FR Doc E9-24379[Federal Register: October 9, 2009 (Volume 74, Number 195)]


[Page 52198-52200]

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




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 Chicago Financial Basis Contract, Offered

for Trading on the IntercontinentalExchange, Inc., Performs a

Significant Price Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of action and request for comment.


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

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

Chicago Financial Basis (``DGD'') contract, offered for trading on the

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

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

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

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

CEA and Commission rule 36.3(c) promulgated thereunder. In connection

with this evaluation, the Commission invites comment from interested


DATES: Comments must be received on or before October 26, 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 Chicago Financial

Basis (DGD) Contract in the subject line of the message.

Fax: (202) 418-5521.

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

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

NW., Washington, DC 20581.

Courier: Same as mail above.

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


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

Division of Market Oversight, Commodity Futures Trading Commission,

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

Telephone: (202) 418-5515. E-mail: [email protected]; or Susan Nathan,

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

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


I. Introduction

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

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

Act'') \1\ which subjects ECMs with significant price discovery

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

well as certain Commission oversight authorities, with respect to those

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

the information-submission requirements applicable to ECMs, establish

procedures and standards by which the Commission will determine whether

an ECM contract performs a significant price discovery function, and

provide guidance with respect to compliance with nine statutory core

principles applicable to ECMs with SPDCs. These rules became effective

on April 22, 2009.


\1\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on

April 22, 2009.


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

Commission will evaluate the contract's material liquidity, price

linkage to other contracts, potential for arbitrage with other

contracts traded on designated

[[Page 52199]]

contract markets or derivatives transaction execution facilities, use

of the ECM contract's prices to execute or settle other transactions,

and other factors.

In order to facilitate the Commission's identification of possible

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

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

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

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

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

regarding the contract to market participants or industry publications;

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

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

contemporaneously determined closing, settlement, or other daily price

of another agreement.

II. Determination of a SPDC

A. The SPDC Determination Process

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

Commission makes and announces its determination on whether a specific

ECM contract serves a significant price discovery function. Under those

procedures, the Commission will publish a notice in the Federal

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

specified agreement, contract, or transaction performs a significant

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

arguments relevant to its determination from the ECM and other

interested persons.\2\ After prompt consideration of all relevant

information,\3\ the Commission will, within a reasonable period of time

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

determination. Following the issuance of an order by the Commission

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

that performs a significant price discovery function, the ECM must

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

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

\4\ and the applicable provisions of Part 36. If the Commission's order

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

contracts performs a significant price discovery function, the ECM must

submit a written demonstration of its compliance with the core

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

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

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

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

Commission's order.


\2\ The Commission may commence this process on its own

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

pursuant to the notification provisions of Commission rule


\3\ Where appropriate, the Commission may choose to interview

market participants regarding their impressions of a particular

contract. Further, while they may not provide direct evidentiary

support with respect to a particular contract, the Commission may

rely for background and context on resources such as its October

2007 Report on the Oversight of Trading on Regulated Futures

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



\4\ 7 U.S.C. 2(h)(7)(C).


B. Chicago Financial Basis Contract

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

on the difference between the price of natural gas at the Chicago

Citygate hub for the month of delivery in the first publication of the

month, as published by Intelligence Press, Inc. (IPI), in NGI's Bidweek

Survey, and the final settlement price for New York Mercantile

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

futures contract for the same specified calendar month. The bidweek

price is computed from fixed-price, bilateral transactions executed

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

transactions specify the delivery of natural gas at the Chicago

Citygate hub during the following calendar month. The price index is

computed as the volume-weighted average of the applicable natural gas

transactions. Bidweek prices are published on the first business day of

the month in which the gas flows. The size of the DGD contract is 2,500

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

contract is listed for up to 72 calendar months commencing with the

next calendar month.

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 DGD contract, the total number of trades was 1,572 in the second

quarter of 2009, resulting in a daily average of 24.6 trades. During

the same period, the DGD contract had a total trading volume of 146,193

contracts and an average daily trading volume of 2,284.3 contracts.

Moreover, the open interest as of June 30, 2009, was 127,744 contracts.

It appears that the DGD contract may satisfy the material

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

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

contract averaged over 2,000 contracts on a daily basis, with nearly 25

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

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

settlement of the DGD contract is based, in part, on the final

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

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

a designated contract market (``DCM''). In terms of material price

reference, the ICE maintains exclusive rights over IPI's bidweek price

indices. As a result, no other exchange can offer such a basis contract

based on IPI's Chicago Citygate bidweek index. While other third-party

price providers produce natural gas price indices for a variety of

trading centers, those indices may not have the same values or quality

as IPI's price indices; each company's bidweek indices are based on

transactions that are consummated during the last five days of the

month prior to delivery and are voluntarily submitted by traders. 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 ``Midcontinent Gas End of Day'' and ``OTC Gas

End of Day'' data packages with access to all price data or just 12,

24, 36, or 48 months of historical data.

III. Request for Comment

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

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

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

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

material liquidity. As it explained in Appendix A to the Part 36

rules,\5\ the Commission, in making SPDC determinations, will apply and

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

circumstances under consideration.


\5\ 17 CFR 36, Appendix A.


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

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

and from any other interested parties. Accordingly, the Commission

requests comment on whether the ICE's DGD contract performs a

significant price discovery function. Commenters'

[[Page 52200]]

attention is directed particularly to Appendix A of the Commission's

Part 36 rules for a detailed discussion of the factors relevant to a

SPDC determination. The Commission notes that comments which analyze

the contract 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 they are knowledgeable about the subject contract.

IV. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') \6\ imposes certain

requirements on federal agencies, including the Commission, in

connection with their conducting or sponsoring any collection of

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

Commission rule 36.3 impose new regulatory and reporting requirements

on ECMs, resulting in information collection requirements within the

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

control number 3038-0060 to this collection of information.


\6\ 44 U.S.C. 3507(d).


B. Cost-Benefit Analysis

Section 15(a) of the CEA \7\ requires the Commission to consider

the costs and benefits of its actions before issuing an order under the

Act. By its terms, section 15(a) does not require the Commission to

quantify the costs and benefits of 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.


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


The bulk of the costs imposed by the requirements of Commission

Rule 36.3 relate to significant and increased information-submission

and reporting requirements adopted in response to the Reauthorization

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

whether contracts listed by ECMs qualify as SPDCs. The enhanced

requirements for ECMs will permit the Commission to acquire the

information it needs to discharge its newly-mandated responsibilities

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

elevated status of registered entity under the CEA and are in

compliance with the statutory terms of the core principles of section

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

the Commission to discharge its statutory obligation to monitor for the

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

Issued in Washington, DC, on October 5, 2009 by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-24379 Filed 10-8-09; 8:45 am]


Last Updated: October 9, 2009