Orders Finding That the Mid-C Financial Peak Daily Contract and Mid-C Financial Off-Peak Daily Contract, Offered for Trading on the IntercontinentalExchange, Inc., Do Not Perform a Significant Price Discovery Function, 38478-38487 [2010-16206]
Download as PDF
<![CDATA[
38478
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
market integrity, both on the ECM itself
and in any related futures contracts
trading on DCMs. An Order finding that
a particular contract is a SPDC triggers
this increased oversight and imposes
obligations on the ECM calculated to
accomplish this goal. The increased
oversight engendered by the issue of a
SPDC Order increases transparency and
helps to ensure fair competition among
ECMs and DCMs trading similar
products and competing for the same
business. Moreover, the ECM on which
the SPDC is traded must assume, with
respect to that contract, all the
responsibilities and obligations of a
registered entity under the CEA and
Commission regulations. Additionally,
the ECM must comply with nine core
principles established by section 2(h)(7)
of the Act—including the obligation to
establish position limits and/or
accountability standards for the SPDC.
Section 4(i) of the CEA authorize the
Commission to require reports for
SPDCs listed on ECMs. These increased
responsibilities, along with the CFTC’s
increased regulatory authority, subject
the ECM’s risk management practices to
the Commission’s supervision and
oversight and generally enhance the
financial integrity of the markets.
c. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 47 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.48 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.
emcdonald on DSK2BSOYB1PROD with NOTICES
VI. Orders
a. Order Relating to the Mid-C Financial
Peak 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 Mid-C
Financial Peak contract, traded on the
IntercontinentalExchange, Inc., satisfies
the statutory material price reference
47 5
U.S.C. 601 et seq.
FR 42256, 42268 (Aug. 10, 2001).
48 66
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
and material liquidity criteria for
significant price discovery contracts.
Consistent with this determination, and
effective immediately, the
IntercontinentalExchange, Inc., must
comply with, with respect to the MidC Financial Peak contract, the nine core
principles established by new section
2(h)(7)(C). Additionally, the
IntercontinentalExchange, Inc., shall be
and is considered a registered entity 49
with respect to the Mid-C Financial
Peak contract and is subject to all 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.,
commence with the issuance of this
Order.50
b. Order Relating to the Mid-C Financial
Off-Peak 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 Mid-C
Financial Off-Peak contract, traded on
the IntercontinentalExchange, Inc.,
satisfies the statutory material price
reference and material liquidity criteria
for significant price discovery contracts.
Consistent with this determination, and
effective immediately, the
IntercontinentalExchange, Inc., must
comply with, with respect to the MidC Financial Off-Peak contract, the nine
core principles established by new
section 2(h)(7)(C). Additionally, the
IntercontinentalExchange, Inc., shall be
and is considered a registered entity 51
with respect to the Mid-C Financial OffPeak contract and is subject to all 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.,
commence with the issuance of this
Order.52
U.S.C. 1a(29).
50 Because ICE already lists for trading a contract
(i.e., the Henry Financial LD1 Fixed Price contract)
that was previously declared by the Commission to
be a SPDC, ICE must submit a written
demonstration of compliance with the Core
Principles within 30 calendar days of the date of
this Order. 17 CFR 36.3(c)(4).
51 7 U.S.C. 1a(29).
52 Because ICE already lists for trading a contract
(i.e., the Henry Financial LD1 Fixed Price contract)
PO 00000
49 7
Frm 00023
Fmt 4703
Sfmt 4703
Issued in Washington, DC, on June 25,
2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010–16212 Filed 7–1–10; 8:45 am]
BILLING CODE 6351–01–P
COMMODITY FUTURES TRADING
COMMISSION
Orders Finding That the Mid-C
Financial Peak Daily Contract and MidC Financial Off-Peak Daily Contract,
Offered for Trading on the
IntercontinentalExchange, Inc., Do Not
Perform a Significant Price Discovery
Function
AGENCY: Commodity Futures Trading
Commission.
ACTION: Final orders.
SUMMARY: On October 6, 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
Mid-C 2 Financial Peak Daily (‘‘MPD’’)
contract and Mid-C Financial Off-Peak
Daily (‘‘MXO’’) contract,3 which are
listed for trading 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’’), perform 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
orders finding that the MPD and MXO
contracts do 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: June 25, 2010.
FOR FURTHER INFORMATION CONTACT:
Gregory K. Price, Industry Economist,
Division of Market Oversight,
Commodity Futures Trading
that was previously declared by the Commission to
be a SPDC, ICE must submit a written
demonstration of compliance with the Core
Principles within 30 calendar days of the date of
this Order. 17 CFR 36.3(c)(4).
1 74 FR 51261 (October 6, 2009).
2 The acronym ‘‘Mid-C’’ stands for Mid-Columbia.
3 The Federal Register notice also requested
comment on the Mid-C Financial Peak (‘‘MDC’’)
contract and Mid-C Financial Off-Peak (‘‘OMC’’)
contract; these contracts will be addressed in a
separate Federal Register release.
E:\FR\FM\02JYN1.SGM
02JYN1
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
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:
emcdonald on DSK2BSOYB1PROD with NOTICES
I. Introduction
The CFTC Reauthorization Act of
2008 (‘‘Reauthorization Act’’) 4
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.5 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.6 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,
4 Incorporated as Title XIII of the Food,
Conservation and Energy Act of 2008, Public Law
110–246, 122 Stat. 1624 (June 18, 2008).
5 7 U.S.C. 1a(29).
6 74 FR 12178 (Mar. 23, 2009); these rules became
effective on April 22, 2009.
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
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.7 The issuance of such an order
also triggers the obligations,
requirements and timetables prescribed
in Commission rule 36.3(c)(4).8
II. Notice of Intent To Undertake SPDC
Determination
On October 6, 2009, the Commission
published in the Federal Register notice
of its intent to undertake a
determination whether the MPD and
MXO contracts 9 perform a significant
price discovery function and requested
comment from interested parties.10
7 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).
8 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.
9 As noted above, the Federal Register notice also
requested comment on the Mid-C Financial Peak
(‘‘MDC’’) contract and Mid-C Financial Off-Peak
(‘‘OMC’’) contract. The MDC and OMC contracts
will be addressed in a separate Federal Register
release.
10 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
PO 00000
Frm 00024
Fmt 4703
Sfmt 4703
38479
Comments were received from the
Federal Energy Regulatory Commission
(‘‘FERC’’), Financial Institutions Energy
Group (‘‘FIEG’’), Working Group of
Commercial Energy Firms (‘‘WGCEF’’),
Edison Electric Institute (‘‘EEI’’), ICE,
Western Power Trading Forum
(‘‘WPTF’’) and Public Utility
Commission of Texas (‘‘PUCT’’).11 The
comment letters from FERC 12 and
PUCT did not directly address the issue
of whether or not the subject contracts
are SPDCs. The remaining comment
letters raised substantive issues with
respect to the applicability of section
2(h)(7) to the MPD and MXO contracts
and generally expressed the opinion
that the contracts are not SPDCs because
they does not meet the material price
reference or material liquidity criteria
for SPDC determination. These
comments are more extensively
discussed below, as applicable.
written data, views and arguments relevant to its
determination from the ECM and other interested
persons.
11 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.’’ 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.’’ EEI is the ‘‘association of
shareholder-owned electric companies,
international affiliates and industry associates
worldwide.’’ ICE is an ECM, as noted above. WPTF
describes itself as a ‘‘broad-based membership
organization dedicated to encouraging competition
in the Western power markets * * * WTPF strives
to reduce the long-run cost of electricity to
consumers throughout the region while maintaining
the current high level of system reliability.’’ PUCT
is the independent organization that oversees the
Electric Reliability Council of Texas (‘‘ERCOT’’) to
‘‘ensure nondiscriminatory access to the
transmission and distribution systems, to ensure the
reliability and adequacy of the regional electrical
network, and to perform other essential market
functions.’’ The comment letters are available on the
Commission’s Web site: https://www.cftc.gov/
lawandregulation/federalregister/
federalregistercomments/2009/09–011.html.
12 FERC expressed the opinion that a
determination by the Commission that either of the
subject contracts performs a significant price
discovery function ‘‘would not appear to conflict
with FERC’s exclusive jurisdiction under the
Federal Power Act (FPA) over the transmission or
sale for resale of electric energy in interstate
commerce or with its other regulatory
responsibilities under the FPA’’ and further that
‘‘FERC staff will monitor proposed SPDC
determinations and advise the CFTC of any
potential conflicts with FERC’s exclusive
jurisdiction over RTOs, [(regional transmission
organizations)], ISOs [(independent system
operators)] or other jurisdictional entities.’’
E:\FR\FM\02JYN1.SGM
02JYN1
emcdonald on DSK2BSOYB1PROD with NOTICES
38480
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
III. Section 2(h)(7) of the CEA
The Commission is directed by
section 2(h)(7) of the CEA to consider
the following criteria in determining a
contract’s significant price discovery
function:
• Price Linkage—the extent to which
the agreement, contract or transaction
uses or otherwise relies on a daily or
final settlement price, or other major
price parameter, of a contract or
contracts listed for trading on or subject
to the rules of a designated contract
market (‘‘DCM’’) or derivatives
transaction execution facility (‘‘DTEF’’),
or a SPDC traded on an electronic
trading facility, to value a position,
transfer or convert a position, cash or
financially settle a position, or close out
a position.
• Arbitrage—the extent to which the
price for the agreement, contract or
transaction is sufficiently related to the
price of a contract or contracts listed for
trading on or subject to the rules of a
DCM or DTEF, or a SPDC traded on or
subject to the rules of an electronic
trading facility, so as to permit market
participants to effectively arbitrage
between the markets by simultaneously
maintaining positions or executing
trades in the contracts on a frequent and
recurring basis.
• Material price reference—the extent
to which, on a frequent and recurring
basis, bids, offers or transactions in a
commodity are directly based on, or are
determined by referencing or
consulting, the prices generated by
agreements, contracts or transactions
being traded or executed on the
electronic trading facility.
