[Federal Register Volume 74, Number 205 (Monday, October 26, 2009)]
[Notices]
[Pages 54966-54969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-25238]


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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