IntercontinentalExchange 10-K 2008
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number 001-32671
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the registrants voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrants most recently completed second fiscal quarter was $9,811,206,389. As of February 11, 2008, the number of shares of the registrants Common Stock outstanding was 70,135,975 shares.
Certain information contained in the registrants Proxy Statement for the 2008 Annual Meeting of Stockholders is incorporated herein by reference in Part III of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrants fiscal year to which this report relates.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2007
TABLE OF CONTENTS
In this Annual Report on Form 10-K, unless otherwise specified or the context otherwise requires:
Due to rounding, figures in tables may not sum exactly.
This Annual Report on Form 10-K, including the sections entitled Business, Legal Proceedings and Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are based on our present beliefs and assumptions and on information currently available to us. You can identify forward-looking statements by terminology such as may, will, should, could, would, targets, goal, expect, intend, plan, anticipate, believe, estimate, predict, potential, continue, or the negative of these terms or other comparable terminology. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These risks and other factors include those set forth in Item 1(A) under the caption Risk Factors and elsewhere in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, or SEC. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you not to place undue reliance on these forward-looking statements. Forward-looking statements and other factors that may affect our performance include, but are not limited to:
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all factors that may affect our business and prospects. Further, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our audited consolidated financial statements included in this Annual Report on Form 10-K.
We are a leading operator of regulated futures exchanges as well as global over-the-counter, or OTC, markets. Currently, we are the only marketplace to offer an integrated electronic platform for side-by-side trading of energy products in futures and both cleared and bilateral OTC markets. Through our widely-distributed electronic trading platform, our marketplace brings together buyers and sellers of derivative and physical commodities and financial contracts and allows our participants to optimize their trading, risk management and hedging operations. We conduct our OTC business directly through IntercontinentalExchange as an Exempt Commercial Market under the Commodity Exchange Act, or CEA. We conduct our regulated U.K. futures markets through our wholly-owned subsidiary, ICE Futures Europe. ICE Futures Europe is the largest energy futures exchange outside of North America, as measured by 2007 traded contract volume, and one of the top 10 commodity exchanges in the world, according to the Futures Industry Association. We conduct our regulated U.S. futures markets through our wholly-owned subsidiary, ICE Futures U.S. We conduct our regulated Canadian futures markets through our wholly-owned subsidiary, ICE Futures Canada. We completed our acquisition of ICE Futures U.S. on January 12, 2007 and our acquisition of ICE Futures Canada on August 27, 2007.
ICE Futures U.S. has a wholly-owned clearing house subsidiary, ICE Clear U.S. ICE Futures Canada has a wholly-owned clearing house subsidiary, ICE Clear Canada. Our clearing houses are designed to ensure the safety and soundness of our markets. Our clearing houses serve as a counterparty to every trade becoming the buyer to each seller of a futures contract and the seller to each buyer. This process substantially reduces credit risk to our customers.
We operate diverse markets that are globally accessible, promote price transparency and offer participants the opportunity to trade a variety of energy, soft agricultural and agricultural commodities and financial products. Our core products include contracts based on crude and refined oil products, natural gas and power, and emissions, as well as sugar, cotton, coffee, cocoa, canola and orange juice along with foreign exchange and index products. Our derivative and physical products provide participants with a means for managing risks associated with changes in the prices of these commodities, asset allocation, ensuring physical delivery of
select commodity products, speculation and arbitrage. The majority of our trading volume is financially, or cash settled, meaning that settlement is made through cash payments based on the difference between the purchase price of the contract and the value of the underlying commodity at contract expiration, rather than through physical delivery of the commodity itself. We offer futures, options and swaps, which are based on underlying commodity products, and are listed primarily on our electronic trading platform. We also offer open-outcry trading and privately negotiated transactions for certain products.
Trading in futures, options on futures, and OTC products offers a way to protect against and potentially profit from price changes in financial instruments and physical commodities. Futures contracts are standardized agreements to buy or sell a commodity or financial product at a specified price in the future. The buyer and seller of a futures contract agree on a price today for a product to be delivered or settled and paid for in the future. Each contract specifies the quantity of the product and the time of delivery or payment. An option on a futures contract is the right, but not the obligation, to buy or sell a futures contract at a specified price on or before a certain expiration date. In the OTC markets, swap contracts are the primary instrument used to reduce or gain exposure to price movements related to a commodity or financial product. Swap contracts are typically less standardized than futures contracts, and are typically financially settled against either a futures contract price or an index price in order to hedge against or gain exposure to commodity price fluctuations. Our customer base includes professional traders, financial institutions, institutional and individual investors, corporations, manufacturers, commodity producers and refiners, and governmental bodies.
All futures and options contracts are cleared through a central clearing house. In contrast, we also offer OTC swap contracts that can be traded on a bilateral basis and certain OTC contracts that can be traded on a cleared basis. Bilateral contracts are settled between counterparties, while cleared contracts are novated to a clearing house, where they are marked to market and margined daily before final settlement at expiration. We do not take proprietary trading positions in any contracts in our markets.
We operate our European, Canadian and OTC markets exclusively on our electronic platform, and we currently offer ICE Futures U.S.s markets on both our electronic platform and through an open-outcry trading floor based in New York City. In December 2007, we announced our intention to end open-outcry trading for futures contracts at ICE Futures U.S. at the end of February 2008, although we will continue to offer open-outcry trading for all options on futures contracts at ICE Futures U.S. We believe that electronic trading offers substantial benefits to market participants. In contrast to alternate means of trade execution, market participants executing trades electronically on our platform are able to achieve improved trade execution and cost efficiencies through firm posted prices and greater speed and market transparency, reduced trading errors and reduced need for market intermediaries. In addition to trade execution, our electronic platform offers a comprehensive suite of trading-related services, including electronic trade confirmation and access to clearing services. Through our electronic platform, we facilitate straight-through processing of trades, with the goal of providing seamless integration of front-, back-and mid-office trading and risk management activities.
We operate and manage our business on the basis of three segments: our futures business segment, our OTC business segment and our market data business segment. For a discussion of these segments and related financial disclosure, refer to note 21 to our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. For financial disclosure related to our geographic areas, refer to note 21 to our consolidated financial statements.
ICE Futures Europe operates as a Recognized Investment Exchange in the United Kingdom, where it is regulated by the United Kingdom Financial Services Authority, or FSA. ICE Futures Europe was founded in 1980 as a traditional open-outcry auction market by a group of leading energy and financial services companies. Today, ICE Futures Europe operates exclusively as an electronic exchange. Trades in our energy futures markets may only be executed in the name of exchange members for the members own account or their customers account. Our members and their customers include many of the worlds largest energy companies and leading financial institutions.
ICE Futures U.S. is the leading global futures and options exchange for trading in a broad array of soft agricultural commodities, including cocoa, coffee, cotton, frozen concentrated orange juice, or FCOJ, and sugar. ICE Futures U.S. also provides trading in futures and options contracts for a variety of financial products, including its futures and options contracts based on the U.S. Dollar Index, or USDX. ICE Futures U.S. operates as a Designated Contract Market and is regulated by the Commodity Futures Trading Commission, or CFTC. Until February 2, 2007, ICE Futures U.S. operated exclusively as an open-outcry exchange and provided floor-based trading for all of its contracts. On that date, ICE Futures U.S. introduced its core soft commodity contracts for trading on our electronic platform, and has subsequently also introduced the Russell index, currency pairs and USDX futures contracts electronically.
ICE Futures U.S. owns its own clearing house, ICE Clear U.S., which clears and settles contracts traded on, or subject to, the rules of ICE Futures U.S. ICE Clear U.S. is a Derivatives Clearing Organization and is regulated by the CFTC. In 2005, ICE Clear U.S. implemented the Extensible Clearing System, known as ECS, which is a flexible Internet-based clearing system. ECS has permitted ICE Clear U.S. to provide its clearing members with real-time clearing information and the ability to scale and complete clearing processes more efficiently.
ICE Futures Canada is Canadas only agricultural futures and options exchange and North Americas first fully electronic futures commodity exchange. Based in Winnipeg, ICE Futures Canada offers futures and options contracts on canola, domestic feed wheat, and western barley. For over a century ICE Futures Canada, and its predecessor companies, have operated regulated futures markets that bring together agricultural industry participants, traders, and investors to engage in price discovery, price risk transfer and price dissemination for the markets. ICE Futures Canada is a recognized commodity futures exchange under the provisions of The Commodity Futures Act (Manitoba), or the CFA, and is regulated by the Manitoba Securities Commission, or MSC.
ICE Futures Canada owns it own clearing house, ICE Clear Canada, which clears and settles contracts traded on, or subject to, the rules of ICE Futures Canada. ICE Clear Canada is a recognized clearing house under the provisions of the CFA and is regulated by the MSC.
In our OTC business, we operate over-the-counter energy markets through our globally distributed electronic platform. We offer trading in thousands of OTC contracts, covering a broad range of energy-related products and contract types. These contracts include derivative contracts as well as contracts that provide for physical delivery of the underlying commodity, principally relating to natural gas, power, natural gas liquids, chemicals and crude and refined oil products. We are able to offer a wide range of derivative contracts in our OTC markets due to the availability of various combinations of commodities, product types, delivery hub locations and terms or settlement dates for a given contract. In 2007, we acquired ChemConnect Inc. and Chatham Energy, and as a result, have expanded our markets to include natural gas liquids, chemicals and natural gas options contracts. Our OTC market participants include many of the worlds largest energy companies, leading financial institutions and proprietary trading firms, as well as natural gas distribution companies and utilities. Participants in our OTC markets must qualify as eligible commercial entities under the CEA.
We offer a variety of market data services for both futures and OTC markets through our market data subsidiary, ICE Data, which we established in 2002 to meet the growing demand for objective, transparent and verifiable energy market data. ICE Data compiles and repackages market data derived from trading activity on our platform into information products that are sold to a broad customer base extending beyond our core trading community.
Since its inception, ICE Data has expanded to provide data services covering our energy futures and OTC markets, as well as soft agricultural and agricultural commodities, equity indices and currency pairs. Market data services for these segments include publication of daily indices, access to historical price and other data,
view only access to our trading platform, end of day settlements and pricing data sets, as well as a service that provides independent validation of participants own valuations for OTC products.
In April 2007, we announced our intention to establish a European clearing house, based in London, as part of our strategic plan to offer clearing services through our wholly-owned clearing businesses in the U.S., Canada and the U.K. Currently, our energy futures and cleared OTC businesses rely on clearing services provided by LCH.Clearnet Ltd., an independent third party clearing house based in the U.K. We provide clearing services in the U.S. for all ICE Futures U.S. contracts through ICE Clear U.S. ICE Clear Canada is the designated clearing house for all ICE Futures Canada contracts.
To date, we have executed significant portions of our strategic plan for ICE Clear Europe. We intend to begin clearing our energy futures and OTC contracts through ICE Clear Europe in the third quarter of 2008. We believe that gaining greater control over this core clearing capability will allow us to introduce more products and services to the futures and OTC markets for broker-dealers and for our customers, as well as ensure service levels meet the standards that we have set within our execution business. We also believe that this flexibility will allow us to increase our speed-to-market for new cleared products and to expand our products further into physically-delivered commodity products. Finally, it is our objective to provide a clearing model that benefits customers and clearing firms alike, through competitive pricing, profit participations and new value-added services. Longer term, we anticipate that collectively, our European, Canadian and U.S. clearing houses might partner to serve our global customer base across the commodities and financial products marketplace, in an innovative and highly capital efficient manner. Our clearing strategy is designed to complement our diverse markets while meeting the risk management and capital and regulatory requirements of an expanding global marketplace.
Prior to commencing operations, ICE Clear Europe must be approved by the FSA as a Recognised Clearing House. We submitted the final FSA application in the third quarter of 2007, and assuming that the information provided is satisfactory and the initial timeline is met, regulatory approval is anticipated in the first quarter of 2008.
On July 18, 2007, we formally notified LCH.Clearnet of our intention to terminate our clearing agreements with them and provided the required one years written notices of termination of these agreements. The notices of termination specify that the termination date will be a date agreed to between the parties, or, in the event that no agreement is reached between the parties regarding a termination date, will be the date that is twelve months from the date of notice.
Over the past two years, we have made several strategic acquisitions and developed strategic relationships to expand our product offering and client base, including our acquisitions of ICE Futures U.S., Commoditrack Inc., Chemconnect Inc., ICE Futures Canada, and Chatham Energy. We also acquired the exclusive rights to the U.S. Russell Index futures contracts, as well as key natural gas indices from both NGI and NGX. We also entered into strategic alliances relating to our electronic platform with Natural Gas Exchange, Inc., and Platts, among others.
On December 21, 2006, we acquired an 8% equity stake in the National Commodity and Derivatives Exchange, Ltd., or NCDEX, a derivatives exchange located in Mumbai, India. NCDEX is presently privately held. The NCDEX investment was made with the strategic view of allowing the Company to participate in the development of exchanges and derivatives markets in India and potentially elsewhere in Asia, which is a key emerging region in the exchange sector.
On January 12, 2007, we completed the transaction to acquire NYBOT, now ICE Futures U.S. The acquisition provided us with the capability to acquire the technology and systems to provide clearing, as well as material revenue and expense synergies, and the diversification and expansion of our product offering into soft agricultural commodities, foreign exchange and equity index futures and options on futures products.
On February 28, 2007, we acquired all of the assets of Commoditrack, Inc., which will enable us to provide our energy market customers with a real-time risk management program.
On March 5, 2007, we purchased the intellectual property rights to widely-used OTC natural gas price indices, called NGI indices, from Intelligence Press, Inc. While Intelligence Press has retained the rights to collect data, publish newsletters and charge its customers for such services, we have the exclusive right to charge and collect fees for those seeking license arrangements for the NGI indices for use in clearing and settlement.
On March 27, 2007, we entered into an agreement with Natural Gas Exchange, Inc., or NGX, to form a technology and clearing alliance for the North American natural gas and Canadian power markets. Under the arrangement, the cleared and bilateral markets for North American physical natural gas and Canadian electricity operated by NGX and by us will be offered together through our electronic trading platform. In turn, NGX will serve as the physical settlement facility for these products, in a process also referred to as physical clearance. We will recognize a portion of transaction fee revenues generated by products traded and cleared under this arrangement. The NGX products will be listing on our electronic trading platform beginning in February 2008. We also acquired the exclusive licensing rights to the benchmark NGX natural gas indices.
On March 30, 2007, we entered into a license agreement with McGraw-Hill Companies, Inc., which operates an energy information business known as Platts. Platts collects market information from energy traders and brokers and publishes daily price information in the form of indices or assessments. Under the agreement, we jointly collaborated with Platts on the migration of the Platts assessment processes to the assessment system developed by us on our electronic trading platform in certain energy products. With continued adoption of electronic price assessment, we expect this to generate increased reliance and trading activity on our platform within the OTC physical oil markets. Platts is reimbursing us for a portion of the development costs that are incurred to provide the additional functionality to the trading platform. The arrangement was initially introduced on our trading platform in June 2007 and is being rolled out in phases across Asia, Europe and the U.S.
On June 15, 2007, we entered into an exclusive licensing agreement with the Frank Russell Company, or Russell, to offer futures and options on futures contracts based on the full range of Russells industry-leading benchmark U.S. equity indexes, including the Russell 1000® Index, Russell 2000® Index and Russell 3000® Index, as well as the related value and growth indexes. After a termination period for trading on existing exchanges in the third quarter of 2008, we will for the first time have exclusive rights, as long as certain trading volumes are maintained, to list futures contracts based on Russells benchmark U.S. equity indices. The term of the licensing agreement is seven years and automatically renews for successive one year periods unless terminated by either party.
On July 9, 2007, we acquired the trading business assets of ChemConnect Inc., which operated an electronic marketplace for trading of OTC natural gas liquids and chemical products, including propane, ethane, ethylene, propylene and benzene. In connection with the completion of the acquisition, we transitioned the trading of the ChemConnect products to our OTC electronic trading platform.
On August 27, 2007, we acquired The Winnipeg Commodity Exchange, Inc., now ICE Futures Canada, the leading agricultural commodity futures and options exchange in Canada, and home to the worlds leading canola futures contract. The transition of electronic trading for ICE Futures Canada from the predecessor platform to our electronic trading platform took place in December 2007.
On October 1, 2007, we acquired substantially all of the assets of Chatham Energy Partners, LLC. The new business is operated as a wholly-owned subsidiary known as Chatham Energy LLC, or Chatham. Chatham is a leading OTC brokerage firm that specializes in structuring and facilitating transactions in the OTC markets for natural gas energy options. The acquisition of Chatham has enabled the development and growth of our OTC options business through Chathams brokerage activities and will support the execution of our strategic plans to develop the leading electronic marketplace for OTC energy options.
On March 15, 2007, we made a proposal to the board of directors of CBOT Holdings, Inc., or CBOT, to combine our two companies in a stock-for-stock transaction. CBOT was at the time, and during the time of
our offer continued to be, a party to a definitive merger agreement with Chicago Mercantile Exchange Holdings, Inc., or CME, which permitted CBOT to consider superior transaction proposals. Ultimately, CBOTs board of directors did not accept our proposal to merge with CBOT, and accepted an improved proposal from CME, which resulted in a completed transaction between CME and CBOT on July 13, 2007.
Our Competitive Strengths
We have established ourselves as a leading operator of regulated futures exchanges as well as OTC markets. We believe our key strengths include:
Highly Liquid Global Markets and Benchmark Contracts
Several of our core products serve as global benchmarks for managing risk relating to exposure to price movements in the underlying commodities. We operate the leading market for trading in Brent crude oil futures, as measured by the volume of contracts traded in 2007, according to the Futures Industry Association. The ICE Brent Crude futures contract is the leading benchmark for pricing light, sweet crude oil produced and consumed outside of the U.S. Similarly, the ICE Gas Oil futures contract is a leading benchmark for the pricing of a range of refined oil products outside the United States. We also operate the worlds second largest market for trading in West Texas Intermediate, or WTI, crude oil futures, as measured by the volume of contracts traded in 2007, according to the Futures Industry Association. The WTI Crude futures contract is the leading benchmark for pricing light, sweet crude oil produced and consumed within the U.S. We operate the leading cleared OTC market for trading in Henry Hub natural gas contracts. We also list hundreds of other contracts based on natural gas and electric power hubs, or delivery points, in North America, as well as certain refined products. We believe that our introduction and adoption of futures-style clearing for OTC products has enabled us to build significant liquidity within the OTC markets we operate, while removing the counterparty risk that is inherent in the bilateral OTC markets.
Our Sugar No. 11 futures contract serves as the benchmark for raw sugar, a basic commodity now produced in over 120 countries and consumed by every country in the world. Our Coffee C and Cotton No. 2 contracts are also recognized as benchmark contracts. These products have been synonymous with the two predecessor exchanges that formed ICE Futures U.S. the Coffee, Sugar & Cocoa Exchange and the New York Cotton Exchange. We believe that our existing liquidity and history and that of ICE Futures U.S.s predecessors in trading these commodity products for over 100 years has enabled the development of our strong industry relationships.
The following table shows the number and notional value of commodities futures contracts traded in our most significant futures markets. The notional value of contracts represents the aggregate value of the underlying commodities covered by the contracts.
The following table shows the number and notional value of OTC commodities contracts traded on our electronic platform in our most significant OTC markets:
We have developed and offer our customers a diverse array of products and a broad range of trade execution, market data and post-trade and clearing services on a single platform. We have a history of developing innovative products and services for the markets we serve, including electronic trade confirmation for the bilateral OTC markets, independent price validation services, OTC clearing and customized contract design. Our markets provide important risk management tools and are constantly evolving based on changes in market conditions, market structure and technological advancements. We work closely with our customers to create products and services that meet their requirements. These relationships help us to anticipate and lead industry changes.
Our electronic trading platform provides centralized and direct access to risk management and trade execution for a variety of energy, soft and agricultural commodities, and financial products. We operate our energy futures and OTC markets, and our Canadian agricultural markets, exclusively on our electronic platform. Our electronic platform has enabled us to attract significant liquidity from traditional market participants as well as new market entrants seeking the access, efficiency, and ease of execution offered by electronic trading. We have developed a significant global presence with thousands of active screens at over 1,500 OTC participant firms and over 750 futures participant firms as of December 31, 2007.
We believe that our growth has been driven in part by our ability to uniquely offer qualified market participants integrated access to both the futures and OTC markets. We believe that our demonstrated ability
to develop technology and launch new products for both the futures and OTC markets provides us with several competitive advantages, including:
Our electronic trading platform provides rapid trade execution and is, we believe, one of the worlds most flexible, efficient and secure systems for commodities trading. We have designed our platform to be highly scalable meaning that we can expand capacity and add new products and functionality efficiently at relatively low cost and without disruption to our markets. For example, we launched side-by-side trading of ICE Futures U.S.s benchmark soft agricultural commodities on our electronic trading platform on February 2, 2007, just twenty one days after we closed the acquisition on January 12, 2007. Our platform can also be adapted for use in other markets, as demonstrated by the decision of the Chicago Climate Exchange, or CCX, to operate its emissions markets on our trading platform. We believe that our commitment to investing in technology to enhance our network infrastructure, electronic trading platform and post-trade processes will continue to contribute to the growth and development of our business.