• Material liquidity—the extent to
which the volume of agreements,
contracts or transactions in a
commodity being traded on the
electronic trading facility is sufficient to
have a material effect on other
agreements, contracts or transactions
listed for trading on or subject to the
rules of a DCM, DTEF or electronic
trading facility operating in reliance on
the exemption in section 2(h)(3).
Not all criteria must be present to
support a determination that a
particular contract performs a
significant price discovery function, and
one or more criteria may be inapplicable
to a particular contract.13 Moreover, the
statutory language neither prioritizes the
criteria nor specifies the degree to
13 In its October 6, 2009, Federal Register release,
the Commission identified material price reference
and material liquidity as the possible criteria for
SPDC determination of the MPD and MXO
contracts. Arbitrage and price linkage were not
identified as possible criteria. As a result, arbitrage
and price linkage will not be discussed further in
this document and the associated Orders.
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
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.14 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 the extent to which, on a
frequent and recurring basis, bids, offers
or transactions are directly based on, or
are determined by referencing, the
prices established for the contract.
IV. Findings and Conclusions
The Commission’s findings and
conclusions with respect to the MPD
and MXO contracts are discussed
separately below:
a. The Mid-C Financial Peak Daily
(MPD) Contract and the SPDC Indicia
The MPD contract is cash settled
based on the peak, day-ahead price
index for the specified day, as published
by ICE in its ‘‘ICE Day Ahead Power
Price Report,’’ which is available on the
ECM’s Web site. The daily peak-hour
electricity price index is a volumeweighted average of qualifying, dayahead, peak-hour power transactions at
the Mid-Columbia hub that are traded
on the ICE platform from 6 a.m. to 11
a.m. CST on the publication date. The
ICE transactions on which the price
index is based specify the physical
delivery of power. The size of the MPD
contract is 400 megawatt hours
(‘‘MWh’’), and the MPD contract is listed
for 38 consecutive days.
As the Columbia River flows through
Washington State, it encounters two
federal and nine privately-owned
hydroelectric dams generating a total of
close to 20,000 MW of power in the
PO 00000
14 17
CFR 36, Appendix A.
Frm 00025
Fmt 4703
Sfmt 4703
Northwest.15 With another three dams
in British Columbia, Canada, and many
more on its various tributaries, the
Columbia River is the largest powerproducing river in North America. A
major goal of the participants in the
Mid-C electricity market is to maximize
the Columbia River’s potential, along
with protecting and enhancing the nonpower uses of the river. The reliability
of the electricity grid in the Northwest
is coordinated by the Northwest
PowerPool (‘‘NWPP’’), which is a
voluntary organization comprised of
major generating utilities serving the
Northwestern United States, as well as
British Columbia and Alberta, Canada.
One stretch of the Columbia River
between the Grand Coulee Dam and
Priests Rapids Dam is governed by the
Mid-Columbia Hourly Coordination
Agreement (‘‘MCHCA’’). The MCHCA
covers seven dams 16 and nearly 13,000
MW of generation. Specifically, the
agreement defines how the Chelan,
Douglas and Grant PUDs coordinate
operations with the Bonneville Power
Administration to maximize power
generation while reducing fluctuations
in the river’s flow. A number of other
utilities that buy power from the PUDs
have also signed onto the agreement.
This agreement was signed into effect in
1972 and renewed for 20 years in
1997.17
In general, electricity is bought and
sold in an auction setting on an hourly
basis at various points along the
electrical grid. The price of electricity at
a particular point on the grid is called
the locational marginal price (‘‘LMP’’),
which includes the costs of producing
the electricity, as well as congestion and
line losses. Thus, an LMP reflects
generation costs as well as the actual
cost of supplying and delivering
electricity to a specific point on the grid.
Electricity is traded in a day-ahead
market as well as a real-time market.
Typically, the bulk of energy
transactions occur in the day-ahead
market. The day-ahead market
establishes prices for electricity that is
to be delivered during the specified
hour on the following day. Day-ahead
prices are determined based on
generation and energy transaction
quotes offered in advance. Because day15 https://www.wpuda.org/publications/
connections/hydro/River%20Riders.pdf.
16 The federal dams are Grand Coulee and Chief
Joseph. The remaining dams are Wells (operated by
the Douglas PUD), Rocky Reach and Rock Island
(operated by the Chelan PUD), and Wanapum and
Priest Rapids (operated by the Grant PUD). The
term ‘‘PUD’’ stands for publically-owned utility,
which provides essential services within a specified
area.
17 https://www.wpuda.org/publications/
connections/hydro/River%20Riders.pdf.
E:\FR\FM\02JYN1.SGM
02JYN1
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
emcdonald on DSK2BSOYB1PROD with NOTICES
ahead quotes for power are based on
estimates of supply and demand,
electricity needs usually are not
perfectly satisfied in the day-ahead
market. In this regard, on the day the
electricity is transmitted and used,
auction participants typically realize
that they bought or sold too much
power or too little power. A real-time
auction is operated to alleviate this
problem by servicing as a balancing
mechanism. Specifically, electricity
traders use the real-time market to sell
excess electricity and buy additional
power to meet demand. Only a
relatively small amount of electricity is
traded in the real-time market compared
with the day-ahead market.
1. Material Price Reference Criterion
The Commission’s October 6, 2009,
Federal Register notice identified
material price reference and material
liquidity as the potential basis for a
SPDC determination with respect to the
MPD contract. The Commission
considered the fact that ICE sells its
price data to market participants in a
number of different packages which
vary in terms of the hubs covered, time
periods, and whether the data are daily
only or historical. For example, ICE
offers the ‘‘West Power of Day’’ package
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. This package includes
price data for the MPD 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’’) found that in
general, market participants view ICE as
a price discovery market for certain
electricity contracts. The study did not
specify which markets performed this
function; nevertheless, the Commission
determined that the MPD contract,
while not mentioned by name in the
ECM Study, might warrant further
review.
The Commission explains in its
Guidance to the Part 36 rules that in
evaluating a contract under the material
price reference criterion, it 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
18 17
CFR 36, Appendix A.
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
generated on the ECM in question.
Direct evidence may be established
when cash market participants are
quoting bid or offer prices or entering
into transactions at prices that are set
either explicitly or implicitly at a
differential to prices established for the
contract in question. Cash market prices
are set explicitly at a differential to the
section 2(h)(3) contract when, for
instance, they are quoted in dollars and
cents above or below the reference
contract’s price. Cash market prices are
set implicitly at a differential to a
section 2(h)(3) contract when, for
instance, they are arrived at after adding
to, or subtracting from the section
2(h)(3) contract, but then quoted or
reported at a flat price. With respect to
indirect evidence, the Commission will
consider the extent to which the price
of the contract in question is being
routinely disseminated in widely
distributed industry publications—or
offered by the ECM itself for some form
of remuneration—and consulted on a
frequent and recurring basis by industry
participants in pricing cash market
transactions.
The Mid-C power market is a major
pricing center for electricity on the West
Coast. Traders, including producers,
keep abreast of the electricity prices in
the Mid-C power market when
conducting cash deals. However, ICE’s
Mid-C Financial Peak (‘‘MDC’’) contract,
which is a monthly contract, is used
more widely as a source of pricing
information for electricity than the
daily, peak-hour contract (i.e., the MPD
contract). Specifically, the MDC contract
prices power at the Mid-C trading point
based on the simple average of the daily
peak-hour prices over the entire month,
as reported by ICE. Moreover, the MDC
contract is listed for up to 86 calendar
months. Thus, market participants can
use the MDC contract to lock-in
electricity prices far into the future. In
contrast, the MPD contract is listed for
a much shorter length of time—up to 38
days in the future. With such a limited
timeframe, the forward pricing
capability of the MPD contract is much
more constrained than that of the MDC
contract. Traders use monthly power
contracts like the MDC contract to price
electricity commitments in the future,
where such commitments are based on
long range forecasts of power supply
and demand. As actual generation and
usage nears, market participants have a
better understanding of actual power
supply and needs. As a result, traders
can modify previously-established
hedges with the daily power contracts,
like the MPD contract.
The Commission explained in its
Guidance that a contract meeting the
PO 00000
Frm 00026
Fmt 4703
Sfmt 4703
38481
material price reference criterion would
routinely be consulted by industry
participants in pricing cash market
transactions. Although the Mid-C is a
major trading center for electricity and,
as noted, ICE sells price information for
the MPD contract, the MPD contract is
not consulted in this manner and does
not satisfy the material price reference
criterion. Thus, the MPD contract does
not satisfy the direct price reference test
for existence of material price reference.
Furthermore, the Commission notes that
publication of the MPD contract’s prices
is not indirect evidence of material price
reference. The MPD contract’s prices are
published with those of numerous other
contracts, including ICE’s monthly
electricity contracts, which are of more
interest to market participants. In these
circumstances, the Commission has
concluded that traders likely do not
specifically purchase ICE data packages
for the MPD contract’s prices and do not
consult such prices on a frequent and
recurring basis in pricing cash market
transactions.
i. Federal Register Comments:
WGCEF, WPTF, EEI and ICE stated
that no other contract directly references
or settles to the MPD contract’s price.
Moreover, the commenters argued that
the underlying cash price series against
which the MPD contract is settled (in
this case, the peak Mid-C electricity
price on a particular day, which is
derived from cash market transactions)
is the authentic reference price and not
the ICE contract itself. Commission staff
believes that this interpretation of price
reference is too narrow and believes that
a cash-settled derivatives contract could
meet the price reference criterion if
market participants ‘‘consult on a
frequent and recurring basis’’ the
derivatives contract when pricing
forward, fixed-price commitments or
other cash-settled derivatives that seek
to ‘‘lock in’’ a fixed price for some future
point in time to hedge against adverse
price movements. As noted above, while
the Mid-C is a major power market,
traders do not consider the daily peakhour Mid-C price to be as important as
the electricity price associated with the
monthly contract.
In addition, WGCEF stated that the
publication of price data for the MPD
contract price is weak justification for
material price reference. This
commenter argued that market
participants generally do not purchase
ICE data sets for one contract’s prices,
such as those for the MPD contract.
