currently pending in the
U.S. Congress could, if enacted, subject our OTC markets to
a level of regulation identical or comparable to that of
regulated exchanges.


 



Further, allegations of manipulative trading by market
participants or the failure of industry participants could
subject us, our markets or our industry to regulatory scrutiny,
possible fines or restrictions, as well as significant legal
expenses and adverse publicity. These changes, if enacted, and
increased regulation regarding commodity prices, market
participants or the OTC and futures markets generally could
materially adversely affect our business by limiting the amount
of trading that is conducted in our markets.


 




Our
cost structure is largely fixed. If our revenues decline and we
are unable to reduce our costs, or if our expenses increase
without a corresponding increase in revenues, our profitability
will be adversely affected.



 



Our cost structure is largely fixed and we expect that it will
continue to be largely fixed in the foreseeable future. We base
our expectations of our cost structure on historical and
expected levels of demand for our products and services as well
as our fixed operating infrastructure, such as computer hardware
and software, leases, hosting facilities and security and
staffing levels. If demand for our current products and services
declines, our revenues will decline. If demand for future
products that we acquire or license is not to the level
necessary to offset the cost of the acquisition or license, our
net income would decline. For example, we have incurred
significant costs to secure the exclusive license with the
Russell Investment Group for listing Russell’s index
futures, the costs of which will be amortized over the next
several years. If our clearing and execution fees for the
Russell index futures is not sufficient to offset the
amortization costs, our net income will decrease. We may not be
able to adjust our cost structure, at all or on a timely basis,
to counteract a decrease in revenue or net income, which would
result in an adverse impact on our profitability.





38





Table of Contents







Owning
clearing houses exposes us to risks, including the risk of
defaults by our participants clearing trades through our
clearing houses, risks regarding investing the funds in the
guaranty fund and held as security for original margin, and
risks related to the cost of operating the clearing
houses.



 



Operating clearing houses requires material ongoing expenditures
and exposes us to various risks. We cannot assure you that our
clearing arrangements will be satisfactory to our participants
or will not require additional substantial system modifications
to accommodate them in the future. Our operation of clearing
houses may not be as successful and may not provide us the
benefits we anticipate. In addition, our operation of these
clearing houses may not generate sufficient revenues to cover
the expenses we incur.


 



There are risks inherent in operating a clearing house,
including exposure to the market and counterparty risk of
clearing members, defaults by clearing members and providing a
return to the clearing members on the funds invested by the
clearing houses, which could subject our business to substantial
losses. For example, clearing members have placed an aggregate
of cash in ICE Clear Europe relating to margin requirements and
funding the guaranty fund that exceeded $10 billion as of
December 31, 2008. These funds are swept and invested daily
by JPMorgan Chase Bank N.A. in accordance with our clearing
house investment guidelines. ICE Clear Europe has an obligation
to return margin payments and guaranty fund contributions to
clearing members once the relevant clearing member’s
exposure to the clearing house no longer exists, and further to
provide an interest yield to clearing members in respect of
margin and guaranty fund contributions lodged with the clearing
house. If the investment principal amount decreases in value,
ICE Clear Europe will be liable for the shortfall.


 



Although our clearing houses have policies and procedures to
help ensure that clearing members can satisfy their obligations,
such policies and procedures may not succeed in preventing
losses after a counterparty’s default. We also have in
place or plan to establish, as appropriate, various measures
intended to enable our clearing houses to cover any default and
maintain liquidity, such as deposits in a guaranty fund.
However, we cannot assure you that these measures and safeguards
will be sufficient to protect us from a default or that we will
not be materially and adversely affected in the event of a
significant default. Additionally, the default of any one of the
clearing members could subject our business to substantial
losses and cause our customers to lose confidence in the
guarantee of our clearing houses.


 




The
derivatives and energy commodities trading industry has been and
continues to be subject to increased legislative and regulatory
scrutiny, and we face the risk of changes to our regulatory
environment in the future, which may diminish trading volumes on
our electronic platform.



