Order Finding That the Carbon Financial Instrument Contract Offered for Trading on the Chicago Climate Exchange, Inc. Does Not Perform a Significant Price Discovery Function, 23686-23690 [2010-10311]

Download as PDF 23686 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices market integrity, both on the ECM itself and in any related futures contracts trading on DCMs. An Order finding that a particular contract is a SPDC triggers this increased oversight and imposes obligations on the ECM calculated to accomplish this goal. The increased oversight engendered by the issue of a SPDC Order increases transparency and helps to ensure fair competition among ECMs and DCMs trading similar products and competing for the same business. Moreover, the ECM on which the SPDC is traded must assume, with respect to that contract, all the responsibilities and obligations of a registered entity under the CEA and Commission regulations. Additionally, the ECM must comply with nine core principles established by section 2(h)(7) of the Act—including the obligation to establish position limits and/or accountability standards for the SPDC. Section 4(i) of the CEA authorize the Commission to require reports for SPDCs listed on ECMs. These increased responsibilities, along with the CFTC’s increased regulatory authority, subject the ECM’s risk management practices to the Commission’s supervision and oversight and generally enhance the financial integrity of the markets. The Commission has concluded that ICE’s MLN contract, which is the subject of the attached Order, is not a SPDC; accordingly, the Commission’s Order imposes no additional costs and no additional statutorily or regulatory mandated responsibilities on the ECM. c. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’) 46 requires that agencies consider the impact of their rules on small businesses. The requirements of CEA section 2(h)(7) and the Part 36 rules affect ECMs. The Commission previously has determined that ECMs are not small entities for purposes of the RFA.47 Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that these Orders, taken in connection with section 2(h)(7) of the Act and the Part 36 rules, will not have a significant impact on a substantial number of small entities. mstockstill on DSKH9S0YB1PROD with NOTICES VI. Order a. Order Relating to the Malin Financial Basis Contract After considering the complete record in this matter, including the comment letters received in response to its request for comments, the Commission has determined to issue the following Order: The Commission, pursuant to its authority under section 2(h)(7) of the Act, hereby determines that the Malin Financial Basis contract, traded on the IntercontinentalExchange, Inc., does not at this time satisfy the material price reference, price linkage or material liquidity criteria for significant price discovery contracts. Consistent with this determination, the IntercontinentalExchange, Inc., is not considered a registered entity 48 with respect to the Malin Financial Basis contract and is not subject to the provisions of the Commodity Exchange Act applicable to registered entities. Further, the obligations, requirements and timetables prescribed in Commission rule 36.3(c)(4) governing core principle compliance by the IntercontinentalExchange, Inc., are not applicable to the Malin Financial Basis contract with the issuance of this Order. This Order is based on the representations made to the Commission by the IntercontinentalExchange, Inc., dated July 27, 2009, and November 13, 2009, and other supporting material. Any material change or omissions in the facts and circumstances pursuant to which this order is granted might require the Commission to reconsider its current determination that the Malin Financial Basis contract is not a significant price discovery contract. Additionally, to the extent that it continues to rely upon the exemption in Section 2(h)(3) of the Act, the IntercontinentalExchange, Inc., must continue to comply with all of the applicable requirements of Section 2(h)(3) and Commission Regulation 36.3. Issued in Washington, DC on April 28, 2010, by the Commission. David A. Stawick, Secretary of the Commission. [FR Doc. 2010–10306 Filed 5–3–10; 8:45 am] BILLING CODE P COMMODITY FUTURES TRADING COMMISSION Order Finding That the Carbon Financial Instrument Contract Offered for Trading on the Chicago Climate Exchange, Inc. Does Not Perform a Significant Price Discovery Function AGENCY: Commodity Futures Trading Commission. ACTION: Final order. SUMMARY: On August 20, 2009, the Commodity Futures Trading Commission (‘‘CFTC’’ or ‘‘Commission’’) published for comment in the Federal Register 1 a notice of its intent to undertake a determination whether the Carbon Financial Instrument (‘‘CFI’’) contract offered for trading on the Chicago Climate Exchange, Inc. (‘‘CCX’’), an exempt commercial market (‘‘ECM’’) under Section 2(h)(3)–(5) of the Commodity Exchange Act (‘‘CEA’’ or the ‘‘Act’’), performs a significant price discovery function pursuant to section 2(h)(7) of the CEA. The Commission undertook this review based upon an initial evaluation of information and data provided by CCX. The Commission has reviewed public comments and the entire record in this matter and has determined to issue an order finding that the CCX CFI contract, at this time, does not perform a significant price discovery function. Authority for this action is found in section 2(h)(7) of the CEA and Commission rule 36.3(c) promulgated thereunder. DATES: Effective date: April 28, 2010. FOR FURTHER INFORMATION CONTACT: Irina Leonova, Financial Economist, Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418–5646. Email: ileonova@cftc.gov, or Gregory K. Price, Industry Economist, Division of Market Oversight, same address. Telephone: (202) 418–5515. E-mail: gprice@cftc.gov, or Susan Nathan, Senior Special Counsel, Division of Market Oversight, same address. Telephone: (202) 418– 5133. E-mail: snathan@cftc.gov. SUPPLEMENTARY INFORMATION: I. Introduction The CFTC Reauthorization Act of 2008 (‘‘Reauthorization Act’’) 2 significantly broadened the CFTC’s regulatory authority with respect to ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory category— ECMs on which significant price discovery contracts (‘‘SPDCs’’) are traded—and treating ECMs in that category as registered entities under the CEA. The legislation authorizes the CFTC to designate an agreement, contract or transaction traded on an ECM as a SPDC if the Commission determines, under criteria established in section 2(h)(7), that it performs a significant price discovery function. When the Commission makes such a 1 74 FR 42052 (August 20, 2009). as Title XIII of the Food, Conservation and Energy Act of 2008, Public Law 110–246, 122 Stat. 1624 (June 18, 2008). 2 Incorporated 46 5 U.S.C. 601 et seq. FR 42256, 42268 (Aug. 10, 2001). 47 66 VerDate Mar<15>2010 18:58 May 03, 2010 Jkt 220001 48 7 PO 00000 U.S.C. 1a(29). Frm 00023 Fmt 4703 Sfmt 4703 E:\FR\FM\04MYN1.SGM 04MYN1 mstockstill on DSKH9S0YB1PROD with NOTICES Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices determination, the ECM on which the SPDC is traded must assume, with respect to that contract, all the responsibilities and obligations of a registered entity under the Act and Commission regulations, and must comply with nine core principles established by new section 2(h)(7)(C). On March 16, 2009, the CFTC promulgated final rules implementing the provisions of the Reauthorization Act.3 As relevant here, Rule 36.3 imposes increased information reporting requirements on ECMs to assist the Commission in making prompt assessments whether particular ECM contracts may be SPDCs. In addition to filing quarterly reports regarding its contracts, an ECM must notify the Commission promptly concerning any contract traded in reliance on the exemption in section 2(h)(3) of the CEA that averaged five trades per day or more over the most recent calendar quarter, and that either: (1) had its price information sold by the exchange to market participants or industry publications or (2) had daily closing or settlement prices which were within 2.5% of the contemporaneously determined closing, settlement or other daily price of another contract on 95 percent or more of the days in the most recent quarter. Commission Rule 36.3(c)(3) established the procedures by which the Commission makes and announces its determination whether a particular ECM contract serves a significant price discovery function. Under those procedures, the Commission publishes notice in the Federal Register that it intends to undertake a determination whether the specified agreement, contract or transaction performs a significant price discovery function and receives written views, data and arguments relevant to its determination from the ECM and other interested persons. The Commission, within a reasonable period of time after the close of the comment period, considers all relevant information and issues an order announcing and explaining its determination. The issuance of an affirmative order subjects an ECM with a SPDC to the full application of the Commission’s regulatory authorities; at that time, such an ECM becomes subject to all provisions of the CEA applicable to registered entities.4 The issuance of such an order also triggers the 3 74 FR 12178 (Mar. 23, 2009); these rules became effective on April 22, 2009. 