FR Doc E9-24384[Federal Register: October 9, 2009 (Volume 74, Number 195)]
[Notices]
[Page 52192-52194]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09oc09-43]
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COMMODITY FUTURES TRADING COMMISSION
Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of
the Commodity Exchange Act and Commission Rule 36.3(c)(3), To Undertake
a Determination Whether the Malin Financial Basis Contract, Offered for
Trading on the IntercontinentalExchange, Inc., Performs a Significant
Price Discovery Function
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of action and request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is undertaking a review to determine whether the Malin
Financial Basis (``MLN'') contract, offered for trading on the
IntercontinentalExchange, Inc. (``ICE''), an exempt commercial market
(``ECM'') under Sections 2(h)(3)-(5) of the Commodity Exchange Act
(``CEA'' or the ``Act''), performs a significant price discovery
function. Authority for this action is found in section 2(h)(7) of the
CEA and Commission rule 36.3(c) promulgated thereunder. In connection
with this evaluation, the Commission invites comment from interested
parties.
DATES: Comments must be received on or before October 26, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Follow the instructions for submitting comments. Federal
eRulemaking Portal: http://www.regulations.gov.
E-mail: [email protected]. Include Malin Financial Basis
(MLN) Contract in the subject line of the message.
Fax: (202) 418-5521.
Mail: Send to David A. Stawick, Secretary, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581
Courier: Same as mail above.
All comments received will be posted without change to http://
www.CFTC.gov/.
FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5515. E-mail: [email protected]; or Susan Nathan,
Senior Special Counsel, Division of Market Oversight, same address.
[[Page 52193]]
Telephone: (202) 418-5133. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
On March 16, 2009, the CFTC promulgated final rules implementing
provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization
Act'') \1\ which subjects ECMs with significant price discovery
contracts (``SPDCs'') to self-regulatory and reporting requirements, as
well as certain Commission oversight authorities, with respect to those
contracts. Among other things, these rules and rule amendments revise
the information-submission requirements applicable to ECMs, establish
procedures and standards by which the Commission will determine whether
an ECM contract performs a significant price discovery function, and
provide guidance with respect to compliance with nine statutory core
principles applicable to ECMs with SPDCs. These rules became effective
on April 22, 2009.
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\1\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on
April 22, 2009.
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In determining whether an ECM's contract is or is not a SPDC, the
Commission will evaluate the contract's material liquidity, price
linkage to other contracts, potential for arbitrage with other
contracts traded on designated contract markets or derivatives
transaction execution facilities, use of the ECM contract's prices to
execute or settle other transactions, and other factors.
In order to facilitate the Commission's identification of possible
SPDCs, Commission rule 36.3(c)(2) requires that an ECM operating in
reliance on section 2(h)(3) promptly notify the Commission and provide
supporting information or data concerning any contract: (i) that
averaged five trades per day or more over the most recent calendar
quarter; and (ii) (A) for which the ECM sells price information
regarding the contract to market participants or industry publications;
or (B) whose daily closing or settlement prices on 95 percent or more
of the days in the most recent quarter were within 2.5 percent of the
contemporaneously determined closing, settlement, or other daily price
of another agreement.
II. Determination of a SPDC
A. The SPDC Determination Process
Commission rule 36.3(c)(3) establishes the procedures by which the
Commission makes and announces its determination on whether a specific
ECM contract serves a significant price discovery function. Under those
procedures, the Commission will publish a notice in the Federal
Register that it intends to undertake a determination as to whether the
specified agreement, contract, or transaction performs a significant
price discovery function and to receive written data, views, and
arguments relevant to its determination from the ECM and other
interested persons.\2\ After prompt consideration of all relevant
information,\3\ the Commission will, within a reasonable period of time
after the close of the comment period, issue an order explaining its
determination. Following the issuance of an order by the Commission
that the ECM executes or trades an agreement, contract, or transaction
that performs a significant price discovery function, the ECM must
demonstrate, with respect to that agreement, contract, or transaction,
compliance with the core principles under section 2(h)(7)(C) of the CEA
\4\ and the applicable provisions of Part 36. If the Commission's order
represents the first time it has determined that one of the ECM's
contracts performs a significant price discovery function, the ECM must
submit a written demonstration of its compliance with the core
principles within 90 calendar days of the date of the Commission's
order. For each subsequent determination by the Commission that the ECM
has an additional SPDC, the ECM must submit a written demonstration of
its compliance with the core principles within 30 calendar days of the
Commission's order.
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\2\ The Commission may commence this process on its own
initiative or on the basis of information provided to it by an ECM
pursuant to the notification provisions of Commission rule
36.3(c)(2).
\3\ Where appropriate, the Commission may choose to interview
market participants regarding their impressions of a particular
contract. Further, while they may not provide direct evidentiary
support with respect to a particular contract, the Commission may
rely for background and context on resources such as its October
2007 Report on the Oversight of Trading on Regulated Futures
Exchanges and Exempt Commercial Markets (``ECM Study''). http://
www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-
07_ecmreport.pdf.
\4\ 7 U.S.C. 2(h)(7)(C).
