F INANCIAL S TATEMENTS

Transcription

1 F INANCIAL S TATEMENTS ICE Trust U.S. LLC As of March 6, 2009, and the Period From January 1, 2009 to March 6, 2009 With Report of Independent Auditors

2 Financial Statements As of March 6, 2009, and the Period From January 1, 2009 to March 6, 2009 Contents Report of Independent Auditors...1 Audited Financial Statements Balance Sheet...2 Statement of Operations...3 Statement of Changes in Member Equity...4 Statement of Cash Flows...5 Notes to Financial Statements

3 Ernst & Young LLP Suite Ivan Allen Jr. Boulevard Atlanta, GA Tel: Fax: Report of Independent Auditors The Board of Managers and Member of ICE Trust U.S. LLC We have audited the accompanying balance sheet of ICE Trust U.S. LLC (the Company) as of March 6, 2009, and the related statements of operations, changes in member equity and cash flows for the period from January 1, 2009 through March 6, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ICE Trust U.S. LLC at March 6, 2009, and the results of its operations and its cash flows for the period from January 1, 2009 through March 6, 2009, in conformity with U.S. generally accepted accounting principles. June 30, 2009 ey A member firm of Ernst & Young Global Limited

4 Balance Sheet March 6, 2009 (In Thousands) Assets Current assets: Guaranty fund $ 200,000 Short-term restricted cash 34,090 Other current assets 10 Total current assets 234,100 Noncurrent assets: Federal Reserve stock 900 Long-term restricted cash 10,000 Total noncurrent assets 10,900 Total assets $ 245,000 Liabilities and member equity Liabilities: Accounts payable and accrued liabilities $ 108 Guaranty fund 200,000 Due to affiliates 1,836 Total liabilities 201,944 Member equity: Member capital contribution 45,000 Accumulated deficit (1,944) Total member equity 43,056 Total liabilities and member equity $ 245,000 See accompanying notes

5 Statement of Operations Period From January 1, 2009 to March 6, 2009 (In Thousands) Operating expenses: Compensation and benefits $ 65 Professional services 811 Selling, general, and administrative 5 Service fees from related parties 685 Total operating expenses 1,566 Net loss $ (1,566) See accompanying notes

6 Statement of Changes in Member Equity Period From January 1, 2009 to March 6, 2009 (In Thousands) Member equity at January 1, 2009 $ (378) Net loss (1,566) Capital contributions 45,000 Capital distributions Member equity at March 6, 2009 $ 43,056 See accompanying notes

7 Statement of Cash Flows Period From January 1, 2009 to March 6, 2009 (In Thousands) Operating activities Net loss $ (1,566) Adjustments to reconcile net loss to net cash used in operating activities: Other current assets (10) Accounts payable and accrued liabilities 108 Due to related parties 1,458 Net cash used in operating activities (10) Investing activities Increase in restricted cash and investments (44,990) Financing activities Capital contributions by members 45,000 Withdrawals Net cash provided by financing activities 45,000 Net change in cash Cash at January 1, 2009 Cash at March 6, 2009 $ See accompanying notes