4 Public Law 110–246 at 13203; Joint Explanatory Statement of the Committee of Conference, H.R. Rep. No. 110–627, 110 Cong., 2d Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888, 75894 (Dec. 12, 2008). VerDate Mar<15>2010 18:58 May 03, 2010 Jkt 220001 obligations, requirements and timetables prescribed in Commission Rule 36.3(c)(4).5 II. Notice of Intent To Undertake SPDC Determination On August 20, 2009, the Commission published in the Federal Register a notice of its intent to undertake a determination whether the CCX’s CFI contract performs a significant price discovery function, and requested comment from interested parties.6 Comments were received from the IntercontinentalExchange, Inc. (‘‘ICE’’); Jeremy D. Weinstein, Esq. (‘‘Weinstein’’); the California Forestry Association (‘‘CFA’’); and Scott DeMonte (‘‘DeMonte’’).7 The comments are more extensively discussed below in the Analysis Section. III. Section 2(h)(7) of the CEA The Commission is directed by section 2(h)(7) of the CEA to consider, as appropriate, the following factors in determining whether a contract performs a significant price discovery function: • Price Linkage—the extent to which the agreement, contract or transaction uses or otherwise relies on a daily or final settlement price, or other major price parameter, of a contract or contracts listed for trading on or subject to the rules of a designated contract market (‘‘DCM’’) or derivatives transaction execution facility (‘‘DTEF’’), or a SPDC traded on an electronic trading facility, to value a position, transfer or convert a position, cash or financially settle a position, or close out a position. • Arbitrage—the extent to which the price for the agreement, contract or transaction is sufficiently related to the price of a contract or contracts listed for trading on or subject to the rules of a 5 For an initial SPDC determination, ECMs have a grace period of 90 calendar days from the issuance of a SPDC determination order to submit a written demonstration of compliance with the applicable core principles. For subsequent SPDC determinations, ECMs have a grace period of 30 calendar days to demonstrate core principle compliance. 6 The Commission’s Part 36 Rules establish, among other things, procedures by which the Commission makes and announces its determination whether a specific ECM contract serves a significant price discovery function. Under those procedures, the Commission publishes a notice in the Federal Register that it intends to undertake a determination whether a specified agreement, contract or transaction performs a significant price discovery function and to receive written data, views and arguments relevant to its determination from the ECM and other interested persons. 7 The comment letters are available on the Commission’s Web site: https://www.cftc.gov/ lawandregulation/federalregister/ federalregistercomments/2009/09-010.html. PO 00000 Frm 00024 Fmt 4703 Sfmt 4703 23687 DCM or DTEF, or a SPDC traded on or subject to the rules of an electronic trading facility, so as to permit market participants to effectively arbitrage between the markets by simultaneously maintaining positions or executing trades in the contracts on a frequent and recurring basis. • Material price reference—the extent to which, on a frequent and recurring basis, bids, offers or transactions in a commodity are directly based on, or are determined by referencing, the prices generated by agreements, contracts or transactions being traded or executed on the electronic trading facility. • Material liquidity—the extent to which the volume of agreements, contracts or transactions in the commodity being traded on the electronic trading facility is sufficient to have a material effect on other agreements, contracts or transactions listed for trading on or subject to the rules of a DCM, DTEF or electronic trading facility operating in reliance on the exemption in section 2(h)(3). Not all factors must be present to support a determination that a particular contract performs a significant price discovery function. Moreover, the statutory language neither prioritizes the factors nor specifies the degrees to which a SPDC must conform to the various factors. In Guidance issued in connection with the Part 36 rules governing ECMs with SPDCs, the Commission observed that these factors do not lend themselves to a mechanical checklist or formulaic analysis.8 Accordingly, the Commission has indicated that in making its determination it will consider the circumstances under which the presence of a particular factor, or combination of factors, would be sufficient to support a SPDC determination.9 For example, for contracts that are linked to other contracts or that may be arbitraged with other contracts, the Commission will consider whether the price of the potential SPDC moves in such harmony with the other contract that the two markets essentially become interchangeable.10 This co-movement of prices would be an indication that activity in the contract had reached a level sufficient for the contract to perform a significant price discovery function. IV. The CCX CFI Contract CCX, launched in 2003, operates the only North American voluntary, legally 8 Appendix A to Part 36, 17 CFR part 36 (2009). CFR part 36, appendix A. 10 Appendix A to Part 36, 17 CFR 36 (2009). 9 17 E:\FR\FM\04MYN1.SGM 04MYN1 23688 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices binding integrated trading system to reduce emissions of six major greenhouse gases, with offset projects worldwide. CCX offers a cap and trade system whose members 11 make a legally binding emission reduction commitment. Members are allocated annual emission allowances in accordance with their emissions baseline and the CCX emission reduction schedule. Members who reduce beyond their targets have surplus allowances to sell or bank; those who do not meet the targets must comply by purchasing CCX CFIs. The CCX CFI contract is a cash market instrument and not a derivatives contract. The Chicago Climate Futures Exchange (CCFE), a subsidiary of CCX that operates as a DCM, lists derivatives (futures and option contracts) on CCX CFIs. The size of the CCX CFI contract is 100 metric tons (MT) of CO2-equivalent emissions. A CCX CFI contract involves the immediate delivery of, and payment for, vintage specific CCX carbon dioxide (CO2) emission allowances called CFIs. Earlier dated vintages may be delivered against later vintage trades. Transactions (with exception of bilateral agreements) are cleared on trade day. Full contract value settlement occurs on the next business day. CCX substitutes as a counterparty to all transactions and guarantees performance until settlement is completed. mstockstill on DSKH9S0YB1PROD with NOTICES 11 CCX membership categories: Members: Entities with direct greenhouse gas (GHG) emissions. Members make a legally binding commitment to the CCX Emission Reduction Schedule and are subject to annual emissions verification by FINRA. Indirect emissions are an opt-in. Registry Participant Members: Entities with direct GHG emissions that establish a CCX Registry account of their emissions and undergo data verification. Standardized independent third-party data verification is provided by FINRA on an annual or multi-annual basis. Associate Members: Office-based businesses or institutions with negligible direct GHG emissions. Associate Members commit to report and fully offset 100 percent of indirect emissions associated with energy purchases and business travel from year of entry through 2010 and emissions data are verified by FINRA. Offset Providers: Owners of title to qualifying offset projects that sequester, destroy or reduce GHG emissions. Offset Providers register and sell offsets directly on the CCX. Offset Aggregators: Entities that serve as the administrative representative, on behalf of offset project owners, of multiple offset-generating projects. Offset projects involving less than 10,000 metric tons of carbon dioxide equivalent per year should be registered and sold through an Offset Aggregator. Liquidity Providers: Entities or individuals who trade on CCX for purposes other than complying with the CCX Emission Reduction Schedule, such as market makers and proprietary trading groups. Exchange Participants: Entities or individuals who purchase CFI contracts and retire them to offset emissions associated with special events or other specified activities. VerDate Mar<15>2010 18:58 May 03, 2010 Jkt 220001 Based upon a required quarterly notification filed on October 15, 2009, (mandatory under Rule 36.3(c)(2)), the CCX reported that, with respect to its CFI contract, an average of 8 trades per day occurred in the third quarter of 2009. During the same period, the CFI had an average daily trading volume of 1,141 contracts. In the second quarter of 2009, market participants traded the CFI contract on average 15 times per day with an average daily trading volume of 1,235 contracts. Because the CCX CFI is a cash market instrument, open interest figures are not applicable. V. Analysis A. The Statutory Criteria In its notice of intent to undertake a determination whether the CCX CFI contract performs a significant price discovery function, the Commission indicated that the CCX CFI contract might satisfy the material price reference and material liquidity criteria for SPDC determination.12 Further analysis reveals that the CCX CFI