10-K 1 d267160d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

(Mark One)

  
þ    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   For the fiscal year ended December 31, 2011
   Or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   For the transition period from              to                 

Commission File Number 001-32671

 

 

INTERCONTINENTALEXCHANGE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   58-2555670

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

2100 RiverEdge Parkway,

Suite 500, Atlanta,

Georgia

 

30328

(Zip Code)

(Address of principal executive offices)  

(770) 857-4700

Registrant’s telephone number, including area code

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Form 10-K.    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  þ    Accelerated filer  ¨   Non-accelerated filer  ¨      Smaller reporting company  ¨   
     (Do not check if a smaller company)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $8,941,643,024. As of January 31, 2012, the number of shares of the registrant’s Common Stock outstanding was 72,590,282 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the registrant’s Proxy Statement for the 2012 Annual Meeting of Stockholders is incorporated herein by reference in Part III of this Annual Report on Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year to which this report relates.

 

 

 


Table of Contents

INTERCONTINENTALEXCHANGE, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2011

TABLE OF CONTENTS

 

Item

Number

       Page
Number
 
  PART I   

1.

  Business      3   

1(A).

  Risk Factors      33   

1(B).

  Unresolved Staff Comments      48   

2.

  Properties      48   

3.

  Legal Proceedings      48   

4(A).

  Executive Officers of IntercontinentalExchange, Inc.      49   
  PART II   

5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      51   

6.

  Selected Financial Data      53   

7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      55   

7(A).

  Quantitative and Qualitative Disclosures About Market Risk      84   

8.

  Financial Statements and Supplementary Data      87   

9.

  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      132   

9(A).

  Controls and Procedures      132   

9(B).

  Other Information      132   
  PART III   

10.

  Directors, Executive Officers and Corporate Governance      132   

11.

  Executive Compensation      133   

12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      133   

13.

  Certain Relationships and Related Transactions, and Director Independence      133   

14.

  Principal Accountant Fees and Services      133   
  PART IV   

15.

  Exhibits, Financial Statement Schedules      134   
SIGNATURES      135   
FINANCIAL STATEMENT SCHEDULE      137   
INDEX TO EXHIBITS      138   


Table of Contents

PART I

In this Annual Report on Form 10-K, unless otherwise specified or the context otherwise requires:

 

   

“IntercontinentalExchange”, “ICE”, “we”, “us”, “our”, “our company” and “our business” refer to IntercontinentalExchange, Inc. and its consolidated subsidiaries. References to ICE products include products listed on one of our markets, as described in the following:

 

   

“ICE Futures Europe” refers to our wholly-owned subsidiary that we acquired on June 18, 2001, and which prior to October 25, 2005, operated as the International Petroleum Exchange of London, Ltd.

 

   

“ICE Clear Europe” refers to our wholly-owned European clearing subsidiary that we established and launched on November 3, 2008.

 

   

“ICE Futures U.S.” refers to our wholly-owned subsidiary that we acquired on January 12, 2007, which, prior to our acquisition, operated as the Board of Trade of the City of New York, Inc.

 

   

“ICE Clear U.S.” refers to ICE Futures U.S.’s wholly-owned clearing subsidiary, which previously operated as the New York Clearing Corporation.

 

   

“ICE Futures Canada” refers to our wholly-owned subsidiary that we acquired on August 27, 2007, which prior to our acquisition operated as the Winnipeg Commodity Exchange, Inc.

 

   

“ICE Clear Canada” refers to ICE Futures Canada’s wholly-owned clearing subsidiary, which previously operated as WCE Clearing Corporation.

 

   

“Creditex” refers to our wholly-owned subsidiary that we acquired on August 29, 2008.

 

   

“ICE Clear Credit” refers to our clearing subsidiary that we established and launched on March 9, 2009. Prior to July 16, 2011, ICE Clear Credit operated as ICE Trust.

Due to rounding, figures in tables may not sum exactly. All references to “options” or “options contracts” in the context of our futures products refer to options on futures contracts.

Forward-Looking Statements

This Annual Report on Form 10-K, including the sections entitled “Business”, “Legal Proceedings,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements that are based on our present beliefs and assumptions and on information currently available to us. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “targets,” “goal,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These risks and other factors include those set forth in Item 1(A) under the caption “Risk Factors” and elsewhere in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, or SEC. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you not to place undue reliance on these forward-looking statements. Forward-looking statements and other factors that may affect our performance include, but are not limited to:

 

   

our expectations regarding the business environment in which we operate and trends in our industry, including trading volumes, changing regulations and increasing competition and consolidation;

 

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conditions in global financial markets and domestic and international economic conditions;

 

   

volatility in commodity prices;

 

   

the impact of any changes in domestic and foreign laws, regulations or government policy with respect to financial markets, including any changes in previously issued regulations and policies;

 

   

our ability to identify and effectively pursue acquisitions and strategic alliances and successfully integrate the companies we acquire;

 

   

the success of our clearing houses and our ability to minimize the risks associated with operating multiple clearing houses in multiple jurisdictions;

 

   

our ability to keep pace with rapid technological developments and to ensure that the technology we utilize is not vulnerable to security risks;

 

   

the accuracy of our cost estimates and expectations;

 

   

our belief that cash flows from operations will be sufficient to service our current levels of debt and fund our working capital needs and capital expenditures for the foreseeable future;

 

   

our ability, on a timely and cost-effective basis, to offer additional products and services, leverage our risk management capabilities and enhance our technology;

 

   

our ability to maintain existing market participants and attract new ones;

 

   

our ability to protect our intellectual property rights, including the costs associated with such protection, and our ability to operate our business without violating the intellectual property rights of others;

 

   

our ability to identify trends and adjust our business to benefit from such trends;

 

   

potential adverse results of litigation; and

 

   

the soundness of our electronic platform and disaster recovery system technologies.

For a detailed discussion of these and other factors that may affect our performance, please see “Item 1(A), Risk Factors”, below. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all factors that may affect our business and prospects. Further, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

 

ITEM 1. BUSINESS

General

We are a leading operator of global futures exchanges, over-the-counter, or OTC, markets, derivatives clearing houses and post-trade services. We operate leading futures and OTC marketplaces for trading and

 

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clearing a broad array of energy and agricultural commodities, emissions contracts, credit default swaps, or CDS, equity indexes and currency contracts. Currently, we are the only marketplace to offer an integrated electronic platform for side-by-side trading of products in both the futures and OTC markets, together with clearing services, post-trade processing and market data. Through our widely-distributed electronic markets, we bring together buyers and sellers of commodities and financial contracts. We also offer a range of services to support our participants’ risk management and trading activities.

We were formed in 2000 as an OTC energy marketplace. Since that time, we have expanded into commodity futures markets and clearing houses, through acquisitions and internal development. We conduct our regulated energy futures markets through our wholly-owned subsidiary, ICE Futures Europe, which is based in the United Kingdom. ICE Futures Europe is the largest energy futures exchange outside of the United States as measured by 2011 traded contract volumes according to the Futures Industry Association. We conduct our regulated U.S. futures markets through our wholly-owned subsidiary, ICE Futures U.S. We conduct our regulated Canadian futures markets through our wholly-owned subsidiary, ICE Futures Canada. ICE Futures Europe contracts are cleared by ICE Clear Europe, ICE Futures U.S. contracts are cleared by ICE Clear U.S. and ICE Futures Canada contracts are cleared by ICE Clear Canada, each of which is a separate wholly-owned subsidiary.

We conduct our OTC energy markets through ICE U.S. OTC Commodity Markets, LLC as an Exempt Commercial Market under the Commodity Exchange Act and our cleared OTC energy contracts clear through ICE Clear Europe. We conduct our CDS trade execution business through Creditex Group Inc. and its subsidiaries, or Creditex, an interdealer broker for CDS. ICE Clear Credit offers clearing primarily for North American CDS and ICE Clear Europe offers clearing for European CDS.

Our Business

We operate global futures, options and swaps markets and derivatives clearing houses that promote price transparency and offer participants the opportunity to hedge and trade a variety of commodities and financial derivatives. Our core products include contracts based on crude and refined oil, natural gas, power, coal, emissions, sugar, cotton, coffee, cocoa, canola, frozen concentrated orange juice, CDS, currencies and equity indexes. Our markets provide participants with a means for trading and managing risks associated with price volatility, securing physical delivery of certain contracts, as well as enabling asset allocation or diverification. The majority of our contract volume is financially, or cash, settled, meaning that settlement is made through cash payments based upon the difference between the contract price and the value of the underlying commodity at contract expiry rather than through physical delivery of the commodity itself.

All futures and options contracts and the majority of our OTC energy contracts are cleared through one of our central counterparty clearing houses. We also offer execution services for OTC contracts on a bilateral basis, meaning that customers enter into the OTC contract directly with counterparties generally under International Swaps and Derivatives Association agreements. Our customer base includes corporations, manufacturers, utilities, commodity producers and refiners, financial institutions, institutional and individual investors and governmental bodies. Except for an immaterial amount of matched principal transactions by Creditex, we do not take any trading positions in any contracts in the markets we operate.

We operate our markets primarily on our electronic trading platform, known as the “ICE platform”, we offer trading in CDS through a hybrid model in which trading is conducted both electronically and through voice brokerage operations, and we offer both open-outcry and electronic trading in options at ICE Futures U.S. In addition to trade execution, our electronic platform offers comprehensive trading-related services, including pre- and post-trade risk management, connectivity, electronic trade confirmation and clearing services. This technology infrastructure facilitates straight-through-processing of trades, including integration of front-, back- and middle-office trading, processing and risk management capabilities.

 

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We operate and manage our business on the basis of three segments: our futures segment, our global OTC segment and our market data segment. For a discussion of these segments and related financial disclosure, refer to note 17 to our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

History

IntercontinentalExchange was established in May 2000, with our founding shareholders representing some of the world’s largest energy companies and global financial institutions. Our mission was to transform the OTC energy markets by providing an open, accessible, around-the-clock electronic marketplace to a previously fragmented and opaque market structure. We offered the energy community improved price transparency, efficiency, liquidity and lower costs than were available through traditional methods of trade execution, such as voice brokered or open outcry markets.

In June 2001, we expanded our business into the futures markets by acquiring ICE Futures Europe. As the leading regulated energy futures exchange outside of the United States, ICE Futures Europe’s markets are fully electronic and today host trading for over 50% of the world’s crude and refined oil futures contract volume. ICE Data was formed in 2002 to meet the demand for increased market data in the OTC energy markets and it provides futures and OTC commodity market data globally.

In November 2005, we completed our initial public offering on the NYSE under the ticker symbol “ICE” and have since become a member of the Russell 1000 and the S&P 500 indexes. In January 2007, we acquired ICE Futures U.S. Following the introduction of electronic futures trading in February 2007, ICE Futures U.S. transitioned from a floor-based futures market to an electronic futures market, although options markets continue to be available for trading on the floor of the exchange.

In August 2007, we acquired ICE Futures Canada, which is the world’s largest canola market. In August 2008, we completed our acquisition of Creditex, an interdealer broker for the execution and processing of credit derivatives. We launched ICE Clear Europe in November 2008 and launched ICE Clear Credit in March 2009 when we acquired The Clearing Corporation, or TCC. TCC’s CDS risk model was utilized by ICE Clear Credit and ICE Clear Europe to develop clearing for CDS instruments.

In July 2010, we acquired Climate Exchange plc, or CLE, an operator of environmental markets in the United States and Europe. CLE was the parent company of European Climate Exchange, or ECX. In July 2011, we acquired a 12% stake in Cetip, S.A., or Cetip. Based in Brazil, Cetip is a publicly traded company and is the country’s leading operator of registration and custodial services for securities, fixed-income bonds and OTC derivatives.

Futures Marketplaces

In our futures segment, we currently operate three regulated futures exchanges in the United States, the United Kingdom and Canada. Each futures exchange has an affiliated clearing house in order to provide settlement and risk management services for the contracts initiated on the exchange.

ICE Futures Europe operates as a Recognized Investment Exchange in the United Kingdom, where it is regulated by the U.K. Financial Services Authority, or FSA. ICE Futures Europe is a leading exchange for crude and refined oil futures contracts, as well as futures based on European emissions, natural gas and power and global coal. Its members and their customers include many of the world’s largest energy companies, commercial energy consumers and financial institutions. ICE Futures Europe contracts are cleared by ICE Clear Europe, which is regulated by the FSA as a Recognized Clearing House. ICE Clear Europe has also registered as a derivatives clearing organization in the United States.

 

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ICE Futures U.S. is a leading global futures and options exchange for trading in a range of agricultural commodities, including sugar, coffee, cotton, cocoa and frozen concentrated orange juice. ICE Futures U.S. also lists futures and options contracts for financial products, including the Russell Indexes, currencies and the U.S. Dollar Index, or USDX. ICE Futures U.S. operates as a designated contract market and is regulated by the Commodity Futures Trading Commission, or CFTC. ICE Clear U.S. clears and settles contracts traded on ICE Futures U.S. and is a derivatives clearing organization regulated by the CFTC.

ICE Futures Canada is Canada’s leading agricultural commodity futures and options exchange. Based in Winnipeg, Manitoba, ICE Futures Canada offers futures and options contracts on canola, wheat and western barley. ICE Futures Canada is a recognized commodity futures exchange under the provisions of The Commodity Futures Act (Manitoba) and is regulated by the Manitoba Securities Commission. ICE Clear Canada, which clears and settles contracts traded on ICE Futures Canada, is a recognized clearing house under the provisions of The Commodity Futures Act (Manitoba) CFA and is regulated by the Manitoba Securities Commission.

Global OTC Markets

In our global OTC segment, we operate energy and CDS markets, as well as OTC clearing operations. We conduct our OTC energy markets through ICE U.S. OTC Commodity Markets, LLC pursuant to the Commodity Exchange Act as an Exempt Commercial Market. We offer trading and clearing in hundreds of energy contracts, covering a broad range of oil, natural gas and power products. These contracts include financially and physically settled contracts. We list 668 standardized OTC energy contracts for clearing, and 92% of our OTC energy transaction and clearing revenues were traded on a cleared basis in our markets during the year ended December 31, 2011. Participants in our OTC energy markets must meet certain guidelines to qualify as eligible contract participants and eligible commercial entities under the Commodity Exchange Act. We offer clearing services for our OTC energy markets through ICE Clear Europe.

In our CDS business, we offer both electronic and voice brokered markets for trading CDS through Creditex Brokerage LLP, which is authorized and regulated by the FSA, and Creditex, LLC, our U.S. based interdealer broker. We offer clearing services for our OTC energy markets and for our European CDS markets through ICE Clear Europe. We offer clearing services for our North American CDS markets through ICE Clear Credit, which is a derivatives clearing organization regulated by the CFTC and a securities clearing agency regulated by the U.S. Securities and Exchange Commission.

Market Data

We offer market data services for futures and OTC markets through our subsidiary, ICE Data. ICE Data compiles, formats and offers packages of market data derived from trading activity on our platform into information products that are relied upon by customers in over 120 countries.

ICE Data provides market data services based on our energy futures and OTC markets, as well as our agricultural commodities, equity indexes and currency markets. Market data services include publication of daily indexes, historical price and other transaction data, view-only and mobile access to our trading platform, end of day settlements and price data. ICE Data also offers a service that provides independent validation of participants’ own valuations for OTC products.

Our Competitive Strengths

We have established ourselves as a leading operator of global regulated futures exchanges, OTC markets and clearing houses. We believe our key strengths include:

 

   

liquid, diverse global markets and benchmark contracts;

 

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geographic and product diversity with multiple regulated exchanges and global OTC markets;

 

   

secure central counterparty clearing operations and risk management for futures and OTC markets;

 

   

widely-distributed, leading edge technology for trading and risk management; and

 

   

innovative, growth-oriented and customer-focused management.

Liquid, Diverse Global Markets and Benchmark Contracts

Our futures contracts serve as global benchmarks for managing risk relating to exposure to price movements in the underlying products, including energy and agricultural commodities and financial products. For example, we operate the leading market for trading in Brent crude oil futures, as measured by the volume of contracts traded in 2011 according to the Futures Industry Association. The ICE Brent Crude futures contract is the leading benchmark for pricing light, sweet crude oil produced and consumed outside of the U.S. The ICE Brent Crude futures contract is part of the Brent complex, which forms the price reference for approximately two-thirds of the world’s physical oil. Similarly, the ICE Gas Oil futures contract is the leading benchmark for the pricing of refined oil products globally, including diesel and heating oil. We also operate the world’s second largest market for trading in West Texas Intermediate, or WTI, crude oil futures, as measured by the volume of contracts traded in 2011 according to the Futures Industry Association. The WTI Crude futures contract is the leading benchmark for pricing light, sweet crude oil delivered and consumed within the United States. Based on 2011 contract volume, over half of the world’s crude and refined oil futures are traded through ICE Futures Europe. We also offer leading agricultural benchmark contracts, including sugar, cotton and coffee, that serve as global price references. In addition, we offer futures markets in the benchmark Russell indexes and U.S. Dollar index.

The following table shows the number and notional value of commodity and equity index futures contracts traded in our most significant futures markets. The notional value of contracts represents the aggregate value of the underlying commodities and instruments covered by the contracts.

 

     Year Ended December 31,  
     2011      2010      2009  
     Number of
Contracts
     Notional
Value
     Number of
Contracts
     Notional
Value
     Number of
Contracts
     Notional
Value
 
     (In thousands)      (In billions)      (In thousands)      (In billions)      (In thousands)      (In billions)  

ICE Brent Crude futures and options

     134,248       $ 14,493         100,217       $ 8,103         74,351       $ 4,748   

ICE Gasoil futures and options

     66,184         6,111         52,583         3,565         36,253         1,963   

ICE WTI Crude futures and options

     51,936         4,878         52,790         4,241         46,412         2,969   

Russell Index futures and options

     44,416         3,366         40,352         2,680         39,297         2,021   

Sugar futures and options

     31,455         952         37,910         943         34,796         699   

The following table shows the number and notional value of OTC commodity contracts in our most significant OTC energy markets:

 

     Year Ended December 31,  
     2011      2010      2009  
     Number of
Contracts
     Notional
Value
     Number of
Contracts
     Notional
Value
     Number of
Contracts
     Notional
Value
 
     (In thousands)      (In billions)      (In thousands)      (In billions)      (In thousands)      (In billions)  

North American natural gas

     338,957       $ 3,539         257,354       $ 2,442         204,690       $ 2,024   

North American power

     68,117         289         69,223         315         53,599         344   

Global oil and refined products

     8,720         5,462         5,722         2,420         2,232         811   

 

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The following table shows the gross notional value of CDS contracts traded through Creditex, and the gross notional value of CDS cleared by ICE Clear Credit and ICE Clear Europe:

 

     Year Ended December 31,  
     2011      2010      2009  
     Gross
Notional
Value
Traded
     Gross
Notional
Value
Cleared
     Gross
Notional
Value
Traded
     Gross
Notional
Value
Cleared
     Gross
Notional
Value
Traded
     Gross
Notional
Value
Cleared
 
     (In billions)      (In billions)      (In billions)      (In billions)      (In billions)      (In billions)  

Credit default swaps

   $ 1,785       $ 11,627       $ 2,256       $ 9,988       $ 2,454       $ 4,620   

Geographic and Product Diversity with Multiple Regulated Exchanges and Global OTC Markets

Our electronic trading platform offers qualified market participants a single interface to our exchanges, covering a range of categories, including energy, agricultural, equity index, environmental and currency products. In addition, Creditex also offers credit derivatives products on its CDS trade execution platform. By offering trading in multiple markets and products we provide our participants with flexibility to implement their trading and risk management strategies across a variety of asset classes and geographies. We serve customers in dozens of countries as a result of listing products that are relevant globally, such as crude oil, credit derivatives, sugar, equity indexes and currencies.

Through our accessible trading platform, we offer real-time market transparency to participants, observers and regulators for dozens of futures and OTC markets. This transparency has increased liquidity and the confidence participants have in transacting in our markets. Our range of market data for the OTC energy markets meets or surpasses those offered by other execution venues and data providers, which may be beneficial to us in a regulatory and market environment that favors price transparency.

In addition, we believe that our growth has been driven in part by our ability to uniquely offer qualified energy market participants integrated access to both the futures and OTC energy markets. We believe that our ability to develop specialized technology and launch new products provides us with competitive advantages, including a larger addressable market, extensive domain knowledge in our markets, insight into commercial market participants’ needs, the ability to offer cross margining for correlated products, and the ability to offer a broad range of market data services. In addition to cleared OTC markets, we continue to offer the ability to execute in bilateral markets for those customers and products where it is preferred or required, for certain physical contracts or those where clearing is not available.

Secure Central Counterparty Clearing Operations and Risk Management for Futures and OTC Markets

We offer a range of risk management services, including trade execution, market data, post-trade processing and clearing services on an integrated platform. The transparency and regulation in our markets, along with our clearing houses, help ensure the security of our markets. The credit and performance assurance provided by our clearing houses to their clearing members substantially reduces counterparty risk and is a critical component of our exchanges’ identity as a reliable and secure marketplace for global transactions.

Our clearing houses are designed to protect the financial integrity of our markets by maintaining collateral, facilitating pays and collects, and limiting counterparty credit risk. Positions are marked to market at least daily, and in some cases at regular intervals throughout the day. The clearing houses maintain a comprehensive set of rules and policies in addition to the customer protection and risk management framework.

In addition to clearing, our markets provide important risk management tools based on changes in market conditions, regulations, market structure and technological advancements. The risk management tools include the

 

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development of new traded contracts, platforms for post-trade services, market data, portfolio compression and credit event auctions, each of which is designed to enable market participants to manage risks inherent in their businesses.

Widely-Distributed, Leading Edge Technology for Trading and Risk Management

Our integrated, leading edge technology infrastructure provides centralized and direct access to trade execution and clearing for a variety of energy and agricultural commodities and financial products. We operate the majority of our energy, agricultural and financial markets on our electronic trading platforms. Our trading platforms have enabled us to attract significant liquidity from traditional market participants, as well as new market entrants seeking the access, efficiency and ease of execution offered by electronic trading. We have developed a significant global presence with thousands of active screens at over 1,900 OTC participant firms and over 900 futures participant firms as of December 31, 2011.

Our participants may connect to our electronic platform via one of our telecommunication hubs, the Internet, dedicated lines, or through co-location at our data center. We have telecommunication hubs available in the United States, Europe, Canada and Asia. Participants may access our electronic platform for trading in our markets through our own front-end, known as WebICE or using our application programming interfaces, or APIs. Our APIs allow access via proprietary integrations, brokerage firms, and multiple Independent Software Vendors, or ISVs. ISVs allow market participants to access multiple exchanges through a single interface, which may be integrated with the participant’s risk management systems. We do not depend on the services of any one ISV for access to a significant portion of our participant base.

Market participants in our CDS markets may transact via Creditex’s trading platform or other electronic trade processing tools developed by Creditex. During the years ended December 31, 2011 and 2010, 61% and 49%, respectively, of our revenues from our Creditex business were generated through electronic trading and processing.

We develop and maintain our own clearing systems across five clearing houses. In 2011, ICE Clear Europe completed its extensive migration from outsourced clearing technology to internally developed technology and related software. The benefits of this transition include modernizing the clearing technology standards to allow our clearing houses to benefit from technology enhancements and increasing our ability to introduce new products, markets and services. Details on each of these and other system offerings are discussed in the “Technology” section, below.

Innovative, Growth-Oriented and Customer-Focused Management

We strive to foster a culture of customer service, innovation and growth within our staff and management team. We put an emphasis on the integrity of our markets to maintain confidence in our marketplace and in our company. We have been recognized both within and outside our industry for innovation and service across our exchange, clearing and corporate initiatives. We work closely with our customers to create products and services that meet their needs and requirements, and these customer relationships help us to anticipate and lead industry change. We offer performance-based compensation that includes various forms of equity ownership in our common stock by a broad base of our employees to reflect our shared, company-wide objectives, which include achieving key financial metrics, growth, innovation and a high level of customer service.

Our board of directors is independent from our participants and the trading activity in our markets, which allows our board to act impartially in making decisions regarding our business. In addition to an independent governance structure at the parent level, we have implemented similar structures at the individual exchange and clearing house levels. Each of our exchanges and clearing houses also have boards that are majority independent and include representatives from the parent board, members of our senior management and other independent directors with industry experience.

 

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Our Growth Strategy

The record consolidated revenues and trading volume we achieved in 2011 reflect our focus on the implementation and execution of our long-term growth strategy. We have expanded our core business both organically and through acquisitions, developed innovative new products for global markets, and provided trading-related services to a larger and more diverse participant base. In addition, we have completed a number of strategic alliances to leverage our core strengths and grow our business. We seek to advance our leadership position in the commodity derivatives markets by focusing our efforts on the following key strategies for growth:

 

   

attract new market participants;

 

   

offer additional markets and services across futures and OTC markets;

 

   

expand on our extensive clearing and risk management capabilities;

 

   

continue to enhance our technology infrastructure and increase distribution; and

 

   

pursue select strategic and acquisition opportunities.

Attract New Market Participants

Our customer base has grown and diversified due to the emergence of new participants in the commodities and financial markets, the increased use of hedging programs by commercial enterprises, our expansion into new markets, the increased access to our markets as a result of electronic trading, an increase in market participants across the U.S., European and Asian markets, and the increased allocation to commodities by institutional investors. Market participants include producers and refiners, utilities and governments, financial services companies, such as investment banks, hedge funds, proprietary trading firms and asset managers, as well as industrial and manufacturing businesses that are increasingly engaging in hedging, trading and risk management strategies. We believe that many participants are attracted to our markets in part, due to transparency, the need to hedge price volatility and the reduced barriers to market access. We intend to continue to expand our customer base by leveraging our existing relationships and our global sales and marketing team to promote participation in our markets and by offering a growing range of products and services.

