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2010-10314

  • FR Doc 2010-10314[Federal Register: May 4, 2010 (Volume 75, Number 85)]

    [Notices]

    [Page 23729-23745]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr04my10-66]

    [[Page 23729]]

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    COMMODITY FUTURES TRADING COMMISSION

    Orders Finding that the (1) Phys,\1\ BS,\2\ LD1 \3\ (US/MM), AB-

    NIT;\4\ (2) Phys, BS, LD1 (US/MM), Union-Dawn; \5\ (3) Phys, FP,\6\

    (CA/GJ),\7\ AB-NIT; (4) Phys, FP, (US/MM), Union-Dawn; and (5) Phys,

    ID,\8\ 7a \9\ (CA/GJ), AB-NIT Contracts, Offered for Trading on the

    Natural Gas Exchange, Inc., Do Not Perform a Significant Price

    Discovery Function

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    \1\ The acronym ``Phys'' indicates physical delivery of natural

    gas.

    \2\ The acronym ``BS'' indicates that the contract is a cash-

    settled basis swap.

    \3\ The acronym ``LD1'' indicates the final settlement price of

    the New York Mercantile Exchange's (``NYMEX's'') physically-

    delivered Henry Hub Natural Gas futures contract for the

    corresponding contract month, which is expressed in U.S. dollars and

    cents per million British thermal units (mmBtu).

    \4\ The acronym ``AB-NIT'' refers to the Alberta, Canada, market

    center and Nova Inventory Transfer hub.

    \5\ ``Union-Dawn'' refers to the Union Gas, Ltd.'s, Dawn hub,

    which is located in Canada across the U.S. border from Detroit,

    Michigan.

    \6\ The acronym ``FP'' refers to a fixed-price contract.

    \7\ The abbreviation CA/GJ refers the Canadian dollars per

    gigajoule, which is a unit of measure for energy. One GJ is equal to

    0.9478 mmBtu.

    \8\ The acronym ``ID'' refers to an index contract.

    \9\ The term ``7a'' refers to a price index that is computed as

    a volume-weighted average of transactions that occur on the Natural

    Gas Exchange's trading platform during a particular calendar month.

    Such transactions specify the physical delivery of natural gas at

    the AB-NIT hub in the following calendar month.

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    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final orders.

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    SUMMARY: On October 20, 2009, the Commodity Futures Trading Commission

    (``CFTC'' or ``Commission'') published for comment in the Federal

    Register \10\ a notice of its intent to undertake a determination

    whether the (1) Phys, BS, LD1 (US/MM), AB-NIT (``Alberta Basis''); (2)

    Phys, BS, LD1 (US/MM), Union-Dawn (``Union-Dawn Basis''); (3) Phys, FP,

    (CA/GJ), AB-NIT (``Alberta Fixed-Price''); (4) Phys, FP, (US/MM),

    Union-Dawn (``Union-Dawn Fixed-Price''); and (5) Phys, ID, 7a (CA/GJ),

    AB-NIT (``7a Index'') contracts, which are listed for trading on the

    Natural Gas Exchange, Inc. (``NGX''), 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 NGX 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

    Alberta Basis, Union-Dawn Basis, Alberta Fixed-Price, Union-Dawn Fixed-

    Price and 7a Index 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.

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    \10\ 74 FR 53724 (October 20, 2009).

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    DATES: Effective Date: April 28, 2010.

    FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,

    Division of Market Oversight, Commodity Futures Trading Commission,

    Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

    Telephone: (202) 418-5515. E-mail: gprice@cftc.gov; or Susan Nathan,

    Senior Special Counsel, Division of Market Oversight, same address.

    Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \11\

    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.\12\ 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).

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    \11\ Incorporated as Title XIII of the Food, Conservation and

    Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

    2008).

    \12\ 7 U.S.C. 1a(29).

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    On March 16, 2009, the CFTC promulgated final rules implementing

    the provisions of the Reauthorization Act.\13\ 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.

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    \13\ 74 FR 12178 (Mar. 23, 2009); these rules became effective

    on April 22, 2009.

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    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.\14\ The issuance of such an order also triggers

    the obligations, requirements and timetables prescribed in Commission

    rule 36.3(c)(4).\15\

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    \14\ 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).

    \15\ 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.

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    II. Notice of Intent To Undertake SPDC Determination

    On October 20, 2009, the Commission published in the Federal

    Register notice of its intent to undertake a determination whether the

    Alberta Basis, Union-Dawn Basis, Alberta Fixed-

    [[Page 23730]]

    Price, Union-Dawn Fixed Price and 7a Index contracts perform a

    significant price discovery function and requested comment from

    interested parties.\16\ Comments were received from the Federal Energy

    Regulatory Commission (``FERC''), NGX and Working Group of Commercial

    Energy Firms (``WGCEF'').\17\ The comment letter from FERC \18\ did not

    directly address the issue of whether or not the subject contracts are

    SPDCs. NGX stated that the subject contracts lack sufficient liquidity

    to perform a significant price discovery function. WGCEF argued that

    the Alberta Basis and Union-Dawn Basis contracts fail to meet the

    material price reference, price linkage and material liquidity criteria

    for SPDC determination. Similarly, the 7a Index contracts lack

    sufficient liquidity to perform a significant price discovery

    function.\19\ NGX's and the Working Group's comments are more

    extensively discussed below, as applicable.

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    \16\ 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.

    \17\ FERC is an independent Federal regulatory agency that,

    among other things, regulates the interstate transmission of natural

    gas, oil and electricity. NGX is Canada's leading energy exchange

    and North America's largest physical clearing and settlement

    facility; NGX is wholly owned by the TMX Group, Inc. WGCEF describes

    itself as ``a diverse group of commercial firms in the domestic

    energy industry whose primary business activity is the physical

    delivery of one or more energy commodities to customers, including

    industrial, commercial and residential consumers'' and whose

    membership consists of ``energy producers, marketers and

    utilities.'' FIEG describes itself as an association of investment

    and commercial banks who are active participants in various sectors

    of the natural gas markets, ``including acting as marketers,

    lenders, underwriters of debt and equity securities, and proprietary

    investors.'' The comment letters are available on the Commission's

    website: comment letters are available on the Commission's Web site:

    http://www.cftc.gov/lawandregulation/federalregister/

    federalregistercomments/2009/ 09-029.html.

    \18\ FERC stated that the subject contracts call for physical

    delivery of natural gas in Canada, and thus do not appear to be

    interstate commerce under the Natural Gas Act (``NGA'').

    Accordingly, FERC expressed the opinion that a determination by the

    Commission that any of the contracts performs a significant price

    discovery function ``would not appear to conflict with FERC's

    exclusive jurisdiction under NGA over certain sales of natural gas

    in interstate commerce for resale or with its other regulatory

    responsibilities under the NGA'' and further that ``FERC staff will

    continue to monitor for any such conflict * * * [and] advise the

    CFTC'' should any such potential conflict arise. CL01.

    \19\ WGCEF did not address whether the Alberta Fixed Price or

    Union-Dawn Fixed Price contracts are SPDCs.

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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 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.\20\ 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.\21\ 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.

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    \20\ In its October 20, 2009, Federal Register release, the

    Commission identified material price reference, price linkage and

    material liquidity as the possible criteria for SPDC determination

    of the Alberta Basis and Union-Dawn Basis contracts (arbitrage was

    not identified as a possible criterion). With respect to the Alberta

    Fixed-Price, Union-Dawn Fixed-Price and 7a Index contracts, the

    Federal Register release identified material price reference and

    material liquidity as the possible criteria for SPDC determination

    (price linkage and arbitrage were not identified as possible

    criteria). The criteria not indentified in the initial release will

    not be discussed further in this document or the associated Orders.

    \21\ 17 CFR part 36, Appendix A.

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    IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the

    Alberta Basis, Union-Dawn Basis, Alberta Fixed-Price, Union-Dawn Fixed-

    Price and 7a Index contracts are discussed separately below.

    a. The Phys, BS, LD1 (US/MM), AB-NIT (Alberta Basis Contract) and the

    SPDC Indicia

    The Alberta Basis contract calls for the physical delivery of

    natural gas based on the final settlement price for New York Mercantile

    Exchange's (``NYMEX's'') Henry Hub physically-delivered Natural Gas

    (``NG'') futures contract for the specified calendar month, plus or

    minus the price differential (basis) between the Alberta delivery point

    and the Henry Hub. There is no standard size for the Alberta Basis

    contract, although a minimum

    [[Page 23731]]

    volume of 100 million British thermal units (``mmBtu'') is required in

    increments of 100 units per day. The Alberta Basis contract is listed

    for 60 consecutive calendar months.

    The Henry Hub,\22\ which is located in Erath, Louisiana, is the

    primary cash market trading and distribution center for natural gas in

    the United States. It also is the delivery point and pricing basis for

    the NYMEX's actively traded, physically-delivered natural gas futures

    contract, which is the most important pricing reference for natural gas

    in the United States. The Henry Hub, which is operated by Sabine Pipe

    Line, LLC, serves as a juncture for 13 different pipelines. These

    pipelines bring in natural gas from fields in the Gulf Coast region and

    ship it to major consumption centers along the East Coast and Midwest.

    The throughput shipping capacity of the Henry Hub is 1.8 trillion mmBtu

    per day.

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    \22\ The term ``hub'' refers to a juncture where two or more

    natural gas pipelines are connected. Hubs also serve as pricing

    points for natural gas at the particular locations.

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    In addition to the Henry Hub, there are a number of other locations

    where natural gas is traded. In 2008, there were 33 natural gas market

    centers in North America.\23\ Some of the major trading centers include

    Alberta, Northwest Rockies, Southern California border and the Houston

    Ship Channel. For locations that are directly connected to the Henry

    Hub by one or more pipelines and where there typically is adequate

    shipping capacity, the price at the other locations usually directly

    tracks the price at the Henry Hub, adjusted for transportation costs.

    However, at other locations that are not directly connected to the

    Henry Hub or where shipping capacity is limited, the prices at those

    locations often diverge from the Henry Hub price. Furthermore, one

    local price may be significantly different than the price at another

    location even though the two markets' respective distances from the

    Henry Hub are the same. The reason for such pricing disparities is that

    a given location may experience supply and demand factors that are

    specific to that region, such as differences in pipeline shipping

    capacity, unusually high or low demand for heating or cooling or supply

    disruptions caused by severe weather. As a consequence, local natural

    gas prices can differ from the Henry Hub price by more than the cost of

    shipping and such price differences can vary in an unpredictable

    manner.

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    \23\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

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    The Alberta hub is far removed from the Henry Hub and is not

    directly connected to the Henry Hub by an existing pipeline. Located in

    the Canadian province of Alberta, the Alberta natural gas market is a

    major connection point for long-distance transmission systems that ship

    natural gas to points throughout Canada and the United States. The

    Alberta province is Canada's dominant natural gas producing region; six

    of the nine Canadian market centers are located in the Alberta

    province. The throughput capacity at the AECO-C hub is ten billion

    cubic feet per day. Moreover, the number of pipeline interconnections

    at that hub was four in 2008. Lastly, the AECO-C hub's capacity is 20.4

    billion cubic feet per day.\24\

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    \24\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf

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    The local price at the Alberta hub typically differs from the price

    at the Henry Hub. Thus, the price of the Henry Hub physically-delivered

    futures contract is an imperfect proxy for the Alberta price. Moreover,

    exogenous factors, such as adverse weather, can cause the Alberta gas

    price to differ from the Henry Hub price by an amount that is more or

    less than the cost of shipping, making the NYMEX Henry Hub futures

    contract even less precise as a hedging tool than desired by market

    participants. Basis contracts \25\ allow traders to more accurately

    discover prices at alternative locations and hedge price risk that is

    associated with natural gas at such locations. In this regard, a

    position at a local price for an alternative location can be

    established by adding the appropriate basis swap position to a position

    taken in the NYMEX physically-delivered Henry Hub contract (or in the

    NYMEX or ICE Henry Hub look-alike contract, which cash settle based on

    the NYMEX physically-delivered NG contract's final settlement price).

