[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38469-38478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16212]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION


Orders Finding That the Mid-C Financial Peak Contract and Mid-C 
Financial Off-Peak Contract, Offered for Trading on the 
IntercontinentalExchange, Inc., Perform a Significant Price Discovery 
Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

-----------------------------------------------------------------------

SUMMARY: On October 6, 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 Mid-C \2\ Financial Peak (``MDC'') contract and Mid-C 
Financial Off-Peak (``OMC'') contract,\3\ which are listed 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 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 orders finding that the 
MDC and OMC contracts 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.
---------------------------------------------------------------------------

    \1\ 74 FR 51261 (October 6, 2009).
    \2\ The acronym ``Mid-C'' stands for Mid-Columbia.
    \3\ The Federal Register notice also requested comment on the 
Mid-C Financial Peak Daily (``MPD'') contract and Mid-C Financial 
Off-Peak Daily (``MXO'') contract. Those contracts will be reviewed 
in a separate Federal Register release.

---------------------------------------------------------------------------
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'') \4\ 
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.\5\ The legislation authorizes the 
CFTC to designate an agreement, contract or transaction as a 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).
---------------------------------------------------------------------------

    \4\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008).
    \5\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    On March 16, 2009, the CFTC promulgated final rules implementing 
the provisions of the Reauthorization Act.\6\ 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.
---------------------------------------------------------------------------

    \6\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.

---------------------------------------------------------------------------

[[Page 38470]]

    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 
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.\7\ The issuance of such an order also triggers the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4).\8\
---------------------------------------------------------------------------

    \7\ Pub. L. 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).
    \8\ 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.
---------------------------------------------------------------------------

II. Notice of Intent To Undertake SPDC Determination

    On October 6, 2009, the Commission published in the Federal 
Register notice of its intent to undertake a determination whether the 
MDC and OMC contracts \9\ perform a significant price discovery 
function and requested comment from interested parties.\10\ Comments 
were received from the Federal Energy Regulatory Commission (``FERC''), 
Financial Institutions Energy Group (``FIEG''), Working Group of 
Commercial Energy Firms (``WGCEF''), Edison Electric Institute 
(``EEI''), ICE, Western Power Trading Forum (``WPTF'') and Public 
Utility Commission of Texas (``PUCT'').\11\ The comment letters from 
FERC \12\ and PUCT did not directly address the issue of whether or not 
the subject contracts are SPDCs. The remaining comment letters raised 
substantive issues with respect to the applicability of section 2(h)(7) 
to the MDC and OMC contracts and generally expressed the opinion that 
the contracts are not SPDCs because they do not meet the material price 
reference or material liquidity criteria for SPDC determination. These 
comments are more extensively discussed below, as applicable.
---------------------------------------------------------------------------

    \9\ As noted above, the Federal Register notice also requested 
comment on the Mid-C Financial Peak Daily (``MPD'') contract and 
Mid-C Financial Off-Peak Daily (``MXO'') contract. The MPD and MXO 
contracts will be addressed in a separate Federal Register release.
    \10\ 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.
    \11\ FERC is an independent federal regulatory agency that, 
among other things, regulates the interstate transmission of natural 
gas, oil and electricity. FIEG describes itself as an association of 
investment and commercial banks who are active participants in 
various sectors of the natural gas markets, ``including acting as 
marketers, lenders, underwriters of debt and equity securities, and 
proprietary investors.'' 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.'' EEI is the ``association of 
shareholder-owned electric companies, international affiliates and 
industry associates worldwide.'' ICE is an ECM, as noted above. WPTF 
describes itself as a ``broad-based membership organization 
dedicated to encouraging competition in the Western power markets * 
* * WTPF strives to reduce the long-run cost of electricity to 
consumers throughout the region while maintaining the current high 
level of system reliability.'' PUCT is the independent organization 
that oversees the Electric Reliability Council of Texas (``ERCOT'') 
to ``ensure nondiscriminatory access to the transmission and 
distribution systems, to ensure the reliability and adequacy of the 
regional electrical network, and to perform other essential market 
functions.'' The comment letters are available on the Commission's 
website: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-011.html
    \12\ FERC expressed the opinion that a determination by the 
Commission that either of the subject contracts performs a 
significant price discovery function ``would not appear to conflict 
with FERC's exclusive jurisdiction under the Federal Power Act (FPA) 
over the transmission or sale for resale of electric energy in 
interstate commerce or with its other regulatory responsibilities 
under the FPA'' and further that ``FERC staff will monitor proposed 
SPDC determinations and advise the CFTC of any potential conflicts 
with FERC's exclusive jurisdiction over RTOs, [(regional 
transmission organizations)], ISOs [(independent system operators)] 
or other jurisdictional entities.''
---------------------------------------------------------------------------

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 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.\13\ 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

[[Page 38471]]

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.\14\ 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 the extent to which, on a frequent and 
recurring basis, bids, offers or transactions are directly based on, or 
are determined by referencing, the prices established for the contract.
---------------------------------------------------------------------------

    \13\ In its October 6, 2009, Federal Register release, the 
Commission identified material price reference and material 
liquidity as the possible criteria for SPDC determination of the MDC 
and OMC contracts. Arbitrage and price linkage were not identified 
as possible criteria. As a result, arbitrage and price linkage will 
not be discussed further in this document and the associated Orders.
    \14\ 17 CFR Part 36, Appendix A.
---------------------------------------------------------------------------

IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the MDC 
and OMC contracts are discussed separately below:

a. The Mid-C Financial Peak (MDC) Contract and the SPDC Indicia

    The MDC contract is cash settled based on the arithmetic average of 
the peak, day-ahead power price indicies that are reported each day in 
the specified contract month. The daily price indicies are published by 
ICE in its ``ICE Day Ahead Power Price Report,'' which is available on 
the ECM's website. The peak-hour electricity price index on a 
particular day is calculated as the volume-weighted average of 
qualifying, day-ahead, peak-hour power transactions at the Mid-Columbia 
hub that are traded on the ICE platform from 6 a.m. to 11 a.m. CST on 
the publication date. The ICE transactions on which the daily price 
index is based specify the physical delivery of power. The size of the 
MDC contract is 400 megawatt hours (``MWh''), and the MDC contract is 
listed for 86 months.
    As the Columbia River flows through Washington State, it encounters 
two federal and nine privately-owned hydroelectric dams that generate 
close to 20,000 MW of power in the Northwest.\15\ With another three 
dams in British Columbia, Canada, and many more on its various 
tributaries, the Columbia River is the largest power-producing river in 
North America. A major goal of the participants in the Mid-C 
electricity market is to maximize the Columbia River's potential, along 
with protecting and enhancing the non-power uses of the river. The 
reliability of the electricity grid in the Northwest is coordinated by 
the Northwest PowerPool (``NWPP''), which is a voluntary organization 
comprised of major generating utilities serving the Northwestern United 
States as well as British Columbia and Alberta, Canada.
---------------------------------------------------------------------------

    \15\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------

    One stretch of the Columbia River between the Grand Coulee Dam and 
Priests Rapids Dam is governed by the Mid-Columbia Hourly Coordination 
Agreement (``MCHCA''). The MCHCA includes seven dams \16\ and nearly 
13,000 MW of generation. Specifically, the agreement defines how the 
Chelan, Douglas and Grant PUDs coordinate their operations with the 
Bonneville Power Administration so as to maximize power generation 
while reducing fluctuations in the river's flow. A number of other 
utilities that buy power from the PUDs have also signed onto the 
agreement. The MCHCA was signed into effect in 1972 and renewed in 1997 
for another 20 years.\17\
---------------------------------------------------------------------------

    \16\ The federal dams are Grand Coulee and Chief Joseph. The 
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach 
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest 
Rapids (operated by the Grant PUD). The term ``PUD'' stands for a 
publically-owned utility which provides essential services within a 
specified area.
    \17\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------

    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various point along the electrical grid. The price 
of electricity at a particular point on the grid is called the 
locational marginal price (``LMP''), which includes the cost of 
producing the electricity, as well as congestion and line losses. Thus, 
an LMP reflects generation costs as well as the actual cost of 
supplying and delivering electricity to a specific point along the 
grid.
    Electricity is traded in a day-ahead market as well as in a real-
time market. Typically, the bulk of the energy transactions occur in 
the day-ahead market. The day-ahead market establishes prices for 
electricity that is to be delivered during the specified hour on the 
following day. Day-ahead prices are determined based on generation and 
energy transaction quotes offered in advance. Because the quotes are 
based on supply and demand estimates, electricity needs usually are not 
perfectly satisfied in the day-ahead market. On the day the electricity 
is transmitted and used, auction participants typically realize that 
they bought or sold either too much or too little power. A real-time 
auction is operated in the Mid-C market to alleviate this problem by 
servicing as a balancing mechanism. In this regard, electricity traders 
use the real-time market to sell excess electricity and buy additional 
power to meet demand. Only a relatively small amount of electricity is 
traded in the real-time market compared with the day-ahead market.
1. Material Price Reference Criterion
    The Commission's October 6, 2009, Federal Register notice 
identified material price reference and material liquidity as the 
potential basis for a SPDC determination with respect to the MDC 
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, ICE offers the ``West Power 
of Day'' package with access to all price data or just current prices 
plus a selected number of months (i.e., 12, 24, 36 or 48 months) of 
historical data. This package includes price data for the MDC 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'') found that in general, market 
participants view ICE as a price discovery market for certain 
electricity contracts. The study did not specify which markets 
performed this function; nevertheless, the Commission determined that 
the MDC contract, while not mentioned by name in the ECM Study, might 
warrant further review.
    The Commission explains in its Guidance to the Part 36 rules that 
in evaluating a contract under the material price reference criterion, 
it 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.\18\ 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

[[Page 38472]]

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 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.
---------------------------------------------------------------------------

    \18\ 17 CFR Part 36, Appendix A.
---------------------------------------------------------------------------

    The Mid-C power market is a major pricing center for electricity on 
the West Coast. Traders, including producers, keep abreast of the 
electricity prices in the Mid-C power market when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of power at the Mid-C hub when entering 
into cash market transaction for electricity, especially those trades 
providing for physical delivery in the future. Traders use the ICE MDC 
contract, as well as other ICE power contracts, to hedge cash market 
positions and transactions--activities which enhance the MDC contract's 
price discovery utility. The substantial volume of trading and open 
interest in the MDC contract appears to attest to its use for this 
purpose. While the MDC contract's settlement prices may not be the only 
factor influencing spot and forward transactions, electricity traders 
consider the ICE price to be a critical factor in conducting OTC 
transactions.\19\ Accordingly, the MDC contract satisfies the direct 
price reference test.
---------------------------------------------------------------------------