Offer Additional Markets and Services Across Futures and OTC Markets

We have grown, and intend to expand, as a result of our unique position in the futures and OTC markets, our extensive clearing services and our ability to develop new and innovative products. Through our acquisition of Creditex and the formation of ICE Clear Credit and ICE Clear Europe, we offer a number of innovative products and services for the OTC markets. We have also enhanced our product offerings by entering into strategic relationships and licensing arrangements, including the arrangements for Russell Index futures, Platts products through licenses with The McGraw Hill Companies, the Natural Gas Intelligence, or NGI, indexes, Natural Gas Exchange, or NGX, indexes, and Argus products, among others. We also continue to pursue opportunities in markets we do not currently serve. We intend to continue to expand the range of products we offer, both by product type and contract design, and by continuing to work with our customers and potential partners to develop new OTC, futures and options products. We may also seek to license our platform to other exchanges for the operation of their markets on our platform, as we have done in the past with the NGX and CLE, similar to our Brix Energia e Futuros S.A., or BRIX, partnership.

Expand on Our Extensive Clearing and Risk Management Capabilities

By establishing and maintaining our own clearing operations, we are able to respond to market demand for central clearing and related risk management services. With the November 2008 launch of ICE Clear Europe,

 

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the March 2009 launch of ICE Clear Credit and the October 2011 migration of ICE Clear Europe from outsourced clearing technology to internally developed clearing technology and related software, we now manage our product development cycle and risk management and are better able to introduce products that our customers require in a timely manner, subject to regulatory approvals. As new markets evolve, we intend to leverage our domain knowledge in clearing and OTC markets to meet demand for clearing globally.

Continue to Enhance Our Technology Infrastructure and Increase Distribution

We develop and maintain our own network infrastructure, electronic trading platform and clearing systems to ensure the delivery of leading-edge technology that meets our customers’ demands for price transparency, reliability, risk management and transaction efficiency. Our participants may connect to our electronic platform via one of our telecommunication hubs, the Internet, dedicated lines or through co-location at our data center. Participants may access our electronic platform for trading in our markets through our own graphical user interface, known as WebICE, or using our APIs. Our APIs provide access for proprietary integrations, brokerage firms, and multiple ISVs. Our participants can currently access our platform using order routing and trade capture conformed ISVs. We intend to continue to increase ease of access and connectivity with our existing and prospective market participants.

Pursue Select Strategic and Acquisition Opportunities

As an early consolidator in global futures exchanges and OTC markets, we intend to continue to explore and pursue acquisition and other strategic opportunities to strengthen our competitive position and support the growth of our company. We may enter into business combinations, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material. In addition to growing our business, we may enter into these transactions for a variety of reasons, including to leverage our existing strengths into new markets, expand our risk management products and services, address underserved markets, advance our technology, anticipate regulatory change, or take advantage of new developments and potential changes in the industry.

Our Products and Services

As a leading operator of global futures exchanges, OTC marketplaces and clearing houses, we seek to provide our participants with centralized access to futures and OTC markets for price transparency, electronic trade execution, clearing and other services that support their trading and risk management activities. The primary services we provide are price discovery in futures markets, trade execution, trade processing, clearing and market data services, as well as the development and delivery of technology to facilitate these and other risk management activities.

Regulated Futures Markets

Our futures markets are fully regulated and are responsible for carrying out self-regulatory functions. Each regulated exchange has its own governance, compliance, surveillance and market supervision functions, as well as a framework for disciplining members and other market participants that do not comply with exchange rules and policies. Trading in our regulated futures markets is available to our members and their customers. Once trades are executed on our platform, they are matched and forwarded to a trade registration system that routes them to the applicable clearing house for clearing and settlement. In our clearing houses, the trades are maintained by our risk management systems until the positions are closed out.

Regulated Energy Futures Products

We operate regulated markets for energy futures contracts and options on those contracts through our subsidiary, ICE Futures Europe. Our core products include contracts based on crude and refined oil, emissions,

 

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natural gas, coal and power. Our largest contract is the ICE Brent Crude futures contract and it is based on forward physical delivery of a blend of light, sweet crude oil that originates from oil fields in the North Sea that comprise the Brent complex. Brent crude is a leading global benchmark used to price a range of traded oil products, including approximately two-thirds of the world’s oil. The ICE WTI Crude futures contract, also a light, sweet crude, is a financially-settled contract. The ICE Gasoil futures contract is a European heating oil contract that offers physical delivery and serves as a significant pricing benchmark for refined oil products, particularly in Europe and Asia.

Regulated Agricultural Futures Products

ICE Futures U.S. is a regulated leading commodity futures exchange for the trading of agricultural commodities. ICE Futures U.S. and its predecessor companies have offered trading in contracts based on agricultural commodities for over 130 years and have maintained a strong franchise in these products. These contracts are designed to provide effective pricing and hedging tools to industry users worldwide, as well as strategic trading opportunities for investors. The prices for our agricultural contracts serve as global benchmarks for the physical commodity markets, including Sugar No. 11 (world raw sugar), Coffee “C” (Arabica coffee), Cotton No. 2 (cotton) and frozen concentrated orange juice. Agricultural products accounted for 50%, 55% and 54% of ICE Futures U.S.’s trading volume in 2011, 2010 and 2009, respectively.

ICE Futures Canada is the only regulated commodity futures exchange in Canada and it facilitates the trading of futures and options on futures contracts for canola, wheat and western barley. ICE Futures Canada contracts are designed to provide effective pricing and hedging tools to industry participants worldwide, as well as strategic trading opportunities for individual and institutional investors. ICE Futures Canada’s canola futures contract is the worldwide price benchmark for canola.

Regulated Financial Futures Products

ICE Futures U.S. also offers financial products in currency, equity index and commodity index markets. ICE Futures U.S. lists futures and options contracts on certain Russell indexes, including the Russell 2000, Russell 1000 and related style indexes. We entered into a licensing arrangement with Russell with respect to Russell Index futures and options and we have certain exclusive rights throughout the remainder of the licensing agreement, which extends through June 2017, subject to achieving specified trading volumes for the various indexes. Trading volumes in the Russell equity index products represented 41%, 38% and 41%, respectively, of ICE Futures U.S.’s exchange volume in 2011, 2010 and 2009, respectively.

ICE Futures U.S. also provides futures and options markets for approximately 56 currency pair contracts including euro-based, U.S. dollar-based, yen-based, sterling-based and other cross-rates, as well as the benchmark USDX futures contract, the Continuous Commodity Index, or CCI, and Reuters Jefferies CRB Futures Price Index.

Clearing Services

We operate the following clearing houses:

 

   

ICE Clear U.S. for ICE Futures U.S. contracts;

 

   

ICE Clear Canada for ICE Futures Canada contracts;

 

   

ICE Clear Europe for ICE Futures Europe contracts, OTC cleared energy contracts and European CDS contracts;

 

   

ICE Clear Credit for North American CDS contracts; and

 

   

TCC for clearing services.

 

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These clearing houses clear, settle and guarantee to their clearing members the financial performance of all futures contracts and options on futures contracts matched through our execution facilities, with the exception of ICE Clear Credit that acts as a central counterparty in the registration and clearing of OTC CDS transactions in North America. Through our clearing houses, we maintain a system for performance of financial obligations related to transactions in products we clear. These financial obligations are between the clearing members through which buyers and sellers conduct transactions. This system is supported by several mechanisms, including rigorous clearing membership requirements, the calculation and posting of original margin deposits, daily marking-to-market of positions and payment of variation margin, maintenance of guaranty funds in which clearing members maintain deposits with our clearing houses, and broad assessment powers to recoup financial losses should they arise due to a clearing member financial default. The amount of margin deposits on hand fluctuates over time as a result of, among other things, the extent of open positions held at any point in time by market participants and the volatility of the market as reflected in the margin rates then in effect for such contracts.

By operating our own clearing houses, we are able to introduce products and services to meet new product demand in the futures and OTC markets, as well as ensure technology and operational service levels meet the efficiency and quality standards of our execution business. This flexibility allows us to increase our speed-to-market for new cleared products.

It is our objective to provide a clearing model that benefits our customers and clearing firms alike, through technological innovation, offering a competitive clearing alternative for new products and new exchanges, competitive pricing, and value-added services. In 2011, we transitioned ICE Clear Europe technology from a licensed, outsourced software to our proprietary clearing technology. The new clearing technology provides flexibility in managing our volume growth and product development. Our clearing strategy is designed to complement our diverse markets while meeting the risk management, capital and regulatory requirements of a dynamic global marketplace.

We believe the services offered by our clearing houses are a significant attraction to our market participants, and an important part of the functioning of our exchanges and OTC markets. Because the role of the clearing house is to serve as a central counterparty for each matched trade, trading parties do not need to evaluate the credit of each potential counterparty on each transaction or limit themselves to a select group of counterparties. In addition, the daily mark-to-market and margin replenishment cycle helps protect the financial integrity of our clearing houses, clearing members and market participants. This discipline and counterparty risk intermediation contributes to increased liquidity in cleared markets.

To ensure performance, our clearing houses have risk management systems and financial requirements for clearing members, and set minimum margin requirements for our cleared products. Our clearing houses use software based on either an industry standard margining convention or on our proprietary models uniquely customized to our products to determine the appropriate margin requirements for each clearing member by simulating the possible gains and losses of complex portfolios based on price movements.

For each daily settlement cycle, our clearing houses mark-to-market or value all open positions at the prevailing market price and require payments from clearing members whose positions have lost value and make payments to clearing members whose positions have gained value. Our clearing houses mark-to-market all open positions at least once per day, and in some cases more often if market volatility warrants. Marking-to-market provides both participants in a transaction with an accounting of their financial obligations under the contract. ICE Clear Europe uses an intraday risk management methodology based on real-time price and trade data feeds from our energy markets. The methodology provides calculations of original margin and realized and unrealized variation margin, and fully revalues all positions at regular intervals throughout the day. Trade, position, profit and loss reports are available to ICE Clear U.S. throughout the trading day thereby substantially reducing intraday price risk. Mark-to-market allows our clearing houses to identify any clearing members that may not be able to satisfy the financial obligations resulting from changes in the prices of their open contracts before those

 

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financial obligations become exceptionally large and jeopardize the ability of our clearing houses to ensure financial performance of their open positions. The clearing houses may make multiple intraday original margin calls in circumstances where market conditions require that they take additional steps to protect the clearing house.

Each of our clearing houses has instituted its own multi-layered risk management system of rules, policies and procedures to protect itself in the event of a clearing member default. In addition, each of our clearing houses engages in the following activities as part of our clearing risk management systems:

 

   

performs real-time monitoring of the risk to clearing members from trading activities in our markets;

 

   

limits the risk exposure of open positions based upon a clearing member’s capital;

 

   

monitors the financial and operational standing of clearing members and potential risks posed by large traders; and

 

   

has broad authority to recoup financial losses following depletion of guaranty fund resources.

In the event of a payment default by a clearing member, the applicable clearing house would follow the default procedures specified in the rules of that clearing house. In general, the clearing houses would first apply assets of the clearing member to cover its payment obligation. These assets include original margin, variation margin, positions held at the clearing house and guaranty fund deposits of the member. In addition, the clearing houses could make a demand for payment pursuant to any available guarantee provided to the clearing houses by the parent or affiliate of a clearing member. Thereafter, if the defaulted payment obligation remains unsatisfied, the clearing houses would use the guaranty fund contributions of other clearing members and funds collected through an assessment against all other non-defaulting clearing members to satisfy the deficit.

ICE Clear Europe has committed $110.0 million of our cash as part of its guaranty fund for its energy business, of which $100.0 million would be utilized once an energy clearing member’s deposits are depleted and default occurs. Of the $100.0 million contribution available to energy clearing members, $50.0 million will be available on a priority basis in the event an energy clearing member defaults and ICE Clear Europe has utilized all such clearing member’s other default resources to settle the position. This amount will be used before other funds in the guaranty fund are used. If additional cash is required to settle positions, then the remaining $50.0 million of our $100.0 million contribution to the guaranty fund will be called pro-rata along with other non-defaulting ICE Clear Europe energy clearing members’ deposits in the energy guaranty fund. ICE Clear Credit and ICE Clear Europe have each committed to provide identical guaranty fund contributions for the default of a CDS clearing member totaling $50.0 million of our cash in each clearing house, $25.0 million of which is treated as a priority in a similar manner as the ICE Clear Europe energy guaranty fund arrangement described above. We have contributed $50.0 million to the ICE Clear Credit guaranty fund and $10.0 million to the ICE Clear Europe CDS guaranty fund as of December 31, 2011. We are obligated to increase our total contribution up to a total of $100.0 million. The remaining $40.0 million contribution to ICE Clear Europe will be made over a two-year period commencing on the future introduction of European CDS customer clearing. The timing for the introduction of European CDS customer clearing has not yet been determined.

As part of the powers and procedures designed to backstop financial obligations in the event of a default, each of our clearing houses may levy assessments on all of their clearing members if there are insufficient funds available to cover a deficit following the depletion of all assets in the guaranty fund prior to such assessment.

We have also committed borrowing capacity under our credit facility to assist our clearing houses with liquidity that may be needed to both operate and manage a default during a time of financial stress. We currently have a $2.1 billion five-year senior unsecured multicurrency revolving credit facility and have reserved $303.0 million of this amount for our clearing houses. We have reserved (i) up to $150.0 million of such amount to

 

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provide liquidity for the clearing operations of ICE Clear Europe, (ii) up to $100.0 million of such amount to provide liquidity for the clearing operations of ICE Clear Credit, (iii) up to $50.0 million of such amount to provide liquidity for the clearing operations of ICE Clear U.S. and (iv) up to $3.0 million to provide liquidity for certain of the clearing operations of ICE Clear Canada.

Prior to July 16, 2011, ICE Trust, which is now known as ICE Clear Credit, operated as a limited purpose New York trust company regulated by the New York State Banking Department and the New York Federal Reserve. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, effective July 16, 2011, ICE Trust converted to a Delaware-registered limited liability company known as ICE Clear Credit LLC and became a CFTC-regulated derivatives clearing organization and an SEC-regulated securities clearing agency.

Our clearing houses have an excellent track record of risk management. ICE Clear Europe, ICE Clear U.S., ICE Clear Canada, ICE Clear Credit and TCC have never experienced an incident of a clearing member default which has required the use of the guaranty funds or the assets of the clearing house.

Global OTC Markets

Our OTC markets comprise distinct energy and CDS markets. We conduct our OTC energy business through ICE U.S. OTC Commodity Markets, LLC pursuant to the Commodity Exchange Act as an Exempt Commercial Market under the oversight of the CFTC. We offer trading and clearing in hundreds of contracts, covering a broad range of oil, natural gas and power products. These contracts include financially settled contracts as well as contracts that provide for physical delivery of the underlying commodity, principally relating to natural gas, power, natural gas liquids, chemicals and crude and refined oil products.

Our global energy markets are offered directly through our transparent, electronic platform, which offers real-time access to liquidity in our markets — including the complete range of bids, offers, trades and volume posted for hundreds of contracts. Our electronic platform displays a live price ticker for all contracts traded in our OTC energy markets and provides information relating to each trade, such as the transaction price, the volume weighted average price and transacted volumes for each contract. We offer fast, secure and anonymous trade matching services, which we believe, generally are offered at a lower cost compared to traditional means of execution.

Qualified participants executing in our markets benefit from straight-through processing whereby trades are automatically confirmed and routed to back office departments and risk management systems. We believe that the broad availability of real-time OTC energy market access and data, together with the availability of cleared OTC contracts at the same price as bilateral products, has allowed us to achieve a critical mass of liquidity in our OTC markets. Our OTC markets for CDS are operated by Creditex through voice brokers and a proprietary electronic trading platform.

OTC Energy Products Overview

We list a range of cash-settled and physical energy contracts to meet market participants’ risk management and trading objectives. As of December 31, 2011, we list 668 OTC energy contracts on our electronic trading platform that are available for clearing, as well as additional contracts that are available for bilateral trading. A substantial portion of our OTC trading volume relates to approximately 35-40 highly liquid contracts in North American natural gas, North American power, and global oil. For these contracts, the highest degree of market liquidity resides in the prompt, or front month, contracts, with decreasing liquidity for longer-dated contracts.

As of December 31, 2011, we listed 143 cleared natural gas contracts, 188 cleared power contracts and 251 cleared oil contracts. Transaction and clearing fees derived from trade execution in cleared electronic OTC

 

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energy contracts were $371.9 million for the year ended December 31, 2011 and represented 92% of our total OTC energy transaction and clearing revenues during the year ended December 31, 2011, net of intersegment fees. This compares to $321.4 million for the year ended December 31, 2010 or 91% of our total OTC energy transaction and clearing revenues for the year ended December 31, 2010.

The introduction of cleared OTC energy contracts, which we helped pioneer, has reduced bilateral counterparty credit risk and the resources required to enter into multiple negotiated bilateral settlement agreements to enable trading with other counterparties. In addition, the availability of clearing for both energy OTC and futures contracts traded in our markets enables our participants to cross-margin their futures and OTC positions — meaning that a participant’s position in its futures or OTC trades may be offset against each other, subject to correlation and other risk management measures, thereby reducing the total amount of capital the participant must deposit with the futures commission merchant clearing members. In order to clear transactions executed on our platform, a participant must either be a member of the clearing house itself, or have an account relationship with a member firm or futures commission merchant. There are 42 futures commission merchants clearing OTC energy transactions in our markets.

Our cleared OTC contracts are available to voice brokers in our industry through our block trading facility. Block trades are trades executed in the voice broker market, typically over the telephone or through an instant messenging service, and then transmitted to us electronically for clearing. The ICE eConfirm platform comprises our electronic trade confirmation service for bilateral commodity markets and provides legally-binding trade confirmations for electronically submitted trades.

As of December 31, 2011, open interest in our cleared OTC energy contracts was 49.8 million contracts in North American natural gas, North American power, and global oil, as compared to 38.9 million contracts as of December 31, 2010. Open interest refers to the total number of contracts that are currently open, in other words, contracts that have been traded but not yet liquidated by either an offsetting trade, exercise, expiration or assignment.

OTC Credit Derivatives Overview

The most widely used type of credit derivatives are CDS that involve the transfer between two parties of credit risk related to fixed income instruments such as corporate debt securities. The buyer of the CDS contract, who may own the underlying credit or otherwise has a credit risk exposure to the writer of the credit, will make a payment or series of payments to the seller of the CDS contract in return for protection against default, a credit rating downgrade or other negative credit event with respect to the underlying debt security. CDS are principally used to hedge against the default of a particular reference entity on a specified credit obligation or debt instrument.

In August 2008, we acquired Creditex, a market leader and innovator in the execution and processing of CDS, with markets spanning the United States, Europe and Asia. Creditex is a dealer-to-dealer execution agent that facilitates trading in the global CDS markets and serves the most liquid segments of the market, including indexes and single-name instruments. Creditex offers voice, hybrid, and electronic trading services, which are provided through the Creditex RealTime trading platform.

The flexibility to provide voice, hybrid, or electronic trading solutions maximizes value for Creditex clients who can select the execution venue that best suits their needs. Electronic trading is the dominant trading means in the European market and has become an increasingly large portion of CDS global trading.

ICE also operates an electronic platform known as ICE Link, which is an automated trade workflow and connectivity platform for affirming credit derivatives transactions. ICE Link also provides connectivity between market participants, facilitating straight-through processing to the Depository Trust & Clearing Corporation’s Trade Information Warehouse for non-cleared CDS transaction or to a clearing house for CDS transactions that are clearing eligible. ICE Link enables market participants to capture and affirm trade details and to electronically deliver the information to downstream systems for novation, confirmation and clearing.

 

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Our CDS clearing solutions were designed to address the operational and risk management needs of the credit derivatives market. We launched the first North American CDS clearing house through ICE Clear Credit in March 2009, and the first European CDS clearing house through ICE Clear Europe in July 2009.

We have established separate CDS risk pools for ICE Clear Credit and ICE Clear Europe, including separate guaranty funds and margin accounts, meaning that the CDS positions are not combined with positions in our traditional futures and OTC energy clearing houses. The CDS clearing houses have risk management systems that are designed specifically for CDS instruments and have independent governance structures. As of December 31, 2011, ICE CDS clearing houses clear 253 single name instruments and 81 CDS indexes.

Market Data Services

ICE Data is our market data services division that manages information services for the OTC energy markets, ICE Futures Europe, ICE Futures U.S. and ICE Futures Canada.

ICE Data — OTC

Through ICE Data, we generate market information and indexes based primarily upon auditable transaction data derived from actual bid and offer postings and trades executed in our markets. Therefore, this information is not affected by subjective estimation or selective polling, the methodologies that are prevalent in other OTC markets.

ICE Data publishes complementary ICE daily indexes for our spot natural gas and power markets for over 110 of the most active gas hubs and over 30 of the most active power hubs in North America. The ICE Data end of day report is a comprehensive electronic summary of trading activity in our OTC energy markets. This information is sold as various subscription-based products. Also, for both our futures and OTC markets, we offer view-only access to market participants who are not active traders but who desire access to real-time energy prices.

ICE Data’s market price validation, or MPV, service provides independent, consensus forward curve and option values for long-dated global energy contracts on a monthly basis. MPV service participants use these consensus values to validate internal forward curves, mark-to-market their month-end portfolios and establish profit and loss valuations in accordance with the Financial Accounting Standard Board and the International Accounting Standards Board’s recommendations concerning the treatment and valuation of energy derivative contracts.

ICE Data — Futures

We provide our real-time futures data to data distributors, commonly called quote vendors, or QVs. These companies, such as Bloomberg or Reuters, then package this data into real-time, tick, intra-day, delayed, end-of-day and historical data packages to sell to end users. The real-time packages are accessed on a subscription basis and the appropriate exchange fee is paid for each screen. End users include financial information providers, futures commission merchants, pension funds, financial services companies, funds, insurance companies, commodity pools and individual investors.

Our Participant Base

Futures Business Participant Base

ICE Futures Europe’s participants include representatives from segments of the underlying industries served by our energy markets, including, among others, the oil, gas and power industries. Participants currently trade in

 

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our energy futures markets, either directly as members or through an ICE Futures Europe member. To become a member of ICE Futures Europe, an applicant must undergo a thorough review and application process and agree to be bound by ICE Futures Europe rules. ICE Futures Europe offers its screens for electronic trading in 59 jurisdictions. Memberships in our energy futures markets totaled 156 member firms as of December 31, 2011.

The five most active clearing members of ICE Futures Europe, which handle cleared trades for their own accounts and on behalf of their customers, accounted for 56%, 56% and 46% of our energy futures business revenues, net of intersegment fees, for the years ended December 31, 2011, 2010 and 2009, respectively. Revenues from two members accounted for 18% and 16% of our energy futures business revenues, net of intersegment fees, for the year ended December 31, 2011 and 21% and 10% of our energy futures business revenues, net of intersegment fees, for the year ended December 31, 2010. Revenues from one member accounted for 18% of our energy futures business revenues, net of intersegment fees, for the year ended December 31, 2009.

ICE Futures U.S.’s participants include representatives from segments of the underlying industries served by our agricultural and financial markets, including, among others, the sugar, coffee and cotton industries. Traders in these futures markets include hedgers, speculators and investors. Investors and speculators typically place orders through futures commission merchants, or through introducing brokers, who have clearing relationships with futures commission merchants. Investors may also pool their funds with other investors in collective investment vehicles known as commodity pools, which are managed by commodity pool operators and commodity trading advisors. To gain membership status, an applicant must meet the eligibility requirements of ICE Futures U.S. and be bound by ICE Futures U.S. rules. All floor brokers and floor traders must be appropriately registered under CFTC regulations and must be guaranteed by an ICE Clear U.S clearing member. ICE Futures U.S. offers its screens for electronic trading in 30 jurisdictions.

The five most active clearing members of ICE Futures U.S., which handle cleared trades for their own accounts and on behalf of their customers, accounted for 40%, 40% and 37% of ICE Futures U.S. business revenues, net of intersegment fees, for the years ended December 31, 2011, 2010 and 2009, respectively. Revenues from one member accounted for 18%, 17% and 13% of our ICE Futures U.S. business revenues, net of intersegment fees, for the years ended December 31, 2011, 2010 and 2009, respectively.

ICE Futures Canada’s participants include companies that hedge their cash products in the markets, including international grain companies, feed lots, and food processors, as well as futures commission merchants and liquidity providers. Individuals and companies can access ICE Futures Canada’s markets by registering as participants with ICE Futures Canada, or trading through a registered participant. To become a participant of ICE Futures Canada, an applicant must submit standard written application and agreement forms and must meet the criteria applicable to the category of registration requested. All futures commission merchants must be appropriately registered with the statutory regulatory authority in their home jurisdiction and any other jurisdiction in which they provide services to customers, and with any self-regulatory organizations required by their statutory regulatory authority. All entities that have direct trading status must be cleared by a registered clearing participant of ICE Clear Canada. ICE Futures Canada can offer its screens in 18 jurisdictions.

The five most active clearing members of ICE Futures Canada, which handle cleared trades for their own accounts and on behalf of their customers, accounted for 68%, 67% and 61% of ICE Futures Canada business revenues, net of intersegment fees, for the years ended December 31, 2011, 2010 and 2009, respectively. Revenues from four members accounted for 20%, 18%, 13% and 11% of ICE Futures Canada revenues for the year ended December 31, 2011, accounted for 19%, 17%, 11% and 11% of ICE Futures Canada revenues for the year ended December 31, 2010, and accounted for 17%, 15%, 11% and 10% of ICE Futures Canada revenues for the year ended December 31, 2009.

A substantial portion of the trading activity of our clearing members has typically represented trades executed on behalf of their respective customers, rather than by the firm for their own account. If a clearing

 

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member ceased its operations, we believe that the underlying customer would continue to conduct transactions and would clear those transactions through another clearing member in each of our futures exchanges. The increase in the concentration of clearing member revenues for the futures exchanges discussed above, was primarily driven by consolidation within the futures commission merchant community.

