Good day, ladies and gentlemen, and welcome to the Intercontinental Exchange second quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance, please press star then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Kelly Loeffler, Vice President of Investor Relations and Corporate Communications. Please go ahead.
Good morning. ICE's second quarter 2012 earnings release and presentation can be found in the Investors section of our website at theice.com. These items will be archived, and our call will be available for replay. Today's call may contain forward-looking statements. These statements, which we undertake no obligation to update, represent our current judgment and are subject to risks, assumptions, and uncertainties. For a description of the risks that could cause our results to differ materially from those described in forward-looking statements, please refer to the company's annual report on Form 10-K and quarterly report on Form 10-Q, which was filed with the SEC this morning. With us today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, President and Chief Operating Officer. We will conduct a question-and-answer session after our prepared remarks. I will now turn the call over to Scott.
Thanks, Kelly. Good morning, and thank you all for joining us on the call today. We are pleased to report our 12th consecutive quarter of double-digit earnings growth. This solid second quarter performance continues the momentum from the first quarter and reflects solid top-line growth enabled by record futures volume and disciplined expense management that delivered increased operating margins. I will begin this morning on slide four of the presentation with an overview of our performance in the first half of the year. Healthy volumes across our futures and OTC energy markets yielded revenue of $716 million, up 9% compared to the first half of last year. Net income attributable to ICE was $291 million, up 16% year-over-year, and operating margins expanded to 62%. Diluted earnings per share rose 18%, and operating cash flow grew 14%.
Our focus on identifying and solving the challenges facing our customers gives us confidence in our ability to deliver double-digit earnings growth and strong returns on invested capital over the long term. Moving to slide five, I will detail our second quarter results. Consolidated revenues rose 8% over the prior second quarter to $351 million. With expense growth of just 1% over last year's second quarter, operating income grew 13% to $215 million, and operating margin expanded two points to 61%. Diluted earnings per share increased 19% to $1.95. Finally, capital expenditures and capitalized software totaled $18 million, and cash flow from operations rose to $180 million in the second quarter. Turning to slide six, you can see the revenue and expense components of our second quarter results. Futures revenues rose 14% to a record $169 million on record volume at ICE Futures Europe.
OTC energy revenues increased 3% to $101 million, while OTC credit revenues declined to $36 million. Taken together, our consolidated transaction and clearing revenues increased 6% to $307 million. Market data revenues grew 21% to a record $37 million, demonstrating continued demand for our globally relevant commodity market and related market data services. ICE's second-quarter consolidated expenses are summarized on the right side of slide six. Operating expenses were $136 million, up just 1% from the prior year and down from the first quarter. Our disciplined expense management, coupled with solid top-line growth, drove our operating margin to 61%, compared to 59% in last year's second quarter. During the second quarter, comp and benefits expense rose 4%, and we recorded $4 million of acquisition-related expense. We expect ongoing M&A expenses of $1 million to $2 million per quarter as we continue to evaluate a range of strategic M&A opportunities.
We continue to forecast full-year expense growth in the range of 3% to 6%, which we believe will enable investment in key growth opportunities, operating efficiency, and solid earnings growth. Next on slide seven, I will highlight the record performance of our futures segment during the second quarter. Record revenue was driven by record average daily volume of 1.6 million contracts, up 11% year to year. ICE Futures Europe and ICE Futures U.S. posted record revenue in the quarter. This strong performance was once again led by our Brent Crude contract, which, despite prices declining more than 20% during the second quarter, saw volumes rise nearly 30%, as its ascendance as the global benchmark continued. This global leadership is evidenced by the diverging trends in volume and open interest relative to WTI and the ongoing $15 premium of Brent.
You can also see the growing preference for ICE Brent options, which resulted in our volume quadrupling year to year in the second quarter. Also in the second quarter, our gas oil contract grew 7% year to year, European emissions contract volume rose 11%. The EU Commission on Climate Change recently confirmed the U.K. government's opt-out auction platform for phase III, where ICE Futures Europe will provide that platform. We believe this will support our leading position for the third phase of the European Emissions Trading System beginning in 2013. While Brent, gas oil, and emissions are our largest revenue contributors, our energy futures complex grew strongly with U.K. natural gas, coal, heating oil, and automobile gasoline futures all posting more than 20% revenue growth over the prior second quarter.
Moving to ICE Futures U.S., rising open interest in our agricultural contracts translated into 14% volume growth in the second quarter. Sugar volumes continued to improve, rising 7% year on year, while cotton volume increased 31%. Also during the quarter, we successfully launched new contracts for corn, soybeans, and wheat. We're seeing encouraging levels of volume and participation, we will continue to develop these markets based on customer feedback. Open interest across our futures exchanges increased 30% year to year and reached nine million contracts at the end of June. Tomorrow, we'll report July average daily volume for our futures market. Month to date volumes reflect continued momentum from 2Q and are up more than 17% year to year. Turning to slide eight, I'll review our OTC business for the second quarter. OTC energy average daily commissions grew 3% to $1.6 million.
North American natural gas revenues were up modestly to $62 million, despite 10-year lows in natural gas prices. Volatility driven by warm weather conditions, natural gas options, and the launch of new products supported modest growth in trading activity. Global oil revenues rose 23% to $14 million, primarily due to the demand for our cleared global oil contracts. Revenue from OTC energy products launched since the inception of ICE Clear Europe contributed $13 million in the quarter. We currently estimate that OTC energy commissions in July will average around $1.4 million a day in a relatively low volatility environment during what is typically a seasonally slow month. Turning to our credit derivatives business, second quarter revenues were $36 million. This included $21 million from Creditex and $15 million from CDS Clearing. Through July 2012, ICE has cleared nearly $33 trillion in gross notional value.
We have open interest of $1.5 trillion. Today, we offer clearing for over 340 CDS instruments. We remain the leader in CDS clearing with a growing range of products and customers. With the recent CFTC pronouncement regarding mandatory clearing of CDS index products, as additional rules such as portfolio margining and swaps rules are finalized, we anticipate improved CDS markets later this year and into 2013. I'll conclude my remarks on slide nine. We generated $366 million of operating cash flows during the first half of 2012. We ended the quarter with over $1 billion in cash, no net debt, low leverage, and access to a $2 billion undrawn credit facility. We generate consistently strong cash flows and have a very strong balance sheet. As you would expect, we continuously evaluate the optimal deployment of our available capital.
We consider many factors, including our operational cash needs, U.S. versus non-U.S. cash generation, tax policies, regulatory requirements, and investment opportunities. Above all, though, we focus on deploying capital in a manner that we believe will generate the greatest value for our shareholders. We've invested not only in key organic growth initiatives, but also in strategically important partnerships, licenses, and acquisitions that have allowed us to outgrow our competition and deliver returns on invested capital, not only better than our industry, but also well above our cost of capital and above the returns generated by our peers in the S&P 500. At the same time, we've spent nearly $600 million since 2008 repurchasing our shares, and we have over $300 million remaining in our share repurchase authorization.
We know that many in our industry have chosen to pay a dividend. Some analysts have a view that we too could pay a dividend. However, we do not believe we should pay a dividend simply because we can. While others in our industry may have concluded that value accretive growth investments have disappeared, we disagree. Thus, we intend to continue to invest in growth opportunities and to aggressively repurchase our shares in an opportunistic manner. In other words, we do not intend to make a change in our capital deployment strategy at this time because we remain confident that we can more effectively invest that capital and continue to deliver earnings growth and solid returns on investment to our shareholders. With that, I'll be glad to take your questions during the Q&A session. Jeff, over to you.
