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Updated to include comment from CME Group spokesman.
NEW YORK (
IntercontinentalExchange (ICE - Get Report) shares received an upgrade to "Buy" Monday from BGB Securities analyst Faye Elliott, who argues the exchange's speed in adapting to new regulations and energy price volatility will lead to more trading and increased profits for the energy derivatives exchange.
Elliott raised her price to earnings multiple "to reflect lower exposure [to] regulatory risk as well as support for shares accorded by company initiatives and supply constraint concerns," according to her note. She also raised her price target to $150 from $145, compared to Friday's closing price of $129.74. ICE shares were down 0.59% to $128.98 roughly two hours after Monday's open.
ICE announced in July that North American swaps contracts on natural gas, electric power, environmental products and natural gas liquids swaps would be listed as futures starting in January 2013. European swaps on oil products, freight and iron ore will also be listed as futures, ICE has said.
The change in classification by ICE will reduce compliance costs for clients of the exchange, according to Elliott.
Changing the classification gave ICE an advantage over rival
CME Group(CME - Get Report), on impending new rule deadlines for swaps. However, an extension until Dec. 31 granted by U.S. futures regulator the Commodity Futures Trading Commission (CFTC) on Friday gave the CME some breathing room,
according to Reuters.
Despite the extension, Elliott believes ICE has the advantage, as she doubts the CME will meet even the extended deadline. She also believes the relief came too late for the CME to avoid losing business from market participants concerned about the impending deadline. Further, she believes "the system that ICE has in place today is still more transparent and likely to gather more depth that makes it hard for CME to catch up," she wrote via email to
TheStreet. CME shares were lower by less than a tenth of one percent on Friday and up by 0.35% shortly before noon on Monday.
CME spokesman Damon Leavell says "CME ClearPort is ready today to allow customers to execute as swaps or futures and to trade both as futures." He said the CFTC's extension on Friday was "to give the market the time that they need to transition their business, if they desire to from swaps to futures--for futures treatment for the whole lifecycle of the trade. But we offer the functionality. You can come to our market today and you can transact as a swap or a future--it makes no difference to us and we will clear both of them as a future. That's not going to change. It won't change after Dec. 31. It is not changing today. We're ready to go."
Leavell declined to comment, however, on whether ICE offers clients more flexibility in avoiding impending CFTC rules related to swaps.
"I can't talk about ICE and their business. I wouldn't talk about ICE and their business."
Separately, Elliott believes "unresolved Middle East relations" could increase trading volatility, as could "increased rhetoric between Brent bulls and bears." Brent refers to a blend of crude oil, futures contracts for which trade on the ICE. Increased volatility would presumably lead to more trading and improved earnings for ICE.
Written by Dan Freed in New York.