    \19\ In addition to referencing ICE prices, firms participating 
in the Mid-C power market may rely on other cash market quotes as 
well as industry publications and price indices that are published 
by third-party price reporting firms in entering into power 
transactions.
---------------------------------------------------------------------------

    The direct price reference finding also is supported by the 
uniqueness of the ICE electricity prices for the Mid-C market. Day-
ahead and real-time electricity prices are reported by a number of 
sources, including third-party price providers (e.g., Dow Jones & 
Company). ICE's Mid-C price indices are unique in that they are derived 
from transactions completed on ICE's electronic system. Moreover, ICE 
is the only entity that has access to such transaction data. Thus, it 
is not possible for any other firm to replicate ICE's indices.\20\
---------------------------------------------------------------------------

    \20\ In contrast, third-party price reporting firms typically 
compute their power index prices from transaction information that 
is voluntarily submitted by traders. It is possible that one trader 
could submit the same transaction data to multiple price reporting 
firms, whereby increasing the likelihood that price indices from 
different firms are similar in value. However, it is more plausible 
that the third-party price reporters' price indices would be similar 
but not exactly the same because different traders are polled.
---------------------------------------------------------------------------

    The fact that ICE's MDC monthly contract is used more widely as a 
source of pricing information rather than the daily contract (i.e., the 
MPD contract)\21\ bolsters the finding of direct price reference. In 
this regard, the MDC contract prices power at the Mid-C up to 86 
calendar months in the future. Thus, market participants can use the 
MDC contract to lock-in electricity prices far into the future. Traders 
use monthly power contracts like the MDC contract to price future power 
electricity commitments, where such commitments are based on long range 
forecasts of power supply and demand. In contrast, the MPD contract is 
listed for a much shorter length of time--up to 38 days in the future. 
As generation and usage nears, market participants have a better 
understanding of actual power supply and needs. As a result, they can 
modify previously-established hedges with daily contracts, like the MPD 
contract.
---------------------------------------------------------------------------

    \21\ The MPD contract is cash settled based on the peak, day-
ahead price index for the specified day, as published by ICE in its 
``ICE Day Ahead Power Price Report,'' which is available on the 
ECM's website. The daily peak-hour electricity price index is a 
volume-weighted average of qualifying, day-ahead, peak-hour power 
contracts at the Mid-Columbia hub that are traded on the ICE 
platform from 6 a.m. to 11 a.m. CST on the publication date.
---------------------------------------------------------------------------

    The Commission notes that the Mid-C is a major trading point for 
electricity, and the MDC contract's prices are well regarded in the 
industry as indicative of the value of power at the Mid-C hub. 
Accordingly, Commission staff believes that it is reasonable to 
conclude that market participants purchase the data packages that 
include the MDC contract's prices in substantial part because the MDC 
contract prices have particular value to them. Moreover, such prices 
are consulted on a frequent and recurring basis by industry 
participants in pricing cash market transactions. In light of the 
above, the MDC contract meets the indirect price reference test.
i. Federal Register Comments
    WGCEF, WPTF, EEI and ICE stated that no other contract directly 
references or settles to the MDC contract's price. Moreover, the 
commenters argued that the underlying cash price series against which 
the MDC contract is settled (in this case, the average of peak-hour 
Mid-C electricity prices over the contract month, which are derived 
from physical transactions) is the authentic reference price and not 
the ICE contract itself. Commission staff believes that this 
interpretation of price reference is too narrow and 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 Mid-C hub is a major trading center for 
electricity in the western United States. Traders, including producers, 
keep abreast of the prices of the MDC contract when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of electricity at the Mid-C hub when 
entering into cash market transaction for power, especially those 
trades that provide for physical delivery in the future. Traders use 
the ICE MDC contract to hedge cash market positions and transactions, 
which enhances the MDC contract's price discovery utility. While the 
MDC contract's settlement prices may not be the only factor influencing 
spot and forward transactions, natural gas traders consider the ICE 
price to be a crucial factor in conducting OTC transactions.
    In addition, WGCEF stated that the publication of price data for 
the MDC contract price is weak justification for material price 
reference. This commenter argued that market participants generally do 
not purchase ICE data sets for one contract's prices, such as those for 
the MDC contract. Instead, traders are interested in the settlement 
prices, so the fact that ICE sells the MDC prices as part of a broad 
package is not conclusive evidence that market participants are buying 
the ICE data sets because they find the MDC prices have substantial 
value to them. As noted above, the Commission notes that publication of 
the MDC contract's prices is indirect evidence of routine 
dissemination. The MDC contract's prices, while sold as a package, are 
of particular interest to market participants. Thus, the Commission has

[[Page 38473]]

concluded that traders likely purchase the ICE data packages 
specifically for the MDC contract's prices and consult such prices on a 
frequent and recurring basis in pricing cash market transactions.
    Lastly, EEI observed that the ECM Study did not specifically 
identify the MDC contract as a contract that is referred to by market 
participants on a frequent and recurring basis. The Commission cited 
the ECM Study's general finding that some ICE electricity contracts 
appear to be regarded as price discovery markets merely as indication 
that an investigation of certain ICE contracts may be warranted. The 
ECM Study was not intended to serve, and did not serve as the sole 
basis for determining whether or not a particular contract meets the 
material price reference criterion.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the ICE MDC contract 
meets the material price reference criterion because cash market 
transactions are priced either explicitly or implicitly on a frequent 
and recurring basis at a differential to the MDC contract's price 
(direct evidence). Moreover, the MDC contract's price data are sold to 
market participants, and those individuals likely purchase the ICE data 
packages specifically for the MDC contract's prices and 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 6, 2009, Federal Register notice, 
the Commission identified material price reference and material 
liquidity as potential criteria for SPDC determination of the MDC 
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 changes to the subject-contract's prices potentially may 
have on prices for other contracts listed on an ECM or a DCM.\22\
---------------------------------------------------------------------------