Thank you, Scott, and thank you all for joining us this morning. ICE again delivered double-digit volume and earnings growth in the second quarter in the face of a fourth consecutive year of economic and regulatory uncertainty. Amid this environment, we've strategically expanded our business, which has produced growth on top of growth. We're executing for our shareholders while providing a path for our customers as financial reform moves from the legislative phase to implementation. We've positioned ICE as a central source for solutions as these new laws take effect. We understand that opportunity exists within change, even if that means we must change. We recently announced the move of our soft commodities options markets from the floor to the screen. The rapid expansion of our new OTC clearing house has now caused it to become systemically important.
Our new swaps data repository is launching, and the planned migration of our energy swaps market to regulated futures is underway. I believe this is where ICE excels, such as the way we transitioned our markets to our own newly built energy clearing house amid the financial crisis in 2008, or the way we implemented position limits on OTC energy markets in 2010, or even last year, how we converted ICE Clear Credit from a U.S. regulated Federal Reserve Bank to a CFTC and SEC regulated clearing house. Our IT team is very adept at managing change, and the strong financial results that we just reported reflect our agility and our continued focus on growth. On slide 10, you can see that ICE has performed well in both risk on and risk-off environments. I think there are two fundamental reasons for this.
First of all, our business is focused on the requirements of commercially oriented hedgers that manage $billions of assets every day. You can see this very high concentration of commercial customers in ICE's weekly commitment of trader reports. These market participants have increasingly relied on ICE for everything from market data and trade confirmation to clearing and technology, all of which are tailored to support their larger business goals. Since the formation of ICE, we've taken an end-user, front-to-back office perspective rather than a pure focus on techniques to attract trade execution. We've completed M&A that's strategic in nature rather than size or scale-oriented, and this has created for us a nimble infrastructure that provides critical risk management tools that are relied upon regardless of market cycle. The second driver of our consistent results has been our diversification across geographies and markets.
Our traditional benchmark futures markets play a key price discovery role around the world, and we've worked with the market to develop, list, and clear standardized swap contracts that provide spread-based and location-specific flexibility to serve the needs of hedgers around the world. As you can see on the chart here, this market depth has produced consistent growth over the last several years, and our product diversity will remain in place under our recently announced transition from swaps to regulated futures. ICE's positioning in the global energy and agricultural commodity markets remains a competitive differentiator. Secular growth is driven by the demand for hedging and risk management that is required to manage prices of raw materials. In the recent months, you've seen Chinese firms making sizable acquisition of commodity-related companies to meet the demands of growing infrastructure and population.
Several of these transactions have been in the European and North American natural gas and oil markets, and two involve North Sea oil fields, on which ICE's Brent Crude contract is based. Additional Chinese investment is just the latest positive development in the North Sea, which reinforces the support for Brent as the global oil benchmark. It also further demonstrates Brent's link to Asian energy markets, as well as the anticipated longevity of future oil production from the North Sea. The reliance on Brent as a marker is due in part to the physical output of more than 2 million barrels per day, and its over 30 billion barrels in estimated reserves. As a result, Brent is used to price over two-thirds of the world's physical oil. You can see the strength of ICE's oil markets on slide 11.
ICE Brent futures and options daily trading volume is up 20% year-over-year in the first half of 2012, and our open interest is up over 100%. The complementary relationship between Brent Crude and gas oil has been a key driver of gas oil's growth, with gas oil serving as a global diesel benchmark to assist in hedging refining margins and refined product prices in Europe and in Asia. The trading volume of gas oil on ICE has more than doubled in four years. Finally, you can see the demand for cleared global oil swap contracts has driven trading volume growth and 7 consecutive quarters of rising open interest at ICE. At the end of the second quarter, open interest of cleared oil swaps contracts was up 57% year-over-year to 2 million contracts. Moving to slide 12.
I'll note that in the U.S. last month, we marked the 2-year anniversary of the passage of Dodd-Frank. Dodd-Frank implementation has resulted in over 8,000 pages of new regulations so far. The CFTC and the SEC recently finalized the swaps definition rule, which triggered effective dates in nearly 20 other rulemakings. These include swaps dealer registration, aggregate position limits, and real-time reporting, among others. The effective dates for our customers generally range from the fourth quarter of this year through the first half of 2013. As implementation advances, ICE is helping our customers to meet these new legal requirements. Last month, ICE Trade Vault was provisionally approved by the CFTC as a swaps data repository. Approved for all asset classes, it is currently the only swaps data repository authorized in the U.S.
Another initiative we've been working on is our transition of OTC energy swaps to regulated futures contracts. We anticipate a seamless shift as the contracts will continue to be listed on the same trading platform and cleared by the same clearing house as they were previously. You may recall we did the same thing in 2006 when we transitioned our West Texas Intermediate crude product from a swap to a regulated futures contract. We believe this move will provide the best features of OTC and futures markets for our customers. It will simplify their efforts to comply with regulation while meeting regulatory goals of increased safety and market transparency. Another area of focus for us is the systemically important designation process. ICE Clear Credit was officially designated as a systemically important financial market utility in July.
While this Dodd-Frank-mandated process is focused on U.S. institutions, similar exercises are taking place globally under the IOSCO framework. All of our clearing houses are highly regulated, and we think the global application of uniform IOSCO rules across clearing houses will help reduce risk. While several global rulemakings are still in process, regulators are pushing towards the G20 deadline for setting forth clearing rules by the end of 2012. Last week, for example, the CFTC issued rules for the first set of products subject to mandatory clearing, which include credit default swap indices. With over $32 trillion in gross notional value cleared to date, we remain the leading risk management model for clearing CDS by a wide margin. Additional asset classes are phased into the clearing mandate, ICE will continue to lever our experience to provide additional services, including the foreign exchange product market.
Working closely with the industry and regulators to ensure that rules and procedures around customer protection are now reinforced. There are a number of rules being implemented, including the so-called Corzine rule, the legally separated, operationally commingled regime, and the electronic verification of funds. We believe these policies will support customer confidence in our markets. On slide 13, I'll update you on a few more items that we're often asked about. First of all, you can see that our customer growth has continued since the start of the year, and it's coincided with the ongoing introduction of new products, services, and technologies. The demand for information about our markets is evident in the 11 consecutive quarters of market data revenue growth. This year, we integrated our YellowJacket platform more deeply into our infrastructure, and we renamed it ICE Chat. We launched additional sophisticated mobile tools.
We continue to benefit from adding new contracts based on customer demand since the launch of ICE Clear Europe, with these products generating solid revenue growth each quarter. Our emissions futures business has been a very strong performer for us, generating over $30 million in revenue in the first half of 2012 on 18% volume growth. Our new grain and oilseed futures have gained traction since their launch, and these increase our relevance not only in North America, but throughout Europe and Asia as demands for ICE's commodity markets grow. Our joint venture in the BRIX Power exchange continues to see growth in traded volume and in new customers. In June, Cetip launched its 1 phase of Brazilian fixed income trading on ICE's technology. These investments exemplify our focus on finding early-stage opportunities and building on them.
