The ratings agency said its decision was based on the Exchange's position in the energy and metals markets, "which underlies the vitality of its operations." It also cited the Exchange's strong operating cash flow coverage, solid capital base, highly liquid balance sheet, and role as the largest physical commodity market in the world, based on the 133 million contracts traded in 2002."
Standard & Poor's also credited the Exchange for evolving "over the years by successfully introducing new products and adapting to changing competitive conditions," and said that, despite a challenge posed by the over-the-counter markets, the Exchange "continues to play a critical role in risk-transfer and price discovery mechanisms for the world's energy and metals markets."
Standard & Poor's also said the ratings take into consideration the financial safeguards that protect the Exchange from clearing member default. Standard & Poor's said, "The clearinghouse controls the risks of clearing member default by setting high capital requirements and holding liquid collateral (i.e. initial margin) to cushion against large potential overnight moves in contract prices. It also collects variation margin twice daily to prevent clearing members from accumulating loss positions during the trading day...The Exchange's compliance department constantly monitors clearing members' financial status and trading positions, as well as supply and demand factors in the physical world, to ensure the integrity of its markets."
As an example of the effectiveness of the Exchange's surveillance capabilities and margining mechanisms, Standard & Poor's cited February 2003, when natural gas prices surged 63% in just one day.
Exchange President J. Robert Collins, Jr., said, "This rating reinforces the confidence we have received from the energy, metals, and financial services industries as the market of choice for the products we offer. The integrity and reliability of the Exchange and its clearinghouse lie at the core of the success we have seen over the years, and particularly as these markets have become more sensitive to credit risk issues."
