Order Finding That the Fuel Oil-180 Singapore Swap Contract Traded on the IntercontinentalExchange, Inc., Does Not Perform a Significant Price Discovery Function, 38487-38492 [2010-16209]
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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).
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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.
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procedures, the Commission will
publish notice in the Federal Register
that it intends to undertake an
evaluation whether the specified
agreement, contract or transaction
performs a significant price discovery
function and to receive written views,
data and arguments relevant to its
determination from the ECM and other
interested persons. Upon the close of
the comment period, the Commission
will consider, among other things, all
relevant information regarding the
subject contract and issue an order
announcing and explaining its
determination whether or not the
contract is a SPDC. The issuance of an
affirmative order signals the
effectiveness of the Commission’s
regulatory authorities over an ECM with
respect to a SPDC; at that time such an
ECM becomes subject to all provisions
of the CEA applicable to registered
entities.5 The issuance of such an order
also triggers the obligations,
requirements and timetables prescribed
in Commission rule 36.3(c)(4).6
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II. Notice of Intent To Undertake SPDC
Determination
On October 20, 2009, the Commission
published in the Federal Register notice
of its intent to undertake a
determination whether the SZS contract
performs a significant price discovery
function and requested comment from
interested parties.7 Comments were
received from Working Group of
Commercial Energy Firms (‘‘WGCEF’’),
Platts, ICE and Shell International
Eastern Trading Company (‘‘SIETCO).8
5 Public Law 110–246 at 13203; Joint Explanatory
Statement of the Committee of Conference, H.R.
Rep. No. 110–627, 110 Cong., 2d Sess. 978, 986
(Conference Committee Report). See also 73 FR
75888, 75894 (Dec. 12, 2008).
6 For an initial SPDC, ECMs have a grace period
of 90 calendar days from the issuance of a SPDC
determination order to submit a written
demonstration of compliance with the applicable
core principles. For subsequent SPDCs, ECMs have
a grace period of 30 calendar days to demonstrate
core principle compliance.
7 The Commission’s Part 36 rules establish,
among other things, procedures by which the
Commission makes and announces its
determination whether a specific ECM contract
serves a significant price discovery function. Under
those procedures, the Commission publishes a
notice in the Federal Register that it intends to
undertake a determination whether a specified
agreement, contract or transaction performs a
significant price discovery function and to receive
written data, views and arguments relevant to its
determination from the ECM and other interested
persons.
8 WGCEF describes itself as ‘‘a diverse group of
commercial firms in the domestic energy industry
whose primary business activity is the physical
delivery of one or more energy commodities to
customers, including industrial, commercial and
residential consumers’’ and whose membership
consists of ‘‘energy producers, marketers and
utilities.’’ McGraw-Hill, through its division Platts,
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The comment letter from Platts did not
directly address the issue of whether or
not the SZS contract is a SPDC. The
remaining comment letters raised
substantive issues with respect to the
applicability of section 2(h)(7) to the
SZS contract and generally expressed
the opinion that the SZS contract is not
a SPDC because it does not meet the
material price reference and material
liquidity criteria for SPDC
determination. These comments are
more extensively discussed below, as
applicable.
III. Section 2(h)(7) of the CEA
The Commission is directed by
section 2(h)(7) of the CEA to consider
the following criteria in determining a
contract’s significant price discovery
function:
• Price Linkage—the extent to which
the agreement, contract or transaction
uses or otherwise relies on a daily or
final settlement price, or other major
price parameter, of a contract or
contracts listed for trading on or subject
to the rules of a designated contract
market (‘‘DCM’’) or derivatives
transaction execution facility (‘‘DTEF’’),
or a SPDC traded on an electronic
trading facility, to value a position,
transfer or convert a position, cash or
financially settle a position, or close out
a position.
• Arbitrage—the extent to which the
price for the agreement, contract or
transaction is sufficiently related to the
price of a contract or contracts listed for
trading on or subject to the rules of a
designated DCM or DTEF, or a SPDC
traded on or subject to the rules of an
electronic trading facility, so as to
permit market participants to effectively
arbitrage between the markets by
simultaneously maintaining positions or
executing trades in the contracts on a
frequent and recurring basis.
• Material price reference—the extent
to which, on a frequent and recurring
basis, bids, offers or transactions in a
commodity are directly based on, or are
determined by referencing or
consulting, the prices generated by
agreements, contracts or transactions
being traded or executed on the
electronic trading facility.
• Material liquidity—the extent to
which the volume of agreements,
compiles and calculates monthly energy price
indices from energy trade data submitted to Platts
by energy marketers. ICE is an exempt commercial
market, as noted above. SIETCO, a subsidiary of
Royal Dutch Shell Oil Company (Shell Oil) located
in Singapore, handles exports and trading of Shell
Oil petroleum products in the Asia-Pacific region.
The comment letters are available on the
Commission’s Web site: https://www.cftc.gov/
lawandregulation/federalregister/
federalregistercomments/2009/09-030.html.
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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.9 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.10 For example, for
contracts that are linked to other
contracts or that may be arbitraged with
other contracts, the Commission will
consider whether the price of the
potential SPDC moves in such harmony
with the other contract that the two
markets essentially become
interchangeable. This co-movement of
prices would be an indication that
activity in the contract had reached a
level sufficient for the contract to
perform a significant price discovery
function. In evaluating a contract’s price
discovery role as a price reference, the
Commission will consider whether 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.
IV. Findings and Conclusions
The Fuel Oil-180 Singapore Swap (SZS)
Contract and the SPDC Indicia
The SZS contract specifies 1,000
metric tons of 180 CentiStokes (cst)
Singapore high-sulfur fuel oil. The
contract is cash-settled based on the
9 In its October 20, 2009, Federal Register release,
the Commission identified material price reference
and material liquidity as the possible criteria for
SPDC determination of the SZS contract. Price
linkage and Arbitrage were not identified as
possible criteria. As a result, price linkage and
arbitrage will not be discussed further in this
document and the associated Order.
10 17 CFR 36, Appendix A.
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arithmetic average of the means between
the daily high and low price quotations
for ‘‘HSFO 180 CST’’ delivered in the
specified calendar month, published
under the ‘‘Singapore’’ heading in Platts’
Asia-Pacific/Arab Gulf Marketscan. The
SZS contract specifies the delivery of
high-sulfur fuel oil in Singapore on an
FOB basis.11 The SZS contract is listed
for up to 60 consecutive calendar
months beginning with the next
calendar month.