Instead, traders are interested in the
settlement prices, so the fact that ICE
sells the MPD prices as part of a broad
package is not conclusive evidence that
market participants are buying the ICE
E:\FR\FM\02JYN1.SGM
02JYN1
38482
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
data sets because they find the MPD
prices have substantial value to them.
As noted above, the Commission notes
that publication of the MPD contract’s
prices is not indirect evidence of routine
dissemination. The MPD 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 daily
power contracts relative to monthly
contracts, the Commission has
concluded that traders likely do not
specifically purchase the ICE data
packages for the MPD contract’s prices
and do not consult such prices on a
frequent and recurring basis in pricing
cash market transactions.
Lastly, EEI criticized that the ECM
Study did not specifically identify the
MPD contract as a contract that is
referred to by market participants on a
frequent and recurring basis. In
response, the Commission notes that it
cited the ECM Study’s general finding
that some ICE electricity contracts
appear to be regarded as price discovery
markets merely as indication that an
investigation of certain ICE contracts
may be warranted. The ECM Study was
not intended to serve as the sole basis
for determining whether or not a
particular contract meets the material
price reference criterion.
emcdonald on DSK2BSOYB1PROD with NOTICES
ii. Conclusion Regarding Material Price
Reference
Based on the above, the Commission
finds that the ICE MPD contract does
not meet the material price reference
criterion because cash market
transactions are not priced either
explicitly or implicitly on a frequent
and recurring basis at a differential to
the MPD contract’s price (direct
evidence). Moreover, while the MPD
contract’s price data is sold to market
participants, those individuals likely do
not purchase the ICE data packages
specifically for the MPD contract’s
prices and do not consult such prices on
a frequent and recurring basis in pricing
cash market transactions (indirect
evidence).
2. Material Liquidity Criterion
As noted above, in its October 6,
2009, Federal Register notice, the
Commission identified material price
reference and material liquidity as
potential criteria for SPDC
determination of the MPD contract. To
assess whether a contract meets the
material liquidity criterion, the
Commission first examines trading
activity as a general measurement of the
contract’s size and potential importance.
If the Commission finds that the
contract in question meets a threshold
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
of trading activity that would render it
of potential importance, the
Commission will then perform a
statistical analysis to measure the effect
that changes to the subject contract’s
prices potentially may have on prices
for other contracts listed on an ECM or
a DCM.
The total number of transactions
executed on ICE’s electronic platform in
the MPD contract was 1,294 in the
second quarter of 2009, resulting in a
daily average of 20.2 trades. During the
same period, the MPD contract had a
total trading volume of 18,862 contracts
and an average daily trading volume of
294.7 contracts. Moreover, open interest
as of June 30, 2009, was 826 contracts,
which included trades executed on
ICE’s electronic trading platform, as
well as trades executed off of ICE’s
electronic trading platform and then
brought to ICE for clearing. In this
regard, ICE does not differentiate
between open interest created by a
transaction executed on its trading
platform and that created by a
transaction executed off its trading
platform.19
In a subsequent filing dated March 24,
2010, ICE reported that total trading
volume in the fourth quarter of 2009
was 19,574 contracts (or 301 contracts
on a daily basis). In terms of number of
transactions, 1,108 trades occurred in
the fourth quarter of 2009 (17 trades per
day). As of December 31, 2009, open
interest in the MPD contract was 550
contracts, which included trades
executed on ICE’s electronic trading
platform, as well as trades executed off
of ICE’s electronic trading platform and
then brought to ICE for clearing.
The number of trades per day
remained relatively low between the
second and fourth quarters of 2009 and
averaged only slightly more than the
reporting level of five trades per day.
Moreover, trading activity in the MPD
contract, as characterized by total
quarterly volume, indicates that the
MPD contract experiences trading
activity that is similar to that of minor
futures markets.20 Thus, the MPD
contract does not meet a threshold of
trading activity that would render it of
potential importance and no additional
statistical analysis is warranted.21
FR 51261 (October 6, 2009).
has advised the Commission that in its
experience, a thinly-traded contract is, generally,
one that has a quarterly trading volume of 100,000
contracts or less. In this regard, in the third quarter
of 2009, physical commodity futures contracts with
trading volume of 100,000 contracts or fewer
constituted less than one percent of total trading
volume of all physical commodity futures contracts.
21 In establishing guidance to illustrate how it
will evaluate the various criteria, or combinations
of criteria, when determining whether a contract is
PO 00000
19 74
20 Staff
Frm 00027
Fmt 4703
Sfmt 4703
i. Federal Register Comments
ICE and WGCEF stated that the MPD
contract lacks a sufficient number of
trades to meet the material liquidity
criterion. These two commenters, along
with WPTF, FEIG and EEI argued that
the MPD contract cannot have a material
effect on other contracts, such as those
listed for trading by the New York
Mercantile Exchange (‘‘NYMEX’’), a
DCM. The commenters pointed out that
it is not possible for the MPD contract
to affect a DCM contract because price
linkage and the potential for arbitrage
do not exist. The DCM contracts do not
cash settle to the MPD contract’s price.
Instead, the DCM contracts and the MPD
contract are both cash settled based on
physical transactions, which neither the
ECM or the DCM contracts can
influence.
WGCEF and ICE 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 MPD 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.’’ 22
ICE opined that the Commission
‘‘seems to have adopted a five trade per
day test for material liquidity.’’ To the
contrary, 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’’ 23 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; however,
the contract will not be found to be a
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].’’ [17 CFR 36, Appendix A].
For the reasons discussed above, the Commission
has found that the MPD contract does not meet the
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 the Commission
believes it is not useful as the sole basis for a SPDC
determination.
22 Guidance, supra.
23 73 FR 75892 (December 12, 2008).
E:\FR\FM\02JYN1.SGM
02JYN1
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
SPDC merely because it met the
reporting threshold.
ICE 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’’ as well as in strips
of contract months. ICE suggested that a
more appropriate method of
determining liquidity is to examine the
activity in a single traded month of a
given contract.’’ 24 It is the Commission’s
opinion that liquidity, as it pertains to
the MPD contract, is typically a function
of trading activity in particular lead
days and, given sufficient liquidity in
such days, the ICE MPD contract itself
would be considered liquid. In any
event, in light of the fact that the
Commission has found that the MPD
contract does not meet the material
price reference criterion, according to
the Commission’s Guidance, it would be
unnecessary to evaluate whether the
MPD 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 finds that the MPD contract
does not meet the material liquidity
criterion.
emcdonald on DSK2BSOYB1PROD with NOTICES
3. Overall Conclusion Regarding the
MPD Contract
After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the ICE MPD contract
does not perform a significant price
discovery function under the criteria
24 In addition, 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 6, 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 28 percent (fourth quarter of 2009) of all
transactions in the MPD contract. Commission
acknowledges that the open interest information it
provided in its October 6, 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 ‘‘onexchange’’ 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.
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
established in section 2(h)(7) of the
CEA. Specifically, the Commission has
determined that the MPD contract does
not meet the material price reference or
material liquidity criteria at this time.
Accordingly, the Commission is issuing
the attached Order declaring that the
MPD 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 MPD contract.25
Accordingly, with respect to its MPD
contract, ICE is not required to comply
with the obligations, requirements and
timetables prescribed in Commission
rule 36.3(c)(4) for ECMs with SPDCs.
However, ICE must continue to comply
with the applicable reporting
requirements for ECMs.
b. The Mid-C Financial Off-Peak Daily
(MXO) Contract and the SPDC Indicia
The MXO contract is cash settled
based on the off-peak, day-ahead price
index for the specified day, as published
by ICE in its ‘‘ICE Day Ahead Power
Price Report,’’ which is available on the
ECM’s website. The daily, off-peak hour
electricity price index is a volumeweighted average of qualifying, dayahead, off-peak hour power transactions
at the Mid-Columbia hub that are traded
on the ICE platform from 6 a.m. to
11a.m. CST on the publication date. The
ICE transactions on which the price
index is based specify the physical
delivery of power. The size of the MXO
contract is 25 MWh, and the MXO
contract is listed for 70 consecutive
days.
As the Columbia River flows through
Washington State, it encounters two
federal and nine privately-owned
hydroelectric dams generating close to
20,000 MW of power for the
Northwest.26 With another three dams
in British Columbia, Canada, and many
more on its various tributaries, the
Columbia River is the largest powerproducing river in North America. A
major goal of the participants in the
Mid-C electricity market is to maximize
the Columbia River’s potential, along
with protecting and enhancing the nonpower uses of the river. The reliability
of the electricity grid in the Northwest
is coordinated by the NWPP.
One stretch of the Columbia River
between the Grand Coulee Dam and
Priests Rapids Dam is governed by the
MCHCA. The MCHCA covers seven
dams 27 and nearly 13,000 MW of
25 See
73 FR 75888, 75893 (Dec. 12, 2008).
26 https://www.wpuda.org/publications/
connections/hydro/River%20Riders.pdf.
27 The federal dams are Grand Coulee and Chief
Joseph. The remaining dams are Wells (operated by
PO 00000
Frm 00028
Fmt 4703
Sfmt 4703
38483
generation. Specifically, the agreement
defines how the Chelan, Douglas and
Grant PUDs coordinate operations with
the Bonneville Power Administration to
maximize power generation while
reducing fluctuations in the river’s flow.
A number of other utilities that buy
power from the PUDs have also signed
onto the agreement. This agreement was
signed into effect on 1972 and renewed
for 20 years in 1997.28
In general, electricity is bought and
sold in an auction setting on an hourly
basis at various point along the
electrical grid. The price of electricity at
a particular point on the grid is called
the LMP, which includes the cost of
producing the electricity, as well as
congestion and line losses. Thus, and
LMP reflects generation costs as well as
the actual cost of supplying and
delivering electricity to a specific point
on the grid.
Electricity is traded in a day-ahead
market as well as a real-time market.
