Order Finding That the ICE Dominion-South Financial Basis Contract Traded on the IntercontinentalExchange, Inc., Does Not Perform a Significant Price Discovery Function, 24599-24606 [2010-10332]
Download as PDF
<![CDATA[
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
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.
sroberts on DSKD5P82C1PROD with NOTICES
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
VerDate Mar<15>2010
19:02 May 04, 2010
Jkt 220001
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
sroberts on DSKD5P82C1PROD with NOTICES
24600
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
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
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,
4 74 FR 12178 (Mar. 23, 2009); these rules became
effective on April 22, 2009.
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).
VerDate Mar<15>2010
19:02 May 04, 2010
Jkt 220001
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 DOM
contract performs a significant price
discovery function, and requested
comment from interested parties.7
Comments were received from the
Industrial Energy Consumers of America
(‘‘IECA’’), Working Group of Commercial
Energy Firms (‘‘WGCEF’’), ICE, Platts,
Economists Incorporated (‘‘EI’’), Federal
Energy Regulatory Commission
(‘‘FERC’’), Natural Gas Suppliers
Association (‘‘NGSA’’) and Financial
Institutions Energy Group (‘‘FIEG’’).8
The comment letters from FERC 9 and
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
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.’’ ICE is an ECM, as noted
above. 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’’). 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/2009/09-018.html.
9 FERC stated that the DOM contract is cash
settled and does not contemplate actual physical
PO 00000
Frm 00033
Fmt 4703
Sfmt 4703
Platts did not directly address the issue
of whether or not the DOM contract is
a SPDC; IECA concluded that the DOM
contract is a SPDC, but did not provide
a basis for its conclusion.10 The other
parties’ comments raised substantive
issues with respect to the applicability
of section 2(h)(7) to the DOM contract,
generally asserting that the DOM
contract is not a SPDC as it does not
meet the material price reference, price
linkage and material liquidity criteria
for SPDC determination. Those
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 factors 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
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
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, ‘‘the FERC staff will continue to
monitor for any such conflict * * * [and] advise
the CFTC’’ should any such potential conflict arise.
CL 07.
10 IECA stated that the subject ICE contract should
‘‘be required to come into compliance with core
principles mandated by Section 2(h)(7) of the Act
and with other statutory provisions applicable to
registered entities. [This contract] should be subject
to the Commission’s position limit authority,
emergency authority and large trader reporting
requirements, among others.’’ CL 01.
E:\FR\FM\05MYN1.SGM
05MYN1
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
sroberts on DSKD5P82C1PROD with NOTICES
commodity are directly based on, or are
determined by referencing, the prices
generated by agreements, contracts or
transactions being traded or executed on
the electronic trading facility.
• Material liquidity—the extent to
which the volume of agreements,
contracts or transactions in 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.11 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.12 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.
11 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 DOM
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.
12 17 CFR part 36, Appendix A.
VerDate Mar<15>2010
19:02 May 04, 2010
Jkt 220001
IV. Findings and Conclusions
a. The Dominion-South Financial Basis
(DOM) Contract and the SPDC Indicia
The DOM contract is cash settled
based on the difference between the
bidweek price index for a particular
calendar month at the Dominion
Transmission, Inc.’s, Appalachia hub, as
published in Platts’ Inside FERC’s Gas
Market Report, and the final settlement
price of the New York Mercantile
Exchange’s (‘‘NYMEX’s’’) physicallydelivered 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 for physical delivery of
natural gas at Dominion Transmission,
Inc.’s, Appalachia hub conducted
during the last five business days of the
month; 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 DOM contract
is 2,500 million British thermal units
(‘‘mmBtu’’), and the unit of trading is
any multiple of 2,500 mmBtu. The DOM
contract is listed for up to 72
consecutive calendar months.
The Henry Hub,13 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
Henry Hub 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 move 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.14 Some of the major trading
centers include Alberta, Northwest
Rockies, Southern California border and
the Houston Ship Channel. For
13 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.
14 See https://www.eia.doe.gov/pub/oil_gas/
natural_gas/feature_articles/2009/ngmarketcenter/
ngmarketcenter.pdf.
PO 00000
Frm 00034
Fmt 4703
Sfmt 4703
24601
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.
