April 16, 2014 9:28 am

ICE on the cutting edge of Asia pivot

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11/2/10 2:57:38 PM Intercontinental Exchange President and CEO Jeff Sprecher photographed in Chicago, IL during an interview with Hal Weitzman © Todd Rosenberg Photography 2010

Sitting in the colonial-era Fullerton Hotel building, the chairman of the New York Stock Exchange enthuses about the impression Singapore makes on visitors as they arrive in the tiny city-state by air.

“We flew in at dawn this morning so it was dark. And just the number of lights on the ocean, which are all ships parked out there, it’s amazing,” says Jeff Sprecher, who is also chief executive of IntercontinentalExchange, one of the world’s biggest exchange companies and owner of the NYSE.

Mr Sprecher spends most of his time either in Atlanta, where ICE is headquartered, or in New York, after his acquisition of NYSE Euronext last year made him chairman of the venerable Wall Street bourse.

But his rare visit to Singapore signals an important shift not only for ICE’s business but for western exchanges in general and for the Asian country itself.

ICE this week could win approval from the Singapore regulator for a new exchange and clearing house – marking the first time a western bourse has set up market infrastructure in Singapore.

The new entity is the result of five months of work transforming the former Singapore Mercantile Exchange, which ICE bought for $150m last year, into a new business aimed at tapping into Asia’s – particularly China’s – swelling appetite for commodity and derivatives trading.

ICE, founded by Mr Sprecher in 2000, operates 17 exchanges and six clearing houses globally. They offer trading and clearing of benchmark futures and options contracts including on Brent and WTI crude oil, coal, gas, jet fuel and frozen orange juice, listed on the New York Board of Trade, which ICE bought in 2007.

So far, ICE and its rivals – CME Group, operator of the Chicago Mercantile Exchange, and Deutsche Börse – have handled trading and clearing for Asia customers out of London or Frankfurt.

But Mr Sprecher says Singapore’s emergence as a vibrant centre for commodities and over-the-counter (OTC) energy derivatives, coupled with its role as a shipping entrepôt – clearly visible from his aircraft window – means it is time to build a bricks and mortar presence in the region.

He says that because of differences between US and European regulators on how to implement sweeping G20 financial system reforms such as the US Dodd-Frank Act, trading is becoming more regional.

“We got this sense at ICE that our customers were going to be facing a ‘Balkanisation’ of trading. In other words, it was going to be hard to sit in any one location and trade around the world,” Mr Sprecher says in an interview.

The collapse of US futures broker MF Global in 2011 illustrated that when big defaults happen, customers prefer to deal with clearing houses – which intermediate between trading counterparties – in their own timezone. In that situation many counterparties were Asia-based but the main clearing houses were in Chicago and London.

“We could see that our customers here [in Asia] would get up in the morning and decisions would have been made on their positions. So you could see this . . . was already suggesting that people prefer to trade and clear in their own timezone,” Mr Sprecher says.

ICE settled on Singapore as the location for its new exchange after a three-year study that concluded that in spite of Hong Kong’s proximity to China and its commodity demand, related trading activities would not all automatically shift there.

“Clearly, at some point mainland China is going to have more [of an] outward reach and potentially we may have the ability to move in there. But I think right now our sense is, where we are strong – which is really in commodities and physical products – that Singapore is best positioned right now,” says Mr Sprecher.

It is no coincidence that Deutsche Börse recently said it too plans to build a clearing house for Asia in Singapore.

All this suggests the city-state is set to become a key Asia centre for exchange and clearing activity outside China and Japan, adding another dimension to a financial centre already known for wealth management and foreign exchange.

“Everything is yen-based in Japan while China is a semi-closed market, so the opening is there for Singapore to take a leadership position for all other traded and cleared Asian OTC energy and commodity products,” says Bill Herder, Singapore-based head of the Asia chapter of the Futures Industry Association.

ICE’s new venture will pit it against the Singapore Exchange, whose fastest-growing businesses are trading and clearing of commodity and energy derivatives.

However, Mr Sprecher plays down any rivalry, holding out the prospect that the two exchanges could even collaborate: “Right now we’re focused on getting our own infrastructure in place, but that doesn’t mean that there aren’t opportunities for us together.”

The immediate challenge will be for ICE to come up with products that will ensure its fledgling Asian exchange will succeed. Asked what those might be, Mr Sprecher says: “We haven’t said yet but what we need are some early hits, a bit like a Broadway play. When the curtain opens we need people to say it’s good.”

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