2010-10314

FR Doc 2010-10314[Federal Register: May 4, 2010 (Volume 75, Number 85)]

[Notices]

[Page 23729-23745]

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

[DOCID:fr04my10-66]

[[Page 23729]]

-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

Orders Finding that the (1) Phys,\1\ BS,\2\ LD1 \3\ (US/MM), AB-

NIT;\4\ (2) Phys, BS, LD1 (US/MM), Union-Dawn; \5\ (3) Phys, FP,\6\

(CA/GJ),\7\ AB-NIT; (4) Phys, FP, (US/MM), Union-Dawn; and (5) Phys,

ID,\8\ 7a \9\ (CA/GJ), AB-NIT Contracts, Offered for Trading on the

Natural Gas Exchange, Inc., Do Not Perform a Significant Price

Discovery Function

---------------------------------------------------------------------------

\1\ The acronym ``Phys'' indicates physical delivery of natural

gas.

\2\ The acronym ``BS'' indicates that the contract is a cash-

settled basis swap.

\3\ The acronym ``LD1'' indicates the final settlement price of

the New York Mercantile Exchange's (``NYMEX's'') physically-

delivered Henry Hub Natural Gas futures contract for the

corresponding contract month, which is expressed in U.S. dollars and

cents per million British thermal units (mmBtu).

\4\ The acronym ``AB-NIT'' refers to the Alberta, Canada, market

center and Nova Inventory Transfer hub.

\5\ ``Union-Dawn'' refers to the Union Gas, Ltd.'s, Dawn hub,

which is located in Canada across the U.S. border from Detroit,

Michigan.

\6\ The acronym ``FP'' refers to a fixed-price contract.

\7\ The abbreviation CA/GJ refers the Canadian dollars per

gigajoule, which is a unit of measure for energy. One GJ is equal to

0.9478 mmBtu.

\8\ The acronym ``ID'' refers to an index contract.

\9\ The term ``7a'' refers to a price index that is computed as

a volume-weighted average of transactions that occur on the Natural

Gas Exchange's trading platform during a particular calendar month.

Such transactions specify the physical delivery of natural gas at

the AB-NIT hub in the following calendar month.

---------------------------------------------------------------------------

AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

-----------------------------------------------------------------------

SUMMARY: On October 20, 2009, the Commodity Futures Trading Commission

(``CFTC'' or ``Commission'') published for comment in the Federal

Register \10\ a notice of its intent to undertake a determination

whether the (1) Phys, BS, LD1 (US/MM), AB-NIT (``Alberta Basis''); (2)

Phys, BS, LD1 (US/MM), Union-Dawn (``Union-Dawn Basis''); (3) Phys, FP,

(CA/GJ), AB-NIT (``Alberta Fixed-Price''); (4) Phys, FP, (US/MM),

Union-Dawn (``Union-Dawn Fixed-Price''); and (5) Phys, ID, 7a (CA/GJ),

AB-NIT (``7a Index'') contracts, which are listed for trading on the

Natural Gas Exchange, Inc. (``NGX''), an exempt commercial market

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

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

function pursuant to section 2(h)(7) of the CEA. The Commission

undertook this review based upon an initial evaluation of information

and data provided by NGX as well as other available information. The

Commission has reviewed the entire record in this matter, including all

comments received, and has determined to issue orders finding that the

Alberta Basis, Union-Dawn Basis, Alberta Fixed-Price, Union-Dawn Fixed-

Price and 7a Index contracts do not perform 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.

---------------------------------------------------------------------------

\10\ 74 FR 53724 (October 20, 2009).

---------------------------------------------------------------------------

DATES: Effective Date: April 28, 2010.

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: [email protected]; or Susan Nathan,

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

Telephone: (202) 418-5133. E-mail: [email protected]

SUPPLEMENTARY INFORMATION:

I. Introduction

The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \11\

significantly broadened the CFTC's regulatory authority with respect to

ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory

category--ECMs on which significant price discovery contracts

(``SPDCs'') are traded--and treating ECMs in that category as

registered entities under the CEA.\12\ The legislation authorizes the

CFTC to designate an agreement, contract or transaction as a SPDC if

the Commission determines, under criteria established in section

2(h)(7), that it performs a significant price discovery function. When

the Commission makes such a determination, the ECM on which the SPDC is

traded must assume, with respect to that contract, all the

responsibilities and obligations of a registered entity under the Act

and Commission regulations, and must comply with nine core principles

established by new section 2(h)(7)(C).

---------------------------------------------------------------------------

\11\ Incorporated as Title XIII of the Food, Conservation and

Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

2008).

\12\ 7 U.S.C. 1a(29).

---------------------------------------------------------------------------

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

the provisions of the Reauthorization Act.\13\ As relevant here, rule

36.3 imposes increased information reporting requirements on ECMs to

assist the Commission in making prompt assessments whether particular

ECM contracts may be SPDCs. In addition to filing quarterly reports of

its contracts, an ECM must notify the Commission promptly concerning

any contract traded in reliance on the exemption in section 2(h)(3) of

the CEA that averaged five trades per day or more over the most recent

calendar quarter, and for which the exchange sells its price

information regarding the contract to market participants or industry

publications, or 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 contract.

---------------------------------------------------------------------------

\13\ 74 FR 12178 (Mar. 23, 2009); these rules became effective

on April 22, 2009.

---------------------------------------------------------------------------

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

Commission makes and announces its determination whether a particular

ECM contract serves a significant price discovery function. Under those

procedures, the Commission will publish notice in the Federal Register

that it intends to undertake an evaluation whether the specified

agreement, contract or transaction performs a significant price

discovery function and to receive written views, data and arguments

relevant to its determination from the ECM and other interested

persons. Upon the close of the comment period, the Commission will

consider, among other things, all relevant information regarding the

subject contract and issue an order announcing and explaining its

determination whether or not the contract is a SPDC. The issuance of an

affirmative order signals the effectiveness of the Commission's

regulatory authorities over an ECM with respect to a SPDC; at that time

such an ECM becomes subject to all provisions of the CEA applicable to

registered entities.\14\ The issuance of such an order also triggers

the obligations, requirements and timetables prescribed in Commission

rule 36.3(c)(4).\15\

---------------------------------------------------------------------------

\14\ Public Law 110-246 at 13203; Joint Explanatory Statement of

the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d

Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888,

75894 (Dec. 12, 2008).

\15\ For an initial SPDC, ECMs have a grace period of 90

calendar days from the issuance of a SPDC determination order to

submit a written demonstration of compliance with the applicable

core principles. For subsequent SPDCs, ECMs have a grace period of

30 calendar days to demonstrate core principle compliance.

---------------------------------------------------------------------------

II. Notice of Intent To Undertake SPDC Determination

On October 20, 2009, the Commission published in the Federal

Register notice of its intent to undertake a determination whether the

Alberta Basis, Union-Dawn Basis, Alberta Fixed-

[[Page 23730]]

Price, Union-Dawn Fixed Price and 7a Index contracts perform a

significant price discovery function and requested comment from

interested parties.\16\ Comments were received from the Federal Energy

Regulatory Commission (``FERC''), NGX and Working Group of Commercial

Energy Firms (``WGCEF'').\17\ The comment letter from FERC \18\ did not

directly address the issue of whether or not the subject contracts are

SPDCs. NGX stated that the subject contracts lack sufficient liquidity

to perform a significant price discovery function. WGCEF argued that

the Alberta Basis and Union-Dawn Basis contracts fail to meet the

material price reference, price linkage and material liquidity criteria

for SPDC determination. Similarly, the 7a Index contracts lack

sufficient liquidity to perform a significant price discovery

function.\19\ NGX's and the Working Group's comments are more

extensively discussed below, as applicable.

---------------------------------------------------------------------------

\16\ The Commission's Part 36 rules establish, among other

things, procedures by which the Commission makes and announces its

determination whether a specific ECM contract serves a significant

price discovery function. Under those procedures, the Commission

publishes a notice in the Federal Register that it intends to

undertake a determination whether a 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.

\17\ FERC is an independent Federal regulatory agency that,

among other things, regulates the interstate transmission of natural

gas, oil and electricity. NGX is Canada's leading energy exchange

and North America's largest physical clearing and settlement

facility; NGX is wholly owned by the TMX Group, Inc. WGCEF describes

itself as ``a diverse group of commercial firms in the domestic

energy industry whose primary business activity is the physical

delivery of one or more energy commodities to customers, including

industrial, commercial and residential consumers'' and whose

membership consists of ``energy producers, marketers and

utilities.'' FIEG describes itself as an association of investment

and commercial banks who are active participants in various sectors

of the natural gas markets, ``including acting as marketers,

lenders, underwriters of debt and equity securities, and proprietary

investors.'' The comment letters are available on the Commission's

website: comment letters are available on the Commission's Web site:

http://www.cftc.gov/lawandregulation/federalregister/

federalregistercomments/2009/ 09-029.html.

\18\ FERC stated that the subject contracts call for physical

delivery of natural gas in Canada, and thus do not appear to be

interstate commerce under the Natural Gas Act (``NGA'').

Accordingly, FERC expressed the opinion that a determination by the

Commission that any of the contracts performs a significant price

discovery function ``would not appear to conflict with FERC's

exclusive jurisdiction under NGA over certain sales of natural gas

in interstate commerce for resale or with its other regulatory

responsibilities under the NGA'' and further that ``FERC staff will

continue to monitor for any such conflict * * * [and] advise the

CFTC'' should any such potential conflict arise. CL01.

\19\ WGCEF did not address whether the Alberta Fixed Price or

Union-Dawn Fixed Price contracts are SPDCs.

---------------------------------------------------------------------------

III. Section 2(h)(7) of the CEA

The Commission is directed by section 2(h)(7) of the CEA to

consider the following criteria in determining a contract's significant

price discovery function:

Price Linkage--the extent to which the agreement, contract

or transaction uses or otherwise relies on a daily or final settlement

price, or other major price parameter, of a contract or contracts

listed for trading on or subject to the rules of a designated contract

market (``DCM'') or derivatives transaction execution facility

(``DTEF''), or a SPDC traded on an electronic trading facility, to

value a position, transfer or convert a position, cash or financially

settle a position, or close out a position.

Arbitrage--the extent to which the price for the

agreement, contract or transaction is sufficiently related to the price

of a contract or contracts listed for trading on or subject to the

rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of

an electronic trading facility, so as to permit market participants to

effectively arbitrage between the markets by simultaneously maintaining

positions or executing trades in the contracts on a frequent and

recurring basis.

Material price reference--the extent to which, on a

frequent and recurring basis, bids, offers or transactions in a

commodity are directly based on, or are determined by referencing or

consulting, the prices generated by agreements, contracts or

transactions being traded or executed on the electronic trading

facility.

Material liquidity--the extent to which the volume of

agreements, contracts or transactions in a commodity being traded on

the electronic trading facility is sufficient to have a material effect

on other agreements, contracts or transactions listed for trading on or

subject to the rules of a DCM, DTEF or electronic trading facility

operating in reliance on the exemption in section 2(h)(3).

Not all criteria must be present to support a determination that a

particular contract performs a significant price discovery function,

and one or more criteria may be inapplicable to a particular

contract.\20\ Moreover, the statutory language neither prioritizes the

criteria nor specifies the degree to which a SPDC must conform to the

various criteria. In Guidance issued in connection with the Part 36

rules governing ECMs with SPDCs, the Commission observed that these

criteria do not lend themselves to a mechanical checklist or formulaic

analysis. Accordingly, the Commission has indicated that in making its

determinations it will consider the circumstances under which the

presence of a particular criterion, or combination of criteria, would

be sufficient to support a SPDC determination.\21\ For example, for

contracts that are linked to other contracts or that may be arbitraged

with other contracts, the Commission will consider whether the price of

the potential SPDC moves in such harmony with the other contract that

the two markets essentially become interchangeable. This co-movement of

prices would be an indication that activity in the contract had reached

a level sufficient for the contract to perform a significant price

discovery function. In evaluating a contract's price discovery role as

a price reference, the Commission the extent to which, on a frequent

and recurring basis, bids, offers or transactions are directly based

on, or are determined by referencing, the prices established for the

contract.

---------------------------------------------------------------------------

\20\ In its October 20, 2009, Federal Register release, the

Commission identified material price reference, price linkage and

material liquidity as the possible criteria for SPDC determination

of the Alberta Basis and Union-Dawn Basis contracts (arbitrage was

not identified as a possible criterion). With respect to the Alberta

Fixed-Price, Union-Dawn Fixed-Price and 7a Index contracts, the

Federal Register release identified material price reference and

material liquidity as the possible criteria for SPDC determination

(price linkage and arbitrage were not identified as possible

criteria). The criteria not indentified in the initial release will

not be discussed further in this document or the associated Orders.

\21\ 17 CFR part 36, Appendix A.

---------------------------------------------------------------------------

IV. Findings and Conclusions

The Commission's findings and conclusions with respect to the

Alberta Basis, Union-Dawn Basis, Alberta Fixed-Price, Union-Dawn Fixed-

Price and 7a Index contracts are discussed separately below.

a. The Phys, BS, LD1 (US/MM), AB-NIT (Alberta Basis Contract) and the

SPDC Indicia

The Alberta Basis contract calls for the physical delivery of

natural gas based on the final settlement price for New York Mercantile

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

(``NG'') futures contract for the specified calendar month, plus or

minus the price differential (basis) between the Alberta delivery point

and the Henry Hub. There is no standard size for the Alberta Basis

contract, although a minimum

[[Page 23731]]

volume of 100 million British thermal units (``mmBtu'') is required in

increments of 100 units per day. The Alberta Basis contract is listed

for 60 consecutive calendar months.