We believe that by using our electronic platform, market participants benefit from price transparency and can achieve price improvement over alternate means of trade execution. Electronic trade execution offers time and cost efficiencies by providing firm posted prices and reducing trade-processing errors and back office overhead, and allows us to accelerate the introduction of new products on our platform. The combination of electronic trade execution across a range of commodities and derivatives markets and market data services facilitates automation by our participants in all phases of processing from front-office to back office, and ranging from trading and risk management to trade settlement. In addition, in our U.K futures business, eligible participants who become members may trade directly in our markets by paying a maximum annual membership fee of approximately $16,000 per year. In contrast, participants on many other exchanges are required to purchase a seat on the exchange before they are eligible to trade directly on or gain membership in the exchange, the cost of which is substantial.
ICE Clear U.S. clears and settles contracts traded on, or subject to, the rules of ICE Futures U.S and ICE Clear Canada clears and settles contracts traded on, or subject to, the rules of ICE Futures Canada. With recognized and highly respected clearing operations, we believe that these clearing houses assurance of performance to its clearing members substantially reduces counterparty risk and is a critical component of ICE Futures U.S. and ICE Futures Canadas identity as a reliable and secure marketplace for global transactions. In April 2007, we announced plans to establish a European clearing house, based in London, as part of our
strategic plan to transition our clearing services in-house from a third party clearing house. This clearing house will be known as ICE Clear Europe.
We offer market participants price transparency meaning a complete view of the depth and breadth of our markets through our electronic platform. This format provides equal access and market information to all participants, as well as an electronic record of all bids, offers and trades. This is in contrast to the traditional open-outcry exchanges and voice-brokered markets with less transparency, speed and access to these markets. All orders placed on our platform are executed in the order in which they are received, ensuring that all participants have equal execution priority. In addition, we believe our transparent electronic markets assist regulators through increased market visibility and through the generation and maintenance by our system of complete and confidential records of all transactions executed in our markets.
The record revenues and trading volume we achieved in 2007 reflect our focus on the implementation and execution of our long-term growth strategy. We have expanded our core business organically, developed innovative new products for global markets, and provided trading-related services more broadly. In addition, we have completed a number of acquisitions and alliances to leverage our core strengths and grow our business. We seek to advance our leadership position in the commodity derivatives markets by focusing our efforts on the following key strategies for growth:
In recent years, our customer base has grown and diversified due to the emergence of new participants in the commodities markets, the increased use of hedging programs by commercial enterprises, our expansion into new markets, the increased access to our markets as a result of electronic trading, and the increased allocation to the commodities asset class by institutional investors. New and traditional participants include financial services companies, such as investment banks, hedge funds, proprietary trading firms and asset managers, as well as industrial businesses that are increasingly engaging in hedging, trading and risk management strategies. We believe that many of these participants have been attracted to our markets in part due to the availability of electronic trading and due to the need to hedge price volatility associated with commodity prices. We intend to continue to expand our customer base by targeting these and other new market participants and by offering a growing range of products and electronic trade execution, as well as pre-trade and post-trade processing capabilities.
We have grown, and intend to continue to grow, as a result of our ability to leverage the combination of OTC markets, clearing services and new product development. As we continue to develop and launch our European clearing house, we will seek additional markets and services with unmet needs in clearing, settlement and trade confirmation services, including markets we do not currently serve. We intend to continue to expand the range of products we offer, both by commodity type and structure, by working with customers and potential partners to develop new OTC, futures and option products that provide relevant risk management tools. We may also seek to license our platform to other exchanges for the operation of their market on our platform, as we have with the Chicago Climate Exchange and the Natural Gas Exchange.
We develop and maintain our own network infrastructure and electronic trading platform to ensure the delivery of a leading-edge technology platform. Our participants may access our electronic platform for trading in our markets through our proprietary front-end, known as WebICE, via a dedicated line or the Internet, through our application programming interface, or API, through one of our telecommunication hubs, through co-location at our data center, or through the front-end systems developed by any of 29 ISVs. These represent a substantial portion of the ISVs that serve the commodities futures markets. Furthermore, participants in our markets can access our platform directly through their own proprietary interfaces or through a number of brokerage firms. We intend to extend our initiatives in this area by continuing to increase ease of access and connectivity with our existing and prospective market participants.
We continue to leverage the value of the market data derived from our trade execution, clearing and confirmation system by developing enhancements to our existing information services and creating new market data products. Currently, we publish daily transaction-based indices for the North American spot natural gas and power markets based on data collected from trading activity on our platform. In addition, we sell real-time and historical futures quotes and other futures market data through 137 data vendors that distribute this information, directly and through various sub-vendors, to approximately 63,000 subscribers. We believe that the database of information generated by our platform serves as the single largest repository of energy market data. As a result of the breadth of our global data offerings, we believe that we are well positioned to meet the growing demand for additional energy market data.
An important revenue source for us is our market data offerings. We intend to further develop our market data offerings by integrating proprietary information generated by us into new market data products designed to meet the requirements of a greater number of participants. Sophisticated quantitative approaches to risk management as well as customer time sensitivity has created new applications, uses and demands for trading related data and analytics. For example, we acquired Commoditrack in 2007 to address opportunities for serving the demand for real-time risk management systems. We intend to create new value-added services to complement our market data products, including risk management technology, analytical tools and other services to assist end users. We believe our market data business is highly scalable, with limited incremental costs.
We intend to continue to explore and pursue acquisition opportunities to strengthen our competitive position and grow our company. We may enter into business combination transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material. We may enter into these transactions for a variety of reasons, including to expand our products and services, advance our technology or take advantage of new developments and potential changes in the industry.
Our Products and Services
As a leading operator of global futures and OTC marketplaces, we seek to provide our participants with centralized and direct access to the futures and OTC markets for price transparency, electronic trade execution, clearing services and services that support their trading and risk management activities. The primary services we provide are electronic price discovery in futures markets, trade execution and trade processing in futures and OTC markets, and the delivery of technology to facilitate these and other trading and risk management activities. We also offer a broad range of market data services for the futures and OTC markets.
Regulated Energy Future Products
We operate regulated markets for energy futures contracts and options on those contracts through our subsidiary, ICE Futures Europe. These contracts include the ICE Brent Crude futures contract, the ICE WTI Crude futures contract, the ICE Gas Oil futures contract, the ICE ECX CFI futures contract, the ICE UK Natural Gas futures contract, the ICE UK Electricity futures contract, the ICE Unleaded Gasoline Blendstock (RBOB) futures contract, the ICE Heating Oil futures contract and options based on the ICE Brent Crude, ICE WTI Crude, ICE ECX CFI and ICE Gas Oil futures contracts. The ICE Brent Crude futures contract is based on forward delivery of the Brent light, sweet grade of crude oil that originates from the North Sea. Brent crude is a leading benchmark used to price a range of traded oil products, including approximately two-thirds of the worlds oil. The ICE WTI Crude futures contract is a cash-settled futures contract based on WTI, also a light, sweet crude. The ICE Gas Oil futures contract is a European heating oil contract and serves as a significant pricing benchmark for refined oil products particularly in Europe and Asia.
Our futures markets are fully regulated. As a Recognized Investment Exchange, ICE Futures Europe is responsible for carrying out certain regulatory and surveillance functions. ICE Futures Europe has its own regulatory, compliance and market supervision functions, as well as a framework for disciplining market participants who do not comply with exchange rules. Any information that ICE Futures Europe obtains in its regulatory capacity is confidential and accessible only by a select group of compliance and surveillance staff within ICE Futures Europe.
We offer trading in each of our energy futures products exclusively in our electronic markets. We provide access to trading our oil contracts and related options continuously for 24 hours, from 11:00 p.m. on Sunday through to 11:00 p.m. on Mondays, and then for 22 hours (from 1:00 a.m. to 11:00 p.m.) Tuesday through Friday (GMT). In our other energy futures contracts and related options and in our emissions futures contracts, we provide electronic market access for 10 hours on business days (from 7:00 a.m. to 5:00 p.m.), Monday through Friday (GMT).
Electronic trading of our energy futures products is available to members and their customers. ICE Futures Europe members may access our trading platform directly via the Internet, through private telecommunication lines, through co-location at our primary data center, through an independent software vendor or through a members own front-end system. Customers of our members may obtain order-routing access to our markets through members. Once trades are executed on our platform, they are matched and forwarded to a trade registration system that routes them to LCH.Clearnet, our current third party clearing services provider, for clearing and settlement. Electronic trading allows participants to execute directly on our platform, when traditionally such orders were delivered via telephone.
We have taken a number of steps to increase the accessibility and connectivity of our electronic platform, including opening our electronic platform to ISVs and allowing members to develop their own conformed front-end systems. Our participants can currently access our platform using 29 ISVs. We do not depend on the services of any one independent software vendor for access to a significant portion of our participant base.
We also have made a number of enhancements to our technology infrastructure and electronic platform to facilitate trading in futures contracts. Those enhancements include increased speed, reliability and additional features, such as stop-limits and extensive implied spread functionality, which allows certain bids and offers to imply prices from one contract month to another, as well as the use of formula-based spreadsheet tools and the development of administrative and monitoring tools.
Regulated Soft Agricultural Future Products
ICE Futures U.S. is a leading world market for the trading of soft commodities, including coffee, sugar, cotton, orange juice and cocoa futures and options. ICE Futures U.S. and its predecessor companies have offered trading in traditional soft agricultural commodities for over 100 years and have maintained a strong franchise in these products. These markets are designed to provide effective pricing and hedging tools to industry users worldwide as well as strategic trading opportunities for individual and institutional investors.
These soft commodity contracts were listed electronically for the first time in their history in February 2007. The prices for many of our agricultural contracts serve as global benchmarks for the physical commodity markets, including Sugar No. 11 (world raw sugar), Coffee C (Arabica coffee) and Cotton No. 2 (cotton).
Through close cooperation with agricultural industry participants, ICE Futures U.S. has supported the development of innovative and internationally recognized futures and options contracts that reflect the basic requirements of the commodity industry. ICE Futures U.S.s contract committees, in conjunction with industry representatives, continuously review contracts and trading practices to adjust specifications and procedures to introduce new contracts when cash market conditions warrant change.
Soft agricultural products have historically accounted for most of ICE Futures U.S.s trading volume. In 2007, soft agricultural products represented approximately 93.0% of the total number of futures and options contracts traded in ICE Futures U.S.s markets.
Regulated Agricultural Future Products
ICE Futures Canada is the only commodity futures exchange in Canada that facilitates the trade of futures and options on futures contracts for canola, feed wheat and western barley. ICE Futures Canada, and its predecessor companies, have been operating for over 137 years and have maintained a strong franchise in agricultural commodities. ICE Futures Canada contracts are designed to provide effective pricing and hedging tools to industry users worldwide as well as strategic trading opportunities for individual and institutional investors. ICE Futures Canada markets converted to a fully electronic marketplace in December 2004. The price of the canola futures contracts is the worldwide benchmark. In 2007, the canola contract represented approximately 92.6% of the total number of contracts traded on the ICE Futures Canada marketplace.
Regulated Financial Future Products
ICE Futures U.S. offers financial products in the currency markets, equity index and commodity index markets, including the US Dollar Index, or USDX, the Russell equity indexes, the CCI and RJ/CRB and dozens of currency pair futures and options contracts. In 2007, contracts traded in our financial product markets represented 7.0% of the total number of contracts traded in ICE Futures U.S.s futures and options markets.
ICE Futures U.S. offers specialized tools such as financial cross-rate contracts to complement its global agricultural markets. We provide futures and options markets for a variety of currency pair contracts including euro-based, U.S. dollar-based, yen-based, sterling-based and other useful cross-rates as well as the original contract based on the USDX introduced in 1985. By identifying interbank market signals and customer needs, we developed currency contracts and defined trading procedures that serve institutional financial managers. These products began being introduced on our electronic platform in the second half of 2007.
ICE Futures U.S. lists futures and options contracts on the Russell Indices of U.S. equities, beginning with the Russell 1000 Index in 1999, followed by the Russell 2000 and the Russell 3000 along with the value and the growth components of these indices. In June 2007, ICE entered into an exclusive licensing agreement with Russell with respect to its U.S. equity index future and options on futures, which will commence in 2008.
We currently operate our own clearing house for our ICE Futures U.S. business through ICE Clear U.S. and for our ICE Futures Canada business through ICE Clear Canada. These clearing houses clear, settle and guarantee to their clearing members the financial performance of all futures contracts and options on futures contracts matched through our execution facilities and accepted by the clearing house from clearing members in our U.S. and Canadian futures markets. Through our clearing houses, we maintain a system for performance of financial obligations owed to the clearing members through which buyers and sellers conduct transactions. This system is supported by several mechanisms, including rigorous clearing membership requirements, the posting of original margin deposits, daily mark-to-market of positions and payment of variation margin, maintenance of a guaranty fund in which clearing members maintain deposits with our
clearing house and broad assessment authority to recoup financial losses if they arise due to a clearing member financial default. The amount of margin deposits on hand will fluctuate over time as a result of, among other things, the extent of open positions held at any point in time by market participants and the volatility of the market as reflected in the margin rates then in effect for such contracts.
We believe that having an integrated clearing function provides us with significant competitive advantages. Ownership and control of our own clearing house at ICE Clear U.S. and ICE Clear Canada enables us to capture the revenue associated with both the trading and clearing of our futures and options contracts. This is particularly important for trade execution alternatives such as privately negotiated block trades, where we can derive a higher clearing fee for each contract traded compared to trades executed on our platform. By owning these clearing houses, we can also control the cost structure and the technology development cycle for our clearing services and are able to manage our new product initiatives without being dependent on a third party approval. We intend to begin clearing our ICE Futures Europe and OTC contracts through ICE Clear Europe in the third quarter of 2008 upon the transition of this business from LCH.Clearnet.
Our clearing houses are a significant attraction, and an important part of the functioning of our exchanges. Because the role of the clearing house is to serve as a single counterparty for each matched trade, clearing members do not need to evaluate the credit of each potential counterparty or limit themselves to a selected set of counterparties. This flexibility increases the potential liquidity available for each trade. Additionally, the substitution of our clearing house as the counterparty for each matched trade allows our customers to establish a position with one party and then to offset the position with another party. This contract offsetting process provides our customers with flexibility in establishing and adjusting positions and provides for original margin efficiencies.
In order to ensure performance, our clearing houses establish and monitor financial requirements for our clearing members and set minimum margin requirements for our traded products. Our clearing houses use proprietary software, based on an industry standard margining convention, to determine the appropriate margin requirements for a member by simulating the gains and losses of complex portfolios. We typically hold margin collateral to cover at least 97% of price changes for a given product within a given historical period.
At each settlement cycle, our clearing houses value, at the market price prevailing at that time, or mark-to-market, all open futures positions and require payments from clearing members whose positions have lost value and make payments to clearing members whose positions have gained value. Our clearing houses mark-to-market all open futures positions at least twice a day, and more often if market volatility warrants. Marking-to-market provides both participants in a transaction with an accounting of their financial obligations under the contract.
Having a mark-to-market cycle of a minimum of two times a day for ICE Clear U.S. and once daily for ICE Clear Canada helps protect the financial integrity of our clearing houses, our clearing members and market participants. This allows our clearing houses to identify quickly any clearing members that may not be able to satisfy the financial obligations resulting from changes in the prices of their open contracts before those financial obligations become exceptionally large and jeopardize the ability of our clearing houses to ensure financial performance of their open positions.
As a self-regulatory organization, ICE Clear U.S. has instituted detailed risk-management policies and procedures to guard against default risk with respect to cleared contracts. In order to manage the risk of financial non-performance, we (i) have established that clearing members maintain at least $5 million in minimum working capital; (ii) limit the risk exposure of open positions based upon that clearing members capital; (iii) require clearing members to post original margin collateral for all open positions, and to collect original margin from their customers; (iv) pay and collect variation margin on a marked-to-market basis at least twice daily; (v) require clearing members to collect funds from under-margined customers; (vi) require deposits to the guaranty fund from clearing members which would be available to cover financial non-performance; and (vii) have broad assessment authority to recoup financial losses.
ICE Clear Canada has instituted a similar multi-layered risk management system of rules, policies and procedures to protect against default which include (i) operational and financial standards for clearing
participants applicable to category of registration, (ii) requirements for clearing participants to post original margin for house and client positions and requirements to collect additional margin from clients, (iii) assessing and collecting intra-day margin payments on a pre-determined basis, (iv) requiring all clearing participants to pay into a guaranty fund and (v) rules requiring all clearing participants to provide additional monies for the clearing fund in the event of a default.
We also maintain extensive surveillance and compliance operations and procedures to monitor and enforce compliance with rules pertaining to the trading, position sizes, delivery obligations and financial condition of clearing members and large trader accounts.
In the unlikely event of a payment default by a clearing member, we would first apply assets of the clearing member to cover its payment obligation. These assets include original margin, variation margin and the guaranty fund deposits and any other available assets. In addition, we would make a demand for payment pursuant to any applicable guarantee provided to the clearing houses by the parent of a clearing member. Thereafter, if the payment default remains unsatisfied, we would use the guaranty fund of other clearing members and funds collected through an assessment against all other solvent clearing members to satisfy the deficit. We have agreed to reserve $50.0 million of the $250.0 million available under our revolving credit facility for use by ICE Clear U.S. to provide liquidity in the event of default by a clearing member. ICE Clear Canada has arranged a total of $3.0 million in revolving standby credit facilities with the Royal Bank of Canada to provide liquidity in the event of default by a clearing member.
As part of our powers and procedures designed to backstop financial obligations in the event of a default, we may levy assessments on all of our clearing members if there are insufficient funds available to cover a deficit. There is no limit on this assessment of each clearing member unless the clearing member has notified the clearing house that it is withdrawing as a clearing member. Despite our authority to levy assessments, there can be no assurance that the relevant clearing members will have the financial resources available to pay, or will not choose to be expelled from membership rather than pay, any such assessments. Despite the risk mitigation techniques adopted by, and the other powers and procedures implemented by our clearing houses, which are designed to, among other things, minimize the potential risks associated with the occurrence of monetary defaults, there can be no assurance that these powers and procedures will prevent such defaults or will otherwise function to preserve the liquidity of the clearing houses.
Our clearing houses have an excellent risk management track record. ICE Clear U.S. and ICE Clear Canada, and their predecessor companies, have never experienced an incident of a clearing member default which has required the use of the guaranty funds or assets of either clearing house.
Our transparent, electronic platform offers real-time access to the liquidity in our global OTC energy markets meaning the complete range of bids, offers, trades and volumes posted for hundreds of contracts listed on our electronic platform. Our platform displays a live ticker for all contracts traded in our OTC markets and provides information relating to each trade, such as the volume weighted average price and transacted volumes by contract. We offer fast, secure and anonymous trade matching services, which we believe generally are offered at a lower cost compared to traditional means of execution.
Our electronic platform provides trade execution on the basis of extensive, real-time price data where trades are processed accurately, rapidly and at minimal cost. We have designed our technology platform to ensure the secure, high-speed flow of data from trading desks through the various stages of trade processing. Qualified participants executing in our markets benefit from straight-through processing whereby trades are automatically confirmed and routed to back office departments and risk management systems. We believe that the broad availability of real-time OTC energy market access and data, together with the availability of cleared OTC contracts at the same price as bilateral products, has allowed us to achieve a critical mass of liquidity in our OTC markets. The following diagram illustrates the processing of an OTC trade from order entry to recording in a companys risk management system. This process typically occurs within a matter of seconds.
OTC Products Overview
We offer market participants a wide selection of derivative contracts, as well as contracts for physical delivery of energy commodities, to satisfy their risk management and trading objectives. We offer trading in over 1,000 unique contracts as a result of the availability of various combinations of products, locations and strips meaning the duration or settlement date of the contract. Excluding the strip element, over 23,700 unique contracts based on products and hub locations were traded in our OTC market in 2007. A substantial portion of the trading volume in our OTC markets relates to approximately 20-25 highly liquid contracts in natural gas, power and oil. For these contracts, the highest degree of market liquidity resides in the prompt, or front month, contracts, with decreasing liquidity for longer-dated contracts.
On October 1, 2007, we acquired substantially all of the assets of Chatham. Chatham is a leading OTC brokerage firm that specializes in structuring and facilitating transactions in the OTC markets for natural gas energy options. The acquisition of Chatham has enabled the development and growth of our OTC options business through Chathams brokerage activities and will support the execution of our strategic plans to develop the leading electronic marketplace for these OTC energy options.