After crude oil is extracted from the
ground and brought to a refinery, it goes
through a process called fractional
distillation. During fractional
distillation, the oil is heated, causing
different types of oil within the crude to
separate as they have different boiling
points. Classically, fractional distillation
is accomplished in a distillation
column, which siphons off various
fractions as they precipitate out. During
fractional distillation, oil refineries can
also use catalysts to ‘‘crack’’ the
hydrocarbon chains in the crude oil to
create specific oil fractions.
Fuel oil is a fraction obtained from
petroleum distillation, either as a
distillate or a residue. Fuel oil is made
of long hydrocarbon chains, particularly
alkanes, cycloalkanes and aromatics.
Technically, different grades of fuel oil
exist; fuel oil is classified into six
classes, numbered 1 through 6,
according to its boiling point,
composition and purpose. Broadly
speaking, fuel oil is any liquid
petroleum product that is burned in a
furnace or boiler for the generation of
heat or used in an engine for the
generation of power, except oils having
a flash point of approximately 104
degrees Fahrenheit and oils burned in
cotton or wool-wick burners. Thus, fuel
oils can include kerosene, diesel, and
heating oil. However, the term ‘‘fuel oil’’
typically is used in a stricter sense to
refer to the heavy commercial fuel that
is obtained from crude oil, which is
thicker than gasoline and naphtha.
No. 5 fuel oil and No. 6 fuel oil are
called residual fuel oils (‘‘RFO’’) or
heavy fuel oils. More No. 6 oil is
produced compared to No. 5 oil, thus
the terms heavy fuel oil and residual
fuel oil are sometimes used as names for
No. 6. No. 5 fuel oil is a mixture of 75–
80 percent No. 6 oil and 25–20 diesel
fuel (No. 2 oil). No. 6 oil may also
11 The term ‘‘FOB’’ indicates ‘‘free on board.’’ In
other words, the seller will pay for transportation
of the product to the port of Singapore, as well as
the cost of loading the fuel oil onto the cargo ship
(this includes inland hauling charges, customs
clearance, origin documentation charges, demurrage
(if any), and origin port handling charges—in this
case Singapore).
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contain a small amount of No. 2 to get
it to meet specifications.
Heavy fuel oils, also known as bunker
fuels,12 are used for powering marine
vessels. The hydrocarbon chains in
bunker fuel are very long, and this fuel
is highly viscous as a result. The thick
fuel is difficult for most engines to burn
since it must be heated before it will
combust, so it tends to be used in large
engines like those on board ships. Ships
have enough space to heat bunker fuel
before feeding it into their engines, and
their extremely sophisticated engines
are capable of burning a wide range of
fuels, including low quality bunker fuel.
The principal market for Singapore
high-sulfur fuel oil 180 cst is the AsiaPacific region.
Fuel oil is transported worldwide by
fleets of supertankers making deliveries
to suitably sized strategic ports such as
Houston, Singapore, and Rotterdam.
Where a convenient seaport does not
exist, inland transport may be achieved
with the use of barges.
Market participants keep abreast of
fuel oil prices worldwide in order to
take advantage of arbitrage
opportunities. In this regard,
international fuel oil prices are
compared with those in the trader’s
home port after accounting for
transportation costs. Market participants
may find it profitable to ship fuel oil
from one market to another. For
example, it is sometimes profitable to
ship fuel oil from the Gulf Coast of the
United States to Singapore. Such
conditions do not exist all of the time;
in fact, a trader may realize this
opportunity only a few times per year.
In its October 20, 2009, Federal
Register notice, the Commission
identified material price reference and
material liquidity as the SPDC criteria
potentially applicable to the SZS
contract. Each of these criteria is
discussed below.13
12 Bunker fuel gets its name from the containers
on ships and in ports that it is stored in; in the days
of steam they were coal bunkers but now they are
bunker-fuel tanks. The Australian Customs and the
Australian Tax Office define a bunker fuel as the
fuel that powers the engine of a ship or aircraft.
Bunker A is No. 2 fuel oil, bunker B is No. 4 or
No. 5 and bunker C is No. 6. Since No. 6 is the most
common, the term ‘‘bunker fuel’’ is often used as a
synonym for No. 6. No. 5 fuel oil is also called navy
special fuel oil or just navy special, No. 6 or 5 are
also called furnace fuel oil (‘‘FFO’’); the high
viscosity requires heating, usually by a re-circulated
low pressure steam system, before the oil can be
pumped from a bunker tank.
13 As noted above, the Commission did not find
any indication of price linkage or arbitrage in
connection with this contract; accordingly, those
criteria were not discussed in reference to the SZS
contract.
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1. Material Price Reference Criterion
The Commission’s October 20, 2009,
Federal Register notice identified
material price reference as a potential
basis for a SPDC determination with
respect to this contract. The
Commission considered the fact that ICE
sells its price data to market participants
in a number of different packages which
vary in terms of the hubs covered, time
periods, and whether the data are daily
only or historical. For example, the ICE
offers the ‘‘OTC Oil End of Day’’ data
package with access to all price data or
just 12, 24, 36, or 48 months of
historical data. This package includes
price data for the SZS 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’’) 14 found that in
general, market participants view the
ICE as a price discovery market for
certain energy contracts. The study did
not specify which markets performed
this function; nevertheless, the
Commission determined that the SZS
contract, while not mentioned by name
in the ECM Study, might warrant further
review.
The Commission will rely on one of
two sources of evidence—direct or
indirect—to determine that the price of
a contract was being used as a material
price reference and therefore, serving a
significant price discovery function.15
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
14 https://www.cftc.gov/ucm/groups/public/
@newsroom/documents/file/pr540307_ecmreport.pdf.
15 17 CFR 36, Appendix A.
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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.
Although Singapore has one of the
most utilized ports in the world and ICE
sells price data for its SZS contract, the
Commission has found upon further
evaluation that cash market transactions
are not being directly based or quoted as
a differential to the SZS contract nor is
that contract routinely consulted by
industry participants in pricing cash
market transactions. In this regard,
traders use the SZS contract’s price as
an indicator of arbitrage potential
between two fuel oil markets (e.g.,
Singapore and the U.S. Gulf Coast). But
because the market conditions are not
always such that diverting fuel oil from
one market to Singapore is profitable,
traders do not regularly keep track of the
SZS contract’s prices. Instead, traders
refer to the SZS contract on an
occasional basis and during periods
when it is historically profitable to ship
fuel oil to Singapore. Cash market
transactions are not priced on a frequent
and recurring basis at a differential to
the SZS contract’s price. Moreover,
market participants likely do not
specifically purchase the ICE data
packages for the SZS contract’s prices
and do not consult such prices on a
frequent and recurring basis in pricing
cash market transactions. Thus, the SZS
contract does not meet the
Commission’s Guidance for the material
price reference criterion.
i. Federal Register Comments
ICE and SIETCO addressed the
question of whether the SZS contract
met the material price reference
criterion for a SPDC. The commenters
argued that the underlying cash price
series against which the ICE SZS
contract is settled (in this case, the
Platts price for 180 cst fuel oil in
Singapore) is the authentic reference
price and not the ICE contract itself.
