On Friday, IntercontinentalExchange Inc. (ICE) announced its plan of clearing 13 freight swaps, including both dry and wet, along with an iron ore swap from April 18, 2011. These products will be launched through ICE Clear Europe. However, it is subject to regulatory approval.
Over the past few quarters, ICE has been initiating new over-the-counter (OTC) contracts for trading and clearing over its futures platform in the rapidly developing spheres such as crude, refined oil, coal and other energy products. Meanwhile, freight has now been a large commodity market with volatility in spot and long-term prices.
Further, based on the strong correlations between freight and energy, ICE projects to offer margin offsets between freight and energy contracts, which will help perk up demand and while providing other capital and hedging efficiencies.
Last week, the company announced its plan to launch 15 global OTC cleared oil products from April 4, 2011. Last month, ICE had also initiated the trading of 21 new gas oil contracts and three new contracts in US thermal coal futures from February 21, launched through ICE Clear Europe. In the last couple of months, ICE promptly announced plans to launch an additional 100 OTC products that will propel growth in the long term.
The launch of such swap clearing of contracts by ICE in the rapidly expanding sectors further boosts the company’s competitive leverage in the derivatives and OTC areas, where presence of arch rivals CME Group Inc. (CME) and CBOE Holdings Inc. (CBOE) creates a challenging operating environment.
For ICE, growth through product novelty and expansion in to global emerging markets is very crucial, given the ongoing regulatory turmoil that set limits for speculative market participants and poses the risk of unsatisfactory financial yield for operationally successful credit default swap (CDS) clearing initiative.
Further, the ongoing consolidation activity in the industry has been putting adequate competitive pressure on the companies. Like other market peers, ICE also bears sufficient risks on this front.
Overall, we believe that based on the current volatile macro-environment, ICE has a strong revenue-generating product portfolio, high earnings visibility, consistent cash generation, disciplined investment and limited balance-sheet risk. In the long run, these factors are expected to drive earnings potential.
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