Speaker 1:

From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision and global business, the dream drivers that have made the NYC an indispensable institution of global growth for over for 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYC and at ICE's 12 exchanges and 6 clearing houses around the world. And now welcome Inside the ICE House, here's your host Josh King of Intercontinental exchange.

Josh King:

Over the last 100 episodes or so of Inside the ICE House, we've been pleased on occasion to take our name literally, actually bringing listeners inside Intercontinental Exchange to talk with our experts and go in depth on the industries we serve, the solutions we offer and better understand some of the unique aspects that make our exchanges and clearing houses tick. Today is one of those special shows. Our show this week is a conversation I recorded recently at the Futures Industry Association meeting in Boca Raton, Florida with Stuart Williams, president of ICE Futures Europe, ICE's largest futures exchange. At one of ICE's recent quarterly earnings conference calls with Wall Street analysts, our chairman and CEO Jeff Sprecher noted that 2018 was the best year in ICE's history and our 13th consecutive year of record revenues and adjusted earnings per share.

Josh King:

He was quick to point out ICE's benchmark contracts that traders, investors, and commercial participants rely on daily to manage and lay off their risk. These contracts include Brent Crude oil, the global benchmark owned by ICE responsible for nearly two-thirds of the internationally traded oil that moves around the world daily. There's also ICE's gas oil contract, one of the fastest growing energy benchmarks. And there's also natural gas markets such as our European TTF natural gas contract. In a moment, our conversation with the man responsible for overseeing these benchmarks and other futures businesses Stuart Williams president of ICE Futures Europe, that's right after this.

Speaker 3:

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Josh King:

Stuart Williams is familiar with acquisition. In fact, it's how he found himself at Intercontinental Exchange. Stuart was working for LIFFE. And if you look at the acronym, it's the London International Financial Futures and Options Exchange and helped transition life into ICE's clearing and trading platforms. He's held several roles at ICE since then, including chief operating officer at ICE Futures Europe. Stuart, you and I have the privilege of sitting here in this bucolic setting looking out over Florida's Intracoastal Waterway. Surrounding us are I think a few thousand delegates to this FIA meeting who've devoted their lives to the futures industry. And it's interesting to watch them huddle up to get deals done. And you're one of them, truly passionate about this industry. As a kid growing up in Pretoria, South Africa, what turned you on to this type of work in math, engineering, and eventually to exchanges?

Stuart Williams:

Yeah, Josh, it's certainly a great setting. From my perspective, the whole idea of how the interplay between business and politics, between markets, between economic drivers globally and how all of those things work together has been something that's been interesting to me since I was young. And yet, you're right, I started out in engineering. But very quickly, the engineering problem of the global interplay between politics and economics and the increased need for trading and hedging as a result of that is something that's been fascinating to me. I remember as a kid just being fascinated listening to these stock reports that were read across the radio and trying to figure out what this is all about and talking that through with my folks.

Stuart Williams:

But the other aspect, Josh, which has been fascinating to me is how you get a community of people together to trade. And [Marcus 00:04:42] is one of those great places where there's this real network effect as people gather around a particular interest, whether they're producers or consumers, whether they're hedges, macro hedges. Whatever view they have of a particular market, that collective coming together around a marketplace has been fascinating. Clearly the most obvious physical manifestation of that was the old floors. And unfortunately in heyday of the floors, I was still wearing short trousers. But now we are in the electronic world where actually it's even greater community right across the planet that's able to gather around a particular interest in trade.

Josh King:

So even though you were in short trousers, did you have any first hand experience with the open outcry trading floor?

Stuart Williams:

My favorite game as a kid growing up was a game called pit, which was based on trading commodities on a floor. And for anyone who's played that game knows it's a very loud and active game. And that's as close as I got to actively trading in a floor type environment myself.

Josh King:

Did you feel coming out of the University of Victoria that your destiny lay outside of South Africa? I mean, was it a hard decision to say, "Mom and dad, I've got to leave"?

Stuart Williams:

I think I've always seen myself as a citizen of the world in the sense that moving around is something that's incredibly easy now. And I'm still incredibly bullish about South Africa, I think it's a great country, great place, got a great future ahead of it, it's great potential. But this is a phase of life where I find myself based in London, London's the global financial center at the moment and is a great place to be based in. And so from that perspective I see myself as much a citizen of the world as of South Africa.

Josh King:

Your first move into the business world was with Accenture, is that right?

Stuart Williams:

I was actually an engineer first. So straight out of university, I worked in engineering. I designed automatic vehicle classification systems for the toll industry, so automated toll gates effectively. You can keep driving along the highway at the same pace, the system will pick up what kind of vehicle you are and automatically charge you. So that was where I started out. And then I moved from there into Accenture as a consultant. When I joined Accenture, I said to them, "I was really joining on the basis I could work in capital markets." Obviously Accenture covers a broad range of different industries, but that was my real interest. And so, yeah, I ended up working with Accenture for four years in capital markets.

Josh King:

It must have been a challenge leaving one world behind and entering a new one. Were there mentors along the way who helped shape your approach to the work ahead?

