Intercontinental Exchange - Earnings Call - Q3 2011

Transcript

Speaker 6

Thank you, ladies and gentlemen, and welcome to the Intercontinental Exchange Third Quarter 2011 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero. As a reminder, today's conference is being recorded. I'd now like to turn the conference to your host, Kelly Loeffler, Vice President of Investor Relations and Communications.

Good morning. Items Third Quarter 2011 Earnings Release and Presentation are available and archived in the Investor section of our website at theice.com. This call will be available for replay. Today's call may contain forward-looking statements. These statements are subject to risks, assumptions, and uncertainties, and we undertake no obligation to update these statements. These represent our current judgment. A description of the risk that could cause our results to differ materially from those described in our forward-looking statement can be found in the company's Form 10-Q, which was filed with the SEC this morning. The results discussed today include adjusted operating numbers, which we believe are more reflective of our performance. Non-GAAP reconciliations can be found in the earnings release and presentation. We also include an explanation of why this information is meaningful and how we use these measures.

With us today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Weiss, President and Chief Operating Officer. I'll now turn the call over to Scott.

Speaker 4

Thanks, Kelly. Good morning, everyone, and thank you for joining us today. I'm pleased to again report that ICE achieved record revenues, record net income, and record cash flows during the third quarter and for the first nine months of 2011. Importantly, we're delivering these results even as we invest to ensure our continued ability to deliver value to our shareholders. I'll begin this morning on slide four with an overview of our performance in the first nine months of this year. Total futures volume increased 18%, while OTC energy volumes rose 23%. Revenues increased 16% to $1 billion. Adjusted operating margins expanded to 61%, and we grew adjusted earnings per share 24% in the first nine months of this year. Cash flow from operations increased 43% to a record $541 million.

We leverage that strong profit and cash generation to make strategic investments in Brazil to build the tools our customers will need in the evolving global market environment, to roll out over 230 new futures and OTC energy products, to expand over 300 cleared CDS products, to add to our technology teams to deliver industry-leading solutions like our new clearing technology in Europe, and to opportunistically buy back our shares. Let's move to slide five now and get into the detail of our third quarter results. Consolidated revenues rose 19% over the prior third quarter to $341 million. Consolidated operating income grew 35% to $204 million. Adjusted diluted earnings per share in the quarter increased 32% to $1.87. For the first nine months, CapEx and capitalized software expenditures were $43 million, and adjusted EBITDA grew 20%.

Moving to slide six, I'll review the components of our revenue and expenses for the third quarter. Transaction and clearing revenues increased 18% to a record $302 million, driven by record volume in both futures and OTC markets. Total contract volume grew 25% to a record 207 million contracts. Futures revenues rose 24% to $155 million. OTC energy revenues increased 13% to $101 million. Revenues from credit derivatives execution and clearing grew 8% in a quarter to a record $46 million. Growth in market data fees also accelerated, improving 17% to a record $32 million. Shifting to the expense side of slide six, we saw a healthy four-point expansion in adjusted margins to 61%, with adjusted expenses up just 6% on 19% top-line growth. Core operating margins, which exclude our CDS brokerage business, remain stable from Q2 levels at 67%.

Turning now to slide seven, I'll walk through the performance of our futures business segment. ICE's futures markets produced a record volume quarter with ADV up 23% and open interest up 10% over the year-ago period. ADV at ICE Futures Europe grew 28%, and during the quarter, the exchange established its fifth monthly volume record in 2011 and in 25.8 million contracts in the month of August. Growth at ICE Futures Europe continues to be driven by activity in our benchmark contracts Brent and Gas Oil at 41% and 30% respectively. Throughout the year, we've set individual product records and exchange-wide volume and open interest records. You might also have seen the recent announcement by commodity indexes that are being reweighted to include ICE Brent futures for the first time, as well as increasing the weighting of Brent within the indices.

While Brent and Gas Oil are our largest revenue contributors, we continue to see healthy growth in our European utility products. These include natural gas and coal, which saw volumes rise 84% and 64% respectively compared to the prior third quarter. Emission volumes increased 52%, and revenues grew 44% to $17 million. Moving now to ICE Futures U.S., volumes grew 12% in the third quarter as a result of strong demands for our Russell and FX contracts. Volume in agriculture contracts was more subdued due in part to the European credit environment and large price movements in the past year in certain markets. We believe that as the environment improves, hedgers will again become more active. Increased U.S. equity market volatility produced strong volume and open interest growth in the Russell Index futures and options contracts during the quarter.

Russell volume increased 32% and OI grew 17% from the year-ago period and set volume records in August and September. Notably, the Russell Index contracts have generated $15 million of profit during the first nine months of 2011. The U.S. Dollar Index also continued to gain traction with volume up 55% from last year's third quarter and open interest doubling. Customers are responding positively to growing liquidity, and we continue to expand our financial product set based on demands, particularly in FX. I'd also like to point out that this morning we announced our October futures volumes increased 21%, and rate for contract remains steady. The fourth quarter is off to a very solid start. Turning next to slide eight, I'll review our over-the-counter segment. Average daily commissions in energy increased 14% over the prior third quarter to $1.55 million.

North American natural gas and global oil volume increased 29% and 58% respectively. Open interest increased at healthy rates despite the relative lack of volatility and continued low prices. Global oil continues to benefit from the ongoing migration to clearing and from new products. As I noted previously, year to date, we have introduced over 230 new contracts for clearing, the vast majority of which are OTC energy contracts. Total new product revenue reached $29 million. This includes $12 million in incremental revenue in the third quarter alone. Open interest for OTC energy contracts rose 31% from the prior third quarter, indicating healthy demand for our products. Our OTC energy business continues to deliver solid results with average daily commissions of $1.6 million per day in October. In our credit derivatives business, third quarter revenues were up 8%.

Credit results were driven by growth on the clearing side of the business, though execution showed improvement, with execution revenue at its highest levels we've seen in five quarters. The CDS execution market remains soft due to low levels of volatility and as participants await regulatory clarity. However, our execution business continues to migrate towards the screen, with 61% of credit after third quarter revenues conducted electronically, up from 55% in this year's first quarter and up from only 35% in the fourth quarter of 2008. ICE has cleared nearly $25 trillion in gross notional value and remains the clear leader in CDS clearing. Open interest at the end of the quarter grew 43% from the prior third quarter. Last week, we began clearing sovereign CDS on certain Latin American names at ICE Clear Credit, making it the first clearing house to clear sovereign CDS.

With 330 cleared credit derivatives contracts, we lift hundreds more contracts for clearing than our nearest competitor. Importantly, through nine months, our profit from CDS clearing is nearly equal to the profit we made throughout the year in 2010. Turning now to slide nine, you can see the solid metrics that our model has produced. We have quarter after quarter consistently grown our operating cash flow as we maintain a lean operating model and focus on profitable growth. For the nine-month period, cash flow grew to $541 million, an increase of 43% compared to last year. This consistent cash generation allows ICE to reinvest in the business, execute disciplined M&A, and opportunistically buy back shares. As of the end of the third quarter, we had $497 million in cash and a very low debt-to-EBITDA ratio of 0.7 times.

Our low leverage and healthy level of cash give us strategic flexibility as we evaluate many new opportunities. With that, I'll be happy to answer any questions during our Q&A, and I'll now turn the call over to Jeff. Jeff, over to you.

