WRITTEN TESTIMONY OF JOHNATHAN SHORT

SENIOR VICE PRESIDENT & GENERAL COUNSEL

INTERCONTINENTALEXCHANGE, INC.

BEFORE THE HOUSE

COMMITTEE ON AGRICULTURE

DECEMBER 8, 2008

***Introduction***

Chairman Peterson, Ranking Member Goodlatte, I am Johnathan Short,
Senior Vice President and General Counsel of the
IntercontinentalExchange, Inc., or \"ICE.\" We very much appreciate the
opportunity to appear before you today to discuss the role of credit
derivatives in the financial markets and ICE's efforts, along with other
market participants, to introduce transparency and risk intermediation
into the OTC credit markets.

ICE is proud to be working with the Federal Reserve System, the
Commodity Futures Trading Commission ("CFTC"), and the Securities
Exchange Commission ("SEC") on these efforts that are vital to the
health of our financial markets. Importantly, ICE has a history of
working with over-the-counter ("OTC") market participants to introduce
transparency and risk intermediation into markets. We pioneered the
introduction of transparent OTC energy markets nearly a decade ago,
moving trading from telephones to screens. In 2002, we introduced
clearing into the OTC energy markets in response to the credit and
counterparty risk crisis that were then gripping the energy markets ---
much like the crisis confronting global financial markets today. With
the formation and launch of ICE Trust ("ICE Trust"), which I will detail
in a few minutes, ICE is leveraging its expertise in OTC clearing and
making significant investments to transform the OTC credit derivatives
market into a regulated, centrally cleared marketplace that will be
open, independent, transparent and efficient.

***Background and Progress Report***

As outlined in previous testimony, to clear credit default swaps
("CDS"), ICE will form a limited purpose bank, ICE Trust. ICE Trust will
be a New York trust company and a member of the Federal Reserve System.
It will therefore be subject to regulatory and supervisory requirements
of the Federal Reserve System and the New York Banking Department.

ICE has agreed to purchase The Clearing Corporation ("TCC") and has
garnered the support of nine banks: Bank of America, Citigroup, Credit
Suisse, Deutsche Bank, Goldman Sachs, J.P.Morgan Chase Bank, Merrill
Lynch, Morgan Stanley and UBS. Currently TCC provides clearing services
for global futures exchanges and OTC markets and since early 2007 has
been working with leading industry participants, regulators and industry
associations on a global initiative to clear CDS indices, tranches and
single name instruments.

The nine banks using the ICE CDS clearinghouse will novate and
capitalize their positions with a new and completely separate bulk fund.
The guaranty fund for index contracts alone has been estimated to be in
excess of \$1 billion. The total level of funding and collateral could
rise considerably as initial and variation margin levels are determined
and as new types of credit transactions move into the clearinghouse.

It is important to note that one of the defining features of the ICE
Trust CDS clearing solution --- and one that we believe is import to its
success over the long term --- is the independence of ICE Trust
management from its clearing membership. The management of ICE Trust
will be vested in an independent board of directors. Initially, the
board of directors of ICE Trust will consist of seven members, four of
whom are independent in accordance with the requirements of the New York
Stock Exchange listing standards, the Exchange Act, and ICE's Board of
Director Governance Principles. Within six months of its initial
constitution, the Board of Directors will increase to nine with the
addition of two new independent directors.

In this vein, ICE Trust has also been holding regular meetings with
buy-side participants to insure their representation in the
clearinghouse solution. Feedback from these meetings has allowed ICE
Trust to tailor its governance to allow buy-side participants to have a
voice in the management of the clearing house through an advisory board.
ICE Trust believes it is very important that its clearing solution be
open to all participants, and thus obtaining buy-side support is very
important.

ICE Trust will also be an open platform: other suitable trading
platforms will be able to use ICE Trust's clearing facilities. Because
TCC and Creditex are integrated with the Depository Trust and Clearing
Corporation (DTCC) warehouse, our solution will have the ability to
support all existing and future CDS trades, regardless of when or where
the trades were executed. Ultimately, the goal is to insure that the
greatest amount of trades are centrally cleared in order to decreased
counterparty risk and increase transparency.

***Regulation of Credit Derivatives Clearing***

As stated in our earlier testimony, appropriate, effective regulation of
credit derivatives is essential for the efficient operation of capital
markets and the financial system. Presently, credit default swaps are
largely exempt from regulation by the CFTC and the SEC. Since the
beginning of the credit crisis in 2007, however, the Federal Reserve
Bank of New York ("New York Fed") has progressively taken steps to
address the unique market structure and systemic risks inherent in the
credit market. As recent events demonstrate, the credit markets are
intricately tied to the banking system, and many of the largest credit
derivative market participants are banks subject to regulation by the
Federal Reserve.