contract does not meet either criterion. Material Price Reference Criterion The Commission has concluded that the CCX CFI contract does not meet the material price reference criterion for SPDC determination. As noted in the original Federal Register notice, the CFI market is solely a CCX-created entity.13 The CCX designed all of the parameters of this carbon emission reduction program, and it established the rules for membership in the ECM, allowance trading, and the creation of offsets. Based on these attributes, staff considered whether traders look to the CCX as a source of price information and price discovery for the CFI or the U.S. carbon market in general that would either be a direct or an indirect source of evidence of the material price reference. Staff concluded that it appears that CCX CFI prices are not used as a price reference to the U.S. carbon market due to the relatively small market share of the CCX CFI program in the overall U.S. carbon market, the limited potential for the CFI program to be folded into a national carbon reduction program, and significant price volatility of the CCX CFI instrument. As part of its material price reference analysis, Commission staff considered comments filed 12 74 FR 42054 (Aug. 20, 2009).The Commission did not identify either price linkage or arbitrage as the possible criteria for the CCX CFI contact to be a SPDC. Accordingly, those criteria will not be discussed further in this Order. 13 74 FR 42054 (Aug. 20, 2009). PO 00000 Frm 00025 Fmt 4703 Sfmt 4703 pursuant to the request for comment and all other relevant information.14 Material Liquidity Criterion The Commission’s decision to undertake a review to determine whether the CCX CFI contract performs a significant price discovery function was based on CCX’s required initial quarterly notification filed on July 1, 2009. At that time, CCX reported that, with respect to all CFI trades combined (aggregate of vintages 2003–2010), an average of 15 separate trades per day occurred in the second quarter of 2009. Subsequent to the publication of the Commission’s Federal Register notice announcing its intent to undertake a SPDC review, however, CCX amended its filing to show the number of trades per day for each vintage, and clarified that the exchange lists and trades CFI contract vintages individually and provides a vintage-specific closing price for each CFI vintage contract. In these circumstances, the Commission recognizes that the CCX CFI vintagespecific contracts should not be aggregated, but rather should be treated individually for the purpose of a SPDC analysis. Accordingly, the Commission has analyzed each individual vintage of the CCX CFIs to determine whether any of them are SPDCs.15 The Commission’s evaluation of the supplemental data indicates that the CCX CFI vintage specific contracts (2003–2010 vintages) do not meet the material liquidity criterion for a SPDC; the average number of trades per day per vintage was only one contract, well below the five trades per day reporting threshold established by the Commission. B. Comments Received The Commission received four responses to its request for comments. Two of the comment letters addressed issues beyond the scope of the instant matter;16 two raised substantive issues 14 The Commission will rely on one of two sources of evidence—direct or indirect—to determine a SPDC. Direct evidence can be cash market transactions that are frequently based on or quoted as a differential to the potential SPDC. Indirect evidence includes contracts whose price series are routinely disseminated in industry publications or are sold to market participants by the ECM. 15 Because this shift in focus did not alter either the analysis or conclusion or otherwise suggest the need for further comment, the Commission did not republish its original notice of intent to make a SPDC determination with respect to the CCX CFI contract. 16 See supra note 7. Specifically, the California Forestry Association offered the opinion that all the over-the-counter voluntary carbon trading occurring now serves a significant price discovery function. CL 02. Scott DeMonte advises the Commission to ‘‘fix the manipulation’’ in [its] exchanges’’ and E:\FR\FM\04MYN1.SGM 04MYN1 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices mstockstill on DSKH9S0YB1PROD with NOTICES with respect to the applicability of section 2(h)(7) to the CFI contract.17 Weinstein opines that the CCX offset project protocols ‘‘do not conform to the stringent additionality 18 and leakage standards 19 that are in the carbon offset contracts * * * accepted by the broader market.’’ Consequently, Mr. Weinstein asserts that ‘‘the absence from the CCX CFI contract of the most essential requirements for commonality with other carbon offset contract prevents market participants from using the CFI contracts for material price reference, arbitrage, and settlement and execution of transactions.’’ The environmental requirements of the CCX offset protocols are beyond the scope of the Commission authority, and this inquiry was limited to an evaluation whether the CCX CFI contract might satisfy the material liquidity and material price reference statutory criterion for a SPDC determination. ICE expressed an opinion that ‘‘the CFI does not serve a significant price discovery function and the Commission may exceed its jurisdiction if it determines that the CFI serves as a significant price discovery contract.’’ ICE observed that the CCX CFI contract fails the threshold for material liquidity because ‘‘each [CCX CFI contract] vintage may trade less than twice a day.’’ Consequently, ICE concluded that ‘‘a trade every couple of hours does not equate to the ‘‘ability to transact immediately’’ or ‘‘a more or less continuous stream of prices.’’ As noted above, after a thorough review of supplemental data provided for the CCX CFI contract, Commission staff concluded that different CCX CFI vintages should be considered as separate CCX contracts. When analyzed requests that firms be required to have collateral in excess of two times their average end of daily trade value in order to participate in this market. CL 01. 17 See supra note 7. The commenters who raised substantive issues with respect to the applicability of section 2(h)(7) to the CFI contract are Jeremy D. Weinstein, Esq., owner of the law offices of Jeremy D. Weinstein, a professional corporation located in Walnut Creek, California and IntercontinentalExchange, Inc., operator of regulated exchanges, trading platforms and clearing houses serving the global markets for agricultural, credit, currency, emissions, energy and equity index markets headquartered in Atlanta, Georgia, U.S. 18 There are a number of interpretations of the additionality concept in application to the environmental offset projects. The most popular interpretations are ‘‘environmental additionality’’ where a project is additional if the emissions from the project are lower than the baseline, and ‘‘project additionality’’ where the project must not have happened without the Clean Development Mechanism (CDM). 19 Leakage generally refers to the increase in emissions outside the project boundary that occurs as a consequence of the project activity’s implementation. VerDate Mar<15>2010 18:58 May 03, 2010 Jkt 220001 in this manner, the CCX CFI contracts do not meet the material liquidity criterion for SPDC determination. When analyzing the material price reference factor for a CCX CFI SPDC determination, ICE commented that ‘‘under the Commission’s theory, any spot contract automatically serves as a material price reference, simply because the contract references itself’’ (emphasis in original). Additionally, ICE expresses an opinion that ‘‘by making this determination [the CCX CFI contract is a SPDC], the Commission is broadly asserting jurisdiction over the spot market if the spot contract is electronically traded.’’ In response, the Commission notes that Section 2(h)(7), refers to ‘‘any agreement, contract or transaction conducted in reliance on the exemption’’ in Section 2(h)(3) and does not require that the Commission find that a potential SPDC contract is a commodity futures or options contract. The determination to list particular instruments in reliance on the Section 2(h)(3) exemption is made by the ECM, not the Commission, when the ECM files notice with the Commission, under Section 2(h)(5), of its reliance on such exemption. Section 2(i) of the CEA reinforces the view that instruments traded on 2(h)(3) markets may include non-futures products; that section states that there is no presumption that an agreement, contract or transaction exempted under section 2(h)(3) ‘‘is or would otherwise be subject to this chapter.’’ VI. Findings and Conclusion In consideration of the initial and supplemental information provided by CCX, the comments received in connection with the Federal Register notice and all other relevant information, the Commission has determined that the CCX CFI contract does not, at this time, perform a significant price discovery function. Accordingly, as set forth in the Commission’s Order, CCX is not required to comply with Commission Rule 36.3(c)(4) applicable to ECMs with SPDCs, or otherwise to assume the statutory and regulatory responsibilities of a registered entity with respect to the CFI contract. The Reauthorization Act amended the CEA to require that the Commission evaluate not less than annually all agreements, contracts and transactions conducted on an ECM in reliance on the exemption in section 2(h)(3) to determine whether they serve a significant price discovery function.20 In addition, the Commission routinely monitors contracts traded or executed in reliance on section 2(h)(3) and reviews all ECM submissions on an ongoing basis for the presence of SPDCs. Accordingly, like all ECMs, CCX remains responsible for compliance with the reporting requirements described in Rule 36.3(a) and (b). VII. Related Matters A. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (‘‘PRA’’) 21 imposes certain requirements on federal agencies, including the Commission, in connection with their conducting or sponsoring any collection of information, as defined by the PRA. Certain provisions of final Commission Rule 36.3 impose new regulatory and reporting requirements on ECMs, resulting in information collection requirements within the meaning of the PRA; OMB previously has approved and assigned OMB control number 3038– 0060 to this collection of information. B. Cost-Benefit Analysis Section 15(a) of the CEA 22 requires the Commission to consider the costs and benefits of its actions before issuing an order under the Act. By its terms, section 15(a) does not require the Commission to quantify the costs and benefits of an order or to determine whether the benefits of the order outweigh its costs; rather, it requires that the Commission ‘‘consider’’ the costs and benefits of its action. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may in its discretion give greater weight to any of the five enumerated areas and could in its discretion determine that, notwithstanding its costs, a particular order is necessary or appropriate to protect the public interest or to effectuate any provisions or accomplish any of the purposes of the Act. When a futures contract begins to serve a significant price discovery function, that contract, and the ECM on which it is traded, warrants increased oversight to deter and prevent price manipulation and other disruptions to market integrity, both on the ECM itself and in any related futures contracts trading on DCMs. An Order finding that a particular contract is a SPDC triggers 21 44 20 Section PO 00000 2(h)(7)(D)(ii), 7 U.S.C. 2(h)(7)(D)(ii). Frm 00026 Fmt 4703 Sfmt 4703 23689 22 7 U.S.C. 3507(d). U.S.C.19(a). E:\FR\FM\04MYN1.SGM 04MYN1 23690 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices this increased oversight and imposes obligations on the ECM calculated to accomplish this goal. The increased oversight engendered by the issuance of a SPDC Order increases transparency and helps to ensure fair competition among ECMs and DCMs trading similar products and competing for the same business. Moreover, the ECM on which the SPDC is traded must assume, with respect to that contract, all the responsibilities and obligations of a registered entity under the CEA and Commission regulations. Additionally, the ECM must comply with nine core principles established by section 2(h)(7) of the Act—including the obligation to establish position limits and/or accountability standards for the SPDC. Amendments to section 4(i) of the CEA authorize the Commission to require large trader reports for SPDCs listed on ECMs. These increased ECM responsibilities, along with the CFTC’s increased regulatory authority, subject the ECM’s risk management practices to the Commission’s supervision and oversight and generally enhance the financial integrity of the markets. The Commission has concluded that the Chicago Climate Exchange’s Carbon Financial Instrument contract that is the subject of the attached Order is not a SPDC; accordingly, the Commission’s Order impose no additional costs and no additional statutorily or regulatory mandated responsibilities on the ECM. mstockstill on DSKH9S0YB1PROD with NOTICES VIII. Order Order Relating to the CCX CFI Contract After considering the complete record in this matter, including the comment letters received in response to its request for comments, the Commission has determined to issue the following: The Commission, pursuant to its authority under section 2(h)(7) of the Act, hereby determines that the Chicago Climate Exchange’s Carbon Financial Instrument contract that was submitted to the Commission by the Chicago Climate Exchange for review on July 1, 2009 and October 15, 2009 does not, at this time, satisfy the statutory or regulatory requirements of a significant price discovery contract. Consistent with this determination, the Chicago Climate Exchange is not required at this time to comply with section 2(h)(7)(C) in connection with the Carbon Financial Instrument contract or the Part 36 regulations applicable to exempt commercial markets with significant price discovery contracts, and is not required to assume the statutory or regulatory responsibilities required of registered entities with respect to the Carbon Financial Instrument contract. VerDate Mar<15>2010 18:58 May 03, 2010 Jkt 220001 This order is based upon the representations made to the Commission by the Chicago Climate Exchange in filings dated July 1, 2009 and October 15, 2009, and other supporting material. Any material change or omissions in the facts and circumstances pursuant to which this order is granted might require the Commission to reconsider its current determination that the Carbon Financial Instrument contract is not a significant price discovery contract. The Commission may, based upon information regarding the Carbon Financial Instrument contract reviewed under this Order that is submitted in required reports and filings, issue another notice of intent to undertake a significant price discovery contract determination for these contracts. Further, issuance of this Order does not affect the Chicago Climate Exchange’s continuing obligation to comply with all statutory and regulatory requirements applicable to 2(h)(3) markets, including all reporting requirements found in Commission Regulation 36.3. Issued in Washington, DC on April 28, 2010 by the Commission. David A. Stawick, Secretary of the Commission. [FR Doc. 2010–10311 Filed 5–3–10; 8:45 am] BILLING CODE P COMMODITY FUTURES TRADING COMMISSION Order Finding That the NGPL TxOk Financial Basis Contract Traded on the IntercontinentalExchange, Inc., Does Not Perform a Significant Price Discovery Function AGENCY: Commodity Futures Trading Commission ACTION: Final Order. SUMMARY: On October 9, 2009, the Commodity Futures Trading Commission (‘‘CFTC’’ or ‘‘Commission’’) published for comment in the Federal Register 1 a notice of its intent to undertake a determination whether the NGPL TxOk Financial Basis (‘‘NTO’’) contract traded on the IntercontinentalExchange, Inc. (‘‘ICE’’), an exempt commercial market (‘‘ECM’’) under sections 2(h)(3)–(5) of the Commodity Exchange Act (‘‘CEA’’ or the ‘‘Act’’), performs a significant price discovery function pursuant to section 2(h)(7) of the CEA. The Commission undertook this review based upon an initial evaluation of information and data provided by ICE as well as other 1 74 PO 00000 FR 52208 (October 9, 2009). Frm 00027 Fmt 4703 Sfmt 4703 available information. The Commission has reviewed the entire record in this matter, including all comments received, and has determined to issue an order finding that the NTO contract does not perform a significant price discovery function. Authority for this action is found in section 2(h)(7) of the CEA and Commission rule 36.3(c) promulgated thereunder. DATES: Effective date: April 28, 2010. FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist, Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418–5515. Email: gprice@cftc.gov; or Susan Nathan, Senior Special Counsel, Division of Market Oversight, same address. Telephone: (202) 418–5133. E-mail: snathan@cftc.gov. SUPPLEMENTARY INFORMATION: I. Introduction The CFTC Reauthorization Act of 2008 (‘‘Reauthorization Act’’) 2 significantly broadened the CFTC’s regulatory authority with respect to ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory category— ECMs on which significant price discovery contracts (‘‘SPDCs’’) are traded—and treating ECMs in that category as registered entities under the CEA.3 The legislation authorizes the CFTC to designate an agreement, contract or transaction as a SPDC if the Commission determines, under criteria established in section 2(h)(7), that it performs a significant price discovery function. When the Commission makes such a determination, the ECM on which the SPDC is traded must assume, with respect to that contract, all the responsibilities and obligations of a registered entity under the Act and Commission regulations, and must comply with nine core principles established by new section 2(h)(7)(C). On March 16, 2009, the CFTC promulgated final rules implementing the provisions of the Reauthorization Act.4 As relevant here, rule 36.3 imposes increased information reporting requirements on ECMs to assist the Commission in making prompt assessments whether particular ECM contracts may be SPDCs. In addition to filing quarterly reports of its contracts, an ECM must notify the Commission 2 Incorporated as Title XIII of the Food, Conservation and Energy Act of 2008, Public Law 110–246, 122 Stat. 1624 (June 18, 2008). 3 7 U.S.C. 1a(29). 4 74 FR 12178 (Mar. 23, 2009); these rules became effective on April 22, 2009. E:\FR\FM\04MYN1.SGM 04MYN1