Speaker 5

Thank you, Scott, and good morning, everyone. ICE's record results were driven by the continuation of long-term secular trends in the global derivatives markets and our unique positioning. As evidenced by our returns on capital, we've invested prudently in the capabilities needed to capture and build upon these secular trends. Whether it's the demand for clearing, connectivity, or post-trade solutions, ICE is woven deeply into the infrastructure of our customers. We continue to build on this vital partnership at a time when risk management and capital efficiency are more important than ever. Before I walk through our results, I'd like to update you on the status of the default of MF Global. MF Global affiliates were members at four of our clearinghouses, with the exception of our CDS clearinghouses where they did not meet our membership criteria. Because of the ongoing regulatory issues, we're limited in what we can say.

I want to confirm that ICE is in a very strong position with respect to managing through MF's default. We believe that we have ample collateral to assist in the orderly movement of customers to new member firms or the termination and liquidation of their positions as this process plays out. The press has reported that there may be potentially a shortfall of funds in customer accounts. In our case, ICE has always been in receipt of the full amount of margin monies that are required for the positions in our clearinghouses. We began the default process on Monday by making certain that our lines of credit were fully available to the clearinghouses in the unexpected event that short-term capital was required to manage through the situation. We then turned our attention to converting MF's non-cash collateral into cash by executing trades in the market.

We were granted access to MF's offices, and we summoned experienced traders to oversee the management of hedging the portfolio and liquidating accounts. We were able to offer account holders a window of opportunity to move their positions or have our traders liquidate them to the extent that the MF trustee and administrator and the local regulators allowed. In the UK, we're operating under the newly implemented special administration regime. This regime was adopted following the Lehman bankruptcy, and within hours, it allowed us to access customer account information. We continue to work with regulators, MF Global, and its trustees and administrators to transfer and liquidate customer positions where we are permitted. We were well prepared in advance of the default, and we've taken action since the default to protect the clearinghouses.

You should know that MF Global represented a low single-digit number in terms of the % of activity in our clearinghouses, and we do not anticipate a material impact based on all the information that we have at this time. We feel we're in an extremely solid position with regard to managing their default. Let me turn back to our results, and I'll update you on how we're delivering on the needs of our customers and why we've produced growth in each of the past 27 quarters. If you'll turn to slide 10, we've provided a snapshot of a few of the areas of growth for us and how we've used changes in technology and regulation to redefine markets and create opportunity. I'll begin with the fundamental strengths of our business model. First, we have a unique reach across geographies, customers, and products.

Nearly half of our revenues come from outside the U.S., and our customer base is skewed towards those that are commercially oriented. Our specialized products are designed for end users and risk managers. While the energy markets were among the last to go electronic, these markets have been an area of unprecedented innovation in product and risk management techniques. ICE's Brent crude and gas oil contracts are in their 14th consecutive year of record volume. The emergence of China as the leading consumer of energy continues to drive growth, along with the supply and demand imbalances in Western economies. Brent is relied upon for pricing two-thirds of the world's physical oil, and it continues to rise in importance to the oil community.

To ensure our contracts have the broadest market appeal possible, we're working with the industry to evolve the benchmark Brent and gas oil futures contracts as their demand rises. While these contracts and the majority of our other contracts have set new volume and open interest records this year, similarly, we're continuing the expansion of our OTC energy markets. I think it's important to understand the unique value proposition that these markets have provided to our customers and ultimately to our shareholders. OTC revenues continue to grow, and year-to-date average daily commissions in 2011 are up 36% compared to 2009, which was the first full year that we operated our energy clearinghouse. We're now able to list 600 cleared OTC energy contracts, up from 100 cleared contracts when our clearing was outsourced.

From a customer perspective, coupling ICE Futures and ICE OTC energy contracts on one platform delivers tremendous value in the form of liquidity, security, and efficiency. Thousands of market participants rely on our integrated energy futures and OTC platform for both trading and risk management. Customers seek sound, well-regulated, transparent markets. I believe fragmented market structures have many unintended consequences, such as creating the need for automated trading systems to simply reassemble the markets. Today, competition in execution and clearing keeps our cost of transacting in the regulated markets well below the cost of transacting off exchange. Because the cost of trade in our markets represents a very small percentage of the total cost of trading, access to multiple clearinghouses and exchanges does not seem to be the primary concern to our commercial hedgers. The capital efficiency of our clearing model draws participants who hold netable transactions.

In fractured markets, customers and regulators faced increased operating complexity and systemic risks rise, just as we saw in the fragmented U.S. equity markets during the flash crash. Today's market structure supports the goal of moving bilateral markets into clearing. It supports moving opaque markets onto exchange, and it allows for the detection of speculative volume that is difficult to detect in a fragmented world. Our model promotes increased transparency and clearing in a way that is already widely accepted and is increasingly relied upon by the industry. Turning to OTC credit markets, we've created a model for CDS execution and open access clearing that has largely been mirrored under financial reform. Our CDS clearing revenues continue to rise in spite of financial reform delays. We believe our leadership in the electronification and clearing of swaps will continue to be a competitive advantage.

We've also shown an ability to compete in new markets that we were not involved in a few years ago. In our financials futures business, we're developing formerly under-leveraged products, such as our foreign exchange futures. Year to date, we've grown our FX futures volume 26% compared to the first 10 months of 2010, which outpaces our peers in both futures and OTC FX markets. As Scott noted, we've already invested and innovated in technology to ensure we're serving customers efficiently and in a way that grows our business. Therefore, as we continue into a more automated world, we believe our investment levels will remain steady. For example, the cost of implementing a new clearing system at ICE Clear Europe this year has been part of our investment, as has increasing the functionality of our platform to more than double our options volume.

ICE's team of over 300 technologists continues to develop best-in-class systems that contribute to ICE's ability to innovate and to meet our customer requirements. If you'll move to the right-hand side of slide 10, you'll see the box labeled Business Optionality that shows a few opportunities that we believe will enable us to continue to diversify our business into growth markets. While the primary driver of ICE's earnings is our core business, many of these initiatives capture a significant amount of attention. Our strategic diversification is a driver of our opportunity set, and it enables ICE to deliver consistent results. By diversifying into these new areas, we've become more relevant to a larger and more global customer base without needing to become a large company. We remain nimble in creating our own opportunities, including our move into Brazil's fixed income and energy markets.

The demand for derivatives trading and clearing is rising, and it's coming from a more globally diverse customer base, which ICE has a very solid start in serving. Turning to the topic of financial reform, you've seen a little more progress with Dodd-Frank in the U.S. since we spoke in August. Dozens of rules remain to be adopted, but we have enough information to move ahead with delivering on the key provisions of the law, and we're bringing needed certainty to markets. With the recent passage of both the position limit and ECO core principle rules, two major policy sets are finalized. In regard to the former, ICE has initiated a position limit regime on its energy futures and OTC contracts pursuant to regulatory actions in 2008. With these position limits already in place, ICE established record OTC commissions as well as record WTI futures volumes.

Given this experience, we believe the position limit approach that was adopted by the CFTC is prudent, and it will lead to increased confidence in our markets. We have a number of assets already deployed that are supporting the market evolution towards increased transparency, including ICE's energy platform and Creditex's electronic credit platform, which will likely become swap execution facilities. We're actively developing our swaps data repository solution, and we anticipate going live in 2012. In the CDS market, our clearinghouses continue to meet demand for more cleared products, and we've introduced clearing for Latin American sovereign CDS just last week. We've cleared nearly $25 trillion in gross notional, representing the vast majority of outstanding clearable CDS. We continue to introduce new products to maintain our leadership, and we've produced record revenue during the third quarter in CDS clearing.

While regulatory change will continue well into 2012, the daily need to manage price and counterparty risk continues. Regulatory reform increasingly requires that exchanges and clearinghouses are the central venue for markets. Whether these markets are futures or over the counter, we've established a leading business model well in advance of these requirements. Financial reform is creating new avenues to serve the market, and it offers additional opportunities for organic growth and M&A. I'll close out this slide on the concept of value creation. The focus of our efforts is to deliver for our customers ahead of the curve, and this in turn generates value for shareholders. While pursuing organic growth, we carefully manage expenses and investments.

