From upstart to industry star: the rise and rise of ICE

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06 October 2011

In little more than a decade Jeff Sprecher, the chief executive of the InterContinentalExchange has built up a global derivatives powerhouse. However, his ambitions have been checked by two high profile failed merger attempts. As new legislation redraws the landscape of European and US derivatives, Elise Coroneos caught up with the man at the top of ICE about his frustrations over the failed mergers and his ambitions for the exchange.

In April, ICE made headlines across the world with its joint bid for NYSE Euronext with the Nasdaq OMX Group. The deal would have seen ICE capture NYSE’s derivatives platform Liffe and expand its equity derivatives product offering, long an ambition of the exchange. Sprecher had argued against the Deutsche Börse offer citing the creation of a derivatives monopoly in Europe, not to mention letting the Big Board fall into foreign ownership.

However, the arguments fell on deaf ears and the deal failed when the US Department of Justice blocked it over concerns about the dominance of the group in US equity trading. For Sprecher it was the second mega deal that had failed in five years following on from his upstart bid for CBOT in which he ultimately lost out to the CME in a frantic deal process immortalised in Erica Olsen’s gripping account Zero Sum Game.

That’s Liffe

While the failed bid for CBOT had been a bitter blow, with ICE losing out after a nearly four month bidding war, Sprecher views the failure to acquire NYSE Liffe in a different light. Speaking about the bid, he says the decision to move with Nasdaq OMX “was literally made in a moment’s notice”, a result of a confluence of events resulting in a whirlwind decision that might have been different under less volatile circumstances.

“I categorise [the NYSE LIffe bid] as opportunistic. We saw that there was so much uncertainty around all the mergers that were going on and simply didn’t know what the outcome was going to be,” says Sprecher.

The first half of 2011 was marked by a wave of proposed exchange consolidation, starting with the Deutsche Börse agreement to acquire the NYSE Euronext on February 15 for stock worth $9.53bn at the time. The following months saw around $20 billion in deals proposed. It was a competitive environment but Sprecher was set on taking Liffe, the jewel in NYSE Euronext’s crown.

“NYSE Liffe’s business is very centered in London with tremendous access to continental Europe. We have our energy futures business centered in London but this deal would have put us much more strongly into financial derivatives trading. That said, when it was clear it wasn’t going to go our way, we turned back to recalibrating our own strategies,” explains Sprecher.

Wait and see

Sprecher would not be drawn on what these recalibrated strategies might be. However, the opportunity to get to know Nasdaq’s business at closer range, has left him with admiration and an enthusiasm to partner with it in the future should the right opportunity present itself.

“I can tell you we went away from the NYSE Liffe bid with a real respect for Nasdaq. I was really unaware how successful they had been in a highly competitive equities market. So we left with heightened respect for their ability to manage in tough times. I hope at some point in the future that our paths will allow us to do business because we have tremendous respect for them,” he says.

Partnership or no partnership with Nasdaq and future acquisition targets aside, Sprecher appears content to let ICE ride out the transition to the new Dodd-Frank/EMIR regulatory environment in its current position.

He believes that the execution of new acquisitions in the face of continued uncertainty surrounding the regulatory landscape is challenging. “To try to do mergers in the middle of a regulatory debate adds a lot of complexity to the merger dynamics. Any major deal being done right now is going to be scrutinised and adds a lot of complications,” he says.

Further reason to wait, says Sprecher, is the current market volatility. With the valuations of companies being pushed up and down because of perceptions about a double-dip recession and currency speculation, Sprecher believes that while new deal opportunities may be created, they can quickly be taken away.

When the economic tide turns, more exposure to equity derivatives is a central goal of ICE, confirms Sprecher. It entered into the arena only a few years ago when it licensed the Russell index in the US.

“There is definitely a movement to trade equities in other forms, such as derivatives, and you have this huge growth in the options market. We think that the underlying trend is for an increase in equity derivatives trading,” says Sprecher.

A life of innovation

Sprecher, the son of a life insurance salesman and a nurse grew up in Madison, Wisconsin. He graduated from the University of Wisconsin n 1978 and took a job at an air-conditioning company before getting into the power business with Western Power Group at the age of 28.

By 1997, Sprecher was the owner and operator of electric power plants at a time when deregulation was sweeping the California energy markets. Frustrated with the current offering, Sprecher sought to create a better system for trading the state’s energy contracts.

The obstacle to effective trading in Sprecher’s mind was that buyers of electric power wanted some kind of future guarantee that a provider would be around for the term of a project. “In the 1990s, buyers started to want some kind of bond or financial guarantee, and eventually this became very important to the output of a project,” says Sprecher.

As a result, Specher launched into researching and developing a clearing solution that would allow energy contracts to be marked-to market once a day, with the clearing house as the guarantor. “At the time, I really wanted access to clearing. It was not about electronic trading,” he says.

Growth by acquisition

With that in mind, Sprecher set to work acquiring and building the infrastructure to make good on his vision, starting with the purchase of the Continental Power Exchange in 1997. However, after the formal launch of ICE in 2000, Sprecher found that the market had little interest in supporting clearing. Nevertheless, market events and then regulators soon intervened, pushing clearing to the fore.

The first of these events, says Sprecher, was the collapse of Enron in 2001. “Suddenly, energy market participants became very interested in clearing because there was so much risk in the business. We were in the right place at the right time and today the energy market is one where clearing is widely accepted,” he says.

The second push towards clearing came with the rise of regulatory reform in the form of Dodd-Frank and the European regulations Emir and Mifid, making clearing not only acceptable and desirable, but compulsory.