We characterize the range of instruments that participants may trade in our markets by reference to type of commodity (such as global oil products, North American power, North American gas, etc.), products (such as forwards and swaps, differentials and spreads, and OTC options) and contracts (meaning products specified by delivery dates).
The following table indicates the number of unique commodities, products and contracts traded in our OTC business for the periods presented:
Cleared OTC Contracts
We developed the concept of cleared OTC energy contracts, which provide participants with access to centralized clearing and settlement arrangements. As of December 31, 2007, we listed 107 cleared contracts, including 43 cleared natural gas contracts, 49 cleared power contracts and 15 cleared oil contracts, all of which are financially settled. Transaction fees derived from trade execution in cleared electronic OTC contracts were $167.6 million for the year ended December 31, 2007 and represented 69.3% of our total OTC revenues during the year ended December 31, 2007, net of intersegment fees. This compares to $121.2 million for the year ended December 31, 2006 or 71.8% of our total OTC revenues for the year ended December 31, 2006.
The introduction of cleared OTC contracts has reduced bilateral credit risk and the amount of capital our participants are required to post on each OTC trade, as well as the resources required to enter into multiple negotiated bilateral settlement agreements to enable trading with other counterparties. In addition, the
availability of clearing for both OTC and futures contracts traded in our markets enables our participants to cross-margin their futures and OTC positions meaning that a participants position in its futures or OTC trades can be offset against each other, thereby reducing the total amount of capital the participant must deposit with the futures commission merchant clearing members, known as FCMs. In order to clear transactions executed on our platform, a participant must therefore either be a member of the clearing house itself, or have an account relationship with an FCM that is a member. FCMs clear transactions for participants in substantially the same way they clear futures transactions for customers. Specifically, each FCM acts as the conduit for payments, such as margin and settlement, required to be made by participants to the clearing house, and for payments due to participants from the clearing house.
Cleared OTC contracts are available for trading on the same screen and are charged the same commission rate as bilaterally traded contracts. In a cleared OTC transaction, the clearing house acts as the counterparty for each side to the trade, thereby reducing counterparty credit risk in the traditional principal-to-principal OTC markets. However, participants to cleared trades also pay a clearing fee directly to the clearing house and to an FCM. There are currently over 50 FCMs clearing OTC transactions in our markets. Participants also have the option to trade on a bilateral basis with the counterparty to avoid paying fees to the clearing house and a FCM subject to the availability of bilateral credit with the counterparty. While we currently derive no revenue directly from providing access to these clearing services through LCH.Clearnet, we believe the availability of clearing services and attendant improved capital efficiency has attracted new participants to the markets for energy commodities trading. Therefore, we plan to introduce clearing in the third quarter of 2008, with the establishment of ICE Clear Europe as the clearing house for OTC markets and ICE Futures Europe.
We have extended the availability of our cleared OTC contracts to voice brokers in our industry through our block trading facility. Block trades are those trades executed in the voice broker market, typically over the telephone, and then transmitted to us electronically for clearing. We charge participants fifty percent of our standard commission fee for block trades. We believe that our block trading facility is a valuable part of our cleared business as it serves to expand our open interest. As of December 31, 2007, open interest in our cleared OTC contracts was 7.2 million contracts in North American natural gas and power, and global oil, as compared to 4.6 million contracts as of December 31, 2006. Open interest refers to the total number of contracts that are currently open, in other words, contracts that have been traded but not yet liquidated by either an offsetting trade, exercise, expiration or assignment.
We offer a broad range of automated OTC trade execution services, including straight-through trade processing, electronic trade confirmation, market data and risk management functionality.
Automated Trade Execution Services Straight-Through Trade Processing.
Our electronic platform offers the following features:
Electronic Trade Confirmation Services
Our electronic trade confirmation system offers market participants an efficient, reliable and automated alternative to manual trade verification and confirmation. When trading on a traditional exchange or through OTC voice brokers, market participants typically manually prepare and exchange paper confirmations evidencing trade execution in order to create a legal record of the trade.
Our automated electronic trade confirmation system reviews electronic trade data received from individual traders, screens and matches this data electronically, then highlights any discrepancies in a report to the traders respective back offices. This allows back office personnel to focus primarily on those trades that require correction and verification, rather than also reviewing the larger percentage of trades without discrepancies. Participants using this service may elect to use this confirmation as the official record of the transaction in place of the fax traditionally generated by participants back offices.
Our electronic trade confirmation service accepts data from trades executed on our platform, through other exchanges or trading facilities or through OTC voice brokers. We believe that the convenience and cost savings offered by our electronic trade confirmation service could attract new participants to our platform, increasing the revenues that we derive from OTC transaction fees.
OTC Risk Management Functionality
Trades in the OTC commodities markets historically have been executed as bilateral contracts in which each counterparty bears the credit and/or delivery risk of the other. Our electronic platform allows participants to pre-approve trading counterparties and establish parameters for trading with each counterparty, thereby enforcing internal risk management policies. Participants may set firm-wide limits on tenor (duration) and the total daily value of trades that its traders may conduct with a particular counterparty in a given market.
Through ICE Data, we generate market information and indices based primarily upon auditable transaction data derived from actual bid and offer postings and trades executed in our markets. Therefore, this information is not affected by subjective estimation or selective polling, the methodologies that currently prevail in the OTC markets. Each trading day, we deliver proprietary market data directly from our OTC market to the desktops of thousands of market participants.
ICE Data publishes ICE daily indices for our spot natural gas and power markets with respect to over 90 of the most active gas hubs and over 20 of the most active power hubs in North America. In 2005, ICE Data was recognized by the Federal Energy Regulatory Commission, or FERC, as the only publisher of natural gas
and power indices to fully comply with all of the natural gas and power index publishing standards identified in its Policy Statement on Price Indices. ICE Data transmits our daily indices via e-mail to approximately 10,000 energy industry participants on a complimentary basis each trading day. In the future, we may begin charging recipients for what we believe is increasingly valuable data.
The ICE Data end of day report is a comprehensive electronic summary of trading activity in our OTC markets. The report features indicative price statistics, such as last price, high and low price, total volume, volume-weighted average price, best and offer, closing bid and closing offer, for all natural gas and power contracts that are traded or quoted on our platform. This information is sold as various subscription based products. Also, for both our futures and OTC markets, we offer view only access to market participants who are not active traders, but who still desire access to real-time prices of physical and financial energy derivative contracts.
ICE Data market price validation, or MPV, service provides independent, consensus forward curve and option values for long-dated global energy contracts on a monthly basis. On the last business day of each month, MPV service participant companies, representing the worlds largest energy and commodities trading entities, submit their month-end forward curve and option prices for over 200 global commodity contracts. MPV service participants use these consensus values to validate internal forward curves, mark-to-market their month-end portfolios and establish profit and loss valuations in accordance with the Financial Accounting Standard Board, or FASB, and the International Account Standards recommendations concerning the treatment and valuation of energy derivative contracts.
We provide our real-time futures data to data distributors, commonly called quote vendors, or QVs. These companies such as Bloomberg or Reuters then package this data into real-time, tick, intra-day, delayed, end-of-day and historical data packages to sell to end users. The real-time packages are accessed on a subscription basis and the appropriate exchange fee is paid for each user/screen taking ICE Futures U.S. or ICE Futures Europe data. The futures data includes the trading activity in those markets, including bids, offers, trades and other key price information. End users include a range of financial information providers, FCMs, pension funds, financial services companies, funds, insurance companies, commodity pools and individual investors.
Participants of ICE Futures Europe include representatives from segments of the underlying industries served by our energy markets, including, among others, the oil, gas and power industries. Participants currently trade in our energy futures markets, either directly as members or through an ICE Futures Europe member. The participant base in our energy futures business is globally dispersed, although we believe a significant proportion of our participants are concentrated in major financial centers in North America, the United Kingdom, Continental Europe and Asia. We have obtained regulatory clearance or received legal advice confirming that there is no legal or regulatory impediment for the location of screens for electronic trading in our energy futures markets in 54 jurisdictions in addition to the United Kingdom for ICE Futures Europe, including the United States, Singapore, Dubai and all of the member countries of the European Economic Area. Like our OTC participant base, the participant base in our energy futures business has grown significantly since we acquired ICE Futures Europe in 2001. Memberships in our energy futures markets increased to 144 members for the year ended December 31, 2007 as demand for electronic access to global energy markets increased.
The five most active clearing members of ICE Futures Europe, which handle cleared trades for their own accounts and on behalf of their customers, accounted for 57.7%, 51.0% and 45.6% of our energy futures business revenues, net of intersegment fees, for the years ended December 31, 2007, 2006 and 2005, respectively. Revenues from one member accounted for 18.2%, 15.4% and 13.3% of our energy futures business revenues, net of intersegment fees, for the years ended December 31, 2007, 2006 and 2005, respectively. Revenues from two other members accounted for 14.8% and 10.7% of our energy futures business revenues, net of intersegment fees, for the year ended December 31, 2007 and another member accounted for 12.1% of our energy futures business revenues, net of intersegment fees, for the year ended
December 31, 2006. A substantial part of the trading activity of these participants typically represents trades executed on behalf of their respective clients, rather than by the firm for their own account.
Trades in our energy futures markets may only be executed in the name of an ICE Futures Europe member for its own or others accounts. In order to become an ICE Futures Europe member, an applicant must complete an application form, undergo a due diligence review and execute an agreement stating that it agrees to be bound by ICE Futures Europe regulations. All energy futures trades executed on our electronic platform are overseen by or attributable to responsible individuals. Each member may register one or more responsible individuals, who are responsible for trading activities of both the member and its customers, and who are accountable to ICE Futures Europe for the conduct of trades executed in the members name. As of December 31, 2007, there were over 2,150 responsible individuals registered in our energy futures market.
ICE Futures U.S.s trading members include representatives from segments of the underlying industries served by our soft agriculture and financial markets, including, among others, the citrus, cocoa, coffee, cotton and sugar industries. Trading rights are also held by FCMs, floor brokers and floor traders. A trading membership in ICE Futures U.S. enables the holder to trade any of the exchanges futures and options contracts. ICE Futures U.S. also issues trading permits that allow the holder to trade a specified category of products, such as options or financial contracts. To gain membership status, a person must be approved by the membership committee. All floor brokers and floor traders must be appropriately registered under CFTC regulations and must be guaranteed by a member of ICE Clear U.S.
ICE Futures U.S. has approval to list its screens in 25 jurisdictions. Traders in these futures markets include hedgers, speculators and investors. Hedgers are commercial firms that trade futures and options to reduce their price risk exposure in the cash market, protect their profit margins and assist in business planning. Investors and speculators, who seek to profit from fluctuating prices, typically place an order through FCMs, or through introducing brokers, who have clearing relationships with FCMs. Investors also participate in the markets by pooling their funds with other investors in collective investment vehicles known as commodity pools, which are managed by commodity pool operators and commodity trading advisors. The CFTC requires commodity professionals to be registered by the National Futures Association a CFTC-designated futures association that is charged with enforcing ethical, financial and customer protection standards in the futures industry.
The five most active clearing members of ICE Futures U.S., which handle cleared trades for their own accounts and on behalf of their customers, accounted for 38.4% of ICE Futures U.S. business revenues, net of intersegment fees, for the period from January 12, 2007 to December 31, 2007. No participant accounted for more than 10% of ICE Futures U.S. business revenues for the period from January 12, 2007 to December 31, 2007.
ICE Futures Canadas market participants include representatives from companies that hedge their cash products in the markets, including international grain companies, feed lots, and food processors, as well as FCMs and liquidity providers. Individuals and companies can access ICE Futures Canadas markets by registering as participants with ICE Futures Canada, or trading through a registered participant. To gain participant status, a company or individual submits standard written application/agreement forms. All FCMs must be appropriately registered with the statutory regulatory authority in their home jurisdiction and any self-regulatory organizations required by their statutory regulatory authority. All entities that have direct trading status must be cleared by a registered clearing participant of ICE Clear Canada.
ICE Futures Canada has approval to have trading be done directly to its marketplace on screens in Canada, other than in Quebec, and in the United States through a no-action letter issued by staff of the CFTC dated December 2004. Trading may be done in the United Kingdom pursuant to a reliance on the overseas persons exemption.
The five most active clearing members of ICE Futures Canada, which handle cleared trades for their own accounts and on behalf of their customers, accounted for 51.6% of ICE Futures Canada business revenues, net of intersegment fees, for the period from August 27, 2007 to December 31, 2007. Revenues from two
members accounted for 13.2% and 11.4%, respectively, of ICE Futures Canada business revenues for the period from August 27, 2007 to December 31, 2007.
Pursuant to the CEA, our global OTC markets are principals-only markets, designed for professional traders or other commercial market participants. Stringent requirements apply to participants, which include some of the worlds largest energy companies, financial institutions and other active contributors to trading volume in global commodities markets. They include oil and gas producers and refiners, power stations and utilities, chemical companies, transportation companies, banks, funds and other energy market participants. Our participant base is global in breadth, with thousands of participants located in 15 countries. The five most active trading participants together accounted for 17.8%, 23.3% and 24.4% of our OTC business revenues, net of intersegment fees, during the years ended December 31, 2007, 2006 and 2005, respectively. No participant accounted for more than 10% of our OTC business revenues for the years ended December 31, 2007, 2006 or 2005.
Trading in our OTC markets is available to a participant that qualifies as an eligible commercial entity, as defined by the CEA and rules promulgated by the CFTC. Eligible commercial entities must satisfy certain asset-holding and other criteria and include entities that, in connection with their business, incur risks relating to a particular commodity or have a demonstrable ability to make or take delivery of that commodity, as well as financial institutions that provide risk management or hedging services to those entities. Pursuant to the CFTCs oversight of our markets, since October 2006, we report all cleared positions in our primary OTC contracts on a daily basis to the CFTC through futures-style large trader reports. In addition, during 2007, we added regulatory staff to our OTC business and anticipate gaining increased authority to have oversight of certain of these markets in the future.
We require each qualified participant to execute a participant agreement, which governs the terms and conditions of its relationship with each participant and grants the participant a non-exclusive, non-transferable, revocable license to access our platform. While we generally establish the same contractual terms for all of our users, in connection with our entry into new commodities markets, we have from time to time agreed to minor modifications to the terms of our participant agreement for trading in new products. We expect that any future services that we may introduce will also be covered by our participant agreement, as we generally have a unilateral right to amend our terms with advance notice. As the OTC markets mature and conventions change, our participant agreement provides us with considerable flexibility to manage our relationship with our participants on an ongoing basis.
Our market data revenues are derived from a diverse customer base including the worlds largest commodity companies, leading financial institutions, proprietary trading firms, natural gas distribution companies and utilities, hedge funds and private investors. From an OTC perspective, a large proportion of our market data revenues are derived from sales of market data to companies executing trades on our platform. We also continue to see an increasingly diverse and expanding list of non-participant companies purchasing our data and subscribing to view-only screens. The primary customer base for our futures market data revenues are the market data redistributors themselves such as Bloomberg, CQG, Interactive Data Corporation or Reuters who redistribute our real-time pricing data and remit to us a real-time exchange fee based on the users access to our data. For both OTC and futures market data, end users include corporate traders, risk managers, individual speculators, consultants and analysts. No participant accounted for more than 10% of our market data revenues for the years ended December 31, 2007, 2006 or 2005.
We leverage our customer relationships, global distribution, technology infrastructure and software development capabilities to diversify our products and services. New product development is an ongoing process that is part of our daily operations. We are continually developing, evaluating and testing new products
for introduction in our futures and OTC markets. Our goal is to create innovative solutions in anticipation of, or in response to, changing conditions in the markets for commodities trading to better serve our participant base. The majority of our product development relates to evaluating new contracts or markets for trading and/or clearing. We generally are able to develop and launch new bilateral OTC contracts for trading within a number of weeks. For futures and cleared OTC contracts, we are required to collaborate with the clearing houses with respect to a number of aspects of the development process. As a result, the investment of time and resources required to develop cleared products is greater than for bilateral contracts. In addition, new contracts in our futures markets must be reviewed and approved as needed by the FSA, the CFTC, the MSC or possibly other foreign regulators. We do not incur separate, identifiable material costs in association with the development of new products such costs are embedded in our normal costs of operation.
While we have historically developed our products and services internally, we also periodically evaluate and enter into strategic partnerships to identify opportunities to develop meaningful new products and services. If we believe our success will be enhanced by collaboration with a third party, we will enter into a licensing arrangement or other strategic arrangement.
In support of our product development goals, we rely on the input of our product management, clearing, technology and sales teams, who we believe are positioned to discern and anticipate our participants needs. In April 2005, we introduced trading in futures contracts linked to E.U. Emissions Allowances issued under the European Unions mandatory Emissions Trading Scheme. These contracts are offered in our energy futures markets in conjunction with the European Climate Exchange, a subsidiary of the Chicago Climate Exchange. In February 2006, we successfully launched the ICE WTI Crude futures contract and we have also introduced over 90 new cleared OTC contracts in 2006 and 2007. During 2007, we entered into strategic alliances with NGI, NGX, Platts and Russell.
Technology is a key component of our business strategy that we regard as crucial to our success. We design, build, and operate the majority of our own software systems and believe that having control of our technology allows us to be more responsive to the needs of our customers, supports the dynamic nature of our business and deliver the highest quality products. Our systems are built using state-of-the-art software technologies and best practices including modern programming languages, component-based architectures, and a combination of leading-edge open source and proprietary technology products. We leverage proven industry standards from leading hardware, software and networking providers, as well as emerging technologies we believe will give us a competitive edge in technology development. We take a customer focused, iterative and results driven approach to software design and development that allows us to deliver innovative, high quality solutions quickly and effectively.
Significant investments in production planning, quality assurance and certification processes have enhanced our ability to expedite the delivery of the system enhancements that we develop for our participants. We believe in offering our customers a choice, and as such, our electronic platform is accessible from anywhere in the world via the Internet, traditional telecommunication hubs, the newly constructed ICE Global Network, or through co-location at our primary data center. Users can access our electronic trading platform via our own web based interface, via ISVs, or build link in their own computer systems via one of our application programming interfaces, or APIs. Over the past two years we have intensely focused on enhancing capacity and performance of our electronic trading platform. This effort has resulted in the best performing platform in our industry, as measured by transaction times and reliability relative to other futures trading platforms offered by other exchanges.
We also develop and operate software components used to support mid- and back office services such as clearing, market data and electronic confirmations. Our clearing infrastructure is designed to be easily extendable to support integration with additional clearing interfaces. We currently support clearing integration to four clearing houses, including LCH.Clearnet, KCBOT, The Clearing Corporation and our own ICE Clear U.S. for the purposes of clearing and settling the markets. We are currently developing the technology infrastructure for our new yet to be launched clearing house, ICE Clear Europe.
We maintain relationships with a range of technology partners, vendors and suppliers in respect of clearing services, software licensing, hosting facilities and electronic trade routing. The technology systems supporting our trading and clearing operations can be best described into the following major categories:
Our technology staff is among the most productive and efficient in the industry. We carefully recruit talented individuals and once in the organization, we foster a culture of entrepreneurship, innovation, customer service and results. Our electronic platform is designed, built and operated by our personnel. As of December 31, 2007, we employed a team of approximately 200 experienced technology specialists, including product managers, project managers, system architects, software developers, network engineers, security specialists, performance engineers, systems and quality analysts, database administrators, website designers, helpdesk and support personnel. We have established a track record of operating a successful electronic platform by developing and integrating multiple evolving technologies that support substantial trading and clearing volume growth. The integrated suite of technologies that we employ has been designed to support a significant expansion of our current business and provide us with the demonstrated ability to integrate new markets, scale our infrastructure, leverage our technology platform and distribution into new markets, and to develop new products and services rapidly and reliably.
Our technology systems may be categorized into the following areas: trading platform, WebICE, application program interfaces, trading platform performance, clearing systems, and risk management systems. Each is discussed below.
At the core of our trading business is our electronic trading platform. Our platform supports all of our futures exchanges as well as all of our OTC marketplace. Order matching, with a proprietary spread-implication algorithm, constitutes the core of our electronic platform. Large scale enterprise servers provide the processing capacity for the matching engine, which captures price requests by our participants and matches trades instantaneously, based on the quantity and price at which orders were entered.
Our platform supports functionality for trading in bilateral and cleared OTC, futures and options on futures contracts. For the futures products, the platform supports a myriad of order types, matching algorithms, price reasonability checks, intercommodity spread pricing and real-time risk management. In addition, we have developed a multi-generation implied matching engine that automatically discovers best bid and offer prices further out on the forward curve. For OTC products we also support bilateral trading with real-time credit risk management between counterparties by commodity or company. We also offer brokers a facility to block trades for all their products. Our core functionality is available on a single platform for all of the products that we offer electronically, rendering it highly flexible and relatively easy to maintain. As a result, enhancements made for one product can easily be propagated for other products.