We've been very disciplined in our approach to M&A, spending over $2 billion in acquisitions since 2007, but during that time, generating over $2 billion in operating cash flow, which is generating 18% return on that invested capital. In the third quarter, when the opportunity arose, we repurchased $103 million of ICE stock at prices that we believe do not reflect the fundamental strength of our business. We remain opportunistic by striving to ensure that our franchise stays in front of new business while creating value for shareholders, which includes virtually all of our employees. Let me close out on slide 11 and show the positive upward trend in open interest and volumes in our markets as it continues. The strong growth engine of our core business is a solid backdrop for layering on new initiatives that create optionality for us in the long term.

As entrepreneurs, we look for opportunities that arise within change, and I continue to believe that this defines our company. On behalf of my colleagues, I'd like to sincerely thank our customers for their business in the third quarter. I'd also like to thank the ICE team for delivering the best quarter in our history. I'll now ask the operator to conduct the question and answer session, and I'll ask you if you could limit yourself to one question and one follow-up. Operator?

Speaker 0

Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, to ask your question at this time, please press star then one. Our first question comes from Rich Repetto of Bank of America. Your line is open.

Speaker 2

Good morning, Jeff. Good morning, Scott.

Speaker 4

Good morning.

Speaker 2

Jeff, from my understanding, on the margin on client asset in the futures market, the exchange requires some margin, and the FCM can also require margin on top of that. In your prepared remarks, you said you were in full control of the client margin. Does that include all margin that even MF Global could have required above what the exchange level is for the products traded on ICE products?

Speaker 4

We're in control of all the margin money that was sent to us, which would be the money that we demanded. There could potentially be other monies that were demanded by MF Global in MF Global's account, and there could also be money that customers left simply on deposit, treating those accounts, as you will, like bank accounts, that would be under MF Global's control. We have what we have requested, and those requests can be out of our directly out of our risk model or can be increased amounts as we see fit, depending upon the clearer and the customer.

Speaker 2

Okay, and then my one follow-up would be, I believe that you would be the SRO of the self-regulating organization that monitors, I believe that's the way the structure is set up for these accounts. Have you found, you know, CME acknowledged, I guess there was potential for commingling? I guess, and also can you explain if this is the case as customers move assets from MF Global to another broker, the potential margin that still sits at MF Global on top of yours, could it be a doubling, you know, for a period of time until these assets get freed up through the bankruptcy? Could there be a small portion of double margining, and how does that impact your volumes? Like they claim they were number three on ICE Europe.

Speaker 4

Yeah, let me break your question down, and I'll answer where I can. First of all, with respect to the SRO, the way the market structure works is that each clearing firm must have an SRO. Because the Chicago Mercantile Exchange acquired the Chicago Board of Trade and NYMEX, it is principally the SRO for almost all clearing firms in the U.S. Our U.S. exchange, the former New York Board of Trade, would be the SRO for any clearer that was simply a member of our clearinghouse that was not also a member of these other clearinghouses, which I believe is a universe of zero. There may be one or two, but I believe it's zero. We are not an SRO over at MF Global. I can't, even if I knew, I probably wouldn't address your question, but I specifically can't address it because I genuinely don't know.

We were not in that role. With respect to customer monies, we are working with the trustee in the U.S. and the administrator in the U.K., and where they permit us, we will either move accounts or liquidate accounts. As we do that, we, the clearinghouse, are not releasing any monies. Those monies are being held in aggregate against the entire MF position by the clearinghouse. If somebody were to move their position to a new FCM and that FCM gave us that position back, theoretically, I assume that the new FCM may be requiring additional margin, but that's between the client and the clearer. We will be margining that clearer for the new position as it moves.

Speaker 2

That helps, Jeff. Unfortunately, I couldn't ask about your record revenues or record earnings, but we'll get that next time. Thanks. I hope you're right about it.

Speaker 4

Thank you.

Speaker 2

I will.

Speaker 0

Our next question comes from Howard Chen of Credit Suisse. Your line is open.

Speaker 1

Hi, good morning.

Speaker 4

Good morning.

Speaker 1

Good morning. Congrats on the quarter and thanks for the color on MF Global. Jeff, we saw proposals for open access, fungibility, and transaction taxes in Europe during the quarter. Given so much is happening in that region right now, everyone's trying to find common ground. I'm just wondering, what's your overall level of concern of these proposals potentially being implemented?

Speaker 4

First of all, I would point out, just as you suggested, that they're proposals. These are things that have been floated by various entities and are up for conversation. I guess my own view, because I'm an engineer and unfortunately think like an engineer, you know, Sir Isaac Newton said in his third law that for every action, there's an equal and opposite reaction. We have a proposal right now to create a large vertical monopoly futures exchange in Europe, and the equal reaction has been a proposal to try to dismantle that. It's not necessarily surprising. In terms of where it goes from here, I think it will be subject to a lot of debate and probably heavily influenced by whether or not a large exchange forms up or not. We won't know that for a bit. We'll be active in that debate.

I think it's a bad policy, both the tax and the MIFID proposals for clearing. I think it will lead to a flight from Europe of trading and ultimately more volatility and fractures of markets that really have a lot of unintended consequences. We will be discussing that with the appropriate legislators and regulators as those proposals go forward, but I think it's probably premature to prejudge their outcome. I do take some comfort that we're located in the UK right now with our European operation, and the UK has suggested that they will veto the transaction tax. I would also suggest to you that we enjoy operating our business out of the UK because it is a global franchise, that people respect UK law, and the UK has a convenient time zone. Other than that, there is no natural reason for our business to be in the UK.

It could easily move if there were changes to market structure that were disadvantageous to hedgers and the ultimate users of the market to some other domicile. It is there as a privilege, I believe, to the UK and not a right. We will be discussing that with European regulators.

Speaker 1

Okay, thanks, Jeff. If we drill into the energy OTC side of the franchise, as both you and Scott noted, you continue to see really strong growth in global oil and other products. Just hoping you could give us a bit more flavor for the appetite that you're seeing in the market and maybe how you grade yourselves on the opportunities that you've seen over the last couple of years. Thanks.

Speaker 4

Yeah, thanks, Scott. Look, I think particularly global oil, that business was up 68% year over year. It's basically two and a half times the revenue it was just two years ago. I think that's really driven by a couple of things. Number one, it's clearly an indication of the market wanting to get out of the bilateral world and into a cleared world. Number two, what's facilitated that is our ability to launch new products for clearing. I think we're now at somewhere around 600 products available for clearing in OTC. When I started four years ago, that number was around 100, and that's back before we controlled our own clearing. As I mentioned in my prepared remarks, we've launched over 230 products this year, the vast majority of which are OTC, a great number of which are OTC global oil. It's really two things.

If the market wants to move into a cleared solution, and now that we've got control of our own clearinghouse, we've done exactly what we said we would, and we've launched the new products that people want to have available for clearing, which has facilitated that. Other product innovations, as we've been able to launch options as an example in natural gas, that business, even in a relatively low volatility environment, we've seen solid performance there. Natural gas revenue is low at 9% in the quarter. I think it's really all about our ability to innovate and launch new products. That's what's really underpinning the strength of the OTC result.

Speaker 1

Okay, thanks, Scott.

Speaker 0

Thank you. Our next question comes from Chris Allen of Citi. Your line is open.

Speaker 3

Morning, guys. Nice quarter.

Speaker 4

Thank you.

Speaker 1

Thank you.

