Larger clearing houses could be more aptly described as technology-driven rather than finance-driven
When I analyze the development of Dubai over the past 20 years, I often consider the factors that have contributed to the growth of the emirate. Not only as a place of commerce, but as a destination for investment, tourism, sport, gastronomy and culture. At best, I can assume it was not just one thing, but a congregation of leaders, a clear understanding of successes and failures in other economies, and a level of agile execution that incorporated proven technology where necessary.
In many ways, this is the story of the most successful companies, and something that the management of the Dubai Multi Commodities Center (DMCC) constantly assesses when evaluating which companies to work with when it comes to ” extend the value to our growing community, while making the FTZ more attractive to companies looking for a safe and globally accessible place to do business.
As a mall, one of the main enablers required for our day-to-day operations is clearing, and while the function itself is not necessarily complicated, the evolution of the clearing industry has come a long way. since its origins some 300 years ago. Today, the largest clearinghouses could be more aptly described as technology-driven rather than finance-driven, especially as the broader market began to migrate to digital solutions in the early 2000s.
While not a household name like Jeff Bezos or Elon Musk, Jeff Sprecher is unquestionably as influential an entrepreneur in global financial markets as either of them in their respective fields. Having developed the Intercontinental Exchange (ICE) from humble beginnings in 1996, his company has a current market capitalization of around $ 66 billion and comprises 10 exchanges, including the New York Stock Exchange (NYSE) and six clearing houses.
As an engineer by training, Sprecher’s approach to expanding his empire both through the acquisition of exchanges and infrastructure enablers allowed him to maintain an objective view of “[celebrating] what is good in these markets, while continuing to repair broken parts ”, a philosophy shared by the initiator of the clearing, Philip Burlamachi.
Born of Italian descent to the exiled descendants of Lucchese Francesco Burlamacchi in Sedan, France, in 1575, Philip Burlamachi is best known for two things: his role as a financial intermediary to King Charles I of England and as a documented first proposer for a national clearing bank. As the main government lender, financier of the East India Company and representative of traders in the City of London, Burlamachi understood the importance of liquidity and reliability when it came to settling transactions and designed the notion of a clearing bank to act as an intermediary, thereby ensuring that transactions protect both buyer and seller, while functioning as an enduring custodian of financial records. Unfortunately for Burlamachi, he was bankrupted by King Charles in 1633, who was unable to pay off the £ 70,000 loan made to him during the Anglo-French War of 1627-1629. However, his legacy was ultimately upheld with the establishment of the Bank of England in 1694, which functioned as the world’s first clearing house, precisely fifty years after his death.
From that moment, independent clearing houses began to open in European trading centers, especially for agricultural products such as grains and coffee. However, the next step towards a more sophisticated structure occurred at the Chicago Board of Trade (CBOT), where market pressures began to drive the evolution of risk controls, no different from those in place today. . According to Governor Randall S. Kroszner, the CBOT “has recognized the importance of creating incentives for compliance with its rules, including the contractual obligations of counterparties to exchange-traded contracts. Initially, the main incentive was the threat that a defaulting member could be denied access to the trading room. There is no doubt that this consequence was a powerful incentive for creditworthy members to meet their obligations, but an insolvent member might not have placed a significant value on the loss of business privileges.
As early as 1873, the CBOT recognized the importance of assessing the solvency of its members and adopted a resolution stipulating that any member whose solvency was in doubt must open its financial accounts for inspection and could be excluded if it refused to do it. Around the same time, the exchange introduced initial margin and variation requirements for exchange-traded contracts and set strict deadlines for the publication of margin deposits. Failure to deposit margin would be considered a default on the member’s contracts.
By 1925, New York and Chicago had established dedicated central clearing houses which became the counterparty to all transactions on their respective stock exchanges. From this point on, the clearing remained relatively unchanged until the arrival of more sophisticated over-the-counter derivatives which required the development of risk management techniques, in particular through the Dodd-Frank law of 2010 to become effective. hedge against flaws and in relatively rapid succession the dawn of the digital age and the arrival of the ICE.
Established and developed almost alongside the DMCC timeline, Sprecher launched ICE in 1997 after buying a tech startup for $ 1. Over the next three years, he and eight colleagues developed the ICE trading platform while meeting with potential clients to better understand how to support the transition to electronic trading, and in doing so, “designed the technology around their flow of trading. work, which has led to many innovative features of the platform. These included pre-trade credit limits, counterparty credit filters, electronic transaction confirmation and other features that are common today, but these were relatively new concepts at the time. When we launched the company with our trading platform completed in May 2000, we gave it the name Intercontinental Exchange (ICE) to reflect our ability to cross borders and serve global markets using our technology platform. innovative web-based. The result of this decision is that today more than 70 countries transact on the ICE markets, and we have effectively extended our trading and clearing infrastructure to UK, Netherlands, Singapore, Canada and the United States.
Equipped with an innovative and proven platform, Sprecher’s ability to identify the positive aspects of existing exchanges and how they could be optimized, while providing them with a truly global level of access, has made their offering a winning solution for all. . In 2001, the International Petroleum Exchange of London (IPE) was looking to move from ground trading to electronics. In addition, it was also a regional exchange that offered oil futures contracts with less than 25 percent of the world market share. Following the acquisition of IPE, now known as ICE Futures Europe, the team worked intensively on the development of new cleared swap products, while developing the electronic futures and options markets, which not only shifted London’s crude oil business from ground trading to screen, but expanded the share of traded oil futures from regional to global.
In 2016, ICE Futures Europe achieved 18 consecutive record years of trading activity and continues to serve as a hub of market innovation as well as a launching pad from which ICE Clear Europe and European credit default swaps (CDS) were launched. It should be noted that the former was the City of London’s first new clearinghouse in over a century.
From that moment, ICE acquired and developed its offering to create six clearing houses, including the New York Board of Trade (NYBOT) in 2006, which is today known as ICE Clear US, and more recently , ICE Clear Netherlands.
For those of you who know me and the direction in which the leaders of Dubai are heading, you will have made the connection between the reasons I am writing about this. As a true shopping center, incorporating a sophisticated global clearinghouse that shares our perspectives of accessibility and connectivity is not only a missing piece of our current infrastructure, but also added value for our 19,000. member companies and our potential activities. owners seeking to establish a business in the country.
Beyond ICE’s ability to provide a highly efficient clearing service, working with the globally regulated clearing house, DCCC, for our major commodities including DGCX for currencies, metals, hydrocarbons and stocks and our ever-growing list of dedicated commodity centers, including diamonds, coffee, tea, cocoa and crypto, ICE’s infrastructure provides the ability for SMEs to raise capital by listing, without having to engage in the currently high market entry points associated with major exchanges, much like that of the recently launched Nasdaq Dubai, which was made available earlier this year for companies with lower valuations to $ 250 million.
After launching ICE Future Abu Dhabi (IFAD) in 2019 with the Abu Dhabi National Oil Company and nine of the world’s largest energy traders, IFAD has laid the groundwork for a true oil benchmark in the Middle East, all by launching the world’s first Murban crude futures contract. Just a 90-minute drive away, it looks like the time has come for ICE to further expand into Dubai and complete what many see as a missing piece of the puzzle.
Ultimately, what makes DMCC unique is not only its ability to create a centralized shopping center on a global scale, but that at one time or another most, if not all, of the largest companies. around the world have either registered or worked directly with a registered member firm. because of its ability to anticipate market needs. In this sense, ICE and DMCC have more in common than it first appears.
Ahmed bin Sulayem is Executive Chairman and Chief Executive Officer, DMCC.