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    \25\ Basis contracts denote the difference in the price of

    natural gas at a specified location minus the price of natural gas

    at the Henry Hub. The differential can be either a positive or

    negative value.

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    In its October 20, 2009, Federal Register notice, the Commission

    identified material price reference, price linkage and material

    liquidity as the potential SPDC criteria applicable to the Alberta

    Basis contract.\26\ Each of these criteria is discussed below.

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    \26\ As noted above, the Commission did not find an indication

    of arbitrage in connection with this contract; accordingly, that

    criterion is not discussed in reference to the Alberta Basis

    contract.

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    1. Material Price Reference Criterion

    The Commission's October 20, 2009, Federal Register notice

    identified material price reference as a potential basis for a SPDC

    determination with respect to the Alberta Basis contract. The

    Commission noted that NGX forged an alliance with the

    IntercontinentalExchange, Inc., (``ICE'') to use the ICE's matching

    engine to complete transactions in physical natural gas contracts

    traded on NGX. In return, NGX agreed to provide clearing services for

    such transactions. As part of the agreement, NGX provides ICE with

    transaction data, which are then made available to market participants

    on a paid basis. ICE offers NGX's price data in several packages, which

    vary in terms of the amount of available historical data. For example,

    the ICE offers the ``OTC Gas End of Day'' data 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.

    The Commission will rely on one of two sources of evidence--direct

    or indirect--to determine that the price of a contract was being used

    as a material price reference and therefore, serving a significant

    price discovery function.\27\ 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

    [[Page 23732]]

    participants in pricing cash market transactions.

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    \27\ 17 CFR part 36, Appendix A.

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    The Alberta hub is a major trading center for natural gas in North

    America. Traders, including producers, keep abreast of the prices of

    the Alberta market center when conducting cash deals. However, ICE's

    cash-settled AECO Financial Basis contract is used more widely as a

    price reference than the NGX Alberta Basis contract. Traders look to

    ICE contract's competitively determined price as an indication of

    expected values of natural gas at the Alberta hub when entering into

    cash market transactions for natural gas, especially those trades

    providing for physical delivery in the future. Moreover, traders use

    ICE's AECO Financial Basis contract, as well as other basis contracts,

    to hedge cash market positions and transactions. The substantial volume

    of trading and open interest in the ICE contract attests to its use for

    this purpose.\28\ In contrast, trading volume in the NGX Alberta Basis

    contract is much smaller than in ICE's cash-settled version of the

    contract. In this regard, total trading volume in the NGX Alberta Basis

    contract in the third quarter of 2009 was equivalent to 52,158 NYMEX

    physically-delivered natural gas contracts, which has a size of 10,000

    mmBtu.

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    \28\ In the third quarter of 2009, 6,320 separate trades

    occurred on ICE's electronic platform in its AECO Financial Basis

    contract, resulting in a daily average of 95.8 trades. During the

    same period, the ICE contract had a total trading volume on its

    electronic platform of 736,412 contracts (which was an average of

    11,158 contracts per day). As of September 30, 2009, open interest

    in the ICE AECO Financial Basis contract was 483,561 contracts.

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    Accordingly, although the Alberta Hub is a major trading center for

    natural gas and, as noted, NGX provides price information for the

    Alberta Basis contract to ICE which sells it, the Commission has found

    upon further evaluation that the Alberta Basis contract is not

    routinely consulted by industry participants in pricing cash market

    transactions and thus does not meet the Commission's Guidance for the

    material price reference criterion. In this regard, the ICE AECO

    natural gas futures contract is routinely consulted by industry

    participants in pricing cash market transactions at this location.

    Because both the NGX and the ICE contracts basically price the same

    commodity at the same location and time and the ICE contract has

    significantly higher trading volume and open interest, it is not

    necessary for market participants to independently refer to the NGX

    Alberta Basis contract for pricing natural gas at this location. Thus,

    the Alberta Basis contract does not satisfy the direct price reference

    test for existence of material price reference. Furthermore, the

    Commission notes that publication of the Alberta Basis contract's

    prices is not indirect evidence of material price reference. The

    Alberta Basis contract's prices are published with those of numerous

    other contracts, including ICE's AECO Financial Basis contract, which

    are of more interest to market participants. Thus, the Commission has

    concluded that traders likely do not specifically purchase ICE data

    packages for the NGX Alberta Basis contract's prices and do not consult

    such prices on a frequent and recurring basis in pricing cash market

    transactions.

    i. Federal Register Comments

    NGX states its opinion that the Alberta Basis contract does not

    satisfy the material price reference criteria because the contract

    lacks sufficient liquidity, and ``the consideration of liquidity is

    implicitly understood to be a relevant, if not fundamental factor,

    where material price reference is being considered.'' \29\ Furthermore,

    NGX opined that the Commission purported ``to adopt a threshold as low

    as 5, 10 or 20 trades per day as sufficiently material to attract a

    SPDC designation.'' \30\ In this regard, the Commission adopted a five

    trades-per-day threshold as a reporting requirement to enable it to

    ``independently be aware of ECM contracts that may develop into SPDCs''

    \31\ rather than solely relying upon an ECM on its own to identify any

    such potential SPDCs to the Commission. Thus, any contract that meets

    this threshold may be subject to scrutiny as a potential SPDC. However,

    this does not mean that the contract will be found to be a SPDC merely

    because it met the reporting threshold. WGCEF states that there is no

    direct evidence that any contracts on any market settle to or reference

    the NGX Alberta Basis price. Moreover, WGCEF ``does not believe the

    fact that ICE publishes the settlement prices of NGX physical

    transactions constitutes sufficient evidence of a Material Price

    Reference necessary to satisfy the requirements of CEA Section

    2(h)(7)(B)(iii).'' It notes that the publication of NGX price data by

    ICE is the result of a unique arrangement between ICE and NGX, whereby

    ICE serves as the exclusive trading platform for NGX contracts and NGX

    does not publish any trade data on its own website. ``Given this unique

    arrangement,'' WGCEF asserts, ``it is only logical that ICE publishes

    transaction data regarding the NGX physical deals in its ``OTC Gas End

    of Day'' publication.'' As noted above, the Commission believes that

    publication of the Alberta Basis contract's prices is not indirect

    evidence of material price reference. The Alberta Basis contract's

    prices are published with those of numerous other contracts, including

    ICE's AECO Financial Basis contract, which are of more interest to

    market participants. As a result, the Commission has concluded that

    traders likely do not specifically purchase ICE data packages for the

    NGX Alberta Basis contract's prices and do not consult such prices on a

    frequent and recurring basis in pricing cash market transactions.

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    \29\ CL 02.

    \30\ Id.

    \31\ 73 FR 75892 (December 12, 2008)

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    ii. Conclusion Regarding Material Price Reference

    Based on the above, the Commission finds that the NGX Alberta Basis

    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 Alberta

    Basis contract's price (direct evidence). Moreover, while the Alberta

    Basis contract's price data is sold to market participants, market

    participants likely do not specifically purchase the ICE data packages

    for the Alberta contract's prices and do not consult such prices on a

    frequent and recurring basis in pricing cash market transactions

    (indirect evidence).

    2. Price Linkage Criterion

    In its October 20, 2009, Federal Register notice, the Commission

    identified price linkage as a potential basis for a SPDC determination

    with respect to the Alberta Basis contract. In this regard, the final

    settlement of the Alberta Basis contract is based, in part, on the

    final settlement price of NYMEX's Henry Hub physically delivered NG

    futures contract, where NYMEX is registered with the Commission as a

    DCM.

    The Commission's Guidance on Significant Price Discovery Contracts

    notes that a ``price-linked contract is a contract that relies on a

    contract traded on another trading facility to settle, value or

    otherwise offset the price-linked contract.'' \32\ Furthermore, the

    Guidance notes that ``[f]or a linked contract, the mere fact that a

    contract is linked to another contract will not be sufficient to

    support a determination that a contract performs a significant

    [[Page 23733]]

    price discovery function. To assess whether such a determination is

    warranted, the Commission will examine the relationship between

    transaction prices of the linked contract and the prices of the

    referenced contract. The Commission believes that where material

    liquidity exists, prices for the linked contract would be observed to

    be substantially the same as, or move substantially in conjunction

    with, the prices of the referenced contract.'' The Guidance proposes a

    threshold price relationship such that prices of the ECM linked

    contract will fall within a 2.5 percent price range for 95 percent of

    contemporaneously determined closing, settlement or other daily prices

    over the most recent quarter. Finally, the Commission also stated in

    the Guidance that it would consider a linked contract that has a

    trading volume equivalent to 5 percent of the volume of trading in the

    contract to which it is linked to have sufficient volume potentially to

    be deemed SPDC (``minimum threshold'').

    ---------------------------------------------------------------------------

    \32\ Appendix A to the Part 36 rules.

    ---------------------------------------------------------------------------

    To assess whether the Alberta Basis contract meets the price

    linkage criterion, Commission staff obtained price data from NGX and

    performed the statistical tests cited above. Staff found that, while

    the Alberta Basis contract price is determined, in part, by the final

    settlement price of the NYMEX physically delivered natural gas futures

    contract (a DCM contract), the imputed Alberta price (derived by adding

    the NYMEX Henry Hub Natural Gas price to the Alberta Basis price) is

    not within 2.5 percent of the settlement price of the corresponding

    NYMEX Henry Hub natural gas futures contract on 95 percent or more of

    the days. Specifically, during the third quarter of 2009, none of the

    Alberta Basis natural gas prices derived from the NGX basis values were

    within 2.5 percent of the daily settlement price of the NYMEX Henry Hub

    futures contract. In addition, staff found that the Alberta Basis

    contract fails to meet the volume threshold requirement. In particular,

    the total trading volume in the NYMEX NG contract during the third

    quarter of 2009 was 14,022,963 contracts, with 5 percent of that number

    being 701,148 contracts. Trades on the NGX centralized market in the

    Alberta Basis contract during the same period was 52,168 NYMEX-

    equivalent contracts. Thus, centralized-market trades in the Alberta

    Basis contract amounted to less than the minimum threshold.

    i. Federal Register Comments

    NGX states its belief that the Alberta Basis contract does not meet

    the price linkage factor because there is insufficient trading activity

    in this contract.

    WGCEF acknowledges that the Alberta Basis contract is technically

    linked to the NYMEX Henry Hub NG contract. However, WGCEF contends that

    a comparison of the Alberta Basis contract price with NYMEX NG

    settlement prices from July 21, 2009 through November 2, 2009 clearly

    establishes that prices for these contracts are not substantially the

    same and do not move substantially in conjunction with one another.

    ii. Conclusion Regarding the Price Linkage Criterion

    The Commission finds that the NGX Alberta Basis contract does not

    meet the price linkage criterion because it fails the price

    relationship and volume test provided for in the Commission's Guidance.