We're positioning ICE in Brazil in much the same way that we introduced technology and risk management to markets in the U.S. over a decade ago. I'll conclude on slide 14 with a progress report to update you on the five themes that we noted at the start of the year. First and foremost, our core energy and agricultural complexes continue to benefit from strong secular to global commodities markets driven by emerging economies, price volatility, and the rising demand for risk management. In the first half of 2012, we introduced over 100 new products across energy, agriculture, and credit. We continued to expand our footprint in emerging markets. We broadened our options technology and options product offerings. We made progress on our operational plans for transitioning our swaps to regulated futures contracts and launching our swaps data repository.
Finally, we continue to actively evaluate strategic growth based on our positioning and our long-term vision on how ICE can serve the global markets. We couple this with a focus on preserving our leading returns on capital and double-digit earnings growth. As shareholders ourselves, our entire team is closely aligned with investors, and we continue to focus on creating pathways for growth. I'd like to thank our customers for their business and their support in the second quarter. I'd also like to acknowledge the ICE team for helping to serve their needs and again, delivering industry-leading results. I'm very proud of our culture that drives us to innovate and grow by serving our customers each day. With that, I'll turn the call over to our operator who can conduct a question and answer section. Operator?
Ladies and gentlemen, if you have a question, please press star then 1 on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from Rich Repetto from Sandler O'Neill. Your line is open.
Yeah. Good morning, Jeff. Good morning, Scott.
Good morning, Rich.
I guess, first question is for Scott. You spent some time to go over the potential uses of the $1.1 billion in cash. I guess, could we get more detail on the potential investments that you're looking at? You've talked in the past about cash in the U.K., there'd be certain tax ramifications of bringing it back. I guess my question, too, is if you're bringing down the M&A or the acquisition-related cost per quarter, what are the big investment opportunities out there?
Yeah, Rich, as is typically the case, I'm not going to comment on any specific acquisition opportunities. As I said in my prepared remarks, we do believe there are opportunities out there, and you can look at the track record we've got. They're not all necessarily billion-dollar, $2 billion opportunities. They're technology opportunities to add to what we've got. They're asset class opportunities to add to the products that we offer to our customers. If you look at the history of what our acquisitive activity has been, I think it gives you a good view into what we're thinking about. The point of the remark was that we still think those opportunities exist, and we believe it's appropriate for us to have capital available for those opportunities.
Shifting to your second part of your question, just with regards to generally how we think about the cash that's available to us. I've said in the past that you could think of our cores, our zero level cash balance in the $250 to $300 million range. That's kind of our comfortable operational cash. You spoke a little bit about the U.K. versus U.S. We generate now less than half of our income or half of our cash flows come from the U.S., so we do have a lot of our cash flows outside the U.S. As you know, the U.K. recently agreed that their tax rate would come down to 24, and it's on a glide path to 23 versus the U.S. at 35. For me to bring that cash back to the U.S. is not efficient for our shareholders or for our company.
As you'll likely know, you probably haven't dug through the details yet in the quarter, but as the regulatory capital requirements are being set, we increased our restricted cash in the quarter by about $30 million, reflective of increased regulatory capital requirements that we've seen. We take into consideration all of those factors as we think about the use of our cash. Then, as I mentioned in my remarks, we focus on what we're able to do with it. Generating 19% returns on invested capital against a WACC of 10%, we think reflects that we do a pretty good job being good stewards of our shareholders' capital.
Understood. It is a lot of cash though, Scott Hill. The one follow-up I have, Jeff Sprecher, the move from OTC energy to the listed, a bold move, and I guess the question is, will you still connect? Will you still have an energy SEF? As a clearing house, will you still clear? Do you see this as a broad trend of the OTC markets, whether it be energy or other asset classes, moving into the listed environment? Yours was sort of unique, I think.
First of all, we do intend to register ICE itself, our trading platform, as a SEF, and we do believe there will be SEF trading of energy products. We at ICE have done a lot of work over the last decade getting into the physical markets that are not cleared and getting into certain bilateral markets that are not likely to lend themselves to clearing, and those for sure will trade on SEF-type platforms. We will see how the market evolves in terms of its skew between futures and OTC trading as time runs forward. It is our intent ultimately to be a very responsive trading and clearing infrastructure for the marketplace so that business can get done however customers want to get their business done, and that ICE can participate in that workflow. I do think it is a bold move that we are doing.
We are trying to show leadership. We are trying to show our customers some direction. We have been talking extensively with our customer base for the last couple of years in the United States, particularly around the implementation of Dodd-Frank. We concluded in the last few weeks that this was the right moment because our customers are almost unanimously telling us that they like this idea and they want to push us there. I think it is foreshadowing trends in other asset classes. One of the things that I think our company and also some of our competitors deserve credit for in the energy and commodity space is that we have helped standardize the markets in terms of their terms and the way they trade so that those products can be cleared. In doing so, the hedging techniques that exist in our space have relied heavily on standardized products.
I would suspect that in other asset classes, particularly as we know more about the new Basel III rules and the way dealers are going to be reorganizing and constructing themselves, we may see that there is a move towards standardizing those other asset class products that can be standardized. That would be my guess.
Our next question comes from Howard Chen from Credit Suisse. Your line is open.
Hi, good morning, everyone.
Good morning.
Good morning.
Jeff, just to follow up on that, the swaps to futures announcement. The benefits to your customers make sense to me, and certainly the additional transparency will be great for us in the investment community. I'm just curious how you think this potentially impacts the pace of new product delivery, the liquidity for some of these products that you may otherwise wanted to keep OTC for a while longer, and just pricing.
I think net-net, it will have little to no effect on any of those things. As a contingency, we've been planning for this move since the creation of Dodd-Frank. We suspected when Dodd-Frank was passed that this would be the likely result for us, and we've been building infrastructure and adopting rules and pricing and other things for the last couple of years in anticipation of potentially making this move. So in that regard, it will be relatively seamless for us. There will be new procedures for the way we list products, the way we announce them. I think it will be evolutionary, not revolutionary. We've become pretty adept at operating both futures and OTC markets. Howard, I'd say one other thing is for you and others that follow us very closely.
If you really look at last quarter's results that we just announced, you'll see a very strong growth in the trading of energy futures products and a less strong growth in the trading of energy OTC products. I believe that there's been a fundamental shift underway in this regard for some time, and I believe that our movement of OTC products into a futures environment is really reflective of a trend that is already underway, and certainly it's what our customers have been telling us. So it's a natural conclusion. I also think for government, that they can really take some credit in all these complicated rules. They've really essentially brought many opaque markets into a regulated, transparent environment that people understand. So in that regard, I think the regulatory policies have been successful.
Thanks for all that color, Jeff. That's really interesting. Yeah, and my follow-up, you mentioned Basel III briefly, but there's been a lot of discussion on central counterparty risk weighting and CVA proposals. Just could you share your thoughts on what you're hearing and how much you're hearing from clients differentiating between better capitalized, more dynamically managed CCPs like yours and maybe weaker ones that are out there?
Those are, again, good questions, everything that you asked about is certainly a work in progress and ongoing dialogue. Generally speaking, all the discussions we've had with senior policymakers has been that they want to make sure that capital rules encourage the use of clearing houses. Regardless of how clearing houses are weighted, I suspect that keeping trades bilaterally and opaque will have much higher weightings. I also think you can take some comfort if you look at the growth of clearing in the commodities markets. What's really been happening is that customers want to give us as many types of trades as they can so that they can net down their absolute exposure, and in doing so, they really net down their capital requirements.