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 75, Number 85 (Tuesday, May 4, 2010)]
[Notices]
[Pages 23686-23690]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-10311]

-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

Order Finding That the Carbon Financial Instrument Contract
Offered for Trading on the Chicago Climate Exchange, Inc. Does Not
Perform a Significant Price Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

-----------------------------------------------------------------------

SUMMARY: On August 20, 2009, the Commodity Futures Trading Commission
(``CFTC'' or ``Commission'') published for comment in the Federal
Register \1\ a notice of its intent to undertake a determination
whether the Carbon Financial Instrument (``CFI'') contract offered for
trading on the Chicago Climate Exchange, Inc. (``CCX''), an exempt
commercial market (``ECM'') under Section 2(h)(3)-(5) of the Commodity
Exchange Act (``CEA'' or the ``Act''), performs a significant price
discovery function pursuant to section 2(h)(7) of the CEA. The
Commission undertook this review based upon an initial evaluation of
information and data provided by CCX. The Commission has reviewed
public comments and the entire record in this matter and has determined
to issue an order finding that the CCX CFI contract, at this time, does
not perform a significant price discovery function. Authority for this
action is found in section 2(h)(7) of the CEA and Commission rule
36.3(c) promulgated thereunder.
---------------------------------------------------------------------------

\1\ 74 FR 42052 (August 20, 2009).

---------------------------------------------------------------------------
DATES: Effective date: April 28, 2010.

FOR FURTHER INFORMATION CONTACT: Irina Leonova, Financial Economist,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5646. Email: ileonova@cftc.gov, or Gregory K.
Price, Industry Economist, Division of Market Oversight, same address.
Telephone: (202) 418-5515. E-mail: gprice@cftc.gov, or Susan Nathan,
Senior Special Counsel, Division of Market Oversight, same address.
Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \2\
significantly broadened the CFTC's regulatory authority with respect to
ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory
category--ECMs on which significant price discovery contracts
(``SPDCs'') are traded--and treating ECMs in that category as
registered entities under the CEA. The legislation authorizes the CFTC
to designate an agreement, contract or transaction traded on an ECM as
a SPDC if the Commission determines, under criteria established in
section 2(h)(7), that it performs a significant price discovery
function. When the Commission makes such a

[[Page 23687]]

determination, the ECM on which the SPDC is traded must assume, with
respect to that contract, all the responsibilities and obligations of a
registered entity under the Act and Commission regulations, and must
comply with nine core principles established by new section 2(h)(7)(C).
---------------------------------------------------------------------------

\2\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008).
---------------------------------------------------------------------------

On March 16, 2009, the CFTC promulgated final rules implementing
the provisions of the Reauthorization Act.\3\ As relevant here, Rule
36.3 imposes increased information reporting requirements on ECMs to
assist the Commission in making prompt assessments whether particular
ECM contracts may be SPDCs. In addition to filing quarterly reports
regarding its contracts, an ECM must notify the Commission promptly
concerning any contract traded in reliance on the exemption in section
2(h)(3) of the CEA that averaged five trades per day or more over the
most recent calendar quarter, and that either: (1) had its price
information sold by the exchange to market participants or industry
publications or (2) had daily closing or settlement prices which were
within 2.5% of the contemporaneously determined closing, settlement or
other daily price of another contract on 95 percent or more of the days
in the most recent quarter.
---------------------------------------------------------------------------

\3\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on
April 22, 2009.
---------------------------------------------------------------------------

