ICE to offer OTC clearing via London

The IntercontinentalExchange (ICE), a leading operator of over-the-counter (OTC) markets for oil, gas, power and metals, has teamed up with the London Clearing House (LCH) to offer OTC derivatives clearing to clients.

The service, due to be up and running by the end of the year, will allow ICE to offer market participants a range of risk management products varying from existing bi-lateral OTC agreements, OTC clearing and exchange-traded futures and options.

"We will soon be in the unique position of providing optimal efficiencies for market users not only through the application of standardised technology to the full spectrum of market needs, but also through the credit enhancement and cross margining opportunities that clearing OTC products will offer," said ICE founder and chief executive Jeff Sprecher.

ICE already owns a stake in LCH following its acquistion of the London-based International Petroleum Exchange (IPE). Other LCH members hold a 75% stake in the clearing house, with IPE, the London International Financial futures and Options Exchange and London Metals Exchange owning the remaining 25. IPE already offers clearing via the LCH, meaning institutions will be able to pool their OTC and futures risk in one location and cross-margin positions held on ICE and IPE.

ICE will initially offer US oil swaps and US natural gas swaps to be cleared via the LCH, but plans to introduce additional poducts in phases. While ICE participants will use the same processes for OTC-cleared trades as they do for current bi-lateral agreements, the two companies will now trade with the LCH rather than directly with each other via a credit agreement. This typically enhances the financial integrity of the trade.

The LCH has yet to disclose margin requirements for ICE participants, but the UK clearing house also has a defualt fund of £292 million should margins prove insufficient.

The LCH has applied to the Commodities Futures Trading Commission (CFTC) for recognition as a derivaitve clearing organisation.