The Henry Hub,\22\ which is located in Erath, Louisiana, is the

primary cash market trading and distribution center for natural gas in

the United States. It also is the delivery point and pricing basis for

the NYMEX's actively traded, physically-delivered natural gas futures

contract, which is the most important pricing reference for natural gas

in the United States. The Henry Hub, which is operated by Sabine Pipe

Line, LLC, serves as a juncture for 13 different pipelines. These

pipelines bring in natural gas from fields in the Gulf Coast region and

ship it to major consumption centers along the East Coast and Midwest.

The throughput shipping capacity of the Henry Hub is 1.8 trillion mmBtu

per day.

---------------------------------------------------------------------------

\22\ The term ``hub'' refers to a juncture where two or more

natural gas pipelines are connected. Hubs also serve as pricing

points for natural gas at the particular locations.

---------------------------------------------------------------------------

In addition to the Henry Hub, there are a number of other locations

where natural gas is traded. In 2008, there were 33 natural gas market

centers in North America.\23\ Some of the major trading centers include

Alberta, Northwest Rockies, Southern California border and the Houston

Ship Channel. For locations that are directly connected to the Henry

Hub by one or more pipelines and where there typically is adequate

shipping capacity, the price at the other locations usually directly

tracks the price at the Henry Hub, adjusted for transportation costs.

However, at other locations that are not directly connected to the

Henry Hub or where shipping capacity is limited, the prices at those

locations often diverge from the Henry Hub price. Furthermore, one

local price may be significantly different than the price at another

location even though the two markets' respective distances from the

Henry Hub are the same. The reason for such pricing disparities is that

a given location may experience supply and demand factors that are

specific to that region, such as differences in pipeline shipping

capacity, unusually high or low demand for heating or cooling or supply

disruptions caused by severe weather. As a consequence, local natural

gas prices can differ from the Henry Hub price by more than the cost of

shipping and such price differences can vary in an unpredictable

manner.

---------------------------------------------------------------------------

\23\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

---------------------------------------------------------------------------

The Alberta hub is far removed from the Henry Hub and is not

directly connected to the Henry Hub by an existing pipeline. Located in

the Canadian province of Alberta, the Alberta natural gas market is a

major connection point for long-distance transmission systems that ship

natural gas to points throughout Canada and the United States. The

Alberta province is Canada's dominant natural gas producing region; six

of the nine Canadian market centers are located in the Alberta

province. The throughput capacity at the AECO-C hub is ten billion

cubic feet per day. Moreover, the number of pipeline interconnections

at that hub was four in 2008. Lastly, the AECO-C hub's capacity is 20.4

billion cubic feet per day.\24\

---------------------------------------------------------------------------

\24\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf

---------------------------------------------------------------------------

The local price at the Alberta hub typically differs from the price

at the Henry Hub. Thus, the price of the Henry Hub physically-delivered

futures contract is an imperfect proxy for the Alberta price. Moreover,

exogenous factors, such as adverse weather, can cause the Alberta gas

price to differ from the Henry Hub price by an amount that is more or

less than the cost of shipping, making the NYMEX Henry Hub futures

contract even less precise as a hedging tool than desired by market

participants. Basis contracts \25\ allow traders to more accurately

discover prices at alternative locations and hedge price risk that is

associated with natural gas at such locations. In this regard, a

position at a local price for an alternative location can be

established by adding the appropriate basis swap position to a position

taken in the NYMEX physically-delivered Henry Hub contract (or in the

NYMEX or ICE Henry Hub look-alike contract, which cash settle based on

the NYMEX physically-delivered NG contract's final settlement price).

---------------------------------------------------------------------------

\25\ Basis contracts denote the difference in the price of

natural gas at a specified location minus the price of natural gas

at the Henry Hub. The differential can be either a positive or

negative value.

---------------------------------------------------------------------------

In its October 20, 2009, Federal Register notice, the Commission

identified material price reference, price linkage and material

liquidity as the potential SPDC criteria applicable to the Alberta

Basis contract.\26\ Each of these criteria is discussed below.

---------------------------------------------------------------------------

\26\ As noted above, the Commission did not find an indication

of arbitrage in connection with this contract; accordingly, that

criterion is not discussed in reference to the Alberta Basis

contract.

---------------------------------------------------------------------------

1. Material Price Reference Criterion

The Commission's October 20, 2009, Federal Register notice

identified material price reference as a potential basis for a SPDC

determination with respect to the Alberta Basis contract. The

Commission noted that NGX forged an alliance with the

IntercontinentalExchange, Inc., (``ICE'') to use the ICE's matching

engine to complete transactions in physical natural gas contracts

traded on NGX. In return, NGX agreed to provide clearing services for

such transactions. As part of the agreement, NGX provides ICE with

transaction data, which are then made available to market participants

on a paid basis. ICE offers NGX's price data in several packages, which

vary in terms of the amount of available historical data. For example,

the ICE offers the ``OTC Gas End of Day'' data package with access to

all price data, or just current prices plus a selected number of months

(i.e., 12, 24, 36, or 48 months) of historical data.

The Commission will rely on one of two sources of evidence--direct

or indirect--to determine that the price of a contract was being used

as a material price reference and therefore, serving a significant

price discovery function.\27\ With respect to direct evidence, the

Commission will consider the extent to which, on a frequent and

recurring basis, cash market bids, offers or transactions are directly

based on or quoted at a differential to, the prices generated on the

ECM in question. Direct evidence may be established when cash market

participants are quoting bid or offer prices or entering into

transactions at prices that are set either explicitly or implicitly at

a differential to prices established for the contract in question. Cash

market prices are set explicitly at a differential to the section

2(h)(3) contract when, for instance, they are quoted in dollars and

cents above or below the reference contract's price. Cash market prices

are set implicitly at a differential to a section 2(h)(3) contract

when, for instance, they are arrived at after adding to, or subtracting

from the section 2(h)(3) contract, but then quoted or reported at a

flat price. With respect to indirect evidence, the Commission will

consider the extent to which the price of the contract in question is

being routinely disseminated in widely distributed industry

publications--or offered by the ECM itself for some form of

remuneration--and consulted on a frequent and recurring basis by

industry

[[Page 23732]]

participants in pricing cash market transactions.

---------------------------------------------------------------------------

\27\ 17 CFR part 36, Appendix A.

---------------------------------------------------------------------------

The Alberta hub is a major trading center for natural gas in North

America. Traders, including producers, keep abreast of the prices of

the Alberta market center when conducting cash deals. However, ICE's

cash-settled AECO Financial Basis contract is used more widely as a

price reference than the NGX Alberta Basis contract. Traders look to

ICE contract's competitively determined price as an indication of

expected values of natural gas at the Alberta hub when entering into

cash market transactions for natural gas, especially those trades

providing for physical delivery in the future. Moreover, traders use

ICE's AECO Financial Basis contract, as well as other basis contracts,

to hedge cash market positions and transactions. The substantial volume

of trading and open interest in the ICE contract attests to its use for

this purpose.\28\ In contrast, trading volume in the NGX Alberta Basis

contract is much smaller than in ICE's cash-settled version of the

contract. In this regard, total trading volume in the NGX Alberta Basis

contract in the third quarter of 2009 was equivalent to 52,158 NYMEX

physically-delivered natural gas contracts, which has a size of 10,000

mmBtu.

---------------------------------------------------------------------------

\28\ In the third quarter of 2009, 6,320 separate trades

occurred on ICE's electronic platform in its AECO Financial Basis

contract, resulting in a daily average of 95.8 trades. During the

same period, the ICE contract had a total trading volume on its

electronic platform of 736,412 contracts (which was an average of

11,158 contracts per day). As of September 30, 2009, open interest

in the ICE AECO Financial Basis contract was 483,561 contracts.

---------------------------------------------------------------------------

Accordingly, although the Alberta Hub is a major trading center for

natural gas and, as noted, NGX provides price information for the

Alberta Basis contract to ICE which sells it, the Commission has found

upon further evaluation that the Alberta Basis contract is not

routinely consulted by industry participants in pricing cash market

transactions and thus does not meet the Commission's Guidance for the

material price reference criterion. In this regard, the ICE AECO

natural gas futures contract is routinely consulted by industry

participants in pricing cash market transactions at this location.

Because both the NGX and the ICE contracts basically price the same

commodity at the same location and time and the ICE contract has

significantly higher trading volume and open interest, it is not

necessary for market participants to independently refer to the NGX

Alberta Basis contract for pricing natural gas at this location. Thus,

the Alberta Basis contract does not satisfy the direct price reference

test for existence of material price reference. Furthermore, the

Commission notes that publication of the Alberta Basis contract's

prices is not indirect evidence of material price reference. The

Alberta Basis contract's prices are published with those of numerous

other contracts, including ICE's AECO Financial Basis contract, which

are of more interest to market participants. Thus, the Commission has

concluded that traders likely do not specifically purchase ICE data

packages for the NGX Alberta Basis contract's prices and do not consult

such prices on a frequent and recurring basis in pricing cash market

transactions.

i. Federal Register Comments

NGX states its opinion that the Alberta Basis contract does not

satisfy the material price reference criteria because the contract

lacks sufficient liquidity, and ``the consideration of liquidity is

implicitly understood to be a relevant, if not fundamental factor,

where material price reference is being considered.'' \29\ Furthermore,

NGX opined that the Commission purported ``to adopt a threshold as low

as 5, 10 or 20 trades per day as sufficiently material to attract a

SPDC designation.'' \30\ In this regard, the Commission adopted a five

trades-per-day threshold as a reporting requirement to enable it to

``independently be aware of ECM contracts that may develop into SPDCs''

\31\ rather than solely relying upon an ECM on its own to identify any

such potential SPDCs to the Commission. Thus, any contract that meets

this threshold may be subject to scrutiny as a potential SPDC. However,

this does not mean that the contract will be found to be a SPDC merely

because it met the reporting threshold. WGCEF states that there is no

direct evidence that any contracts on any market settle to or reference

the NGX Alberta Basis price. Moreover, WGCEF ``does not believe the

fact that ICE publishes the settlement prices of NGX physical

transactions constitutes sufficient evidence of a Material Price

Reference necessary to satisfy the requirements of CEA Section

2(h)(7)(B)(iii).'' It notes that the publication of NGX price data by

ICE is the result of a unique arrangement between ICE and NGX, whereby

ICE serves as the exclusive trading platform for NGX contracts and NGX

does not publish any trade data on its own website. ``Given this unique

arrangement,'' WGCEF asserts, ``it is only logical that ICE publishes

transaction data regarding the NGX physical deals in its ``OTC Gas End

of Day'' publication.'' As noted above, the Commission believes that

publication of the Alberta Basis contract's prices is not indirect

evidence of material price reference. The Alberta Basis contract's

prices are published with those of numerous other contracts, including

ICE's AECO Financial Basis contract, which are of more interest to

market participants. As a result, the Commission has concluded that

traders likely do not specifically purchase ICE data packages for the

NGX Alberta Basis contract's prices and do not consult such prices on a

frequent and recurring basis in pricing cash market transactions.

---------------------------------------------------------------------------

\29\ CL 02.

\30\ Id.

\31\ 73 FR 75892 (December 12, 2008)

---------------------------------------------------------------------------

ii. Conclusion Regarding Material Price Reference

Based on the above, the Commission finds that the NGX Alberta Basis

contract does not meet the material price reference criterion because

cash market transactions are not priced either explicitly or implicitly

on a frequent and recurring basis at a differential to the Alberta

Basis contract's price (direct evidence). Moreover, while the Alberta

Basis contract's price data is sold to market participants, market

participants likely do not specifically purchase the ICE data packages

for the Alberta contract's prices and do not consult such prices on a

frequent and recurring basis in pricing cash market transactions

(indirect evidence).

2. Price Linkage Criterion

In its October 20, 2009, Federal Register notice, the Commission

identified price linkage as a potential basis for a SPDC determination

with respect to the Alberta Basis contract. In this regard, the final

settlement of the Alberta Basis contract is based, in part, on the

final settlement price of NYMEX's Henry Hub physically delivered NG

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

DCM.

The Commission's Guidance on Significant Price Discovery Contracts

notes that a ``price-linked contract is a contract that relies on a

contract traded on another trading facility to settle, value or

otherwise offset the price-linked contract.'' \32\ Furthermore, the

Guidance notes that ``[f]or a linked contract, the mere fact that a

contract is linked to another contract will not be sufficient to

support a determination that a contract performs a significant

[[Page 23733]]

price discovery function. To assess whether such a determination is

warranted, the Commission will examine the relationship between

transaction prices of the linked contract and the prices of the

referenced contract. The Commission believes that where material

liquidity exists, prices for the linked contract would be observed to

be substantially the same as, or move substantially in conjunction

with, the prices of the referenced contract.'' The Guidance proposes a

threshold price relationship such that prices of the ECM linked

contract will fall within a 2.5 percent price range for 95 percent of

contemporaneously determined closing, settlement or other daily prices

over the most recent quarter. Finally, the Commission also stated in

the Guidance that it would consider a linked contract that has a

trading volume equivalent to 5 percent of the volume of trading in the

contract to which it is linked to have sufficient volume potentially to

be deemed SPDC (``minimum threshold'').

