May 22, 2008
Via Facsimile and Overnight Delivery
The Honorable Dianne Feinstein
331 Hart Senate Office Building
Washington DC 20510
Dear Senator Feinstein:
I write on behalf of IntercontinentalExchange, Inc. (“ICE”) and ICE Futures Europe in response to recent comments regarding the role of regulated, global exchanges that provide centralized and transparent price discovery for commodity markets. Specifically, with regard to energy, ICE has strived to demonstrate leadership in supporting efforts of both the CFTC and Congress further enhancing market transparency. As you know from our work together on the 2008 Farm Bill, ICE strongly supports the objective of fair and properly regulated global energy markets. As a concerned member of the financial services community and a close observer of the global energy market, we would like to respond with some facts in regard to recent public statements.
First, I would like to highlight some key misperceptions about our global futures exchange. The regulated futures products offered at ICE Futures Europe include: Brent Crude oil, West Texas Intermediate (WTI) Crude oil, Gas Oil, Heating Oil and Emissions, as well as several other UK or Europe-specific gas and power contracts. Today, we maintain an approximate 25% market share for WTI Crude oil, with the remainder belonging to CFTC-regulated NYMEX. Importantly, ICE’s WTI crude oil contract is cash-settled based on the daily price discovered on the NYMEX, rather than a price determined in our markets. Furthermore, the price of U.S. gasoline and heating oil is discovered on NYMEX, and not on our exchange, where our market share in these products is less than 1% . These facts are contrary to statements indicating that a significant portion of U.S. crude oil, gasoline or heating oil futures are traded on our exchange. The increases that have occurred in the price of U.S. gasoline futures are fully established in the U.S. on the NYMEX under U.S. oversight. Finally, it is important to make a key distinction; ICE’s OTC markets, which were the subject of the Farm Bill provisions, have a 0% market share for U.S. crude oil, gasoline, heating oil, and diesel fuel.
In the development of our business over the past decade, the integrity, transparency and neutrality of our marketplace is the cornerstone on which we’ve built our foundation. To do otherwise would be unworkable both from a customer acceptance and a regulatory perspective. Today, we operate a global marketplace that includes three fully regulated futures exchanges and a transparent over-the-counter (OTC) market, which will soon be regulated under the provisions that you helped craft. In our dialogue with you regarding OTC provisions in the Farm Bill, I believe we came to the mutual understanding that applying one style of regulation to all markets would not effectively serve the oversight needs of every market structure. Furthermore, exchanges in no way benefit when the prices of their contracts rise in value. On the contrary, rising prices in commodity markets has put increased demands on exchange, clearinghouse and customer operations. In the space of a year, margin requirements in our crude oil markets have risen over 100%, yet these margin increases have had no impact on the global crude oil markets. This is because the demand for scarce resources is rising while the production of such resources has been flat. Market forces must prevail, and we cannot manage the prices in our markets.
So that you and your staff might gain a more solid understanding of ICE’s energy markets, I have outlined some key information about our exchange.
Early on, ICE recognized the benefits of providing “central clearing” services for energy products. The use of clearing is a key risk management tool for market participants. For example, a key issue in the credit markets today is the lack of central clearing to enhance liquidity, transparency and risk management. Today’s ICE’s OTC clearing innovations have become an industry standard for risk management and transparency in the energy markets. In 2000, ICE sought clearing services in the U.S. for its energy products, but it was precluded from accessing these services due to competitive interests at the CME, CBOT and the NYMEX. The refusal of risk management services by the dominant U.S. exchanges resulted in the need for ICE to seek these services in London. As a result, in 2001, ICE acquired a UK exchange, the International Petroleum Exchange, which was formed in 1980. This enabled us to provide the clearing services that ICE was denied in the U.S. Now known as ICE Futures Europe, it is fully regulated exchange under the Financial Services Authority (FSA). The FSA has a wide range of rule-making, investigatory and enforcement powers and strives to meet four statutory objectives:
- market confidence;
- public awareness;
- the protection of consumers; and
- the reduction of financial crime.
