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e9-25174

  • FR Doc E9-25174[Federal Register: October 20, 2009 (Volume 74, Number 201)]

    [Notices]

    [Page 53720-53722]

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

    [DOCID:fr20oc09-39]

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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 Henry Financial Swing Contract; Henry

    Financial Basis Contract; and Henry Financial Index 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 Henry

    Financial Swing (``HHD'') contract; Henry Financial Basis (``HEN'')

    contract; and/or Henry Financial Index (``HIS'') 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 November 4, 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 Henry Financial Swing

    (HHD) contract; Henry Financial Basis (HEN) contract; and/or Henry

    Financial Index (HIS) 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 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 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,

    [[Page 53721]]

    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. Henry Financial Swing Contract

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

    the spot index price for natural gas at the Henry Hub, as published by

    Platts in the ``Daily Price Survey'' table of Gas Daily. The Platts

    index price is based on fixed-price cash market transactions that are

    voluntarily reported by traders. The size of the HHD contract is 2,500

    million British thermal units (``mmBtu''), and the unit of trading is

    any multiple of 2,500 mmBtu. The HHD contract is listed for 65

    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 HHD contract, 5,246 separate trades occurred in the second

    quarter of 2009, resulting in a daily average of 82.0 trades. During

    the same period, the HHD contract had a total trading volume of 242,968

    contracts (which was an average of 3,796.4 contracts per day). As of

    June 30, 2009, open interest in the HHD contract was 20,173 contracts.

    It appears that the HHD contract may satisfy the material

    liquidity, arbitrage, and material price reference factors for SPDC

    determination. With respect to material liquidity, trading in the HHD

    contract averaged over 3,500 contracts on a daily basis with more than

    80 separate transactions each day. Moreover, the open interest at the

    end of the second quarter in 2009 was significant. Because the HHD

    contract specifies the Henry Hub, the contract's prices series may be

    highly correlated with that of the New York Mercantile Exchange's

    physically-delivered Natural Gas contract and/or the ICE's Henry

    Financial LD1 Financial Fixed Price contract, thus increasing the

    opportunity for arbitrage. In regard to material price reference, while

    it did not specifically address the natural gas contracts under review,

    the ECM Study stated that, in general, market participants view the ICE

    as a price discovery market for certain natural gas contracts. Natural

    gas contracts based on actively-traded hubs are transacted 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 ``Henry Hub End of Day'' and ``OTC Gas End of

    Day'' data packages with access to all price data or just 12, 24, 36,

    or 48 months of historical data.

    C. Henry Financial Basis Contract

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

    on the difference between the bidweek price index for a particular

    calendar month at the Henry Hub, as published by Platts in its Inside

    FERC's Gas Market Report, and the final settlement price of the New

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

    the same calendar month. The Platts bidweek price is based on fixed-

    price cash market transactions that are conducted during the last five

    business days of the month and are voluntarily reported by traders;

    bidweek transactions specify the delivery of natural gas during the

    following calendar month. The size of the HEN contract is 2,500 mmBtu,

    and the unit of trading is any multiple of 2,500 mmBtu. The HEN

    contract is listed for up to 72 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 HEN contract, 538 separate trades occurred in the second quarter

    of 2009, resulting in a daily average of 8.4 trades. During the same

    period, the HEN contract had a total trading volume of 78,870 (which

    was an average of 1,232.3 contracts per day). As of June 30, 2009, open

    interest in the HEN contract was 128,504 contracts.

    It appears that the HEN contract may satisfy the material

    liquidity, price linkage, and material price reference factors for SPDC

    determination. With respect to material liquidity, trading in the HEN

    contract averaged more than 1,000 contracts on a daily basis, with

    nearly 10 separate transactions each day. In addition, the open

    interest in the subject contract was substantial. In regard to price

    linkage, the final settlement of the HEN contract is based, in part, on

    the final settlement price of the NYMEX's physically-delivered natural

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

    designated contract market (``DCM''). In regard to material price

    reference, while it did not specifically address the

    [[Page 53722]]

    natural gas contracts under review, the ECM Study stated that, in

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

    for certain natural gas contracts. Natural gas contracts based on

    actively-traded hubs are transacted 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 ``Henry Hub End of Day'' and ``OTC Gas End of

    Day'' data packages with access to all price data or just 12, 24, 36,

    or 48 months of historical data.

    D. Henry Financial Index Contract

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

    on the arithmetic average of the daily natural gas prices at the Henry

    Hub, as quoted in the ``Daily Price Survey'' table of Platts' Gas Daily

    during the specified month, less the Platts bidweek price that is

    reported in the first issue of Inside FERC's Gas Market Report in which

    the natural gas is produced. The Platts prices are based on fixed-price

    cash market transactions that are voluntarily reported by traders. The

    size of the HIS contract is 2,500 mmBtu, and the unit of trading is any

    multiple of 2,500 mmBtu. The HIS contract is listed for 36 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 HIS contract, 550 separate trades occurred in the second quarter

    of 2009, resulting in a daily average of 8.6 trades. During the same

    period, the HIS contract had a total trading volume of 79,330 contracts

    (which was an average of 1,239.5 contracts per day). As of June 30,

    2009, open interest in the HIS contract was 127,346 contracts.

    It appears that the HIS contract may satisfy the material

    liquidity, and material price reference factors for SPDC determination.

    With respect to material liquidity, trading in the HIS contract

    averaged over 1,200 contracts on a daily basis with more than 8

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

    subject contract was substantial. In regard to material price

    reference, while it did not specifically address the natural gas

    contracts under review, the ECM Study stated that, in general, market

    participants view the ICE as a price discovery market for certain

    natural gas contracts. Natural gas contracts based on actively-traded

    hubs are transacted 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 ``Henry Hub

    End of Day'' and ``OTC Gas 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,\5\ 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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    \5\ 17 CFR Part 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 HHD, HEN, and/or HIS 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 an 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 three 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'') \6\ 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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    \6\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA \7\ 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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    \7\ 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. E9-25174 Filed 10-19-09; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: October 20, 2009



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