8 Notes to Financial Statements March 6, Formation, Organization, and Description of Business ICE Trust U.S. LLC (ICE Trust), a New York limited purpose limited liability trust company, was formed on December 4, 2008 to serve as a clearing house for the clearing of credit default swaps (CDS). ICE Trust s term of existence will be for 100 years. ICE Trust was formerly known as ICE US Trust, LLC and is a wholly owned subsidiary of its ultimate parent, IntercontinentalExchange, Inc. (ICE), a leading operator of global regulated futures exchanges, clearing houses, and over-the-counter markets for commodities and derivative financial products. Operating expenses of approximately $378,000 were incurred during the period from December 4, 2008 to December 31, 2008, and have been included in the accumulated deficit as of January 1, ICE Trust is a regulated North American CDS central counterparty clearing house solution, which has developed a market structure that brings transparency, capital efficiency, and mitigation of counterparty credit risk by acting as a central counterparty to clear CDS transactions. ICE Trust is designed to address the operational and risk management needs of the credit derivatives market, as well as calls by regulators and policy makers for systemic risk reduction. ICE Trust is subject to regulation by multiple regulators, including the Board of Governors of the Federal Reserve System and the New York State Banking Department (NYBD). Although it operates pursuant to exemptive relief from the U.S. Securities and Exchange Commission (SEC) and the U.S. Treasury Department, it is required to comply with certain requirements to satisfy the conditions of the exemptive relief. ICE Trust received regulatory approval from the Board of Governors of the Federal Reserve System on March 4, 2009, to become a member of the Federal Reserve System and to serve as a clearing house and central counterparty for CDS transactions. The SEC issued an exemptive order permitting ICE Trust to begin clearing CDS transactions on March 6, The exemptive relief was granted through December 2009, at which point certain aspects of the exemptive relief will be renewed. In December 2008, ICE Trust received approval from the NYBD, and on March 5, 2009, the Superintendent of the NYBD issued the authorization certificate to ICE Trust to commence business as a regulated bank based in New York. These approvals marked the completion of the required regulatory reviews prior to the launch of ICE Trust on March 9, In connection with the granting of regulatory approvals, the regulators for ICE Trust have requested audited financial statements from January 1, 2009 through March 6, 2009 (the completion date of the required regulatory reviews) to be posted on ICE s public website

9 1. Formation, Organization, and Description of Business (continued) ICE Trust began processing and clearing North American CDS index contracts on March 9, Clearing of North American CDS indexes will be followed by U.S. liquid single-name CDS contracts. CDS trade and clearing data is generally recorded with the Depository Trust & Clearing Corporation (DTCC), which acts as a centralized depository for trade data. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements are presented in accordance with U.S. generally accepted accounting principles. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of expenses during the reporting period. Actual amounts could differ from those estimates. Cash and Cash Equivalents ICE Trust considers all short-term, highly liquid investments with remaining maturities at the purchase date of three months or less to be cash equivalents. Short-Term and Long-Term Restricted Cash ICE Trust classifies all cash and cash equivalents that are not available for general use by ICE Trust, either due to regulatory requirements or through restrictions in specific agreements, as restricted in the accompanying balance sheet (see Note 3)

10 2. Summary of Significant Accounting Policies (continued) Short-Term and Long-Term Investments ICE Trust considers all investments with remaining maturities at the purchase date greater than three months to be investments. ICE Trust determines the appropriate classification of its investments at the time of purchase and reevaluates such designation at each balance sheet date. Investments that ICE Trust intends to hold for more than one year are classified as long-term investments in the accompanying balance sheet. Margin Deposits and Guaranty Funds Initial margin, variation margin, and guaranty funds held for clearing members may currently be in the form of cash, U.S. Treasuries, and certain government debt securities (see Note 6). Cash initial margin, variation margin, and guaranty fund deposits are reflected in the accompanying balance sheet as current assets and current liabilities. The amount of margin deposits on-hand will fluctuate over time as a result of, among other things, the extent of open positions held at any point in time by clearing participants in contracts and the margin rates then in effect for such contracts. Non-cash initial margin and guaranty fund deposits will not be reflected in the accompanying balance sheet. These securities will be held in safekeeping and will only be pledged to the clearing house, and the clearing house will not take legal ownership. Changes in margin deposit assets and liabilities are presented net in the consolidated statement of cash flows. Property and Equipment Property and equipment are recorded at cost, reduced by accumulated depreciation. Depreciation and amortization expense related to property and equipment is computed using the straight-line method based on the estimated useful lives of the assets, or in the case of leasehold improvements, the shorter of the initial lease term or the estimated useful life of the asset. ICE Trust will review the remaining estimated useful lives of its property and equipment at each balance sheet date and will make adjustments to the estimated remaining useful lives whenever events or changes in circumstances indicate that the remaining useful lives have changed

