Bank, Broker/Dealer & Power - Operations and Strategy
| UPDATE: ICE benefits from natural gas price volatility |  |
November 03, 2009 12:56 PM ET
By Joe Mantone
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IntercontinentalExchange Inc. executives said commodity products boosted earnings in the third quarter, and they believe credit will boost results in the future. The executives made the comments Nov. 3 during the company's third-quarter earnings conference call. ICE CFO Scott Hill touted the results in ICE's over-the-counter energy clearing business, which saw average daily commissions increase 12% to $1.25 million in the third quarter, compared to the year-ago period. He added that in October, the average daily commission increased to $1.4 million. Hill said volatility in natural gas prices increased volume for ICE. He noted that natural gas rebounded from the historical lows hit in the second quarter even though storage levels remain high because of a weak U.S. economy, mild temperatures and an uneventful hurricane season. "However, the combination of the winter hedging and storage season and mixed expectations for an economic recovery has resulted in increased price volatility in recent months," Hill said during the call. ICE Chairman and CEO Jeffrey Sprecher said hedging in natural gas has increased because market participants have a better idea about future supply. He said discussions around decommissioning of natural gas wells had made it difficult for market onlookers to project production and storage levels. "They had a hard time understanding how many rigs were going to go offline because that was part of the equation," he said. He added that the market now has a better understanding of how many rigs will leave. "So it allows the technicians to look at supply and demand again, and you see them come into hedging," he said. Sprecher believes that hedging will continue to drive energy OTC volumes for ICE, and he also thinks that growth in the clearing of credit products will benefit ICE. The ICE CDS clearinghouse only handles dealer-to-dealer index trades, and Sprecher said its CDS clearinghouse is operationally ready to handle transactions from the buy-side along with single-name swaps. However, the company is awaiting regulatory approval, which Sprecher said has taken "substantially longer than expected." He added that the regulatory delay related to certain calculations for proper margining, and Sprecher hopes buy-side participants bring added liquidity to the market. He also believes the liquidity in the CDS market will increase as banks add staff. "The banks are hiring in the credit space, in the derivative space," he said. "In fact, we hear there is tremendous competition to bring qualified people into this space." Hill said ICE expects its CDS clearinghouse to generate at least $30 million in full-year revenue, which would make it accretive to earnings. But the company has higher revenue hopes. "Our credit offerings remain an early-stage investment," Hill said. | 
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