    3. Material Liquidity Criterion

    As noted above, in its October 20, 2009, Federal Register notice,

    the Commission identified material liquidity, price linkage and

    material price reference as potential criteria for SPDC determination

    of the AB contract. To assess whether a contract meets the material

    liquidity criterion, the Commission first examines trading activity as

    a general measurement of the contract's size and potential importance.

    If the Commission finds that the contract in question meets a threshold

    of trading activity that would render it of potential importance, the

    Commission will then perform a statistical analysis to measure the

    effect that changes to the subject-contract's prices potentially may

    have on prices for other contracts listed on an ECM or a DCM.

    With respect to the material liquidity criterion, the Commission

    noted that the average number of transactions in the Alberta Basis

    nearby month contract was 23.2 trades per day in the second quarter of

    2009. During the same period, the Alberta Basis contract had an average

    daily trading volume of 5,869,000 mmBtu (or 587 NYMEX-equivalent

    contracts of 10,000 mmBtu size). Moreover, open interest as of June 30,

    2009, was 150,213,600 mmBtu in the nearby month (15,021 NYMEX

    equivalents) and 10,112,200 mmBtu (1,011 NYMEX equivalents) for

    delivery two months out.\33\

    ---------------------------------------------------------------------------

    \33\ Second quarter 2009 data was submitted to the Commission in

    a different format than in later filings. In this regard total

    trading volume and total number of trades per quarter were not

    identified.

    ---------------------------------------------------------------------------

    In a subsequent filing, NGX reported that in the third quarter of

    2009 the total number of transactions was 2,640 trades (an average of

    40 trades per day). Trading volume in the third quarter of 2009 was

    521,580,000 mmBtu (52,158 NYMEX-equivalent contracts) or an average of

    7,900,000 mmBtu (790 NYMEX-equivalent contracts) on a daily basis. As

    of September 30, 2009, open interest in the Alberta Basis contract was

    6,440,000 mmBtu (644 NYMEX-equivalent contracts).

    The number of trades per day remained relatively low from the

    second to third quarters of 2009, and averaged only slightly more than

    the reporting level of five trades per day. Moreover, trading activity

    in the Alberta Basis contract, as characterized by total quarterly

    volume, indicates that the Alberta Basis contract experiences trading

    activity that is similar to that of minor futures markets.\34\ Thus,

    the Alberta Basis 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\ Based on the Commission's experience, a minor futures

    contract is, generally, one that has a quarterly trading volume of

    100,000 contracts or less.

    \35\ In establishing guidance to illustrate how it will evaluate

    the various criteria, or combinations of criteria, when determining

    whether a contract is an SPDC, the Commission made clear that

    ``material liquidity itself would not be sufficient to make a

    determination that a contract is a [SPDC], * * * but combined with

    other factors it can serve as a guidepost indicating which contracts

    are functioning as [SPDCs].'' For the reasons discussed above, the

    Commission has found that the Union-Dawn Basis contract does not

    meet either the price linkage or material price reference criterion.

    In light of this finding and the Commission's Guidance cited above,

    there is no need to evaluate further the material liquidity criteria

    since it cannot be used alone as a basis for an SPDC determination.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX stated in its comment letter that the Alberta Basis contract

    does not meet the material liquidity criterion for SPDC determination

    for a number of reasons.

    First, NGX opined that the Commission ``seems to have applied a

    threshold for `material liquidity' that is extremely low, and in

    general insufficient to support a determination that these contracts

    are no longer emerging markets but in fact serve a significant price

    discovery function.'' NGX also noted that the Commission's Guidance

    states that material liquidity was intended to be a ``broad concept

    that captures the ability to transact immediately with little or no

    price concession.'' The Guidance also states that where ``material

    liquidity exists, a more or less continuous stream of prices can be

    observed and the prices should be similar,'' such as ``where trades

    occur multiple times per minute.'' NGX then opined that ``[t]he levels

    of liquidity

    [[Page 23734]]

    outlined above for the Proposed Contracts cannot be what Congress

    intended in establishing the dividing line between contracts ripe for

    regulation and those still emerging and in need of further

    incubation.''

    WGCEF used arguments similar to those of NGX in opining that the

    Alberta Basis contract does not meet the material liquidity criterion.

    For example, WGCEF stated that the Alberta Basis contract does not have

    an effect on other contracts that are listed for trading, particularly

    the NYMEX NG contract. WGCEF pointed out the Commission's Guidance

    which states that a ``continuous stream of prices'' should be observed

    in markets with material liquidity. In addition, WGCEF indicated that

    in liquid markets observed prices should be similar to each other and

    that transactions should occur multiple times per minute; ``the trade

    frequency of the Alberta Basis Contract in terms of multiple trades per

    minute is very low.'' In this regard, the Commission notes that it

    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'' \36\ rather than solely relying upon an ECM on its own to

    identify any such potential SPDCs to the Commission. Thus, any contract

    that meets this threshold may be subject to scrutiny as a potential

    SPDC but this does not mean that the contract will be found to be a

    SPDC merely because it met the reporting threshold. Furthermore, 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\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

    For the reasons discussed above, the Commission finds that the

    Alberta Basis contract does not meet the material liquidity criterion.

    4. Overall Conclusion Regarding the Alberta Basis Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the NGX Alberta

    Basis 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 NGX Alberta Basis

    contract does not meet the material price reference, price linkage, or

    material liquidity criteria at this time. Accordingly, the Commission

    is issuing the attached Order declaring that the Alberta Basis contract

    is not a SPDC.

    Issuance of this Order indicates that the Commission does not at

    this time regard NGX as a registered entity in connection with its

    Alberta Basis contract.\37\ Accordingly, with respect to its Alberta

    Basis contract, NGX is not required to comply with the obligations,

    requirements and timetables prescribed in Commission rule 36.3(c)(4)

    for ECMs with SPDCs. However, NGX must continue to comply with the

    applicable reporting requirements for ECMs.

    ---------------------------------------------------------------------------

    \37\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    b. The Phys, BS, LD1 (US/MM), Union-Dawn (Union-Dawn Basis) Contract

    and the SPDC Indicia

    The NGX Union-Dawn Basis contract is a monthly contract that calls

    for physical delivery of natural gas based on the final settlement

    price for NYMEX's Henry Hub physically-delivered natural gas futures

    contract for the specified calendar month, plus or minus the price

    differential (basis) between the Dawn delivery point and the Henry Hub.

    There is no standard size for the Union-Dawn Basis contract, although a

    minimum volume of 100 mmBtu is required in increments of 100 units per

    day. The Union-Dawn Basis contract is listed for 60 consecutive

    calendar months.

    The Henry Hub,\38\ which is located in Erath, Louisiana, is the

    primary cash market trading and distribution center for natural gas in

    the United States. It also is the delivery point and pricing basis for

    the NYMEX's actively traded, physically-delivered natural gas futures

    contract, which is the most important pricing reference for natural gas

    in the United States. The Henry Hub, which is operated by Sabine Pipe

    Line, LLC, serves as a juncture for 13 different pipelines. These

    pipelines bring in natural gas from fields in the Gulf Coast region and

    ship it to major consumption centers along the East Coast and Midwest.

    The throughput shipping capacity of the Henry Hub is 1.8 trillion mmBtu

    per day.

    ---------------------------------------------------------------------------

    \38\ The term ``hub'' refers to a juncture where two or more

    natural gas pipelines are connected. Hubs also serve as pricing

    points for natural gas at the particular locations.

    ---------------------------------------------------------------------------

    In addition to the Henry Hub, there are a number of other locations

    where natural gas is traded. In 2008, there were 33 natural gas market

    centers in North America.\39\ Some of the major trading centers include

    Alberta, Northwest Rockies, Southern California border and the Houston

    Ship Channel. For locations that are directly connected to the Henry

    Hub by one or more pipelines and where there typically is adequate

    shipping capacity, the price at the other locations usually directly

    tracks the price at the Henry Hub, adjusted for transportation costs.

    However, at other locations that are not directly connected to the

    Henry Hub or where shipping capacity is limited, the prices at those

    locations often diverge from the Henry Hub price. Furthermore, one

    local price may be significantly different than the price at another

    location even though the two markets' respective distances from the

    Henry Hub are the same. The reason for such pricing disparities is that

    a given location may experience supply and demand factors that are

    specific to that region, such as differences in pipeline shipping

    capacity, unusually high or low demand for heating or cooling or supply

    disruptions caused by severe weather. As a consequence, local natural

    gas prices can differ from the Henry Hub price by more than the cost of

    shipping and such price differences can vary in an unpredictable

    manner.

    ---------------------------------------------------------------------------

    \39\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

    ---------------------------------------------------------------------------

    Union Gas, Ltd., is a major Canadian natural gas storage,

    transmission, and distribution company based in Ontario, Canada. Union

    Gas offers premium storage and transportation services to customers at

    the Dawn hub, which is the largest underground storage facility in

    Canada and one of the largest in North America. The Dawn hub offers

    customers an important link for natural gas moving from Western

    Canadian and U.S. supply basins to markets in central Canada and the

    northeast United States. The throughput capacity at the Dawn hub is 9.3

    billion cubic feet per day. Moreover, the number of pipeline

    interconnections at that hub was ten in 2008. Lastly, the Dawn hub's

    capacity is 12.8 billion cubic feet per day.\40\

    ---------------------------------------------------------------------------

    \40\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

    ---------------------------------------------------------------------------

    The local price at the Dawn hub typically differs from the price at

    the Henry Hub. Thus, the price of the Henry Hub physically-delivered

    futures contract is an imperfect proxy for the Dawn price. Moreover,

    exogenous factors, such as adverse weather, can cause the Dawn gas

    price to differ from the Henry Hub price by an amount that is more or

    less than the cost of shipping, making the NYMEX Henry Hub futures

    [[Page 23735]]

    contract even less precise as a hedging tool than desired by market

    participants. Basis contracts \41\ allow traders to more accurately

    discover prices at alternative locations and hedge price risk that is

    associated with natural gas at such locations. In this regard, a

    position at a local price for an alternative location can be

    established by adding the appropriate basis swap position to a position

    taken in the NYMEX physically-delivered Henry Hub contract (or in the

    NYMEX or ICE Henry Hub look-alike contract, which cash settle based on

    the NYMEX physically-delivered natural gas contract's final settlement

    price).

    ---------------------------------------------------------------------------

    \41\ Basis contracts denote the difference in the price of

    natural gas at a specified location minus the price of natural gas

    at the Henry Hub. The differential can be either a positive or

    negative value.

    ---------------------------------------------------------------------------

    In its October 20, 2009, Federal Register notice, the Commission

    identified material price reference, price linkage and material

    liquidity as the potential SPDC criteria applicable to the Union-Dawn

    Basis contract. Each of these criteria is discussed below.\42\

    ---------------------------------------------------------------------------

    \42\ As noted above, the Commission did not find an indication

    of arbitrage in connection with this contract; accordingly, that

    criterion is not discussed in reference to the Union-Dawn Basis

    contract.

