Orders Finding That the PJM WH Real Time Peak Daily Contract, PJM WH Real Time Off-Peak Daily Contract and PJM WH Day Ahead LMP Peak Daily Contract Offered for Trading on the IntercontinentalExchange, Inc., Do Not Perform a Significant Price Discovery Function, 42399-42411 [2010-17744]
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Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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 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.
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c. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 46 requires that agencies
consider the impact of their rules on
small businesses. The requirements of
CEA section 2(h)(7) and the Part 36
rules affect ECMs. The Commission
previously has determined that ECMs
are not small entities for purposes of the
RFA.47 Accordingly, the Chairman, on
behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that
these Orders, taken in connection with
section 2(h)(7) of the Act and the Part
36 rules, will not have a significant
46 5
U.S.C. 601 et seq.
FR 42256, 42268 (Aug. 10, 2001).
47 66
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impact on a substantial number of small
entities.
VI. Orders
a. Order Relating to the PJM WH Real
Time 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 PJM WH
Real Time Peak contract, traded on the
IntercontinentalExchange, Inc., satisfies
the material price preference 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 PJM
WH Real Time 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 48
with respect to the PJM WH Real Time
Peak contract and is subject to all the
provisions of the Commodity Exchange
Act applicable to registered entities.
Further with respect to the PJM WH
Real Time Peak contract, 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.49
b. Order Relating to the PJM WH Real
Time 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 PJM WH
Real Time 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
U.S.C. 1a(29).
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).
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48 7
49 Because
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42399
IntercontinentalExchange, Inc., must
comply with, with respect to the PJM
WH Real Time 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 50
with respect to the PJM WH Real Time
Off-Peak contract and is subject to all
the provisions of the Commodity
Exchange Act applicable to registered
entities.
Further with respect to the PJM WH
Real Time Off-Peak contract, 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.51
Issued in Washington, DC, on July 9, 2010,
by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010–17743 Filed 7–20–10; 8:45 am]
BILLING CODE 6351–01–P
COMMODITY FUTURES TRADING
COMMISSION
Orders Finding That the PJM WH Real
Time Peak Daily Contract, PJM WH
Real Time Off-Peak Daily Contract and
PJM WH Day Ahead LMP Peak Daily
Contract Offered for Trading on the
IntercontinentalExchange, Inc., Do Not
Perform a Significant Price Discovery
Function
Commodity Futures Trading
Commission.
ACTION: Final orders.
AGENCY:
On October 26, 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
PJM 2 WH 3 Real Time Peak Daily
SUMMARY:
50 7
U.S.C. 1a(29).
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).
1 74 FR 54966 (October 26, 2009).
2 The acronym ‘‘PJM’’ stands for Pennsylvania
New Jersey Maryland Interconnection, LLC (‘‘PJM
Interconnection’’), and signifies the regional
electricity transmission organization (‘‘RTO’’) that
coordinates the generation and distribution of
electricity in all or parts of 13 states and the District
of Columbia.
3 The acronym ‘‘WH’’ signifies the PJM
Interconnection’s Western Hub.
51 Because
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(‘‘PDP’’) contract, PJM WH Real Time
Off-Peak Daily (‘‘ODP’’) contract and
PJM WH Day Ahead LMP Peak Daily
(‘‘PDA’’) contract,4 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 PDP, ODP and
PDA 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: July 9, 2010.
FOR FURTHER INFORMATION CONTACT:
Gregory K. Price, Industry Economist,
Division of Market Oversight,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581. Telephone: (202) 418–5515. Email: gprice@cftc.gov; or Susan Nathan,
Senior Special Counsel, Division of
Market Oversight, same address.
Telephone: (202) 418–5133. E-mail:
snathan@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
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The CFTC Reauthorization Act of
2008 (‘‘Reauthorization Act’’) 5
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.6 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
4 The Federal Register notice also requested
comment on the PJM WH Real Time Peak (‘‘PJM’’)
contract and PJM WH Real Time Off-Peak (‘‘OPJ’’)
contract; these contracts will be addressed in a
separate Federal Register release.
5 Incorporated as Title XIII of the Food,
Conservation and Energy Act of 2008, Public Law
110–246, 122 Stat. 1624 (June 18, 2008).
6 7 U.S.C. 1a(29).
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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.7 As relevant here, rule 36.3
imposes increased information reporting
requirements on ECMs to assist the
Commission in making prompt
assessments whether particular ECM
contracts may be SPDCs. In addition to
filing quarterly reports of its contracts,
an ECM must notify the Commission
promptly concerning any contract
traded in reliance on the exemption in
section 2(h)(3) of the CEA that averaged
five trades per day or more over the
most recent calendar quarter, and for
which the exchange sells its price
information regarding the contract to
market participants or industry
publications, or whose daily closing or
settlement prices on 95 percent or more
of the days in the most recent quarter
were within 2.5 percent of the
contemporaneously determined closing,
settlement or other daily price of
another contract.
Commission rule 36.3(c)(3)
established the procedures by which the
Commission makes and announces its
determination whether a particular ECM
contract serves a significant price
discovery function. Under those
procedures, the Commission will
publish notice in the Federal Register
that it intends to undertake an
evaluation whether the specified
agreement, contract or transaction
performs a significant price discovery
function and to receive written views,
data and arguments relevant to its
determination from the ECM and other
interested persons. Upon the close of
the comment period, the Commission
will consider, among other things, all
relevant information regarding the
subject contract and issue an order
announcing and explaining its
determination whether or not the
contract is a SPDC. The issuance of an
affirmative order signals the
effectiveness of the Commission’s
regulatory authorities over an ECM with
respect to a SPDC; at that time such an
ECM becomes subject to all provisions
of the CEA applicable to registered
entities.8 The issuance of such an order
7 74 FR 12178 (Mar. 23, 2009); these rules became
effective on April 22, 2009.
8 Public Law 110–246 at 13203; Joint Explanatory
Statement of the Committee of Conference, H.R.
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also triggers the obligations,
requirements and timetables prescribed
in Commission rule 36.3(c)(4).9
II. Notice of Intent To Undertake SPDC
Determination
On October 26, 2009, the Commission
published in the Federal Register notice
of its intent to undertake a
determination whether the PDP, ODP
and PDA contracts10 perform a
significant price discovery function and
requested comment from interested
parties.11 Comments were received from
PJM Interconnection, Federal Energy
Regulatory Commission (‘‘FERC’’),
Electric Power Supply Association
(‘‘EPSA’’), Financial Institutions Energy
Group (‘‘FIEG’’), Edison Electric Institute
(‘‘EEI’’), ICE and Public Utility
Commission of Texas (‘‘PUCT’’).12 The
comment letters from PJM
Rep. No. 110–627, 110 Cong., 2d Sess. 978, 986
(Conference Committee Report). See also 73 FR
75888, 75894 (Dec. 12, 2008).
9 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.
10 As noted above, the Federal Register notice
also requested comment on the PJM WH Real Time
Peak (‘‘PJM’’) contract and PJM WH Real Time OffPeak (‘‘OPJ’’) contract. The PJM and OPJ contracts
will be addressed in a separate Federal Register
release.
11 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.
12 PJM Interconnection, as noted above, is the
RTO that coordinates the generation and
distribution of electricity in all or parts of 13 states
and the District of Columbia. FERC is an
independent federal regulatory agency that, among
other things, regulates the interstate transmission of
natural gas, oil and electricity. EPSA describes itself
as the ‘‘national trade association representing
competitive power suppliers, including generators
and marketers.’’ 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.’’ EEI is the ‘‘association of
shareholder-owned electric companies,
international affiliates and industry associates
worldwide.’’ ICE is an ECM, as noted above. 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/2009/09-032.html.
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Interconnection,13 FERC 14 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
subject contracts and generally
expressed the opinion that the contracts
are not SPDCs because they do not meet
the material price reference or material
liquidity criteria for SPDC
determination. These comments are
more extensively discussed below, as
applicable.
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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
13 PJM Interconnection stated that it ‘‘takes no
position as to whether the ICE [contracts] * * *
perform significant price discovery functions.’’
14 FERC expressed the opinion that a
determination by the Commission that any 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, ISOs [(independent system
operators)] or other jurisdictional entities.’’
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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.15 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.16 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 PDP,
15 In its October 26, 2009, Federal Register
release, the Commission identified material price
reference and material liquidity as the possible
criteria for SPDC determination of the PDP, ODP
and PDA 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.
16 17 CFR Part 36, Appendix A.
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42401
ODP and PDA contracts are discussed
separately below.
a. The PJM WH Real Time Peak Daily
(PDP) Contract and the SPDC Indicia
The PDP contract is cash settled based
on the arithmetic average of peak-hour,
real-time locational marginal prices
(‘‘LMPs’’) 17 published by PJM
Interconnection for its Western Hub for
all peak hours during the specified day
of generation. The hourly LMPs are
derived from power trades that result in
physical delivery. The size of the PDP
contract is 800 megawatt hours
(‘‘MWh’’), and the PDP contract is listed
for 38 consecutive days.