 



Providing facilities to trade financial derivatives and energy
products is one of our core businesses. In 2008, given the high
price of energy, crude oil and other commodities, the
U.S. Congress held numerous hearings regarding the proper
regulation of energy trading and, in particular, the potential
impact of speculation on energy prices. In addition, the
U.K.’s Treasury Select Committee has also held a hearing on
this issue. In addition, hearings were held on the role that
financial derivatives may have played in the broader financial
market crisis. There are currently legislative proposals
outstanding, and additional bills may be introduced in the
future, that target futures and OTC market participants. In the
U.S. Congress, legislative proposals have recently been
introduced that would (1) eliminate the OTC bilateral
market by forcing OTC trades to be cleared;
and/or
(2) eliminate derivatives trading except for trading on
futures exchanges. Finally, we anticipate that the
U.S. Congress and the President will propose major changes
to the financial regulatory system. These changes could include
merging the CFTC and SEC, a merger of financial regulators into
a “super” regulator similar to the UK’s Financial
Service Authority, or the creation of new regulatory body or
bodies that would regulate by activity, not product.


 



Further, the Energy Independence and Security Act of 2007 has
given the Federal Trade Commission, or FTC, additional authority
to investigate and prosecute manipulation in the petroleum
markets. In August 2008, the FTC released a proposed rule
stating that it would exercise its authority in the petroleum
futures markets, which would include participants on ICE Futures
Europe and our OTC markets. The standard of proof relating to
manipulation proposed by the FTC is less stringent than the
standard currently used by the CFTC and could deter participants
from our markets.





39





Table of Contents






We currently operate our OTC markets as an “exempt
commercial market” under the Commodity Exchange Act. As
such, our markets are subject to anti-fraud, anti-manipulation,
access, reporting and record-keeping requirements of the CFTC.
However, unlike a futures exchange, we are not a self regulatory
organization that undertakes regulatory oversight of OTC
trading. In May 2008, Congress passed legislation as part of the
Farm Bill to increase regulation of OTC markets. The new
legislation requires and grants authority to OTC electronic
trading facilities to assume self regulatory responsibilities,
such as market monitoring and establishing position limits or
accountability levels, over contracts that serve a significant
price discovery function. This legislation requires us and our
OTC participants to operate under heightened regulatory burdens
and incur additional costs, including recordkeeping and
reporting costs, to comply with the additional regulations, and
could deter some participants from trading on our OTC platform.
In December 2008, the CFTC proposed rules to implement the Farm
Bill. In addition to requirements outlined by the Farm Bill, the
proposed rules would require the exempt commercial market to
impose limits on bilateral trades executed on our platform. This
could provide an incentive for market participants to execute
these transactions off exchange. Our OTC Henry Hub natural gas
contract, which comprised 75.2%, 73.4%, and 81.6% of our OTC
energy transaction volumes and 24.9%, 21.4%, and 30.1% of our
consolidated revenues in the fiscal years ended
December 31, 2008, 2007, and 2006, respectively, would be
considered a “significant price discovery contract.”
It is possible that the CFTC will deem additional OTC contracts
traded in our markets to be “significant price discovery
contracts.” One bill currently pending in the
U.S. Congress could, if enacted, subject our OTC markets to
a level of regulation identical or comparable to that of
regulated exchanges.


 



Further, allegations of manipulative trading by market
participants or the failure of industry participants could
subject us, our markets or our industry to regulatory scrutiny,
possible fines or restrictions, as well as significant legal
expenses and adverse publicity. These changes, if enacted, and
increased regulation regarding commodity prices, market
participants or the OTC and futures markets generally could
materially adversely affect our business by limiting the amount
of trading that is conducted in our markets.


 




Our
cost structure is largely fixed. If our revenues decline and we
are unable to reduce our costs, or if our expenses increase
without a corresponding increase in revenues, our profitability
will be adversely affected.