OTC Business Participant Base

Energy

OTC energy participants include many of the world’s largest energy companies, financial institutions and other active participants in the global commodities markets. These include oil and gas producers and refiners, power stations and utilities, chemical companies, transportation companies, banks, funds and other energy market participants. Pursuant to the Commodity Exchange Act, our global OTC energy markets are principals-only Exempt Commercial Markets, designed for professional traders or other commercial market participants. To become an OTC energy participant, an applicant must execute a standard participant agreement, which governs the terms and conditions of its relationship with each participant and grants the participant a non-exclusive, non-transferable, revocable license to access our electronic trading platform. Trading in our OTC energy markets is available to a participant that qualifies as an eligible commercial entity, as defined by the Commodity Exchange Act and rules promulgated by the CFTC. Eligible commercial entities must satisfy certain asset-holding and other criteria and include entities that, in connection with their business, incur risks relating to a particular commodity or have a demonstrable ability to make or take delivery of that commodity, as well as financial institutions that provide risk management or hedging services to those entities. As part of the 2008 Farm Bill, Exempt Commercial Markets were required to assume certain self regulatory responsibilities, such as market monitoring and establishing position limits or accountability limits, over contracts that serve a significant price discovery function. Fourteen natural gas and power swaps on our platform have futures-style regulation, including position limits and large trader reporting. Our participant base is global in breadth, with thousands of participants located in 33 countries.

The five most active trading participants together accounted for 10%, 16% and 15% of our OTC energy revenues, net of intersegment fees, during the years ended December 31, 2011, 2010 and 2009, respectively. No single participant accounted for more than 10% of our OTC energy revenues for the years ended December 31, 2011, 2010 or 2009.

Credit

Participants of Creditex’s RealTime electronic CDS trading platform are comprised primarily of trading desks at major international financial institutions. Clients of ICE Link’s post-trade affirmation, confirmation and processing platform include most major CDS market participants on both the buy-side and sell-side, and its post-trade processing services are used by inter-dealer brokers. To become a user of either the Creditex or ICE Link platforms, participants must meet applicable jurisdictional and regulatory requirements.

Participants in our CDS clearing business, ICE Clear Credit, currently consist of 26 clearing members. ICE Clear Europe has 16 CDS clearing members. As neutral and independent clearing houses, all qualified CDS market participants have the ability to access ICE Clear Credit and ICE Clear Europe either directly or indirectly through clearing members. Membership is available to institutions that meet the financial and other eligibility standards set forth in the clearing house rules. Each member firm provides ICE Clear Credit and/or ICE Clear Europe with authority to obtain their respective transaction information for the purpose of facilitating the novation of its CDS contracts that are warehoused within The Depository Trust & Clearing Corporation. For those firms that do not meet the membership criteria or do not wish to become members, our buy-side clearing solution provides for indirect clearing in North America, and in the near-term in Europe, subject to regulatory approval.

 

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Effective July 16, 2011, ICE Clear Credit transitioned from a regulated bank to a CFTC-regulated derivatives clearing organization and an SEC-regulated securities clearing agency pursuant to the transition provisions in the Dodd-Frank Act. ICE Clear Credit formed its Risk Management Subcommittee in September 2011. The Risk Management Subcommittee is comprised of two independent members of the ICE Clear Credit Board of Managers, two representatives of clearing members and one representative of a buy-side firm that is not a clearing member but is an active market participant. This Committee is tasked with making recommendations to the ICE Clear Credit Board of Managers regarding membership requirements, participant and product eligibility.

The five most active trading participants together accounted for 41%, 45% and 46% of our CDS revenues, net of intersegment fees, during the years ended December 31, 2011, 2010 and 2009, respectively. No single participant accounted for more than 10% of our CDS revenues for the year ended December 31, 2011. Revenues from one participant accounted for 10% of our CDS revenues, net of intersegment fees, for the year ended December 31, 2010, and revenues from two participants accounted for 11% and 10% of our CDS revenues, net of intersegment fees, for the year ended December 31, 2009.

Market Data Participant Base

Market data participants include the world’s largest commodity companies, leading financial institutions, proprietary trading firms, natural gas distribution companies and utilities, hedge funds and private investors. A large proportion of our OTC market data revenues are derived from companies executing trades on our platform. We continue to see a growing number of non-participant companies purchasing our data and subscribing to view-only screens. The primary customer base for our futures market data are market data redistributors such as Bloomberg, CQG, Interactive Data Corporation and Reuters, who redistribute our real-time pricing data and remit to us a real-time exchange fee based on the user’s access to our data. For both OTC and futures market data, end users include corporate traders, risk managers, individual speculators, consultants and analysts. No participant accounted for more than 10% of our market data revenues for the years ended December 31, 2011, 2010, or 2009.

Product Development

We leverage our customer relationships, global distribution, technology infrastructure and software development capabilities to diversify our products and services. New product development is an ongoing process, and we are continually developing, evaluating and testing new products for introduction into our futures and OTC markets to better serve our participant base. The majority of our product development relates to evaluating new contracts or markets. New contracts in our futures markets must be reviewed and approved by relevant regulators. Outside of standard licensing costs, we typically do not incur separate, identifiable material costs in connection with the development of new products — such costs are embedded in our normal costs of operation.

While we have historically developed our products and services internally, we also periodically evaluate and enter into strategic partnerships to identify opportunities to develop meaningful new products and services. If we believe our success will be enhanced by collaboration with a third party, we will enter into a licensing or other strategic arrangement.

Technology

Technology is a key component of our business strategy, and we regard effective execution of our technology initiatives as crucial to our success. We design and build our software systems and believe that having control over our technology allows us to be more responsive to the needs of our customers, better support the dynamic nature of our business and deliver the highest quality markets and data. Our systems are built using state-of-the-art software technologies, including component-based architectures and a combination of leading-edge open source and proprietary technology products. We leverage proven industry standards from

 

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leading hardware, software and networking providers, as well as employing emerging technologies that we believe will give us a competitive edge. We take a customer-focused, iterative and results-driven approach to software design and development that allows us to deliver innovative, high quality solutions quickly and effectively.

As of December 31, 2011, we employed 502 experienced technology specialists including product managers, project managers, system architects, software developers, network engineers, security specialists, performance engineers, systems and quality analysts, database administrators, website designers, helpdesk personnel and support personnel.

ICE Trading Platforms Technology

Trading Platforms

The ICE trading platforms support trading in bilateral and cleared OTC markets, as well as futures and options markets. For futures products, the platform supports several order types, matching algorithms, price reasonability checks, inter-commodity spread pricing and real-time risk management. In addition, we have developed a multi-generation implied matching engine that automatically discovers best bid and offer prices throughout the forward curve. For OTC products we also support bilateral trading with real-time credit risk management between counterparties by commodity and company. We also offer voice brokers a facility for submitting block trades for products that are eligible for clearing. Our core functionality is available on a single platform for most products we offer electronically, rendering it highly flexible and straightforward to maintain. As a result, enhancements made for one product can easily be made for other products.

Trading Platform Performance

Speed, reliability, scalability and capacity are critical performance criteria for electronic trading platforms. A substantial portion of our operating budget is dedicated to system design, development and operations in order to achieve high levels of overall system performance. Our platform currently delivers the fastest round-trip transaction times in the commodity markets, with average transaction times of approximately 700 microseconds in our futures markets, and a blended average of less than one millisecond for futures and OTC markets. We measure round trip performance end to end within our data center and through our matching engine.

High speed trading must not only be fast, but it must also be consistently fast particularly during peak trading periods. Thus, in addition to low average round trip times, we pay close attention to performance “outliers” and strive to minimize them. We define outliers as any request taking over twenty milliseconds. In addition to speed, our platform offers a high level of consistency, with more than 99.5% of transactions being completed in less than twenty milliseconds during peak trading periods. Our platform is also highly reliable, having achieved greater than 99.99% availability during 2011. Planning for capacity, performance and reliability is a core requirement and competency of our technology operations. We continually run benchmark tests and monitor our production systems to make adjustments to ensure that our systems can handle two to three times our peak transactions in our highest volume products.

WebICE & ICE mobile

Connectivity to our trading platform for our futures and OTC energy markets is available through our web-based front-end, multiple ISVs and APIs. We provide secure access to our electronic platform via our front-end, WebICE. WebICE serves as a customizable, feature-rich front-end to our trading platform. WebICE also provides an easy to use and easily accessible front-end for the entire suite of futures and OTC energy products we offer. Participants can access our platform globally via the Internet by logging in via our website homepage. Generally, we have over 10,000 connections to our electronic platform globally each trading day via WebICE

 

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and over 4,000 connections to our platform through multiple ISVs, co-location data centers, dedicated lines and global telecommunication hubs. In 2010, we introduced ICE mobile for iPhone, iPod Touch and iPad, and in 2011, we added support for Android and Blackberry enabled devices. ICE mobile allows WebICE customers to receive real-time data for our futures and OTC markets on their mobile devices. ICE mobile allows WebICE users the ability to view and manage their WebICE orders from their mobile device, as well as the option to enter new orders and trade from certain mobile devices, including the iPhone, iPad, and Android devices.

Application Programming Interfaces (APIs)

For our futures markets we offer participants the use of APIs, which allow developers to create customized applications and services around our electronic platform to suit their specific needs. Participants using APIs are able to link their own internal computer systems to our platform and enable algorithmic trading, risk management, data services, and straight-through processing. Our APIs also enable ISVs to adapt their products to our platform, thereby offering our participants a wide variety of front-end choices in addition to our WebICE interface.

We offer the following APIs for direct access customers and ISVs of our futures markets:

 

   

Order Routing — We offer order routing based on the industry standard Financial Information eXchange, or FIX protocol. The FIX message specification is fully compliant with the standard protocol.

 

   

Market Data — We offer an independent market data feed called iMpact. This feed provides full depth of book information and can be used by both trading clients and quote vendors.

 

   

Trade Capture — We offer a FIX-based API to capture all trades done by a given company for all of our products which can be used by firms to manage positions and the risk of their participants.

Creditex and ICE Link Technology

For OTC credit derivatives, Creditex’s proprietary RealTime trading platform connects buyers and sellers of credit derivatives, including single-name CDS, index CDS, emerging market CDS, and structured products and bonds, and serves as a facilitator of price discovery. RealTime’s functionality is highly scalable and quickly integrates into dealers’ existing trading systems. The RealTime platform technology can easily accommodate enhancements and add-ons in order to support additional products and rapidly respond to market demands for new functionality. The RealTime trading platform also serves as the centralized electronic site for accessing credit event fixings and credit event auctions for the CDS marketplace. ICE Link is an API-based affirmation platform that is connected to over 500 customers, including most of the major buy-side, sell-side and inter-dealer participants within the credit derivatives market. ICE Link offers three services that are available both via its API and its own user graphical user interface, including dealer-to-client trade affirmation, electronic connectivity to downstream operational vendors, connectivity to clearing houses and straight-through processing services.

YellowJacket Communication and Negotiation Technology

YellowJacket is a peer-to-peer communication and negotiation application designed to meet the advanced needs of traders and brokers in the complex markets for structured swaps, futures and options. YellowJacket integrates with multiple instant messaging, or IM, networks, and transforms ad-hoc messages into actionable market data that is consolidated in a grid, along with exchange prices, to provide a single aggregated view of the market. YellowJacket integrates with pricing and risk management systems, providing participants with the information to make better decisions with more speed and accuracy. Voice brokers may use YellowJacket tools

 

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for contact organization and quote distribution. Negotiated trades can be easily blocked into our clearing systems. The YellowJacket application supports the strict security, reliability, data control and compliance requirements of regulated trading firms.

Clearing Technology

Trade Management and Clearing Services Technology

A broad range of trade management and clearing services are offered through our clearing houses. ICE clearing systems are used at ICE Clear U.S. and ICE Clear Europe.

Historically, ICE Clear Europe relied on the clearing technology of a third party. In 2009, ICE Clear Europe began a project to migrate from its outsourced clearing technology to internally developed clearing technology and related software, called the “ICE Clearing Systems”. The ICE Clearing Systems encompass a number of integrated systems, most importantly the Post-Trade Management System, or PTMS, and the Extensible Clearing System, or ECS. PTMS provides real-time trade processing services enabling clearing members to offer real-time risk management services. ECS supports open and delivery position management, real-time trade and post-trade accounting, risk management (daily and intra-day cash, mark-to-market/option premium, and original margin using the CME SPAN® algorithm), collateral management, daily settlement and banking. ECS is a state-of-the art system offering open, Internet-based connectivity and integration options for clearing member access to user and account management, position reporting and collateral management. ECS also has an extensive reporting system which delivers on-line access to daily and historical reports in multiple formats, as well as an extensive currency delivery system to manage the delivery and payment of currency settlements. The final phase of the migration to the ICE Clearing Systems was finalized in 2011. This final phase resulted in the complete decommissioning of the third party clearing technology at ICE Clear Europe with post-trade registration and administration and position-keeping being migrated to the ICE Clearing Systems.

We offer real-time trade confirmations of trades booked for clearing over standard FIX API and support a multitude of post trade management functions including trade corrections, trade adjustment, position transfers, average pricing and give-up processing. As with the trading platform, we take a proactive approach to enhancing the reliability, capacity and performance of our clearing systems.

Clearing Risk Technology

A core component of our clearing houses is risk management of clearing firm members. We enforce rigorous risk mitigation policies, covering market, liquidity, credit and operational risk. The risk teams at each of our clearing houses set margin rates and monitor on-hand collateral of clearing members. Our risk system provides analytical tools to determine margin, to determine credit risk, and monitor risk of the clearing members. The risk system also monitors trading activities of the clearing members.

The CDS risk system self-adjusts to market conditions, accounts for the highly asymmetric risk profiles of CDS instruments, and captures the specificities of CDS trading behavior. Because the ICE CDS risk management model is self-adjusting, new original margin requirements are computed daily, as CDS spreads and volatility change. In addition to normal clearing functions, CDS clearing technology facilitates a daily auction-style price discovery process in which all clearinghouse members provide end-of-day quotes for all index and single name CDS instruments in which they have open interest. From these quotes the CDS clearing systems establish final prices for mark-to-market and variation margin calculations, as well as for computing original margin requirements and guaranty fund contributions.

Compliance and Regulatory Reporting Technology

We have invested in extensive internal compliance and external regulatory reporting systems for post trade analysis. For compliance, we developed ICEcap, which is used by our futures exchanges and OTC energy

 

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markets. The foundation for ICEcap is our enterprise data warehouse which combines data from multiple exchanges and clearing platforms. A flexible, customizable reporting front-end is then used to deliver the data to users, such as market supervision or regulators. ICEcap also services enterprise-wide business intelligence needs for our finance, operations and sales departments. For real time trade analysis, we have a license and maintenance agreement with SMARTS Market Surveillance PTY Limited to use the SMARTS system, which gives us a real time graphical view of all the trading on our futures and OTC markets and is coupled with real time alerts.

Data Centers, Global Network and Distribution

We offer a state-of-the-art hosting center in Illinois and maintain a disaster recovery site for our technology systems in Georgia. We offer access to our electronic markets through a broad range of interfaces including dedicated lines, server co-location data centers, telecommunications hubs in the United States, Europe and Asia, and directly via the Internet. The ICE global network consists of high speed dedicated data lines connecting data hubs in New York, Atlanta, Chicago, London and Singapore with the exchanges’ and clearing houses’ primary and disaster recovery data centers. This network offers customers an inexpensive, high speed, high-bandwidth solution for routing data between these hub locations and to the primary and secondary data centers.

In addition to our global network, the accessibility of our platform through the Internet differentiates our markets and serves to attract liquidity in our markets. As of the fourth quarter of 2011, there was an average of 13,500 simultaneous active connections daily during peak trading hours. One active connection can represent many individual traders. In addition, we have 44 order routing and 28 trade capture conformed ISVs interfacing to our trading platform. Many ISVs present a single connection while facilitating numerous individual participants entering orders and trading on our exchange. As a result, we have the potential to attract thousands of additional participants who may trade in our markets through ISVs or through our own front-end.

We offer server co-location space at our data centers to all of our customers. This service allows customers to deploy their trading servers and applications which virtually eliminate data transmission latency between the customer and the exchange.

Security and Disaster Recovery Technology

Physical and digital security are each critical to the operation of our platform. We employ leading-edge digital security technology and processes, including high level encryption technology, complex passwords, multiple firewalls, network level virus detection, intrusion detection systems and secured servers. We use a multi-tiered firewall scheme to control access to our network and have incorporated several protective features into our electronic platform at the application layers to ensure the integrity of participant data and connectivity. While our electronic platform is accessible over the Internet, we have added functionality that allows us to restrict platform access to designated IP addresses if so desired by a participant.

We use a remote data center to provide a point of redundancy for our trading and clearing technology. Our back-up disaster recovery facility fully replicates our primary data center and is designed to provide continuity of operations in the event of external threats, unforeseen disasters or internal failures. Our primary data center continuously collects and saves all trade information and transmits it to our disaster recovery site. For that reason, we expect that our disaster recovery system would have current, and in most cases, real-time, information in the event of a platform outage.

Competition

The markets in which we operate are highly competitive. We face competition in all aspects of our business from a number of different enterprises, both domestic and international, including traditional exchanges,

 

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electronic trading platforms and voice brokers. Prior to the passage of the Commodity Futures Modernization Act of 2000, or the CFMA, futures trading was generally required to take place on, or subject to the rules of, a designated contract market. The costs and difficulty of obtaining contract market designation and corresponding regulatory requirements created significant barriers to entry for competing exchanges. The CFMA and changing market dynamics have led to increased competition from a number of different domestic and international sources of varied size, business objectives and resources.

We believe we compete on the basis of a number of factors, including:

 

   

depth and liquidity of markets;

 

   

price transparency;

 

   

reliability and speed of trade execution and processing;

 

   

technological capabilities and innovation;

 

   

breadth of product range;

 

   

rate and quality of new product developments;

 

   

quality of service;

 

   

distribution and ease of connectivity;

 

   

mid- and back-office service offerings, including differentiated and value-added services;

 

   

transaction costs; and

 

   

reputation.

We believe that we compete favorably with respect to these factors, and that our deep, liquid markets, breadth of product offerings, new product development, and efficient, secure settlement, clearing and support services distinguish us from our competitors. We believe that in order to maintain our competitive position, we must continue to develop new and innovative products and services, enhance our technology infrastructure, maintain liquidity and offer competitive transaction costs.

Our Principal Competitors

Currently, our principal competitors include exchanges such as the CME Group Inc., or CME, the New York Mercantile Exchange, or NYMEX, which is owned by CME, and NYSE Euronext. In addition, we currently compete with voice brokers active in the OTC commodities and credit derivatives markets, other electronic trading platforms for derivatives, clearing houses and market data vendors.

Competition in our Futures Business

In our energy futures business, ICE Futures Europe competes with global exchanges such as CME and European natural gas and power exchanges, such as the European Energy Exchange. Other exchanges may, in the future, offer trading in contracts that compete with our exchange. In addition, the recent consolidation in the industry and development of industry alliances has resulted in a growing number of well-capitalized trading services providers that compete with all or portions of our business.

 

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ICE Futures U.S. competes with traditional exchanges as well as new entrants to the derivatives exchange sector. ICE Futures U.S. is a leading U.S. commodity futures exchange, with volume surpassing 425,000 contracts per day. CME, the largest derivatives exchange in the United States with 97% market share of all U.S. futures traded, competes with ICE Futures U.S. in its markets for agricultural commodities, currency and equity index contracts. ICE Futures U.S. also faces competition abroad from NYSE Euronext. Currently, ICE Futures U.S. competes with NYSE Euronext in the cocoa, sugar and coffee markets. ICE Futures U.S. also competes with other exchanges such as the Tokyo Grain Exchange and the Brazilian Mercantile and Futures Exchange.

ICE Futures Canada competes with NYSE Euronext’s rapeseed contract and the Australian Securities Exchange’s canola futures contract.

In addition to competition from derivative exchanges that offer commodity products, our futures business also faces competition from other exchanges, electronic trading systems, third party clearing houses, futures commission merchants and technology firms.

Competition in Our OTC Business

Certain financial services or technology companies, in addition to the competitors named above with respect to our futures business, have entered the OTC electronic trading services market. Additional joint ventures and consortia could form, or have been formed, to provide services that could potentially compete with certain services that we provide. Others may acquire the capacity to compete with us through acquisitions. If we expand into new markets in the future, we could face further competition. Creditex competes with other large inter-dealer brokers in the credit derivatives market, including GFI Group Inc., Tullet Prebon plc and ICAP plc.

Intellectual Property

We rely on a wide range of intellectual property, both owned and licensed, that is utilized in the operation of our electronic platforms, much of which has been internally developed by our technology team. We own the rights to a large number of trademarks, service marks, domain names and trade names in the United States, Europe and in other parts of the world. We have registered many of our most important trademarks in the United States and other countries. We hold the rights to a number of patents and have made a number of patent applications in the United States and other countries. We also own the copyright to a variety of material. Those copyrights, some of which are registered, include printed and online publications, websites, advertisements, educational material, graphic presentations, software code and other literature, both textual and electronic. We attempt to protect our intellectual property rights by relying on trademarks, patents, copyrights, database rights, trade secrets, restrictions on disclosure and other methods.

In August 2011, we obtained a patent for the business process that underpins ICE eConfirm, our electronic trade confirmation service. The patent covers the design of a computer system that matches and categorizes trades between a trader and a counterparty based on the electronically submitted trade details, which constitutes the foundation of ICE eConfirm.

In connection with the settlement of patent infringement litigation with EBS Dealing Resources, Inc., or EBS, we obtained from EBS a worldwide, fully paid, non-exclusive license to use technology covered under the Togher family of patents (presently issued or to be issued in the future claiming priority to U.S. patent application 07/830,408), which relate to the way in which bids and offers are displayed on an electronic trading system in a manner that permits parties to act only on those bids and offers from counterparties with whom the party has available credit. As a fully-paid license, we pay no royalties to EBS on an ongoing basis. The EBS license expires on the latest expiration of the underlying patents.

We hold a license and maintenance agreement with SMARTS to use its real-time market surveillance software to assist in monitoring trading of commodities, futures and options markets.

 

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ICE Futures U.S. holds exclusive licenses to use various trademarks of Russell for U.S. futures and options contracts. Our Russell license is exclusive through June 30, 2017, with some exceptions if certain trading volume is not achieved. Redacted copies of the Russell license, as amended, have been filed with the SEC as material contracts.

This Annual Report on Form 10-K also contains additional trade names, trademarks and service marks of our and of other companies. We do not intend the use or display of other parties’ trademarks, trade names or service marks to imply, and this use or display should not be construed to imply, our endorsement or sponsorship of these other parties, their endorsement or sponsorship of it, or any other relationship between it and these other parties. In particular, (i) “SPAN” is a registered trademark of CME used herein under license, (ii) SMARTS is a registered trademark of Nasdaq OMX Company and (ii) “Russell” is a trademark and service mark of the Russell Investment Group used under license.

Sales

As of December 31, 2011, we employed 175 full-time sales personnel, including voice brokers. Our global sales team is comprised primarily of former brokers and traders with extensive experience and established relationships within the derivatives markets and trading community. Since our futures and OTC businesses are regulated, we also employ sales and marketing staff knowledgeable with respect to the regulatory constraints upon marketing in this field.

Our sales and marketing strategy is designed to expand relationships with existing participants through the provision of value-added products and services, technology support and product information, as well as to attract new participants. We also seek to build brand awareness and promote greater public understanding of our business, including how our products and technology can improve current approaches to price discovery and risk management in the commodity and financial markets.

We use a cross-promotional sales and marketing team. We believe this approach is consistent with, and will provide more effective support of, the underlying emphasis of our business model — an open architecture with flexibility that allows us to anticipate and respond rapidly to customers and evolving trends in the markets for trading and risk management, while maintaining separate markets on a regulatory basis. In our CDS business, we maintain a separate brokerage and sales team to support trade execution and the delivery of services to the market.

We typically pursue our marketing goals through a combination of on-line promotion through our website, third party websites, e-mail, advertising, one-on-one client relationship management and the hosting of customer forums and events. From time to time, we also provide commission rate discounts and broker clearing rebates. We participate in domestic and international trade shows, conferences and seminars regarding derivatives markets and other marketing events designed to inform market participants about our products and services. Our sales and marketing efforts typically involve the development of relationships with market participants who actively use our markets to ensure that our product and service offerings are based on their needs.

Employees

As of December 31, 2011, we had a total of 1,013 employees, with 347 employees at our headquarters in Atlanta, 310 employees in New York, 176 employees in London and a total of 180 employees across our Winnipeg, Houston, Chicago, Stamford, Washington, D.C., San Francisco, Singapore and Calgary offices.

Business Continuity Planning and Disaster Recovery

We maintain comprehensive business continuity and disaster recovery plans and facilities to provide nearly continuous availability of our markets in the event of a business disruption or disaster. We maintain incident and

 

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crisis management plans that address responses to disruptive events at any of our locations worldwide. We continuously evaluate business risks and their impact on operations, provide training to employees and perform exercises to validate the effectiveness of our plans, including participation in industry-sponsored disaster recovery and business continuity exercises. Oversight of business continuity and disaster recovery planning is provided by a committee comprised of senior managers representing each business unit, Internal Audit and the Audit Committee of the Board of Directors.

We use a remote data center to provide a point of redundancy for our trading technology in addition to redundant power, cooling and communications infrastructure within each data center. Our back-up facility fully replicates our primary data center and is able to provide the same capacity and functionality as the primary data center. In the event of a disruption at the primary data center, participants connecting to our electronic platform are automatically routed to the back-up facility. Our primary data center continuously collects and saves all trade information and transmits it to our back-up facility. For that reason, we expect that our disaster recovery system would have current, and in most cases real-time, information in the event of a platform outage at the primary data center. In the event that we are required to complete a changeover to our back-up disaster facility, we anticipate that our platform would experience less than two hours of down time. Our primary data center is located in Illinois and the backup data center is a secure Tier-4 facility in Georgia.

Finally, our office facilities are protected against physical unavailability via our incident management plans. Dedicated business continuity facilities in Atlanta, New York, Chicago and London are maintained for employee relocation in the event that a main office is unavailable. Incident management plans place a priority on the protection of our employees.

