```

[Federal Register: July 21, 2010 (Volume 75, Number 139)]
[Notices]               
[Page 42390-42399]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jy10-39]                         

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COMMODITY FUTURES TRADING COMMISSION

 
Orders Finding That the PJM WH Real Time Peak Contract and PJM WH 
Real Time Off-Peak Contract Offered for Trading on the 
IntercontinentalExchange, Inc., Perform a Significant Price Discovery 
Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

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SUMMARY: On October 26, 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 PJM \2\ WH \3\ Real Time Peak (``PJM'') contract and PJM WH 
Real Time Off-Peak (``OPJ'') contract,\4\ 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 
PJM and OPJ 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.
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    \1\ 74 FR 54966 (October 26, 2009).
    \2\ The acronym ``PJM'' stands for Pennsylvania New Jersey 
Maryland Interconnection, LLC (``PJM Interconnection''), and 
signifies the regional electricity transmission organization 
(``RTO'') that coordinates the generation and distribution of 
electricity in all or parts of 13 states and the District of 
Columbia.
    \3\ The acronym ``WH'' signifies the PJM's Western Hub.
    \4\ The Federal Register notice also requested comment on the 
PJM WH Real Time Peak Daily (``PDP'') contract, PJM WH Day Ahead LMP 
Peak Daily (``PDA'') contract and PJM WH Real Time Off-Peak Daily 
(``ODP'') contract. Those contracts will be addressed in a separate 
Federal Register release.

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DATES: Effective Date: July 9, 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: gprice@cftc.gov; or Susan Nathan, 
Senior Special Counsel, Division of Market Oversight, same address. 
Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \5\ 
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.\6\ 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).
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    \5\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 
2008).
    \6\ 7 U.S.C. 1a(29).
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    On March 16, 2009, the CFTC promulgated final rules implementing 
the provisions of the Reauthorization Act.\7\ As relevant here, rule 
36.3

[[Page 42391]]

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.
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    \7\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.
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    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.\8\ The issuance of such an order also triggers the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4).\9\
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    \8\ Public Law 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).
    \9\ 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.
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II. Notice of Intent To Undertake SPDC Determination

    On October 26, 2009, the Commission published in the Federal 
Register notice of its intent to undertake a determination whether the 
PJM and OPJ contracts \10\ perform a significant price discovery 
function and requested comment from interested parties.\11\ Comments 
were received from PJM Interconnection, Federal Energy Regulatory 
Commission (``FERC''), Electric Power Supply Association (``EPSA''), 
Financial Institutions Energy Group (``FIEG''), Edison Electric 
Institute (``EEI''), ICE and Public Utility Commission of Texas 
(``PUCT'').\12\ The comment letters from PJM Interconnection,\13\ 
FERC\14\ 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 subject 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.
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    \10\ As noted above, the Federal Register notice also requested 
comment on the PJM WH Real Time Peak Daily (``PDP'') contract, PJM 
WH Day Ahead LMP Peak Daily (``PDA'') contract and PJM WH Real Time 
Off-Peak Daily (``ODP'') contract. Those contracts will be addressed 
in a separate Federal Register release.
    \11\ 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.
    \12\ PJM Interconnection, as noted above, is the RTO that 
coordinates the generation and distribution of electricity in all or 
parts of 13 states and the District of Columbia. FERC is an 
independent federal regulatory agency that, among other things, 
regulates the interstate transmission of natural gas, oil and 
electricity. EPSA describes itself as the ``national trade 
association representing competitive power suppliers, including 
generators and marketers.'' 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.'' EEI is the ``association of shareholder-
owned electric companies, international affiliates and industry 
associates worldwide.'' ICE is an ECM, as noted above. 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 Web site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-032.html.
    \13\ PJM Interconnection stated that it ``takes no position as 
to whether the ICE [contracts] * * * perform significant price 
discovery functions.''
    \14\ FERC expressed the opinion that a determination by the 
Commission that any 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.''
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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

[[Page 42392]]

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.\15\ 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 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.\16\ 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.
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    \15\ In its October 26, 2009, Federal Register release, the 
Commission identified material price reference and material 
liquidity as the possible criteria for SPDC determination of the PJM 
and OPJ 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.
    \16\ 17 CFR 36, Appendix A.
