"Today we stand one step closer to our vision of providing a comprehensive and global suite of energy products and services to market users," stated Jeff Sprecher, founder and Chief Executive Officer of ICE. "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."
The London Clearing House (LCH) has been chosen by ICE to handle clearing services for its participants. As LCH already acts as the clearing house for the IPE, this 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 will also be able to facilitate cross margining between positions held by market participants on ICE and IPE.
Products available for clearing initially will include two of ICE's most active OTC products: financially, or cash, settled US oil swaps (West Texas Intermediate crude swaps) and US natural gas swaps (Henry Hub swaps). These products were selected to inaugurate this service based on customer demand as reflected by current levels of trading activity. Additional products will be added in the coming months.
"I am delighted that LCH is part of this history making development in the energy markets," said David Hardy, Chief Executive, LCH. "We will soon be offering our members a service that will help them foster new and innovative trading strategies that will impact all segments of the energy marketplace for many years to come."
Concurrent with today's announcement, LCH has applied to the Commodity Futures Trading Commission (CFTC) for recognition as a Derivatives Clearing Organization (DCO).
In commenting on this announcement, James Davison, Cargill Investor Services (CIS) President and CEO, said, "CIS is very supportive of the ICE initiatives and is well positioned to be part of this market. These are the types of products our customers want and need."
Since ICE is leveraging existing channels of distribution, LCH and its members will be seamlessly integrated through ICE's trade process. 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 is not with the process, but with the counterparty. Today, it's two companies entering into a trade on the basis of a bilateral credit agreement. With ICE OTC clearing, it will be two companies 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 stringent 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, Senior Vice President of IntercontinentalExchange and the man who has headed up this project for ICE. "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."
