[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38487-38492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16209]


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COMMODITY FUTURES TRADING COMMISSION


Order Finding That the Fuel Oil-180 Singapore Swap Contract 
Traded on the IntercontinentalExchange, Inc., Does Not Perform a 
Significant Price Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Order.

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SUMMARY: On October 20, 2009, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment in the Federal 
Register \1\ a notice of its intent to undertake a determination 
whether the Fuel Oil-180 Singapore Swap (``SZS'') 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 pursuant to section 2(h)(7) of the CEA. The Commission 
undertook this review based upon an initial evaluation of information 
and data provided by ICE as well as other available information. The 
Commission has reviewed the entire record in this matter, including all 
comments received, and has determined to issue an order finding that 
the SZS contract does not 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.
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    \1\ 74 FR 53728 (October 20, 2009).

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DATES: Effective Date: June 25, 2010.

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

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \2\ 
significantly broadened the CFTC's regulatory authority with respect to 
ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory 
category--ECMs on which significant price discovery contracts 
(``SPDCs'') are traded--and treating ECMs in that category as 
registered entities under the CEA.\3\ The legislation authorizes the 
CFTC to designate an agreement, contract or transaction as an SPDC if 
the Commission determines, under criteria established in section 
2(h)(7), that it performs a significant price discovery function. When 
the Commission makes such a determination, the ECM on which the SPDC is 
traded must assume, with respect to that contract, all the 
responsibilities and obligations of a registered entity under the Act 
and Commission regulations, and must comply with nine core principles 
established by new section 2(h)(7)(C).
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    \2\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 
2008).
    \3\ 7 U.S.C. 1a(29).
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    On March 16, 2009, the CFTC promulgated final rules implementing 
the provisions of the Reauthorization Act.\4\ As relevant here, rule 
36.3 imposes increased information reporting requirements on ECMs to 
assist the Commission in making prompt assessments whether particular 
ECM contracts may be SPDCs. In addition to filing quarterly reports of 
its contracts, an ECM must notify the Commission promptly concerning 
any contract traded in reliance on the exemption in section 2(h)(3) of 
the CEA that averaged five trades per day or more over the most recent 
calendar quarter, and for which the exchange sells its price 
information regarding the contract to market participants or industry 
publications, or 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 contract.
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    \4\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.
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    Commission rule 36.3(c)(3) established the procedures by which the 
Commission makes and announces its determination whether a particular 
ECM contract serves a significant price discovery function. Under those

[[Page 38488]]

procedures, the Commission will publish notice in the Federal Register 
that it intends to undertake an evaluation whether the specified 
agreement, contract or transaction performs a significant price 
discovery function and to receive written views, data and arguments 
relevant to its determination from the ECM and other interested 
persons. Upon the close of the comment period, the Commission will 
consider, among other things, all relevant information regarding the 
subject contract and issue an order announcing and explaining its 
determination whether or not the contract is a SPDC. The issuance of an 
affirmative order signals the effectiveness of the Commission's 
regulatory authorities over an ECM with respect to a SPDC; at that time 
such an ECM becomes subject to all provisions of the CEA applicable to 
registered entities.\5\ The issuance of such an order also triggers the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4).\6\
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    \5\ Public Law 110-246 at 13203; Joint Explanatory Statement of 
the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d 
Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888, 
75894 (Dec. 12, 2008).
    \6\ For an initial SPDC, ECMs have a grace period of 90 calendar 
days from the issuance of a SPDC determination order to submit a 
written demonstration of compliance with the applicable core 
principles. For subsequent SPDCs, ECMs have a grace period of 30 
calendar days to demonstrate core principle compliance.
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II. Notice of Intent To Undertake SPDC Determination

