e9-25238

FR Doc E9-25238[Federal Register: October 26, 2009 (Volume 74, Number 205)]

[Notices]

[Page 54966-54969]

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

[DOCID:fr26oc09-37]

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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 PJM WH Real Time Peak Daily

Contract; PJM WH Real Time Peak Contract; PJM WH Real Time Off-Peak

Contract; PJM WH Day Ahead LMP Peak Daily Contract; and PJM WH Real

Time 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 PJM

\1\ WH \2\ Real Time Peak Daily (``PDP'') contract; PJM WH Real Time

Peak (``PJM'') contract; PJM WH Real Time Off-Peak (``OPJ'') contract;

PJM WH Day Ahead LMP \3\ Peak Daily (``PDA'') contract; and PJM WH Real

Time Off-Peak Daily (``ODP'') 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) promulgated thereunder. In connection

with this evaluation, the Commission invites comment from interested

parties.

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\1\ The acronym ``PJM'' stands for Pennsylvania New Jersey

Maryland Interconnection, LLC (``PJM Interconnection''), and

signifies the regional electricity transmission organization that

coordinates the generation and distribution of electricity in all or

parts of 13 states and the District of Columbia.

\2\ The acronym WH signifies the PJM's Western Hub.

\3\ The term ``LMP'' stands for ``locational marginal price''

and represents the additional cost associated with producing an

incremental amount of electricity. LMPs account for generation

costs, congestion along the transmission lines, and electricity

loss.

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DATES: Comments must be received on or before November 10, 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 PJM WH Real Time Peak

Daily (PDP) Contract; PJM WH Real Time Peak (PJM) Contract; PJM WH Real

Time Off-Peak (OPJ) Contract; PJM WH Day Ahead LMP Peak Daily (PDA)

Contract; and/or PJM WH Real Time Off-Peak Daily (ODP) 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

[[Page 54967]]

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'') \4\ 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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\4\ 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 a 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 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.\5\ After prompt consideration of all relevant

information,\6\ 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

\7\ 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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\5\ 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).

\6\ 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.

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

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B. PJM WH Real Time Peak Daily Contract

The PDP contract is a daily contract that is cash settled based on

the arithmetic average of hourly, real-time LMPs during the specified

calendar day for the Western Hub, which are published by the PJM

Interconnection for all peak hours during a particular date of

production. The LMPs are published by PJM Interconnection on its Web

site under the heading, ``Daily Real-Time LMP Files.'' The LMPs are

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

the PDP contract is 800 megawatt hours (``MWh''), and the unit of

trading is any multiple of 800 MWh. The PDP contract is listed for up

to 38 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 PDP contract, 48,072

separate trades occurred in the second quarter of 2009, resulting in a

daily average of 751.1 trades. During the same period, the PDP contract

had a total trading volume of 68,586 contracts (which was an average of

1,071.7 contracts per day). As of June 30, 2009, open interest in the

PDP contract was 1,856 contracts. It appears that the ICE PDP contract

may satisfy the material liquidity and material price reference factors

for SPDC determination. With respect to material liquidity, trading in

the PDP contract averaged over 1,000 contracts on a daily basis with

more than 750 separate transactions each day. 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. Power contracts based on actively-traded hubs

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, 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 ``PJM

Power End of Day'' and ``OTC Power End of Day'' data packages with

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

data.

C. PJM WH Real Time Peak Contract

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

on the arithmetic average of hourly, real-time LMPs during the

specified calendar

[[Page 54968]]

month for the Western Hub, which are published by the PJM

Interconnection for all peak hours during the month of production. The

LMPs are published by PJM Interconnection on its Web site under the

heading, ``Daily Real-Time LMP Files.'' The LMPs are derived from power

trades that result in physical delivery. The size of the PJM contract

is 800 MWh, and the unit of trading is the contract size multiplied by

the number of peak days in the calendar month. The PJM contract is

listed for up to 110 consecutive calendar months.

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 PJM contract, 7,990 separate trades occurred in the second

quarter of 2009, resulting in a daily average of 124.8 trades. During

the same period, the PJM contract had a total trading volume of 268,489

(which was an average of 4,195.1 contracts per day). As of June 30,

2009, open interest in the PJM contract was 318,788 contracts.

It appears that the ICE PJM contract may satisfy the material

liquidity and material price reference factors for SPDC determination.

