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ICE Sees Hedging Tending Toward Options, Products

While participation in its energy futures markets by global energy companies remains strong, IntercontinentalExchange Inc. (ICE) is seeing principals move toward specialized products rather than crude oil and also into options because of increased intraday market volatility, Chairman Jeffrey Sprecher said in a 2Q2008 briefing on the company's "second strongest quarter ever." He also announced plans for a share buyback program worth up to $500 million because the board believed the company's shares are undervalued.

Three new initiatives are coming into play in the third quarter to broaden the electronic exchange's footprint into new markets and allow more flexibility in existing energy markets, Sprecher said during an earnings conference call last week. ICE reported consolidated net income for the second quarter of 2008 of $84.9 million, a 58% increase compared to $53.7 million for the second quarter of 2007. Diluted earnings per share (EPS) in the second quarter were $1.19, an increase of 59% over 75 cents in 2Q2007.

Commercial customers increased to 50% of ICE business in the first half of 2008 compared to 46% a year ago, Sprecher said, reflecting "a strong commitment by commercials...We are seeing more commercial users in OTC [over the counter] markets" as those markets become more regulated and transparent.

Since the energy markets have been "very, very choppy," however, the companies have been moving more into the options arena where they can more easily capture trends. "I'm amazed by the movement into options." He said ICE plans to have an options platform rolling out "pretty soon."

Also, as long as prices were rising the oil companies did not need to hedge as much. On the other hand energy users have been moving hedging activities away from crude toward products closer to ones they actually use, such as distillate and natural gas. "Natural gas has been doing very well on ICE," Sprecher said.

He commented that crude volumes on rival exchange Nymex were buoyed by huge trades by an oil trading company that went into bankruptcy [SemGroup], "which was not a customer of ICE" (see NGI, July 28).

ICE expects to capture more energy trading once it completes its transition in mid-September from clearing contracts from LCH.Clearnet to its own in-house ICE Clear Europe. Currently, margin requirements as much as 25% higher on Clearnet than Nymex, which could be having a short-term impact on trading volumes. Sprecher noted that Clearnet tends to raise margins more readily than it lowers them. Chuck Vice, ICE president, said that using its own risk analysis, ICE will be updating margin requirements more frequently.

Also, in late September ICE Futures U.S. will establish itself in the equity index futures market as the only exchange for all U.S. Russell Index futures and options on futures contracts, including the Russell 2000 mini-futures contract. It also expects to complete its acquisition of Creditex Group Inc., moving into the credit default swaps markets spanning the U.S., Europe and Asia at a time when that market is restructuring. Sprecher said that while the venture is risky it "is in a similar place that the energy market was seven years ago," and has good potential.

Noting that "extreme measures" to rein in excessive speculation "failed to gain traction in the Congress," Sprecher said he expects more bipartisan legislation aimed at energy fundamentals to emerge when Congress returns from its recess. The outcry against the futures markets reflected in part the failure of ICE and the industry to educate the Congress as to the workings and the value of these markets, he said. One benefit of the recent focus on futures markets has been that ICE officials have forged relationships with leading policymakers in Congress and the administration. Sprecher said ICE now has a infrastructure and people in place to continue to deal with potential government legislation and regulation.

The company's 2Q report showed combined volume for ICE's futures exchanges increased 18% over 2Q2007 to 58.1 million contracts, with the ICE Brent Crude and ICE WTI Crude futures contracts establishing new quarterly volume records. Average daily volume (ADV) for ICE Futures Europe was 610,187 contracts during the second quarter. ADV for ICE Futures U.S. was 274,420 contracts, and total quarterly volume represented the second highest in history. ADV for ICE Futures Canada was 13,633 contracts. Average daily commissions for ICE's global OTC segment rose 69% to $1.2 million during the second quarter of 2008.

Consolidated revenues in the second quarter increased to $197.2 million, a 44% increase over $136.7 million in the second quarter of 2007.

The share buyback program for up to $500 million will extend over the next 12 months.

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