Order Finding that the TETCO-M3 Financial Basis Contract Traded on the IntercontinentalExchange, Inc., Does Not Perform a Significant Price Discovery Function, 24592-24599 [2010-10327]
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effectuate any of the provisions or
accomplish any of the purposes of the
Act. The Commission has considered
the costs and benefits in light of the
specific provisions of section 15(a) of
the Act and has concluded that the
Order, required by Congress to
strengthen Federal oversight of exempt
commercial markets and to prevent
market manipulation, is necessary and
appropriate to accomplish the purposes
of section 2(h)(7) 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 or other disruptions to
market integrity, both on the ECM itself
and in any related futures contracts
trading on DCMs. An Order fining 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.
Amendments to 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 SNJ 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’’) 43 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 exempt commercial markets.
The Commission previously has
determined that exempt commercial
markets are not small entities for
purposes of the RFA.44 Accordingly, the
Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C.
605(b) that this Order, 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.
VI. Order
Order Regarding the San Juan 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 San
Juan Financial Basis contract, traded on
the IntercontinentalExchange, Inc., does
not at this time satisfy the material price
reference, price linkage and material
liquidity criteria for significant price
discovery contracts. Consistent with this
determination, the
IntercontinentalExchange, Inc., is not
considered a registered entity 45 with
respect to the San Juan 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 San Juan Basin
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 San Juan
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.
[FR Doc. 2010–10343 Filed 5–4–10; 8:45 am]
BILLING CODE P
COMMODITY FUTURES TRADING
COMMISSION
Order Finding that the TETCO–M3
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
TETCO–M3 Financial Basis (‘‘TMT’’)
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
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 TMT 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:
44 66
43 5
FR 42256, 42268 (Aug. 10, 2001).
45 7 U.S.C. 1a(29).
Issued in Washington, DC, on April 28,
2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
U.S.C. 601 et seq.
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1 74
FR 52186 (October 9, 2009).
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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
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 for
which the exchange sells its price
information regarding the contract to
market participants or industry
publications, or whose daily closing or
settlement prices on 95 percent or more
of the days in the most recent quarter
were within 2.5 percent of the
contemporaneously determined closing,
settlement or other daily price of
another contract.
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 will
publish notice in the Federal Register
that it intends to undertake an
evaluation whether the specified
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.
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agreement, contract or transaction
performs a significant price discovery
function and to receive written views,
data and arguments relevant to its
determination from the ECM and other
interested persons. Upon the close of
the comment period, the Commission
will consider, among other things, all
relevant information regarding the
subject contract and issue an order
announcing and explaining its
determination whether or not the
contract is a SPDC. The issuance of an
affirmative order signals the
effectiveness of the Commission’s
regulatory authorities over an ECM with
respect to a SPDC; at that time such an
ECM becomes subject to all provisions
of the CEA applicable to registered
entities.5 The issuance of such an order
also triggers the obligations,
requirements and timetables prescribed
in Commission rule 36.3(c)(4).6
II. Notice of Intent To Undertake SPDC
Determination
On October 9, 2009, the Commission
published in the Federal Register notice
of its intent to undertake a
determination whether the TMT
contract performs a significant price
discovery function and requested
comment from interested parties.7
Comments were received from
Industrial Energy Consumers of America
(‘‘IECA’’), Working Group of Commercial
Energy Firms (‘‘WGCEF’’), Platts, ICE,
Economists Incorporated (‘‘EI’’), Natural
Gas Supply Association (‘‘NGSA’’),
Federal Energy Regulatory Commission
(‘‘FERC’’) and Financial Institutions
Energy Group (‘‘FIEG’’).8 The comment
5 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).
6 For an initial SPDC, 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 SPDCs, ECMs have
a grace period of 30 calendar days to demonstrate
core principle compliance.
7 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.
8 IECA describes itself as an ‘‘association of
leading manufacturing companies’’ whose
membership ‘‘represents a diverse set of industries
including: plastics, cement, paper, food processing,
brick, chemicals, fertilizer, insulation, steel, glass,
industrial gases, pharmaceutical, aluminum and
brewing.’’ WGCEF describes itself as ‘‘a diverse
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letters from FERC 9 and Platts did not
directly address the issue of whether or
not the TMT contract is a SPDC; IECA
expressed the opinion that the TMT
contract did perform a significant price
discovery function; and thus, should be
subject to the requirements of the core
principles enumerated in Section 2(h)(7)
of the Act, but did not elaborate on its
reasons for saying so or directly address
any of the criteria. The remaining
comment letters raised substantive
issues with respect to the applicability
of section 2(h)(7) to the TMT contract
and generally expressed the opinion
that the TMT contract is not a SPDC
because it does not meet the price
linkage, material price reference and
material liquidity criteria for SPDC
determination. These comments are
more extensively discussed below, as
applicable.
III. Section 2(h)(7) of the CEA
The Commission is directed by
section 2(h)(7) of the CEA to consider
the following criteria in determining a
contract’s 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
group of commercial firms in the domestic energy
industry whose primary business activity is the
physical delivery of one or more energy
commodities to customers, including industrial,
commercial and residential consumers’’ and whose
membership consists of ‘‘energy producers,
marketers and utilities.’’ McGraw-Hill, through its
division Platts, compiles and calculates monthly
natural gas price indices from natural gas trade data
submitted to Platts by energy marketers. Platts
includes those price indices in its monthly Inside
FERC’s Gas Market Report (‘‘Inside FERC’’). ICE is
an exempt commercial market, as noted above. EI
is an economic consulting firm with offices located
in Washington, DC, and San Francisco, CA. NGSA
is an industry association comprised of natural gas
producers and marketers. FERC is an independent
Federal regulatory agency that, among other things,
regulates the interstate transmission of natural gas,
oil and electricity. FIEG describes itself as an
association of investment and commercial banks
who are active participants in various sectors of the
natural gas markets, ‘‘including acting as marketers,
lenders, underwriters of debt and equity securities,
and proprietary investors.’’ The comment letters are
available on the Commission’s Web site: https://
www.cftc.gov/lawandregulation/federalregister/
federalregistercomments/2009/09–014.html.
9 FERC stated that the TMT contract is cash
settled and does not contemplate the actual
physical delivery of natural gas. Accordingly, FERC
expressed the opinion that a determination by the
Commission that a contract performs a significant
price discovery function ‘‘would not appear to
conflict with FERC’s exclusive jurisdiction under
the Natural Gas Act (NGA) over certain sales of
natural gas in interstate commerce for resale or with
its other regulatory responsibilities under the NGA’’
and further that, ‘‘FERC staff will continue to
monitor for any such conflict * * * [and] advise
the CFTC’’ should any such potential conflict arise.
CL 07.
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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
designated 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 or
consulting, 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 a
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 criteria must be present to
support a determination that a
particular contract performs a
significant price discovery function, and
one or more criteria may be inapplicable
to a particular contract.10 Moreover, the
statutory language neither prioritizes the
criteria nor specifies the degree to
which a SPDC must conform to the
various criteria. In Guidance issued in
connection with the Part 36 rules
governing ECMs with SPDCs, the
Commission observed that these criteria
do not lend themselves to a mechanical
checklist or formulaic analysis.
Accordingly, the Commission has
indicated that in making its
determinations it will consider the
circumstances under which the
presence of a particular criterion, or
10 In its October 9, 2009, Federal Register release,
the Commission identified material price reference,
price linkage and material liquidity as the possible
criteria for SPDC determination of the TMT
contract. Arbitrage was not identified as a possible
criterion. As a result, arbitrage will not be discussed
further in this document and the associated Order.
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combination of criteria, would be
sufficient to support a SPDC
determination.11 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. 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. In evaluating a contract’s price
discovery role as a price reference, the
Commission will consider the extent to
which, on a frequent and recurring
basis, bids, offers or transactions are
directly based on, or are determined by
referencing, the prices established for
the contract.
IV. Findings and Conclusions
The TETCO–M3 Financial Basis (TMT)
Contract and the SPDC Indicia
The TMT contract is cash settled
based on the difference between the
bidweek price index for a particular
calendar month at the Texas Eastern
Transmission Company’s (‘‘TETCO’s’’)
M3 zone, as published in Platts’ Inside
FERC’s Gas Market Report, and the final
settlement price of the New York
Mercantile Exchange’s (‘‘NYMEX’s’’)
physically-delivered Henry Hub natural
gas futures contract for the same
calendar month. The Platts bidweek
price, which is published monthly, is
based on a survey of cash market traders
who voluntarily report to Platts data on
their fixed-price transactions conducted
during the last five business days of the
month for physical delivery of natural
gas at the M3 zone; such bidweek
transactions specify the delivery of
natural gas on a uniform basis
throughout the following calendar
month at the agreed upon rate. The
Platts bidweek index is published on
the first business day of the calendar
month in which the natural gas is to be
delivered. The size of the TMT contract
is 2,500 million British thermal units
(‘‘mmBtu’’), and the unit of trading is
any multiple of 2,500 mmBtu. The TMT
contract is listed for up to 72
consecutive calendar months.