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IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the PJM 
and OPJ contracts are discussed separately below.

a. The PJM WH Real Time Peak (PJM) Contract and the SPDC Indicia

    The PJM contract is cash settled based on the arithmetic average of 
peak-hour, real-time locational marginal prices (``LMPs'') \17\ 
published by PJM Interconnection for its Western Hub for all peak hours 
during the contract month. The hourly LMPs are derived from power 
trades that result in physical delivery. The size of the PJM contract 
is 800 megawatt hours (``MWh''), and the PJM contract is listed for 110 
calendar months.
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    \17\ An LMP represents the additional cost associated with 
producing an incremental amount of electricity. LMPs account for 
generation costs, congestion along the transmission lines, and 
electricity loss.
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    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various point along the electrical grid. An LMP 
associated with a specific hour is calculated as the volume-weighted 
average price of all of the transactions where electricity is to be 
supplied and consumed during that hour.
    Electricity is traded in a day-ahead market as well as a real-time 
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 offers and bids are dependent on 
estimates of supply and demand, electricity needs usually are not 
perfectly satisfied in the day-ahead market. In this regard, on the day 
the electricity is transmitted and used, auction participants typically 
realize that they bought or sold either too much power or too little 
power. A real-time auction is operated to alleviate this problem by 
serving as a balancing mechanism. Specifically, electricity traders use 
the real-time market to sell excess electricity and buy additional 
power to meet demand.
    PJM Interconnection is an RTO that coordinates the movement of 
wholesale electricity in all or parts of Delaware, Illinois, Indiana, 
Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, 
Pennsylvania, Tennessee, Virginia, West Virginia and the District of 
Columbia. PJM Interconnection's transmission network is the largest 
centrally-dispatched grid in North America. PJM Interconnection 
dispatches about 163,500 MW of generating capacity over 56,350 miles of 
transmission lines and serves more than 51 million customers. The RTO's 
members, totaling more than 500, include power generators, transmission 
owners, electricity distributors, power marketers and large consumers.
    PJM Interconnection is responsible for operating a competitive 
wholesale electricity market as well as maintaining the reliability of 
the grid. The RTO acts as a neutral, independent party, and its 
activities are regulated by FERC. The company coordinates the 
continuous buying, selling and delivery of wholesale electricity 
through robust, open and competitive spot markets. In operating the 
markets, PJM balances the needs of suppliers, wholesale customers and 
other market participants, and it continuously monitors market 
behavior.
    Electricity is priced at individual points along the transmission 
network called nodes. An electric grid has many interconnections or 
buses. RTOs group certain buses together to form hubs, which do not 
necessarily follow along state lines or geographic boundaries. Power 
also is priced at the hub level and serves as a basis for trading 
electricity. PJM Interconnnection has 11 hubs, including AEP GEN, AEP-
Dayton, Chicago GEN, Chicago, Dominion, Eastern, Northern Illinois, New 
Jersey, Ohio, West INT and Western Hub.\18\ The Western Hub is basket 
of 109 buses that stretch all the way from Erie, PA, to Washington, 
DC.\19\
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    \18\ http://www.ferc.gov/market-oversight/mkt-electric/pjm.asp.
    \19\ http://www.ferc.gov/market-oversight/mkt-electric/pjm/2010/05-2010-elec-pjm-archive.pdf.
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1. Material Price Reference Criterion
    The Commission's October 26, 2009, Federal Register notice 
identified the PJM contract as a potential SPDC based on the material 
price reference and material liquidity criteria. 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 ``East 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 PJM 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 PJM contract, while not mentioned by name in the ECM Study, 
warranted further review.
    The Commission explains in its Guidance to the statutory criteria 
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

[[Page 42393]]

material price reference and therefore, serving a significant price 
discovery function.\20\ 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.
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    \20\ 17 CFR 36, Appendix A.
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    The PJM Western hub is a major pricing center for electricity in 
the eastern portion of the United States. Traders, including producers, 
keep abreast of the electricity prices at PJM's Western Hub when 
conducting cash deals. These traders look to a competitively determined 
price as an indication of expected values of power at the Western Hub 
when entering into cash market transaction for electricity, especially 
those trades providing for physical delivery in the future. 
