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Executives

Kelly Loeffler – VP, IR and Corporate Communications

Scott Hill – CFO

Jeff Sprecher – Chairman and CEO

Chuck Vice – COO

Analysts

Roger Freeman – Barclays Capital

Rich Repetto – Sandler O'Neill

Howard Chen – Credit Suisse

Ken Worthington – JPMorgan

Mike Carrier – UBS

Jonathan Casteleyn – Wachovia Securities

Chris Allen – Banc of America Securities

Mark Lane – William Blair & Co.

Daniel Harris – Goldman Sachs

Jillian Miller – BMO Capital Markets

Niamh Alexander – KBW

Don Fandetti – Citigroup

Rob Chow – Deutsche Bank

IntercontinentalExchange, Inc. (ICE) Q3 2008 Earnings Call Transcript October 30, 2008 8:30 AM ET

Operator

Good day, and welcome to the InterContinental Exchange third quarter 2008 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Kelly Loeffler, Vice President Investor Relations and Corporate Communications. Please go ahead.

Kelly Loeffler

Good morning. To obtain a copy of the company’s third quarter earnings release and presentation, please visit the Investors and Media section of our website at theice.com. These items will be archived, and our call will be available for replay.

Please be aware that our comments may contain forward-looking statements, these statements represent our current judgment, and are subject to various risks, assumptions, and uncertainties, as outlined in the company’s filings with the SEC. Actual results may differ materially from those that are expressed or implied in any forward-looking statement. Please refer to our filings with the SEC, including our most recent Form 10-K and our Form 10-Q, for a description of the risks that could cause our results to differ materially from those described in the forward-looking statements.

With us today are Jeff Sprecher, Chairman and Chief Executive Officer. Scott Hill, Chief Financial Officer, and Chuck Vice, President and Chief Operating Officer. At the conclusion of the prepared remarks, we will take your questions.

I will now turn the call over to Scott.

Scott Hill.

Thanks, Kelly and thanks to everyone for joining us this morning. We recognize that given today’s market conditions, it is even more important to provide clear information on our performance, as well as on the operating environment. That is our primary objective today.

We delivered a solid third quarter, and are pleased with our record performance through the first nine months of this year. We achieved the second highest revenues in operating cash flow in our history during the third quarter and for the third consecutive quarter more than 120 million contracts traded on the ICE platform, including the second highest quarterly volumes ever at ICE Futures U.S. Our OTC commissions were once again in excess of $1 million per day, when we had another record quarter in our Market Data business.

These are significant accomplishments, particularly given the challenging credit and general economic environment in which we are operating. We believe our performance reflects the importance of the risk management role we play during times of uncertainty. Our results also demonstrate our continued ability to deliver growth, despite difficult market conditions.

I will begin the presentation with a review of our third quarter performance on slide four. ICE’s consolidated revenues of $201 million, grew 33% over last year’s third quarter. Consolidated operating income of 18% to $119 million, and our operating margin was 59%. Net income increased 12% to $75 million, and diluted EPS were $1.04. We continued to invest in expanding our market infrastructure, while delivering strong results in our core business during the quarter.

Moving next to slide five, you will see that ICE continues to produce growth across each of its business segments. Through September we have already traded over 375 million contracts, surpassing last year’s total contract volume, and resulting in record revenue in operating income for the first nine months of 2008. The pie chart on this slide shows the increased product diversification that we have achieved.

We believe this diversification positions us to increase our share of very large traded markets such as equity indexes, foreign exchange, commodities and credit derivatives. Importantly, the overwhelming majority of our transaction-based business is cleared through a central clearing house, which provides capital efficiency and counterparty protection, both of which have become increasingly important in recent months.

On slide six, we have provided a detailed look at our consolidated revenues and expenses. ICE's transaction revenues are derived from our global futures and OTC market segments. Third quarter transaction revenues totaled $171 million, up 30% year-to-year. This included nearly $17 million of revenue from Creditex. Market Data revenues increased 50% to a record $26 million. Our diverse portfolio of products and asset classes continues to enable solid overall revenue growth.

Moving to expenses, third quarter consolidated operating expenses were $82 million, versus $51 million in the third quarter of last year. Of the roughly $30 million increase, expenses related to Creditex were $16 million. Expenses related to ICE Clear Europe increased to roughly $3 million and our compensation and depreciation and amortization expenses excluding Creditex, increased $9 million due primarily to investments in technology and strategic acquisitions. Our expenses once again reflect targeted investments that will support our continued growth.

Starting with slide 7, I will provide additional detail on our futures and OTC business. Average daily volume, or ADV, for ICE Futures Europe was 569,000 contracts, an increase of 3% versus 3Q '07. Third quarter Rate per Contract or RPC, for energy futures was $1.22. Growth in our energy futures segment was driven by continued strength in crude and refined oil futures market.

Slide 8 shows the performance of our North American Futures exchanges during 3Q. RPC for agricultural commodities futures traded on our US exchange averaged $2.22 in the quarter, and RPC for financial futures averaged $1.18. ADV was 290,000 contracts per day, up 33% year-to-year. In September we successfully transitioned all trading in Russell futures and options, exclusively to ICE Futures US. We set new volume records for Russell Index and the US dollar index futures contracts during the quarter.

Now let's take a look at our OTC business on slide 9. Our OTC results include Creditex's September performance, in addition to our core energy business. Transaction revenues totaled $90 million in the third quarter, up 55% year-to-year. OTC Energy average daily commissions rose 25%, to $1.1 million per day. The depth and transparency of our OTC Energy markets for natural gas and power, combined with strategic partnerships, such as Chatham and NGX, continue to enhance the value of ICE's OTC markets to commercial participants.

As I mentioned previously, clearing for OTC contracts has become increasingly valuable to financial institutions around the world, as credit and counterparty risk have taken center stage. For ICE's OTC Energy business, you can see that over 90% of our business comes from cleared contracts that we offer. On the OTC credit side, we are actively engaged in developing a clear solution, which Jeff will discuss later on the call.

I will wrap up with some year-to-date highlights on slide 10. Our consistently strong growth and disciplined approach to investment during 2008, has helped us generate a record $299 million of operating cash flow in the first three quarters of 2008. That is a 61% increase versus the same period in 2007.

We ended September with $245 million in unrestricted cash and short term investments, and our leverage remains low. In terms of the business we are seeing in our core commodity markets today, we continue to see record number of trader IDs logging onto our platform, indicating continued strong interest in our market.

During September we also initiated the first share repurchase program in ICE's history, and have bought back 3.2 million shares of our common stock since the inception of the program. This healthy capital structure, paired with the key growth initiatives in which we have invested throughout the year, provide a solid foundation to build on over the coming months. We have provided additional updates and guidance with our earnings announcement today, so please refer to the press release, or the Appendix of this presentation for complete details.

I will now turn it over to Jeff.