The Henry Hub,12 which is located in
Erath, Louisiana, is the primary cash
market trading and distribution center
for natural gas in the United States. It
11 17
CFR part 36, Appendix A.
term ‘‘hub’’ refers to a juncture where two
or more natural gas pipelines are connected. Hubs
also serve as pricing points for natural gas at the
particular locations.
12 The
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also is the delivery point and pricing
basis for the NYMEX’s actively traded,
physically-delivered natural gas futures
contract, which is the most important
pricing reference for natural gas in the
United States. The Henry Hub, which is
operated by Sabine Pipe Line, LLC,
serves as a juncture for 13 different
pipelines. These pipelines bring in
natural gas from fields in the Gulf Coast
region and ship it to major consumption
centers along the East Coast and
Midwest. The throughput shipping
capacity of the Henry Hub is 1.8 trillion
mmBtu per day.
In addition to the Henry Hub, there
are a number of other locations where
natural gas is traded. In 2008, there were
33 natural gas market centers in North
America.13 Some of the major trading
centers include Alberta, Northwest
Rockies, Southern California border and
the Houston Ship Channel. For
locations that are directly connected to
the Henry Hub by one or more pipelines
and where there typically is adequate
shipping capacity, the price at the other
locations usually directly tracks the
price at the Henry Hub, adjusted for
transportation costs. However, at other
locations that are not directly connected
to the Henry Hub or where shipping
capacity is limited, the prices at those
locations often diverge from the Henry
Hub price. Furthermore, one local price
may be significantly different than the
price at another location even though
the two markets’ respective distances
from the Henry Hub are the same. The
reason for such pricing disparities is
that a given location may experience
supply and demand factors that are
specific to that region, such as
differences in pipeline shipping
capacity, unusually high or low demand
for heating or cooling or supply
disruptions caused by severe weather.
As a consequence, local natural gas
prices can differ from the Henry Hub
price by more than the cost of shipping
and such price differences can vary in
an unpredictable manner.
TETCO transports natural gas from
production areas in Texas, Louisiana,
and the Gulf of Mexico to the MidAtlantic and Northeast regions of the
United States. The TETCO system,
owned and operated by Spectra Energy
Transmission, spans some 9,200 miles
and has a capacity of 6.7 billion cubic
feet per day with 75 billion cubic feet
of storage.14 The TMT contract prices
trading activity at the M3 zone of
13 See https://www.eia.doe.gov/pub/oil_gas/
natural_gas/feature_articles/2009/ngmarketcenter/
ngmarketcenter.pdf.
14 See https://www.spectraenergy.com/what_we
_do/businesses/us/assets/texas_eastern/.
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TETCO’s pipeline. The M3 zone is
defined as the portion of the pipeline
traversing the area between eastern
Pennsylvania near the New Jersey
border and north central New Jersey.
Specifically, the Platts index includes
deliveries at any point between the
Delmont compressor station in
Westmoreland County, Pennsylvania,
and the Hanover and Linden stations in
Morris County, New Jersey. Included are
deals delivered at interconnections with
New York City distributors’ citygates
and with Algonquin Gas Transmission
at Lambertville in Hunterdon County,
New Jersey, and at the Hanover station.
The Dominion hub, a market center
that encompasses the Leidy area of
north central Pennsylvania includes the
TETCO M3 natural gas trading hub. The
Dominion market center had an
estimated throughput capacity of 2.5
billion cubic feet per day in 2008.
Moreover, the number of pipeline
interconnections at the Dominion hub
was 17 in 2008, up from 16 in 2003.
Lastly, the pipeline interconnection
capacity of the Dominion hub in 2008
was 8.3 billion cubic feet per day, which
constituted a 42 percent increase over
the pipeline interconnection capacity in
2003.15 The TMT hub is far removed
from the Henry Hub but is directly
connected to the Henry Hub by
TETCO’s interstate pipeline system.
The local price at the TMT location
typically differs from the price at the
Henry Hub. Thus, the price of the Henry
Hub physically-delivered futures
contract is an imperfect proxy for the
TMT price. Moreover, exogenous
factors, such as adverse weather, can
cause the TMT gas price to differ from
the Henry Hub price by an amount that
is more or less than the cost of shipping,
making the NYMEX Henry Hub futures
contract even less precise as a hedging
tool than desired by market participants.
Basis contracts 16 allow traders to more
accurately discover prices at alternative
locations and hedge price risk that is
associated with natural gas at such
locations. In this regard, a position at a
local price for an alternative location
can be established by adding the
appropriate basis swap position to a
position taken in the NYMEX
physically-delivered Henry Hub
contract (or in the NYMEX or ICE Henry
Hub look-alike contract, which cash
settle based on the NYMEX physically15 See https://www.eia.doe.gov/pub/oil_gas/
natural_gas/feature_articles/2009/ngmarketcenter/
ngmarketcenter.pdf.
16 Basis contracts denote the difference in the
price of natural gas at a specified location minus the
price of natural gas at the Henry Hub. The
differential can be either a positive or negative
value.
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delivered natural gas contract’s final
settlement price).
In its October 9, 2009, Federal
Register notice, the Commission
identified material price reference, price
linkage and material liquidity as the
potential SPDC criteria applicable to the
TMT contract. Each of these criteria is
discussed below.17
1. Material Price Reference Criterion
The Commission’s October 9, 2009,
Federal Register notice identified
material price reference as a potential
basis for a SPDC determination with
respect to this contract. The
Commission considered the fact that ICE
sells its price data to market participants
in a number of different packages which
vary in terms of the hubs covered, time
periods, and whether the data are daily
only or historical. For example, ICE
offers the ‘‘East Gas End of Day’’ and
‘‘OTC Gas End of Day’’ 18 packages with
access to all price data or just current
prices plus a selected number of months
(i.e., 12, 24, 36 or 48 months) of
historical data. These two packages
include price data for the TMT contract.
The Commission also noted that its
October 2007 Report on the Oversight of
Trading on Regulated Futures
Exchanges and Exempt Commercial
Markets (‘‘ECM Study’’) 19 found that in
general, market participants view the
ICE as a price discovery market for
certain natural gas contracts. The study
did not specify which markets
performed this function; nevertheless,
the Commission determined that the
TMT contract, while not mentioned by
name in the ECM Study, might warrant
further study. Following the issuance of
the Federal Register release, the
Commission further evaluated ICE’s
data offerings and their use by industry
participants. The TETCO M3 zone is a
significant trading center for natural gas
but is not as important as other hubs,
such as the Henry Hub, for pricing
natural gas in the eastern half of the U.S.
marketplace.
The Commission will rely on one of
two sources of evidence—direct or
indirect—to determine that the price of
a contract was being used as a material
price reference and therefore, serving a
significant price discovery function.20
With respect to direct evidence, the
17 As noted above, the Commission did not find
an indication of arbitrage in connection with this
contract; accordingly, that criterion was not
discussed in reference to the TMT contract.
18 The OTC Gas End of Day dataset includes daily
settlement prices for natural gas contracts listed for
all points in North America.
19 https://www.cftc.gov/ucm/groups/public/
newsroom/documents/file/pr5403-07
_ecmreport.pdf
20 17 CFR part 36, Appendix A.
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24595
Commission will consider the extent to
which, on a frequent and recurring
basis, cash market bids, offers or
transactions are directly based on or
quoted at a differential to, the prices
generated on the ECM in question.
Direct evidence may be established
when cash market participants are
quoting bid or offer prices or entering
into transactions at prices that are set
either explicitly or implicitly at a
differential to prices established for the
contract in question. Cash market prices
are set explicitly at a differential to the
section 2(h)(3) contract when, for
instance, they are quoted in dollars and
cents above or below the reference
contract’s price. Cash market prices are
set implicitly at a differential to a
section 2(h)(3) contract when, for
instance, they are arrived at after adding
to, or subtracting from the section
2(h)(3) contract, but then quoted or
reported at a flat price. With respect to
indirect evidence, the Commission will
consider the extent to which the price
of the contract in question is being
routinely disseminated in widely
distributed industry publications—or
offered by the ECM itself for some form
of remuneration—and consulted on a
frequent and recurring basis by industry
participants in pricing cash market
transactions.
The M3 zone is a major trading center
for natural gas in the United States and,
as noted, ICE sells price information for
the TMT contract. Upon further
evaluation, however, the Commission
has found that the cash market
transactions are not being directly based
on or quoted as a differential to the TMT
contract nor is that contract routinely
consulted by industry participants in
pricing cash market transactions. Thus,
the contract does not meet the
Commission’s Guidance for the material
price reference criterion. In this regard,
liquidity constraints caused by severe
winter weather on peak days may create
complications for cash market
participants. Because the TMT contract
is not consulted on a frequent basis, it
does not satisfy the direct price
reference test for the existence of
material price reference. Furthermore,
the Commission notes that publication
of the TMT contract’s prices is not
indirect evidence of material price
reference. The TMT contract’s prices are
published with those of numerous other
contracts, which are of more interest to
market participants. Due to the lack of
importance of the M3 zone, the
Commission has concluded that traders
likely do not specifically purchase the
ICE data packages for the TMT
contract’s prices and do not consult
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such prices on a frequent and recurring
basis in pricing cash market
transactions.