Commission Rule 36.3(c)(3) established the procedures by which the
Commission makes and announces its determination whether a particular
ECM contract serves a significant price discovery function. Under those
procedures, the Commission publishes notice in the Federal Register
that it intends to undertake a determination whether the specified
agreement, contract or transaction performs a significant price
discovery function and receives written views, data and arguments
relevant to its determination from the ECM and other interested
persons. The Commission, within a reasonable period of time after the
close of the comment period, considers all relevant information and
issues an order announcing and explaining its determination. The
issuance of an affirmative order subjects an ECM with a SPDC to the
full application of the Commission's regulatory authorities; at that
time, such an ECM becomes subject to all provisions of the CEA
applicable to registered entities.\4\ The issuance of such an order
also triggers the obligations, requirements and timetables prescribed
in Commission Rule 36.3(c)(4).\5\
---------------------------------------------------------------------------

\4\ Public Law 110-246 at 13203; Joint Explanatory Statement of
the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d
Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888,
75894 (Dec. 12, 2008).
\5\ For an initial SPDC determination, ECMs have a grace period
of 90 calendar days from the issuance of a SPDC determination order
to submit a written demonstration of compliance with the applicable
core principles. For subsequent SPDC determinations, ECMs have a
grace period of 30 calendar days to demonstrate core principle
compliance.
---------------------------------------------------------------------------

II. Notice of Intent To Undertake SPDC Determination

On August 20, 2009, the Commission published in the Federal
Register a notice of its intent to undertake a determination whether
the CCX's CFI contract performs a significant price discovery function,
and requested comment from interested parties.\6\ Comments were
received from the IntercontinentalExchange, Inc. (``ICE''); Jeremy D.
Weinstein, Esq. (``Weinstein''); the California Forestry Association
(``CFA''); and Scott DeMonte (``DeMonte'').\7\ The comments are more
extensively discussed below in the Analysis Section.
---------------------------------------------------------------------------

\6\ The Commission's Part 36 Rules establish, among other
things, procedures by which the Commission makes and announces its
determination whether a specific ECM contract serves a significant
price discovery function. Under those procedures, the Commission
publishes a notice in the Federal Register that it intends to
undertake a determination whether a specified agreement, contract or
transaction performs a significant price discovery function and to
receive written data, views and arguments relevant to its
determination from the ECM and other interested persons.
\7\ The comment letters are available on the Commission's Web
site: https://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-010.html.
---------------------------------------------------------------------------

III. Section 2(h)(7) of the CEA

The Commission is directed by section 2(h)(7) of the CEA to
consider, as appropriate, the following factors in determining whether
a contract performs a significant price discovery function:
Price Linkage--the extent to which the agreement, contract
or transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated contract
market (``DCM'') or derivatives transaction execution facility
(``DTEF''), or a SPDC traded on an electronic trading facility, to
value a position, transfer or convert a position, cash or financially
settle a position, or close out a position.
Arbitrage--the extent to which the price for the
agreement, contract or transaction is sufficiently related to the price
of a contract or contracts listed for trading on or subject to the
rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of
an electronic trading facility, so as to permit market participants to
effectively arbitrage between the markets by simultaneously maintaining
positions or executing trades in the contracts on a frequent and
recurring basis.
Material price reference--the extent to which, on a
frequent and recurring basis, bids, offers or transactions in a
commodity are directly based on, or are determined by referencing, the
prices generated by agreements, contracts or transactions being traded
or executed on the electronic trading facility.
Material liquidity--the extent to which the volume of
agreements, contracts or transactions in the commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a DCM, DTEF or electronic trading facility
operating in reliance on the exemption in section 2(h)(3).
Not all factors must be present to support a determination that a
particular contract performs a significant price discovery function.
Moreover, the statutory language neither prioritizes the factors nor
specifies the degrees to which a SPDC must conform to the various
factors. In Guidance issued in connection with the Part 36 rules
governing ECMs with SPDCs, the Commission observed that these factors
do not lend themselves to a mechanical checklist or formulaic
analysis.\8\
---------------------------------------------------------------------------

\8\ Appendix A to Part 36, 17 CFR part 36 (2009).
---------------------------------------------------------------------------

Accordingly, the Commission has indicated that in making its
determination it will consider the circumstances under which the
presence of a particular factor, or combination of factors, would be
sufficient to support a SPDC determination.\9\ For example, for
contracts that are linked to other contracts or that may be arbitraged
with other contracts, the Commission will consider whether the price of
the potential SPDC moves in such harmony with the other contract that
the two markets essentially become interchangeable.\10\ This co-
movement of prices would be an indication that activity in the contract
had reached a level sufficient for the contract to perform a
significant price discovery function.
---------------------------------------------------------------------------

\9\ 17 CFR part 36, appendix A.
\10\ Appendix A to Part 36, 17 CFR 36 (2009).
---------------------------------------------------------------------------

IV. The CCX CFI Contract

CCX, launched in 2003, operates the only North American voluntary,
legally

[[Page 23688]]

binding integrated trading system to reduce emissions of six major
greenhouse gases, with offset projects worldwide. CCX offers a cap and
trade system whose members \11\ make a legally binding emission
reduction commitment. Members are allocated annual emission allowances
in accordance with their emissions baseline and the CCX emission
reduction schedule. Members who reduce beyond their targets have
surplus allowances to sell or bank; those who do not meet the targets
must comply by purchasing CCX CFIs. The CCX CFI contract is a cash
market instrument and not a derivatives contract. The Chicago Climate
Futures Exchange (CCFE), a subsidiary of CCX that operates as a DCM,
lists derivatives (futures and option contracts) on CCX CFIs.
---------------------------------------------------------------------------

\11\ CCX membership categories:
Members: Entities with direct greenhouse gas (GHG) emissions.
Members make a legally binding commitment to the CCX Emission
Reduction Schedule and are subject to annual emissions verification
by FINRA. Indirect emissions are an opt-in.
Registry Participant Members: Entities with direct GHG emissions
that establish a CCX Registry account of their emissions and undergo
data verification. Standardized independent third-party data
verification is provided by FINRA on an annual or multi-annual
basis.
Associate Members: Office-based businesses or institutions with
negligible direct GHG emissions. Associate Members commit to report
and fully offset 100 percent of indirect emissions associated with
energy purchases and business travel from year of entry through 2010
and emissions data are verified by FINRA.
Offset Providers: Owners of title to qualifying offset projects
that sequester, destroy or reduce GHG emissions. Offset Providers
register and sell offsets directly on the CCX.
Offset Aggregators: Entities that serve as the administrative
representative, on behalf of offset project owners, of multiple
offset-generating projects. Offset projects involving less than
10,000 metric tons of carbon dioxide equivalent per year should be
registered and sold through an Offset Aggregator.
Liquidity Providers: Entities or individuals who trade on CCX
for purposes other than complying with the CCX Emission Reduction
Schedule, such as market makers and proprietary trading groups.
Exchange Participants: Entities or individuals who purchase CFI
contracts and retire them to offset emissions associated with
special events or other specified activities.
---------------------------------------------------------------------------

The size of the CCX CFI contract is 100 metric tons (MT) of
CO2-equivalent emissions. A CCX CFI contract involves the
immediate delivery of, and payment for, vintage specific CCX carbon
dioxide (CO2) emission allowances called CFIs. Earlier dated
vintages may be delivered against later vintage trades. Transactions
(with exception of bilateral agreements) are cleared on trade day. Full
contract value settlement occurs on the next business day. CCX
substitutes as a counterparty to all transactions and guarantees
performance until settlement is completed.
Based upon a required quarterly notification filed on October 15,
2009, (mandatory under Rule 36.3(c)(2)), the CCX reported that, with
respect to its CFI contract, an average of 8 trades per day occurred in
the third quarter of 2009. During the same period, the CFI had an
average daily trading volume of 1,141 contracts. In the second quarter
of 2009, market participants traded the CFI contract on average 15
times per day with an average daily trading volume of 1,235 contracts.
Because the CCX CFI is a cash market instrument, open interest figures
are not applicable.