In general, electricity is bought and
sold in an auction setting on an hourly
basis at various points along the
electrical grid. An LMP associated with
a specific hour is calculated as the
volume-weighted average price of all of
the transactions where electricity is to
be supplied and consumed during that
hour.
Electricity is traded in a day-ahead
market as well as a real-time 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 the offers and bids are
dependent 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 either too much
power or too little power. A real-time
auction is operated to alleviate this
problem by serving as a balancing
mechanism. Specifically, electricity
traders use the real-time market to sell
excess electricity and buy additional
power to meet demand.
PJM Interconnection is an RTO that
coordinates the movement of wholesale
electricity in all or parts of Delaware,
Illinois, Indiana, Kentucky, Maryland,
Michigan, New Jersey, North Carolina,
Ohio, Pennsylvania, Tennessee,
Virginia, West Virginia and the District
of Columbia. PJM Interconnection’s
transmission network is the largest
centrally-dispatched grid in North
America. PJM Interconnection
dispatches about 163,500 MW of
generating capacity over 56,350 miles of
transmission lines and serves more than
51 million customers. The RTO’s
17 An LMP represents the additional cost
associated with producing an incremental amount
of electricity. LMPs account for generation costs,
congestion along the transmission lines, and
electricity loss.
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members, totaling more than 500,
include power generators, transmission
owners, electricity distributors, power
marketers and large consumers.
PJM Interconnection is responsible for
operating a competitive wholesale
electricity market as well as maintaining
the reliability of the grid. The RTO acts
as a neutral, independent party, and its
activities are regulated by FERC. The
company coordinates the continuous
buying, selling and delivery of
wholesale electricity through robust,
open and competitive spot markets. In
operating the markets, PJM
Interconnection balances the needs of
suppliers, wholesale customers and
other market participants, and it
continuously monitors market behavior.
Electricity is priced at individual
points along the transmission network
called nodes. An electric grid has many
interconnections or buses. RTOs group
certain buses together to form hubs,
which do not necessarily follow along
state lines or geographic boundaries.
Power also is priced at the hub level and
serves as a basis for trading electricity.
PJM Interconnnection has 11 hubs,
including AEP GEN, AEP–Dayton,
Chicago GEN, Chicago, Dominion,
Eastern, Northern Illinois, New Jersey,
Ohio, West INT and Western Hub.18 The
Western Hub is a basket of 109 buses
that stretch all the way from Erie, PA,
to Washington, DC.19
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1. Material Price Reference Criterion
The Commission’s October 26, 2009,
Federal Register notice identified the
PDP contract as a potential SPDC based
on the material price reference and
material liquidity criteria. The
Commission considered the fact that ICE
sells its price data to market participants
in a number of different packages which
vary in terms of the hubs covered, time
periods, and whether the data are daily
only or historical. For example, ICE
offers the ‘‘East 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 PDP 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
18 https://www.ferc.gov/market-oversight/mktelectric/pjm.asp.
19 https://www.ferc.gov/market-oversight/mktelectric/pjm/2010/05-2010-elec-pjm-archive.pdf.
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function; nevertheless, the Commission
determined that the PDP contract, while
not mentioned by name in the ECM
Study, warranted further review.
The Commission explains in its
Guidance to the statutory criteria that in
evaluating a contract under the material
price reference criterion, it will rely on
one of two sources of evidence—direct
and indirect—to determine that the
price of a contract was being used as a
material price reference and therefore,
serving a significant price discovery
function.20 With respect to direct
evidence, the Commission will consider
the extent to which, on a frequent and
recurring basis, cash market bids, offers
or transactions are directly based on, or
quoted at a differential to, the prices
generated on the ECM in question.
Direct evidence may be established
when cash market participants are
quoting bid or offer prices or entering
into transactions at prices that are set
either explicitly or implicitly at a
differential to prices established for the
contract in question. Cash market prices
are set explicitly at a differential to the
section 2(h)(3) contract when, for
instance, they are quoted in dollars and
cents above or below the reference
contract’s price. Cash market prices are
set implicitly at a differential to a
section 2(h)(3) contract when, for
instance, they are arrived at after adding
to, or subtracting from the section
2(h)(3) contract, but then quoted or
reported at a flat price. With respect to
indirect evidence, the Commission will
consider the extent to which the price
of the contract in question is being
routinely disseminated in widely
distributed industry publications—or
offered by the ECM itself for some form
of remuneration—and consulted on a
frequent and recurring basis by industry
participants in pricing cash market
transactions.
The PJM Western hub is a major
pricing center for electricity in the
eastern portion of the United States.
Traders, including producers, keep
abreast of the electricity prices at PJM
Interconnection’s Western Hub when
conducting cash deals. Power prices in
other neighboring markets, such as New
York ISO’s Zone A (Western New York),
Zone G (Hudson Valley region) and
Zone J (New York City) as well as
Midwest ISO’s Cinergy hub are typically
based implicitly relative to the prices
reported for PJM Interconnection’s
Western hub. However, ICE’s PJM WH
Real Time Peak (‘‘PJM’’) contract, which
is a monthly contract, is used more
widely as a source of pricing
information for electricity than the
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20 17
CFR Part 36, Appendix A.
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daily, peak-hour contract (i.e., the PDP
contract). Specifically, the PJM contract
prices power at the Western Hub based
on the simple average of peak-hour
prices over the contract month, as
reported by PJM Interconnection.
Market participants use the PJM
contract to lock-in electricity prices far
into the future. (The PJM contract is
listed for 110 months into the future.) In
contrast, the PDP contract is listed for a
much shorter length of time (about five
weeks); with such a limited timeframe,
the forward pricing capability of the
PDP contract is much more constrained
than that of the PJM contract. Traders
use monthly power contracts like the
PJM contract to price electricity
commitments in the future, where such
commitments are based on long range
forecasts of power supply and demand.
As generation and usage 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 PDP contract.
Accordingly, although the Western
Hub is a major trading center for
electricity and, as noted, ICE sells price
information for the PDP contract, the
Commission has 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. The PDP contract is not
consulted in this manner and does not
satisfy the material price reference
criterion. Thus, the PDP contract does
not satisfy the direct price reference test
for existence of material price reference.
Furthermore, the Commission notes that
publication of the PDP contract’s prices
is not indirect evidence of material price
reference. The PDP contract’s prices are
published with those of numerous other
contracts, including ICE’s monthly
electricity contracts (such as the PJM
contract), 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 PDP contract’s prices and do not
consult such prices on a frequent and
recurring basis in pricing cash market
transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that
no other contract directly references or
settles to the PDP contract’s price.
Moreover, the commenters argued that
the underlying cash price series against
which the PDP contract is settled 21 is
21 In this case, the average of the real-time peakhour Western hub electricity prices over the day of
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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 [the
derivatives contract] on a frequent and
recurring basis’’ when pricing forward,
fixed-price commitments or other cashsettled 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
Western Hub is a major power market,
traders do not consider the daily average
peak-hour Western Hub price to be as
important as the peak electricity price
associated with the monthly contract.
In addition, EPSA stated that the
publication of price data for the PDP
contract price is a weak justification for
material price reference because market
participants generally do not purchase
ICE data sets for one contract’s prices,
such as those for the PDP contract.
Instead, traders are interested in the
settlement prices, so the fact that ICE
sells the PDP prices as part of a broad
package is not conclusive evidence that
market participants are buying the ICE
data sets because they find the PDP
prices have substantial value. As noted
above, the Commission indicated that
publication of the PDP contract’s prices
is not indirect evidence of routine
dissemination. The PDP contract’s
prices are published with those of
numerous other contracts, which are of
more interest to market participants.
The Commission has concluded that
traders likely do not specifically
purchase the ICE data packages for the
PDP contract’s prices and do not consult
such prices on a frequent and recurring
basis in pricing cash market
transactions.
Lastly, ICE and EEI criticized the ECM
Study since it did not specifically
identify the PDP 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 PDP 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 PDP contract’s price (direct
evidence). Moreover, while the PDP
contract’s price data is sold to market
participants, those individuals likely do
not purchase the ICE data packages
specifically for the PDP 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
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 PDP contract was 48,072 in the
second quarter of 2009, resulting in a
daily average of 751.1 trades. During the
same period, the PDP contract had a
total trading volume of 68,586 contracts
and an average daily trading volume of
1,071.7 contracts. Moreover, open
interest as of June 30, 2009, was 1,856
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.22
In a subsequent filing dated March 24,
2010, ICE reported that total trading
volume in the fourth quarter of 2009
was 64,233 contracts (or 988.2 contracts
on a daily basis). In terms of number of
transactions, 45,167 trades occurred in
the fourth quarter of 2009 (694.9 trades
per day). As of December 31, 2009, open
interest in the PDP contract was 710
generation, which are derived from cash market
transactions.