Today, ICE Futures Europe has established over a quarter of a century of regulatory experience in the regulated global oil markets. With the 2006 introduction of the WTI crude oil contract, ICE took proactive measures to ensure that both the FSA and the Commodity Futures Trading Commission (CFTC), had adequate data to monitor ICE’s markets across borders. A
primary focus of the FSA is on co-operating with overseas regulators, both in agreeing on international standards and in monitoring global firms and markets effectively. In 2006, the information sharing agreement between the CFTC and the FSA with regard to ICE’s markets was established.
We maintain close and cooperative relationships with both the CFTC and the FSA to ensure that there is open communication and information about our marketplace. These agencies have provided a solid framework for growth while preventing and detecting major market issues amid turbulent markets over the past year of rising commodity prices. Specifically, today, ICE Futures Europe provides trader position reports in WTI crude oil to the CFTC via the FSA. Separately, the FSA reviews individual customer positions on a frequent basis; the FSA can and has ordered positions to be reduced when needed.
Moreover, the exchange itself plays a significant role in monitoring participant activity. We have a team of dedicated team of market compliance specialists that monitor trading activity on a continual and real-time basis. We’ve established extensive monitoring processes and expertise through a range of market cycles over the years, including:
- ICE Futures Europe has detailed rules to prohibit misconduct. Like U.S. exchanges, we conduct client position reporting and monitoring, we monitor trading patterns in real-time and we conduct cyclical risked-based member audits.
- ICE Futures Europe performs daily market monitoring by analyzing activity in spreads, settlements, and other types of market activity on an individual trade basis.
- ICE Futures Europe performs real-time position monitoring. Our staff looks for concentration and unusual size and for physically delivered contracts, staff reviews delivery capacity; these essentially comprise a position accountability regime.
While there has been significant focus recently on the price of oil and related products, it is important to note that prices for all commodities, such as corn, soybeans, precious metals and wheat, have surged at the same rate as crude oil, and in some cases more sharply and with greater volatility. It should be noted that in most of these commodity products, except in crude oil, where ICE and NYMEX have coexisted for more than 25 years, there are no major overseas markets offering these other commodity contracts to U.S. markets, yet their prices have risen as well. These facts indicate that the existence of properly regulated markets, whether domestic or London-based, should not be the scapegoat when it comes to higher prices. These important price signals serve to encourage the expansion in supply and a reduction in demand. While it is tempting to blame those who deliver the pricing signals, economists continue to agree that driver of commodity prices is a well-documented expansion in demand for the building blocks of large, emerging economies, coupled with a lack of growth in supply and capacity.
I would like to reiterate that the issue of foreign boards of trade and the no-action process was comprehensively reevaluated by the CFTC in conjunction with dozens of industry participants at the end of 2006. Coupled with the no-action process, information sharing protocols have been established to provide U.S. regulators with the very information you say they need to do their job. These are in place today. Both ICE and NYMEX operate liquid, transparent futures exchanges that serve the important function of price discovery for the world’s oil markets. Onerous or selectively applied regulation could easily lead oil market participants to conduct their trades off-exchange in opaque, non-regulated markets. This would truly represent a shift to “dark markets”.
Commodities markets are global. New contracts will continue to emerge outside of the U.S. This is most recently demonstrated by the NYMEX and the Dubai Mercantile Exchange, who together have developed and launched several crude oil contracts, including a WTI contract under the regulation of the Dubai Financial Services Authority. That the leading global crude oil exchange sees demand for contracts outside of the U.S., demonstrates the rising demand for commodities outside of U.S. markets.
This issue does not exist in a vacuum. As a United States citizen and an employer with hundreds of hard-working American employees with families to support in today’s economic climate, our jobs at ICE depend on the proper functioning of these very markets and our ability to compete in a global marketplace. I appreciate your concerns regarding the fairness of markets and the impact of commodity prices. However, we believe that the ICE’s WTI contract has no causal relationship with today’s rising commodity price environment. As always, I stand ready to engage in constructive dialogue and have a sincere interest in finding workable policies. I would very much appreciate an opportunity to meet with you in Washington in the near future to discuss these issues.
Sincerely,
Jeffrey C. Sprecher
Chairman & Chief Executive Officer
cc: Senator Carl Levin
Senator Maria Cantwell
Senator Olympia Snowe
Senator Byron Dorgan