Connectivity to our trading platform is available through our own web based front-end, multiple ISVs and APIs. We provide secure access to our electronic platform via a graphical user interface, or front-end, known as WebICE. The WebICE graphical user interface serves as a customizable, feature rich front-end to our platform. WebICE provides an easy to use and easily accessible front-end for the entire suite of futures and OTC products we offer. Participants can access our platform globally via the Internet by logging in via our website homepage. Our platform can be accessed using a number of operating systems, including Microsoft Windows Vista, 2000/XP, Linux and Mac OS. Assuming all legal agreements are in place, a new participant can be configured and onto our electronic platform within ten minutes. Thousands of users globally access our electronic platform each trading day via WebICE.
Application Programming Interfaces (APIs)
We selectively offer our participants use of APIs that allow users to create customized applications and services around our electronic platform to suit their specific needs. Completely redesigned over the last two years, our interfaces are considered among the fastest and easiest to work with APIs in the industry. Participants using APIs are able to link their own internal computer systems to our platform and enable algorithmic trading, risk management, data services, and straight through processing. Our APIs also enable ISVs to adapt their products to our platform, thereby offering our participants a wide variety of front-end choices in addition to our WebICE interface
We offer the following APIs to direct access customers and ISVs:
Trading Platform Performance
Speed, reliability, scalability and capacity are critical performance criteria for electronic trading platforms. A substantial portion of our operating budget is dedicated to system design, development and operations in order to achieve high levels of overall system performance. In 2007, we completed a major two-year technology initiative to rebuild and optimize the trading platform software, hardware, network and security components to increase speed, access, capacity, reliability and functionality. Our platform now delivers the fastest published round-trip transaction time in the commodity markets, with average transaction times today
of three milliseconds in our futures markets, and a blended average of seven milliseconds for futures and OTC markets.
In our business, latency performance is not only measured in average time, but also in the percentage of outliers particularly during peak trading periods. We define outliers as any request taking over 50 milliseconds. These outlier metrics characterize the consistency of the platforms performance. Not only is our platform fast, it is also consistent with better than 99.5% of transactions completing in less than 50 milliseconds during the busiest of trading periods. Our platform is also highly reliable achieving 99.996% availability during 2007. Planning for capacity, performance and reliability is something we take very seriously and has become a core competency. We continually run benchmark tests and monitor our production systems and make adjustments as necessary in order to insure that our systems can handle approximately two to three times our peak transactions in our highest volume products.
Through our wholly-owned clearing house, ICE Clear U.S., a broad range of trade management and clearing services are offered, and as is the case with the trading system, ICE now designs, develops, and operates its own clearing technology. In 2007, ICE Clear U.S. launched a new Post Trade Management System, or PTMS, to client firms to efficiently manage their trades and trade allocations prior to their submission to the trade clearance system. PTMS is used by brokers, clerks and clearing members to manage trades executed electronically on our platform as well as via floor trading. Direct integration of post-trade management functions within our clearing members internal systems is also available via our industry-standard FIXML protocol-based messaging solution. Our core clearing system, Extensible Clearing System, or ECS, supports open and delivery position management, real-time trade and post-trade accounting, risk management (daily and intra-day cash mark-to-market/option premium and initial margin using the CME SPAN@ algorithm), collateral management, daily settlement and banking. ECS is a state-of-the art system offering open Internet-based connectivity and integration options for clearing member access to user and account management, position reporting and collateral management. ECS also has an extensive reporting system which delivers on-line access to daily and historical reports in multiple formats, as well as an extensive currency delivery system to manage the delivery and payment of currency settlements. As we do with the trading platform, we take a proactive approach to enhancing the reliability, capacity and performance of our clearing systems. In the past year, we have improved the performance and capacity of each of our core clearing components by a factor of ten.
Risk Management Systems
ICE Risk, formerly Commoditrack, Inc., is a unique hosted risk management solution we offer to our clients to provide them with world class risk management features without significant investment in software or hardware. Developed to be a hosted solution, all data resides securely in our redundant data centers. Utilizing the latest database technologies, clients can securely access the system with a front-end from any computer and see their entire real-time risk position. Streaming market data over the same link allows us to provide real-time prices and profit/loss position, enhanced with formula processing to provide the most accurate real-time view possible. ICE Risk maintains multiple views of trades, from the top level as they were executed (like spreads, swaps, and other derivatives) all the way down to the lowest level breakdown. This allows traders and risk managers to operate at different levels, all while viewing the same position. The system also offers the ability to move forward and backward in time, so customers can view their position and profit/loss position as it existed last month, or how decaying trades and expirations will change in the future.
In June 2007, we completed the construction of a state-of-the art hosting center in Chicago, Illinois. The new hosting facility includes expanded co-location capabilities and will provide the physical space, electric power, and bandwidth necessary to accommodate continued growth in our messaging traffic, trading volume and customer base. The facility was used temporarily as our disaster recovery site but became the primary
production site in January 2008. The Atlanta-based data center then became the disaster recovery site for our technology systems.
We offer access to our electronic markets through a broad range of interfaces including dedicated lines, server co-location data centers, telecommunications hubs in the U.S., Europe and Asia, and directly via the Internet. In 2007, the completed the build-out of the ICE Global Fiber Network which consists of high speed dedicated fiber-optic lines connecting data hubs in New York, Atlanta, Chicago, London and Singapore with the exchanges primary and disaster recovery data centers. This network offers customers an inexpensive, high speed, high-bandwidth, fiber network solution to routing trading and pricing messages between each of these data hub locations and to the primary and secondary data centers.
In addition to our global network, the accessibility of our platform through the Internet differentiates our markets and serves to attract liquidity in our markets. As of December 31, 2007, we had thousands of active connections to our platform at over 1,500 OTC participant firms and over 750 futures participant firms. As of the fourth quarter of 2007, there was an average of 8,400 simultaneous active connections daily during peak trading hours. One active connection can represent many individual traders. In addition, we have 29 conformed ISVs interfacing to our trading platform. As a result, we have the potential to attract thousands of additional participants who may trade in our markets through ISVs rather than through our own front-end. Many ISVs represent a single connection to our platform, though numerous participants may access our markets through multiple ISVs.
For high velocity traders interested in the lowest latency possible we offer server co-location space at our data centers. This service allows customers to deploy their trading servers and applications which virtually eliminates data transmission latency between the customer and the exchange. The combination of our easy to use trading and data APIs, rapid trade execution and collocation serves to attract algorithmic traders which are growing liquidity contributors in many of our markets.
Physical and digital security are each critical to the operation of our platform. At our corporate offices and at all of our data centers, physical access controls have been instituted to restrict access to sensitive areas. We also employ leading-edge digital security technology and processes, including high level encryption technology, complex passwords, multiple firewalls, network level virus detection, intrusion detection systems and secured servers.
We use a multi-tiered firewall scheme to control access to our network. We have also incorporated several protective features into our electronic platform at the application layers to ensure the integrity of participant data and connectivity. For example, we use access control profiles to prevent a given participant from accessing data affiliated with another participant. We are also able to restrict the functions that a particular user can perform with any company data within a given application. Our electronic platform monitors the connection with each user connected to our platform. If a connection to a particular participant can no longer be detected, certain outstanding orders entered by that participant are automatically withdrawn and held. Users have the ability to allow orders to remain in the market as inactive after logging out or disconnecting from our platform. In addition, though our electronic platform is accessible over the Internet, it is able to restrict platform access to designated IP addresses, if so desired by a participant.
We use a remote data center to provide a point of redundancy for our trading technology. Our back-up disaster recovery facility fully replicates our primary data center and is designed to ensure the uninterrupted operation of our electronic platforms functionality in the event of external threats, unforeseen disasters or internal failures. In the event of a major disruption, participants connecting to our electronic platform would be rerouted automatically to the disaster recovery facility. Our primary data center continuously collects and saves all trade information and periodically transmits it to our disaster recover site. For that reason, we expect that our disaster recovery system would have current, and in most cases real-time, information in the event of a platform outage. In the event that we were required to complete a changeover to our back-up disaster recovery facility, we anticipate that our platform would experience less than six hours of down time.
All of our participants have access via e-mail, online and telephone to our specialized help desk, which provides support with respect to general technical, business and administrative questions, and is staffed 24 hours a day from Sunday at 5:30 p.m. Eastern Time until Friday at 6:30 p.m. Eastern Time. At all other times, support personnel are available to assist our participants via mobile phone and e-mail. We utilize customer relationship management software to assist support staff in tracing inbound calls, web requests and e-mails to centralize issue reporting and resolution tracking. Each week a summary of reported issues is compiled and sent to operations management for review. In addition, our participants may access training and informational materials, which are available on our website.
The markets in which we operate are highly competitive. We face competition in all aspects of our business from a number of different enterprises, both domestic and international, including traditional exchanges, electronic platforms and voice brokers. Prior to the passage of the Commodity Futures Modernization Act of 2000, or the CFMA, futures trading was generally required to take place on, or subject to the rules of, a federally designated contract market. The costs and difficulty of obtaining contract market designation and corresponding regulatory requirements created significant barriers to entry for competing exchanges. The CFMA and other changing market dynamics have led to increasing competition from a number of different domestic and international sources of varied size, business objectives and resources.
We believe we compete on the basis of a number of factors, including:
We believe that we compete favorably with respect to these factors, and that our deep, liquid markets; breadth of product offerings; new product development; and efficient, secure settlement, clearing and support services distinguish us from our competitors. We believe that in order to maintain our competitive position, we must continue to develop new and innovative products and services; enhance our technology infrastructure; maintain liquidity and offer competitive transaction costs.
Currently, our principal competitors include exchanges such as the New York Mercantile Exchange, or NYMEX, the Chicago Mercantile Exchange, or CME, and London International Financial Futures and Options Exchange, or LIFFE, which is now part of NYSE Euronext. In April 2006, NYMEX and CME announced that they had entered into a definitive technology services agreement under which CME, through CME Globex, is the exclusive electronic trading services provider for NYMEXs energy futures and options contracts. Subsequently, the volume of NYMEX energy futures contracts traded through Globex surpassed the volume of NYMEX energy futures contracts traded in its open-outcry market. Among its primary products, NYMEX
offers trading in WTI light sweet crude oil futures and Henry Hub natural gas futures contracts. In addition, we currently compete with:
In our energy futures business, ICE Futures Europe, we currently compete with global exchanges such as NYMEX, CME and the Tokyo Commodity Exchange, or TOCOM, and European natural gas and power exchanges, such as the European Energy Exchange. There are also several exchanges that may, in the future, offer trading in contracts that compete with our futures exchanges. In addition, the recent consolidation of, and development of industry alliances has resulted in a growing number of and well-capitalized trading services providers, which compete with all or portions of our business.
ICE Futures U.S. faces competition from traditional exchanges as well as from new entrants to the derivatives exchange sector. According to Futures Industry Association, ICE Futures U.S. is currently the third largest derivatives exchange in the U.S. The CME, the largest derivatives exchange in the United States, competes with ICE Futures U.S. in its markets for foreign currency and equity index contracts. In December 2006, NYMEX listed cash-settled versions of ICE Futures U.S.s physically delivered soft agricultural contracts, initiating competition with ICE Futures U.S. for the first time. Certain of NYMEXs soft agricultural contracts have since been de-listed. Following the merger of the CME and CBOT in July 2007, ICE Futures U.S. expects that competition will intensify.
ICE Futures U.S. also faces limited competition abroad from NYSE Euronext. Currently, ICE Futures U.S. competes directly with NYSE Euronext in the cocoa, sugar and coffee markets. ICE Futures U.S. also competes on a limited basis with other exchanges such as the Tokyo Grain Exchange and the Brazilian Mercantile and Futures Exchange. At any time, a regional exchange in an emerging market country, such as India or China, or a producer country could attract enough activity from outside its borders to compete with ICE Futures U.S.s status as the benchmark pricing market for a given commodity.
ICE Futures Canada competes primarily with NYSE Euronexts rapeseed contract and, to a lesser extent, the Australian Securities Exchanges canola futures contract. There are no other exchanges that list contracts for western barley or Canadian feed wheat, although the Minneapolis Grain Exchange, the Kansas City Board of Trade and CME have wheat contracts that can be used to hedge Canadian wheat.
In addition to competition from derivates exchanges that offer commodity products, our futures business also faces competition from other exchanges, electronic trading systems, third party clearing houses, FCMs and technology firms.
Certain financial services or technology companies, in addition to the competitors named above, have entered the OTC electronic trading services market. Additional joint ventures and consortia could form, or have been formed, to provide services that would potentially compete with certain services that we provide. Others may acquire the capacity to compete with us through acquisitions. If we expand into new markets in the future, we could face significant competition.
We compete in the market data sector based on our data for futures markets and OTC markets. Competition for real-time data comes from both the U.S. and European exchanges and online brokers such as ICAP and Tradition Financial Services, which list and sell market data relating to OTC contracts that co-exist along side our futures contracts. Competition for OTC market data comes from voice brokerage firms
such as Amerex, whose market data is derived from their brokerage activities in the North American power and gas markets, market price assessment and reporting organizations such as Platts and NGI, as well as market data redistributors such as Bloomberg and Reuters, which produce their own OTC price assessments.
We rely on a wide range of intellectual property. We own or have a license to use all of the software that is essential to the operation of our electronic platform, much of which has been internally-developed by our technology team since our inception. In addition to our software, we regard certain business methods and our brand names, marketing elements, logos and market data to be valuable intellectual property. We protect this intellectual property by means of patent, trademark, service mark, copyright and trade secret laws, contractual restrictions on disclosure and other methods.
We license a U.S. patent for an apparatus and method for trading electric energy and share the rights and benefits of this patent. Also, we are co-owners (together with NYMEX) of a U.S. patent directed to an implied market trading system.
We currently have licenses to use several U.S. patents, including the Togher family of patents, which relate to the way in which bids and offers are displayed on an electronic trading system in a manner that permits parties to act only on those bids and offers from counterparties with whom the party has available credit. In connection with the settlement of patent infringement litigation with EBS Dealing Resources, Inc., or EBS, we obtained from EBS a worldwide, fully paid, non-exclusive license to use technology covered under patents known as the Togher patents (presently issued or to be issued in the future claiming priority to U.S. patent application 07/830,408). As a fully paid license, we pay no royalties to EBS on an ongoing basis. The EBS license expires on the latest expiration of the underlying patents. Additionally, on May 2, 2006, we received a U.S. patent jointly owned with NYMEX for an implied market trading system. The joint patent covers a method for a computer-based trading system that implies spread markets for multiple real or implied spread markets.
We cannot guarantee that the Togher patents, the joint patent with NYMEX or any other patents that we may license or acquire in the future, are or will be valid and enforceable.
We have several U.S. and foreign patent applications pending, including with respect to our electronic trade confirmation service, our ICEMaker system, and our OTC clearing service. We can provide no assurance that any of these applications will result in the issuance of patents.
We have received several U.S. federal registrations on trademarks used in our business, including IntercontinentalExchange, IntercontinentalExchange + design, ICE and ICE + design. We have also received U.S. federal registrations on other services or products we provide, including ICEMaker, ICEBLOCK, ICE DATA, ICE DATA + block design, ICE Futures, ICE Futures + block design, WEBICE, IPN ICE Private Network & Design, The Interchange, Trade the World, The Edge in Energy, The Energy Marketplace, 10X, and 10X + design. In addition, we have several foreign and U.S. applications pending for other marks used in our business. For instance, in the United States, we have applications pending for the marks: ICE Clear, ICE Clear U.S., ICE Clear Canada, ICE Clear Europe, ICE Futures U.S., ICE Futures Canada, ICE Futures Europe, ICE eConfirm, ICE iMpact, and ICE Risk. In Canada, we have applications pending for the marks: ICE, ICE + block design, ICE Clear, ICE Clear U.S., ICE Clear Canada, ICE Clear Europe, ICE Futures, ICE Futures + block design, ICE Futures U.S., ICE Futures Canada, ICE Futures Europe, ICE eConfirm, ICE iMpact, ICEMAKER, ICE Risk, ICE DATA, and ICE DATA + block design. In the European Union, we have applications pending for the marks: ICEMAKER, ICE Clear, ICE Clear U.S., ICE Clear Canada, ICE Clear Europe, ICE Futures U.S., ICE Futures Canada, ICE Futures Europe, ICE eConfirm, ICE iMpact, and ICE Risk. In Singapore, we have applications pending for the marks: ICE Clear, ICE Clear U.S., ICE Clear Canada, ICE Clear Europe, ICE Futures U.S., ICE Futures Canada, ICE Futures Europe, ICE eConfirm, ICE iMpact, and ICE Risk. We can provide no assurance that any of these applications will mature into registered trademarks.
ICE Futures U.S.s key strength is the brand recognition of its soft commodity products. Unlike our U.S. competitors, which have larger corporate identities, ICE Futures U.S.s primary brand identity is derived from the individual benchmark contracts that it trades. ICE Futures U.S.s most significant brands are Coffee C, Sugar No. 11 and Cotton No. 2. We protect these brand names, as well as other products and services by relying on trademark law and contractual safeguards. ICE Futures U.S. owns the following registered service marks: Coffee C, eCOPS, FINEX, TIPS, U.S. Dollar Index, and USDX. ICE Futures U.S also licenses the following trademarks from third parties: Russell 1000, Russell 1000 Value, Russell 1000 Growth, Russell 2000, Russell 2000 Value, Russell 2000 Growth, Russell 3000, Russell 3000 Value, Russell 3000 Growth, Russell Top 200, Russell Top 200 Value, Russell Top 200 Growth, Russell MidCap, Russell MidCap Value, Russell MidCap Growth, Russell 2500, Russell 2500 Growth, Russell Small Cap Completeness Indextm, Russell Small Cap Completeness Value Indextm and Russell Small Cap Completeness Growth Indextm. These are trademarks and service marks of the Russell Investment Group. ICE Futures U.S. has an exclusive license to use the trademark of the Russell Investment Group. ICE Futures U.S. also licenses the NYSE Composite Index from NYSE Euronext. ICE Futures U.S.s license with the NYSE Euronext is an exclusive license to list and trade futures and options contracts on the NYSE Composite Index. ICE Futures U.S. also has an exclusive license with Reuters America, LLC to list and trade futures and options contracts on the Reuters Jefferies CRB Futures Price Index and the Continuous Commodity Index.
We also have several foreign trademark registrations, including: ICE, IntercontinentalExchange, and IntercontinentalExchange + design, in the European Union; ICEMAKER, ICE Futures and ICE Futures + block design in Singapore; and ICEBLOCK in the European Union, China, Hong Kong, Norway, Singapore, and Switzerland.
This Annual Report on Form 10-K also contains additional trade names, trademarks and service marks of our and of other companies. We do not intend the use or display of other parties trademarks, trade names or service marks to imply, and this use or display should not be construed to imply, our endorsement or sponsorship of these other parties, their endorsement or sponsorship of it, or any other relationship between it and these other parties.
As of December 31, 2007, we employed 63 full-time sales personnel. Our global sales team is managed by a futures industry sales and marketing professional and is comprised primarily of former brokers and traders with extensive experience and established relationships within the commodity trading community. Since our futures business is highly regulated, we also employ sales and marketing staff knowledgeable with respect to the regulatory constraints upon marketing in this field.
Our marketing strategy is designed to expand relationships with existing participants through the provision of value-added products and services, technology support and product information, as well as to attract new participants, including those in markets and geographic areas where we do not currently have a strong presence. We also seek to build brand awareness and promote greater public understanding of our business, including how our technology can improve current approaches to price discovery and risk management in the energy markets.
We use a cross-promotional sales and marketing team for our futures and OTC businesses. We believe this approach is consistent with, and will provide more effective support of, the underlying emphasis of our business model an open architecture with flexibility that allows us to anticipate and respond rapidly to customers and evolving trends in the markets for commodities trading, while maintaining separate markets on a regulatory basis.
We typically pursue our marketing goals through a combination of on-line promotion through our website, third party websites, e-mail, print advertising, one-on-one client relationship management and participation in trade shows and conferences. From time to time, we also provide commission rate discounts of limited duration to support new product launches. We participate in a number of domestic and international trade shows, conferences and seminars regarding futures, options on futures and OTC markets and other marketing events designed to inform market participants about our products.
Our marketing department designs materials, information and programs to educate market participants about our products and services. We seek to educate these users about changes in product design, margin requirements and product usage. Our sales and marketing effort typically involves the development of personal relationships with market participants who actively use our markets to ensure that our product and service offerings are based on their needs.
As of December 31, 2007, we had a total of 506 employees, with 167 employees at our headquarters in Atlanta, 218 in New York, 81 in London and a total of 40 employees in our Winnipeg, Houston, Chicago, Singapore, Dublin and Calgary offices. ICE Futures U.S. is a party to a collective bargaining agreement, which represents a small percentage of its trading floor employees. We have not experienced any work stoppages, and we believe our relationship with our employees is good.
We maintain comprehensive business continuity and disaster recovery plans and facilities to provide continuous availability in the event of a business disruption or disaster.