Dominion Transmission Inc.’s
Appalachia hub is a gateway for natural
gas flowing from the Midwest bound for
the Mid-Atlantic and Northeast markets
(excluding New England). According to
Platts’ methodology, deliveries include
those into a transmission line running
northeast from Warren County, Ohio,
midway between Cincinnati and
Dayton, and merges with the second
line northeast of Pittsburg,
Pennsylvania. The second line runs
from Buchanan County, Virginia, on the
Virginia/West Virginia border north to
the end of the zone at Valley Gate in
Armstrong County, Pennsylvania. The
major stations in the South Point system
include interconnections with ANR
Pipeline (Lebanon station), Columbia
Gas Transmission (Windbridge and
Loudoun stations), Tennessee Gas
Pipeline (Cornwell station),
Transcontinental Gas Pipe Line
(Nokesville station) and Texas Eastern
Transmission (Lebanon, Oakford,
Chambersburg, Perulack and Windridge
stations). Storage pools in the South
Point system include South Bend,
Murrysville, Oakford, Gamble, Hayden,
Webster, Colvin, North Summit,
Bridgeport, Lost Creek, Kennedy, Fink
and Rocket Newberne.
The Dominion Market Center, which
includes the Dominion hub, had an
estimated throughput capacity of 2.5
billion cubic feet per day in 2008.
Moreover, the number of pipeline
interconnections at the Dominion
Market Center was 17 in 2008, up from
16 in 2003. Lastly, the pipeline
E:\FR\FM\05MYN1.SGM
05MYN1
24602
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
interconnection capacity of the
Dominion Market Center 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 Dominion Market Center is
far removed from the Henry Hub but is
directly connected to the Henry Hub by
an existing pipeline.
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
DOM contract. Each of these criteria is
discussed below.16
sroberts on DSKD5P82C1PROD with NOTICES
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 ‘‘East Gas End of Day’’ and ‘‘OTC
Gas End of Day’’ 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 DOM 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’’) 17 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
DOM contract, while not mentioned by
name in the ECM Study, might warrant
further study.
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.18
With respect to direct evidence, the
Commission will consider the extent to
which, on a frequent and recurring
15 See https://www.eia.doe.gov/pub/oil_gas/
natural_gas/feature_articles/2009/ngmarketcenter/
ngmarketcenter.pdf.
16 As noted above, the Commission did not find
an indication of arbitrage in connection with this
contract; accordingly, that criterion is not discussed
in reference to the DOM contract.
17 https://www.cftc.gov/ucm/groups/public/
@newsroom/documents/file/pr5403–07
_ecmreport.pdf.
18 17 part CFR 36, Appendix A.
VerDate Mar<15>2010
19:02 May 04, 2010
Jkt 220001
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.
Following the issuance of the Federal
Register release, the Commission further
evaluated the ICE’s data offerings and
their use by industry participants. The
Dominion Transmission, Inc.’s,
Appalachia hub 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.
Although the Dominion hub is a
major trading center for natural gas in
the United States and, as noted, ICE
sells price information for the DOM
contract, the Commission has found
upon further evaluation that the cash
market transactions are not being
directly based or quoted as a differential
to the DOM contract nor is that contract
routinely consulted by industry
participants in pricing cash market
transactions and thus does not meet the
Commission’s Guidance for the material
price reference criterion. In this regard,
the NYMEX Henry Hub physically
delivered natural gas futures contract is
routinely consulted by industry
participants in pricing cash market
transactions at this location. Because
both the Dominion hub is directly
connected to the Henry Hub via the Gas
Transmission interstate pipeline, it is
not necessary for market participants to
independently refer to the DOM
contract for pricing natural gas at this
location. Thus, the DOM contract does
not satisfy the direct price reference test
PO 00000
Frm 00035
Fmt 4703
Sfmt 4703
for existence of material price reference.
Furthermore, the Commission has found
that the sale by ICE of the DOM
contract’s prices is not indirect evidence
of material price reference. The DOM
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 Dominion hub, the
Commission has concluded that traders
likely do not specifically purchase the
ICE data packages for the DOM
contract’s prices and do not consult
such prices on a frequent and recurring
basis in pricing cash market
transactions.
i. Federal Register Comments
As noted above, WGCEF,19 ICE,20
EI,21 NGSA 22 and FIEG 23 addressed the
question of whether the DOM contract
met the material price reference
criterion for a SPDC.24 The commenters
argued that because the DOM 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 DOM 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 in that it only
considers the final index value on
which the contract is cash settled after
trading ceases. Instead, the Commission
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
Dominion hub is a significant trading
center for natural gas in North America.
However, traders do not consider the
Dominion hub to be as important as
other natural gas trading points, such as
the Henry Hub.
ICE argued that the Commission
appeared to base the case that the DOM
contract is potentially a SPDC on a
disputable assertion. In issuing its
notice of intent to determine whether
19 CL
02.
04.