Typically, the bulk of the energy
transactions occur in the day-ahead
market. The day-ahead market
establishes prices for electricity that is
to be delivered during the specified
hour on the following day. Day-ahead
prices are determined based on
generation and energy transaction
quotes offered in advance. Because dayahead price quotes are based on
estimates of supply and demand,
electricity needs usually are not
perfectly satisfied in the day-ahead
market. On the day electricity is
generated and used, auction participants
usually realize that they bought or sold
either too much or too little power. A
real-time auction is operated in the MidC market to alleviate this problem. In
this regard, electricity traders use the
real-time market to sell excess
electricity and buy additional power to
meet demand. Only a relatively small
amount of electricity is traded in the
real-time market compared with the
day-ahead market.
1. Material Price Reference Criterion
The Commission’s October 6, 2009,
Federal Register notice identified
material price reference and material
liquidity as the potential basis for a
SPDC determination with respect to the
MXO 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
the Douglas PUD), Rocky Reach and Rock Island
(operated by the Chelan PUD), and Wanapum and
Priest Rapids (operated the Grant PUD).
28 https://www.wpuda.org/publications/
connections/hydro/River%20Riders.pdf.
E:\FR\FM\02JYN1.SGM
02JYN1
emcdonald on DSK2BSOYB1PROD with NOTICES
38484
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
only or historical. For example, ICE
offers the ‘‘West Power of Day’’ package
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. This package includes
price data for the MXO contract.
The Commission also noted that its
October 2007 ECM Study found that, in
general, market participants view ICE as
a price discovery market for certain
electricity contracts. The study did not
specify which markets performed this
function; nevertheless, the Commission
determined that the MXO contract,
while not mentioned by name in the
ECM Study, might warrant further
analysis.
The Commission has explained in
Guidance that it will rely on one of two
sources of evidence—direct or
indirect—to determine that the price of
a contract is being used as a material
price reference and therefore, serving a
significant price discovery function.29
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.
The Mid-C power market is a major
pricing center for electricity on the West
Coast. Traders, including producers,
keep abreast of the electricity prices in
the Mid-C power market when
conducting cash deals. However, ICE’s
Mid-C Financial Off-Peak (‘‘OMC’’)
29 17
CFR 36, Appendix A.
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
contract, which is a monthly contract, is
used more widely as a source of pricing
information for electricity in that market
than the daily off-peak hour contract
(i.e., the MXO contract). In this regard,
OMC contract prices power at the MidC trading point based on the simple
average of the daily off-peak hour prices
over the entire month, as reported by
ICE. Moreover, the OMC contract is
listed for up to 86 calendar months.
Market participants can use the OMC
contract to lock-in off-peak electricity
prices far into the future. In contrast, the
MXO contract is listed for a much
shorter length of time—up to 70 days in
the future. With such a limited
timeframe, the forward pricing
capability of the MXO contract is
constrained relative to that of the OMC
contract. Traders likely use monthly
power contracts like the OMC contract
to price electricity commitments in the
future. Such commitments are based on
long range forecasts of power supply
and demand. As the time of generation
and consumption nears, market
participants have a better understanding
of actual power supply and needs. As a
result, traders can modify previouslyestablished hedges with the daily power
contracts, like the MXO contract.
The Commission explained in its
Guidance that a contract meeting the
material price reference criterion would
routinely be consulted by industry
participants in pricing cash market
transactions. Although the Mid-C is a
major trading center for electricity and,
as noted, ICE sells price information for
the MXO contract, the Commission
found upon further evaluation that the
MXO contract is not routinely consulted
by industry participants in pricing cash
market transactions. Furthermore, the
Commission notes that publication of
the MXO contract’s prices is not indirect
evidence of material price reference.
The MXO contract’s prices are
published with those of numerous other
contracts, including ICE’s OMC
contract, which are of more interest to
market participants. Thus, the
Commission has concluded that traders
likely do not specifically purchase ICE
data packages for the MXO contract’s
prices and do not consult such prices on
a frequent and recurring basis in pricing
cash market transactions.
i. Federal Register Comments
WGCEF, WPTF, EEI and ICE stated
that no other contract directly references
or settles to the MXO contract’s price.
Moreover, the commenters argued that
the underlying cash price series against
which the MXO contract is settled (in
this case, the off-peak Mid-C electricity
price on a particular day, which is
PO 00000
Frm 00029
Fmt 4703
Sfmt 4703
derived from cash market transactions)
is the authentic reference price and not
the ICE contract itself. Commission staff
believes that this interpretation of price
reference is too limiting and believes
that a cash-settled derivatives contract
could meet the price reference criterion
if market participants ‘‘consult on a
frequent and recurring basis’’ the
derivatives contract when pricing
forward, fixed-price commitments or
other cash-settled derivatives that seek
to ‘‘lock in’’ a fixed price for some future
point in time to hedge against adverse
price movements. As noted above, while
the Mid-C is a major power market,
traders do not consider the daily offpeak hour Mid-C price to be as
important as the electricity price
associated with the average monthly offpeak price.
In addition, WGCEF stated that the
publication of price data for the MXO
contract price reference is weak
justification for material price reference.
This commenter argued that market
participants generally do not purchase
ICE data sets for one contract’s prices,
such as those for the MXO contract.
Instead, traders are interested in the
settlement prices, so the fact that ICE
sells the MXO prices as part of a broad
package is not conclusive evidence that
market participants are buying the ICE
data sets because they find the MXO
prices have substantial value to them.
As mentioned above, the Commission
notes that publication of the MXO
contract’s prices is not indirect evidence
of routine dissemination. The MXO
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 daily power contracts
relative to monthly power contracts, the
Commission has concluded that traders
likely do not specifically purchase the
ICE data packages for the MXO
contract’s prices and do not consult
such prices on a frequent and recurring
basis in pricing cash market
transactions.
Lastly, EEI observed that the ECM
Study did not specifically identify the
MXO contract as a contract that is
referred to by market participants on a
frequent and recurring basis. In
response, the Commission notes that it
cited the ECM Study’s general finding
that some ICE electricity contracts
appear to be regarded as price discovery
markets merely as indication that an
investigation of certain ICE contracts
may be warranted. The ECM Study was
not intended to serve as the sole basis
for determining whether or not a
particular contract meets the material
price reference criterion.
E:\FR\FM\02JYN1.SGM
02JYN1
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
emcdonald on DSK2BSOYB1PROD with NOTICES
ii. Conclusion Regarding Material
Price Reference:
Based on the above, the Commission
finds that the ICE MXO contract does
not meet the material price reference
criterion because cash market
transactions are not priced either
explicitly or implicitly on a frequent
and recurring basis at a differential to
the MXO contract’s price (direct
evidence). Moreover, while the MXO
contract’s price data is sold to market
participants, those individuals likely do
not specifically purchase the ICE data
packages for the MXO contract’s prices
and do not consult such prices on a
frequent and recurring basis in pricing
cash market transactions (indirect
evidence).
2. Material Liquidity Criterion
As noted above, in its October 6,
2009, Federal Register notice, the
Commission identified material price
reference and material liquidity as
potential criteria for SPDC
determination of the MXO contract. To
assess whether a contract meets the
material liquidity criterion, the
Commission first examines trading
activity as a general measurement of the
contract’s size and potential importance.
If the Commission finds that the
contract in question meets a threshold
of trading activity that would render it
of potential importance, the
Commission will then perform a
statistical analysis to measure the effect
that changes to the subject contract’s
prices potentially may have on prices
for other contracts listed on an ECM or
a DCM.
The total number of transactions
executed on ICE’s electronic platform in
the MXO contract was 437 in the second
quarter of 2009, resulting in a daily
average of 6.8 trades. During the same
period, the MXO contract had a total
trading volume of 61,688 contracts and
an average daily trading volume of 963.9
contracts. Moreover, open interest as of
June 30, 2009, was 826 contracts, which
included trades executed on ICE’s
electronic trading platform, as well as
trades executed off of ICE’s electronic
trading platform and then brought to
ICE for clearing. In this regard, ICE does
not differentiate between open interest
created by a transaction executed on its
trading platform and that created by a
transaction executed off its trading
platform.30
In a subsequent filing dated March 24,
2010, ICE reported that total trading
volume in the fourth quarter of 2009
was 19,216 contracts (or 296 contracts
on a daily basis). In terms of number of
30 74
FR 51261 (October 6, 2009).
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
transactions, 123 trades occurred in the
fourth quarter of 2009 (1.9 trades per
day). As of December 31, 2009, open
interest in the MXO contract was 2,528
contracts, which included trades
executed on ICE’s electronic trading
platform, as well as trades executed off
of ICE’s electronic trading platform and
then brought to ICE for clearing.
The number of trades per day fell
below minimum reporting level of five
trades per day in the fourth quarters of
2009. Moreover, trading activity in the
MXO contract, as characterized by total
quarterly volume, indicates that the
MXO contract experiences trading
activity that is similar to that of minor
futures markets.31 Thus, the MXO
contract does not meet a threshold of
trading activity that would render it of
potential importance and no additional
statistical analysis is warranted.32
i. Federal Register Comments
ICE and WGCEF stated that the MXO
contract lacks a sufficient number of
trades to meet the material liquidity
criterion. These two commenters, along
with WPTF, FEIG and EEI argued that
the MXO contract cannot have a
material effect on other contracts, such
as those listed for trading by NYMEX.
The commenters pointed out that it is
not possible for the MXO contract to
affect a DCM contract because price
linkage and the potential for arbitrage
do not exist. The DCM contracts do not
cash settle to the MXO contract’s price.
Moreover, the DCM contracts and the
MXO contract are both cash settled
based on physical transactions, which
the contracts cannot influence.
WGCEF and ICE 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
31 Staff has advised the Commission that in its
experience, a thinly-traded contract is, generally,
one that has a quarterly trading volume of 100,000
contracts or less. In this regard, in the third quarter
of 2009, physical commodity futures contracts with
trading volume of 100,000 contracts or fewer
constituted less than one percent of total trading
volume of all physical commodity futures contracts.