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B. Malin Financial Basis Contract
The MLN contract is a monthly contract that is cash settled based
on the difference between the price of natural gas at the Malin hub for
the month of delivery in the first publication of the month, as
published by Intelligence Press, Inc. (IPI), in NGI's Bidweek Survey,
and the final settlement price for New York Mercantile Exchange's
(``NYMEX's'') Henry Hub physically-delivered natural gas futures
contract for the same specified calendar month. The bidweek price is
computed from fixed-price, bilateral transactions executed during the
last five business days of a given month, where the transactions
specify the delivery of natural gas at the Malin hub during the
following calendar month. The price index is computed as the volume-
weighted average of the applicable natural gas transactions. Bidweek
prices are published on the first business day of the month in which
the gas flows. The size of the MLN contract is 2,500 mm Btu, and the
unit of trading is any multiple of 2,500 mm Btu. The MLN contract is
listed for up to 72 calendar months commencing with the next calendar
month.
Based upon a required quarterly notification filed on July 27, 2009
(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect
to its MLN contract, the total number of trades was 664 in the second
quarter of 2009, resulting in a daily average of 10.4 trades. During
the same period, the MLN contract had a total trading volume of 59,564
contracts and an average daily trading volume of 930.7 contracts.
Moreover, the open interest as of June 30, 2009, was 65,804 contracts.
It appears that the MLN contract may satisfy the material
liquidity, price linkage, and material price reference factors for SPDC
determination. With respect to material liquidity, trading in the MLN
contract averaged just shy of 1,000 contracts on a daily basis, with
more than 10 separate transactions each day. In addition, the open
interest in the subject contract was substantial. In regard to price
linkage, the final settlement of the MLN contract is based, in part, on
the final settlement price of the NYMEX's physically-delivered natural
gas futures contract, where the NYMEX is registered with the Commission
as a designated contract market (``DCM''). In terms of material price
reference, the ICE maintains exclusive rights over IPI's bidweek price
indices. As a result, no other exchange can offer such a basis contract
based on IPI's Malin bidweek index. While other third-party price
providers produce natural gas price indices for a variety of trading
centers, those indices may not have the same values or quality as IPI's
price indices; each company's bidweek indices are based on transactions
that are consummated during the last five days of the month prior to
delivery and are voluntarily submitted by traders. In addition, the ICE
sells its price data to market participants in a number of different
packages which vary in terms of the hubs covered, time periods, and
[[Page 52194]]
whether the data are daily only or historical. For example, the ICE
offers ``West Gas End of Day'' and ``OTC Gas End of Day'' data packages
with access to all price data or just 12, 24, 36, or 48 months of
historical data.
III. Request for Comment
In evaluating whether an ECM's agreement, contract, or transaction
performs a significant price discovery function, section 2(h)(7) of the
CEA directs the Commission to consider, as appropriate, four specific
criteria: price linkage, arbitrage, material price reference, and
material liquidity. As it explained in Appendix A to the Part 36
rules,\5\ the Commission, in making SPDC determinations, will apply and
weigh each factor, as appropriate, to the specific contract and
circumstances under consideration.
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\5\ 17 CFR 36, Appendix A.
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As part of its evaluation, the Commission will consider the written
data, views, and arguments from any ECM that lists the potential SPDC
and from any other interested parties. Accordingly, the Commission
requests comment on whether the ICE's MLN contract performs a
significant price discovery function. Commenters' attention is directed
particularly to Appendix A of the Commission's Part 36 rules for a
detailed discussion of the factors relevant to a SPDC determination.
The Commission notes that comments which analyze the contract in terms
of these factors will be especially helpful to the determination
process. In order to determine the relevance of comments received, the
Commission requests that commenters explain in what capacity are they
knowledgeable about the subject contract.
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \6\ imposes certain
requirements on federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. Certain provisions of final
Commission rule 36.3 impose new regulatory and reporting requirements
on ECMs, resulting in information collection requirements within the
meaning of the PRA; OMB previously has approved and assigned OMB
control number 3038-0060 to this collection of information.
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\6\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis
Section 15(a) of the CEA \7\ requires the Commission to consider
the costs and benefits of its actions before issuing an order under the
Act. By its terms, section 15(a) does not require the Commission to
quantify the costs and benefits of such an order or to determine
whether the benefits of such an order outweigh its costs; rather, it
requires that the Commission ``consider'' the costs and benefits of its
action. Section 15(a) further specifies that the costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: (1) Protection of market participants and the public; (2)
efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery; (4) sound risk management practices; and
(5) other public interest considerations.
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\7\ 7 U.S.C. 19(a).
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The bulk of the costs imposed by the requirements of Commission
Rule 36.3 relate to significant and increased information-submission
and reporting requirements adopted in response to the Reauthorization
Act's directive that the Commission take an active role in determining
whether contracts listed by ECMs qualify as SPDCs. The enhanced
requirements for ECMs will permit the Commission to acquire the
information it needs to discharge its newly-mandated responsibilities
and to ensure that ECMs with SPDCs are identified as entities with the
elevated status of registered entity under the CEA and are in
compliance with the statutory terms of the core principles of section
2(h)(7)(C) of the Act. The primary benefit to the public is to enable
the Commission to discharge its statutory obligation to monitor for the
presence of SPDCs and extend its oversight to the trading of SPDCs.
Issued in Washington, DC on October 5, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-24384 Filed 10-8-09; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: October 9, 2009