Stuart Williams:

Yeah, sure. I mean, there were definitely people in that group that were great mentors. I think the other thing though is presented with an opportunity, presented with interesting projects. One is the opportunity of really growing your own skills and expertise. And I also see young people starting out that if you're working 16, 20 hours a day, you're gaining experience twICE as fast as anybody else, so grab that as an opportunity.

Josh King:

So share with me your view Stuart of the transition that many consultants go through, whether they're in places like Bain, McKinsey, or in your case, Accenture. You're working with them nose to the grindstone four days a week at their headquarters. But at the end of the day or at the end of the work week, you're still outside the organization. I've known many consultants who at some point say they're ready for the shared labor. And also I think the shared reward that comes from actually being inside an organization rather than having them as your customer.

Stuart Williams:

Right. So LIFFE had become my biggest customer. So at the time I'd worked on a number of projects, I'd worked on a project to launch a new cash equity exchange in London called Euronext London. I then also worked on various ranges of clearing projects, And it came to the point where [inaudible 00:07:59] who was the CEO of LIFFE at the time said, "Hey, you're ready to spend all your time here, why don't you just come and join us?" I took that opportunity. I think for me what I was interested in seeing was you spend a lot of time advising clients, and sometimes they take your advice, sometimes they don't.

Stuart Williams:

But actually being part of the decision making process and ultimately being responsible for your decisions and for the implementation of those decisions was something that interested me. And I was keen to see what that looked like. So it was a great opportunity that [inaudible 00:08:25] presented me, and I was very glad to take the chance. Now, as it happened, I actually signed my contract with LIFFE a matter of days before the proposed acquisition of the NYSE NX group by ICE was announced. From there, I had the opportunity to work on the integration of the LIFFE and the ICE businesses and then ultimately to take up a permanent role as COO of ICE Futures Europe with ICE.

Josh King:

Your story tracks chronologically with Stacey Cunningham now president of the New York Stock Exchange. She too had just joined what was then NYSC Euronext right before ICE initiated its acquisition of that institution in 2012. So this is a familiar pattern Stuart, ICE buys a company to grow a strategy inorganically and finds a lot of great talent in the process. It's really famous for the way it integrates its acquisitions. I mean, Lynn Martin now president of ICE Data Services is a similar case. She was at LIFFE in the US. So your boss Stuart says, "Don't tear up the contract, we need you for this." Walk us through the process of integration because yours wasn't the first time it would happen nor I think would be the last.

Stuart Williams:

Well, I think one of the great successes of the ICE story is its ability and our ability to integrate acquired businesses into our existing infrastructure and to do it quickly, efficiently. In a sense, this is an engineering problem. And when you approach it with that mindset in the collaborative environment, which is ICE, one can get things done quickly, efficiently. And I look back at the time of the integration of those businesses very fondly as a time where we were able to cut through what in many other instances integration projects can create a lot of noise, which is unnecessary. Just a clear intent that the team had around that integration project. And we were able to do it very efficiently and very quickly. And this was a real privilege to be a part of that process. So when the acquisition was first announced at the same time LIFFE signed a clearing services agreement with ICE so that the clearing of the LIFFE business would happen at ICE Clear Europe regardless of the outcome of the eventual merger decision.

Stuart Williams:

And so it took us the six months from the beginning of January 2013 to the 1st of July 2013 when we transitioned all of the LIFFE business from what was at that time NYC LIFFE clearing with significant outsource services to LCH Clearnet Limited. And that was transferred to ICE Clear Europe in that six months. And then of course the deal closed at the end of 2013. And we spent January 2014 through to November 2014 migrating all of the business both from NYC LIFFE US but also from LIFFE onto ICE Futures Europe and ICE Clear Europe and ICE Technology. And that was done over two tranches for the US business and five tranches for the London business.

Stuart Williams:

When we announced the timeline in January, there were many that felt that was a pretty aggressive timeline. But in fact, by the time we got to the first of those five tranches, we had a number of customers coming to us to say, "We're ready, could we not just all do this all in one go?" Not clearly. We didn't, we kept the approach we'd agreed. It really was a great example of the ICE team but also the customer base pulling together around an integration project that was extraordinarily successful.

Josh King:

One of the toughest aspects of any merger or acquisition is the melding of culture, Stuart. You can describe what LIFFE culture was like at the time and what you of ICE culture before you got into it. Maybe they were harmonious from the get go, but help our listeners understand what it really took to bring those two businesses together.

Stuart Williams:

Yeah, you're right. I mean, culture is a key thing. Clearly the culture at ICE has been extraordinarily successful over the years. What I would say, if you go back to the DNA of LIFFE, which was back in the day an extraordinarily innovative exchange, perhaps a little bit slow on the uptake on technology. But that was quickly rectified in the late 90s when LIFFE transitioned to a fully electronic market incidentally ahead of the IPE which ICE did in 2005. So for those that had been around for a long period of time within LIFFE, there was a similar innovative culture. But ultimately when you're bringing together two exchange and clearing businesses, there were a large number of people that eventually moved on. Played their part in the transition and did a great job doing that but have since moved on to other businesses.

