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e9-23966

  • FR Doc E9-23966[Federal Register: October 6, 2009 (Volume 74, Number 192)]

    [Notices]

    [Page 51261-51264]

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

    [DOCID:fr06oc09-29]

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    COMMODITY FUTURES TRADING COMMISSION

    Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of

    the Commodity Exchange Act and Commission Rule 36.3(c)(3), To Undertake

    a Determination Whether the Mid-C Financial Peak Contract; Mid-C

    Financial Peak Daily Contract; Mid-C Financial Off-Peak Contract; and

    Mid-C Financial Off-Peak Daily Contract, Offered for Trading on the

    IntercontinentalExchange, Inc., Perform Significant Price Discovery

    Functions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of action and request for comment.

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    SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') is undertaking a review to determine whether the Mid-C

    Financial Peak (``MDC'') contract; Mid-C Financial Peak Daily (``MPD'')

    contract; Mid-C Financial Off-Peak (``OMC'') contract; and Mid-C

    Financial Off-Peak Daily (``MXO'') contract, offered for trading on the

    IntercontinentalExchange, Inc. (``ICE''), an exempt commercial market

    (``ECM'') under Sections 2(h)(3)-(5) of the Commodity Exchange Act

    (``CEA'' or the ``Act''), perform significant price discovery

    functions. Authority for this action is found in section 2(h)(7) of the

    CEA and Commission rule 36.3(c) promulgated thereunder. In connection

    with this evaluation, the Commission invites comment from interested

    parties.

    DATES: Comments must be received on or before October 21, 2009.

    ADDRESSES: Comments may be submitted by any of the following methods:

    Follow the instructions for submitting comments. Federal

    eRulemaking Portal: http://www.regulations.gov.

    E-mail: secretary@cftc.gov. Include ICE Mid-C Financial

    Peak (MDC) Contract, ICE Mid-C Financial Peak Daily (MPD) Contract, ICE

    Mid-C Financial Off-Peak (OMC) Contract, and/or Mid-C Financial Off-

    Peak Daily (MXO) Contract in the subject line of the

    [[Page 51262]]

    message, depending on the subject contracts to which the comments

    apply.

    Fax: (202) 418-5521.

    Mail: Send to David A. Stawick, Secretary, Commodity

    Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,

    NW., Washington, DC 20581.

    Courier: Same as mail above.

    All comments received will be posted without change to http://

    www.CFTC.gov/.

    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

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

    provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization

    Act'') \1\ which subjects ECMs with significant price discovery

    contracts (``SPDCs'') to self-regulatory and reporting requirements, as

    well as certain Commission oversight authorities, with respect to those

    contracts. Among other things, these rules and rule amendments revise

    the information-submission requirements applicable to ECMs, establish

    procedures and standards by which the Commission will determine whether

    an ECM contract performs a significant price discovery function, and

    provide guidance with respect to compliance with nine statutory core

    principles applicable to ECMs with SPDCs. These rules became effective

    on April 22, 2009.

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    \1\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on

    April 22, 2009.

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    In determining whether an ECM's contract is or is not a SPDC, the

    Commission will evaluate the contract's material liquidity, price

    linkage to other contracts, potential for arbitrage with other

    contracts traded on designated contract markets or derivatives

    transaction execution facilities, use of the ECM contract's prices to

    execute or settle other transactions, and other factors.

    In order to facilitate the Commission's identification of possible

    SPDCs, Commission rule 36.3(c)(2) requires that an ECM operating in

    reliance on section 2(h)(3) promptly notify the Commission and provide

    supporting information or data concerning any contract: (i) That

    averaged five trades per day or more over the most recent calendar

    quarter; and (ii) (A) for which the ECM sells price information

    regarding the contract to market participants or industry publications;

    or (B) 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 agreement.