I think there will be a continued role for major clearing firms in helping people with collateral conversion into clearing houses that will make the posting of margin less onerous for ultimate end users. I think that the net risk that will come via clearing for many major customers will be a nice surprise for them when they really see their true exposure, and they'll be able to see their true hedge, for example. I think with respect to the various clearing houses, the U.S. did a systemic overview of clearing houses. That process is going on globally. I would expect that our European clearing house, where we clear huge amounts of energy and credit default swaps, will ultimately receive some kind of similar designation by the U.K. government under these IOSCO regimes.
It's yet to be known what a systemically important financial market utility is going to look like or how it's going to be ultimately regulated or what its ultimate capital needs are. That's part of the uncertainty that Scott mentioned in ICE, looking at our own capital needs and looking at the opportunities that we may find in the marketplace for others that can't manage through their needs in terms of M&A.
Our next question comes from Ken Worthington from JP Morgan. Your line is open.
Hi, good morning.
Good morning.
First, I wanted to dig into options. You've had huge success in Brent options. What is the outlook for options in your non-Brent European and U.S. products? Maybe where do you see the most promise at this point?
Well, sure. There's been a long-term trend towards the use of options in the cash equity space, even the retailization of the use of options. They're becoming better understood, better accepted as risk management tools. There's an overall secular trend going on there that we've been tapping into. I think, as you know, Ken, we have been heavily investing in various technologies to try to move options more electronic. We certainly found a sweet spot this year. Basically, in seven or eight months, the floor-traded options that were traded at the ICE Futures U.S., the old New York Board of Trade, coffee, cocoa, and sugar have moved electronic. I believe earlier this week we were 96% electronic and 4% floor based. There is a movement and a customer preference towards electronifying these.
I think as they become electronic and standardized, you will see the velocity of trading increase in those markets where there is already liquidity. I think as traders look for alpha, as people are trying to hedge more complex books, and as dealers reposition themselves and brokers try to create value for their shareholders, there will be a movement towards a greater use of options and option strategies. I do think that you'll see it move next, probably much more in our gas oil contracts. As we move down the oil refining curve, I suspect you'll see greater use of options, just levering off of Brent, for example.
Okay. Thank you. Then maybe regulatory side. We've had two FCM failures. What do you feel are the best outcomes from a regulatory perspective for the market? What are the realistic outcomes that would be maybe most impactful for ICE, both helpful and harmful? Do the rules in the U.S. kind of transcend the U.K. and Canadian markets? Does what happen in the U.S. influence what could happen with rules here in the U.K. or Canada, or are those regions likely to remain as is or status quo?
Good questions. I do think, first of all, that the infrastructure providers like ICE will have a bigger role in helping to manage customer risk. In that regard, we'll be able to provide more services and charge for them. I think that this trend is probably in our company's best interest. Beyond that, we need to find a balance, and the U.S. is searching for it, and certainly there's a lot of debate about it. Some of the trends that were already in place are being accelerated. The market is not being caught flat-footed. There was already talk of customer improvements in things like electronic certification of funds on deposit that to a large degree helped uncover the Peregrine Financial Group issues were already well underway. I do think that what's happening here will influence events outside the U.S.
I do think people are looking to what's going on here. One thing that's important for ICE is to maintain the role of the clearer and broker in the process. They play an important role for exchanges in providing connectivity and distribution and marketing and on-the-ground risk management to our customers. It's important that we find a balance that keeps them in the business and incented to make money and provide services for their customers. That will be in our long-term best interest. I do think that the clearing houses and exchanges through technology and through bankruptcy regimes will play an increasingly important part. One last thing I'll say to Ken is I hope that whatever we do will continue to keep the onus on the end user customer to think about who they give their money to.
At the end of the day, you and I, as consumers, have choices on who we can use to manage our money, and I think it's important that customers realize that there will be protections in the marketplace, but there will not necessarily be implicit guarantees and that there's still an onus to manage your money wisely, and that exists in every other asset class and in every other jurisdiction around the world. I hope that customers don't put unrealistic expectations on the futures markets.
Our next question comes from Jillian Miller from BMO Capital Markets. Your line is open.
Thanks. Morning, everyone.
Good morning.
Morning.
I just wanted to touch on this year. From listening to the debates going on in the parliament, it sounds to me like some form of open access is, well, I think likely in Europe. Probably not fungibility, but maybe something similar to what we have in the OTC markets now. I just want to get your thoughts on how something like that might impact your business, and are there any moves you can make that might protect you from something like that, just given you operate across a number of different countries and regulatory regimes?
Well, first of all, it's hard to predict what will ultimately become of the regulatory debate that's going on in Europe. It's still an active debate. I do think, similar to some of the earlier questions that I responded to, that Europe is looking at what the U.S. has done and they're looking at what Asia is intending to do, and they want to find a balance so that there's not a regulatory arbitrage. I don't expect that we're going to see an outlier in global regulation. In other words, I think global regulation is going to be relatively similar across jurisdictions. The reason I think that is because it's in regulators' best interests to do that. That being said, the discussions about access for clearing are an active conversation.
There are lots of amendments that have been being tabled and developed in Europe and they're under debate and discussion, so it's hard to say what the exact language will look like. One last point is we have, as you know, a really important clearing infrastructure, and we take trades from hundreds of different venues into our clearinghouse, both in the form of regulated futures that are done off exchange and OTC contracts that are done outside of ICE. We, more than anybody, set up our clearing infrastructure as a business to attract business, and we've built the infrastructure to do that, and we've built pricing to accommodate that. I think the trend, which is to push more business, regardless of how it's executed into clearing houses, is in ICE's favor.
Okay, thanks. Just on the grain product launch, volumes have been growing but a little bit more slowly recently, and it seems to be having maybe plateaued around 4,000 contracts per day with open interest around the same mark. I was just wondering, what your thoughts are on the product. Is it having the start that you anticipated? Did some of the changes that CME made kind of in response to the launch maybe erode some of the competitive advantage that you were hoping for with the product? Is it just the case that you still have very high hopes and it's just going to take a little while to build up the liquidity?
Again, a complicated question. First of all, I'm actually pretty impressed with how well that product is doing for us. It's trading regularly with very tight markets, and there's still a lot of customer demand for that product and a lot of customers that are working with us in the background to get set up to make changes to their internal policies and processes to be able to get access to the product. I'm actually pretty impressed because I was a bit of an internal skeptic of our own efforts this way. Look, I'm an engineer by education. I bring that up a lot. I know Sir Isaac Newton taught us all that for every action, there's an equal and opposite reaction, and I know that, and expect that, and it's a law of nature. You don't try to change that.
I expected that there would be competitive reactions. The desire for ICE to get into this business was driven by a host of customer demands, that I think are long-term and secular in nature and will continue to support those products regardless of the competitive changes.
Our next question comes from Chris Allen from Evercore. Your line is open.
Morning, guys.
Morning.
If we can just revisit kind of the expense outlook. When we look at the full-year forecast relative to the first half, it's pointing to expenses in the $137-$145 range, so up sequentially from where we were this quarter. I'm just wondering, what would be the drivers of sequential expense growth from here?
