IntercontinentalExchange Inc. (ICE) is working with regulators and market participants to establish a "new market structure" that will standardize over-the-counter credit derivatives and increase price transparency to the $30 trillion market, the company's chief executive said Tuesday.

As ICE prepares to launch ICE US Trust, a credit derivatives clearinghouse developed with the bank-backed Clearing Corporation, ICE Chief Executive Jeffrey Sprecher said the exchange is now involved in a "broader CDS discussion" that will bring fundamental changes to the functioning of a market laid low by the credit crisis.

Over the last 30 days, Sprecher said, there is a growing consensus among market participants that the credit derivatives market in its current form is "broken," and that most of the trades taking place are associated with participants' exiting the sector.

Introducing clearing to bilaterally traded credit instruments is just one step, according to Sprecher.

"It's really about repackaging the risk and making needed changes in the product itself to support a growing and important market," he said in a call discussing ICE's fourth-quarter earnings.

ICE reported Tuesday that net income declined 24% in the fourth quarter, following a $16 million write-down related to its stake in the National Commodity and Derivatives Exchange of India, a deal which has lost value in the wake of the global financial crisis.

Fourth-quarter net income at ICE came in at $48.9 million, or 67 cents a share, down from $64.7 million, or 90 cents a share, a year earlier; analysts surveyed by Thomson Reuters expected earnings, excluding items, of 83 cents on revenue of $213 million.

Futures-related transaction revenue grew by 18% year-over-year, while over-the-counter revenue grew 54%.

ICE shares were recently up 6.4% at $66.27.

Clearing Credit Derivatives Only the First Step

ICE, along with other exchanges including CME Group Inc. (CME), NYSE Euronext (NYX) and Deutsche Boerse's (DB1.XE) derivatives unit Eurex, has had a proposal to clear credit derivatives trades in the works since last fall.

ICE US Trust will be structured as a Federal Reserve-regulated New York trust bank. As part of the venture, ICE announced in October that it would acquire The Clearing Corp., which had been developing its own credit derivatives clearing solution.

That deal has yet to close and is being evaluated by the Department of Justice. Meanwhile, ICE US Trust has secured approval from the New York State Banking Department and the Commodity Futures Trading Commission, though it still awaits approval from the Federal Reserve and the Securities and Exchange Commission.

Moving preexisting credit derivatives trades into clearinghouse is only the first step-then they must be marked to market, a much more difficult proposition, according to Sprecher. The answer, he said, increasingly appears to be an end-of-day auction process that would improve price transparency in the historically opaque market.

Sprecher said there is also a need to standardize default procedures, based on anecdotal evidence from the two dozen or so defaults in the fourth quarter of 2008. Work on ICE US Trust, he said, has "served as a forum for these issues" for market participants and regulators.

"We're positioning for what we think is going to be a very different market going forward," he said.

Although the International Swaps and Derivatives Association, which oversees swaps markets, is currently weighing the same issues, Sprecher said credit market participants can't wait for that process to play out.

That's because upon launch of ICE US Trust, Sprecher said the nine banks that have signaled their support for the venture will immediately migrate their existing CDS positions into the clearinghouse.

"That means from the first day, we need transparency and price discovery into these positions," he said. "Our clearinghouse will only be as good as the marks we put in; it's important that from the beginning, we get these right."

Sprecher said that because the banks supporting the ICE US Trust initiative represent such a large amount of open interest in the credit derivatives market, the mark-to-market and standardization processes it incorporates will likely become the industry standard.

Closing the TCC deal is tied to the final regulatory approvals for ICE US Trust, Sprecher said. The exchange expects those approvals sometime in the first quarter of this year.

Acquisition Opportunities May Arise From Chaos

Separately, Sprecher said that acquisition opportunities could surface as the financial crisis has prompted private companies to revisit their valuations.

While investors have badly bruised the market capitalization of public companies - the exchange sector itself has shed approximately 70% over the past year - it's taken a bit longer for the climate to affect private companies, according to Sprecher.

"For a while, private companies that could have been acquired had not reset their expectations" regarding valuation, he said. "People are getting realistic now."

Sprecher added that in recent weeks, ICE has had discussions with banks regarding borrowing capacities and the exchange's debt positioning.

"We really do see an improvement in the debt markets right now," he said, "to an extent that we might want to tap them."

Besides the deal to acquire The Clearing Corporation as part of its ICE US Trust effort, ICE last June purchased the credit derivatives boutique Creditex in June.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

   (Kerry E. Grace contributed to this report.)