 



Our cost structure is largely fixed and we expect that it will
continue to be largely fixed in the foreseeable future. We base
our expectations of our cost structure on historical and
expected levels of demand for our products and services as well
as our fixed operating infrastructure, such as computer hardware
and software, leases, hosting facilities and security and
staffing levels. If demand for our current products and services
declines, our revenues will decline. If demand for future
products that we acquire or license is not to the level
necessary to offset the cost of the acquisition or license, our
net income would decline. For example, we have incurred
significant costs to secure the exclusive license with the
Russell Investment Group for listing Russell’s index
futures, the costs of which will be amortized over the next
several years. If our clearing and execution fees for the
Russell index futures is not sufficient to offset the
amortization costs, our net income will decrease. We may not be
able to adjust our cost structure, at all or on a timely basis,
to counteract a decrease in revenue or net income, which would
result in an adverse impact on our profitability.





38





Table of Contents







Owning
clearing houses exposes us to risks, including the risk of
defaults by our participants clearing trades through our
clearing houses, risks regarding investing the funds in the
guaranty fund and held as security for original margin, and
risks related to the cost of operating the clearing
houses.



 



Operating clearing houses requires material ongoing expenditures
and exposes us to various risks. We cannot assure you that our
clearing arrangements will be satisfactory to our participants
or will not require additional substantial system modifications
to accommodate them in the future. Our operation of clearing
houses may not be as successful and may not provide us the
benefits we anticipate. In addition, our operation of these
clearing houses may not generate sufficient revenues to cover
the expenses we incur.


 



There are risks inherent in operating a clearing house,
including exposure to the market and counterparty risk of
clearing members, defaults by clearing members and providing a
return to the clearing members on the funds invested by the
clearing houses, which could subject our business to substantial
losses. For example, clearing members have placed an aggregate
of cash in ICE Clear Europe relating to margin requirements and
funding the guaranty fund that exceeded $10 billion as of
December 31, 2008. These funds are swept and invested daily
by JPMorgan Chase Bank N.A. in accordance with our clearing
house investment guidelines. ICE Clear Europe has an obligation
to return margin payments and guaranty fund contributions to
clearing members once the relevant clearing member’s
exposure to the clearing house no longer exists, and further to
provide an interest yield to clearing members in respect of
margin and guaranty fund contributions lodged with the clearing
house. If the investment principal amount decreases in value,
ICE Clear Europe will be liable for the shortfall.


 



Although our clearing houses have policies and procedures to
help ensure that clearing members can satisfy their obligations,
such policies and procedures may not succeed in preventing
losses after a counterparty’s default. We also have in
place or plan to establish, as appropriate, various measures
intended to enable our clearing houses to cover any default and
maintain liquidity, such as deposits in a guaranty fund.
However, we cannot assure you that these measures and safeguards
will be sufficient to protect us from a default or that we will
not be materially and adversely affected in the event of a
significant default. Additionally, the default of any one of the
clearing members could subject our business to substantial
losses and cause our customers to lose confidence in the
guarantee of our clearing houses.


 




The
derivatives and energy commodities trading industry has been and
continues to be subject to increased legislative and regulatory
scrutiny, and we face the risk of changes to our regulatory
environment in the future, which may diminish trading volumes on
our electronic platform.



 



Providing facilities to trade financial derivatives and energy
products is one of our core businesses. In 2008, given the high
price of energy, crude oil and other commodities, the
U.S. Congress held numerous hearings regarding the proper
regulation of energy trading and, in particular, the potential
impact of speculation on energy prices. In addition, the
U.K.’s Treasury Select Committee has also held a hearing on
this issue. In addition, hearings were held on the role that
financial derivatives may have played in the broader financial
market crisis. There are currently legislative proposals
outstanding, and additional bills may be introduced in the
future, that target futures and OTC market participants. In the
U.S. Congress, legislative proposals have recently been
introduced that would (1) eliminate the OTC bilateral
market by forcing OTC trades to be cleared;
and/or
(2) eliminate derivatives trading except for trading on
futures exchanges. Finally, we anticipate that the
U.S. Congress and the President will propose major changes
to the financial regulatory system. These changes could include
merging the CFTC and SEC, a merger of financial regulators into
a “super” regulator similar to the UK’s Financial
Service Authority, or the creation of new regulatory body or
bodies that would regulate by activity, not product.