Jeff Sprecher

Thank you, Scott, and good morning, everyone. As you can hear by our results, we continue to deliver on a range of new initiatives. We are maintaining our focus on growing our core business, and on the needs of our futures, OTC, and clearing communities, in light of economic challenges over the last 15 months. We take our role of providing risk management and market-driven solutions very seriously, and it is times like these that we rise to the challenge.

If you turn to slide 11, you will see a few of our key initiatives for next several quarters. These reflect growth drivers that we have created over the last year. In addition to the expansion we continue to see in our core commodity markets. The first driver that I will highlight is a suite of new financial contracts we offer through ICE Futures US. As Scott mentioned, we completed the transition of the Russell index futures to ICE last month.

The successful transition demonstrates the strength of our exchange and our technology, even amid today's dynamic market conditions. Including the September roll, we are now averaging 240,000 Russell index futures per day, and we continue to work on additional growth opportunities across the suite of Russell futures. With our upcoming launch of the ICE Millions foreign exchange futures contract, we see a unique opportunity to leverage the use of clearing, to meet the needs of the OTC foreign exchange market.

Next Friday, November 6th, we will introduce a set of 12 cleared FX contracts that mirror existing OTC market conventions. We have received positive feedback about the need for a value priced OTC hedging instrument that offers the benefits of clearing in the foreign exchange markets. These contracts will be in addition to the 41 currency pairs that we already list on ICE. This is an example of how we listen to our customers to evolve existing product, to effectively meet the needs of a changing market.

Moving on to a second and key initiative, we expect to complete the transition to ICE Clear Europe over this coming weekend, with ICE Clear Europe commencing operations on Monday. This is an important milestone for ICE, and our world-class clearing team, as we continue to innovate in the clearing landscape.

Today 100% of the open interest is ready and contractually committed to make that transition. In addition, we have been employing our clearing technology for trade processing through the London Clearing House since mid-September, so a major step in the transition has already been completed. Once the existing futures and OTC contracts are transitioned to ICE Clear Europe, we will begin rolling out new clear contracts within a matter of weeks, which brings us to the third point on this slide.

Since we announced our intention to build the new clearing house early last year, we have been unable to list new contracts through LCH.ClearNet. The ability to launch customer-driven cleared OTC products will once again become a growth driver for ICE.

It is our belief that the first major clearing house in London in over 100 years, will bring customers more opportunity to manage risk, at a very dynamic time in the financial markets. Now turning to slide 12, I will discuss a fourth key initiative. This initiative brings automation, transparency, and central counterparty clearing to the credit derivatives marketplace. ICE has established a track record of working with the OTC market participants, to introduce transparency and risk intermediation into market. At the time of the formation of ICE in year 2000, we announced what seemed to be an impossible task.

Our intention to build a clearing solution for OTC energy swaps contracts. This had never been done before. Now eight years later, the OTC Energy markets for US natural gas and power are predominantly cleared, mitigating the risk that can flow from a failure of a large trading counterparty. Of equal importance in the United States, regulators such as the CFTC and the Federal Energy Regulatory Commission, now have improved access to important trading information. This has allowed each agency to better understand, monitor, and discharge their regulatory obligations.

Today over the counter energy markets on ICE are large, liquid, and transparent and overall, the market is now many times larger than it was in year 2000. This is largely a result of a strong market infrastructure that now includes clearing. So much like our work in developing the concept of OTC clearing for the energy swaps market, one of the reasons we acquired Creditex was to combine ICE's broad OTC capabilities and Creditex's deep product and customer insights, with the goal of delivering a clearing solution to the CDS market.

I want to take a moment to discuss the expertise that we now have in-house. Today Creditex has a strong global presence, and unparalleled CDS infrastructure, that is already being relied upon by the market. For example, in the last few weeks, Creditex along with our partner Markit has conducted 11 portfolio compression runs for single-name CDS contracts, resulting in over 70,000 trade tear-offs, or netted positions. Nearly $0.5 trillion worth of notional outstanding has been compressed in the last few weeks alone.

This effort relies on Creditex's CDS infrastructure, which is deployed globally and electronically connects to the systems of all major market participants. Again, working with markets, Creditex has conducted 18 auctions for the final settlement of credit events on behalf of the industry. These include running the high-profile auctions, for the settlement of Fannie Mae, Freddie Mac, Lehman Brothers, and Washington Mutual.

These auctions have resulted in a transparent and orderly price discovery, and efficient processing of an unprecedented level of debt securities. As an example, this process determined that Lehman's expected recovery value was $0.08625 on the dollar. This was used by 358 market participants to settle CDS contracts referencing Lehman's debt and finally Creditex works collaboratively with market participants, to reboost the jump to default risk, and the market associated risks with single name CDS contracts.

So far this year our new delta neutral options platform has affected over $150 billion in notional risk reduction. So as you can see Creditex is working hard to serve the needs of the nascent but vital CDS industry. The importance of hedging credit events has been demonstrated this year.

However in the days after Lehman's collapsed, we heard rumors that the credit markets had frozen, and that there was no trading occurring. This is untrue as the brokerage and risk management teams at Creditex, continued to work around the clock. In fact, during September Creditex's revenue increased 45% over September 2007. These efforts are just the tip of the iceberg, in terms of our involvement in bringing pre- and post-trade processing to the CDS space.

So now moving on to clearing, as recent events demonstrate, the credit markets are intricately tied to the banking system. Many of the major derivative market participants are banks, or are becoming banks.

As such, they are subject to US regulation by the Federal Reserve. Given the central role that the Federal Reserve has played in addressing the current credit crisis, and its domain knowledge related to highly complex CDS instruments, ICE sought to design a clearing model for this market that would be subject to direct oversight by the Federal Reserve. Shortly after announcing our intent to acquire Creditex earlier this year, ICE began forming a limited purpose bank, called ICE US Trust, to be a New York trust company, and importantly, a member of the Federal Reserve sSystem ICE US Trust is designed to meet the statutory requirements for a multilateral clearing organization as a state member bank, and as a clearing house for OTC derivatives.

Unlike other companies, ICE chose not to build CDS clearing into our existing exchanges or commodity clearing houses, as we concluded that the contract design and the risk profile differed too significantly from that of futures. It is our view that the existing collateral and liquidation provisions of future style clearing, would not be sufficient, nor would combining CDS with futures positions be prudent, in terms of adding systemic risk.

Therefore we developed this model to offer specialized tools, risk reduction, and connectivity required to address the complexities of the CDS market. You may recall that earlier this month ICE announced an agreement in principal with leading credit market participants. Market, Risk Metrics and the Clearing Corporation, to launch a comprehensive clearing facility.

This morning we have further announced that ICE has entered into Memorandums of Understanding, with Bank of America, with Citi, with Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Merrill Lynch, Morgan Stanley, and UBS, to develop and use ICE to clear their global CDS positions. Together with these nine market participants, who hold a majority of the credit default swaps, we believe that their collective involvement in moving OTC swaps to a central counterparty, will greatly enhance the integrity of the credit markets.

