Greater clearing efficiency to boost Dubai's global position

When analysing Dubai’s evolution over the past 20 years, I often consider which contributing factors aided the emirate’s growth. Not only as a place of trade, but as a destination for investment, tourism, sports, gastronomy, and culture. At best, I can surmise it was no single thing, but a congregation of leadership, a clear understanding of the successes and failures in other economies and an agile level of execution that integrated proven technology as necessary.

In many ways, it’s the story of most successful businesses, and something that Dubai Multi Commodities Centre’s (DMCC) management constantly evaluates when assessing companies to work with when it comes to extending value to our growing community, while making the free zone more attractive for companies seeking a secure and globally accessible place to conduct business.

As a centre for trade, one of the key facilitators required for our day-to-day activities is clearing, and while the function itself isn’t necessarily complicated, the evolution of the clearing industry has come a long way since its origins some 300 years ago. Today, the largest clearing houses could be more aptly described as tech-driven as opposed to financial, particularly since the wider market began to migrate towards digitally-based solutions in the early 2000s.

While not a household name akin to the likes of Jeff Bezos or Elon Musk, Jeff Sprecher is indisputably as influential an entrepreneur within the global financial markets as either of the aforementioned in their respective fields. Having developed Intercontinental Exchange (ICE) from humble beginnings in 1996, his business has a current market cap of around $66 billion and includes 10 exchanges, including the New York Stock Exchange (NYSE) and six clearing houses.

As an engineer by education, Sprecher’s approach to expanding his empire through both acquisition of exchanges and infrastructure enablers has allowed him to maintain an objective view of “[celebrating] what is good about these markets, while getting on with fixing the parts that are broken,” – a philosophy shared by the originator of clearing, Philip Burlamachi.

Born of Italian heritage from the exiled descendants of the Lucchese Francesco Burlamacchi in Sedan, France, in 1575, Philip Burlamachi is most widely known for two things — his role as the financial intermediary of King Charles I of England and as the first documented proposer for a national clearing bank. As a primary lender to the government, a financier to the East India Company, and a representative of the City of London merchants, Burlamachi understood the importance of liquidity and reliability when it came to settling trades and conceived the notion of a clearing bank to act as an intermediary, thereby guaranteeing trades to protect both buyer and seller, while functioning as an enduring keeper of financial records. Unfortunately for Burlamachi, he was bankrupted by King Charles in 1633, who was unable to pay the £70,000 loan extended to him during the Anglo-French War of 1627-29. However his legacy was ultimately upheld through 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 this point, independent clearing houses began to open across Europe’s trading centres, particularly for agri-commodities 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, not dissimilar from the ones in place today. According to Governor Randall S. Kroszner, the CBOT “recognised the importance of creating incentives for adherence to its rules, including the contractual obligations of counterparties to contracts traded on the exchange. Initially, the primary incentive was the threat that a member that defaulted on its obligations could be barred from the trading floor. No doubt this consequence was a powerful incentive for solvent members to meet their obligations, but an insolvent member might not have assigned significant value to the loss of trading privileges.

By 1873, the CBOT recognised the importance of evaluating the solvency of its members and adopted a resolution stipulating that any member whose solvency was questioned must open its financial accounts to inspection and could be expelled if it refused to do so. Around the same time, the exchange introduced initial and variation margin requirements for contracts traded on the exchange and set strict time limits for the posting of margin deposits. Failure to post margin deposits would be considered a default on the member’s contracts.”

By 1925, both New York and Chicago had established dedicated central clearing houses that became the counterparty to all transactions on their respective exchanges. From this stage, clearing remained relatively unchanged until the arrival of more sophisticated OTC derivatives which required the development of risk-management techniques, most notably through the 2010 Dodd-Frank Act to hedge against defaults and in relatively quick succession, the dawn of the digital era and the arrival of ICE.

Established and grown almost tangentially with DMCC’s timeline, Sprecher started ICE in 1997 having bought a technology start up for $1. In the following three years, he and eight colleagues developed the ICE trading platform while meeting potential customers to better understand how to support the transition to electronic trading, and in so doing, “designed the technology around their workflow, which led to a lot of innovative features in the platform. These included pre-trade credit limits, counterparty credit filters, electronic trade confirmation and other features that are commonplace today, but these were relatively new concepts then. When we launched the company with our completed trading platform in May 2000, we gave it the name Intercontinental Exchange (ICE) to reflect our ability to cross borders and to serve global markets using our innovative, web-based, technology platform. The result of that decision is that today more than 70 countries transact in ICE’s markets, and we’ve efficiently scaled our exchange and clearing infrastructure across the UK, the Netherlands, Singapore, Canada and the US.”

Equipped with an innovative, tried and tested platform, Sprecher’s ability to identify the positive aspects of existing exchanges and how they could be optimised, while providing them with a truly global level of access, made his offering a win for all concerned. In 2001, the International Petroleum Exchange of London (IPE) was looking to evolve from floor trading to electronic. Additionally, it was also a regional exchange that offered oil future contracts with less than a 25 per cent share in the global market. After acquiring IPE, which is today known as ICE Futures Europe, the team worked intensely on developing new cleared swap products, while building out the electronic futures and options markets, which not only moved the London crude oil business from floor to screen trading, but expanded the share of traded oil futures, transitioning it from regional to global.

As of 2016, ICE Futures Europe reported 18 consecutive record years of trading activity and continues to serve as a centre for market innovation as well as being the launch pad from which ICE Clear Europe and European Credit Default Swaps (CDS) were launched. It is worth noting, the former was the first new clearing house in the City of London for over a century.

From this point, 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 Dubai’s leadership has been heading, you will have connected the dots as to why I’m writing about this. As a true centre for trade, the incorporation of a sophisticated, global clearing house that shares our outlook for accessibility and connectivity is not only a missing piece from our current infrastructure, but also a value-add for our 19,000+ member companies and potential business owners seeking to establish a business in country.

Beyond ICE’s capacity to deliver a highly effective clearing service, in conjunction with the globally regulated clearing house, DCCC, for our core commodities including DGCX for currencies, metals, hydrocarbons and equities and our ever-expanding list of dedicated commodity centres, including diamonds, coffee, tea, cacao and crypto, ICE’s infrastructure means the opportunity for SMEs to raise capital by listing, without having to engage in the current high market entry points associated with the major exchanges, similarly to that of the recently launched Nasdaq Dubai, which was made available earlier this year for companies with a valuation less than $250 million.

Having launched ICE Future Abu Dhabi (IFAD) in 2019 with Abu Dhabi National Oil Company and nine of the world’s largest energy traders, IFAD laid the foundations for a true oil benchmark in the Middle East, while launching the world’s first Murban Crude future contract. At just 90 minutes down the road, it feels as though the timing is right for ICE to continue its expansion to Dubai and complete what many feel is a missing piece to the puzzle.

Ultimately, what makes DMCC unique isn’t just its ability to create a globally centralised trade hub, but that at one stage or another, most, if not all, of the world’s largest corporations have either registered or worked directly with a registered member company because of its ability to anticipate the needs of the market. In this sense, ICE and DMCC have more in common than first meets the eye.

Ahmed bin Sulayem is Executive Chairman and Chief Executive Officer, DMCC.

• Dubai