Consequently, the commenters maintain
that the only price which is referenced
and relied upon by market participants
for this product is the one published by
Platts. Commission staff believes that
this interpretation of price reference is
too limiting in that it only considers the
average index value on which the
contract is cash settled after trading
ceases. Instead, the Commission
believes that a cash-settled derivatives
contract could meet the price reference
criterion if market participants ‘‘consult
on a frequent and recurring basis’’ the
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derivatives contract when pricing
forward, fixed-price commitments or
other cash-settled derivatives that seek
to ‘‘lock in’’ a fixed price for some future
point in time to hedge against adverse
price movements. As noted above, the
port of Singapore is a significant trading
center for 180 cst fuel oil in the Asian
market. However, traders do not consult
the SZS contract’s price on a frequent
and recurring basis since the potential
for arbitrage between fuel oil market
centers worldwide is sporadic and
infrequent.
ICE argued that the Commission
appeared to base the case that the SZS
contract is potentially a SPDC on a
disputable assertion. In issuing its
notice of intent to determine whether
the SZS contract is a SPDC, the CFTC
cited a general conclusion in its ECM
Study ‘‘that certain market participants
referred to ICE as a price discovery
market for certain energy contracts.’’ ICE
states that this argument is ‘‘nearly
impossible to respond to as the ECM
report did not mention the SZS
[contract] as a potential significant price
discovery contract. It is hard to say
which market participants made this
statement in 2007 or the contracts that
were referenced * * * Basing a material
price reference determination on general
statements made in a two year old study
does not seem to meet Congress’ intent
that the CFTC use its considerable
expertise to study the OTC markets.’’ In
response to the above comment, the
Commission notes that it cited the ECM
Study’s general finding that some ICE
energy contracts appear to be regarded
as price discovery markets merely as an
indication that a further review of
certain ICE contracts may be warranted,
and was not intended to serve as the
sole basis for determining whether or
not a particular contract meets the
material price reference criterion.
WGCEF argued that the SZS contract
does not meet the direct evidence or the
indirect evidence with respect to the
material price reference criterion. With
regard to direct evidence, WGCEF stated
that ‘‘[t]here are no other related
contracts traded in any market that
settle to, or reference, the contract.’’ As
noted above, this view of price reference
is narrow. Nevertheless, while the
Commission believes that price
reference can include consultation on a
frequent and recurring basis, the
Commission has determined that such
frequent and recurring consultation
does not take place with respect to the
SZS contract.
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ii. Conclusion Regarding Material Price
Reference
Based on the above, the Commission
finds that the SZS contract does not
meet the material price reference
criterion because cash market
transactions are not priced on a frequent
and recurring basis at a differential to
the SZS contract’s price (direct
evidence). Moreover, while the ECM
sells the SZS contract’s price data to
market participants, market participants
likely do not specifically purchase the
ICE data packages for the SZS 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 20,
2009, Federal Register notice, the
Commission identified material
liquidity and material price reference as
potential criteria for SPDC
determination of the SZS contract. To
assess whether a contract meets the
material liquidity criterion, the
Commission first examines trading
activity as a general measurement of the
contract’s size and potential importance.
If the Commission finds that the
contract in question meets a threshold
of trading activity that would render it
of potential importance, the
Commission will then perform a
statistical analysis to measure the effect
that the prices of the subject contract
potentially may have on prices for other
contracts listed on an ECM or a DCM.
The Commission noted that the total
number of transactions executed on
ICE’s electronic platform in the SZS
contract was 1,957 in the second quarter
of 2009, resulting in a daily average of
30.6 trades. During the same period, the
SZS contract had a total trading volume
of 13,170 contracts and an average daily
trading volume of 205.8 contracts.
Moreover, open interest as of June 30,
2009, was 11,356 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.16
In a subsequent filing dated
November 13, 2009, ICE reported that
total trading volume in the third quarter
of 2009 was 22,255 contracts (or 337
contracts on a daily basis). In terms of
16 74
E:\FR\FM\02JYN1.SGM
FR 53728 (October 20, 2009).
02JYN1
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number of transactions, 4,625 trades
occurred in the third quarter of 2009
(70.1 trades per day). As of September
30, 2009, open interest in the SZS
contract was 15,681 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.17
Trading activity in the SZS contract,
as characterized by total quarterly
volume, indicates that the SZS contract
experiences trading activity similar to
that of other thinly-traded contracts.18
Thus, the SZS contract does not meets
a threshold of trading activity that
would render it of potential importance
and no additional statistical analysis is
warranted.19
Federal Register Comments
emcdonald on DSK2BSOYB1PROD with NOTICES
As noted above, WGCEF, ICE, and
SIETCO addressed the question of
whether the SZS contract met the
material liquidity criterion for a SPDC.
These commenters stated that the SZS
contract does not meet the material
liquidity criterion for SPDC
determination for a number of reasons.
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. 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.’’
17 In this regard, supplemental data subsequently
submitted by the ICE indicated that block trades are
included in the on-exchange trades; block trades
comprise 42.5 percent of all transactions in the SZS
contract.
18 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.
19 In establishing guidance to illustrate how it
will evaluate the various criteria, or combinations
of criteria, when determining whether a contract is
a SPDC, the Commission made clear that ‘‘material
liquidity itself would not be sufficient to make a
determination that a contract is a [SPDC], * * * but
combined with other factors it can serve as a
guidepost indicating which contracts are
functioning as [SPDCs].’’ For the reasons discussed
above, the Commission has found that the SZS
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.
17 CFR 36, Appendix A.
VerDate Mar<15>2010
18:27 Jul 01, 2010
Jkt 220001
ICE opined that the Commission
‘‘seems to have adopted a five trade-perday test to determine whether a contract
is materially liquid. It is worth noting
that ICE originally suggested that the
CFTC use a five trades-per-day
threshold as the basis for an ECM to
report trade data to the CFTC.’’ In this
regard, the Commission adopted a five
trades-per-day threshold as a reporting
requirement to enable it to
‘‘independently be aware of ECM
contracts that may develop into
SPDCs’’ 20 rather than solely relying
upon an ECM on its own to identify any
such potential SPDCs to the
Commission. Thus, any contract that
meets this threshold may be subject to
scrutiny as a potential SPDC but this
does not mean that the contract will be
found to be a SPDC merely because it
met the reporting threshold.