    On October 20, 2009, the Commission published in the Federal 
Register notice of its intent to undertake a determination whether the 
SZS contract performs a significant price discovery function and 
requested comment from interested parties.\7\ Comments were received 
from Working Group of Commercial Energy Firms (``WGCEF''), Platts, ICE 
and Shell International Eastern Trading Company (``SIETCO).\8\ The 
comment letter from Platts did not directly address the issue of 
whether or not the SZS contract is a SPDC. The remaining comment 
letters raised substantive issues with respect to the applicability of 
section 2(h)(7) to the SZS contract and generally expressed the opinion 
that the SZS contract is not a SPDC because it does not meet the 
material price reference and material liquidity criteria for SPDC 
determination. These comments are more extensively discussed below, as 
applicable.
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    \7\ The Commission's Part 36 rules establish, among other 
things, procedures by which the Commission makes and announces its 
determination whether a specific ECM contract serves a significant 
price discovery function. Under those procedures, the Commission 
publishes a notice in the Federal Register that it intends to 
undertake a determination whether a 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.
    \8\ WGCEF describes itself as ``a diverse group of commercial 
firms in the domestic energy industry whose primary business 
activity is the physical delivery of one or more energy commodities 
to customers, including industrial, commercial and residential 
consumers'' and whose membership consists of ``energy producers, 
marketers and utilities.'' McGraw-Hill, through its division Platts, 
compiles and calculates monthly energy price indices from energy 
trade data submitted to Platts by energy marketers. ICE is an exempt 
commercial market, as noted above. SIETCO, a subsidiary of Royal 
Dutch Shell Oil Company (Shell Oil) located in Singapore, handles 
exports and trading of Shell Oil petroleum products in the Asia-
Pacific region. The comment letters are available on the 
Commission's Web site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-030.html.
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III. Section 2(h)(7) of the CEA

    The Commission is directed by section 2(h)(7) of the CEA to 
consider the following criteria in determining a contract's significant 
price discovery function:
     Price Linkage--the extent to which the agreement, contract 
or transaction uses or otherwise relies on a daily or final settlement 
price, or other major price parameter, of a contract or contracts 
listed for trading on or subject to the rules of a designated contract 
market (``DCM'') or derivatives transaction execution facility 
(``DTEF''), or a SPDC traded on an electronic trading facility, to 
value a position, transfer or convert a position, cash or financially 
settle a position, or close out a position.
     Arbitrage--the extent to which the price for the 
agreement, contract or transaction is sufficiently related to the price 
of a contract or contracts listed for trading on or subject to the 
rules of a designated DCM or DTEF, or a SPDC traded on or subject to 
the rules of an electronic trading facility, so as to permit market 
participants to effectively arbitrage between the markets by 
simultaneously maintaining positions or executing trades in the 
contracts on a frequent and recurring basis.
     Material price reference--the extent to which, on a 
frequent and recurring basis, bids, offers or transactions in a 
commodity are directly based on, or are determined by referencing or 
consulting, the prices generated by agreements, contracts or 
transactions being traded or executed on the electronic trading 
facility.
     Material liquidity--the extent to which the volume of 
agreements, contracts or transactions in a commodity being traded on 
the electronic trading facility is sufficient to have a material effect 
on other agreements, contracts or transactions listed for trading on or 
subject to the rules of a DCM, DTEF or electronic trading facility 
operating in reliance on the exemption in section 2(h)(3).
    Not all criteria must be present to support a determination that a 
particular contract performs a significant price discovery function, 
and one or more criteria may be inapplicable to a particular 
contract.\9\ Moreover, the statutory language neither prioritizes the 
criteria nor specifies the degree to which a SPDC must conform to the 
various criteria. In Guidance issued in connection with the Part 36 
rules governing ECMs with SPDCs, the Commission observed that these 
criteria do not lend themselves to a mechanical checklist or formulaic 
analysis. Accordingly, the Commission has indicated that in making its 
determinations it will consider the circumstances under which the 
presence of a particular criterion, or combination of criteria, would 
be sufficient to support a SPDC determination.\10\ For example, for 
contracts that are linked to other contracts or that may be arbitraged 
with other contracts, the Commission will consider whether the price of 
the potential SPDC moves in such harmony with the other contract that 
the two markets essentially become interchangeable. This co-movement of 
prices would be an indication that activity in the contract had reached 
a level sufficient for the contract to perform a significant price 
discovery function. In evaluating a contract's price discovery role as 
a price reference, the Commission will consider whether cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract.
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    \9\ In its October 20, 2009, Federal Register release, the 
Commission identified material price reference and material 
liquidity as the possible criteria for SPDC determination of the SZS 
contract. Price linkage and Arbitrage were not identified as 
possible criteria. As a result, price linkage and arbitrage will not 
be discussed further in this document and the associated Order.
    \10\ 17 CFR 36, Appendix A.
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IV. Findings and Conclusions

