NEW YORK/MUMBAI (Reuters) - IntercontinentalExchange Group (ICE.N) said on Tuesday it would buy the Singapore Mercantile Exchange (SMX) in a $150 million deal that gives it a foothold in trading and clearing in Asia, the main engine of growth for the commodities market.
ICE said it would buy the operation from embattled Indian trading platform provider Financial Technologies (India) Ltd FITE.NS, less than a week after closing its $11 billion takeover of NYSE Euronext.
“Events and circumstances led to an opportunity for us to acquire it and we jumped on it,” ICE Chief Executive Jeff Sprecher said on a call with analysts.
SMX operates futures markets in Singapore across metals, currencies, energy and agriculture, but has attracted limited volumes since it started in 2010.
ICE is not actually interested in the existing business, which is currently losing money, but rather in buying the ability to offer and clear trading in Asia, Sprecher said.
“We are really buying the infrastructure and the fact that we would avoid a three year process if we were start on our own, and the fact that it’s not particularly easy in Asia for a Western company to start an exchange and clearing infrastructure,” he said.
The deal can be compared with ICE’s purchase of Chicago-based credit default swap clearinghouse The Clearing Corporation, which closed in 2009, said Chief Financial Officer Scott Hill. He said that was also a money-losing business, it was relatively small, and while ICE was not interested in the products cleared there at that time, it served a set of customers ICE knew and moved it into an area where its competitors were not.
“We saw the CDS world evolving at that time towards clearing and bought an asset to serve it. We see the potential of the energy world maybe trading more in Asia than it does today, and we want to be prepared to serve that,” Hill said at a conference on Tuesday.
Last quarter, Atlanta-based ICE earned $22 million from CDS clearing, a 40 percent increase from a year earlier. The opaqueness of derivatives like CDSs - used to insure against falls in bond prices - badly exacerbated market uncertainty during the 2007-2009 financial crisis, and regulators have been pushing such products onto trading platforms and into central clearing to reduce systemic risk.
Hill said ICE’s customers in Asia have been vocal about their concerns over the regulatory uncertainly in the United States and Europe, and that they may not want to continue to operate in those places.
“We’ve got a very significant Asian base energy customer set that we wanted to continue to serve, and so we felt like the SMX purchase gave us the optionality to serve that customer set locally, whereas in the past, we served that customer set largely out of the UK,” he said.
ICE’s acquisition of NYSE Euronext gives it control of Liffe, Europe’s No.2 derivatives market. It initiated the purchase in December, four months after losing out to Hong Kong Exchanges and Clearing Ltd (0388.HK) in a bid to buy the London Metals Exchange.
ICE first reached out to SMX’s parent, Financial Technologies, about a possible deal last spring, Sprecher said.
Since then, Financial Technologies has run into regulatory difficulties and the company’s stock is down more than 80 percent this year. The share slide accelerated after the exchange operator’s spot commodities exchange, National Spot Exchange (NSEL), suspended trading in August. It has since struggled to square off outstanding contracts worth over 55 billion rupees ($880 million).
Financial Technologies is now under investigation by Indian regulators and police over suspected violations of rules on contract durations at NSEL. [ID:nL3N0I904P]
“If, in a couple of years, their losses hadn’t come down, they would have contemplated selling (SGX), but it’s come before that scheduled period of time simply because of what’s happening on the domestic front with all the regulatory scrutiny,” said Ashish Chopra, an analyst at Motilal Oswal Securities in Mumbai.
Financial Technologies said it would use the proceeds of the sale to repay foreign currency loans.
Once the deal is complete, ICE will operate 17 exchanges and six clearing houses in eight countries.
“No one has the footprint that we have now,” said Sprecher. “We are in the U.S., Canada, Brazil, London, Continental Europe, and now in Asia in Singapore, and that’s where our customers are.”
Reporting by John McCrank, Rafael Nam and Himank Sharma; Editing by Matt Driskill, Michael Urquhart and Marguerita Choy