ICE proposed that the statistics it
provided were misinterpreted and
misapplied by the Commission. In
particular, ICE stated that the volume
figures used in the Commission’s
analysis (cited above) include trades
made in all months of the contract as
well as in strips of contract months, and
a ‘‘more appropriate method of
determining liquidity is to examine the
activity in a single traded month or strip
of a given contract.’’
It is the Commission’s opinion that
liquidity, as it pertains to the SZS
contract, is typically a function of
trading activity in particular lead
months and, given sufficient liquidity in
such months, the ICE SZS contract itself
would be considered liquid.
Nevertheless, in light of the fact that the
Commission has found that the SZS
contract does not meet the material
price reference criterion, material
liquidity cannot be used alone for SPDC
determination.
Additionally, 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 20, 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. SIETCO
expressed a similar concern. In this
respect, 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
PO 00000
addition to the trades that were
conducted on the electronic platform;
block trades comprise about 42.5
percent of all transactions in the SZS
contract. The Commission
acknowledges that the open interest
information it provided in its October
20, 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 has found that the SZS
contract does not meet the material
price reference criterion.
4. Overall Conclusion
After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the SZS 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 SZS contract does
not meet the material price reference
criterion at this time. In light of this fact,
according to the Commission’s
Guidance, it would be unnecessary to
evaluate whether the SZS contract
meets the material liquidity criterion
since the Commission believes it is not
useful as the sole basis for a SPDC
determination. Accordingly, the
Commission is issuing the attached
Order declaring that the SZS 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 SZS contract.21
Accordingly, with respect to its SZS
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
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 22 imposes certain requirements
21 See
20 73
FR 75892 (December 12, 2008).
Frm 00036
Fmt 4703
Sfmt 4703
38491
22 44
E:\FR\FM\02JYN1.SGM
73 FR 75888, 75893 (Dec. 12, 2008).
U.S.C. 3507(d).
02JYN1
38492
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices
emcdonald on DSK2BSOYB1PROD with NOTICES
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 CEA 23 requires
the Commission to consider the costs
and benefits of its actions before issuing
an order under the Act. By its terms,
section 15(a) does not require the
Commission to quantify the costs and
benefits of an order or to determine
whether the benefits of the order
outweigh its costs; rather, it requires
that the Commission ‘‘consider’’ the
costs and benefits of its actions. Section
15(a) further specifies that the costs and
benefits shall be evaluated in light of
five broad areas of market and public
concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission may in its discretion give
greater weight to any one of the five
enumerated areas and could in its
discretion determine that,
notwithstanding its costs, a particular
order is necessary or appropriate to
protect the public interest or to
effectuate any of the provisions or
accomplish any of the purposes of the
Act. The Commission has considered
the costs and benefits in light of the
specific provisions of section 15(a) of
the Act and has concluded that the
Order, required by Congress to
strengthen federal oversight of exempt
commercial markets and to prevent
market manipulation, is necessary and
appropriate to accomplish the purposes
of section 2(h)(7) of the Act.
When a futures contract begins to
serve a significant price discovery
function, that contract, and the ECM on
which it is traded, warrants increased
oversight to deter and prevent price
manipulation or other disruptions to
market integrity, both on the ECM itself
and in any related futures contracts
trading on DCMs. An Order finding that
a particular contract is a SPDC triggers
this increased oversight and imposes
obligations on the ECM calculated to
accomplish this goal. The increased
oversight engendered by the issue of a
SPDC Order increases transparency and
helps to ensure fair competition among
ECMs and DCMs trading similar
products and competing for the same
business. Moreover, the ECM on which
the SPDC is traded must assume, with
respect to that contract, all the
responsibilities and obligations of a
registered entity under the CEA and
Commission regulations. Additionally,
the ECM must comply with nine core
principles established by section 2(h)(7)
of the Act—including the obligation to
establish position limits and/or
accountability standards for the SPDC.
Amendments to section 4(i) of the CEA
authorize the Commission to require
reports for SPDCs listed on ECMs. These
increased responsibilities, along with
the CFTC’s increased regulatory
authority, subject the ECM’s risk
management practices to the
Commission’s supervision and oversight
and generally enhance the financial
integrity of the markets.
The Commission has concluded that
ICE’s SZS contract, which is the subject
of the attached Order, is not a SPDC;
accordingly, the Commission’s Order
imposes no additional costs and no
additional statutorily or regulatory
mandated responsibilities on the ECM.
c. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 24 requires that agencies
consider the impact of their rules on
small businesses. The requirements of
CEA section 2(h)(7) and the Part 36
rules affect exempt commercial markets.
The Commission previously has
determined that exempt commercial
markets are not small entities for
purposes of the RFA.25 Accordingly, the
Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C.
605(b) that this Order, taken in
connection with section 2(h)(7) of the
Act and the Part 36 rules, will not have
a significant impact on a substantial
number of small entities.
Order Relating to the Fuel Oil-180
Singapore Swap 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 Fuel
Oil-180 Singapore Swap contract, traded
U.S.C. 19(a).
VerDate Mar<15>2010
18:27 Jul 01, 2010
U.S.C. 601 et seq.
FR 42256, 42268 (Aug. 10, 2001).
25 66
Jkt 220001
PO 00000
Frm 00037
Issued in Washington, DC on June 25,
2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010–16209 Filed 7–1–10; 8:45 am]
BILLING CODE 6351–01–P
VI. Order
24 5
23 7
on the IntercontinentalExchange, Inc.,
does not at this time satisfy the material
price reference and material liquidity
criteria for significant price discovery
contracts. Moreover, under Commission
Guidance material liquidity alone
cannot support a significant price
discovery finding for the Fuel Oil-180
Singapore Swap contract.
Consistent with this determination,
the IntercontinentalExchange, Inc., is
not considered a registered entity 26
with respect to the Fuel Oil-180
Singapore Swap 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 Fuel Oil-180 Singapore
Swap contract with the issuance of this
Order.
This Order is based on the
representations made to the
Commission by the
IntercontinentalExchange, Inc., dated
July 27, 2009, and November 13, 2009,
and other supporting material. Any
material change or omissions in the
facts and circumstances pursuant to
which this order is granted might
require the Commission to reconsider its
current determination that the Fuel Oil180 Singapore Swap 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.
Fmt 4703
Sfmt 4703
CONSUMER PRODUCT SAFETY
COMMISSION
Sunshine Act Meetings
TIME AND DATE: Wednesday, June 30,
2010, 2 p.m.–3 p.m.