V. Analysis

A. The Statutory Criteria

In its notice of intent to undertake a determination whether the
CCX CFI contract performs a significant price discovery function, the
Commission indicated that the CCX CFI contract might satisfy the
material price reference and material liquidity criteria for SPDC
determination.\12\ Further analysis reveals that the CCX CFI contract
does not meet either criterion.
---------------------------------------------------------------------------

\12\ 74 FR 42054 (Aug. 20, 2009).The Commission did not identify
either price linkage or arbitrage as the possible criteria for the
CCX CFI contact to be a SPDC. Accordingly, those criteria will not
be discussed further in this Order.
---------------------------------------------------------------------------

Material Price Reference Criterion
The Commission has concluded that the CCX CFI contract does not
meet the material price reference criterion for SPDC determination. As
noted in the original Federal Register notice, the CFI market is solely
a CCX-created entity.\13\ The CCX designed all of the parameters of
this carbon emission reduction program, and it established the rules
for membership in the ECM, allowance trading, and the creation of
offsets. Based on these attributes, staff considered whether traders
look to the CCX as a source of price information and price discovery
for the CFI or the U.S. carbon market in general that would either be a
direct or an indirect source of evidence of the material price
reference. Staff concluded that it appears that CCX CFI prices are not
used as a price reference to the U.S. carbon market due to the
relatively small market share of the CCX CFI program in the overall
U.S. carbon market, the limited potential for the CFI program to be
folded into a national carbon reduction program, and significant price
volatility of the CCX CFI instrument. As part of its material price
reference analysis, Commission staff considered comments filed pursuant
to the request for comment and all other relevant information.\14\
---------------------------------------------------------------------------

\13\ 74 FR 42054 (Aug. 20, 2009).
\14\ The Commission will rely on one of two sources of
evidence--direct or indirect--to determine a SPDC. Direct evidence
can be cash market transactions that are frequently based on or
quoted as a differential to the potential SPDC. Indirect evidence
includes contracts whose price series are routinely disseminated in
industry publications or are sold to market participants by the ECM.
---------------------------------------------------------------------------

Material Liquidity Criterion
The Commission's decision to undertake a review to determine
whether the CCX CFI contract performs a significant price discovery
function was based on CCX's required initial quarterly notification
filed on July 1, 2009. At that time, CCX reported that, with respect to
all CFI trades combined (aggregate of vintages 2003-2010), an average
of 15 separate trades per day occurred in the second quarter of 2009.
Subsequent to the publication of the Commission's Federal Register
notice announcing its intent to undertake a SPDC review, however, CCX
amended its filing to show the number of trades per day for each
vintage, and clarified that the exchange lists and trades CFI contract
vintages individually and provides a vintage-specific closing price for
each CFI vintage contract. In these circumstances, the Commission
recognizes that the CCX CFI vintage-specific contracts should not be
aggregated, but rather should be treated individually for the purpose
of a SPDC analysis. Accordingly, the Commission has analyzed each
individual vintage of the CCX CFIs to determine whether any of them are
SPDCs.\15\
---------------------------------------------------------------------------

\15\ Because this shift in focus did not alter either the
analysis or conclusion or otherwise suggest the need for further
comment, the Commission did not republish its original notice of
intent to make a SPDC determination with respect to the CCX CFI
contract.
---------------------------------------------------------------------------

The Commission's evaluation of the supplemental data indicates that
the CCX CFI vintage specific contracts (2003-2010 vintages) do not meet
the material liquidity criterion for a SPDC; the average number of
trades per day per vintage was only one contract, well below the five
trades per day reporting threshold established by the Commission.

B. Comments Received

The Commission received four responses to its request for comments.
Two of the comment letters addressed issues beyond the scope of the
instant matter;\16\ two raised substantive issues

[[Page 23689]]

with respect to the applicability of section 2(h)(7) to the CFI
contract.\17\
---------------------------------------------------------------------------

\16\ See supra note 7. Specifically, the California Forestry
Association offered the opinion that all the over-the-counter
voluntary carbon trading occurring now serves a significant price
discovery function. CL 02. Scott DeMonte advises the Commission to
``fix the manipulation'' in [its] exchanges'' and requests that
firms be required to have collateral in excess of two times their
average end of daily trade value in order to participate in this
market. CL 01.
\17\ See supra note 7. The commenters who raised substantive
issues with respect to the applicability of section 2(h)(7) to the
CFI contract are Jeremy D. Weinstein, Esq., owner of the law offices
of Jeremy D. Weinstein, a professional corporation located in Walnut
Creek, California and IntercontinentalExchange, Inc., operator of
regulated exchanges, trading platforms and clearing houses serving
the global markets for agricultural, credit, currency, emissions,
energy and equity index markets headquartered in Atlanta, Georgia,
U.S.
---------------------------------------------------------------------------

Weinstein opines that the CCX offset project protocols ``do not
conform to the stringent additionality \18\ and leakage standards \19\
that are in the carbon offset contracts * * * accepted by the broader
market.'' Consequently, Mr. Weinstein asserts that ``the absence from
the CCX CFI contract of the most essential requirements for commonality
with other carbon offset contract prevents market participants from
using the CFI contracts for material price reference, arbitrage, and
settlement and execution of transactions.'' The environmental
requirements of the CCX offset protocols are beyond the scope of the
Commission authority, and this inquiry was limited to an evaluation
whether the CCX CFI contract might satisfy the material liquidity and
material price reference statutory criterion for a SPDC determination.
---------------------------------------------------------------------------

\18\ There are a number of interpretations of the additionality
concept in application to the environmental offset projects. The
most popular interpretations are ``environmental additionality''
where a project is additional if the emissions from the project are
lower than the baseline, and ``project additionality'' where the
project must not have happened without the Clean Development
Mechanism (CDM).
\19\ Leakage generally refers to the increase in emissions
outside the project boundary that occurs as a consequence of the
project activity's implementation.
---------------------------------------------------------------------------