32 In establishing guidance to illustrate how it
will evaluate the various criteria, or combinations
of criteria, when determining whether a contract is
a SPDC, the Commission observed 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 MXO
contract does not meet the 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 the Commission believes it is not
useful as the sole basis for a SPDC determination.
PO 00000
Frm 00030
Fmt 4703
Sfmt 4703
38485
trades per day in the MXO 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.’’ 33
ICE opined that the Commission
‘‘seems to have adopted a five trade per
day test for material liquidity.’’ To the
contrary, 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’’34 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; however,
the contract will not be found to be a
SPDC merely because it met the
reporting threshold.
ICE 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’’ as well as in strips
of contract months. ICE suggested that a
more appropriate method of
determining liquidity is to examine the
activity in a single traded month of a
given contract.35 It is the Commission’s
opinion that liquidity, as it pertains to
the MXO contract, is typically a
function of trading activity in particular
lead days and, given sufficient liquidity
33 Guidance,
supra.
FR 75892 (December 12, 2008).
35 In addition, 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 6, 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 61 percent of all transactions in the MXO
contract (fourth quarter of 2009). Commission
acknowledges that the open interest information it
provided in its October 6, 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 ‘‘onexchange’’ 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.
34 73
E:\FR\FM\02JYN1.SGM
02JYN1
38486
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
in such days, the ICE MXO contract
itself would be considered liquid. In any
event, in light of the fact that the
Commission has found that the MXO
contract does not meet the material
price reference criterion, according to
the Commission’s Guidance, it would be
unnecessary to evaluate whether the
MXO 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 finds that the MXO
contract does not meet the material
liquidity criterion.
3. Overall Conclusion Regarding the
MXO Contract
After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the ICE MXO 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 MXO contract does
not meet the material price reference or
material liquidity criteria at this time.
Accordingly, the Commission is issuing
the attached Order declaring that the
MXO 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 MXO contract.36
Accordingly, with respect to its MXO
contract, ICE is not required to comply
with the obligations, requirements and
timetables prescribed in Commission
rule 36.3(c)(4) for ECMs with SPDCs.
However, ICE must continue to comply
with the applicable reporting
requirements for ECMs.
V. Related Matters
emcdonald on DSK2BSOYB1PROD with NOTICES
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 37 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.
b. Cost-Benefit Analysis
Section 15(a) of the CEA38 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
36 See
73 FR 75888, 75893 (Dec. 12, 2008).
37 44 U.S.C. 3507(d).
VerDate Mar<15>2010
18:27 Jul 01, 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
the MPD and MXO contracts, which are
the subject of the attached Orders, are
not SPDCs; accordingly, the
Commission’s Orders impose no
additional costs and no additional
statutorily or regulatory mandated
responsibilities on the ECM.
c. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 39 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.40 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. Orders
a. Order Relating to the Mid-C Financial
Peak Daily 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 Mid-C
Financial Peak Daily contract, traded on
the IntercontinentalExchange, Inc., does
not at this time satisfy the material price
preference or material liquidity criteria
for significant price discovery contracts.
Consistent with this determination, the
IntercontinentalExchange, Inc., is not
considered a registered entity 41 with
respect to the Mid-C Financial Peak
Daily 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 Mid-C Financial Peak
Daily contract with the issuance of this
Order.
This Order is based on the
representations made to the
39 5
U.S.C. 601 et seq.
FR 42256, 42268 (Aug. 10, 2001).
41 7 U.S.C. 1a(29).
40 66
38 7
PO 00000
U.S.C. 19(a).
Frm 00031
Fmt 4703
Sfmt 4703
E:\FR\FM\02JYN1.SGM
02JYN1
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
emcdonald on DSK2BSOYB1PROD with NOTICES
Commission by the
IntercontinentalExchange, Inc., dated
July 27, 2009, and March 24, 2010, 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 Mid-C Financial
Peak Daily 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.
b. Order Relating to the Mid-C Financial
Off-Peak Daily 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 Mid-C
Financial Off-Peak Daily contract,
traded on the IntercontinentalExchange,
Inc., does not at this time satisfy the
material price reference or material
liquidity criteria for significant price
discovery contracts. Consistent with this
determination, the
IntercontinentalExchange, Inc., is not
considered a registered entity 42 with
respect to the Mid-C Financial Off-Peak
Daily 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 Mid-C Financial OffPeak Daily contract with the issuance of
this Order.
This Order is based on the
representations made to the
Commission by the
IntercontinentalExchange, Inc., July 27,
2009, and March 24, 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 Mid-C Financial
Off-Peak Daily contract is not a
significant price discovery contract.
Additionally, to the extent that it
continues to rely upon the exemption in
42 7
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 June 25,
2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010–16206 Filed 7–1–10; 8:45 am]
BILLING CODE 6351–01–P
COMMODITY FUTURES TRADING
COMMISSION
Order Finding That the Fuel Oil-180
Singapore Swap 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 20, 2009, the
Commodity Futures Trading
Commission (‘‘CFTC’’ or ‘‘Commission’’)
published for comment in the Federal
Register 1 a notice of its intent to
undertake a determination whether the
Fuel Oil-180 Singapore Swap (‘‘SZS’’)
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 SZS 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: June 25, 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.
U.S.C. 1a(29).
VerDate Mar<15>2010
18:27 Jul 01, 2010
1 74
Jkt 220001
PO 00000
FR 53728 (October 20, 2009).
Frm 00032
Fmt 4703
Sfmt 4703
38487
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 an SPDC if the
Commission determines, under criteria
established in section 2(h)(7), that it
performs a significant price discovery
function. When the Commission makes
such a determination, the ECM on
which the SPDC is traded must assume,
with respect to that contract, all the
responsibilities and obligations of a
registered entity under the Act and
Commission regulations, and must
comply with nine core principles
established by new section 2(h)(7)(C).
On March 16, 2009, the CFTC
promulgated final rules implementing
the provisions of the Reauthorization
Act.4 As relevant here, rule 36.3
imposes increased information reporting
requirements on ECMs to assist the
Commission in making prompt
assessments whether particular ECM
contracts may be SPDCs. In addition to
filing quarterly reports of its contracts,
an ECM must notify the Commission
promptly concerning any contract
traded in reliance on the exemption in
section 2(h)(3) of the CEA that averaged
five trades per day or more over the
most recent calendar quarter, and for
which the exchange sells its price
information regarding the contract to
market participants or industry
publications, or whose daily closing or
settlement prices on 95 percent or more
of the days in the most recent quarter
were within 2.5 percent of the
contemporaneously determined closing,
settlement or other daily price of
another contract.
Commission rule 36.3(c)(3)
established the procedures by which the
Commission makes and announces its
determination whether a particular ECM
contract serves a significant price
discovery function. Under those
2 Incorporated as Title XIII of the Food,
Conservation and Energy Act of 2008, Pub. L. No.
110–246, 122 Stat. 1624 (June 18, 2008).
3 7 U.S.C. 1a(29).
4 74 FR 12178 (Mar. 23, 2009); these rules became
effective on April 22, 2009.
E:\FR\FM\02JYN1.SGM
02JYN1
]]>Agencies
[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38478-38487]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16206]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Orders Finding That the Mid-C Financial Peak Daily Contract and
Mid-C Financial Off-Peak Daily Contract, Offered for Trading on the
IntercontinentalExchange, Inc., Do Not Perform a Significant Price
Discovery Function
AGENCY: Commodity Futures Trading Commission.
ACTION: Final orders.
-----------------------------------------------------------------------
SUMMARY: On October 6, 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 Mid-C \2\ Financial Peak Daily (``MPD'') contract and Mid-C
Financial Off-Peak Daily (``MXO'') contract,\3\ which are listed for
trading 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''), perform 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
orders finding that the MPD and MXO contracts do 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 51261 (October 6, 2009).
\2\ The acronym ``Mid-C'' stands for Mid-Columbia.
\3\ The Federal Register notice also requested comment on the
Mid-C Financial Peak (``MDC'') contract and Mid-C Financial Off-Peak
(``OMC'') contract; these contracts will be addressed in a separate
Federal Register release.
---------------------------------------------------------------------------
DATES: Effective Date: June 25, 2010.
FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,
Division of Market Oversight, Commodity Futures Trading
[[Page 38479]]
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'') \4\
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.\5\ 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).
---------------------------------------------------------------------------
\4\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008).
\5\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------
On March 16, 2009, the CFTC promulgated final rules implementing
the provisions of the Reauthorization Act.\6\ 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.
---------------------------------------------------------------------------
\6\ 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.\7\ The issuance of such an order also triggers the
obligations, requirements and timetables prescribed in Commission rule
36.3(c)(4).\8\
---------------------------------------------------------------------------
\7\ 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).
\8\ 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 6, 2009, the Commission published in the Federal
Register notice of its intent to undertake a determination whether the
MPD and MXO contracts \9\ perform a significant price discovery
function and requested comment from interested parties.\10\ Comments
were received from the Federal Energy Regulatory Commission (``FERC''),
Financial Institutions Energy Group (``FIEG''), Working Group of
Commercial Energy Firms (``WGCEF''), Edison Electric Institute
(``EEI''), ICE, Western Power Trading Forum (``WPTF'') and Public
Utility Commission of Texas (``PUCT'').\11\ The comment letters from
FERC \12\ and PUCT did not directly address the issue of whether or not
the subject contracts are SPDCs. The remaining comment letters raised
substantive issues with respect to the applicability of section 2(h)(7)
to the MPD and MXO contracts and generally expressed the opinion that
the contracts are not SPDCs because they does not meet the material
price reference or material liquidity criteria for SPDC determination.
These comments are more extensively discussed below, as applicable.
---------------------------------------------------------------------------
\9\ As noted above, the Federal Register notice also requested
comment on the Mid-C Financial Peak (``MDC'') contract and Mid-C
Financial Off-Peak (``OMC'') contract. The MDC and OMC contracts
will be addressed in a separate Federal Register release.
\10\ 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.