    ---------------------------------------------------------------------------

    1. Material Price Reference Criterion

    The Commission's October 20, 2009, Federal Register notice

    identified material price reference as a potential basis for a SPDC

    determination with respect to this contract. The Commission noted that

    NGX forged an alliance with ICE to use ICE's matching engine to

    complete transactions in physical natural gas contracts traded on NGX.

    In return, NGX agreed to provide the clearing services for such

    transactions. As part of the agreement, NGX provides ICE with

    transaction data, which are then made available to market participants

    on a paid basis. ICE offers the NGX data in several packages, which

    vary in terms of the amount of available historical data. For example,

    the ICE offers the ``OTC Gas End of Day'' data packages with access to

    all price data, or just current prices plus a selected number of months

    (i.e., 12, 24, 36, or 48 months) of historical data.

    The Commission will rely on one of two sources of evidence--direct

    or indirect--to determine that the price of a contract was being used

    as a material price reference and therefore, serving a significant

    price discovery function.\43\ 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.

    ---------------------------------------------------------------------------

    \43\ 17 CFR part 36, Appendix A.

    ---------------------------------------------------------------------------

    The Union-Dawn hub is a relatively important trading center for

    natural gas in North America. Traders use the NGX Union-Dawn Basis

    contract to hedge cash market positions and transactions. Nevertheless,

    the relatively small volume of trading and open interest \44\ in the

    Union-Dawn Basis contract does not support a finding that the contract

    is consulted on a frequent and recurring basis in establishing cash

    market transaction prices. Thus, the Union-Dawn Basis contract does not

    satisfy the direct price reference test for existence of material price

    reference. Furthermore, the Commission notes that publication of the

    Union-Dawn Basis contract's prices is not indirect evidence of material

    price reference. The Union-Dawn Basis contract's prices are published

    with those of numerous other contracts, including ICE's AECO Financial

    Basis contract, which are of more interest to market participants.

    Thus, the Commission has concluded that traders likely do not

    specifically purchase ICE data packages for the NGX Union-Dawn Basis

    contract's prices and do not consult such prices on a frequent and

    recurring basis in pricing cash market transactions.

    ---------------------------------------------------------------------------

    \44\ In the third quarter of 2009, the Union-Dawn Basis contract

    had a total trading volume that was equivalent to 28,090 NYMEX

    physically-delivered NG futures contracts (the size of one NYMEX NG

    contract is 10,000 mmBtu); the Union-Dawn contract also had an open

    interest equivalent to 2,948 NYMEX NG futures contracts.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX expressed the opinion that the Union Dawn Basis contract does

    not meet the material price reference criterion because there is

    insufficient trading activity in this contract.

    WGCEF stated that there is no evidence that the Union-Dawn Basis

    contract does not directly affect the ``settlement of the NYMEX NG

    Contract nor does it influence physical pricing at the Henry Hub.''

    \45\ Moreover, there is no evidence that a contract in any market is

    tied directly or indirectly to the settlement price of the Union-Dawn

    Basis contract. With respect to indirect evidence, WGCEF believes that

    ICE's publication of the NGX contract's settlement prices does not

    ``constitute sufficient evidence'' of material price reference, and is

    simply an extension of the ``unique [business] arrangement'' between

    ICE and NGX.

    ---------------------------------------------------------------------------

    \45\ CL 03.

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Price Reference

    Based on the above, the Commission finds that the NGX Union-Dawn

    Basis 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

    Union-Dawn Basis contract's price (direct evidence). Moreover, while

    the Union-Dawn Basis contract's price data is sold to market

    participants, individuals likely do not specifically purchase the ICE

    data packages for the Union-Dawn Basis contract's prices and do not

    consult such prices on a frequent and recurring basis in pricing cash

    market transactions (indirect evidence).

    2. Price Linkage Criterion

    In its October 20, 2009, Federal Register notice, the Commission

    identified price linkage as a potential basis for a SPDC determination

    with respect to the Union-Dawn Basis contract. In this regard, the

    final settlement of the Union-Dawn Basis contract is based, in part, on

    the final settlement price of the NYMEX's Henry Hub physically-

    delivered natural gas futures contract, where the NYMEX is registered

    with the Commission as a DCM.

    The Commission's Guidance on Significant Price Discovery Contracts

    notes that a ``price-linked contract is a contract that relies on a

    contract traded on another trading facility to settle, value or

    otherwise offset the price-

    [[Page 23736]]

    linked contract.'' \46\ Furthermore, the Guidance notes that ``[f]or a

    linked contract, the mere fact that a contract is linked to another

    contract will not be sufficient to support a determination that a

    contract performs a significant price discovery function. To assess

    whether such a determination is warranted, the Commission will examine

    the relationship between transaction prices of the linked contract and

    the prices of the referenced contract. The Commission believes that

    where material liquidity exists, prices for the linked contract would

    be observed to be substantially the same as, or move substantially in

    conjunction with, the prices of the referenced contract.'' The Guidance

    proposes a threshold price relationship such that prices of the ECM

    linked contract will fall within a 2.5 percent price range for 95

    percent of contemporaneously determined closing, settlement or other

    daily prices over the most recent quarter. Finally, the Commission also

    stated in the Guidance that it would consider a linked contract that

    has a trading volume equivalent to 5 percent of the volume of trading

    in the contract to which it is linked to have sufficient volume

    potentially to be deemed a SPDC (``minimum threshold'').

    ---------------------------------------------------------------------------

    \46\ Appendix A to the Part 36 rules.

    ---------------------------------------------------------------------------

    To assess whether the Union-Dawn contract meets the price linkage

    criterion, Commission staff obtained price data from NGX and performed

    the statistical tests cited above. Staff found that, while the Union-

    Dawn Basis contract price is determined, in part, by the final

    settlement price of the NYMEX physically-delivered natural gas futures

    contract (a DCM contract), the imputed Union-Dawn price (derived by

    adding the NYMEX Henry Hub Natural Gas price to the Union-Dawn Basis

    price) is not within 2.5 percent of the settlement price of the

    corresponding NYMEX Henry Hub natural gas futures contract on 95

    percent or more of the days. Specifically, during the third quarter of

    2009, 27.4 percent of the Union-Dawn Basis natural gas prices derived

    from the NGX basis values were within 2.5 percent of the daily

    settlement price of the NYMEX Henry Hub futures contract. In addition,

    staff found that the Union-Dawn Basis contract fails to meet the volume

    threshold requirement. In particular, the total trading volume in the

    NYMEX NG contract during the third quarter of 2009 was 14,022,963

    contracts, with 5 percent of that number being 701,148 contracts.

    Trades on the NGX centralized market in the Union-Dawn Basis contract

    during the same period was 28,090 NYMEX-equivalent contracts. Thus,

    centralized-market trades in the Union-Dawn Basis contract amounted to

    less than the minimum threshold.

    i. Federal Register Comments

    NGX states its belief that the Union Dawn Basis contract does not

    meet the price linkage factor because there is insufficient trading

    activity in this contract. WGCEF acknowledges that the Union-Dawn Basis

    is technically linked to the NYMEX physically-delivered NG futures

    contract. The Working Group notes that a comparison of the Union-Dawn

    Basis with NYMEX NG settlement prices from July 21, 2009, through

    November 2, 2009, clearly establishes that these contracts are not

    substantially the same and do not move substantially in conjunction

    with one another.

    ii. Conclusion Regarding the Price Linkage Criterion

    The Commission finds that the Union-Dawn Basis contract does not

    meet the price linkage criterion because it fails the price

    relationship and volume tests provided for in the Commission's

    Guidance.

    3. Material Liquidity Criterion

    As noted above, in its October 20, 2009, Federal Register notice,

    the Commission identified material liquidity, price linkage and

    material price reference as potential criteria for SPDC determination

    of the Union-Dawn Basis contract. To assess whether a contract meets

    the material liquidity criterion, the Commission first examines trading

    activity as a general measurement of the contract's size and potential

    importance. If the Commission finds that the contract in question meets

    a threshold of trading activity that would render it of potential

    importance, the Commission will then perform a statistical analysis to

    measure the effect that changes to the subject-contract's prices

    potentially may have on prices for other contracts listed on an ECM or

    a DCM.

    In its October 20, 2009, Federal Register release, the Commission

    noted that the total number of transactions executed on NGX's

    electronic platform in the nearby month of the Union-Dawn Basis

    contract was 8.3 trades per day in the second quarter of 2009. During

    the same period, the Union-Dawn Basis contract had an average daily

    trading volume of 1,332,400 mmBtu (or 133 NYMEX-equivalent contracts

    per day). Moreover, open interest as of June 30, 2009, was 28,203,800

    mmBtu (2,820 NYMEX-equivalent contracts) in the nearby contract month

    and 12,908,400 mmBtu (1,291 NYMEX-equivalent contracts) for delivery

    two months out.\47\

    ---------------------------------------------------------------------------

    \47\ Second quarter 2009 data was submitted to the Commission is

    a different format than in later filings. In this regard total

    trading volume and total number of trades per quarter were not

    identified.

    ---------------------------------------------------------------------------

    In a subsequent filing, NGX reported that total trading volume in

    the third quarter of 2009 was 28,090 contracts (or 425 contracts on a

    daily basis). In term of number of transactions, 1,831 trades occurred

    in the third quarter of 2009 (28 trades per day). As of September 30,

    2009, open interest in the Union-Dawn Basis contract was 23,289 NYMEX-

    equivalent contracts.

    As indicated above, the average number of trades per day in the

    second and third quarters of 2009 was only slightly above the minimum

    reporting level (5 trades per day). Moreover, trading activity in the

    Union-Dawn Basis contract, as characterized by total quarterly volume,

    indicates that the Union-Dawn Basis contract experiences trading

    activity similar to that of minor futures markets.\48\ Thus, the Union-

    Dawn Basis contract does not meets a threshold of trading activity that

    would render it of potential importance and no additional statistical

    analysis is warranted.\49\

    ---------------------------------------------------------------------------

    \48\ Based on the Commission's experience, a minor futures

    contract is, generally, one that has a quarterly trading volume of

    100,000 contracts or less.

    \49\ In establishing guidance to illustrate how it will evaluate

    the various criteria, or combinations of criteria, when determining

    whether a contract is a SPDC, the Commission made clear that

    ``material liquidity itself would not be sufficient to make a

    determination that a contract is a [SPDC], * * * but combined with

    other factors it can serve as a guidepost indicating which contracts

    are functioning as [SPDCs].'' For the reasons discussed above, the

    Commission has found that the Union-Dawn Basis contract does not

    meet either the price linkage or material price reference criterion.

    In light of this finding and the Commission's Guidance cited above,

    there is no need to evaluate further the material liquidity criteria

    since it cannot be used alone as a basis for a SPDC determination.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX stated in its comment letter that the Union-Dawn Basis contract

    does not meet the material liquidity criterion for SPDC determination

    for a number of reasons.

    First, NGX opined that the Commission ``seems to have applied a

    threshold for `material liquidity' that is extremely low, and in

    general insufficient to support a determination that these contracts

    are no longer emerging markets but in fact serve a significant price

    discovery function''. NGX also noted that the Commission's Guidance

    states that material liquidity was intended to be a ``broad concept

    that captures the ability to transact immediately with little or no

    price

    [[Page 23737]]

    concession.'' The Guidance also states that where ``material liquidity

    exists, a more or less continuous stream of prices can be observed and

    the prices should be similar'', such as ``where trades occur multiple

    times per minute.'' NGX then opined that ``[t]he levels of liquidity

    outlined above for the Proposed Contracts cannot be what Congress

    intended in establishing the dividing line between contracts ripe for

    regulation and those still emerging and in need of further incubation.