Regulation

We are primarily subject to the jurisdiction of regulatory agencies in the United States, the United Kingdom and Canada. Due to the global financial crisis that occurred in 2008, various domestic and foreign governments have undertaken reviews of the existing legal framework governing financial markets and have either passed new laws and regulations, or are in the process of debating new laws and regulations, that will apply to our business. While certain of these changes may have a positive impact on our business, some of these changes could adversely affect our business. Please also refer to the discussion below and the “Risk Factors” section below for a description of these regulatory and legislative risks and uncertainties.

Regulation in the United States

ICE Futures U.S.’s operations are subject to extensive regulation by the CFTC under the Commodity Exchange Act. The Commodity Exchange Act generally requires that futures trading in the United States be conducted on a commodity exchange registered as a designated contract market by the CFTC. As a registered designated contract market, ICE Futures U.S. is a self-regulatory organization that has instituted detailed rules and procedures to comply with the core principles applicable to it under the Commodity Exchange Act. ICE Futures U.S. also has surveillance and compliance operations and procedures to monitor and enforce compliance with its rules, and ICE Futures U.S. is periodically audited by the CFTC with respect to the fulfillment of its self-regulatory programs in these areas. The cost of regulatory compliance is substantial.

We operate our OTC energy electronic platform through ICE U.S. OTC Commodity Markets, LLC as an Exempt Commercial Market under the Commodity Exchange Act and regulations of the CFTC. We are subject to CFTC regulation with respect to the majority of contract volume conducted in these markets pursuant to provisions of the 2008 Farm Bill. For contracts that serve a significant price discovery function, our markets are subject to regulation that is equivalent to the regulation that would apply to a futures contract traded on a designated contract market. Where contracts are not deemed to be significant price discovery contracts, we have to comply with certain reporting, data access, and record keeping obligations to and for the CFTC. Markets that

 

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do not meet the definition of significant price discovery are typically illiquid and not subject to large volumes of trading. Our non-significant price discovery contracts will be subject to regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) when the CFTC finishes implementation.

In our U.S. CDS clearing business, ICE Clear Credit is subject to the regulation of the CFTC as a derivatives clearing organization and the SEC as a clearing agency. ICE Clear Europe, which is primarily regulated in the United Kingdom by the FSA as a Recognized Clearing House, is also subject to regulation by the CFTC as a derivatives clearing organization and the SEC as a clearing agency. Also, in our U.S. CDS execution business, we offer both electronic and voice brokered markets for trading CDS through Creditex Securities Corporation, a U.S. broker-dealer and alternative trading system registered with the SEC and a member of the Financial Industry Regulatory Authority, or FINRA.

On July 21, 2010, President Obama signed the Dodd-Frank Act, into law. On July 16, 2011, certain provisions of Dodd-Frank became effective, and other provisions will become effective pending issuance of final rules by regulators. The Dodd-Frank Act is intended to reduce the risk of future financial crises and will make major changes to the U.S. financial regulatory system. The Dodd-Frank Act significantly alters the way we operate certain aspects of our OTC business, including our energy and credit OTC execution business, our OTC clearing business and our OTC data business. The Dodd-Frank Act gives the CFTC and SEC expansive authority over the OTC derivatives markets and market participants, and provides the Federal Reserve Board with authority over systemically important financial entities. ICE Clear Credit has already been notified that it may be regulated as a systemically important financial entity, and we expect that other of our clearing houses may receive similar notifications.

Through extensive rulemaking authority granted under the Dodd-Frank Act, the CFTC and SEC are creating a comprehensive new regulatory regime governing OTC derivative markets and market participants, including our OTC markets and customers. Our markets operated efficiently, securely and transparently during the financial crisis and many of the new requirements of the Dodd-Frank Act are consistent with the manner in which we already operate our business. For example, the new requirements to centrally clear OTC swaps and trade them on regulated platforms is consistent with our existing business model, thereby providing us with potential new business opportunities. The mandate to clear standardized swaps complements our clearing business since we have five clearing houses operating in three countries. Similarly, we believe our electronic platform for trading swaps already meets many of the swap execution facility requirements and satisfies many of the CFTC core principles to which swap execution facilities will be subject upon implementation of the Dodd-Frank Act, which provides us an advantage over many of our competitors in the swaps market. Finally, we believe our existing eConfirm and clearing house businesses may have advantages over companies attempting to become a swap data repository because our businesses already possess much of the data required to be reported to swap data repositories. In anticipation of swap reporting requirements, we have submitted an application to register a swap data repository, which is called TradeVault.

Over the past year, the CFTC has begun to issue final rules to implement the Dodd-Frank Act. In November 2011, the CFTC issued a final rule modifying position limits for our WTI crude oil, Henry Hub natural gas, RBOB gasoline, coffee, cocoa, sugar, and heating oil contracts. The new rules operate in two phases. The first phase will place position limits on contracts in the spot month, much like the manner in which exchanges today place position limits on contracts during the expiration period, and will require accountability levels, which are more flexible than position limits, in other months. However, spot month position limits will be aggregated across exchanges, which will limit the total number of contracts a trader can hold to contract expiration compared to our existing position limits. Like current expiration limits, the new limits are set at a percentage of deliverable supply for the underlying commodity. One exception is the financially settled Henry Hub natural gas contract, which is subject to a spot month limit that is five times higher than the deliverable supply. In the second phase, likely due in a year, the final rules will place aggregate hard position limits across all contract months on all trading venues trading economically equivalent contracts. Contracts will be aggregated across exchanges in two classes: (i) futures and options and (ii) swaps, including uncleared swaps. There will be limits within a class

 

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(futures in one class and swaps in another class) and limits across classes (futures and swaps combined). Currently, our energy contracts are not subject to all month position limits and are subject to position limits in the final three days of the delivery month. Foreign boards of trade, such as ICE Futures Europe, that list contracts that settle on the settlement price of a domestic designated contract market, would be subject to these position limits for U.S. linked contracts.

Also in November 2011, the CFTC issued final rules implementing new core principles for clearing houses. The final rules require clearing houses to lower their capital requirements for clearing members to $50 million in adjusted net capital. While lowering the capital requirements for members to join a clearing house may increase the number of clearing members, such a regulatory change may force our clearing houses to include clearing members that would not have otherwise satisfied the risk profile that we impose on existing clearing members, thereby increasing the likelihood of a default by a clearing member and risk to the clearing house. The rules also require us to make changes to the way we currently operate some of our clearing houses, including requiring the clearing house to collect gross margin at the clearing house, instead of a net amount as currently collected by ICE Clear Europe.

In January 2012, the CFTC issued final rules mandating that for OTC products, a futures commission merchant is required to keep funds of each of its customers legally segregated from other customers. The intent of this rule is to minimize the exposure of a customer to a default of another customer by removing non-defaulting customer’s funds from the risk waterfall. Clearing houses may increase the amount of original margin required from its customers or increase the size of the guaranty fund deposits required from their clearing members as a result of this change to the risk waterfall. Adding to the higher margin requirements and segregating customer funds pursuant to the rules is operationally more expensive. The additional margin requirements and expense could curtail OTC clearing at our clearing houses in the future.

In addition, the Dodd-Frank Act has an open access provision that requires a clearing house to accept swaps that originate from any swap execution facility if the clearing house already accepts the swap for clearing. For our energy swap contracts, we currently have the ability to determine the eligibility of execution venues to clear OTC swaps at our clearing house and most trading occurs on our own execution platform. The open access provisions could diminish the value of our OTC swaps execution platform by enabling competing electronic venues the ability to submit swap trades for clearing.

ICE Clear Credit has been informed by the Financial Stability Oversight Council that it may be designated as systemically important. It is likely that systemically important clearing houses will be held to standards higher than other clearing houses that are deemed not to be systemically important. Such designation may include greater regulatory scrutiny and different, likely higher, margin requirements, as well as more onerous operational standards.

Currently, we clear our U.S. OTC energy business through ICE Clear Europe. The Dodd-Frank Act requires U.S. derivatives to be cleared by a U.S. registered futures commission merchant and through a U.S. registered derivatives clearing organization. ICE Clear Europe is registered as a derivatives clearing organization and many of its clearing members have affiliates that are U.S. futures commission merchants, which we believe will limit the impact of this obligation on us, but some clearing members will have to establish clearing capabilities through a U.S. based futures commission merchant.

The Dodd-Frank Act will also make changes to the regulatory requirements of our market participants, including large market participants, such as investment banks and hedge funds. For example, some of our participants will have to register as swaps dealers or major swaps participants. Registration as a swaps dealer or major swaps participant will result in additional regulation for these entities, including greater record keeping requirements, higher capital and margin requirements and higher business conduct standards. They will also be required to segregate clients’ or counterparties’ margin in a manner similar to the segregation of futures margin.

In the United States and Europe, there are several proposals to tax financial transactions or to assess user fees for market participants. For example, in the United States, there is discussion of assessing a user fee to fund

 

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the CFTC and in Europe, legislative bodies are considering a tax on all financial transactions, commonly referred to as a “Tobin Tax.” In addition, the U.S. Congress may propose to eliminate the favorable “60/40” tax treatment for futures.

The Dodd-Frank Act also imposes changes on the parts of our business operated outside the United States. With respect to ICE Futures Europe and ICE Futures Canada, we presently have permission to allow screen-based access by market participants in the United States pursuant to “no action” letters from the CFTC. Pursuant to the Dodd-Frank Act and recently issued final rules, the CFTC will require foreign exchanges such as ICE Futures Europe and ICE Futures Canada to register with the CFTC and be subject to direct regulation in the United States. While the registration process will impose obligations similar to the obligations currently imposed under the informal “no-action” process, direct regulation of our non-U.S. exchanges by U.S. regulators may prove to be unattractive to non-U.S. market participants due to the additional costs and greater oversight associated with this regulation.

Finally, the CFTC has issued final rules implementing the Dodd-Frank Act provisions for real time public reporting of swaps transaction data and swap data recordkeeping. Such rules will place added burdens on our market participants and could negatively impact the value of our market data business. In anticipation of the final rules, we submitted an application to the CFTC to register ICE Trade Vault, LLC as a Swap Data Repository, or SDR. If the CFTC approves our registration as a SDR, operating a SDR will allow us to offer swap data recordkeeping and reporting services that fulfill the reporting requirement on market participants.

We have and expect to continue to incur significant additional costs to make the necessary changes to our business to comply with the Dodd-Frank Act.

Regulation in the United Kingdom

In the United Kingdom, we operate a number of subsidiary entities that are subject to regulation by the FSA. ICE Futures Europe is recognized as a U.K. investment exchange and ICE Clear Europe is recognized as a U.K. clearing house by the FSA in accordance with the Financial Services and Markets Act 2000, or FSMA. As such, ICE Futures Europe maintains front-line regulatory responsibility for its markets. In order to retain their status as U.K. Recognised Bodies, ICE Futures Europe and ICE Clear Europe are required to meet various legislative and regulatory requirements. Failure to comply with these requirements could subject ICE Futures Europe or ICE Clear Europe to significant penalties, including de-recognition.

Further, we engage in sales and marketing activities in relation to our OTC business through our subsidiary ICE Markets Limited, or ICE Markets, which is authorized and regulated by the FSA as an investment adviser and arranger. Creditex Brokerage LLP, a subsidiary of ICE, is authorized and regulated by the FSA to operate the Creditex RealTime platform in the United Kingdom and facilitate the conclusion of transactions of credit derivative instruments and bonds. Creditex Brokerage has FSA regulatory approval to deal as riskless principal or agent. The RealTime platform is open to eligible counterparties and professional clients as defined by the Markets in Financial Instruments Directive and Creditex’s services are not available to retail consumers. ICE Processing International Limited, a subsidiary of ICE, is also authorized and regulated by the FSA and authorized to provide the ICE Link platform and related services in the United Kingdom. In order to retain their status as FSA registered entities, these entities are required to meet various regulatory requirements in the United Kingdom.

The regulatory framework applicable to ICE Futures Europe is supplemented by a series of legislative provisions regulating the conduct of participants in the regulated market. Importantly, FSMA contains provisions making it an offense for participants to engage in certain market behavior and prohibits market abuse through the misuse of information, the giving of false or misleading impressions or the creation of market distortions. Breaches of those provisions give rise to the risk of sanctions, including financial penalties. It should be noted that under FSMA, ICE Futures Europe as a recognized investment exchange, and ICE Clear Europe as a

 

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recognized clearing house, enjoy statutory immunity in respect of any claims for damages brought against them relating to any actions undertaken (or in respect of any action they have failed to take) in good faith, in the discharge of their regulatory functions.

As in the United States and in other jurisdictions, the United Kingdom has decided to reform the national structures for the supervision of financial institutions. More power is being given to its central bank, the Bank of England, by splitting the current unitary regulator, the FSA, into a consumer protection and markets agency, or FCA (Financial Conduct Authority), and a prudential agency, known as the Prudential Regulatory Authority, or PRA. The PRA will become a subsidiary of the Bank of England and the supervision of central counterparties will move from the FSA to the Bank of England. As a result of these changes, ICE Futures Europe will be supervised by the markets division of the FCA and ICE Clear Europe will be supervised by the Bank of England. The new structure is expected to be launched in 2013 and we have begun to plan for this transition.

The Markets in Financial Instruments Directive (Directive 2004/39/EC), or MiFID, came into force on November 1, 2007 and introduced a harmonized approach to the licensing of services relating to commodity derivatives across Europe. The legislation also imposed greater regulatory burdens on European Union based operators of regulated markets, alternative trading systems and authorized firms in the commodity derivatives area. Further, it introduced the concept of a pan-European “passport” that allowed ICE Futures Europe to offer services in all European Economic Area member states. This legislation is consistent with other initiatives introduced to provide a more harmonized approach to European regulation, for example, the Market Abuse Directives (Directives 2003/06/EC and 2004/72/EC) that became effective in October 2004 and July 2005 introduced a specific prohibition against insider dealing in commodity derivative products.

In the wake of the financial crisis, MiFID has been reviewed. The negotiation of upgraded legislation, known as MiFID II, has begun on the basis of a draft from the European Commission, containing provisions to enhance financial stability, increase consumer protection and to bring standardized OTC derivatives onto electronic trading platforms. In particular the new legislation will contain enhanced provisions on exchanges and trading systems, trade transparency, publication mechanisms, high frequency trading, a revamp of retail client-facing conduct of business rules, commodity trading, position limits and position reporting. There are also provisions relating to the extension of access provisions to both swaps and futures, and the introduction of principles that would allow a trading venue to request that a clearing house clear its contracts together with existing open interest from other trading venues—a “fungible” clearing concept for both swaps and futures. It is expected that given its complexity MiFID II will take some time to agree, nevertheless, although these are only draft proposals subject to change, MiFID II could have a significant effect on our markets and our clearing house in Europe depending on the details of its implementation.

The European Union is also considering new legislation on OTC derivatives, clearing houses and trade repositories commonly known as the European Market Infrastructure Regulation, or EMIR. In general, EMIR will require, among other things, OTC trades to be reported to trade repositories, clearing of standardized OTC derivative contracts, and more stringent prudential, operational and business requirements for clearing houses. The final form of the legislation is expected in early 2012, although secondary legislation may take until the end of the year. Any delays to this timetable would also delay the secondary legislation foreseen in several areas of EMIR.

The negotiation of the latest Basel accord commonly known as Basel III is ongoing. Of particular interest to us is the impact of Basel revisions on the capital banks must hold in relation to clearing house default fund exposures, and the policy on this is expected to be decided during 2012. Such proposals could make participation in our clearing houses more expensive for banks. Basel III is expected to be implemented in the EU through revisions to the Capital Requirements Directive, negotiation of which is running in parallel to the Basel discussions.

All of the above changes in legislation and regulation could impose additional regulatory burdens and costs on our European businesses.

 

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Regulation in Canada

ICE Futures Canada’s operations are subject to extensive regulation by the MSC under the CFA. The CFA requires that an organization must be recognized and registered before it can carry on the business of a futures exchange, and establishes financial and non-financial criteria for an exchange. In addition, ICE Futures Canada is also recognized by the MSC as a self-regulatory organization and is required to institute and maintain detailed rules and procedures to fulfill its obligations. ICE Futures Canada is responsible for surveillance and compliance operations and procedures to monitor and enforce compliance by market participants with its rules, and is under the audit jurisdiction of the MSC with respect to these self-regulatory functions. ICE Futures Canada’s operations are also subject to oversight by other provincial securities commissions, including the Ontario Securities Commission and the Autorité des marchés financiers in Québec. ICE Futures Canada has a significant number of trading terminals in the United States for which it relies upon a no action letter. The no action letter requires it to comply with the requirements of the CFTC including making regular filings. On December 5, 2011 the CFTC approved new Part 48 of its regulations, which requires that a foreign board of trade apply to the CFTC under a formal registration process if it wishes to provide direct access to its electronic trading and order matching system to entities resident in the United States. The completed application must be submitted to the CFTC no later than August 20, 2012. ICE Futures Canada intends to complete the registration process in advance of the August 2012 date.

Available Information

Our principal executive offices are located at 2100 RiverEdge Parkway, Suite 500, Atlanta, Georgia 30328. Our main telephone number is (770) 857-4700.

We are required to file reports and other information with the SEC. A copy of this Annual Report on Form 10-K, as well as any future Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are, or will be, available free of charge, on the Internet at the Company’s website (http://www.theice.com) as soon as reasonably practicable after we file such reports with, or furnish such reports to, the SEC. A copy of these filings is also available at the SEC’s website (www.sec.gov). The reference to our website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this report. Our reports, excluding exhibits, are also available free of charge by mail upon written request to our Secretary at the address listed above. You may read and copy any documents filed by us at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

In addition, we have posted on our website the charters for our (i) Audit Committee, (ii) Compensation Committee, (iii) Nominating and Corporate Governance Committee and (iv) Regulatory Oversight Committee, as well as our Code of Business Conduct and Ethics, which includes our Whistleblower Hotline information, Board of Directors Governance Principles and Board Communication Policy. We will provide a copy of these documents without charge to stockholders upon request.

ITEM 1(A).     RISK FACTORS

You should carefully consider the following risk factors, as well as other information contained in or incorporated by reference in this Annual Report on Form 10-K. The risks and uncertainties described below are those that we currently believe may materially affect us. Other risks and uncertainties that we do not presently consider to be material or of which we are not presently aware may become important factors that affect our company in the future. If any of the risks discussed below actually occur, our business, financial condition, operating results, or cash flows could be materially adversely affected.

 

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Since our business is primarily transaction-based and dependent on trading volumes, the conditions in global financial markets and new laws and regulations as a result of such conditions may adversely affect our trading volumes and market liquidity.

Our business is primarily transaction-based, and declines in trading volumes and market liquidity would adversely affect our business and profitability. We earn transaction fees for transactions executed and cleared in our markets and from the provision of electronic trade confirmation services. We derived 89% of our consolidated revenues from our transaction-based business for each of the years ended December 31, 2011, 2010 and 2009. The success of our business depends on our ability to maintain and increase our trading volumes and the resulting transaction and clearing fees. Over the last few years, global financial markets have experienced significant and adverse conditions as a result of the financial crisis, including a freezing of credit, substantially increased volatility, outflows of customer funds and investments, uncertain regulatory and legislative changes, losses resulting from lower asset values, defaults on loans and reduced liquidity. Many of the financial services firms that have been adversely impacted by the financial crisis are active participants in our markets. The trading volumes in our markets could decline substantially if our market participants reduce their level of trading activity for any reason, such as:

 

   

a reduction in the number of market participants that use our platform;

 

   

a reduction in trading demand by customers or a decision to curtail or cease hedging or speculative trading;

 

   

regulatory or legislative changes that result in reduced trading activity, including additional regulation of swap participants and swap dealers, transaction taxes on trading, limits on high frequency trading, reduction in proprietary trading by banks and the imposition of position limits in energy markets;

 

   

heightened capital maintenance requirements resulting from new regulation or mandated reductions in existing leverage;

 

   

defaults by clearing members that have deposits in our clearing houses;

 

   

changes to our contract specifications that are not viewed favorably by our market participants;

 

   

reduced access to capital required to fund trading activities;

 

   

significant defaults by issuers of debt leading to market disruption or a lack of confidence in the market’s ability to process such defaults; or

 

   

increased instances of counterparty failure or the inability of CDS protection sellers to pay out contractual obligations upon the occurrence of a credit event.

A reduction in our overall trading volume would reduce our revenue and could also render our markets less attractive to market participants as a source of liquidity, which could result in further loss of trading volume and associated transaction-based revenues. Further, a reduction in trading volumes would likely result in a corresponding decrease in the demand for our market data, which would reduce our overall revenue.

Our business and operating results depend in large part on volatility in commodity prices generally and energy markets in particular and may be adversely impacted by domestic and international economic and market conditions.

Participants in the markets for energy and agricultural commodities trading pursue a range of trading strategies. While some participants trade in order to satisfy physical consumption needs, others seek to hedge

 

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contractual price risk or take speculative or arbitrage positions, seeking returns from price movements in different markets. Trading volume is driven primarily by the degree of volatility — the magnitude and frequency of fluctuations — in prices of commodities. Volatility increases the need to hedge contractual price risk and creates opportunities for speculative or arbitrage trading. Were there to be a sustained period of stability in the prices of commodities, we could experience lower trading volumes, slower growth or declines in revenues. In addition, a number of factors beyond our control may contribute to substantial fluctuations in our operating results.

Factors that are particularly likely to affect price volatility and price levels, and thus trading volumes and our operating results, include:

 

   

global and domestic economic, political and market conditions;

 

   

seasonality and weather conditions, including hurricanes, natural disasters and other significant weather events, and unnatural disasters like large oil spills that impact the production of commodities, and, in the case of energy commodities, production, refining and distribution facilities for oil and natural gas;

 

   

real and perceived supply and demand imbalances in the commodities underlying our products, particularly energy and agricultural products;

 

   

war and acts of terrorism;

 

   

legislative and regulatory changes;

 

   

credit quality of market participants and the availability of capital;

 

   

changes in the average rate per contract that we charge for trading or the amounts we charge for market data;

 

   

the number of trading days in a quarter;

 

   

broad trends in industry and finance, including consolidation in our industry, and the level and volatility of interest rates, fluctuating exchange rates, our hedging actions, and currency values; and

 

   

concerns over inflation and deflation.

Any one or more of these factors may reduce trading activity, which could reduce liquidity — the ability to find ready buyers and sellers at current prices — which in turn could further discourage existing and potential market participants and thus accelerate a decline in the level of trading activity in these markets. A significant decline in our trading volumes due to reduced volatility, lower prices or any other factor, could have a material adverse effect on our revenues since our transaction fees would decline reducing profitability since our revenues would decline faster than our expenses, some of which are fixed. Moreover, if these unfavorable conditions were to persist over a lengthy period of time and trading volumes were to decline substantially and for a long enough period, the liquidity of our markets, and the critical mass of transaction volume necessary to support viable markets, could be jeopardized.

Our revenues depend heavily upon trading volume in the markets for ICE Brent Crude and OTC North American natural gas. A decline in volume or in our market share in these contracts would jeopardize our profitability and growth.

Our revenues currently depend heavily on trading volume in the markets for ICE Brent Crude futures and options contracts and OTC North American natural gas contracts. Trading in these contracts in the aggregate has

 

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represented 34%, 32% and 30% of our consolidated revenues for the years ended December 31, 2011, 2010 and 2009, respectively. A decline in the combined trading volume in these contracts would have a material negative impact on our operating results and revenues.

The derivatives and energy commodities trading industry has been and continues to be subject to increased legislation and regulatory scrutiny, and we face the risk of changes to our regulatory environment and business in the future, which may reduce our trading and clearing volumes or increase our cost of doing business.

Providing facilities to trade financial derivatives and energy products is one of our core businesses and financial reform legislation like the Dodd-Frank Act, will impact many aspects of our business. With the passage of the Dodd-Frank Act, an OTC platform will have to register with the CFTC or the SEC (for security-based OTC trades) as a swap execution facility, or SEF. A SEF will be subject to a set of core principles similar to a regulated futures exchange. These core principles would require market monitoring and position limits, among other things. In addition, pursuant to rules proposed by the CFTC and the SEC, many derivatives market participants will have to register as swap dealers or major swap participants. Registration as a swap dealer or a major swap participant will subject these participants to greater regulation, including business conduct standards, record-keeping requirements and capital requirements, which may result in some of these participants leaving our markets.

An additional example of the impact of the Dodd-Frank Act includes a CFTC rule to modify position limits for our WTI crude oil, Henry Hub natural gas, RBOB gasoline, coffee, cocoa, sugar, and heating oil contracts. The new rules will place position limits on contracts in the spot month, much like the manner in which exchanges today place position limits on contracts during the expiration period and accountability levels, which are more flexible than position limits, in other months. However, spot month position limits will be aggregated across exchanges, which will limit the total number of contracts a trader can hold to contract expiration compared to our existing position limits. In the second phase, the proposed rules will place aggregate hard position limits across all contract months on all trading venues trading economically equivalent contracts. Foreign boards of trade, such as ICE Futures Europe, that list contracts that settle on the settlement price of a domestic designated contract market, would be subject to the same position limits for U.S.-linked contracts. The Dodd-Frank Act also calls for the real time public reporting of OTC derivatives transactions. ICE currently sells its OTC data and a requirement to publicly report derivatives transactions could impact the revenue we derive from selling this data. In addition, the Dodd-Frank Act mandates clearing of most OTC derivatives and we operate an electronic trade confirmation business, eConfirm, that derives revenues from electronically confirming bilateral OTC transactions. Given that the number of bilateral OTC transactions will decrease as a result of the Dodd-Frank Act and that the proposed rules provide that any swap executed on a swap execution facility platform would be deemed “confirmed”, eConfirm’s business, and the revenue we receive from eConfirm, could be materially impacted. Further, the Volker Rule and swaps push out provisions require certain of our market participants to make major changes to their business models, including, in some cases, the potential termination of some trading activities or divestiture of certain trading operations. Given the higher regulatory requirements, participants could migrate away from transacting in swaps to other derivatives, such as futures, that will not subject them to the more stringent regulatory requirements governing major market participants that trade swaps.