21 CL 05.
22 CL 06.
23 CL 08.
24 As noted above, IECA expressed the opinion
that the DOM contract met the criteria for SPDC
determination but did not provide its reasoning.
20 CL
E:\FR\FM\05MYN1.SGM
05MYN1
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
sroberts on DSKD5P82C1PROD with NOTICES
the DOM contract is a 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 stated 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.’’ 25 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, and 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 26 and WGCEF 27 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 DOM contract.
Instead, traders are interested in the
settlement prices, so the fact that ICE
sells the DOM prices as part of a broad
package is not conclusive evidence that
market participants are buying the ICE
data sets because they find the DOM
prices have substantial value to them.
As mentioned above, the Commission
has found that the sale by ICE of the
DOM contract’s prices is not indirect
evidence of routine dissemination. The
DOM contract’s prices are sold as a
package with those of numerous other
contracts, which are of more interest to
market participants. Due to the lack of
importance of the Dominion hub, the
Commission has concluded that traders
likely do not specifically purchase the
ICE data packages for the DOM
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 DOM contract does not
meet the material price reference
criterion because cash market
transactions are not priced on a frequent
and recurring basis at a differential to
the DOM contract’s price (direct
evidence). Moreover, while the ECM
25 CL
04.
05.
27 CL 02.
sells the DOM contract’s price data to
market participants, market participants
likely do not specifically purchase the
ICE data packages for the DOM
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 DOM contract. In this
regard, the final settlement of the DOM
contract is based, in part, on the final
settlement price of the NYMEX’s Henry
Hub 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 28
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.’’ 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.’’ 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, the Commission also
stated in the Guidance 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 potentially to be deemed a
SPDC (‘‘minimum threshold’’).
To assess whether the DOM 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 Dominion-South price is
26 CL
VerDate Mar<15>2010
28 Appendix
19:02 May 04, 2010
Jkt 220001
PO 00000
A to the Part 36 rules.
Frm 00036
Fmt 4703
Sfmt 4703
24603
determined, in part, by the final
settlement price of the NYMEX
physically-delivered natural gas futures
contract (a DCM contract), the
Dominion-South 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, 11 percent of the Dominion
Transmission, Inc.’s, Appalachia hub
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 finds that the DOM contract fails to
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. The number of
trades on the ICE centralized market in
the DOM contract during the same
period was 54,107 contracts (equivalent
to 13,527 NYMEX contracts, given the
size difference).29 Thus, centralizedmarket trades in the DOM contract
amounted to less than the minimum
threshold.
i. Federal Register Comments
WGCEF, ICE, EI, NGSA and FIEG
addressed the question of whether the
DOM contract met the price linkage
criterion for a SPDC.30 Each of the
commenters expressed the opinion that
the DOM 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 DOM is linked.
Based on its analysis discussed above,
the Commission agrees with this
assessment.
ii. Conclusion Regarding the Price
Linkage Criterion
The Commission finds that the DOM
contract does not meet the price linkage
criterion because it fails the volume and
price linkage tests provided for in the
Commission’s Guidance.
3. Material Liquidity Factor
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 DOM contract. To
29 The DOM contract is one-quarter the size of the
NYMEX Henry Hub physically-delivered futures
contract.
30 As noted above, IECA expressed the opinion
that the DOM contract met the criteria for SPDC
determination but did not provide its reasoning.
E:\FR\FM\05MYN1.SGM
05MYN1
24604
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
sroberts on DSKD5P82C1PROD with NOTICES
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.
Based upon on a required quarterly
filing made by ICE on July 27, 2009, the
total number of DOM trades executed on
ICE’s electronic trading platform was
347 in the second quarter of 2009,
resulting in a daily average of 5.4 trades.
During the same period, the DOM
contract had a total trading volume on
ICE’s electronic trading platform of
38,872 contracts and an average daily
trading volume of 607.4 contracts. The
open interest as of June 30, 2009, was
97,240 contracts, which includes 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 a subsequent filing dated
November 13, 2009, ICE reported that
460 separate trades occurred on its
electronic platform in the third quarter
of 2009, resulting in a daily average of
7.0 trades. During the same period, the
DOM contract had a total trading
volume on its electronic platform of
54,107 contracts (which was an average
of 819 contracts per day). As of
September 30, 2009, open interest in the
DOM contract was 97,213 contracts.