Stuart Williams:

But again, it's been an exciting time I think for me to walk through that process and come out the other end with what is London's largest exchange covering a very wide range of asset classes and providing a central base for customers of all descriptions to come and trade and lay off risk in a wide range of asset classes.

Josh King:

The largest exchange in Europe. It would be a fair observation I think for many diehard listeners of Inside the ICE House that our guests have skewed more toward North America. So bring us into ICE Futures Europe and paint a picture for us of its component parts and what makes it tick.

Stuart Williams:

Well, if we go back to its core, the problem that we're trying to solve in the futures world is clearly the problem of uncertainty, the problem of the unknown going forward and what impact that'll have on people's real businesses today. We're talking about real producers, real consumers. We're talking about our energy prices at home ultimately and the ability that we have today of laying off risk and swapping future uncertainty for fixed price, if you like. So ultimately what we're seeking to solve within the exchange world and within ICE Futures Europe in particular is the problem of liquidity, providing a venue where customers of any description can come at any point in time regardless of the macroeconomic environments outside and trade and layoff risk. So it's a problem of liquidity, it's a problem of capital efficiency. Increasingly in the world that we live in today, our customers are having to be very thoughtful about how capital is deployed, and capital efficiency is very important.

Stuart Williams:

And so providing an infrastructure with clearing services provides a very capital efficient environment. And the third problem is a problem around data and technology. What we've seen since the late 90s as the world's exchanges have gone electronic and as trading has become increasingly electronic and as trading decisions are increasingly made through the use of AI and machine learning. And the requirement for quality data quickly has grown exponentially. That's the other problem that we're trying to solve for our customers is to provide trusted data in a usable format quickly that can help customers make the right trading decisions. And so wrapped up around all of that really is the ICE business, and that's how we're presenting our business to our customers. We have extraordinarily liquid markets that we host on ICE Futures Europe, we've got a great clearing solution that brings together all of our energy clearing across the world in one place in a capital efficient structure in ICE Clear Europe and in our ICE Data Services business. We're bringing new technology, we're bringing new data, better data to our customers to allow them to make better trading decisions.

Josh King:

Helping solve the problem of uncertainty, helping solve the problem of the unknown going forward. If that's not existential, I don't know what is. What would you say are the most challenging unknowns that your customers face?

Stuart Williams:

So we're seeing through the rise of populist policies in the political realm an interesting response I think globally to the effect of globalization. The impact that that has on markets and on our industry through things like Brexit, through policies that we're seeing coming out which could potentially have an impact on our industry is the question of fragmentation. Particularly post-financial crisis in 2008, the financial world has become a global world. And so anything which threatens the coherence of the global financial system is something that is of concern to all of us in our industry. So things like Brexit have been a consistent theme, market fragmentation have been a consistent theme. And then on the product side, there have been many discussions around benchmark reform in interest rates, which is clearly a hot topic for anyone who has any exposure to LIBOR.

Stuart Williams:

In the energy world, energy transition is a key theme. And how we move from where we are today to where we need to be in 20 years time where there is greater demand for energy but a need that there is less carbon and sulfur emitted. And that is a real challenge for the energy industry. And then of course in the short term in energy there's a lot of discussions around the effect of the IMO 2020 rules that come into force in January next year. So the International Maritime Organization will be constraining the sulfur levels in bunker fuels from January next year. And so the industry is figuring out how much of that will be transitioned to lower sulfur fuels, whether that's gasoil, diesel or low sulfur fuel oil or LNG, or indeed through the introduction of technology in the form of scrubbers on ships that could then burn existing bunker grays. So there's a lot of change underway at the moment, and clearly a lot of lively discussion around all of points.

Josh King:

Talking about the financial crisis now 10 years in the rear view mirror. So much of what ICE has put in place since then has added to the safeguards against another meltdown of that magnitude. Across the arc of the last decade, remind us where you were when the world seemed to fray at the seams and lay out some of the innovations that have been put in place to establish the proper guardrails against history repeating itself.

Stuart Williams:

So you asked me where I was. I has actually just made the decision to move to the UK at the time that the financial crisis started to really bite in terms of employment in the UK. So it was an interesting time to land in London looking for a job in financial services just about the time that RBS had shared 3,000 jobs and shortly before Lehman went into default as well.

Josh King:

Let's go back and hear a piece of a report from the VoICE of America 10 years ago that reported on the stakes of that gathering when leaders like US Treasury secretary Tim Geithner and his fellow finance ministers were stitching the world economy back together.

Speaker 5:

The protests were underway about the same time Air Force One landed at the Pittsburgh Airport bringing President Obama to a city which has rebounded from its own economic recession that occurred decades ago. Helping to bring the world out of its current recession remains a big topic for the G20 leaders who are meeting for the third time in less than one year. US Treasury secretary Timothy Geithner says there are signs of recovery though he cautions more remains to be done.

Timothy Geithner:

This is encouraging, but we have aways to go. And we are going to keep working to sustain the progress we've seen.

Speaker 5:

The G20 will seek ways to encourage people in wealthier nations to save more and to promote more purchasing of domestic made goods in emerging economies. Geithner says a framework agreement is likely to emerge from the summit.