11 2. Summary of Significant Accounting Policies (continued) Long-Lived Assets ICE Trust reviews its property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. To analyze recoverability, ICE Trust projects undiscounted net future cash flows over the remaining life of such assets. If these projected cash flows are less than the carrying amount, an impairment would be recognized, resulting in a write-down of assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amount and the fair value of the assets. Finite-lived intangible assets are generally amortized on a straight-line basis or using an accelerated method over the lesser of their contractual or estimated useful lives. Revenue Recognition ICE Trust s revenues will primarily consist of clearing revenues for executed CDS trades cleared through the clearing house and will be recognized as services are provided. Clearing fee revenues will be generated based on the size of the notional value cleared by each clearing firm, subject to pricing structures provided to certain clearing participants, which may limit the revenue opportunities available to ICE Trust from these clearing participants (see Note 5). Credit Risk and Significant Customers ICE Trust s accounts receivable will subject it to credit risk, as ICE Trust will not require its customers to post collateral for fees related to the clearing service. ICE Trust guarantees the settlement of all CDS contracts it clears. This guarantee is effective when the trade is accepted for clearing and remains in place until the contract is offset by another accepted trade, the contract expires, or is terminated. ICE Trust does not risk its own capital in proprietary trading activities or in extending credit to clearing members. ICE Trust limits its risk of loss by allowing clearing access only to companies that meet the financial and eligibility standards set forth in the rules of the clearing house and by terminating the access of entities with delinquent accounts. Further, ICE Trust requires clearing members to maintain appropriate levels of guaranty funds and margin deposits (see Note 6)

12 2. Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments ICE Trust s financial instruments will consist primarily of cash and cash equivalents, short-term and long-term restricted cash, Federal Reserve stock, customer accounts receivable, margin deposits and guaranty funds and other short-term assets and liabilities. All financial instruments are determined to approximate carrying value as of March 6, 2009, due to their high-credit quality and their short period of time to maturity. Income Taxes ICE Trust is a New York limited liability trust company and is treated as a disregarded entity for tax purposes. Because ICE Trust is not a taxpaying entity, its financial statements are different from those of a taxpaying entity. Accordingly, no provision has been made for federal, state, or local income taxes in the accompanying financial statements. Additionally, the balance sheet does not include any current or deferred tax assets or liabilities. 3. Short-Term and Long-Term Restricted Cash Pursuant to the Federal Reserve Bank and NYBD capitalization requirements, ICE Trust is required to maintain at all times a minimum level of capital in the form of liquid assets equal to ICE Trust s costs to provide clearing central counterparty services during a period of time sufficient for the orderly wind-down of counterparty positions and clearing operations, which ICE Trust initially determined to be nine months. These liquid assets include cash or cash equivalents and Federal Reserve Bank stock. As of March 6, 2009, this was estimated to be $35.0 million and is primarily reflected as short-term restricted cash and long-term investments in the accompanying balance sheet. The capitalization requirement calculation will be updated on an annual basis, which may cause a change in the amount required to be restricted. ICE Trust also contributed an initial $10.0 million to the ICE Trust guaranty fund as of March 6, 2009, and this is reflected as long-term restricted cash in the accompanying balance sheet (see Note 6). 4. Federal Reserve Stock Under the Federal Reserve Bank Regulation 209.4(d), ICE Trust is required to purchase capital stock of the Federal Reserve Bank to become a member of the Federal Reserve System. ICE Trust is required to purchase stock in the amount of 3.0% of its member capital balance. On March 4, 2009, ICE Trust bought Federal Reserve Bank stock of $900,000, representing 3.0% of