    The WGCEF used arguments similar to those of NGX in opining that

    the Union-Dawn Basis contract does not meet the material liquidity

    criterion. In addition, WGCEF noted that to be materially liquid, a

    contract must have ``a material effect of other contracts'' and have

    ``sufficient liquidity to perform a significant price discovery

    function.'' WGCEF stated that the Union-Dawn Basis contract lacks both

    of those features.

    In this regard, the Commission notes that it 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''

    \50\ rather than solely relying upon an ECM on its own to identify any

    such potential SPDCs to the Commission. Thus, any contract that meets

    this threshold may be subject to scrutiny as a potential SPDC but this

    does not mean that the contract will be found to be a SPDC merely

    because it met the reporting threshold. Furthermore, 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.''

    ---------------------------------------------------------------------------

    \50\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

    For the reasons discussed above, the Commission finds that the

    Union-Dawn Basis contract does not meet the material liquidity

    criterion.

    4. Overall Conclusion Regarding the Union-Dawn Basis Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the Union-Dawn

    Basis 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 Union-Dawn Basis

    contract does not meet the material price reference, price linkage, or

    material liquidity criteria at this time. Accordingly, the Commission

    is issuing the attached Order declaring that the Union-Dawn Basis

    contract is not a SPDC.

    Issuance of this Order indicates that the Commission does not at

    this time regard NGX as a registered entity in connection with its

    Union-Dawn Basis contract.\51\ Accordingly, with respect to its Union-

    Dawn Basis contract, NGX is not required to comply with the

    obligations, requirements and timetables prescribed in Commission rule

    36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply

    with the applicable reporting requirements for ECMs.

    ---------------------------------------------------------------------------

    \51\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    c. The Phys, FP, (CA/GJ), AB-NIT (Alberta Fixed Price) Contract and the

    SPDC Indicia

    The Alberta Fixed-Price contract calls for physical delivery of

    natural gas at the Alberta hub over a number of different time periods.

    This contract allows delivery of natural gas during the following day,

    Friday plus two or three days, Saturday plus three or four days, Sunday

    plus two days, the remainder of the month, throughout the nearby

    calendar month, and during a specific future calendar month. Each

    delivery period is considered to be a separate contract, and market

    participants value each delivery period separately. However,

    overlapping delivery days are considered fungible, and, thus, may be

    offset by traders. There is no standard size for the Alberta Fixed-

    Priced contract, although a minimum volume of 94.78 mmBtu is required

    in increments of 100 units per day. The NGX lists the Alberta Fixed-

    Price contract for 60 calendar months.

    As noted above, the primary pricing point for natural gas in North

    America is the Henry Hub, which is located in Erath, Louisiana. In

    addition to the Henry Hub, there are a number of other locations where

    natural gas is traded. In 2008, there were 33 natural gas market

    centers in North America.\52\ Some of the major trading centers include

    Alberta, Northwest Rockies, Southern California border and the Houston

    Ship Channel. For locations that are directly connected to the Henry

    Hub by one or more pipelines and where there typically is adequate

    shipping capacity, the price at the other locations usually directly

    tracks the price at the Henry Hub, adjusted for transportation costs.

    However, at other locations that are not directly connected to the

    Henry Hub or where shipping capacity is limited, the prices at those

    locations often diverge from the Henry Hub price. Furthermore, one

    local price may be significantly different than the price at another

    location even though the two markets' respective distances from the

    Henry Hub are the same. The reason for such pricing disparities is that

    a given location may experience supply and demand factors that are

    specific to that region, such as differences in pipeline shipping

    capacity, unusually high or low demand for heating or cooling or supply

    disruptions caused by severe weather. As a consequence, local natural

    gas prices can differ from the Henry Hub price by more than the cost of

    shipping and such price differences can vary in an unpredictable

    manner.

    ---------------------------------------------------------------------------

    \52\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

    ---------------------------------------------------------------------------

    The Alberta hub is far removed from the Henry Hub and is not

    directly connected to the Henry Hub by an existing pipeline. Located in

    the Canadian province of Alberta, the Alberta natural gas market is a

    major connection point for long-distance transmission systems that ship

    natural gas to points throughout Canada and the United States. The

    Alberta province is Canada's dominant natural gas producing region; six

    of the nine Canadian market centers are located in the Alberta

    province. The throughput capacity at the AECO-C hub is ten billion

    cubic feet per day. Moreover, the number of pipeline interconnections

    at that hub was four in 2008. Lastly, the AECO-C hub's capacity is 20.4

    billion cubic feet per day.\53\

    ---------------------------------------------------------------------------

    \53\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf

    ---------------------------------------------------------------------------

    The local price at the Alberta hub typically differs from the price

    at the Henry Hub. Thus, the price of the Henry Hub physically-delivered

    futures contract is an imperfect proxy for the Alberta price. Moreover,

    exogenous factors, such as adverse weather, can cause the Alberta gas

    price to differ from the Henry Hub price by an amount that is more or

    less than the cost of shipping, making the NYMEX Henry Hub futures

    contract even less precise as a hedging tool than desired by market

    participants.

    In its October 20, 2009, Federal Register notice, the Commission

    identified material liquidity and material price reference as the

    potential SPDC criteria applicable to the Alberta Fixed-Price contract.

    Each of these factors is discussed below.\54\

    ---------------------------------------------------------------------------

    \54\ As noted above, the Commission did not find an indication

    of arbitrage and price linkage in connection with this contract;

    accordingly, those criteria are not discussed in reference to the

    Alberta Fixed-Price contract.

    ---------------------------------------------------------------------------

    [[Page 23738]]

    1. Material Price Reference Criterion

    The Commission's October 20, 2009, Federal Register notice

    identified material price reference as a potential basis for a SPDC

    determination with respect to this contract. The Commission noted that

    the NGX forged an alliance with ICE to use the ICE's matching engine to

    complete transactions in physical gas contracts traded on NGX. In

    return, the NGX agreed to provide the clearing services for such

    transactions. As part of the agreement, NGX provides the ICE with

    transaction data, which are then made available to market participants

    on a paid basis. The ICE offers the NGX data in several packages, which

    vary in terms of the amount of available historical data. For example,

    the ICE offers the ``OTC Gas End of Day'' data 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.

    The Commission will rely on one of two sources of evidence--direct

    or indirect--to determine that the price of a contract was being used

    as a material price reference and therefore, serving a significant

    price discovery function.\55\ 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.

    ---------------------------------------------------------------------------

    \55\ 17 CFR part 36, Appendix A.

    ---------------------------------------------------------------------------

    The Alberta hub is a major trading center for natural gas in North

    America. Traders, including producers, keep abreast of the prices of

    the Alberta market center when conducting cash deals. However, ICE's

    cash-settled AECO Financial Basis contract is used more widely as a

    price reference than the NGX Alberta Fixed-Price contract. Traders look

    to the ICE contract's competitively determined price as an indication

    of expected values of natural gas at the Alberta hub when entering into

    cash market transactions for natural gas, especially those trades

    providing for physical delivery in the future. Traders use ICE's AECO

    Financial Basis contract, as well as other basis contracts, to hedge

    cash market positions and transactions. The substantial volume of

    trading and open interest in the ICE contract attests to its use for

    this purpose.\56\ In contrast, trading volume in the NGX Alberta Fixed-

    Price contract is much smaller than in ICE's AECO Financial Basis

    contract. In this regard, total trading volume in the NGX Alberta Fixed

    Price contract in the third quarter of 2009 was equivalent to 50,313

    NYMEX physically-delivered NG contracts, which has a size of 10,000

    mmBtu.\57\

    ---------------------------------------------------------------------------

    \56\ In the third quarter of 2009, 6,320 separate trades

    occurred on ICE's electronic platform, resulting in a daily average

    of 95.8 trades. During the same period, the ICE contract had a total

    trading volume on its electronic platform of 736,412 contracts

    (which was an average of 11,158 contracts per day). Open interest in

    ICE's AECO Financial Basis Contract was 483,561 contracts as of

    September 30, 2009.

    \57\ Trading volume in the ICE AECO Financial Basis contract

    during the third quarter of 2009 was equivalent to 184,103 NYMEX NG

    contracts.

    ---------------------------------------------------------------------------

    Accordingly, although the Alberta Hub is a major trading center for

    natural gas and, as noted, NGX provides price information for the

    Alberta Fixed Price contract to ICE which sells it, the Commission has

    found upon further evaluation that the Alberta Fixed Price contract is

    not routinely consulted by industry participants in pricing cash market

    transactions and thus does not meet the Commission's Guidance for the

    material price reference criterion. In this regard, the ICE AECO

    Financial Basis contract is routinely consulted by industry

    participants in pricing cash market transactions at this location.

    Because both the NGX and the ICE contracts basically price the same

    commodity at the same location and time \58\ and the ICE contract has

    significantly higher trading volume and open interest, it is not

    necessary for market participants to independently refer to the NGX

    Alberta Fixed-Price contract for pricing natural gas at this location.

    Thus, the Alberta Fixed-Price contract does not satisfy the direct

    price reference test for existence of material price reference.

    Furthermore, the Commission notes that publication of the NGX Alberta

    Fixed-Price contract's prices is not indirect evidence of material

    price reference. The NGX Alberta Fixed-Price contract's prices are

    published with those of numerous other contracts, which are of more

    interest to market participants. Thus, the Commission has concluded

    that traders likely do not specifically purchase the ICE data packages

    for the NGX Alberta Fixed-Price contract's prices and do not consult

    such prices on a frequent and recurring basis in pricing cash market

    transactions.

    ---------------------------------------------------------------------------

    \58\ The Alberta natural gas price can be derived using the

    Alberta Basis contract and the NYMEX Henry Hub NG contract. In this

    regard, the imputed price is the Henry Hub price plus or minus the

    basis at Alberta, as indicated by the NGX Alberta Basis contract.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX states its belief that the Alberta Fixed Price contract does

    not meet the material price reference factor because there is

    insufficient trading activity in this contract.

    ii. Conclusion Regarding Material Price Reference

    Based on the above, the Commission finds that the NGX Alberta

    Fixed-Price 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 Alberta Fixed Price contract's price (direct

    evidence). Moreover, while the Alberta Fixed-Price contract's price

    data is sold to market participants, market participants likely do not

    specifically purchase the ICE data packages for the Alberta Fixed-Price

    contract's prices and do not consult such prices on a frequent and

    recurring basis in pricing cash market transactions (indirect

    evidence).