Furthermore, power prices in other neighboring markets, such as New 
York ISO's Zone A (Western New York), Zone G (Hudson Valley region) and 
Zone J (New York City) as well as Midwest ISO's Cinergy hub are 
typically based implicitly relative to the prices reported for PJM 
Interconnection's Western hub. Traders use the ICE PJM contract, as 
well as other ICE power contracts, to hedge cash market positions and 
transactions--activities which enhance the PJM contract's price 
discovery utility. The substantial volume of trading and open interest 
in the PJM contract appears to attest to its use for this purpose. 
While the PJM 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.\21\ In these circumstances, the PJM contract satisfies 
the direct price reference test.
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    \21\ In addition to referencing ICE prices, firms participating 
in PJM's Western hub 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.
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    The fact that ICE's PJM monthly contract is used more widely as a 
source of pricing information than the daily contract (i.e., the 
``PDP'' contract) \22\ bolsters the argument that it serves as a direct 
price reference. In this regard, PJM contract prices power at the 
Western hub up to almost ten years into the future. Thus, market 
participants can use the PJM contract to lock in electricity prices far 
into the future. Traders use monthly power contracts like the PJM 
contract to price future power electricity commitments, where such 
commitments are based on long-range forecasts of power supply and 
demand. In contrast, the PDP 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 PDP contract.
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    \22\ The PDP contract is cash settled based on the arithmetic 
average of peak-hour, real-time LMPs posted by PJM for the Western 
hub for all peak hours on the day of generation. The LMPs are 
derived from power trades that result in physical delivery. The size 
of the SDP contract is 800 MWh, and the PDP contract is listed for 
38 consecutive calendar days.
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    The Commission notes that the Western hub is a major trading point 
for electricity, and that the PJM contract's prices are well regarded 
in the industry as indicative of the value of power at the Western hub. 
Accordingly, the Commission believes that it is reasonable to conclude 
that market participants purchase the data packages that include the 
PJM contract's prices in substantial part because the PJM contract's 
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 PJM 
contract also meets the indirect price reference test.
    The New York Mercantile Exchange (``NYMEX'') lists a futures 
contract on its ClearPort platform-- the PJM Western Hub Peak Calendar-
Month Real-Time LMP Swap futures contract --that is comparable to the 
ICE PJM contract. However, unlike the ICE contract, none of the trades 
in the NYMEX version are executed in NYMEX's centralized marketplace; 
instead, all of the transactions originate as bilateral swaps that are 
submitted to NYMEX for clearing. The daily settlement prices of NYMEX's 
monthly, peak-hour Western hub contract are influenced, in part, by the 
daily settlement prices of the ICE PJM contract. NYMEX determines the 
daily settlement prices for its power contracts through a survey of 
cash market voice brokers. Voice brokers, in turn, refer to the ICE PJM 
price, among other information, as an important indicator as to where 
the market is trading. In this manner, the ICE PJM price influences the 
settlement price for the NYMEX monthly, peak-hour Western hub power 
contract. This conclusion is supported by an analysis of the daily 
settlement prices for the PJM contract and the NYMEX equivalent which 
indicates that 81 percent of the daily settlement prices \23\ for the 
NYMEX version of the contract are within one standard deviation of the 
PJM contract's price settlement prices.
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    \23\ The price data covered the period December 2008 through 
December 2009.
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    i. Federal Register Comments:
    EPSA, FIEG, EEI and ICE stated that no other contract directly 
references or settles to the PJM contract's price. Moreover, the 
commenters argued that the underlying cash price series against which 
the PJM contract is settled \24\ 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 [the derivatives contract] 
on a frequent and recurring basis'' 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.
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    \24\ In this case, the average of the real-time peak-hour 
Western hub electricity prices over the contract month, which are 
derived from cash market transactions.
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    As noted above, PJM's Western hub is a major trading center for 
electricity in the eastern United States. Traders, including producers, 
keep abreast of the prices of the PJM contract when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of electricity at the Western hub when 
entering into cash market transaction for power, especially those 
trades that provide for physical delivery in the future. Traders use 
the ICE PJM

[[Page 42394]]

contract to hedge cash market positions and transactions, which 
enhances the PJM contract's price discovery utility. While the PJM 
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, EPSA stated that the publication of price data for the 
PJM contract price is a weak justification for material price reference 
because market participants generally do not purchase ICE data sets for 
one contract's prices, such as those for the PJM contract. Instead, 
traders are interested in the settlement prices, so the fact that ICE 
sells the PJM prices as part of a broad package is not conclusive 
evidence that market participants are buying the ICE data sets because 
they find the PJM prices have substantial value. As noted above, the 
Commission recognizes that publication of the PJM contract's prices is 
indirect evidence of routine dissemination. Thus, the Commission has 
concluded that traders likely purchase the ICE data packages 
specifically for the PJM contract's prices and consult such prices on a 
frequent and recurring basis in pricing cash market transactions.