The Fuel Oil-180 Singapore Swap (SZS) Contract and the SPDC Indicia

    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

[[Page 38489]]

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 in Platts' Asia-
Pacific/Arab Gulf Marketscan. The SZS contract specifies the delivery 
of high-sulfur fuel oil in Singapore on an FOB basis.\11\ The SZS 
contract is listed for up to 60 consecutive calendar months beginning 
with the next calendar month.
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    \11\ The term ``FOB'' indicates ``free on board.'' In other 
words, the seller will pay for transportation of the product to the 
port of Singapore, as well as the cost of loading the fuel oil onto 
the cargo ship (this includes inland hauling charges, customs 
clearance, origin documentation charges, demurrage (if any), and 
origin port handling charges--in this case Singapore).
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    After crude oil is extracted from the ground and brought to a 
refinery, it goes through a process called fractional distillation. 
During fractional distillation, the oil is heated, causing different 
types of oil within the crude to separate as they have different 
boiling points. Classically, fractional distillation is accomplished in 
a distillation column, which siphons off various fractions as they 
precipitate out. During fractional distillation, oil refineries can 
also use catalysts to ``crack'' the hydrocarbon chains in the crude oil 
to create specific oil fractions.
    Fuel oil is a fraction obtained from petroleum distillation, either 
as a distillate or a residue. Fuel oil is made of long hydrocarbon 
chains, particularly alkanes, cycloalkanes and aromatics. Technically, 
different grades of fuel oil exist; fuel oil is classified into six 
classes, numbered 1 through 6, according to its boiling point, 
composition and purpose. Broadly speaking, fuel oil is any liquid 
petroleum product that is burned in a furnace or boiler for the 
generation of heat or used in an engine for the generation of power, 
except oils having a flash point of approximately 104 degrees 
Fahrenheit and oils burned in cotton or wool-wick burners. Thus, fuel 
oils can include kerosene, diesel, and heating oil. However, the term 
``fuel oil'' typically is used in a stricter sense to refer to the 
heavy commercial fuel that is obtained from crude oil, which is thicker 
than gasoline and naphtha.
    No. 5 fuel oil and No. 6 fuel oil are called residual fuel oils 
(``RFO'') or heavy fuel oils. More No. 6 oil is produced compared to 
No. 5 oil, thus the terms heavy fuel oil and residual fuel oil are 
sometimes used as names for No. 6. No. 5 fuel oil is a mixture of 75-80 
percent No. 6 oil and 25-20 diesel fuel (No. 2 oil). No. 6 oil may also 
contain a small amount of No. 2 to get it to meet specifications.
    Heavy fuel oils, also known as bunker fuels,\12\ are used for 
powering marine vessels. The hydrocarbon chains in bunker fuel are very 
long, and this fuel is highly viscous as a result. The thick fuel is 
difficult for most engines to burn since it must be heated before it 
will combust, so it tends to be used in large engines like those on 
board ships. Ships have enough space to heat bunker fuel before feeding 
it into their engines, and their extremely sophisticated engines are 
capable of burning a wide range of fuels, including low quality bunker 
fuel. The principal market for Singapore high-sulfur fuel oil 180 cst 
is the Asia-Pacific region.
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    \12\ Bunker fuel gets its name from the containers on ships and 
in ports that it is stored in; in the days of steam they were coal 
bunkers but now they are bunker-fuel tanks. The Australian Customs 
and the Australian Tax Office define a bunker fuel as the fuel that 
powers the engine of a ship or aircraft. Bunker A is No. 2 fuel oil, 
bunker B is No. 4 or No. 5 and bunker C is No. 6. Since No. 6 is the 