    2. Material Liquidity Criterion

    As noted above, in its October 20, 2009, Federal Register notice,

    the Commission identified material liquidity and material price

    reference as potential criteria for SPDC determination of the Alberta

    Fixed-Price contract. With respect to the material liquidity criterion,

    the Commission noted that the total number of transactions executed in

    the contract on NGX's electronic platform during the second quarter of

    2009 was 122.1, 36.0,

    [[Page 23739]]

    7.0, 30.1, 7.4, 68.6 and 12.8 trades for the following delivery

    periods--following day, Friday plus two days, Friday plus three days,

    Saturday plus three days, Saturday plus four days, Sunday plus two

    days, remainder of the month, nearby calendar month, and any single

    future calendar month, respectively. During the same period, the

    Alberta Fixed-Price contract had a total trading volume of 1,209,505

    mmBtu; 821,565 mmBtu; 223,874 mmBtu; 754,175 mmBtu; 672,568 mmBtu;

    6,634,030 mmBtu; and 1,233,958 mmBtu for the following delivery

    periods--next day, Friday plus two days, Friday plus three days,

    Saturday plus three days, Saturday plus four days, Sunday plus two

    days, remainder of the month, nearby calendar month, and any single

    future calendar month, respectively. Moreover, the net open interest as

    of June 30, 2009, was 96,003,450 mmBtu for next-month delivery. For

    delivery two months out, the open interest was 54,456,997 mmBtu.\59\

    ---------------------------------------------------------------------------

    \59\ Second quarter 2009 data was submitted to the Commission is

    a different format than in later filings. In this regard total

    trading volume and total number of trades per quarter were not

    identified.

    ---------------------------------------------------------------------------

    In a subsequent filing NGX reported that total trading volume in

    the third quarter of 2009 was 50,313 contracts (or 762 contracts on a

    daily basis). In term of number of transactions, 4,694 trades occurred

    in the third quarter of 2009 (73 trades per day), for those Alberta

    Fixed-Price contracts that specify delivery in the spot month. As of

    September 30, 2009, open interest in the Alberta Fixed-Price contract

    was 23,961 NYMEX-equivalent contracts.

    The average number of trades per day in the second and third

    quarters of 2009 was only moderately above the minimum reporting level

    (5 trades per day). Moreover, trading activity in the Alberta Fixed-

    Price contract, as characterized by total quarterly volume, indicates

    that the Alberta Fixed-Price contract experiences trading activity

    similar to that of minor futures markets.\60\ Thus, the Alberta Fixed-

    Price contract does not meets a threshold of trading activity that

    would render it of potential importance and no additional statistical

    analysis is warranted.\61\

    ---------------------------------------------------------------------------

    \60\ Based on the Commission's experience, a minor futures

    contract is, generally, one that has a quarterly trading volume of

    100,000 contracts or less.

    \61\ In establishing guidance to illustrate how it will evaluate

    the various criteria, or combinations of criteria, when determining

    whether a contract is a SPDC, the Commission made clear that

    ``material liquidity itself would not be sufficient to make a

    determination that a contract is a [SPDC], * * * but combined with

    other factors it can serve as a guidepost indicating which contracts

    are functioning as [SPDCs].'' For the reasons discussed above, the

    Commission has found that the Alberta Fixed-Price contract does not

    meet either the price linkage or material price reference criterion.

    In light of this finding and the Commission's Guidance cited above,

    there is no need to evaluate further the material liquidity criteria

    since it cannot be used alone as a basis for a SPDC determination.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX stated in its comment letter that the Alberta Fixed-Price

    contract does not meet the material liquidity criterion for SPDC

    determination for a number of reasons.

    First, NGX opined that the Commission ``seems to have applied a

    threshold for ``material liquidity'' that is extremely low, and in

    general insufficient to support a determination that these contracts

    are no longer emerging markets but in fact serve a significant price

    discovery function.'' NGX also noted that the Commission's Guidance

    states that material liquidity was intended to be a ``broad concept

    that captures the ability to transact immediately with little or no

    price concession''. The Guidance also states that where ``material

    liquidity exists, a more or less continuous stream of prices can be

    observed and the prices should be similar'', such as ``where trades

    occur multiple times per minutes. NGX then opined that ``[t]he levels

    of liquidity outlined above for the Proposed Contracts cannot be what

    Congress intended in establishing the dividing line between contracts

    ripe for regulation and those still emerging and in need of further

    incubation.

    In this regard, the Commission notes that it 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''

    \62\ rather than solely relying upon an ECM on its own to identify any

    such potential SPDCs to the Commission. Thus, any contract that meets

    this threshold may be subject to scrutiny as a potential SPDC but this

    does not mean that the contract will be found to be a SPDC merely

    because it met the reporting threshold. Furthermore, 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.''

    ---------------------------------------------------------------------------

    \62\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

    For the reasons discussed above, the Commission finds that the

    Alberta Fixed-Price contract does not meet the material liquidity

    criterion.

    3. Overall Conclusion Regarding the Alberta Fixed-Price Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the Alberta

    Fixed-Price 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 Alberta Fixed-

    Price 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 Alberta Fixed-Price contract is

    not a SPDC.

    Issuance of this Order indicates that the Commission does not at

    this time regard NGX as a registered entity in connection with its

    Alberta Fixed-Price contract.\63\ Accordingly, with respect to its

    Alberta Fixed-Price contract, NGX is not required to comply with the

    obligations, requirements and timetables prescribed in Commission rule

    36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply

    with the applicable reporting requirements.

    ---------------------------------------------------------------------------

    \63\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    d. The Phys, FP, (US/MM), Union-Dawn (Union-Dawn Fixed-Price) Contract

    and the SPDC Indicia

    The Union-Dawn Fixed-Price contract calls for physical delivery of

    natural gas at the Dawn hub over two different time periods: The

    following day and Saturday plus three days. Each delivery period is

    considered to be a separate contract, and the market participants value

    each delivery period separately. However, overlapping delivery days are

    considered fungible, and, thus, may be offset by traders. There is no

    standard size for the Union-Dawn Fixed-Priced contract, although a

    minimum volume of 100 mmBtu required in increments of 100 units per

    day. The NGX lists the Union-Dawn Fixed-Price contract for 60 calendar

    months.

    Union Gas, Ltd., is a major Canadian natural gas storage,

    transmission, and distribution company based in Ontario, Canada. Union

    Gas offers premium storage and transportation services to customers at

    the Dawn hub, which the largest underground storage facility in Canada

    and one of the largest in North America. The Dawn hub offers customers

    an important link for natural gas moving from Western Canadian and U.S.

    supply basins to markets in central

    [[Page 23740]]

    Canada and the northeast United States. The throughput capacity at the

    Dawn hub is 9.3 billion cubic feet per day. Moreover, the number of

    pipeline interconnections at that hub was ten in 2008. Lastly, the Dawn

    hub's capacity is 12.8 billion cubic feet per day.\64\

    ---------------------------------------------------------------------------

    \64\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

    ---------------------------------------------------------------------------

    In its October 20, 2009, Federal Register notice, the Commission

    identified material liquidity and material price reference as the

    potential SPDC criteria applicable to the Union-Dawn Fixed-Price

    contract. Each of these factors is discussed below.\65\

    ---------------------------------------------------------------------------

    \65\ As noted above, the Commission did not find an indication

    of arbitrage and price linkage in connection with this contract;

    accordingly, those criteria are not discussed in reference to the

    Union-Dawn Fixed-Price contract.

    ---------------------------------------------------------------------------

    1. Material Price Reference Criterion

    The Commission's October 20, 2009, Federal Register notice

    identified material price reference as a potential basis for a SPDC

    determination with respect to this contract. The Commission noted that

    NGX forged an alliance with ICE to use the ICE's matching engine to

    complete transactions in physical gas contracts traded on NGX. In

    return, the NGX agreed to provide the clearing services for such

    transactions. As part of the agreement, NGX provides the ICE with

    transaction data, which are then made available to market participants

    on a paid basis. The ICE offers the NGX data in several packages, which

    vary in terms of the amount of available historical data. For example,

    the ICE offers the ``OTC Gas End of Day'' data packages with access to

    all price data, or just current prices plus a selected number of months

    (i.e., 12, 24, 36, or 48 months) of historical data.

    The Commission will rely on one of two sources of evidence--direct

    or indirect--to determine that the price of a contract was being used

    as a material price reference and therefore, serving a significant

    price discovery function.\66\ 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.

    ---------------------------------------------------------------------------

    \66\ 17 CFR part 36, Appendix A.

    ---------------------------------------------------------------------------

    The Dawn hub is a major trading center for natural gas in the

    United States. Traders use the NGX Union-Dawn Fixed-Price contract to

    hedge cash market positions and transactions. Nevertheless, the

    relatively small volume of trading and open interest \67\ in the Union-

    Dawn Fixed-Price contract does not support a finding that the contract

    is consulted on a frequent and recurring basis in establishing cash

    market transaction prices. Thus, the Union-Dawn Fixed-Price contract

    does not satisfy the direct price reference test for existence of

    material price reference. Furthermore, the Commission notes that

    publication of the Union-Dawn Fixed-Price contract's prices is not

    indirect evidence of material price reference. The Union-Dawn Fixed-

    Price contract's prices are published with those of numerous other

    contracts, which are of more interest to market participants. Thus, the

    Commission has concluded that traders likely do not specifically

    purchase ICE data packages for the NGX Union-Dawn Fixed-Price

    contract's prices and do not consult such prices on a frequent and

    recurring basis in pricing cash market transactions.

    ---------------------------------------------------------------------------

    \67\ In the third quarter of 2009, the Union-Dawn Fixed-Price

    contract had a total trading volume that was equivalent to 145 NYMEX

    physically-delivered NG futures contracts (the size of one NYMEX NG

    contract is 10,000 mmBtu); the Union-Dawn contract also had an open

    interest equivalent to 1,738 NYMEX NG futures contracts.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX states its belief that the Union Dawn Fixed Price contract does

    not meet the material price reference factor because there is

    insufficient trading activity in this contract.

    ii. Conclusion Regarding Material Price Reference

    Based on the above, the Commission finds that the NGX Union-Dawn

    Fixed-Price 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 Union-Dawn Fixed-Price contract's price (direct

    evidence). Moreover, while the Union-Dawn Fixed-Price contract's price

    data is sold to market participants, traders likely do not specifically

    purchase the ICE data packages for the NGX Union-Dawn Fixed-Price

    contract's prices and do not consult such prices on a frequent and

    recurring basis in pricing cash market transactions (indirect

    evidence).

    2. Material Liquidity Criterion

    As noted above, in its October 20, 2009, Federal Register notice,

    the Commission identified material liquidity and material price

    reference as potential criteria for SPDC determination of the Union-

    Dawn Fixed-Price contract. With respect to the material liquidity

    criterion, the Commission noted that the total number of transactions

    executed on NGX's electronic platform in the Union-Dawn Fixed-Price

    contract during the second quarter of 2009 was 114.1 trades and 23.9

    trades for next-day delivery and delivery Saturday plus the next three

    days, respectively. During the same period, the Union-Dawn Fixed-Price

    contract had an average daily trading volume of 812,800 mmBtu and

    458,000 mmBtu for the delivery periods next day and Saturday plus three

    days, respectively. Moreover, the net open interest as of June 30,

    2009, was 2,241,600 mmBtu for next-day delivery (equivalent to 224

    NYMEX NG contracts).\68\

    ---------------------------------------------------------------------------

    \68\ Second quarter 2009 data was submitted to the Commission is

    a different format than in later filings. In this regard total

    trading volume and total number of trades per quarter were not

    identified.

    ---------------------------------------------------------------------------

    In a subsequent filing, NGX reported that total trading volume in

    the third quarter of 2009 was the equivalent of 8,333 NYMEX NG

    contracts (or 130 contracts on a daily basis).\69\ In term of number of

    transactions, 7,899 trades occurred over the entire third quarter,

    which equates to 123 trades per day.\70\ As of September 30, 2009, open

    interest

    [[Page 23741]]

    in the Union-Dawn Fixed-Price contract was 1,738 NYMEX NG contracts.