To address these issues, on November 14, the President's Working Group
on Financial Markets ("PWG") announced its policy objectives for the OTC
Derivatives Market. In the policy statement, the PWG outlined four
objectives for OTC derivatives markets: (1) Improve Market Transparency
and Integrity for Credit Default Swaps, (2) Enhance Risk Management of
OTC Derivatives, (3) Strengthen OTC Derivatives Market Infrastructure,
and (4) Continue Cooperation among Regulatory Authorities. ICE supports
the PWG's policy objectives, and as outlined below, ICE believes its
credit default swaps clearing solution, ICE Trust, will help regulators
achieve these objectives.

***Improving Market Transparency and Integrity for Credit Default
Swaps***

The first policy objective of the PWG is to improve market transparency
and integrity for credit default swaps. Specifically, the PWG calls for
public reporting of prices, trading volumes, and aggregated open
interest. Further, the PWG states that regulators should have access to
trade and position information housed at central counterparties and
central trade repositories. ICE will satisfy these objectives through
direct regulation by the Federal Reserve, and through adoption of
appropriate clearing house rules.

The Federal Reserve Act authorizes the Federal Reserve System and the
New York Federal Reserve to require reporting from ICE Trust, and to
conduct examinations of ICE Trust as it sees fit.  The Federal Reserve
has this authority because it establishes the terms under which ICE
Trust will become a member bank. The Federal Reserve also has statutory
authority to require reports and conduct examinations of any affiliate
of ICE Trust.  We expect that the Federal Reserve will require detailed
reports on a regular basis concerning all aspects of the operations of
ICE Trust.  As the Federal Reserve reviews our membership application,
we will work with the agency, as well as other regulators, to ensure
that we provide requested and required data, including public reporting.

In the case of the current market structure for credit default swaps,
the *absence* of this kind of information has contributed to uncertainty
in the credit derivatives marketplace. ICE fully supports reporting of
consolidated CDS market information because we know transparency will
improve public confidence and market effectiveness. Our experience has
taught us that central clearing combined with timely and appropriate
information disclosure will substantially improve market safety and
soundness, while preserving OTC market participants' ability to innovate
and create new risk management products.

Oversight by the Federal Reserve System will ensure that ICE's cleared
credit derivatives model is transparent and fully regulated from the
inception of its operation. The Federal Reserve System has played a
central role in addressing both the current credit crisis and issues
related to credit derivatives within the broader market. Indeed, since
its founding in 1913, the U.S. central bank has had primary
responsibility for maintaining the stability of the financial system and
containing systemic risk in financial markets.

***Enhanced Risk Management of OTC Derivatives***

The second policy objective of the PWG is to enhanced risk management of
OTC derivatives. Among the specific objectives, the PWG calls for
consistent risk management standards for regulated entities that
transact OTC derivatives instruments, including best practices for
market participants with respect to risk management.

To meet these objectives, Federal Reserve regulatory requirements
include minimum capital requirements, governance requirements,
membership requirements, margin requirements, a satisfactory guaranty
fund, and operational safeguards, all with a view to satisfying
internationally recognized clearing standards. As a limited purpose
bank, ICE Trust will be subject to regular examination by the Federal
Reserve and the New York Banking Department, among other regulatory
bodies as appropriate in the normal course of operations and will be
required to satisfy reporting requirements.

ICE Trust will offer clearing services to its membership. Membership
will be open to all market participants that meet the clearinghouse\'s
financial criteria, and, importantly, third parties unable to meet
membership criteria will be able to clear through members of the
clearinghouse. Like other clearinghouses, ICE Trust will review each
member\'s financial standing, operational capabilities (including
technical competence), systems and controls, and the size, nature and
sophistication of its business in order to meet comprehensive risk
management standards with respect to the operation of the clearinghouse.

ICE Trust will require members to report various specific other matters
to the clearinghouse including: where the member ceases to hold
sufficient capital or breaches any applicable position limit; if the net
worth of such member reduces by more than 20% from that shown on the
latest financial statement filed by it with the clearinghouse for any
reason; the failure to meet any obligation to deposit or pay any margin
when and as required by any clearinghouse of which it is a member;
failure to be in compliance with any applicable financial requirements
of any regulatory authority, exchange, clearing organization or delivery
facility; the insolvency of the member or any controller or affiliate of
that member; any default affecting it.