Reported open interest included
positions resulting from trades that were
executed on ICE’s electronic platform,
as well as trades that were executed off
of ICE’s electronic platform and brought
to ICE for clearing.31
As indicated above, the average
number of trades per day in the second
and third quarters of 2009 was only
slightly above the minimum reporting
level (5 trades per day). Moreover,
trading activity in the DOM contract, as
characterized by total quarterly volume,
indicates that the DOM contract
experiences trading activity similar to
that of other thinly-traded contracts.32
31 Supplemental data supplied by the ICE
confirmed that block trades in the third quarter of
2009 were in addition to the trades that were
conducted on the electronic platform; block trades
comprised 67.4 percent of all transactions in the
DOM contract.
32 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
VerDate Mar<15>2010
19:02 May 04, 2010
Jkt 220001
Thus, the DOM contract does not meet
a threshold of trading activity that
would render it of potential importance
and no additional statistical analysis is
warranted.33
i. Federal Register Comments
As noted above, WGCEF, ICE, EI,
NGSA and FIEG addressed the question
of whether the DOM contract met the
material liquidity criterion for a SPDC.34
These commenters stated that the DOM
contract does not meet the material
liquidity criterion for SPDC
determination for a number of reasons.
WGCEF,35 ICE 36 and EI 37 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 DOM 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.’’
WGCEF, FIEG 38 and NGSA 39 noted
that the DOM 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
DOM 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
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.
33 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 DOM
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.
34 As noted above, IECA expressed the opinion
that the DOM contract met the criteria for SPDC
determination but did not provide its reasoning.
35 CL 02.
36 CL 04.
37 CL 05.
38 CL 08.
39 CL 06.
PO 00000
Frm 00037
Fmt 4703
Sfmt 4703
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
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 DOM
contract, is typically a function of
trading activity in particular lead
months and, given sufficient liquidity in
such months, the ICE DOM contract
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 65 percent of all transactions in the DOM
contract. The 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.
41 In
E:\FR\FM\05MYN1.SGM
05MYN1
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
itself would be considered liquid. In any
event, in light of the fact that the
Commission has found that the DOM
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 DOM 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 does not find evidence that
the DOM contract meets the material
liquidity criterion.
4. Overall Conclusion
After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the DOM 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 DOM contract does
not meet the material price reference,
price linkage and material liquidity
criteria at this time. Accordingly, the
Commission will issue the attached
Order declaring that the DOM 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 DOM contract.42
Accordingly, with respect to its DOM
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.
V. Related Matters
sroberts on DSKD5P82C1PROD with NOTICES
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.
73 FR 75888, 75893 (Dec. 12, 2008).
43 44 U.S.C. 3507(d).
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.
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
the SPDC is traded must assume, with
respect to that contract, all the
responsibilities and obligations of a
registered entity under the CEA and
Commission regulations. Additionally,
the ECM must comply with nine core
principles established by section 2(h)(7)
of the Act—including the obligation to
establish position limits and/or
accountability standards for the SPDC.
Section 4(i) of the CEA authorizes the
Commission to require reports for
SPDCs listed on ECMs. These increased
responsibilities, along with the CFTC’s
increased regulatory authority, subject
42 See
VerDate Mar<15>2010
19:02 May 04, 2010
Jkt 220001
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 DOM 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 ECMs. The Commission
previously has determined that ECMs
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
these Orders, taken in connection with
section 2(h)(7) of the Act and the Part
36 rules, will not have a significant
impact on a substantial number of small
entities.
VI. Order
a. Order Relating to the Dominion-South
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
Dominion-South 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 47 with
respect to the Dominion-South
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 Dominion-South
45 5
U.S.C. 601 et seq.
FR 42256, 42268 (Aug. 10, 2001).
47 7 U.S.C. 1a(29).
46 66
44 7
PO 00000
U.S.C. 19(a).
Frm 00038
Fmt 4703
Sfmt 4703
24605
E:\FR\FM\05MYN1.SGM
05MYN1
24606
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices
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
Dominion-South 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. 2010–10332 Filed 5–4–10; 8:45 am]
BILLING CODE P
COMMODITY FUTURES TRADING
COMMISSION
Order Finding That the TCO 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
Commission (‘‘CFTC’’ or ‘‘Commission’’)
published for comment in the Federal
Register 1 a notice of its intent to
undertake a determination whether the
TCO Financial Basis (‘‘TCO’’) 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 TCO
contract does not perform a significant
sroberts on DSKD5P82C1PROD with NOTICES
SUMMARY:
1 74
FR 52200 (October 9, 2009).
VerDate Mar<15>2010
19:02 May 04, 2010
Jkt 220001
price discovery function. Authority for
this action is found in section 2(h)(7) of
the CEA and Commission rule 36.3(c)
promulgated thereunder.
DATES: Effective Date: April 28, 2010.
