WRITTEN TESTIMONY OF JEFFREY C. SPRECHER

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

INTERCONTINENTAL EXCHANGE, INC.

BEFORE THE HOUSE

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

COMMITTEE ON AGRICULTURE

UNITED STATES HOUSE OF REPRESENTATIVES

September 26, 2007

Mr. Chairman, I am Jeff Sprecher, Chairman and Chief Executive Officer
of IntercontinentalExchange, Inc., or \"ICE.\" We very much appreciate
the opportunity to appear before you today to discuss our views on the
reauthorization of the Commodity Exchange Act (the "Act" or "CEA").

ICE was established in 2000 as an over-the-counter (OTC) market. Since
that time, ICE has grown significantly, both through its own market
growth fostered by ICE's product, technology and trading innovations, as
well as by acquisition of other markets to broaden its product
offerings.

Today, ICE operates a leading global marketplace in futures and OTC
derivatives across a variety of product classes, including agricultural
and energy commodities, foreign exchange and equity indexes. Commercial
hedgers use our products to manage risk and investors provide necessary
liquidity to the markets. Headquartered in Atlanta, ICE has offices in
New York, Chicago, Houston, London, Singapore, and Calgary.

ICE hosts three separate markets on our electronic trading platform --
ICE's OTC energy market, which operates under the CEA as an \"exempt
commercial market,\" or ECM, and two subsidiaries: ICE Futures Europe,
formerly known as the "International Petroleum Exchange," which is
regulated by the UK Futures and Securities Authority and ICE Futures US,
formerly known as "The Board of Trade of the City of New York (NYBOT),"
which is a regulated Designated Contract Market (DCM) under the CEA.

ICE Futures US offers traditional open-outcry trading in futures and
options on soft commodities (coffee, sugar, cocoa, cotton, and orange
juice), financial indexes and currencies through trading floors located
in New York City and in Dublin, Ireland. In February 2007, ICE Futures
US started trading its core agricultural futures on the ICE electronic
platform, side-by-side with open outcry and we are in the process of
introducing electronic trading of futures and options in our equity
index and foreign currency products. Adding the electronic platform gave
market users greater flexibility in trade execution, with availability
via Internet or dedicated lines anywhere in the world. As a result, ICE
Futures US became more competitive in the global marketplace, as
evidenced by a 36% increase in volume in soft commodity futures during
the first six months following initiation of electronic trading,
compared to the same six-month period in 2006.

ICE also acquired NYBOT's clearinghouse, which is now called "ICE Clear
US" and continues to be operated as a registered Derivatives Clearing
Organization (DCO) under the CEA. Currently, it only clears trades
transacted on ICE Futures US. ICE's other contracts are cleared through
LCH.Clearnet Ltd. in the United Kingdom, but plans are underway to
transition ICE's other contracts to our own, newly-formed UK
clearinghouse.

As the Subcommittee considers reauthorization of the CEA, we urge you to
maintain the principles-based regulatory structure and flexibility
embodied in the landmark Commodity Futures Modernization Act of 2000
(CFMA). In particular, the tiered system of regulation provides
regulatory certainty and has placed the United States in a better
position to attract business and maintain competitiveness in the global
marketplace. US futures and derivatives markets flourished, while new
technologies and products tailored to meet the changing needs of
commercial customers and investors were given the opportunity to
develop.

ICE and its market participants, including energy producers,
distributors and users, benefited significantly from the regulatory
flexibility embodied in the CFMA through the ECM structure established
under section 2(h)(3) of the Act. It allowed the development of a
transparent electronic trading system for commercial and professional
market users, allowing them to hedge risk in a more efficient and
effective manner.

As these markets have grown and developed since passage of the CFMA, new
regulatory challenges have emerged. ICE advocates a targeted approach to
any reform of the CEA. Such an approach recognizes the unique
characteristics of the many customized markets that have evolved and the
importance of continuing to encourage market innovation.

***In this regard, some level of additional reporting and a system of
position accountability may be appropriate for certain ECM contracts --
specifically, those that settle on a futures market contract price and
that are the true economic equivalent of a contract actively traded on a
regulated futures market. However,*** ***most of the energy swap
contracts traded on ICE are*** ***niche OTC products that are not
amenable to the application of such requirements**.* ICE therefore urges
the Subcommittee to stay within the current regulatory framework and to
allow the CFTC to make adjustments that may be appropriate for a few
particular products.

***Background and History***

At the time of CFMA's passage and ICE's formation, commercial hedgers
had two primary options if they wished to hedge energy price risk --
they could seek to hedge their risk through one of ***the limited number
of futures contracts traded on an exchange,*** such as NYMEX, or they
could work with an investment bank or so--called "voice broker" to
negotiate a bilateral swap contract to address their hedging needs in a
more tailored fashion. Each of these markets had its benefits and
drawbacks.