most common, the term ``bunker fuel'' is often used as a synonym for 
No. 6. No. 5 fuel oil is also called navy special fuel oil or just 
navy special, No. 6 or 5 are also called furnace fuel oil (``FFO''); 
the high viscosity requires heating, usually by a re-circulated low 
pressure steam system, before the oil can be pumped from a bunker 
tank.
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    Fuel oil is transported worldwide by fleets of supertankers making 
deliveries to suitably sized strategic ports such as Houston, 
Singapore, and Rotterdam. Where a convenient seaport does not exist, 
inland transport may be achieved with the use of barges.
    Market participants keep abreast of fuel oil prices worldwide in 
order to take advantage of arbitrage opportunities. In this regard, 
international fuel oil prices are compared with those in the trader's 
home port after accounting for transportation costs. Market 
participants may find it profitable to ship fuel oil from one market to 
another. For example, it is sometimes profitable to ship fuel oil from 
the Gulf Coast of the United States to Singapore. Such conditions do 
not exist all of the time; in fact, a trader may realize this 
opportunity only a few times per year.
    In its October 20, 2009, Federal Register notice, the Commission 
identified material price reference and material liquidity as the SPDC 
criteria potentially applicable to the SZS contract. Each of these 
criteria is discussed below.\13\
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    \13\ As noted above, the Commission did not find any indication 
of price linkage or arbitrage in connection with this contract; 
accordingly, those criteria were not discussed in reference to the 
SZS contract.
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1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission considered 
the fact that 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 the ``OTC Oil End of Day'' data package with 
access to all price data or just 12, 24, 36, or 48 months of historical 
data. This package includes price data for the SZS contract.
    The Commission also noted that its October 2007 Report on the 
Oversight of Trading on Regulated Futures Exchanges and Exempt 
Commercial Markets (``ECM Study'') \14\ found that in general, market 
participants view the ICE as a price discovery market for certain 
energy contracts. The study did not specify which markets performed 
this function; nevertheless, the Commission determined that the SZS 
contract, while not mentioned by name in the ECM Study, might warrant 
further review.
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    \14\ http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf.
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    The Commission will rely on one of two sources of evidence--direct 
or indirect--to determine that the price of a contract was being used 
as a material price reference and therefore, serving a significant 
price discovery function.\15\ With respect to direct evidence, the 
Commission will consider the extent to which, on a frequent and 
recurring basis, cash market bids, offers or transactions are directly 
based on or quoted at a differential to, the prices generated on the 
ECM in question. Direct evidence may be established when cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract in question. Cash 
market prices are set explicitly at a differential to the section 
2(h)(3) contract when, for instance, they are quoted in dollars and 
cents above or below the reference contract's price. Cash market prices 
are set implicitly at a differential to a section 2(h)(3) contract 
when, for instance, they are arrived at after adding to, or subtracting 
from the section 2(h)(3) contract, but then quoted or reported at a 
flat price. With respect to indirect evidence, the Commission will 
consider the extent to which the price