PLACE: Hearing Room 420, Bethesda
Towers, 4330 East West Highway,
Bethesda, Maryland.
STATUS: Commission Meeting—Open to
the Public.
26 7
E:\FR\FM\02JYN1.SGM
U.S.C. 1a(29).
02JYN1
]]>Agencies
[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38487-38492]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16209]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 74 FR 53728 (October 20, 2009).
---------------------------------------------------------------------------
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. E-mail: gprice@cftc.gov; or Susan Nathan,
Senior Special Counsel, Division of Market Oversight, same address.
Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \2\
significantly broadened the CFTC's regulatory authority with respect to
ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory
category--ECMs on which significant price discovery contracts
(``SPDCs'') are traded--and treating ECMs in that category as
registered entities under the CEA.\3\ The legislation authorizes the
CFTC to designate an agreement, contract or transaction as 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).
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
On March 16, 2009, the CFTC promulgated final rules implementing
the provisions of the Reauthorization Act.\4\ As relevant here, rule
36.3 imposes increased information reporting requirements on ECMs to
assist the Commission in making prompt assessments whether particular
ECM contracts may be SPDCs. In addition to filing quarterly reports of
its contracts, an ECM must notify the Commission promptly concerning
any contract traded in reliance on the exemption in section 2(h)(3) of
the CEA that averaged five trades per day or more over the most recent
calendar quarter, and for which the exchange sells its price
information regarding the contract to market participants or industry
publications, or whose daily closing or settlement prices on 95 percent
or more of the days in the most recent quarter were within 2.5 percent
of the contemporaneously determined closing, settlement or other daily
price of another contract.
---------------------------------------------------------------------------
\4\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on
April 22, 2009.
---------------------------------------------------------------------------
Commission rule 36.3(c)(3) established the procedures by which the
Commission makes and announces its determination whether a particular
ECM contract serves a significant price discovery function. Under those
[[Page 38488]]
procedures, the Commission will publish notice in the Federal Register
that it intends to undertake an evaluation whether the specified
agreement, contract or transaction performs a significant price
discovery function and to receive written views, data and arguments
relevant to its determination from the ECM and other interested
persons. Upon the close of the comment period, the Commission will
consider, among other things, all relevant information regarding the
subject contract and issue an order announcing and explaining its
determination whether or not the contract is a SPDC. The issuance of an
affirmative order signals the effectiveness of the Commission's
regulatory authorities over an ECM with respect to a SPDC; at that time
such an ECM becomes subject to all provisions of the CEA applicable to
registered entities.\5\ The issuance of such an order also triggers the
obligations, requirements and timetables prescribed in Commission rule
36.3(c)(4).\6\
---------------------------------------------------------------------------
\5\ Public Law 110-246 at 13203; Joint Explanatory Statement of
the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d
Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888,
75894 (Dec. 12, 2008).
\6\ For an initial SPDC, ECMs have a grace period of 90 calendar
days from the issuance of a SPDC determination order to submit a
written demonstration of compliance with the applicable core
principles. For subsequent SPDCs, ECMs have a grace period of 30
calendar days to demonstrate core principle compliance.
---------------------------------------------------------------------------
II. Notice of Intent To Undertake SPDC Determination
On October 20, 2009, the Commission published in the Federal
Register notice of its intent to undertake a determination whether the
SZS contract performs a significant price discovery function and
requested comment from interested parties.\7\ Comments were received
from Working Group of Commercial Energy Firms (``WGCEF''), Platts, ICE
and Shell International Eastern Trading Company (``SIETCO).\8\ The
comment letter from Platts did not directly address the issue of
whether or not the SZS contract is a SPDC. The remaining comment
letters raised substantive issues with respect to the applicability of
section 2(h)(7) to the SZS contract and generally expressed the opinion
that the SZS contract is not a SPDC because it does not meet the
material price reference and material liquidity criteria for SPDC
determination. These comments are more extensively discussed below, as
applicable.
---------------------------------------------------------------------------
\7\ The Commission's Part 36 rules establish, among other
things, procedures by which the Commission makes and announces its
determination whether a specific ECM contract serves a significant
price discovery function. Under those procedures, the Commission
publishes a notice in the Federal Register that it intends to
undertake a determination whether a specified agreement, contract or
transaction performs a significant price discovery function and to
receive written data, views and arguments relevant to its
determination from the ECM and other interested persons.
\8\ WGCEF describes itself as ``a diverse group of commercial
firms in the domestic energy industry whose primary business
activity is the physical delivery of one or more energy commodities
to customers, including industrial, commercial and residential
consumers'' and whose membership consists of ``energy producers,
marketers and utilities.'' McGraw-Hill, through its division Platts,
compiles and calculates monthly energy price indices from energy
trade data submitted to Platts by energy marketers. ICE is an exempt
commercial market, as noted above. SIETCO, a subsidiary of Royal
Dutch Shell Oil Company (Shell Oil) located in Singapore, handles
exports and trading of Shell Oil petroleum products in the Asia-
Pacific region. The comment letters are available on the
Commission's Web site: https://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-030.html.
---------------------------------------------------------------------------
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 designated DCM or DTEF, or a SPDC traded on or subject to
the rules of an electronic trading facility, so as to permit market
participants to effectively arbitrage between the markets by
simultaneously maintaining positions or executing trades in the
contracts on a frequent and recurring basis.
Material price reference--the extent to which, on a
frequent and recurring basis, bids, offers or transactions in a
commodity are directly based on, or are determined by referencing or
consulting, the prices generated by agreements, contracts or
transactions being traded or executed on the electronic trading
facility.
Material liquidity--the extent to which the volume of
agreements, contracts or transactions in a commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a DCM, DTEF or electronic trading facility
operating in reliance on the exemption in section 2(h)(3).
Not all criteria must be present to support a determination that a
particular contract performs a significant price discovery function,
and one or more criteria may be inapplicable to a particular
contract.\9\ 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.\10\ For example, for
contracts that are linked to other contracts or that may be arbitraged
with other contracts, the Commission will consider whether the price of
the potential SPDC moves in such harmony with the other contract that
the two markets essentially become interchangeable. This co-movement of
prices would be an indication that activity in the contract had reached
a level sufficient for the contract to perform a significant price
discovery function. In evaluating a contract's price discovery role as
a price reference, the Commission will consider whether 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.
---------------------------------------------------------------------------
\9\ In its October 20, 2009, Federal Register release, the
Commission identified material price reference and material
liquidity as the possible criteria for SPDC determination of the SZS
contract. Price linkage and Arbitrage were not identified as
possible criteria. As a result, price linkage and arbitrage will not
be discussed further in this document and the associated Order.
