ICE Plans Clearing Services for OTC Market, Inks Deal with LCH
The IntercontinentalExchange (ICE), a large electronic trading system for the energy and metals industries, signed an agreement with the London Clearing House (LCH) to offer optional clearing services to its over-the-counter (OTC) market participants. Clearing services are expected to be available as early as the fourth quarter.
ICE and eNymex are in a race to be the first provider of clearing services in the OTC commodity markets. The New York Mercantile Exchange is expected to launch OTC clearing services as well this year through eNymex (see NGI, May 8, 2000).
ICE stepped up the pressure on Nymex earlier this year by acquiring the International Petroleum Exchange (IPE) in London, which could enable it to be the world's first exchange organization to offer market participants a full spectrum of risk management products ranging from traditional bi-lateral OTC agreements to cleared OTC products to exchange-traded futures and options on futures.
"Today we stand one step closer to our vision of providing a comprehensive and global suite of energy products and services to market users," said ICE CEO Jeff Sprecher. "We will soon be in the unique position of providing optimal efficiencies for market users not only through the application of standardized technology to the full spectrum of market needs, but also through the credit enhancement and cross margining opportunities that clearing OTC products will offer."
LCH already acts as the clearing house for the IPE and will allow market participants to pool their OTC and futures risk in one location. In this broader role, LCH will provide secure and capital efficient clearing services to ICE participants interested in utilizing this service. It also will be able to facilitate cross margining between positions held by market participants on ICE and IPE.
"We believe that if we can add credit amelioration services through the London Clearinghouse and the broad infrastructure of clearing firms that surround it that we can open up new trading opportunities for these markets, increase the velocity of trading, the capacity to trade and increase the ability to take on new risk for many people," Sprecher said during a conference call. "If you can imagine, large companies in the over the counter [market] often run out of credit to one another. Small companies often don't have enough credit to participate in a meaningful way. By bringing the technique of clearing and settlement that has long been established and managed by the London Clearing House, we think that we can dramatically change the market shape in energy and precious metals.
Products available for clearing initially will include two of ICE's most active OTC products: financially, or cash, settled U.S. oil swaps (West Texas Intermediate crude swaps) and US natural gas swaps (Henry Hub swaps). Additional products will be added in the coming months.
"ICE has a tremendous amount of inertia it has long surpassed the expectations that my management colleagues when we started this thing," Sprecher added. "We now have over 6,000 traders around the world and I can tell you honestly we had no idea that there were 6,000 market participants in this when we started the company. We had expanded our data center for the sixth time in 12 months. The velocity and the growth of our exchange really continues to defy imagination, but we want to build on that inertia to try to change the way the market trades and bring a new paradigm and new set of tools to the market by offering the ability to cross margin against IPE futures."
Concurrent with the announcement, LCH has applied to the Commodity Futures Trading Commission for recognition as a Derivatives Clearing Organization.
ICE participants will utilize the same process on the ICE system for OTC cleared trades as they currently do for bi-lateral agreements. The difference will not be with the process, but rather with the counterparty. Today, two companies enter into a trade on the basis of a bilateral credit agreement. With ICE OTC clearing, two companies will be trading with a clearing firm -- the clearing firm acts as the seller to every buyer and the buyer to every seller. This practice enhances the financial integrity of each OTC trade transacted over the ICE system and provides market participants with greater financial certainty. Margins for ICE's OTC clearing products will be set by LCH and will be based upon LCH's risk analysis of the respective products.
"Our plans to offer OTC participants more than bi-lateral agreements grew out of customer demand," said David Goone, ICE senior vice president. "The OTC market is missing a big piece of the puzzle -- a global solution for clearing that provides a single point of access for commodity trading. We have the technology, we have the capabilities and we have the expertise to fill that void and offer the marketplace a global trading platform that enables full utilization of both capital and operational efficiencies."
Products traded on ICE include natural gas and power products such as physically-delivered gas at fixed and indexed prices, natural gas basis and swing swaps, and firm power. ICE also trades oil swaps including crude oil, fuel oil, gas oil/heating oil, jet fuel, gasoline, and naphtha. Additionally, precious metals, including gold and silver spot, forwards, and options are traded. ICE is based in Atlanta with offices in New York, Houston, Chicago, London and Singapore. For more information visit ICE's web site at www.intercontinentalexchange.com.
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