Racked by larger expenses than during last year’s quarter and an $11 million after-tax impairment charge related to its investment in the National Commodity and Derivatives Exchange (NCDEX) of India, IntercontinentalExchange Inc. (ICE), the Atlanta-based operator of regulated global exchanges, clearing houses and over-the-counter (OTC) markets, reported Tuesday a 15% drop in net income. The company recorded 2Q2009 net income of $72.1 million (97 cents/share) down from $84.9 million ($1.19) during 2Q2008.

“ICE continues to deliver innovative solutions that address the risk management needs of market participants globally, including the development and launch of the leading CDS [credit default swap] clearing solution in the U.S. and Europe,” said ICE CEO Jeffrey C. Sprecher. “This approach has allowed us to serve our customers well during a very critical time in the evolution of the broader financial markets. We have maintained our focus on bringing greater transparency and new tools to manage risks.”

The exchange operator faces some potential bumps in the road ahead as the Commodity Futures Trading Commission (CFTC) seeks to add more transparency into the markets and possibly reduce speculative trader position limits. Late last month the CFTC moved to bring the Henry Financial LD1 Fixed Price contract traded on ICE under its regulatory authority, saying the contract “performs a significant price discovery function.” The ICE contract is a “look-alike” contract to the CME Group’s Nymex Henry Hub contract, which already is under CFTC regulation (see Daily GPI, July 29; July 28).

“ICE will continue to work closely with regulators in the U.S. and abroad to ensure that they are appropriately informed of the vital role that derivatives exchanges have played in providing a secure and reliable venue for price discovery among global market participants — particularly during times of significant market dislocations,” Sprecher added.

During an earnings conference call, Sprecher expressed concerns about limiting market participants, but noted that ICE is ready to continue to work with the CFTC. “It remains our view that excessively limiting market participation will only serve to increase market volatility, however, we recognize that the current political environment in the U.S. renders changes to the current oversight regime very likely,” he said. “So in accordance with requirements that are explicitly included in both ICE Futures Europe’s no action letter and are also applicable to ICE’s significant price discovery contracts under the Commodity Exchange Act, ICE’s U.S. futures link contracts today are subject to position limits that are established by the CME group without consultation with ICE. This is an untenable position in properly overseeing our regulated market as we have no view into the process for setting position limits for granting hedge exemptions.”

Sprecher noted that the energy markets, electronic futures exchanges, OTC platforms and clearing houses have “substantially increased transparency and reduced systemic risk” over the past decade, yet there have already been situations where market participants have been required to curtail their transactions in regulated markets. “The unintended results is that they’re shifting away from regulated exchanges and clearing houses and into bilateral over-the-counter market transactions due to position limits,” he said. “We’ve urged the CFTC to move cautiously in reforming the position limit regime in order to alleviate rather than exacerbate the risk position moving away from transparent clear markets and back into opaque bilateral markets. We believe that a reduction in the number of position held by clearing houses will meaningfully increase market opacity, systemic risk and volatility. Each of these outcomes is counter to the administration’s stated objectives of market security and transparency.”

ICE CFO Scott Hill noted that 72% of ICE’s participants in its energy futures market are commercial participants as defined by the CFTC. “So we continue to have a very high percentage of commercial market participants in our market, and as we’ve said on many occasions and I’d reaffirm it today, we do not have a situation where we have a single or any one position that dominates any of our markets,” he said. “So they’re very commercially oriented. The mix of the trading has not changed” over the past few years.

Despite the reduced earnings, ICE said transaction and clearing revenues in its consolidated futures segment totaled $106 million during the second quarter, an increase of 21% over $87 million in the same period in 2008. Second quarter 2009 volume for all ICE futures exchanges was a record 64.7 million contracts, 11% higher than the 2Q2008 volume of 58.1 million contracts.

“Our strategy is to consistently drive growth in revenue and profitability for the long term, with a continued focus on disciplined investment in select growth initiatives and margin expansion opportunities that produce tangible results for our shareholders,” Hill said. “In addition to growing our core businesses, we are advancing new OTC clearing initiatives that meet the transparency and systemic risk reduction goals of regulators and market participants alike. We will continue to apply our domain knowledge and expertise as we grow our clearing businesses.”

ICE said 2Q2009 transaction and clearing revenues in its global OTC segment increased 47% to $117 million, compared to $80 million for the comparable period in 2008. Average daily commissions for ICE’s OTC energy business were $1.1 million, a decline of 7% from $1.2 million in 2Q2008. Cleared contracts accounted for 96% of OTC energy contract volume during 2Q2009. In ICE’s credit derivative markets, second quarter transaction and clearing revenues were $45 million, up 10% versus the same period in 2008 on a pro forma basis.

During the first half of 2009 consolidated revenues grew to $482 million, up 19% compared to the first half of 2008. ICE’s futures volumes increased 6% to 127.3 million contracts, driving consolidated futures transaction revenue growth of 10% over the first half of 2008. ICE’s consolidated global OTC transaction revenues were $223 million in the first half of the year, an increase of 40% from the first two quarters of 2008, driven primarily by the addition of revenues related to credit derivative product offerings.

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