    \22\ As noted above, the material liquidity criterion speaks to 
the effect that transactions in the potential SPDC may have on 
trading in ``agreements, contracts and transactions listed for 
trading on or subject to the rules of a designated contract market, 
a derivatives transaction execution facility, or an electronic 
trading facility operating in reliance on the exemption in section 
2(h)(3) of the Act.''
---------------------------------------------------------------------------

    The total number of transactions executed on ICE's electronic 
platform in the MDC contract was 2,022 in the second quarter of 2009, 
resulting in a daily average of 31.6 trades. During the same period, 
the MDC contract had a total trading volume of 67,400 contracts and an 
average daily trading volume of 1,053.1 contracts. Moreover, open 
interest as of June 30, 2009, was 169,851 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.\23\
---------------------------------------------------------------------------

    \23\ 74 FR 51261 (October 6, 2009).
---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 142,700 
contracts (or 2,195 contracts on a daily basis). In terms of number of 
transactions, 2,975 trades occurred in the fourth quarter of 2009 (46 
trades per day). As of December 31, 2009, open interest in the MDC 
contract was 221,608 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.
    Trading activity in the MDC contract, as characterized by total 
quarterly volume, indicates that the MDC contract experiences trading 
activity that is significantly greater than that of minor futures 
markets.\24\ Thus, it is reasonable to infer that the MDC contract 
could have a material effect on other ECM contracts or on DCM 
contracts.
---------------------------------------------------------------------------

    \24\ 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.
---------------------------------------------------------------------------

    To measure the potential effect of the MDC contract on another ECM 
contract staff performed a statistical analysis \25\ using daily 
settlement prices between July 1, 2008, and December 31, 2009, for the 
ICE MDC and OMC contracts. The simulation suggests that, on average 
over the sample period, a one percent rise in the MDC contract's price 
elicited a 1.09 percent increase in ICE OMC contract's price.
---------------------------------------------------------------------------

    \25\ Specifically, Commission staff econometrically estimated a 
cointegrated vector autoregression (CVAR) model using daily 
settlement prices. CVAR methods permit a dichotomization of the data 
relationships into long-run equilibrium components (called the 
cointegration space or cointegrating relationships) and a short-run 
component. A CVAR model was chosen over the more traditional vector 
autoregression model in levels because the statistical properties of 
the data (lack of stationarity and ergodicity) precluded the more 
traditional modeling treatment. Moreover, the statistical properties 
of the data necessitated the modeling of the contracts' prices as a 
CVAR model containing both first differences (to handle 
stationarity) and an error-correction term to capture long run 
equilibrium relationships. The prices were treated as a single 
reduced-form model in order to test hypothesis that power prices in 
the same market affect each other. The prices of ICE's MDC and OMC 
contracts are positively related to each other in a cointegrating 
relationship and display a high level of statistical strength. On 
average during the sample period, each percentage rise in MDC 
contract's price elicited a 1.09 percent rise in OMC contract's 
price.
---------------------------------------------------------------------------

i.  Federal Register Comments
    ICE and WGCEF stated that the MDC contract lacks a sufficient 
number of trades to meet the material liquidity criterion. These two 
commenters, along with WPTF, FEIG and EEI argued that the MDC contract 
cannot have a material effect on other contracts, such as those listed 
for trading by the New York Mercantile Exchange (``NYMEX''), a DCM. The 
commenters pointed out that it is not possible for the MDC contract to 
affect a DCM contract because price linkage and the potential for 
arbitrage do not exist. The DCM contracts do not cash settle based on 
the MDC contract's price. Instead, the DCM contracts and the MDC 
contract are both cash settled based on physical transactions, which 
the ECM and DCM contracts cannot influence. The Commission's 
statistical analysis shows that changes in the ICE MDC contract's price 
significantly influences the prices of other ECM contracts (namely, the 
OMC contract).
    WGCEF and 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, and noted that the relatively low 
number of trades per day in the MDC contract did not meet this standard 
of liquidity. 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.'' \26\
---------------------------------------------------------------------------

    \26\ Guidance, supra.
---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade 
per day test for material liquidity.'' To the contrary, the Commission 
adopted a five trades-per-day threshold as a reporting

[[Page 38474]]

requirement to enable it to ``independently be aware of ECM contracts 
that may develop into SPDCs'' \27\ rather than solely relying upon an 
ECM to identify potential SPDCs to the Commission. Thus, any contract 
that meets this threshold may be subject to scrutiny as a potential 
SPDC; however, the contract will not be found to be a SPDC merely 
because it met the reporting threshold.
---------------------------------------------------------------------------

    \27\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE asserted that the statistics provided by ICE 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'' as well as in strips of 
contract months. ICE suggested that a more appropriate method of 
determining liquidity is to examine the activity in a single traded 
month of a given contract.'' \28\ It is the Commission's opinion that 
liquidity, as it pertains to the MDC contract, is typically a function 
of trading activity in particular lead months and, given sufficient 
liquidity in such months, the ICE MDC contract itself would be 
considered liquid.
---------------------------------------------------------------------------