    Lastly, ICE and EEI criticized the ECM Study since it did not 
specifically identify the PJM 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:
    The Commission finds that the ICE PJM 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 PJM contract's price (direct evidence). Moreover, 
the PJM contract's price data are sold to market participants, and 
those individuals likely purchase the ICE data packages specifically 
for the PJM 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 26, 2009, Federal Register notice, the Commission 
identified the PJM contract as a potential SPDC based on the material 
price reference and material liquidity criteria. 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.
    The Commission's Guidance to the statutory criteria (Appendix A to 
Part 36) notes that ``[t]raditionally, objective measures of trading 
such as volume or open interest have been used as measures of 
liquidity.'' In this regard, the total number of transactions executed 
on ICE's electronic platform in the PJM contract was 7,990 in the 
second quarter of 2009, resulting in a daily average of 124.8 trades. 
During the same period, the PJM contract had a total trading volume of 
268,489 contracts and an average daily trading volume of 4,195.1 
contracts. Moreover, open interest as of June 30, 2009, was 318,788 
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.\25\
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    \25\ 74 FR 54966 (October 26, 2009).
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    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 371,885 
contracts (or 5,721.3 contracts on a daily basis). In terms of number 
of transactions, 9,913 trades occurred in the fourth quarter of 2009 
(152.5 trades per day). As of December 31, 2009, open interest in the 
PJM contract was 344,754 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 substantial during the period 
between the second and fourth quarters of 2009. In addition, trading 
activity in the PJM contract, as characterized by total quarterly 
volume, indicates that the PJM contract experiences trading activity 
that is greater than that of thinly-traded futures markets.\26\ Thus, 
it is reasonable to infer that the PJM contract could have a material 
effect on other ECM contracts or on DCM contracts.
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    \26\ 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 PJM contract potentially could have 
on another ECM contract staff performed a statistical analysis \27\ 
using daily settlement prices (between July 1, 2008 and December 31, 
2009) for the ICE PJM and OPJ contracts. The simulation suggest that, 
on average over the sample period, a one percent rise in the PJM 
contract's price elicited a 2.15 percent increase in ICE OPJ contract's 
price.
---------------------------------------------------------------------------

    \27\ 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 PJM and OPJ 
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 PJM 
contract's price elicited a 2.15 percent rise in OPJ contract's 
price.
---------------------------------------------------------------------------

    i. Federal Register Comments:
    ICE stated that the PJM contract lacks a sufficient number of 
trades to meet the material liquidity criterion. Along with EPSA and 
EEI, ICE argued that the PJM contract cannot have a material effect on 
DCM contracts or other ECM contracts because these other contracts do 
not cash settle to the PJM contract's price. Instead, the DCM contracts 
and the PJM contract are both cash settled based on physical 
transactions, which neither the ECM or the DCM contracts can influence. 
The Commission's statistical analysis shows that changes in the ICE PJM 
contract's price significantly influences the prices of other ECM 
contracts (namely, the OPJ contract). In this regard, a one-percent 
rise in the PJM contract's price leads to a 2.15 percent rise in OPJ 
contract's price.

[[Page 42395]]

    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 PJM 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.'' \28\
---------------------------------------------------------------------------

    \28\ 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'' \29\ 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.
---------------------------------------------------------------------------

    \29\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE argued 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.'' \30\ It is the Commission's opinion that liquidity, 
as it pertains to the PJM contract, is typically a function of trading 
activity in particular lead months and, given sufficient liquidity in 
such months, the ICE PJM contract itself would be considered liquid. 
ICE's analysis of its own trade data confirms this to be the case for 
the PJM contract, and thus, the Commission believes that it applied the 
statistical data cited above in an appropriate manner for gauging 
material liquidity.