Futures exchanges such as NYMEX offered ***a limited number of highly
liquid benchmark contracts***. While these pricing benchmarks offered
deep liquidity (and hence a better view of true market price at a given
location), they usually did not address the precise hedging needs of the
commercial user due to the limited number of contracts traded and the
limited number of delivery points of those contracts. For example, a
NYMEX Henry Hub natural gas futures contract is tied to the price of
natural gas delivered at the Henry Hub in Tailgate, Louisiana. While
relevant, the price of natural gas at the Henry Hub does not define the
price of natural gas at all locations around the country for a large
number of reasons, ranging from the influence of transportation and
storage costs to local supply and demand dynamics. For this reason,
futures contracts did not provide a complete hedge of the commercial
user's ultimate price risk. In addition, a physically delivered futures
contract had the added problem that if held to expiration (the time
through which a commercial user might need to hedge price risk), the
holder of the contract could be forced to make or take delivery of the
underlying commodity.

Furthermore, NYMEX was, until the introduction of meaningful competition
by ICE, overwhelmingly an ***open outcry*** trading market. The hedger
or customer wishing to execute business would call its broker and
typically be quoted a wide "bid/ask spread". Customers often did not
even get executed in the quoted range due to the time delay inherent in
the process and the absence of firm, executable prices resulted in
customers paying more to hedge their price risk --making their
businesses more expensive to operate, with costs ultimately either being
born by the business itself (resulting in lower operating margins) or by
its customers (higher prices being charged to customers). Finally, open
outcry gave floor traders who were trading ***for their own account***
an important time and information advantage in the market.

Alternatively, if the hedger sought to hedge its price risk through use
of a bilateral swap contract executed with a dealer (such as an
investment bank) or through the services of a voice broker, the hedger
faced a number of different trade-offs. On the one hand, the hedger
could better tailor the product to its specific hedging needs, for
example, by entering into a swap contract that was tied to a delivery
point closer to where the commodity would be used. On the other hand,
bilateral swap markets tended to be opaque and the commercial hedger
often had little sense of where the true market was and whether it was
being charged a fair premium by the dealer or voice broker for shifting
the risk in question. Finally, there was no guarantee of fairness in
pricing \-- different fees and better terms could be charged to
different customers -- meaning the small commercial player with limited
hedging needs might not be offered the same opportunity as another
market participant that transacted a significant volume of business with
the investment bank or voice broker. As a result, spreads might be even
wider than in the futures market.

I formed ICE to bridge the gap between the existing futures market and
the voice brokered swaps market. In addition to offering bilateral swaps
tied to individual futures contracts (swaps that were financially
settled and could be held to contract expiry), ICE also offered a large
number of tailored swap contracts that, like those being offered in the
broader OTC swaps market, were better tailored to the delivery locations
of users around the country and thus better tailored to the specific
hedging needs of the end user. Importantly, ICE offered all of these
contracts through a transparent electronic marketplace offering firm,
executable prices and employing a strict best bid/best offer trading
protocol that did not discriminate between market users (the smallest
utility would get the same treatment as the largest investment bank).
Furthermore, ICE offered users a view into the "bid/offer" stack so that
market participants could for the first time assess the depth of
liquidity in a market.

In summary, ICE provided market participants a compelling alternative to
the hedging opportunities then being offered by the futures market or by
the voice-brokered swaps market. Fundamentally, however, ICE served as
an "electronic voice broker," offering its services to the same
institutional and commercial entities participating in the OTC market,
but allowing them to trade in a more efficient and cost effective
manner.

Responding to the needs presented by the downturn in the merchant energy
markets in 2002, ICE continued to innovate through its subsequent
introduction of "cleared" OTC swap contracts. Following its acquisition
of ICE Futures Europe (formerly the International Petroleum Exchange),
ICE for the first time had the infrastructure to offer the option of
credit intermediation in a swap contract to better provide liquidity to
the marketplace. The elimination of bilateral counterparty credit risk
was an important innovation facilitated by the CFMA, which allowing
contracts to be cleared through third party clearing arrangements such
as the one ICE entered by ICE with a third party clearing house.

