CME CME Group Inc

Yesterday, IntercontinentalExchange Inc. (ICE) announced the introduction of non-deliverable forward foreign exchange (FX) over-the-counter (OTC) contracts to its clearing services. An official launch is scheduled in the second quarter of 2012, subject to regulatory approvals.

Post the receipt of approval, the service will begin for both client and clearing member trades, whereby ICE plans to clear non-deliverable forward contracts for foreign exchange currencies including Brazilian Real, Korean Won, Chinese Yuan, Indian Rupee, Indonesian Rupiah, Chilean Peso and Russian Ruble at the outset. All of these FX OTC contracts will be settled in the US dollars.

ICE has also added BofA Merrill Lynch of Bank of America Corp. (BAC), Citigroup Inc. (C), Credit Suisse AG (CS), Deutsche Bank AG (DB), JP Morgan Chase & Co. (JPM), Morgan Stanley (MS) and UBS AG (UBS), among others, to the list of its global FX market participants, in order to initiate its FX OTC clearing.

Of late, the regulatory compliances by the Dodd Frank Act have been prompting the exchanges to initiate clearing and other technological services to its clients in order to reduce risk and enhance transparency. As per the directives stated by the regulatory authorities in the US, exchanges should start clearing swaps by the fourth quarter of 2012. This further justifies ICE’s step of refining its business model to include a broad array of FX OTC contracts clearing.

Moreover, in an effort to support its market holding, ICE has scheduled to launch cleared OTC FX contracts. The company is aware of changing market needs, and attempts to evolve through its hedging strategies, product modification and innovation, in turn supporting volumes and the top-line growth in the long run.

The launch of clearing of contracts by ICE in the rapidly expanding foreign exchange sphere further boosts the company’s competitive leverage in the derivatives and OTC areas, where other arch rivals such as CME Group Inc. (CME), NYSE Euronext Inc. (NYX) and CBOE Holdings Inc. (CBOE) are vigorously making their presence, thereby providing a challenging operating environment.

ICE has been growing through product novelty and expansion in the global emerging markets over the past several quarters. Strong trading volumes in ICE's FX, crude oil and energy futures and OTC markets, new product introduction along with increase in credit default swap (CDS) clearing revenues also drove the top- and bottom line during 2011. The strengthening of this portfolio is further expected to drive growth in future.

Overall, we believe that based on the current volatile macro environment, ICE has a strong revenue-generating product portfolio, high earnings visibility, consistent cash generation, disciplined investment and limited balance-sheet risk. These factors are expected to drive strong earnings potential in the long run. Hence, ICE carries a Zacks Rank #1, implying a short-term Strong Buy rating, while the long-term stance remains Outperform.

 
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