ICE expressed an opinion that ``the CFI does not serve a
significant price discovery function and the Commission may exceed its
jurisdiction if it determines that the CFI serves as a significant
price discovery contract.'' ICE observed that the CCX CFI contract
fails the threshold for material liquidity because ``each [CCX CFI
contract] vintage may trade less than twice a day.'' Consequently, ICE
concluded that ``a trade every couple of hours does not equate to the
``ability to transact immediately'' or ``a more or less continuous
stream of prices.'' As noted above, after a thorough review of
supplemental data provided for the CCX CFI contract, Commission staff
concluded that different CCX CFI vintages should be considered as
separate CCX contracts. When analyzed in this manner, the CCX CFI
contracts do not meet the material liquidity criterion for SPDC
determination.
When analyzing the material price reference factor for a CCX CFI
SPDC determination, ICE commented that ``under the Commission's theory,
any spot contract automatically serves as a material price reference,
simply because the contract references itself'' (emphasis in original).
Additionally, ICE expresses an opinion that ``by making this
determination [the CCX CFI contract is a SPDC], the Commission is
broadly asserting jurisdiction over the spot market if the spot
contract is electronically traded.'' In response, the Commission notes
that Section 2(h)(7), refers to ``any agreement, contract or
transaction conducted in reliance on the exemption'' in Section 2(h)(3)
and does not require that the Commission find that a potential SPDC
contract is a commodity futures or options contract. The determination
to list particular instruments in reliance on the Section 2(h)(3)
exemption is made by the ECM, not the Commission, when the ECM files
notice with the Commission, under Section 2(h)(5), of its reliance on
such exemption. Section 2(i) of the CEA reinforces the view that
instruments traded on 2(h)(3) markets may include non-futures products;
that section states that there is no presumption that an agreement,
contract or transaction exempted under section 2(h)(3) ``is or would
otherwise be subject to this chapter.''

VI. Findings and Conclusion

In consideration of the initial and supplemental information
provided by CCX, the comments received in connection with the Federal
Register notice and all other relevant information, the Commission has
determined that the CCX CFI contract does not, at this time, perform a
significant price discovery function. Accordingly, as set forth in the
Commission's Order, CCX is not required to comply with Commission Rule
36.3(c)(4) applicable to ECMs with SPDCs, or otherwise to assume the
statutory and regulatory responsibilities of a registered entity with
respect to the CFI contract. The Reauthorization Act amended the CEA to
require that the Commission evaluate not less than annually all
agreements, contracts and transactions conducted on an ECM in reliance
on the exemption in section 2(h)(3) to determine whether they serve a
significant price discovery function.\20\ In addition, the Commission
routinely monitors contracts traded or executed in reliance on section
2(h)(3) and reviews all ECM submissions on an ongoing basis for the
presence of SPDCs. Accordingly, like all ECMs, CCX remains responsible
for compliance with the reporting requirements described in Rule
36.3(a) and (b).
---------------------------------------------------------------------------

\20\ Section 2(h)(7)(D)(ii), 7 U.S.C. 2(h)(7)(D)(ii).
---------------------------------------------------------------------------

VII. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') \21\ imposes certain
requirements on federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. Certain provisions of final
Commission Rule 36.3 impose new regulatory and reporting requirements
on ECMs, resulting in information collection requirements within the
meaning of the PRA; OMB previously has approved and assigned OMB
control number 3038-0060 to this collection of information.
---------------------------------------------------------------------------

\21\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

B. Cost-Benefit Analysis

Section 15(a) of the CEA \22\ requires the Commission to consider
the costs and benefits of its actions before issuing an order under the
Act. By its terms, section 15(a) does not require the Commission to
quantify the costs and benefits of an order or to determine whether the
benefits of the order outweigh its costs; rather, it requires that the
Commission ``consider'' the costs and benefits of its action. Section
15(a) further specifies that the costs and benefits shall be evaluated
in light of five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may in its discretion give
greater weight to any of the five enumerated areas and could in its
discretion determine that, notwithstanding its costs, a particular
order is necessary or appropriate to protect the public interest or to
effectuate any provisions or accomplish any of the purposes of the Act.
---------------------------------------------------------------------------

\22\ 7 U.S.C.19(a).
---------------------------------------------------------------------------

When a futures contract begins to serve a significant price
discovery function, that contract, and the ECM on which it is traded,
warrants increased oversight to deter and prevent price manipulation
and other disruptions to market integrity, both on the ECM itself and
in any related futures contracts trading on DCMs. An Order finding that
a particular contract is a SPDC triggers

[[Page 23690]]

this increased oversight and imposes obligations on the ECM calculated
to accomplish this goal. The increased oversight engendered by the
issuance of a SPDC Order increases transparency and helps to ensure
fair competition among ECMs and DCMs trading similar products and
competing for the same business. Moreover, the ECM on which the SPDC is
traded must assume, with respect to that contract, all the
responsibilities and obligations of a registered entity under the CEA
and Commission regulations. Additionally, the ECM must comply with nine
core principles established by section 2(h)(7) of the Act--including
the obligation to establish position limits and/or accountability
standards for the SPDC. Amendments to section 4(i) of the CEA authorize
the Commission to require large trader reports for SPDCs listed on
ECMs. These increased ECM responsibilities, along with the CFTC's
increased regulatory authority, subject the ECM's risk management
practices to the Commission's supervision and oversight and generally
enhance the financial integrity of the markets.
The Commission has concluded that the Chicago Climate Exchange's
Carbon Financial Instrument contract that is the subject of the
attached Order is not a SPDC; accordingly, the Commission's Order
impose no additional costs and no additional statutorily or regulatory
mandated responsibilities on the ECM.

VIII. Order

Order Relating to the CCX CFI Contract

After considering the complete record in this matter, including the
comment letters received in response to its request for comments, the
Commission has determined to issue the following:
The Commission, pursuant to its authority under section 2(h)(7) of
the Act, hereby determines that the Chicago Climate Exchange's Carbon
Financial Instrument contract that was submitted to the Commission by
the Chicago Climate Exchange for review on July 1, 2009 and October 15,
2009 does not, at this time, satisfy the statutory or regulatory
requirements of a significant price discovery contract. Consistent with
this determination, the Chicago Climate Exchange is not required at
this time to comply with section 2(h)(7)(C) in connection with the
Carbon Financial Instrument contract or the Part 36 regulations
applicable to exempt commercial markets with significant price
discovery contracts, and is not required to assume the statutory or
regulatory responsibilities required of registered entities with
respect to the Carbon Financial Instrument contract.
This order is based upon the representations made to the Commission
by the Chicago Climate Exchange in filings dated July 1, 2009 and
October 15, 2009, and other supporting material. Any material change or
omissions in the facts and circumstances pursuant to which this order
is granted might require the Commission to reconsider its current
determination that the Carbon Financial Instrument contract is not a
significant price discovery contract.
The Commission may, based upon information regarding the Carbon
Financial Instrument contract reviewed under this Order that is
submitted in required reports and filings, issue another notice of
intent to undertake a significant price discovery contract
determination for these contracts. Further, issuance of this Order does
not affect the Chicago Climate Exchange's continuing obligation to
comply with all statutory and regulatory requirements applicable to
2(h)(3) markets, including all reporting requirements found in
Commission Regulation 36.3.

Issued in Washington, DC on April 28, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-10311 Filed 5-3-10; 8:45 am]
BILLING CODE P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.