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22 74
PO 00000
FR 54966 (October 26, 2009).
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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 was
substantial between the second and
fourth quarters of 2009. However,
trading activity in the PDP contract, as
characterized by total quarterly volume,
indicates that the PDP contract
experiences trading activity that is
similar to that of thinly-traded futures
markets.23 Thus, the PDP contract does
not meet a threshold of trading activity
that would render it of potential
importance and no additional statistical
analysis is warranted.24
i. Federal Register Comments
ICE stated that the PDP contract lacks
a sufficient number of trades to meet the
material liquidity criterion. Along with
EPSA and EEI, ICE argued that the PDP
contract cannot have a material effect on
other contracts, such as those listed for
trading by the New York Mercantile
Exchange (‘‘NYMEX’’), a DCM, because
price linkage and the potential for
arbitrage do not exist. Moreover, the
DCM contracts do not cash settle to the
PDP contract’s price. Instead, the DCM
contracts and the PDP contract are both
cash settled based on physical
transactions, which neither the ECM nor
the DCM contracts can influence.
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 PDP
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
23 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.
24 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 PDP 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.
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would define material liquidity may
differ from one market or commodity to
another.’’ 25
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’’ 26 rather than solely relying
upon an ECM to identify potential
SPDCs to the Commission. Thus, any
contract that meets this threshold may
be subject to scrutiny as a potential
SPDC; however, a 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.’’ 27 It is the Commission’s
opinion that liquidity, as it pertains to
the PDP contract, is typically a function
of trading activity in particular lead
days and, given sufficient liquidity in
such days, the ICE PDP contract itself
would be considered liquid. In any
event, in light of the fact that the
Commission has found that the PDP
contract does not meet the material
price reference criterion, according to
the Commission’s Guidance, it would be
unnecessary to evaluate whether the
25 Guidance,
supra.
FR 75892 (December 12, 2008).
27 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 26, 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 10 percent of all transactions in the PDP
contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest
information it provided in its October 26, 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.
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26 73
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PDP 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 PDP contract
does not meet the material liquidity
criterion.
3. Overall Conclusion Regarding the
PDP Contract
After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the ICE PDP 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 PDP 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
PDP 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 PDP contract.28
Accordingly, with respect to its PDP
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 PJM WH Real Time Off-Peak
Daily (ODP) Contract and the SPDC
Indicia
The ODP contract is cash settled
based on the arithmetic average of offpeak hour, real-time LMPs published by
PJM Interconnection for its Western Hub
for all peak hours during the specified
day of generation. The hourly LMPs are
derived from power trades that result in
physical delivery. The size of the ODP
contract is 50 MWh, and the ODP
contract is listed for 38 consecutive
days.
In general, electricity is bought and
sold in an auction setting on an hourly
basis at various point along the
electrical grid. An LMP associated with
a specific hour is calculated as the
volume-weighted average price of all of
the transactions where electricity is to
be supplied and consumed during that
hour.
Electricity is traded in a day-ahead
market as well as a real-time market.
The day-ahead market establishes prices
for electricity that is to be delivered
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28 See
73 FR 75888, 75893 (Dec. 12, 2008).
Frm 00031
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during the specified hour on the
following day. Day-ahead prices are
determined based on generation and
energy transaction quotes offered in
advance. Because the offers and bids are
dependent 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 either too much
power or too little power. A real-time
auction is operated to alleviate this
problem by serving as a balancing
mechanism. Specifically, electricity
traders use the real-time market to sell
excess electricity and buy additional
power to meet demand.
PJM Interconnection is an RTO that
coordinates the movement of wholesale
electricity in all or parts of Delaware,
Illinois, Indiana, Kentucky, Maryland,
Michigan, New Jersey, North Carolina,
Ohio, Pennsylvania, Tennessee,
Virginia, West Virginia and the District
of Columbia. PJM Interconnection’s
transmission network is the largest
centrally-dispatched grid in North
America. PJM Interconnection
dispatches about 163,500 MW of
generating capacity over 56,350 miles of
transmission lines and serves more than
51 million customers. The RTO’s
members, totaling more than 500,
include power generators, transmission
owners, electricity distributors, power
marketers and large consumers.
PJM Interconnection is responsible for
operating a competitive wholesale
electricity market as well as maintaining
the reliability of the grid. The RTO acts
as a neutral, independent party, and its
activities are regulated by FERC. The
company coordinates the continuous
buying, selling and delivery of
wholesale electricity through robust,
open and competitive spot markets. In
operating the markets, PJM
Interconnection balances the needs of
suppliers, wholesale customers and
other market participants, and it
continuously monitors market behavior.
Electricity is priced at individual
points along the transmission network
called nodes. An electric grid has many
interconnections or buses. RTOs group
certain buses together to form hubs,
which do not necessarily follow along
state lines or geographic boundaries.
Power also is priced at the hub level and
serves as a basis for trading electricity.
PJM Interconnnection has 11 hubs,
including AEP GEN, AEP–Dayton,
Chicago GEN, Chicago, Dominion,
Eastern, Northern Illinois, New Jersey,
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Ohio, West INT and Western Hub.29 The
Western Hub is a basket of 109 buses
that stretch all the way from Erie, PA,
to Washington, DC.30
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1. Material Price Reference Criterion
The Commission’s October 26, 2009,
Federal Register notice identified the
ODP contract as a potential SPDC based
on the material price reference and
material liquidity criteria. The
Commission considered the fact that ICE
sells its price data to market participants
in a number of different packages which
vary in terms of the hubs covered, time
periods, and whether the data are daily
only or historical. For example, ICE
offers the ‘‘East 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 ODP 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 ODP contract, while
not mentioned by name in the ECM
Study, warranted further review.
The Commission explains in its
Guidance to the statutory criteria that in
evaluating a contract under the material
price reference criterion, it will rely on
one of two sources of evidence—direct
and 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.31 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
29 https://www.ferc.gov/market-oversight/mktelectric/pjm.asp.
30 https://www.ferc.gov/market-oversight/mktelectric/pjm/2010/05-2010-elec-pjm-archive.pdf.
31 17 CFR Part 36, Appendix A.
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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 PJM Western hub is a major
pricing center for electricity in the
eastern portion of the United States.
Traders, including producers, keep
abreast of the electricity prices at PJM
Interconnection’s Western Hub when
conducting cash deals. Power prices in
other neighboring markets, such as New
York ISO’s Zone A (Western New York),
Zone G (Hudson Valley region) and
Zone J (New York City) as well as
Midwest ISO’s Cinergy hub are typically
based implicitly relative to the prices
reported for PJM Interconnection’s
Western hub. However, ICE’s PJM WH
Real Time Off-Peak (‘‘OPJ’’) contract,
which is a monthly contract, is used
more widely as a source of pricing
information for electricity than the
daily, off-peak hour contract (i.e., the
ODP contract). Specifically, the OPJ
contract prices power at the Western
Hub based on the simple average of offpeak hour prices over the contract
month, as reported by PJM
Interconnection. Market participants use
the OPJ contract to lock-in electricity
prices far into the future. (The OPJ
contract is listed up to 86 months into
the future.) In contrast, the ODP contract
is listed for a much shorter length of
time (about five weeks); with such a
limited timeframe, the forward pricing
capability of the ODP contract is much
more constrained than that of the OPJ
contract. Traders use monthly power
contracts like the OPJ contract to price
electricity commitments in the future,
where such commitments are based on
long range forecasts of power supply
and demand. As 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
ODP contract.
Accordingly, although the Western
Hub is a major trading center for
electricity and, as noted, ICE sells price
information for the ODP contract, the
Commission has explained in its
Guidance that a contract meeting the
material price reference criterion would
routinely be consulted by industry
PO 00000
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42405
participants in pricing cash market
transactions. The ODP contract is not
consulted in this manner and does not
satisfy the material price reference
criterion. Thus, the ODP contract does
not satisfy the direct price reference test
for existence of material price reference.
Furthermore, the Commission notes that
publication of the ODP contract’s prices
is not indirect evidence of material price
reference. The ODP contract’s prices are
published with those of numerous other
contracts, including ICE’s monthly
electricity contracts (such as the OPJ
contract), 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 ODP contract’s prices and do not
consult such prices on a frequent and
recurring basis in pricing cash market
transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that
no other contract directly references or
settles to the ODP contract’s price.
Moreover, the commenters argued that
the underlying cash price series against
which the ODP contract is settled 32 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 [the
derivatives contract] on a frequent and
recurring basis’’ when pricing forward,
fixed-price commitments or other cashsettled 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
Western Hub is a major power market,
traders do not consider the daily average
off-peak hour Western Hub price to be
as important as the peak electricity price
associated with the monthly contract.
In addition, EPSA stated that the
publication of price data for the ODP
contract price is a weak justification for
material price reference because market
participants generally do not purchase
ICE data sets for one contract’s prices,
such as those for the ODP contract.