Speaker 3

Yeah, I just wanted to talk a little bit about expenses. You guys have provided the guidance at the beginning of the year running that adjusted operating expenses can be 4% to 6%. Obviously, with the record level of revenues and what looks like a strong start to the fourth quarter, I'm just wondering if you're still comfortable with that guidance or is there going to be any pressure from non-cash comp and bonus accrual or anything like that. Anything to think about into the fourth quarter?

Speaker 4

No, Chris, I think as opposed to prior years where we've had a single quarter where the performance outstripped maybe what our expectations were, we came out of the gate really strong this year. We were strong in the first quarter. We had a strong second quarter. We just set a record in the third quarter. We've been able to manage the accrual with a pretty good view that the year was going to be good almost from the very beginning. I'm hopeful that the fourth quarter blows away our expectations. I think the trend, as you saw from the metrics I gave, $1.6 million OTC and 21% futures volume growth. We feel good about October, and I think the fourth quarter is going to be another good quarter. I think we're fairly well positioned in terms of where we've got the accruals on our performance, our performance bonuses, etc.

In terms of overall expense, I think the mid-single digits and the 19% revenue growth in the quarter speaks for itself. Our margins were up four points on a year-over-year basis. Our core margins, excluding the brokerage business, are 67%. We're investing in future growth, and we're delivering current growth with relatively modest expense growth.

Speaker 3

Great, sounds good. Not to beat a dead horse on MF Global, I guess just to simplify everything, from your perspective related to the ICE clearinghouses, did MF Global violate any customer seg rules?

Speaker 4

They did not violate any of our rules, so they were a member in good standing at the point they went into default.

Speaker 3

Right. Good, thanks a lot, guys.

Speaker 4

Thank you.

Speaker 0

Thank you. Our next question comes from Alex Kramm of UBS. Your line is open.

Speaker 1

Hey, good morning. Just one more on MF Global, not so much about the clearinghouse, but I think you talked about the clearinghouse percentage here before. If I go back to some of your older Ks, I think you certainly highlight them as one of your biggest customers in some of your businesses. Maybe you can just give us a little bit of a flavor where they were strong, where they were not so strong. I think they were a big energy and commodities player. I think they also did a lot of energy facilitation. If you think about the business, what do you think the impact, the timeline is, and how long do you think realistically some of this clearing up of all this going on, account movement is going to be done? Thanks.

Speaker 4

Yeah, the MF Global house positions were very, very small. The vast majority of the positions in our clearinghouse were related to their customers. As you know, our markets tend to be made up predominantly by commercial market participants. Any disruption is going to cause some amount of impact, but our expectation is, just as you saw in October, our volumes will continue to perform well based upon the large commercial participation in the market. Again, we'll work through what the details are, but our expectation right now is that it should not have a material impact on the performance of our business.

Speaker 1

Okay, good. Just switching gears for a little bit, obviously in this whole OTC to exchange clearing migration, you've shown where you pick your battles. I think more recently there's been a lot of discussion about not just the clearing side, but also on a call like the futurization of business and how business is shifting to the futures world. Can you maybe talk about that a little bit more? I think it's not a new trend, but clearly it's something that people focus on right now. Do you think that's going to be a big impact for you in what business perhaps, or do you still think the clearing side and maybe just a shift to clear on the energy side is really the bigger opportunity, not so much the future side? Thank you.

Speaker 4

Alex, I think it's, as we sit here today, hard to know with any specificity because the rules about what is an OTC swap versus what is a future are still being discussed in the U.S. I think the details in those rules will matter in the answer to your question. Generally speaking, if you step back, I do think that it will become more complicated than it used to be to trade in the over-the-counter markets. There will likely be these swap data repositories and reporting requirements, and there will be requirements to demonstrate that you're hedged or not hedged and the like. It may ultimately be easier for contracts that can be highly standardized and with standardized tenors to be traded as futures if they can serve the needs that people were getting in the over-the-counter market.

Obviously, there will always be, in my mind, some need for customization. Generally speaking, I think where contracts can be standardized, there will be a trend towards futures. I think, you know, we see from others that in the FX market, our own FX futures market and others' market, that there does seem to be, in that case, a trend from OTC to futures. Just elaborating on energy, which is where we sit, we're very, you know, we have a lot of optionality. We have a great OTC platform. We have an open clearinghouse in the sense that we accept trades from over 100 different OTC venues now. We have an amazing futures franchise that's quite global and quite standardized, and the benchmarks in there continue to be increased importance. I think we're sort of set up regardless of how the market goes.

If you were to read our comments in this area, you'll see we're relatively agnostic, just trying to help the regulators make informed decisions.

Speaker 1

All right, very good. Thank you.

Speaker 0

Thank you. Our next question comes from Matthew Hines of Stifel Nicolaus. Your line is open.

Speaker 3

Hi, good morning.

Speaker 4

Morning.

Speaker 3

Morning. I'd just like to go back to the OTC energy business quickly and I guess trying to think about specifically with the global oil, trying to think about what's the, you know, the bilateral, what's the real opportunity out there in terms of the bilateral turnover in similar products and, you know, how much and how quickly do you think some of this could move over to your platform?

Speaker 4

I have a simplistic view from, you know, going back to the starting of ICE where I came out of the electric power market and that was the first market that Chuck Weiss and I packed, and then it moved into natural gas, and then we moved into oil. If you think about that chronology, oil had been the oldest market of those three that had traded natural gas at the time we started. ICE had been trading relatively robustly for maybe almost 10 years, and electric power was just starting in its infancy. The newer the market, the faster they are willing to adopt newer trading techniques and technology. The oil is the last of those. It seems to just now be starting to think about clearing.

For many, many years, you had major oil companies with deep balance sheets and large global banks and asset managers that were trading that, and balance sheet credit was not an issue. We saw after the Lehman collapse that people started to think about their counterparty risk, and it's that trend that is moving people, and I would suggest to you it's all voluntary, not regulated, into clearing. It's early days. I'm sure there's a lot of people that have long-term, longstanding bilateral big balance sheet, big collateralized OTC relationships that have yet to move positions into clearing, but I think the trend is starting and accelerating, and we're helping that trend by now controlling our clearing technology and putting domain knowledge in how to manage risks of complicated OTC oil portfolios.

Speaker 3

Okay, that's great. Thank you. As my follow-up, you mentioned that you were clearing some more sovereign CDS in ICE Trust or formerly ICE Trust in ICE Europe. How much sovereign are you doing on the brokerage side? It seems like you saw some nice growth there. Really, I guess the first quarter of year-over-year growth in quite a while for the brokerage. How much sovereign are you doing and what are the kind of early, or what's the early feedback you're seeing from the Greek situation?

Speaker 4

What we announced is the clearing of Latin American stocks out of our ICE Clear Credit clearinghouse. We've not yet launched the European sovereign clearings yet. We're working through still with regulators on the approval to launch those products. We don't have a large sovereign desk in our execution business. Obviously, the volatility that's been generated around those sovereigns has been good for volumes and was one of the contributors as you look at the third quarter. The other thing that really drove the strong performance is with that volatility and with some of the other economic risks that are out there, what we're seeing is a lot of customers trying to get off risk as much as they can. One of the products that we've talked a little bit about in the past are DNA or delta neutral options, which basically allow customers to mitigate risk.

We saw a tremendous performance out of that product in the quarter. It's a highly electronic product, and that was really a big contributor to the growth. We don't have direct exposure to the sovereigns on the execution side, but the volatility around those sovereigns certainly contributes to the performance of that business, and particularly in the electronic offerings like DNA.

Speaker 3

Is there anything you're hearing just on the sovereign side in general from the Greek situation?

Speaker 4

Same thing you read in the paper.

Speaker 3

Okay, thanks. Let me try.