    II. Determination of a SPDC

    A. The SPDC Determination Process

    Commission rule 36.3(c)(3) establishes the procedures by which the

    Commission makes and announces its determination on whether a specific

    ECM contract serves a significant price discovery function. Under those

    procedures, the Commission will publish a notice in the Federal

    Register that it intends to undertake a determination as to whether the

    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.\2\ After prompt consideration of all relevant

    information,\3\ the Commission will, within a reasonable period of time

    after the close of the comment period, issue an order explaining its

    determination. Following the issuance of an order by the Commission

    that the ECM executes or trades an agreement, contract, or transaction

    that performs a significant price discovery function, the ECM must

    demonstrate, with respect to that agreement, contract, or transaction,

    compliance with the core principles under section 2(h)(7)(C) of the CEA

    \4\ and the applicable provisions of Part 36. If the Commission's order

    represents the first time it has determined that one of the ECM's

    contracts performs a significant price discovery function, the ECM must

    submit a written demonstration of its compliance with the core

    principles within 90 calendar days of the date of the Commission's

    order. For each subsequent determination by the Commission that the ECM

    has an additional SPDC, the ECM must submit a written demonstration of

    its compliance with the core principles within 30 calendar days of the

    Commission's order.

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    \2\ The Commission may commence this process on its own

    initiative or on the basis of information provided to it by an ECM

    pursuant to the notification provisions of Commission rule

    36.3(c)(2).

    \3\ Where appropriate, the Commission may choose to interview

    market participants regarding their impressions of a particular

    contract. Further, while they may not provide direct evidentiary

    support with respect to a particular contract, the Commission may

    rely for background and context on resources such as its October

    2007 Report on the Oversight of Trading on Regulated Futures

    Exchanges and Exempt Commercial Markets (``ECM Study''). http://

    www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-

    07_ecmreport.pdf.

    \4\ 7 U.S.C. 2(h)(7)(C).

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    B. Mid-C Financial Peak Contract

    The MDC contract is cash settled based on the arithmetic calendar-

    month average of peak-hour day-ahead electricity prices published daily

    in the ``ICE Day Ahead Power Price Report'' for the Mid-Columbia hub

    during all peak hours in the month of the electricity production. The

    peak-hour electricity price reported each day by the ICE is a volume-

    weighted index that includes qualifying,\5\ day-ahead, peak-hour power

    contracts based on the Mid-Columbia hub that are traded on the ICE

    platform from 6 a.m. to 11 a.m. CST on the publication date. The ICE

    contracts on which the price index is based specify physical delivery

    of power. The ICE publishes index prices for those hubs where there is

    sufficient trading activity. Ideally, a hub displays a minimum of one

    trade per day and an average of three trades per day during the prior

    three months before the ICE begins publishing an index for that hub.

    The size of the MDC contract is 400 megawatt hours (``MWh''),\6\ and

    the unit of trading is any multiple of 400 MWh. The MDC contract is

    listed for up to 86 calendar months with four complete calendar years.

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    \5\ Trades that are not deemed to qualify for inclusion in the

    index calculation are those that are done between two companies

    owned by the same parent company, price basis spread legs (i.e.

    spread trades that are executed on a trading platform that

    subsequently are converted into two outright prices for trade-

    reporting purposes), cancelled or altered trades prior to a

    counterparty's confirmation, trades where the counterparty reverses

    a trade within two minutes of the previous transaction, and option

    trades that fall outside of the given time period for the index.

    \6\ The MDC contract permits traders to choose either a single

    lot of 400 MWh in an entire month or 400 MWh each peak day of the

    contract month (in this case, the number of lots traded would equal

    the number of peak days). By and large, most traders opt for the

    latter variation of the contract.

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    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its MDC contract, the total number of trades was 2,022 in the second

    quarter of 2009, resulting in a daily average of 31.6 trades. During

    the same period, the MDC contract had a total trading volume of 67,400

    contracts and an average daily trading volume of 1,053.1

    [[Page 51263]]

    contracts. Moreover, the open interest as of June 30, 2009, was 169,851

    contracts.

    It appears that the MDC contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the ICE MDC contract averaged

    more than 1,000 contracts on a daily basis, with more than 30 separate

    transactions each day. In addition, the open interest in the subject

    contract was large. In regard to material price reference, while it did

    not specifically address the power contracts under review, the ECM

    Study stated that, in general, market participants view the ICE as a

    price discovery market for certain electricity contracts. Power

    contracts based on actively-traded hubs are transacted heavily on the

    ICE's electronic trading platform, with the remainder being completed

    over-the-counter and potentially submitted for clearing by voice

    brokers. In addition, the ICE sells its price data to market

    participants in a number of different packages which vary in terms of

    the hubs covered, time periods, and whether the data are daily only or

    historical. For example, the ICE offers ``West Power End of Day'' data

    packages with access to all price data or just 12, 24, 36, or 48 months

    of historical data.