Instead, traders are interested in the
settlement prices, so the fact that ICE
sells the ODP prices as part of a broad
package is not conclusive evidence that
market participants are buying the ICE
data sets because they find the ODP
prices have substantial value. As noted
32 In this case, the average of the real-time peakhour Western hub electricity prices over the day of
generation, which are derived from cash market
transactions.
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above, the Commission indicated that
publication of the ODP contract’s prices
is not indirect evidence of routine
dissemination. The ODP contract’s
prices are published with those of
numerous other contracts, which are of
more interest to market participants.
The Commission has concluded that
traders likely do not specifically
purchase the ICE data packages for the
ODP contract’s prices and do not
consult such prices on a frequent and
recurring basis in pricing cash market
transactions.
Lastly, ICE and EEI criticized the ECM
Study since it did not specifically
identify the ODP 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.
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ii. Conclusion Regarding Material Price
Reference
Based on the above, the Commission
finds that the ICE ODP 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 ODP contract’s price (direct
evidence). Moreover, while the ODP
contract’s price data is sold to market
participants, those individuals likely do
not purchase the ICE data packages
specifically for the ODP 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
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
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the ODP contract was 723 in the second
quarter of 2009, resulting in a daily
average of 11.3 trades. During the same
period, the ODP contract had a total
trading volume of 7,448 contracts and
an average daily trading volume of 116.4
contracts. Moreover, open interest as of
June 30, 2009, was 256 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.33
In a subsequent filing dated March 24,
2010, ICE reported that total trading
volume in the fourth quarter of 2009
was 12,304 contracts (or 189.3 contracts
on a daily basis). In terms of number of
transactions, 737 trades occurred in the
fourth quarter of 2009 (11.3 trades per
day). As of December 31, 2009, open
interest in the ODP contract was 488
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 between
the second and fourth quarters of 2009
was not substantial. In addition, trading
activity in the ODP contract, as
characterized by total quarterly volume,
indicates that the ODP contract
experiences trading activity that is
similar to that of thinly traded futures
markets.34 Thus, the ODP contract does
not meet a threshold of trading activity
that would render it of potential
importance and no additional statistical
analysis is warranted.35
FR 54966 (October 26, 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.
35 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 ODP 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.
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34 Staff
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i. Federal Register Comments
ICE stated that the ODP contract lacks
a sufficient number of trades to meet the
material liquidity criterion. Along with
EPSA and EEI, ICE argued that the ODP
contract cannot have a material effect on
other contracts, such as those listed for
trading by NYMEX, a DCM, because
price linkage and the potential for
arbitrage do not exist. Moreover, the
DCM contracts do not cash settle to the
ODP contract’s price. Instead, the DCM
contracts and the ODP contract are both
cash settled based on physical
transactions, which neither the ECM nor
the DCM contracts can influence.
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
ODP 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.’’ 36
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’’ 37 rather than solely relying
upon an ECM to identify potential
SPDCs to the Commission. Thus, any
contract that meets this threshold may
be subject to scrutiny as a potential
SPDC; however, a 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.’’ 38 It is the Commission’s
36 Guidance,
supra.
FR 75892 (December 12, 2008).
38 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 26, 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
37 73
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opinion that liquidity, as it pertains to
the ODP contract, is typically a function
of trading activity in particular lead
days and, given sufficient liquidity in
such days, the ICE ODP contract itself
would be considered liquid. In any
event, in light of the fact that the
Commission has found that the ODP
contract does not meet the material
price reference criterion, according to
the Commission’s Guidance, it would be
unnecessary to evaluate whether the
ODP 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 ODP contract
does not meet the material liquidity
criterion.
3. Overall Conclusion Regarding the
ODP Contract
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After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the ICE ODP 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 ODP 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
ODP 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 ODP contract.39
Accordingly, with respect to its ODP
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
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 34 percent of all transactions in the ODP
contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest
information it provided in its October 26, 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.
39 See 73 FR 75888, 75893 (Dec. 12, 2008).
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with the applicable reporting
requirements for ECMs.
c. The PJM WH Day-Ahead LMP Peak
Daily (PDA) Contract and the SPDC
Indicia
The PDA contract is cash settled
based on the arithmetic average of the
peak-hour, day-ahead LMPs published
by PJM Interconnection for its Western
Hub for all peak hours during the day
prior to power generation. The hourly
LMPs are derived from power trades
that result in physical delivery. The size
of the PDA contract is 800 MWh, and
the PDA contract is listed for 38
consecutive days.
In general, electricity is bought and
sold in an auction setting on an hourly
basis at various points along the
electrical grid. An LMP associated with
a specific hour is calculated as the
volume-weighted average price of all of
the transactions where electricity is to
be supplied and consumed during that
hour.
Electricity is traded in a day-ahead
market as well as a real-time 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 the offers and bids are
dependent 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 either too much
power or too little power. A real-time
auction is operated to alleviate this
problem by serving as a balancing
mechanism. Specifically, electricity
traders use the real-time market to sell
excess electricity and buy additional
power to meet demand.
PJM Interconnection is an RTO that
coordinates the movement of wholesale
electricity in all or parts of Delaware,
Illinois, Indiana, Kentucky, Maryland,
Michigan, New Jersey, North Carolina,
Ohio, Pennsylvania, Tennessee,
Virginia, West Virginia and the District
of Columbia. PJM Interconnection’s
transmission network is the largest
centrally-dispatched grid in North
America. PJM Interconnection
dispatches about 163,500 MW of
generating capacity over 56,350 miles of
transmission lines and serves more than
51 million customers. The RTO’s
members, totaling more than 500,
include power generators, transmission
owners, electricity distributors, power
marketers and large consumers.
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PJM Interconnection is responsible for
operating a competitive wholesale
electricity market as well as maintaining
the reliability of the grid. The RTO acts
as a neutral, independent party, and its
activities are regulated by FERC. The
company coordinates the continuous
buying, selling and delivery of
wholesale electricity through robust,
open and competitive spot markets. In
operating the markets, PJM
Interconnection balances the needs of
suppliers, wholesale customers and
other market participants, and it
continuously monitors market behavior.
Electricity is priced at individual
points along the transmission network
called nodes. An electric grid has many
interconnections or buses. RTOs group
certain buses together to form hubs,
which do not necessarily follow along
state lines or geographic boundaries.
Power also is priced at the hub level and
serves as a basis for trading electricity.
PJM Interconnnection has 11 hubs,
including AEP GEN, AEP–Dayton,
Chicago GEN, Chicago, Dominion,
Eastern, Northern Illinois, New Jersey,
Ohio, West INT and Western Hub.40 The
Western Hub is basket of 109 buses that
stretch all the way from Erie, PA, to
Washington, DC.41
1. Material Price Reference Criterion
The Commission’s October 26, 2009,
Federal Register notice identified the
PDA contract as a potential SPDC based
on the material price reference and
material liquidity criteria. The
Commission considered the fact that ICE
sells its price data to market participants
in a number of different packages which
vary in terms of the hubs covered, time
periods, and whether the data are daily
only or historical. For example, ICE
offers the ‘‘East 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 PDA 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 PDA contract, while
not mentioned by name in the ECM
Study, warranted further review.
The Commission explains in its
Guidance to the statutory criteria that in
evaluating a contract under the material
40 https://www.ferc.gov/market-oversight/mktelectric/pjm.asp.
41 https://www.ferc.gov/market-oversight/mktelectric/pjm/2010/05-2010-elec-pjm-archive.pdf.
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price reference criterion, it will rely on
one of two sources of evidence—direct
and 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.42 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 PJM Western hub is a major
pricing center for electricity in the
eastern portion of the United States.
Traders, including producers, keep
abreast of the electricity prices at PJM
Interconnection’s Western Hub when
conducting cash deals. Power prices in
other neighboring markets, such as New
York ISO’s Zone A (Western New York),
Zone G (Hudson Valley region) and
Zone J (New York City) as well as
Midwest ISO’s Cinergy hub are typically
based implicitly relative to the prices
reported for PJM Interconnection’s
Western hub. However, ICE’s PJM WH
Real Time Peak (‘‘PJM’’) contract, which
is a monthly contract, is used more
widely as a source of pricing
information for electricity than the
daily, peak-hour day-ahead contract
(i.e., the PDA contract). Specifically, the
PJM contract prices power at the
Western Hub based on the simple
average of the real time, peak-hour
prices over the contract month, as
reported by PJM Interconnection.
42 17
CFR Part 36, Appendix A.
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Market participants use the PJM
contract to lock-in electricity prices far
into the future. (The PJM contract is
listed up to 110 months into the future.)
In contrast, the PDA contract is listed
for a much shorter length of time (about
five weeks); with such a limited
timeframe, the forward pricing
capability of the PDA contract is much
more constrained than that of the PJM
contract. Traders use monthly power
contracts like the PJM contract to price
electricity commitments in the future,
where such commitments are based on
long range forecasts of power supply
and demand. As 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.
