ICE Readies ‘Trade Vault’ For Commodity Derivatives Market

By Jacob Bunge

The head of IntercontinentalExchange Inc. (ICE) said the exchange operator is developing a new unit to collect data from commodity derivatives trades, responding to a push by regulators for the industry to provide more transparency on trillions of dollars in outstanding over-the-counter swaps.

Jeff Sprecher, chairman and CEO of ICE, said its Trade Vault facility will build on an existing service providing electronic confirmation of privately negotiated deals in energy and other commodity markets.

The Dodd-Frank financial reforms in the U.S. called for the creation of swap-data repositories to house transaction information and provide regulators with a better overview of market risk. “We view ourselves as a natural player in the swap data repository business for commodities,” Sprecher said in a recent interview.

The Atlanta exchange operator was one of the first in the sector to service over-the-counter trading, and its planned expansion comes as regulators on both sides of the Atlantic push for more transparency and competition in the market, alongside reduced systemic risk.

ICE plans to submit the Trade Vault proposal to the International Swaps and Derivatives Association, which last week sought pitches for the creation of a commodity-focused swaps database. The trade organization, which is managing the process on behalf of the industry, already has selected similar repositories for derivatives linked to credit, interest rates and equities.

Trade Vault will build on ICE’s nine-year-old eConfirm system that automates the process of matching transaction details and already has banked about 6 million trades, mostly in oil, gas and power, said Bruce Tupper, ICE’s vice president of eConfirm and swap data repository services.

The eConfirm system is used by major energy companies like Royal Dutch Shell plc (RDSA.LN) and Chevron Corp. (CVX), as well as hedge fund firms including Citadel LLC and DE Shaw. Incorporating the function into a swap-data repository would be easier than asking users to hook up to a new system, said Tupper.

The Trade Vault unit will run as a wholly owned subsidiary of ICE, as per anticipated rules and customers’ preference, he said.

The Atlanta-based exchange company earns most of its revenue from energy trading, split nearly evenly last year between its futures markets and bilateral transactions sealed off-exchange and carried out through ICE systems. eConfirm contributes about $2 million per quarter in revenue, according to an estimate from BMO Capital Markets; ICE’s total revenue for the fourth quarter of 2010 was $285 million.

Sprecher on a February conference call said swap-data repositories would be “steady earning companies.”

“They will have to be priced appropriately because they are likely to become large industry utilities, but they should have substantial and sustainable revenues and revenue growth if they’re done properly,” he said at the time.

The repository facility could also bring new clientele to ICE, according to Joel Telpner, partner at law firm Jones Day. “The more customers they have using their infrastructure, the more they can offer their other related services, like a swap-execution facility or other electronic trade matching,” he said.

The role of swap-data repositories is seen gaining significance as U.S. regulators face funding pressures, requiring industry-supported groups to take on more oversight and monitoring functions.

“The regulators are viewing the swap-data repositories as their outsourced oversight system,” said ICE’s Tupper.


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