You have also probably seen this morning, that we are pleased to announce our agreement to acquire the Clearing Corporation. The Clearing Corp. has been actively designing and building credit derivatives clearing technology for the past 18 months. As a result, the Clearing Corp. has made significant progress on finalizing the solution, completely eight joint operational tests of its CDS clearing platforms, involving the largest market participants in the recent weeks.

This alliance reflects our shared vision for the framework of CDS clearing, and brings together the practical aspects of connectivity, system capability, and expertise. In addition to significant speed to market advantages, our combination provides an independent solution that will now be open to all market participants.

We believe together with the Clearing Corporation, the largest holders the CDS position, Creditex, T-Zero, and our ICE team, that ICE US Trust is well-positioned to begin clearing credit default swaps in the very near term. We are executing on a detailed plan, and we will continue to update you in the coming weeks. We have worked for many months to create a wide range of compelling growth initiatives, for both the near term and the long term. These include our Russell index transition last month, our launch of our European clearing house next week, and our entry into the CDS market among others.

Because we actively manage our evolution as a global exchange Operator, we continue to position ICE to outperform by virtually any measure. In our focus to expand, we are also diligent in delivering strong operating income and cash flow metrics. We continue to produce high quality earnings from a diverse set of products, where we see opportunities for growth.

Thank you for joining us today, and thank you for your interest in ICE. We are at a pivotal time with regards to the world financial system. It will require concerted effort by policymakers and industry participants, for our financial system to emerge stronger.

The entire ICE team is focusing on continuing to innovate to do our part to help our customers. I would like to close by thanking our customers for their business, and by thanking our employees for the hard work they did this quarter, that led to delivering another strong quarter.

Operator, we are now ready to start the Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Roger Freeman with Barclays Capital.

Roger Freeman – Barclays Capital

Good morning.

Jeff Sprecher

Good morning.

Roger Freeman – Barclays Capital

I guess my questions will all be around the CDS space. So you have said you have lined up, pretty much all of the key, or most of the he key dealers in the space. They owned TCC, now you own it, they are committed to using it. What is the nature of the commitment? How locked up do you think that will be? Because obviously there are a couple of other solutions out there. What kind of guarantees do you have to actually get clients?

Jeff Sprecher

Sure. I don't want to give you the details of what we have agreed just yet as they are finalized and as they become material, we will obviously file them in an 8-K. But let me just step back, Roger, and give you the context of what has happened is that ICE has set up a company, a bank, called ICE US Trust, to be a member of the Federal Reserve System and it is going to be a typical open clearing house as we have operated for years now. This will be our fourth clearing house.

And the Clearing Corporation, which as you mentioned, the dealers had a substantial ownership in, along with all of the inter-dealer brokers, including our company, Creditex, was really designed to be an inter-dealer platform. So the nuance differences that we are taking over the dealers own operations, and merging it into an open clearing house, that will be open to buy side and sell side customers alike and the major dealers have committed to use that solution.

Roger Freeman – Barclays Capital

Got it. My follow-up is around the go live here. There are two parts. One is, does this you taking over at TCC, potentially accelerate the timing at all? I know industry has been working towards, and I think the Fed wants to work toward a Jan. 1 launch. At least one dealer this week, told us they think that is probably unrealistic, it seems like April is more likely the timeframe. I wonder if this speeds it up.

Second, when does it go live there is some discussion that there is potentially some systemic risk because of differences in pricing around single-name CDS, and that, one, you have to come up with a universal pricing the day this goes live, that there is going to be some major balance sheet transfers, from parties that are either owed or owe a lot of money?

Jeff Sprecher

Well, answering your first question, the consolidated effort of all of the parties that I have mentioned has really put us in a position to move quite quickly, and the long lead, the gating item, is really the regulatory approvals, in my mind, not the technology.

To deal with the second part of your question, one of the other things that we have done, and we announced earlier this month, that we have entered into an arrangement with market and with risk metrics as well, and as part of that major market participants that are initially going to become members of this clearing house, have agreed to a new end-of-day process to basically run auctions to price illiquid single-name CDSs.

And you are absolutely correct, that clearing is a two-part process. One is having the infrastructure and connectivity, but also the other is having good marks, since we are marking people to market. So as a part of this initiative there is going to be a wholesale change in the way that transparency is created.

Roger Freeman – Barclays Capital

Okay, thanks.

Operator

And we will take our next question from Rich Repetto of Sandler O'Neill.

Rich Repetto – Sandler O'Neill

Good morning Jeff and Scott. Staying on the topic as you all heard on CDS, it seems like a significant difference in your solution, is that you are separating it from the futures, and you think that the risk, there could be a systematic, I guess, risk added if it was cleared side by side with futures and I wonder if you could expound on that, and I guess, how do you get up with a CME has a clearing house that has $100 billion in collateral, how do you get that scale in the TCC, to have enough scale to give the insurance?

Jeff Sprecher

Sure. The first part of your question, you are absolutely correct, one of the main differences between the proposal and the offering that we have in the market, is that we came to the conclusion, I guess more than a year ago, that it wasn't going to be likely in our mind, that you could clear OTC derivatives contemporaneously with regulated futures contracts. There were a number of problems.

The collateral problem is an obvious one, which is the collateral that are in our three clearing houses that we operate for futures, are there to back the futures positions and to try to use that collateral in two different ways, to also back very, very complicated derivative contracts, that have led to a global financial meltdown seemed nonsensical to us.

The second problem is really a technology problem. You will recall, Rich, when we acquired Creditex, one of the bread crumbs that we were dropping in this regard, was that the infrastructure for clearing regulated futures, goes through FCMs and billing systems that are very unrelated to risk management in the credit default space and so we needed different connectivity to get to the risk management systems that people are using, to margin and to manage risk.

The overall in the futures space, the futures industry uses span margining. Span margining in our minds will not work for clearing CDS and other complex derivatives and so from a technology standpoint and connectivity standpoint, it seemed like you were going to have to rebuild the systems in any event. You might as well start with a clean default and risk pool.

One of the great things about the nine banks that have agreed to join our clearing house, is that they have agreed to not only move positions into the clearing house, but to also capitalize those positions, with both a default fund that will be new and separate, and they are solely for CDS, as well as obviously the initial margin and variation margin associated with those positions, and the ability to go to them for more capital, should the default fund not be initially enough.

So others could argue that it is not capital efficient, but these nine banks have decided that capital efficiency is not at the top of the list right now. Getting this risk out of the system, getting the collateral against that risk into a central counterparty, getting new marks that can mark illiquid positions in new systems, is really the goal of what we are trying to accomplish.

Rich Repetto – Sandler O'Neill

Okay, that is very helpful and the one quick follow-up on the same topic, of course, is I asked the same question last night of your peer, and just trying to understand the process here. I think people are sort of expecting, or some people think that the New York Fed is going to decrease some one, I don't know whether it's a winner, but at least approved. I would think it's more likely they will just approve a number of solutions and let the market decide. Am I off, or what do you think, I guess?