Speaker 4

Okay.

Speaker 0

Our next question comes from Michael Carrier of Deutsche Bank. Your line is open.

Speaker 1

Thanks, guys. Scott, just the tax rate in the quarter is fairly low relative to what you've said on the guidance side. You didn't change the guidance for the year, so I just wanted to get some sense, obviously depending on where the business is coming from, that's going to have an impact, but any update there?

Speaker 4

Yeah, look, I hate to go into the accounting weeds, but our tax rate for the first nine months is 32%, which is spot in the range that we've given at 31% to 34%. However, each quarter, I've got to book a rate in the quarter that gets me booked right on the year. The low rate in the quarter simply is reflective of the math to get me to the right full year or the current year rate of 32%. What I'd look at is the year-to-date rate, not the quarter rate, as indicative. That's in the range of 31% to 34%. I'll note that we definitely are trending lower on the tax rate, and that's reflective of the fact that we continue to grow the business outside the U.S. In the U.K. in particular, the authorities in the U.K.

have made the determination that it's good for business to have a relatively lower tax rate. We're seeing the tax rate in the U.K. come down, and we benefit from that. It's almost a perfect storm of more business coming from the U.K. and tax rates going down in the U.K. that's driving that. Range of 31% to 34%, we're sitting at 32% on a year-to-date basis, then trending lower. We'll give some updated guidance as we move into 2012, but as we see our business continue to grow outside the U.S. and continue to see indications from outside the U.S. that tax rates are likely to stabilize or continue to come down, I think you should expect to continue to see us have a fairly attractive, certainly on a relative basis, tax rate.

Speaker 1

Okay, thanks. Just to follow up, on the OTC credit side, the sovereign opportunity, obviously that's not going to make or break you, meaning there's a lot of other opportunities, and you guys have been gaining traction in other product areas. The way this, the Greek situation plays out, I guess it'll ultimately depend on what is decided, but does it put a crimp in the whole sovereign CDS opportunity, particularly if the CDS doesn't trigger in a restructuring? Just wondering, sovereigns may be different than corporates in terms of when you go into a bankruptcy or the actual triggers. Obviously, it's still to be determined, and we'll see how this all shakes out over the next months and quarters. Any thoughts around that and how is the, we'll potentially look at that.

Speaker 4

I agree with you that it's yet to be determined, and it's obviously, I think, important for a determination to ultimately be made in a collective view of the market as to what it means to own a sovereign CDS. I think once the market understands its utility and maybe where it lacks utility, then the product can seek its own trading level. It may be that the market has a different view of different countries and the way they manage defaults or potential defaults. It may not be just one thing, but it may be country by country, the product may have different utility. We're going to have to wait and see. Right now, this is a voluntary write-down proposal. If the market really accepts that this is voluntary, then I think CDS will continue somewhat unabated, frankly.

Speaker 1

Okay, thanks, guys.

Speaker 0

Thank you. Our next question comes from Ken Worthington of JPMorgan. Your line is open.

Speaker 1

Hi, good morning. I apologize, I missed some of your opening remarks. If this is repeated, just shut me down. In Brent versus Gas Oil, we're seeing open interest kind of stagnate on the Gas Oil side when it's accelerating on the Brent side. I would assume the customers are the same. There was the reconstitution. Is that still having an impact here, or is there something else? When would you kind of think the Gas Oil and Brent fundamentals would start to converge, or what would it take for them to converge again?

Speaker 4

Right now, Ken, the fundamental issue is gas oil, the pricing curve is in backwardization. I can't even say it, which fundamentally means there's a negative cost to carry. You're not seeing people put open interest on it and hold it because basically the prices are lower out in the future than they are today. That is the fundamental issue. Volume growth has been in line. I think I said in my prepared remark, Brent grew 41% and gas oil grew 30%. The volume growth has continued unabated. The interest in the product has continued unabated. The OI is simply related to the shape of the curve right now.

Speaker 1

Okay, great. Again, apologies if you mentioned this, but on BRICS, can we get an update on the project there and what kind of progress you're making towards launch?

Speaker 3

Sure, this is Chuck. We've launched the trading system for over-the-counter physical trades in Brazil. We launched that several months ago. That's gone very well. I think there are about 40 or 45 signed participants with, you know, we're having trades every day there. We're kind of now beginning to think about phase two and how we go about offering and structuring the right kinds of derivatives for trading there to help in risk management in that market, looking at the clearing assets that we have, speaking with Satif where we have a minority investment there, and really just exploring what the options are to continue to build some infrastructure for that market, not only power, but some of the other commodities in Brazil.

Speaker 1

Okay, great. Thank you very much.

Speaker 4

Thanks.

Speaker 0

Thank you. Our next question comes from Julian Miller of BMO Capital Markets. Your line is open. Thanks. Morning.

Speaker 4

Morning.

Speaker 0

You guys have said in the past that your Energy Markets were gaining some new participants from China and the Middle East as the governments kind of scaled back the subsidies they're providing for gasoline, and so hedging becomes more important. I just want to get an update there on how those policies of the government are progressing and maybe some commentary on any new firms in the past quarter or two that have been looking to start trading on your markets as a result.

Speaker 4

Yeah, I guess that probably the, I don't know, most exciting or interesting new news that we've gotten recently is over the past couple of months, China has said that they're going to allow, I believe it was 31 of their largest companies to begin to participate in global markets. I believe the comment was something along the lines of, you know, we're large consumers of commodities, but we don't really participate in the price formation. I think that's a big opportunity. Clearly, as I think we said on a call maybe three, four calls ago, when Jeff and I were in China last year, we met with Sinopec and talked to them about their trading activities in our market. We're seeing more and more interest.

We actually have a person in China and then an office in Singapore who are in constant dialogue with the Chinese companies and instructing them on how to get access to our markets for trading. That's probably the biggest new news is that the Chinese government now, as they start to try and deregulate pricing to some extent, they recognize their companies are going to be faced with price volatility, and they're now offering an opportunity for at least a small subset of those companies to go out and manage that risk. I think when they look to go and manage that risk, they're going to think about what are their exposures. Brent, which is what their oil is priced on, gas oil, which is an important diesel hedge or hedge tool, those are the benchmarks globally.

Those are going to be the products that attract the Chinese companies because it will help them manage the risks they've got. Global sugar, global cotton, same thing. We're basically letting them know that on our exchange, we've got these benchmark contracts. They reflect the risk you're looking to hedge. We are clearly seeing growing interest from those companies in our market.

Speaker 0

Great, thanks. There's some regulatory changes, I guess, going on in Canada that are going to allow you to list additional contracts. Just want to get some insight as to, you know, how widely used you expect the new contracts could be. In general, maybe you could give us an update on your strategy for ICE Canada. I don't know if there's like OTC clearing opportunities or maybe some additional new product launches that you're eyeing.

Speaker 4

It's an exciting opportunity for us in that the Canadian Wheat Board used to be the price setter for wheat. With the proposed legislation to eliminate that, there will be a free market. We have the canola contract in Canada, as you may know, and many of the same agribusiness firms are active in the wheat market. They have rallied around us to work with us, and the market has designed a new contract and contract terms and specifications, delivery points, etc., for a Canadian wheat contract. We have filed with a regulator to begin to launch that, to get approval to launch that contract. We think we are the natural home for that contract. Our customers think we're the natural home for that contract, and it should be a good opportunity for us.

As a result of that, Intercontinental Exchange has a history of, as we get customer connectivity, we work with those customers to try to figure out their other hedging needs and launch new contracts that are similar that can give economic offsets and other hedging tools for them. I would expect that it would spawn additional contracts from us.