    ---------------------------------------------------------------------------

    \69\ Approximately 96 percent of the contracted natural gas

    volume was specified for delivery on either the next day or on the

    weekend. The remaining volume was to be delivered over the specified

    month or during the remainder of the current month.

    \70\ Nearly all (more than 99 percent) of the trades were in

    contracts that specified next-day or weekend delivery of natural

    gas.

    ---------------------------------------------------------------------------

    The Commission notes that while trading activity in the Union-Dawn

    Fixed-Price appears to be substantial, it is important to keep in mind

    that the majority of trades involve close to immediate delivery, many

    times on a daily basis. With deliveries occurring each day, it is

    reasonable that more contracts would be traded compared to those

    contracts that specify delivery over an entire month. Moreover, trading

    activity in the Union-Dawn Fixed-Price contract, as characterized by

    total quarterly volume, indicates that the Union-Dawn Fixed-Price

    contract experiences less trading activity than minor futures

    markets.\71\ Thus, the Union-Dawn Fixed-Price contract does not meets a

    threshold of trading activity that would render it of potential

    importance and no additional statistical analysis is warranted.\72\

    ---------------------------------------------------------------------------

    \71\ Based on the Commission's experience, a minor futures

    contract is, generally, one that has a quarterly trading volume of

    100,000 contracts or less.

    \72\ In establishing guidance to illustrate how it will evaluate

    the various criteria, or combinations of criteria, when determining

    whether a contract is a SPDC, the Commission made clear that

    ``material liquidity itself would not be sufficient to make a

    determination that a contract is a [SPDC], * * * but combined with

    other factors it can serve as a guidepost indicating which contracts

    are functioning as [SPDCs].'' For the reasons discussed above, the

    Commission has found that the Alberta Fixed-Price contract does not

    meet either the price linkage or material price reference criterion.

    In light of this finding and the Commission's Guidance cited above,

    there is no need to evaluate further the material liquidity criteria

    since it cannot be used alone as a basis for a SPDC determination.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX stated in its comment letter that the Union-Dawn Fixed-Price

    contract does not meet the material liquidity criterion for SPDC

    determination for a number of reasons.

    First, NGX opined that the Commission ``seems to have applied a

    threshold for ``material liquidity'' that is extremely low, and in

    general insufficient to support a determination that these contracts

    are no longer emerging markets but in fact serve a significant price

    discovery function''. NGX also noted that the Commission's Guidance

    states that material liquidity was intended to be a ``broad concept

    that captures the ability to transact immediately with little or no

    price concession''. The Guidance also states that where ``material

    liquidity exists, a more or less continuous stream of prices can be

    observed and the prices should be similar'', such as ``where trades

    occur multiple times per minutes. NGX then opined that ``[t]he levels

    of liquidity outlined above for the Proposed Contracts cannot be what

    Congress intended in establishing the dividing line between contracts

    ripe for regulation and those still emerging and in need of further

    incubation.

    In this regard, the Commission notes that it 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''

    \73\ rather than solely relying upon an ECM on its own to identify any

    such potential SPDCs to the Commission. Thus, any contract that meets

    this threshold may be subject to scrutiny as a potential SPDC but this

    does not mean that the contract will be found to be a SPDC merely

    because it met the reporting threshold. Furthermore, 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.''

    ---------------------------------------------------------------------------

    \73\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

    Based on the above, the Commission finds that the NGX Union-Dawn

    Fixed-Price contract does not meet the material liquidity criterion.

    3. Overall Conclusion Regarding the Union-Dawn Fixed-Price Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the Union-Dawn

    Fixed-Price 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 NGX Union-Dawn

    Fixed-Price 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 Union-Dawn Fixed-Price

    contract is not a SPDC.

    Issuance of this Order indicates that the Commission does not at

    this time regard NGX as a registered entity in connection with its

    Union-Dawn Fixed-Price contract.\74\ Accordingly, with respect to its

    Union-Dawn Fixed-Price contract, NGX is not required to comply with the

    obligations, requirements and timetables prescribed in Commission rule

    36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply

    with the applicable reporting requirements for ECMs.

    ---------------------------------------------------------------------------

    \74\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    e. The Phys, ID, 7a (CA/GJ), AB-NIT (7a Index) Contract and the SPDC

    Indicia

    The NGX 7a Index contract calls for physical delivery of natural

    gas at the Alberta, Canada, trading hub during the specified calendar

    month. When trading this contract, market participants price the

    difference between the anticipated value of natural gas at the time of

    delivery and the average of actual trades on the NGX system. The

    average of transactions on the NGX system is reported as a volume-

    weighted average price index in the first publication of the delivery

    month of Canadian Enerdata, Ltd.'s Canadian Gas Price Reporter. At the

    time of delivery, the negotiated price premium or discount is added or

    subtracted to the published index price. There is no standard size for

    the 7a Index contract, although a minimum volume of 94.78 mmBtu is

    required in increments of 100 units per day. The NGX lists the 7a Index

    contract for 60 calendar months.

    Located in the Canadian province of Alberta, the Alberta natural

    gas market is a major connection point for long-distance transmission

    systems that ship natural gas to points throughout Canada and the

    United States. The Alberta province is Canada's dominant natural gas

    producing region; six of the nine Canadian market centers are located

    in the Alberta province. The throughput capacity at the AECO-C hub is

    ten billion cubic feet per day. Moreover, the number of pipeline

    interconnections at that hub was four in 2008. Lastly, the AECO-C hub's

    capacity is 20.4 billion cubic feet per day.\75\

    ---------------------------------------------------------------------------

    \75\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

    feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

    ---------------------------------------------------------------------------

    In its October 20, 2009, Federal Register notice, the Commission

    identified material liquidity and material price reference as the

    potential SPDC criteria applicable to the 7a Index contract. Each of

    these factors is discussed below.\76\

    ---------------------------------------------------------------------------

    \76\ As noted above, the Commission did not find an indication

    of arbitrage and price linkage in connection with this contract;

    accordingly, those criteria are not discussed in reference to the 7a

    Index contract.

    ---------------------------------------------------------------------------

    1. Material Price Reference Criterion

    The Commission's October 20, 2009, Federal Register notice

    identified material price reference as a potential basis for a SPDC

    determination with respect to this contract. The Commission noted that

    NGX forged an alliance with ICE to use ICE's matching engine to

    complete transactions in

    [[Page 23742]]

    physical gas contracts traded on NGX. In return, NGX agreed to provide

    the clearing services for such transactions. As part of the agreement,

    NGX provides ICE with transaction data, which are then made available

    to market participants on a paid basis. ICE offers the NGX data in

    several packages, which vary in terms of the amount of available

    historical data. For example, the ICE offers the ``OTC Gas End of Day''

    data packages with access to all price data, or just current prices

    plus a selected number of months (i.e., 12, 24, 36, or 48 months) of

    historical data.

    The Commission will rely on one of two sources of evidence--direct

    or indirect--to determine that the price of a contract was being used

    as a material price reference and therefore, serving a significant

    price discovery function.\77\ 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.

    ---------------------------------------------------------------------------

    \77\ 17 CFR part 36, Appendix A.

    ---------------------------------------------------------------------------

    The Alberta hub is a major trading center for natural gas in North

    America. Traders, including producers, keep abreast of the prices of

    the Alberta market center when conducting cash deals. However, ICE's

    cash-settled AECO Financial Basis contract is used more widely as a

    price reference than the NGX 7a Index contract. Traders look to the ICE

    contract's competitively determined price as an indication of expected

    values of natural gas at the Alberta hub when entering into cash market

    transactions for natural gas, especially those trades providing for

    physical delivery in the future. Traders use ICE's Alberta contract, as

    well as other basis contracts, to hedge cash market positions and

    transactions. The substantial volume of trading and open interest in

    the ICE contract attests to its use for this purpose.\78\ In contrast,

    trading volume in the 7a Index contract is much smaller than in ICE's

    cash-settled version of the contract. In this regard, total trading

    volume in the NGX 7a Index contract in the third quarter of 2009 was

    equivalent to 1,946 NYMEX physically-delivered natural gas contracts,

    which has a size of 10,000 mmBtu.

    ---------------------------------------------------------------------------

    \78\ In the third quarter of 2009, 6,320 separate trades

    occurred on ICE's electronic platform, resulting in a daily average

    of 95.8 trades. During the same period, the ICE contract had a total

    trading volume on its electronic platform of 736,412 contracts

    (which was an average of 11,158 contracts per day). As of September

    30, 2009, open interest in the ICE AECO Financial Basis contract was

    483,561 contracts.

    ---------------------------------------------------------------------------

    Accordingly, although the Alberta Hub is a major trading center for

    natural gas and, as noted, NGX provides price information for the 7a

    Index contract to ICE which sells it, the Commission has found upon

    further evaluation that the 7a Index contract is not routinely

    consulted by industry participants in pricing cash market transactions

    and thus does not meet the Commission's Guidance for the material price

    reference criterion. In this regard, the ICE AECO Financial Basis

    contract is routinely consulted by industry participants in pricing

    cash market transactions at this location. Because both the NGX and the

    ICE contracts basically price the same commodity at the same location

    and time and the ICE contract has significantly higher trading volume

    and open interest, it is not necessary for market participants to

    independently refer to the 7a Index contract for pricing natural gas at

    this location. Thus, the 7a Index contract does not satisfy the direct

    price reference test for existence of material price reference.

    Furthermore, the Commission notes that publication of the 7a Index

    contract's prices is not indirect evidence of material price reference.

    The 7a Index contract's prices are published with those of numerous

    other contracts, which are of more interest to market participants.

    Thus, the Commission has concluded that traders likely do not

    specifically purchase the ICE data packages for the 7a Index contract's

    prices and do not consult such prices on a frequent and recurring basis

    in pricing cash market transactions.

    i. Federal Register Comments

    NGX expressed the opinion that the 7a Index contract does not meet

    the material price reference criteria because it lacks sufficient

    trading activity.

    ii. Conclusion Regarding Material Price Reference

    Based on the above, the Commission finds that the NGX 7a Index

    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 7a Index

    contract's price (direct evidence). Moreover, while the 7a Index

    contract's price data is sold to market participants, market

    participants likely do not specifically purchase the ICE data packages

    for the 7a Index contract's prices and do not consult such prices on a

    frequent and recurring basis in pricing cash market transactions

    (indirect evidence).

    2. Material Liquidity Criterion

    As noted above, in its October 20, 2009, Federal Register notice,

    the Commission identified material liquidity and material price

    reference as potential criteria for SPDC determination of the 7a Index

    contract. To assess whether a contract meets the material liquidity

    criterion, the Commission first examines trading activity as a general

    measurement of the contract's size and potential importance. If the

    Commission finds that the contract in question meets a threshold of

    trading activity that would render it of potential importance, the

    Commission will then perform a statistical analysis to measure the

    effect that changes to the subject-contract's prices potentially may

    have on prices for other contracts listed on an ECM or a DCM.