In the United States and Europe, there are several proposals to tax financial transactions or to assess user fees for market participants. For example, in the United States, there is discussion of assessing a user fee to fund the CFTC. In Europe, legislative bodies are considering a tax on all financial transactions, commonly referred to as a “Tobin Tax.” In addition, the U.S. Congress may propose to eliminate the favorable “60/40” tax treatment for futures. If any of these proposals become law, it could reduce our trading volumes.

With respect to our clearing houses, the CFTC may attempt to increase competition in clearing by making various changes, including the manner in which we operate our clearing houses, such as determining who qualifies as a clearing member and implementing different risk management standards. These changes could impair the effectiveness and profitability of our clearing houses. For example, the Dodd-Frank Act has an open

 

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access provision that would require a clearing house to accept swaps that originate from any swap execution facility if the clearing house already accepts the swap for clearing. Further, MiFID II contains provisions relating to open access for exchange-traded derivatives and the introduction of fungible clearing. Requiring a clearing house to accept and clear trades executed on an unrelated trading facility would expose our clearing house to trades that we may not have the same level of confidence compared to a trade that had been executed on our trading facility. Further, clearing trades from other trading facilities could make it more difficult to track positions and counterparty risk exposure, which will make the operation of our clearing houses riskier and more difficult since there will need to be common rules and margin requirements as well as more information sharing between competing clearing houses. Finally, the open access provisions could diminish the value of our OTC swaps execution platform by enabling competing electronic venues to submit trades to our clearing houses for clearing. Also, our clearing houses will have less control over the decision of whether to accept and clear trades from various execution facilities.

The CFTC approved final rulemaking to require clearing houses to lower their capital requirements for clearing members to $50 million in adjusted net capital. While lowering the capital requirements for members to join a clearing house may increase the number of clearing members in a clearing house, such a regulatory change may force our clearing houses to include clearing members that would not have otherwise satisfied the risk profile that we impose on existing clearing members, thereby increasing the likelihood of a default by a clearing member. Also, if regulatory considerations override our existing core risk management processes, margin parameters could be set too low, which could result in a clearing house holding insufficient margin funds to cover the cost of a default and thus exposing its guaranty fund to claims. The CFTC has issued final rules mandating that futures commission merchants keep funds of one customer legally segregated from other customers for OTC products. The intent of this rule is to minimize the exposure of a customer to a default of another customer by eliminating the non-defaulting customer from the risk waterfall in the event of a default. To make up for the change in the risk waterfall, clearing houses may increase the amount of original margin required from customers, which could reduce trading activity due to the higher burden associated with the increased original margin.

Our clearinghouses and trading platforms are vertically integrated. In Europe, there is discussion about whether to allow vertically integrated clearing and trading. In addition, there are proposals in Europe to force clearinghouses to offer fungible clearing forcing clearinghouses to link, allowing participants to move positions between clearinghouses. Elimination of integrated clearing and trading or fungible trading could hurt the value of our clearing and trading businesses.

Finally, the Financial Stability Oversight Committee, or FSOC, a regulatory body made up of the U.S. financial regulatory agencies, the Federal Reserve and the Department of Treasury, recently issued a letter notifying ICE Clear Credit that FSOC is considering whether to designate ICE Clear Credit as a systemically important market utility under Title VIII of Dodd-Frank. While the CFTC and SEC have not finalized rules for systemically important institutions, this designation will likely result in higher regulation for ICE Clear Credit and any of our other clearing houses that are deemed systemically important. Please see “Item 1 — Business — Regulation” above for additional information regarding new laws and regulations that impact our business.

Our compliance and risk management methods might not be effective and may result in outcomes that could adversely affect our reputation, financial condition and operating results.

Our ability to comply with applicable complex and changing laws and rules is largely dependent on our establishment and maintenance of compliance, audit and reporting systems, as well as our ability to attract and retain qualified compliance and other risk management personnel. While we have policies and procedures to identify, monitor and manage our risks, we cannot assure you that our policies and procedures will always be effective or that we will always be successful in monitoring or evaluating the risks to which we are or may be exposed. Regulators periodically review our exchanges’ ability to self-regulate and our compliance with a variety of laws and self regulatory standards. If we fail to comply with these obligations, regulators could take a variety of actions that could impair our ability to conduct our business.

 

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In addition, our regulators have broad enforcement powers to censure, fine, issue cease-and-desist orders or prohibit us from engaging in some of our businesses. We face the risk of significant intervention by regulatory authorities, including extensive examination and surveillance activity. In the case of non-compliance or alleged non-compliance with applicable laws or regulations, we could be subject to investigations and proceedings that may result in substantial penalties or civil lawsuits, including by customers, for damages which can be significant. Any of these outcomes would adversely affect our reputation, financial condition and operating results. In extreme cases, these outcomes could adversely affect our ability to continue to conduct our business.

Financial reform initiatives are occurring globally and we operate in many jurisdictions. ICE Futures Europe, through which we conduct our energy futures business, operates as a Recognized Investment Exchange in the United Kingdom. As a Recognized Investment Exchange, ICE Futures Europe has regulatory responsibility in its own right and is subject to supervision by the FSA pursuant to the FSMA. ICE Futures Europe is required under the FSMA to maintain sufficient financial resources, adequate systems and controls and effective arrangements for monitoring and disciplining its members. Likewise, ICE Futures U.S. operates as a designated contract market and as a self-regulatory organization. ICE Futures U.S. is responsible for ensuring that the exchange operates in accordance with existing rules and regulations, and must comply with eighteen core principles under the Commodity Exchange Act. The ability of each of ICE Futures Europe and ICE Futures U.S. to comply with all applicable laws and rules is largely dependent on its maintenance of compliance, surveillance, audit and reporting systems. We cannot assure you that these systems and procedures are fully effective. Failure to comply with current regulatory requirements and regulatory requirements that may be imposed on us in the future could subject us to significant penalties, including termination of our ability to conduct our regulated energy futures business through ICE Futures Europe and our regulated agricultural commodities, equity index and currency businesses through ICE Futures U.S.

The implementation of new legislation or regulations, or changes in or unfavorable interpretations of existing regulations by courts or regulatory bodies, could require us to incur significant compliance costs and impede our ability to operate, expand and enhance our electronic platform as necessary to remain competitive and grow our business. Regulatory changes inside or outside the United States or the United Kingdom could materially and adversely affect our business, financial condition and results of operations.

Owning clearing houses exposes us to risks, including the risk of defaults by clearing members clearing trades through our clearing houses, risks regarding investing the funds in the guaranty fund and held as security for original margin, and risks related to the cost of operating the clearing houses.

Operating clearing houses requires material ongoing expenditures and exposes us to various risks. There are risks inherent in operating a clearing house, including exposure to the market and counterparty risk of clearing members, defaults by clearing members and providing a return to the clearing members on the funds invested by the clearing houses, which could subject our business to substantial losses. For example, clearing members have placed an aggregate amount of cash in ICE Clear Europe relating to margin requirements and funding the guaranty funds of $16.6 billion as of December 31, 2011 and a total of $31.6 billion for all of our clearing houses. For ICE Clear Europe, these funds are swept and invested daily by JPMorgan Chase Bank N.A. in accordance with our clearing house investment guidelines. Our clearing houses have an obligation to return margin payments and guaranty fund contributions to clearing members once the relevant clearing member’s exposure to the clearing house no longer exists. In addition, ICE Clear Europe must provide an interest yield to clearing members in respect of certain margin and guaranty fund contributions lodged with the clearing house. If the investment principal amount decreases in value, ICE Clear Europe will be liable for the shortfall. Further, if the number of large, well capitalized banks that are clearing members decreases, the concentration of risks within our clearing houses will be spread among a smaller pool of clearing members.

Although our clearing houses have policies and procedures to help ensure that clearing members can satisfy their obligations, such policies and procedures may not succeed in preventing losses after a counterparty’s default. In addition, the process for deriving margins and financial safeguards for our trading activity is complex,

 

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especially for CDS products, and although we believe that we have carefully analyzed the process for setting margins and our financial safeguards, there is no guarantee that our procedures will adequately protect us from the risks of clearing these products. We cannot assure you that these measures and safeguards will be sufficient to protect us from a default or that we will not be materially and adversely affected in the event of a significant default. We have contributed our own capital to the guaranty fund of the clearing houses that could be used in the event of a default where the defaulting clearing participant’s margins, the defaulting clearing participant’s guaranty fund contributions and non-defaulting clients net funds of the clearing participant are not sufficient to cover the default. Furthermore, the default of any one of the clearing members could subject our business to substantial losses and cause our customers to lose confidence in the guarantee of our clearing houses.

Our clearing houses hold substantial amounts of sovereign and government guaranteed agency debt securities as collateral for original margin and guaranty fund deposits and as security for cash investments and loans. A decline in the value of these securities or default by a sovereign government could subject our clearing houses to additional risks of default by their clearing members, or if a loan counterparty were to default, the value of the sovereign treasury securities held by our clearing houses may be insufficient on liquidation to recover the full loan value.

Our clearing houses hold a substantial amount of client assets as collateral, which comprise U.S. and other sovereign treasury securities. As of December 31, 2011, our clearing houses held $20.9 billion of non-cash collateral: $11.3 billion of this amount was comprised of U.S. Treasury securities, $2.3 billion was comprised of Italian Treasury securities, $1.2 billion was comprised of Spanish Treasury securities, $794.2 million was comprised of Belgian Treasury securities and $1.4 billion was comprised of other European and Canadian Treasury securities (none of which were issued by Greece or Portugal). Sovereign treasury securities have historically been viewed as one of the safest securities for clearing houses to hold due to the perceived credit worthiness of major governments, but the markets for such treasury securities have experienced significant volatility recently. Our clearing houses apply a haircut or discount on the value of the collateral based on market values for sovereign securities held as collateral. The markets for such treasury securities have experienced significant volatility recently related to on-going financial challenges in some of the major European countries and leading up to the U.S. government’s negotiations regarding raising the debt ceiling, which is the maximum amount of debt that the U.S. government can incur. In 2011, the U.S. government approved an increase to the debt ceiling and approved certain spending cuts. However, the U.S. government will need to revisit the debt ceiling issue and find additional spending cuts again in the near future. In addition, if there is a collapse of the euro, our clearing houses would face significant expenses in changing their systems to account for the collapse of the euro and such an event could cause another credit crunch and major swings in asset prices and exchange rates.

Notwithstanding the current intraday margin and valuation checks conducted by our clearing houses, our clearing houses will need to continue to monitor the volatility and value of U.S. and other sovereign treasury securities because if the value of these treasury securities declines significantly, our clearing houses will need to collect additional collateral from their clearing members, which may be difficult for the clearing members to supply in the event of an actual or threatened default by a sovereign government. In addition, our clearing houses may be required to impose a more significant haircut on the value of sovereign treasury securities posted as collateral if there is uncertainty regarding the future value of these securities, which would trigger additional collateral contributions by the clearing members. If a clearing member cannot supply the additional collateral, which may include cash deposits in a currency acceptable to the clearing house, the clearing house would deem the clearing member in default. If any clearing members default as a result of the reduction in value of their collateral, our clearing houses and trading business could suffer substantial losses as a result of the loss of our own capital that has been contributed to the clearing house’s guaranty fund, a reduction in the volume of cleared transactions and a loss of confidence by clearing members in the guaranty of the clearing houses.

Further, our clearing houses invest large sums of money in connection with their clearing operations and may hold sovereign securities as security for these deposits. Our clearing houses may find access to security in

 

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the loan market constrained and be unable to secure or maintain sufficient collateral to secure cash deposits made with authorized financial institutions if there is a threat that the U.S. government could default on its debt obligations. In that event, our clearing houses might make time deposits with banks, which are secured only to the value of FDIC insurance and therefore may in significant part be lost in the event of the insolvency of the loan counterparty. Our clearing houses that utilize time deposits currently manage such exposure by limiting the counterparties with which time deposits are made and the value of such loans. However, such limits may not be feasible in the event of a significant shortfall in available security for loans as a result of a potential default by the U.S. government. In such event our clearing houses may make time deposits with lesser credit worthy counterparties or increase the loan size limit for existing counterparties, which leads to more risks with respect to the funds held by the clearing houses and could lead to substantial losses.

We face intense competition that could materially and adversely affect our business. If we are not able to compete successfully, our business will be adversely impacted.

The global derivatives industry is highly competitive and we face intense competition in all aspects of our business. We believe competition in our industry is based on a number of important factors including, but not limited to, market liquidity, transparency, technology advancements, platform speed and reliability, regulatory differences, new and existing product offerings, pricing and risk management capabilities.

Our competitors, both domestic and international, are numerous. We currently compete with:

 

   

regulated, diversified futures exchanges globally that offer trading in a variety of asset classes similar to those offered by us such as energy, agriculture, equity index, credit markets and foreign exchange;

 

   

voice brokers active in the global commodities and credit markets;

 

   

existing and newly formed electronic trading platforms, service providers and other exchanges for OTC markets;

 

   

other clearing houses;

 

   

inter-dealer brokers; and

 

   

market data and information vendors.

In addition, in the future we may be forced to compete with consortiums of our customers that may pool their trading activity to establish new exchanges, trading platforms or clearing facilities. We may also face heightened competition for execution in our OTC markets by SEFs as a result of the Dodd-Frank Act.

Recent trends towards the globalization of capital markets have resulted in greater mobility of capital, greater international participation in markets and increased competition among markets in different geographical areas. Competition in the market for derivatives trading and clearing has intensified as a result of consolidation and as the market becomes more global in connection with the increase in electronic trading platforms and the desire by existing exchanges to diversify their product offerings. Further, a regional exchange in an emerging market country, such as Brazil, India or China, or a producer country, could attract enough trading activity to compete with our benchmark products. A decline in our fees due to competitive pressure, the inability to successfully launch new products or the loss of customers due to competition could lower our revenues, which would adversely affect our profitability. We cannot assure you that we will be able to continue to expand our product offerings, or that we will be able to retain our current customers or attract new customers. If we are not able to compete successfully our business could be materially impacted, including our ability to sustain as an operating entity.

 

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We intend to continue offering new products and to explore acquisition opportunities and strategic alliances relating to other businesses, products or technologies, which will involve risks. We may not be successful in identifying opportunities or integrating other businesses, products or technologies successfully with our business. Any such transaction also may not produce the results we anticipate.

We intend to launch new products and continue to explore and pursue acquisition and other opportunities to strengthen our business and grow our company. We may enter into business combination transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material and will involve risks. Further, we may enter into or increase our presence in markets that already possess established competitors who may enjoy the protection of high barriers to entry. Attracting customers in certain countries may also be subject to a number of risks, including currency exchange rate risk, difficulties in enforcing agreements or collecting receivables, longer payment cycles, compliance with the laws or regulations of these countries, and political and regulatory uncertainties. In addition, we may spend substantial time and money developing new product offerings or improving current product offerings. If these product offerings are not successful, we may miss a potential market opportunity and not be able to offset the costs of such initiatives.

In light of consolidation in the exchange and clearing sector and competition for opportunities, we may be unable to identify strategic opportunities or we may be unable to negotiate or finance any future acquisition successfully. Further, our competitors could merge, making it more difficult for us to find appropriate entities to acquire or merge with and making it more difficult to compete in our industry due to the increased resources of our merged competitors. If we are required to raise capital by incurring additional debt or issuing additional equity for any reason in connection with a strategic acquisition or investment, we cannot assure you that any such financing will be available or that the terms of such financing will be favorable to us.

Also, offering new products and pursuing acquisitions requires substantial time and attention of our management team, which could prevent the management team from successfully overseeing other initiatives. As a result of any future acquisition, we may issue additional shares of our common stock that dilute shareholders’ ownership interest in us, expend cash, incur debt, assume contingent liabilities, inherit existing or pending litigation or create additional expenses related to amortizing intangible assets with estimable useful lives, any of which could harm our business, financial condition or results of operations and negatively impact our stock price.

We may fail to realize the anticipated cost savings, growth opportunities and synergies and other benefits anticipated from our mergers and acquisitions, strategic joint ventures or investments, which could adversely affect the value of our common stock.

The success of our mergers and acquisitions will depend, in part, on our ability to realize the anticipated synergies and growth opportunities, as well as our expected cost savings and revenue growth trends. In general, we expect to benefit from operational synergies resulting from the consolidation of capabilities and elimination of redundancies. However, the process of integration may produce unforeseen regulatory and operating difficulties and expenditures and may divert the attention of management from the ongoing operation of our business.

Integration of acquired companies is complex and time consuming, and requires substantial resources and effort. The integration process and other disruptions resulting from the mergers or acquisitions may disrupt each company’s ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships with market participants, employees, regulators and others with whom we have business or other dealings or our ability to achieve the anticipated benefits of the merger or acquisition. We may not successfully achieve the integration objectives, and we may not realize the anticipated cost savings, revenue growth and synergies in full or at all, or it may take longer to realize them than expected.

We may not realize anticipated growth opportunities and other benefits from strategic investments or strategic joint ventures that we have entered into or may enter into in the future for a number of reasons,

 

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including regulatory or government approvals or changes, global market changes, contractual obligations, competing products and, in some instances, our lack of or limited control over the management of the business. Further, strategic initiatives that have historically been successful may not continue to be successful due to competitive threats, changing market conditions or the inability for the parties to extend the relationship into the future.

We may be required to recognize impairments of our goodwill, other intangible assets or investments, which could adversely affect our results of operations or financial condition.

Under accounting principles generally accepted in the United States, the determination of the value of goodwill and other intangible assets with respect to our acquisitions and other investments requires management to make estimates and assumptions that affect our consolidated financial statements. As of December 31, 2011, we had goodwill of $1.9 billion and net other intangible assets of $854.4 million relating to our acquisitions, our purchase of trademarks and Internet domain names from various third parties, and the Russell licensing agreement. We assess goodwill, other intangible assets and other investments and assets for impairment by applying a fair-value based test looking at historical performance, capital requirements and projected cash flows on an annual basis or more frequently if indicators of impairment arise. We have recorded pre-tax, non-cash impairment charges on our investment in the National Commodity and Derivatives Exchange, Ltd., or NCDEX, and the latest such charge was for $9.3 million during the year ended December 31, 2009.

We cannot assure you that we will not experience future events that result in similar and additional impairments. An impairment of the value of our existing goodwill, other intangible assets and other investments and assets could have a significant negative impact on our future operating results. For additional information on the NCDEX impairment charges and other potential impairment charges, refer to notes 6 and 8 to our consolidated financial statements and related notes and “Critical Accounting Policies — Goodwill and Other Identifiable Intangible Assets” in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Annual Report on Form 10-K.

Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, or if our expenses increase without a corresponding increase in revenues, our profitability will be adversely affected.

Our cost structure is largely fixed and we expect that it will continue to be largely fixed in the foreseeable future. We base our expectations of our cost structure on historical and expected levels of demand for our products and services as well as our fixed operating infrastructure, such as computer hardware and software, leases, hosting facilities and security and staffing levels. If demand for our current products and services decline, our revenues will decline. If demand for future products that we acquire or license is not to the level necessary to offset the cost of the acquisition or license, our net income would decline. For example, we have incurred significant costs to secure the exclusive license with Russell for listing Russell’s Index futures, the costs of which is being amortized over the next several years. If our clearing and execution fees for the Russell Index futures is not sufficient to offset the amortization costs, our net income will decrease. Further, we have to achieve certain volume levels to maintain exclusivity with respect to our licensing agreement with Russell and the failure to do so could materially impact the value we receive from the Russell investment. We may not be able to adjust our cost structure, at all or on a timely basis, to counteract a decrease in revenues or net income, which would adversely impact our revenues.

If we are unable to keep up with rapid changes in technology and participant preferences, we may not be able to compete effectively.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality, accessibility and reliability of our electronic platforms and our proprietary technology. The financial services

 

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industry is characterized by rapid technological change, change in use patterns, change in client preferences, frequent product and service introductions and the emergence of new industry standards and practices. These changes could render our existing proprietary technology uncompetitive or obsolete. Our ability to pursue our strategic objectives, including increasing trading volumes on our trading platforms, as well as our ability to continue to grow our business, will depend, in part, on our ability to:

 

   

enhance our existing services and maintain and improve the functionality, speed and reliability of our electronic platform, in particular, reducing network downtime or disruptions;

 

   

develop or license new technologies that address the increasingly sophisticated and varied needs of our participants;

 

   

increase trading and clearing system functionality to support future growth;

 

   

continue to build on technology provided to customers and maintain or grow the use of WebICE by our customers;

 

   

anticipate and respond to technological advances, customer demands and emerging industry practices on a cost-effective and timely basis; and

 

   

continue to attract and retain highly skilled technology staff to maintain and develop our existing technology and to adapt to and manage emerging technologies while attempting to keep our employee headcount low.

We cannot assure you that we will successfully implement new technologies or adapt our proprietary technology to our participants’ requirements or emerging industry standards in a timely and cost-effective manner. Any failure to remain abreast of industry standards in technology and to be responsive to participant preferences could cause our market share to decline and negatively impact our revenues.

Our business may be harmed by computer and communications systems failures and delays.

We support and maintain many of the systems that comprise our electronic platforms. Our failure to monitor or maintain these systems, or to find replacements for defective components within a system in a timely and cost-effective manner when necessary, could have a material adverse effect on our ability to conduct our business. Although we fully replicate our primary data center, our redundant systems or disaster recovery plans may prove to be inadequate. Our systems, or those of our third party providers, may fail or be shutdown or, due to capacity constraints, may operate slowly, causing one or more of the following:

 

   

unanticipated disruption in service to our participants;

 

   

slower response time and delays in our participants’ trade execution and processing;

 

   

failed settlement by participants to whom we provide trade confirmation or clearing services;

 

   

incomplete or inaccurate accounting, recording or processing of trades;

 

   

failure to complete the clearing house margin settlement process resulting in significant financial risk;

 

   

our distribution of inaccurate or untimely market data to participants who rely on this data in their trading activity; and

 

   

financial loss.

 

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We could experience system failures due to power or telecommunications failures, human error on our part or on the part of our vendors or participants, natural disasters, fire, sabotage, hardware or software malfunctions or defects, computer viruses, intentional acts of vandalism or terrorism and similar events. In these instances, our disaster recovery plan may prove ineffective. If any one or more of these situations were to arise, they could result in damage to our business reputation, participant dissatisfaction with our electronic platform, prompting participants to trade elsewhere, or exposure to litigation or regulatory sanctions. As a consequence, our business, financial condition and results of operations could suffer materially.

Our regulated business operations generally require that our trade execution and communications systems be able to handle anticipated present and future peak trading volume. Heavy use of computer systems during peak trading times or at times of unusual market volatility could cause those systems to operate slowly or even to fail for periods of time. However, we cannot assure you that our estimates of future trading volume will be accurate or that our systems will always be able to accommodate actual trading volume without failure or degradation of performance.

Although many of our systems are designed to accommodate additional volume and products and services without redesign or replacement, we will need to continue to make significant investments in additional hardware and software and telecommunications infrastructure to accommodate the increases in volume of order and trading transaction traffic and to provide processing and clearing services to third parties. If we cannot increase the capacity and capabilities of our systems to accommodate an increasing volume of transactions and to execute our business strategy, our ability to maintain or expand our businesses would be adversely affected.

Our systems and those of our third party service providers may be vulnerable to security risks, hacking and cyber attacks, especially in light of our role in the global marketplace, which could result in wrongful use of our information, or which could make our participants reluctant to use our electronic platform.

We regard the secure transmission of confidential information on our electronic platforms as a critical element of our operations. Our networks and those of our participants, our third party service providers and external market infrastructures, may, however, be vulnerable to unauthorized access, fraud, computer viruses, denial of service attacks, terrorism, firewall or encryption failures and other security problems. Recently, groups have targeted the financial services industry as part of their protest against the perceived lack of regulation of the financial markets and economic inequality. Further, former employees of certain companies in the financial sector have misappropriated trade secrets or stolen source code in the past and we could be a target for such illegal acts in the future.

For example, phishing and hacking incidents in the past have resulted in unauthorized transfers of certain affected European Union emissions allowances, or EUAs from accounts in various European registries. The affected EUAs have been transferred between registry accounts and eventually some affected EUAs were delivered by clearing members to the clearing house’s registered accounts in the United Kingdom pursuant to delivery obligations under relevant ICE Futures Europe contracts. Further, some affected EUAs were delivered to ICE Clear Europe’s registered accounts in the United Kingdom as collateral. We are also aware of litigation between some market participants in connection with these stolen certificates and it is possible that we could be joined to such litigation in the future.

Although we intend to continue to implement industry standard security measures ourselves and are requiring additional collateral, we cannot assure you that those measures will be sufficient to protect our business against losses or any reduced trading volume incurred in our markets as a result of any security breach. We will continue to employ resources to monitor the environment and protect our infrastructure against security breaches and misappropriation of our intellectual property assets, but these measures may prove insufficient depending upon the attack or threat posed, which could result in system failures and delays that could cause us to lose customers, experience lower trading volume, incur significant liabilities or have a negative impact on our competitive advantage.

 

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Fluctuations in foreign currency exchange rates may adversely affect our financial results.

Since we conduct operations in several different countries, including the United States, several European countries and Canada, substantial portions of our revenues, expenses, assets and liabilities are denominated in U.S. dollars, pounds sterling, euros and Canadian dollars. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against the other currencies will affect our net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies.

Although we have entered into hedging transactions and may enter into additional hedging transactions in the future to help mitigate our foreign exchange risk exposure, these hedging arrangements may not be effective, particularly in the event of imprecise forecasts of the levels of our non-U.S. denominated assets and liabilities. Accordingly, if there are adverse movements in exchange rates, we may suffer significant losses, which would adversely affect our operating results and financial condition.