    \28\ In addition, 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 6, 2009, Federal Register 
notice included 2(h)(1) transactions, which were not completed on 
the electronic trading platform and should not be considered in the 
SPDC determination process. 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 54 percent of all 
transactions in the MDC contract. The Commission acknowledges that 
the open interest information it provided in its October 6, 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 finds that the MDC 
meets the material liquidity criterion. Specifically, there is 
sufficient trading activity in the MDC contract to have a material 
effect on ``other agreements, contracts or transactions listed for 
trading on or subject to the rules of a designated contract market * * 
* or an electronic trading facility operating in reliance on the 
exemption in section 2(h)(3) of the Act.''
3. Overall Conclusion Regarding the MDC Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the MDC contract 
performs a significant price discovery function under two of the four 
criteria established in section 2(h)(7) of the CEA. The Commission has 
concluded that the MDC contract meets both the material price reference 
and material liquidity criteria. Accordingly, the Commission is issuing 
the attached Order declaring that the MDC contract is a SPDC.
    Issuance of this Order signals the immediate effectiveness of the 
Commission's authorities with respect to ICE as a registered entity in 
connection with its MDC contract,\29\ and triggers the obligations, 
requirements--both procedural and substantive--and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs.
---------------------------------------------------------------------------

    \29\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

b. The Mid-C Financial Off-Peak (OMC) Contract and the SPDC Indicia

    The OMC contract is cash settled based on the arithmetic average of 
the off-peak, day-ahead power price indices that are reported each day 
in the specified contract month. The daily price indices are published 
by ICE in its ``ICE Day Ahead Power Price Report,'' which is available 
on the ECM's website. The off-peak hour electricity price index on a 
particular day is calculated as the volume-weighted average of 
qualifying, day-ahead, off-peak hour power transactions at the Mid-
Columbia hub that are traded on the ICE platform from 6 a.m. to 11 a.m. 
CST on the publication date. The ICE transactions on which the price 
index is based specify the physical delivery of power. The size of the 
OMC contract is 25 MWh, and the OMC contract is listed for 86 months.
    As the Columbia River flows through Washington State, it encounters 
two federal and nine privately-owned hydroelectric dams that generate 
close to 20,000 MW of power in the Northwest.\30\ With another three 
dams in British Columbia, Canada, and many more on its various 
tributaries, the Columbia River is the largest power-producing river in 
North America. A major goal of the participants in the Mid-C 
electricity market is to maximize the Columbia River's potential, along 
with protecting and enhancing the non-power uses of the river. The 
reliability of the electricity grid in the Northwest is coordinated by 
the NWPP.
---------------------------------------------------------------------------

    \30\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------

    One stretch of the Columbia River between the Grand Coulee Dam and 
Priests Rapids Dam is governed by the MCHCA. The MCHCA includes seven 
dams \31\ and nearly 13,000 MW of generation. Specifically, the 
agreement defines how the Chelan, Douglas and Grant PUDs coordinate 
their operations with the Bonneville Power Administration to maximize 
power generation while reducing fluctuations in the river's flow. A 
number of other utilities that buy power from the PUDs have also signed 
onto the agreement. The MCHCA agreement was signed into effect in 1972 
and renewed in 1997 for 20 years.\32\
---------------------------------------------------------------------------

    \31\ The federal dams are Grand Coulee and Chief Joseph. The 
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach 
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest 
Rapids (operated by the Grant PUD).
    \32\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------

    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various point along the electrical grid. The price 
of electricity at a particular point on the grid is called the LMP, 
which includes the cost of producing the electricity, as well as 
congestion and line losses. Thus, an LMP reflects generation costs as 
well as the actual cost of supplying and delivering electricity to a 
specific point along the grid.
    Electricity is traded in a day-ahead market as well as a real-time 
market. Typically, the bulk of the energy transactions occur in the 
day-ahead market. The day-ahead market establishes prices for 
electricity that is to be delivered during the specified hour on the 
following day. Day-ahead prices are determined based on generation and 
energy transaction quotes offered in advance. Because the quotes are 
based on estimates of supply and demand, electricity needs usually are 
not perfectly satisfied in the day-ahead market. On the day the 
electricity is transmitted and used, auction participants usually 
realize that they bought or sold either too much power or too little 
power. A real-time auction is operated in the Mid-C market to alleviate 
this problem by servicing as a balancing mechanism. In this regard, 
electricity traders use the real-time market to sell excess electricity 
and buy additional power to meet demand. Only a relatively small amount 
of electricity is traded in the real-time market compared with the day-
ahead market.

[[Page 38475]]

1. Material Price Reference Criterion
    The Commission's October 6, 2009, Federal Register notice 
identified material price reference and material liquidity as the 
potential basis for a SPDC determination with respect to the OMC 
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, ICE offers the ``West Power 
of Day'' package with access to all price data or just current prices 
plus a selected number of months (i.e., 12, 24, 36 or 48 months) of 
historical data. This package includes price data for the OMC contract.
    The Commission also noted that its October 2007 ECM Study found 
that in general, market participants view ICE as a price discovery 
market for certain electricity contracts. The study did not specify 
which markets performed this function; nevertheless, the Commission 
determined that the OMC contract, while not mentioned by name in the 
ECM Study, might warrant further review.
    The Commission explains in its Guidance to the Part 36 rules that 
in evaluating a contract under the material price reference criterion, 
it 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.\33\ 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 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.
---------------------------------------------------------------------------