---------------------------------------------------------------------------

    \30\ 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 26, 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 49 percent of all 
transactions in the PJM contract (as of the fourth quarter of 2009). 
Commission acknowledges that the open interest information it 
provided in its October 26, 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 PJM 
contract meets the material liquidity criterion. Specifically, there is 
sufficient trading activity in the PJM 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 PJM Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the ICE PJM 
contract performs a significant price discovery function under two of 
the four criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the PJM contract meets 
the material price reference and material liquidity criteria at this 
time. Accordingly, the Commission is issuing the attached Order 
declaring that the PJM 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 PJM contract,\31\ and triggers the obligations, 
requirements--both procedural and substantive--and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs.
---------------------------------------------------------------------------

    \31\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

b. The PJM WH Real Time Off-Peak (OPJ) Contract and the SPDC Indicia

    The OPJ contract is cash settled based on the arithmetic average of 
off-peak hour, real-time LMPs published by PJM Interconnection for its 
Western Hub for all off-peak hours during the contract month. The 
hourly LMPs are derived from power trades that result in physical 
delivery. The size of the OPJ contract is 50 MWh, and the OPJ contract 
is listed for up to 86 calendar months.
    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various points along the electrical grid. An LMP 
associated with a specific hour is calculated as the volume-weighted 
average price of all of the transactions where electricity is to be 
supplied and consumed during that hour.
    Electricity is traded in a day-ahead market as well as a real-time 
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 offers and bids are dependent on 
estimates of supply and demand, electricity needs usually are not 
perfectly satisfied in the day-ahead market. In this regard, on the day 
the electricity is transmitted and used, auction participants typically 
realize that they bought or sold either too much power or too little 
power. A real-time auction is operated to alleviate this problem by 
serving as a balancing mechanism. Specifically, electricity traders use 
the real-time market to sell excess electricity and buy additional 
power to meet demand.
    PJM Interconnection is an RTO that coordinates the movement of 
wholesale electricity in all or parts of Delaware, Illinois, Indiana, 
Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, 
Pennsylvania, Tennessee, Virginia, West Virginia and the District of 
Columbia. PJM Interconnection's transmission network is the largest 
centrally dispatched grid in North America. PJM Interconnection 
dispatches about 163,500 MW of generating capacity over 56,350 miles of 
transmission lines and serves more than 51 million customers. The RTO's 
members, totaling more than 500, include power generators, transmission 
owners, electricity distributors, power marketers and large consumers.
    PJM Interconnection is responsible for operating a competitive 
wholesale electricity market as well as maintaining the reliability of 
the grid. The RTO acts as a neutral, independent party, and its 
activities are monitored by FERC. The company coordinates the 
continuous buying, selling and delivery of wholesale electricity 
through robust, open and competitive spot markets. In operating the 
markets, PJM balances the needs of suppliers, wholesale customers and 
other market participants, and it continuously monitors market 
behavior.
    Electricity is priced at individual points along the transmission 
network

[[Page 42396]]

called nodes. An electric grid has many interconnections or buses. RTOs 
group certain buses together to form hubs for pricing and trading 
purposes, and these hubs do not necessarily follow along state lines or 
geographic boundaries. Power also is priced at the hub level and serves 
as a basis for trading electricity. PJM Interconnnection has 11 hubs, 
including AEP GEN, AEP-Dayton, Chicago GEN, Chicago, Dominion, Eastern, 
Northern Illinois, New Jersey, Ohio, West INT and Western Hub.\32\ The 
Western Hub is a basket of 109 buses that stretch all the way from 
Erie, PA, to Washington, DC.\33\
---------------------------------------------------------------------------

    \32\ http://www.ferc.gov/market-oversight/mkt-electric/pjm.asp.
    \33\ http://www.ferc.gov/market-oversight/mkt-electric/pjm/2010/05-2010-elec-pjm-archive.pdf.
---------------------------------------------------------------------------

1. Material Price Reference Criterion
    The Commission's October 26, 2009, Federal Register notice 
identified the OJP contract as a potential SPDC based on the material 
price reference and material liquidity criteria. 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 ``East 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 OPJ 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 OPJ contract, while not mentioned by name in the 
ECM Study, warranted further review.
    The Commission explains in its Guidance to the statutory criteria 
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.\34\ 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.