\10\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------
IV. Findings and Conclusions
The Fuel Oil-180 Singapore Swap (SZS) Contract and the SPDC Indicia
The SZS contract specifies 1,000 metric tons of 180 CentiStokes
(cst) Singapore high-sulfur fuel oil. The contract is cash-settled
based on the
[[Page 38489]]
arithmetic average of the means between the daily high and low price
quotations for ``HSFO 180 CST'' delivered in the specified calendar
month, published under the ``Singapore'' heading in Platts' Asia-
Pacific/Arab Gulf Marketscan. The SZS contract specifies the delivery
of high-sulfur fuel oil in Singapore on an FOB basis.\11\ The SZS
contract is listed for up to 60 consecutive calendar months beginning
with the next calendar month.
---------------------------------------------------------------------------
\11\ The term ``FOB'' indicates ``free on board.'' In other
words, the seller will pay for transportation of the product to the
port of Singapore, as well as the cost of loading the fuel oil onto
the cargo ship (this includes inland hauling charges, customs
clearance, origin documentation charges, demurrage (if any), and
origin port handling charges--in this case Singapore).
---------------------------------------------------------------------------
After crude oil is extracted from the ground and brought to a
refinery, it goes through a process called fractional distillation.
During fractional distillation, the oil is heated, causing different
types of oil within the crude to separate as they have different
boiling points. Classically, fractional distillation is accomplished in
a distillation column, which siphons off various fractions as they
precipitate out. During fractional distillation, oil refineries can
also use catalysts to ``crack'' the hydrocarbon chains in the crude oil
to create specific oil fractions.
Fuel oil is a fraction obtained from petroleum distillation, either
as a distillate or a residue. Fuel oil is made of long hydrocarbon
chains, particularly alkanes, cycloalkanes and aromatics. Technically,
different grades of fuel oil exist; fuel oil is classified into six
classes, numbered 1 through 6, according to its boiling point,
composition and purpose. Broadly speaking, fuel oil is any liquid
petroleum product that is burned in a furnace or boiler for the
generation of heat or used in an engine for the generation of power,
except oils having a flash point of approximately 104 degrees
Fahrenheit and oils burned in cotton or wool-wick burners. Thus, fuel
oils can include kerosene, diesel, and heating oil. However, the term
``fuel oil'' typically is used in a stricter sense to refer to the
heavy commercial fuel that is obtained from crude oil, which is thicker
than gasoline and naphtha.
No. 5 fuel oil and No. 6 fuel oil are called residual fuel oils
(``RFO'') or heavy fuel oils. More No. 6 oil is produced compared to
No. 5 oil, thus the terms heavy fuel oil and residual fuel oil are
sometimes used as names for No. 6. No. 5 fuel oil is a mixture of 75-80
percent No. 6 oil and 25-20 diesel fuel (No. 2 oil). No. 6 oil may also
contain a small amount of No. 2 to get it to meet specifications.
Heavy fuel oils, also known as bunker fuels,\12\ are used for
powering marine vessels. The hydrocarbon chains in bunker fuel are very
long, and this fuel is highly viscous as a result. The thick fuel is
difficult for most engines to burn since it must be heated before it
will combust, so it tends to be used in large engines like those on
board ships. Ships have enough space to heat bunker fuel before feeding
it into their engines, and their extremely sophisticated engines are
capable of burning a wide range of fuels, including low quality bunker
fuel. The principal market for Singapore high-sulfur fuel oil 180 cst
is the Asia-Pacific region.
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\12\ Bunker fuel gets its name from the containers on ships and
in ports that it is stored in; in the days of steam they were coal
bunkers but now they are bunker-fuel tanks. The Australian Customs
and the Australian Tax Office define a bunker fuel as the fuel that
powers the engine of a ship or aircraft. Bunker A is No. 2 fuel oil,
bunker B is No. 4 or No. 5 and bunker C is No. 6. Since No. 6 is the
most common, the term ``bunker fuel'' is often used as a synonym for
No. 6. No. 5 fuel oil is also called navy special fuel oil or just
navy special, No. 6 or 5 are also called furnace fuel oil (``FFO'');
the high viscosity requires heating, usually by a re-circulated low
pressure steam system, before the oil can be pumped from a bunker
tank.
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Fuel oil is transported worldwide by fleets of supertankers making
deliveries to suitably sized strategic ports such as Houston,
Singapore, and Rotterdam. Where a convenient seaport does not exist,
inland transport may be achieved with the use of barges.
Market participants keep abreast of fuel oil prices worldwide in
order to take advantage of arbitrage opportunities. In this regard,
international fuel oil prices are compared with those in the trader's
home port after accounting for transportation costs. Market
participants may find it profitable to ship fuel oil from one market to
another. For example, it is sometimes profitable to ship fuel oil from
the Gulf Coast of the United States to Singapore. Such conditions do
not exist all of the time; in fact, a trader may realize this
opportunity only a few times per year.
In its October 20, 2009, Federal Register notice, the Commission
identified material price reference and material liquidity as the SPDC
criteria potentially applicable to the SZS contract. Each of these
criteria is discussed below.\13\
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\13\ As noted above, the Commission did not find any indication
of price linkage or arbitrage in connection with this contract;
accordingly, those criteria were not discussed in reference to the
SZS contract.
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1. Material Price Reference Criterion
The Commission's October 20, 2009, Federal Register notice
identified material price reference as a potential basis for a SPDC
determination with respect to this contract. The Commission considered
the fact that ICE sells its price data to market participants in a
number of different packages which vary in terms of the hubs covered,
time periods, and whether the data are daily only or historical. For
example, the ICE offers the ``OTC Oil End of Day'' data package with
access to all price data or just 12, 24, 36, or 48 months of historical
data. This package includes price data for the SZS 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'') \14\ found that in general, market
participants view the ICE as a price discovery market for certain
energy contracts. The study did not specify which markets performed
this function; nevertheless, the Commission determined that the SZS
contract, while not mentioned by name in the ECM Study, might warrant
further review.
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\14\ https://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf.
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The Commission will rely on one of two sources of evidence--direct
or indirect--to determine that the price of a contract was being used
as a material price reference and therefore, serving a significant
price discovery function.\15\ 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
[[Page 38490]]
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.
---------------------------------------------------------------------------
\15\ 17 CFR 36, Appendix A.