    C. Mid-C Financial Peak Daily Contract

    The MPD contract is cash settled based on the day-ahead index price

    published in the settlement month by the ICE for the specified day. The

    peak day-ahead electricity prices are published in the ``ICE Day Ahead

    Power Price Report.'' For each peak day of the month, the ICE reports a

    next-day peak electricity price for each hub using the methodology

    noted above. The ICE contracts on which the price index is based

    specify physical delivery of power. The size of the MPD contract is 400

    MWh. The MPD contract is listed for 38 consecutive days.

    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its MPD contract, the total number of trades was 1,294 in the second

    quarter of 2009, resulting in a daily average of 20.2 trades. During

    the same period, the MPD contract had a total trading volume of 18,862

    contracts and an average daily trading volume of 294.7 contracts.

    Moreover, the open interest as of June 30, 2009, was 826 contracts.

    It appears that the MPD contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the ICE contract averaged

    nearly 300 contracts on a daily basis, with more than 20 separate

    transactions each day. In addition, the open interest in the subject

    contract was sizable. In regard to material price reference, while it

    did not specifically address the power contracts under review, the ECM

    Study stated that, in general, market participants view the ICE as a

    price discovery market for certain electricity contracts. Power

    contracts based on actively-traded hubs are transacted heavily on the

    ICE's electronic trading platform, with the remainder being completed

    over-the-counter and potentially submitted for clearing by voice

    brokers. In addition, the ICE sells its price data to market

    participants in a number of different packages which vary in terms of

    the hubs covered, time periods, and whether the data are daily only or

    historical. For example, the ICE offers ``West Power End of Day'' data

    packages with access to all price data or just 12, 24, 36, or 48 months

    of historical data.

    D. Mid-C Financial Off-Peak Contract

    The OMC contract is cash settled based on the arithmetic calendar

    month average of off-peak day-ahead electricity prices published in the

    ``ICE Day Ahead Power Price Report'' for the Mid-Columbia hub during

    all off-peak hours in the month of the electricity production. The

    electricity price reported each day by the ICE is a volume-weighted

    index that includes qualifying day-ahead off-peak power contracts based

    on the Mid-Columbia hub that are traded on the ICE platform from 6 a.m.

    to 11 a.m. CST on the date of publication. The ICE contracts on which

    the price index is based specify physical delivery of power. The ICE

    publishes off-peak index prices for those hubs where there is

    sufficient trading activity. The size of the OMC contract is 25 MWh,\7\

    and the unit of trading is any multiple of 25 MWh. The OMC contract is

    listed for up to 86 calendar months with three complete calendar years.

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    \7\ The OMC contract permits traders to choose either a single

    lot of 25 MWh in an entire month or 25 MWh each off-peak day of the

    contract month (in this case, the number of lots traded would equal

    the number of off-peak days). By and large, most traders opt for the

    latter variation of the contract.

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    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its OMC contract, the total number of trades was 443 in the second

    quarter of 2009, resulting in a daily average of 6.9 trades. During the

    same period, the OMC contract had a total trading volume of 185,950

    contracts and an average daily trading volume of 2,905.5 contracts. The

    open interest as of June 30, 2009, was 1,015,361 contracts (each with a

    size of 25 MWh).

    It appears that the OMC contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material liquidity, trading in the ICE OMC contract averaged

    nearly 3,000 contracts on a daily basis, with more than six separate

    transactions each day. In addition, the open interest in the subject

    contract was large. In regard to material price reference, while it did

    not identify the particular contract under review, the ECM Study stated

    that, in general, market participants view the ICE as a price discovery

    market for certain electricity contracts. Power contracts based on

    actively-traded hubs are transacted heavily on the ICE's electronic

    trading platform, with the remainder being completed over-the-counter

    and potentially submitted for clearing by voice brokers. In addition,

    the ICE sells its price data to market participants in a number of

    different packages which vary in terms of the hubs covered, time

    periods, and whether the data are daily only or historical. For

    example, the ICE offers ``West Power End of Day'' data packages with

    access to all price data or just 12, 24, 36, or 48 months of historical

    data.

    E. Mid-C Financial Off-Peak Daily Contract

    The MXO contract is cash settled based on the day-ahead index price

    published in the settlement month by the ICE for the specified day. The

    off-peak day-ahead electricity prices are published in the ``ICE Day

    Ahead Power Price Report.'' For each off-peak day of the month, the ICE

    reports a next-day off-peak electricity price for each hub using the

    methodology noted above. The ICE contracts on which the price index is

    based specify physical delivery of power. The size of the MXO contract

    is 25 MWh. The MXO contract is listed for 38 consecutive days.