Speaker 0

Okay, thank you. Thank you. Our next question comes from Roger Freeman of Barclays. Your line is open.

Speaker 1

Hi, good morning.

Speaker 4

All right.

Speaker 1

Just wanted to come back to your OTC business. There's been a bunch of questions on that. We're trying to size the opportunity. If you look at all of the, I don't know, the 600 contracts across the energy space, what % of the total OTC market would you say is addressed by sort of equivalent contracts in your clearinghouse?

Speaker 4

I don't even know where I'd begin to answer that question, Roger. I don't have a view to full size of the OTC market. We've tried a few times to size it. The thing I keep going back to is the global oil two years ago was just under $5 million and around 60% of our total OTC revenue. Every one of our OTC revenue products has grown over the past two years, and yet global oil is now roughly 12% of our total OTC revenues and has doubled in size. I don't know how large the opportunity is. There is clearly demand for the clearing solution.

We've got one recent example of a fairly large airline who's making a decision to start hedging their risk directly as opposed to, or at least hedging a portion of their risk directly as opposed to going to a third party to write those hedges for them. I can't give you a metric. I'd love to give you a metric, but I can't give you a firm metric other than what we've seen over the last couple of years and the customer movements that we're seeing move directly into the market as opposed to going through third parties for their hedging.

Speaker 1

Okay, I'm just assuming, do you talk to customers as you develop these new products? I was just trying to get a sense for whether, you know, obviously, like the airline issue is one where the airlines decide to take on maybe some basis risk from a standardized cleared contract versus an OTC, but are willing to do that. Just wondering, are there any big holes at this point in terms of kind of customization that corporates and other customers look for in these true bilateral arrangements that they can't get pretty close to in a cleared contract?

Speaker 4

I think the thing that exchanges are chance-less, at least as the market exists right now, are contracts that have lots of optionality in it. I mean, just let's just take a hypothetical airline. If you were an airline, you might want an OTC hedge that in the event you add certain routes, you were able to increase its size. In the event that you drop certain routes, you might drop certain delivery points and so on and so forth. You might, in the case of a tenor, have certain contracts, and if you get out of your long-dated contracts, you might want to swap to also terminate. Exchanges that list standard contracts for trading tend to not have all that optionality.

I personally think one of the unintended consequences of all this new OTC regulation is that there will be more money to be made by people that can write a lot of optionality into contracts. I think those will become hard to value because options are more difficult to value. I think that just happens to be one of the unintended consequences, creating harder to value contracts for those that don't come into clearinghouses or on exchange.

Speaker 1

Okay. All right, thanks.

Speaker 0

Thank you. Our next question comes from Daniel Harris of Goldman Sachs. Your line is open.

Speaker 1

Hey, good morning.

Speaker 4

Good morning.

Speaker 1

Hey, Jeff, you mentioned earlier that you thought that a transaction tax was bad policy, and yet, probably for the third time that I can remember in the last five years, it was put forth again or it will be put forth today. How much global coordination do you think is out there, maybe in front of the G20 meeting, given that we know that France and Germany want this? There are certainly some sects of the U.S. government that might want this. I'm not sure. Do you feel that there's any global demand for putting a transaction tax out there to raise taxes, or is it just something that's just more noise, do you think?

Speaker 4

First of all, I do think that if regulators and legislators are being much more coordinated globally than I've seen in my 10-year tenure here in the industry, I do think that's a positive thing because we operate global markets. To the extent that we have consistent regulation, it's helpful for our customers. I don't know if we've got some large countries that have very explicitly said they won't support such a tax and others that have very explicitly said they are demanding such a tax, it's hard to know where it all lands. I do think there's a general appreciation that unless such a tax is widely applied, global products will find a different home in a lower tax environment. I do think that in every conversation we've had, there is an acknowledgment that that's a real capability.

That being said, we have seen that the equities markets tend to be local markets, and there have been local transaction taxes on some equity markets, and those markets haven't left. They have evolved into things like contracts for differences, OTC markets that try to avoid the tax, etc. Nonetheless, they haven't actually left. They've morphed into something that avoids the tax but stays.

Speaker 1

If you look at, I mean, if today it costs you less than $1 to trade a Brent contract, if you take 0.1% as a tax on that one contract, which is 1,000 barrels of oil, it's going to cost you $10. Today it costs you $1 to trade, tomorrow it costs you $10 in taxes on a commodity. The price of that commodity is going to go up to what that additional tax.

Speaker 3

Right. Couldn't agree with you more. Just want to turn back to also something you guys said about the CDS market. You're seeing some signs of stabilization. I'm guessing that's both in the execution side as well as the clearing side, which obviously has continued to grow through more and more people using the clearing. What are you really seeing? It looks like the execution side is up off the four-year ten lows. Are you seeing more traders engaging that market? You also mentioned electronification was increasing pretty rapidly, certainly over the last two years. Where do you think that could go back to in a market that has more certainty around clearing and regulation around CDS?

Speaker 1

I think more clarity on what the rules are going to be for SEFs. I think more clarity around the rules for clearing. I think all of those are predicate to that market recovery. What you're seeing in the result today, as I mentioned earlier, really is driven largely by risk mitigation strategies, and that's enabled by the products that we offer like Derivative Analytics, which allow people to get off the risk. Today, that's what's driving it. As I look, despite the fact that we have been in a relatively subdued environment, we're still a number one and number two market share in key index and single name products that we serve. We're building out capabilities in things like emerging markets.

As we get the clarity around the rules for trading CDS and the rules for clearing CDS, we feel very good about the position we've got, and we feel very confident that over the longer term, the CDS is a viable product. It does facilitate the flow of credit into the market. It is a good indicator, and I would argue a better indicator than the ratings agencies or stock prices with regards to the health of a company. We think it's a way that people in the future will take a view on a company. We like our market position. We like the product offerings we've got. We like the position we have as the clearinghouse. As that market turns, we believe it's a significant opportunity to help contribute to our ability to continue to grow.

Speaker 3

Thanks, Scott.

Speaker 0

Thank you. Our next question comes from Chris Harris of Wells Fargo. Your line is open.

Speaker 1

Thank you. Good morning, guys. Just a quick follow-up on the CDS business. Obviously, CME is focused on capturing share here, and they're obviously looking closely at getting share in the buy side. We know that you guys have obviously cornered the dealer market, but just wondering, what kind of strategic advantages or structural advantages do you have over CME that will help you win out on the buy side with respect to CDS?

Speaker 6

First advantage is $25 trillion versus a few million or billion that they've done. The second is $1.6 trillion of open interest. The third is over 330 CDS products that we clear, which is far way more than anybody else in the industry. The fourth is a very open and robust dialogue with the buy-side customers where, for example, we're putting together allocation capabilities, which is key to a number of those buy-side firms that we'll be rolling out shortly, which will facilitate their ability to come in. It's our risk models and our risk management capabilities, the ability to develop technology to look at the portfolio that our clients have. We're in discussions with regulators right now to try and get them to allow us to deploy the technology we've already built that will look at the portfolio of single name and index products.

I think it's the full suite of offers. It's our operations, it's our risk management, it's our open interest, it's the number of products we clear. We feel very good about the position that we've got in terms of CDS clearing.

Thanks for that, Scott. Just a quick follow-up on the health of the overall business. You guys are definitely not seeing it in volumes yet, but just curious how you think a prolonged slowdown in Europe might affect your growth outlook over the next couple of years.

I think the thing you've seen historically, if you go back and look at the fourth quarter of 2008 and end of 2009, our business model is very geographically diverse. We're not tied to just the European economy. We're not tied to just the U.S. economy. We're not tied to the deleveraging of financial institutions. We've got a very strong commercial customer base. We have global commodities, the demand for which is being driven out of the emerging economies. The geographic diversity, the product diversity, all of that has enabled us to grow right through the difficult periods over the last two years and give this confidence that we'll continue to grow into the future.