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Although Singapore has one of the most utilized ports in the world
and ICE sells price data for its SZS contract, the Commission has found
upon further evaluation that cash market transactions are not being
directly based or quoted as a differential to the SZS contract nor is
that contract routinely consulted by industry participants in pricing
cash market transactions. In this regard, traders use the SZS
contract's price as an indicator of arbitrage potential between two
fuel oil markets (e.g., Singapore and the U.S. Gulf Coast). But because
the market conditions are not always such that diverting fuel oil from
one market to Singapore is profitable, traders do not regularly keep
track of the SZS contract's prices. Instead, traders refer to the SZS
contract on an occasional basis and during periods when it is
historically profitable to ship fuel oil to Singapore. Cash market
transactions are not priced on a frequent and recurring basis at a
differential to the SZS contract's price. Moreover, market participants
likely do not specifically purchase the ICE data packages for the SZS
contract's prices and do not consult such prices on a frequent and
recurring basis in pricing cash market transactions. Thus, the SZS
contract does not meet the Commission's Guidance for the material price
reference criterion.
i. Federal Register Comments
ICE and SIETCO addressed the question of whether the SZS contract
met the material price reference criterion for a SPDC. The commenters
argued that the underlying cash price series against which the ICE SZS
contract is settled (in this case, the Platts price for 180 cst fuel
oil in Singapore) is the authentic reference price and not the ICE
contract itself. Consequently, the commenters maintain that the only
price which is referenced and relied upon by market participants for
this product is the one published by Platts. Commission staff believes
that this interpretation of price reference is too limiting in that it
only considers the average index value on which the contract is cash
settled after trading ceases. Instead, the Commission believes that a
cash-settled derivatives contract could meet the price reference
criterion if market participants ``consult on a frequent and recurring
basis'' the derivatives contract when pricing forward, fixed-price
commitments or other cash-settled derivatives that seek to ``lock in''
a fixed price for some future point in time to hedge against adverse
price movements. As noted above, the port of Singapore is a significant
trading center for 180 cst fuel oil in the Asian market. However,
traders do not consult the SZS contract's price on a frequent and
recurring basis since the potential for arbitrage between fuel oil
market centers worldwide is sporadic and infrequent.
ICE argued that the Commission appeared to base the case that the
SZS contract is potentially a SPDC on a disputable assertion. In
issuing its notice of intent to determine whether the SZS contract is a
SPDC, the CFTC cited a general conclusion in its ECM Study ``that
certain market participants referred to ICE as a price discovery market
for certain energy contracts.'' ICE states that this argument is
``nearly impossible to respond to as the ECM report did not mention the
SZS [contract] as a potential significant price discovery contract. It
is hard to say which market participants made this statement in 2007 or
the contracts that were referenced * * * Basing a material price
reference determination on general statements made in a two year old
study does not seem to meet Congress' intent that the CFTC use its
considerable expertise to study the OTC markets.'' In response to the
above comment, the Commission notes that it cited the ECM Study's
general finding that some ICE energy contracts appear to be regarded as
price discovery markets merely as an indication that a further review
of certain ICE contracts may be warranted, and was not intended to
serve as the sole basis for determining whether or not a particular
contract meets the material price reference criterion.
WGCEF argued that the SZS contract does not meet the direct
evidence or the indirect evidence with respect to the material price
reference criterion. With regard to direct evidence, WGCEF stated that
``[t]here are no other related contracts traded in any market that
settle to, or reference, the contract.'' As noted above, this view of
price reference is narrow. Nevertheless, while the Commission believes
that price reference can include consultation on a frequent and
recurring basis, the Commission has determined that such frequent and
recurring consultation does not take place with respect to the SZS
contract.
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the SZS contract does
not meet the material price reference criterion because cash market
transactions are not priced on a frequent and recurring basis at a
differential to the SZS contract's price (direct evidence). Moreover,
while the ECM sells the SZS contract's price data to market
participants, market participants likely do not specifically purchase
the ICE data packages for the SZS 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 20, 2009, Federal Register notice,
the Commission identified material liquidity and material price
reference as potential criteria for SPDC determination of the SZS
contract. To assess whether a contract meets the material liquidity
criterion, the Commission first examines trading activity as a general
measurement of the contract's size and potential importance. If the
Commission finds that the contract in question meets a threshold of
trading activity that would render it of potential importance, the
Commission will then perform a statistical analysis to measure the
effect that the prices of the subject contract potentially may have on
prices for other contracts listed on an ECM or a DCM.
The Commission noted that the total number of transactions executed
on ICE's electronic platform in the SZS contract was 1,957 in the
second quarter of 2009, resulting in a daily average of 30.6 trades.
During the same period, the SZS contract had a total trading volume of
13,170 contracts and an average daily trading volume of 205.8
contracts. Moreover, open interest as of June 30, 2009, was 11,356
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.\16\
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\16\ 74 FR 53728 (October 20, 2009).
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In a subsequent filing dated November 13, 2009, ICE reported that
total trading volume in the third quarter of 2009 was 22,255 contracts
(or 337 contracts on a daily basis). In terms of
[[Page 38491]]
number of transactions, 4,625 trades occurred in the third quarter of
2009 (70.1 trades per day). As of September 30, 2009, open interest in
the SZS contract was 15,681 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.\17\
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\17\ In this regard, supplemental data subsequently submitted by
the ICE indicated that block trades are included in the on-exchange
trades; block trades comprise 42.5 percent of all transactions in
the SZS contract.
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Trading activity in the SZS contract, as characterized by total
quarterly volume, indicates that the SZS contract experiences trading
activity similar to that of other thinly-traded contracts.\18\ Thus,
the SZS contract does not meets a threshold of trading activity that
would render it of potential importance and no additional statistical
analysis is warranted.\19\
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\18\ 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.
\19\ In establishing guidance to illustrate how it will evaluate
the various criteria, or combinations of criteria, when determining
whether a contract is a SPDC, the Commission made clear that
``material liquidity itself would not be sufficient to make a
determination that a contract is a [SPDC], * * * but combined with
other factors it can serve as a guidepost indicating which contracts
are functioning as [SPDCs].'' For the reasons discussed above, the
Commission has found that the SZS 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. 17 CFR 36, Appendix A.
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Federal Register Comments
As noted above, WGCEF, ICE, and SIETCO addressed the question of
whether the SZS contract met the material liquidity criterion for a
SPDC. These commenters stated that the SZS contract does not meet the
material liquidity criterion for SPDC determination for a number of
reasons.
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. 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.''
ICE opined that the Commission ``seems to have adopted a five
trade-per-day test to determine whether a contract is materially
liquid. It is worth noting that ICE originally suggested that the CFTC
use a five trades-per-day threshold as the basis for an ECM to report
trade data to the CFTC.'' In this regard, the Commission adopted a five
trades-per-day threshold as a reporting requirement to enable it to
``independently be aware of ECM contracts that may develop into SPDCs''
\20\ rather than solely relying upon an ECM on its own to identify any
such potential SPDCs to the Commission. Thus, any contract that meets
this threshold may be subject to scrutiny as a potential SPDC but this
does not mean that the contract will be found to be a SPDC merely
because it met the reporting threshold.