Yeah, I think, Chris, you may be taking the high end of the range to get to that view. I actually think we're trending more to the middle of the range for the full year. My expectation as you look out at the next couple of quarters is similar first quarter to second quarter, we were down. I don't expect third quarter to bounce up a lot from where we were in the second quarter, and I don't expect the fourth quarter to be materially different either. The one variable that we've got embedded in that is what happens with our bonus accrual. I think we're tracking to our typically very challenging budget through the first half of the year.
Again, assuming that stays on target, my expectation is you're not going to see much of an increase and we'll end up somewhere in the middle to kind of four-ish, 5% for the full year, which by the way, is about where we are through the first half.
Got it. Okay. Then, just thinking about some of your growth opportunities. One that was not mentioned in the slide deck, which we've talked about before, is the European natural gas opportunity. Any comment around that?
Yeah, that business continues to do very well. I touched on it ever so briefly in my remarks. It was one of three or four products that I listed off that saw growth of over 20% on a year-over-year basis. Jeff was talking earlier in response to one of the questions about where we're seeing options growth. We saw good options growth. I think the options in U.K. natural gas were the volumes were about three times what they were a year ago. That business continues to do very well for us. We also recently announced a deal that we're doing with GFI Group, which is really targeting the European power and natural gas market and looking at another avenue to bring bilateral voice broker business into our clearinghouse, into a more transparent venue. I think we remain very excited about that opportunity.
It is continuing to grow in its contribution to us overall. Good performance in the first half of this year, our expectation is that there's a lot of runway in front of us for that product.
Our next question comes from Alex Kramm from UBS. Your line is open.
Hey, good morning.
Good morning.
Good morning.
Scott, first of all, I want to come back to the first question Rich asked about capital. Not sure how much incremental you can add to your previous answer, but just look at the slides, I guess slide nine, $1.1 billion in unrestricted cash, $2 billion undrawn, and
When I look at my model in terms of free cash flow generation, it's like $700 million-$800 million over the next year or so. That basically gives you $4 billion in flexibility. When I review your comments here, like through technology, M&A opportunities, $100 million plus or so, and then maybe like $1 billion or $2 billion sizable deals. You've got a lot of that opportunity. You've got a lot of money for those kind of opportunities and still have a lot of cash beyond that. Where is maybe the drive or the motivation to do stepped-up buybacks or something like that, given that if you believe in the growth of your company, you should be buying back stock to participate in the growth more. Maybe flesh it out a little bit more. Thank you.
Alex Kramm, first of all, we absolutely do believe in the growth prospects for our company. As I mentioned in my remarks, since 2008, we've spent $600 million repurchasing our shares. We have over $300 million remaining in our authorization, and you should expect us to continue to act aggressively in share repurchase as a means of capital return. I won't debate with you or Rich or any of the other folks on the call whether or not we could do a dividend. We do have a very strong balance sheet, low leverage, very strong cash flows. We can, as I mentioned in my remarks, we don't do things simply because we can. We step back and ask ourselves, where do we think we can put those dollars to the highest value use?
I'm not going to go into details now on each of the individual acquisitions that we're thinking about now or ones that we may think about in the future. What I would point you to is we have demonstrated consistently that we are good stewards of capital with strong returns, with good investments that have been value accretive for our shareholders, and we believe we can continue to do that. The other point I would make, too, and I've alluded to it, is there are a lot of variables that are moving around today. Jeff touched on one earlier, which is, what's it going to mean to be systemically important? What are the capital requirements for that? We don't expect that they will be materially different, we don't know. What's the corporate tax rate in the U.S. going to be?
Are we going to move to a territorial system? Are we going to finally realize that being 11 points higher than the U.K. is a bad thing for the United States? That would make it more efficient to bring cash back from outside the U.S. What's going to happen with dividend policy and capital gains, which is more efficient? Is 15 going to go to zero or going to go to 45%? Is it going to go consistently, or is it going to be mixed between dividend and capital gains? There are a lot of moving pieces right now that would suggest to me that making a decision on we're going to go one way versus the other, this isn't the right time to do it. We remain very confident in our ability to grow and return.
The last point I would make and emphasize, though, is Jeff and I haven't made this decision, and our board hasn't made this decision today, and then we'll get back to it and think about it again two years from now or a year from now. We constantly evaluate what the best use of our capital is and how to best deploy it. We'll continue to look at all the variables that are out there, the M&A opportunities, the tax policies, the regulatory capital requirements. As we've done in the past, we'll adjust, and we'll make changes in our capital deployment strategies as facts and circumstances change.
All right. Well, thanks for the additional clarification. It's helpful. I guess for Jeff, looking at what happened on the M&A side with the London Metal Exchange in Hong Kong, clearly, you were involved there as well, and I think in some of the public comments you've made about that asset, you could clearly tell that you were pretty excited about it and the opportunities that was changing some of the things around there, which Hong Kong seems like is not going to do. They're going to keep things pretty intact. Just wondering if from an organic perspective, you think there are opportunities to go after that market, another avenue into Asia, given that you've challenged incumbents before and have done so pretty successfully, or if you think this is a market that is so closely knit that it's pretty hard to enter. Thank you.
Well, first of all, you got a round of laughter in the room here that you didn't hear because it wasn't so clearly that we were going after that asset. We've never actually commented on that, and I won't start that process today. I will say that whenever we have participated in auction-type M&A, we both think about how to play to win, and we also think about how to play to lose. I think you've seen us do that in many ways in the past, and the reason that we play to lose is to open up opportunities for us as a result of potentially a winner's curse. I'll just suggest to you that our company could not have gotten a fairness opinion to buy the London Metal Exchange for GBP 1.4 billion.
I do think it's a great company, and I do think it could have been a company that would have been interesting to potentially do business with, and I hope there will be opportunities to do business with it in the future under its new ownership. That being said, we are pretty strategic around here. We pride ourselves on driving strategy and creating a roadmap for both the success and failure in various things that we do. At this moment in time, we feel pretty comfortable with where we're sitting, and you can see it in our results.
Next question comes from Matthew Heinz from Stifel, Nicolaus. Your line is open.
Hi, good morning, guys.
Good morning.
Good morning.
Just a question on CDS execution. You've clearly been investing heavily on the clearing side, and you have the presence in the dealer-dealer space with Creditex, but do you feel you have the right combination of assets and platforms to have the type of business you want there long-term, post-implementation of Dodd-Frank on the execution side?
I think we're very confident that the investments that we've made in the CDS space position us very well as the rules are finalized around Dodd-Frank. As you mentioned, we've got a very strong clearing platform. I said in my prepared remarks, we now clear over 340 different products. We've cleared $33 trillion. We have well over a trillion and a half of open interest. Without question, we are the leading clearing house. We had our best quarter in terms of buy-side notional cleared in the second quarter. As I've mentioned earlier, we continue to see the march of the buy side towards clearing. The CFTC recently announced that CDS indexes would be mandatory for clearing, which I believe started 180-day clock for the category 1 traders, which is a vast majority of that market. I feel very good about the clearing.
