ICE » Topics » Global OTC Marketplace

This excerpt taken from the ICE 10-K filed Feb 13, 2008.
Global OTC Marketplace
 
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 company’s risk management system. This process typically occurs within a matter of seconds.
 


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(COMPANY LOGO)
 
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 Chatham’s 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:
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Commodities markets traded
    10       7       9  
                         
Products traded
    1,041       990       843  
                         
Contracts traded
    23,780       17,540       15,264  
                         
 
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

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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 participant’s 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. FCM’s 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.
 
This excerpt taken from the ICE 10-K filed Feb 26, 2007.
Global OTC Marketplace
 
Our electronic platform offers real-time access to, and transparency of, the liquidity in our global OTC energy markets — meaning the complete range of bids, offers and volumes posted 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 cumulative weighted average price and transacted volumes by contract. We offer fast, secure and anonymous trade execution 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 electronic 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 company’s risk management system. This process, depicted below, typically occurs within a matter of seconds.
 
(FLOW CHART)
 
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 trading objectives. We offer trading in 990 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 17,500 unique contracts based on products and hub locations were traded in our OTC market in 2006. 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.
 
We characterize the range of instruments that participants may trade in our markets by reference to type of commodity (such as global oil, 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 (precious metals and European physical gas did not trade during the year ended December 31, 2006):
 
                         
    Year Ended December 31,  
    2006     2005     2004  
 
Commodities markets traded
    7       9       9  
                         
Products traded
    990       843       742  
                         
Contracts traded
    17,540       15,264       13,654  
                         


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Cleared OTC Contracts
 
We developed the concept of cleared OTC energy contracts, which provide participants with access to centralized clearing and settlement arrangements through LCH.Clearnet. As of December 31, 2006, we listed 38 cleared natural gas contracts, 35 cleared power contracts and 10 cleared oil contracts, all of which are financially settled. Transaction fees derived from trade execution in cleared OTC contracts were $121.2 million for the year ended December 31, 2006 and represented 71.8% of our total OTC revenues during the year ended December 31, 2006, net of intersegment fees.
 
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 through LCH.Clearnet for both OTC and futures contracts traded in our markets enables our participants to cross-margin their futures and OTC positions — meaning that a participant’s 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 member of LCH.Clearnet. LCH.Clearnet, like other clearing houses, provides direct clearing services only to its members. In order to clear transactions executed on our platform, a participant must therefore either be a member of LCH.Clearnet itself, or have an account relationship with a futures commission merchant that is a member of LCH.Clearnet. Futures commission merchants clear transactions for participants in substantially the same way they clear futures transactions for customers. Specifically, each futures commission merchant acts as the conduit for payments required to be made by participants to the clearing house, and for payments due to participants from the clearing house.
 
OTC contracts are available for trading on the same screen and are traded in the same price stream, and are charged the same commission rate, as bilaterally traded contracts. In a cleared OTC transaction, LCH.Clearnet 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 LCH.Clearnet and to a futures commission merchant. There are currently over 40 futures commission merchants clearing transactions for over 2,400 active connections in our cleared OTC markets. Participants have the option to trade on a bilateral basis with the counterparty to avoid paying fees to LCH.Clearnet and a futures commission merchant subject to the availability of bilateral credit with the counterparty. While we derive no revenue directly from providing access to these clearing services, we believe the availability of clearing services and attendant improved capital efficiency has attracted new participants to the markets for energy commodities trading.
 
We 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 50% 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, 2006, open interest in our cleared OTC contracts was 4.6 million contracts in North American natural gas and power, and global oil, as compared to 1.4 million contracts as of December 31, 2005. 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.
 

EXCERPTS ON THIS PAGE:

10-K
Feb 13, 2008
10-K
Feb 26, 2007
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