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\20\ 73 FR 75892 (December 12, 2008).
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ICE proposed that the statistics it provided were misinterpreted
and misapplied by the Commission. In particular, ICE stated that the
volume figures used in the Commission's analysis (cited above) include
trades made in all months of the contract as well as in strips of
contract months, and a ``more appropriate method of determining
liquidity is to examine the activity in a single traded month or strip
of a given contract.''
It is the Commission's opinion that liquidity, as it pertains to
the SZS contract, is typically a function of trading activity in
particular lead months and, given sufficient liquidity in such months,
the ICE SZS contract itself would be considered liquid. Nevertheless,
in light of the fact that the Commission has found that the SZS
contract does not meet the material price reference criterion, material
liquidity cannot be used alone for SPDC determination.
Additionally, 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 20, 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. SIETCO expressed a similar concern. In this respect, 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
42.5 percent of all transactions in the SZS contract. The Commission
acknowledges that the open interest information it provided in its
October 20, 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 has found that the
SZS contract does not meet the material price reference criterion.
4. Overall Conclusion
After considering the entire record in this matter, including the
comments received, the Commission has determined that the SZS 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 SZS contract does not meet the
material price reference criterion at this time. In light of this fact,
according to the Commission's Guidance, it would be unnecessary to
evaluate whether the SZS contract meets the material liquidity
criterion since the Commission believes it is not useful as the sole
basis for a SPDC determination. Accordingly, the Commission is issuing
the attached Order declaring that the SZS 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 SZS
contract.\21\ Accordingly, with respect to its SZS contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
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\21\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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V. Related Matters
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \22\ imposes certain
requirements
[[Page 38492]]
on Federal agencies, including the Commission, in connection with their
conducting or sponsoring any collection of information as defined by
the PRA. Certain provisions of Commission rule 36.3 impose new
regulatory and reporting requirements on ECMs, resulting in information
collection requirements within the meaning of the PRA. OMB previously
has approved and assigned OMB control number 3038-0060 to this
collection of information.
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\22\ 44 U.S.C. 3507(d).
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b. Cost-Benefit Analysis
Section 15(a) of the CEA \23\ requires the Commission to consider
the costs and benefits of its actions before issuing an order under the
Act. By its terms, section 15(a) does not require the Commission to
quantify the costs and benefits of an order or to determine whether the
benefits of the order outweigh its costs; rather, it requires that the
Commission ``consider'' the costs and benefits of its actions. Section
15(a) further specifies that the costs and benefits shall be evaluated
in light of five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may in its discretion give
greater weight to any one of the five enumerated areas and could in its
discretion determine that, notwithstanding its costs, a particular
order is necessary or appropriate to protect the public interest or to
effectuate any of the provisions or accomplish any of the purposes of
the Act. The Commission has considered the costs and benefits in light
of the specific provisions of section 15(a) of the Act and has
concluded that the Order, required by Congress to strengthen federal
oversight of exempt commercial markets and to prevent market
manipulation, is necessary and appropriate to accomplish the purposes
of section 2(h)(7) of the Act.
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\23\ 7 U.S.C. 19(a).
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When a futures contract begins to serve a significant price
discovery function, that contract, and the ECM on which it is traded,
warrants increased oversight to deter and prevent price manipulation or
other disruptions to market integrity, both on the ECM itself and in
any related futures contracts trading on DCMs. An Order finding that a
particular contract is a SPDC triggers this increased oversight and
imposes obligations on the ECM calculated to accomplish this goal. The
increased oversight engendered by the issue of a SPDC Order increases
transparency and helps to ensure fair competition among ECMs and DCMs
trading similar products and competing for the same business. Moreover,
the ECM on which the SPDC is traded must assume, with respect to that
contract, all the responsibilities and obligations of a registered
entity under the CEA and Commission regulations. Additionally, the ECM
must comply with nine core principles established by section 2(h)(7) of
the Act--including the obligation to establish position limits and/or
accountability standards for the SPDC. Amendments to section 4(i) of
the CEA authorize the Commission to require reports for SPDCs listed on
ECMs. These increased responsibilities, along with the CFTC's increased
regulatory authority, subject the ECM's risk management practices to
the Commission's supervision and oversight and generally enhance the
financial integrity of the markets.
The Commission has concluded that ICE's SZS contract, which is the
subject of the attached Order, is not a SPDC; accordingly, the
Commission's Order imposes no additional costs and no additional
statutorily or regulatory mandated responsibilities on the ECM.
c. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \24\ requires that
agencies consider the impact of their rules on small businesses. The
requirements of CEA section 2(h)(7) and the Part 36 rules affect exempt
commercial markets. The Commission previously has determined that
exempt commercial markets are not small entities for purposes of the
RFA.\25\ Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Order, taken in
connection with section 2(h)(7) of the Act and the Part 36 rules, will
not have a significant impact on a substantial number of small
entities.
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\24\ 5 U.S.C. 601 et seq.
\25\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Order
Order Relating to the Fuel Oil-180 Singapore Swap 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 Fuel Oil-180 Singapore Swap
contract, traded on the IntercontinentalExchange, Inc., does not at
this time satisfy the material price reference and material liquidity
criteria for significant price discovery contracts. Moreover, under
Commission Guidance material liquidity alone cannot support a
significant price discovery finding for the Fuel Oil-180 Singapore Swap
contract.
Consistent with this determination, the IntercontinentalExchange,
Inc., is not considered a registered entity \26\ with respect to the
Fuel Oil-180 Singapore Swap 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 Fuel Oil-180 Singapore Swap contract with the issuance of this
Order.
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\26\ 7 U.S.C. 1a(29).
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This Order is based on the representations made to the Commission
by the IntercontinentalExchange, Inc., dated July 27, 2009, and
November 13, 2009, and other supporting material. Any material change
or omissions in the facts and circumstances pursuant to which this
order is granted might require the Commission to reconsider its current
determination that the Fuel Oil-180 Singapore Swap contract is not a
significant price discovery contract. Additionally, to the extent that
it continues to rely upon the exemption in Section 2(h)(3) of the Act,
the IntercontinentalExchange, Inc., must continue to comply with all of
the applicable requirements of Section 2(h)(3) and Commission
Regulation 36.3.
Issued in Washington, DC on June 25, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-16209 Filed 7-1-10; 8:45 am]
BILLING CODE 6351-01-P