Speaker 4

Thank you. Our next question comes from Niamh Alexander of KBW.

Speaker 5

Hi, good morning. Thanks for taking my question. If I could touch on the climate exchange business, are we still kind of running as a neutral this year or maybe positively accretive? Can you give me an update on that market environment? I think we're moving into an important next phase in Europe.

Speaker 6

Yeah, Niamh, I would say we're on track to where we had expected to be. We took the cost synergies out, frankly, a little bit ahead of pace. In terms of revenues, we had off to a little bit of a soft start this year, but as I mentioned in my remarks, 52% volume in the third quarter, 44% revenues. October was another good month in terms of the emissions. I would tell you we're kind of right on track with where we expected to be. Embedded in your question is the key. The next real, if you will, growth wave that we think we're well positioned for is phase three. There are new participants in that marketplace, airlines as an example, who haven't participated in before, who will begin to be able to participate in 2012.

The emission certificates today, which have been provided for free, will start to be auctioned in the future. We will participate in a part of that, but more importantly, those auctions will generate additional price volatility, which tends to mean more risk, which tends to mean more hedging, which is what people do with the products on our exchange. We feel good about where we are now, had a very strong third quarter and a good October in terms of top line. With the new participants and the implementation of phase three in the coming 12 to 18 months, we feel like that's a good growth business for us looking forward.

Speaker 5

Okay, fair enough. Thanks, Scott. If I could, Jeff or Scott, you know, you tend to like to see a lot of outside of non-organic acquisition opportunities. You've made the big investment into Brazil, but I saw from your comments there that you're still seeing some acquisitive opportunities. Are the conversations changing? Are the sellers kind of more willing sellers? Are the price expectations different? Do you think maybe you're getting closer to something?

Speaker 6

I won't say whether we're getting closer to something, you know that. Yeah, I do think that people are having different price expectations. It is interesting that you picked up on that because the last few months, we went through this period, I think, after Dodd-Frank was announced when everybody said we're a big winner here. Now what we've seen is that the implementation of Dodd-Frank and its counterparty EMIR in Europe is going to take some time. It's going to be implemented over a long period of time. There are a lot of details. The details matter. I've seen some people realize, okay, there's a pot of gold that didn't land in my lap, and I'm going to have to work to evolve businesses and stay ahead of all this. It's been sobering for some people.

I do think that there will be some opportunities to potentially buy interesting businesses at reasonable prices, at creative prices for us as time goes on, which I suggested I thought would be the case, and I do see it starting to happen now.

Speaker 5

Thank you.

Speaker 4

Thank you. Our next question comes from Johnathan Short of Safana. Your line is open.

Speaker 0

Yeah, thanks. Good morning. Just one question for me on your legacy OTC energy business. I guess, you know, what impact does a very abundant supply of U.S. natural gas have on the business? If your adoption rates of new participants in your market start to slow, you know, why won't this be an issue for the gas franchise? Thank you.

Speaker 6

John, I would argue that the abundance of natural gas and the fact that, you know, in the U.S., we're looking at natural gas as a potential alternative to oil is something that's going to drive more interest in that product, drive more people towards using that product, consuming, producing, and all of that will be good for that business on the longer term. Obviously, in pockets where we see really low prices because of supplies we've seen in the past, that can impact volumes over the short term. Over the longer term, as natural gas is looked to more as a viable alternative to oil, I think that only bodes well for that market.

I would say, John, one of the interesting things that we look at here in trying to figure out forward-looking budgets is the growth in our data revenues and the growth in people that are requesting screens for view only. You can look at that and see that it continues to be robust. We have a very powerful set of OTC energy data that comes from all of these contracts and all the data points that we see. There is increasing demand, it appears, for that data set, which would suggest to me that there's more interest in those natural gas markets.

Speaker 0

Great. That's very helpful. Thanks very much.

Speaker 4

Thank you. Our next question comes from Brian Baddell of ISI Group. Your line is open.

Speaker 2

Thanks. Good morning, folks. Jeff, if you could just comment on Brent and WTI. You gained about 10% of market share if you look at Brent as a proportion of Brent and WTI combined from about 30% to about 40% in the beginning of the year. With the price convergence coming back in to around $16, do you think that has an impact on how people will view Brent versus WTI? Do you think more organically, Brent has much more room to go in terms of gaining share of those two?

Speaker 6

Both Brent and WTI have, you know, they're physically delivered products, and they have unique delivery issues. Both of them do, and they've evolved over time just to continue to stay relevant and grow in relevance. What's happened really more obviously for the first time to many in the market over the last couple of quarters is that people see that those are two different grades, that they have two different specific issues. As those issues move around, it's good for hedging. They're both important benchmarks. We like having both.

I would say, you know, we probably have cannibalized our WTI contracts more than our competitors in pushing people to Brent, but that's the natural consequence of the fact that we have an active sales force and education component that are talking to people about using Brent as a hedge and showing them against our own contracts how that would work. I think that all in, that's very helpful and positive. I do think that, you know, these issues will move around. I think they'll continue to move around. I think that the contract is disconnected long enough that people will continue to use both now for specific reasons and not necessarily as substitutes for one another, which used to be the case. You'll see that we've been able to develop an active Brent options market around our Brent.

It used to be that the only options that traded in oil were options on WTI because Brent and WTI were so highly correlated. When you got the illiquid options market, people didn't want to split the liquidity, so you were able to hedge Brent with a WTI option. Today, there's a new options market. It creates new arbitrage opportunities for options market makers to deal in both. I think that will just continue to grow. Feel good about both contracts.

Speaker 2

Yeah, great. That's very helpful. For my follow-up, can you elaborate a little bit on the cross-sell progress between your energy products and your financial and other commodity products between customer sets? What type of resources are you allocating to that from a, I guess, a salesforce perspective? Do you see that improving over the next, you know, say, 12 months or so?

Speaker 6

Yeah, we've got quite a salesforce here now. It doesn't just span product, but it also then spans geography. If you think about it, we really now have a salesforce that's selling clearing, and we have a salesforce that's selling post-trade services. We go from front to middle to back office. We've done a pretty good job. It's a great team, and they're real energetic. People that are on our sales team, you know, if you like working here, you really like working here. They work together as a giant team. We standardize information inside that salesforce for a tremendous amount of information sharing on customers, what we learn. The cross-selling opportunity, I think, has really been helpful.

I would suggest to you, for example, that people like to ask me a lot in shareholder meetings about moving the Russell index to Intercontinental Exchange and what we paid and how it's doing and what its return on investment is and so on and so forth. One of the side benefits is that it got us, that became our first truly retail product, which that sales channel opened up our ability to sell the dollar index, get on some of the independent system vendor screens that deal with retail. Now we've been pushing other FX products. We wouldn't have had that sales channel unless we had a flagship product like Russell. It's been a really great consequence of that. We see that all over the organization.

Speaker 2

Right. Is the momentum improving there?

Speaker 6

Yeah, definitely, because we've maybe, to your question, started to recognize our ability to organize our own salesforce better and to cross-pollinate those opportunities through our own management efforts.

Speaker 2

Great. Thank you very much.

Speaker 6

Thank you.

Speaker 4

Thank you. Our next question comes from Patrick O'Shaughnessy of Raymond James. Your line is open.

Speaker 1

Hey, good morning. One interesting slide that one of your competitors in Chicago put together is to talk about how much of their trading activity takes place during U.S. trading hours versus Asian versus U.K. hours. Have you guys looked at data similar to that? I'm guessing that given ICE features Europe, obviously based on London, it would probably skew a little bit more towards Europe. Can you give us a sense for how global your customer order flow is from that perspective?