We maintain incident and crisis management plans that address how we would respond to a crisis event at any of our locations world wide. We are committed to continuously understanding and evaluating business risks and their impact on operations, providing training to employees and performing exercises to validate the effectiveness of our plans by participating in industry sponsored disaster recovery and business continuity exercises. We have invested in technology that will allow us to manage incidents, track results and continuously update our plans. We also utilize our strategic partners to provide an independent view of the continued viability of our plans.
We use a remote data center to provide a point of redundancy for our trading technology. Our back-up facility fully replicates our primary data center and is designed to ensure the uninterrupted operation of our electronic platforms functionality in the face of external threats, unforeseen disasters or internal failures. In the event of an emergency, participants connecting to our electronic platform would be rerouted automatically to the back-up facility. Our primary data center continuously collects and saves all trade information and periodically transmits it to our back-up facility. For that reason, we expect that our disaster recovery system would have current, and in most cases real-time, information in the event of a platform outage. In the event that we were required to complete a changeover to our back-up disaster facility, we anticipate that our platform would experience less than six hours of down time. Our primary datacenter is currently located in Chicago, Illinois. We currently maintain a disaster recovery hot-site in a secured Tier-1 datacenter in Atlanta, Georgia.
Office facilities are protected against physical unavailability via our incident management plans. Dedicated business continuity facilities in Atlanta, New York, London and Winnipeg are maintained for employee relocation in the event that a main office is unavailable. Incident management plans place a priority on the protection of our employees.
We are primarily subject to the jurisdiction of regulatory agencies in the United States, the United Kingdom and Canada. With respect to the ICE Futures Europe products, we have permission from 55 jurisdictions to allow trading on our platform. With respect to the ICE Futures U.S. products, we have permission from 25 jurisdictions to allow trading on our platform. With respect to the ICE Futures Canada
products, we have permission from Canada (except Quebec), the United States and are able to facilitate trading under a statutory exemption in the United Kingdom.
We operate our OTC electronic platform as an exempt commercial market under the CEA and regulations of the CFTC. The CFTC generally oversees, but does not currently substantively regulate, the trading of OTC derivative contracts on our platform. Each of our participants must qualify as eligible commercial entities, as defined by the CEA, and each participant must trade for its own account, as a principal. Eligible commercial entities include entities with at least $10 million in assets that incur risks (other than price risk) relating to a particular commodity or have a demonstrable ability to make or take delivery of that commodity, as well as entities that regularly purchase or sell commodities or related contracts that are either (i) funds offered to participants that do not meet specified sophistication standards that have (or are part of a group of funds that collectively have) at least $1 billion in assets, or (ii) have, or are part of a group that has, at least $100 million in assets. We have also obtained orders from the CFTC permitting us to treat floor brokers and floor traders on U.S. exchanges and ICE Futures Europe as eligible commercial entities, subject to their meeting certain requirements. As an exempt commercial market, we are required to comply with access, reporting and record-keeping requirements of the CFTC. In 2006, we undertook technology enhancements and processes to begin reporting on a daily basis to the CFTC all cleared futures-look-alike positions. Our OTC business is not otherwise currently subject to substantive regulation by the CFTC or other U.S. regulatory authorities. However, both the CFTC and the Federal Energy Regulatory Commission, or FERC, have view only access to our trading screens on a real-time basis. In addition, we are required to:
In December 2007, the United States Senate and a committee of the House of Representatives passed legislation to increase regulation of OTC markets. While the final legislation may change, both bills would require and grant authority to OTC electronic trading facilities to assume self regulatory responsibilities, such as market monitoring and establishing position limits or accountability limits, over contracts that serve a significant price discovery function. Presently, we believe that we would be required under the legislation to assume regulatory responsibilities over at least one OTC contract, the Henry Hub natural gas swap. The legislation could deter trading on our platform. In addition, we would incur additional costs in order to comply with new regulations in the OTC markets. However, these are not believed to be material on a consolidated basis. Specifically, the Senate version of the legislation would require us to become a registrant of the CFTC, which could mean that we may have to pay a regulatory fee on each trade to a registered futures association.
In addition to the legislation above, several pieces of legislation have recently been introduced in Congress that would (i) increase regulation of the bilateral OTC market and (ii) place a fee on cleared trades to fund the CFTC. If any of these proposals are adopted, they could restrict or foreclose some of our business, require us and our participants to operate under heightened regulatory burdens and incur additional costs in order to comply with additional regulations, and could deter some participants from trading on our OTC platform.
We cannot predict whether this legislation will be adopted. If such legislation or other legislation were to be enacted into law, it could have an adverse effect on our business.
The Energy Policy Act of 2005 grants to the FERC the power to prescribe rules related to the collection and government dissemination of information regarding the availability and price of natural gas and wholesale electric energy. In 2006, FERC also issued final rules clarifying the agencys authority over market manipulation by all electricity and natural gas sellers, transmission owners and pipelines, regardless of whether they are regulated by FERC. In July 2007, FERC brought its first case using its new authority against Amaranth Advisors, LLC. FERCs standard to prove manipulation is lower than the CFTCs. Thus, given the lower standard, it is possible that FERC may bring more actions against our market participants. FERCs new authority and possible future exercises of its rulemaking powers will impose additional regulatory compliance costs on us and could adversely impact demand for our data products in the United States. In addition, recently passed legislation provided the Federal Trade Commission with jurisdiction over fraud or false reports in connection with transactions in crude oil or petroleum distillates. The Federal Trade Commissions exercise of this authority could also adversely affect trading activity on our platform.
In the United Kingdom, we also engage in a variety of activities related to our business through subsidiary entities that are subject to regulation by the UKs FSA. ICE Futures Europe is recognized as an investment exchange by the FSA in accordance with the Financial Services and Markets Act 2000, or FSMA. As such, ICE Futures Europe maintains front-line regulatory responsibility for its markets and is subject to regulatory oversight by the FSA. In order to retain its status as a recognized investment exchange, ICE Futures Europe is required to dedicate sufficient resources to its regulatory functions and to meet various regulatory requirements relating to sufficiency of financial resources, adequacy of systems and controls and effectiveness of arrangements for monitoring and disciplining its members. Failure to comply with these requirements could subject ICE Futures Europe to significant penalties, including de-recognition.
Further, we engage in sales and marketing activities in relation to our OTC business through our subsidiary ICE Markets Limited, or ICE Markets, which is authorized and regulated by the FSA as an arranger of deals in investments and as an agency broker. ICE Markets agreed to be subject to certain aspects of the FSAs Alternative Trading Systems regime which include various reporting, record keeping, and monitoring obligations with respect to use by its participants of our electronic trading platform.
The regulatory framework in relation to ICE Futures Europes status as a recognized investment exchange is supplemented by a series of legislative provisions regulating the conduct of participants in the regulated market. Importantly, FSMA contains provisions making it an offense to engage in certain market behavior and prohibits market abuse through the misuse of information, the giving of false or misleading impressions or the creation of market distortions. Breaches of those provisions give rise to the risk of criminal or civil sanctions, including financial penalties. It should be noted, that under FSMA, ICE Futures Europe, as a recognized investment exchange, enjoys statutory immunity in respect of any claims for damages brought against it relating to any actions it has undertaken (or in respect of any action it has failed to take) in good faith, in the discharge of its regulatory function.
The Markets in Financial Instruments Directive (Directive 2004/39/EC) came into force on November 1, 2007, and introduced a harmonized approach to the licensing of services relating to commodity derivatives across the European Economic Area. The legislation also imposed greater regulatory burdens on E.U.-based operators of regulated markets, alternative trading systems and authorized firms in the commodity derivatives area. The legislation also introduced the concept of a pan-European passport allowing ICE Futures Europe to offer services in all European Economic Area member states in which our participants are based on the basis of UK regulation. This legislation is consistent with other initiatives introduced to provide a more harmonized approach to European regulation, for example, the Market Abuse Directive (Directive 2003/06/EC) which came into force in October 2004 introducing a specific prohibition against insider dealing in commodity derivative products.
ICE Futures U.S.s operations are subject to extensive regulation by the CFTC under the CEA. The CEA generally requires that futures trading conducted in the United States be conducted on a commodity exchange
designated as a contract market by the CFTC. It also establishes non-financial criteria for an exchange to be designated to list futures and options contracts. Designation as a contract market for the trading of specified futures contracts is non-exclusive. This means that the CFTC may designate additional exchanges as contract markets for trading in the same or similar contracts. As a designated contract market, ICE Futures U.S. is a self-regulatory organization that has instituted detailed rules and procedures to comply with the core principles applicable to it under the CEA. ICE Futures U.S. also has surveillance and compliance operations and procedures to monitor and enforce compliance with its rules, and ICE Futures U.S. is periodically audited by the CFTC with respect to the fulfillment of ICE Futures U.S.s self-regulatory programs in these areas. The cost of regulatory compliance is substantial.
Additional legislation or regulation, or changes in existing laws and rules or their interpretation, may directly affect ICE Futures U.S.s mode of operation and profitability. The regulations under which ICE Futures U.S. has operated since 1974 have been changed in a manner that will permit unregulated competitors and competitors in other regulated industries to attempt to trade ICE Futures U.S.s products in their own trading facilities without the same regulatory costs that ICE Futures U.S. bears and allow ICE Futures U.S.s competitors to trade futures contracts identical to the ones that ICE Futures U.S. offers without any form of regulation or oversight by the CFTC under certain circumstances. Generally, those exclusions are available to markets limited to financial products traded among institutions, whether traded electronically or not. ICE Futures U.S. could also comply with those exclusions and operate markets that are outside CFTC jurisdiction.
The CFTC is subject to periodic reauthorization by Congress. Congress is currently undertaking this process of reviewing the laws and regulations embodied in the CEA to ensure that those affecting the futures industry are adequate as market conditions evolve. Changes made to the regulatory framework for exchanges during reauthorization could make it easier for others to compete with ICE Futures U.S. at a lower regulatory cost.
ICE Futures Canadas operations are subject to extensive regulation by the Manitoba Securities Commission, or MSC, under the CFA. The CFA requires that an organization must be recognized and registered before it can carry on the business of a futures exchange. It establishes financial and non-financial criteria for an exchange. Registration and recognition under the CFA is non-exclusive. This means that the MSC may recognize and registered additional exchanges as futures exchanges for trading in the same or similar contracts. In addition, ICE Futures Canada is also recognized by the MSC as a self-regulatory organization and is required to institute and maintain detailed rules and procedures to fulfill its obligations. ICE Futures Canada also has surveillance and compliance operations and procedures to monitor and enforce compliance by market participants with its rules, and ICE Futures Canada is under the audit jurisdiction of the MSC with respect to these self-regulatory functions. ICE Futures Canada has a significant number of trading terminals in the United States for which it has received a no action letter. The no action letter requires it to comply with the requirements of the CFTC including making regular filings. The cost of regulatory compliance is substantial.
Additional legislation or regulation, or changes in existing laws and rules or their interpretation, may directly affect ICE Futures Canadas mode of operation and profitability. The regulations under which ICE Futures Canada operates permit competitors in other regulated industries to attempt to trade ICE Futures Canadas products in their own trading facilities.
The markets for commodities trading include trading in both physical commodities contracts and derivative instruments instruments that derive their value from an underlying commodity or index across a wide variety of products. Derivative instruments provide a means for hedging price risk, asset allocation, speculation or arbitrage. Contracts for physical commodities allow counterparties to contract for the delivery of the underlying physical asset.
A futures exchange typically operates as an auction market, where trading is conducted either on an electronic platform or on an open-outcry trading floor. In an auction market, prices are established publicly either on a screen or on the floor of an exchange by participants posting bids, or buying indications, and offers, or indications to sell. A futures exchange offers trading of standardized contracts and provides access to a centralized clearing system. Commodity futures exchanges are regulated in the United States by the CFTC and are required to publish certain information, such as contract settlement prices and participant information. Commodity futures exchanges are regulated in the United Kingdom by the FSA and in Canada by the MSC. In a typical futures market, participants can trade two types of instruments:
Historically, trading in futures contracts took place exclusively through face-to-face interaction on a physical trading floor by members of an exchange, also known as a pit, through an auction process known as open-outcry. In an open-outcry market, the matching of buyers and sellers is achieved by traders in the pit locating other traders in the pit who have an opposite trading interest. As the name implies, traders cry out their bids and offers, often in combination with a system of hand signals, with the objective of finding a counterparty with whom to trade.
All futures contracts and options on futures contracts are cleared through a central clearing house. Clearing is the procedure by which each futures and options contract traded on an exchange is, typically, novated, or replaced, with a contract with the clearing house. In this process, the clearing house is interposed between the trading parties and becomes the buyer to each member firm that is a seller, and the seller to each member firm that is a buyer. By interposing itself between the member firm parties of every trade, the clearing house guarantees each member firm partys performance, and eliminates the need to evaluate counterparty credit risk. FCMs function, in turn, as intermediaries between market participants and a clearing house. In effect, the clearing house takes on the counterparty credit risk of the FCM, and the FCM assumes the credit risk of each of its client market participants, which is partially offset by capital held by the FCM with respect to each of its client market participants.
Over-the-counter, or OTC, is a term used to describe trading activity that does not take place on a regulated exchange through listed contracts. In this market, commercial market participants have historically entered into negotiated, bilateral contracts, although in recent years participants have begun to take advantage of cleared OTC contracts that, like futures contracts, are standardized and cleared through a central clearing house.
In contrast to the limited number of futures contracts available for trading on regulated exchanges, participants in the OTC markets have the ability to trade both standardized and customized contracts, where counterparties can specify contract terms, such as the underlying commodity, delivery date and location, term and contract size. Furthermore, while exchanges typically limit their hours of operation and restrict direct trading access to a limited number of exchange members, OTC markets operate virtually around the clock and do not impose membership requirements. Our electronic OTC markets operate seven days a week for 23 hours per day.
Financially- or cash-settled OTC contracts are classified as derivatives meaning that the contract is settled through cash payments based on the value of the underlying commodity, rather than through physical delivery of the commodity. Physical contracts provide for settlement through physical delivery of the underlying commodity. Physical contracts may be entered into for either immediate delivery of a commodity, in the cash or spot market, or for delivery of a commodity at a specified time in the future, in the forward market. Forward contract prices are generally based on the spot market prices of the underlying commodity, since long-term contracts evolve into short-term contracts over time.
Several types of contracts can be traded in the OTC market, including:
Because bilateral OTC contracts are entered into and settled on a principal-to-principal basis, each party is exposed to counterparty credit risk. Therefore, traditionally, OTC market participants have relied heavily on their internal risk management systems to monitor and mitigate counterparty credit and performance risk. In recent years, a growing number of markets, including ours, have begun to offer clearing for some of the more commonly traded, standardized OTC contracts to address the risks associated with entering into bilateral agreements. Participants who choose to trade cleared OTC products must have an account with a FCM.
We believe that the increasing interest in derivatives trading is being driven primarily by the following key factors:
Our principal executive offices are located at 2100 RiverEdge Parkway, Suite 500, Atlanta, Georgia 30328. Our main telephone number is (770) 857-4700.
A copy of this Annual Report on Form 10-K, as well as any future Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are, or will be, available free of charge, on the Internet at the Companys website (www.theice.com) as soon as reasonably practicable after we file such reports with, or furnish such reports to, the SEC. A copy of these filings is also available at the SECs website (www.sec.gov). The reference to our website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this report. Our reports, excluding exhibits, are also available free of charge by mail upon written request to our Secretary at the address listed above.
In addition, we have posted on our website the charters for our (i) Audit Committee, (ii) Compensation Committee and (iii) Nominating and Corporate Governance Committee, as well as our Code of Ethics and Business Conduct, Board of Directors Governance Principles, Board Communication Policy and Governance Hotline. We will provide a copy of these documents without charge to stockholders upon request.
You should carefully consider the following risk factors, as well as other information contained in or incorporated by reference in this Annual Report on Form 10-K. The risks and uncertainties described below are those that we currently believe may materially affect us. Other risks and uncertainties that we do not presently consider to be material or of which we are not presently aware may become important factors that affect our company in the future. If any of the risks discussed below actually occur, our business, financial condition, operating results, or cash flows could be materially adversely affected.
Risks Relating to Our Business
We face intense competition that could materially and adversely affect our business. If we are not able to compete successfully, our business will not survive.
The industry in which we operate is highly competitive and we expect competition to intensify in the future. Our current and prospective competitors, both domestically and internationally, are numerous.
We currently compete with:
The global derivatives industry has grown more competitive due to increasing consolidation and evolving markets. We may also face additional competition from new entrants to our markets. Competition in the market for derivatives trading has intensified in connection with the increase in electronic trading platforms. Competition will intensify if more exchanges are established, or if existing platforms or exchanges that currently do not trade commodities products decide to do so. Additional competition from new entrants to our markets could negatively impact our trading volumes and profitability.
In addition, some of the exchanges, trading systems, dealers and other companies with which we currently or in the future may compete are or may be substantially larger than us and have or may have substantially greater financial, technical, marketing, personnel and other resources and more diverse revenue streams than we do. Some of these exchanges and other businesses have long-standing, well-established and, in some cases, dominant positions in their existing markets. They may offer a broader range of products and services and may take better advantage of business opportunities than we do.
Our ability to continually remain competitive with stronger current and potential competitors will have a direct impact on our results of operations. We cannot assure you that we will be able to compete effectively. If our markets, products and services are not competitive, our business, financial condition and operating results will be materially affected. Our business could also be materially affected if we fail to attract new customers or lose a substantial number of our current customers to competitors. In addition, even if new entrants or existing competitors do not significantly erode our market share, we may be required to reduce significantly the rates we charge for trade execution for certain contracts or market data to remain competitive, which could have a material adverse effect on our profitability.
One of our principal competitors is NYMEX, a regulated futures exchange that offers trading in futures products and options on those futures in the crude oil, gas and metals markets, among other commodities markets that compete directly with some of our contracts. NYMEX has an agreement with CME under which CME exclusively lists NYMEX energy contracts on its electronic trading platform. In addition, on January 28, 2008, CME and NYMEX announced that they are in discussions regarding CMEs potential acquisition of NYMEX. NYMEXs electronic trading volume has surpassed the volume on its open outcry trading floor, which may increase the competition for trading in our electronic platform and negatively impact our trading volume and the liquidity in our markets.
Our business is primarily transaction-based, and declines in trading volumes and market liquidity would adversely affect our business and profitability.
We earn transaction fees for transactions executed in our markets and from the provision of electronic trade confirmation services. We derived 85.4%, 87.2% and 87.9% of our consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively, from our transaction-based business.
The success of our business depends on our ability to maintain and increase our trading volumes and the resulting transaction fees. Any decline in our trading volumes in the short-term or long-term will negatively impact our transaction fees and, therefore, our revenues. Accordingly, the occurrence of any event that reduces the amount of transaction fees we receive, which may result from declines in trading volumes or market liquidity, our decision to close the trading floor for futures contracts at the end of February 2008 for ICE Futures U.S.s core soft agricultural commodity contracts, reductions in commission rates, regulatory changes,
rebates to customers, competition or otherwise, will have a significant impact on our operating results and profitability.
Our business depends in large part on volatility in commodity prices generally and energy prices in particular.
Participants in the markets for energy, soft agricultural and agricultural commodities trading pursue a range of trading strategies. While some participants trade in order to satisfy physical consumption needs, others seek to hedge contractual price risk or take speculative or arbitrage positions, seeking returns from price movements in different markets. Trading volume is driven primarily by the degree of volatility the magnitude and frequency of fluctuations in prices of commodities. Volatility increases the need to hedge contractual price risk and creates opportunities for speculative or arbitrage trading. Commodities markets historically have experienced significant price volatility and in recent years reached record levels. We cannot predict whether this pattern will continue, or for how long, or if this trend will reverse itself. Were there to be a sustained period of stability in the prices of commodities, we could experience lower trading volumes, slower growth or even declines in revenues.
In addition to price volatility, the increase in global energy prices, particularly for crude oil, during the past several years may have had a positive impact on the trading volume of global energy commodities, including trading volumes in our markets. If global crude oil prices decrease or return to the lower levels where they historically have been, it is possible that many market participants could reduce their trading activity or leave the trading markets altogether. Global energy prices are determined by many factors, including those listed below, which are beyond our control and are unpredictable. Consequently, we cannot predict whether global energy prices will remain at their current levels, and we cannot predict the impact that these prices will have on our future revenues or profitability.
Factors that are particularly likely to affect price volatility and price levels, and thus trading volumes, include:
Any one or more of these factors may reduce price volatility or price levels in the markets for derivatives trading generally and for commodity products in particular. Any reduction in price volatility or price levels could reduce trading activity in those markets, including in our markets. Moreover, any reduction in trading activity could reduce liquidity the ability to find ready buyers and sellers at current prices which in turn could further discourage existing and potential market participants and thus accelerate any decline in the level
of trading activity in these markets. In these circumstances, the markets with the highest trading volumes, and therefore the most liquidity, would likely have a growing competitive advantage over other markets. This could put us at a greater disadvantage relative to our principal competitor and other competitors, whose markets are larger and more established than ours.