13 4. Federal Reserve Stock (continued) its estimated member capital balance of $30.0 million. However, ICE Trust ended up with a member capital balance for the capitalization requirement of $35.0 million as of March 6, 2009, and also funded an additional $10.0 million in member capital representing the initial funding of the ICE Trust guaranty fund (see Note 6). Therefore, additional Federal Reserve Bank capital stock of $450,000 was purchased subsequent to March 6, 2009, representing 3.0% of the additional $15.0 million in member capital. The Federal Reserve Bank stock pays dividends, which shall accrue at the rate of one-half of one percent per month calculated on the basis of a 360-day year of twelve 30-day months. 5. Related-Party Transactions ICE Trust is wholly owned by ICE US Holding Company L.P., a Cayman Islands exempted limited partnership. ICE US Holding Company L.P. is owned by ICE US Holding Company GP LLC and various other companies. ICE US Holding Company L.P. is a Delaware limited liability company wholly owned by ICE. ICE Trust has entered into related-party agreements with ICE and other subsidiaries of ICE, including The Clearing Corporation (TCC), a United States clearing house, and Creditex Group Inc. (Creditex), a market leader in the execution and processing of CDS, to support the operations of ICE Trust. TCC has developed the CDS risk management framework, operational processes and infrastructure for ICE Trust s clearing operations. ICE Trust licenses TCC s technology to clear the CDS contracts, and TCC s risk management methodology will be used by ICE Trust to determine initial and variation margin requirements as well as guaranty fund requirements. Official daily settlement prices used in these calculations will be calculated by Markit using data provided by clearing members of ICE Trust (see Note 7). ICE and Creditex will provide select infrastructure, domain knowledge, and personnel to ICE Trust. The $685,000 in service fees in the accompanying statement of operations primarily relate to salary, wages, and benefits of the employees at ICE and Creditex directly involved in setting up, performing or directly supervising services for ICE Trust as well as other direct and overhead costs incurred in providing these services. Licensing fees from TCC to ICE Trust began on March 9, 2009, in connection with the commencing of clearing operations

14 5. Related-Party Transactions (continued) Bank of America, N.A, Barclays Bank PLC, Citibank, N.A., Credit Suisse International, Deutsche Bank AG, Goldman, Sachs & Co., JPMorgan Chase Bank, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley Capital Services Inc. and UBS AG are limited partners of ICE US Holding Company L.P., effective as of March 6, 2009 and they or their affiliates are also the initial clearing members of ICE Trust. Distinct pricing structure agreements apply to these initial clearing members of ICE Trust and may limit the revenue opportunities available to ICE Trust from these clearing participants. All revenue derived from these related-party clearing members will be reflected as related-party revenue in the ICE Trust statements of operations. 6. Clearing House Operations ICE Trust has established rules and operating procedures governing the clearing house, including membership and governance requirements. ICE Trust membership is open to all qualifying buyside and sell-side institutions. As a neutral and independent clearing house, all qualified CDS market participants will have the ability to access ICE Trust. Membership is available to institutions that meet the financial and eligibility standards set forth in the rules of the clearing house. As a clearing house, ICE Trust performs the clearing and settlement of CDS contracts and began clearing these contracts on March 9, ICE Trust has equal and offsetting claims to and from its respective clearing members on opposite sides of each contract, standing as the central financial counterparty on every contract cleared. To the extent that funds will not otherwise be available to satisfy an obligation under an applicable contract, ICE Trust bears financial counterparty credit risk in the event that future market movements create conditions that could lead to its clearing members failing to meet their obligations to ICE Trust. Accordingly, ICE Trust accounts for this central counterparty guarantee as a performance guarantee under Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB interpretation No. 34 (FIN 45). ICE Trust seeks to significantly reduce this exposure through a risk management program that includes initial and ongoing financial standards for clearing firm admission and ongoing membership, initial and variation margin requirements, and mandatory deposits to a guaranty fund. The amounts that the clearing members are required to maintain in the initial margin and