Jeff Sprecher

I don't want to speak to what is in the Federal Reserve's mind. Frankly, we have been asked by all of the regulators not to talk publicly. So to a certain degree, you are reacting to leaks that some people have put out into the press, to try to shape their offerings, frankly. The reason that ICE is talking to the Fed is that we have specifically asked to join the Federal Reserve System.

We have asked to be a chartered bank and so our nexus to conversations with the Fed is the regulatory approval of ICE Trust US. Others have suggested that this should be CFTC regulated. Credit default swaps are specifically excluded from CFTC regulation. So others are suggesting there should be an Act of Congress, or some kind of CFTC rulemaking, where they would take control, I guess, of the CDS marketplaces. So as a result of that action, you have got a need for regulators to continue to communicate with one another and I think that is where a lot of misinformation is coming from.

Rich Repetto – Sandler O'Neill

Got it. Thanks, Jeff and we always follow your bread crumbs.

Jeff Sprecher

Thanks, Rich.

Operator

And we will take the next question from Howard Chen with Credit Suisse.

Howard Chen – Credit Suisse

Good morning everyone thanks for taking the questions. Maybe mix it up, and ask about the energy business. Your core OTC energy business, Jeff, is one of the few exchange business line items, where we know exactly what your customer mix shift is at any moment in time, or you do. You spoke to a steady customer mix, but you did see something like a 200 to 300-basis-point shift away from the commercial players, and towards the liquidity providers. What drove that shift in your mind, and given these are fairly unique times, have you seen any market shift in activity levels, or customer mix shift October to date?

Scott Hill

Hey, Howard, let me kind of start with a data point. As we sit here through nine months of September, we are at 46.5% commercial companies, versus 45.5% last year. If you look at that time three months ended, we did see a bit of a shift, but through nine months of the year we have been really steady with our commercial participants, and we have also been consistent with the important liquidity providers, which as you know for us tend to be much less hedge fund, and much more the algorithmic traders, that provide the necessary liquidity.

I will let Jeff talk to some of the broader market dynamics that we are seeing, but just with regards to the shift we have been pretty consistent from a year-over-year standpoint, and continue to be largely a commercial market.

Jeff Sprecher

Howard, one of the amazing things that we have seen is that we have not lost a major customer. Our customer footprint today looks just very similar to the way did it a year ago, and the other thing that we monitor, Scott and I and Chuck, in trying to manage the business and our spending and go forward look, is new user IDs and password requests, which we have visibility into, because we have our own screen.

And we are at an all-time record, in terms of number of log-ins, user requests, and so on and so forth. So we have continued to see demand for access to our systems, even though we all are reading about how some people are leaving the trading market due to redemptions. We just haven't seen that phenomenon. Again, I suspect that it is because our business really grew up out of serving commercial users and banks, and they have continued to trade and invest in this space.

Howard Chen – Credit Suisse

Okay, that is helpful. Thanks. My follow-up, just following up on the TCC announcement, specifically what does acquiring the Clearing Corp. bring you that you don't already have today, and what type of dealer commitments, exclusive or not, would you obtain when you consummate a deal? It seems like you have a lot of technology and capability already with Creditex already with your core clearing strategy, and from TCC, we have just heard that they have delayed their stand-alone offering a few times now. So what exactly was the deal breaker?

Jeff Sprecher

First of all it is a transaction that's independent of our announcement of ICE Trust US, and the commitment of the nine banks to use ICE Trust US. So that initiative will go forward, and it's timetable and launch, is not dependent upon closing the TCC transaction. Separately though, acquiring TCC does a number of things for us. One is that it allows us to bring in all the people, the domain knowledge, and skill set that has been specifically targeted towards clearing derivative contracts, and we would like to have that in-house.

There are a lot of good people that have been put into that company, particularly just recently in getting ready to go live. Second thing that does it, is it allows us to bring in Dr. Sandor's business for the Chicago Climate Exchange, which you recall, that we really run the execution piece of that business, and now we will be able to bring the clearing piece in.

That same phenomena is happening in Europe. We run the execution piece for the European Climate Exchange, and on Monday we will be bringing the clearing of that business into our European business. So it gives us some more obvious ties, to our already existing partners in the traditional futures clearing arena as well.

Howard Chen – Credit Suisse

Okay. As a quick follow-up, I think before you also said, Jeff, there is an agreement from the dealers to capitalize your clearing house, and I guess the lack of better word, novate their books. That part of the TCC transaction in your mind, or is that part of the ICE Trust transaction, or both?

Jeff Sprecher

That is part of the ICE trust transaction. I think, again the major difference, the thing that has happened here in my mind, is that the banks and Creditex and the other inter-broker dealers were working around TCC, to build an inter-dealer solution that looked a lot like swaps clear in Europe.

Swaps clear, as you know, is sort of a clearing house within a clearing house at London Clearing House, that handles dealers' interest rate swap positions and it has been very effective and it worked very, very well during the Lehman collapse, frankly, but it was a dealer-only solution and you think a pivotal thing happened at the time of the collapse of Lehman Brothers, which was for the first time the market, both the buy side and the sell side and the regulators, recognized that it was possible for a major dealer to collapse, and it has caused a lot of problems in the OTC space.

And so as a result of that, very senior people at these nine banks, listening to our pitch, frankly, concluded that it was time to actually put this OTC business into an open clearing house, of the type that you are used to seeing operating at ICE, where anyone can become a member, and where even people who are not members can get the benefit of clearing.

And so that is really what ICE US Trust has been set up to do and so it is a nuance difference, but it is an important difference in a post-Lehman world and as you know, ICE is a public company, has a completely independent Board of Directors, it operates our systems both execution and clearing on behalf of an industry, and it is that focus that we will now have in working on the OTC derivative space.

Howard Chen – Credit Suisse

Thanks. Those distinctions are really helpful. Thanks a lot.

Operator

And we will hear next from Ken Worthington with JPMorgan.

Ken Worthington – JPMorgan

Hi. Good morning.

Jeff Sprecher

Good morning.

Ken Worthington – JPMorgan

In terms of the revenue model, in CDS, can you talk about, like do you get 100% of the clearing fees? Do you control the data, and get the revenue stream from data? Are there fee sharing arrangements? I am sure there are some details you don't want to give, but just from a higher level, just trying to figure out how this revenue stream, is going to look similarly or differently than your other clearing houses, and any help there would be great?

Scott Hill

Ken, we are still working through the details of the model as we speak, and that is not really something that we can comment on. But suffice it to say that one of the compelling reasons for the Creditex acquisition was the opportunity to move into this space, and so we do think there is longer term value there for our shareholders.