Timothy Geithner:

My sense is that we have a lot of support for this, and I think we're encouraged by that.

Stuart Williams:

Really the global authorities looked around the financial industry and what had worked. What was if anything a success through the financial crisis? And very quickly, it became evident that futures and clearing were a great success in the sense that you looked at the liquid futures markets right through the financial crisis, there was no loss of liquidity. If you had risk to lay off, there was a place to go and lay off that risk. And so those markets and the efficiency around futures markets was proved to be a great success even in some of the most difficult circumstances our industry has seen in recent future.

Stuart Williams:

I think where we are today, and we go back to what I was saying earlier about the risk of market fragmentation. 10 years on from the financial crisis, we're at risk of having policies and political pressures increase fragmentation in markets that were ultimately the success story in the last financial crisis and in my view would be key to ensuring stable approach through any future financial crisis.

Josh King:

From the last 10 years to the next 10 years, if you can look into your crystal ball, Stuart, where do you see the major changes happening in the futures industry? Especially as, to take one specific example of how the world is changing, the thousands of vessels plying the ocean carrying oil and goods from port to port, I mean, they'll change over to lower sulfur fuels and bring with it significant follow-on upheaval to the way we trade.

Stuart Williams:

Well, it's interesting, the crystal ball is slightly clouded at the moment for most in the industry. We had IP Week a couple of weeks ago in London, and I don't think there's consensus yet on what the effect of these changes will be. I think from an ICE point of view though and where we're positioning ourselves to help our customers, we've just recently launched a series of low sulfur marine fuel oil contracts which have been dubbed by the industry as the high five. And so that's a new hedging vehicle for participants that'll be looking to move on to lower sulfur fuel oil as an energy source. Of course, we operate the most liquid gasoil futures contract on the planet, it's the global benchmark for the middle distillates. So to the extent that moves down into increasing demand for the middle distillates, that will continue to be a very useful tool for our customers.

Stuart Williams:

We've also seen a significant increase in liquidity in the LNG markets. And again, and we have a JKM futures contract which captures a lot of that growth. So we have a wide range of risk management instruments. And as it becomes clearer where all of these effects will land, we'll continue to evolve our product design and be innovative in providing solutions to our customers that they can hedge risk of whatever outcome will materialize.

Josh King:

Let's go back to well before were the financial crisis to how the modern oil market evolved along with the approaches to hedging against it.

Stuart Williams:

So Josh actually if I go back, if I may, just a little bit beyond 2001, if we think about how the market has evolved in energy in particular up until the 1970s give or take, the prICE of oil had been very stable because production was controlled by a small number of large oil majors. In 1970, we had two crises, one in 1973, one in 1979 that created the risk of prICE volatility and largely birthed the need for greater hedging in energy.

John Chancellor:

This is NBC nightly news Wednesday October 17th reported by John Chancellor.

Speaker 8:

Good evening.

John Chancellor:

The Middle East war produced developments all over the world today, the oil producing countries of the Arab world decided to use their oil as a political weapon. They will reduce oil production by 5% a month until the Israelis withdraw from occupied territories. If the Arab countries keep that pledge, it would reduce their production by almost 50% in one year. There were diplomatic maneuvers at the United Nations in Washington and in Cairo, and there is a savage and possibly decisive tank battle raging in the Sinai Desert.

Stuart Williams:

Fast forward to 1980, you then had the creation of the IPE, the International Petroleum Exchange in London by a number of energy traders. And with it, the first contract, which actually was gasoil at the time. 1988, Brent was launched in its current guise having failed on a couple of other occasions. And that really was the early part of trading in futures in energy largely for hedging purposes. And now again as you consider the evolutionary tale of the markets, the demand for greater price, risk management, the demand for greater distribution meant that as soon as technology started to play a role, and here we're in the late 1990s where LIFFE had moved from a floor trading exchange to an electronic based exchange, the IPE was looking around for a partner, for someone who could provide strong technology that could take the IPE into the future, which was clearly going to be an electronic form of the market rather than a floor based market.

Stuart Williams:

And of course at the time Jeff and Chuck and others had started ICE, and there was this new trading platform that was being used extensively for power trading in the US. And ICE and the IPE got together and ICE acquired the IPE. So if we look at from that point onwards, it took about four years until 2005 when the IPE, then ICE Futures was fully electronified. And ICE Futures became the first fully electronic energy market on the planet. And what that meant was that you didn't have to be in London, you didn't have to be in the IPE building in St. Katharine's Dock in order to trade or to try be on the end of a phone with your broker. You could trade electronically from anywhere around the globe.

Stuart Williams:

And that distribution network that started to grow through that electronification of the market meant that Brent grew year over year and has grown year over year ever since then into the global benchmark that we have today where on average a million lots of Brent crude trades every single on ICE. And it's become the key prICE point for, as you mentioned at the beginning, around two thirds of the world's oil.

Josh King:

Looking at today, how does the day unfold for the modern oil trader?