15 6. Clearing House Operations (continued) guaranty fund accounts are determined by standardized parameters established by the risk management department, the risk committee, and the board of managers of ICE Trust and may fluctuate over time. The ICE Trust audit committee is not responsible for determining these parameters. The risk management program gives ICE Trust the ability to collect additional funds from its clearing members to cover a defaulting clearing member s remaining obligations. ICE Trust requires all clearing members to maintain on deposit or pledge certain assets known as initial margin. Initial margin is risk-based and forward-looking and is intended to protect the clearing house against the risk of a clearing participant default over a specifically designed time period and confidence level. The types of assets held as initial margin may include up to 20% in U.S. Treasuries and up to 35% in certain government debt securities, with the remainder required to be in cash. ICE Trust marks all outstanding contracts to market on a daily basis. The daily payment of profits and losses from and to ICE Trust in respect of relevant contracts is known as variation margin and may only be made in cash. ICE Trust requires that each clearing member make deposits in a fund known as a guaranty fund (Guaranty Fund). These amounts serve to secure the obligations of a clearing member and may be used to cover losses sustained by ICE Trust in the event of a default of any clearing member. The types of assets that may be deposited into the Guaranty Fund are the same as those permitted for initial margin. Should a particular clearing member fail to deposit initial margin or fail to make a variation margin payment, when and as required, ICE Trust may liquidate or hedge the clearing member s open positions and use the clearing member s initial margin and Guaranty Fund deposits to make up the amount owed. Once a clearing member s deposits are depleted and a default occurs, a contribution made by ICE Trust to the Guaranty Fund would be utilized. ICE Trust has contributed $10.0 million to the Guaranty Fund as of March 6, 2009, and it is obligated to increase the contribution up to $100.0 million over a two-year period using profits and cash flows of the ICE Trust business and additional capital contributions if needed. As amounts are required to be funded by ICE Trust to the Guaranty Fund, those amounts will be available in the event of a clearing member default. The first $50.0 million contributed to the Guaranty Fund, including the $10.0 million contributed as of March 6, 2009, will be utilized after the available

16 6. Clearing House Operations (continued) funds of the defaulting member but before all other amounts within the Guaranty Fund. The additional $50.0 million contributed will be utilized pro-rata along with other non-defaulting clearing members deposits in the Guaranty Fund. ICE Trust may then assess its clearing members to meet any remaining shortfall after the Guaranty Fund deposits are utilized. As of March 6, 2009, there were no initial margin or variation margin balances, since the clearing operations did not begin until March 9, However, there was $200.0 million of cash deposits in the Guaranty Fund. These amounts were required to be funded by the clearing members prior to the commencement of clearing by ICE Trust. ICE Trust has recorded these cash deposits in the accompanying balance sheet as current assets with offsetting current liabilities to the clearing members. These deposits may fluctuate due to the types of margin collateral choices available to clearing members and the change in the amount of deposits required. As a result, these assets and offsetting liabilities may vary significantly over time. The total Guaranty Fund balance as of March 6, 2009, is $210.0 million, which includes the $200.0 million in Guaranty Fund cash deposits from clearing members as well as $10.0 million that ICE Trust has committed of its own cash. In addition to the cash deposits for initial margin, variation margin, and the Guaranty Fund made to ICE Trust, clearing members may also pledge certain assets, as discussed above, to mitigate its credit risk. These assets will not be reflected in the balance sheet, as ICE Trust does not take legal ownership of the assets as the risks and rewards remain with the clearing members. ICE Trust has the ability to access the accounts where these assets are held at the financial institutions and depositories in the event of a clearing member default. As of March 6, 2009, there were only cash deposits for the Guaranty Fund for ICE Trust. 7. Markit Agreement ICE Trust has entered into an agreement with Markit Group Ltd. (Markit) to jointly produce daily settlement prices required for mark-to-market pricing, margining, and clearing. ICE Trust has licensed Markit s pricing data and indices, which it uses as part of the process of determining settlement prices for purposes of calculating margin. In exchange for these license rights, ICE Trust has agreed to pay Markit 5% of its gross clearing fee revenues on a global basis. Certain clearing members have ownership interests in Markit

17 8. Subsequent Event On April 9, 2009, ICE entered into several new credit facilities that amended or replaced existing ICE credit facilities. Included in the new credit facilities was a 364-day senior unsecured revolving credit facility in the aggregate principal amount of $300.0 million. Of the $300.0 million available under this facility, up to $100.0 million is permitted to be used to provide liquidity for the clearing operations of ICE Trust