Over the years, Sprecher has moved methodically to expand ICE’s infrastructure in different parts of the globe. Notably, in 2001, the purchase of International Petroleum Exchange laid the foundation for what is now ICE Futures Europe, and in 2007, the acquisition of the New York Board of Trade firmly established ICE Futures US.

On the clearing side, the company bought CreditEx in 2008 supporting its European efforts, and the Clearing Corporation in 2009 in the US. In other markets, it added options capabilities with its acquisition of Yellowjacket and Ballista emissions trading with the acquisition of CCX in 2010.

It also expanded its global reach with its foray into South America when it completed its investment in CETIP, the region’s largest central depository for OTC and derivatives, and launched BRIX, an electronic platform for Brazilian power trading, both completed this year.

The firm had studied and participated in Brazil for quite some time before it announced BRIX and the CETIP deal, beginning with its acquisition of the NY Board of Trade in 2007, which had coffee and sugar contracts relevant to the Brazilian market. “It gave us a reason to be doing business in Brazil, to get to know Brazilian traders, and ultimately led to us making some relatively large investments in Brazil,” says Sprecher.

“Everything we have done recently is to expand our global footprint. We are now participating in the global development of markets, many of which are starting and developing quickly outside of the North America and Europe. That is a big focus,” says Sprecher.

Geographically speaking, ICE is active in expanding its operations into Asia, however, remains cognizant of the local markets and local culture. “Because it is difficult to get direct access to markets in China, and because the Chinese have been developing their own exchanges and their own financial markets, doing business with them is a matter of finding unique ways to get access,” says Sprecher.

Currently, ICE contracts are accessible to Chinese market participants through Singapore, London, and, in part, through Chinese intermediaries. Its efforts to gain traction have benefited from the global benchmark status of ICE’s energy contracts. “It is such that the Chinese can’t ignore them and Asia in general is relying on them so people have reason to do business with us,” Sprecher says.

Regulatory burden or opportunity?

It is not just through acquisitions that Sprecher aims to grow his business. He sees opportunity in the new regulation coming into force in the US and Europe. ICE will establish a Swap Execution Facility (SEF) to facilitate the trading and clearing of over the counter swaps as mandated under the Dodd-Frank Financial Reform Bill.

On an industry level, ICE is doing its best to navigate the birthing stages of this burgeoning industry, which is not an easy task given the lack of clarity in the market as to what qualifies as a SEF. Many participants favour defining a SEF differently to a traditional exchange which has an open order model with publicly listed bids and offers.

With swaps traded less frequently than futures contracts, many analysts believe SEF participants ought to be granted a degree of anonymity in order to preserve market liquidity. ICE is actively participating in the rule-making around Dodd-Frank while shaping its own platform. Sprecher serves on the CFTC Global Markets Advisory Committee.

“We are very active in talking to our customers and other market participants, trying to figure out how various markets are likely to evolve and what technology a market will need, and who will need the technology,” he says.

Questions the industry and ICE as a company are still working to clarify, says Sprecher, include whether there will be a dealer market that is separate from a dealer and client market; whether some asset classes will have separate wholesale and retail markets; whether some markets are sufficiently liquid and broad that they can exist as a single tier market; as well as defining the roles of brokers and third party intermediaries.

“Right now, inside ICE we are trying to make various judgment calls on how we this market will evolve and make sure we are building the tools that will ensure they will be successful,” says Sprecher.

The increased liquidity and standardisation in swaps contracts that SEFs will bring, says Sprecher, will also result in added complexity in OTC swaps. “Because there will be more correlated, liquid markets that you can hedge against, people will develop even more complicated bespoke contracts. Part of the consequence of Emir and Dodd-Frank is that parts of the market will become more simplified and bespoke parts will become more complicated,” he says.

ICE is well placed to meet the OTC clearing requirements under the new regime though its ownership of ICE Clear Credit, formerly known as ICE Trust US, a credit derivatives clearing house. In March 2009, it became the first clearing house to process credit default swaps, following ICE’s acquisition of The Clearing Corporation, which provides clearing infrastructure for both ICE Clear Credit and ICE Clear Europe CDS.

“We have moved very quickly to show the market that we have a lot of expertise in very flexible technology that allows us to understand and manage risk for OTC contracts. We had been thought of as an energy and commodities business but have proved that we can manage all kinds of transaction risk,” says Sprecher.

Climate change

However, some aspects of the changing legislation have not been to ICE’s benefit. In August, ICE announced it will shut down its US emissions derivatives platform in the first quarter of 2012. The exchange was acquired as part of a $600m deal for the London-based Climate Exchange.

Announcing the closure, Sprecher made it clear where the blame lay criticizing Washington for delaying the implementation of the cap and trade scheme. The failure in the US, however, has been offset by success in Europe where the Climate Exchange, now ICE Futures Europe, remains by far the largest emissions trading platform (see page 18). Many of the contracts trading on the US exchange will be migrated into OTC.

“We think the markets have had some hiccups because the spot market had some fraud, but that is being fixed and the market is continuing to grow. We are quite bullish on climate trading in Europe, where carbon trading is being embraced by the European populous,” says Sprecher.

Sprecher has transformed ICE from a regional energy exchange into a global powerhouse and once the upstart, is now a viable contender for global mega deals. ICE has not yet secured a position at the top of global derivative exchanges and a deal to propel the firm to this status has thus far eluded Sprecher. However, with a spin-off of Liffe a possible result of the merger between NYSE Euronext and Deutsche Börse, his chance may soon come. Such a deal would also enable ICE to expand its weak foothold in equity derivatives.

ICE is well positioned to meet the changing regulatory landscape with its strong OTC clearing operations. And should the Liffe opportunity present itself or not, few would be against the continued growth of ICE.

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