Our investment in businesses outside of the United States, in particular, our investments in Cetip and Brix Energia e Futuros S.A., or BRIX, a Brazilian marketplace for electric power, could subject us to investment and currency translation risk.

We have substantial investments outside of the United States that expose us to investment and currency translation risks. In particular, we acquired 31.6 million shares, or 12%, of the common stock of Cetip for an aggregate consideration of $514.1 million in cash on July 15, 2011. We also have a partnership in BRIX, which is a Brazilian marketplace for trading electric power. We account for our investment in Cetip as an available-for-sale investment. As of December 31, 2011, the fair value of the equity security investment was $451.1 million, which was classified as a long-term investment in our consolidated balance sheet, and the unrealized loss was $63.0 million for the year ended December 31, 2011. The unrealized loss primarily resulted from foreign currency translation losses relating to the decrease in value of the Brazilian real relative to the U.S. dollar from July 15, 2011 through December 31, 2011. The Company’s investment in Cetip was recorded in and is held in Brazilian reais.

Cetip’s ability to maintain or expand its business is subject to many of the same types of risks to which we are subject. Additionally, its stock is valued in Brazilian real, which subjects us to currency translation risk. There is no guarantee that our investment in Cetip or our partnership in BRIX will be successful or that we will be able to sell our shares at prices and terms favorable to us. Further, a decrease in value of the Brazilian real or other currencies where we have investments would decrease the value of our investments in these foreign jurisdictions and would have a negative impact on our financial statements.

Owning and operating voice broker businesses expose us to additional risk and these businesses are largely dependent on their broker-dealer clients. These clients are not restricted from transacting or processing transactions directly, or through their own proprietary or third-party platforms, and the Dodd-Frank Act will change the way voice brokers can conduct their business.

Our voice broker business is primarily transaction-based and it provides brokerage services to clients primarily in the form of agency transactions, although it also engages in a limited number of matched principal transactions. In agency transactions, customers pay transaction fees for trade execution services in which we connect buyers and sellers who settle their transactions directly. In matched principal transactions (also known as “risk-less principal” transactions), we agree to buy instruments from one customer and sell them to another customer. The amount of the fee generally depends on the spread between the buy and sell price of the security that is brokered. Such transactions leave Creditex, which is the subsidiary that engages in these transactions, with risk as principal on a transaction. The majority of the Creditex transactions are agency transactions and the

 

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matched principal transactions accounted for approximately 3% of the total transactions for Creditex for the year ended December 31, 2011. With respect to matched principal transactions, a counterparty to a matched principal transaction may fail to fulfill its obligations, or Creditex may face liability for an unmatched trade. Declines in trading volumes in credit derivatives would adversely affect the revenues we derive from Creditex. We also face the risk of not being able to collect transaction or processing fees charged to customers for brokerage services and processing services we provide.

None of our broker-dealer clients are contractually or otherwise obligated to continue to use our services and our agreements with broker-dealers are generally not exclusive and broker-dealers may terminate such agreements and enter into, and in some cases have entered into, similar agreements with our competitors. Additionally, many of our broker-dealer clients are involved in other ventures, including other electronic trading and processing platforms, as trading participants or as equity holders, and such ventures or newly created ventures may compete with us.

Finally, under the Dodd-Frank Act and its rules, voice brokers will be subjected to heightened regulation and limitations on the manner in which they can execute business on behalf of customers. Requirements of trading clearable swaps on a SEF may negatively impact the interdealer broker business.

Any infringement by us of intellectual property rights of others could result in litigation and adversely affect our ability to continue to provide, or increase the cost of providing, our products and services.

Patents and other intellectual property rights are increasingly important as additional electronic components are used in trading and patents and other intellectual property rights of third parties may have an important bearing on our ability to offer certain of our products and services. Our competitors, as well as other companies and individuals, may have obtained, and may be expected to obtain in the future, patent rights related to the types of products and services we offer or plan to offer. We cannot assure you that we are or will be aware of all patents that may pose a risk of infringement by our products and services. In addition, some patent applications in the United States are confidential until a patent is issued, and therefore we cannot evaluate the extent to which our products and services may be covered or asserted to be covered in pending patent applications. Thus, we cannot be sure that our products and services do not infringe on the rights of others or that others will not make claims of infringement against us. Further, our competitors may claim other intellectual property rights over information that is used by us in our product offerings.

In addition, if one or more of our products or services is found to infringe patents held by others, we may be required to stop developing or marketing the products or services, obtain licenses to develop and market the products or services from the holders of the patents or redesign the products or services in such a way as to avoid infringing the patents. We also could be required to pay damages if we were found to infringe patents held by others, which could materially adversely affect our business, financial condition and operating results. We cannot assess the extent to which we may be required in the future to obtain licenses with respect to patents held by others, whether such licenses would be available or, if available, whether we would be able to obtain such licenses on commercially reasonable terms. If we were unable to obtain such licenses, we may not be able to redesign our products or services at a reasonable cost to avoid infringement, which could materially adversely affect our business, financial condition and operating results.

Some of the proprietary technology we employ may be vulnerable to infringement by others.

Our business is dependent on proprietary technology and other intellectual property that we own or license from third parties. Despite precautions we have taken or may take to protect our intellectual property rights, third parties could copy or otherwise obtain and use our proprietary technology without authorization. It may be difficult for us to monitor unauthorized use of our intellectual property. We cannot assure you that the steps that we have taken will prevent misappropriation of our proprietary technology or intellectual property.

 

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We have filed patent applications in the United States, Europe and in other jurisdictions on a number of aspects of our electronic trading system and trade confirmation systems. We cannot assure you that we will obtain any final patents covering these services, nor can we predict the scope of any patents issued. In addition, we cannot assure you that any patent issued will be effective to protect this intellectual property against misappropriation or infringement. Third parties in Europe or elsewhere could acquire patents covering this or other intellectual property for which we obtain patents in the United States, or equivalent intellectual property, as a result of differences in local laws affecting patentability and patent validity. Third parties in other jurisdictions might also misappropriate or infringe our intellectual property rights with impunity if intellectual property protection laws are not actively enforced in those jurisdictions. Patent infringement and/or the grant of parallel patents would erode the value of our intellectual property.

In addition, we may need to resort to litigation to enforce our intellectual property rights, protect our trade secrets, and determine the validity and scope of the intellectual property rights of others or defend ourselves from claims of infringement. We may not receive an adequate remedy for any infringement of our intellectual property rights, and we may incur substantial costs and diversion of resources and the attention of management as a result of litigation, even if we prevail. As a result, we may choose not to enforce our infringed intellectual property rights, depending on our strategic evaluation and judgment regarding the best use of our resources, the relative strength of our intellectual property portfolio and the recourse available to us.

We rely on third party providers and other suppliers for a number of services that are important to our business. An interruption or cessation of an important service or supply by any third party could have a material adverse effect on our business.

We depend on a number of suppliers, such as online service providers, hosting service and software providers, data processors, software and hardware vendors, banks, local and regional utility providers, and telecommunications companies, for elements of our trading, clearing and other systems. We rely on access to certain data used in our business through licenses with third parties and we rely on a large international telecommunications company for the provision of hosting services. The general trend toward industry consolidation may increase the risk that these services may not be available to us in the future. In addition, participants trading on our electronic platform may access it through 44 order routing and 28 trade capture conformed ISVs, which represent a substantial portion of the ISVs that serve the commodities markets. The loss of a significant number of ISVs providing access could make our platform less attractive to participants who prefer this form of access. If these companies were to discontinue providing services to us, we would likely experience significant disruption to our business.

We are subject to significant litigation and liability risks.

Many aspects of our business, and the businesses of our participants, involve substantial risks of liability. These risks include, among others, potential liability from disputes over terms of a trade and the claim that a system failure or delay caused monetary loss to a participant or that an unauthorized trade occurred. For example, dissatisfied market participants that have traded on our electronic platform or those on whose behalf such participants have traded, may make claims regarding the quality of trade execution, or allege improperly confirmed or settled trades, abusive trading practices, security and confidentiality breaches, mismanagement or even fraud against us or our participants. In addition, because of the ease and speed with which sizable trades can be executed on our electronic platform, participants can lose substantial amounts by inadvertently entering trade orders or by entering them inaccurately. A large number of significant error trades could result in participant dissatisfaction and a decline in participant willingness to trade in our electronic markets. In addition, we are subject to various legal disputes, some of which we are involved in due to acquisition activity. An adverse resolution of any lawsuit or claim against us may require us to pay substantial damages or impose restrictions on how we conduct business, either of which could adversely affect our business, financial condition and operating results.

 

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ITEM 1 (B). UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our most valuable property is our technology and the infrastructure underlying it. Our intellectual property is described under the heading “Technology” in Item 1 — Business. In addition to our intellectual property, our other primary assets include computer equipment, software, internally developed software and a corporate aircraft. We own an array of computers and related equipment. The net book value of our property was $131.0 million as of December 31, 2011.

Our principal executive offices are located in Atlanta, Georgia. We occupy 92,171 square feet of office space in Atlanta under a lease that expires on June 30, 2014. We also lease an aggregate of 212,882 square feet of office space in New York, London, Chicago, Stamford, San Francisco, Washington, D.C., Houston, Winnipeg, Calgary and Singapore. Our largest physical presence outside of Atlanta is in New York, New York, where we have leased 113,276 square feet of office space, primarily relating to ICE Futures U.S.’s executive office and its principal trading floor that are located at One North End Avenue, New York, New York. ICE Futures U.S. leases this space from our competitor NYMEX under a lease that expires on July 1, 2013, unless an option to renew for five years is extended by NYMEX following the initial term. Our second largest physical presence outside of Atlanta is in London, England, where we have leased 46,417 square feet of office space. The various leases covering these spaces generally expire in 2013, 2014 and 2024.

We believe that our facilities are adequate for our current operations and that we will be able to obtain additional space as and when it is needed.

 

ITEM 3. LEGAL PROCEEDINGS

We are from time to time involved in a number of legal proceedings (including the one described below) concerning matters arising in connection with the conduct of our business. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.

On August 5, 2011, we announced that we will be ceasing operations of the Chicago Climate Futures Exchange, LLC, or CCFE, an emissions futures exchange that we acquired as part of our acquisition of CLE in July 2010. On December 14, 2011, a group of twenty-four plaintiffs who hold “trading privileges” (a right to trade at a discount) at CCFE filed suit against CCFE and CLE, together with two current and one former employee of those entities, claiming that they were defrauded in connection with the purchase of their trading privileges at CCFE and that the sales of such privileges were made in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The plaintiffs seek the return of amounts paid for their trading privileges, the lost “value” of their trading privileges, punitive damages and interest. We do not believe the plaintiffs’ claims to be meritorious, and we intend to vigorously defend the action.

 

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ITEM 4 (A).    EXECUTIVE OFFICERS OF INTERCONTINENTALEXCHANGE, INC.

Set forth below, in accordance with General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, is information regarding our executive officers and certain other key employees:

 

Name

   Age   

Title

Jeffrey C. Sprecher

   56    Chairman of the Board and Chief Executive Officer

Charles A. Vice

   48    President and Chief Operating Officer

Scott A. Hill

   44    Chief Financial Officer and Senior Vice President

David S. Goone

   51    Senior Vice President, Chief Strategic Officer

Edwin D. Marcial

   44    Chief Technology Officer and Senior Vice President

Johnathan H. Short

   46    Senior Vice President, General Counsel and Corporate Secretary

David J. Peniket

   46    President and Chief Operating Officer, ICE Futures Europe

Thomas W. Farley

   36    President, ICE Futures U.S.

Jeffrey C. Sprecher.    Mr. Sprecher has served as Chief Executive Officer and a director since our inception and has served as our Chairman of the Board since November 2002. As our Chief Executive Officer, he is responsible for our strategic direction, operation, and financial performance. Mr. Sprecher purchased Continental Power Exchange, Inc., our predecessor company, in 1997. Prior to joining Continental Power Exchange, Inc., Mr. Sprecher held a number of positions, including President, over a fourteen-year period with Western Power Group, Inc., a developer, owner and operator of large central-station power plants. While with Western Power, Mr. Sprecher was responsible for a number of significant financings. Mr. Sprecher serves on the U.S. Commodity Futures Trading Commission Global Market Advisory Committee and is a member of the Energy Security Leadership Council. Mr. Sprecher has been consistently recognized for his entrepreneurial achievements. Mr. Sprecher holds a B.S. degree in Chemical Engineering from the University of Wisconsin and an MBA from Pepperdine University.

Charles A. Vice.    Mr. Vice has served as Chief Operating Officer since July 2001 and our President since October 2005. As our President and Chief Operating Officer, Mr. Vice is responsible for overseeing our technology operations, including market development, customer support and business development activities. He has over 16 years of experience in applying information technology in the energy industry. Mr. Vice joined Continental Power Exchange, Inc. as a Marketing Director during its startup in 1994, and prior thereto was a Principal with Energy Management Associates for five years, providing consulting services to energy firms. From 1985 to 1988, he was a Systems Analyst with Electronic Data Systems. Mr. Vice holds a B.S. degree in Mechanical Engineering from the University of Alabama and an MBA from Vanderbilt University.

Scott A. Hill.    Mr. Hill has served as Senior Vice President and Chief Financial Officer since May 2007. As our Chief Financial Officer, he is responsible for overseeing all aspects of our finance and accounting functions, including treasury, tax, cash management and investor relations. He is also responsible for financial planning, audit, business development and human resources. Mr. Hill also oversees ICE’s global clearing operation and global CDS initiatives. Prior to joining us, Mr. Hill spent 16 years as an international finance executive for IBM. He oversaw IBM’s worldwide financial forecasts and measurements from 2006 through 2007, working alongside the CFO of IBM and with all of the company’s global business units. Prior to that, Mr. Hill was Vice President and Controller of IBM’s Japan multi-billion dollar business operation from 2003 through 2005. Mr. Hill earned his BBA in Finance from the University of Texas at Austin and his MBA from New York University, where he was recognized as a Stern Scholar.

David S. Goone.    Mr. Goone has served as Senior Vice President, Chief Strategic Officer since March 2001. He is responsible for the expansion of our product lines, including futures products and trading capabilities for our electronic platform. Mr. Goone also leads our global sales organization. Prior to joining us, Mr. Goone served as the Managing Director, Product Development and Sales at the Chicago Mercantile Exchange where he worked for nine years. From 1989 through 1992, Mr. Goone was Vice President at Indosuez Carr Futures, where

 

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he developed institutional and corporate business. Prior to joining Indosuez, Mr. Goone worked at Chase Manhattan Bank, where he developed and managed their exchange-traded foreign currency options operation at the Chicago Mercantile Exchange. Mr. Goone holds a B.S. degree in Accountancy from the University of Illinois at Urbana-Champaign.

Edwin D. Marcial.    Mr. Marcial has served as Senior Vice President and Chief Technology Officer since May 2000. He is responsible for all systems development and our overall technology strategy. He also oversees the software design and development initiatives of our information technology professionals in the areas of project management, architecture, software development and quality assurance. Mr. Marcial joined the software development team at Continental Power Exchange, Inc. in 1996 and has nearly 20 years of IT experience building large-scale systems in the energy industry. Prior to joining Continental Power Exchange, Inc., he led design and development teams at Harris Corporation building software systems for the company’s energy controls division. Mr. Marcial earned a B.S. degree in Computer Science from the College of Engineering at the University of Florida.

Johnathan H. Short.    Mr. Short has served as Senior Vice President, General Counsel and Corporate Secretary since June 2004. In his role as General Counsel, he is responsible for managing our legal and regulatory affairs. As Corporate Secretary, he is also responsible for a variety of our corporate governance matters. Prior to joining us, Mr. Short was a partner at McKenna Long & Aldridge LLP, a national law firm. Mr. Short practiced in the corporate law group of McKenna, Long & Aldridge (and its predecessor firm, Long Aldridge & Norman LLP) from November 1994 until he joined us in June 2004. From April 1991 until October 1994, he practiced in the commercial litigation department of Long Aldridge & Norman LLP. Mr. Short holds a J.D. degree from the University of Florida, College of Law, and a B.S. in Accounting from the University of Florida, Fisher School of Accounting.

David J. Peniket.    Mr. Peniket has served as President, ICE Futures Europe, since October 2005 and Chief Operating Officer, ICE Futures Europe, since January 2005. Mr. Peniket is responsible for ICE Futures Europe’s financial performance, technology and market operations, human resources, business development, regulation and risk management. Prior to assuming the role of Chief Operating Officer, Mr. Peniket served as Director of Finance of ICE Futures Europe since May 2000. Before joining ICE Futures Europe in 1999, Mr. Peniket worked for seven years at KPMG LLP, where he trained as an accountant and was a consultant in its financial management practice. Mr. Peniket was Research Assistant to John Cartwright MP from 1988 to 1991. He holds a B.Sc. (Econ) degree in Economics from the London School of Economics and Political Science and is a Chartered Accountant.

Thomas W. Farley.    Mr. Farley joined ICE Futures U.S. in February 2007 as President. Mr. Farley also serves as a member of the Board of Directors of ICE Futures U.S. and ICE Clear U.S. From July 2006 to January 2007, Mr. Farley was President of SunGard Kiodex, a risk management technology provider to the commodity derivatives markets. From October 2000 to July 2006, Mr. Farley served as Kiodex’s Chief Financial Officer and he also served as Kiodex’s Chief Operating Officer from January 2003 to July 2006. Prior to Kiodex, Mr. Farley held positions in investment banking and private equity. Mr. Farley holds a B.A. in Political Science from Georgetown University.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Approximate Number of Holders of Common Stock

As of January 31, 2012, there were approximately 437 holders of record of our common stock.

Dividends

We have paid no dividends on our common stock and we have not determined that we will pay dividends on our common stock in the near future. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law or the SEC and other factors our board of directors deems relevant.

Price Range of Common Stock

Our common stock trades on the New York Stock Exchange under the ticker symbol “ICE”. Our common stock was initially offered and sold to the public at a price of $26.00 per share and has been publicly traded since November 16, 2005. Prior to that date, there was no public market in our stock. On January 31, 2012, our common stock traded at a high of $116.07 per share and a low of $114.20 per share. The following table sets forth the quarterly high and low sale prices for the periods indicated for our common stock on the New York Stock Exchange.

 

     Common Stock Market
Price
 
     High      Low  

Year Ended December 31, 2010

     

First Quarter

   $ 113.62       $ 93.50   

Second Quarter

   $ 129.53       $ 105.53   

Third Quarter

   $ 114.44       $ 92.18   

Fourth Quarter

   $ 121.90       $ 105.08   

Year Ended December 31, 2011

     

First Quarter

   $ 135.38       $ 112.13   

Second Quarter

   $ 126.67       $ 112.20   

Third Quarter

   $ 131.72       $ 102.57   

Fourth Quarter

   $ 132.89       $ 113.00   

 

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Equity Compensation Plan Information

The following table provides information about our common stock that has been or may be issued under our equity compensation plans as of December 31, 2011, which consist of the 2000 Stock Option Plan, 2003 Directors Plan, 2004 Restricted Stock Plan, 2005 Equity Incentive Plan, 2009 Omnibus Incentive Plan and Creditex 1999 Stock Option/Stock Issuance Plan. The 2000 Stock Option Plan, the 2004 Restricted Stock Plan, the 2005 Equity Incentive Plan and the Creditex 1999 Stock Option/Stock Issuance Plan were all retired on May 14, 2009, when our shareholders approved the 2009 Omnibus Incentive Plan. No future issuances will be made from these retired plans.

 

Plan Category

   Number of
securities to be issued
upon exercise of
outstanding options
and rights

(a)
    Weighted average
exercise price of
outstanding options
(b)
    Number of securities
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
 

Equity compensation plans approved by security holders(1)

     1,620,497 (1)    $ 84.90 (1)      2,411,394   

Equity compensation plans not approved by security holders(2)

     288,553 (2)    $ 28.25 (2)      206,023   
  

 

 

   

 

 

   

 

 

 

TOTAL

     1,909,050      $ 72.34        2,617,417   
  

 

 

   

 

 

   

 

 

 

 

(1) The 2000 Stock Option Plan was approved by our stockholders in June 2000. The 2005 Equity Incentive Plan was approved by our stockholders in June 2005. The 2009 Omnibus Incentive Plan was approved by our stockholders on May 14, 2009, on which date the 2000 Stock Option Plan and the 2005 Equity Incentive Plan were retired. Of the 1,620,497 securities to be issued upon exercise of outstanding options and rights, 785,439 are options with a weighted average exercise price of $84.90 and the remaining 835,058 securities are restricted stock shares that do not have an exercise price.

 

(2) This category includes the 2003 Directors Plan, 2004 Restricted Stock Plan and the Creditex 1999 Stock Options/Stock Issuance Plan. Of the 288,553 securities to be issued upon exercise of outstanding options and rights, 260,305 are options with a weighted average exercise price of $28.25 and the remaining 28,248 securities are restricted stock shares that do not have an exercise price. For more information concerning these plans, see note 10 to our consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K.

Stock Repurchases

The table below sets forth the information with respect to purchases made by or on behalf of IntercontinentalExchange, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of our common stock during the three months ended December 31, 2011.

 

Period

(2011)

   Total number of
shares purchased
     Average price
paid per share
     Total number of
shares purchased as
part of publicly
announced plans or
programs(1)
     Approximate dollar
value of shares that
may yet be
purchased under the
plans or programs
(in millions)(1)
 

October 1 – October 31

     62,790      $ 117.92         2,150,041       $ 374.0   

November 1 – November 30

     230,800       $ 116.68         2,380,841       $ 347.1   

December 1 – December 31

     107,100       $ 117.74         2,487,941       $ 334.4   

Total

     400,690       $ 117.16         2,487,941       $ 334.4   

 

(1)

As previously announced, in February 2010 our board of directors authorized us to repurchase up to $300.0 million in our common stock. During September 2011, our board of directors authorized us to repurchase up to an additional $300.0 million in our common stock. This is in addition to the $81.4 million that was still available to be repurchased under the February 2010 authorization. These stock repurchase authorizations do

 

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  not have an expiration date. Under a trading plan adopted in compliance with Rule 10b5-1 under the Securities Exchange Act, we repurchased $47.0 million worth of our common stock through open market purchases during the quarter ended December 31, 2011. Under our Rule 10b5-1 trading plan, we may purchase additional shares of our common stock in the future outside of open trading window periods subject to the terms of the plan. Our repurchase program may be suspended or discontinued at any time without prior notice.

 

ITEM 6. SELECTED FINANCIAL DATA

The following tables present our selected consolidated financial data as of and for the dates and periods indicated. We derived the selected consolidated financial data set forth below for the years ended December 31, 2011, 2010 and 2009 and as of December 31, 2011 and 2010 from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. We derived the selected consolidated financial data set forth below for the years ended December 31, 2008 and 2007 and as of December 31, 2009, 2008 and 2007 from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K. The selected consolidated financial data presented below is not indicative of our future results for any period. The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

 

     Year Ended December 31,  
   2011(1)     2010(1)     2009(1)     2008(1)     2007(1)  
   (In thousands, except for per share data)  

Consolidated Statement of Income Data

          

Revenues:

          

Transaction and clearing fees, net(2)

   $ 1,176,367      $ 1,023,454      $ 884,473      $ 693,229      $ 490,358   

Market data fees

     124,956        109,175        101,684        102,944        70,396   

Other

     26,168        17,315        8,631        16,905        13,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,327,491        1,149,944        994,788        813,078        574,293   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Compensation and benefits

     250,601        236,649        235,677        159,792        101,397   

Technology and communication

     47,875        44,506        38,277        27,473        20,203   

Professional services

     34,831        32,597        35,557        29,705        23,047   

Rent and occupancy

     19,066        17,024        20,590        14,830        11,816   

Acquisition-related transaction costs(3)

     15,624        9,996        6,139               11,121   

Selling, general and administrative

     33,909        35,714        34,572        25,497        20,445   

Depreciation and amortization

     132,252        121,209        111,357        62,247        32,701   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     534,158        497,695        482,169        319,544        220,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     793,333        652,249        512,619        493,534        353,563   

Other income (expense), net(4)

     (34,094     (42,107     (18,914     (20,038     4,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     759,239        610,142        493,705        473,496        358,434   

Income tax expense

     237,498        202,375        179,551        172,524        117,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 521,741      $ 407,767      $ 314,154      $ 300,972      $ 240,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to noncontrolling interest(5)

     (12,068     (9,469     1,834                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to IntercontinentalExchange, Inc.

   $ 509,673      $ 398,298      $ 315,988      $ 300,972      $ 240,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to IntercontinentalExchange, Inc. common shareholders:

          

Basic

   $ 6.97      $ 5.41      $ 4.33      $ 4.23      $ 3.49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 6.90      $ 5.35      $ 4.27      $ 4.17      $ 3.39   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

          

Basic

     73,145        73,624        72,985        71,184        68,985   

Diluted

     73,895        74,476        74,090        72,164        70,980   

 

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(1) We acquired several companies during the years ended December 31, 2011, 2010, 2009, 2008 and 2007 and have included the financial results of these companies in our consolidated financial statements effective from the respective acquisition dates. Refer to note 3 to our consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K, for more information on these acquisitions.

 

(2) Our transaction and clearing fees are presented net of rebates. For a discussion of these rebates, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

 

(3) During the years ended December 31, 2011, 2010 and 2009, we expensed $15.6 million, $10.0 million and $6.1 million in transaction costs directly relating to various successful and unsuccessful acquisitions. On January 1, 2009, we adopted what is now part of Accounting Standards Codification, or ASC, Topic 805 related to business combinations and are now required to expense all acquisition-related transaction costs as incurred. Prior to 2009, we could capitalize these costs as part of the purchase price and would only expense these costs if we incurred these costs but the acquisition did not close. During the year ended December 31, 2007, we incurred $11.1 million in transaction costs directly relating to our proposed merger with CBOT Holdings, Inc., or CBOT. We did not succeed in our proposed merger with CBOT, and the CME Group Inc. completed its acquisition of CBOT in July 2007. Refer to note 15 to our consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K, for more information on these costs.