---------------------------------------------------------------------------

\32\ Appendix A to the Part 36 rules.

---------------------------------------------------------------------------

To assess whether the Alberta Basis contract meets the price

linkage criterion, Commission staff obtained price data from NGX and

performed the statistical tests cited above. Staff found that, while

the Alberta Basis contract price is determined, in part, by the final

settlement price of the NYMEX physically delivered natural gas futures

contract (a DCM contract), the imputed Alberta price (derived by adding

the NYMEX Henry Hub Natural Gas price to the Alberta Basis price) is

not within 2.5 percent of the settlement price of the corresponding

NYMEX Henry Hub natural gas futures contract on 95 percent or more of

the days. Specifically, during the third quarter of 2009, none of the

Alberta Basis natural gas prices derived from the NGX basis values were

within 2.5 percent of the daily settlement price of the NYMEX Henry Hub

futures contract. In addition, staff found that the Alberta Basis

contract fails to meet the volume threshold requirement. In particular,

the total trading volume in the NYMEX NG contract during the third

quarter of 2009 was 14,022,963 contracts, with 5 percent of that number

being 701,148 contracts. Trades on the NGX centralized market in the

Alberta Basis contract during the same period was 52,168 NYMEX-

equivalent contracts. Thus, centralized-market trades in the Alberta

Basis contract amounted to less than the minimum threshold.

i. Federal Register Comments

NGX states its belief that the Alberta Basis contract does not meet

the price linkage factor because there is insufficient trading activity

in this contract.

WGCEF acknowledges that the Alberta Basis contract is technically

linked to the NYMEX Henry Hub NG contract. However, WGCEF contends that

a comparison of the Alberta Basis contract price with NYMEX NG

settlement prices from July 21, 2009 through November 2, 2009 clearly

establishes that prices for these contracts are not substantially the

same and do not move substantially in conjunction with one another.

ii. Conclusion Regarding the Price Linkage Criterion

The Commission finds that the NGX Alberta Basis contract does not

meet the price linkage criterion because it fails the price

relationship and volume test provided for in the Commission's Guidance.

3. Material Liquidity Criterion

As noted above, in its October 20, 2009, Federal Register notice,

the Commission identified material liquidity, price linkage and

material price reference as potential criteria for SPDC determination

of the AB contract. To assess whether a contract meets the material

liquidity criterion, the Commission first examines trading activity as

a general measurement of the contract's size and potential importance.

If the Commission finds that the contract in question meets a threshold

of trading activity that would render it of potential importance, the

Commission will then perform a statistical analysis to measure the

effect that changes to the subject-contract's prices potentially may

have on prices for other contracts listed on an ECM or a DCM.

With respect to the material liquidity criterion, the Commission

noted that the average number of transactions in the Alberta Basis

nearby month contract was 23.2 trades per day in the second quarter of

2009. During the same period, the Alberta Basis contract had an average

daily trading volume of 5,869,000 mmBtu (or 587 NYMEX-equivalent

contracts of 10,000 mmBtu size). Moreover, open interest as of June 30,

2009, was 150,213,600 mmBtu in the nearby month (15,021 NYMEX

equivalents) and 10,112,200 mmBtu (1,011 NYMEX equivalents) for

delivery two months out.\33\

---------------------------------------------------------------------------

\33\ Second quarter 2009 data was submitted to the Commission in

a different format than in later filings. In this regard total

trading volume and total number of trades per quarter were not

identified.

---------------------------------------------------------------------------

In a subsequent filing, NGX reported that in the third quarter of

2009 the total number of transactions was 2,640 trades (an average of

40 trades per day). Trading volume in the third quarter of 2009 was

521,580,000 mmBtu (52,158 NYMEX-equivalent contracts) or an average of

7,900,000 mmBtu (790 NYMEX-equivalent contracts) on a daily basis. As

of September 30, 2009, open interest in the Alberta Basis contract was

6,440,000 mmBtu (644 NYMEX-equivalent contracts).

The number of trades per day remained relatively low from the

second to third quarters of 2009, and averaged only slightly more than

the reporting level of five trades per day. Moreover, trading activity

in the Alberta Basis contract, as characterized by total quarterly

volume, indicates that the Alberta Basis contract experiences trading

activity that is similar to that of minor futures markets.\34\ Thus,

the Alberta Basis contract does not meet a threshold of trading

activity that would render it of potential importance and no additional

statistical analysis is warranted.\35\

---------------------------------------------------------------------------

\34\ Based on the Commission's experience, a minor futures

contract is, generally, one that has a quarterly trading volume of

100,000 contracts or less.

\35\ In establishing guidance to illustrate how it will evaluate

the various criteria, or combinations of criteria, when determining

whether a contract is an SPDC, the Commission made clear that

``material liquidity itself would not be sufficient to make a

determination that a contract is a [SPDC], * * * but combined with

other factors it can serve as a guidepost indicating which contracts

are functioning as [SPDCs].'' For the reasons discussed above, the

Commission has found that the Union-Dawn Basis contract does not

meet either the price linkage or material price reference criterion.

In light of this finding and the Commission's Guidance cited above,

there is no need to evaluate further the material liquidity criteria

since it cannot be used alone as a basis for an SPDC determination.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX stated in its comment letter that the Alberta Basis contract

does not meet the material liquidity criterion for SPDC determination

for a number of reasons.

First, NGX opined that the Commission ``seems to have applied a

threshold for `material liquidity' that is extremely low, and in

general insufficient to support a determination that these contracts

are no longer emerging markets but in fact serve a significant price

discovery function.'' NGX also noted that the Commission's Guidance

states that material liquidity was intended to be a ``broad concept

that captures the ability to transact immediately with little or no

price concession.'' The Guidance also states that where ``material

liquidity exists, a more or less continuous stream of prices can be

observed and the prices should be similar,'' such as ``where trades

occur multiple times per minute.'' NGX then opined that ``[t]he levels

of liquidity

[[Page 23734]]

outlined above for the Proposed Contracts cannot be what Congress

intended in establishing the dividing line between contracts ripe for

regulation and those still emerging and in need of further

incubation.''

WGCEF used arguments similar to those of NGX in opining that the

Alberta Basis contract does not meet the material liquidity criterion.

For example, WGCEF stated that the Alberta Basis contract does not have

an effect on other contracts that are listed for trading, particularly

the NYMEX NG contract. WGCEF pointed out the Commission's Guidance

which states that a ``continuous stream of prices'' should be observed

in markets with material liquidity. In addition, WGCEF indicated that

in liquid markets observed prices should be similar to each other and

that transactions should occur multiple times per minute; ``the trade

frequency of the Alberta Basis Contract in terms of multiple trades per

minute is very low.'' In this regard, the Commission notes that it

adopted a five trades-per-day threshold as a reporting requirement to

enable it to ``independently be aware of ECM contracts that may develop

into SPDCs'' \36\ rather than solely relying upon an ECM on its own to

identify any such potential SPDCs to the Commission. Thus, any contract

that meets this threshold may be subject to scrutiny as a potential

SPDC but this does not mean that the contract will be found to be a

SPDC merely because it met the reporting threshold. Furthermore, the

Commission observes that a continuous stream of prices would indeed be

an indication of liquidity for certain markets but the Guidance also

notes that ``quantifying the levels of immediacy and price concession

that would define material liquidity may differ from one market or

commodity to another.''

---------------------------------------------------------------------------

\36\ 73 FR 75892 (December 12, 2008).

---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity

For the reasons discussed above, the Commission finds that the

Alberta Basis contract does not meet the material liquidity criterion.

4. Overall Conclusion Regarding the Alberta Basis Contract

After considering the entire record in this matter, including the

comments received, the Commission has determined that the NGX Alberta

Basis contract does not perform a significant price discovery function

under the criteria established in section 2(h)(7) of the CEA.

Specifically, the Commission has determined that the NGX Alberta Basis

contract does not meet the material price reference, price linkage, or

material liquidity criteria at this time. Accordingly, the Commission

is issuing the attached Order declaring that the Alberta Basis contract

is not a SPDC.

Issuance of this Order indicates that the Commission does not at

this time regard NGX as a registered entity in connection with its

Alberta Basis contract.\37\ Accordingly, with respect to its Alberta

Basis contract, NGX is not required to comply with the obligations,

requirements and timetables prescribed in Commission rule 36.3(c)(4)

for ECMs with SPDCs. However, NGX must continue to comply with the

applicable reporting requirements for ECMs.

---------------------------------------------------------------------------

\37\ See 73 FR 75888, 75893 (Dec. 12, 2008).

---------------------------------------------------------------------------

b. The Phys, BS, LD1 (US/MM), Union-Dawn (Union-Dawn Basis) Contract

and the SPDC Indicia

The NGX Union-Dawn Basis contract is a monthly contract that calls

for physical delivery of natural gas based on the final settlement

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

contract for the specified calendar month, plus or minus the price

differential (basis) between the Dawn delivery point and the Henry Hub.

There is no standard size for the Union-Dawn Basis contract, although a

minimum volume of 100 mmBtu is required in increments of 100 units per

day. The Union-Dawn Basis contract is listed for 60 consecutive

calendar months.

The Henry Hub,\38\ which is located in Erath, Louisiana, is the

primary cash market trading and distribution center for natural gas in

the United States. It also is the delivery point and pricing basis for

the NYMEX's actively traded, physically-delivered natural gas futures

contract, which is the most important pricing reference for natural gas

in the United States. The Henry Hub, which is operated by Sabine Pipe

Line, LLC, serves as a juncture for 13 different pipelines. These

pipelines bring in natural gas from fields in the Gulf Coast region and

ship it to major consumption centers along the East Coast and Midwest.

The throughput shipping capacity of the Henry Hub is 1.8 trillion mmBtu

per day.

---------------------------------------------------------------------------

\38\ The term ``hub'' refers to a juncture where two or more

natural gas pipelines are connected. Hubs also serve as pricing

points for natural gas at the particular locations.

---------------------------------------------------------------------------

In addition to the Henry Hub, there are a number of other locations

where natural gas is traded. In 2008, there were 33 natural gas market

centers in North America.\39\ Some of the major trading centers include

Alberta, Northwest Rockies, Southern California border and the Houston

Ship Channel. For locations that are directly connected to the Henry

Hub by one or more pipelines and where there typically is adequate

shipping capacity, the price at the other locations usually directly

tracks the price at the Henry Hub, adjusted for transportation costs.

However, at other locations that are not directly connected to the

Henry Hub or where shipping capacity is limited, the prices at those

locations often diverge from the Henry Hub price. Furthermore, one

local price may be significantly different than the price at another

location even though the two markets' respective distances from the

Henry Hub are the same. The reason for such pricing disparities is that

a given location may experience supply and demand factors that are

specific to that region, such as differences in pipeline shipping

capacity, unusually high or low demand for heating or cooling or supply

disruptions caused by severe weather. As a consequence, local natural

gas prices can differ from the Henry Hub price by more than the cost of

shipping and such price differences can vary in an unpredictable

manner.

---------------------------------------------------------------------------

\39\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

---------------------------------------------------------------------------

Union Gas, Ltd., is a major Canadian natural gas storage,

transmission, and distribution company based in Ontario, Canada. Union

Gas offers premium storage and transportation services to customers at

the Dawn hub, which is the largest underground storage facility in

Canada and one of the largest in North America. The Dawn hub offers

customers an important link for natural gas moving from Western

Canadian and U.S. supply basins to markets in central Canada and the

northeast United States. The throughput capacity at the Dawn hub is 9.3

billion cubic feet per day. Moreover, the number of pipeline

interconnections at that hub was ten in 2008. Lastly, the Dawn hub's

capacity is 12.8 billion cubic feet per day.\40\

---------------------------------------------------------------------------

\40\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

---------------------------------------------------------------------------

The local price at the Dawn hub typically differs from the price at

the Henry Hub. Thus, the price of the Henry Hub physically-delivered

futures contract is an imperfect proxy for the Dawn price. Moreover,

exogenous factors, such as adverse weather, can cause the Dawn gas

price to differ from the Henry Hub price by an amount that is more or

less than the cost of shipping, making the NYMEX Henry Hub futures

[[Page 23735]]

contract even less precise as a hedging tool than desired by market

participants. Basis contracts \41\ allow traders to more accurately

discover prices at alternative locations and hedge price risk that is

associated with natural gas at such locations. In this regard, a

position at a local price for an alternative location can be

established by adding the appropriate basis swap position to a position

taken in the NYMEX physically-delivered Henry Hub contract (or in the

NYMEX or ICE Henry Hub look-alike contract, which cash settle based on

the NYMEX physically-delivered natural gas contract's final settlement

price).

---------------------------------------------------------------------------

\41\ Basis contracts denote the difference in the price of

natural gas at a specified location minus the price of natural gas

at the Henry Hub. The differential can be either a positive or

negative value.

---------------------------------------------------------------------------

In its October 20, 2009, Federal Register notice, the Commission

identified material price reference, price linkage and material

liquidity as the potential SPDC criteria applicable to the Union-Dawn

Basis contract. Each of these criteria is discussed below.\42\

---------------------------------------------------------------------------

\42\ As noted above, the Commission did not find an indication

of arbitrage in connection with this contract; accordingly, that

criterion is not discussed in reference to the Union-Dawn Basis

contract.

