by Ari Peskoe
IntercontinentalExchange (ICE) announced June 30 that it will convert all of its cleared over-the-counter (OTC) derivative products listed on its OTC energy market to futures. Cleared North American natural gas, electric power, environmental products and natural gas liquids swaps will be listed as futures on the energy division of ICE Futures; cleared oil products will be listed as futures on ICE Futures Europe. The transition is in reaction to new regulations being phased in pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which are expected to make OTC swap trades more costly.
Currently, traders can exchange futures products, cleared OTC products, and uncleared OTC products on ICE’s platforms. ICE’s cleared OTC products provide access to centralized clearing and settlement arrangements while reducing bilateral credit risk and capital required for OTC trades. ICE currently offers over 760 cleared OTC energy contracts. Since both futures and many cleared OTC swaps currently offered by ICE are standardized contracts, the transition to futures will allow traders to use similar products but avoid the more costly regulations being phased in under Dodd-Frank. Traders will continue to be able to exchange uncleared OTC products or bilateral contracts on ICE’s OTC platform, which will become a swap execution facility regulated by the Commodity Futures Trading Commission (CFTC).
Under new CFTC regulations, OTC products, — whether standardized and cleared products or uncleared bilateral contracts — will become subject to more extensive and burdensome regulation than standard futures contracts. The increased regulation is to include reporting requirements and higher margin and collateral requirements. Additionally, firms with more than a de minimis number of OTC transactions can be subject to regulation as swap dealers. Because of regulatory burdens attached to OTC products, it is anticipated that other exchange operators that clear swaps will follow ICE’s lead in transitioning to less burdensome futures.
The new regulations and ICE’s transition to futures stand to benefit ICE since traders may opt to use proprietary listed futures products in lieu of customized contracts that can be sent through any clearinghouse. Conversely, the banking sector stands to lose market share since historically it has sold customized bilateral swaps to customers who are now likely to turn to futures contracts whenever possible.
The transition from OTC swaps to futures is subject to approvals from the CFTC and the Financial Services Authority.
*Jessica Bayles, a summer associate in the McDermott’s Washington D.C. office, contributed to this article.