 

(4) The financial results for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 include $28.4 million, $25.1 million, $16.8 million, $13.2 million and $15.5 million, respectively, in interest expense on our outstanding indebtedness and $6.1 million, $5.0 million, $5.6 million, $6.0 million and $3.1 million, respectively, in interest expense relating to the Russell licensing agreement. The financial results for the year ended December 31, 2010 include a loss of $15.1 million on our foreign currency hedge relating to the pounds sterling cash consideration paid to acquire CLE. The financial results for the years ended December 31, 2009 and 2008 include impairment losses of $9.3 million and $15.7 million, respectively, relating to our cost method investment in NCDEX. The financial results for the year ended December 31, 2009 include a net gain of $11.1 million relating to the sale of our LCH.Clearnet shares, partially offset by adjustments to various other cost method investments. The financial results for the year ended December 31, 2007 include a gain on disposal of an asset of $9.3 million. Refer to notes 3, 6, 9 and 13 to our consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K, for more information on these items.

 

(5) On January 1, 2009, we adopted what is now part of ASC Topic 810 related to noncontrolling interests. Increases in noncontrolling interest, including those resulting from the formation of ICE Clear Credit and the acquisition of TCC, have been recorded within equity, with income attributable to that noncontrolling interest recorded separately in our consolidated statements of income.

 

    As of December 31,  
  2011     2010     2009     2008     2007  
  (In thousands)  

Consolidated Balance Sheet Data

         

Cash and cash equivalents

  $ 822,949      $ 621,792      $ 552,465      $ 283,522      $ 119,597   

Short-term and long-term investments(1)

    451,136        1,999        25,497        6,484        140,955   

Margin deposits and guaranty fund assets(2)

    31,555,831        22,712,281        18,690,238        12,117,820        792,052   

Total current assets

    32,605,391        23,575,778        19,459,851        12,552,588        1,142,094   

Property and equipment, net

    130,962        94,503        91,735        88,952        63,524   

Goodwill and other intangible assets, net(3)

    2,757,358        2,806,873        2,168,291        2,163,671        1,547,409   

Total assets

    36,147,864        26,642,259        21,884,875        14,959,581        2,796,345   

Margin deposits and guaranty fund liabilities(2)

    31,555,831        22,712,281        18,690,238        12,117,820        792,052   

Total current liabilities

    31,800,314        23,127,384        18,967,832        12,311,642        910,961   

Current and long-term debt(4)

    887,500        578,500        307,500        379,375        221,875   

Equity

    3,162,341        2,816,765        2,433,647        2,012,180        1,476,856   

 

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(1) We have historically invested a portion of our cash in short-term and long-term investments. Due to the adverse conditions in the credit markets, beginning in 2008 we began to allocate more of our funds to cash equivalent investments and out of short-term and long-term investments. As of December 31, 2011, the Company holds a $451.1 million investment in Cetip, S.A. that is classified as a long-term investment. Refer to note 5 to our consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K, for more information on this investment.

 

(2) Clearing members of ICE Clear Europe, ICE Clear U.S., ICE Clear Credit, ICE Clear Canada and TCC are required to deposit original margin and variation margin and to make deposits to a guaranty fund. The cash deposits made to these margin accounts and to the guaranty fund are recorded in the consolidated balance sheet as current assets with corresponding current liabilities to the clearing members that deposited them. ICE Clear Europe began clearing contracts in November 2008 upon the transition of clearing from LCH.Clearnet Ltd. and ICE Clear Credit began to clear CDS contracts in March 2009. Refer to note 12 to our consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K, for more information on these items.

 

(3) The increase in the goodwill and intangible assets in 2010 primarily relates to the acquisition of CLE in July 2010. The increase in the goodwill and intangible assets in 2008 primarily relates to the acquisition of Creditex in August 2008. Refer to notes 3 and 8 to our consolidation financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K, for more information on these items.

 

(4) We entered into a new aggregate $2.6 billion senior unsecured credit facility during 2011, which includes a $2.1 billion five-year senior unsecured multicurrency revolving credit facility and an aggregate $500.0 million five-year senior unsecured term loan facility. We also entered into a $400.0 million note purchase agreement. The cash proceeds from the new debt entered into during 2011 were used to fund a portion of our investment in Cetip during 2011 and for general corporate purposes, including stock repurchases. We borrowed $400.0 million under a senior unsecured term loan facility during 2010, part of which was used in connection with the purchase of CLE and for our stock repurchases. We borrowed $250.0 million under a senior unsecured credit facility in connection with the purchase of ICE Futures U.S. in January 2007 and we borrowed an additional $195.0 million in 2008 in connection with our stock repurchases. Refer to note 9 to our consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K, for more information on our outstanding debt.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those set forth in Item 1(A) under the heading “Risk Factors” and elsewhere in this Annual Report on Form 10-K. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information contained in Item 6 “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview and Our Business Environment

We are a leading operator of global futures exchanges, over-the-counter, or OTC, markets, derivatives clearing houses and post-trade services. We operate these global marketplaces for trading and clearing a broad array of energy, environmental and agricultural commodities, credit default swaps, or CDS, equity indexes and currency contracts. Currently, we are the only marketplace to offer an integrated electronic platform for trading of products in both the futures and OTC markets, together with post-trade processing and clearing services. Through our widely-distributed electronic markets, we bring together buyers and sellers of derivative and physical commodities and financial contracts and offer a range of services to support our participants’ risk management and trading activities.

 

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We conduct our regulated U.K.-based energy futures markets through our wholly-owned subsidiary, ICE Futures Europe. We conduct our regulated U.S.-based futures markets through our wholly-owned subsidiary, ICE Futures U.S. We conduct our regulated Canadian futures markets through our wholly-owned subsidiary, ICE Futures Canada. We operate our OTC energy markets through ICE U.S. OTC Commodity Markets, LLC as an Exempt Commercial Market under the Commodity Exchange Act and our CDS markets through Creditex, our wholly-owned brokerage business. Contracts listed by ICE Futures Europe, as well as our cleared OTC energy swap contracts clear through ICE Clear Europe. ICE Futures U.S. clears its contracts through ICE Clear U.S. and ICE Futures Canada clears its contracts through ICE Clear Canada. We clear North American and European CDS contracts submitted by a variety of trade execution venues, including Creditex, through ICE Clear Credit and ICE Clear Europe, respectively.

Our business is primarily transaction-based, and the revenues and profitability in our markets relate directly to the amount, or volume, of trading and clearing activity and the respective execution and clearing fee levels. Trading volume is driven by a number of factors, including the degree of price volatility of commodities and financial contracts such as equity indexes and foreign exchange, as well as economic conditions, changes in supply/demand dynamics or perceptions, weather, new product introductions, fees, currency moves and interest rates, margin requirements, regulation of our markets and market participants, geopolitical events, and competition. Price volatility increases the need to hedge price risk and creates opportunities for the exchange of risk between market participants. Changes in our futures trading volume and OTC average daily commissions are also driven by varying levels of volatility and liquidity in our markets and in the broader commodities markets, which influence trading volume across all of the markets we operate.

Since our business is primarily transaction-based, declines in trading volumes and market liquidity could adversely affect our business and profitability. Market liquidity is one of the primary keys to attracting and maintaining customers and is an important indicator of a market’s strength.

We operate our markets primarily on our electronic platforms. In addition, we offer ICE Futures U.S.’s options markets on both our electronic platform and our New York-based trading floor. We also operate brokerage desks for CDS and certain of our energy options businesses. Participation in our markets has continued to increase as participants continue to employ the use of more financial instruments and more sophisticated hedging and risk management strategies to manage their price exposure.

Recent Developments and Trends

Regulatory and Clearing

In connection with the financial crisis, which began in 2008, global financial markets have generally experienced a period of reduced liquidity, outflow of customer funds, defaults and extraordinary volatility due to deteriorating credit market conditions. As a result, many market participants, including many of our key customers, experienced reduced liquidity with continued credit contraction, financial institution consolidation and market participant bankruptcies. While our business continued to grow amid these market conditions, a sustained period of uncertainty relating to regulatory changes, counterparty creditworthiness and the availability of credit to facilitate trading have limited trading participation in certain of our markets, including CDS markets.

As a result of the financial crisis, on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. The Dodd-Frank Act is intended to reduce the risk of future financial crises and will make major changes to the U.S. financial regulatory system. While the Dodd-Frank Act technically became effective on July 16, 2011, many provisions of the law require the Commodity Futures Trading Commission, or CFTC, and the Securities and Exchange Commission, or SEC, to issue final rules before many of the provisions become effective. While most of the Dodd-Frank Act is delayed, certain provisions have become effective. Our Derivatives Clearing Organizations, or DCOs, and our Designated

 

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Contract Markets are now subject to new core principles. Over the past six months, the CFTC has been issuing final rules, including rules implementing the new core principles for DCOs and instituting a new customer segregation system for swaps.

In Europe, the member states of the European Union are considering a tax on financial transactions. Each of the member states must agree to impose the tax in order for the tax to be implemented in 2014, which the United Kingdom and some other member states currently oppose. In addition, recent bills introduced before Congress seek to impose a similar tax on U.S. financial transactions. A tax imposed by either the United States or the European Union could adversely impact industry trading volumes.

In addition, the European Union is drafting several pieces of financial reform legislation. The Regulation on OTC Derivatives, Clearing Houses and Trade Repositories (formerly known as the European Market Infrastructure Regulation, or EMIR) requires OTC derivatives to be cleared. The European Commission has published draft revisions to the Markets in Financial Instruments Directive, or MiFID. One proposal contained in the revisions could force open access for clearing and trading. This could impact the processes in use by the market today for trading by requiring clearing houses to accept trades from alternative execution venues. Another proposal would require firms to offer financial or commodity indices on reasonable commercial terms, eliminating the ability of exchanges or clearing houses to have exclusive rights to an index. In addition, MiFID will require that exchanges have position limits or equivalent methods, such as position accountability, to prevent market abuse. Finally, a proposed law on short selling and CDS provides for a prohibition on naked sovereign CDS positions.

Though we have enabled the move to clearing, established position limits and brought increased market transparency ahead of the implementation of the Dodd-Frank Act, the final Dodd-Frank Act rules and laws may impact the way our markets operate. We believe the availability of central counterparty clearing for futures and OTC contracts has supported and will continue to support the liquidity and participation in our marketplaces, and that we have adequate flexibility in our market structure to adapt to financial reform requirements in a timely manner.

For additional information regarding the Dodd-Frank Act and other regulations affecting our business, see Item 1 “Business — Regulation” and Item 1(A) “Risk Factors” included elsewhere in this Annual Report on Form 10-K.

New Products

The establishment of ICE Clear Europe has facilitated our launch of new cleared OTC contracts. Since the launch of ICE Clear Europe, we have launched over 540 new cleared OTC contracts, including over 260 new OTC contracts launched during 2011 for global oil and refined petroleum products, North American natural gas, North American power, North American emissions and natural gas liquids. We also continued to launch new futures contracts during 2011, including new currency futures contracts, coal and natural gas option contracts, freight swap contracts, iron ore swap contracts and Dutch TTF natural gas option contracts.

ICE Futures Canada introduced new futures and options on futures contracts on milling wheat, durum wheat and barley on January 23, 2012, subsequent to the passage by the federal government of Canada of the Marketing Freedom for Grain Farmers Act. This act ends the Canadian Wheat Board’s monopoly for sales and marketing of Canadian wheat and barley in the export and human consumption markets as of August 1, 2012. The first delivery month in the new contracts is October 2012. ICE Futures Canada has secured all necessary regulatory approvals for these new contracts.

We established ICE Clear Credit in 2009 to facilitate the clearing of credit derivative contracts, including North American CDS index contracts and certain North American single-name CDS contracts. ICE Clear Credit offers clearing solutions for the buyside in the U.S. ICE Clear Credit commenced clearing of Latin American sovereign CDS in the fourth quarter of 2011 and is the first clearing house to clear sovereign CDS.

 

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We have applied to register our ICE Trade Vault service as a swap data repository, or SDR, with the CFTC. ICE Trade Vault will provide reporting compliance for our global customer base through a widely-accepted, proven method for capturing and reporting commodity trade data. ICE eConfirm will serve as the front-end application for the ICE Trade Vault SDR under the Dodd-Frank Act and is slated to launch in 2012. The combination of ICE Trade Vault and ICE eConfirm will offer streamlined reporting by employing processes and systems already in use by the industry.

MF Global

On October 31, 2011, MF Global filed for bankruptcy or insolvency protection in the United States and the United Kingdom. Certain subsidiaries of MF Global were clearing members of our clearing houses, including ICE Clear Europe (MF Global UK Limited), ICE Clear U.S. (MF Global Inc.) and ICE Clear Canada (MF Global Canada Co.). As a result of the bankruptcy and insolvency filings, our clearing houses declared MF Global and its subsidiaries in default and they were not permitted to enter into new trades. Open positions with our clearing houses became the responsibility of the clearing houses and were managed in accordance with their respective default rules and provisions. Pursuant to clearing house rules, our clearing houses and clearing members continue to work with exchange participants, the trustee and the administrator to efficiently manage the default of MF Global with minimum impact on the market, the clearing houses, the clearing members and exchange participants.

In November 2011, all of our clearing houses completed the transfer or closure of all MF Global customer positions executed on our exchanges and held at our clearing houses. The substantial majority of customer positions were transferred to alternative clearing members and the balance of open positions were closed by the clearing houses. The clearing houses remained fully collateralized throughout the close-out process. The majority of the original margin and guaranty fund cash deposits have been returned to the relevant estate trustees and administrators for subsequent disposition or to an alternative clearing member for the participants. However, as of December 31, 2011, certain of our clearing houses held $65.8 million in combined MF Global original margin and guaranty fund cash deposits and await instructions from the trustee and administrator of the bankruptcy or insolvency protection to return or transfer this cash.

As a precaution and to ensure liquidity, our clearing houses borrowed $203.0 million in combined capacity on October 31, 2011 that was reserved for this purpose, under our credit facilities. The drawn facilities were not needed by our clearing houses and the $203.0 million in borrowings were repaid in full in November 2011. See “Loan Agreements” below.

Technology

In 2009, ICE Clear Europe began a project to migrate from its outsourced clearing technology to internally developed clearing technology and related software, called the “ICE Clearing Systems”. The ICE Clearing Systems encompass a number of integrated systems, most importantly the Post-Trade Management System, or PTMS, and the Extensible Clearing System, or ECS. The ICE Clearing Systems were already used extensively within ICE Clear U.S. All of ICE Clear Europe’s products are now cleared exclusively on the ICE Clearing Systems. The benefits of the transition to the ICE Clearing Systems include modernizing the clearing technology standards over the last two years to allow our clearing houses to benefit from technology enhancements and to increase our ability to introduce new products, markets and services.

Investments

In April 2011, we entered into a partnership to launch Brix Energia e Futuros S.A., or BRIX, a Brazilian marketplace for electric power. BRIX launched its Brazilian power markets in July 2011 and uses our electronic platform for trading. All trades are registered with the Camara de Comercializacao de Energia Eletrica, the Brazilian registry required for energy trades. We are a minority owner of BRIX together with a group of Brazilian partners with industrial, energy and regulatory backgrounds.

 

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On July 15, 2011, we acquired 31.6 million shares, or 12%, of the common stock of Cetip, S.A., or Cetip, from two Cetip stockholders for an aggregate consideration of $514.1 million in cash. The transaction consideration consisted of $304.1 million from our cash on hand and $210.0 million drawn from our revolving credit facilities. We have appointed a representative to Cetip’s board of directors. Cetip is a publicly traded company and is Brazil’s leading operator of registration and custodial services for securities, fixed-income bonds and OTC derivatives. Cetip offers registration, custody, trading, clearing and settlement to its customers, including banks, brokerage houses, securities dealers, leasing companies, insurance companies, investment funds and pension funds.

We accounted for our investment in Cetip as an available-for-sale investment. As of December 31, 2011, the fair value of the equity security investment was $451.1 million and was classified as a long-term investment in our consolidated balance sheet. The unrealized loss of $63.0 million for the year ended December 31, 2011 was recorded as a component of accumulated other comprehensive income. The unrealized loss primarily resulted from foreign currency translation losses relating to the decrease in value of the Brazilian real relative to the U.S. dollar from July 15, 2011 through December 31, 2011 of $88.4 million, partially offset by a $25.4 million increase in the stock price of Cetip. The Company’s investment in Cetip was made in and is held in Brazilian reais.

Consolidated Financial Highlights

The following summarizes significant changes in our consolidated financial performance for the periods presented (dollars in thousands, except per share amounts):

 

     Year Ended
December 31,
          Year Ended
December 31,
       
     2011     2010     Change     2010     2009     Change  

Total revenues

   $ 1,327,491      $ 1,149,944        15   $ 1,149,944      $ 994,788        16

Total operating expenses

   $ 534,158      $ 497,695        7   $ 497,695      $ 482,169        3

Operating income

   $ 793,333      $ 652,249        22   $ 652,249      $ 512,619        27

Operating margin

     60     57     3 bps        57     52     5 bps   

Total other expense, net

   $ 34,094      $ 42,107        (19 )%    $ 42,107      $ 18,914        123

Income tax expense

   $ 237,498      $ 202,375        17   $ 202,375      $ 179,551        13

Effective tax rate

     31     33     (2 bps     33     36     (3 bps

Net income attributable to ICE

   $ 509,673      $ 398,298        28   $ 398,298      $ 315,988        26

Diluted earnings per share attributable to ICE common shareholders

   $ 6.90      $ 5.35        29   $ 5.35      $ 4.27        25

Cash flows from operating activities

   $ 712,770      $ 533,758        34   $ 533,758      $ 486,593        10

 

   

Consolidated revenue growth for both the years ended December 31, 2011 and 2010 was primarily due to higher trading volume in ICE Brent Crude and ICE Gasoil futures and options contracts, the OTC North American natural gas and the OTC global oil contracts and due to increases in the ICE ECX emission futures and options volumes and revenues.

 

   

Consolidated operating expenses increased $36.5 million for the year ended December 31, 2011 from the comparable period in 2010 and increased $15.5 million for the year ended December 31, 2010 from the comparable period in 2009 primarily due to the following:

 

   

Depreciation and amortization expenses increased $11.0 million for the year ended December 31, 2011 from the comparable period in 2010 and increased $9.9 million for the year ended December 31, 2010 from the comparable period in 2009. The increase each year primarily related to amortization expenses recorded on the intangible assets associated with our acquisition of Climate Exchange plc, or CLE, in July 2010, and due to additional depreciation expenses recorded on fixed asset additions.

 

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Compensation and benefits expenses increased $14.0 million for the year ended December 31, 2011 from the comparable period in 2010. The increase primarily related to an increase in our employee headcount, partially offset by $5.2 million in employee termination costs that we incurred during the comparable period in 2010 following our acquisition of CLE.

 

   

Technology and communications expenses increased $3.4 million for the year ended December 31, 2011 from the comparable period in 2010 and increased $6.2 million for the year ended December 31, 2010 from the comparable period in 2009. The increase each year primarily related to an increase in our technology hosting expenses, hardware and software support expenses and other license fees, all of which resulted from the growth of our business and related revenues.

 

   

Acquisition-related transaction costs increased $5.6 million for the year ended December 31, 2011 from the comparable period in 2010 and increased $3.9 million for the year ended December 31, 2010 from the comparable period in 2009. Our acquisition-related transaction costs primarily related to costs incurred for the potential acquisition of NYSE Euronext and for our investment in Cetip during the year ended December 31, 2011, costs incurred for our acquisition of CLE during the year ended December 31, 2010 and for costs incurred for our acquisition of The Clearing Corporation, or TCC, during the year ended December 31, 2009.

 

   

Consolidated total other expense, net includes a pre-tax loss on our foreign currency hedge relating to the pounds sterling cash consideration paid to acquire CLE of $15.1 million during the year ended December 31, 2010. Consolidated total other expense, net for the year ended December 31, 2009 includes a pre-tax gain of $17.2 million from the sale of our LCH.Clearnet cost method investment, which was partially offset by combined pre-tax losses of $15.4 million relating to impairment losses on various cost method investments.

 

   

Excluding our acquisition-related transaction costs and other items that are not reflective of our core business performance, net of taxes, consolidated net income attributable to ICE for the years ended December 31, 2011, 2010 and 2009 would have been $523.4 million, $420.9 million and $333.6 million, respectively. See “Non-GAAP Financial Measures” below.

Variability in Quarterly Comparisons

In addition to general economic conditions and conditions in the financial markets, particularly the commodities markets, trading volume is subject to variability due to a number of key factors, including:

 

   

Geopolitical Events and Economic Conditions:    Geopolitical events tend to impact global commodity prices and may impact commodity supply. Because commodity prices often move in conjunction with changes in the perception of geopolitical risk, these events in the past have impacted trading activities in our markets due to the increased volatility and need for risk management in times of uncertainty.

 

   

Weather and Disasters:    Weather events have been an important factor in price volatility and the supply and demand of energy and agricultural commodities and, therefore, the trading activities of market participants. Unexpected or extreme weather conditions, such as low temperatures or hurricanes, and other events that cause demand increases, supply disruptions or unexpected volatility tend to result in business disruptions and expanded hedging and trading activity in our markets. In addition, disasters, both natural (like earthquakes and tsunamis) and unnatural (like large oil spills or terrorist activities), can result in disruptions that impact trading activity.

 

   

Real and Perceived Supply and Demand Imbalances:    Various agencies and groups, such as the International Energy Agency and the U.S. Energy Information Administration, regularly track commodity supply data. Reporting on supply or production may impact trading volume and price volatility due to real or perceived supply and demand imbalances.

 

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Regulatory Considerations:    The implementation of the Dodd-Frank Act may impact participation in our markets. Generally, legislative and regulatory bodies have expressed increased concern regarding derivatives markets when underlying commodity prices rise. As a result, legislative and regulatory actions may change the way we conduct our business and may create uncertainty for market participants, which could affect trading volumes.

 

   

Availability of Capital:    Margin is required to be deposited for each cleared trade executed in our markets. Cost of capital, balance sheet capacity available to support trading, capital markets conditions or any combination of these factors may impact trading volumes due to higher costs or lower availability of capital available to support trading.

 

   

Number of Trading Days:    The variability in the number of business days in each quarter affects our revenues, and will affect quarter-to-quarter revenue comparisons, since trading generally only takes place on business days.

 

   

Seasonality:    Participants engaged in energy and agricultural businesses tend to experience moderate seasonal fluctuations in demand and price volatility, although such seasonal impacts have been somewhat negated in periods of high volume trading.

Further, we periodically make adjustments to our contract specifications and are currently introducing new ICE Brent Crude and ICE Gasoil futures contracts alongside our existing contracts for those products. Changes to contracts are generally aimed at making the contracts more relevant to more customers and their evolving hedging needs or are required based on changes to the underlying commodity and may result in fluctuations in trading volume. These and other factors could cause our revenues to fluctuate from period to period and these fluctuations may affect the reliability of period to period comparisons of our revenues and operating results.

Segment Reporting

For financial reporting purposes, our business is currently divided into three reportable segments: our futures segment, our global OTC segment and our market data segment. In our futures markets, we offer trading and clearing in standardized derivative contracts on our regulated exchanges. In our OTC markets, which include energy markets and credit derivatives, we offer electronic trading, clearing and brokerage services. Through our market data segment, we offer a variety of market data services and products for both futures and OTC market participants and observers. For a discussion of these segments and related financial disclosure, refer to note 17 to our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Intersegment Fees

Intersegment fees include charges for developing, operating, managing and supporting the platform for electronic trading and clearing in our futures segment. Our global OTC segment provides and supports the platform for electronic trading and clearing in our futures segment. Our futures segment and our global OTC segment provide access to trading data to our market data segment. Our market data segment provides marketing and other promotional services to our global OTC segment. These internal charges are reflected as intersegment revenues and expenses. We determine the intercompany or intersegment fees to be paid by the business segments based on transfer pricing standards and independent documentation.

 

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Our Futures Segment

The following table presents selected statement of income data for our futures segment (dollars in thousands):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Revenues:

                

Transaction and clearing fees, net:

                

ICE Brent Crude futures and options

   $ 190,171       $ 145,278         31   $ 145,278       $ 111,216         31

ICE Gasoil futures and options

     99,499         79,113         26        79,113         56,153         41   

Sugar futures and options

     69,160         74,538         (7     74,538         71,972         4   

ICE ECX emission futures and options

     63,480         41,123         54        41,123         27,916         47   

ICE WTI Crude futures and options

     44,708         48,846         (8     48,846         49,319         (1

Russell Index futures and options

     40,034         32,337         24        32,337         31,253         3   

Cotton futures and options

     20,907         21,064         (1     21,064         12,924         63   

Other futures products and options

     76,151         61,399         24        61,399         49,168         25   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total transaction and clearing fees, net

     604,110         503,698         20        503,698         409,921         23   

Intersegment fees

     35,589         31,062         15        31,062         27,618         12   

Other

     11,000         5,943         85        5,943         4,167         43   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     650,699         540,703         20        540,703         441,706         22   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses:

                

Intersegment expenses

     85,630         70,322         22        70,322         49,716         41   

Other operating expenses

     144,902         144,067         1        144,067         113,427         27   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     230,532         214,389         8        214,389         163,143         31   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating income

   $ 420,167       $ 326,314         29   $ 326,314       $ 278,563         17
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

In our futures segment, we earn transaction and clearing fees from both counterparties to each futures contract or option on futures contract that is traded and cleared, based on the volume of the commodity underlying the futures or option contract that is traded and cleared. The amount of our transaction and clearing fees will depend upon many factors, including but not limited to transaction and clearing volume, pricing and new product introductions.

Our futures segment’s transaction and clearing fees increased the last two years primarily due to increases in the trading volumes in the ICE Brent Crude and ICE Gasoil futures and options contracts. Volume in the Brent crude and Gasoil markets increased the last two years due to several factors, including increased trading activity stimulated by the wide differential between Brent and WTI crude prices as a result of physical supplies, political unrest in the Middle East, higher economic growth outside of the United States that benefited trading in our global oil markets and the impact on global commodity markets of the Japanese earthquake.

