[Federal Register Volume 74, Number 112 (Friday, June 12, 2009)]
[Notices]
[Pages 28028-28030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-13871]


=======================================================================
-----------------------------------------------------------------------

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 Henry Financial LD1 Fixed Price Contract 
Traded on the IntercontinentalExchange, Inc., Performs a Significant 
Price Discovery Function

AGENCY: Commodity Futures Trading Commission.

[[Page 28029]]


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 Henry 
Financial LD1 Fixed Price contract traded 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. The Commission is undertaking this review based upon its 
evaluation of information provided by the ICE, as well as a Commission 
report on ECMs. 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.

DATES: Comments must be received on or before July 13, 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 Henry Financial 
LD1 Fixed Price 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://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'') \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 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.\2\ After prompt consideration of all relevant 
information, 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 
\3\ 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 
36.3(c)(2).
    \3\ 7 U.S.C. 2(h)(7)(C).
---------------------------------------------------------------------------

B. ICE's Henry Financial LD1 Fixed Price Contract

    The ICE Henry Financial LD1 Fixed Price contract is cash settled 
based on the final settlement price of the New York Mercantile 
Exchange's (NYMEX's) physically-delivered Henry Hub-based Natural Gas 
futures contract for the corresponding contract month. \4\ The trading 
unit of the ICE Henry Financial LD1 Fixed Price contract is 2,500 mmBtu 
multiplied by the number of calendar days in the contract month. For 
example, if a contract month has 30 days, the trading unit is 75,000 
mmBtu, which is referred to as 30 lots.
---------------------------------------------------------------------------

    \4\ The NYMEX is a designated contract market that offers 
futures and option contracts on a wide range of energy products, 
including crude oil, refined petroleum products, and natural gas.
---------------------------------------------------------------------------

    Based upon a required quarterly notification filed on April 30, 
2009 (mandatory under Rule 36.3(c)(2)), the subject contract realized 
more than an average of five trades per day during the first quarter of 
2009. In addition, the average volume of natural gas traded each 
business day over that period was 449,010 contracts, and the open 
interest in the contract as of March 31, 2009, was 2,932,798 contracts.

[[Page 28030]]

    It appears that the ICE Henry Financial LD1 Fixed Price contract 
may satisfy the material liquidity, price linkage, and arbitrage 
criteria for SPDC determination. With regard to material liquidity, the 
high average daily trading volume indicates that the subject contract 
is relatively liquid. With respect to the price linkage and arbitrage 
tests, it is noted above that the ICE Henry Financial LD1 Fixed Price 
contract and the NYMEX's physically-delivered Natural Gas futures 
contract have the same final settlement prices. Moreover, ICE uses the 
NYMEX's forward settlement curve when conducting its mark-to-market 
accounting procedures to settle the subject contract on daily basis. An 
October 2007 CFTC publication entitled Report on the Oversight of 
Trading on Regulated Futures Exchanges and Exempt Commercial Markets 
(``ECM Study'') stated that traders and voice brokers view the subject 
ICE contract as economically equivalent to the NYMEX physically-
delivered Natural Gas futures contract. \5\ The ICE and NYMEX contracts 
essentially comprise a single market for natural gas derivatives 
trading, and traders look to both the ICE and to the NYMEX when 
determining where to execute a trade at the best price. The ECM Study 
also stated that the ICE natural gas contract acts as price discovery 
market. To this end, the ECM Study referenced an analysis \6\ of 
whether the NYMEX, ICE, or both facilities exhibit price leadership 
with respect to their natural gas contracts. If a particular exchange's 
prices lead those on another exchange, then the former exchange's 
contract is thought of as a price discovery market. In 2006, the ICE's 
natural gas contract exhibited price leadership on 20 percent of the 
contract days; the NYMEX's physically-delivered natural gas contract, 
on the other hand, exhibited price leadership on 63 percent of the 
contract days. Based on these factors, the ECM Study concluded that the 
ICE and the NYMEX contracts are both price discovery venues for natural 
gas trading.
---------------------------------------------------------------------------

    \5\ http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf.)
    \6\ ECM Study at 11.
---------------------------------------------------------------------------

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. In addition, as part of its evaluation, the 
Commission will consider the written data, views, and arguments from 
the ECM that lists the potential SPDC and from any other interested 
parties.
    The Commission requests comment on whether the ICE's Henry 
Financial LD1 Fixed Price 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 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 are they knowledgeable about 
the Henry Financial LD1 Fixed Price contract.

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.
---------------------------------------------------------------------------

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

B. Cost-Benefit Analysis

    Section 15(a) of the CEA \8\ 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.
---------------------------------------------------------------------------

    \8\ 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.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \9\ requires that agencies 
consider the impact of their rules on small businesses. The 
requirements of part 36 affect exempt commercial markets. The 
Commission previously has determined that exempt commercial markets are 
not small entities for purposes of the RFA.\10\ Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that this Order, taken in connection with the part 36 
rules, will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \9\ 5 U.S.C. 601 et seq.
    \10\ 66 FR 42256, 42268 (Aug. 10, 2001).

    Issued in Washington, DC on June 9, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-13871 Filed 6-11-09; 8:45 am]
BILLING CODE 6351-01-P