Sometimes it’s the little things in a big deal that are interesting to note.
There is much to analyze in the IntercontinentalExchange‘s $8.2 billion purchase of NYSE Euronext – from OTC interest rates and credit default swaps to securities to futures. But with its acquisition of the New York Board of Trade (NYBOT) in 2007, ICE is now dominant in the global trading of soft commodities, as it acquired the lion’s share of the world’s sugar, coffee and cocoa derivatives trade.
While the likely increase in contract volume once the deal has closed is not staggering, the geographical reach is impressive.
The existing cocoa futures contracts of ICE and NYSE Liffe, the global derivatives business of NYSE Euronext, tend to attract cocoa from different areas of the world. ICE attracts cocoa mainly from Indonesia, Central and South America, and NYSE Liffe’s cocoa contract has been seen as the main market for hedging cocoa from West Africa, the largest global cocoa producing region.
ICE’s average daily volume in cocoa is about 25,000 lots. The NYSE Liffe contract averaged volume of about 15,000 lots per day. The major users of the NYSE Liffe contract included the international cocoa trade, cocoa processors and chocolate manufacturers, managed futures funds, institutional investors and options specialists.
Previously, the International Cocoa Organization quoted the daily price for cocoa beans as the average of the quotations of the nearest three active futures trading months on NYSE Liffe and ICE Futures U.S.
Coffee futures traded on ICE are considered to be the world benchmark for Arabica coffee, which is considered by many to be better-tasting than Robusta, the No. 2 commercially cultivated species. ICE trades an average daily volume of about 25,000 coffee futures.
The NYSE Liffe Robusta coffee futures contract was launched in 1958 (by the London Commodity Exchange, later acquired by LIFFE). NYSE Liffe offers a robusta contract with an average daily futures volume of around 12,000 lots. Coffee futures and options have been traded on LIFFE CONNECT since Nov. 27, 2000. The main contract users traditionally have been coffee exporters, international trade houses, European and U.S. coffee roasters, managed futures funds, institutional investors and options specialists. The contract had a role as the price fixing medium for physical coffee contracts.
ICE Futures U.S. operates the global benchmark contract for raw sugar, the No. 11 contract, which has an average daily futures volume of more than 100,000 lots. An ICE Futures U.S. Sugar No. 16 futures contract is for the physical delivery of cane sugar of U.S. or duty-free foreign origin, duty paid and delivered in bulk to New York, Baltimore, Galveston, New Orleans or Savannah. That contract sees an average daily volume of around 316 lots.
NYSE Liffe operates a raw white sugar contract with an average daily futures volume of about 7,500 lots.
In addition to the New York exchange and ICE, Japan’s second-largest commodity exchange – the Tokyo Grain Exchange (TGE) – offers Arabica and Robusta coffee futures contracts, in addition to raw sugar offerings. The Asian exchange’s contracts are quoted in yen per bag.
Volumes at the TGE have been on the decline since 2005, however, when the government tightened regulations over retail sales of commodity futures. It’s anticipated that the exchange may be forced to dissolve in the near term.
The TGE traded an average daily volume of 146 sugar futures contracts in October. ICE trades an average daily volume of about 110,000 sugar futures.
In June of 2012, the Tokyo Commodity Exchange, Inc. (TOCOM), Japan’s largest commodity futures exchange, said it would accept the transfer of contracts including raw sugar contracts from the TGE. TOCOM plans to launch an agricultural market in February of 2013.
What remains to be seen is to what extent the ICE/NYSE deal will enhance New York-to-London spread opportunities in soft commodities. While the announcement suggests that NYSE will remain a separate business unit within ICE, it is in the company’s best interest to facilitate the geographic arbitrage. It is not yet clear if and when trading rights would be merged between the two exchanges. Theoretically, the deal should lead to clearing and collateral efficiencies for spreaders – an ever-important aspect of trading in the new global regulatory regime. But regulatory issues may play a part in how efficient that may be.
The exchanges told investors in a printed presentation released Thursday that the acquisition would allow for a “strong global presence, infrastructure and brands across international markets with ability to drive new initiatives on a combined basis.“
The deal is expected to close in the second half of 2013. ICE founder Jeffrey Sprecher will remain chairman and CEO of the combined company. NYSE Euronext CEO Duncan Niederauer will become president of ICE.
Doug Ashburn and Christine Nielsen also contributed to this article.