Our benchmark ICE Brent Crude futures contract is relied upon by a broad range of market participants, including large oil producing nations and multinationals, to price their crude oil production. Market participants are increasingly relying on the Brent contract for their risk management activities, as evidenced by steady increases in traded volumes and open interest over the past several years. Based on traded volume in both our ICE Brent Crude futures contract and our ICE WTI Crude futures contract, we achieved a 51%, 47% and 46% market share of the global oil futures contracts trading for the years ended December 31, 2011, 2010 and 2009, respectively. Volume in our Gasoil contract also increased due to its role as a key refined products benchmark in Europe and Asia, as well as increased liquidity in the related Brent market.

 

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Revenues in our ICE ECX emission futures and options contracts increased the last two years primarily due to increases in our trading volumes and due to our recognition of 100% of the revenues from the ICE ECX emission contracts following our acquisition of CLE in July 2010. Prior to our acquisition of CLE, we only recognized a portion of the total ICE ECX emission futures and option revenues under our prior licensing agreement with CLE.

The Russell Index futures and options contracts set various monthly volume records in the second half of 2011. The increase in U.S. equity market volatility was a key factor as the Russell Index and other major indexes experienced their highest volatility levels in the past three years. Along with the heightened volatility, there was a significant amount of institutional hedging activity utilizing the Russell Index to adjust risk exposure in small cap issues.

Revenues in our cotton futures and options contracts has steadily increased since 2009, during which time cotton volumes were down dramatically from prior periods due to a significant reduction in global exports and in the U.S. production of cotton. Improved credit conditions, as well as increased production and market liquidity, have also helped traditional hedgers to return to the agricultural markets.

The increase in other futures products and options revenues the last two years is primarily due to increased trading volumes in our U.K. natural gas, coal, coffee, canola, cocoa, and U.S. Dollar Index futures and options contracts.

Our futures segment transaction and clearing fees are presented net of rebates. We recorded rebates in our futures segment of $188.3 million, $159.7 million and $117.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in rebates is due primarily to an increase in the number of participants in the rebate programs offered on various futures and option contracts and from higher contract volume traded under these programs during the period. We offer rebates in certain of our markets primarily to support market liquidity and trading volume by providing qualified participants in those markets a discount to the applicable commission rate.

The increase in other revenues the last two years is primarily due to a reduction in the net interest paid to clearing members for their futures cash margin deposits at ICE Clear Europe as a result of fluctuations in the amounts and types of margin collateral made by the clearing members to ICE Clear Europe and an increase in cotton certification fees associated with our increased cotton volume. This interest paid to clearing members is recorded as a reduction to other revenues. Effective January 1, 2011, ICE Clear Europe no longer pays clearing members basis points on certain cash margin deposits. This also applies to our global OTC segment relating to OTC cleared energy cash margin deposits at ICE Clear Europe.

The increased intersegment fees being charged from our global OTC segment to our futures segment for the last two years primarily relates to increased expenses being incurred and charged for developing, operating, managing and supporting the platforms for electronic trading and clearing and due to the increased trading volume of the futures segment during the years ended December 31, 2011 and 2010.

The increase in other operating expenses for the year ended December 31, 2010 from the comparable period in 2009 primarily relates to costs associated with and following our acquisition of CLE in July 2010. Amortization expenses recorded on the CLE intangible assets were $19.5 million and $9.7 million for the years ended December 31, 2011 and 2010, respectively. The other operating expenses for the year ended December 31, 2010 also include $8.4 million in acquisition-related transaction costs that we incurred relating to the CLE acquisition and $6.0 million in employee termination costs that we incurred following the acquisition.

 

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A futures contract is a standardized contract for a fixed quantity of the commodity underlying each contract. The following table presents the underlying commodity size per futures contract traded in our key futures markets as well as the relevant standard of measure for each contract:

 

Futures Contract

   Size      Measure  

ICE Brent Crude

     1,000         Barrels   

ICE WTI Crude

     1,000         Barrels   

ICE Gasoil

     1,000         Metric Tonnes   

Sugar

     112,000         Pounds   

The following table presents trading activity in our futures markets by commodity type based on the total number of contracts traded (in thousands, except for percentages):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Number of futures and options contracts traded:

                

ICE Brent Crude futures and options

     134,248         100,217         34     100,217         74,351         35

ICE Gasoil futures and options

     66,184         52,583         26        52,583         36,253         45   

Sugar futures and options

     31,455         37,910         (17     37,910         34,796         9   

ICE ECX emission futures and options

     7,570         6,166         23        6,166         5,124         20   

ICE WTI Crude futures and options

     51,936         52,790         (2     52,790         46,412         14   

Russell Index futures and options

     44,416         40,352         10        40,352         39,297         3   

Cotton futures and options

     8,083         8,644         (6     8,644         5,284         64   

Other futures and options

     37,228         30,303         23        30,303         20,803         46   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     381,120         328,965         16     328,965         262,320         25
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Futures average daily volume

     1,513         1,306         16     1,306         1,036         26
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Open interest is the aggregate number of contracts (long or short) that clearing members hold either for their own account or on behalf of their clients. Open interest refers to the total number of contracts that are currently open — in other words, contracts that have been traded but not yet liquidated by either an offsetting trade, exercise, expiration or assignment. Open interest is also a measure of the future activity remaining to be closed out in terms of the number of contracts that members and their clients continue to hold in the particular contract and by the number of contracts held for each contract month listed by the exchange. The following table presents our year-end open interest for our futures and options contracts (in thousands, except for percentages).

 

     As of
December 31,
           As of
December 31,
        
     2011      2010      Change     2010      2009      Change  

Open interest — futures and options contracts:

                

ICE Brent Crude futures and options

     1,301         904         44     904         771         17

ICE Gasoil futures and options

     482         643         (25     643         563         14   

Sugar futures and options

     1,263         1,735         (27     1,735         2,053         (15

ICE ECX emission futures and options

     984         781         26        781         547         43   

ICE WTI Crude futures and options

     611         640         (4     640         521         23   

Russell Index futures and options

     427         341         25        341         364         (6

Cotton futures and options

     349         598         (42     598         366         63   

Other futures and options

     1,340         1,296         3        1,296         956         36   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     6,757         6,938         (3 )%      6,938         6,141         13
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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The following table presents key futures transaction volume information, as well as other selected futures operating information (dollars in thousands, except rate per contact amounts):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Futures average daily trading and clearing revenues:

                

U.K. futures average daily exchange and clearing revenues

   $ 1,678       $ 1,322         27   $ 1,322       $ 1,023         29

U.S. and Canadian futures average daily exchange and clearing revenues

     719         677         6        677         596         14   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total futures average daily trading and clearing revenues

   $ 2,397       $ 1,999         20   $ 1,999       $ 1,619         23
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Futures rate per contract:

                

Energy futures and options rate per contract

   $ 1.57       $ 1.53         3   $ 1.53       $ 1.56         (2 )% 

Agricultural commodity futures and options rate per contract

   $ 2.33       $ 2.13         9   $ 2.13       $ 2.17         (2 )% 

Financial futures and options rate per contract

   $ 0.91       $ 0.81         13   $ 0.81       $ 0.84         (4 )% 

Our Global OTC Segment

The following table presents selected statement of income data for our global OTC segment (dollars in thousands):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Revenues:

                

Transaction and clearing fees, net:

                

North American natural gas

   $ 254,773       $ 221,856         15   $ 221,856       $ 186,810         19

Credit default swaps

     167,003         165,689         1        165,689         165,145           

North American power

     88,606         92,245         (4     92,245         95,277         (3

Global oil and other

     54,278         31,997         70        31,997         20,729         54   

Electronic trade confirmation

     7,597         7,969         (5     7,969         6,591         21   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total transaction and clearing fees, net

     572,257         519,756         10        519,756         474,552         10   

Intersegment fees

     86,845         74,759         16        74,759         58,881         27   

Market data fees

     48,667         47,843         2        47,843         47,682           

Other

     15,134         11,323         34        11,323         4,427         156   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     722,903         653,681         11        653,681         585,542         12   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses:

                

Intersegment expenses

     36,994         35,893         3        35,893         42,872         (16

Other operating expenses

     385,136         349,670         10        349,670         365,497         (4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     422,130         385,563         9        385,563         408,369         (6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating income

   $ 300,773       $ 268,118         12   $ 268,118       $ 177,173         51
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Revenues in our global OTC segment are generated primarily through transaction and clearing fees earned from trades. While we charge a monthly market data access fee for access to our electronic platform, we derive a substantial portion of our OTC revenues from transaction and clearing fees paid by participants based on the underlying commodity volume for each trade that they execute or clear. Transaction fees are payable by each

 

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counterparty to a trade and, for bilateral trades and trades through Creditex, are generally due within 30 days of the invoice date. Our OTC commission rates vary by product and are based on the volume of the commodity underlying the contract that is traded. Our global OTC segment includes costs associated with our trading and clearing platforms, as well as corporate overhead costs. The market data fees above relate to view only data access to our OTC markets.

Our global OTC segment’s transaction and clearing fees increased the last two years primarily due to increased trading volume in North American natural gas and global oil contracts. Contract volume in our North American natural gas markets increased 32% to 339.0 million contracts traded during the year ended December 31, 2011 from 257.4 million contracts traded during the year ended December 31, 2010 and increased 26% for the year ended December 31, 2010 from 204.7 million contracts trading during the year ended December 31, 2009. Volume in our North American natural gas markets increased due to the introduction of new products, increased natural gas options volume, increased credit availability and increased demand for hedging and risk management as market participants became less risk averse as the global financial markets stabilized.

Volume in our global oil markets increased 52% to 8.7 million contracts during the year ended December 31, 2011 from 5.7 million contracts during the year ended December 31, 2010 and increased 156% for the year ended December 31, 2010 from 2.2 million contracts during the year ended December 31, 2009. These increases were primarily due to the successful launch of new cleared global oil contracts in 2009, 2010 and 2011.

CDS trade execution revenues at Creditex decreased to $99.9 million during the year ended December 31, 2011 from $105.6 million during the year ended December 31, 2010 and from $133.9 million during the year ended December 31, 2009. Trading volumes in the broader CDS market have declined during the last two years impacting Creditex revenue performance. Diminished CDS trading by dealer clients, reduced perceptions of credit risk and significant regulatory uncertainty all contributed to lower revenues the last two years. The decline in CDS trading revenues was offset by an increase in CDS clearing revenues. CDS clearing revenues at ICE Clear Credit and ICE Clear Europe increased from $31.2 million during the year ended December 31, 2009 to $60.1 million during the year ended December 31, 2010 and to $67.1 million during the year ended December 31, 2011. During the years ended December 31, 2011, 2010 and 2009, ICE Clear Credit cleared $6.5 trillion, $5.5 trillion and $3.3 trillion, respectively, of CDS notional value. During the years ended December 31, 2011, 2010 and 2009, ICE Clear Europe cleared $5.2 trillion, $4.5 trillion and $1.3 trillion, respectively, of CDS notional value.

Transaction and clearing fees are presented net of rebates. We recorded rebates in our global OTC segment of $107.9 million, $56.0 million and $32.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in rebates is due primarily to an increase in the number of participants in the rebate programs offered on various OTC contracts and from higher contract volume traded under these programs during the period.

The following table presents the underlying commodity size for selected contracts traded in our OTC energy markets as well as the relevant standard of measure for such contracts:

 

OTC Contract

   Size     

Measure

Financial gas

     2,500       MMBtu

Physical gas

     2,500       MMBtu

East power

     800       Megawatt Hours per day

West power

     400       Megawatt Hours per day

Crude oil

     1,000       Barrels

Refined oil

     100       Barrels

 

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The following table presents the total volume of the underlying commodity or the total notional value of the underlying CDS traded in our OTC markets:

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Total Volume/Notional Value — OTC:

                

North American natural gas (in million British thermal units, or MMBtu)

     837,961         643,370         30     643,370         511,714         26

North American power (in million megawatt hours)

     6,323         6,721         (6     6,721         6,921         (3

Global oil (in equivalent million barrels of oil)

     18,697         11,727         59        11,727         4,429         165   

Credit default swaps (notional value in billions of dollars)

   $ 1,785       $ 2,256         (21   $ 2,256       $ 2,454         (8

The following table presents the number of contracts traded in our OTC energy markets (in thousands, expect for percentages):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Number of OTC energy contracts traded:

                

North American natural gas

     338,957         257,354         32     257,354         204,690         26

North American power

     68,117         69,223         (2     69,223         53,599         29   

Global oil and other

     10,047         6,486         54        6,486         2,539         155   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     417,121         333,063         25     333,063         260,828         28
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

OTC energy average daily volume

     1,655         1,322         25     1,322         1,035         28
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

North American power transaction and clearing revenues decreased 3% from $95.3 million for the year ended December 31, 2009 to $92.2 million for the year ended December 31, 2010. North American power contract volume increased 29% during the same period of time due to growth in smaller sized power contracts, which have a lower rate per contract than the full sized North American power contracts. Volume in the standard North American power contracts decreased from the year ended December 31, 2009 to the years ended December 31, 2010 and 2011 primarily due to significantly lower levels of price volatility due to weather and lower absolute price levels in natural gas, which is correlated to power, during the years ended December 31, 2010 and 2011 as compared to the year ended December 31, 2009.

As of December 31, 2011, open interest of $1.5 trillion in notional value of CDS were held at ICE Clear Credit and ICE Clear Europe, compared to $1.2 trillion as of December 31, 2010 and $339.8 billion as of December 31, 2009. The following table presents our year-end open interest for our cleared OTC energy contracts (in thousands, except for percentages):

 

     As of
December 31,
           As of
December 31,
        
     2011      2010      Change     2010      2009      Change  

Open interest — cleared OTC energy contracts:

                

North American natural gas

     27,191         14,202         91     14,202         9,583         48

North American power

     20,879         23,545         (11     23,545         17,387         35   

Global oil and other

     1,733         1,112         56        1,112         728         53   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     49,803         38,859         28     38,859         27,698         40
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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The following table presents the OTC average daily trading and clearing revenues (dollars in thousands):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Bilateral OTC energy average daily commission revenues

   $ 102       $ 98         5   $ 98       $ 78         26

Cleared OTC energy average daily commission and clearing revenues

     1,476         1,276         16        1,276         1,124         14   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total OTC energy average daily commission and clearing revenues

     1,578         1,374         15        1,374         1,202         14   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Global CDS OTC average daily commission and clearing revenues

     663         657         1        657         655           
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total OTC average daily trading and clearing revenues

   $ 2,241       $ 2,031         10   $ 2,031       $ 1,857         9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Our Market Data Segment

The following table presents selected statement of income data for our market data segment (dollars in thousands):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Revenues:

                

Market data fees

   $ 76,289       $ 61,332         24   $ 61,332       $ 54,002         14

Intersegment fees

     34,440         33,811         2        33,811         33,671           

Other

     34         49         (31     49         37         32   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     110,763         95,192         16        95,192         87,710         9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses:

                

Intersegment expenses

     34,250         33,417         2        33,417         27,582         21   

Other operating expenses

     4,120         3,958         4        3,958         3,245         22   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     38,370         37,375         3        37,375         30,827         21   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating income

   $ 72,393       $ 57,817         25   $ 57,817       $ 56,883         2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

We earn terminal and license fee revenues that we receive from data vendors through the distribution of real-time and historical futures prices and other futures market data derived from trading in our futures markets. During the years ended December 31, 2011, 2010 and 2009, we recognized $55.5 million, $47.4 million and $41.8 million, respectively, in terminal and license fees from data vendors in our market data segment. We also earn subscription fee revenues from direct access services, OTC daily indexes, futures terminal fees and OTC and futures end of day reports. In addition, we provide a service to independently establish market price validation curves whereby participant companies subscribe to receive consensus market valuations.

 

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Consolidated Operating Expenses

The following table presents our consolidated operating expenses (dollars in thousands):

 

     Year Ended
December 31,
           Year Ended
December 31,
        
     2011      2010      Change     2010      2009      Change  

Compensation and benefits

   $ 250,601       $ 236,649         6   $ 236,649       $ 235,677        

Technology and communication

     47,875         44,506         8        44,506         38,277         16   

Professional services

     34,831         32,597         7        32,597         35,557         (8

Rent and occupancy

     19,066         17,024         12        17,024         20,590         (17

Acquisition-related transaction costs

     15,624         9,996         56        9,996         6,139         63   

Selling, general and administrative

     33,909         35,714         (5     35,714         34,572         3   

Depreciation and amortization

     132,252         121,209         9        121,209         111,357         9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 534,158       $ 497,695         7   $ 497,695       $ 482,169         3
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Consolidated compensation and benefits expenses increased for the year ended December 31, 2011 from the comparable period in 2010 primarily due to an increase in our employee headcount. We had 1,013 employees as of December 31, 2011, which is an increase of 9% from 933 employees as of December 31, 2010, primarily due to hiring for clearing, technology and compliance operations, and due to our acquisitions over the last year. Non-cash compensation expenses recognized in our consolidated financial statements for employee stock options and restricted stock were $52.9 million, $48.8 million and $51.2 million for the years ended December 31, 2011, 2010 and 2009, respectively, with the 2011 increase primarily relating to a greater number of employees receiving non-cash awards due to the headcount increases from 2010. We incurred employee termination costs of $6.0 million and $6.8 million for the years ended December 31, 2010 and 2009, respectively, following our acquisitions of CLE during 2010 and TCC during 2009.

The increase in our consolidated technology and communication expenses the last two years is directly associated with the growth of our business and the related increases in our technology hosting expenses, hardware and software support expenses and other license fees. During the year ended December 31, 2009, consolidated rent and occupancy expenses included $2.4 million in costs that we incurred to vacate office space in New York City.

We incurred consolidated acquisition-related transaction costs during the year ended December 31, 2011 primarily relating to our potential acquisition of NYSE Euronext and our Cetip investment, during the year ended December 31, 2010 primarily relating to our acquisition of CLE and during the year ended December 31, 2009 primarily relating to our acquisition of TCC. These costs largely relate to investment banking advisors, lawyers, accountants, tax advisors and public relations firms, as well as costs associated with obtaining committed funding and other external costs directly related to the proposed or closed transactions.

Consolidated depreciation and amortization expenses increased the last two years primarily due to additional amortization expenses recorded on the intangible assets associated with our acquisitions of CLE in July 2010 and TCC in March 2009 and due to additional depreciation expenses recorded on fixed asset additions. We recorded amortization expenses on the intangible assets acquired as part of our acquisitions, as well as on the Russell licensing agreement intangible assets, of $75.8 million, $71.0 million and $65.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. We recorded depreciation expenses on our fixed assets of $56.5 million, $50.2 million and $45.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

We expect our operating expenses to increase in absolute terms in future periods in connection with the growth of our business and to vary from year to year in the future periods based on the type and level of our acquisitions and other investments.

 

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Consolidated Non-Operating Income (Expenses)

The following tables present our consolidated non-operating income (expenses) (dollars in thousands):

 

     Year Ended
December 31,
          Year Ended
December 31,
       
     2011     2010     Change     2010     2009     Change  

Other income (expense)

            

Interest and investment income

   $ 3,012      $ 2,313        30   $ 2,313      $ 1,961        18

Interest expense

     (36,097     (29,765     21        (29,765     (22,922     30   

Other income (expense), net

     (1,009     (14,655     n.m.        (14,655     2,047        n.m.   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

   ($ 34,094   ($ 42,107     (19 %)    ($ 42,107   ($ 18,914     123
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to noncontrolling interest

   ($ 12,068   ($ 9,469     27   ($ 9,469   $ 1,834        n.m.   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

n.m. in the table above stands for not meaningful.

The increases in consolidated interest expense the last two years are primarily due to an increase in the overall amount of the debt outstanding during each of the past two years. See “Loan Agreements” below.

During the year ended December 31, 2011, we settled two outstanding legal matters by paying the separate plaintiffs a cash payment, and we sold our minority stake in an exchange located in China that was acquired as part of the assets of CLE. The two legal settlements and the divestiture, none of which were individually significant, resulted in a net loss of $1.3 million for the year ended December 31, 2011. During the year ended December 31, 2010, we incurred a $15.1 million loss on our foreign currency hedge relating to the pounds sterling cash consideration paid to acquire CLE, offset by a net gain of $1.8 million that we recognized during the year ended December 31, 2010 on the CLE acquisition based upon the difference between the £7.50 (pounds sterling) per share acquisition price versus the £6.45 per share price at which we purchased our initial 4.8% stake in CLE. During the year ended December 31, 2009, we recognized a $17.2 million net gain on the sale of our LCH.Clearnet cost method investment, which was offset by a $9.3 million impairment loss on our investment in NCDEX and $6.1 million in other cost method investment impairment losses. These gains and losses discussed above were recorded in other income (expense).

We incurred foreign currency transaction losses of $406,000, $1.4 million and $632,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Foreign currency gains and losses are recorded in other income (expense) and relate to the settlement of foreign currency assets, liabilities and payables that occur through our foreign operations that are received in non-functional currencies due to the increase or decrease in the period-end foreign currency exchange rates between periods. During the year ended December 31, 2011, Cetip declared a $2.1 million dividend on the shares that we own in Cetip and we recognized this as other income.

For those consolidated subsidiaries in which our ownership is less than 100%, and for which we have control over the assets, liabilities and management of the entity, the outside stockholders’ interests are shown as noncontrolling interests. Noncontrolling interest relates primarily to the operating results of our CDS clearing subsidiaries in which non-ICE limited partners hold a 45.5% net profit sharing interest as of December 31, 2011. The increase in the net income attributable to noncontrolling interest for the past two years is primarily due to the increase in the net income attributable to our CDS clearing business as a result of increased revenues.

Income Tax Provision

Consolidated income tax expense was $237.5 million, $202.4 million and $179.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increases in consolidated income tax expense the last two

years was primarily due to the increase in our pre-tax income each year. Our effective tax rate was 31%, 33% and

 

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36% for the years ended December 31, 2011, 2010 and 2009, respectively. The effective tax rate for the years ended December 31, 2011 and 2010 is lower than the federal statutory rate primarily due to favorable foreign income tax rate differentials reflecting the mix of income between U.S. and foreign jurisdictions and foreign rate reductions, which are partially offset by state taxes and non-deductible expenses. Favorable foreign income tax rate differentials result primarily from lower tax rates in the United Kingdom. The United Kingdom reduced corporate income tax rates from 28% to 26% effective April 1, 2011 and to 25% effective April 1, 2012.

Our effective tax rate decreased to 33% for the year ended December 31, 2010 from 36% for the year ended December 31, 2009, primarily due to a decrease in our state effective tax rate. The effective tax rate for the year ended December 31, 2009 is higher than the federal statutory rate primarily due to state taxes and non-deductible expenses, which are partially offset by favorable foreign income tax rates and tax credits.

 

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Quarterly Results of Operations

We believe the following quarterly unaudited consolidated statements of income data has been prepared on substantially the same basis as our audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our consolidated results of operations for the quarters presented. The historical results for any quarter do not necessarily indicate the results expected for any future period. This unaudited condensed consolidated quarterly data should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following table sets forth quarterly consolidated statements of income data (in thousands):

 

    Three Months Ended,  
    December 31,
2011
    September 30,
2011
    June 30,
2011
    March 31,
2011
    December 31,
2010
    September 30,
2010
    June 30,
2010
    March 31,
2010
 

Revenues:

               

Transaction and clearing fees, net:

               

Futures:

               

ICE Brent Crude futures and options

  $ 46,858      $ 48,158      $ 46,593      $ 48,562      $ 36,602      $ 35,460      $ 38,012      $ 35,204   

ICE Gasoil futures and options

    25,072        25,418        22,235        26,774        20,717        19,529        18,681        20,186   

Sugar futures and options

    11,793        19,255        20,423        17,689        16,408        18,531        18,258        21,341   

ICE ECX emission futures and options

    17,252        16,928        15,049        14,251        11,889        11,778        9,978        7,478   

ICE WTI Crude futures and options

    9,195        10,096        10,695        14,722        11,116        12,153        14,033        11,544   

Russell Index futures and options

    9,223        11,680        9,478        9,653        7,949        7,931        8,623        7,834   

Cotton futures and options

    4,772        3,953        5,636        6,546        7,012        4,600        5,058        4,394   

Other futures products and options

    18,800        19,516        18,814        19,021        15,019        14,613        17,129        14,638   

OTC:

               

North American natural gas

    67,116        62,699        61,127        63,831        54,771        57,544        58,110        51,431   

Credit default swaps

    41,311        45,543        41,072        39,077        37,639        42,304        43,024        42,722   

North American power

    19,499        22,317        22,506        24,284        21,376        21,472        24,353        25,044   

Global oil and other

    14,540        14,048        13,002        12,688        9,025        8,152        7,553        7,267   

Electronic trade confirmation

    1,876        1,899        1,910        1,912        1,907        2,035        2,048        1,979   

Market data fees

    32,625        32,212        30,699        29,420        27,608        27,528        27,186        26,853   

Other

    7,283        7,056        5,979        5,850        5,985        3,516        4,109        3,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    327,215        340,778        325,218        334,280        285,023        287,146        296,155        281,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Compensation and benefits

    62,650        64,137        62,176        61,638        56,953        62,586        58,870        58,240   

Technology and communication

    11,989        12,316        12,045        11,525        11,650        11,544        10,407        10,905   

Professional services

    9,861        8,743        8,422        7,805        7,757        8,262        8,029        8,549   

Rent and occupancy

    5,138        5,107        4,462        4,359        4,349        4,678        3,582        4,415   

Acquisition-related transaction costs

    864        5,446        5,877        3,437        934        7,019        1,498        545   

Selling, general and administrative

    8,716        7,885        8,521        8,787        11,457        9,760        7,560        6,937   

Depreciation and amortization

    33,189        33,095        32,837        33,131        33,342        31,739        27,914        28,214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    132,407        136,729        134,340        130,682        126,442        135,588        117,860        117,805