---------------------------------------------------------------------------

1. Material Price Reference Criterion

The Commission's October 20, 2009, Federal Register notice

identified material price reference as a potential basis for a SPDC

determination with respect to this contract. The Commission noted that

NGX forged an alliance with ICE to use ICE's matching engine to

complete transactions in physical natural gas contracts traded on NGX.

In return, NGX agreed to provide the clearing services for such

transactions. As part of the agreement, NGX provides ICE with

transaction data, which are then made available to market participants

on a paid basis. ICE offers the NGX data in several packages, which

vary in terms of the amount of available historical data. For example,

the ICE offers the ``OTC Gas End of Day'' data packages with access to

all price data, or just current prices plus a selected number of months

(i.e., 12, 24, 36, or 48 months) of historical data.

The Commission will rely on one of two sources of evidence--direct

or indirect--to determine that the price of a contract was being used

as a material price reference and therefore, serving a significant

price discovery function.\43\ With respect to direct evidence, the

Commission will consider the extent to which, on a frequent and

recurring basis, cash market bids, offers or transactions are directly

based on or quoted at a differential to, the prices generated on the

ECM in question. Direct evidence may be established when cash market

participants are quoting bid or offer prices or entering into

transactions at prices that are set either explicitly or implicitly at

a differential to prices established for the contract in question. Cash

market prices are set explicitly at a differential to the section

2(h)(3) contract when, for instance, they are quoted in dollars and

cents above or below the reference contract's price. Cash market prices

are set implicitly at a differential to a section 2(h)(3) contract

when, for instance, they are arrived at after adding to, or subtracting

from the section 2(h)(3) contract, but then quoted or reported at a

flat price. With respect to indirect evidence, the Commission will

consider the extent to which the price of the contract in question is

being routinely disseminated in widely distributed industry

publications--or offered by the ECM itself for some form of

remuneration--and consulted on a frequent and recurring basis by

industry participants in pricing cash market transactions.

---------------------------------------------------------------------------

\43\ 17 CFR part 36, Appendix A.

---------------------------------------------------------------------------

The Union-Dawn hub is a relatively important trading center for

natural gas in North America. Traders use the NGX Union-Dawn Basis

contract to hedge cash market positions and transactions. Nevertheless,

the relatively small volume of trading and open interest \44\ in the

Union-Dawn Basis contract does not support a finding that the contract

is consulted on a frequent and recurring basis in establishing cash

market transaction prices. Thus, the Union-Dawn Basis contract does not

satisfy the direct price reference test for existence of material price

reference. Furthermore, the Commission notes that publication of the

Union-Dawn Basis contract's prices is not indirect evidence of material

price reference. The Union-Dawn Basis contract's prices are published

with those of numerous other contracts, including ICE's AECO Financial

Basis contract, which are of more interest to market participants.

Thus, the Commission has concluded that traders likely do not

specifically purchase ICE data packages for the NGX Union-Dawn Basis

contract's prices and do not consult such prices on a frequent and

recurring basis in pricing cash market transactions.

---------------------------------------------------------------------------

\44\ In the third quarter of 2009, the Union-Dawn Basis contract

had a total trading volume that was equivalent to 28,090 NYMEX

physically-delivered NG futures contracts (the size of one NYMEX NG

contract is 10,000 mmBtu); the Union-Dawn contract also had an open

interest equivalent to 2,948 NYMEX NG futures contracts.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX expressed the opinion that the Union Dawn Basis contract does

not meet the material price reference criterion because there is

insufficient trading activity in this contract.

WGCEF stated that there is no evidence that the Union-Dawn Basis

contract does not directly affect the ``settlement of the NYMEX NG

Contract nor does it influence physical pricing at the Henry Hub.''

\45\ Moreover, there is no evidence that a contract in any market is

tied directly or indirectly to the settlement price of the Union-Dawn

Basis contract. With respect to indirect evidence, WGCEF believes that

ICE's publication of the NGX contract's settlement prices does not

``constitute sufficient evidence'' of material price reference, and is

simply an extension of the ``unique [business] arrangement'' between

ICE and NGX.

---------------------------------------------------------------------------

\45\ CL 03.

---------------------------------------------------------------------------

ii. Conclusion Regarding Material Price Reference

Based on the above, the Commission finds that the NGX Union-Dawn

Basis contract does not meet the material price reference criterion

because cash market transactions are not priced either explicitly or

implicitly on a frequent and recurring basis at a differential to the

Union-Dawn Basis contract's price (direct evidence). Moreover, while

the Union-Dawn Basis contract's price data is sold to market

participants, individuals likely do not specifically purchase the ICE

data packages for the Union-Dawn Basis contract's prices and do not

consult such prices on a frequent and recurring basis in pricing cash

market transactions (indirect evidence).

2. Price Linkage Criterion

In its October 20, 2009, Federal Register notice, the Commission

identified price linkage as a potential basis for a SPDC determination

with respect to the Union-Dawn Basis contract. In this regard, the

final settlement of the Union-Dawn Basis contract is based, in part, on

the final settlement price of the NYMEX's Henry Hub physically-

delivered natural gas futures contract, where the NYMEX is registered

with the Commission as a DCM.

The Commission's Guidance on Significant Price Discovery Contracts

notes that a ``price-linked contract is a contract that relies on a

contract traded on another trading facility to settle, value or

otherwise offset the price-

[[Page 23736]]

linked contract.'' \46\ Furthermore, the Guidance notes that ``[f]or a

linked contract, the mere fact that a contract is linked to another

contract will not be sufficient to support a determination that a

contract performs a significant price discovery function. To assess

whether such a determination is warranted, the Commission will examine

the relationship between transaction prices of the linked contract and

the prices of the referenced contract. The Commission believes that

where material liquidity exists, prices for the linked contract would

be observed to be substantially the same as, or move substantially in

conjunction with, the prices of the referenced contract.'' The Guidance

proposes a threshold price relationship such that prices of the ECM

linked contract will fall within a 2.5 percent price range for 95

percent of contemporaneously determined closing, settlement or other

daily prices over the most recent quarter. Finally, the Commission also

stated in the Guidance that it would consider a linked contract that

has a trading volume equivalent to 5 percent of the volume of trading

in the contract to which it is linked to have sufficient volume

potentially to be deemed a SPDC (``minimum threshold'').

---------------------------------------------------------------------------

\46\ Appendix A to the Part 36 rules.

---------------------------------------------------------------------------

To assess whether the Union-Dawn contract meets the price linkage

criterion, Commission staff obtained price data from NGX and performed

the statistical tests cited above. Staff found that, while the Union-

Dawn Basis contract price is determined, in part, by the final

settlement price of the NYMEX physically-delivered natural gas futures

contract (a DCM contract), the imputed Union-Dawn price (derived by

adding the NYMEX Henry Hub Natural Gas price to the Union-Dawn Basis

price) is not within 2.5 percent of the settlement price of the

corresponding NYMEX Henry Hub natural gas futures contract on 95

percent or more of the days. Specifically, during the third quarter of

2009, 27.4 percent of the Union-Dawn Basis natural gas prices derived

from the NGX basis values were within 2.5 percent of the daily

settlement price of the NYMEX Henry Hub futures contract. In addition,

staff found that the Union-Dawn Basis contract fails to meet the volume

threshold requirement. In particular, the total trading volume in the

NYMEX NG contract during the third quarter of 2009 was 14,022,963

contracts, with 5 percent of that number being 701,148 contracts.

Trades on the NGX centralized market in the Union-Dawn Basis contract

during the same period was 28,090 NYMEX-equivalent contracts. Thus,

centralized-market trades in the Union-Dawn Basis contract amounted to

less than the minimum threshold.

i. Federal Register Comments

NGX states its belief that the Union Dawn Basis contract does not

meet the price linkage factor because there is insufficient trading

activity in this contract. WGCEF acknowledges that the Union-Dawn Basis

is technically linked to the NYMEX physically-delivered NG futures

contract. The Working Group notes that a comparison of the Union-Dawn

Basis with NYMEX NG settlement prices from July 21, 2009, through

November 2, 2009, clearly establishes that these contracts are not

substantially the same and do not move substantially in conjunction

with one another.

ii. Conclusion Regarding the Price Linkage Criterion

The Commission finds that the Union-Dawn Basis contract does not

meet the price linkage criterion because it fails the price

relationship and volume tests provided for in the Commission's

Guidance.

3. Material Liquidity Criterion

As noted above, in its October 20, 2009, Federal Register notice,

the Commission identified material liquidity, price linkage and

material price reference as potential criteria for SPDC determination

of the Union-Dawn Basis contract. To assess whether a contract meets

the material liquidity criterion, the Commission first examines trading

activity as a general measurement of the contract's size and potential

importance. If the Commission finds that the contract in question meets

a threshold of trading activity that would render it of potential

importance, the Commission will then perform a statistical analysis to

measure the effect that changes to the subject-contract's prices

potentially may have on prices for other contracts listed on an ECM or

a DCM.

In its October 20, 2009, Federal Register release, the Commission

noted that the total number of transactions executed on NGX's

electronic platform in the nearby month of the Union-Dawn Basis

contract was 8.3 trades per day in the second quarter of 2009. During

the same period, the Union-Dawn Basis contract had an average daily

trading volume of 1,332,400 mmBtu (or 133 NYMEX-equivalent contracts

per day). Moreover, open interest as of June 30, 2009, was 28,203,800

mmBtu (2,820 NYMEX-equivalent contracts) in the nearby contract month

and 12,908,400 mmBtu (1,291 NYMEX-equivalent contracts) for delivery

two months out.\47\

---------------------------------------------------------------------------

\47\ Second quarter 2009 data was submitted to the Commission is

a different format than in later filings. In this regard total

trading volume and total number of trades per quarter were not

identified.

---------------------------------------------------------------------------

In a subsequent filing, NGX reported that total trading volume in

the third quarter of 2009 was 28,090 contracts (or 425 contracts on a

daily basis). In term of number of transactions, 1,831 trades occurred

in the third quarter of 2009 (28 trades per day). As of September 30,

2009, open interest in the Union-Dawn Basis contract was 23,289 NYMEX-

equivalent contracts.

As indicated above, the average number of trades per day in the

second and third quarters of 2009 was only slightly above the minimum

reporting level (5 trades per day). Moreover, trading activity in the

Union-Dawn Basis contract, as characterized by total quarterly volume,

indicates that the Union-Dawn Basis contract experiences trading

activity similar to that of minor futures markets.\48\ Thus, the Union-

Dawn Basis contract does not meets a threshold of trading activity that

would render it of potential importance and no additional statistical

analysis is warranted.\49\

---------------------------------------------------------------------------

\48\ Based on the Commission's experience, a minor futures

contract is, generally, one that has a quarterly trading volume of

100,000 contracts or less.

\49\ In establishing guidance to illustrate how it will evaluate

the various criteria, or combinations of criteria, when determining

whether a contract is a SPDC, the Commission made clear that

``material liquidity itself would not be sufficient to make a

determination that a contract is a [SPDC], * * * but combined with

other factors it can serve as a guidepost indicating which contracts

are functioning as [SPDCs].'' For the reasons discussed above, the

Commission has found that the Union-Dawn Basis contract does not

meet either the price linkage or material price reference criterion.

In light of this finding and the Commission's Guidance cited above,

there is no need to evaluate further the material liquidity criteria

since it cannot be used alone as a basis for a SPDC determination.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX stated in its comment letter that the Union-Dawn Basis contract

does not meet the material liquidity criterion for SPDC determination

for a number of reasons.

First, NGX opined that the Commission ``seems to have applied a

threshold for `material liquidity' that is extremely low, and in

general insufficient to support a determination that these contracts

are no longer emerging markets but in fact serve a significant price

discovery function''. NGX also noted that the Commission's Guidance

states that material liquidity was intended to be a ``broad concept

that captures the ability to transact immediately with little or no

price

[[Page 23737]]

concession.'' The Guidance also states that where ``material liquidity

exists, a more or less continuous stream of prices can be observed and

the prices should be similar'', such as ``where trades occur multiple

times per minute.'' NGX then opined that ``[t]he levels of liquidity

outlined above for the Proposed Contracts cannot be what Congress

intended in establishing the dividing line between contracts ripe for

regulation and those still emerging and in need of further incubation.

The WGCEF used arguments similar to those of NGX in opining that

the Union-Dawn Basis contract does not meet the material liquidity

criterion. In addition, WGCEF noted that to be materially liquid, a

contract must have ``a material effect of other contracts'' and have

``sufficient liquidity to perform a significant price discovery

function.'' WGCEF stated that the Union-Dawn Basis contract lacks both

of those features.

In this regard, the Commission notes that it adopted a five trades-

per-day threshold as a reporting requirement to enable it to

``independently be aware of ECM contracts that may develop into SPDCs''

\50\ rather than solely relying upon an ECM on its own to identify any

such potential SPDCs to the Commission. Thus, any contract that meets

this threshold may be subject to scrutiny as a potential SPDC but this

does not mean that the contract will be found to be a SPDC merely

because it met the reporting threshold. Furthermore, the Commission

observes that a continuous stream of prices would indeed be an

indication of liquidity for certain markets but the Guidance also notes

that ``quantifying the levels of immediacy and price concession that

would define material liquidity may differ from one market or commodity

to another.''