Stuart Williams:

Well, because it's the global benchmark for crude, you've got traders' eyes in all jurisdictions on the Brent price. And so trading opens at 1:00 in the morning UK time, and the contract will trade all the way through to 11 o'clock UK time. So depending on the timezone, we start off the day with Asian traders trading Brent, and that transitions to European institutions trading and ends off the day with the US trading.

Josh King:

And how do you Stuart watch the day of trading unfold?

Stuart Williams:

I keep a web eye screen on my day desktop and keep an eye on activity there as well. But of course, from my perspective, it's less about the individual prICE movements at any point during the day, and it's more about how our infrastructure is providing the capability for our customers to hedge and manage their prICE risk.

Josh King:

From its humble start, how did ICE evolve the Brent benchmark?

Stuart Williams:

So Brent futures is a benchmark that has continued to evolve over the last 30 years that it's been in existence. As supply in the North Sea changed and new fields were discovered, the basket was extended to include other grades. And right now it includes five grades within the Brent basket. So from that perspective, there's been a constant evolution in the nature of the crude underpinning the benchmark. But of course, we've been able to together with the industry develop a range of hedging vehicles that sit around Brent. And so right now today, you've got in the region of 500 Brent related hedging vehicles all trading on ICE Futures Europe and providing a really cohesive web, if you like, of products that can provide precise hedging in terms of locational spreads or quality spreads or refining spreads.

Josh King:

Coming back to this side of the Atlantic, ICE announced earlier this year several enhancements to the ICE Permian WTI crude oil contract. It includes new delivery terminals, crude storage futures, and new metals data showing the level of metals such as nickel, vanadium, and iron in Permian WTI. Stuart, what was this a response to?

Stuart Williams:

So we've constantly evolved our products over the years. And we recently launched a WTI Permian futures contract on ICE Futures Europe as well which is set to capture the pricing points of oil that's leaving the US Gulf Coast. But as things stand at the moment, once oil is on the ocean, it's Brent related. And so from that perspective, any crude that moves its way around the globe, whether it's from the US or from other locations is often hedged using one of those Brent instruments I referred to earlier. But from our perspective, the rise in US production and the rise in US exports is an important feature of the global dynamic. And as I say, we are building out and developing a range of instruments which reflect prICE dynamics here in the US.

Josh King:

How are differences in quality from one form of crude to another manifested in our futures contract?

Stuart Williams:

Now, one of the interesting things when you look at the rise in US exports in crude, the variability in quality which has really been a feature of North American crude and the high degree of blending that traditionally goes on here in the US has meant that US refineries are very flexible in terms of the quality of crude that they can process. That level of flexibility is not yet in place in many of our European and Asian refineries. So the question of quality and consistency of quality is a key aspect for any crude that gets exported from the US. And so what we've done as part of our strategy here in the US is partnered with Magellan because we feel that Magellan has really got the key to quality control. Magellan is an operator of physical infrastructure in East Houston, that includes pipelines that bring WHI Permian down from the Permian into East Houston.

Stuart Williams:

So Magellan has within their infrastructure a good control over quality. And so from that perspective, one of the things we've done with Magellan is to increase the level of transparency of data, which is available on our website, it's available on the Magellan website so that refineries across the globe can see on a daily basis the quality of crude coming into that system and therefore being delivered through that futures contract. And so we think that is a key feature of that contract and is an important feature for a global audience.

Josh King:

So drilling down where oil prices are headed, Stuart, what are the major factors as we watch the prICE of ICE Brent Crude rise or fall. What affects that benchmark on any particular day, week or month?

Stuart Williams:

At the macro level, Josh, it's effectively three things. It's supply, it's demand, and it's geopolitics. So if we think about it in the context of those three things, from a supply perspective, what we're seeing at the moment is good discipline around the OPEC cut commitments. So OPEC is cutting its supply. But offsetting that, we've got the US production increases which are continuing to grow. The US became the biggest producer of oil last year and is well on track to becoming the biggest exporter of crude by the middle of the next decade. Political fall-outs in Venezuela, Iranian sanctions, so all of these affect the supply dynamics. So that's the first leg of the stool, if you like. The second is around demand. So what a trade will be typically looking at here is economic forecast particularly out in Asia, which is where a lot of crude ends up.

Stuart Williams:

So forecast around Chinese economic growth, for example, forecast around increased energy demand in India over the next 20 years. Economic growth, energy transition, all of these aspects will affect the forecast that traders will be looking at around demand. And then finally, geopolitics. Of course, anything affects freight routes, anything which affects from a sanctions perspective would affect supply or demand would contribute to prICE formation. And so there are a lot of various factors involved in this. And of course, then what we have is you've got a global community from 60 plus jurisdictions all expressing the view on prICE in ICE Brent Futures. And again, that is one of the great utilities of the global benchmark for crude is you've got a plethora of different types of customers from different jurisdictions all expressing a prICE view. So the prICE discovery process is robust and is a true representation of the view on value at any one point in time. And of course, it provides a robust prICE discovery location for customers to come and lay off risk and to participate in that prICE discovery process.

Josh King:

While so much of the focus is on demand in the US or in places like China, one of the great unfolding stories that most casual observers of the global oil market haven't really got their arms around is the transformation of US crude oil production hitting 12 million barrels per day earlier this year, projected to grow to over 13 million barrels per day in 2020.