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i. Federal Register Comments
As noted above, WGCEF, ICE, EI,
NGSA and FIEG addressed the question
of whether the TMT contract met the
material price reference criterion for a
SPDC.21 The commenters argued that
because the TMT contract is cashsettled, it cannot truly serve as an
independent ‘‘reference price’’ for
transactions in natural gas at this
location. Rather, the commenters argue,
the underlying cash price series against
which the ICE TMT contract is settled
(in this case, the Platts bidweek price for
natural gas at this location) is the
authentic reference price and not the
ICE contract itself. The Commission
believes that this interpretation of price
reference is too limiting and believes
that a cash-settled derivatives contract
could meet the price reference criterion
if market participants ‘‘consult on a
frequent and recurring basis’’ the
derivatives contract when pricing
forward, fixed-price commitments or
other cash-settled derivatives that seek
to ‘‘lock in’’ a fixed price for some future
point in time to hedge against adverse
price movements. As noted above, the
M3 zone is a significant trading center
for natural gas in North America.
However, traders do not consider the
M3 zone to be as important as other
natural gas trading points.
ICE also argued that the Commission
appeared to base the case that the TMT
contract is potentially an SPDC on a
disputable assertion. In issuing its
notice of intent to determine whether
the TMT contract is an SPDC, the CFTC
cited a general conclusion in its ECM
Study ‘‘that certain market participants
referred to ICE as a price discovery
market for certain natural gas contracts.’’
ICE states that CFTC’s reason is ‘‘hard to
quantify as the ECM report does not
mention’’ this contract as a potential
SPDC. ‘‘It is unknown which market
participants made this statement in
2007 or the contracts that were
referenced.’’ In response to the above
comment, the Commission notes that it
cited the ECM Study’s general finding
that some ICE natural gas contracts
appear to be regarded as price discovery
markets merely as an indicia that an
investigation of certain ICE contracts
may be warranted. The ECM Study was
not intended to serve as the sole basis
for determining whether or not a
21 As noted above, IECA expressed the opinion
that the TMT contract met the criteria for SPDC
determination but did not provide its reasoning.
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particular contract meets the material
price reference criterion.
Both EI 22 and WGCEF 23 stated that
publication of price data in a package
format is a weak justification for
material price reference. These
commenters argue that market
participants generally do not purchase
ICE data sets for one contract’s prices,
such as those for the TMT contract.
Instead, traders are interested in the
settlement prices, so the fact that ICE
sells the TMT prices as part of a broad
package is not conclusive evidence that
market participants are buying the ICE
data sets because they find the TMT
prices have substantial value to them.
As mentioned above, the Commission
notes that publication of the TMT
contract’s prices is not indirect evidence
of routine dissemination. The TMT
contract’s prices are published with
those of numerous other contracts,
which are of more interest to market
participants. Due to the lack of
importance of the M3 zone, the
Commission has concluded that traders
likely do not specifically purchase the
ICE data packages for the TMT
contract’s prices and do not consult
such prices on a frequent and recurring
basis in pricing cash market
transactions.
ii. Conclusion Regarding Material Price
Reference
Based on the above, the Commission
finds that the TMT contract does not
meet the material price reference
criterion because cash market
transactions are not priced either
explicitly or implicitly on a frequent
and recurring basis at a differential to
the TMT contract’s price (direct
evidence). Moreover, while the ECM
sells the TMT contract’s price data to
market participants, market participants
likely do not specifically purchase the
ICE data packages for the TMT
contract’s prices and do not consult
such prices on a frequent and recurring
basis in pricing cash market transactions
(indirect evidence).
2. Price Linkage Criterion
In its October 9, 2009, Federal
Register notice, the Commission
identified price linkage as a potential
basis for a SPDC determination with
respect to the TMT contract. In this
regard, the final settlement of the TMT
contract is based, in part, on the final
settlement price of the NYMEX’s
physically-delivered natural gas futures
contract, where the NYMEX is
registered with the Commission as a
DCM.
The Commission’s Guidance on
Significant Price Discovery Contracts
notes that a ‘‘price-linked contract is a
contract that relies on a contract traded
on another trading facility to settle,
value or otherwise offset the pricelinked contract.’’ 24 Furthermore, the
Guidance notes that, ‘‘[f]or a linked
contract, the mere fact that a contract is
linked to another contract will not be
sufficient to support a determination
that a contract performs a significant
price discovery function. To assess
whether such a determination is
warranted, the Commission will
examine the relationship between
transaction prices of the linked contract
and the prices of the referenced
contract. The Commission believes that
where material liquidity exists, prices
for the linked contract would be
observed to be substantially the same as
or move substantially in conjunction
with the prices of the referenced
contract.’’ 25 Furthermore, the Guidance
proposes a threshold price relationship
such that prices of the ECM linked
contract will fall within a 2.5 percent
price range for 95 percent of
contemporaneously determined closing,
settlement or other daily prices over the
most recent quarter. Finally, in
Guidance the Commission stated that it
would consider a linked contract that
has a trading volume equivalent to 5
percent of the volume of trading in the
contract to which it is linked to have
sufficient volume to be deemed a SPDC
(‘‘minimum threshold’’).26
To assess whether the TMT contract
meets the price linkage criterion,
Commission staff obtained price data
from ICE and performed the statistical
tests cited above. Staff found that, while
the TMT contract price is determined,
in part, by the final settlement price of
the NYMEX physically-delivered
natural gas futures contract (a DCM
contract), the imputed TMT location
price (derived by adding the NYMEX
Henry Hub Natural Gas price to the ICE
TCO basis price) is not within 2.5
percent of the settlement price of the
corresponding NYMEX Henry Hub
natural gas futures contract on 95
percent or more of the days.
Specifically, during the third quarter of
2009, none of the TMT natural gas
prices derived from the ICE basis values
were within 2.5 percent of the daily
settlement price of the NYMEX Henry
Hub futures contract. In addition, staff
found that the TMT contract fails to
24 Appendix
22 CL
05.
23 CL 02.
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25 Id.
26 Id.
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meet the volume threshold requirement.
In particular, the total trading volume in
the NYMEX Natural Gas contract during
the third quarter of 2009 was 14,022,963
contracts, with 5 percent of that number
being 701,148 contracts. Trades on the
ICE centralized market in the TMT
contract during the same period was
145,681 contracts (equivalent to 36,420
NYMEX contracts, given the size
difference).27 Thus, centralized-market
trades in the TMT contract amounted to
less than the minimum threshold.28
i. Federal Register Comments
As noted above, WGCEF, ICE, EI,
NGSA and FIEG addressed the question
of whether the TMT contract met the
price linkage criterion for a SPDC.29
Each of the commenters expressed the
opinion that the TMT contract did not
appear to meet the above-discussed
Commission guidance regarding the
price relationship and/or the minimum
volume threshold relative to the DCM
contract to which the TMT is linked.
Based on its analysis discussed above,
the Commission agrees with this
assessment.
ii. Conclusion Regarding the Price
Linkage Criterion
Based on the above, the Commission
finds that the TMT contract does not
meet the price linkage criterion because
it fails the price relationship and
volume tests provided for in the
Commission’s Guidance.
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3. Material Liquidity Criterion
As noted above, in its October 9,
2009, Federal Register notice, the
Commission identified material price
reference, price linkage and material
liquidity as potential criteria for SPDC
determination of the TMT contract. To
assess whether a contract meets the
material liquidity criterion, the
Commission first examines trading
activity as a general measurement of the
contract’s size and potential importance.
If the Commission finds that the
contract in question meets a threshold
of trading activity that would render it
of potential importance, the
Commission will then perform a
statistical analysis to measure the effect
that the prices of the subject contract
27 The size of the NYMEX Henry Hub physicallydelivered natural gas futures contract is 10,000
mmBtu. The TMT contract has a trading unit of
2,500 mmBtu, which is one-quarter the size of the
NYMEX Henry Hub contract.
28 Supplemental data subsequently submitted by
the ICE indicated that block trades are included in
the on-exchange trades; block trades comprise 63.3
percent of all transactions in the TMT contract.
29 As noted above, IECA expressed the opinion
that the TMT contract met the criteria for SPDC
determination but did not provide its reasoning.
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potentially may have on prices for other
contracts listed on an ECM or a DCM.
The total number of transactions
executed on ICE’s electronic platform in
the TMT contract was 1,073 in the
second quarter of 2009, resulting in a
daily average of 16.8 trades. During the
same period, the TMT contract had a
total trading volume of 145,328
contracts and an average daily trading
volume of 2,271 contracts. Moreover,
open interest as of June 30, 2009, was
168,963 contracts, which included
trades executed on ICE’s electronic
trading platform, as well as trades
executed off of ICE’s electronic trading
platform and then brought to ICE for
clearing. In this regard, ICE does not
differentiate between open interest
created by a transaction executed on its
trading platform and that created by a
transaction executed off its trading
platform.30
In a subsequent filing dated
November 13, 2009, ICE reported that
total trading volume in the third quarter
of 2009 was 145,681 contracts (or 2,207
contracts on a daily basis). In terms of
number of transactions, 1,140 trades
occurred in the third quarter of 2009
(17.3 trades per day). As of September
30, 2009, open interest in the TMT
contract was 251,573 contracts, which
included trades executed on ICE’s
electronic trading platform, as well as
trades executed off of ICE’s electronic
trading platform and then brought to
ICE for clearing.
