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  • [Federal Register: June 12, 2009 (Volume 74, Number 112)]


    [Page 28028-28030]

    From the Federal Register Online via GPO Access []





    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 Henry Financial LD1 Fixed Price Contract

    Traded on the IntercontinentalExchange, Inc., Performs a Significant

    Price Discovery Function

    AGENCY: Commodity Futures Trading Commission.

    [[Page 28029]]

    ACTION: Notice of action and request for comment.


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

    ``Commission'') is undertaking a review to determine whether the Henry

    Financial LD1 Fixed Price contract traded on the

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

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

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

    function. The Commission is undertaking this review based upon its

    evaluation of information provided by the ICE, as well as a Commission

    report on ECMs. 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 July 13, 2009.

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

    Follow the instructions for submitting comments. Federal

    eRulemaking Portal:

    E-mail: Include ICE Henry Financial

    LD1 Fixed Price Contract in the subject line of the message.

    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://

    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:; or Susan Nathan,

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

    Telephone: (202) 418-5133. E-mail:


    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.


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

    April 22, 2009.


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

    Commission will consider 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, 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

    \3\ 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.


    \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


    \3\ 7 U.S.C. 2(h)(7)(C).


    B. ICE's Henry Financial LD1 Fixed Price Contract

    The ICE Henry Financial LD1 Fixed Price contract is cash settled

    based on the final settlement price of the New York Mercantile

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

    futures contract for the corresponding contract month. \4\ The trading

    unit of the ICE Henry Financial LD1 Fixed Price contract is 2,500 mmBtu

    multiplied by the number of calendar days in the contract month. For

    example, if a contract month has 30 days, the trading unit is 75,000

    mmBtu, which is referred to as 30 lots.


    \4\ The NYMEX is a designated contract market that offers

    futures and option contracts on a wide range of energy products,

    including crude oil, refined petroleum products, and natural gas.


    Based upon a required quarterly notification filed on April 30,

    2009 (mandatory under Rule 36.3(c)(2)), the subject contract realized

    more than an average of five trades per day during the first quarter of

    2009. In addition, the average volume of natural gas traded each

    business day over that period was 449,010 contracts, and the open

    interest in the contract as of March 31, 2009, was 2,932,798 contracts.

    [[Page 28030]]

    It appears that the ICE Henry Financial LD1 Fixed Price contract

    may satisfy the material liquidity, price linkage, and arbitrage

    criteria for SPDC determination. With regard to material liquidity, the

    high average daily trading volume indicates that the subject contract

    is relatively liquid. With respect to the price linkage and arbitrage

    tests, it is noted above that the ICE Henry Financial LD1 Fixed Price

    contract and the NYMEX's physically-delivered Natural Gas futures

    contract have the same final settlement prices. Moreover, ICE uses the

    NYMEX's forward settlement curve when conducting its mark-to-market

    accounting procedures to settle the subject contract on daily basis. An

    October 2007 CFTC publication entitled Report on the Oversight of

    Trading on Regulated Futures Exchanges and Exempt Commercial Markets

    (``ECM Study'') stated that traders and voice brokers view the subject

    ICE contract as economically equivalent to the NYMEX physically-

    delivered Natural Gas futures contract. \5\ The ICE and NYMEX contracts

    essentially comprise a single market for natural gas derivatives

    trading, and traders look to both the ICE and to the NYMEX when

    determining where to execute a trade at the best price. The ECM Study

    also stated that the ICE natural gas contract acts as price discovery

    market. To this end, the ECM Study referenced an analysis \6\ of

    whether the NYMEX, ICE, or both facilities exhibit price leadership

    with respect to their natural gas contracts. If a particular exchange's

    prices lead those on another exchange, then the former exchange's

    contract is thought of as a price discovery market. In 2006, the ICE's

    natural gas contract exhibited price leadership on 20 percent of the

    contract days; the NYMEX's physically-delivered natural gas contract,

    on the other hand, exhibited price leadership on 63 percent of the

    contract days. Based on these factors, the ECM Study concluded that the

    ICE and the NYMEX contracts are both price discovery venues for natural

    gas trading.




    \6\ ECM Study at 11.


    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. In addition, as part of its evaluation, the

    Commission will consider the written data, views, and arguments from

    the ECM that lists the potential SPDC and from any other interested


    The Commission requests comment on whether the ICE's Henry

    Financial LD1 Fixed Price contract performs a significant price

    discovery function. Commenters' attention is directed particularly to

    Appendix A of the Commission's part 36 rules for a detailed discussion

    of the factors relevant to SPDC determination. The Commission notes

    that comments which analyze the contract 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

    the Henry Financial LD1 Fixed Price contract.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \7\ 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.


    \7\ 44 U.S.C. 3507(d).


    B. Cost-Benefit Analysis

    Section 15(a) of the CEA \8\ 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 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.


    \8\ 7 U.S.C.19(a).


    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.

    C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \9\ requires that agencies

    consider the impact of their rules on small businesses. The

    requirements of part 36 affect exempt commercial markets. The

    Commission previously has determined that exempt commercial markets are

    not small entities for purposes of the RFA.\10\ Accordingly, the

    Chairman, on behalf of the Commission, hereby certifies pursuant to 5

    U.S.C. 605(b) that this Order, taken in connection with the part 36

    rules, will not have a significant economic impact on a substantial

    number of small entities.


    \9\ 5 U.S.C. 601 et seq.

    \10\ 66 FR 42256, 42268 (Aug. 10, 2001).

    Issued in Washington, DC on June 9, 2009 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-13871 Filed 6-11-09; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: May 9, 2012