Ken Worthington – JPMorgan

Okay. Worth a try. I will try something separate. Jeff, in terms of technology, for kind of the core energy business, can you talk about maybe what is working there, and what is not? I think there has been some problems over the last, just periodically over the last three to six months. Maybe what you are doing to improve the systems and technology, and overall the traders experience, and are more focused on back end than the front end?

Jeff Sprecher

Sure. Chuck Vice is here, let me ask Chuck to answer that for you.

Chuck Vice

Yes I will take that one. Over the past three months we have had a number of major projects come to fruition, and we have moved them into production, both on our trading platform and in our clearing systems. We have also now completed consolidation of the data centers that we inherited with the New York Board of Trade acquisition, into the ICE data centers and, so quite honestly, some of those, there were a couple of instances that we had around that transition, and all of those projects are now complete, with the last major project being this weekend, ICE Clear Europe, and performance of those systems is very good, and we are continuing working all the time, to make them as fast as possible, and as reliable as possible. It is going very well at the moment.

Ken Worthington – JPMorgan

Was there outsourcing, like what do you outsource and what do you insource, and was some of the problem outsourcing as well? Or using vendors?

Chuck Vice

We used, we make as little use of outsourcing as possible. In ICE Clear Europe, of course, we have a strategic relationship with NYSE and AMEX, and they are providing some systems, but around our other systems it is primarily our own development.

Ken Worthington – JPMorgan

So your conclusion is the problems that you have been addressed, by the transition and rollouts of some of this new technology over the last quarter or so.

Chuck Vice

Absolutely.

Ken Worthington – JPMorgan

Thank you very much.

Operator

And we will hear next from Mike Carrier with UBS.

Mike Carrier – UBS

Thanks, guys. Just another question on the CDS clearing opportunity. When you initially thought about this opportunity, it seems like there was a clearing component, then there is obviously like the transaction component, and Creditex right now, they make money more on the platform side, and then there is also this clearing opportunity and we can all come up with our assumptions, in terms of how big this opportunity is. But given how much, I guess, talk and energy there is coming up with a solution in the industry, is there any way to think about like what you guys view as the total revenue opportunity for that market? Not necessarily how the revenues are going to be structured or fee rates, or anything like that, but just the opportunity?

And then in terms of the structure of the platform, if it is something where the clearing house is new, and it is centralized, will there be multiples, like trading platforms? Which it sounds like it would be more likely the options market and if that is the case would most of the electronic platforms, like Creditex, benefit irregardless of who gets the clearing for this CDS market?

Jeff Sprecher

Those are good questions. I am going to avoid answering the first question, because I don't want to size the space, but let me talk anecdotally. When Enron collapsed, one of the things that ICE did, was not only build an OTC clearing house, but we worked with the industry to rework the contracts and frankly, a lot of the contracts that are traded today, particularly in natural gas and power, are contracts that Chuck Vice had a hand in designing, so that they would fit towards operating within a clearing infrastructure and today those contracts are widely traded, and as you know electronically traded, and are much more standardized and transparent. As a result of those facts, the volume has really grown. So I think our prediction is that the CDS market will standardize around a contract design, and in fact, we are working with the dealers exactly on that issue. The contracts that we are proposing to clear, will be a standardized version of the OTC contracts, and that the current outstanding open interest, will be run through algorithms and converted into new contracts.

Once that happens, I suspect that those new standardized contracts will start to be traded, and there is some talk about actually beginning to trade those during the next roll cycle, which would begin on December 20th, to start to build infrastructure for new standardized contracts and I suspect that the market may shrink as a result of this credit crisis, and then turn around and grow, and grow dramatically. That is the thesis that I think we are operating under, because it is what we saw in energy. You are right in that we are designing a clearing house for existing derivative contracts, and existing connectivity that people have to get into those contracts and there are $60 trillion or so of outstanding CDS contracts. That is more than the GDP of the world's economies combined. So there has been no shortfall of ability to enter into CDS contracts and we are not futurizing, if you will, those contracts. We are creating a derivatives clearing house that ICE will own and operate, and it will be open to all market participants, including electronic trading platforms.

I think it the bodes well for Creditex's execution business. Creditex has probably the leading CDS electronic platform. Many of you probably haven't seen it, but it is not only a bid offer platform, but we also have dark pools, we also have these things called delta neutral auctions, and obviously we settle on behalf of the industry the ultimate credit events through bond auctions, so we have a number of different technologies built into that execution platform, that I think will benefit from growth. I also think that the voice broker business as a whole, that surrounds the CDS business, will do well. I think that is a view that may not be shared looking at the stock prices of some of the pure CDS brokerage companies. But I think that what you will see is a need for voice brokered structuring, and options, and other things, just like you have around the standardized energy business.

Mike Carrier – UBS

Okay, thanks. Then just a follow-up, Scott. In the current environment it is pretty challenging when you have volume headwinds, you are doing a lot on the new initiative front. You gave some guidance on 4Q, but as you look to 2009, how do you plan for an environment where volumes are flat to down, given the expense base, and some of these new initiatives? Is there a portion of the expenses that you guys could pull back on if you had to, particularly if some of these new initiatives, like the CDS clearing, took longer, in terms of generating revenues?

Scott Hill

Yes, look. I mean, if the market is softer, there is no question that we as a company, have a history of being able to manage expenses through those times. We have got discretionary spending that we constantly monitor, and can manage. We have got some terrific desk heads at Creditex, who can manage the broker community as volumes slow. We have shown a good ability to add resources outgrowing head count in the past, and we look to continue to do that in the future. I think the one thing that sets us apart though, from some of our competitors, is we have some natural growth drivers like clearing, like Russell, that come on-line later this year, and into next year, which will provide us the ability to generate profit and cash growth, regardless of what happens with the underlying core volumes. So I think it will be a combination of continued vigilance around cost and expense management, but then also the realization of some of the key growth drivers we have spent the past year or two working on.

Mike Carrier – UBS

Okay. Thanks a lot.

Operator

And next we will hear from Jonathan Casteleyn with Wachovia Securities.

Jonathan Casteleyn – Wachovia Securities

Good morning. Jeff, you kind of touched on it in some of your remarks, but I am just wondering, the company was formed by dealers earlier this decade. Just trying to understand if those dealers become bank holding companies, do you think there is a risk of lower amounts of activity in their commodity trading going forward?

Jeff Sprecher

First of all, the company was started by Chuck Vice and myself. Not to take credit.

Jonathan Casteleyn – Wachovia Securities

Well, supported by the dealers, I guess is the correct terminology.

Jeff Sprecher

I understand the spirit in which you asked the question. We did, and a very instrumental part of our success is that having started the company, we reached out to the dealer community, and put 13 dealers around to us give us order flow. It is that model that we are using exactly again, that I think you have picked up on, for derivatives clearing.