---------------------------------------------------------------------------

\50\ 73 FR 75892 (December 12, 2008).

---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity

For the reasons discussed above, the Commission finds that the

Union-Dawn Basis contract does not meet the material liquidity

criterion.

4. Overall Conclusion Regarding the Union-Dawn Basis Contract

After considering the entire record in this matter, including the

comments received, the Commission has determined that the Union-Dawn

Basis contract does not perform a significant price discovery function

under the criteria established in section 2(h)(7) of the CEA.

Specifically, the Commission has determined that the Union-Dawn Basis

contract does not meet the material price reference, price linkage, or

material liquidity criteria at this time. Accordingly, the Commission

is issuing the attached Order declaring that the Union-Dawn Basis

contract is not a SPDC.

Issuance of this Order indicates that the Commission does not at

this time regard NGX as a registered entity in connection with its

Union-Dawn Basis contract.\51\ Accordingly, with respect to its Union-

Dawn Basis contract, NGX is not required to comply with the

obligations, requirements and timetables prescribed in Commission rule

36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply

with the applicable reporting requirements for ECMs.

---------------------------------------------------------------------------

\51\ See 73 FR 75888, 75893 (Dec. 12, 2008).

---------------------------------------------------------------------------

c. The Phys, FP, (CA/GJ), AB-NIT (Alberta Fixed Price) Contract and the

SPDC Indicia

The Alberta Fixed-Price contract calls for physical delivery of

natural gas at the Alberta hub over a number of different time periods.

This contract allows delivery of natural gas during the following day,

Friday plus two or three days, Saturday plus three or four days, Sunday

plus two days, the remainder of the month, throughout the nearby

calendar month, and during a specific future calendar month. Each

delivery period is considered to be a separate contract, and market

participants value each delivery period separately. However,

overlapping delivery days are considered fungible, and, thus, may be

offset by traders. There is no standard size for the Alberta Fixed-

Priced contract, although a minimum volume of 94.78 mmBtu is required

in increments of 100 units per day. The NGX lists the Alberta Fixed-

Price contract for 60 calendar months.

As noted above, the primary pricing point for natural gas in North

America is the Henry Hub, which is located in Erath, Louisiana. In

addition to the Henry Hub, there are a number of other locations where

natural gas is traded. In 2008, there were 33 natural gas market

centers in North America.\52\ Some of the major trading centers include

Alberta, Northwest Rockies, Southern California border and the Houston

Ship Channel. For locations that are directly connected to the Henry

Hub by one or more pipelines and where there typically is adequate

shipping capacity, the price at the other locations usually directly

tracks the price at the Henry Hub, adjusted for transportation costs.

However, at other locations that are not directly connected to the

Henry Hub or where shipping capacity is limited, the prices at those

locations often diverge from the Henry Hub price. Furthermore, one

local price may be significantly different than the price at another

location even though the two markets' respective distances from the

Henry Hub are the same. The reason for such pricing disparities is that

a given location may experience supply and demand factors that are

specific to that region, such as differences in pipeline shipping

capacity, unusually high or low demand for heating or cooling or supply

disruptions caused by severe weather. As a consequence, local natural

gas prices can differ from the Henry Hub price by more than the cost of

shipping and such price differences can vary in an unpredictable

manner.

---------------------------------------------------------------------------

\52\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

---------------------------------------------------------------------------

The Alberta hub is far removed from the Henry Hub and is not

directly connected to the Henry Hub by an existing pipeline. Located in

the Canadian province of Alberta, the Alberta natural gas market is a

major connection point for long-distance transmission systems that ship

natural gas to points throughout Canada and the United States. The

Alberta province is Canada's dominant natural gas producing region; six

of the nine Canadian market centers are located in the Alberta

province. The throughput capacity at the AECO-C hub is ten billion

cubic feet per day. Moreover, the number of pipeline interconnections

at that hub was four in 2008. Lastly, the AECO-C hub's capacity is 20.4

billion cubic feet per day.\53\

---------------------------------------------------------------------------

\53\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf

---------------------------------------------------------------------------

The local price at the Alberta hub typically differs from the price

at the Henry Hub. Thus, the price of the Henry Hub physically-delivered

futures contract is an imperfect proxy for the Alberta price. Moreover,

exogenous factors, such as adverse weather, can cause the Alberta gas

price to differ from the Henry Hub price by an amount that is more or

less than the cost of shipping, making the NYMEX Henry Hub futures

contract even less precise as a hedging tool than desired by market

participants.

In its October 20, 2009, Federal Register notice, the Commission

identified material liquidity and material price reference as the

potential SPDC criteria applicable to the Alberta Fixed-Price contract.

Each of these factors is discussed below.\54\

---------------------------------------------------------------------------

\54\ As noted above, the Commission did not find an indication

of arbitrage and price linkage in connection with this contract;

accordingly, those criteria are not discussed in reference to the

Alberta Fixed-Price contract.

---------------------------------------------------------------------------

[[Page 23738]]

1. Material Price Reference Criterion

The Commission's October 20, 2009, Federal Register notice

identified material price reference as a potential basis for a SPDC

determination with respect to this contract. The Commission noted that

the NGX forged an alliance with ICE to use the ICE's matching engine to

complete transactions in physical gas contracts traded on NGX. In

return, the NGX agreed to provide the clearing services for such

transactions. As part of the agreement, NGX provides the ICE with

transaction data, which are then made available to market participants

on a paid basis. The ICE offers the NGX data in several packages, which

vary in terms of the amount of available historical data. For example,

the ICE offers the ``OTC Gas End of Day'' data package with access to

all price data, or just current prices plus a selected number of months

(i.e., 12, 24, 36, or 48 months) of historical data.

The Commission will rely on one of two sources of evidence--direct

or indirect--to determine that the price of a contract was being used

as a material price reference and therefore, serving a significant

price discovery function.\55\ With respect to direct evidence, the

Commission will consider the extent to which, on a frequent and

recurring basis, cash market bids, offers or transactions are directly

based on or quoted at a differential to, the prices generated on the

ECM in question. Direct evidence may be established when cash market

participants are quoting bid or offer prices or entering into

transactions at prices that are set either explicitly or implicitly at

a differential to prices established for the contract in question. Cash

market prices are set explicitly at a differential to the section

2(h)(3) contract when, for instance, they are quoted in dollars and

cents above or below the reference contract's price. Cash market prices

are set implicitly at a differential to a section 2(h)(3) contract

when, for instance, they are arrived at after adding to, or subtracting

from the section 2(h)(3) contract, but then quoted or reported at a

flat price. With respect to indirect evidence, the Commission will

consider the extent to which the price of the contract in question is

being routinely disseminated in widely distributed industry

publications--or offered by the ECM itself for some form of

remuneration--and consulted on a frequent and recurring basis by

industry participants in pricing cash market transactions.

---------------------------------------------------------------------------

\55\ 17 CFR part 36, Appendix A.

---------------------------------------------------------------------------

The Alberta hub is a major trading center for natural gas in North

America. Traders, including producers, keep abreast of the prices of

the Alberta market center when conducting cash deals. However, ICE's

cash-settled AECO Financial Basis contract is used more widely as a

price reference than the NGX Alberta Fixed-Price contract. Traders look

to the ICE contract's competitively determined price as an indication

of expected values of natural gas at the Alberta hub when entering into

cash market transactions for natural gas, especially those trades

providing for physical delivery in the future. Traders use ICE's AECO

Financial Basis contract, as well as other basis contracts, to hedge

cash market positions and transactions. The substantial volume of

trading and open interest in the ICE contract attests to its use for

this purpose.\56\ In contrast, trading volume in the NGX Alberta Fixed-

Price contract is much smaller than in ICE's AECO Financial Basis

contract. In this regard, total trading volume in the NGX Alberta Fixed

Price contract in the third quarter of 2009 was equivalent to 50,313

NYMEX physically-delivered NG contracts, which has a size of 10,000

mmBtu.\57\

---------------------------------------------------------------------------

\56\ In the third quarter of 2009, 6,320 separate trades

occurred on ICE's electronic platform, resulting in a daily average

of 95.8 trades. During the same period, the ICE contract had a total

trading volume on its electronic platform of 736,412 contracts

(which was an average of 11,158 contracts per day). Open interest in

ICE's AECO Financial Basis Contract was 483,561 contracts as of

September 30, 2009.

\57\ Trading volume in the ICE AECO Financial Basis contract

during the third quarter of 2009 was equivalent to 184,103 NYMEX NG

contracts.

---------------------------------------------------------------------------

Accordingly, although the Alberta Hub is a major trading center for

natural gas and, as noted, NGX provides price information for the

Alberta Fixed Price contract to ICE which sells it, the Commission has

found upon further evaluation that the Alberta Fixed Price contract is

not routinely consulted by industry participants in pricing cash market

transactions and thus does not meet the Commission's Guidance for the

material price reference criterion. In this regard, the ICE AECO

Financial Basis contract is routinely consulted by industry

participants in pricing cash market transactions at this location.

Because both the NGX and the ICE contracts basically price the same

commodity at the same location and time \58\ and the ICE contract has

significantly higher trading volume and open interest, it is not

necessary for market participants to independently refer to the NGX

Alberta Fixed-Price contract for pricing natural gas at this location.

Thus, the Alberta Fixed-Price contract does not satisfy the direct

price reference test for existence of material price reference.

Furthermore, the Commission notes that publication of the NGX Alberta

Fixed-Price contract's prices is not indirect evidence of material

price reference. The NGX Alberta Fixed-Price contract's prices are

published with those of numerous other contracts, which are of more

interest to market participants. Thus, the Commission has concluded

that traders likely do not specifically purchase the ICE data packages

for the NGX Alberta Fixed-Price contract's prices and do not consult

such prices on a frequent and recurring basis in pricing cash market

transactions.

---------------------------------------------------------------------------

\58\ The Alberta natural gas price can be derived using the

Alberta Basis contract and the NYMEX Henry Hub NG contract. In this

regard, the imputed price is the Henry Hub price plus or minus the

basis at Alberta, as indicated by the NGX Alberta Basis contract.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX states its belief that the Alberta Fixed Price contract does

not meet the material price reference factor because there is

insufficient trading activity in this contract.

ii. Conclusion Regarding Material Price Reference

Based on the above, the Commission finds that the NGX Alberta

Fixed-Price contract does not meet the material price reference

criterion because cash market transactions are not priced either

explicitly or implicitly on a frequent and recurring basis at a

differential to the Alberta Fixed Price contract's price (direct

evidence). Moreover, while the Alberta Fixed-Price contract's price

data is sold to market participants, market participants likely do not

specifically purchase the ICE data packages for the Alberta Fixed-Price

contract's prices and do not consult such prices on a frequent and

recurring basis in pricing cash market transactions (indirect

evidence).

2. Material Liquidity Criterion

As noted above, in its October 20, 2009, Federal Register notice,

the Commission identified material liquidity and material price

reference as potential criteria for SPDC determination of the Alberta

Fixed-Price contract. With respect to the material liquidity criterion,

the Commission noted that the total number of transactions executed in

the contract on NGX's electronic platform during the second quarter of

2009 was 122.1, 36.0,

[[Page 23739]]

7.0, 30.1, 7.4, 68.6 and 12.8 trades for the following delivery

periods--following day, Friday plus two days, Friday plus three days,

Saturday plus three days, Saturday plus four days, Sunday plus two

days, remainder of the month, nearby calendar month, and any single

future calendar month, respectively. During the same period, the

Alberta Fixed-Price contract had a total trading volume of 1,209,505

mmBtu; 821,565 mmBtu; 223,874 mmBtu; 754,175 mmBtu; 672,568 mmBtu;

6,634,030 mmBtu; and 1,233,958 mmBtu for the following delivery

periods--next day, Friday plus two days, Friday plus three days,

Saturday plus three days, Saturday plus four days, Sunday plus two

days, remainder of the month, nearby calendar month, and any single

future calendar month, respectively. Moreover, the net open interest as

of June 30, 2009, was 96,003,450 mmBtu for next-month delivery. For

delivery two months out, the open interest was 54,456,997 mmBtu.\59\

---------------------------------------------------------------------------

\59\ Second quarter 2009 data was submitted to the Commission is

a different format than in later filings. In this regard total

trading volume and total number of trades per quarter were not

identified.

---------------------------------------------------------------------------

In a subsequent filing NGX reported that total trading volume in

the third quarter of 2009 was 50,313 contracts (or 762 contracts on a

daily basis). In term of number of transactions, 4,694 trades occurred

in the third quarter of 2009 (73 trades per day), for those Alberta

Fixed-Price contracts that specify delivery in the spot month. As of

September 30, 2009, open interest in the Alberta Fixed-Price contract

was 23,961 NYMEX-equivalent contracts.

The average number of trades per day in the second and third

quarters of 2009 was only moderately above the minimum reporting level

(5 trades per day). Moreover, trading activity in the Alberta Fixed-

Price contract, as characterized by total quarterly volume, indicates

that the Alberta Fixed-Price contract experiences trading activity

similar to that of minor futures markets.\60\ Thus, the Alberta Fixed-

Price contract does not meets a threshold of trading activity that

would render it of potential importance and no additional statistical

analysis is warranted.\61\

---------------------------------------------------------------------------

\60\ Based on the Commission's experience, a minor futures

contract is, generally, one that has a quarterly trading volume of

100,000 contracts or less.