We cannot predict whether or when these unfavorable conditions may arise in the future or, if they occur, how long or severely they will affect trading volumes. A significant decline in our trading volumes due to reduced volatility, lower prices or any other factor, could have a material adverse effect on our revenues since our transaction fees would decline and on our profitability since our revenues would decline faster than our expenses, some of which are fixed. Moreover, if these unfavorable conditions were to persist over a lengthy period of time and trading volumes were to decline substantially and for a long enough period, the liquidity of our markets, and the critical mass of transaction volume necessary to support viable markets, could be jeopardized.
Our revenues have depended heavily upon trading volume in the markets for ICE Brent Crude, ICE WTI Crude and ICE Gas Oil futures contracts, and OTC North American natural gas and power contracts. In addition, with the acquisition of ICE Futures U.S. in January 2007, sugar futures and options on sugar futures contracts have added to ICEs trading volumes. A decline in volume or in our market share in these contracts would jeopardize our ability to remain profitable and grow.
Our revenues currently depend heavily on trading volume in the markets for ICE Brent Crude futures contracts, ICE WTI Crude futures contract, ICE Gas Oil futures contracts, sugar futures and options on sugar futures contracts, OTC North American natural gas contracts and OTC North American power contracts. Trading in these contracts in the aggregate has represented 73.0% of our consolidated revenues for the most recent annual period.
Our trading volume or market share in these markets may decline due to a number of factors, including:
A decline in trading volume would have a negative impact on our operating results and profitability.
A decline in the production of commodities traded in our markets could reduce our liquidity and adversely affect our revenues and profitability.
We derived 84.3%, 86.1% and 86.9% of our consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively, from exchange fees and commission fees generated from trading in commodity products in our futures and OTC markets. The volume of contracts traded in the futures and OTC markets for any specific commodity tends to be a multiple of the physical production of that commodity. If the physical supply or production of any commodity declines, market participants could become less willing to trade in contracts based on that commodity. For example, ICE Brent Crude futures contract has been subject to this risk as production of Brent crude oil peaked in 1984 and began steadily falling in subsequent years. We, in consultation with market participants, altered the mechanism for settlement of ICE Brent Crude futures contract to a mechanism based on the Brent/Forties/Oseberg North Sea oil fields, known as the BFO Index, to ensure that the commodity prices on which its settlement price is based reflect a large enough pool of traders and trading activity so as to be less susceptible to manipulation. Market participants that trade in ICE Brent
Crude futures contract may determine in the future, however, that additional underlying commodity products need to be considered in the settlement of that contract or that the settlement mechanism is not credible.
Exchange fees earned from trading in ICE Brent Crude futures contract accounted for 47.6%, 50.5% and 68.8% of our total revenues from our energy futures business, net of intersegment fees, for the years ended December 31, 2007, 2006 and 2005, respectively, or 15.2%, 20.4% and 26.5% of our consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively. Any uncertainty concerning the settlement of ICE Brent Crude futures contract, or a decline in the physical supply or production of any other commodity on which our trading products are based could result in a decline in trading volumes in our markets, adversely affecting our revenues and profitability.
In connection with our strategy to form a wholly-owned European clearing house, we served notice to terminate our clearing arrangements with LCH.Clearnet, which currently provides clearing services for the trading of certain futures and cleared OTC contracts in our markets. We cannot offer our futures and cleared OTC products without clearing services, and any delay in commencing our European clearing operations at ICE Clear Europe could result in a disruption to our business or materially and adversely affect our financial condition and results of operations.
On July 18, 2007, we provided LCH.Clearnet with written notice of our intent to terminate our contractual arrangements pursuant to which LCH.Clearnet currently provides clearing services to us for all energy futures contracts and cleared OTC contracts traded in our markets. As provided in our notice of termination, these services will terminate on a mutually agreed upon date or in July 2008.
As previously announced, we intend to expand our clearing operations globally by establishing a wholly-owned clearing house in Europe, to be named ICE Clear Europe, through which we intend to clear our energy futures contracts and cleared OTC contracts. The successful establishment of ICE Clear Europe is subject to a number of risks and uncertainties, including obtaining appropriate regulatory approvals in the U.K., building out or procuring appropriate clearing house technology and integrating that technology with ICE Futures Europe and our OTC business, and ultimately the acceptance of the clearing house by FCMs and our trading participants who will be the users of the clearing house. In addition, our competitors, who for this purpose would include LCH.Clearnet, may attempt to interfere with the transition of clearing to ICE Clear Europe or take advantage of any issues or delays that occur with the clearing transition. In particular, LCH.Clearnet may breach its clearing services agreements with us or attempt to legally challenge portions of the clearing services agreements that we believe obligate LCH.Clearnet to refrain from amalgamating, transferring or permitting credit offset for margin purposes with respect to our contracts or they may attempt to interfere with the transition of customer business to a new clearing house. Further, we may be forced to seek legal action against LCH.Clearnet to enforce our rights under the clearing services agreements, which may disrupt our plans for providing clearing services.
We cannot assure you that we will be able to obtain regulatory approval for ICE Clear Europe, that we will execute our business plan in a timely manner or that there will be no issues, whether operationally or due to the actions of competitors, with the transition of clearing to ICE Clear Europe. If our clearing services are delayed, suspended or interrupted, our business, financial condition and results of operations would be materially and adversely affected. For the years ended December 31, 2007, 2006 and 2005, transaction fees generated by our U.K. futures business, which are also referred to as exchange fees, accounted for 31.1%, 39.3% and 36.7%, respectively, of our consolidated revenues.
In addition, if ICE Clear Europe, or our existing clearing operations at ICE Clear U.S. or ICE Clear Canada, are not able to provide clearing services relating to our OTC business following the termination of our agreements with LCH.Clearnet, we may be unable to offer clearing services in connection with trading certain OTC contracts in our markets for a considerable period of time. For the years ended December 31, 2007, 2006 and 2005, transaction fees derived from trading in cleared OTC contracts accounted for 29.2%, 38.6% and 37.5%, respectively, of our consolidated revenues. Our cleared OTC contracts have been a significant component of our business, and accounted for 69.3%, 71.8% and 69.3% of revenues, net of the
intersegment fees, generated by our OTC business for the years ended December 31, 2007, 2006 and 2005, respectively.
Legislation or regulatory changes preventing clearing facilities from being owned or controlled by exchanges may limit or stop our ability to run a clearing house.
Many clearing firms have emphasized the importance to them of centralizing clearing of futures contracts and options on futures in order to maximize the efficient use of their capital, exercise greater control over their value at risk and extract greater operating leverage from clearing activities. Many have expressed the view that clearing firms should have a choice of where to clear their transactions or should control the governance of clearing houses. In addition, some clearing firms have expressed the view that multiple clearing houses should be consolidated and operated as utilities rather than as for-profit enterprises. Some of these firms, along with the Futures Industry Association and UK Futures and Options Associations, are attempting to cause legislative or regulatory changes to be adopted that would allow market participants to transfer positions from an exchange-owned clearing house (such as ICEClear Europe) to a clearing house owned and controlled by clearing firms. Some market participants, including the UK Futures and Options Association, have expressed support for extending the European Union Code of Clearing and Conduct to derivatives, which would mandate clearing choice for customers through interoperability. In addition, the U.S. Department of Justice released comments on February 7, 2008 requesting the U.S. Department of Treasury to review futures markets to determine if a different regime for clearing is feasible, which could include ending exchange control of financial futures clearing to foster exchange competition. The Department of Justice comments specifically excluded markets for commodities futures, such as energy futures markets. If these legislative or regulatory changes are adopted, alternative clearing houses may seek to clear positions established on our exchanges. Even if they are not successful in their efforts, the factors described above may cause clearing firms to limit the use of our clearing houses. If any of these events occur, our revenues and profits would be materially and adversely affected.
Owning clearing houses exposes us to risks, including risks related to the cost of operating the clearing houses and the risk of defaults by our participants clearing trades through our clearing houses.
Operating clearing houses requires material ongoing expenditures and may consume a significant portion of managements time. We cannot assure you that our participants will migrate their business from LCH.Clearnet to ICE Clear Europe. In addition, 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. The transition to new clearing facilities for many of our participants could be disruptive and costly. 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 credit risk of clearing members and defaults by clearing members, which could subject our business to substantial losses. Although our clearing houses have policies and procedures to help ensure that clearing members can satisfy their obligations (and ICE Clear Europe will adopt comparable policies and procedures), such policies and procedures may not succeed in preventing defaults. 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 cause our customers to lose confidence in the guarantee of our clearing houses, which would have an adverse affect on our business.
Currently, we continue to rely on LCH.Clearnet to provide clearing services for the trading of certain futures and cleared OTC contracts in our markets despite owning ICE Clear U.S., ICE Clear Canada and forming ICE Clear Europe. We cannot operate our futures and cleared OTC businesses without clearing services.
The termination of the contract with LCH.Clearnet will take effect at the end of the exit phase, which is currently expected to be in July 2008. Currently, we continue to rely on LCH.Clearnet to provide clearing services to us for all energy futures contracts traded in our markets.
ICE Clear U.S. will continue to serve as the designated clearing house for trades executed at ICE Futures U.S. and ICE Clear Canada will continue to provide clearing service for trades executed at ICE Futures Canada. ICE Clear U.S. is seeking recognition from the FSA to be allowed to provide clearing services in the United Kingdom, for an exchange like ICE Futures Europe. ICE Clear Canada is not currently authorized by United Kingdom regulators to clear transactions executed on an exchange located in the United Kingdom. Consequently, these clearing houses are not currently able to clear trades in the United Kingdom until they obtain such recognition, which could take considerable time and resources, but they may offer certain clearing services as an overseas person under United Kingdom laws. There is no assurance that such recognition will be granted.
If our clearing services are suspended or interrupted and we are unable to provide clearing services to our customers through an alternate provider on a timely basis, our business, financial condition and results of operations would be materially and adversely affected. If ICE Clear U.S. and ICE Clear Canada could not provide clearing services for our energy futures or OTC products, we could not obtain clearing services from an alternate provider, or ICE Clear Europe was unable to provide such services, we may be unable to operate certain of our energy futures and OTC markets and would possibly be required to cease operations in those segments of our business. We cannot assure you that our energy futures or OTC businesses would be able to obtain clearing services from ICE Clear U.S. or ICE Clear Canada, an alternate provider or ICE Clear Europe in sufficient time to avoid or mitigate the material adverse effects described above and, in the case of an alternate provider, on acceptable terms.
We intend to explore acquisition opportunities and strategic alliances relating to other businesses, products or technologies. We may not be successful in identifying opportunities or integrating other businesses, products or technologies successfully with our business. Any such transaction also may not produce the results we anticipate.
We intend to continue to explore and pursue acquisition opportunities to strengthen our business and grow our company. We may enter into business combination transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material. We may enter into these transactions to acquire other businesses, products or technologies to expand our products and services, advance our technology or take advantage of new developments and potential changes in the industry.
The market for acquisition targets and strategic alliances is highly competitive, particularly in light of increasing consolidation in the exchange sector. As a result, we may be unable to identify strategic opportunities or we may be unable to negotiate or finance any future acquisition successfully. Further, our competitors could merge, making it more difficult for us to find appropriate entities to acquire or merge with and making it more difficult to compete in our industry due to the increased resources of our merged competitors. For example, on January 28, 2008, CME and NYMEX announced that they are in discussions regarding CMEs potential acquisition of NYMEX.
The process of integration may produce unforeseen regulatory and operating difficulties and expenditures and may divert the attention of management from the ongoing operation of our business. Further, as a result of any future acquisition, we may issue additional shares of our common stock that dilute shareholders ownership interest in us, expend cash, incur debt, assume contingent liabilities or create additional expenses related to amortizing intangible assets with estimable useful lives, any of which could harm our business, financial condition or results of operations and negatively impact our stock price.
We may fail to realize the anticipated cost savings, growth opportunities and synergies and other benefits anticipated from our mergers and acquisitions, which could adversely affect the value of our common stock.
We completed multiple acquisitions in 2007, including transactions with NYBOT (ICE Futures U.S.), Winnipeg Commodity Exchange, Inc. (ICE Futures Canada), Chatham Energy Partners, LLC, ChemConnect Inc., and Commoditrack, Inc (ICE Risk). The success of our mergers and acquisitions will depend, in part, on our ability to realize the anticipated synergies and growth opportunities from combining the businesses, as well as our expected cost savings and revenue growth trends. In general, we expect to benefit from operational synergies resulting from the consolidation of capabilities and elimination of redundancies in our mergers and acquisitions. If we fail to successfully integrate an acquired business, or if the reason we acquired the business is materially impacted, we may be required to take an impairment charge on our financial statements, which could negatively impact our stock price.
With respect to the ICE Futures U.S. acquisition, we expect continued operational synergies from the use of ICE Futures U.S.s clearing technology, as well as greater efficiencies from increased scale, market integration and increased automation. Management also expects the combined entity will enjoy revenue synergies, including additional clearing alternatives; expense sharing; increased access, volume and liquidity to the products traded on our respective markets; and expanded product offerings and increased geographic reach.
Integration of companies acquired by us is complex and time consuming, and requires substantial resources and effort. We must successfully combine the businesses in a manner that permits the expected cost savings and synergies to be realized. In addition, we must achieve the anticipated savings and synergies without adversely affecting current revenues and our investments in future growth. The integration process and other disruptions resulting from the mergers or acquisitions may also disrupt each companys ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships with market participants, employees, regulators and others with whom we have business or other dealings or our ability to achieve the anticipated benefits of the merger or acquisition. In addition, difficulties in integrating the businesses or any negative impact on the regulatory functions of any of our companies could harm the reputation of the companies. We may not successfully achieve the integration objectives, and we may not realize the anticipated cost savings, revenue growth and synergies in full or at all, or it may take longer to realize them than expected.
We are currently subject to regulation in multiple jurisdictions. Failure to comply with existing regulatory requirements, and possible future changes in these requirements or in the current interpretation of these requirements, could adversely affect our business.
ICE Futures Europe, through which we conduct our energy futures business, operates as a Recognized Investment Exchange in the United Kingdom. As a Recognized Investment Exchange, ICE Futures Europe has regulatory responsibility in its own right and is subject to supervision by the FSA pursuant to the Financial Services and Markets Act 2000, or FSMA. ICE Futures Europe is required under the FSMA to maintain sufficient financial resources, adequate systems and controls and effective arrangements for monitoring and disciplining its members. Likewise, ICE Futures U.S. operates as a Designated Contract Market. As a self-regulatory organization, it is responsible for ensuring that the exchange operates in accordance with existing rules and regulations, and must comply with eighteen core principles under the CEA. The ability of ICE Futures Europe and ICE Futures U.S. to comply with all applicable laws and rules is largely dependent on its maintenance of compliance, audit and reporting systems. We cannot assure you that these systems and procedures are fully effective. Failure to comply with current regulatory requirements and regulatory requirements that may be imposed on us in the future could subject us to significant penalties, including termination of our ability to conduct our regulated energy futures business conducted through ICE Futures Europe and our regulated soft commodities business through ICE Futures U.S.
Electronic trading in our energy futures contracts on ICE Futures Europe is permitted in many jurisdictions, including in the United States, through no-action relief from the local jurisdictions regulatory requirements. In the United States, direct electronic access to trading in ICE Futures Europe products is
offered to U.S. persons based on a series of no-action letters from the CFTC that permit non-U.S. exchanges, referred to as foreign boards of trade, to provide U.S. persons with electronic access to their markets without registration with the CFTC. Our ability to offer new futures products under our existing no-action relief could be impacted by any actions taken by the CFTC as a result of future conditions being imposed on ICE Futures Europe under its no-action relief. If our offering of products through ICE Futures Europe to U.S. participants is subject to additional regulatory constraints, our business could be adversely affected. Similarly, electronic trading in ICE Futures U.S. contracts is permitted in many jurisdictions through no-action relief from the local jurisdictions regulatory requirements. With the proposed end of open outcry trading of ICE Futures U.S. futures contracts scheduled for February 2008, the ability of ICE Futures U.S. to offer trading in futures products in multiple jurisdictions will be dependent upon its ability to comply with the existing conditions of its no-action relief in various jurisdictions and any new conditions that may be added.
New regulations or enforcement may force us to allocate more resources to regulation or confidence in our markets may be diminished and our business may be adversely affected. Even the perception of unfairness or illegal behavior in our markets could adversely affect our business. In addition, the recent demise of certain hedge funds that traded energy commodities may result in additional regulation by the CFTC or Congress. Legislative and regulatory initiatives, either in the United States, the United Kingdom or elsewhere, could affect one or more of the following aspects of our business or impose one or more of the following requirements:
The implementation of new regulations, or changes in or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs and impede our ability to operate, expand and enhance our electronic platform as necessary to remain competitive and expand our business. Regulatory changes inside or outside the United States or the United Kingdom could materially and adversely affect our business, financial condition and results of operations.
Some financial services regulators have publicly stated their interest in evaluating the ability of a financial exchange, organized as a for-profit corporation, to adequately discharge its self-regulatory responsibilities. ICE Futures U.S.s regulatory programs and capabilities contribute significantly to its brand name and reputation. We cannot assure you that ICE Futures U.S. will not be required to further modify or restructure its corporate governance or regulatory functions in order to address these or other concerns. For example, the CFTC adopted, but recently stayed implementation of, final rules to minimize conflicts of interest on Boards of Directors of registered, futures exchanges, or designated contract markets. The new rules provided a safe harbor to designated contract markets that had at least 35% of their board of directors comprised of persons with no material relationship to the designated contract market or its members and were deemed to be public directors. While the rules regarding conflicts of interest that were stayed would not likely result in costly or burdensome changes at ICE Futures U.S., implementation of such rules could alter the composition of ICE
Futures U.S.s Board of Directors if implemented. Any future new rules, modifications of existing rules or restructuring of regulatory functions could entail material costs.
The energy commodities trading industry in North America has been subject to increased regulatory scrutiny in the recent past, and we face the risk of changes to our regulatory environment in the future, which may diminish trading volumes on our electronic platform.
We currently operate our OTC markets as an exempt commercial market under the CEA. 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, ICE is not itself a self regulatory organization that undertakes active regulatory oversight of OTC trading. In December, the United States Senate and the United States House of Representatives each passed legislation to increase regulation of OTC markets, and in particular to require active oversight of certain contracts traded on exempt commercial markets that are deemed by the CFTC to be significant price discovery contracts. Both bills require OTC electronic trading facilities to assume self regulatory responsibilities, such as market monitoring and establishing position limits or accountability limits, over contracts that serve a significant price discovery function. If adopted, this legislation would require 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. Presently, we anticipate that our OTC Henry Hub natural gas contract, which comprised 73.4%, 81.6%, and 76.5% of our OTC transaction volumes in 2007, 2006, and 2005, respectively, would be considered a significant price discovery contract.
In addition, the market for OTC energy commodities trading has been the subject of increased scrutiny by regulatory and enforcement authorities due to a number of highly publicized incidents alleging manipulative trading activity by certain entities and the failure of several hedge funds.
Furthermore, in response to the rise in energy commodity prices in recent years and allegations that manipulative trading practices by certain market participants may have contributed to the rise in prices, legislative and regulatory authorities at both the federal and state levels, as well as political and consumer groups, have called for increased regulation and monitoring of the OTC energy commodities markets and a review of the no-action process pursuant to which ICE Futures contracts are presently offered to market participants in the United States.
It is possible that future unanticipated events in the markets for energy commodities trading will lead to additional regulatory scrutiny and changes in the level of regulation to which we are subject. Increased regulation of our participants or our markets could materially adversely affect our business. The imposition of stabilizing measures such as price controls in energy commodities markets could substantially reduce or potentially even eliminate trading activity in affected markets. New laws and rules applicable to us could significantly increase our regulatory compliance costs, delay or prevent us from introducing new products and services as planned and discourage some market participants from using our electronic platform. Allegations of manipulative trading by market participants or additional failures of hedge funds could subject us to regulatory scrutiny and possibly fines or restrictions on our business, as well as significant legal expenses and adverse publicity. All of this could lead to lower trading volumes, liquidity and transaction fees, higher operating costs and lower profitability or losses.
If we are unable to keep up with rapid changes in technology and participant preferences, we may not be able to compete effectively.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality, accessibility and reliability of our electronic platform and our proprietary technology. The financial services industry is characterized by rapid technological change, change in use patterns, change in client preferences, frequent product and service introductions and the emergence of new industry standards and practices. These changes could render our existing proprietary technology uncompetitive or obsolete. Our ability to pursue our
strategic objectives, including increasing trading volumes on our trading platforms, as well as our ability to continue to grow our business, will depend, in part, on our ability to:
We cannot assure you that we will successfully implement new technologies or adapt our proprietary technology to our participants requirements or emerging industry standards in a timely and cost-effective manner. Any failure to remain abreast of industry standards in technology and to be responsive to participant preferences could cause our market share to decline and negatively impact our profitability.