\11\ 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.'' 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.'' EEI is the ``association of
shareholder-owned electric companies, international affiliates and
industry associates worldwide.'' ICE is an ECM, as noted above. WPTF
describes itself as a ``broad-based membership organization
dedicated to encouraging competition in the Western power markets *
* * WTPF strives to reduce the long-run cost of electricity to
consumers throughout the region while maintaining the current high
level of system reliability.'' PUCT is the independent organization
that oversees the Electric Reliability Council of Texas (``ERCOT'')
to ``ensure nondiscriminatory access to the transmission and
distribution systems, to ensure the reliability and adequacy of the
regional electrical network, and to perform other essential market
functions.'' The comment letters are available on the Commission's
Web site: https://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-011.html.
\12\ FERC expressed the opinion that a determination by the
Commission that either of the subject contracts performs a
significant price discovery function ``would not appear to conflict
with FERC's exclusive jurisdiction under the Federal Power Act (FPA)
over the transmission or sale for resale of electric energy in
interstate commerce or with its other regulatory responsibilities
under the FPA'' and further that ``FERC staff will monitor proposed
SPDC determinations and advise the CFTC of any potential conflicts
with FERC's exclusive jurisdiction over RTOs, [(regional
transmission organizations)], ISOs [(independent system operators)]
or other jurisdictional entities.''
---------------------------------------------------------------------------
[[Page 38480]]
III. Section 2(h)(7) of the CEA
The Commission is directed by section 2(h)(7) of the CEA to
consider the following criteria in determining a contract's significant
price discovery function:
Price Linkage--the extent to which the agreement, contract
or transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated contract
market (``DCM'') or derivatives transaction execution facility
(``DTEF''), or a SPDC traded on an electronic trading facility, to
value a position, transfer or convert a position, cash or financially
settle a position, or close out a position.
Arbitrage--the extent to which the price for the
agreement, contract or transaction is sufficiently related to the price
of a contract or contracts listed for trading on or subject to the
rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of
an electronic trading facility, so as to permit market participants to
effectively arbitrage between the markets by simultaneously maintaining
positions or executing trades in the contracts on a frequent and
recurring basis.
Material price reference--the extent to which, on a
frequent and recurring basis, bids, offers or transactions in a
commodity are directly based on, or are determined by referencing or
consulting, the prices generated by agreements, contracts or
transactions being traded or executed on the electronic trading
facility.
Material liquidity--the extent to which the volume of
agreements, contracts or transactions in a commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a DCM, DTEF or electronic trading facility
operating in reliance on the exemption in section 2(h)(3).
Not all criteria must be present to support a determination that a
particular contract performs a significant price discovery function,
and one or more criteria may be inapplicable to a particular
contract.\13\ 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.\14\ 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 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.
---------------------------------------------------------------------------
\13\ In its October 6, 2009, Federal Register release, the
Commission identified material price reference and material
liquidity as the possible criteria for SPDC determination of the MPD
and MXO contracts. Arbitrage and price linkage were not identified
as possible criteria. As a result, arbitrage and price linkage will
not be discussed further in this document and the associated Orders.
\14\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------
IV. Findings and Conclusions
The Commission's findings and conclusions with respect to the MPD
and MXO contracts are discussed separately below:
a. The Mid-C Financial Peak Daily (MPD) Contract and the SPDC Indicia
The MPD contract is cash settled based on the peak, day-ahead price
index for the specified day, as published by ICE in its ``ICE Day Ahead
Power Price Report,'' which is available on the ECM's Web site. The
daily peak-hour electricity price index is a volume-weighted average of
qualifying, day-ahead, peak-hour power transactions at the Mid-Columbia
hub that are traded on the ICE platform from 6 a.m. to 11 a.m. CST on
the publication date. The ICE transactions on which the price index is
based specify the physical delivery of power. The size of the MPD
contract is 400 megawatt hours (``MWh''), and the MPD contract is
listed for 38 consecutive days.
As the Columbia River flows through Washington State, it encounters
two federal and nine privately-owned hydroelectric dams generating a
total of close to 20,000 MW of power in the Northwest.\15\ With another
three dams in British Columbia, Canada, and many more on its various
tributaries, the Columbia River is the largest power-producing river in
North America. A major goal of the participants in the Mid-C
electricity market is to maximize the Columbia River's potential, along
with protecting and enhancing the non-power uses of the river. The
reliability of the electricity grid in the Northwest is coordinated by
the Northwest PowerPool (``NWPP''), which is a voluntary organization
comprised of major generating utilities serving the Northwestern United
States, as well as British Columbia and Alberta, Canada.
---------------------------------------------------------------------------
\15\ https://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------
One stretch of the Columbia River between the Grand Coulee Dam and
Priests Rapids Dam is governed by the Mid-Columbia Hourly Coordination
Agreement (``MCHCA''). The MCHCA covers seven dams \16\ and nearly
13,000 MW of generation. Specifically, the agreement defines how the
Chelan, Douglas and Grant PUDs coordinate operations with the
Bonneville Power Administration to maximize power generation while
reducing fluctuations in the river's flow. A number of other utilities
that buy power from the PUDs have also signed onto the agreement. This
agreement was signed into effect in 1972 and renewed for 20 years in
1997.\17\
---------------------------------------------------------------------------
\16\ The federal dams are Grand Coulee and Chief Joseph. The
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest
Rapids (operated by the Grant PUD). The term ``PUD'' stands for
publically-owned utility, which provides essential services within a
specified area.
\17\ https://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------
In general, electricity is bought and sold in an auction setting on
an hourly basis at various points along the electrical grid. The price
of electricity at a particular point on the grid is called the
locational marginal price (``LMP''), which includes the costs of
producing the electricity, as well as congestion and line losses. Thus,
an LMP reflects generation costs as well as the actual cost of
supplying and delivering electricity to a specific point on the grid.
Electricity is traded in a day-ahead market as well as a real-time
market. Typically, the bulk of energy transactions occur in the day-
ahead market. The day-ahead market establishes prices for electricity
that is to be delivered during the specified hour on the following day.
Day-ahead prices are determined based on generation and energy
transaction quotes offered in advance. Because day-
[[Page 38481]]
ahead quotes for power are based on estimates of supply and demand,
electricity needs usually are not perfectly satisfied in the day-ahead
market. In this regard, on the day the electricity is transmitted and
used, auction participants typically realize that they bought or sold
too much power or too little power. A real-time auction is operated to
alleviate this problem by servicing as a balancing mechanism.
Specifically, electricity traders use the real-time market to sell
excess electricity and buy additional power to meet demand. Only a
relatively small amount of electricity is traded in the real-time
market compared with the day-ahead market.
1. Material Price Reference Criterion
The Commission's October 6, 2009, Federal Register notice
identified material price reference and material liquidity as the
potential basis for a SPDC determination with respect to the MPD
contract. The Commission considered the fact that ICE sells its price
data to market participants in a number of different packages which
vary in terms of the hubs covered, time periods, and whether the data
are daily only or historical. For example, ICE offers the ``West Power
of Day'' package 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. This package includes price data for the MPD 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'') found that in general, market
participants view ICE as a price discovery market for certain
electricity contracts. The study did not specify which markets
performed this function; nevertheless, the Commission determined that
the MPD contract, while not mentioned by name in the ECM Study, might
warrant further review.
The Commission explains in its Guidance to the Part 36 rules that
in evaluating a contract under the material price reference criterion,
it 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 CFR 36, Appendix A.
---------------------------------------------------------------------------
The Mid-C power market is a major pricing center for electricity on
the West Coast. Traders, including producers, keep abreast of the
electricity prices in the Mid-C power market when conducting cash
deals. However, ICE's Mid-C Financial Peak (``MDC'') contract, which is
a monthly contract, is used more widely as a source of pricing
information for electricity than the daily, peak-hour contract (i.e.,
the MPD contract). Specifically, the MDC contract prices power at the
Mid-C trading point based on the simple average of the daily peak-hour
prices over the entire month, as reported by ICE. Moreover, the MDC
contract is listed for up to 86 calendar months. Thus, market
participants can use the MDC contract to lock-in electricity prices far
into the future. In contrast, the MPD contract is listed for a much
shorter length of time--up to 38 days in the future. With such a
limited timeframe, the forward pricing capability of the MPD contract
is much more constrained than that of the MDC contract. Traders use
monthly power contracts like the MDC contract to price electricity
commitments in the future, where such commitments are based on long
range forecasts of power supply and demand. As actual generation and
usage nears, market participants have a better understanding of actual
power supply and needs. As a result, traders can modify previously-
established hedges with the daily power contracts, like the MPD
contract.
The Commission explained in its Guidance that a contract meeting
the material price reference criterion would routinely be consulted by
industry participants in pricing cash market transactions. Although the
Mid-C is a major trading center for electricity and, as noted, ICE
sells price information for the MPD contract, the MPD contract is not
consulted in this manner and does not satisfy the material price
reference criterion. Thus, the MPD contract does not satisfy the direct
price reference test for existence of material price reference.
Furthermore, the Commission notes that publication of the MPD
contract's prices is not indirect evidence of material price reference.
The MPD contract's prices are published with those of numerous other
contracts, including ICE's monthly electricity contracts, which are of
more interest to market participants. In these circumstances, the
Commission has concluded that traders likely do not specifically
purchase ICE data packages for the MPD contract's prices and do not
consult such prices on a frequent and recurring basis in pricing cash
market transactions.
i. Federal Register Comments:
WGCEF, WPTF, EEI and ICE stated that no other contract directly
references or settles to the MPD contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the MPD contract is settled (in this case, the peak Mid-C electricity
price on a particular day, which is derived from cash market
transactions) is the authentic reference price and not the ICE contract
itself. Commission staff believes that this interpretation of price
reference is too narrow and believes that a cash-settled derivatives
contract could meet the price reference criterion if market
participants ``consult on a frequent and recurring basis'' the
derivatives contract when pricing forward, fixed-price commitments or
other cash-settled derivatives that seek to ``lock in'' a fixed price
for some future point in time to hedge against adverse price movements.
As noted above, while the Mid-C is a major power market, traders do not
consider the daily peak-hour Mid-C price to be as important as the
electricity price associated with the monthly contract.