Accordingly, although the Western
Hub is a major trading center for
electricity and, as noted, ICE sells price
information for the PDA contract, the
Commission has 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. The PDA contract is not
consulted in this manner and does not
satisfy the material price reference
criterion. Thus, the PDA contract does
not satisfy the direct price reference test
for existence of material price reference.
Furthermore, the Commission notes that
publication of the PDA contract’s prices
is not indirect evidence of material price
reference. The PDA contract’s prices are
published with those of numerous other
contracts, including ICE’s monthly
electricity contracts (such as the PJM
contract), 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 PDA contract’s prices and do not
consult such prices on a frequent and
recurring basis in pricing cash market
transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that
no other contract directly references or
settles to the PDA contract’s price.
Moreover, the commenters argued that
the underlying cash price series against
which the PDA contract is settled 43 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
43 In this case, the average of the real-time peakhour Western hub electricity prices over the day of
generation, which are derived from cash market
transactions.
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a cash-settled derivatives contract could
meet the price reference criterion if
market participants ‘‘consult [the
derivatives contract] on a frequent and
recurring basis’’ when pricing forward,
fixed-price commitments or other cashsettled 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
Western Hub is a major power market,
traders do not consider the daily average
peak-hour, day-ahead Western Hub
price to be as important as the peak,
real-time electricity price associated
with the monthly contract.
In addition, EPSA stated that the
publication of price data for the PDA
contract price is a weak justification for
material price reference because market
participants generally do not purchase
ICE data sets for one contract’s prices,
such as those for the PDA contract.
Instead, traders are interested in the
settlement prices, so the fact that ICE
sells the PDA prices as part of a broad
package is not conclusive evidence that
market participants are buying the ICE
data sets because they find the PDA
prices have substantial value. As noted
above, the Commission indicated that
publication of the PDA contract’s prices
is not indirect evidence of routine
dissemination. The PDA contract’s
prices are published with those of
numerous other contracts, which are of
more interest to market participants.
The Commission has concluded that
traders likely do not specifically
purchase the ICE data packages for the
PDA contract’s prices and do not
consult such prices on a frequent and
recurring basis in pricing cash market
transactions.
Lastly, ICE and EEI criticized the ECM
Study since it did not specifically
identify the ODP 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 PDA contract does not
meet the material price reference
criterion because cash market
transactions are not priced either
explicitly or implicitly on a frequent
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and recurring basis at a differential to
the PDA contract’s price (direct
evidence). Moreover, while the PDA
contract’s price data is sold to market
participants, those individuals likely do
not purchase the ICE data packages
specifically for the PDA 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
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 PDA contract was 1,063 in the
second quarter of 2009, resulting in a
daily average of 16.6 trades. During the
same period, the PDA contract had a
total trading volume of 1,435 contracts
and an average daily trading volume of
22.4 contracts. Moreover, open interest
as of June 30, 2009, was 75 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.44
In a subsequent filing dated March 24,
2010, ICE reported that total trading
volume in the fourth quarter of 2009
was 1,960 contracts (or 30.2 contracts on
a daily basis). In terms of number of
transactions, 1,181 trades occurred in
the fourth quarter of 2009 (19.2 trades
per day). As of December 31, 2009, open
interest in the PDA contract was 45
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 between
the second and fourth quarters of 2009
was not substantial. In addition, trading
activity in the PDA contract, as
44 74
FR 54966 (October 26, 2009).
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characterized by total quarterly volume,
indicates that the PDA contract
experiences trading activity that is
similar to that of thinly-traded futures
markets.45 Thus, the PDA contract does
not meet a threshold of trading activity
that would render it of potential
importance and no additional statistical
analysis is warranted.46
i. Federal Register Comments
ICE stated that the PDA contract lacks
a sufficient number of trades to meet the
material liquidity criterion. Along with
EPSA and EEI, ICE argued that the PDA
contract cannot have a material effect on
other contracts, such as those listed for
trading by NYMEX, a DCM, because
price linkage and the potential for
arbitrage do not exist. Moreover, the
DCM contracts do not cash settle to the
PDA contract’s price. Instead, the DCM
contracts and the PDA contract are both
cash settled based on physical
transactions, which neither the ECM nor
the DCM contracts can influence.
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
PDA 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.’’ 47
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’’ 48 rather than solely relying
upon an ECM to identify potential
SPDCs to the Commission. Thus, any
contract that meets this threshold may
be subject to scrutiny as a potential
SPDC; however, a 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.’’ 49 It is the Commission’s
opinion that liquidity, as it pertains to
the PDA contract, is typically a function
of trading activity in particular lead
days and, given sufficient liquidity in
such days, the ICE PDA contract itself
would be considered liquid. In any
event, in light of the fact that the
Commission has found that the PDA
contract does not meet the material
price reference criterion, according to
the Commission’s Guidance, it would be
unnecessary to evaluate whether the
PDA 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 PDA contract
does not meet the material liquidity
criterion.
48 73
FR 75892 (December 12, 2008).
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 26, 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 five percent of all transactions in the PDA
contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest
information it provided in its October 26, 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.
49 In
45 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.
46 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 Part 36, Appendix
A. For the reasons discussed above, the
Commission has found that the PDA 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.
47 Guidance, supra.
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3. Overall Conclusion Regarding the
PDA Contract
After considering the entire record in
this matter, including the comments
received, the Commission has
determined that the ICE PDA 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 PDA 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
PDA 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 PDA contract.50
Accordingly, with respect to its PDA
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
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a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 51 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 CEA 52 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
50 See
73 FR 75888, 75893 (Dec. 12, 2008).
U.S.C. 3507(d).
52 7 U.S.C. 19(a).
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 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
the PDP, OPD and PDA 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’’) 53 requires that agencies
consider the impact of their rules on
small businesses. The requirements of
CEA section 2(h)(7) and the Part 36
51 44
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15:19 Jul 20, 2010
Jkt 220001
rules affect ECMs. The Commission
previously has determined that ECMs
are not small entities for purposes of the
RFA.54 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 PJM WH Real
Time 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 PJM WH
Real Time 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 55 with
respect to the PJM WH Real Time 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 PJM WH Real Time
Peak Daily 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 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 PJM WH Real
Time 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
54 66
53 5
PO 00000
U.S.C. 601 et seq.
Frm 00037
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FR 42256, 42268 (Aug. 10, 2001).
U.S.C. 1a(29).
21JYN1
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
2(h)(3) and Commission Regulation
36.3.
erowe on DSKG8SOYB1PROD with NOTICES
b. Order Relating to the PJM WH Real
Time 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 PJM WH
Real Time Off-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 56 with
respect to the PJM WH Real Time OffPeak 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 PJM WH Real Time
Off-Peak Daily 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 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 PJM WH Real
Time Off-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.
Act, hereby determines that the PJM WH
Day Ahead LMP 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 57 with
respect to the PJM WH Day Ahead LMP
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 PJM WH Day Ahead
LMP Peak Daily 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 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 PJM WH Day
Ahead LMP 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.
Issued in Washington, DC, on July 9, 2010,
by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010–17744 Filed 7–20–10; 8:45 am]
BILLING CODE 6351–01–P
c. Order Relating to the PJM WH Day
Ahead LMP 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
56 7
U.S.C. 1a(29).
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
PO 00000
COMMODITY FUTURES TRADING
COMMISSION
Orders Finding That the SP–15
Financial Day-Ahead LMP Peak Daily
Contract; SP–15 Financial Day-Ahead
LMP Off-Peak Daily Contract; SP–15
Financial Swap Real Time LMP–Peak
Daily Contract; NP–15 Financial DayAhead LMP Peak Daily Contract and
NP–15 Financial Day-Ahead LMP OffPeak Daily Contract; Offered for
Trading on the
IntercontinentalExchange, Inc., Do Not
Perform a Significant Price Discovery
Function
Commodity Futures Trading
Commission.
AGENCY:
ACTION:
Final orders.
On October 6, 2009, the
Commodity Futures Trading
Commission (‘‘CFTC’’ or ‘‘Commission’’)
published for comment in the Federal
Register1 a notice of its intent to
undertake a determination whether the
SP–152 Financial Day-Ahead LMP Peak
Daily (‘‘SDP’’) contract; SP–15 Financial
Day-Ahead LMP Off-Peak Daily (‘‘SQP’’)
contract; SP–15 Financial Swap Real
Time LMP–Peak Daily (‘‘SRP’’) contract;
NP–153 Financial Day-Ahead LMP Peak
Daily (‘‘DPN’’) contract; and NP–15
Financial Day-Ahead LMP Off-Peak
Daily (‘‘UNP’’) contract,4 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 SDP, SQP, SRP,
DPN and UNP 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.
SUMMARY:
DATES:
Effective date: July 9, 2010.