As indicated above, the average
number of trades per day in the second
and third quarters of 2009 was above the
minimum reporting level (5 trades per
day). Moreover, trading activity in the
TMT contract, as characterized by total
quarterly volume, indicates that the
TMT contract experiences trading
activity that is greater than in thinlytraded contracts.31 This level of trading
activity would ordinarily merit a
statistical analysis to measure the effect
that the prices of the subject contract
potentially may have on prices for other
contracts listed on an ECM or DCM.
However, in light of the fact that the
Commission has found that the TETCO–
M3 contract does not meet the material
price reference or price linkage criteria,
according to the Commission’s guidance
it would be unnecessary to evaluate
whether the TETCO–M3 contract meets
30 74
FR 52186 (October 9, 2009).
has advised the Commission that in its
experience, a thinly-traded contract is, generally,
one that has a quarterly trading volume of 100,000
contracts or less. In this regard, in the third quarter
of 2009, physical commodity futures contracts with
trading volume of 100,000 contracts or fewer
constituted less than one percent of total trading
volume of all physical commodity futures contracts.
31 Staff
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the material liquidity criterion since it
cannot be used alone for SPDC
determination.32
i. Federal Register Comments
As noted above, WGCEF, ICE, EI,
NGSA and FIEG addressed the question
of whether the TMT contract met the
material liquidity criterion for a SPDC.33
These commenters stated that the TMT
contract does not meet the material
liquidity criterion for SPDC
determination for a number of reasons.
WGCEF,34 ICE 35 and EI 36 noted that
the Commission’s Guidance had posited
concepts of liquidity that generally
assumed a fairly constant stream of
prices throughout the trading day, and
noted that the relatively low number of
trades per day in the TMT contract did
not meet this standard of liquidity. The
Commission observes that a continuous
stream of prices would indeed be an
indication of liquidity for certain
markets but the Guidance also notes that
‘‘quantifying the levels of immediacy
and price concession that would define
material liquidity may differ from one
market or commodity to another.’’ 37
WGCEF, FIEG 38 and NGSA 39 noted
that the TMT contract represents a
differential, which does not affect other
contracts, including the NYMEX Henry
Hub contract and physical gas contracts.
FIEG and WGCEF also noted that the
TMT contract’s trading volume
represents only a fraction of natural gas
trading.
ICE opined that the Commission
‘‘seems to have adopted a five trade-perday test to determine whether a contract
is materially liquid. It is worth noting
that ICE originally suggested that the
CFTC use a five trades-per-day
threshold as the basis for an ECM to
report trade data to the CFTC.’’
Furthermore, FIEG cautioned the
32 In establishing guidance to illustrate how it
will evaluate the various criteria, or combinations
of criteria, when determining whether a contract is
a SPDC, the Commission made clear that ‘‘material
liquidity itself would not be sufficient to make a
determination that a contract is a [SPDC], * * * but
combined with other factors it can serve as a
guidepost indicating which contracts are
functioning as [SPDCs].’’ For the reasons discussed
above, the Commission has found that the TMT
contract does not meet either the price linkage or
material price reference criterion. In light of this
finding and the Commission’s Guidance cited
above, there is no need to evaluate further the
material liquidity criteria since it cannot be used
alone as a basis for a SPDC determination.
33 As noted above, IECA expressed the opinion
that the TMT contract met the criteria for SPDC
determination but did not provide its reasoning.
34 CL 02.
35 CL 04.
36 CL 05.
37 Guidance, supra.
38 CL 08.
39 CL 06.
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Commission in using a reporting
threshold as a measure of liquidity. In
this regard, the Commission adopted a
five trades-per-day threshold as a
reporting requirement to enable it to
‘‘independently be aware of ECM
contracts that may develop into
SPDCs’’ 40 rather than solely relying
upon an ECM on its own to identify any
such potential SPDCs to the
Commission. Thus, any contract that
meets this threshold may be subject to
scrutiny as a potential SPDC but this
does not mean that the contract will be
found to be a SPDC merely because it
met the reporting threshold.
ICE and EI proposed that the statistics
provided by ICE were misinterpreted
and misapplied by the Commission. In
particular, ICE stated that the volume
figures used in the Commission’s
analysis (cited above) ‘‘include trades
made in all months of each contract’’ as
well as in strips of contract months, and
a ‘‘more appropriate method of
determining liquidity is to examine the
activity in a single traded month or strip
of a given contract.’’ 41 A similar
argument was made by EI, which
observed that the five-trades-per-day
number ‘‘is highly misleading * * *
because the contracts can be offered for
as long as 120 months, [thus] the
average per day for an individual
contract may be less than 1 per day.’’
It is the Commission’s opinion that
liquidity, as it pertains to the TMT
contract, is typically a function of
trading activity in particular lead
months and, given sufficient liquidity in
such months, the ICE TMT contract
itself would be considered liquid. In any
event, in light of the fact that the
Commission has found that the TMT
contract does not meet the material
40 73
FR 75892 (December 12, 2008).
addition, both EI and ICE stated that the
trades-per-day statistics that it provided to the
Commission in its quarterly filing and which were
cited in the Commission’s October 9, 2009, Federal
Register notice includes 2(h)(1) transactions, which
were not completed on the electronic trading
platform and should not be considered in the SPDC
determination process. The Commission staff asked
ICE to review the data it sent in its quarterly filings;
ICE confirmed that the volume data it provided and
which the Commission cited includes only
transaction data executed on ICE’s electronic
trading platform. As noted above, supplemental
data supplied by ICE confirmed that block trades
are in addition to the trades that were conducted
on the electronic platform; block trades comprise
about 63 percent of all transactions in the TMT
contract. Commission acknowledges that the open
interest information it provided in its October 9,
2009, Federal Register notice includes transactions
made off the ICE platform. However, once open
interest is created, there is no way for ICE to
differentiate between ‘‘on-exchange’’ versus ‘‘offexchange’’ created positions, and all such positions
are fungible with one another and may be offset in
any way agreeable to the position holder regardless
of how the position was initially created. CL 04.
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41 In
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price reference or price linkage criteria,
according to the Commission’s
Guidance, it would be unnecessary to
evaluate whether the TM contract meets
the material liquidity criterion since it
cannot be used alone for SPDC
determination.
ii. Conclusion Regarding Material
Liquidity
For the reasons discussed above, the
Commission has found that the TMT
contract does not meet either the price
linkage or material price reference
criteria. Accordingly, there is no need to
evaluate further the material liquidity
criterion since it cannot be used alone
as a basis for a SPDC determination.
4. Overall Conclusion
After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the TMT contract does
not perform a significant price discovery
function under the criteria established
in section 2(h)(7) of the CEA.
Specifically, the Commission has
determined that the TMT contract does
not meet the material price reference
and price linkage criteria at this time. In
light of the fact that the Commission has
found that the TMT contract does not
meet the material price reference or
price linkage criteria, according to the
Commission’s Guidance, it would be
unnecessary to evaluate whether the
TMT contract meets the material
liquidity criterion since it cannot be
used alone for SPDC determination.
Accordingly, the Commission is issuing
the attached Order declaring that the
TMT contract is not a SPDC.
Issuance of this Order indicates that
the Commission does not at this time
regard ICE as a registered entity in
connection with its TMT contract.42
Accordingly, with respect to its TMT
contract, ICE is not required to comply
with the obligations, requirements and
timetables prescribed in Commission
rule 36.3(c)(4) for ECMs with SPDCs.
However, ICE must continue to comply
with the applicable reporting
requirements for ECMs.
IV. Related Matters
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 43 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 Commission rule
36.3 impose new regulatory and
b. Cost-Benefit Analysis
Section 15(a) of the CEA 44 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 actions. 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 one 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 of the provisions or
accomplish any of the purposes of the
Act. The Commission has considered
the costs and benefits in light of the
specific provisions of section 15(a) of
the Act and has concluded that the
Order, required by Congress to
strengthen Federal oversight of exempt
commercial markets and to prevent
market manipulation, is necessary and
appropriate to accomplish the purposes
of section 2(h)(7) 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 or 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
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
42 See
43 44
PO 00000
73 FR 75888, 75893 (Dec. 12, 2008).
U.S.C. 3507(d).
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.
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U.S.C. 19(a).
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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
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 TMT 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’’) 45 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 exempt commercial markets.
The Commission previously has
determined that exempt commercial
markets are not small entities for
purposes of the RFA.46 Accordingly, the
Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C.
605(b) that this Order, 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.
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V. Order
Order Relating to the TETCO–M3
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 TETCO–
M3 Financial Basis contract, traded on
the IntercontinentalExchange, Inc., does
not at this time satisfy the material price
reference and price linkage criteria for
significant price discovery contracts. In
light of the fact that the Commission has
found that the TMT contract does not
45 5
U.S.C. 601 et seq.
FR 42256, 42268 (Aug. 10, 2001).