Clearly the banks are looking at their balance sheets, and balance sheets are going to have to be used now, to collateralize CDS business, possibly in a way that wasn't being done before. But we have always built this company, to go after where we think the most growthy and liquid markets are, that are about to go from analog to digital, and that is what we see in the CDS space and so I do stand by the thesis that these markets that we are targeting, are going to grow long term and the banks themselves, having learned about CDS, the banks are telling me that CDS and the trading of credit, is an instrumental part of risk management in today's world. It is probably going to change. It is certainly going to be regulated. But I still believe that it is going to grow.

Jonathan Casteleyn – Wachovia Securities

Okay. So growth in potential new credit products could offset some slack in commodities? I guess my question was around the commodity portion?

Jeff Sprecher

Sure. We have still seen people hedging and the banks tend to really trade around customer business, as opposed to taking directional positions themselves. So with low oil prices now, for example, low energy prices, you have got people wanting to lock those things in and that is why you see, if you look at our numbers, our October volumes have actually increased during this period of dramatically lower energy prices.

Jonathan Casteleyn – Wachovia Securities

Okay, that is fair. Thanks for that. Secondly, you have made a couple of acquisitions over the course of the year within the OTC business, ChemConnect, Yellow Jacket, Chatham, et cetera. What percentage of the synergies do you think are realized here in these results? I am just trying to understand, if we do have some slack in cyclical trading, how much more alpha can we expect from what you have done in the acquisition side in OTC?

Scott Hill

ChemConnect is 100% synergy, because it basically was us picking up a contract with very little cost associated with it. Yellow Jacket was largely a technology investment that is around our option strategy, and the team there has moved that project along quite well, and we expect that will be a growth driver for us as we move forward. In terms of overall synergies, we continue to make progress at ICE Futures US. There remain synergy opportunities to be realized there. We have said publicly that our Creditex business will yield $9 to 14 million in synergies, as we move into next year. So I think, Jonathan, at the end of the day, we have still a significant synergy opportunity in front of us. We have yielded it this year, and I am confident that we will achieve or overachieve our synergy opportunities as we move into 2009.

Jonathan Casteleyn – Wachovia Securities

Okay. Thanks for that.

Operator

And next we will hear from Chris Allen with Banc of America Securities.

Chris Allen – Banc of America Securities

Hey, guys, how are you doing?

Jeff Sprecher

Good morning.

Chris Allen – Banc of America Securities

Some of the other worries that investors bring up recently has been the falling price of commodities, the impact on potential pension flows and retail flows into commodities. I was wondering if you could address that, as well as how energy trading volumes typically hold up in a recessionary environment.

Jeff Sprecher

Sure. I think, as I just mentioned, our October volumes accelerated, and obviously we have an incredibly low-priced environment for energy right now, historically anyway. So we have not seen a direct connection between price and volume.

You can imagine right now if you are running an airline, and looking at $60 oil, you are probably thinking about trying lock in that, because analysts still believe that we haven't put any new production into the systems, and that global demand will outstrip current supply at some point in the future. Beyond that I think the credit issues that we have seen, don't seem to have directly impacted any of our major customers. Their business still looks good and I think the only thing that it has potentially done, is shortened up the duration of trading. So people that may have in the past wanted to hold a multiyear position, in order to earn a return on it, are now looking at the value of tying up the balance sheet, versus the potential return for a multiyear position and frankly, that may not be a short-term trend. That may be he a long-term trend, because I think people are going to focus more on the balance sheet uses, now particularly that most of the major dealers have become banks.

Scott Hill

Chris, just to give you a couple of data points, if you look at our Brent volumes as an example, thus far in the month they are up nearly 20%. That has always tended to be one the commercials used more for hedging purposes, where WTI has tended to be more speculative. WTI from an OI standpoint for us over the last three months has held in fairly steady, and Brent has actually creeped up although bit. So it is not just anecdotal. We have got data points that would suggest, that people are still in our markets, using them to hedge the risks they have.

Chris Allen – Banc of America Securities

Great. Thanks a lot, guys. Have a good day.

Operator

And Mark Lane with William Blair and company, please go ahead.

Mark Lane – William Blair & Co.

Good morning. Two related questions. First on the Over the Counter energy, the new product launches that you have framed, are there any particular products that you see as significant opportunities, or typically you see a lot of new product introductions without any really significant benefit, at least in the near term?

Jeff Sprecher

That is a good question, Mark. We handle new product introductions a little different than some of our competitors. Some of our competitors just try to roll everything out and see what sticks. If you have a low-cost ability to do that, there is nothing particular wrong with that idea. It is just that we have tended to go where we can be very focused and very targeted, and build liquidity in new products and I think ICE more than any other company in our space, has done the best job of building interest in the products that we launch. So we are dying to get this new clearing house up, because we have customers who have been begging us for products that they have told us they will give us volume in, for various reasons that we understand, and those are the ones that we are going to be rolling out quickly, and so we have got a pretty big suite of products coming out, but we are cautiously optimistic that the products that we have selected will give us incremental volume.

Mark Lane – William Blair & Co.

Any one or two in particular?

Scott Hill

We have this kind of interesting footprint now, where we have NGX in the physical markets in natural gas. We have Platt [ph] working with us in the physical markets in oil, and so those relationships have given us new insight into the market that we didn't have in the past, and it is that, that we will be able to lever those relationships, I think, in the energy space, and for the energy products, I think we will be able to really push some new volume through.

Mark Lane – William Blair & Co.

Okay. Then a quick follow-up on Russell. The average daily volume, ex the roll, is well below what the run rate was at the CME. Where are you in your ramp process here with the suite overall, and do you have conviction that this product is going to be a lot larger over the next two or three quarters?

Jeff Sprecher

We do. First of all, regarding NYMEX versus ICE, we have sort of different footprints. So we split the market in different ways, and where we compete directly, we continue to hold or take share in our view. So again, we are very, very targeted in the markets that we go after. So yes, we do have conviction.

Mark Lane – William Blair & Co.

We are talking about the Russell, right?

Jeff Sprecher

Oh, I am sorry, you were talking about Russell, I thought you were talking about third quarter. I apologize for that. On Russell, we feel like we got the roll. There is still a backlog of people that are looking to hook to us. This is because there are a lot of smaller niche platforms, retail traders, and distribution that wasn't highly correlated to our energy trading, and so we know there is more volume out there just in the products that we have and I think, Mark, you are aware that our stated intent was to consolidate the Russell 2000 on our platform, get all of these people in, get the distribution there, and then start focusing on other Russell indices, particularly the Growth and Value, and the Russell 1000, which we really do believe will be great opportunities. I am bullish on the trading of equity indices in general. I think it is a long-term trend, growth trend, and so we wanted to be in that space.

Mark Lane – William Blair & Co.

Okay, thank you.

Operator

And we will take our next question from Daniel Harris with Goldman Sachs.

Daniel Harris – Goldman Sachs

Hi, good morning.

Jeff Sprecher

Good morning.

Daniel Harris – Goldman Sachs

I was wondering if you guys can help me understand a little bit more, the relationship and connection that Creditex has directly to the DTCC trade warehouse. How does that benefit what you are trying to do with the Clearing Corp.? Does it somewhat create a more unique solution that you have maybe relative to peers?