1 74
FR 51264 (October 6, 2009).
acronym ‘‘SP’’ stands for ‘‘South Path.’’
3 The acronym ‘‘NP’’ stands for ‘‘North Path.’’
4 The Federal Register notice also requested
comment on the SP–15 Financial Day-Ahead LMP
Peak (‘‘SPM’’) contract and SP–15 Financial DayAhead LMP Off-Peak (‘‘OFP’’) contract; these
contracts will be addressed in a separate Federal
Register release.
2 The
57 7
U.S.C. 1a(29).
Frm 00038
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42411
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21JYN1
]]>Agencies
[Federal Register Volume 75, Number 139 (Wednesday, July 21, 2010)]
[Notices]
[Pages 42399-42411]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17744]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Orders Finding That the PJM WH Real Time Peak Daily Contract, PJM
WH Real Time Off-Peak Daily Contract and PJM WH Day Ahead LMP 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 26, 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 PJM \2\ WH \3\ Real Time Peak Daily
[[Page 42400]]
(``PDP'') contract, PJM WH Real Time Off-Peak Daily (``ODP'') contract
and PJM WH Day Ahead LMP Peak Daily (``PDA'') contract,\4\ 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 PDP, ODP and PDA 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 54966 (October 26, 2009).
\2\ The acronym ``PJM'' stands for Pennsylvania New Jersey
Maryland Interconnection, LLC (``PJM Interconnection''), and
signifies the regional electricity transmission organization
(``RTO'') that coordinates the generation and distribution of
electricity in all or parts of 13 states and the District of
Columbia.
\3\ The acronym ``WH'' signifies the PJM Interconnection's
Western Hub.
\4\ The Federal Register notice also requested comment on the
PJM WH Real Time Peak (``PJM'') contract and PJM WH Real Time Off-
Peak (``OPJ'') contract; these contracts will be addressed in a
separate Federal Register release.
---------------------------------------------------------------------------
DATES: Effective Date: July 9, 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'') \5\
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.\6\ 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).
---------------------------------------------------------------------------
\5\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008).
\6\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------
On March 16, 2009, the CFTC promulgated final rules implementing
the provisions of the Reauthorization Act.\7\ 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.
---------------------------------------------------------------------------
\7\ 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.\8\ The issuance of such an order also triggers the
obligations, requirements and timetables prescribed in Commission rule
36.3(c)(4).\9\
---------------------------------------------------------------------------
\8\ 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).
\9\ 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 26, 2009, the Commission published in the Federal
Register notice of its intent to undertake a determination whether the
PDP, ODP and PDA contracts\10\ perform a significant price discovery
function and requested comment from interested parties.\11\ Comments
were received from PJM Interconnection, Federal Energy Regulatory
Commission (``FERC''), Electric Power Supply Association (``EPSA''),
Financial Institutions Energy Group (``FIEG''), Edison Electric
Institute (``EEI''), ICE and Public Utility Commission of Texas
(``PUCT'').\12\ The comment letters from PJM
[[Page 42401]]
Interconnection,\13\ FERC \14\ 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 subject contracts and generally
expressed the opinion that the contracts are not SPDCs because they do
not meet the material price reference or material liquidity criteria
for SPDC determination. These comments are more extensively discussed
below, as applicable.
---------------------------------------------------------------------------
\10\ As noted above, the Federal Register notice also requested
comment on the PJM WH Real Time Peak (``PJM'') contract and PJM WH
Real Time Off-Peak (``OPJ'') contract. The PJM and OPJ contracts
will be addressed in a separate Federal Register release.
\11\ 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.
\12\ PJM Interconnection, as noted above, is the RTO that
coordinates the generation and distribution of electricity in all or
parts of 13 states and the District of Columbia. FERC is an
independent federal regulatory agency that, among other things,
regulates the interstate transmission of natural gas, oil and
electricity. EPSA describes itself as the ``national trade
association representing competitive power suppliers, including
generators and marketers.'' 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.'' EEI is the ``association of shareholder-
owned electric companies, international affiliates and industry
associates worldwide.'' ICE is an ECM, as noted above. 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/2009/09-032.html.
\13\ PJM Interconnection stated that it ``takes no position as
to whether the ICE [contracts] * * * perform significant price
discovery functions.''
\14\ FERC expressed the opinion that a determination by the
Commission that any 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, ISOs [(independent system
operators)] or other jurisdictional entities.''
---------------------------------------------------------------------------
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.\15\ 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.\16\ 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.
---------------------------------------------------------------------------
\15\ In its October 26, 2009, Federal Register release, the
Commission identified material price reference and material
liquidity as the possible criteria for SPDC determination of the
PDP, ODP and PDA 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.
\16\ 17 CFR Part 36, Appendix A.
---------------------------------------------------------------------------
IV. Findings and Conclusions
The Commission's findings and conclusions with respect to the PDP,
ODP and PDA contracts are discussed separately below.
a. The PJM WH Real Time Peak Daily (PDP) Contract and the SPDC Indicia
The PDP contract is cash settled based on the arithmetic average of
peak-hour, real-time locational marginal prices (``LMPs'') \17\
published by PJM Interconnection for its Western Hub for all peak hours
during the specified day of generation. The hourly LMPs are derived
from power trades that result in physical delivery. The size of the PDP
contract is 800 megawatt hours (``MWh''), and the PDP contract is
listed for 38 consecutive days.
---------------------------------------------------------------------------
\17\ An LMP represents the additional cost associated with
producing an incremental amount of electricity. LMPs account for
generation costs, congestion along the transmission lines, and
electricity loss.
---------------------------------------------------------------------------
In general, electricity is bought and sold in an auction setting on
an hourly basis at various points along the electrical grid. An LMP
associated with a specific hour is calculated as the volume-weighted
average price of all of the transactions where electricity is to be
supplied and consumed during that hour.
Electricity is traded in a day-ahead market as well as a real-time
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 the offers and bids are dependent 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 either too much power or too little
power. A real-time auction is operated to alleviate this problem by
serving as a balancing mechanism. Specifically, electricity traders use
the real-time market to sell excess electricity and buy additional
power to meet demand.
PJM Interconnection is an RTO that coordinates the movement of
wholesale electricity in all or parts of Delaware, Illinois, Indiana,
Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee, Virginia, West Virginia and the District of
Columbia. PJM Interconnection's transmission network is the largest
centrally-dispatched grid in North America. PJM Interconnection
dispatches about 163,500 MW of generating capacity over 56,350 miles of
transmission lines and serves more than 51 million customers. The RTO's
[[Page 42402]]
members, totaling more than 500, include power generators, transmission
owners, electricity distributors, power marketers and large consumers.
PJM Interconnection is responsible for operating a competitive
wholesale electricity market as well as maintaining the reliability of
the grid. The RTO acts as a neutral, independent party, and its
activities are regulated by FERC. The company coordinates the
continuous buying, selling and delivery of wholesale electricity
through robust, open and competitive spot markets. In operating the
markets, PJM Interconnection balances the needs of suppliers, wholesale
customers and other market participants, and it continuously monitors
market behavior.
Electricity is priced at individual points along the transmission
network called nodes. An electric grid has many interconnections or
buses. RTOs group certain buses together to form hubs, which do not
necessarily follow along state lines or geographic boundaries. Power
also is priced at the hub level and serves as a basis for trading
electricity. PJM Interconnnection has 11 hubs, including AEP GEN, AEP-
Dayton, Chicago GEN, Chicago, Dominion, Eastern, Northern Illinois, New
Jersey, Ohio, West INT and Western Hub.\18\ The Western Hub is a basket
of 109 buses that stretch all the way from Erie, PA, to Washington,
DC.\19\
---------------------------------------------------------------------------
\18\ https://www.ferc.gov/market-oversight/mkt-electric/pjm.asp.
\19\ https://www.ferc.gov/market-oversight/mkt-electric/pjm/2010/05-2010-elec-pjm-archive.pdf.
---------------------------------------------------------------------------
1. Material Price Reference Criterion
The Commission's October 26, 2009, Federal Register notice
identified the PDP contract as a potential SPDC based on the material
price reference and material liquidity criteria. The Commission
considered the fact that ICE sells its price data to market
participants in a number of different packages which vary in terms of
the hubs covered, time periods, and whether the data are daily only or
historical. For example, ICE offers the ``East 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 PDP 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 PDP contract, while not mentioned by name in the ECM Study,
warranted further review.