    \33\ 17 CFR Part 36, Appendix A.
---------------------------------------------------------------------------

    The Mid-C power market is a major pricing center for electricity on 
the West Coast. Traders, including producers, keep abreast of the 
electricity prices in the Mid-C power market when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of power at the Mid-C hub when entering 
into cash market transaction for electricity, especially those trades 
providing for physical delivery in the future. Traders use the ICE OMC 
contract, as well as other ICE power contracts, to hedge cash market 
positions and transactions--activities which enhance the OMC contract's 
price discovery utility. The substantial volume of trading and open 
interest in the OMC contract appears to attest to its use for this 
purpose. While the OMC contract's settlement prices may not be the only 
factor influencing spot and forward transactions, power traders 
consider the ICE price to be a critical factor in conducting OTC 
transactions.\34\ As a result, the OMC contract satisfies the direct 
price reference test.
---------------------------------------------------------------------------

    \34\ In addition to referencing ICE prices, firms participating 
in the Mid-C power market may rely on other cash market quotes as 
well as industry publications and price indices that are published 
by third-party price reporting firms in entering into power 
transactions.
---------------------------------------------------------------------------

    Another reason that bolsters the direct price reference claim is 
related to the uniqueness of the ICE electricity prices for the Mid-C 
market. Day-ahead and real-time electricity prices are reported by a 
number of sources, including third-party price providers (e.g., Dow 
Jones & Company). ICE's Mid-C price indices are unique in that they are 
derived from transactions completed on ICE's electronic system. 
Moreover, ICE is the only entity that has access to such transaction 
data. Thus, it is not possible for any other firm to replicate ICE's 
indices.\35\
---------------------------------------------------------------------------

    \35\ In contrast, third-party price reporting firms typically 
compute their power index prices from transaction information that 
is voluntarily submitted by traders. It is possible that one trader 
could submit the same transaction data to multiple price reporting 
firms, whereby increasing the likelihood that price indices from 
different firms are similar in value. However, it is more plausible 
that the third-party price reporters' price indices would be similar 
but not exactly the same because different traders are polled.
---------------------------------------------------------------------------

    The fact that ICE's OMC contract is used more widely as a source of 
pricing information rather than the daily contract (i.e., the MXO 
contract) \36\ reinforces the argument for direct price reference. In 
this regard, the OMC contract is a monthly contact that prices power at 
the Mid-C up to 86 calendar months in the future. Thus, market 
participants can use the OMC contract to lock-in electricity prices far 
into the future. In contrast, the MXO contract is listed for a much 
shorter length of time--up to 70 days in the future. Traders use 
monthly power contracts like the OMC contract to price future power 
electricity commitments, where such commitments are based on long range 
forecasts of power supply and demand. As generation and usage nears, 
market participants have a better understanding of generation capacity 
actual power needs. As a result, they can modify previously-established 
hedges with daily contracts, like the MXO contract.
---------------------------------------------------------------------------

    \36\ The MXO contract is cash settled based on the off-peak, 
day-ahead price index for the specified day, as published by ICE in 
its ``ICE Day Ahead Power Price Report,'' which is available on the 
ECM's website. The daily, off-peak hour electricity price index is a 
volume-weighted average of qualifying, day-ahead, off-peak hour 
power contracts at the Mid-Columbia hub that are traded on the ICE 
platform from 6 a.m. to 11 a.m. CST on the publication date.
---------------------------------------------------------------------------

    The Commission notes that the Mid-C is a major trading point for 
electricity, and the OMC contract's prices are well regarded in the 
industry as indicative of the value of power at the Mid-C hub. 
Accordingly, Commission staff believes that it is reasonable to 
conclude that market participants purchase the data packages that 
include the OMC contract's prices in substantial part because the OMC 
contract prices have particular value to them. Moreover, such prices 
are consulted on a frequent and recurring basis by industry 
participants in pricing cash market transactions. In light of the 
above, the OMC contract meets the indirect price reference test.
i. Federal Register Comments
    WGCEF, WPTF, EEI and ICE stated that no other contract directly 
references or settles to the OMC contract's price. Moreover, the 
commenters argued that the underlying cash price series against which 
the OMC contract is settled (in this case, the average of peak Mid-C 
electricity prices over the contract month, which are derived from cash 
market transactions) is the authentic reference price and not the ICE 
contract itself. Commission staff believes that this interpretation of 
price reference is too narrow and believes that a cash-settled 
derivatives contract could meet the price reference criterion if market 
participants ``consult on a frequent and

[[Page 38476]]