In addition, WGCEF stated that the publication of price data for
the MPD contract price is weak justification for material price
reference. This commenter argued that market participants generally do
not purchase ICE data sets for one contract's prices, such as those for
the MPD contract. Instead, traders are interested in the settlement
prices, so the fact that ICE sells the MPD prices as part of a broad
package is not conclusive evidence that market participants are buying
the ICE
[[Page 38482]]
data sets because they find the MPD prices have substantial value to
them. As noted above, the Commission notes that publication of the MPD
contract's prices is not indirect evidence of routine dissemination.
The MPD 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 daily power contracts relative to monthly
contracts, the Commission has concluded that traders likely do not
specifically purchase the ICE data packages for the MPD contract's
prices and do not consult such prices on a frequent and recurring basis
in pricing cash market transactions.
Lastly, EEI criticized that the ECM Study did not specifically
identify the MPD contract as a contract that is referred to by market
participants on a frequent and recurring basis. In response, the
Commission notes that it cited the ECM Study's general finding that
some ICE electricity contracts appear to be regarded as price discovery
markets merely as indication that an investigation of certain ICE
contracts may be warranted. The ECM Study was not intended to serve as
the sole basis for determining whether or not a particular contract
meets the material price reference criterion.
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the ICE MPD contract
does not meet the material price reference criterion because cash
market transactions are not priced either explicitly or implicitly on a
frequent and recurring basis at a differential to the MPD contract's
price (direct evidence). Moreover, while the MPD contract's price data
is sold to market participants, those individuals likely do not
purchase the ICE data packages specifically for the MPD contract's
prices and do not consult such prices on a frequent and recurring basis
in pricing cash market transactions (indirect evidence).
2. Material Liquidity Criterion
As noted above, in its October 6, 2009, Federal Register notice,
the Commission identified material price reference and material
liquidity as potential criteria for SPDC determination of the MPD
contract. To assess whether a contract meets the material liquidity
criterion, the Commission first examines trading activity as a general
measurement of the contract's size and potential importance. If the
Commission finds that the contract in question meets a threshold of
trading activity that would render it of potential importance, the
Commission will then perform a statistical analysis to measure the
effect that changes to the subject contract's prices potentially may
have on prices for other contracts listed on an ECM or a DCM.
The total number of transactions executed on ICE's electronic
platform in the MPD contract was 1,294 in the second quarter of 2009,
resulting in a daily average of 20.2 trades. During the same period,
the MPD contract had a total trading volume of 18,862 contracts and an
average daily trading volume of 294.7 contracts. Moreover, open
interest as of June 30, 2009, was 826 contracts, which included trades
executed on ICE's electronic trading platform, as well as trades
executed off of ICE's electronic trading platform and then brought to
ICE for clearing. In this regard, ICE does not differentiate between
open interest created by a transaction executed on its trading platform
and that created by a transaction executed off its trading
platform.\19\
---------------------------------------------------------------------------
\19\ 74 FR 51261 (October 6, 2009).
---------------------------------------------------------------------------
In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 19,574 contracts
(or 301 contracts on a daily basis). In terms of number of
transactions, 1,108 trades occurred in the fourth quarter of 2009 (17
trades per day). As of December 31, 2009, open interest in the MPD
contract was 550 contracts, which included trades executed on ICE's
electronic trading platform, as well as trades executed off of ICE's
electronic trading platform and then brought to ICE for clearing.
The number of trades per day remained relatively low between the
second and fourth quarters of 2009 and averaged only slightly more than
the reporting level of five trades per day. Moreover, trading activity
in the MPD contract, as characterized by total quarterly volume,
indicates that the MPD contract experiences trading activity that is
similar to that of minor futures markets.\20\ Thus, the MPD contract
does not meet a threshold of trading activity that would render it of
potential importance and no additional statistical analysis is
warranted.\21\
---------------------------------------------------------------------------
\20\ 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.
\21\ 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].'' [17 CFR 36, Appendix A]. For the
reasons discussed above, the Commission has found that the MPD
contract does not meet the 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 the Commission believes it is not useful as the sole basis for
a SPDC determination.
---------------------------------------------------------------------------
i. Federal Register Comments
ICE and WGCEF stated that the MPD contract lacks a sufficient
number of trades to meet the material liquidity criterion. These two
commenters, along with WPTF, FEIG and EEI argued that the MPD contract
cannot have a material effect on other contracts, such as those listed
for trading by the New York Mercantile Exchange (``NYMEX''), a DCM. The
commenters pointed out that it is not possible for the MPD contract to
affect a DCM contract because price linkage and the potential for
arbitrage do not exist. The DCM contracts do not cash settle to the MPD
contract's price. Instead, the DCM contracts and the MPD contract are
both cash settled based on physical transactions, which neither the ECM
or the DCM contracts can influence.
WGCEF and ICE 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 MPD 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.'' \22\
---------------------------------------------------------------------------
\22\ Guidance, supra.
---------------------------------------------------------------------------
ICE opined that the Commission ``seems to have adopted a five trade
per day test for material liquidity.'' To the contrary, 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'' \23\ 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; however, the contract will not be found to be a
[[Page 38483]]
SPDC merely because it met the reporting threshold.
---------------------------------------------------------------------------
\23\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------
ICE 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'' as well as in strips of
contract months. ICE suggested that a more appropriate method of
determining liquidity is to examine the activity in a single traded
month of a given contract.'' \24\ It is the Commission's opinion that
liquidity, as it pertains to the MPD contract, is typically a function
of trading activity in particular lead days and, given sufficient
liquidity in such days, the ICE MPD contract itself would be considered
liquid. In any event, in light of the fact that the Commission has
found that the MPD contract does not meet the material price reference
criterion, according to the Commission's Guidance, it would be
unnecessary to evaluate whether the MPD contract meets the material
liquidity criterion since it cannot be used alone for SPDC
determination.
---------------------------------------------------------------------------
\24\ In addition, 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 6, 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 28 percent (fourth
quarter of 2009) of all transactions in the MPD contract. Commission
acknowledges that the open interest information it provided in its
October 6, 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.
---------------------------------------------------------------------------
ii. Conclusion Regarding Material Liquidity
For the reasons discussed above, the Commission finds that the MPD
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the MPD Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE MPD
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 MPD contract does not meet the
material price reference or material liquidity criteria at this time.
Accordingly, the Commission is issuing the attached Order declaring
that the MPD 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 MPD
contract.\25\ Accordingly, with respect to its MPD contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
---------------------------------------------------------------------------
\25\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
b. The Mid-C Financial Off-Peak Daily (MXO) Contract and the SPDC
Indicia
The MXO contract is cash settled based on the off-peak, day-ahead
price index for the specified day, as published by ICE in its ``ICE Day
Ahead Power Price Report,'' which is available on the ECM's website.
The daily, off-peak hour electricity price index is a volume-weighted
average of qualifying, day-ahead, off-peak hour power transactions at
the Mid-Columbia hub that are traded on the ICE platform from 6 a.m. to
11a.m. CST on the publication date. The ICE transactions on which the
price index is based specify the physical delivery of power. The size
of the MXO contract is 25 MWh, and the MXO contract is listed for 70
consecutive days.
As the Columbia River flows through Washington State, it encounters
two federal and nine privately-owned hydroelectric dams generating
close to 20,000 MW of power for the Northwest.\26\ With another three
dams in British Columbia, Canada, and many more on its various
tributaries, the Columbia River is the largest power-producing river in
North America. A major goal of the participants in the Mid-C
electricity market is to maximize the Columbia River's potential, along
with protecting and enhancing the non-power uses of the river. The
reliability of the electricity grid in the Northwest is coordinated by
the NWPP.
---------------------------------------------------------------------------
\26\ https://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------
One stretch of the Columbia River between the Grand Coulee Dam and
Priests Rapids Dam is governed by the MCHCA. The MCHCA covers seven
dams \27\ and nearly 13,000 MW of generation. Specifically, the
agreement defines how the Chelan, Douglas and Grant PUDs coordinate
operations with the Bonneville Power Administration to maximize power
generation while reducing fluctuations in the river's flow. A number of
other utilities that buy power from the PUDs have also signed onto the
agreement. This agreement was signed into effect on 1972 and renewed
for 20 years in 1997.\28\
---------------------------------------------------------------------------
\27\ The federal dams are Grand Coulee and Chief Joseph. The
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest
Rapids (operated the Grant PUD).
\28\ https://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------
In general, electricity is bought and sold in an auction setting on
an hourly basis at various point along the electrical grid. The price
of electricity at a particular point on the grid is called the LMP,
which includes the cost of producing the electricity, as well as
congestion and line losses. Thus, and LMP reflects generation costs as
well as the actual cost of supplying and delivering electricity to a
specific point on the grid.
Electricity is traded in a day-ahead market as well as a real-time
market. Typically, the bulk of the energy transactions occur in the
day-ahead market. The day-ahead market establishes prices for
electricity that is to be delivered during the specified hour on the
following day. Day-ahead prices are determined based on generation and
energy transaction quotes offered in advance. Because day-ahead price
quotes are based on estimates of supply and demand, electricity needs
usually are not perfectly satisfied in the day-ahead market. On the day
electricity is generated and used, auction participants usually realize
that they bought or sold either too much or too little power. A real-
time auction is operated in the Mid-C market to alleviate this problem.
In this regard, electricity traders use the real-time market to sell
excess electricity and buy additional power to meet demand. Only a
relatively small amount of electricity is traded in the real-time
market compared with the day-ahead market.
1. Material Price Reference Criterion
The Commission's October 6, 2009, Federal Register notice
identified material price reference and material liquidity as the
potential basis for a SPDC determination with respect to the MXO
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
[[Page 38484]]
only or historical. For example, ICE offers the ``West Power of Day''
package 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. This package includes price data for the MXO contract.
The Commission also noted that its October 2007 ECM Study found
that, in general, market participants view ICE as a price discovery
market for certain electricity contracts. The study did not specify
which markets performed this function; nevertheless, the Commission
determined that the MXO contract, while not mentioned by name in the
ECM Study, might warrant further analysis.