Speaker 6

First of all, we don't have to guess by guessing hours. We actually have data. We have the unique ability because of the way the Intercontinental Exchange trading platform was built as an OTC platform where we were required by law to know the identity of every customer in the early days of Intercontinental Exchange. We have tremendous tracking capabilities inside our trading engine. We also have our own screen that I mentioned earlier, so we don't rely solely on third-party screens. We have a very good sampling across the market of people that are using our screen so that we can see, and we track people's IP addresses, frankly, so we can see not just to the country, but exactly to their address where people are acting from. We have about half of our revenues that come from outside the U.S., and frankly, we just don't look at hours.

Speaker 1

Okay. I appreciate that. For my follow-up question, just kind of a more long-term philosophical question. With North Sea production dwindling, the way that they calculate the Brent basket, obviously, it keeps changing a little bit. At some point, do you run the risk where Brent isn't a relevant global benchmark just because there is no Brent left? How do you see that developing over, I think, probably the next 10 to 20 years? It's probably not a next 5 to 10 years issue, but farther out.

Speaker 6

Yeah, it's interesting because, you know, we call the contract Brent, but actually, there's little or maybe no Brent in Brent. Over time, this trend is not a new trend. This has been a trend for the 25 years or so that the contract's been in existence. What's happened is that the industry has worked with us, and we've moved the location. We went from Brent to Osseberg to Forties, which are different grades of oil. We will likely, at some point, add Ekofisk. Frankly, what people are delivering would be the cheapest to deliver, which is another way of saying the lowest grade of that complex. Brent is becoming less sweet as the sweetest oils go away.

Also, as we announced Platts, which is one of the, one of the, there's three or four price assessors, is changing their assessment criteria to lengthen the number of cargoes, put more cargoes in the assessment that they do. We've announced that we're going to follow them, follow behind them, and change the way we create our own Brent index that uses the data that we get from Platts and other assessors. It will continue to evolve. I don't, it doesn't go to zero. You know, it's not a peak oil theory kind of contract. The reality is the market wants a grade of crude that is sort of the utopian grade against which all other grades can be benchmarked through delta pricing. It will continue, that contract will continue to evolve to be the best that's available.

Also, by the way, when we first bought the International Petroleum Exchange of London, there was a lot of discussion whether the North Sea was going to go away. Technology keeps finding new ways of extracting more and more oil. It's just, it's $80 and $100 oil prices. You know, market forces continue to find new oil. The demise of the actual Brent oil field has been, you know, greatly exaggerated over decades.

Speaker 1

Very helpful.

Speaker 6

I think, frankly, just stepping back, it provides intellectual property and domain knowledge and content that we uniquely have to keep that market organized and keep the customers around us. In that regard, it's a good thing. It would be very hard for a competitor to replicate what we do in continuing to evolve that contract.

Speaker 4

Thank you. Our next question comes from Rob Rutschau of CLFA. Your line is open.

Speaker 1

Hey, good morning, everybody. I guess my first question, open interest in Europe and the energy business has been largely a result of growth in options open interest. You spoke to it a bit, but can you kind of talk about what's driving the growth in those options open interest and also whether or not there's any reason to think that turnover in those would be higher than it is for some of your other options contracts?

Speaker 6

Yeah, I think as Jeff mentioned a few minutes ago on the options question, there really wasn't a viable Brent option until we launched that product this year. In the past, where people were potentially wanting to hedge a Brent futures position with an option, their only option for any liquid pool was to go to the WTI option. The reason you've seen the big buildup in Brent options is because we've launched the product that's built up a liquidity pool. It's obviously the most natural hedge to a Brent future is the Brent option. I'll note, though, that not only are Brent options up dramatically, I think over the last year, a year ago it was 10% of what it is today, but Brent futures OI is also up very significantly.

Gas Oil, as I mentioned earlier in one of my responses, that OI is flat, but that's largely related to the nature of the price curve, which is currently in backwardation. You do have some substitution effect that there are people that will hold options positions as synthetic futures and move back and forth since the option expires into the underlying. All of that ultimately becomes additive as market makers are moving back and forth between options and underlying and the interplay between the two.

Speaker 1

Okay. My follow-up is a little bit longer-term question. You talked about this a little bit, but it sounds like you're sort of questioning whether or not OTC market participants will be able to recreate, you know, idiosyncratic risk management tools with futures. I wanted to see if that's, you know, is an accurate assessment. If it's not, is there a strategic benefit to having a broader product set if you are trying to, you know, recreate or address idiosyncratic risks with futures contracts?

Speaker 6

That's a good word, by the way. I'm going to cannibalize that for you. The interesting thing is that at least in the U.S., there are very strict accounting rules that companies use to determine whether or not their risk is hedged. It is helpful for companies to have very perfect hedges, which means if you have loans that have prepayment capabilities and the ability to switch from fixed to floating and so on and so forth, you might want to write an interest rate swap that has all that optionality in it. Then it would be very clear that that was a hedge and not helpful for trading. I think there will continue to be a real demand for a lot of optionality that will be uniquely tailored to underlying risk, and that will not make its way onto exchanges.

The people writing those, the dealers and market makers that will be on one side of providing the liquidity to the end user on those trades, will want to hedge out that risk, and they will break that optionality into small building blocks, I suspect, and put it into liquid markets that we list. If you look at our energy business now, the hundreds of OTC contracts that we list, those are all the building blocks that a sophisticated market maker can use to assemble an energy trade for an end user that has a lot of optionality and hedge it out in our market. The two are complementary. The reason I make that distinction is I don't think that one substitutes for the other. I think that they will both grow together.

Over time, where we can standardize components of that risk and list them for trading and clearing, there will be a natural growth in that. Where the end user is willing to sacrifice some optionality, they will enter the listed markets directly.

Speaker 1

Okay. Thank you.

Speaker 4

Thank you. Our last question comes from Dan Fannon of Jefferies. Your line is open.

Speaker 2

Good morning. Just one question for me. Jeff, you mentioned the kind of global coordination on the regulatory front. I guess if you think about the differences in the two dynamics that are coming about, are there key issues that you are focused on or concerned about given how things are progressing at this point?

Speaker 6

Yeah, it's mostly that the trend, the overall trend, ignoring the detailed differences between various regulators, is for more clearing of OTC contracts and more transparency in the way the over-the-counter markets trade. There will be timing differences, I suspect, on when those get implemented. While regulators are trying to coordinate all that, the realities of legislators and lobbyists and people like us that want to have a say in the details will affect the timing of implementation. We're pretty focused on making sure that during that period of instability, we can provide a stable environment for our customers so that there's not some arbitrage that goes on because we've been in the wrong place at the wrong time. That kind of means we really have to be everything to everybody at the same time.

There's tremendous effort going on here to try to figure out exactly where our customers' needs are going to be at what time and make sure that we're there ahead of it, then make sure we're educating our customers how they can get through us. For example, I mentioned that we're building out a swaps data repository that we'll have available shortly and well in advance, we believe, of the implementation of the U.S. version of SDRs. It's that kind of thing that is really the goal of being an operator.

Speaker 2

Great, thank you.

Speaker 4

I'd always turn the conference over to management.

Speaker 6

Thank you, operator. I'd like to again thank all of our customers. The third quarter for many of our customers was full of volatility, and we very much appreciate that you turned to us for help in managing your risk. I'd like to thank our employees. It was a lot of work that went on here, including the delivery of our new clearing systems in Europe that really positioned us well for handling that customer business. With that, we'll see you all next quarter.

Speaker 4

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Neil will disconnect.