The Commission explains in its Guidance to the statutory criteria
that in evaluating a contract under the material price reference
criterion, it will rely on one of two sources of evidence--direct and
indirect--to determine that the price of a contract was being used as a
material price reference and therefore, serving a significant price
discovery function.\20\ With respect to direct evidence, the Commission
will consider the extent to which, on a frequent and recurring basis,
cash market bids, offers or transactions are directly based on, or
quoted at a differential to, the prices generated on the ECM in
question. Direct evidence may be established when cash market
participants are quoting bid or offer prices or entering into
transactions at prices that are set either explicitly or implicitly at
a differential to prices established for the contract in question. Cash
market prices are set explicitly at a differential to the section
2(h)(3) contract when, for instance, they are quoted in dollars and
cents above or below the reference contract's price. Cash market prices
are set implicitly at a differential to a section 2(h)(3) contract
when, for instance, they are arrived at after adding to, or subtracting
from the section 2(h)(3) contract, but then quoted or reported at a
flat price. With respect to indirect evidence, the Commission will
consider the extent to which the price of the contract in question is
being routinely disseminated in widely distributed industry
publications--or offered by the ECM itself for some form of
remuneration--and consulted on a frequent and recurring basis by
industry participants in pricing cash market transactions.
---------------------------------------------------------------------------
\20\ 17 CFR Part 36, Appendix A.
---------------------------------------------------------------------------
The PJM Western hub is a major pricing center for electricity in
the eastern portion of the United States. Traders, including producers,
keep abreast of the electricity prices at PJM Interconnection's Western
Hub when conducting cash deals. Power prices in other neighboring
markets, such as New York ISO's Zone A (Western New York), Zone G
(Hudson Valley region) and Zone J (New York City) as well as Midwest
ISO's Cinergy hub are typically based implicitly relative to the prices
reported for PJM Interconnection's Western hub. However, ICE's PJM WH
Real Time Peak (``PJM'') 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 PDP contract). Specifically, the
PJM contract prices power at the Western Hub based on the simple
average of peak-hour prices over the contract month, as reported by PJM
Interconnection. Market participants use the PJM contract to lock-in
electricity prices far into the future. (The PJM contract is listed for
110 months into the future.) In contrast, the PDP contract is listed
for a much shorter length of time (about five weeks); with such a
limited timeframe, the forward pricing capability of the PDP contract
is much more constrained than that of the PJM contract. Traders use
monthly power contracts like the PJM contract to price electricity
commitments in the future, where such commitments are based on long
range forecasts of power supply and demand. As 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 PDP
contract.
Accordingly, although the Western Hub is a major trading center for
electricity and, as noted, ICE sells price information for the PDP
contract, the Commission has 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.
The PDP contract is not consulted in this manner and does not satisfy
the material price reference criterion. Thus, the PDP contract does not
satisfy the direct price reference test for existence of material price
reference. Furthermore, the Commission notes that publication of the
PDP contract's prices is not indirect evidence of material price
reference. The PDP contract's prices are published with those of
numerous other contracts, including ICE's monthly electricity contracts
(such as the PJM contract), 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
PDP contract's prices and do not consult such prices on a frequent and
recurring basis in pricing cash market transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that no other contract directly
references or settles to the PDP contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the PDP contract is settled \21\ is
[[Page 42403]]
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 [the derivatives contract] on a frequent and recurring
basis'' 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 Western Hub is a major power market, traders do not
consider the daily average peak-hour Western Hub price to be as
important as the peak electricity price associated with the monthly
contract.
---------------------------------------------------------------------------
\21\ In this case, the average of the real-time peak-hour
Western hub electricity prices over the day of generation, which are
derived from cash market transactions.
---------------------------------------------------------------------------
In addition, EPSA stated that the publication of price data for the
PDP contract price is a weak justification for material price reference
because market participants generally do not purchase ICE data sets for
one contract's prices, such as those for the PDP contract. Instead,
traders are interested in the settlement prices, so the fact that ICE
sells the PDP prices as part of a broad package is not conclusive
evidence that market participants are buying the ICE data sets because
they find the PDP prices have substantial value. As noted above, the
Commission indicated that publication of the PDP contract's prices is
not indirect evidence of routine dissemination. The PDP contract's
prices are published with those of numerous other contracts, which are
of more interest to market participants. The Commission has concluded
that traders likely do not specifically purchase the ICE data packages
for the PDP contract's prices and do not consult such prices on a
frequent and recurring basis in pricing cash market transactions.
Lastly, ICE and EEI criticized the ECM Study since it did not
specifically identify the PDP 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 PDP 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 PDP contract's
price (direct evidence). Moreover, while the PDP contract's price data
is sold to market participants, those individuals likely do not
purchase the ICE data packages specifically for the PDP 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
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 PDP contract was 48,072 in the second quarter of 2009,
resulting in a daily average of 751.1 trades. During the same period,
the PDP contract had a total trading volume of 68,586 contracts and an
average daily trading volume of 1,071.7 contracts. Moreover, open
interest as of June 30, 2009, was 1,856 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.\22\
---------------------------------------------------------------------------
\22\ 74 FR 54966 (October 26, 2009).
---------------------------------------------------------------------------
In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 64,233 contracts
(or 988.2 contracts on a daily basis). In terms of number of
transactions, 45,167 trades occurred in the fourth quarter of 2009
(694.9 trades per day). As of December 31, 2009, open interest in the
PDP contract was 710 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 was substantial between the second and
fourth quarters of 2009. However, trading activity in the PDP contract,
as characterized by total quarterly volume, indicates that the PDP
contract experiences trading activity that is similar to that of
thinly-traded futures markets.\23\ Thus, the PDP contract does not meet
a threshold of trading activity that would render it of potential
importance and no additional statistical analysis is warranted.\24\
---------------------------------------------------------------------------
\23\ 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.
\24\ 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 PDP 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 stated that the PDP contract lacks a sufficient number of
trades to meet the material liquidity criterion. Along with EPSA and
EEI, ICE argued that the PDP contract cannot have a material effect on
other contracts, such as those listed for trading by the New York
Mercantile Exchange (``NYMEX''), a DCM, because price linkage and the
potential for arbitrage do not exist. Moreover, the DCM contracts do
not cash settle to the PDP contract's price. Instead, the DCM contracts
and the PDP contract are both cash settled based on physical
transactions, which neither the ECM nor the DCM contracts can
influence.
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 PDP 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
[[Page 42404]]
would define material liquidity may differ from one market or commodity
to another.'' \25\
---------------------------------------------------------------------------
\25\ 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'' \26\ rather than solely relying upon an ECM to identify
potential SPDCs to the Commission. Thus, any contract that meets this
threshold may be subject to scrutiny as a potential SPDC; however, a
contract will not be found to be a SPDC merely because it met the
reporting threshold.
---------------------------------------------------------------------------
\26\ 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.'' \27\ It is the Commission's opinion that
liquidity, as it pertains to the PDP contract, is typically a function
of trading activity in particular lead days and, given sufficient
liquidity in such days, the ICE PDP contract itself would be considered
liquid. In any event, in light of the fact that the Commission has
found that the PDP contract does not meet the material price reference
criterion, according to the Commission's Guidance, it would be
unnecessary to evaluate whether the PDP contract meets the material
liquidity criterion since it cannot be used alone for SPDC
determination.
---------------------------------------------------------------------------
\27\ 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 26, 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 10 percent of all
transactions in the PDP contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest information it
provided in its October 26, 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 PDP
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the PDP Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE PDP
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 PDP 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 PDP 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 PDP
contract.\28\ Accordingly, with respect to its PDP 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.
---------------------------------------------------------------------------
\28\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
b. The PJM WH Real Time Off-Peak Daily (ODP) Contract and the SPDC
Indicia
The ODP contract is cash settled based on the arithmetic average of
off-peak hour, real-time LMPs published by PJM Interconnection for its
Western Hub for all peak hours during the specified day of generation.
The hourly LMPs are derived from power trades that result in physical
delivery. The size of the ODP contract is 50 MWh, and the ODP contract
is listed for 38 consecutive days.
In general, electricity is bought and sold in an auction setting on
an hourly basis at various point along the electrical grid. An LMP
associated with a specific hour is calculated as the volume-weighted
average price of all of the transactions where electricity is to be
supplied and consumed during that hour.
Electricity is traded in a day-ahead market as well as a real-time
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 the offers and bids are dependent 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 either too much power or too little
power. A real-time auction is operated to alleviate this problem by
serving as a balancing mechanism. Specifically, electricity traders use
the real-time market to sell excess electricity and buy additional
power to meet demand.
PJM Interconnection is an RTO that coordinates the movement of
wholesale electricity in all or parts of Delaware, Illinois, Indiana,
Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee, Virginia, West Virginia and the District of
Columbia. PJM Interconnection's transmission network is the largest
centrally-dispatched grid in North America. PJM Interconnection
dispatches about 163,500 MW of generating capacity over 56,350 miles of
transmission lines and serves more than 51 million customers. The RTO's
members, totaling more than 500, include power generators, transmission
owners, electricity distributors, power marketers and large consumers.
PJM Interconnection is responsible for operating a competitive
wholesale electricity market as well as maintaining the reliability of
the grid. The RTO acts as a neutral, independent party, and its
activities are regulated by FERC. The company coordinates the
continuous buying, selling and delivery of wholesale electricity
through robust, open and competitive spot markets. In operating the
markets, PJM Interconnection balances the needs of suppliers, wholesale
customers and other market participants, and it continuously monitors
market behavior.
