Intercontinental Exchange Picked as Top Stock at Sandler O’Neill

Intercontinental Exchange Inc., which last month agreed to buy NYSE Euronext, is the top stock pick this year as earnings should grow 25 percent in 2014, according to Sandler O’Neill & Partners LP analyst Richard Repetto.

The $8 billion acquisition would create the second-largest futures market by volume, behind CME Group Inc., according to data from the Futures Industry Association. By folding the New York Stock Exchange and European equity markets owned by NYSE Euronext into the derivatives business, Chief Executive Officer Jeff Sprecher should derive about 70 percent of income from derivatives and 30 percent from stock and other operations, Repetto wrote in a note today.

Sprecher, 57, is on his third try to acquire contracts based on interest rates after failed attempts to buy the Chicago Board of Trade in 2007 and NYSE Liffe in 2011. Intercontinental, based in Atlanta, specializes in energy commodities and guaranteeing credit-default swaps with clearinghouses in London and the U.S. The interest-rate futures traded in London at NYSE Euronext’s Liffe exchange will give Sprecher an entry into clearing over-the-counter interest-rate swaps, Repetto said.

“The opportunity that isn’t being talked about as much is all these assets and partnerships that position him for the over-the-counter” market, the analyst said in an interview.

Joint Venture

He was referring to a joint venture between NYSE and the Depository Trust & Clearing Corp., known as New York Portfolio Clearing, that allows investors to combine cash and derivative positions in one clearinghouse to lower margin costs.

The joint venture is in talks with LCH.Clearnet Group Ltd. to include interest-rate swaps in the mix of contracts to offset margin, the companies said last year. The deal is known as Project Trinity.

Sprecher has also worked with the world’s biggest banks to create the largest clearinghouse for credit-default swaps.

“Now you’re giving him the opportunity to move beyond credit-default swaps, where he’s been as effective as possible, to a much bigger playground,” Repetto said. The rate swap market totaled $379 trillion in outstanding notional value as of June 2012, compared with $26.9 trillion for credit swaps, according to the Bank for International Settlements.

Intercontinental shares have gained 10 percent in the past year while NYSE Euronext has jumped 20 percent. Repetto picked Intercontinental as his top pick today among the online brokers, exchanges and trading companies he covers.

Cost Savings

There has been no change so far in the proposed Project Trinity after the Intercontinental acquisition was announced Dec. 20, said Nina Truman, a spokeswoman for LCH.Clearnet. Brookly McLaughlin, an Intercontinental spokeswoman, declined to comment. Tom Callahan, chief executive officer of NYSE Liffe U.S., the company’s New York-based futures market, said the project was moving forward.

“We continue to work closely with our partners at DTCC, LCH and the team at NYPC to include over-the-counter interest rate swaps alongside fixed income, cash, repo and futures” that New York Portfolio Clearing uses to offset margin rates, he said in an e-mailed statement.

The cost savings for banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. that are active in these markets come from combining positions in Eurodollar and Treasury futures with interest-rate swaps to allow long and short positions to cancel each other out. The lower risk of that entire position leads to less margin having to be pledged to back the trades.

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