A number of factors beyond our control may contribute to substantial fluctuations in our operating results. As a result of the factors described in the preceding risk factors, you will not be able to rely on our historical operating results in any particular period as an indication of our future performance. The commodities trading industry, and energy commodities trading in particular, has historically been subject to variability in trading volumes due primarily to five key factors. These factors include:
As a result of one or more of these factors, trading volumes in our markets could decline, possibly significantly, which would adversely affect our revenues derived from transaction fees. If we fail to meet securities analysts expectations regarding our operating performance, the price of our common stock could decline substantially.
Our cost structure is largely fixed in the short-term period. 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.
The revenues, expenses and financial results of ICE Futures Europe and other U.K. subsidiaries have historically been denominated in pounds sterling, which was the functional currency of our U.K. subsidiaries. As a result, we had foreign currency translation risk equal to our net investment in our U.K. subsidiaries. The
financial statements of our U.K. subsidiaries were translated into U.S. dollars using current rates of exchange, with gains or losses included in the cumulative translation adjustment account, a component of shareholders equity. Effective as of July 1, 2006, the functional currency of the majority of our U.K. subsidiaries became the U.S. dollar. The decision to change the functional currency of these entities was based on various economic factors and circumstances, including the fact that beginning in the second quarter of 2006, ICE Futures Europe began to charge and collect exchange fees in U.S. dollars rather than pounds sterling in its key futures contracts, including crude oil and heating oil contracts. The functional currency of an entity is the currency of the primary economic environment in which the entity operates. We will no longer recognize any translation adjustments relating to those U.K. subsidiaries that have switched their functional currency to the U.S. dollar.
The revenues, expenses and financial results of ICE Futures Canada and other Canadian subsidiaries are denominated in Canadian dollars. We have foreign currency translation risk equal to our net investment in our Canadian subsidiaries. The financial statements of our Canadian subsidiaries were translated into U.S. dollars using current rates of exchange, with gains or losses included in the cumulative translation adjustment account, a component of shareholders equity. As of December 31, 2007, the portion of our shareholders equity attributable to accumulated other comprehensive income from foreign currency translation was $33.0 million. The period-end foreign currency exchange rate for the Canadian dollar to the U.S. dollar increased from 1.0515 as of August 27, 2007, the acquisition date of ICE Futures Canada, to 0.9881 as of December 31, 2007.
We have foreign currency transaction risk primarily related to the settlement of certain foreign assets, liabilities and payables that occur through our foreign operations which are received in or paid in pounds sterling. We had foreign currency transaction gains (losses) of $842,000, ($288,000) and $1.5 million for the years ended December 31, 2007, 2006 and 2005, respectively, primarily attributable to the fluctuations of pounds sterling relative to the U.S. dollar. The average exchange rate of pounds sterling to the U.S. dollar increased from 1.8434 for the year ended December 31, 2006 to 2.0020 for the year ended December 31, 2007.
We may experience substantial gains or losses from foreign currency transactions in the future given that there are still certain net assets or net liabilities and expenses of our subsidiaries that are denominated in pounds sterling and Canadian dollars. Of our consolidated operating expenses, 15.2%, 29.8% and 48.1% were denominated in pounds sterling for the year ended December 31, 2007, 2006 and 2005, respectively. As the pounds sterling exchange rate changes, the U.S. equivalent of expenses denominated in foreign currencies changes accordingly. All sales in our business are denominated in U.S. dollars, except for some small futures contracts in our futures business segment. Our U.K. operations in some instances function as a natural hedge because we generally hold an equal amount of monetary assets and liabilities that are denominated in pounds sterling.
While we may enter into hedging transactions in the future to help mitigate our foreign exchange risk exposure, these hedging arrangements may not be effective, particularly in the event of imprecise forecasts of the levels of our non-U.S. denominated assets and liabilities. Accordingly, if there is an adverse movement in exchange rates, we may suffer significant losses, which would adversely affect our operating results and financial condition.
Any infringement by us of intellectual property rights of others could result in litigation and adversely affect our ability to continue to provide, or increase the cost of providing, our products and services.
Patents and other intellectual property rights are increasingly important as further electronic components are added to trading, and patents and other intellectual property rights of third parties may have an important bearing on our ability to offer certain of our products and services. Our competitors, as well as other companies and individuals, may have obtained, and may be expected to obtain in the future, patent rights related to the types of products and services we offer or plan to offer. We cannot assure you that we are or will be aware of all patents that may pose a risk of infringement by our products and services. In addition, some patent applications in the United States are confidential until a patent is issued, and therefore we cannot evaluate the extent to which our products and services may be covered or asserted to be covered in pending
patent applications. Thus, we cannot be sure that our products and services do not infringe on the rights of others or that others will not make claims of infringement against us.
In addition, our competitors may claim other intellectual property rights over information that is used by us in our product offerings. For example, in November 2002, NYMEX filed claims against us in the U.S. District Court for the Southern District of New York asserting that, among other things, it infringed copyrights NYMEX claims exist in its publicly available settlement prices that we use in connection with the clearing of certain OTC derivative contracts. The court granted a motion for summary judgment in our favor in September 2005 dismissing all claims brought against us by NYMEX. NYMEX appealed the ruling of the District Court to the Second Circuit Court of Appeals, and the Court of Appeals Affirmed the ruling of the District Court by decision on August 1, 2007. On August 15, 2007, NYMEX filed a Combined Petition for Panel Rehearing and Rehearing En Banc, requesting that the case be reheard before the Second Circuit Court of Appeals. On October 25, 2007, the Second Circuit Court of Appeals denied NYMEXs Combined Petition for a rehearing. On January 16, 2008, NYMEX filed a writ of certiorari with the U.S. Supreme Court seeking discretionary review of the case, and the U.S. Supreme Court has not yet decided whether to hear the case. Should NYMEX be successful in its appeal to the Supreme Court and we are subsequently found to have infringed NYMEXs intellectual property rights, we may incur substantial monetary damages and may be enjoined from using or referring to one or more types of NYMEX settlement prices. If we are so enjoined, we could lose all or a substantial portion of our cleared trading volume in Henry Hub natural gas and WTI crude oil contracts and the related commission revenues. Our OTC Henry Hub natural gas contract comprised 35.0%, 47.8%, and 45.6% of our total transaction volumes in 2007, 2006, and 2005, respectively, and our ICE Futures Europe WTI Crude futures contract comprised 14.0% and 12.8% of our total transaction volumes in 2007 and 2006, respectively.
With respect to our intellectual property, if one or more of our products or services is found to infringe patents held by others, it may be required to stop developing or marketing the products or services, obtain licenses to develop and market the products or services from the holders of the patents or redesign the products or services in such a way as to avoid infringing the patents. We also could be required to pay damages if we were found to infringe patents held by others, which could materially adversely affect our business, financial condition and operating results. We cannot assess the extent to which we may be required in the future to obtain licenses with respect to patents held by others, whether such licenses would be available or, if available, whether it would be able to obtain such licenses on commercially reasonable terms. If we were unable to obtain such licenses, we may not be able to redesign our products or services at a reasonable cost to avoid infringement, which could materially adversely affect our business, financial condition and operating results.
Our business is dependent on proprietary technology and other intellectual property that we own or license from third parties. Despite precautions we have taken or may take to protect our intellectual property rights, third parties could copy or otherwise obtain and use our proprietary technology without authorization. It may be difficult for us to monitor unauthorized use of our intellectual property. We cannot assure you that the steps that we have taken will prevent misappropriation of our proprietary technology or intellectual property.
We have filed patent applications in the U.S. and in other jurisdictions on a number of aspects of our electronic trading system and trade confirmation systems. In addition, we have licenses under two U.S. patents for trading electric energy, and two joint U.S. patents with NYMEX covering an implied market trading system. We have also filed patent applications on certain aspects of our electronic trading and trade confirmation systems in the European Patent Office and Canada. We cannot assure you that we will obtain any final patents covering these services, nor can we predict the scope of any patents issued. In addition, we cannot assure you that any patent issued will be effective to protect this intellectual property against misappropriation. Third parties in Europe or elsewhere could acquire patents covering this or other intellectual property for which we obtain patents in the United States, or equivalent intellectual property, as a result of differences in local laws affecting patentability and patent validity. Third parties in other jurisdictions might also misappropriate our intellectual property rights with impunity if intellectual property protection laws are
not actively enforced in those jurisdictions. Patent infringement and/or the grant of parallel patents would erode the value of our intellectual property.
We have secured trademark registrations for IntercontinentalExchange and ICE from the United States Patent and Trademark Office and from relevant agencies in Europe, as appropriate, with ICE also being registered in Singapore, as well as registrations for other trademarks used in our business. We also have several U.S. and foreign applications pending for other trademarks used in our business. We cannot assure you that any of these marks for which applications are pending will be registered.
In addition, we may have to resort to litigation to enforce our intellectual property rights, protect our trade secrets, and determine the validity and scope of the intellectual property rights of others or defend ourselves from claims of infringement. We may not receive an adequate remedy for any infringement of our intellectual property rights, and we may incur substantial costs and diversion of resources and the attention of management as a result of litigation, even if we prevail. As a result, we may choose not to enforce our infringed intellectual property rights, depending on our strategic evaluation and judgment regarding the best use of our resources, the relative strength of our intellectual property portfolio and the recourse available to us.
We face significant challenges in implementing our strategic goals of expanding product and service offerings and attracting new market participants to our markets. If we do not meet these challenges, we may not be able to increase our revenues or remain profitable.
We seek to expand the range of derivative products that can be traded in our markets and to ensure that trading in those new products becomes liquid within a sufficiently short period of time to support viable trading markets. We also seek to expand the number of contracts traded in our futures markets. In meeting these strategic goals, however, we face a number of significant challenges, including:
Even if we resolve these issues and are able to introduce new products and services, there is no assurance that they will be accepted by our participants, attract new market participants, or be competitive with those offered by other companies. If we do not succeed in these efforts on a consistent, sustained basis, we will be unable to implement our strategic objectives. This would seriously jeopardize our ability to increase and diversify our revenues, remain profitable and continue as a viable competitor in our markets.
Reductions in our exchange fee rates or commission rates resulting from competitive pressures could lower our revenues and profitability.
We may experience pressure on our exchange fee rates and commission rates as a result of competition we face in our futures and OTC markets. Some of our competitors offer a broader range of products and services to a larger participant base, and enjoy higher trading volumes, than we do. Consequently, our competitors may be able and willing to offer commodity trading services at lower commission rates than we currently offer or may be able to offer. As a result of this pricing competition, we could lose both market share and revenues. We believe that any downward pressure on commission rates would likely continue and intensify as we continue to develop our business and gain recognition in our markets. A decline in commission rates could lower our revenues, which would adversely affect our profitability. In addition, our competitors may offer other financial incentives such as rebates or payments in order to induce trading in their markets, rather than in our markets.
We support and maintain many of the systems that comprise our electronic platform. Our failure to monitor or maintain these systems, or to find replacements for defective components within a system in a timely and cost-effective manner when necessary, could have a material adverse effect on our ability to conduct our business. Although we fully replicate our primary data center, our redundant systems or disaster recovery plans may prove to be inadequate. Our systems, or those of our third party providers, may fail or, due to capacity constraints, may operate slowly, causing one or more of the following:
We could experience system failures due to power or telecommunications failures, human error on our part or on the part of our vendors or participants, natural disasters, fire, sabotage, hardware or software malfunctions or defects, computer viruses, intentional acts of vandalism or terrorism and similar events. In these instances, our disaster recovery plan may prove ineffective. If any one or more of these situations were to arise, they could result in damage to our business reputation, participant dissatisfaction with our electronic platform, prompting participants to trade elsewhere, or exposure to litigation or regulatory sanctions. As a consequence, our business, financial condition and results of operations could suffer materially.
Our regulated business operations generally require that our trade execution and communications systems be able to handle anticipated present and future peak trading volume. Heavy use of computer systems during peak trading times or at times of unusual market volatility could cause those systems to operate slowly or even to fail for periods of time. We will continue to constantly monitor system loads and performance and regularly implement system upgrades to handle estimated increases in trading volume. However, we cannot assure you that our estimates of future trading volume will be accurate or that our systems will always be able to accommodate actual trading volume without failure or degradation of performance.
Our systems and those of our third party service providers may be vulnerable to security risks, which could result in wrongful use of our information, or which could make our participants reluctant to use our electronic platform.
We regard the secure transmission of confidential information on our electronic platform as a critical element of our operations. Our networks and those of our participants and our third party service providers,
may, however, be vulnerable to unauthorized access, computer viruses, firewall or encryption failures and other security problems. We may be required to expend significant resources to protect our business and our participants against the threat of security breaches or to alleviate problems caused by security breaches. Although we intend to continue to implement industry standard security measures, we cannot assure you that those measures will be sufficient to protect our business against losses or any reduced trading volume incurred in our markets as a result of any significant security breaches on our platform.
Our future success depends, in part, upon the continued contributions of our executive officers and key employees whom we rely on for executing our business strategy and identifying new strategic initiatives. Some of these individuals have significant experience in the commodities trading industry and financial services markets generally, and possess extensive technology skills. Although we have entered into employment agreements with our executive officers, it is possible that one or more of these persons could voluntarily terminate their employment agreements with us. Furthermore, we have not entered into employment agreements with non-executive personnel, who may terminate their employment at any time. Several of these employees have been with us since our inception and have vested stock options. Any loss or interruption of the services of our executive officers or other key personnel could result in our inability to manage our operations effectively or to execute our business strategy. We cannot assure you that we would be able to find appropriate replacements for these key personnel if the need arose. We may have to incur significant costs to replace key employees who leave, and our ability to execute our business strategy could be impaired if we cannot replace departing employees in a timely manner. Competition in our industry for persons with trading industry and technology expertise is intense.
We rely on third party providers and other suppliers for a number of services that are important to our business. An interruption or cessation of an important service or supply by any third party could have a material adverse effect on our business.
We depend on a number of suppliers, such as online service providers, hosting service and software providers, data processors, software and hardware vendors, banks, and telephone companies, for elements of our trading, clearing and other systems. For example, we rely on Atos Euronext Market Solutions Limited for the provision of a trade registration system that routes trades executed in our markets for clearing. Atos Euronext Market Solutions Limited and other companies within the NYSE Euronext group of companies, are potential competitors to both our futures business and OTC business, which could affect the continued provision of these services in the future. Moreover, the general trend toward industry consolidation, may increase the risk that these services may not be available to us in the future. We also rely on access to certain data used in our business through licenses with third parties and we rely on a large international telecommunications company for the provision of hosting services. If these companies were to discontinue providing services to us, we would likely experience significant disruption to our business.
We cannot assure you that any of these providers will be able to continue to provide these services in an efficient, cost-effective manner or that they will be able to adequately expand their services to meet our needs. We also cannot assure you that any of these providers will not terminate our business relationship with us for competitive reasons or otherwise. An interruption in or the cessation of an important service or supply by any third party and our inability to make alternative arrangements in a timely manner, or at all, would result in lost revenues and higher costs.
In addition, participants trading on our electronic platform may access it through 29 ISVs, which represent a substantial portion of the ISVs that serve the commodities markets. The loss of a significant number of ISVs providing access could make our platform less attractive to participants who prefer this form of access.
Many aspects of our business, and the businesses of our participants, involve substantial risks of liability. These risks include, among others, potential liability from disputes over terms of a trade and the claim that a system failure or delay caused monetary loss to a participant or that an unauthorized trade occurred. For example, dissatisfied participants that have traded on our electronic platform or on ICE Futures U.S.s open outcry exchange, or those on whose behalf such participants have traded, may make claims regarding the quality of trade execution, or alleged improperly confirmed or settled trades, abusive trading practices, security and confidentiality breaches, mismanagement or even fraud against us or our participants. In addition, because of the ease and speed with which sizable trades can be executed on our electronic platform, participants can lose substantial amounts by inadvertently entering trade orders or by entering them inaccurately. A large number of significant error trades could result in participant dissatisfaction and a decline in participant willingness to trade in our electronic markets.
Our compliance and risk management methods might not be effective and may result in outcomes that could adversely affect our financial condition and operating results.
Our ability to comply with applicable laws and rules is largely dependent on our establishment and maintenance of compliance, audit and reporting systems, as well as our ability to attract and retain qualified compliance and other risk management personnel. Our policies and procedures to identify, monitor and manage risks may not be fully effective. Management of operational, legal and regulatory risk requires, among other things, policies and procedures to record properly and verify a large number of transactions and events. We cannot assure you that our policies and procedures will always be effective or that we will always be successful in monitoring or evaluating the risks to which we are or may be exposed.
In addition, the CFTC has broad enforcement powers to censure, fine, issue cease-and-desist orders, prohibit us from engaging in some of our businesses or suspend or revoke our designation as a contract market or the designation of ICE Clear U.S. as a derivatives clearing organization. Our ability to comply with applicable laws and rules is largely dependent on our establishment and maintenance of compliance, audit and reporting systems, as well as our ability to attract and retain qualified compliance and other risk management personnel. We face the risk of significant intervention by regulatory authorities, including extensive examination and surveillance activity. In the case of non-compliance or alleged non-compliance with applicable laws or regulations, we could be subject to investigations and proceedings that may result in substantial penalties or civil lawsuits, including by customers, for damages which can be significant. Any of these outcomes would adversely affect our reputation, financial condition and operating results. In extreme cases, these outcomes could adversely affect our ability to conduct our business.
Our most valuable property is our technology and the infrastructure underlying it. Our intellectual property is described under the heading Technology in Item 1 Business. In addition to our intellectual property, our other primary assets include computer equipment, software, internally developed software and real property. We own an array of computers and related equipment. The net book value of our computer equipment, software and internally developed software was $46.8 million as of December 31, 2007.
Our principal executive offices are located in Atlanta, Georgia. We occupy 46,437 square feet of office space in Atlanta under a lease that expires on February 15, 2012. We also lease an aggregate of 158,679 square feet of office space in New York, London, Chicago, Houston, Winnipeg, Calgary and Singapore. Our largest physical presence outside of Atlanta is in New York, New York, where we have leased 111,255 square feet of office space, primarily relating to ICE Futures U.S.s executive office and its principal trading floor that are located at One North End Avenue, New York, New York. ICE Futures U.S. leases this space from NYMEX under a lease that expires on July 1, 2013, unless an option to renew for five years is extended by NYMEX
following the initial term. In addition, ICE Futures U.S. leases space in lower Manhattan to house its primary computer center, its new grading facility and certain administrative offices. These leases expire on June 30, 2014 or December 31, 2016. ICE Futures U.S. also maintains a back-up facility, which contains a fully operational trading floor and a lights-out 24 by 7 computer center, through leases of three parcels of space in Long Island City for this facility, which expires on December 31, 2013. Our second largest physical presence outside of Atlanta is in London, England, where we have leased 16,348 square feet of office space. The various leases covering these spaces generally expire between 2008 and 2010.
We believe that our facilities are adequate for our current operations and that we will be able to obtain additional space as and when it is needed.
We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.
On September 29, 2005, the U.S. District Court for the Southern District of New York granted our motion for summary judgment dismissing all claims brought by NYMEX against us in an action commenced in November 2002. NYMEXs complaint alleged copyright infringement by us on the basis of our use of NYMEXs publicly available settlement prices in two of our cleared OTC contracts. The complaint also alleged that we infringe and dilute NYMEXs trademark rights by referring to NYMEX trademarks in certain of our swap contract specifications and that we tortiously interfered with a contract between NYMEX and the data provider that provides us with the NYMEX settlement prices pursuant to a license. In dismissing all of NYMEXs claims, the court found that NYMEXs settlement prices were not copyrightable works as a matter of law, and we had not engaged in copyright or trademark infringement in referencing NYMEXs publicly available settlement prices. The trademark dilution and tortious interference claims, which are state law claims, were dismissed on jurisdictional grounds. While the court granted summary judgment in our favor on all claims, NYMEX appealed the decision regarding the copyright claims and state law claims in the Second Circuit Court of Appeals. On August 1, 2007, the Second Circuit Court of Appeals affirmed the District Courts grant of motion for summary judgment in our favor. On August 15, 2007, NYMEX filed a Combined Petition for Panel Rehearing and Rehearing En Banc, requesting that the case be reheard before the Second Circuit Court of Appeals. On October 25, 2007, the Second Circuit Court of Appeals denied NYMEXs Combined Petition for a rehearing. On January 16, 2008, NYMEX filed a writ of certiorari with the U.S. Supreme Court seeking discretionary review of the case, and the U.S. Supreme Court has not yet decided whether to hear the case. Should NYMEX be successful in its appeal to the Supreme Court and we are subsequently found to have infringed NYMEXs intellectual property rights, we may incur substantial monetary damages and may be enjoined from using or referring to one or more types of NYMEX settlement prices.