ICE Trust will adhere to the \"Recommendations for Central
Counterparties\" ("RCC") developed jointly by the Committee on Payment
and Settlement Systems ("CPSS") and the Technical Committee of the
International Organization of Securities Commissions ("IOSCO") which set
out standards for Risk Management of a central counterparty ("CCP").
These recommendations are broadly recognized and have been used by
national regulators and other clearinghouses for self-assessment.

Following these guidelines, ICE Trust will establish a guaranty fund
sufficient to meet costs associated with the cost of closing out an
insolvent member's liabilities that exceed the financial resources (cash
and collateral) held in the account of the insolvent member. Each member
will be required to contribute to the guaranty fund in an amount which
is adjusted to reflect the volume of activity and risk they hold within
the clearinghouse. The value of the guaranty fund will be sufficient in
aggregate to meet the largest single modeled stress-test loss of the
largest two members in excess of the margin requirement of that member.
Portfolio stress-testing will use scenarios to cover market risks
exceeding a confidence level of 99.9%.

The ICE Trust guaranty fund will be for CDS positions only and will not
serve as a collateral deposit for any other commodity contracts. We
believe the best solution for containing the financial risks associated
with credit derivative markets is to completely separate them from other
derivative markets.

***Strengthened OTC Derivatives Market Infrastructure***

The third policy goal of the PWG is to strengthen the OTC derivatives
market infrastructure. This objective includes ensuring that all market
participants have open and fair access to key infrastructure components
and that exchange or similar platforms for standardized CDS contracts
should be encouraged. Finally, the PWG states that regulators should
encourage improvements to operational infrastructure, including
improvements to post-trade automation, frequent portfolio compression
and enhanced standardized documentation.

ICE's clearing solution squarely addresses this objective by addressing
the OTC CDS market as it exists today. By bringing a CDS clearing
solution to the existing market structure, ICE's solution can quickly
address the existing systemic risk that is resident in the market. Of
equal importance, ICE has critical domain knowledge and expertise to
bring to its clearing solution as a result of its acquisition of
Creditex Group, Inc. ("Creditex"). Creditex is the global market leader
and innovator in providing infrastructure to the credit default swap
markets. In the last few years, Creditex has worked collaboratively with
market participants on three important initiatives to improve
operational efficiency and scalability in the credit derivatives market.

In 2005, Creditex helped to develop the ISDA Cash Settlement Auctions,
which are the market standard for credit derivative settlement and have
been used in recent weeks to facilitate the orderly settlement of CDS
contracts referencing Fannie Mae, Freddie Mac, Lehman Brothers,
Landsbanki (Europe's first credit event auction) and many others. In
addition, Creditex and Markit, a credit derivative pricing service,
designed a compression solution to reduce the overall notional size and
the number of outstanding contracts in credit derivative portfolios.
Since August, Creditex and Markit have completed the compression of
\$1.036 trillion in notional value of CDS transactions, greatly reducing
the risk to the financial system.

Finally, Creditex's subsidiary, T-Zero, is provides critical
infrastructure for trade transmission and same-day trade matching. The
platform addresses recommendations by the PWG earlier this year for
flexible and open architecture, ambitious standards for accuracy and
timeliness of trade matching errors and operationally reliable and
scalable infrastructure.

Importantly, ICE US Trust will be open to other appropriate market
"front end" and "back end" solutions that fit the needs of market
participants. As noted earlier, other suitable trading platforms will be
able to use ICE Trust's clearing facilities. Because TCC and Creditex
are working with the Depository Trust and Clearing Corporation ("DTCC")
warehouse, our solution will have the ability to support all existing
and future CDS trades, regardless of when or where the trades were
executed.

***Cooperation among Regulators***

The final policy objective of the President's Working Group is continued
cooperation among regulators. Specifically, the PWG states that
regulators that have jurisdiction over OTC markets should cooperate and
ensure that they have adequate enforcement authority. ICE fully supports
this recommendation and believes that CDS clearing will help achieve its
goal. ICE Trust's principal regulator will be the Federal Reserve, but
it stands willing to work with any regulator to make sure that the CDS
market is open, transparent and regulated.

***Conclusion***

ICE has always been and continues to be a strong proponent of open and
competitive derivatives markets, and of appropriate regulatory oversight
of those markets. As an operator of global futures and OTC markets, and
as a publicly-held company, ICE understands the importance of ensuring
the utmost confidence in its markets. To that end, we have continuously
worked with regulatory bodies in the U.S. and abroad in order to ensure
that they have access to all relevant information available to ICE
regarding trading activity on our markets. We have also worked closely
with Congress to address the regulatory challenges presented by
derivatives markets and will continue to work cooperatively for
solutions that promote the best marketplace possible.

Mr. Chairman, thank you for the opportunity to share our views with you.
I would be happy to answer any questions you may have.