FOR FURTHER INFORMATION CONTACT:
Gregory K. Price, Industry Economist,
Division of Market Oversight,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581. Telephone: (202) 418–5515. Email: gprice@cftc.gov; or Susan Nathan,
Senior Special Counsel, Division of
Market Oversight, same address.
Telephone: (202) 418–5133. E-mail:
snathan@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
The CFTC Reauthorization Act of
2008 (‘‘Reauthorization Act’’) 2
significantly broadened the CFTC’s
regulatory authority with respect to
ECMs by creating, in section 2(h)(7) of
the CEA, a new regulatory category—
ECMs on which significant price
discovery contracts (‘‘SPDCs’’) are
traded—and treating ECMs in that
category as registered entities under the
CEA.3 The legislation authorizes the
CFTC to designate an agreement,
contract or transaction as a SPDC if the
Commission determines, under criteria
established in section 2(h)(7), that it
performs a significant price discovery
function. When the Commission makes
such a determination, the ECM on
which the SPDC is traded must assume,
with respect to that contract, all the
responsibilities and obligations of a
registered entity under the Act and
Commission regulations, and must
comply with nine core principles
established by new section 2(h)(7)(C).
On March 16, 2009, the CFTC
promulgated final rules implementing
the provisions of the Reauthorization
Act.4 As relevant here, rule 36.3
imposes increased information reporting
requirements on ECMs to assist the
Commission in making prompt
assessments whether particular ECM
contracts may be SPDCs. In addition to
filing quarterly reports of its contracts,
an ECM must notify the Commission
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
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.
PO 00000
Frm 00039
Fmt 4703
Sfmt 4703
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
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 TCO contract
performs a significant price discovery
function and requested comment from
interested parties.7 Comments were
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
E:\FR\FM\05MYN1.SGM
05MYN1
]]>Agencies
[Federal Register Volume 75, Number 86 (Wednesday, May 5, 2010)]
[Notices]
[Pages 24599-24606]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-10332]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Order Finding That the ICE Dominion-South 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 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.
---------------------------------------------------------------------------
\1\ 74 FR 52190 (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:
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
[[Page 24600]]
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\
---------------------------------------------------------------------------
\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
DOM contract performs a significant price discovery function, and
requested comment from interested parties.\7\ Comments were received
from the Industrial Energy Consumers of America (``IECA''), Working
Group of Commercial Energy Firms (``WGCEF''), ICE, Platts, Economists
Incorporated (``EI''), Federal Energy Regulatory Commission (``FERC''),
Natural Gas Suppliers Association (``NGSA'') 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 DOM
contract is a SPDC; IECA concluded that the DOM contract is a SPDC, but
did not provide a basis for its conclusion.\10\ The other parties'
comments raised substantive issues with respect to the applicability of
section 2(h)(7) to the DOM contract, generally asserting that the DOM
contract is not a SPDC as it does not meet the material price
reference, price linkage and material liquidity criteria for SPDC
determination. Those 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.'' ICE is an ECM, as noted above. 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''). 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/2009/09-018.html.
\9\ FERC stated that the DOM contract is cash settled and does
not contemplate 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, ``the
FERC staff will continue to monitor for any such conflict * * *
[and] advise the CFTC'' should any such potential conflict arise. CL
07.
\10\ IECA stated that the subject ICE contract should ``be
required to come into compliance with core principles mandated by
Section 2(h)(7) of the Act and with other statutory provisions
applicable to registered entities. [This contract] should be subject
to the Commission's position limit authority, emergency authority
and large trader reporting requirements, among others.'' CL 01.
---------------------------------------------------------------------------
III. Section 2(h)(7) of the CEA
The Commission is directed by section 2(h)(7) of the CEA to
consider the following factors 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 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
[[Page 24601]]
commodity are directly based on, or are determined by referencing, the
prices generated by agreements, contracts or transactions being traded
or executed on the electronic trading facility.
Material liquidity--the extent to which the volume of
agreements, contracts or transactions in 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.\11\ 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.\12\ 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.
---------------------------------------------------------------------------
\11\ 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 DOM 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.
\12\ 17 CFR part 36, Appendix A.
---------------------------------------------------------------------------
IV. Findings and Conclusions
a. The Dominion-South Financial Basis (DOM) Contract and the SPDC
Indicia
The DOM contract is cash settled based on the difference between
the bidweek price index for a particular calendar month at the Dominion
Transmission, Inc.'s, Appalachia hub, 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 for physical delivery of natural gas at Dominion
Transmission, Inc.'s, Appalachia hub conducted during the last five
business days of the month; 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 DOM contract is 2,500
million British thermal units (``mmBtu''), and the unit of trading is
any multiple of 2,500 mmBtu. The DOM contract is listed for up to 72
consecutive calendar months.
