July 30, 2012 / 9:01 PM / 8 years ago

ICE plans transition of cleared energy swaps to futures

NEW YORK (Reuters) - IntercontinentalExchange Inc plans to transition all of its cleared over-the-counter (OTC) energy products to futures contracts in anticipation of regulatory reforms expected to make trading swaps more expensive and complicated.

ICE energy swaps include crude and refined oil, natural gas, electric power, and natural gas liquids. The transatlantic exchange and clearing house said on Monday the shift to futures would occur in January.

The move comes ahead of regulatory reforms expected to be rolled out later this year in the United States, and being drafted in Europe and Asia, aimed at increasing transparency in the $650 trillion swaps market.

“Based upon our extensive analysis of new swap rules and consultations with a wide variety of customers, we believe that these policies will increase the cost and complexity for swaps market participants, both in absolute terms and relative to that of futures market participants,” Chuck Vice, ICE president and chief operating officer, said in a statement.

Under legislation included in the U.S. Dodd-Frank act, each swap traded will have to be reported to a swap data repository, which ICE described as “a new and untested reporting regime.” Futures contracts, however, will remain under the existing futures reporting systems and regime.

New bank-like regulation may also be imposed on those who trade swaps above a certain threshold, while those who trade futures contracts will be subject to futures oversight, which has been in effect for decades, ICE said.

“By shifting OTC energy products to futures, existing methods of transacting should be maintained for customers, while alleviating concerns of an increased regulatory burden from being designated a major swap participant,” said Sandler O’Neill analyst Richard Repetto.

He said he does not expect any financial impact to ICE due to the move.


The OTC derivatives market came under increased regulatory scrutiny in the wake of the financial crisis when risky derivatives trading at firms such as insurer American International Group and investment bank Lehman Brothers nearly toppled the financial system.

The inability to assess the scale of the market, the identity of contracting parties, or the nature of non-standard contracts, frustrated regulators.

Last week, the Commodity Futures Trading Commission finalized a timeline laying out when different types of firms will have to route their trades through clearinghouses, as required by Dodd-Frank.

Major swaps players will face the clearing mandate 90 days after the agency designates a category of swaps for clearing. Commodity pools and private funds will have 180 days to comply, and all other firms will have 270 days to route trades through clearing houses.

Atlanta-based ICE said its transition from cleared swaps to futures will happen over a weekend in January, and should be seamless.

There will be no change in execution and clearing fees, minimum commission and view-only fees, and margin methodology and rates. Clearing will remain at ICE Clear Europe.

In early 2006, ICE moved its West Texas Intermediate crude swap to an equivalent futures contract for competitive reasons. The product is now ICE’s No. 2 futures contract.

ICE said it plans to make the appropriate regulatory filings over the next few weeks to the CFTC and the UK Financial Services Authority.

ICE’s non-cleared contracts will remain as swaps on ICE’s OTC Commodity Markets subsidiary. That platform will register as a U.S. Swap Execution Facility.

Editing by Dale Hudson

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