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e9-25238

  • FR Doc E9-25238[Federal Register: October 26, 2009 (Volume 74, Number 205)]

    [Notices]

    [Page 54966-54969]

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

    [DOCID:fr26oc09-37]

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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 PJM WH Real Time Peak Daily

    Contract; PJM WH Real Time Peak Contract; PJM WH Real Time Off-Peak

    Contract; PJM WH Day Ahead LMP Peak Daily Contract; and PJM WH Real

    Time 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 PJM

    \1\ WH \2\ Real Time Peak Daily (``PDP'') contract; PJM WH Real Time

    Peak (``PJM'') contract; PJM WH Real Time Off-Peak (``OPJ'') contract;

    PJM WH Day Ahead LMP \3\ Peak Daily (``PDA'') contract; and PJM WH Real

    Time Off-Peak Daily (``ODP'') 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.

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    \1\ The acronym ``PJM'' stands for Pennsylvania New Jersey

    Maryland Interconnection, LLC (``PJM Interconnection''), and

    signifies the regional electricity transmission organization that

    coordinates the generation and distribution of electricity in all or

    parts of 13 states and the District of Columbia.

    \2\ The acronym WH signifies the PJM's Western Hub.

    \3\ The term ``LMP'' stands for ``locational marginal price''

    and represents the additional cost associated with producing an

    incremental amount of electricity. LMPs account for generation

    costs, congestion along the transmission lines, and electricity

    loss.

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    DATES: Comments must be received on or before November 10, 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 PJM WH Real Time Peak

    Daily (PDP) Contract; PJM WH Real Time Peak (PJM) Contract; PJM WH Real

    Time Off-Peak (OPJ) Contract; PJM WH Day Ahead LMP Peak Daily (PDA)

    Contract; and/or PJM WH Real Time Off-Peak Daily (ODP) Contract in the

    subject line of the message, depending on the subject contract(s) 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

    [[Page 54967]]

    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'') \4\ 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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    \4\ 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 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.\5\ After prompt consideration of all relevant

    information,\6\ 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

    \7\ 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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    \5\ 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).

    \6\ 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.

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

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    B. PJM WH Real Time Peak Daily Contract

    The PDP contract is a daily contract that is cash settled based on

    the arithmetic average of hourly, real-time LMPs during the specified

    calendar day for the Western Hub, which are published by the PJM

    Interconnection for all peak hours during a particular date of

    production. The LMPs are published by PJM Interconnection on its Web

    site under the heading, ``Daily Real-Time LMP Files.'' The LMPs are

    derived from power trades that result in physical delivery. The size of

    the PDP contract is 800 megawatt hours (``MWh''), and the unit of

    trading is any multiple of 800 MWh. The PDP contract is listed for up

    to 38 consecutive calendar 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 PDP contract, 48,072

    separate trades occurred in the second quarter of 2009, resulting in a

    daily average of 751.1 trades. During the same period, the PDP contract

    had a total trading volume of 68,586 contracts (which was an average of

    1,071.7 contracts per day). As of June 30, 2009, open interest in the

    PDP contract was 1,856 contracts. It appears that the ICE PDP contract

    may satisfy the material liquidity and material price reference factors

    for SPDC determination. With respect to material liquidity, trading in

    the PDP contract averaged over 1,000 contracts on a daily basis with

    more than 750 separate transactions each day. 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 ``PJM

    Power End of Day'' and ``OTC Power End of Day'' data packages with

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

    data.

    C. PJM WH Real Time Peak Contract

    The PJM contract is a monthly contract that is cash settled based

    on the arithmetic average of hourly, real-time LMPs during the

    specified calendar

    [[Page 54968]]

    month for the Western Hub, which are published by the PJM

    Interconnection for all peak hours during the month of production. The

    LMPs are published by PJM Interconnection on its Web site under the

    heading, ``Daily Real-Time LMP Files.'' The LMPs are derived from power

    trades that result in physical delivery. The size of the PJM contract

    is 800 MWh, and the unit of trading is the contract size multiplied by

    the number of peak days in the calendar month. The PJM contract is

    listed for up to 110 consecutive calendar months.

    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 PJM contract, 7,990 separate trades occurred in the second

    quarter of 2009, resulting in a daily average of 124.8 trades. During

    the same period, the PJM contract had a total trading volume of 268,489

    (which was an average of 4,195.1 contracts per day). As of June 30,

    2009, open interest in the PJM contract was 318,788 contracts.

    It appears that the ICE PJM contract may satisfy the material

    liquidity and material price reference factors for SPDC determination.

    With respect to material liquidity, trading in the PJM contract

    averaged 4,200 contracts on a daily basis with more than 120 separate

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

    contract was significant. 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 ``PJM Power End of Day'' and

    ``OTC Power End of Day'' data packages with access to all price data or

    just 12, 24, 36, or 48 months of historical data.

