FR Doc E9-25174[Federal Register: October 20, 2009 (Volume 74, Number 201)]
[Notices]
[Page 53720-53722]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20oc09-39]
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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 Henry Financial Swing Contract; Henry
Financial Basis Contract; and Henry Financial Index Contract, Offered
for Trading on the IntercontinentalExchange, Inc., Perform Significant
Price Discovery Functions
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of action and request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is undertaking a review to determine whether the Henry
Financial Swing (``HHD'') contract; Henry Financial Basis (``HEN'')
contract; and/or Henry Financial Index (``HIS'') contract, offered for
trading on the IntercontinentalExchange, Inc. (``ICE''), an exempt
commercial market (``ECM'') under Sections 2(h)(3)-(5) of the Commodity
Exchange Act (``CEA'' or the ``Act''), perform significant price
discovery functions. Authority for this action is found in section
2(h)(7) of the CEA and Commission rule 36.3(c) promulgated thereunder.
In connection with this evaluation, the Commission invites comment from
interested parties.
DATES: Comments must be received on or before November 4, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Follow the instructions for submitting comments. Federal
eRulemaking Portal: http://www.regulations.gov.
E-mail: [email protected]. Include Henry Financial Swing
(HHD) contract; Henry Financial Basis (HEN) contract; and/or Henry
Financial Index (HIS) contract in the subject line of the message,
depending on the subject contract(s) to which the comments apply.
Fax: (202) 418-5521.
Mail: Send to David A. Stawick, Secretary, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581.
Courier: Same as mail above.
All comments received will be posted without change to http://
www.CFTC.gov/.
FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5515. E-mail: [email protected]; or Susan Nathan,
Senior Special Counsel, Division of Market Oversight, same address.
Telephone: (202) 418-5133. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
On March 16, 2009, the CFTC promulgated final rules implementing
provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization
Act'') \1\ which subjects ECMs with significant price discovery
contracts (``SPDCs'') to self-regulatory and reporting requirements, as
well as certain Commission oversight authorities, with respect to those
contracts. Among other things, these rules and rule amendments revise
the information-submission requirements applicable to ECMs, establish
procedures and standards by which the Commission will determine whether
an ECM contract performs a significant price discovery function, and
provide guidance with respect to compliance with nine statutory core
principles applicable to ECMs with 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 consider the contract's material liquidity, price
linkage to other contracts, potential for arbitrage with other
contracts traded on designated contract markets or derivatives
transaction execution facilities, use of the ECM contract's prices to
execute or settle other transactions, and other factors.
In order to facilitate the Commission's identification of possible
SPDCs,
[[Page 53721]]
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. Henry Financial Swing Contract
The HHD contract is a daily contract that is cash settled based on
the spot index price for natural gas at the Henry Hub, as published by
Platts in the ``Daily Price Survey'' table of Gas Daily. The Platts
index price is based on fixed-price cash market transactions that are
voluntarily reported by traders. The size of the HHD contract is 2,500
million British thermal units (``mmBtu''), and the unit of trading is
any multiple of 2,500 mmBtu. The HHD contract is listed for 65
consecutive calendar days.
Based upon a required quarterly notification filed on July 27, 2009
(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect
to its HHD contract, 5,246 separate trades occurred in the second
quarter of 2009, resulting in a daily average of 82.0 trades. During
the same period, the HHD contract had a total trading volume of 242,968
contracts (which was an average of 3,796.4 contracts per day). As of
June 30, 2009, open interest in the HHD contract was 20,173 contracts.
It appears that the HHD contract may satisfy the material
liquidity, arbitrage, and material price reference factors for SPDC
determination. With respect to material liquidity, trading in the HHD
contract averaged over 3,500 contracts on a daily basis with more than
80 separate transactions each day. Moreover, the open interest at the
end of the second quarter in 2009 was significant. Because the HHD
contract specifies the Henry Hub, the contract's prices series may be
highly correlated with that of the New York Mercantile Exchange's
physically-delivered Natural Gas contract and/or the ICE's Henry
Financial LD1 Financial Fixed Price contract, thus increasing the
opportunity for arbitrage. In regard to material price reference, while
it did not specifically address the natural gas contracts under review,
the ECM Study stated that, in general, market participants view the ICE
as a price discovery market for certain natural gas contracts. Natural
gas contracts based on actively-traded hubs are transacted on the ICE's
electronic trading platform, with the remainder being completed over-
the-counter and potentially submitted for clearing by voice brokers. In
addition, the ICE sells its price data to market participants in a
number of different packages which vary in terms of the hubs covered,
time periods, and whether the data are daily only or historical. For
example, the ICE offers ``Henry Hub 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.
C. Henry Financial Basis Contract
The HEN contract is a monthly contract that is cash settled based
on the difference between the bidweek price index for a particular
calendar month at the Henry Hub, as published by Platts in its Inside
FERC's Gas Market Report, and the final settlement price of the New
NYMEX's physically-delivered Henry Hub natural gas futures contract for
the same calendar month. The Platts bidweek price is based on fixed-
price cash market transactions that are conducted during the last five
business days of the month and are voluntarily reported by traders;
bidweek transactions specify the delivery of natural gas during the
following calendar month. The size of the HEN contract is 2,500 mmBtu,
and the unit of trading is any multiple of 2,500 mmBtu. The HEN
contract is listed for up to 72 calendar months.