Electricity is priced at individual points along the transmission
network called nodes. An electric grid has many interconnections or
buses. RTOs group certain buses together to form hubs, which do not
necessarily follow along state lines or geographic boundaries. Power
also is priced at the hub level and serves as a basis for trading
electricity. PJM Interconnnection has 11 hubs, including AEP GEN, AEP-
Dayton, Chicago GEN, Chicago, Dominion, Eastern, Northern Illinois, New
Jersey,
[[Page 42405]]
Ohio, West INT and Western Hub.\29\ The Western Hub is a basket of 109
buses that stretch all the way from Erie, PA, to Washington, DC.\30\
---------------------------------------------------------------------------
\29\ https://www.ferc.gov/market-oversight/mkt-electric/pjm.asp.
\30\ https://www.ferc.gov/market-oversight/mkt-electric/pjm/2010/05-2010-elec-pjm-archive.pdf.
---------------------------------------------------------------------------
1. Material Price Reference Criterion
The Commission's October 26, 2009, Federal Register notice
identified the ODP contract as a potential SPDC based on the material
price reference and material liquidity criteria. The Commission
considered the fact that ICE sells its price data to market
participants in a number of different packages which vary in terms of
the hubs covered, time periods, and whether the data are daily only or
historical. For example, ICE offers the ``East 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 ODP 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 ODP contract, while not mentioned by name in the
ECM Study, warranted further review.
The Commission explains in its Guidance to the statutory criteria
that in evaluating a contract under the material price reference
criterion, it will rely on one of two sources of evidence--direct and
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.\31\ 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.
---------------------------------------------------------------------------
\31\ 17 CFR Part 36, Appendix A.
---------------------------------------------------------------------------
The PJM Western hub is a major pricing center for electricity in
the eastern portion of the United States. Traders, including producers,
keep abreast of the electricity prices at PJM Interconnection's Western
Hub when conducting cash deals. Power prices in other neighboring
markets, such as New York ISO's Zone A (Western New York), Zone G
(Hudson Valley region) and Zone J (New York City) as well as Midwest
ISO's Cinergy hub are typically based implicitly relative to the prices
reported for PJM Interconnection's Western hub. However, ICE's PJM WH
Real Time Off-Peak (``OPJ'') contract, which is a monthly contract, is
used more widely as a source of pricing information for electricity
than the daily, off-peak hour contract (i.e., the ODP contract).
Specifically, the OPJ contract prices power at the Western Hub based on
the simple average of off-peak hour prices over the contract month, as
reported by PJM Interconnection. Market participants use the OPJ
contract to lock-in electricity prices far into the future. (The OPJ
contract is listed up to 86 months into the future.) In contrast, the
ODP contract is listed for a much shorter length of time (about five
weeks); with such a limited timeframe, the forward pricing capability
of the ODP contract is much more constrained than that of the OPJ
contract. Traders use monthly power contracts like the OPJ contract to
price electricity commitments in the future, where such commitments are
based on long range forecasts of power supply and demand. As 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
ODP contract.
Accordingly, although the Western Hub is a major trading center for
electricity and, as noted, ICE sells price information for the ODP
contract, the Commission has 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.
The ODP contract is not consulted in this manner and does not satisfy
the material price reference criterion. Thus, the ODP contract does not
satisfy the direct price reference test for existence of material price
reference. Furthermore, the Commission notes that publication of the
ODP contract's prices is not indirect evidence of material price
reference. The ODP contract's prices are published with those of
numerous other contracts, including ICE's monthly electricity contracts
(such as the OPJ contract), 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
ODP contract's prices and do not consult such prices on a frequent and
recurring basis in pricing cash market transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that no other contract directly
references or settles to the ODP contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the ODP contract is settled \32\ 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 [the derivatives contract]
on a frequent and recurring basis'' 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 Western Hub is a major power
market, traders do not consider the daily average off-peak hour Western
Hub price to be as important as the peak electricity price associated
with the monthly contract.
---------------------------------------------------------------------------
\32\ In this case, the average of the real-time peak-hour
Western hub electricity prices over the day of generation, which are
derived from cash market transactions.
---------------------------------------------------------------------------
In addition, EPSA stated that the publication of price data for the
ODP contract price is a weak justification for material price reference
because market participants generally do not purchase ICE data sets for
one contract's prices, such as those for the ODP contract. Instead,
traders are interested in the settlement prices, so the fact that ICE
sells the ODP prices as part of a broad package is not conclusive
evidence that market participants are buying the ICE data sets because
they find the ODP prices have substantial value. As noted
[[Page 42406]]
above, the Commission indicated that publication of the ODP contract's
prices is not indirect evidence of routine dissemination. The ODP
contract's prices are published with those of numerous other contracts,
which are of more interest to market participants. The Commission has
concluded that traders likely do not specifically purchase the ICE data
packages for the ODP contract's prices and do not consult such prices
on a frequent and recurring basis in pricing cash market transactions.
Lastly, ICE and EEI criticized the ECM Study since it did not
specifically identify the ODP 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 ODP 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 ODP contract's
price (direct evidence). Moreover, while the ODP contract's price data
is sold to market participants, those individuals likely do not
purchase the ICE data packages specifically for the ODP 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
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 ODP contract was 723 in the second quarter of 2009,
resulting in a daily average of 11.3 trades. During the same period,
the ODP contract had a total trading volume of 7,448 contracts and an
average daily trading volume of 116.4 contracts. Moreover, open
interest as of June 30, 2009, was 256 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.\33\
---------------------------------------------------------------------------
\33\ 74 FR 54966 (October 26, 2009).
---------------------------------------------------------------------------
In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 12,304 contracts
(or 189.3 contracts on a daily basis). In terms of number of
transactions, 737 trades occurred in the fourth quarter of 2009 (11.3
trades per day). As of December 31, 2009, open interest in the ODP
contract was 488 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 between the second and fourth quarters
of 2009 was not substantial. In addition, trading activity in the ODP
contract, as characterized by total quarterly volume, indicates that
the ODP contract experiences trading activity that is similar to that
of thinly traded futures markets.\34\ Thus, the ODP contract does not
meet a threshold of trading activity that would render it of potential
importance and no additional statistical analysis is warranted.\35\
---------------------------------------------------------------------------
\34\ 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.
\35\ 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 ODP 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 stated that the ODP contract lacks a sufficient number of
trades to meet the material liquidity criterion. Along with EPSA and
EEI, ICE argued that the ODP contract cannot have a material effect on
other contracts, such as those listed for trading by NYMEX, a DCM,
because price linkage and the potential for arbitrage do not exist.
Moreover, the DCM contracts do not cash settle to the ODP contract's
price. Instead, the DCM contracts and the ODP contract are both cash
settled based on physical transactions, which neither the ECM nor the
DCM contracts can influence.
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 ODP 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.'' \36\
---------------------------------------------------------------------------
\36\ 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'' \37\ rather than solely relying upon an ECM to identify
potential SPDCs to the Commission. Thus, any contract that meets this
threshold may be subject to scrutiny as a potential SPDC; however, a
contract will not be found to be a SPDC merely because it met the
reporting threshold.
---------------------------------------------------------------------------
\37\ 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.'' \38\ It is the Commission's
[[Page 42407]]
opinion that liquidity, as it pertains to the ODP contract, is
typically a function of trading activity in particular lead days and,
given sufficient liquidity in such days, the ICE ODP contract itself
would be considered liquid. In any event, in light of the fact that the
Commission has found that the ODP contract does not meet the material
price reference criterion, according to the Commission's Guidance, it
would be unnecessary to evaluate whether the ODP contract meets the
material liquidity criterion since it cannot be used alone for SPDC
determination.
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\38\ 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 26, 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 34 percent of all
transactions in the ODP contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest information it
provided in its October 26, 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.
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ii. Conclusion Regarding Material Liquidity
For the reasons discussed above, the Commission finds that the ODP
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the ODP Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE ODP
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 ODP 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 ODP 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 ODP
contract.\39\ Accordingly, with respect to its ODP 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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\39\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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c. The PJM WH Day-Ahead LMP Peak Daily (PDA) Contract and the SPDC
Indicia
The PDA contract is cash settled based on the arithmetic average of
the peak-hour, day-ahead LMPs published by PJM Interconnection for its
Western Hub for all peak hours during the day prior to power
generation. The hourly LMPs are derived from power trades that result
in physical delivery. The size of the PDA contract is 800 MWh, and the
PDA contract is listed for 38 consecutive days.
In general, electricity is bought and sold in an auction setting on
an hourly basis at various points along the electrical grid. An LMP
associated with a specific hour is calculated as the volume-weighted
average price of all of the transactions where electricity is to be
supplied
