[Federal Register Volume 74, Number 195 (Friday, October 9, 2009)]
[Notices]
[Pages 52192-52194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24384]


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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 Malin 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.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is undertaking a review to determine whether the Malin 
Financial Basis (``MLN'') 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 
parties.

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 Malin Financial Basis 
(MLN) 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.

[[Page 52193]]

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.
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    \1\ 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 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.
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    \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\ 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.
    \4\ 7 U.S.C. 2(h)(7)(C).
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B. Malin Financial Basis Contract

    The MLN contract is a monthly contract that is cash settled based 
on the difference between the price of natural gas at the Malin 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 Malin 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 MLN contract is 2,500 mm Btu, and the 
unit of trading is any multiple of 2,500 mm Btu. The MLN 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 MLN contract, the total number of trades was 664 in the second 
quarter of 2009, resulting in a daily average of 10.4 trades. During 
the same period, the MLN contract had a total trading volume of 59,564 
contracts and an average daily trading volume of 930.7 contracts. 
Moreover, the open interest as of June 30, 2009, was 65,804 contracts.
    It appears that the MLN contract may satisfy the material 
liquidity, price linkage, and material price reference factors for SPDC 
determination. With respect to material liquidity, trading in the MLN 
contract averaged just shy of 1,000 contracts on a daily basis, with 
more than 10 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 MLN 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 Malin 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

[[Page 52194]]

whether the data are daily only or historical. For example, the ICE 
offers ``West 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.
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    \5\ 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 ICE's MLN 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 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 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.
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    \6\ 44 U.S.C. 3507(d).
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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.
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    \7\ 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 5, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-24384 Filed 10-8-09; 8:45 am]
BILLING CODE 6351-01-P