[Federal Register: June 12, 2009 (Volume 74, Number 112)]
[Notices]
[Page 28028-28030]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12jn09-43]
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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 Henry Financial LD1 Fixed Price Contract
Traded on the IntercontinentalExchange, Inc., Performs a Significant
Price Discovery Function
AGENCY: Commodity Futures Trading Commission.
[[Page 28029]]
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 LD1 Fixed Price contract traded on the
IntercontinentalExchange, Inc. (ICE), an exempt commercial market
(``ECM'') under sections 2(h)(3)-(5) of the Commodity Exchange Act
(``CEA'' or the ``Act''), performs a significant price discovery
function. The Commission is undertaking this review based upon its
evaluation of information provided by the ICE, as well as a Commission
report on ECMs. 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 July 13, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Follow the instructions for submitting comments. Federal
eRulemaking Portal: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov http://www.regulations.gov.
E-mail: [email protected]. Include ICE Henry Financial
LD1 Fixed Price 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.
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, 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, 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
\3\ 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\ 7 U.S.C. 2(h)(7)(C).
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B. ICE's Henry Financial LD1 Fixed Price Contract
The ICE Henry Financial LD1 Fixed Price contract is cash settled
based on the final settlement price of the New York Mercantile
Exchange's (NYMEX's) physically-delivered Henry Hub-based Natural Gas
futures contract for the corresponding contract month. \4\ The trading
unit of the ICE Henry Financial LD1 Fixed Price contract is 2,500 mmBtu
multiplied by the number of calendar days in the contract month. For
example, if a contract month has 30 days, the trading unit is 75,000
mmBtu, which is referred to as 30 lots.
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\4\ The NYMEX is a designated contract market that offers
futures and option contracts on a wide range of energy products,
including crude oil, refined petroleum products, and natural gas.
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Based upon a required quarterly notification filed on April 30,
2009 (mandatory under Rule 36.3(c)(2)), the subject contract realized
more than an average of five trades per day during the first quarter of
2009. In addition, the average volume of natural gas traded each
business day over that period was 449,010 contracts, and the open
interest in the contract as of March 31, 2009, was 2,932,798 contracts.
[[Page 28030]]
It appears that the ICE Henry Financial LD1 Fixed Price contract
may satisfy the material liquidity, price linkage, and arbitrage
criteria for SPDC determination. With regard to material liquidity, the
high average daily trading volume indicates that the subject contract
is relatively liquid. With respect to the price linkage and arbitrage
tests, it is noted above that the ICE Henry Financial LD1 Fixed Price
contract and the NYMEX's physically-delivered Natural Gas futures
contract have the same final settlement prices. Moreover, ICE uses the
NYMEX's forward settlement curve when conducting its mark-to-market
accounting procedures to settle the subject contract on daily basis. An
October 2007 CFTC publication entitled Report on the Oversight of
Trading on Regulated Futures Exchanges and Exempt Commercial Markets
(``ECM Study'') stated that traders and voice brokers view the subject
ICE contract as economically equivalent to the NYMEX physically-
delivered Natural Gas futures contract. \5\ The ICE and NYMEX contracts
essentially comprise a single market for natural gas derivatives
trading, and traders look to both the ICE and to the NYMEX when
determining where to execute a trade at the best price. The ECM Study
also stated that the ICE natural gas contract acts as price discovery
market. To this end, the ECM Study referenced an analysis \6\ of
whether the NYMEX, ICE, or both facilities exhibit price leadership
with respect to their natural gas contracts. If a particular exchange's
prices lead those on another exchange, then the former exchange's
contract is thought of as a price discovery market. In 2006, the ICE's
natural gas contract exhibited price leadership on 20 percent of the
contract days; the NYMEX's physically-delivered natural gas contract,
on the other hand, exhibited price leadership on 63 percent of the
contract days. Based on these factors, the ECM Study concluded that the
ICE and the NYMEX contracts are both price discovery venues for natural
gas trading.
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\5\ http://www.cftc.gov/stellent/groups/public/@newsroom/
documents/file/pr5403-07_ecmreport.pdf.)
\6\ ECM Study at 11.
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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,
the Commission, in making SPDC determinations, will apply and weigh
each factor, as appropriate, to the specific contract and circumstances
under consideration. In addition, as part of its evaluation, the
Commission will consider the written data, views, and arguments from
the ECM that lists the potential SPDC and from any other interested
parties.
The Commission requests comment on whether the ICE's Henry
Financial LD1 Fixed Price 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 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 Henry Financial LD1 Fixed Price contract.
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \7\ 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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\7\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis
Section 15(a) of the CEA \8\ 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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\8\ 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.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \9\ requires that agencies
consider the impact of their rules on small businesses. The
requirements of part 36 affect exempt commercial markets. The
Commission previously has determined that exempt commercial markets are
not small entities for purposes of the RFA.\10\ Accordingly, the
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that this Order, taken in connection with the part 36
rules, will not have a significant economic impact on a substantial
number of small entities.
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\9\ 5 U.S.C. 601 et seq.
\10\ 66 FR 42256, 42268 (Aug. 10, 2001).
Issued in Washington, DC on June 9, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-13871 Filed 6-11-09; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: May 9, 2012