[[Page 38490]]

of the contract in question is being routinely disseminated in widely 
distributed industry publications--or offered by the ECM itself for 
some form of remuneration--and consulted on a frequent and recurring 
basis by industry participants in pricing cash market transactions.
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    \15\ 17 CFR 36, Appendix A.
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    Although Singapore has one of the most utilized ports in the world 
and ICE sells price data for its SZS contract, the Commission has found 
upon further evaluation that cash market transactions are not being 
directly based or quoted as a differential to the SZS contract nor is 
that contract routinely consulted by industry participants in pricing 
cash market transactions. In this regard, traders use the SZS 
contract's price as an indicator of arbitrage potential between two 
fuel oil markets (e.g., Singapore and the U.S. Gulf Coast). But because 
the market conditions are not always such that diverting fuel oil from 
one market to Singapore is profitable, traders do not regularly keep 
track of the SZS contract's prices. Instead, traders refer to the SZS 
contract on an occasional basis and during periods when it is 
historically profitable to ship fuel oil to Singapore. Cash market 
transactions are not priced on a frequent and recurring basis at a 
differential to the SZS contract's price. Moreover, market participants 
likely do not specifically purchase the ICE data packages for the SZS 
contract's prices and do not consult such prices on a frequent and 
recurring basis in pricing cash market transactions. Thus, the SZS 
contract does not meet the Commission's Guidance for the material price 
reference criterion.
i. Federal Register Comments
    ICE and SIETCO addressed the question of whether the SZS contract 
met the material price reference criterion for a SPDC. The commenters 
argued that the underlying cash price series against which the ICE SZS 
contract is settled (in this case, the Platts price for 180 cst fuel 
oil in Singapore) is the authentic reference price and not the ICE 
contract itself. Consequently, the commenters maintain that the only 
price which is referenced and relied upon by market participants for 
this product is the one published by Platts. Commission staff believes 
that this interpretation of price reference is too limiting in that it 
only considers the average index value on which the contract is cash 
settled after trading ceases. Instead, the Commission believes that a 
cash-settled derivatives contract could meet the price reference 
criterion if market participants ``consult on a frequent and recurring 
basis'' the derivatives contract when pricing forward, fixed-price 
commitments or other cash-settled derivatives that seek to ``lock in'' 
a fixed price for some future point in time to hedge against adverse 
price movements. As noted above, the port of Singapore is a significant 
trading center for 180 cst fuel oil in the Asian market. However, 
traders do not consult the SZS contract's price on a frequent and 
recurring basis since the potential for arbitrage between fuel oil 
market centers worldwide is sporadic and infrequent.
    ICE argued that the Commission appeared to base the case that the 
SZS contract is potentially a SPDC on a disputable assertion. In 
issuing its notice of intent to determine whether the SZS contract is a 
SPDC, the CFTC cited a general conclusion in its ECM Study ``that 
certain market participants referred to ICE as a price discovery market 
for certain energy contracts.'' ICE states that this argument is 
``nearly impossible to respond to as the ECM report did not mention the 
SZS [contract] as a potential significant price discovery contract. It 
is hard to say which market participants made this statement in 2007 or 
the contracts that were referenced * * * Basing a material price 
reference determination on general statements made in a two year old 
study does not seem to meet Congress' intent that the CFTC use its 
considerable expertise to study the OTC markets.'' In response to the 
above comment, the Commission notes that it cited the ECM Study's 
general finding that some ICE energy contracts appear to be regarded as 
price discovery markets merely as an indication that a further review 
of certain ICE contracts may be warranted, and was not intended to 
serve as the sole basis for determining whether or not a particular 
contract meets the material price reference criterion.
    WGCEF argued that the SZS contract does not meet the direct 
evidence or the indirect evidence with respect to the material price 
reference criterion. With regard to direct evidence, WGCEF stated that 
``[t]here are no other related contracts traded in any market that 
settle to, or reference, the contract.'' As noted above, this view of 
price reference is narrow. Nevertheless, while the Commission believes 
that price reference can include consultation on a frequent and 
recurring basis, the Commission has determined that such frequent and 
recurring consultation does not take place with respect to the SZS 
contract.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the SZS contract does 
not meet the material price reference criterion because cash market 
transactions are not priced on a frequent and recurring basis at a 
differential to the SZS contract's price (direct evidence). Moreover, 
while the ECM sells the SZS contract's price data to market 
participants, market participants likely do not specifically purchase 
the ICE data packages for the SZS contract's prices and do not consult 
such prices on a frequent and recurring basis in pricing cash market 
transactions (indirect evidence).
2. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity and material price 
reference as potential criteria for SPDC determination of the SZS 
contract. To assess whether a contract meets the material liquidity 
criterion, the Commission first examines trading activity as a general 
measurement of the contract's size and potential importance. If the 
Commission finds that the contract in question meets a threshold of 
trading activity that would render it of potential importance, the 
Commission will then perform a statistical analysis to measure the 
effect that the prices of the subject contract potentially may have on 
prices for other contracts listed on an ECM or a DCM.
    The Commission noted that the total number of transactions executed 
on ICE's electronic platform in the SZS contract 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. Moreover, open interest as of June 30, 2009, was 11,356 
contracts, which included trades executed on ICE's electronic trading 
platform, as well as trades executed off of ICE's electronic trading 
platform and then brought to ICE for clearing. In this regard, ICE does 
not differentiate between open interest created by a transaction 
executed on its trading platform and that created by a transaction 
executed off its trading platform.\16\
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    \16\ 74 FR 53728 (October 20, 2009).
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    In a subsequent filing dated November 13, 2009, ICE reported that 
total trading volume in the third quarter of 2009 was 22,255 contracts 
(or 337 contracts on a daily basis). In terms of