 



Further, the Energy Independence and Security Act of 2007 has
given the Federal Trade Commission, or FTC, additional authority
to investigate and prosecute manipulation in the petroleum
markets. In August 2008, the FTC released a proposed rule
stating that it would exercise its authority in the petroleum
futures markets, which would include participants on ICE Futures
Europe and our OTC markets. The standard of proof relating to
manipulation proposed by the FTC is less stringent than the
standard currently used by the CFTC and could deter participants
from our markets.





39





Table of Contents






We currently operate our OTC markets as an “exempt
commercial market” under the Commodity Exchange Act. As
such, our markets are subject to anti-fraud, anti-manipulation,
access, reporting and record-keeping requirements of the CFTC.
However, unlike a futures exchange, we are not a self regulatory
organization that undertakes regulatory oversight of OTC
trading. In May 2008, Congress passed legislation as part of the
Farm Bill to increase regulation of OTC markets. The new
legislation requires and grants authority to OTC electronic
trading facilities to assume self regulatory responsibilities,
such as market monitoring and establishing position limits or
accountability levels, over contracts that serve a significant
price discovery function. This legislation requires us and our
OTC participants to operate under heightened regulatory burdens
and incur additional costs, including recordkeeping and
reporting costs, to comply with the additional regulations, and
could deter some participants from trading on our OTC platform.
In December 2008, the CFTC proposed rules to implement the Farm
Bill. In addition to requirements outlined by the Farm Bill, the
proposed rules would require the exempt commercial market to
impose limits on bilateral trades executed on our platform. This
could provide an incentive for market participants to execute
these transactions off exchange. Our OTC Henry Hub natural gas
contract, which comprised 75.2%, 73.4%, and 81.6% of our OTC
energy transaction volumes and 24.9%, 21.4%, and 30.1% of our
consolidated revenues in the fiscal years ended
December 31, 2008, 2007, and 2006, respectively, would be
considered a “significant price discovery contract.”
It is possible that the CFTC will deem additional OTC contracts
traded in our markets to be “significant price discovery
contracts.” One bill currently pending in the
U.S. Congress could, if enacted, subject our OTC markets to
a level of regulation identical or comparable to that of
regulated exchanges.


 



Further, allegations of manipulative trading by market
participants or the failure of industry participants could
subject us, our markets or our industry to regulatory scrutiny,
possible fines or restrictions, as well as significant legal
expenses and adverse publicity. These changes, if enacted, and
increased regulation regarding commodity prices, market
participants or the OTC and futures markets generally could
materially adversely affect our business by limiting the amount
of trading that is conducted in our markets.


 




This excerpt taken from the ICE 10-K filed Feb 26, 2007.
Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, or if our expenses increase without a corresponding increase in revenues, our profitability will be adversely affected.
 
Our cost structure is largely fixed and we expect that it will continue to be largely fixed. We base our expectations of our cost structure on historical and expected levels of demand for our products and services as well as our fixed operating infrastructure, such as computer hardware and software, leases, hosting facilities and security and staffing levels. If demand for our products and services declines and, as a result, our revenues decline, we may not be able to adjust our cost structure on a timely basis. In that event, our profitability will be adversely affected.
 
This excerpt taken from the ICE 10-K filed Mar 10, 2006.
Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, our profitability will be adversely affected.
 
Our cost structure is largely fixed. We base our expectations of our cost structure on historical and expected levels of demand for our products and services as well as our fixed operating infrastructure, such as computer hardware and software, hosting facilities and security and staffing levels. If demand for our products and services declines and, as a result, our revenues decline, we may not be able to adjust our cost structure on a timely basis. In that event, our profitability will be adversely affected.
 

"Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, or if our expenses increase without a corresponding increase in revenues, our profitability will be adversely affected." elsewhere:

CME GROUP INC. (CME)
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