\61\ In establishing guidance to illustrate how it will evaluate

the various criteria, or combinations of criteria, when determining

whether a contract is a SPDC, the Commission made clear that

``material liquidity itself would not be sufficient to make a

determination that a contract is a [SPDC], * * * but combined with

other factors it can serve as a guidepost indicating which contracts

are functioning as [SPDCs].'' For the reasons discussed above, the

Commission has found that the Alberta Fixed-Price contract does not

meet either the price linkage or material price reference criterion.

In light of this finding and the Commission's Guidance cited above,

there is no need to evaluate further the material liquidity criteria

since it cannot be used alone as a basis for a SPDC determination.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX stated in its comment letter that the Alberta Fixed-Price

contract does not meet the material liquidity criterion for SPDC

determination for a number of reasons.

First, NGX opined that the Commission ``seems to have applied a

threshold for ``material liquidity'' that is extremely low, and in

general insufficient to support a determination that these contracts

are no longer emerging markets but in fact serve a significant price

discovery function.'' NGX also noted that the Commission's Guidance

states that material liquidity was intended to be a ``broad concept

that captures the ability to transact immediately with little or no

price concession''. The Guidance also states that where ``material

liquidity exists, a more or less continuous stream of prices can be

observed and the prices should be similar'', such as ``where trades

occur multiple times per minutes. NGX then opined that ``[t]he levels

of liquidity outlined above for the Proposed Contracts cannot be what

Congress intended in establishing the dividing line between contracts

ripe for regulation and those still emerging and in need of further

incubation.

In this regard, the Commission notes that it adopted a five trades-

per-day threshold as a reporting requirement to enable it to

``independently be aware of ECM contracts that may develop into SPDCs''

\62\ rather than solely relying upon an ECM on its own to identify any

such potential SPDCs to the Commission. Thus, any contract that meets

this threshold may be subject to scrutiny as a potential SPDC but this

does not mean that the contract will be found to be a SPDC merely

because it met the reporting threshold. Furthermore, the Commission

observes that a continuous stream of prices would indeed be an

indication of liquidity for certain markets but the Guidance also notes

that ``quantifying the levels of immediacy and price concession that

would define material liquidity may differ from one market or commodity

to another.''

---------------------------------------------------------------------------

\62\ 73 FR 75892 (December 12, 2008).

---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity

For the reasons discussed above, the Commission finds that the

Alberta Fixed-Price contract does not meet the material liquidity

criterion.

3. Overall Conclusion Regarding the Alberta Fixed-Price Contract

After considering the entire record in this matter, including the

comments received, the Commission has determined that the Alberta

Fixed-Price contract does not perform a significant price discovery

function under the criteria established in section 2(h)(7) of the CEA.

Specifically, the Commission has determined that the Alberta Fixed-

Price contract does not meet the material price reference or material

liquidity criteria at this time. Accordingly, the Commission is issuing

the attached Order declaring that the Alberta Fixed-Price contract is

not a SPDC.

Issuance of this Order indicates that the Commission does not at

this time regard NGX as a registered entity in connection with its

Alberta Fixed-Price contract.\63\ Accordingly, with respect to its

Alberta Fixed-Price contract, NGX is not required to comply with the

obligations, requirements and timetables prescribed in Commission rule

36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply

with the applicable reporting requirements.

---------------------------------------------------------------------------

\63\ See 73 FR 75888, 75893 (Dec. 12, 2008).

---------------------------------------------------------------------------

d. The Phys, FP, (US/MM), Union-Dawn (Union-Dawn Fixed-Price) Contract

and the SPDC Indicia

The Union-Dawn Fixed-Price contract calls for physical delivery of

natural gas at the Dawn hub over two different time periods: The

following day and Saturday plus three days. Each delivery period is

considered to be a separate contract, and the market participants value

each delivery period separately. However, overlapping delivery days are

considered fungible, and, thus, may be offset by traders. There is no

standard size for the Union-Dawn Fixed-Priced contract, although a

minimum volume of 100 mmBtu required in increments of 100 units per

day. The NGX lists the Union-Dawn Fixed-Price contract for 60 calendar

months.

Union Gas, Ltd., is a major Canadian natural gas storage,

transmission, and distribution company based in Ontario, Canada. Union

Gas offers premium storage and transportation services to customers at

the Dawn hub, which the largest underground storage facility in Canada

and one of the largest in North America. The Dawn hub offers customers

an important link for natural gas moving from Western Canadian and U.S.

supply basins to markets in central

[[Page 23740]]

Canada and the northeast United States. The throughput capacity at the

Dawn hub is 9.3 billion cubic feet per day. Moreover, the number of

pipeline interconnections at that hub was ten in 2008. Lastly, the Dawn

hub's capacity is 12.8 billion cubic feet per day.\64\

---------------------------------------------------------------------------

\64\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

---------------------------------------------------------------------------

In its October 20, 2009, Federal Register notice, the Commission

identified material liquidity and material price reference as the

potential SPDC criteria applicable to the Union-Dawn Fixed-Price

contract. Each of these factors is discussed below.\65\

---------------------------------------------------------------------------

\65\ As noted above, the Commission did not find an indication

of arbitrage and price linkage in connection with this contract;

accordingly, those criteria are not discussed in reference to the

Union-Dawn Fixed-Price contract.

---------------------------------------------------------------------------

1. Material Price Reference Criterion

The Commission's October 20, 2009, Federal Register notice

identified material price reference as a potential basis for a SPDC

determination with respect to this contract. The Commission noted that

NGX forged an alliance with ICE to use the ICE's matching engine to

complete transactions in physical gas contracts traded on NGX. In

return, the NGX agreed to provide the clearing services for such

transactions. As part of the agreement, NGX provides the ICE with

transaction data, which are then made available to market participants

on a paid basis. The ICE offers the NGX data in several packages, which

vary in terms of the amount of available historical data. For example,

the ICE offers the ``OTC Gas End of Day'' data packages with access to

all price data, or just current prices plus a selected number of months

(i.e., 12, 24, 36, or 48 months) of historical data.

The Commission will rely on one of two sources of evidence--direct

or indirect--to determine that the price of a contract was being used

as a material price reference and therefore, serving a significant

price discovery function.\66\ With respect to direct evidence, the

Commission will consider the extent to which, on a frequent and

recurring basis, cash market bids, offers or transactions are directly

based on or quoted at a differential to, the prices generated on the

ECM in question. Direct evidence may be established when cash market

participants are quoting bid or offer prices or entering into

transactions at prices that are set either explicitly or implicitly at

a differential to prices established for the contract in question. Cash

market prices are set explicitly at a differential to the section

2(h)(3) contract when, for instance, they are quoted in dollars and

cents above or below the reference contract's price. Cash market prices

are set implicitly at a differential to a section 2(h)(3) contract

when, for instance, they are arrived at after adding to, or subtracting

from the section 2(h)(3) contract, but then quoted or reported at a

flat price. With respect to indirect evidence, the Commission will

consider the extent to which the price of the contract in question is

being routinely disseminated in widely distributed industry

publications--or offered by the ECM itself for some form of

remuneration--and consulted on a frequent and recurring basis by

industry participants in pricing cash market transactions.

---------------------------------------------------------------------------

\66\ 17 CFR part 36, Appendix A.

---------------------------------------------------------------------------

The Dawn hub is a major trading center for natural gas in the

United States. Traders use the NGX Union-Dawn Fixed-Price contract to

hedge cash market positions and transactions. Nevertheless, the

relatively small volume of trading and open interest \67\ in the Union-

Dawn Fixed-Price contract does not support a finding that the contract

is consulted on a frequent and recurring basis in establishing cash

market transaction prices. Thus, the Union-Dawn Fixed-Price contract

does not satisfy the direct price reference test for existence of

material price reference. Furthermore, the Commission notes that

publication of the Union-Dawn Fixed-Price contract's prices is not

indirect evidence of material price reference. The Union-Dawn Fixed-

Price contract's prices are published with those of numerous other

contracts, which are of more interest to market participants. Thus, the

Commission has concluded that traders likely do not specifically

purchase ICE data packages for the NGX Union-Dawn Fixed-Price

contract's prices and do not consult such prices on a frequent and

recurring basis in pricing cash market transactions.

---------------------------------------------------------------------------

\67\ In the third quarter of 2009, the Union-Dawn Fixed-Price

contract had a total trading volume that was equivalent to 145 NYMEX

physically-delivered NG futures contracts (the size of one NYMEX NG

contract is 10,000 mmBtu); the Union-Dawn contract also had an open

interest equivalent to 1,738 NYMEX NG futures contracts.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX states its belief that the Union Dawn Fixed Price contract does

not meet the material price reference factor because there is

insufficient trading activity in this contract.

ii. Conclusion Regarding Material Price Reference

Based on the above, the Commission finds that the NGX Union-Dawn

Fixed-Price contract does not meet the material price reference

criterion because cash market transactions are not priced either

explicitly or implicitly on a frequent and recurring basis at a

differential to the Union-Dawn Fixed-Price contract's price (direct

evidence). Moreover, while the Union-Dawn Fixed-Price contract's price

data is sold to market participants, traders likely do not specifically

purchase the ICE data packages for the NGX Union-Dawn Fixed-Price

contract's prices and do not consult such prices on a frequent and

recurring basis in pricing cash market transactions (indirect

evidence).

2. Material Liquidity Criterion

As noted above, in its October 20, 2009, Federal Register notice,

the Commission identified material liquidity and material price

reference as potential criteria for SPDC determination of the Union-

Dawn Fixed-Price contract. With respect to the material liquidity

criterion, the Commission noted that the total number of transactions

executed on NGX's electronic platform in the Union-Dawn Fixed-Price

contract during the second quarter of 2009 was 114.1 trades and 23.9

trades for next-day delivery and delivery Saturday plus the next three

days, respectively. During the same period, the Union-Dawn Fixed-Price

contract had an average daily trading volume of 812,800 mmBtu and

458,000 mmBtu for the delivery periods next day and Saturday plus three

days, respectively. Moreover, the net open interest as of June 30,

2009, was 2,241,600 mmBtu for next-day delivery (equivalent to 224

NYMEX NG contracts).\68\

---------------------------------------------------------------------------

\68\ Second quarter 2009 data was submitted to the Commission is

a different format than in later filings. In this regard total

trading volume and total number of trades per quarter were not

identified.

---------------------------------------------------------------------------

In a subsequent filing, NGX reported that total trading volume in

the third quarter of 2009 was the equivalent of 8,333 NYMEX NG

contracts (or 130 contracts on a daily basis).\69\ In term of number of

transactions, 7,899 trades occurred over the entire third quarter,

which equates to 123 trades per day.\70\ As of September 30, 2009, open

interest

[[Page 23741]]

in the Union-Dawn Fixed-Price contract was 1,738 NYMEX NG contracts.

---------------------------------------------------------------------------

\69\ Approximately 96 percent of the contracted natural gas

volume was specified for delivery on either the next day or on the

weekend. The remaining volume was to be delivered over the specified

month or during the remainder of the current month.

\70\ Nearly all (more than 99 percent) of the trades were in

contracts that specified next-day or weekend delivery of natural

gas.

---------------------------------------------------------------------------

The Commission notes that while trading activity in the Union-Dawn

Fixed-Price appears to be substantial, it is important to keep in mind

that the majority of trades involve close to immediate delivery, many

times on a daily basis. With deliveries occurring each day, it is

reasonable that more contracts would be traded compared to those

contracts that specify delivery over an entire month. Moreover, trading

activity in the Union-Dawn Fixed-Price contract, as characterized by

total quarterly volume, indicates that the Union-Dawn Fixed-Price

contract experiences less trading activity than minor futures

markets.\71\ Thus, the Union-Dawn Fixed-Price contract does not meets a

threshold of trading activity that would render it of potential

importance and no additional statistical analysis is warranted.\72\

---------------------------------------------------------------------------

\71\ Based on the Commission's experience, a minor futures

contract is, generally, one that has a quarterly trading volume of

100,000 contracts or less.

\72\ In establishing guidance to illustrate how it will evaluate

the various criteria, or combinations of criteria, when determining

whether a contract is a SPDC, the Commission made clear that

``material liquidity itself would not be sufficient to make a

determination that a contract is a [SPDC], * * * but combined with

other factors it can serve as a guidepost indicating which contracts

are functioning as [SPDCs].'' For the reasons discussed above, the

Commission has found that the Alberta Fixed-Price contract does not

meet either the price linkage or material price reference criterion.

In light of this finding and the Commission's Guidance cited above,

there is no need to evaluate further the material liquidity criteria

since it cannot be used alone as a basis for a SPDC determination.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX stated in its comment letter that the Union-Dawn Fixed-Price

contract does not meet the material liquidity criterion for SPDC

determination for a number of reasons.

First, NGX opined that the Commission ``seems to have applied a

threshold for ``material liquidity'' that is extremely low, and in

general insufficient to support a determination that these contracts

are no longer emerging markets but in fact serve a significant price

discovery function''. NGX also noted that the Commission's Guidance

states that material liquidity was intended to be a ``broad concept

that captures the ability to transact immediately with little or no

price concession''. The Guidance also states that where ``material

liquidity exists, a more or less continuous stream of prices can be

observed and the prices should be similar'', such as ``where trades

occur multiple times per minutes. NGX then opined that ``[t]he levels

of liquidity outlined above for the Proposed Contracts cannot be what

Congress intended in establishing the dividing line between contracts

ripe for regulation and those still emerging and in need of further

incubation.