[[Page 38491]]

number of transactions, 4,625 trades occurred in the third quarter of 
2009 (70.1 trades per day). As of September 30, 2009, open interest in 
the SZS contract was 15,681 contracts, which included trades executed 
on ICE's electronic trading platform, as well as trades executed off of 
ICE's electronic trading platform and then brought to ICE for 
clearing.\17\
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    \17\ In this regard, supplemental data subsequently submitted by 
the ICE indicated that block trades are included in the on-exchange 
trades; block trades comprise 42.5 percent of all transactions in 
the SZS contract.
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    Trading activity in the SZS contract, as characterized by total 
quarterly volume, indicates that the SZS contract experiences trading 
activity similar to that of other thinly-traded contracts.\18\ Thus, 
the SZS contract does not meets a threshold of trading activity that 
would render it of potential importance and no additional statistical 
analysis is warranted.\19\
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    \18\ Staff has advised the Commission that in its experience, a 
thinly-traded contract is, generally, one that has a quarterly 
trading volume of 100,000 contracts or less. In this regard, in the 
third quarter of 2009, physical commodity futures contracts with 
trading volume of 100,000 contracts or fewer constituted less than 
one percent of total trading volume of all physical commodity 
futures contracts.
    \19\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the SZS contract does not meet the 
material price reference criterion. In light of this finding and the 
Commission's Guidance cited above, there is no need to evaluate 
further the material liquidity criteria since the Commission 
believes it is not useful as the sole basis for a SPDC 
determination. 17 CFR 36, Appendix A.
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Federal Register Comments
    As noted above, WGCEF, ICE, and SIETCO addressed the question of 
whether the SZS contract met the material liquidity criterion for a 
SPDC. These commenters stated that the SZS contract does not meet the 
material liquidity criterion for SPDC determination for a number of 
reasons.
    ICE noted that the Commission's Guidance had posited concepts of 
liquidity that generally assumed a fairly constant stream of prices 
throughout the trading day. The Commission observes that a continuous 
stream of prices would indeed be an indication of liquidity for certain 
markets but the Guidance also notes that ``quantifying the levels of 
immediacy and price concession that would define material liquidity may 
differ from one market or commodity to another.''
    ICE opined that the Commission ``seems to have adopted a five 
trade-per-day test to determine whether a contract is materially 
liquid. It is worth noting that ICE originally suggested that the CFTC 
use a five trades-per-day threshold as the basis for an ECM to report 
trade data to the CFTC.'' In this regard, the Commission adopted a five 
trades-per-day threshold as a reporting requirement to enable it to 
``independently be aware of ECM contracts that may develop into SPDCs'' 
\20\ rather than solely relying upon an ECM on its own to identify any 
such potential SPDCs to the Commission. Thus, any contract that meets 
this threshold may be subject to scrutiny as a potential SPDC but this 
does not mean that the contract will be found to be a SPDC merely 
because it met the reporting threshold.
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    \20\ 73 FR 75892 (December 12, 2008).
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    ICE proposed that the statistics it provided were misinterpreted 
and misapplied by the Commission. In particular, ICE stated that the 
volume figures used in the Commission's analysis (cited above) include 