46 66
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meet the material price reference or
price linkage criteria, according to the
Commission’s Guidance, it would be
unnecessary to evaluate whether the
TMT contract meets the material
liquidity criterion since it cannot be
used alone for SPDC determination.
Consistent with this determination,
the IntercontinentalExchange, Inc., is
not considered a registered entity 47
with respect to the TETCO–M3
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 TETCO–M3 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 TETCO–
M3 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. 2010–10327 Filed 5–4–10; 8:45 am]
BILLING CODE P
COMMODITY FUTURES TRADING
COMMISSION
Order Finding That the ICE DominionSouth Financial Basis Contract Traded
on the IntercontinentalExchange, Inc.,
Does Not Perform a Significant Price
Discovery Function
AGENCY: Commodity Futures Trading
Commission.
ACTION: Final Order.
On October 9, 2009, the
Commodity Futures Trading
SUMMARY:
47 7
PO 00000
U.S.C. 1a(29).
Frm 00032
Fmt 4703
Sfmt 4703
24599
Commission (‘‘CFTC’’ or ‘‘Commission’’)
published for comment in the Federal
Register 1 a notice of its intent to
undertake a determination whether the
Dominion-South Financial Basis
(‘‘DOM’’) 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 a
Commission report on ECMs. The
Commission has reviewed the entire
record in this matter, including all
comments received, and has determined
to issue an order finding that the DOM
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.
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.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
1 74
FR 52190 (October 9, 2009).
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).
2 Incorporated
E:\FR\FM\05MYN1.SGM
05MYN1
]]>Agencies
[Federal Register Volume 75, Number 86 (Wednesday, May 5, 2010)]
[Notices]
[Pages 24592-24599]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-10327]
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COMMODITY FUTURES TRADING COMMISSION
Order Finding that the TETCO-M3 Financial Basis Contract Traded
on the IntercontinentalExchange, Inc., Does Not Perform a Significant
Price Discovery Function
AGENCY: Commodity Futures Trading Commission.
ACTION: Final order.
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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 TETCO-M3 Financial Basis (``TMT'') 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 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 TMT 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.
---------------------------------------------------------------------------
\1\ 74 FR 52186 (October 9, 2009).
---------------------------------------------------------------------------
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. 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:
[[Page 24593]]
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).
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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 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 for which the exchange sells its price
information regarding the contract to market participants or industry
publications, or whose daily closing or settlement prices on 95 percent
or more of the days in the most recent quarter were within 2.5 percent
of the contemporaneously determined closing, settlement or other daily
price of another contract.
---------------------------------------------------------------------------
\4\ 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 will publish notice in the Federal Register
that it intends to undertake an evaluation whether the specified
agreement, contract or transaction performs a significant price
discovery function and to receive written views, data and arguments
relevant to its determination from the ECM and other interested
persons. Upon the close of the comment period, the Commission will
consider, among other things, all relevant information regarding the
subject contract and issue an order announcing and explaining its
determination whether or not the contract is a SPDC. The issuance of an
affirmative order signals the effectiveness of the Commission's
regulatory authorities over an ECM with respect to a SPDC; at that time
such an ECM becomes subject to all provisions of the CEA applicable to
registered entities.\5\ The issuance of such an order also triggers the
obligations, requirements and timetables prescribed in Commission rule
36.3(c)(4).\6\
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\5\ 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).
\6\ For an initial SPDC, 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 SPDCs, ECMs have a grace period of 30
calendar days to demonstrate core principle compliance.
---------------------------------------------------------------------------
II. Notice of Intent To Undertake SPDC Determination
On October 9, 2009, the Commission published in the Federal
Register notice of its intent to undertake a determination whether the
TMT contract performs a significant price discovery function and
requested comment from interested parties.\7\ Comments were received
from Industrial Energy Consumers of America (``IECA''), Working Group
of Commercial Energy Firms (``WGCEF''), Platts, ICE, Economists
Incorporated (``EI''), Natural Gas Supply Association (``NGSA''),
Federal Energy Regulatory Commission (``FERC'') and Financial
Institutions Energy Group (``FIEG'').\8\ The comment letters from FERC
\9\ and Platts did not directly address the issue of whether or not the
TMT contract is a SPDC; IECA expressed the opinion that the TMT
contract did perform a significant price discovery function; and thus,
should be subject to the requirements of the core principles enumerated
in Section 2(h)(7) of the Act, but did not elaborate on its reasons for
saying so or directly address any of the criteria. The remaining
comment letters raised substantive issues with respect to the
applicability of section 2(h)(7) to the TMT contract and generally
expressed the opinion that the TMT contract is not a SPDC because it
does not meet the price linkage, material price reference and material
liquidity criteria for SPDC determination. These comments are more
extensively discussed below, as applicable.
---------------------------------------------------------------------------
\7\ 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.
\8\ IECA describes itself as an ``association of leading
manufacturing companies'' whose membership ``represents a diverse
set of industries including: plastics, cement, paper, food
processing, brick, chemicals, fertilizer, insulation, steel, glass,
industrial gases, pharmaceutical, aluminum and brewing.'' WGCEF
describes itself as ``a diverse group of commercial firms in the
domestic energy industry whose primary business activity is the
physical delivery of one or more energy commodities to customers,
including industrial, commercial and residential consumers'' and
whose membership consists of ``energy producers, marketers and
utilities.'' McGraw-Hill, through its division Platts, compiles and
calculates monthly natural gas price indices from natural gas trade
data submitted to Platts by energy marketers. Platts includes those
price indices in its monthly Inside FERC's Gas Market Report
(``Inside FERC''). ICE is an exempt commercial market, as noted
above. EI is an economic consulting firm with offices located in
Washington, DC, and San Francisco, CA. NGSA is an industry
association comprised of natural gas producers and marketers. FERC
is an independent Federal regulatory agency that, among other
things, regulates the interstate transmission of natural gas, oil
and electricity. FIEG describes itself as an association of
investment and commercial banks who are active participants in
various sectors of the natural gas markets, ``including acting as
marketers, lenders, underwriters of debt and equity securities, and
proprietary investors.'' The comment letters are available on the
Commission's Web site: https://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-014.html.
\9\ FERC stated that the TMT contract is cash settled and does
not contemplate the actual physical delivery of natural gas.
Accordingly, FERC expressed the opinion that a determination by the
Commission that a contract performs a significant price discovery
function ``would not appear to conflict with FERC's exclusive
jurisdiction under the Natural Gas Act (NGA) over certain sales of
natural gas in interstate commerce for resale or with its other
regulatory responsibilities under the NGA'' and further that, ``FERC
staff will continue to monitor for any such conflict * * * [and]
advise the CFTC'' should any such potential conflict arise. CL 07.
---------------------------------------------------------------------------
III. Section 2(h)(7) of the CEA
The Commission is directed by section 2(h)(7) of the CEA to
consider the following criteria in determining a contract's 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
[[Page 24594]]
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 designated 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 or
consulting, 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 a 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 criteria must be present to support a determination that a
particular contract performs a significant price discovery function,
and one or more criteria may be inapplicable to a particular
contract.\10\ Moreover, the statutory language neither prioritizes the
criteria nor specifies the degree to which a SPDC must conform to the
various criteria. In Guidance issued in connection with the Part 36
rules governing ECMs with SPDCs, the Commission observed that these
criteria do not lend themselves to a mechanical checklist or formulaic
analysis. Accordingly, the Commission has indicated that in making its
determinations it will consider the circumstances under which the
presence of a particular criterion, or combination of criteria, would
be sufficient to support a SPDC determination.\11\ 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. 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. In evaluating a contract's price discovery role as
a price reference, the Commission will consider the extent to which, on
a frequent and recurring basis, bids, offers or transactions are
directly based on, or are determined by referencing, the prices
established for the contract.
---------------------------------------------------------------------------
\10\ In its October 9, 2009, Federal Register release, the
Commission identified material price reference, price linkage and
material liquidity as the possible criteria for SPDC determination
of the TMT contract. Arbitrage was not identified as a possible
criterion. As a result, arbitrage will not be discussed further in
this document and the associated Order.
\11\ 17 CFR part 36, Appendix A.
---------------------------------------------------------------------------
IV. Findings and Conclusions
The TETCO-M3 Financial Basis (TMT) Contract and the SPDC Indicia
The TMT contract is cash settled based on the difference between
the bidweek price index for a particular calendar month at the Texas
Eastern Transmission Company's (``TETCO's'') M3 zone, as published in
Platts' Inside FERC's Gas Market Report, and the final settlement price
of the New York Mercantile Exchange's (``NYMEX's'') physically-
delivered Henry Hub natural gas futures contract for the same calendar
month. The Platts bidweek price, which is published monthly, is based
on a survey of cash market traders who voluntarily report to Platts
data on their fixed-price transactions conducted during the last five
business days of the month for physical delivery of natural gas at the
M3 zone; such bidweek transactions specify the delivery of natural gas
on a uniform basis throughout the following calendar month at the
agreed upon rate. The Platts bidweek index is published on the first
business day of the calendar month in which the natural gas is to be
delivered. The size of the TMT contract is 2,500 million British
thermal units (``mmBtu''), and the unit of trading is any multiple of
2,500 mmBtu. The TMT contract is listed for up to 72 consecutive
calendar months.