Stuart Williams:

Well, it's certainly a big theme is changing the way people think about the supply demand dynamic. Historically, OPEC cuts in and of themselves would have an immediate effect, but we're now seeing the offsetting effect of increased US production in the pricing and supply dynamic. From a global oil perspective, I think what's interesting is this also increased the amount of light sweets which is available out there. And for our listeners who don't perhaps follow this as closely as we do, there are various grades of crude out there and historically light sweet has had a higher pricing point than sour grades typically from the Middle East.

Stuart Williams:

But the other aspect now which goes into the pricing particularly between sour grades and sweeter crudes is the question of how refineries are set up and what the diet of any particular finery is in terms of taking on light sweet or sour grade. So it really is affecting not just the supply side of our industry but is also affecting the dynamic between different grades which historically have traded at a premier or a discount to each other. It's creating a garde of light sweet out there, and the industry is in a standstill adjusting to the effect of that. And we'll continue to watch that very closely.

Josh King:

So if oil production in the US is at an all time high, where does the stand in the North Sea? I mean, in recent years, there's been some speculation on the sustainability of North Sea oil.

Stuart Williams:

This has been a topic that's been discussed for a very long time. And one of the strengths of Brent as a complex has been its ability to evolve and its ability to innovate over time. We started off with Brent as just being a single field, that has now expanded over time to include five different fields in that structure. It started out as a 15-day ahead contract, it is now a month ahead. So as a benchmark, it has proved its ability to evolve. And I think that has supported its social utility in the marketplace. The general question though that constantly gets asked is where are we in terms of North Sea production? We are seeing new fields coming on stream. The Norwegian energy authorities have indicated that they foresee growth in production in the North Sea basin at least on the Norwegian side of that in the coming 5 to 10 years.

Stuart Williams:

But having said that, there are a lot of US barrels coming into the North Sea. So what Platts and the industry are figuring out at the moment is what is the next step of evolution for the Brent complex, and in particular for Dated Brent but that has an effect elsewhere? And so we've seen that Platts is introducing a safe mechanism on the existing five grades later this year. And then the question that the industry will be working on for next year is what is the next step. Is the next step, introducing other FOB grades in the North Sea, some of these new grades coming on stream or is the next step to include grades that are being imported into the North Sea?

Stuart Williams:

But I think the general point from my perspective is that we have a benchmark which has proved its ability to evolve, and there's no reason why it can't evolve. There is a lot of vested interest in the future of Brent. And so I'm confident that the industry will, as it has in the past, will work together to find the right next step for the evolution of Brent. And we'll obviously be a part of that discussion working together with Platts and Shell and other physical players in North Sea to ensure that we protect the future of Brent and the usefulness of that benchmark as the global benchmark for crude for the industry for many years to come.

Josh King:

When we come back, we dive even deeper into ICE Futures Europe and the hedging and risk management solutions that drive the global economy. That's right after this.

Speaker 9:

We are the most advanced form of respiratory technology in the world, we have the only mask free form of non-invasive ventilation, very important for patients with respiratory distress. Our culture is focused on the patient and providing our clinicians with the very best tools. And we have the very best people in the medical technology industry, and I'm super proud of them all. The New York Stock Exchange, I love the commitment of the people who work here. The most liquid, efficient market in the world. So excited that we're big enough that we could be part of this [crosstalk 00:36:00], now listed on the New York Stock Exchange.

Josh King:

Now with Stuart Williams, president of ICE Futures Europe talking here at the Futures Industry Association conference in Boca Raton, Florida. Before the break, we took a journey through Stuart's career that brought him from Pretoria, South Africa to London, England and the geopolitical forces that have shaped the futures industry over the past decade since the global financial crisis. Now, looking ahead, Stuart and I dive deeper into how ICE customers rely on our futures contracts to hedge and lay off risks. So when you get around the table with your counterparts, it's really at the continuation of an ongoing discussion of how to address many of the news making issues that affect markets.

Stuart Williams:

Well, Josh, I think many of these conversations are ongoing discussions, particularly around themes, multi-year themes in cases. Some of the themes that we've been talking about this year at Boca around fragmentation of markets, around some of the regulatory dialogue we're seeing driven by Brexit, also driven by some of the CFTC's recent comments around Dodd-Frank. So many multi-year regulatory themes, Clearly Brexit has been dominant in many of those. We've also been talking about themes around LIBOR transition, we'll perhaps get to that a little bit later in our discussion on interest rates. And then of course from an energy perspective, the whole issue of energy transition and how the world deals with that dual challenge of creating more energy but less carbon.

Josh King:

We talked a lot in the first half of our conversation about oil, but now I want to pivot to some of our other contracts used around the world to hedge against macroeconomic and geopolitical forces. Here's a primer from Bloomberg on where natural gas fits on the continuum.

Speaker 10:

Ever since the US shale gas boom started, the role of gas in power generation has been expanding. By 2015, natural gas accounted for just over a quarter of the world's power generation capacity. Its attraction has been prICE and also that it answers the new need for electricity generators to reduce carbon emissions. Coal by comparison accounted for more than 30% of power generation in 2015 even though burning coal produces about 50% more carbon emissions than burning gas. Increased use of gas has resulted in it being dubbed the transition duel or bridge fuel between a coal intensive past and a renewable intensive future when solar and wind power could be much more prevalent.