Jeff Sprecher

Yes, I think so. First of all, a product that we own called T-zero has direct connectivity to the DTCC warehouse. It is two-way connectivity, so it allows us to take existing OTC trades in, and as those trades become cleared, and effectively are terminated as bilaterals, it allows us to put the termination notice back into DTCC. That platform is hooked to every one of the major banks, every one of the prime brokers. So it has an API connectivity that is already in place to the sell side of the market. It also has 238 buy side connections, it basically has connectivity to all of the major players in the space at this point. So it will allow trades to be easily picked up and novated into the clearing house, and it will allow the clearing house to communicate back to market participants, that those trades have made their way in and I think it is a very important network, particularly now that we are really targeting bringing the buy side into the hedge fund, and insurance community into this clearing infrastructure.

Daniel Harris – Goldman Sachs

Is that something that has been replicated by anybody else, in terms of maybe some of your peers that are trying to do something similar, and that could include maybe even some of the European players, or is that something that is somewhat unique to T-zero?

Jeff Sprecher

It is totally unique. Nobody has that kind of connectivity. Beyond that, as I mentioned earlier, trying to put these trades through the typical futures systems, which typically globally are provided by SunGard and Rolfe & Nolan in the futures industry. It gets those trades into the wrong billing systems and wrong books, and not that companies like Goldman Sachs couldn't figure out how to get a trade out of it's futures back office into its OTC derivatives back office, most likely those platforms are in two different buildings, in two different managements, with connectivity that would have to be built and that's why, if you really think back to some of our earlier statements, it is one of the real reasons that we wanted to own Creditex, because we wanted to get at that T-Zero infrastructure, so that we could quickly build a clearing infrastructure.

Daniel Harris – Goldman Sachs

Okay, that makes sense. Then just a quick follow-up and maybe this can help me think through this. I guess sort of the velocity in futures is fairly easy to track relative to your open interest, but it has been much harder on the CDS side. Given what you guys have seen at Creditex, and what you have learned about the credit business, how does that 55 trillion, or 35 trillion by the DTCC, whatever number you want to use, how does that somewhat relate to activity rates you see in CDS, on a daily, monthly, or any way you want to look at it basis?

Jeff Sprecher

Just give you some anecdotes. The vast majority of trading that goes on in CDS is dealer to dealer. I have actually seen the numbers. I can't disclose them, but it is a significant majority. So the volumes that we see through Creditex inter-dealer platform are very indicative of the market.

There is a lot of trading going on right now, because there are obviously a lot of credit stress, and people are buying protection in a stressful market. So that is why I mentioned in my prepared remarks that contrary to sort of rumors that we hear, this is a very, very active market, and continues to be an active market and I think now that we have been through this period, hopefully we emerge quickly through, and have stability in our credit markets. I think people will see the value of owning credit protection going forward.

In other words, I believe, and this is my belief, that credit is a viable, tradable asset class, and notwithstanding the fact that it is going to be more regulated, there is a need for these products to exist.

Scott Hill

The other thing we have learned in looking at the credit business is similar to our other businesses. The volume of trading tends to be pretty closely correlated with volatility. So as the VICs, volatility levels have been high, trading volumes have been high.

Daniel Harris – Goldman Sachs

Would it be safe to say that, relative to some of the futures products and options products, this trades a lot less? And that is not a bad thing. Just to make share understand it.

Jeff Sprecher

To give you a sense, ICE today is clearing about 2 million trades a day in futures. The total volume of trades believed to be in the DTCC warehouse is about 2 million trades. So in other words, what we clear in a day at ICE, which is a modest-sized futures footprint, equals the entire outstanding number of trades. So what you see is a small number of trades that have high notional value, and a high amount of risk. So it is a different look and feel than what you would see in futures and when you step back and think about, it is why hat existed probably as an OTC market.

Daniel Harris – Goldman Sachs

That is perfect, Jeff. Thanks.

Operator

And Mike Vinciquerra with BMO Capital Markets.

Jillian Miller – BMO Capital Markets

Hi. This is actually Jillian Miller, filling in for Mike. Question back to the CDS. I have seen some reports in the media questioning whether these contracts could be fungible. It seems just based on the huge differences in the way you are approaching the clearing, that that is highly unlikely and if they are not fungible, I was just wondering, in your own personal opinion, I know there is no definite answer, if you see there being a bifurcated liquidity, or if it is going to be more like in the futures markets, where the liquidity tends to be consolidated on one exchange?

Jeff Sprecher

Sure. I think a couple of good questions there. One of the things that we are working with the industry on in connection with ICE Trust is to standardize the contracts, so that they can be nettable against themselves and I believe that once that is done in clearing, that from there forward, there will be a propensity for people to trade these more standardized contracts. So they will collapse and net down much more conveniently, and it will lower the overall capital requirements and collateral requirements for people's net positions.

One of the milestones that exists in our offering, is that we are trying to clear the existing OTC business, and also maintain the existing execution structure. So this is not a product that ICE has invented, and has Intellectual Property in, and feels that we could list on a futures exchange, and have as a vertical model.

These are existing contracts, that others have created, but we feel that we can bring clearing to. So as a result of that, it will be an open platform, with multiple execution venues. I think it will evolve to look a lot more like the options markets cleared through the OCC, for example, with multiple execution venues all headed to one clearing platform.

Now that being said, once this market is up and stabilized, there is a lot of innovation going on in our space, and there may be other exchanges or clearing houses that are able to clear or create derivative kinds of product, and grow around the credit space, and I am not sure that there isn't enough fruit dropping from the tree to feed all of the various venues.

Jillian Miller – BMO Capital Markets

Okay, thanks, that is really helpful and then just a quick numbers question. There is a big bump in the professional services expenses this quarter, and I was wondering, is it all Creditex, or what piece of Creditex, kind of what was the rest of the delta?

Scott Hill

Creditex is actually a relatively small piece of the increase. The increase was largely related to the transition activity around ICE Clear Europe in the middle of September, and those are expenses that are now behind us, and we will pay for the transition we're doing over this weekend. But the jump from quarter to quarter was solely due to the ICE Clear Europe transition.

Jillian Miller – BMO Capital Markets

Okay, great, thanks.

Operator

And Niamh Alexander with KBW.

Niamh Alexander – KBW

Hi. Thanks for taking my question. On the OTC Energy venue, I am just trying to understand, we have looked at, I guess one of your competitors has shown the daily volume we can see there. The clearing-only venue for providing clearing facilities for OTC traded, seems to be doing exceptionally well into October as well. That is something that ICE also offers. It is just a trade, or to clear through LCH, in addition to kind of not trading on your OTC venue. Has that been a bigger part of the growth this year? Is that something we could maybe expect some incremental revenue from going forward?