The Henry Hub,\12\ which is located in Erath, Louisiana, is the
primary cash market trading and distribution center for natural gas in
the United States. It also is the delivery point and pricing basis for
the NYMEX's actively traded, physically-delivered natural gas futures
contract, which is the most important pricing reference for natural gas
in the United States. The Henry Hub, which is operated by Sabine Pipe
Line, LLC, serves as a juncture for 13 different pipelines. These
pipelines bring in natural gas from fields in the Gulf Coast region and
ship it to major consumption centers along the East Coast and Midwest.
The throughput shipping capacity of the Henry Hub is 1.8 trillion mmBtu
per day.
---------------------------------------------------------------------------
\12\ The term ``hub'' refers to a juncture where two or more
natural gas pipelines are connected. Hubs also serve as pricing
points for natural gas at the particular locations.
---------------------------------------------------------------------------
In addition to the Henry Hub, there are a number of other locations
where natural gas is traded. In 2008, there were 33 natural gas market
centers in North America.\13\ Some of the major trading centers include
Alberta, Northwest Rockies, Southern California border and the Houston
Ship Channel. For locations that are directly connected to the Henry
Hub by one or more pipelines and where there typically is adequate
shipping capacity, the price at the other locations usually directly
tracks the price at the Henry Hub, adjusted for transportation costs.
However, at other locations that are not directly connected to the
Henry Hub or where shipping capacity is limited, the prices at those
locations often diverge from the Henry Hub price. Furthermore, one
local price may be significantly different than the price at another
location even though the two markets' respective distances from the
Henry Hub are the same. The reason for such pricing disparities is that
a given location may experience supply and demand factors that are
specific to that region, such as differences in pipeline shipping
capacity, unusually high or low demand for heating or cooling or supply
disruptions caused by severe weather. As a consequence, local natural
gas prices can differ from the Henry Hub price by more than the cost of
shipping and such price differences can vary in an unpredictable
manner.
---------------------------------------------------------------------------
\13\ See https://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------
TETCO transports natural gas from production areas in Texas,
Louisiana, and the Gulf of Mexico to the Mid-Atlantic and Northeast
regions of the United States. The TETCO system, owned and operated by
Spectra Energy Transmission, spans some 9,200 miles and has a capacity
of 6.7 billion cubic feet per day with 75 billion cubic feet of
storage.\14\ The TMT contract prices trading activity at the M3 zone of
[[Page 24595]]
TETCO's pipeline. The M3 zone is defined as the portion of the pipeline
traversing the area between eastern Pennsylvania near the New Jersey
border and north central New Jersey. Specifically, the Platts index
includes deliveries at any point between the Delmont compressor station
in Westmoreland County, Pennsylvania, and the Hanover and Linden
stations in Morris County, New Jersey. Included are deals delivered at
interconnections with New York City distributors' citygates and with
Algonquin Gas Transmission at Lambertville in Hunterdon County, New
Jersey, and at the Hanover station.
---------------------------------------------------------------------------
\14\ See https://www.spectraenergy.com/what_we_do/businesses/us/assets/texas_eastern/.
---------------------------------------------------------------------------
The Dominion hub, a market center that encompasses the Leidy area
of north central Pennsylvania includes the TETCO M3 natural gas trading
hub. The Dominion market center had an estimated throughput capacity of
2.5 billion cubic feet per day in 2008. Moreover, the number of
pipeline interconnections at the Dominion hub was 17 in 2008, up from
16 in 2003. Lastly, the pipeline interconnection capacity of the
Dominion hub in 2008 was 8.3 billion cubic feet per day, which
constituted a 42 percent increase over the pipeline interconnection
capacity in 2003.\15\ The TMT hub is far removed from the Henry Hub but
is directly connected to the Henry Hub by TETCO's interstate pipeline
system.
---------------------------------------------------------------------------
\15\ See https://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------
The local price at the TMT location typically differs from the
price at the Henry Hub. Thus, the price of the Henry Hub physically-
delivered futures contract is an imperfect proxy for the TMT price.
Moreover, exogenous factors, such as adverse weather, can cause the TMT
gas price to differ from the Henry Hub price by an amount that is more
or less than the cost of shipping, making the NYMEX Henry Hub futures
contract even less precise as a hedging tool than desired by market
participants. Basis contracts \16\ allow traders to more accurately
discover prices at alternative locations and hedge price risk that is
associated with natural gas at such locations. In this regard, a
position at a local price for an alternative location can be
established by adding the appropriate basis swap position to a position
taken in the NYMEX physically-delivered Henry Hub contract (or in the
NYMEX or ICE Henry Hub look-alike contract, which cash settle based on
the NYMEX physically-delivered natural gas contract's final settlement
price).
---------------------------------------------------------------------------
\16\ Basis contracts denote the difference in the price of
natural gas at a specified location minus the price of natural gas
at the Henry Hub. The differential can be either a positive or
negative value.
---------------------------------------------------------------------------
In its October 9, 2009, Federal Register notice, the Commission
identified material price reference, price linkage and material
liquidity as the potential SPDC criteria applicable to the TMT
contract. Each of these criteria is discussed below.\17\
---------------------------------------------------------------------------
\17\ As noted above, the Commission did not find an indication
of arbitrage in connection with this contract; accordingly, that
criterion was not discussed in reference to the TMT contract.
---------------------------------------------------------------------------
1. Material Price Reference Criterion
The Commission's October 9, 2009, Federal Register notice
identified material price reference as a potential basis for a SPDC
determination with respect to this contract. The Commission considered
the fact that ICE sells its price data to market participants in a
number of different packages which vary in terms of the hubs covered,
time periods, and whether the data are daily only or historical. For
example, ICE offers the ``East Gas End of Day'' and ``OTC Gas End of
Day'' \18\ packages with access to all price data or just current
prices plus a selected number of months (i.e., 12, 24, 36 or 48 months)
of historical data. These two packages include price data for the TMT
contract.
---------------------------------------------------------------------------
\18\ The OTC Gas End of Day dataset includes daily settlement
prices for natural gas contracts listed for all points in North
America.
---------------------------------------------------------------------------
The Commission also noted that its October 2007 Report on the
Oversight of Trading on Regulated Futures Exchanges and Exempt
Commercial Markets (``ECM Study'') \19\ found that in general, market
participants view the ICE as a price discovery market for certain
natural gas contracts. The study did not specify which markets
performed this function; nevertheless, the Commission determined that
the TMT contract, while not mentioned by name in the ECM Study, might
warrant further study. Following the issuance of the Federal Register
release, the Commission further evaluated ICE's data offerings and
their use by industry participants. The TETCO M3 zone is a significant
trading center for natural gas but is not as important as other hubs,
such as the Henry Hub, for pricing natural gas in the eastern half of
the U.S. marketplace.
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\19\ https://www.cftc.gov/ucm/groups/public/newsroom/documents/file/pr5403-07_ecmreport.pdf
---------------------------------------------------------------------------
The Commission will rely on one of two sources of evidence--direct
or indirect--to determine that the price of a contract was being used
as a material price reference and therefore, serving a significant
price discovery function.\20\ With respect to direct evidence, the
Commission will consider the extent to which, on a frequent and
recurring basis, cash market bids, offers or transactions are directly
based on or quoted at a differential to, the prices generated on the
ECM in question. Direct evidence may be established when cash market
participants are quoting bid or offer prices or entering into
transactions at prices that are set either explicitly or implicitly at
a differential to prices established for the contract in question. Cash
market prices are set explicitly at a differential to the section
2(h)(3) contract when, for instance, they are quoted in dollars and
cents above or below the reference contract's price. Cash market prices
are set implicitly at a differential to a section 2(h)(3) contract
when, for instance, they are arrived at after adding to, or subtracting
from the section 2(h)(3) contract, but then quoted or reported at a
flat price. With respect to indirect evidence, the Commission will
consider the extent to which the price of the contract in question is
being routinely disseminated in widely distributed industry
publications--or offered by the ECM itself for some form of
remuneration--and consulted on a frequent and recurring basis by
industry participants in pricing cash market transactions.
---------------------------------------------------------------------------
\20\ 17 CFR part 36, Appendix A.
---------------------------------------------------------------------------
The M3 zone is a major trading center for natural gas in the United
States and, as noted, ICE sells price information for the TMT contract.
Upon further evaluation, however, the Commission has found that the
cash market transactions are not being directly based on or quoted as a
differential to the TMT contract nor is that contract routinely
consulted by industry participants in pricing cash market transactions.
Thus, the contract does not meet the Commission's Guidance for the
material price reference criterion. In this regard, liquidity
constraints caused by severe winter weather on peak days may create
complications for cash market participants. Because the TMT contract is
not consulted on a frequent basis, it does not satisfy the direct price
reference test for the existence of material price reference.
Furthermore, the Commission notes that publication of the TMT
contract's prices is not indirect evidence of material price reference.