    D. PJM WH Real-Time Off-Peak Contract

    The OPJ contract is a monthly contract that is cash settled based

    on the arithmetic average of hourly, real-time LMPs during the

    specified calendar month for the Western Hub, which are published by

    the PJM Interconnection for all off-peak hours during the month of

    production. The LMPs are published by PJM Interconnection on its Web

    site under the heading, ``Daily Real-Time LMP Files.'' The LMPs are

    derived from power trades that result in physical delivery. The size of

    the OPJ contract is 50 MWh, and the unit of trading is determined by

    multiplying the contract size by the number of off-peak days in the

    calendar month traded. The OPJ contract is listed for up to 86 calendar

    months with four complete calendar years. 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 OPJ contract,

    437 separate trades occurred in the second quarter of 2009, resulting

    in a daily average of 6.8 trades. During the same period, the OPJ

    contract had a total trading volume of 325,799 contracts (which was an

    average of 5,090.6 contracts per day). As of June 30, 2009, open

    interest in the OPJ contract was 2,976,492 contracts.

    It appears that the ICE OPJ contract may satisfy the material

    liquidity and material price reference factors for SPDC determination.

    With respect to material liquidity, trading in the OPJ contract

    averaged over 5,000 contracts on a daily basis with more than six

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

    subject contract was extremely 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 ``PJM

    Power End of Day'' and ``OTC Power End of Day'' data packages with

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

    data.

    E. PJM WH Day-Ahead LMP Peak Daily Contract

    The PDA contract is a daily contract that is cash settled based on

    the arithmetic average of hourly, day-ahead LMPs during the specified

    day for the Western Hub, which are published by the PJM Interconnection

    for all peak hours during a particular date of production. The LMPs are

    published by PJM Interconnection on its Web site under the heading,

    ``Day-Ahead LMP Data.'' The LMPs are derived from power trades that

    result in physical delivery. The size of the PDA contract is 800 MWh.

    The PDA contract is listed for up to 38 consecutive calendar 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 PDA contract, 1,063 separate trades occurred in the second

    quarter of 2009, resulting in a daily average of 16.6 trades. During

    the same period, the PDA contract had a total trading volume of 1,435

    contracts (which was an average of 22.4 contracts per day). As of June

    30, 2009, open interest in the PDA contract was 75 contracts.

    It appears that the ICE PDA contract may satisfy the material

    liquidity and material price reference factors for SPDC determination.

    With respect to material liquidity, trading in the PDA contract

    averaged over 20 contracts on a daily basis with more than 15 separate

    transactions each day. 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 ``PJM Power End of Day'' and

    ``OTC Power End of Day'' data packages with access to all price data or

    just 12, 24, 36, or 48 months of historical data.

    F. PJM WH Real-Time Off-Peak Daily Contract

    The ODP contract is a daily contract that is cash settled based on

    the arithmetic average of hourly, real-time LMPs during the specified

    calendar day for the Western Hub, which are published by the PJM

    Interconnection for all off-peak hours during the particular date of

    production. The LMPs are published by PJM Interconnection on its Web

    site under the heading, ``Daily Real-Time LMP Files.'' The LMPs are

    derived from power trades that result in physical delivery. The size of

    the ODP contract is 50 MWh, and the unit of trading is any multiple of

    50 MWh. The ODP contract is listed for up to 38 consecutive calendar

    days. Based upon a required quarterly notification

    [[Page 54969]]

    filed on July 27, 2009 (mandatory under Rule 36.3(c)(2)), the ICE

    reported that, with respect to its ODP contract, 723 separate trades

    occurred in the second quarter of 2009, resulting in a daily average of

    11.3 trades. During the same period, the ODP contract had a total

    trading volume of 7,448 contracts (which was an average of 116.4

    contracts per day). As of June 30, 2009, open interest in the ODP

    contract was 256 contracts.

    It appears that the ICE ODP contract may satisfy the material

    liquidity and material price reference factors for SPDC determination.

    With respect to material liquidity, trading in the ODP contract

    averaged over 110 contracts on a daily basis with more than 10 separate

    transactions each day. 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 ``PJM Power End of Day'' and

    ``OTC 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,\8\ the Commission, in making SPDC determinations, will apply and

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

    circumstances under consideration.

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    \8\ 17 CFR 36, Appendix A.

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    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 PDP, PJM, OPJ, PDA, and/or ODP

    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 the subject contracts.

    Moreover, because five contracts are included in this notice, it is

    important that commenters identify to which contract(s) their comments

    apply.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \9\ 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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    \9\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA \10\ 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.

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    \10\ 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 October 14, 2009 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-25238 Filed 10-23-09; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: October 26, 2009



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