Jeff Sprecher

I think the answer is yes. As you probably see, we went from something like an 80% of our products being cleared, to 90%, so a lot of the footprint that ICE has had, we have been moving the business from bilateral into cleared over the last six years or so and we have seen now, to the extent that there was bilateral business that existed around that, it's because of counterparty risk, obviously, it has been moving into the cleared environment, and that is largely, I suspect, where you see that percentage jump.

Niamh Alexander – KBW

Okay. But in addition to your like trading facility, you currently offer folks who maybe just execute the trade in the OTC, the voice brokered markets, to be able to clear through LCH, is that something you offer now?

Jeff Sprecher

Yes. That is what I was trying to say, is that we have a facility, it is called ICE Block. It is an electronic way of the marketplace uploading bilateral trades that are done, not on our platform, into our clearing house. When we publish our results, and say how much of our business was cleared, it is skewing that upward.

Niamh Alexander – KBW

Okay, that is helpful. Thanks. That is helpful for modeling and then just lastly on the credit derivatives at this point, can you help me understand what kind of movement there has been in the US toward trading the product electronically? I know you talked about maybe multiple execution venues, but you own one of them, so what is the mindset, or what is the movement towards trading electronically as well as clearing?

Scott Hill

This is Scott. I will take that one. We have seen a continued increase both in the US and Europe, but to be clear Europe remains in the low 70% in terms of electronics. The US remains below double digits. So while we are seeing continued migration towards the electronic platform, the US continues to trail Europe substantially.

Niamh Alexander – KBW

Do you expect that might change with the introduction of the central sharing?

Jeff Sprecher

It is possible. I think the real effort that is going on right now, is to get the sort of contagious derivatives that exist bilaterally off the books, and get them into a clearing house. So there has been much more activity on behalf of the industry, to get existing positions into the clearing house, than there has on trying to figure out how new positions will be treated. I am telling you that I am speculating that once that happens, and the products become more standardized, and more transparent, it will lend itself to more electronic trading in the US. By multiple venues, but Creditex is certainly one.

Niamh Alexander – KBW

Okay, that is great. Thanks for take my questions.

Operator

And we will take Don Fandetti with Citi.

Don Fandetti – Citigroup

Good morning. I wanted to clarify something. You had mentioned that your plan for clearing credit derivatives is open. So what if Citadel, for example, wanted to trade a credit derivative, are the dealers going to open up the execution side, is that the plan here? I just wanted to confirm that.

Jeff Sprecher

Sure. I don't want to talk specifically about Citadel. We have a lot of regard for them, and they are an important customer at ICE as well. But the idea is that there will be membership standards to join the clearing house, just like all other clearing houses that you are familiar with, and anyone can become a member.

You can be a buy side or a sell side. For those people that will choose not to be members, which I think will be the bulk of people that trade, just like in futures, there has to be a mechanism to get access to take bilateral positions and put them into the clearing house through a member. So, sort of the FCM model, if will you and to give that nonmember customer access to basically segregated funds protection in a bankruptcy.

In other words, so that it is very, very clear in a bankruptcy, that the collateral and the positions are owned by the customer, and they are not a part of the member’s bankruptcy, like what happened at Lehman Brothers, in the bilateral world.

Don Fandetti – Citigroup

Okay. So a large hedge fund then could come in and act almost like a dealer in the new structure that you envision, whereas today we know that they can't do that right?

Jeff Sprecher

Yes, absolutely and my guess is that, looking at our futures membership, the number of people that actually – the buy side participants that actually want to join the clearing house tends to be small, because most people are simply trying to get the benefits of the counterparty elements of clearing, so they can get that through a member. But there are clearly people that view their ability to be members, as helping to shape and modify their business model and I expect that will happen in the derivative space.

Don Fandetti – Citigroup

Okay. Thank you.

Operator

We will take our last question from Rob Chow with Deutsche Bank.

Rob Chow – Deutsche Bank

Hi good morning everybody.

Jeff Sprecher

Good morning.

Rob Chow – Deutsche Bank

I was trying to think through the implications of you creating a bank and there’s lots of thoughts I can come up with. Is it possible that you figured out a way to treat the collateral as deposits, or are you trying to pick your regulator, or tax implications? Can you help us sort of figure out what the implications are?

Jeff Sprecher

Sure. One of the things we noticed in the United States, was that CDS are specifically prohibited from being regulated by the CFTC. So in order to have used our current regulatory infrastructure in the United States, which is CFTC oversight, we either would have needed an Act of Congress to change that, or we would have needed the CFTC to do a rulemaking, and assert that they have jurisdiction over the CDS space.

We have asked for rulemaking in front of the CFTC to clear OTC soft Ag products, like sugar swaps and coffee swaps, and that process has taken over a year and a half for products that we are relatively confident the CFTC will find they have domain and jurisdiction over. So in looking at that history and lesson, we said this probably doesn't look like a CFTC regulated product.

In thinking about where the government itself would want to regulate these, we saw that the Fed had because of its heavy involvement in the banking area, and now movement towards looking at how it is going to manage RWA on bank balance sheets, was probably the venue that would make the most sense.

When we got into that, we discovered that under banking regulation, we will be able to offer segregated funds-type protection for members, given that we are going to be a bank, and the people that are going to join this clearing house, at least the first nine that have stepped up, are all banks and they themselves have additional capabilities to – under banking regulations, to manage customer business. So it just felt like the right venue for us for those reasons.

Rob Chow – Deutsche Bank

Okay, and my follow-up, it sounds like that is a pretty big advantage relative to your peers. So, this certainly doesn't look like any bank I have ever looked at. Where are you in the regulatory process and the approval process, and what is the timeframe for you being up and running with this sort of new structure?

Jeff Sprecher

We are very far along. Obviously we have thrown the regulators a bit of a curved ball in that this morning we are announcing that we are acquiring the clearing corporation. But we had been messaging that to them for some time, so hopefully that won't slow things down too much. So I don't want to speak for the regulator, they have a right to approve it or not approve it, whenever they see fit.

But we are very, very deeply into the process. We have done this very quietly, and it only came to light when others were invited to meetings that we participated in, and it was mentioned.

Rob Chow – Deutsche Bank

So the Treasury is asking for solutions to be up quickly. Are you going to be able to meet their requests?

Jeff Sprecher

Yes.

Rob Chow – Deutsche Bank

Okay. Thank you very much.

Jeff Sprecher

Thank you.

Operator

And at this time there are no further questions. We will turn the call back over to our host.

Jeff Sprecher

Great. Well, thank you all. It was a long call today. I appreciate those of you that hung with us for the duration of the call. These are really unprecedented times, but I hope you can tell that we are quite excited about the solutions that we are bringing to the marketplace.

We think it will have long-term value for our customers, and obviously we run the company on behalf of our shareholders, and so I think we will ultimately be very well-positioned going forward.

So thank you again. We will talk to you next quarter.

Operator

And that does conclude our conference for today. Thank you for your participation, and have a wonderful day. You may now disconnect.

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