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The UK Department of Energy & Climate Change recently revealed that it has selected the UK arm of IntercontinentalExchange Inc. (ICE - Analyst Report) -- ICE Futures Europe -- to carry out the aviation allowances, formalities and auctions for Phase III of the EU Emissions Trading Scheme (EU ETS) on behalf of the UK Government. Subject to the approval of the European Union, the Phase III and aviation auction for UK is scheduled to start in November this year.

The authorities found IntercontinentalExchangeis best suited for both compliance and price risk management for Phase III of the EU ETSand expects it to deliver the auction services efficiently. IntercontinentalExchange possesses compelling fundamental strength compared to its peers, and the recent decision of the UK authorities further demonstrates the fact. Moreover, the recent contract is in sync with the company’s long-term strategy of gaining a significant foothold in the booming emission market. 

Since 2005, the emissions trading volumes have been rising steadily. ICE Emissions futures and options products registered an annual volume equal to 7,570 million tons of CO2 in 2011, a 23% hike over the last year. The average daily volume for March 2012 was 33,625, 0.8% more than a year ago. Open Interest for ICE Emissions products as of April 20, 2012 were equal to 1.2 million contracts.

In 2001, IntercontinentalExchange acquired the IPE, or ICE Futures Europe, that currently accounts for approximately 50% of the world’s crude oil and refined futures traded each day in the European markets. It serves as the Recognized Auction Platform and Recognized Investment Exchange for the Financial Services Authority as well as its products enlisted in the European Climate Exchange (ECX).

CME Group Inc. (CME - Analyst Report), which competes with IntercontinentalExchange, recently acquired GreenX Holdings LLC, the second largest carbon exchange globally. The company is also venturing into the OTC market and its portfolio margining of over-the-counter (OTC) interest rate swap (IRS) positions and Eurodollar and Treasury Futures for house accounts is slated to launch on May 7, 2012.

We retain our long-term Neutral recommendation on IntercontinentalExchange. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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