In terms of the execution, again, we've been managing that business now for three years, really to deliver as much efficiency as we can. We continue to look at ways of getting more efficient, whether it's moving markets more electronic. You noticed in the quarter, we're up to 63% electronic execution. It's getting rid of brokers in spaces that are going largely electronic, such as in the index space. It's maintaining our share, our number 1 ranking in the single name space and in some of the structured product space, all with an expectation that I'm sorry, just to round it out, and to build out our SEF, to leverage the CDS execution platform that we've got and the expertise that we've got generally in execution technology and ICE to build the SEF for CDS trading. I absolutely think we've got the right assets.
I absolutely think that we've got the right customer engagement. I am absolutely confident, as I said in my remarks, that as the rules get finalized later this year and certainly into 2013, that at that market turn, we will be the biggest beneficiary.
Okay, thanks for that. Just to follow up on the emissions business, you mentioned some of the opportunities there just very briefly. I was wondering if you could expand on that. It remains your most lucrative product in terms of RPC. Just wondering if we could get some more detail on maybe the EU Stage 3 timeline and kind of your market share trends there.
Sure. First of all, thank you for asking about it. When we bought out our partner in that business, a lot of people scratched their heads and said, "Why would anybody want to be in the emissions business?" We felt relatively confident about our positioning in Europe. So far, our results have exceeded our expectations. We were picked to build the U.K. auction platform. There's a process going underway in Europe, for continental Europe, to pick a platform, which I suggested on an earlier call, I don't expect we will be a part of. As a result of getting deeper into the way these contracts are actually created and administered by governments, I think it further ingrains us. Our market share has gone dramatically up over the last few years.
The competitors are reacting to us by massively cutting prices or trying to do other things to claw back some relevance at the margin. That may be a little bit of a share skirmish. It really is a result of the fact that we are so strongly positioned and continue to be and feel good about it. You do see the European government as a whole, both the U.K. and the EU, wanting to take proactive steps to continue for that market to grow and evolve. There is a real commitment to carbon trading in Europe. The stress of the euro and the stress of the economy has not caused them to waver, which is pretty amazing. We have a lot of confidence in our continued growth over there.
The 11% volume growth that we saw in the quarter is despite some level of uncertainty with regards to what governments may or may not do with emissions certificates. It's at a moment in time where we're pivoting towards the phase III, which will run from 2013 to, I believe, 2020. You asked about the transition into phase III. I mean, one of the big things in phase III, or two of the big things in phase III are, one, the emission credits will start to be auctioned off, which I think will create some price volatility. Volatility tends to be good for hedging activity. The second big thing is you're going to see big transportation companies, airlines, and metals companies come into trading.
Not only are you going to see the new auction activity, you're also going to see a much more expansive set of customers who have a need and an opportunity to hedge their emissions exposures.
Question comes from Roger Freeman from Barclays. Your line is open.
Hello. Hi, good morning.
Good morning.
Good morning.
Just to come back to the swaps to futures, could you clarify this a little bit more? Is the plan to basically replicate all of the energy OTC contracts as futures, or are you going to consolidate them down to some more standardized list? If so, does that create any basis risk issues? Will you dual list at all and ultimately let the market decide whether they want OTC cleared or futures?
That's a good question. We are going to, over a weekend, convert any open interest in any contract that we have listed to a regulated futures contract, so there will be no change in the individual contract specification or the way it trades or the way it's listed on ICE. It will simply become futurized over a weekend, any open interest that is in the clearing house will be deemed to be futures open interest. In terms of how we list OTC contracts, we believe that the vast majority of energy companies will want to trade standardized swaps in the form of futures, there will be potentially some OTC business that will stay in the over-the-counter markets, also there are final rules that the CFTC is working on in the U.S. that will determine exactly what an OTC contract is.
We will make sure that we can clear all of the energy business. We're not trying to discriminate, we're making a highly calculated bet that our customers want standardized swaps to be futures.
Okay. Great. Thanks. Just following on that, might ask thee, what does it take for this to occur in CDS, if you have plans for that as well, and where are you on clearing financial CDS? Just lastly, on the options, is it YellowJacket that really pushed the envelope to a point where you could get the electronic penetration up to where it is? I know that negotiating those complex electronic options order was always the challenge in that.
Well, first of all, our focus on the futures conversion is in the pure commodity space. The reason that that's our focus is for 10 years, we've been working with the market to standardize those contracts and standardize them in a form that makes them able to be listed on a central limit order book and cleared as futures, in future-style clearing, in other words. In other asset classes, there is much less standardization. As we sit here today, we have helped drive standards in credit default swaps. The market has been working on recasting that product to make it clearable.
There's still work going on by ISDA and others to continue to evolve credit products. There are unique aspects of credit products and of interest rate products and even foreign exchange products that, at this moment in time, don't necessarily lend themselves to futures because they involve off dates and cash flows and other kinds of very customized and bespoke features that don't have the same attributes that energy does. That isn't to say that they aren't going to evolve. I suspect they will. We have a decade of working with the commodities markets to get us to this position.
With respect to options, I think there's actually a similar trend going on there, which is in the commodity space, generally, you can trade any strike price at any premium price. Generally speaking, our customers use some form of Black-Scholes to calculate volatility. Nobody uses the identical Black-Scholes tweaks, if you will. It is highly tailored. What you're seeing happening is ICE has been evolving our technology to be able to clear and list more tailored contracts. At the same time, you'll see liquidity starting to concentrate around some contracts that ultimately we think will help to drive standardization. That process is in early days in commodity options, but the trend is certainly there.
As you know, in the cash equity space today, you have very standardized values, premiums, and strikes that I would expect over time, commodities will start to trend in that direction. All of which I think will concentrate liquidity and increase volumes and give customers and brokers and dealers better tools for helping to manage risk.
Our next question comes from Niamh Alexander from KBW. Your line is open.
Hi, good morning, and thanks for your patience. On the credit derivatives, again, Jeff, how much today is clearing and eligible versus how much you think could be mandated to be cleared going forward? You're so early ahead of the rules. I'm just wondering, how much more of an opportunity is there without the next phase of standardization and maybe some futures?
Scott mentioned that the way the U.S. clearing mandate is coming into effect is that Tier 1 type players will be the first to be subject to a clearing mandate. Those are basically the large banks and possibly some large funds. That's obviously the target group that we've been working with to help build our clearing infrastructure. That's why Scott mentioned we are very well-positioned as the actual legal clearing mandate in the U.S. unfolds. The large banks that have a large presence in the United States have made commitments to the U.S. Fed to clear a large majority of their business, and those banks have been doing that. There is new contracts that are being written, a large percentage of them by banks that are in the U.S. that have a large U.S. presence have been going into clearing.
What we would expect would follow under the clearing mandate would be banks that don't have as large a presence in the U.S. that have not been necessarily following that clearing mandate as well as potentially a couple of large funds that have exposure to CDS that may be in that first tier. After that, we think things will unfold relatively quickly, where the entire buy side essentially will start to be drawn into clearing, and you'll see that in 2013 in the United States. I think because Europe, in the EMIR legislation, is working towards laying out their clearing mandate under the G20 rules to have visibility into that by the end of the year. I know from our conversations over there that European legislatures feel pressure to get moving on this.
They don't want a regulatory arbitrage to exist. I think you'll see similar 2013 kind of mandates and timelines coming out of Europe, would be my guess.