The Commission has explained in Guidance that it will rely on one
of two sources of evidence--direct or indirect--to determine that the
price of a contract is being used as a material price reference and
therefore, serving a significant price discovery function.\29\ 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.
---------------------------------------------------------------------------
\29\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------
The Mid-C power market is a major pricing center for electricity on
the West Coast. Traders, including producers, keep abreast of the
electricity prices in the Mid-C power market when conducting cash
deals. However, ICE's Mid-C Financial Off-Peak (``OMC'') contract,
which is a monthly contract, is used more widely as a source of pricing
information for electricity in that market than the daily off-peak hour
contract (i.e., the MXO contract). In this regard, OMC contract prices
power at the Mid-C trading point based on the simple average of the
daily off-peak hour prices over the entire month, as reported by ICE.
Moreover, the OMC contract is listed for up to 86 calendar months.
Market participants can use the OMC contract to lock-in off-peak
electricity prices far into the future. In contrast, the MXO contract
is listed for a much shorter length of time--up to 70 days in the
future. With such a limited timeframe, the forward pricing capability
of the MXO contract is constrained relative to that of the OMC
contract. Traders likely use monthly power contracts like the OMC
contract to price electricity commitments in the future. Such
commitments are based on long range forecasts of power supply and
demand. As the time of generation and consumption nears, market
participants have a better understanding of actual power supply and
needs. As a result, traders can modify previously-established hedges
with the daily power contracts, like the MXO contract.
The Commission explained in its Guidance that a contract meeting
the material price reference criterion would routinely be consulted by
industry participants in pricing cash market transactions. Although the
Mid-C is a major trading center for electricity and, as noted, ICE
sells price information for the MXO contract, the Commission found upon
further evaluation that the MXO contract is not routinely consulted by
industry participants in pricing cash market transactions. Furthermore,
the Commission notes that publication of the MXO contract's prices is
not indirect evidence of material price reference. The MXO contract's
prices are published with those of numerous other contracts, including
ICE's OMC contract, which are of more interest to market participants.
Thus, the Commission has concluded that traders likely do not
specifically purchase ICE data packages for the MXO contract's prices
and do not consult such prices on a frequent and recurring basis in
pricing cash market transactions.
i. Federal Register Comments
WGCEF, WPTF, EEI and ICE stated that no other contract directly
references or settles to the MXO contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the MXO contract is settled (in this case, the off-peak Mid-C
electricity price on a particular day, which is derived from cash
market transactions) is the authentic reference price and not the ICE
contract itself. Commission staff believes that this interpretation of
price reference is too limiting and believes that a cash-settled
derivatives contract could meet the price reference criterion if market
participants ``consult on a frequent and recurring basis'' the
derivatives contract when pricing forward, fixed-price commitments or
other cash-settled derivatives that seek to ``lock in'' a fixed price
for some future point in time to hedge against adverse price movements.
As noted above, while the Mid-C is a major power market, traders do not
consider the daily off-peak hour Mid-C price to be as important as the
electricity price associated with the average monthly off-peak price.
In addition, WGCEF stated that the publication of price data for
the MXO contract price reference is weak justification for material
price reference. This commenter argued that market participants
generally do not purchase ICE data sets for one contract's prices, such
as those for the MXO contract. Instead, traders are interested in the
settlement prices, so the fact that ICE sells the MXO prices as part of
a broad package is not conclusive evidence that market participants are
buying the ICE data sets because they find the MXO prices have
substantial value to them. As mentioned above, the Commission notes
that publication of the MXO contract's prices is not indirect evidence
of routine dissemination. The MXO 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 daily power contracts
relative to monthly power contracts, the Commission has concluded that
traders likely do not specifically purchase the ICE data packages for
the MXO contract's prices and do not consult such prices on a frequent
and recurring basis in pricing cash market transactions.
Lastly, EEI observed that the ECM Study did not specifically
identify the MXO contract as a contract that is referred to by market
participants on a frequent and recurring basis. In response, the
Commission notes that it cited the ECM Study's general finding that
some ICE electricity contracts appear to be regarded as price discovery
markets merely as indication that an investigation of certain ICE
contracts may be warranted. The ECM Study was not intended to serve as
the sole basis for determining whether or not a particular contract
meets the material price reference criterion.
[[Page 38485]]
ii. Conclusion Regarding Material Price Reference:
Based on the above, the Commission finds that the ICE MXO contract
does not meet the material price reference criterion because cash
market transactions are not priced either explicitly or implicitly on a
frequent and recurring basis at a differential to the MXO contract's
price (direct evidence). Moreover, while the MXO contract's price data
is sold to market participants, those individuals likely do not
specifically purchase the ICE data packages for the MXO contract's
prices and do not consult such prices on a frequent and recurring basis
in pricing cash market transactions (indirect evidence).
2. Material Liquidity Criterion
As noted above, in its October 6, 2009, Federal Register notice,
the Commission identified material price reference and material
liquidity as potential criteria for SPDC determination of the MXO
contract. To assess whether a contract meets the material liquidity
criterion, the Commission first examines trading activity as a general
measurement of the contract's size and potential importance. If the
Commission finds that the contract in question meets a threshold of
trading activity that would render it of potential importance, the
Commission will then perform a statistical analysis to measure the
effect that changes to the subject contract's prices potentially may
have on prices for other contracts listed on an ECM or a DCM.
The total number of transactions executed on ICE's electronic
platform in the MXO contract was 437 in the second quarter of 2009,
resulting in a daily average of 6.8 trades. During the same period, the
MXO contract had a total trading volume of 61,688 contracts and an
average daily trading volume of 963.9 contracts. Moreover, open
interest as of June 30, 2009, was 826 contracts, which included trades
executed on ICE's electronic trading platform, as well as trades
executed off of ICE's electronic trading platform and then brought to
ICE for clearing. In this regard, ICE does not differentiate between
open interest created by a transaction executed on its trading platform
and that created by a transaction executed off its trading
platform.\30\
---------------------------------------------------------------------------
\30\ 74 FR 51261 (October 6, 2009).
---------------------------------------------------------------------------
In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 19,216 contracts
(or 296 contracts on a daily basis). In terms of number of
transactions, 123 trades occurred in the fourth quarter of 2009 (1.9
trades per day). As of December 31, 2009, open interest in the MXO
contract was 2,528 contracts, which included trades executed on ICE's
electronic trading platform, as well as trades executed off of ICE's
electronic trading platform and then brought to ICE for clearing.
The number of trades per day fell below minimum reporting level of
five trades per day in the fourth quarters of 2009. Moreover, trading
activity in the MXO contract, as characterized by total quarterly
volume, indicates that the MXO contract experiences trading activity
that is similar to that of minor futures markets.\31\ Thus, the MXO
contract does not meet a threshold of trading activity that would
render it of potential importance and no additional statistical
analysis is warranted.\32\
---------------------------------------------------------------------------
\31\ Staff has advised the Commission that in its experience, a
thinly-traded contract is, generally, one that has a quarterly
trading volume of 100,000 contracts or less. In this regard, in the
third quarter of 2009, physical commodity futures contracts with
trading volume of 100,000 contracts or fewer constituted less than
one percent of total trading volume of all physical commodity
futures contracts.
\32\ In establishing guidance to illustrate how it will evaluate
the various criteria, or combinations of criteria, when determining
whether a contract is a SPDC, the Commission observed 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 MXO contract does not meet the
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 the Commission
believes it is not useful as the sole basis for a SPDC
determination.
---------------------------------------------------------------------------
i. Federal Register Comments
ICE and WGCEF stated that the MXO contract lacks a sufficient
number of trades to meet the material liquidity criterion. These two
commenters, along with WPTF, FEIG and EEI argued that the MXO contract
cannot have a material effect on other contracts, such as those listed
for trading by NYMEX. The commenters pointed out that it is not
possible for the MXO contract to affect a DCM contract because price
linkage and the potential for arbitrage do not exist. The DCM contracts
do not cash settle to the MXO contract's price. Moreover, the DCM
contracts and the MXO contract are both cash settled based on physical
transactions, which the contracts cannot influence.
WGCEF and ICE 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 MXO 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.'' \33\
---------------------------------------------------------------------------
\33\ Guidance, supra.
---------------------------------------------------------------------------
ICE opined that the Commission ``seems to have adopted a five trade
per day test for material liquidity.'' To the contrary, 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''\34\ 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; however, the contract will not be found to be a SPDC merely
because it met the reporting threshold.
---------------------------------------------------------------------------
\34\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------
ICE 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'' as well as in strips of
contract months. ICE suggested that a more appropriate method of
determining liquidity is to examine the activity in a single traded
month of a given contract.\35\ It is the Commission's opinion that
liquidity, as it pertains to the MXO contract, is typically a function
of trading activity in particular lead days and, given sufficient
liquidity
[[Page 38486]]
in such days, the ICE MXO contract itself would be considered liquid.
In any event, in light of the fact that the Commission has found that
the MXO contract does not meet the material price reference criterion,
according to the Commission's Guidance, it would be unnecessary to
evaluate whether the MXO contract meets the material liquidity
criterion since it cannot be used alone for SPDC determination.
---------------------------------------------------------------------------
\35\ In addition, 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 6, 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 61 percent of all
transactions in the MXO contract (fourth quarter of 2009).
Commission acknowledges that the open interest information it
provided in its October 6, 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.
---------------------------------------------------------------------------
ii. Conclusion Regarding Material Liquidity
For the reasons discussed above, the Commission finds that the MXO
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the MXO Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE MXO
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 MXO contract does not meet the
material price reference or material liquidity criteria at this time.
Accordingly, the Commission is issuing the attached Order declaring
that the MXO 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 MXO
contract.\36\ Accordingly, with respect to its MXO contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
---------------------------------------------------------------------------
\36\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
V. Related Matters
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \37\ 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.
---------------------------------------------------------------------------
\37\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
b. Cost-Benefit Analysis
Se
