[Federal Register Volume 74, Number 201 (Tuesday, October 20, 2009)]
[Notices]
[Pages 53728-53730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-25181]
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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 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.
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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
parties.
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://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
[[Page 53729]]
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. 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.
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\5\ 17 CFR Part 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 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.
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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 14, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-25181 Filed 10-19-09; 8:45 am]
BILLING CODE 6351-01-P