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  • FR Doc E9-25239[Federal Register: October 22, 2009 (Volume 74, Number 203)]


    [Page 54550-54552]

    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 NWP Rockies Financial Basis Contract,

    Offered for Trading on the IntercontinentalExchange, Inc., Performs a

    Significant Price Discovery Function

    AGENCY: Commodity Futures Trading Commission.

    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 NWP

    \1\ Rockies Financial Basis (``NWR'') 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''), performs 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. In connection

    with this evaluation, the Commission invites comment from interested



    \1\ The acronym ``NWP'' indicates the Northwest Pipeline.


    DATES: Comments must be received on or before November 6, 2009.

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

    [[Page 54551]]

    Follow the instructions for submitting comments. Federal

    eRulemaking Portal:

    E-mail: Include NWP Rockies Financial

    Basis (NWR) 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. Email:; 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'') \2\ 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.


    \2\ 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 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.\3\ After prompt consideration of all relevant

    information,\4\ 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

    \5\ 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.


    \3\ 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


    \4\ 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://


    \5\ 7 U.S.C. 2(h)(7)(C).


    B. NWP Rockies Financial Basis Contract

    The NWR contract is cash settled based on the difference between

    the bidweek price index for a particular calendar month at the NWP,

    Rockies hub, as published by Platts in its Inside IFERC's Gas Market

    Report, and the final settlement price of the New York Mercantile

    Exchange's (NYMEX's) physically-delivered Henry Hub natural gas futures

    contract for the same calendar month. The Platts bidweek price is

    computed from fixed-price, bilateral transactions executed during the

    last five business days of a given month, where the transactions

    specify the delivery of natural gas at the NWP, Rockies hub, during the

    following calendar month. The price index is computed as the volume-

    weighted average of the applicable natural gas transactions. Bidweek

    prices are published on the first business day of the month in which

    the gas flows. The size of the NWR contract is 2,500 mmBtu, and the

    unit of trading is any multiple of 2,500 mmBtu. The NWR contract is

    listed for up to 120 calendar months commencing with the next calendar


    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 NWR contract, the total number of trades was 3,013 in the second

    quarter of 2009, resulting in a daily average of 47.1 trades. During

    the same period, the NWR contract had a total trading volume of 276,187

    contracts and an average daily trading volume of 4,315.4 contracts.

    Moreover, the open interest as of June 30, 2009, was 349,931 contracts.

    It appears that the NWR contract may satisfy the material

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

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

    contract averaged more than 4,000 contracts on a daily basis, with

    nearly 50 separate transactions each day. In addition, the open

    interest in the

    [[Page 54552]]

    subject contract was substantial. In regard to price linkage, the final

    settlement of the NWR 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 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 the ``West

    Gas 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,\6\ the Commission, in making SPDC determinations, will apply and

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

    circumstances under consideration.


    \6\ 17 CFR 36, Appendix A.


    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 NWR 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 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.

    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 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.


    \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.

    Issued in Washington, DC, on October 14, 2009 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-25239 Filed 10-21-09; 8:45 am]

    Last Updated: October 22, 2009