FR Doc E9-25181[Federal Register: October 20, 2009 (Volume 74, Number 201)]


[Page 53728-53730]

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 Fuel Oil-180 Singapore Swap 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 Fuel

Oil--180 Singapore Swap (``SZS'') 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 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 November 4, 2009.

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

Follow the instructions for submitting comments. Federal

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

E-mail: [email protected] Include Fuel Oil--180

Singapore Swap (SZS) 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

[[Page 53729]]

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 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. Fuel Oil-180 Singapore Swap Contract

The SZS contract specifies 1,000 metric tons of 180 CentiStokes

(cst) Singapore high-sulfur fuel oil. The contract is cash-settled

based on the arithmetic average of the means between the daily high and

low price quotations for ``HSFO 180 CST'' delivered in the specified

calendar month, published under the ``Singapore'' heading within

Platts' Asia-Pacific/Arab Gulf Marketscan. The SZS contract is listed

for up to 60 consecutive calendar months beginning 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 the SZS contract, the total number of trades was 1,957 in the second

quarter of 2009, resulting in a daily average of 30.6 trades. During

the same period, the SZS contract had a total trading volume of 13,170

contracts and an average daily trading volume of 205.8 contracts.

Additionally, as of June 30, 2009, open interest was 11,356 contracts.

It appears that the SZS contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, as noted above, trading in the ICE SZS

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

30 separate transactions each day. In regard to material price

reference, while it did not specify which contracts served a

significant price discovery function or reference this particular

contract, the Commission's ECM Study stated that, in general, market

participants view the ICE as a price discovery market for certain

energy contracts. Energy contracts based on actively-traded locations

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

the remainder being completed over-the-counter and potentially

submitted for clearing by voice brokers. In addition, 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 ``OTC

Oil 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 Part 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 SZS contract performs a

significant price discovery function. Commenters' attention is directed

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

detailed discussion of the factors relevant to a SPDC determination.

The Commission notes that comments which analyze the contracts in terms

of these factors will be especially helpful to the determination

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

Commission requests that commenters explain in what capacity are they

knowledgeable about the subject contract.

[[Page 53730]]

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 14, 2009 by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-25181 Filed 10-19-09; 8:45 am]


Last Updated: October 20, 2009