The TMT contract's prices are published with those of numerous other
contracts, which are of more interest to market participants. Due to
the lack of importance of the M3 zone, the Commission has concluded
that traders likely do not specifically purchase the ICE data packages
for the TMT contract's prices and do not consult
[[Page 24596]]
such prices on a frequent and recurring basis in pricing cash market
transactions.
i. Federal Register Comments
As noted above, WGCEF, ICE, EI, NGSA and FIEG addressed the
question of whether the TMT contract met the material price reference
criterion for a SPDC.\21\ The commenters argued that because the TMT
contract is cash-settled, it cannot truly serve as an independent
``reference price'' for transactions in natural gas at this location.
Rather, the commenters argue, the underlying cash price series against
which the ICE TMT contract is settled (in this case, the Platts bidweek
price for natural gas at this location) is the authentic reference
price and not the ICE contract itself. The Commission believes that
this interpretation of price reference is too limiting and believes
that a cash-settled derivatives contract could meet the price reference
criterion if market participants ``consult on a frequent and recurring
basis'' the derivatives contract when pricing forward, fixed-price
commitments or other cash-settled derivatives that seek to ``lock in''
a fixed price for some future point in time to hedge against adverse
price movements. As noted above, the M3 zone is a significant trading
center for natural gas in North America. However, traders do not
consider the M3 zone to be as important as other natural gas trading
points.
---------------------------------------------------------------------------
\21\ As noted above, IECA expressed the opinion that the TMT
contract met the criteria for SPDC determination but did not provide
its reasoning.
---------------------------------------------------------------------------
ICE also argued that the Commission appeared to base the case that
the TMT contract is potentially an SPDC on a disputable assertion. In
issuing its notice of intent to determine whether the TMT contract is
an SPDC, the CFTC cited a general conclusion in its ECM Study ``that
certain market participants referred to ICE as a price discovery market
for certain natural gas contracts.'' ICE states that CFTC's reason is
``hard to quantify as the ECM report does not mention'' this contract
as a potential SPDC. ``It is unknown which market participants made
this statement in 2007 or the contracts that were referenced.'' In
response to the above comment, the Commission notes that it cited the
ECM Study's general finding that some ICE natural gas contracts appear
to be regarded as price discovery markets merely as an indicia that an
investigation of certain ICE contracts may be warranted. The ECM Study
was not intended to serve as the sole basis for determining whether or
not a particular contract meets the material price reference criterion.
Both EI \22\ and WGCEF \23\ stated that publication of price data
in a package format is a weak justification for material price
reference. These commenters argue that market participants generally do
not purchase ICE data sets for one contract's prices, such as those for
the TMT contract. Instead, traders are interested in the settlement
prices, so the fact that ICE sells the TMT prices as part of a broad
package is not conclusive evidence that market participants are buying
the ICE data sets because they find the TMT prices have substantial
value to them. As mentioned above, the Commission notes that
publication of the TMT contract's prices is not indirect evidence of
routine dissemination. The TMT contract's prices are published with
those of numerous other contracts, which are of more interest to market
participants. Due to the lack of importance of the M3 zone, the
Commission has concluded that traders likely do not specifically
purchase the ICE data packages for the TMT contract's prices and do not
consult such prices on a frequent and recurring basis in pricing cash
market transactions.
---------------------------------------------------------------------------
\22\ CL 05.
\23\ CL 02.
---------------------------------------------------------------------------
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the TMT contract does
not meet the material price reference criterion because cash market
transactions are not priced either explicitly or implicitly on a
frequent and recurring basis at a differential to the TMT contract's
price (direct evidence). Moreover, while the ECM sells the TMT
contract's price data to market participants, market participants
likely do not specifically purchase the ICE data packages for the TMT
contract's prices and do not consult such prices on a frequent and
recurring basis in pricing cash market transactions (indirect
evidence).
2. Price Linkage Criterion
In its October 9, 2009, Federal Register notice, the Commission
identified price linkage as a potential basis for a SPDC determination
with respect to the TMT contract. In this regard, the final settlement
of the TMT contract is based, in part, on the final settlement price of
the NYMEX's physically-delivered natural gas futures contract, where
the NYMEX is registered with the Commission as a DCM.
The Commission's Guidance on Significant Price Discovery Contracts
notes that a ``price-linked contract is a contract that relies on a
contract traded on another trading facility to settle, value or
otherwise offset the price-linked contract.'' \24\ Furthermore, the
Guidance notes that, ``[f]or a linked contract, the mere fact that a
contract is linked to another contract will not be sufficient to
support a determination that a contract performs a significant price
discovery function. To assess whether such a determination is
warranted, the Commission will examine the relationship between
transaction prices of the linked contract and the prices of the
referenced contract. The Commission believes that where material
liquidity exists, prices for the linked contract would be observed to
be substantially the same as or move substantially in conjunction with
the prices of the referenced contract.'' \25\ Furthermore, the Guidance
proposes a threshold price relationship such that prices of the ECM
linked contract will fall within a 2.5 percent price range for 95
percent of contemporaneously determined closing, settlement or other
daily prices over the most recent quarter. Finally, in Guidance the
Commission stated that it would consider a linked contract that has a
trading volume equivalent to 5 percent of the volume of trading in the
contract to which it is linked to have sufficient volume to be deemed a
SPDC (``minimum threshold'').\26\
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\24\ Appendix A to the Part 36 rules.
\25\ Id.
\26\ Id.
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To assess whether the TMT contract meets the price linkage
criterion, Commission staff obtained price data from ICE and performed
the statistical tests cited above. Staff found that, while the TMT
contract price is determined, in part, by the final settlement price of
the NYMEX physically-delivered natural gas futures contract (a DCM
contract), the imputed TMT location price (derived by adding the NYMEX
Henry Hub Natural Gas price to the ICE TCO basis price) is not within
2.5 percent of the settlement price of the corresponding NYMEX Henry
Hub natural gas futures contract on 95 percent or more of the days.
Specifically, during the third quarter of 2009, none of the TMT natural
gas prices derived from the ICE basis values were within 2.5 percent of
the daily settlement price of the NYMEX Henry Hub futures contract. In
addition, staff found that the TMT contract fails to
[[Page 24597]]
meet the volume threshold requirement. In particular, the total trading
volume in the NYMEX Natural Gas contract during the third quarter of
2009 was 14,022,963 contracts, with 5 percent of that number being
701,148 contracts. Trades on the ICE centralized market in the TMT
contract during the same period was 145,681 contracts (equivalent to
36,420 NYMEX contracts, given the size difference).\27\ Thus,
centralized-market trades in the TMT contract amounted to less than the
minimum threshold.\28\
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\27\ The size of the NYMEX Henry Hub physically-delivered
natural gas futures contract is 10,000 mmBtu. The TMT contract has a
trading unit of 2,500 mmBtu, which is one-quarter the size of the
NYMEX Henry Hub contract.
\28\ Supplemental data subsequently submitted by the ICE
indicated that block trades are included in the on-exchange trades;
block trades comprise 63.3 percent of all transactions in the TMT
contract.
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i. Federal Register Comments
As noted above, WGCEF, ICE, EI, NGSA and FIEG addressed the
question of whether the TMT contract met the price linkage criterion
for a SPDC.\29\ Each of the commenters expressed the opinion that the
TMT contract did not appear to meet the above-discussed Commission
guidance regarding the price relationship and/or the minimum volume
threshold relative to the DCM contract to which the TMT is linked.
Based on its analysis discussed above, the Commission agrees with this
assessment.
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\29\ As noted above, IECA expressed the opinion that the TMT
contract met the criteria for SPDC determination but did not provide
its reasoning.
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ii. Conclusion Regarding the Price Linkage Criterion
Based on the above, the Commission finds that the TMT contract does
not meet the price linkage criterion because it fails the price
relationship and volume tests provided for in the Commission's
Guidance.
3. Material Liquidity Criterion
As noted above, in its October 9, 2009, Federal Register notice,
the Commission identified material price reference, price linkage and
material liquidity as potential criteria for SPDC determination of the
TMT contract. To assess whether a contract meets the material liquidity
criterion, the Commission first examines trading activity as a general
measurement of the contract's size and potential importance. If the
Commission finds that the contract in question meets a threshold of
trading activity that would render it of potential importance, the
Commission will then perform a statistical analysis to measure the
effect that the prices of the subject contract potentially may have on
prices for other contracts listed on an ECM or a DCM.
The total number of transactions executed on ICE's electronic
platform in the TMT contract was 1,073 in the second quarter of 2009,
resulting in a daily average of 16.8 trades. During the same period,
the TMT contract had a total trading volume of 145,328 contracts and an
average daily trading volume of 2,271 contracts. Moreover, open
interest as of June 30, 2009, was 168,963 contracts, which included
trades executed on ICE's electronic trading platform, as well as trades
executed off of ICE's electronic trading platform and then brought to
ICE for clearing. In this regard, ICE does not differentiate between
open interest created by a transaction executed on its trading platform
and that created by a transaction executed off its trading
platform.\30\
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\30\ 74 FR 52186 (October 9, 2009).
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In a subsequent filing dated November 13, 2009, ICE reported that
total trading volume in the third quarter of 2009 was 145,681 contracts
(or 2,207 contracts on a daily basis). In terms of number of
transactions, 1,140 trades occurred in the third quarter of 2009 (17.3
trades per day). As of September 30, 2009, open interest in the TMT
contract was 251,573 contracts, which included trades executed on ICE's
electronic trading platform, as well as trades executed off of ICE's
electronic trading platform and then brought to ICE for clearing.