Josh King:

So Stuart, let's start with our European natural gas contract. Bloomberg reported recently that our Dutch natural gas market has the potential to become a world leader in energy trading. Take us through ICE's relationship with natural gas and why the market is surging.

Stuart Williams:

So natural gas is an interesting commodity at the moment Josh. Our customers are all talking about the energy transition and how over the next 20 years there'll be an increase in energy demand, but at the same time, we'll need to be very cognizant of carbon and self remissions. And so natural gas is one of the most versatile primary energy sources and certainly one of the cleanest primary energy sources. Now, the other feature or other factor that we're seeing is with the commoditization of LNG as long-term supply arrangements in LNG have unwound, we're seeing a move from a procurement style supply arrangement to a market style supply arrangement for LNG. And what that has meant is that gas as a commodity is becoming much more globalized.

Stuart Williams:

Historically gas pricing was regional. Oil you could put on a ship and move around, so it was much more global, but gas was regional. With LNG, now gas is becoming much more global. So what we're seeing is in the US where our basis markets are increasingly becoming the hedging vehicle of choICE because of the important dynamics of the shale industry in the US together with our strong position in the UK and increasing strength in the European gas market, we're seeing the prICE dynamics across the globe being much more linked together by the rise of LNG.

Stuart Williams:

Now, what we're seeing in Europe, Josh, is that the European energy slates is a dynamic energy slate in the sense that depending on the cost of carbon, energy producers in Europe are able to switch quite dynamically between coal and gas. And so Europe is becoming the balancing market for global gas. And that's what we're seeing driving a lot of the volumes in TTF right now. So TTF is well on its way beyond being just a Dutch natural gas benchmark to being a European gas benchmark. And in fact, we think it's well on its way to becoming a global benchmark for gas.

Josh King:

Another area of energy fueling our growth is the JKM LNG Platts contract, the fastest growing Asian natural gas benchmark. Why has growth been so explosive over there?

Stuart Williams:

Well, again it's linked to the LNG story we were talking about just now. Now, in Asia we don't have the same type of coordinated infrastructure that we have in Europe. So there isn't a natural virtual trading hub like we've got in Europe at the moment. So LNG rarely has become the Asian benchmark for gas. And so with the increased liquidity in LNG, that particular JKM market has emerged as the Asian benchmark for gas. Now, it's interesting, Josh, you're talking about the increased volumes. Just over the last few years, the explosion we've seen in that. If I look back a couple of years in 2017, we did 150 cargo equivalents in that JKM futures contract. In January and February this year alone, we've equaled that number. And so the growth in that market has been exponential.

Josh King:

Last year, carbon prICE volatility drove headlines. Last year's prICE surge was to a large extent driven by a revival in the carbon market as regulators tightened supply. The cost of permits tripled beating all other major commodities and sent power prices surging. ICE Futures Europe is the world's leading market for emissions trading. What's going on in the emissions market, and why do companies need to trade emissions?

Stuart Williams:

So environmental risk management is increasingly becoming an important part of business operations in energy in terms of industries. When we think about the cost of carbon and the importance of the world while producing more energy doing so with less carbon, we're seeing different jurisdictions and different authorities apply the requirements of the Paris accord in different ways. What we've had in Europe for some time now is a cap in trade policy where the authorities will issue a certain number of emission allowances every year, and that comes down over time.

Stuart Williams:

And what that means as a practical matter is it's a market dynamic that takes way in the sense that our customers are able to decide when and by how much they invest in cleaner technology. And so the prICE of carbon is a prICE that's available on a daily basis to our customers, and they can make investment decision on that basis. Now, ICE Futures Europe, as you said, operates the world's leading carbon market, and we've seen a significant growth in demand for hedging in that market, as you say, as prices have increased.

Josh King:

Moving away from energy, interest rates are a large part of ICE Futures Europe. And the Short Sterling and Euribor complex is where the market turns to manage its risk exposure to changing interest rates. Take us through how futures perform a specific role to the market, Stuart, in times of stress and how the market turns to interest rate contracts.

Stuart Williams:

So one of the real strengths of a futures market regardless of the asset loss is the depth of the liquidity that we have in benchmark contracts. And if you look back in time, including through the financial crisis where we've had incredible stress in the markets, the one market which has retained strong and deep liquidity is futures markets. And so when we think about interest rate futures, and by the way, we operate a multicurrency, multi benchmark. We've got the most liquid futures contracts in Sterling and euros as you're referred to. But we've all also got markets in dollars and Swiss Franks. And that's really the place where firms can come and lay off risk in interest rate markets and can also express a view on whether it's a macro view on interest rate trends and economic trends going forward or a short term view on a particular event in the economic announcements that are coming up.

Josh King:

Recently, we saw big announcement from the European Central Bank where Mario Draghi the president of the ECB said he would push back any interest rate hikes because of fears around the slowing European economy and weaker growth outlook. How did the market respond to that announcement, and how do you see traders readjusting their position to take account of this?