trades made in all months of the contract as well as in strips of 
contract months, and a ``more appropriate method of determining 
liquidity is to examine the activity in a single traded month or strip 
of a given contract.''
    It is the Commission's opinion that liquidity, as it pertains to 
the SZS contract, is typically a function of trading activity in 
particular lead months and, given sufficient liquidity in such months, 
the ICE SZS contract itself would be considered liquid. Nevertheless, 
in light of the fact that the Commission has found that the SZS 
contract does not meet the material price reference criterion, material 
liquidity cannot be used alone for SPDC determination.
    Additionally, ICE stated that the trades-per-day statistics that it 
provided to the Commission in its quarterly filing and which were cited 
in the Commission's October 20, 2009, Federal Register notice includes 
2(h)(1) transactions, which were not completed on the electronic 
trading platform and should not be considered in the SPDC determination 
process. SIETCO expressed a similar concern. In this respect, the 
Commission staff asked ICE to review the data it sent in its quarterly 
filings; ICE confirmed that the volume data it provided and which the 
Commission cited includes only transaction data executed on ICE's 
electronic trading platform. As noted above, supplemental data supplied 
by ICE confirmed that block trades are in addition to the trades that 
were conducted on the electronic platform; block trades comprise about 
42.5 percent of all transactions in the SZS contract. The Commission 
acknowledges that the open interest information it provided in its 
October 20, 2009, Federal Register notice includes transactions made 
off the ICE platform. However, once open interest is created, there is 
no way for ICE to differentiate between ``on-exchange'' versus ``off-
exchange'' created positions, and all such positions are fungible with 
one another and may be offset in any way agreeable to the position 
holder regardless of how the position was initially created.
ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission has found that the 
SZS contract does not meet the material price reference criterion.
4. Overall Conclusion
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the SZS contract 
does not perform a significant price discovery function under the 
criteria established in section 2(h)(7) of the CEA. Specifically, the 
Commission has determined that the SZS contract does not meet the 
material price reference criterion at this time. In light of this fact, 
according to the Commission's Guidance, it would be unnecessary to 
evaluate whether the SZS contract meets the material liquidity 
criterion since the Commission believes it is not useful as the sole 
basis for a SPDC determination. Accordingly, the Commission is issuing 
the attached Order declaring that the SZS contract is not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard ICE as a registered entity in connection with its SZS 
contract.\21\ Accordingly, with respect to its SZS contract, ICE is not 
required to comply with the obligations, requirements and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However, 
ICE must continue to comply with the applicable reporting requirements 
for ECMs.
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    \21\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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V. Related Matters

a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \22\ imposes certain 
requirements

[[Page 38492]]

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 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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    \22\ 44 U.S.C. 3507(d).
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b. Cost-Benefit Analysis

