e9-23966

FR Doc E9-23966[Federal Register: October 6, 2009 (Volume 74, Number 192)]

[Notices]

[Page 51261-51264]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr06oc09-29]

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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 Mid-C Financial Peak Contract; Mid-C

Financial Peak Daily Contract; Mid-C Financial Off-Peak Contract; and

Mid-C Financial Off-Peak Daily Contract, Offered for Trading on the

IntercontinentalExchange, Inc., Perform Significant Price Discovery

Functions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of action and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

``Commission'') is undertaking a review to determine whether the Mid-C

Financial Peak (``MDC'') contract; Mid-C Financial Peak Daily (``MPD'')

contract; Mid-C Financial Off-Peak (``OMC'') contract; and Mid-C

Financial Off-Peak Daily (``MXO'') 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 October 21, 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 ICE Mid-C Financial

Peak (MDC) Contract, ICE Mid-C Financial Peak Daily (MPD) Contract, ICE

Mid-C Financial Off-Peak (OMC) Contract, and/or Mid-C Financial Off-

Peak Daily (MXO) Contract in the subject line of the

[[Page 51262]]

message, depending on the subject contracts 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 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

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. Mid-C Financial Peak Contract

The MDC contract is cash settled based on the arithmetic calendar-

month average of peak-hour day-ahead electricity prices published daily

in the ``ICE Day Ahead Power Price Report'' for the Mid-Columbia hub

during all peak hours in the month of the electricity production. The

peak-hour electricity price reported each day by the ICE is a volume-

weighted index that includes qualifying,\5\ day-ahead, peak-hour power

contracts based on 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

contracts on which the price index is based specify physical delivery

of power. The ICE publishes index prices for those hubs where there is

sufficient trading activity. Ideally, a hub displays a minimum of one

trade per day and an average of three trades per day during the prior

three months before the ICE begins publishing an index for that hub.

The size of the MDC contract is 400 megawatt hours (``MWh''),\6\ and

the unit of trading is any multiple of 400 MWh. The MDC contract is

listed for up to 86 calendar months with four complete calendar years.

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\5\ Trades that are not deemed to qualify for inclusion in the

index calculation are those that are done between two companies

owned by the same parent company, price basis spread legs (i.e.

spread trades that are executed on a trading platform that

subsequently are converted into two outright prices for trade-

reporting purposes), cancelled or altered trades prior to a

counterparty's confirmation, trades where the counterparty reverses

a trade within two minutes of the previous transaction, and option

trades that fall outside of the given time period for the index.

\6\ The MDC contract permits traders to choose either a single

lot of 400 MWh in an entire month or 400 MWh each peak day of the

contract month (in this case, the number of lots traded would equal

the number of peak days). By and large, most traders opt for the

latter variation of the contract.

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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 MDC contract, the total number of trades 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

[[Page 51263]]

contracts. Moreover, the open interest as of June 30, 2009, was 169,851

contracts.

It appears that the MDC contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, trading in the ICE MDC contract averaged

more than 1,000 contracts on a daily basis, with more than 30 separate

transactions each day. In addition, the open interest in the subject

contract was large. In regard to material price reference, while it did

not specifically address the power contracts under review, the ECM

Study stated that, in general, market participants view the ICE as a

price discovery market for certain electricity contracts. Power

contracts based on actively-traded hubs are transacted heavily on the

ICE's electronic trading platform, with the remainder being completed

over-the-counter and potentially submitted for clearing by voice

brokers. In addition, the ICE sells its price data to market

participants in a number of different packages which vary in terms of

the hubs covered, time periods, and whether the data are daily only or

historical. For example, the ICE offers ``West Power End of Day'' data

packages with access to all price data or just 12, 24, 36, or 48 months

of historical data.

C. Mid-C Financial Peak Daily Contract

The MPD contract is cash settled based on the day-ahead index price

published in the settlement month by the ICE for the specified day. The

peak day-ahead electricity prices are published in the ``ICE Day Ahead

Power Price Report.'' For each peak day of the month, the ICE reports a

next-day peak electricity price for each hub using the methodology

noted above. The ICE contracts on which the price index is based

specify physical delivery of power. The size of the MPD contract is 400

MWh. The MPD contract is listed for 38 consecutive 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 MPD contract, the total number of trades was 1,294 in the second

quarter of 2009, resulting in a daily average of 20.2 trades. During

the same period, the MPD contract had a total trading volume of 18,862

contracts and an average daily trading volume of 294.7 contracts.

Moreover, the open interest as of June 30, 2009, was 826 contracts.

It appears that the MPD contract may satisfy the material liquidity

and material price reference factors for SPDC determination. With

respect to material liquidity, trading in the ICE contract averaged

nearly 300 contracts on a daily basis, with more than 20 separate

transactions each day. In addition, the open interest in the subject

contract was sizable. In regard to material price reference, while it

did not specifically address the power contracts under review, the ECM