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 Mid-C hub is a major trading center for 
electricity in the western United States. Traders, including producers, 
keep abreast of the prices of the OMC contract when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of electricity at the Mid-C hub when 
entering into cash market transaction for power, especially those 
trades that provide for physical delivery in the future. Traders use 
the ICE OMC contract to hedge cash market positions and transactions, 
which enhances the OMC contract's price discovery utility. While the 
OMC contract's settlement prices may not be the only factor influencing 
spot and forward transactions, power traders consider the ICE price to 
be a crucial factor in conducting OTC transactions.
    In addition, WGCEF stated that the publication of price data for 
the OMC contract price is weak justification for material price 
reference. This commenter argued that market participants generally do 
not purchase ICE data sets for one contract's prices, such as those for 
the OMC contract. Instead, traders are interested in the settlement 
prices, so the fact that ICE sells the OMC prices as part of a broad 
package is not conclusive evidence that market participants are buying 
the ICE data sets because they find the OMC prices have substantial 
value to them. As noted above, the Commission notes that publication of 
the OMC contract's prices is indirect evidence of routine 
dissemination. The OMC contract's prices, while sold as a package, are 
of particular interest to market participants. Thus, the Commission has 
concluded that traders likely specifically purchase the ICE data 
packages for the OMC contract's prices and consult such prices on a 
frequent and recurring basis in pricing cash market transactions.
    Lastly, EEI criticized that the ECM Study did not specifically 
identify the OMC contract as a contract that is referred to by market 
participants on a frequent and recurring basis. In response, the 
Commission notes that it cited the ECM Study's general finding that 
some ICE electricity contracts appear to be regarded as price discovery 
markets merely as indication that an investigation of certain ICE 
contracts may be warranted. The ECM Study was not intended to serve as 
the sole basis for determining whether or not a particular contract 
meets the material price reference criterion.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the ICE OMC contract 
meets the material price reference criterion because cash market 
transactions are priced either explicitly or implicitly on a frequent 
and recurring basis at a differential to the OMC contract's price 
(direct evidence). Moreover, the OMC contract's price data are sold to 
market participants, and those individuals likely purchase the ICE data 
packages specifically for the OMC contract's prices and consult such 
prices on a frequent and recurring basis in pricing cash market 
transactions (indirect evidence).
2. Material Liquidity Criterion
    In its October 6, 2009, Federal Register notice, the Commission 
identified material price reference and material liquidity as potential 
criteria for SPDC determination of the OMC 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 changes to the subject-
contract's prices potentially may have on prices for other contracts 
listed on an ECM or a DCM.\37\
---------------------------------------------------------------------------

    \37\ As noted above, the material liquidity criterion speaks to 
the effect that transactions in the potential SPDC may have on 
trading in ``agreements, contracts and transactions listed for 
trading on or subject to the rules of a designated contract market, 
a derivatives transaction execution facility, or an electronic 
trading facility operating in reliance on the exemption in section 
2(h)(3) of the Act.''
---------------------------------------------------------------------------

    The total number of transactions executed on ICE's electronic 
platform in the OMC contract was 443 in the second quarter of 2009, 
resulting in a daily average of 6.9 trades. During the same period, the 
OMC contract had a total trading volume of 185,950 contracts and an 
average daily trading volume of 2,905.5 contracts. Moreover, open 
interest as of June 30, 2009, was 1,105,361 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.\38\
---------------------------------------------------------------------------

    \38\ 74 FR 51261 (October 6, 2009).
---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 213,862 
contracts (or 3,290 contracts on a daily basis). In terms of number of 
transactions, 327 trades occurred in the fourth quarter of 2009 (5 
trades per day). As of December 31, 2009, open interest in the OMC 
contract was 1,249,165 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.
    The number of trades per day was relatively low between the second 
and fourth quarters of 2009. However, trading activity in the OMC 
contract, as characterized by total quarterly volume, indicates that 
the MDC contract experiences trading activity that is greater than that 
of minor futures markets.\39\ Thus, it is reasonable to infer that the 
OMC contract could have a material effect on other ECM contracts or on 
DCM contracts.
---------------------------------------------------------------------------

    \39\ 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.
---------------------------------------------------------------------------

    To measure the effect that the OMC contract potentially could have 
on another ECM contract, staff performed a statistical analysis \40\ 
using daily settlement prices between July 1, 2008, and December 31, 
2009, for the ICE OMC and MDC contracts. The simulation suggests that, 
on average over the sample period, a one percent

[[Page 38477]]

rise in the OMC contract's price elicited a 0.915 percent increase in 
ICE MDC contract's price.
---------------------------------------------------------------------------

    \40\ Specifically, Commission staff econometrically estimated a 
cointegrated vector autoregression (CVAR) model using daily 
settlement prices. CVAR methods permit a dichotomization of the data 
relationships into long-run equilibrium components (called the 
cointegration space or cointegrating relationships) and a short-run 
component. A CVAR model was chosen over the more traditional vector 
autoregression model in levels because the statistical properties of 
the data (lack of stationarity and ergodicity) precluded the more 
traditional modeling treatment. Moreover, the statistical properties 
of the data necessitated the modeling of contracts' prices as a CVAR 
model containing both first differences (to handle stationarity) and 
an error correction term to capture long run equilibrium 
relationships. The prices were treated as a single reduced-form 
model in order to test hypothesis that power prices in the same 
market affect each other. The prices of ICE's OMC and MDC contracts 
are positively related to each other in a cointegrating relationship 
and display a high level of statistical strength. On average during 
the sample period, each percentage rise in OMC contract's price 
elicited a 0.915 percent rise in MDC contract's price.
---------------------------------------------------------------------------

i.  Federal Register Comments
    ICE and WGCEF stated that the OMC contract lacks a sufficient 
number of trades to meet the material liquidity criterion. These two 
commenters, along with WPTF, FEIG and EEI argued that the OMC contract 
cannot have a material effect on other contracts, such as those listed 
for trading by NYMEX. The commenters pointed out that it is not 
possible for the OMC contract to affect a DCM contract because price 
linkage and the potential for arbitrage do not exist. The DCM contracts 
do not cash settle to the OMC contract's price. Instead, the DCM 
contracts and the OMC contract are both cash settled based on physical 
transactions, which the ECM and DCM contracts cannot influence. The 
Commission's statistical analysis shows that changes in the ICE OMC 
contract's price significantly influence the prices of other ECM 
contracts (namely, the MDC contract).
    WGCEF and 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, and noted that the relatively low 
number of trades per day in the OMC contract did not meet this standard 
of liquidity. While a continuous stream of prices would indeed be an 
indication of liquidity for certain markets, 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.'' \41\
---------------------------------------------------------------------------