The Henry Hub,\13\ 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 Henry Hub 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 move 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.
---------------------------------------------------------------------------
\13\ 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.
---------------------------------------------------------------------------
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.\14\ 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.
---------------------------------------------------------------------------
\14\ See https://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------
Dominion Transmission Inc.'s Appalachia hub is a gateway for
natural gas flowing from the Midwest bound for the Mid-Atlantic and
Northeast markets (excluding New England). According to Platts'
methodology, deliveries include those into a transmission line running
northeast from Warren County, Ohio, midway between Cincinnati and
Dayton, and merges with the second line northeast of Pittsburg,
Pennsylvania. The second line runs from Buchanan County, Virginia, on
the Virginia/West Virginia border north to the end of the zone at
Valley Gate in Armstrong County, Pennsylvania. The major stations in
the South Point system include interconnections with ANR Pipeline
(Lebanon station), Columbia Gas Transmission (Windbridge and Loudoun
stations), Tennessee Gas Pipeline (Cornwell station), Transcontinental
Gas Pipe Line (Nokesville station) and Texas Eastern Transmission
(Lebanon, Oakford, Chambersburg, Perulack and Windridge stations).
Storage pools in the South Point system include South Bend,
Murrysville, Oakford, Gamble, Hayden, Webster, Colvin, North Summit,
Bridgeport, Lost Creek, Kennedy, Fink and Rocket Newberne.
The Dominion Market Center, which includes the Dominion hub, had an
estimated throughput capacity of 2.5 billion cubic feet per day in
2008. Moreover, the number of pipeline interconnections at the Dominion
Market Center was 17 in 2008, up from 16 in 2003. Lastly, the pipeline
[[Page 24602]]
interconnection capacity of the Dominion Market Center 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 Dominion
Market Center is far removed from the Henry Hub but is directly
connected to the Henry Hub by an existing pipeline.
---------------------------------------------------------------------------
\15\ See https://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------
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 DOM
contract. Each of these criteria is discussed below.\16\
---------------------------------------------------------------------------
\16\ As noted above, the Commission did not find an indication
of arbitrage in connection with this contract; accordingly, that
criterion is not discussed in reference to the DOM 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 ``East Gas End of Day'' and ``OTC Gas End of Day''
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 DOM 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'') \17\ 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 DOM contract, while not mentioned by name in the ECM Study, might
warrant further study.
---------------------------------------------------------------------------
\17\ 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.\18\ 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.
---------------------------------------------------------------------------
\18\ 17 part CFR 36, Appendix A.
---------------------------------------------------------------------------
Following the issuance of the Federal Register release, the
Commission further evaluated the ICE's data offerings and their use by
industry participants. The Dominion Transmission, Inc.'s, Appalachia
hub 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.
Although the Dominion hub is a major trading center for natural gas
in the United States and, as noted, ICE sells price information for the
DOM contract, the Commission has found upon further evaluation that the
cash market transactions are not being directly based or quoted as a
differential to the DOM contract nor is that contract routinely
consulted by industry participants in pricing cash market transactions
and thus does not meet the Commission's Guidance for the material price
reference criterion. In this regard, the NYMEX Henry Hub physically
delivered natural gas futures contract is routinely consulted by
industry participants in pricing cash market transactions at this
location. Because both the Dominion hub is directly connected to the
Henry Hub via the Gas Transmission interstate pipeline, it is not
necessary for market participants to independently refer to the DOM
contract for pricing natural gas at this location. Thus, the DOM
contract does not satisfy the direct price reference test for existence
of material price reference. Furthermore, the Commission has found that
the sale by ICE of the DOM contract's prices is not indirect evidence
of material price reference. The DOM 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 Dominion hub,
the Commission has concluded that traders likely do not specifically
purchase the ICE data packages for the DOM contract's prices and do not
consult such prices on a frequent and recurring basis in pricing cash
market transactions.
i. Federal Register Comments
As noted above, WGCEF,\19\ ICE,\20\ EI,\21\ NGSA \22\ and FIEG \23\
addressed the question of whether the DOM contract met the material
price reference criterion for a SPDC.\24\ The commenters argued that
because the DOM 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 DOM 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 in
that it only considers the final index value on which the contract is
cash settled after trading ceases. Instead, the Commission 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 Dominion hub is a significant
trading center for natural gas in North America. However, traders do
not consider the Dominion hub to be as important as other natural gas
trading points, such as the Henry Hub.