In this regard, the Commission notes that it adopted a five trades-

per-day threshold as a reporting requirement to enable it to

``independently be aware of ECM contracts that may develop into SPDCs''

\73\ rather than solely relying upon an ECM on its own to identify any

such potential SPDCs to the Commission. Thus, any contract that meets

this threshold may be subject to scrutiny as a potential SPDC but this

does not mean that the contract will be found to be a SPDC merely

because it met the reporting threshold. Furthermore, the Commission

observes that a continuous stream of prices would indeed be an

indication of liquidity for certain markets but the Guidance also notes

that ``quantifying the levels of immediacy and price concession that

would define material liquidity may differ from one market or commodity

to another.''

---------------------------------------------------------------------------

\73\ 73 FR 75892 (December 12, 2008).

---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity

Based on the above, the Commission finds that the NGX Union-Dawn

Fixed-Price contract does not meet the material liquidity criterion.

3. Overall Conclusion Regarding the Union-Dawn Fixed-Price Contract

After considering the entire record in this matter, including the

comments received, the Commission has determined that the Union-Dawn

Fixed-Price contract does not perform a significant price discovery

function under the criteria established in section 2(h)(7) of the CEA.

Specifically, the Commission has determined that the NGX Union-Dawn

Fixed-Price contract does not meet the material price reference or

material liquidity criteria at this time. Accordingly, the Commission

is issuing the attached Order declaring that the Union-Dawn Fixed-Price

contract is not a SPDC.

Issuance of this Order indicates that the Commission does not at

this time regard NGX as a registered entity in connection with its

Union-Dawn Fixed-Price contract.\74\ Accordingly, with respect to its

Union-Dawn Fixed-Price contract, NGX is not required to comply with the

obligations, requirements and timetables prescribed in Commission rule

36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply

with the applicable reporting requirements for ECMs.

---------------------------------------------------------------------------

\74\ See 73 FR 75888, 75893 (Dec. 12, 2008).

---------------------------------------------------------------------------

e. The Phys, ID, 7a (CA/GJ), AB-NIT (7a Index) Contract and the SPDC

Indicia

The NGX 7a Index contract calls for physical delivery of natural

gas at the Alberta, Canada, trading hub during the specified calendar

month. When trading this contract, market participants price the

difference between the anticipated value of natural gas at the time of

delivery and the average of actual trades on the NGX system. The

average of transactions on the NGX system is reported as a volume-

weighted average price index in the first publication of the delivery

month of Canadian Enerdata, Ltd.'s Canadian Gas Price Reporter. At the

time of delivery, the negotiated price premium or discount is added or

subtracted to the published index price. There is no standard size for

the 7a Index contract, although a minimum volume of 94.78 mmBtu is

required in increments of 100 units per day. The NGX lists the 7a Index

contract for 60 calendar months.

Located in the Canadian province of Alberta, the Alberta natural

gas market is a major connection point for long-distance transmission

systems that ship natural gas to points throughout Canada and the

United States. The Alberta province is Canada's dominant natural gas

producing region; six of the nine Canadian market centers are located

in the Alberta province. The throughput capacity at the AECO-C hub is

ten billion cubic feet per day. Moreover, the number of pipeline

interconnections at that hub was four in 2008. Lastly, the AECO-C hub's

capacity is 20.4 billion cubic feet per day.\75\

---------------------------------------------------------------------------

\75\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/

feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.

---------------------------------------------------------------------------

In its October 20, 2009, Federal Register notice, the Commission

identified material liquidity and material price reference as the

potential SPDC criteria applicable to the 7a Index contract. Each of

these factors is discussed below.\76\

---------------------------------------------------------------------------

\76\ As noted above, the Commission did not find an indication

of arbitrage and price linkage in connection with this contract;

accordingly, those criteria are not discussed in reference to the 7a

Index contract.

---------------------------------------------------------------------------

1. Material Price Reference Criterion

The Commission's October 20, 2009, Federal Register notice

identified material price reference as a potential basis for a SPDC

determination with respect to this contract. The Commission noted that

NGX forged an alliance with ICE to use ICE's matching engine to

complete transactions in

[[Page 23742]]

physical gas contracts traded on NGX. In return, NGX agreed to provide

the clearing services for such transactions. As part of the agreement,

NGX provides ICE with transaction data, which are then made available

to market participants on a paid basis. ICE offers the NGX data in

several packages, which vary in terms of the amount of available

historical data. For example, the ICE offers the ``OTC Gas End of Day''

data packages with access to all price data, or just current prices

plus a selected number of months (i.e., 12, 24, 36, or 48 months) of

historical data.

The Commission will rely on one of two sources of evidence--direct

or indirect--to determine that the price of a contract was being used

as a material price reference and therefore, serving a significant

price discovery function.\77\ With respect to direct evidence, the

Commission will consider the extent to which, on a frequent and

recurring basis, cash market bids, offers or transactions are directly

based on or quoted at a differential to, the prices generated on the

ECM in question. Direct evidence may be established when cash market

participants are quoting bid or offer prices or entering into

transactions at prices that are set either explicitly or implicitly at

a differential to prices established for the contract in question. Cash

market prices are set explicitly at a differential to the section

2(h)(3) contract when, for instance, they are quoted in dollars and

cents above or below the reference contract's price. Cash market prices

are set implicitly at a differential to a section 2(h)(3) contract

when, for instance, they are arrived at after adding to, or subtracting

from the section 2(h)(3) contract, but then quoted or reported at a

flat price. With respect to indirect evidence, the Commission will

consider the extent to which the price of the contract in question is

being routinely disseminated in widely distributed industry

publications--or offered by the ECM itself for some form of

remuneration--and consulted on a frequent and recurring basis by

industry participants in pricing cash market transactions.

---------------------------------------------------------------------------

\77\ 17 CFR part 36, Appendix A.

---------------------------------------------------------------------------

The Alberta hub is a major trading center for natural gas in North

America. Traders, including producers, keep abreast of the prices of

the Alberta market center when conducting cash deals. However, ICE's

cash-settled AECO Financial Basis contract is used more widely as a

price reference than the NGX 7a Index contract. Traders look to the ICE

contract's competitively determined price as an indication of expected

values of natural gas at the Alberta hub when entering into cash market

transactions for natural gas, especially those trades providing for

physical delivery in the future. Traders use ICE's Alberta contract, as

well as other basis contracts, to hedge cash market positions and

transactions. The substantial volume of trading and open interest in

the ICE contract attests to its use for this purpose.\78\ In contrast,

trading volume in the 7a Index contract is much smaller than in ICE's

cash-settled version of the contract. In this regard, total trading

volume in the NGX 7a Index contract in the third quarter of 2009 was

equivalent to 1,946 NYMEX physically-delivered natural gas contracts,

which has a size of 10,000 mmBtu.

---------------------------------------------------------------------------

\78\ In the third quarter of 2009, 6,320 separate trades

occurred on ICE's electronic platform, resulting in a daily average

of 95.8 trades. During the same period, the ICE contract had a total

trading volume on its electronic platform of 736,412 contracts

(which was an average of 11,158 contracts per day). As of September

30, 2009, open interest in the ICE AECO Financial Basis contract was

483,561 contracts.

---------------------------------------------------------------------------

Accordingly, although the Alberta Hub is a major trading center for

natural gas and, as noted, NGX provides price information for the 7a

Index contract to ICE which sells it, the Commission has found upon

further evaluation that the 7a Index contract is not routinely

consulted by industry participants in pricing cash market transactions

and thus does not meet the Commission's Guidance for the material price

reference criterion. In this regard, the ICE AECO Financial Basis

contract is routinely consulted by industry participants in pricing

cash market transactions at this location. Because both the NGX and the

ICE contracts basically price the same commodity at the same location

and time and the ICE contract has significantly higher trading volume

and open interest, it is not necessary for market participants to

independently refer to the 7a Index contract for pricing natural gas at

this location. Thus, the 7a Index contract does not satisfy the direct

price reference test for existence of material price reference.

Furthermore, the Commission notes that publication of the 7a Index

contract's prices is not indirect evidence of material price reference.

The 7a Index contract's prices are published with those of numerous

other contracts, which are of more interest to market participants.

Thus, the Commission has concluded that traders likely do not

specifically purchase the ICE data packages for the 7a Index contract's

prices and do not consult such prices on a frequent and recurring basis

in pricing cash market transactions.

i. Federal Register Comments

NGX expressed the opinion that the 7a Index contract does not meet

the material price reference criteria because it lacks sufficient

trading activity.

ii. Conclusion Regarding Material Price Reference

Based on the above, the Commission finds that the NGX 7a Index

contract does not meet the material price reference criterion because

cash market transactions are not priced either explicitly or implicitly

on a frequent and recurring basis at a differential to the 7a Index

contract's price (direct evidence). Moreover, while the 7a Index

contract's price data is sold to market participants, market

participants likely do not specifically purchase the ICE data packages

for the 7a Index contract's prices and do not consult such prices on a

frequent and recurring basis in pricing cash market transactions

(indirect evidence).

2. Material Liquidity Criterion

As noted above, in its October 20, 2009, Federal Register notice,

the Commission identified material liquidity and material price

reference as potential criteria for SPDC determination of the 7a Index

contract. To assess whether a contract meets the material liquidity

criterion, the Commission first examines trading activity as a general

measurement of the contract's size and potential importance. If the

Commission finds that the contract in question meets a threshold of

trading activity that would render it of potential importance, the

Commission will then perform a statistical analysis to measure the

effect that changes to the subject-contract's prices potentially may

have on prices for other contracts listed on an ECM or a DCM.

The Commission noted that the average number of transactions in the

7a Index contract was 10.9 in the second quarter of 2009. During the

same period, the 7a Index contract had an average daily trading volume

of 2,438,627 mmBtu (244 NYMEX-equivalent contracts of 10,000 mmBtu

size). Moreover, the net open interest as of June 30, 2009, was

6,287,794 mmBtu (629 NYMEX-equivalent contracts of 10,000 mmBtu size)

for delivery in the following month.\79\

---------------------------------------------------------------------------

\79\ Second quarter 2009 data was submitted to the Commission is

a different format than in later filings. In this regard total

trading volume and total number of trades per quarter were not

identified.

---------------------------------------------------------------------------

[[Page 23743]]

In a subsequent filing dated November 13, 2009, NGX reported that

total trading volume in the third quarter of 2009 was 1,964 NYMEX-

equivalent contracts. In terms of number of transactions, 1,056 trades

occurred in the third quarter of 2009 (an average of 17 trades per

day). As of September 30, 2009, open interest in the 7a Index contract

was 14,355 NYMEX-equivalent contracts.

The Commission notes that trading activity in the 7a Index contract

increased between the second and third quarters of 2009. In any case,

the number of trades per day was only slightly more than the minimum

reporting threshold (5 trades per day). Moreover, trading activity in

the 7a Index contract, as characterized by total quarterly volume,

indicates that the Index contract experiences trading activity similar

to that of minor futures markets.\80\ Thus, the 7a Index contract does

not meets a threshold of trading activity that would render it of

potential importance and no additional statistical analysis is

warranted.\81\

---------------------------------------------------------------------------

\80\ Based on the Commission's experience, a minor futures

contract is, generally, one that has a quarterly trading volume of

100,000 contracts or less.

\81\ In establishing guidance to illustrate how it will evaluate

the various criteria, or combinations of criteria, when determining

whether a contract is a SPDC, the Commission made clear that

``material liquidity itself would not be sufficient to make a

determination that a contract is a [SPDC], * * * but combined with

other factors it can serve as a guidepost indicating which contracts

are functioning as [SPDCs].'' For the reasons discussed above, the

Commission has found that the TCO contract does not meet either the

price linkage or material price reference criterion. In light of

this finding and the Commission's Guidance cited above, there is no

need to evaluate further the material liquidity criteria since it

cannot be used alone as a basis for a SPDC determination.

---------------------------------------------------------------------------

i. Federal Register Comments

NGX stated in its comment letter that the 7a Index contract does

not meet the material liquidity criterion for SPDC determination for a

number of reasons.

First NGX opined that the Commission ``seems to have applied a

threshold for ``material liquidity'' that is extremely low, and in

general insufficient to support a determination that these contracts

are no longer emerging markets but in fact serve a significant price

discovery function''. NGX also noted that the Commission's Guidance

states that material liquidity was intended to be a ``broad concept

that captures the ability to transact immediately with little or no

price concession.'' The Guidance also states that where ``material

liquidity exists, a more or less continuous stream of prices can be

observed and the prices should be similar'', such as ``where trades

occur multiple times per minutes. NGX then opined that ``[t]he levels

of liquidity outlined above for the Proposed Contracts cannot be what

Congress intended in establishing the dividing line between contracts

ripe for regulation and those still emerging and in need of further

investigation.

WGCEF also stated that the 7a contract lacks sufficient liquidity

to perform a significant price discovery function. They cite the data

in the Notice of Intent as evidence that trade frequency in terms of

multiple trades per day is extremely low.

In this regard, the Commission notes that it adopted a five trades-

per-day threshold as a reporting requirement to enable it to

``independently be aware of ECM contracts that may develop into SPDCs''

\82\ rather than solely relying upon an ECM on its own to identify any

such potential SPDCs to the Commission. Thus, any contract that meets

this threshold may be subject to scrutiny as a potential SPDC but this

does not mean that the contract will be found to be a SPDC merely

because it met the reporting threshold. Furthermore, the Commission

observes that a continuous stream of prices would indeed be an

indication of liquidity for certain markets but the Guidance also notes

that ``quantifying the levels of immediacy and price concession that

would define material liquidity may differ from one market or commodity

to another.''

---------------------------------------------------------------------------

\82\ 73 FR 75892 (December 12, 2008).

---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity

For the reasons discussed above, the Commission finds that the 7a

Index contract does not meet the material liquidity criterion.

3. Overall Conclusion Regarding the 7a Index Contract

After considering the entire record in this matter, including the

comments received, the Commission has determined that the 7a Index

contract does not perform a significant price discovery function under

the criteria established in section 2(h)(7) of the CEA. Specifically,

the Commission has determined that the 7a Index contract does not meet

the material price reference or material liquidity criteria at this

time. Accordingly, the Commission will issue the attached Order

declaring that the 7a Index contract is not a SPDC.

Issuance of this Order indicates that the Commission does not at

this time regard NGX as a registered entity in connection with its 7a

Index contract.\83\ Accordingly, with respect to its 7a Index contract

NGX is not required to comply with the obligations, requirements and

timetables prescribed in Commission rule 36.3(c)(4) for ECMs with

SPDCs. However, NGX must continue to comply with the applicable

reporting requirements.

---------------------------------------------------------------------------

\83\ See 73 FR 75888, 75893 (Dec. 12, 2008).

---------------------------------------------------------------------------

V. Related Matters

a. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') \84\ 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 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.

---------------------------------------------------------------------------

\84\ 44 U.S.C. 3507(d).

---------------------------------------------------------------------------

b. Cost-Benefit Analysis

Section 15(a) of the CEA\85\ 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 actions. 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. The Commission may in its discretion give

greater weight to any one of the five enumerated areas and could in its

discretion determine that, notwithstanding its costs, a particular

order is necessary or appropriate to protect the public interest or to

effectuate any of the provisions or accomplish any of the purposes of

the Act.

---------------------------------------------------------------------------

\85\ 7 U.S.C. 19(a).

---------------------------------------------------------------------------

When a futures contract begins to serve a significant price

discovery function, that contract, and the ECM on which it is traded,

warrants increased oversight to deter and prevent price manipulation or

other disruptions to market integrity, both on the ECM itself and in

any related futures contracts

[[Page 23744]]

trading on DCMs. An Order finding that a particular contract is a SPDC

triggers this increased oversight and imposes obligations on the ECM

calculated to accomplish this goal. The increased oversight engendered

by the issue of a SPDC Order increases transparency and helps to ensure

fair competition among ECMs and DCMs trading similar products and

competing for the same business. Moreover, the ECM on which the SPDC is

traded must assume, with respect to that contract, all the

responsibilities and obligations of a registered entity under the CEA

and Commission regulations. Additionally, the ECM must comply with nine

core principles established by section 2(h)(7) of the Act--including

the obligation to establish position limits and/or accountability

standards for the SPDC. Section 4(i) of the CEA authorize the

Commission to require reports for SPDCs listed on ECMs. These increased

responsibilities, along with the CFTC's increased regulatory authority,

subject the ECM's risk management practices to the Commission's

supervision and oversight and generally enhance the financial integrity

of the markets.

The Commission has concluded that NGX's Alberta Basis, Union-Dawn

Basis, Alberta Fixed-Price, Union-Dawn Fixed-Price and 7a Index

contracts that are the subject of the attached Orders are not SPDCs;

accordingly, the Commission's Orders impose no additional costs and no

additional statutorily or regulatory mandated responsibilities on the

ECM.

c. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') \86\ requires that

agencies consider the impact of their rules on small businesses. The

requirements of CEA section 2(h)(7) and the Part 36 rules affect ECMs.

The Commission previously has determined that ECMs are not small

entities for purposes of the RFA.\87\ Accordingly, the Chairman, on

behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)

that these Orders, taken in connection with section 2(h)(7) of the Act

and the Part 36 rules, will not have a significant impact on a

substantial number of small entities.

---------------------------------------------------------------------------

\86\ 5 U.S.C. 601 et seq.

\87\ 66 FR 42256, 42268 (Aug. 10, 2001).

---------------------------------------------------------------------------

VI. Orders

a. Order Relating to the Phys, BS, LD1 (US/MM), AB-NIT Contract

After considering the complete record in this matter, including the

comment letters received in response to its request for comments, the

Commission has determined to issue the following Order:

The Commission, pursuant to its authority under section 2(h)(7) of

the Act, hereby determines that the Phys, BS, LD1 (US/MM), AB-NIT

contract, traded on the Natural Gas Exchange, Inc., does not at this

time satisfy the material price preference, price linkage or material

liquidity criteria for significant price discovery contracts.

Consistent with this determination, the Natural Gas Exchange, Inc., is

not considered a registered entity \88\ with respect to the Phys, BS,

LD1 (US/MM), AB-NIT contract and is not subject to the provisions of

the Commodity Exchange Act applicable to registered entities. Further,

the obligations, requirements and timetables prescribed in Commission

rule 36.3(c)(4) governing core principle compliance by the Natural Gas

Exchange, Inc., are not applicable to the Phys, BS, LD1 (US/MM), AB/NIT

contract with the issuance of this Order.

---------------------------------------------------------------------------

\88\ 7 U.S.C. 1a(29).

---------------------------------------------------------------------------

This Order is based on the representations made to the Commission

by the Natural Gas Exchange, Inc., dated August 25, 2009, and October

15, 2009, and other supporting material. Any material change or

omissions in the facts and circumstances pursuant to which this order

is granted might require the Commission to reconsider its current

determination that the Phys, BS, LD1 (US/MM), AB-NIT contract is not a

significant price discovery contract. Additionally, to the extent that

it continues to rely upon the exemption in Section 2(h)(3) of the Act,

the Natural Gas Exchange, Inc., must continue to comply with all of the

applicable requirements of Section 2(h)(3) and Commission Regulation

36.3.

b. Order Relating to the Phys, BS, LD1 (US/MM), Union-Dawn Contract

After considering the complete record in this matter, including the

comment letters received in response to its request for comments, the

Commission has determined to issue the following Order:

The Commission, pursuant to its authority under section 2(h)(7) of

the Act, hereby determines that the Phys, BS, LD1 (US/MM), Union-Dawn

contract, traded on the Natural Gas Exchange, Inc., does not at this

time satisfy the material price reference, price linkage or material

liquidity criteria for significant price discovery contracts.

Consistent with this determination, the Natural Gas Exchange, Inc., is

not considered a registered entity \89\ with respect to the Phys, BS,

LD1 (US/MM), Union-Dawn contract and is not subject to the provisions

of the Commodity Exchange Act applicable to registered entities.

Further, the obligations, requirements and timetables prescribed in

Commission rule 36.3(c)(4) governing core principle compliance by the

Natural Gas Exchange, Inc., are not applicable to the Phys, BS, LD1

(US/MM), Union-Dawn contract with the issuance of this Order.

---------------------------------------------------------------------------

\89\ 7 U.S.C. 1a(29).

---------------------------------------------------------------------------

This Order is based on the representations made to the Commission

by the Natural Gas Exchange, Inc., August 25, 2009, and October 15,

2009, and other supporting material. Any material change or omissions

in the facts and circumstances pursuant to which this order is granted

might require the Commission to reconsider its current determination

that the Phys, BS, LD1 (US/MM), Union-Dawn contract is not a

significant price discovery contract. Additionally, to the extent that

it continues to rely upon the exemption in Section 2(h)(3) of the Act,

the Natural Gas Exchange, Inc., must continue to comply with all of the

applicable requirements of Section 2(h)(3) and Commission Regulation

36.3.

c. Order Relating to the Phys, FP, (CA/GJ), AB-NIT Contract

After considering the complete record in this matter, including the

comment letters received in response to its request for comments, the

Commission has determined to issue the following Order:

The Commission, pursuant to its authority under section 2(h)(7) of

the Act, hereby determines that the Phys, FP, (CA/GJ), AB-NIT contract,

traded on the Natural Gas Exchange, Inc., does not at this time satisfy

the material price reference or material liquidity reference criteria

for significant price discovery contracts. Consistent with this

determination, the Natural Gas Exchange, Inc., is not considered a

registered entity \90\ with respect to the Phys, FP, (CA/GJ), AB-NIT

contract and is not subject to the provisions of the Commodity Exchange

Act applicable to registered entities. Further, the obligations,

requirements and timetables prescribed in Commission rule 36.3(c)(4)

governing core principle compliance by the Natural Gas Exchange, Inc.,

are not applicable to the Phys, FP, (CA/GJ), AB-NIT contract with the

issuance of this Order.

---------------------------------------------------------------------------

\90\ 7 U.S.C. 1a(29).

---------------------------------------------------------------------------

[[Page 23745]]

This Order is based on the representations made to the Commission

by the Natural Gas Exchange, Inc., dated August 25, 2009, and October

15, 2009, and other supporting material. Any material change or

omissions in the facts and circumstances pursuant to which this order

is granted might require the Commission to reconsider its current

determination that the Phys, FP, (CA/GJ), AB-NIT contract is not a

significant price discovery contract. Additionally, to the extent that

it continues to rely upon the exemption in Section 2(h)(3) of the Act,

the Natural Gas Exchange, Inc., must continue to comply with all of the

applicable requirements of Section 2(h)(3) and Commission Regulation

36.3.

d. Order Relating to the Phys, FP, (US/MM), Union-Dawn Contract

After considering the complete record in this matter, including the

comment letters received in response to its request for comments, the

Commission has determined to issue the following Order:

The Commission, pursuant to its authority under section 2(h)(7) of

the Act, hereby determines that the Phys, FP, (US/MM), Union-Dawn

contract, traded on the Natural Gas Exchange, Inc., does not at this

time satisfy the material price reference or material liquidity

criteria for significant price discovery contracts. Consistent with

this determination, the Natural Gas Exchange, Inc., is not considered a

registered entity \91\ with respect to the Phys, FP, (US/MM), Union-

Dawn contract and is not subject to the provisions of the Commodity

Exchange Act applicable to registered entities. Further, the

obligations, requirements and timetables prescribed in Commission rule

36.3(c)(4) governing core principle compliance by the Natural Gas

Exchange, Inc., are not applicable to the Phys, FP, (US/MM), Union-Dawn

contract with the issuance of this Order.

---------------------------------------------------------------------------

\91\ 7 U.S.C. 1a(29).

---------------------------------------------------------------------------

This Order is based on the representations made to the Commission

by the Natural Gas Exchange, Inc., dated August 25, 2009, and October,

15, 2009, and other supporting material. Any material change or

omissions in the facts and circumstances pursuant to which this order

is granted might require the Commission to reconsider its current

determination that the Phys, FP, (US/MM), Union-Dawn contract is not a

significant price discovery contract. Additionally, to the extent that

it continues to rely upon the exemption in Section 2(h)(3) of the Act,

the Natural Gas Exchange, Inc., must continue to comply with all of the

applicable requirements of Section 2(h)(3) and Commission Regulation

36.3.

e. Order Relating to the Phys, ID, 7a (CA/GJ), AB-NIT Contract

After considering the complete record in this matter, including the

comment letters received in response to its request for comments, the

Commission has determined to issue the following Order:

The Commission, pursuant to its authority under section 2(h)(7) of

the Act, hereby determines that the Phys, ID, 7a (CA/GJ), AB-NIT

contract, traded on the Natural Gas Exchange, Inc., does not at this

time satisfy the material price reference or material liquidity

criteria for significant price discovery contracts. Consistent with

this determination, the Natural Gas Exchange, Inc., is not considered a

registered entity \92\ with respect to the Phys, ID, 7a (CA/GJ), AB-NIT

contract and is not subject to the provisions of the Commodity Exchange

Act applicable to registered entities. Further, the obligations,

requirements and timetables prescribed in Commission rule 36.3(c)(4)

governing core principle compliance by the Natural Gas Exchange, Inc.,

are not applicable to the Phys, ID, 7a (CA/GJ), AB-NIT contract with

the issuance of this Order.

---------------------------------------------------------------------------

\92\ 7 U.S.C. 1a(29).

---------------------------------------------------------------------------

This Order is based on the representations made to the Commission

by the Natural Gas Exchange, Inc., dated August 25, 2009, and October

15, 2009, and other supporting material. Any material change or

omissions in the facts and circumstances pursuant to which this order

is granted might require the Commission to reconsider its current

determination that the Phys, ID, 7a (CA/GJ), AB-NIT contract is not a

significant price discovery contract. Additionally, to the extent that

it continues to rely upon the exemption in Section 2(h)(3) of the Act,

the Natural Gas Exchange, Inc., must continue to comply with all of the

applicable requirements of Section 2(h)(3) and Commission Regulation

36.3.

Issued in Washington, DC on April 28, 2010, by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. 2010-10314 Filed 5-3-10; 8:45 am]

BILLING CODE P

Last Updated: May 4, 2010