Stuart Williams:

I think it came a little bit as a surprise to some in the markets. Of course, the ECB have got the challenge right now of supporting economic expansion while still normalizing monetary policy. And we've had 10 years of low interest rates, and the world has got used to that environment. But clearly that's not possible to continue in perpetuity. So I think it is a real challenge for the ECB. But from a trading perspective, we have seen, as you said, we've seen traders reallocate their risk across the curve in line with the expectations now that are different from what they were before.

Josh King:

With the focus on the LIBOR transition, ICE Futures Europe launched the SOFR and SONIA Futures, which are alternative reference rates for the US dollar and Sterling. How are these trading, and is the market adopting them?

Stuart Williams:

So our strategy Josh has always been that we will operate a multi-benchmark platform. And so we've launched the SOFR Futures and the SONIA Futures contracts, as you said. And trading is growing fast in those markets. It's still small relative to the LIBOR counterparties, but it's still early days. And so to date we've seen $1.9 trillion traded in SOFR and in SONIA. SONIA is sitting at about 87 billion Sterling in notional outstanding. And so those markets are growing, we're seeing a number of new entrants coming into those markets. But they still are in the early phases of development relative to the LIBOR counterparts, which remain the most liquid short-term interest rate contracts around.

Josh King:

Part of what makes ICE Futures Europe so important to our business is the extensive span of the markets that the business covers from energy to interest rates, to commodities, and contracts that are listed both in Europe and around the world. So what are some future trends in the markets that you're keeping a close eye on? Where do you see ICE Futures Europe experiencing the most growth let's say over the next five years?

Stuart Williams:

So from an energy perspective, the energy transition is a key focus for our customers, and therefore a focus for us. So we're constantly looking to see and working with our customers on what new hedging instruments are required. We recently launched a series of new marine fuel oil contracts to capture the IMO 2020 regulation, which will require a reduction in the sulfur content of fuel oil that's burnt by ships. That's one trend. Clearly, the ongoing growth of US production is another trend, and we'll continue to develop our suite of contracts in the US. And then from a gas perspective, again we continue to monitor how that particular market develops. And we're building out a range of new instruments which largely reflect some of the trading habits of the more traditional energy products around oil. But as gas emerges as a commodity in and of its own right, there are a range of new products that we're looking to launch on that front.

Stuart Williams:

From an interest rate perspective, the ongoing development of new benchmarks is an interesting trend. And of course, the reversing of 10 years of monetary policy that we've experienced coming out of the last financial crisis, as that unwinds will be an interesting trend, which we'll be watching very closely.

Josh King:

An interesting trend which we'll be watching very closely indeed. I mean, Stuart, you've watched these trends evolve over decades from the game you played as a boy in Pretoria, South Africa, it was called pits, remembering the beginning of our conversation to the full electronification and transparency of today's oil, energy, commodities, and rates markets. If you could channel what you've learned and share with the engineering student just emerging from university now on what really matters in problem solving and helping customers achieve their goals, what would be at the top of your curriculum?

Stuart Williams:

Interesting question. Look, I think the ability to look at a problem and to break it down into its constituent parts and solve it is key. I think the number one piece of advICE I'd give to anybody is to spend time with your customers regardless of your industry, regardless of what it is that you do. Spending an hour with your customers will generally be an hour worth much more than an hour spent internally. So spend a lot of time with customers and align what you care about with what your customers care about.

Josh King:

We've covered a lot of ground here, Stuart, from those early days that paralleled the original oil shocks in 1973 and 1979 to the global financial crisis that met your arrival in London, to the geopolitical challenges we face today from Brexit to Venezuela and their resulting impact on global markets. In some ways, it could leave you uncertain about the future we face. But I guess that's why we hedge and use the tools that companies like ICE provides. But I'm curious on a personal level, based on everything you've seen often expressed through simple discovery of future prICE of commodities, does it leave you optimistic or pessimistic?

Stuart Williams:

Well, I'm optimistic Josh. I'm optimistic because I think the world is a developing and an exciting place. The West has developed, the globalization has been a good thing for people living in the West. And I think if we look East, that same opportunity is presenting itself to people out in the East. And I think as a provider of financial services, as a provider of global benchmarks to traders from every jurisdiction, I think the opportunities are immense and the importance for us to be nimble, for us to meet our client needs present great opportunities for us but also great opportunities for our customers.

Josh King:

On that note, Stuart, we'll let you get back to your customers to spread some of that optimism around. That's our conversation for this week from our perch aside the Intracoastal Waterway at the Boca Raton Resort and Spa in Boca Raton, Florida. Our guests was Stuart Williams, president of ICE Futures Europe. If you liked what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us at IceHousePodcast. Our show is produced by Theresa DeLuca and Pete Ash with production assistance from Ken Abel and Ian Wolf. I'm Josh King, your host signing off from the Southern headquarters of Inside the ICE House. Thanks for listening, talk to you next week.

Speaker 1:

Information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE nor its affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content here in all of which has presented solely for informational and educational purposes. Nothing here constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.