***Benefits to the Marketplace***

Ultimately, the tangible benefits to the marketplace included more
efficient hedging of energy price risk (tighter markets), greater price
transparency in all parts of the marketplace (not just at benchmark hubs
tied to futures contracts), and vastly improved liquidity through the
introduction of more participants (and thus greater price competition)
in the markets. These benefits have not been limited to those brought
about directly by ICE's business and its product offerings, but include
those resulting from changes to the business models and product
offerings of other market participants that responded to the competitive
challenge presented by ICE's business. It is ultimately for others to
determine cause and effect, but one cannot ignore the question of
whether and how quickly other parts of the market, in some cases
dominated by member interests, would have adopted electronic trading and
pursued product innovation in the absence of the competition presented
by ICE's markets.

***One Size of Regulation Does Not Fit All Markets or Contracts***

As these markets have grown and developed, new regulatory challenges
have emerged, requiring a thorough and careful review by Congress and
the CFTC during the CEA reauthorization process. As we have stated
previously before this Subcommittee, ICE advocates a targeted approach
to any reform of the CEA. This approach recognizes the unique
characteristics of the many customized markets that have evolved under
the CFMA. Unfortunately, some in Congress are suggesting a uniform
approach to regulating these markets. This would be a great mistake.

The problem with "one size fits all" regulation can best be illustrated
by contrasting the historic nature of futures markets (limited number of
actively traded benchmark contracts, all transactions executed through a
broker who can trade for its own account or that of a retail customer)
with the ECM OTC swaps markets (large number of niche products, many
illiquid and thinly traded, principals only trading). Recognizing the
importance of futures pricing benchmarks to the general public (a DCM is
obligated to publish its prices to be used by the broader market), and
in recognition of the potential for conflicts of interest due to members
trading for their own accounts alongside business transacted on behalf
of customers, some of whom were retail customers, DCM core principles
were developed to facilitate regulation of the markets by the DCM, which
acted as a self regulatory organization. The typical high level of
liquidity in benchmark contracts make application of core principles
such as market monitoring and position accountability and limits
feasible and appropriate.

Suggesting that these same DCM core principles, which were developed
with the futures exchange model in mind, should apply to all OTC swap
contracts traded on an ECM market is attempting to fit the proverbial
square peg in a round hole. While some level of additional reporting and
a system of position accountability may be appropriate for certain
contracts -- specifically, ***those that settle on a futures market
contract price and that are the true economic equivalent of a contract
actively traded on a regulated futures market*** -- ***most of the
energy swap contracts traded on ICE are*** ***niche OTC products*** that
trade in ***illiquid markets*** that are not amenable to the application
of DCM core principles. For example, how would an ECM actively monitor
an illiquid swaps market in an attempt to "prevent manipulation" where
price changes can be abrupt due to the limited liquidity in the market?
How would an ECM swaps market administer accountability limits in a
market that has only a handful of market participants? Should the ECM
question when a single market participant holds 50% of the liquidity in
an illiquid market when the market participant is one of the few
providers of liquidity in the market?

It is important to analyze these questions not in isolation, but in the
context of market participants having alternatives such as OTC voice
brokers through which they can conduct their business. Importantly, such
OTC voice brokers can even offer their customers the benefits of
clearing through use of block clearing facilities offered by NYMEX (and
also by ICE). Faced with constant inquiries or regular reporting by the
ECM related to legitimate market activity, and facing no such monitoring
when it transacts through a voice broker, market participants might
choose to conduct their business elsewhere. It is for these and other
reasons that Congress and the Commission have developed the carefully
calibrated two-tier regulatory structure applicable to DCMs and ECMs. We
believe that the judgments made by Congress and the Commission thus far
have been prudent and should generally be maintained.

***Conclusion***

ICE has always been and continues to be a strong proponent of open and
competitive markets in energy commodities and other derivatives, 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 the CFTC and
other regulatory agencies 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 emerging
markets and will continue to work cooperatively for solutions that
promote the best marketplace possible.

However, in prescribing regulation, it is important to consider the
fundamental nature of the market in question and avoid engaging in a
superficial, "one size fits all" analysis that would unduly burden the
efficient operation of markets and potentially stifle innovation. In
short, the level of regulation should fit the market in question both in
terms of the users who can access the market as well as the amenability
of the market to active monitoring and the prevention of manipulative
activity.

The goal of regulation fitting the characteristics of the market in
question has been ably achieved under the principles-based regulation
embodied in the CFMA, and calls to apply DCM core principles to illiquid
markets, to replace the ECM category of marketplace with a more
regimented level of oversight, or to eliminate the ECM category
entirely, are misguided and counterproductive. The CFMA has allowed for
greater competition and heightened transparency and provided the CFTC
with a deeper view of the OTC markets than they would have otherwise
had.

Mr. Chairman, thank you for the opportunity to share our views with you
on reauthorization of the CEA. We look forward to continuing to work
with the Subcommittee and your staff as you address this critical
reauthorization. I would be happy to answer any questions you may have.