    The Commission noted that the average number of transactions in the

    7a Index contract was 10.9 in the second quarter of 2009. During the

    same period, the 7a Index contract had an average daily trading volume

    of 2,438,627 mmBtu (244 NYMEX-equivalent contracts of 10,000 mmBtu

    size). Moreover, the net open interest as of June 30, 2009, was

    6,287,794 mmBtu (629 NYMEX-equivalent contracts of 10,000 mmBtu size)

    for delivery in the following month.\79\

    ---------------------------------------------------------------------------

    \79\ Second quarter 2009 data was submitted to the Commission is

    a different format than in later filings. In this regard total

    trading volume and total number of trades per quarter were not

    identified.

    ---------------------------------------------------------------------------

    [[Page 23743]]

    In a subsequent filing dated November 13, 2009, NGX reported that

    total trading volume in the third quarter of 2009 was 1,964 NYMEX-

    equivalent contracts. In terms of number of transactions, 1,056 trades

    occurred in the third quarter of 2009 (an average of 17 trades per

    day). As of September 30, 2009, open interest in the 7a Index contract

    was 14,355 NYMEX-equivalent contracts.

    The Commission notes that trading activity in the 7a Index contract

    increased between the second and third quarters of 2009. In any case,

    the number of trades per day was only slightly more than the minimum

    reporting threshold (5 trades per day). Moreover, trading activity in

    the 7a Index contract, as characterized by total quarterly volume,

    indicates that the Index contract experiences trading activity similar

    to that of minor futures markets.\80\ Thus, the 7a Index contract does

    not meets a threshold of trading activity that would render it of

    potential importance and no additional statistical analysis is

    warranted.\81\

    ---------------------------------------------------------------------------

    \80\ Based on the Commission's experience, a minor futures

    contract is, generally, one that has a quarterly trading volume of

    100,000 contracts or less.

    \81\ In establishing guidance to illustrate how it will evaluate

    the various criteria, or combinations of criteria, when determining

    whether a contract is a SPDC, the Commission made clear that

    ``material liquidity itself would not be sufficient to make a

    determination that a contract is a [SPDC], * * * but combined with

    other factors it can serve as a guidepost indicating which contracts

    are functioning as [SPDCs].'' For the reasons discussed above, the

    Commission has found that the TCO contract does not meet either the

    price linkage or material price reference criterion. In light of

    this finding and the Commission's Guidance cited above, there is no

    need to evaluate further the material liquidity criteria since it

    cannot be used alone as a basis for a SPDC determination.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    NGX stated in its comment letter that the 7a Index contract does

    not meet the material liquidity criterion for SPDC determination for a

    number of reasons.

    First NGX opined that the Commission ``seems to have applied a

    threshold for ``material liquidity'' that is extremely low, and in

    general insufficient to support a determination that these contracts

    are no longer emerging markets but in fact serve a significant price

    discovery function''. NGX also noted that the Commission's Guidance

    states that material liquidity was intended to be a ``broad concept

    that captures the ability to transact immediately with little or no

    price concession.'' The Guidance also states that where ``material

    liquidity exists, a more or less continuous stream of prices can be

    observed and the prices should be similar'', such as ``where trades

    occur multiple times per minutes. NGX then opined that ``[t]he levels

    of liquidity outlined above for the Proposed Contracts cannot be what

    Congress intended in establishing the dividing line between contracts

    ripe for regulation and those still emerging and in need of further

    investigation.

    WGCEF also stated that the 7a contract lacks sufficient liquidity

    to perform a significant price discovery function. They cite the data

    in the Notice of Intent as evidence that trade frequency in terms of

    multiple trades per day is extremely low.

    In this regard, the Commission notes that it 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''

    \82\ rather than solely relying upon an ECM on its own to identify any

    such potential SPDCs to the Commission. Thus, any contract that meets

    this threshold may be subject to scrutiny as a potential SPDC but this

    does not mean that the contract will be found to be a SPDC merely

    because it met the reporting threshold. Furthermore, 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.''

    ---------------------------------------------------------------------------

    \82\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

    For the reasons discussed above, the Commission finds that the 7a

    Index contract does not meet the material liquidity criterion.

    3. Overall Conclusion Regarding the 7a Index Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the 7a Index

    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 7a Index contract does not meet

    the material price reference or material liquidity criteria at this

    time. Accordingly, the Commission will issue the attached Order

    declaring that the 7a Index contract is not a SPDC.

    Issuance of this Order indicates that the Commission does not at

    this time regard NGX as a registered entity in connection with its 7a

    Index contract.\83\ Accordingly, with respect to its 7a Index contract

    NGX is not required to comply with the obligations, requirements and

    timetables prescribed in Commission rule 36.3(c)(4) for ECMs with

    SPDCs. However, NGX must continue to comply with the applicable

    reporting requirements.

    ---------------------------------------------------------------------------

    \83\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    V. Related Matters

    a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \84\ 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.

    ---------------------------------------------------------------------------

    \84\ 44 U.S.C. 3507(d).

    ---------------------------------------------------------------------------

    b. Cost-Benefit Analysis

    Section 15(a) of the CEA\85\ requires the Commission to consider

    the costs and benefits of its actions before issuing an order under the

    Act. By its terms, section 15(a) does not require the Commission to

    quantify the costs and benefits of an order or to determine whether the

    benefits of the order outweigh its costs; rather, it requires that the

    Commission ``consider'' the costs and benefits of its actions. Section

    15(a) further specifies that the costs and benefits shall be evaluated

    in light of five broad areas of market and public concern: (1)

    Protection of market participants and the public; (2) efficiency,

    competitiveness and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular

    order is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or accomplish any of the purposes of

    the Act.

    ---------------------------------------------------------------------------

    \85\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    When a futures contract begins to serve a significant price

    discovery function, that contract, and the ECM on which it is traded,

    warrants increased oversight to deter and prevent price manipulation or

    other disruptions to market integrity, both on the ECM itself and in

    any related futures contracts

    [[Page 23744]]

    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 NGX's Alberta Basis, Union-Dawn

    Basis, Alberta Fixed-Price, Union-Dawn Fixed-Price and 7a Index

    contracts that 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'') \86\ 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.\87\ 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.

    ---------------------------------------------------------------------------

    \86\ 5 U.S.C. 601 et seq.

    \87\ 66 FR 42256, 42268 (Aug. 10, 2001).

    ---------------------------------------------------------------------------

    VI. Orders

    a. Order Relating to the Phys, BS, LD1 (US/MM), AB-NIT 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 Phys, BS, LD1 (US/MM), AB-NIT

    contract, traded on the Natural Gas Exchange, Inc., does not at this

    time satisfy the material price preference, price linkage or material

    liquidity criteria for significant price discovery contracts.

    Consistent with this determination, the Natural Gas Exchange, Inc., is

    not considered a registered entity \88\ with respect to the Phys, BS,

    LD1 (US/MM), AB-NIT 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 Natural Gas

    Exchange, Inc., are not applicable to the Phys, BS, LD1 (US/MM), AB/NIT

    contract with the issuance of this Order.

    ---------------------------------------------------------------------------

    \88\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the Natural Gas Exchange, Inc., dated August 25, 2009, and October

    15, 2009, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the Phys, BS, LD1 (US/MM), AB-NIT 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 Natural Gas Exchange, Inc., must continue to comply with all of the

    applicable requirements of Section 2(h)(3) and Commission Regulation

    36.3.

    b. Order Relating to the Phys, BS, LD1 (US/MM), Union-Dawn 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 Phys, BS, LD1 (US/MM), Union-Dawn

    contract, traded on the Natural Gas Exchange, Inc., does not at this

    time satisfy the material price reference, price linkage or material

    liquidity criteria for significant price discovery contracts.

    Consistent with this determination, the Natural Gas Exchange, Inc., is

    not considered a registered entity \89\ with respect to the Phys, BS,

    LD1 (US/MM), Union-Dawn 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

    Natural Gas Exchange, Inc., are not applicable to the Phys, BS, LD1

    (US/MM), Union-Dawn contract with the issuance of this Order.

    ---------------------------------------------------------------------------

    \89\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the Natural Gas Exchange, Inc., August 25, 2009, and October 15,

    2009, and other supporting material. Any material change or omissions

    in the facts and circumstances pursuant to which this order is granted

    might require the Commission to reconsider its current determination

    that the Phys, BS, LD1 (US/MM), Union-Dawn 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 Natural Gas Exchange, Inc., must continue to comply with all of the

    applicable requirements of Section 2(h)(3) and Commission Regulation

    36.3.

    c. Order Relating to the Phys, FP, (CA/GJ), AB-NIT 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 Phys, FP, (CA/GJ), AB-NIT contract,

    traded on the Natural Gas Exchange, Inc., does not at this time satisfy

    the material price reference or material liquidity reference criteria

    for significant price discovery contracts. Consistent with this

    determination, the Natural Gas Exchange, Inc., is not considered a

    registered entity \90\ with respect to the Phys, FP, (CA/GJ), AB-NIT

    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 Natural Gas Exchange, Inc.,

    are not applicable to the Phys, FP, (CA/GJ), AB-NIT contract with the

    issuance of this Order.

    ---------------------------------------------------------------------------

    \90\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    [[Page 23745]]

    This Order is based on the representations made to the Commission

    by the Natural Gas Exchange, Inc., dated August 25, 2009, and October

    15, 2009, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the Phys, FP, (CA/GJ), AB-NIT 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 Natural Gas Exchange, Inc., must continue to comply with all of the

    applicable requirements of Section 2(h)(3) and Commission Regulation

    36.3.

    d. Order Relating to the Phys, FP, (US/MM), Union-Dawn 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 Phys, FP, (US/MM), Union-Dawn

    contract, traded on the Natural Gas Exchange, Inc., does not at this

    time satisfy the material price reference or material liquidity

    criteria for significant price discovery contracts. Consistent with

    this determination, the Natural Gas Exchange, Inc., is not considered a

    registered entity \91\ with respect to the Phys, FP, (US/MM), Union-

    Dawn 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 Natural Gas

    Exchange, Inc., are not applicable to the Phys, FP, (US/MM), Union-Dawn

    contract with the issuance of this Order.

    ---------------------------------------------------------------------------

    \91\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the Natural Gas Exchange, Inc., dated August 25, 2009, and October,

    15, 2009, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the Phys, FP, (US/MM), Union-Dawn 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 Natural Gas Exchange, Inc., must continue to comply with all of the

    applicable requirements of Section 2(h)(3) and Commission Regulation

    36.3.

    e. Order Relating to the Phys, ID, 7a (CA/GJ), AB-NIT 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 Phys, ID, 7a (CA/GJ), AB-NIT

    contract, traded on the Natural Gas Exchange, Inc., does not at this

    time satisfy the material price reference or material liquidity

    criteria for significant price discovery contracts. Consistent with

    this determination, the Natural Gas Exchange, Inc., is not considered a

    registered entity \92\ with respect to the Phys, ID, 7a (CA/GJ), AB-NIT

    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 Natural Gas Exchange, Inc.,

    are not applicable to the Phys, ID, 7a (CA/GJ), AB-NIT contract with

    the issuance of this Order.

    ---------------------------------------------------------------------------

    \92\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the Natural Gas Exchange, Inc., dated August 25, 2009, and October

    15, 2009, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the Phys, ID, 7a (CA/GJ), AB-NIT 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 Natural Gas Exchange, Inc., must continue to comply with all of the

    applicable requirements of Section 2(h)(3) and Commission Regulation

    36.3.

    Issued in Washington, DC on April 28, 2010, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-10314 Filed 5-3-10; 8:45 am]

    BILLING CODE P

    Last Updated: May 4, 2010



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