As indicated above, the average number of trades per day in the
second and third quarters of 2009 was above the minimum reporting level
(5 trades per day). Moreover, trading activity in the TMT contract, as
characterized by total quarterly volume, indicates that the TMT
contract experiences trading activity that is greater than in thinly-
traded contracts.\31\ This level of trading activity would ordinarily
merit a statistical analysis to measure the effect that the prices of
the subject contract potentially may have on prices for other contracts
listed on an ECM or DCM. However, in light of the fact that the
Commission has found that the TETCO-M3 contract does not meet the
material price reference or price linkage criteria, according to the
Commission's guidance it would be unnecessary to evaluate whether the
TETCO-M3 contract meets the material liquidity criterion since it
cannot be used alone for SPDC determination.\32\
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\31\ Staff has advised the Commission that in its experience, a
thinly-traded contract is, generally, one that has a quarterly
trading volume of 100,000 contracts or less. In this regard, in the
third quarter of 2009, physical commodity futures contracts with
trading volume of 100,000 contracts or fewer constituted less than
one percent of total trading volume of all physical commodity
futures contracts.
\32\ In establishing guidance to illustrate how it will evaluate
the various criteria, or combinations of criteria, when determining
whether a contract is a SPDC, the Commission made clear that
``material liquidity itself would not be sufficient to make a
determination that a contract is a [SPDC], * * * but combined with
other factors it can serve as a guidepost indicating which contracts
are functioning as [SPDCs].'' For the reasons discussed above, the
Commission has found that the TMT contract does not meet either the
price linkage or material price reference criterion. In light of
this finding and the Commission's Guidance cited above, there is no
need to evaluate further the material liquidity criteria since it
cannot be used alone as a basis for a SPDC determination.
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i. Federal Register Comments
As noted above, WGCEF, ICE, EI, NGSA and FIEG addressed the
question of whether the TMT contract met the material liquidity
criterion for a SPDC.\33\ These commenters stated that the TMT contract
does not meet the material liquidity criterion for SPDC determination
for a number of reasons.
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\33\ As noted above, IECA expressed the opinion that the TMT
contract met the criteria for SPDC determination but did not provide
its reasoning.
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WGCEF,\34\ ICE \35\ and EI \36\ noted that the Commission's
Guidance had posited concepts of liquidity that generally assumed a
fairly constant stream of prices throughout the trading day, and noted
that the relatively low number of trades per day in the TMT contract
did not meet this standard of liquidity. The Commission observes that a
continuous stream of prices would indeed be an indication of liquidity
for certain markets but the Guidance also notes that ``quantifying the
levels of immediacy and price concession that would define material
liquidity may differ from one market or commodity to another.'' \37\
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\34\ CL 02.
\35\ CL 04.
\36\ CL 05.
\37\ Guidance, supra.
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WGCEF, FIEG \38\ and NGSA \39\ noted that the TMT contract
represents a differential, which does not affect other contracts,
including the NYMEX Henry Hub contract and physical gas contracts. FIEG
and WGCEF also noted that the TMT contract's trading volume represents
only a fraction of natural gas trading.
---------------------------------------------------------------------------
\38\ CL 08.
\39\ CL 06.
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ICE opined that the Commission ``seems to have adopted a five
trade-per-day test to determine whether a contract is materially
liquid. It is worth noting that ICE originally suggested that the CFTC
use a five trades-per-day threshold as the basis for an ECM to report
trade data to the CFTC.'' Furthermore, FIEG cautioned the
[[Page 24598]]
Commission in using a reporting threshold as a measure of liquidity. In
this regard, the Commission adopted a five trades-per-day threshold as
a reporting requirement to enable it to ``independently be aware of ECM
contracts that may develop into SPDCs'' \40\ rather than solely relying
upon an ECM on its own to identify any such potential SPDCs to the
Commission. Thus, any contract that meets this threshold may be subject
to scrutiny as a potential SPDC but this does not mean that the
contract will be found to be a SPDC merely because it met the reporting
threshold.
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\40\ 73 FR 75892 (December 12, 2008).
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ICE and EI proposed that the statistics provided by ICE were
misinterpreted and misapplied by the Commission. In particular, ICE
stated that the volume figures used in the Commission's analysis (cited
above) ``include trades made in all months of each contract'' as well
as in strips of contract months, and a ``more appropriate method of
determining liquidity is to examine the activity in a single traded
month or strip of a given contract.'' \41\ A similar argument was made
by EI, which observed that the five-trades-per-day number ``is highly
misleading * * * because the contracts can be offered for as long as
120 months, [thus] the average per day for an individual contract may
be less than 1 per day.''
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\41\ In addition, both EI and ICE stated that the trades-per-day
statistics that it provided to the Commission in its quarterly
filing and which were cited in the Commission's October 9, 2009,
Federal Register notice includes 2(h)(1) transactions, which were
not completed on the electronic trading platform and should not be
considered in the SPDC determination process. The Commission staff
asked ICE to review the data it sent in its quarterly filings; ICE
confirmed that the volume data it provided and which the Commission
cited includes only transaction data executed on ICE's electronic
trading platform. As noted above, supplemental data supplied by ICE
confirmed that block trades are in addition to the trades that were
conducted on the electronic platform; block trades comprise about 63
percent of all transactions in the TMT contract. Commission
acknowledges that the open interest information it provided in its
October 9, 2009, Federal Register notice includes transactions made
off the ICE platform. However, once open interest is created, there
is no way for ICE to differentiate between ``on-exchange'' versus
``off-exchange'' created positions, and all such positions are
fungible with one another and may be offset in any way agreeable to
the position holder regardless of how the position was initially
created. CL 04.
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It is the Commission's opinion that liquidity, as it pertains to
the TMT contract, is typically a function of trading activity in
particular lead months and, given sufficient liquidity in such months,
the ICE TMT contract itself would be considered liquid. In any event,
in light of the fact that the Commission has found that the TMT
contract does not meet the material price reference or price linkage
criteria, according to the Commission's Guidance, it would be
unnecessary to evaluate whether the TM contract meets the material
liquidity criterion since it cannot be used alone for SPDC
determination.
ii. Conclusion Regarding Material Liquidity
For the reasons discussed above, the Commission has found that the
TMT contract does not meet either the price linkage or material price
reference criteria. Accordingly, there is no need to evaluate further
the material liquidity criterion since it cannot be used alone as a
basis for a SPDC determination.
4. Overall Conclusion
After considering the entire record in this matter, including the
comments received, the Commission has determined that the TMT contract
does not perform a significant price discovery function under the
criteria established in section 2(h)(7) of the CEA.
Specifically, the Commission has determined that the TMT contract
does not meet the material price reference and price linkage criteria
at this time. In light of the fact that the Commission has found that
the TMT contract does not meet the material price reference or price
linkage criteria, according to the Commission's Guidance, it would be
unnecessary to evaluate whether the TMT contract meets the material
liquidity criterion since it cannot be used alone for SPDC
determination. Accordingly, the Commission is issuing the attached
Order declaring that the TMT contract is not a SPDC.
Issuance of this Order indicates that the Commission does not at
this time regard ICE as a registered entity in connection with its TMT
contract.\42\ Accordingly, with respect to its TMT contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
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\42\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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IV. Related Matters
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \43\ 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 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.
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\43\ 44 U.S.C. 3507(d).
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b. Cost-Benefit Analysis
Section 15(a) of the CEA \44\ 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 actions. 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 one 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 of the provisions or accomplish any of the purposes of
the Act. The Commission has considered the costs and benefits in light
of the specific provisions of section 15(a) of the Act and has
concluded that the Order, required by Congress to strengthen Federal
oversight of exempt commercial markets and to prevent market
manipulation, is necessary and appropriate to accomplish the purposes
of section 2(h)(7) of the Act.
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\44\ 7 U.S.C. 19(a).
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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 or
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 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
[[Page 24599]]
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 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 TMT 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'') \45\ 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 exempt
commercial markets. The Commission previously has determined that
exempt commercial markets are not small entities for purposes of the
RFA.\46\ Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Order, 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.
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\45\ 5 U.S.C. 601 et seq.
\46\ 66 FR 42256, 42268 (Aug. 10, 2001).
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V. Order
Order Relating to the TETCO-M3 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 TETCO-M3 Financial Basis contract,
traded on the IntercontinentalExchange, Inc., does not at this time
satisfy the material price reference and price linkage criteria for
significant price discovery contracts. In light of the fact that the
Commission has found that the TMT contract does not meet the material
price reference or price linkage criteria, according to the
Commission's Guidance, it would be unnecessary to evaluate whether the
TMT contract meets the material liquidity criterion since it cannot be
used alone for SPDC determination.
Consistent with this determination, the IntercontinentalExchange,
Inc., is not considered a registered entity \47\ with respect to the
TETCO-M3 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 TETCO-M3
Financial Basis contract with the issuance of this Order.
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\47\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------
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 TETCO-M3 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. 2010-10327 Filed 5-4-10; 8:45 am]
BILLING CODE P