    Section 15(a) of the CEA \23\ 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 actions. 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. The Commission may in its discretion give 
greater weight to any one of the five enumerated areas and could in its 
discretion determine that, notwithstanding its costs, a particular 
order is necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or accomplish any of the purposes of 
the Act. The Commission has considered the costs and benefits in light 
of the specific provisions of section 15(a) of the Act and has 
concluded that the Order, required by Congress to strengthen federal 
oversight of exempt commercial markets and to prevent market 
manipulation, is necessary and appropriate to accomplish the purposes 
of section 2(h)(7) of the Act.
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    \23\ 7 U.S.C. 19(a).
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    When a futures contract begins to serve a significant price 
discovery function, that contract, and the ECM on which it is traded, 
warrants increased oversight to deter and prevent price manipulation or 
other disruptions to market integrity, both on the ECM itself and in 
any related futures contracts trading on DCMs. An Order finding that a 
particular contract is a SPDC triggers this increased oversight and 
imposes obligations on the ECM calculated to accomplish this goal. The 
increased oversight engendered by the issue of a SPDC Order increases 
transparency and helps to ensure fair competition among ECMs and DCMs 
trading similar products and competing for the same business. Moreover, 
the ECM on which the SPDC is traded must assume, with respect to that 
contract, all the responsibilities and obligations of a registered 
entity under the CEA and Commission regulations. Additionally, the ECM 
must comply with nine core principles established by section 2(h)(7) of 
the Act--including the obligation to establish position limits and/or 
accountability standards for the SPDC. Amendments to section 4(i) of 
the CEA authorize the Commission to require reports for SPDCs listed on 
ECMs. These increased responsibilities, along with the CFTC's increased 
regulatory authority, subject the ECM's risk management practices to 
the Commission's supervision and oversight and generally enhance the 
financial integrity of the markets.
    The Commission has concluded that ICE's SZS contract, which is the 
subject of the attached Order, is not a SPDC; accordingly, the 
Commission's Order imposes no additional costs and no additional 
statutorily or regulatory mandated responsibilities on the ECM.

c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \24\ requires that 
agencies consider the impact of their rules on small businesses. The 
requirements of CEA section 2(h)(7) and the Part 36 rules affect exempt 
commercial markets. The Commission previously has determined that 
exempt commercial markets are not small entities for purposes of the 
RFA.\25\ 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 section 2(h)(7) of the Act and the Part 36 rules, will 
not have a significant impact on a substantial number of small 
entities.
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    \24\ 5 U.S.C. 601 et seq.
    \25\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Order

Order Relating to the Fuel Oil-180 Singapore Swap Contract

    After considering the complete record in this matter, including the 
comment letters received in response to its request for comments, the 
Commission has determined to issue the following Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Fuel Oil-180 Singapore Swap 
contract, traded on the IntercontinentalExchange, Inc., does not at 
this time satisfy the material price reference and material liquidity 
criteria for significant price discovery contracts. Moreover, under 
Commission Guidance material liquidity alone cannot support a 
significant price discovery finding for the Fuel Oil-180 Singapore Swap 
contract.
    Consistent with this determination, the IntercontinentalExchange, 
Inc., is not considered a registered entity \26\ with respect to the 
Fuel Oil-180 Singapore Swap contract and is not subject to the 
provisions of the Commodity Exchange Act applicable to registered 
entities. Further, the obligations, requirements and timetables 
prescribed in Commission rule 36.3(c)(4) governing core principle 
compliance by the IntercontinentalExchange, Inc., are not applicable to 
the Fuel Oil-180 Singapore Swap contract with the issuance of this 
Order.
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    \26\ 7 U.S.C. 1a(29).
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    This Order is based on the representations made to the Commission 
by the IntercontinentalExchange, Inc., dated July 27, 2009, and 
November 13, 2009, and other supporting material. Any material change 
or omissions in the facts and circumstances pursuant to which this 
order is granted might require the Commission to reconsider its current 
determination that the Fuel Oil-180 Singapore Swap contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the IntercontinentalExchange, Inc., must continue to comply with all of 
the applicable requirements of Section 2(h)(3) and Commission 
Regulation 36.3.

    Issued in Washington, DC on June 25, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-16209 Filed 7-1-10; 8:45 am]
BILLING CODE 6351-01-P