Okay. That's really helpful. Thank you for the color. Just bear with me in how I ask this question. The OTC markets, the futures markets, certainly in the futures, you have the kind of member layer guarantor in front of the customer, and then in the OTC business, you have some customers coming in, but from a clearing perspective, they still go through a member, correct?
Yes.
Help me understand, are you kind of getting to a point now where you are more interested in getting more of a connection directly to end user clients? Because with Creditex, you got the dealer-to-dealer flow on the execution side. You bought it for the clearing and the changing market structure. But is a next phase for ICE to kind of start looking at more of the direct dealer-to-client type execution venues?
If we really look at what we have technology-wise, our ICE trading platform is somewhat unique in that it can be permissioned by us to be a future-style platform, which is an all-to-all platform that does not rely on dealers or market makers per se. We have the ability to create dealer-to-client in more traditional OTC type role where the dealer is the market maker and the client is a price taker, and we have the ability to go dealer to dealer where it's basically a wholesale market. We have never necessarily biased ourselves on how the market should evolve. We've simply tried to create technology that serves whatever the market needs are.
What's happening specifically in the case of energy swaps, and as I mentioned, this is something that we suspected was going to happen, so we've been preparing for the last couple of years, is that as the rules unfolded, the customers really looked at, and they have enough visibility into Dodd-Frank rules right now, even though they're not finalized, but the key ones are, and they have said, "You know what? I'd rather trade these as futures." What does that mean? It means I'm willing to put my trades on a real-time ticker, not have them delayed 15 minutes or whatever, in terms of what goes into a swap data repository. I'm willing to have my trades be highly standardized, in the sense that they could be listed on a central limit order book.
I'm willing to provide liquidity and take liquidity and be a price maker and a price taker. There are people that have said it is incumbent on us as an industry to make sure that these markets stay liquid and transparent in order for this conversion to happen. Energy's a bit unique, but I do think the other markets, where possible, will seek to operate with the lowest capital and the lowest friction. That's just sort of a natural phenomenon. We are well-positioned with this technology footprint as these other markets transition, and that's why Scott spoke somewhat confidently about our views in the credit default swap markets. All of these markets are on a different trajectory and operating under different timetables, and we want to be in the workflow as much we can.
Our next question comes from Ken Leon from S&P Capital IQ. Your line is open.
Great. Jeff, question in terms of international growth. Do you mostly see these organically growing products or
leveraging your technology platform to new partners, despite your large capital. Is this the way you're really going to grow? Does that provide enough upside for you, given that there aren't a lot of London Metal Exchange companies out there for you?
It's a good question. We are not in the technology business, per se. We do not, unlike a lot of exchanges, have an active goal of licensing our technology. Where we have licensed it, and we do, where we feel like we're at a disadvantage, and through a strong partner, we could accelerate growth in an emerging area faster than being on our own. Our licenses and our partnerships are highly strategic. Our business has done well financially for our shareholders. While we completely drive the business to have solutions for customers, we are very aware of the needs of serving our shareholders. We tend to want to do business against our current model, which is to try to keep costs fixed and have growing volumes that have variable pricing.
Where we do license or JV or enter new markets with others, we're highly aware that that is the driver of growth for us. In that way, we're a bit different than a typical technology licensor, if you will.
Go ahead.
I agree there are not many London Metal Exchanges. London Metal Exchange is, I don't know, 200 years old, 150 years old. It's an unbelievable franchise. It was a member organization that had resisted becoming part of a larger exchange group for a long period of time. You're right, there are not many London Metal Exchanges. We have tended to do deals that people don't expect us to do. We don't really do deals where we are part of an auction, and it is simply who can pay the most or who wants to pay the most for an asset. Our deals that have really driven a lot of value have been the deals that we've created, they've moved us outside of our current comfort level, and they have not been obvious.
I know that may sound odd, at the time we did the deals that we did, none of the things that we did particularly seemed very obvious to people.
Finally, as an organization, you're very focused, very successful in executing with your management team. A wide number of opportunities and challenges which have been on this call today, the question is: Do you feel that maybe you need to expand the management team even before you secure other new businesses, just because this is the way that you're going to stay ahead of the curve?
That's a good question. Because I'm the founder of the company, and because I'm very public in terms of wanting to meet with shareholders and analysts a lot, and an outward face for the company, I think oftentimes, people don't recognize how deep the management team is here. The reason I can do that and be public and talk a lot as an outside voice is because it's just the opposite. It's because we have such a strong management team, and they give me the opportunity to be outward. Chuck Vice, who sits next to me on all these calls and is our President, Chief Operating Officer, has been driving a lot of our execution. Recently, we acknowledged a number of our younger executives and promoted them.
That was very intentional on the part of Chuck and I to both acknowledge their contribution and to continue to keep an upward momentum for this next tier of executives so that they stay attached to the company, because they are our ultimate future. I hope that I'm not getting in the way of the visibility into the strength of this team. It's because of the strong team that the company has done so well, and they afford me the luxury of standing in front of them and being the mouthpiece for them. No, we don't need more executives. In fact, we have an unbelievably deep bench. The other last point I would make to you is we drive this company as a management team.
I don't think necessarily people are aware of it, that there is a strong contribution by all of the people on our management committee, which I think now numbers around 18 or so, in driving the business across geographies and asset classes and technology and what have you. It is a very collaborative effort, but it takes decisions and moves quickly and backs each other up. We have an unbelievable chemistry that's been going on here. One last thing, if you'll let me just pontificate a little bit. We have been preparing this company for regulatory change in the form of Dodd-Frank and ultimately EMIR. We've been preparing this company for increased flow of business into clearing houses. There has been a huge investment of energy and time and evolution of what goes on inside the company to prepare for that.
We've been able to make that investment for relatively modest capital. Nonetheless, you should not underestimate how well-prepared we are for what we think is a heavily evolving financial services business.
Our next question comes from Chris Harris from Wells Fargo Securities. Your line is open.
Thank you. Good morning, guys.
Good morning.
Just a quick follow-up question on the grains business. Jeff, you mentioned a pretty strong start to that business, exceeding your expectations. Wondering if you could maybe share with us who the earlier customers or adopters are in that business. Are these hedgers, or are they more the algo traders that like to maybe trade off CME's platform? Assuming continued success there, might we see you extend this strategy into maybe other non-obvious asset classes, like metals comes to mind, for instance?
Well, interesting. This is a customer-driven product launch. The ags are a customer-driven product launch, the customers that we refer to are the hedgers that wanted some alternatives in the space and wanted competition and were willing to bifurcate liquidity to create another natural competitor. I think that we can grow these markets with algorithmic traders and other non-traditional market participants because we've shown ourselves in other markets that if we can attract the ultimate hedger end user, then you've got natural flow, and it becomes easy to attract other users. We're very cautious in who we attract to our markets and how, because we want to make sure that that volume growth is for the benefit of that end-user customer who is at the root of our business. That's why I'm personally surprised and feel good about that particular product launch.
I do think that we continue to dialogue with the commodities trade. They are really going through a lot of changes because of global regulation, because of the emergence of business in Asia and Brazil and other places. There is just an unbelievable amount of change happening at the commodity end-user level. There is a host of opportunities. Scott keeps referring to this opportunity set in relation to our capital, but we truly believe that there are fundamental changes going on in the way business is being conducted, and that we are very well-positioned and are being opportunistic around those changes.