With respect to material liquidity, trading in the PJM contract

averaged 4,200 contracts on a daily basis with more than 120 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. Power

contracts based on actively-traded hubs 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, 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 ``PJM Power End of Day'' and

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

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

D. PJM WH Real-Time Off-Peak Contract

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

on the arithmetic average of hourly, real-time LMPs during the

specified calendar month for the Western Hub, which are published by

the PJM Interconnection for all off-peak hours during the month of

production. The LMPs are published by PJM Interconnection on its Web

site under the heading, ``Daily Real-Time LMP Files.'' The LMPs are

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

the OPJ contract is 50 MWh, and the unit of trading is determined by

multiplying the contract size by the number of off-peak days in the

calendar month traded. The OPJ contract is listed for up to 86 calendar

months with four complete calendar years. 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 OPJ contract,

437 separate trades occurred in the second quarter of 2009, resulting

in a daily average of 6.8 trades. During the same period, the OPJ

contract had a total trading volume of 325,799 contracts (which was an

average of 5,090.6 contracts per day). As of June 30, 2009, open

interest in the OPJ contract was 2,976,492 contracts.

It appears that the ICE OPJ contract may satisfy the material

liquidity and material price reference factors for SPDC determination.

With respect to material liquidity, trading in the OPJ contract

averaged over 5,000 contracts on a daily basis with more than six

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. Power contracts based on actively-traded hubs

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, 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 ``PJM

Power End of Day'' and ``OTC Power End of Day'' data packages with

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

data.

E. PJM WH Day-Ahead LMP Peak Daily Contract

The PDA contract is a daily contract that is cash settled based on

the arithmetic average of hourly, day-ahead LMPs during the specified

day for the Western Hub, which are published by the PJM Interconnection

for all peak hours during a particular date of production. The LMPs are

published by PJM Interconnection on its Web site under the heading,

``Day-Ahead LMP Data.'' The LMPs are derived from power trades that

result in physical delivery. The size of the PDA contract is 800 MWh.

The PDA contract is listed for up to 38 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 PDA contract, 1,063 separate trades occurred in the second

quarter of 2009, resulting in a daily average of 16.6 trades. During

the same period, the PDA contract had a total trading volume of 1,435

contracts (which was an average of 22.4 contracts per day). As of June

30, 2009, open interest in the PDA contract was 75 contracts.

It appears that the ICE PDA contract may satisfy the material

liquidity and material price reference factors for SPDC determination.

With respect to material liquidity, trading in the PDA contract

averaged over 20 contracts on a daily basis with more than 15 separate

transactions each day. 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. Power

contracts based on actively-traded hubs 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, 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 ``PJM Power End of Day'' and

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

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

F. PJM WH Real-Time Off-Peak Daily Contract

The ODP contract is a daily contract that is cash settled based on

the arithmetic average of hourly, real-time LMPs during the specified

calendar day for the Western Hub, which are published by the PJM

Interconnection for all off-peak hours during the particular date of

production. The LMPs are published by PJM Interconnection on its Web

site under the heading, ``Daily Real-Time LMP Files.'' The LMPs are

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

the ODP contract is 50 MWh, and the unit of trading is any multiple of

50 MWh. The ODP contract is listed for up to 38 consecutive calendar

days. Based upon a required quarterly notification

[[Page 54969]]

filed on July 27, 2009 (mandatory under Rule 36.3(c)(2)), the ICE

reported that, with respect to its ODP contract, 723 separate trades

occurred in the second quarter of 2009, resulting in a daily average of

11.3 trades. During the same period, the ODP contract had a total

trading volume of 7,448 contracts (which was an average of 116.4

contracts per day). As of June 30, 2009, open interest in the ODP

contract was 256 contracts.

It appears that the ICE ODP contract may satisfy the material

liquidity and material price reference factors for SPDC determination.

With respect to material liquidity, trading in the ODP contract

averaged over 110 contracts on a daily basis with more than 10 separate

transactions each day. 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. Power

contracts based on actively-traded hubs 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, 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 ``PJM Power End of Day'' and

``OTC 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,\8\ the Commission, in making SPDC determinations, will apply and

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

circumstances under consideration.

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\8\ 17 CFR 36, Appendix A.

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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 PDP, PJM, OPJ, PDA, and/or ODP

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 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 contracts.

Moreover, because five contracts are included in this notice, it is

important that commenters identify to which contract(s) their comments

apply.

IV. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') \9\ 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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\9\ 44 U.S.C. 3507(d).

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B. Cost-Benefit Analysis

Section 15(a) of the CEA \10\ 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 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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\10\ 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 October 14, 2009 by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-25238 Filed 10-23-09; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: October 26, 2009