---------------------------------------------------------------------------
\19\ CL 02.
\20\ CL 04.
\21\ CL 05.
\22\ CL 06.
\23\ CL 08.
\24\ As noted above, IECA expressed the opinion that the DOM
contract met the criteria for SPDC determination but did not provide
its reasoning.
---------------------------------------------------------------------------
ICE argued that the Commission appeared to base the case that the
DOM contract is potentially a SPDC on a disputable assertion. In
issuing its notice of intent to determine whether
[[Page 24603]]
the DOM contract is a 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 stated 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.'' \25\ 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, and was not intended to serve as the sole
basis for determining whether or not a particular contract meets the
material price reference criterion.
---------------------------------------------------------------------------
\25\ CL 04.
---------------------------------------------------------------------------
Both EI \26\ and WGCEF \27\ 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 DOM contract. Instead, traders are interested in the settlement
prices, so the fact that ICE sells the DOM prices as part of a broad
package is not conclusive evidence that market participants are buying
the ICE data sets because they find the DOM prices have substantial
value to them. As mentioned above, the Commission has found that the
sale by ICE of the DOM contract's prices is not indirect evidence of
routine dissemination. The DOM contract's prices are sold as a package
with those of numerous other contracts, which are of more interest to
market participants. Due to the lack of importance of the Dominion hub,
the Commission has concluded that traders likely do not specifically
purchase the ICE data packages for the DOM contract's prices and do not
consult such prices on a frequent and recurring basis in pricing cash
market transactions.
---------------------------------------------------------------------------
\26\ CL 05.
\27\ CL 02.
---------------------------------------------------------------------------
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the DOM contract does
not meet the material price reference criterion because cash market
transactions are not priced on a frequent and recurring basis at a
differential to the DOM contract's price (direct evidence). Moreover,
while the ECM sells the DOM contract's price data to market
participants, market participants likely do not specifically purchase
the ICE data packages for the DOM 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 DOM contract. In this regard, the final settlement
of the DOM contract is based, in part, on the final settlement price of
the NYMEX's Henry Hub 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
\28\ 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.'' 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.'' 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,
the Commission also stated in the Guidance 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 potentially to be deemed a SPDC (``minimum
threshold'').
---------------------------------------------------------------------------
\28\ Appendix A to the Part 36 rules.
---------------------------------------------------------------------------
To assess whether the DOM 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
Dominion-South price is determined, in part, by the final settlement
price of the NYMEX physically-delivered natural gas futures contract (a
DCM contract), the Dominion-South 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, 11 percent of the Dominion
Transmission, Inc.'s, Appalachia hub 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 finds
that the DOM contract fails to 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. The number of
trades on the ICE centralized market in the DOM contract during the
same period was 54,107 contracts (equivalent to 13,527 NYMEX contracts,
given the size difference).\29\ Thus, centralized-market trades in the
DOM contract amounted to less than the minimum threshold.
---------------------------------------------------------------------------
\29\ The DOM contract is one-quarter the size of the NYMEX Henry
Hub physically-delivered futures contract.
---------------------------------------------------------------------------
i. Federal Register Comments
WGCEF, ICE, EI, NGSA and FIEG addressed the question of whether the
DOM contract met the price linkage criterion for a SPDC.\30\ Each of
the commenters expressed the opinion that the DOM 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 DOM is linked. Based on its analysis
discussed above, the Commission agrees with this assessment.
---------------------------------------------------------------------------
\30\ As noted above, IECA expressed the opinion that the DOM
contract met the criteria for SPDC determination but did not provide
its reasoning.
---------------------------------------------------------------------------
ii. Conclusion Regarding the Price Linkage Criterion
The Commission finds that the DOM contract does not meet the price
linkage criterion because it fails the volume and price linkage tests
provided for in the Commission's Guidance.
3. Material Liquidity Factor
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
DOM contract. To
[[Page 24604]]
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.