That's great, Jeff. Just a quick follow-up for Scott, really quick, if I could. I know a lot of questions on the capital return. Just one other for you. Along the lines of seeing kind of an increase in cash balance here, we've also seen your debt go up by quite a lot over the last, I don't know, couple of quarters, and I know you paid down a little bit this quarter. Any strategic rationale why you have an increasing debt balance along with the cash? I presume some of that in the fourth quarter of last year was maybe you wanted to prepare for LME, but now that that's kind of not really an opportunity for you anymore, might we see you perhaps aggressively pay down the debt a little bit more?
I'm not sure what you're looking at. The debt level's actually been coming down the last three quarters. We did take on a little bit of debt when we made the Cetip share acquisition a little over a year ago. I feel pretty good about the debt structure we've got, and our leverage is below one. The term on our debt is, I think, around five or six years, and the absolute cost of our debt is below 4%. I think if you lay that up against anybody in the space, nobody's got the maturity of debt that we've got at the interest rates that we have, and I'm not aware that anybody's got leverage much below where we are. I think it's a very low-leverage, very efficient structure that we've got in place.
In terms of paying it down more aggressively, in a world where we're not paying much on the debt, I don't feel completely compelled to go and do that. It's an alternative. It's not one of the more attractive ones.
Our next question comes from Gaston Ceron from Morningstar Equity. Your line is open.
Hi. Good morning.
Good morning.
Morning.
Thank you for taking my question. Just I have two very quick questions. One is, just going back to the grains for a second. I know it's been a big topic conversation since the launch, and I know it's still early days, as you said, but curious if you expand your range a little bit, what do you see as the kind of like the long-term potential for that segment? As we all know, we've got this drought here in the U.S., and there are experts that think that events like this are going to become more and more common going forward, which you would think would increase the opportunities or the need, rather, for hedging and other trading activity around that segment. Curious to know what your long-term sort of growth outlook is for that segment.
lastly, on the market data fees, seems like they saw a nice increase again this quarter. Curious to know what's going on there.
I'll take both those in order. Just with regards to droughts and things that affect the agricultural contracts, I don't know to what extent that's going to continue, but we do believe that the contracts that we offer in the agricultural space give commercial customers the opportunity to hedge against those risks. Depending on what those risks are, though, it does materially impact what we see in volume. For example, cotton was extremely volatile a year ago, but the drought wiped most of the crops out, so there weren't a lot of commercial customers hedging crops that didn't exist, and so volumes were impacted. As we've gotten into a better growing season this year, and some of the droughts have abated in the key cotton-growing areas, in a volatile environment, you saw cotton volumes grow 31% year-over-year.
I think some of the dynamics that you've talked about have always played a part in what we see in volumes, and will always continue to play a part. Your reference to the grains, again, we heard from customers that they wanted us to launch those contracts to provide them with an opportunity to more efficiently hedge their risk. To the extent there is customer demand to do that in those contracts or in other contracts, we are certainly going to listen to that demand and react to it. With regards to market data, as I said in our prepared remarks, that, for me, has always been a very good leading indicator of interest in our markets and where are our growth opportunities.
When I say that we're optimistic about our forward growth prospects, a lot of it is the investment opportunities that Jeff talked about and the regulatory uncertainty, which opens up opportunities. It's also a confidence in our core business. That market data revenue growth, I believe, is reflective of people being interested in seeing our data, and Jeff had a chart that he spoke to in the presentation that showed the increase of customers that we're seeing. What we see is we'll see people that want the data first, and then once they've seen the data, start to trade. Then that's combined with the fact that we have had an opportunity because of the growth in demand to adjust our pricing in the market data space.
We do that in a very careful manner, but that's another reason why you've seen our data business grow significantly, over 20% in the quarter year-over-year, and pretty consistently quarter after quarter.
Our final question comes from Brian Bedell from ISI Group. Your line is open.
Hi. Thanks. Good morning, folks.
Good morning.
Just another follow-up on the OTC conversion to futures in the energy complex. Obviously, the trading velocity tends to increase pretty significantly on futures versus over-the-counter contracts. How should we think about how you're factoring that in your pricing of the futures contracts? I guess, in other words, do you think the trading velocity can increase a lot, and should that be upside to the current revenue stream in OTC energy?
That's a good question. First of all, we're not making any changes to our pricing. Maybe second of all, and less obvious, is we are very cautious in the way we introduce algorithms to our markets, and we have not really tried to drive volume through algorithmic trading per se. I made that comment in our prepared remarks. We really have been trying to create a holistic environment where there's enough liquidity for people to get business done, and for algorithms to make money, but for end-user hedgers to have a good trading experience. We balance that. All that being said, we're making no changes to our pricing or our philosophies as we go forward.
There is an overall trend, however, in Dodd-Frank, that more trades are going to be done across electronic transparent screens, and we think that there will be more trades done on a futures platform. Underneath the details of Dodd-Frank, the OTC brokers community has higher standards if they are going to continue to trade OTC. Our broker partners in the OTC space are getting certified. They're taking Series 7 tests. They're registering with the NFA in many cases. They are, for all intents and purposes, taking the steps to become futures brokers. We think that the community itself will look a lot like the way it looks today, everybody with heightened standards and with more business being traded electronically, as it is being mandated to do so by Dodd-Frank.
Okay. That's very helpful. Just lastly, on just the volume trends in very late July. Obviously, they're very strong in the first half on the energy side, but if you can give us a sense of maybe we'll get a little bounce back on the OTC. I know 1.4 million today and July was trending down from last quarter. Do you think we'll get a little bit of a snapback as we move through the third quarter there? Do you think the London Olympics at all are impacting volumes on the ICE Energy futures side?
Those are good questions. We had a Fourth of July in the U.S. that was in the middle of the week. It sort of lent itself to a lot of people taking the week off, and now we have basically a two-week period where a lot of our colleagues in London are not at their desks, have chosen to leave town.
July is normally seasonally slow, this particular July, I'm not foreshadowing anything, I'm just saying this particular July, you do have these unique timetables that are going on. More broadly, as we go into the third and fourth quarter, we expect the U.S. gas and power OTC customers are going to be thinking about Dodd-Frank in earnest and their compliance with Dodd-Frank. We hope that our transparency on the convertibility of OTC to futures will keep people active in the OTC markets during that transition period. That's partly why we've come out with the statement now and given a lot of foreshadowing in what we're going to do. We felt it was best to actually make that transition in January so that we can get people through what will be busy November and December holiday seasons, as well as a lot of pressure on people to comply with Dodd-Frank.
We didn't want to be one more thing to have to deal with. Also, getting that election in the new year will allow people who hedge to make proper tax elections, which companies tend to do early in the new year under U.S. tax law. All that being said, it's hard to predict how the OTC markets will respond into the early days of implementation of Dodd-Frank. We know there'll be more clearing coming, and so how that all shakes out is yet to be seen. We feel good about the way we've positioned the company, however, as a regulatory roadmap for people to do business, and that's certainly how we're going to be marketing ourselves to our customers, so that they can have confidence and compliance at the same time.
That concludes today's Q&A session. I will now hand the call back to management for closing remarks.
Well, again, I'd like to thank everybody for joining us today, and we're looking forward to reporting on our progress for the next quarter. We start tomorrow with our July volume release. With that, I'll terminate the call and wish you all a good day. Thank you.
Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.