The IntercontinentalExchange (ICE), the over-the-counter (OTC) market for oil, natural gas, power and metals products, has struck a deal with The London Clearing House (LCH) to offer its clients a centralised clearing service as early as the fourth quarter of this year.
ICE claims to be the first provider of OTC commodity markets to offer participants the option to utilise a central clearing service. Trading firms are expected to take advantage of such a service since it offers considerable opportunities for reducing risk and freeing up capital.
Jeff Sprecher, founder and chief executive officer of ICE, says: "We will soon be in the unique position of providing optimal efficiencies for market users not only through the application of standardised technology to the full spectrum of market needs, but also through the credit enhancement and cross margining opportunities that clearing OTC products will offer."
LCH already acts as the clearing house for the International Petroleum Exchange (IPE), recently acquired by ICE. This latest move will allow market participants to pool their OTC and futures risk in one location. LCH will also be able to facilitate cross margining between positions held by market participants on ICE and IPE.
Products available for clearing initially will include financially, or cash, settled US oil swaps (West Texas Intermediate crude swaps) and US natural gas swaps (Henry Hub swaps). Additional products will be added in the coming months.
"Our plans to offer OTC participants more than bi-lateral agreements grew out of customer demand," states David Goone, senior vice president of IntercontinentalExchange and the man who has headed up this project for ICE.
"The OTC market is missing a big piece of the puzzle - a global solution for clearing that provides a single point of access for commodity trading. We...will fill that void and offer the marketplace a global trading platform that enables full utilization of both capital and operational efficiencies," he says.
Concurrent with today's announcement, LCH has applied to the Commodity Futures Trading Commission (CFTC) for recognition as a Derivatives Clearing Organization (DCO).