Based upon on a required quarterly filing made by ICE on July 27,
2009, the total number of DOM trades executed on ICE's electronic
trading platform was 347 in the second quarter of 2009, resulting in a
daily average of 5.4 trades. During the same period, the DOM contract
had a total trading volume on ICE's electronic trading platform of
38,872 contracts and an average daily trading volume of 607.4
contracts. The open interest as of June 30, 2009, was 97,240 contracts,
which includes 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 a subsequent filing dated November 13, 2009, ICE reported that
460 separate trades occurred on its electronic platform in the third
quarter of 2009, resulting in a daily average of 7.0 trades. During the
same period, the DOM contract had a total trading volume on its
electronic platform of 54,107 contracts (which was an average of 819
contracts per day). As of September 30, 2009, open interest in the DOM
contract was 97,213 contracts. Reported open interest included
positions resulting from trades that were executed on ICE's electronic
platform, as well as trades that were executed off of ICE's electronic
platform and brought to ICE for clearing.\31\
---------------------------------------------------------------------------
\31\ Supplemental data supplied by the ICE confirmed that block
trades in the third quarter of 2009 were in addition to the trades
that were conducted on the electronic platform; block trades
comprised 67.4 percent of all transactions in the DOM contract.
---------------------------------------------------------------------------
As indicated above, the average number of trades per day in the
second and third quarters of 2009 was only slightly above the minimum
reporting level (5 trades per day). Moreover, trading activity in the
DOM contract, as characterized by total quarterly volume, indicates
that the DOM contract experiences trading activity similar to that of
other thinly-traded contracts.\32\ Thus, the DOM contract does not meet
a threshold of trading activity that would render it of potential
importance and no additional statistical analysis is warranted.\33\
---------------------------------------------------------------------------
\32\ 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.
\33\ 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 DOM 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.
---------------------------------------------------------------------------
i. Federal Register Comments
As noted above, WGCEF, ICE, EI, NGSA and FIEG addressed the
question of whether the DOM contract met the material liquidity
criterion for a SPDC.\34\ These commenters stated that the DOM contract
does not meet the material liquidity criterion for SPDC determination
for a number of reasons.
---------------------------------------------------------------------------
\34\ As noted above, IECA expressed the opinion that the DOM
contract met the criteria for SPDC determination but did not provide
its reasoning.
---------------------------------------------------------------------------
WGCEF,\35\ ICE \36\ and EI \37\ 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 DOM 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.''
---------------------------------------------------------------------------
\35\ CL 02.
\36\ CL 04.
\37\ CL 05.
---------------------------------------------------------------------------
WGCEF, FIEG \38\ and NGSA \39\ noted that the DOM 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 DOM contract's trading volume represents
only a fraction of natural gas trading.
---------------------------------------------------------------------------
\38\ CL 08.
\39\ CL 06.
---------------------------------------------------------------------------
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 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.
---------------------------------------------------------------------------
\40\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------
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.''
---------------------------------------------------------------------------
\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 65
percent of all transactions in the DOM contract. The 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.
---------------------------------------------------------------------------
It is the Commission's opinion that liquidity, as it pertains to
the DOM contract, is typically a function of trading activity in
particular lead months and, given sufficient liquidity in such months,
the ICE DOM contract
[[Page 24605]]
itself would be considered liquid. In any event, in light of the fact
that the Commission has found that the DOM 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
DOM 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 does not find
evidence that the DOM contract meets the material liquidity criterion.
4. Overall Conclusion
After considering the entire record in this matter, including the
comments received, the Commission has determined that the DOM 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 DOM contract does not meet the
material price reference, price linkage and material liquidity criteria
at this time. Accordingly, the Commission will issue the attached Order
declaring that the DOM 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 DOM
contract.\42\ Accordingly, with respect to its DOM 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.
---------------------------------------------------------------------------
\42\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
V. 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.
---------------------------------------------------------------------------
\43\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\44\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
When a futures contract begins to serve a significant price
discovery function, that contract, and the ECM on which it is traded,
warrants increased oversight to deter and prevent price manipulation 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 the SPDC is traded must assume, with respect to that
contract, all the responsibilities and obligations of a registered
entity under the CEA and Commission regulations. Additionally, the ECM
must comply with nine core principles established by section 2(h)(7) of
the Act--including the obligation to establish position limits and/or
accountability standards for the SPDC. Section 4(i) of the CEA
authorizes 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 DOM 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 ECMs.
The Commission previously has determined that ECMs 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 these Orders, taken in connection with section 2(h)(7) of the Act
and the Part 36 rules, will not have a significant impact on a
substantial number of small entities.
---------------------------------------------------------------------------
\45\ 5 U.S.C. 601 et seq.
\46\ 66 FR 42256, 42268 (Aug. 10, 2001).
---------------------------------------------------------------------------
VI. Order
a. Order Relating to the Dominion-South 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 Dominion-South 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 \47\ with respect to the
Dominion-South 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 Dominion-South
[[Page 24606]]
Financial Basis contract with the issuance of this Order.
---------------------------------------------------------------------------
\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 Dominion-South 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. 2010-10332 Filed 5-4-10; 8:45 am]
BILLING CODE P