    \41\ Guidance, supra.
---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade 
per day test for material liquidity.'' To the contrary, 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'' \42\ 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; however, the contract will not be found to be a SPDC merely 
because it met the reporting threshold.
---------------------------------------------------------------------------

    \42\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE also asserted that the statistics provided by ICE 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'' as well as in strips of 
contract months. ICE suggested that a more appropriate method of 
determining liquidity is to examine the activity in a single traded 
month of a given contract.\43\ It is the Commission's opinion that 
liquidity, as it pertains to the OMC contract, is typically a function 
of trading activity in particular lead months and, given sufficient 
liquidity in such months, the ICE OMC contract itself would be 
considered liquid.
---------------------------------------------------------------------------

    \43\ In addition, 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 6, 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. 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 82 percent of all 
transactions in the OMC contract. Commission acknowledges that the 
open interest information it provided in its October 6, 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 finds that the OMC 
meets the material liquidity criterion. Specifically, there is 
sufficient trading activity in the OMC contract to have a material 
effect on ``other agreements, contracts or transactions listed for 
trading on or subject to the rules of a designated contract market * * 
* or an electronic trading facility operating in reliance on the 
exemption in section 2(h)(3) of the Act'' (that is, an ECM).
3. Overall Conclusion Regarding the OMC Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the OMC contract 
performs a significant price discovery function under two of the four 
criteria established in section 2(h)(7) of the CEA. The Commission has 
concluded that the OMC contract meets both the material price reference 
and material liquidity criteria. Accordingly, the Commission is issuing 
the attached Order declaring that the OMC contract is a SPDC.
    Issuance of this Order signals the immediate effectiveness of the 
Commission's authorities with respect to ICE as a registered entity in 
connection with its OMC contract,\44\ and triggers the obligations, 
requirements--both procedural and substantive--and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs.
---------------------------------------------------------------------------

    \44\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

V. Related Matters

a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \45\ 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 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.
---------------------------------------------------------------------------

    \45\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

b. Cost-Benefit Analysis

    Section 15(a) of the CEA \46\ 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.
---------------------------------------------------------------------------

    \46\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    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

[[Page 38478]]

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. 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.

c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \47\ 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 ECMs. 
The Commission previously has determined that ECMs are not small 
entities for purposes of the RFA.\48\ Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that these Orders, 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.
---------------------------------------------------------------------------

    \47\ 5 U.S.C. 601 et seq.
    \48\ 66 FR 42256, 42268 (Aug. 10, 2001).
---------------------------------------------------------------------------

VI. Orders

a. Order Relating to the Mid-C Financial Peak 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 Mid-C Financial Peak contract, 
traded on the IntercontinentalExchange, Inc., satisfies the statutory 
material price reference and material liquidity criteria for 
significant price discovery contracts. Consistent with this 
determination, and effective immediately, the IntercontinentalExchange, 
Inc., must comply with, with respect to the Mid-C Financial Peak 
contract, the nine core principles established by new section 
2(h)(7)(C). Additionally, the IntercontinentalExchange, Inc., shall be 
and is considered a registered entity \49\ with respect to the Mid-C 
Financial Peak contract and is subject to all the provisions of the 
Commodity Exchange Act applicable to registered entities.
---------------------------------------------------------------------------

    \49\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    Further, the obligations, requirements and timetables prescribed in 
Commission rule 36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., commence with the issuance of this 
Order.\50\
---------------------------------------------------------------------------

    \50\ Because ICE already lists for trading a contract (i.e., the 
Henry Financial LD1 Fixed Price contract) that was previously 
declared by the Commission to be a SPDC, ICE must submit a written 
demonstration of compliance with the Core Principles within 30 
calendar days of the date of this Order. 17 CFR 36.3(c)(4).
---------------------------------------------------------------------------

b. Order Relating to the Mid-C Financial Off-Peak 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 Mid-C Financial Off-Peak contract, 
traded on the IntercontinentalExchange, Inc., satisfies the statutory 
material price reference and material liquidity criteria for 
significant price discovery contracts. Consistent with this 
determination, and effective immediately, the IntercontinentalExchange, 
Inc., must comply with, with respect to the Mid-C Financial Off-Peak 
contract, the nine core principles established by new section 
2(h)(7)(C). Additionally, the IntercontinentalExchange, Inc., shall be 
and is considered a registered entity \51\ with respect to the Mid-C 
Financial Off-Peak contract and is subject to all the provisions of the 
Commodity Exchange Act applicable to registered entities.
---------------------------------------------------------------------------

    \51\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    Further, the obligations, requirements and timetables prescribed in 
Commission rule 36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., commence with the issuance of this 
Order.\52\
---------------------------------------------------------------------------

    \52\ Because ICE already lists for trading a contract (i.e., the 
Henry Financial LD1 Fixed Price contract) that was previously 
declared by the Commission to be a SPDC, ICE must submit a written 
demonstration of compliance with the Core Principles within 30 
calendar days of the date of this Order. 17 CFR 36.3(c)(4).

    Issued in Washington, DC, on June 25, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-16212 Filed 7-1-10; 8:45 am]
BILLING CODE 6351-01-P