[Federal Register Volume 74, Number 192 (Tuesday, October 6, 2009)]
[Notices]
[Pages 51264-51268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23965]


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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