    Based upon a required quarterly notification filed on July 27, 2009

    (mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

    to its MXO contract, the total number of trades was 437 in the second

    quarter of 2009, resulting in a daily average of 6.8 trades. During the

    same period, the MXO contract had a total trading volume of 61,688

    contracts and an average daily trading volume of 963.9 contracts.

    Moreover, the open interest as of June 30, 2009, was 5,232 contracts.

    It appears that the MXO contract may satisfy the material liquidity

    and material price reference factors for SPDC determination. With

    respect to material

    [[Page 51264]]

    liquidity, trading in the ICE MXO contract averaged nearly 1,000

    contracts on a daily basis, with more than six separate transactions

    each day. In addition, the open interest in the subject contract was

    large. In regard to material price reference, while it did not specify

    or otherwise reference the particular contract under review, the ECM

    Study stated that, in general, market participants view the ICE as a

    price discovery market for certain electricity contracts. Power

    contracts based on actively-traded hubs are transacted heavily on the

    ICE's electronic trading platform, with the remainder being completed

    over-the-counter and potentially submitted for clearing by voice

    brokers. In addition, the ICE sells its price data to market

    participants in a number of different packages which vary in terms of

    the hubs covered, time periods, and whether the data are daily only or

    historical. For example, the ICE offers ``West Power End of Day'' data

    packages with access to all price data or just 12, 24, 36, or 48 months

    of historical data.

    III. Request for Comment

    In evaluating whether an ECM's agreement, contract, or transaction

    performs a significant price discovery function, section 2(h)(7) of the

    CEA directs the Commission to consider, as appropriate, four specific

    criteria: price linkage, arbitrage, material price reference, and

    material liquidity. As it explained in Appendix A to the Part 36 rules,

    the Commission, in making SPDC determinations, will apply and weigh

    each factor, as appropriate, to the specific contract and circumstances

    under consideration.

    As part of its evaluation, the Commission will consider the written

    data, views, and arguments from any ECM that lists the potential SPDC

    and from any other interested parties. Accordingly, the Commission

    requests comment on whether the ICE's MDC, MPD, OMC, and/or MXO

    contracts perform significant price discovery functions. Commenters'

    attention is directed particularly to Appendix A of the Commission's

    Part 36 rules for a detailed discussion of the factors relevant to a

    SPDC determination. The Commission notes that comments which analyze

    the contracts in terms of these factors will be especially helpful to

    the determination process. In order to determine the relevance of

    comments received, the Commission requests that commenters explain in

    what capacity are they knowledgeable about one or several of the

    subject contracts. Moreover, because four contracts are included in

    this notice, it is important that commenters identify to which contract

    or contracts their comments apply.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \8\ 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 final

    Commission rule 36.3 impose new regulatory and reporting requirements

    on ECMs, resulting in information collection requirements within the

    meaning of the PRA; OMB previously has approved and assigned OMB

    control number 3038-0060 to this collection of information.

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    \8\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA \9\ 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 such an order or to determine

    whether the benefits of such an order outweigh its costs; rather, it

    requires that the Commission ``consider'' the costs and benefits of its

    action. 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.

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    \9\ 7 U.S.C.19(a).

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    The bulk of the costs imposed by the requirements of Commission

    Rule 36.3 relate to significant and increased information-submission

    and reporting requirements adopted in response to the Reauthorization

    Act's directive that the Commission take an active role in determining

    whether contracts listed by ECMs qualify as SPDCs. The enhanced

    requirements for ECMs will permit the Commission to acquire the

    information it needs to discharge its newly-mandated responsibilities

    and to ensure that ECMs with SPDCs are identified as entities with the

    elevated status of registered entity under the CEA and are in

    compliance with the statutory terms of the core principles of section

    2(h)(7)(C) of the Act. The primary benefit to the public is to enable

    the Commission to discharge its statutory obligation to monitor for the

    presence of SPDCs and extend its oversight to the trading of SPDCs.

    Issued in Washington, DC, on September 22, 2009 by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-23966 Filed 10-5-09; 8:45 am]

    Last Updated: October 6, 2009



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