In December 2007, the parties mutually agreed to settle all claims and disputes between the parties with respect to the matters described below.
On July 26, 2000, Klein & Co. Futures, Inc., or Klein, commenced a civil action, referred to as the Klein Action, in the United States District Court for the Southern District of New York (00 Civ. 5563) against numerous defendants, including ICE Futures U.S., various affiliates of ICE Futures U.S. and officials of ICE Futures U.S. and/or its affiliates. Kleins claims arose out of its collapse in the wake of the recalculation of settlement prices for futures and options on the Pacific Stock Exchange Technology Index (an index of technology stocks) in May 2000. Klein purported to allege federal claims arising under the CEA and various state law claims. On February 18, 2005, the District Court dismissed Kleins CEA claims with prejudice in
accordance with Section 22(b) of the CEA for lack of standing and declined to exercise supplemental jurisdiction over Kleins state law claims. That decision was affirmed on September 18, 2006, by a panel of the United States Court of Appeals for the Second Circuit, and a subsequent motion for rehearing insomuch as the panel affirmed the District Courts dismissal of its CEA claims against ICE Futures U.S. and certain of its affiliates was denied. Klein then filed a petition in the United States Supreme Court seeking to appeal the decision of the United States Circuit Court on March 14, 2007. The petition was granted and the appeal was heard before the United States Supreme Court on October 29, 2007.
In March 2007, Klein filed a parallel action in the Supreme Court of the State of New York, New York County, against certain defendants, including ICE Futures U.S. and its former president. The action alleged a claim of slander and libel against ICE Futures U.S. and its former president relating to certain statements made in connection with Kleins collapse. In May 2007, ICE Futures U.S. filed a motion to dismiss on multiple grounds. Oral argument was held in August 2007 but the motion was not decided by the court.
Also, on May 14, 2001, ICE Futures U.S. and ICE Clear U.S. commenced an action, referred to as ICE Futures U.S.s Action, in the United States District Court for the Southern District of New York (01 Civ. 4071) against Klein. ICE Futures U.S. and ICE Clear U.S. commenced this action in their capacity as the assignees of certain claims that were held against Klein by its former customers. ICE Futures U.S.s Action sought to recover money owed by Klein to those customers in the wake of Kleins collapse. In the same decision that dismissed the Klein action, the District Court dismissed all of Kleins counterclaims against ICE Futures U.S., denied ICE Futures U.S.s motion for judgment on the pleadings and found that the complaint in ICE Futures U.S.s Action did not state a claim for which relief could be granted. However, the District Court granted ICE Futures U.S. leave to replead. On April 14, 2005, ICE Futures U.S. and ICE Clear U.S. filed an amended complaint, which Klein subsequently moved to dismiss. ICE Futures U.S. and ICE Clear U.S. opposed that motion which was briefed on August 5, 2005, but was never decided by the court.
In December 2007 and prior to the Supreme Courts ruling, the parties mutually agreed to settle all claims and disputes between the parties through entry of an omnibus settlement agreement whereby all claims and disputes between them were released and all actions dismissed, with prejudice, upon payment of an undisclosed amount by ICE Futures U.S. to Klein. The payment under the settlement agreement was a pre-acquisition contingency that existed at the time of the ICE Futures U.S. acquisition. Therefore, the payment to Klein was accrued as a liability in the purchase price allocation and had no income statement impact.
On April 6, 2007, the Supreme Court of the State of New York, County of New York, granted ICE Futures U.S.s motion to dismiss all claims brought against it in an action commenced on December 8, 2006, by certain holders of non-equity trading permits, or Permit Holders, of ICE Futures U.S. seeking declaratory, monetary and injunctive relief with respect to the merger. Plaintiffs alleged that, in violation of contract rights and/or rights under New Yorks Not-For-Profit Corporation Law, or NPCL, ICE Futures U.S.s Permit Holders, including plaintiffs, were not permitted to vote with respect to the merger and would not receive any part of the merger consideration. Plaintiffs sought (i) to enjoin consummation of the merger, (ii) declaratory relief regarding their past and future rights as Permit Holders, and (iii) an award of unspecified damages on claims for breach of fiduciary duty, breach of contract, unjust enrichment, estoppel and fraud. The court also denied the plaintiffs motion for a preliminary injunction. On February 4, 2008, the Permit Holders perfected their appeal from the lower courts ruling dismissing their complaint. The Permit Holders did not pursue an appeal of the lower courts denial of their request for an order enjoining the merger. ICE Futures U.S. will oppose the appeal and seek affirmance of the lower courts decision.
There were no matters submitted to a vote of IntercontinentalExchanges security holders during the fourth quarter of our fiscal year ended December 31, 2007.
Set forth below, in accordance with General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, is information regarding our executive officers and certain other key employees:
Jeffrey C. Sprecher. Mr. Sprecher has served as our Chief Executive Officer and a director since our inception and has served as our Chairman of the Board since November 2002. As our Chief Executive Officer, he is responsible for our strategic direction, operation, and financial performance. Mr. Sprecher purchased Continental Power Exchange, Inc., our predecessor company, in 1997. Prior to joining Continental Power Exchange, Inc., Mr. Sprecher held a number of positions, including President, over a fourteen-year period with Western Power Group, Inc., a developer, owner and operator of large central-station power plants. While with Western Power, Mr. Sprecher was responsible for a number of significant financings. In 2002, Mr. Sprecher was recognized by Business Week magazine as one of its Top Entrepreneurs. Mr. Sprecher holds a B.S. degree in Chemical Engineering from the University of Wisconsin and an MBA from Pepperdine University.
Charles A. Vice. Mr. Vice has served as our President since October 2005 and our Chief Operating Officer since July 2001. As our President and Chief Operating Officer, Mr. Vice is responsible for overseeing our operations, including market development, customer support and business development activities. He has over 15 years of experience in applying information technology in the energy industry. Mr. Vice joined Continental Power Exchange, Inc. as a Marketing Director during its startup in 1994, and prior thereto was a Principal with Energy Management Associates for five years, providing consulting services to energy firms. From 1985 to 1988, he was a Systems Analyst with Electronic Data Systems. Mr. Vice holds a Bachelors of Science degree in Mechanical Engineering from the University of Alabama and an MBA from Vanderbilt University.
Scott A. Hill. Mr. Hill has served as our Chief Financial Officer since May 2007. As our Chief Financial Officer, he is responsible for overseeing all aspects of our finance and accounting functions, including treasury, tax, cash management and investor relations. He is also responsible for financial planning, audit, business development and human resources. Prior to joining us, Mr. Hill spent 16 years as an international finance executive for IBM. He oversaw IBMs worldwide financial forecasts and measurements from 2006 through 2007, working alongside the CFO of IBM and with all of the companys global business units. Prior to that, Mr. Hill was Vice President and Controller of IBMs Japan multi-billion dollar business operation from 2003 through 2005. Mr. Hill earned his BBA in Finance from the University of Texas in Austin and his MBA from New York University, where he was recognized as a Stern Scholar.
David S. Goone. Mr. Goone has served as our Senior Vice President, Chief Strategic Officer since March 2001. He is responsible for the expansion of our product line, including futures products and trading capabilities for our electronic platform. Mr. Goone also leads our global sale organization. Prior to joining us, Mr. Goone served as the Managing Director, Product Development and Sales at the Chicago Mercantile Exchange where he worked for nine years. From 1989 through 1992, Mr. Goone was Vice President at Indosuez Carr Futures, where he developed institutional and corporate business. Prior to joining Indosuez, Mr. Goone worked at Chase Manhattan Bank, where he developed and managed their exchange-traded foreign
currency options operation at the Chicago Mercantile Exchange. Mr. Goone holds a B.S. degree in Accountancy from the University of Illinois at Urbana-Champaign.
Edwin D. Marcial. Mr. Marcial has served as our Chief Technology Officer since May 2000. He is responsible for all systems development and our overall technology strategy. He also oversees the software design and development initiatives of our information technology professionals in the areas of project management, architecture, software development and quality assurance. Mr. Marcial joined the software development team at Continental Power Exchange, Inc. in 1996 and has 14 years of IT experience building large-scale systems in the energy industry. Prior to joining Continental Power Exchange, Inc., he led design and development teams at Harris Corporation building software systems for the companys energy controls division. Mr. Marcial earned a B.S. degree in Computer Science from the College of Engineering at the University of Florida.
Johnathan H. Short. Mr. Short has served as our Senior Vice President, General Counsel and Corporate Secretary since June 2004. In his role as General Counsel, he is responsible for managing our legal and regulatory affairs. As Corporate Secretary, he is also responsible for a variety of our corporate governance matters. Prior to joining us, Mr. Short was a partner at McKenna Long & Aldridge LLP, a national law firm with approximately 350 attorneys. Mr. Short practiced in the corporate law group of McKenna, Long & Aldridge (and its predecessor firm, Long Aldridge & Norman LLP) from November 1994 until he joined us in June 2004. From April 1991 until October 1994, he practiced in the commercial litigation department of Long Aldridge & Norman LLP. Mr. Short holds a J.D. degree from the University of Florida, College of Law, and a B.S. in Accounting from the University of Florida, Fisher School of Accounting.
David J. Peniket. Mr. Peniket has served as President, ICE Futures Europe, since October 2005 and Chief Operating Officer, ICE Futures Europe, since January 2005. Mr. Peniket is responsible for ICE Futures Europes financial performance, technology and market operations, human resources, business development and regulation and risk management. Prior to assuming the role of Chief Operating Officer, Mr. Peniket served as Director of Finance of ICE Futures Europe since May 2000. Before joining ICE Futures Europe in 1999, Mr. Peniket worked for seven years at KPMG LLP, where he trained as an accountant and was a consultant in its financial management practice. Mr. Peniket was Research Assistant to John Cartwright MP from 1988 to 1991. He holds a B.Sc. (Econ) degree in Economics from the London School of Economics and Political Science and is a Chartered Accountant.
Thomas W. Farley. Mr. Farley joined ICE Futures U.S. in February 2007 as President and Chief Operating Officer. Mr. Farley is also a member of the Board of Directors of ICE Futures U.S. Prior to joining ICE Futures U.S., from July 2006 to January 2007, Mr. Farley was President of SunGard Kiodex, a risk management technology provider to the commodity derivatives markets. From October 2000 to July 2006, Mr. Farley served as Kiodexs Chief Financial Officer and he also served as Kiodexs Chief Operating Officer from January 2003 to July 2006. Prior to Kiodex, Mr. Farley held positions in investment banking and private equity. Mr. Farley holds a Bachelor of Arts in Political Science from Georgetown University.
At February 11, 2008, there were approximately 743 holders of record of our common stock.
We have paid no dividends on our common stock and we do not anticipate paying any dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend upon our results of operations, financial conditions,
contractual restrictions, restrictions imposed by applicable law or the SEC and other factors our board of directors deems relevant.
Our common stock trades on the New York Stock Exchange under the ticker symbol ICE. Our common stock was initially offered and sold to the public at a price of $26.00 per share and has been publicly traded since November 16, 2005. Prior to that date, there was no public market in our stock. On February 12, 2008, our common stock traded at a high of $138.49 per share and a low of $130.77 per share. The following table sets forth the quarterly high and low sale prices for the periods indicated for our common stock on the New York Stock Exchange.
The following table provides information about our common stock that may be issued under our existing equity compensation plans as of December 31, 2007, which consists of the 2000 Stock Option Plan, 2003 Directors Plan, 2004 Restricted Stock Plan and 2005 Equity Incentive Plan.
The following tables present our selected consolidated financial data as of and for the dates and periods indicated. We derived the selected consolidated financial data set forth below for the years ended December 31, 2007, 2006 and 2005 and as of December 31, 2007 and 2006 from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. We derived the selected consolidated financial data set forth below for the years ended December 31, 2004 and 2003 and as of December 31, 2005, 2004 and 2003 from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K.
The selected consolidated financial data presented below is not indicative of our future results for any period. The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K.
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth in Item 1(A) under the heading Risk Factors and elsewhere in this Annual Report on Form 10-K. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information contained in Item 6 Selected Financial Data and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
We are a leading global exchange and over-the-counter, or OTC, market operator. We offer the leading electronic integrated futures and OTC marketplace for trading a broad array of energy products, as well as the leading soft commodities exchange. Currently, we are the only marketplace to offer an integrated electronic platform for side-by-side trading of products in both futures and OTC markets. Through our widely-distributed electronic trading platform, our marketplace brings together buyers and sellers of derivative and physical commodities and financial contracts. We conduct our regulated U.K. futures markets through our wholly-owned subsidiary, ICE Futures Europe (formerly known as ICE Futures). We conduct our regulated U.S. futures markets through our wholly-owned subsidiary, ICE Futures U.S. (formerly known as the Board of Trade of the City of New York, Inc., or NYBOT). We conduct our regulated Canadian futures markets through our wholly-owned subsidiary, ICE Futures Canada (formerly known as the Winnipeg Commodity Exchange Inc., or WCE). ICE Futures U.S. has a wholly-owned clearing house subsidiary called ICE Clear U.S. (formerly known as the New York Clearing Corp., or NYCC) and ICE Futures Canada has a wholly-owned clearing house subsidiary called ICE Clear Canada (formerly known as the WCE Clearing Corporation). We completed our acquisition of ICE Futures U.S. on January 12, 2007 and our acquisition of ICE Futures Canada on August 27, 2007.
We operate our business through three segments: a futures business segment, an OTC business segment and a market data business segment. In our futures markets, we offer trading in standardized derivative contracts on our regulated exchanges. In our OTC markets, we offer trading in over-the-counter, or off-exchange, derivative contracts, including contracts that provide for the physical delivery of an underlying commodity or for financial settlement based on the price of an underlying commodity. Through our market data segment, we offer a variety of market data services and products for both futures and OTC market participants and observers.
On a consolidated basis, we recorded $574.3 million in revenues for year ended December 31, 2007, a 83.0% increase compared to $313.8 million for the year ended December 31, 2006. Consolidated net income was $240.6 million for the year ended December 31, 2007, a 67.9% increase compared to $143.3 million for the year ended December 31, 2006. The financial results for the year ended December 31, 2007 include $11.1 million in CBOT merger-related transaction costs, or $7.2 million after tax. Excluding these costs, our net income would have been $247.8 million for the year ended December 31, 2007. During the year ended December 31, 2007, 192.0 million contracts were traded in our futures markets, up 107.1% from 92.7 million contracts traded during the year ended December 31, 2006. During the year ended December 31, 2007, 174.9 million contract equivalents were traded in our OTC markets, up 33.7% from 130.8 million contract equivalents traded during the year ended December 31, 2006.
Our business is primarily transaction based, and our revenues and profitability relate directly to the level of trading activity in our markets. Trading volumes are driven by a number of factors, including the degree of volatility in commodities prices. Price volatility increases the need to hedge contractual price risk and creates opportunities for arbitrage or speculative trading. Changes in our futures trading volumes and OTC average daily commissions have also been driven by varying levels of liquidity and volatility both in our markets and in the broader markets for commodities trading, which influence trading volumes across all of the markets we operate.
We operate our energy futures and OTC markets and for ICE Futures Canada exclusively on our electronic platform and we currently offer ICE Futures U.S.s markets on both our electronic platform and through our trading floor based in New York. We transitioned our Canadian futures contracts to our electronic platform in the fourth quarter of 2007. We believe that the move toward electronic trade execution, together with the improved accessibility for new market participants and the increased adoption of energy commodities as a tradable, investable asset class, has contributed to and will likely support continued secular growth in the global markets. As participation continues to increase and as participants continue to employ more sophisticated financial instruments and risk management strategies to manage their price exposure, we believe there remains opportunity for further growth in derivatives trading on a global basis. We do not risk our own capital by engaging in any trading activities.
In addition to general conditions in the financial markets and in our markets in particular, commodity trading has historically been subject to variability in trading volumes due primarily to five key factors. These factors include:
These and other factors could cause our revenues to fluctuate from period to period. These fluctuations may affect the reliability of period to period comparisons of our revenues and operating results when, for example, these comparisons are between periods in different seasons. Inter-seasonal comparisons will not necessarily be indicative of our results for future periods.
For financial reporting purposes, as of December 31, 2007, our business is divided into three segments: our futures business segment, our OTC business segment and our market data business segment. For a discussion of these segments and related financial disclosure, refer to note 21 to our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. We combined our U.K. futures business segment and our U.S. futures business segment into one single futures business segment to better reflect the manner in which management views the business and in connection with the globalization of our futures business as a result of the acquisition of ICE Futures Canada.
Our Futures Business Segment
The following table presents, for the years indicated, selected statement of income data in dollars and as a percentage of revenues for our futures business segment:
Our ICE Brent Crude futures contract is a benchmark contract relied upon by a broad range of market participants, including certain large oil producing nations, to price their crude oil. During the year ended December 31, 2007, the average daily quantity of Brent crude oil traded in our markets was 232.4 million barrels, with an average notional daily value of over $16.7 billion. We believe that market participants are increasingly relying on this contract for their risk management activities, as evidenced by steady increases in traded volumes over the past several years. The growth of the ICE Brent Crude futures contract, as well as the
launch of our ICE WTI Crude futures contract in February 2006 and its continued growth, has allowed us to achieve a 47.8% market share of the global oil futures contracts traded for the year ended December 31, 2007.
In our futures business segment, we earn transaction fees from both counterparties to each futures contract or option on futures contract that is traded, based on the volume of the commodity underlying the futures or option contract that is traded. We derived futures transaction fees of $278.6 million, $123.4 million and $57.2 million for the years ended December 31, 2007, 2006 and 2005, respectively, representing 48.5%, 39.3% and 36.7%, respectively, of our consolidated revenues. The transaction fees earned on energy futures and option transactions, which occur through ICE Futures Europe, increased $55.5 million or 44.9% to $178.9 million for the year ended December 31, 2007 from $123.4 million during the year ended December 31, 2006. The transaction fees earned on soft agriculture and agriculture futures and options transactions, which occur through ICE Futures U.S. and ICE Futures Canada, were $93.8 million for the year ended December 31, 2007 and transaction fees earned on financial futures and options transactions, which occur through ICE Futures U.S., were $5.9 million for the year ended December 31, 2007.
A contract is a standardized quantity of the physical commodity underlying each futures contract. The following table presents the underlying commodity size per futures contract traded in our key futures markets as well as the relevant standard of measure for each contract:
The following table presents, for the periods indicated, trading activity in our futures markets for commodity type based on the total number of contracts traded:
The following chart presents the futures transaction fee revenues by contract traded in our futures markets for the periods presented:
The following table presents our average daily open interest for our futures contracts. Open interest is the number of contracts (long or short) that a member holds either for its own account or on behalf of its clients. Open interest refers to the total number of contracts that are currently open in other words, contracts that have been traded but not yet liquidated by either an offsetting trade, exercise, expiration or assignment. Open interest is also a measure of the future activity remaining to be closed out in terms of the number of contracts that members and their clients continue to hold in the particular contract and by the number of contracts held for each contract month listed by the exchange.
We charge transaction fees to the clearing members of ICE Futures Europe, ICE Futures U.S. and ICE Futures Canada for contracts traded for their own account and for contracts traded on behalf of their customers or local traders.
Our OTC Business Segment
The following table presents, for the years indicated, selected statement of income data in dollars and as a percentage of revenues for our OTC business segment:
Revenues in our OTC business segment are generated primarily through transaction fees earned from trades. While we charge a monthly data access fee for access to our electronic platform, we derive a substantial portion of our OTC revenues from transaction fees paid by participants for each trade that they execute or clear based on the underlying commodity volume. Transaction fees are payable by each
counterparty to a trade and, for bilateral trades, are generally due within 30 days of the invoice date. We derived transaction fees for OTC trades executed on our electronic platform of $205.8 million, $146.7 million and $78.2 million for the years ended December 31, 2007, 2006 and 2005, respectively, representing 35.8%, 46.7% and 50.2%, respectively, of our consolidated revenues. Our OTC commission rates vary by product and are based on the volume of the commodity underlying the contract that is traded.
In addition to our transaction fees, a participant that chooses to clear a trade must currently pay a fee to LCH.Clearnet for the benefit of clearing and another for the services of the relevant member clearing firm, or FCMs. Consistent with our ICE Futures U.S. business, we currently do not derive any direct revenues from the clearing process and participants pay the clearing fees directly to LCH.Clearnet and the FCMs. However, we have announced plans to launch ICE Clear Europe in the third quarter of 2008. For the years ended December 31, 2007, 2006 and 2005, transaction fees related to cleared trades represented 69.3%, 71.8% and 69.3% of our total OTC revenues, respectively, net of intersegment fees. We intend to continue to support the introduction of these products in response to the requirements of our participants.
The following tables present, for the periods indicated, the total volume of the underlying commodity and number of contracts traded in our OTC markets, measured in the units indicated in the footnotes: