e9-23965

FR Doc E9-23965[Federal Register: October 6, 2009 (Volume 74, Number 192)]

[Notices]

[Page 51264-51268]

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

[DOCID:fr06oc09-30]

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COMMODITY FUTURES TRADING COMMISSION

Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of

the Commodity Exchange Act and Commission Rule 36.3(c)(3), To Undertake

a Determination Whether the SP-15 Financial Day-Ahead LMP Peak

Contract; SP-15 Financial Day-Ahead LMP Peak Daily Contract; SP-15

Financial Day-Ahead LMP Off-Peak Daily Contract; SP-15 Financial Swap

Real Time LMP--Peak Daily Contract; SP-15 Financial Day-Ahead LMP Off-

Peak Contract; NP-15 Financial Day-Ahead LMP Peak Daily Contract; and

NP-15 Financial Day-Ahead LMP Off-Peak Daily Contract, Offered for

Trading on the IntercontinentalExchange, Inc., Perform Significant

Price Discovery Functions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of action and request for comment.

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

``Commission'') is undertaking a review to determine whether the SP-15

Financial Day-Ahead LMP \1\ Peak (``SPM'') contract; SP-15 Financial

Day-Ahead LMP Peak Daily (``SDP'') contract; SP-15 Financial Day-Ahead

LMP Off-Peak Daily (``SQP'') contract; SP-15 Financial Swap Real Time

LMP--Peak Daily (``SRP'') contract; SP-15 Financial Day-Ahead LMP Off-

Peak Contract (``OFP''); NP-15 Financial Day-Ahead LMP Peak Daily

(``DPN'') contract; and NP-15 Financial Day-Ahead LMP Off-Peak Daily

(``UNP'') contract, offered for trading on the

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

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

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

functions. Authority for this action is found in section 2(h)(7) of the

CEA and Commission rule 36.3(c)

[[Page 51265]]

promulgated thereunder. In connection with this evaluation, the

Commission invites comment from interested parties.

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\1\ The term LMP represents ``locational marginal price,'' which

represents the additional cost associated with producing an

incremental amount of electricity. LMPs account for generation

costs, congestion along the transmission lines, and loss.

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DATES: Comments must be received on or before October 21, 2009.

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

Follow the instructions for submitting comments. Federal

eRulemaking Portal: http://www.regulations.gov.

E-mail: [email protected] Include ICE SP-15 Financial

Day-Ahead LMP Peak (SPM) Contract; ICE SP-15 Financial Day-Ahead LMP

Peak Daily (SDP) Contract; ICE SP-15 Financial Day-Ahead LMP Off-Peak

Daily (SQP) Contract; ICE SP-15 Financial Swap Real Time LMP--Peak

Daily (SRP) Contract; ICE SP-15 Financial Day-Ahead LMP Off-Peak (OFP)

Contract; ICE NP-15 Financial Day-Ahead LMP Peak Daily (DPN) Contract;

and/or ICE NP-15 Financial Day-Ahead LMP Off-Peak Daily (UNP) Contract

in the subject line of the message, depending on the subject

contract(s) to which the comments apply.

Fax: (202) 418-5521.

Mail: Send to David A. Stawick, Secretary, Commodity

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,

NW., Washington, DC 20581.

Courier: Same as mail above.

All comments received will be posted without change to http://

www.CFTC.gov/.

FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,

Division of Market Oversight, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

Telephone: (202) 418-5515. E-mail: [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

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

provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization

Act'') \2\ which subjects ECMs with significant price discovery

contracts (``SPDCs'') to self-regulatory and reporting requirements, as

well as certain Commission oversight authorities, with respect to those

contracts. Among other things, these rules and rule amendments revise

the information-submission requirements applicable to ECMs, establish

procedures and standards by which the Commission will determine whether

an ECM contract performs a significant price discovery function, and

provide guidance with respect to compliance with nine statutory core

principles applicable to ECMs with SPDCs. These rules became effective

on April 22, 2009.

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\2\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on

April 22, 2009.

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

Commission will consider the contract's material liquidity, price

linkage to other contracts, potential for arbitrage with other

contracts traded on designated contract markets or derivatives

transaction execution facilities, use of the ECM contract's prices to

execute or settle other transactions, and other factors.

In order to facilitate the Commission's identification of possible

SPDCs, Commission rule 36.3(c)(2) requires that an ECM operating in

reliance on section 2(h)(3) promptly notify the Commission and provide

supporting information or data concerning any contract: (i) That

averaged five trades per day or more over the most recent calendar

quarter; and (ii) (A) for which the ECM sells price information

regarding the contract to market participants or industry publications;

or (B) whose daily closing or settlement prices on 95 percent or more

of the days in the most recent quarter were within 2.5 percent of the

contemporaneously determined closing, settlement, or other daily price

of another agreement.

II. Determination of an SPDC

A. The SPDC Determination Process

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

Commission makes and announces its determination on whether a specific

ECM contract serves a significant price discovery function. Under those

procedures, the Commission will publish a notice in the Federal

Register that it intends to undertake a determination as to whether the

specified agreement, contract, or transaction performs a significant

price discovery function and to receive written data, views, and

arguments relevant to its determination from the ECM and other

interested persons.\3\ After prompt consideration of all relevant

information,\4\ the Commission will, within a reasonable period of time

after the close of the comment period, issue an order explaining its

determination. Following the issuance of an order by the Commission

that the ECM executes or trades an agreement, contract, or transaction

that performs a significant price discovery function, the ECM must

demonstrate, with respect to that agreement, contract, or transaction,

compliance with the core principles under section 2(h)(7)(C) of the CEA

\5\ and the applicable provisions of part 36. If the Commission's order

represents the first time it has determined that one of the ECM's

contracts performs a significant price discovery function, the ECM must

submit a written demonstration of its compliance with the core

principles within 90 calendar days of the date of the Commission's

order. For each subsequent determination by the Commission that the ECM

has an additional SPDC, the ECM must submit a written demonstration of

its compliance with the core principles within 30 calendar days of the

Commission's order.

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\3\ The Commission may commence this process on its own

initiative or on the basis of information provided to it by an ECM

pursuant to the notification provisions of Commission rule

36.3(c)(2).

\4\ Where appropriate, the Commission may choose to interview

market participants regarding their impressions of a particular

contract. Further, while they may not provide direct evidentiary

support with respect to a particular contract, the Commission may

rely for background and context on resources such as its October

2007 Report on the Oversight of Trading on Regulated Futures

Exchanges and Exempt Commercial Markets (``ECM Study''). http://

www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-

07_ecmreport.pdf.

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

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B. SP-15 Financial Day-Ahead LMP Peak Contract

The SPM contract is cash settled based on the arithmetic average of

peak-hour, day-ahead LMPs posted by the California ISO \6\ (CAISO) for

the SP-15 Existing Zone Generation (EZ Gen) Hub for all peak hours in

the calendar month. The LMPs are derived from power trades that result

in physical delivery. The size of the SPM contract is 400 megawatt

hours (``MWh''), and the unit of trading is the number of peak days in

the contract month multiplied by 400 MWh (one 400-MWh increment is

referred to as a lot). In other words, a minimum of 400 MWh must be

delivered each peak day of the month, and trading is restricted to

multiples of the number of peak days in the contract month. The SPM

contract is listed for up to 110 months including four entire calendar

years.

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\6\ The acronym ``ISO'' signifies ``Independent System

Operator,'' which is an entity that coordinates electricity

generation and transmission, as well as the grid reliability,

throughout its service area.

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Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the

[[Page 51266]]

ICE reported that, with respect to its SPM contract, 3,235 separate

transactions occurred in the second quarter of 2009, resulting in a

daily average of 50.5 trades. During the same period, the SPM contract

had a total trading volume of 143,717 contracts, and an average daily

trading volume of 2,245.6 contracts. Moreover, the open interest in the

contract as of June 30, 2009, was 460,583 contracts.

It appears that the SPM contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, trading in the SPM contract averaged

more than 2,000 contracts on a daily basis, with approximately 50

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

subject contract was extremely large. In regard to material price

reference, while it did not specifically address the power contracts

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

participants view the ICE as a price discovery market for certain

electricity contracts. Specifically, power contracts based on actively-

traded hubs are transacted heavily on the ICE's electronic trading

platform, with the remainder being traded over-the-counter through

voice brokers and potentially submitted for clearing. In addition, the

ICE sells its price data to market participants in a number of

different packages which vary in terms of the hubs covered, time

periods, and whether the data are daily only or historical. For

example, the ICE offers ``West Power End of Day'' data packages with

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

data.

C. SP-15 Financial Day-Ahead LMP Peak Daily Contract

The SDP contract is cash settled based on the arithmetic average of

peak-hour, day-ahead LMPs posted by the CAISO for the SP-15 EZ Gen Hub

for all peak hours on the day prior to generation. The LMPs are derived

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

contract is 400 MWh. The SDP contract is listed for 45 consecutive

calendar days.

Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

to its SDP contract, 6,159 separate transactions occurred in the second

quarter of 2009, resulting in a daily average of 96.2 trades. During

the same period, the SDP contract had a total trading volume of 23,365

contracts and an average trading volume of 365.1 contracts per day.

Moreover, the open interest in the contract as of June 30, 2009, was

3,387 contracts.

It appears that the SDP contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, trading in the ICE SDP contract averaged

more than 350 contracts on a daily basis, with more than 95 separate

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

contract was large. In regard to material price reference, while it did

not specifically address the power contracts under review, the ECM

Study stated that, in general, market participants view the ICE as a

price discovery market for certain electricity contracts. Specifically,

power contracts based on actively-traded hubs are transacted heavily on

the ICE's electronic trading platform, with the remainder being traded

over-the-counter through voice brokers and potentially submitted for

clearing. In addition, the ICE sells its price data to market

participants in a number of different packages which vary in terms of

the hubs covered, time periods, and whether the data are daily only or

historical. For example, the ICE offers ``West Power End of Day'' data

packages with access to all price data or just 12, 24, 36, or 48 months

of historical data.

D. SP-15 Financial Swap Real Time LMP--Peak Daily

The SRP contract is cash settled based on the arithmetic average of

hourly, real-time LMPs posted by the CAISO for the SP-15 EZ Gen Hub for

all peak hours in the day of the electricity generation. The LMPs are

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

the SRP contract is 400 MWh, and the unit of trading is any multiple of

400 MWh. The SRP contract is listed for 45 consecutive calendar days.

Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

to its SRP contract, 826 separate transactions occurred in the second

quarter of 2009, resulting in a daily average of 12.9 trades. During

the same period, the SRP contract had a total trading volume of 1,014

contracts and an average trading volume of 15.8 contracts per day.

Moreover, the open interest in the contract as of June 30, 2009, was

143 contracts.

It appears that the SRP contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, trading in the ICE SRP contract averaged

more than 15 contracts on a daily basis, with more than 12 separate

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

contract was substantial. In regard to material price reference, while

it did not specifically address the power contracts under review, the

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

a price discovery market for certain electricity contracts.

Specifically, power contracts based on actively-traded hubs are

transacted heavily on the ICE's electronic trading platform, with the

remainder being traded over-the-counter through voice brokers and

potentially submitted for clearing. In addition, the ICE sells its

price data to market participants in a number of different packages

which vary in terms of the hubs covered, time periods, and whether the

data are daily only or historical. For example, the ICE offers ``West

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

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

E. SP-15 Financial Day-Ahead LMP Off-Peak Contract

The OFP contract is cash settled based on the arithmetic average of

off-peak-hour, day-ahead LMPs posted by the CAISO for the SP-15

Existing Zone Generation (EZ Gen) Hub for all off-peak hours in the

calendar month. The LMPs are derived from power trades that result in

physical delivery. The size of the OFP contract is 25 megawatt hours

(``MWh''), and the unit of trading is any multiple of 25 MWh. That is,

a minimum of 25 MWh must be delivered each off-peak day of the month,

and trading is restricted to multiples of the number of off-peak days

in the contract month. The OFP contract is listed for up to 86 months

including three entire calendar years.

Based upon a required quarterly notification filed on April 30,

2009 (mandatory under Rule 36.3(c)(2)), the ICE reported that its OFP

contract met the minimum five trades or more per day threshold in the

first quarter of 2009. During that period, the OFP contract had a total

trading volume of 1,159,586 contracts and the open interest as of March

31, 2009, was 3,259 contracts.

It appears that the ICE OFP contract may satisfy the material

liquidity and material price reference factors for SPDC determination.

With respect to material liquidity, the OFP contract met the minimum

trading threshold with a total trading volume of over one million

contracts in the first quarter of 2009. In addition, the ending open

interest was sizeable. In regard to material price reference, while it

did not specifically

[[Page 51267]]

address the power contracts under review, the ECM Study stated that, in

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

for certain electricity contracts. Specifically, power contracts based

on actively-traded hubs are transacted heavily on the ICE's electronic

trading platform, with the remainder being traded over-the-counter

through voice brokers and potentially submitted for clearing. In

addition, the ICE sells its price data to market participants in a

number of different packages which vary in terms of the hubs covered,

time periods, and whether the data are daily only or historical. For

example, the ICE offers ``West Power End of Day'' data packages with

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

data.

F. NP-15 Financial Day-Ahead LMP Peak Daily Contract

The DPN contract is cash settled based on the arithmetic average of

the peak-hour, day-ahead LMPs posted by the CAISO for the NP-15 EZ Gen

Hub for peak hours on the day prior to generation. The LMPs are derived

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

contract is 400 MWh. The DPN contract is listed for 45 consecutive

calendar days.

Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

to its DPN contract, 2,782 separate transactions occurred in the second

quarter of 2009, resulting in a daily average of 43.5 trades. During

the same period, the DPN contract had a total trading volume of 5,766

contracts and an average trading volume of 90.1 contracts per day.

Moreover, the open interest in the contract as of June 30, 2009, was

947 contracts.

It appears that the DPN contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, trading in the ICE DPN contract averaged

approximately 90 contracts on a daily basis, with more than 40 separate

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

contract was significant. In regard to material price reference, while

it did not specifically address the power contracts under review, the

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

a price discovery market for certain electricity contracts.

Specifically, power contracts based on actively-traded hubs are

transacted heavily on the ICE's electronic trading platform, with the

remainder being traded over-the-counter through voice brokers and

potentially submitted for clearing. In addition, the ICE sells its

price data to market participants in a number of different packages

which vary in terms of the hubs covered, time periods, and whether the

data are daily only or historical. For example, the ICE offers ``West

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

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

G. NP-15 Financial Day-Ahead LMP Off-Peak Daily Contract

The UNP contract is cash settled based on the arithmetic average of

the off-peak-hour, day-ahead LMPs posted by the CAISO for the NP-15 EZ

Gen Hub for off-peak hours on the day prior to generation. The LMPs are

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

the UNP contract is 25 MWh. The UNP contract is listed for 45

consecutive calendar days.

Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

to its UNP contract, 1,925 separate transactions occurred in the second

quarter of 2009, resulting in a daily average of 30.1 trades. During

the same period, the UNP contract had a total trading volume of 36,936

contracts and an average trading volume of 577.1 contracts per day.

Moreover, the open interest in the contract as of June 30, 2009, was

4,152 contracts.

It appears that the UNP contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, trading in the ICE UNP contract averaged

more than 575 contracts on a daily basis, with more than 30 separate

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

contract was large. In regard to material price reference, while it did

not specifically address the power contracts under review, the ECM

Study stated that, in general, market participants view the ICE as a

price discovery market for certain electricity contracts. Specifically,

power contracts based on actively-traded hubs are transacted heavily on

the ICE's electronic trading platform, with the remainder being traded

over-the-counter through voice brokers and potentially submitted for

clearing. In addition, the ICE sells its price data to market

participants in a number of different packages which vary in terms of

the hubs covered, time periods, and whether the data are daily only or

historical. For example, the ICE offers ``West Power End of Day'' data

packages with access to all price data or just 12, 24, 36, or 48 months

of historical data.

III. Request for Comment

In evaluating whether an ECM's agreement, contract, or transaction

performs a significant price discovery function, section 2(h)(7) of the

CEA directs the Commission to consider, as appropriate, four specific

criteria: price linkage, arbitrage, material price reference, and

material liquidity. As it explained in Appendix A to the part 36 rules,

the Commission, in making SPDC determinations, will apply and weigh

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

under consideration.

As part of its evaluation, the Commission will consider the written

data, views, and arguments from any ECM that lists the potential SPDC

and from any other interested parties. Accordingly, the Commission

requests comment on whether the subject contracts perform significant

price discovery functions. Commenters' attention is directed

particularly to Appendix A of the Commission's part 36 rules for a

detailed discussion of the factors relevant to an SPDC determination.

The Commission notes that comments which analyze the contracts in terms

of these factors will be especially helpful to the determination

process. In order to determine the relevance of comments received, the

Commission requests that commenters explain in what capacity are they

knowledgeable about the subject contracts. Moreover, commenters are

requested to identify the contract or contracts to which their comments

apply.

IV. Related Matters

A. Paperwork Reduction Act

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

requirements on Federal agencies, including the Commission, in

connection with their conducting or sponsoring any collection of

information, as defined by the PRA. Certain provisions of final

Commission rule 36.3 impose new regulatory and reporting requirements

on ECMs, resulting in information collection requirements within the

meaning of the PRA; OMB previously has approved and assigned OMB

control number 3038-0060 to this collection of information.

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

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B. Cost-Benefit Analysis

Section 15(a) of the CEA \8\ requires the Commission to consider

the costs and

[[Page 51268]]

benefits of its actions before issuing an order under the Act. By its

terms, section 15(a) does not require the Commission to quantify the

costs and benefits of such an order or to determine whether the

benefits of such an order outweigh its costs; rather, it requires that

the Commission ``consider'' the costs and benefits of its action.

Section 15(a) further specifies that the costs and benefits shall be

evaluated in light of five broad areas of market and public concern:

(1) Protection of market participants and the public; (2) efficiency,

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations.

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

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The bulk of the costs imposed by the requirements of Commission

Rule 36.3 relate to significant and increased information-submission

and reporting requirements adopted in response to the Reauthorization

Act's directive that the Commission take an active role in determining

whether contracts listed by ECMs qualify as SPDCs. The enhanced

requirements for ECMs will permit the Commission to acquire the

information it needs to discharge its newly-mandated responsibilities

and to ensure that ECMs with SPDCs are identified as entities with the

elevated status of registered entity under the CEA and are in

compliance with the statutory terms of the core principles of section

2(h)(7)(C) of the Act. The primary benefit to the public is to enable

the Commission to discharge its statutory obligation to monitor for the

presence of SPDCs and extend its oversight to the trading of SPDCs.

Issued in Washington, DC on September 22, 2009 by the

Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-23965 Filed 10-5-09; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: October 6, 2009