Based upon a required quarterly notification filed on July 27, 2009
(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect
to its HEN contract, 538 separate trades occurred in the second quarter
of 2009, resulting in a daily average of 8.4 trades. During the same
period, the HEN contract had a total trading volume of 78,870 (which
was an average of 1,232.3 contracts per day). As of June 30, 2009, open
interest in the HEN contract was 128,504 contracts.
It appears that the HEN contract may satisfy the material
liquidity, price linkage, and material price reference factors for SPDC
determination. With respect to material liquidity, trading in the HEN
contract averaged more than 1,000 contracts on a daily basis, with
nearly 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 HEN contract is based, in part, on
the final settlement price of the NYMEX's physically-delivered natural
gas contract, where the NYMEX is registered with the Commission as a
designated contract market (``DCM''). In regard to material price
reference, while it did not specifically address the
[[Page 53722]]
natural gas contracts under review, the ECM Study stated that, in
general, market participants view the ICE as a price discovery market
for certain natural gas contracts. Natural gas contracts based on
actively-traded hubs are transacted on the ICE's electronic trading
platform, with the remainder being completed over-the-counter and
potentially submitted for clearing by voice brokers. In addition, the
ICE sells its price data to market participants in a number of
different packages which vary in terms of the hubs covered, time
periods, and whether the data are daily only or historical. For
example, the ICE offers ``Henry Hub 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.
D. Henry Financial Index Contract
The HIS contract is a monthly contract that is cash settled based
on the arithmetic average of the daily natural gas prices at the Henry
Hub, as quoted in the ``Daily Price Survey'' table of Platts' Gas Daily
during the specified month, less the Platts bidweek price that is
reported in the first issue of Inside FERC's Gas Market Report in which
the natural gas is produced. The Platts prices are based on fixed-price
cash market transactions that are voluntarily reported by traders. The
size of the HIS contract is 2,500 mmBtu, and the unit of trading is any
multiple of 2,500 mmBtu. The HIS contract is listed for 36 calendar
months.
Based upon a required quarterly notification filed on July 27, 2009
(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect
to its HIS contract, 550 separate trades occurred in the second quarter
of 2009, resulting in a daily average of 8.6 trades. During the same
period, the HIS contract had a total trading volume of 79,330 contracts
(which was an average of 1,239.5 contracts per day). As of June 30,
2009, open interest in the HIS contract was 127,346 contracts.
It appears that the HIS contract may satisfy the material
liquidity, and material price reference factors for SPDC determination.
With respect to material liquidity, trading in the HIS contract
averaged over 1,200 contracts on a daily basis with more than 8
separate transactions each day. In addition, the open interest in the
subject contract was substantial. In regard to material price
reference, while it did not specifically address the natural gas
contracts under review, the ECM Study stated that, in general, market
participants view the ICE as a price discovery market for certain
natural gas contracts. Natural gas contracts based on actively-traded
hubs are transacted on the ICE's electronic trading platform, with the
remainder being completed over-the-counter and potentially submitted
for clearing by voice brokers. In addition, the ICE sells its price
data to market participants in a number of different packages which
vary in terms of the hubs covered, time periods, and whether the data
are daily only or historical. For example, the ICE offers ``Henry Hub
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 Part 36, Appendix A.
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As part of its evaluation, the Commission will consider the written
data, views, and arguments from any ECM that lists the potential SPDC
and from any other interested parties. Accordingly, the Commission
requests comment on whether the HHD, HEN, and/or HIS contracts perform
significant price discovery functions. Commenters' attention is
directed particularly to Appendix A of the Commission's Part 36 rules
for a detailed discussion of the factors relevant to an SPDC
determination. The Commission notes that comments which analyze the
contracts in terms of these factors will be especially helpful to the
determination process. In order to determine the relevance of comments
received, the Commission requests that commenters explain in what
capacity are they knowledgeable about the subject contracts. Moreover,
because three contracts are included in this notice, it is important
that commenters identify to which contract(s) their comments apply.
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \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 an order or to determine whether the
benefits of the order outweigh its costs; rather, it requires that the
Commission ``consider'' the costs and benefits of its action. Section
15(a) further specifies that the costs and benefits shall be evaluated
in light of five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations.
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\7\ 7 U.S.C. 19(a).
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The bulk of the costs imposed by the requirements of Commission
Rule 36.3 relate to significant and increased information-submission
and reporting requirements adopted in response to the Reauthorization
Act's directive that the Commission take an active role in determining
whether contracts listed by ECMs qualify as SPDCs. The enhanced
requirements for ECMs will permit the Commission to acquire the
information it needs to discharge its newly-mandated responsibilities
and to ensure that ECMs with SPDCs are identified as entities with the
elevated status of registered entity under the CEA and are in
compliance with the statutory terms of the core principles of section
2(h)(7)(C) of the Act. The primary benefit to the public is to enable
the Commission to discharge its statutory obligation to monitor for the
presence of SPDCs and extend its oversight to the trading of SPDCs.
Issued in Washington, DC, on October 14, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-25174 Filed 10-19-09; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: October 20, 2009