---------------------------------------------------------------------------

    \34\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------

    PJM's Western hub is a major pricing center for electricity in the 
eastern portion of the United States. Traders, including producers, 
keep abreast of the electricity prices at PJM's Western hub when 
conducting cash deals. These traders look to a competitively determined 
price as an indication of expected values of power at the Western hub 
when entering into cash market transactions for electricity, especially 
those trades providing for physical delivery in the future. 
Furthermore, power prices in other neighboring markets, such as New 
York ISO's Zone A (Western New York), Zone G (Hudson Valley region) and 
Zone J (New York City) as well as Midwest ISO's Cinergy hub, are 
typically based implicitly relative to the prices reported for PJM 
Interconnection's Western hub. Traders use the ICE OPJ contract, as 
well as other ICE power contracts, to hedge cash market positions and 
transactions--activities which enhance the OPJ contract's price 
discovery utility. The substantial volume of trading and open interest 
in the OPJ contract appears to attest to its use for this purpose. 
While the OPJ 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.\35\ As a result, the OPJ contract satisfies the direct 
price reference test.
---------------------------------------------------------------------------

    \35\ In addition to referencing ICE prices, firms participating 
in PJM's Western hub 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 fact that ICE's OPJ monthly contract is used widely as a source 
of pricing information is further evidence of direct price reference. 
In this regard, OPJ contract prices power at the Western hub about 
seven years into the future. Thus, market participants can use the OPJ 
contract to lock-in electricity prices far into the future. Traders use 
monthly power contracts like the OPJ contract to price future power 
electricity commitments, where such commitments are based on long-range 
forecasts of power supply and demand.
    The Commission notes that the Western hub is a major trading point 
for electricity, and the OPJ contract's prices are well regarded in the 
industry as indicative of the value of off-peak power at the Western 
hub. Accordingly, the Commission believes that it is reasonable to 
conclude that market participants purchase the data packages that 
include the OPJ contract's prices in substantial part because the OPJ 
contract's 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 OPJ contract meets the indirect price reference test.
    NYMEX lists a futures contract that is comparable to the ICE OPJ 
contract on its ClearPort platform called the PJM Western Hub Off-Peak 
Calendar-Month Real-Time LMP Swap futures contract. However, unlike the 
ICE contract, none of the trades in the NYMEX version are executed in 
NYMEX's centralized marketplace; instead, all of the transactions 
originate as bilateral swaps that are submitted to NYMEX for clearing. 
The daily settlement prices of NYMEX's monthly, off-peak hour Western 
hub contract are influenced, in part, by the daily settlement prices of 
the ICE OPJ contract. This is because NYMEX determines the daily 
settlement prices for its power contracts through a survey of cash 
market voice brokers. Voice brokers, in turn, refer to the ICE OPJ 
price, among other information, as an important indicator as to where 
the market is trading. Therefore, the ICE OPJ price influences the 
settlement price for the NYMEX monthly, off-peak hour Western hub power 
contract. This conclusion is supported by an analysis of the daily 
settlement prices for the OPJ contract and the NYMEX equivalent which 
demonstrates that 94 percent of the daily settlement prices \36\ for 
the

[[Page 42397]]

NYMEX version of the contract are within one standard deviation of the 
OPJ contract's price settlement prices.
---------------------------------------------------------------------------

    \36\ The price data covered the period December 2008 through 
December 2009.
---------------------------------------------------------------------------

    i. Federal Register Comments:
    EPSA, FIEG, EEI and ICE stated that no other contract directly 
references or settles to the OPJ contract's price. Moreover, the 
commenters argued that the underlying cash price series against which 
the OPJ contract is settled (in this case, the average of the real-time 
off-peak hour Western Hub electricity prices over the contract month, 
which are derived from cash market transactions) is the authentic 
reference price and not the ICE contract itself. The Commission 
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.
    PJM's Western hub is a major trading center for electricity in the 
eastern United States. Traders, including producers, keep abreast of 
the prices of the OPJ contract when conducting cash deals. These 
traders look to a competitively determined price as an indication of 
expected values of electricity at the Western hub when entering into 
cash market transaction for power, especially those trades that provide 
for physical delivery in the future. Traders use the ICE OPJ contract 
to hedge cash market positions and transactions, which enhances the OPJ 
contract's price discovery utility. While the OPJ 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, EPSA stated that the publication of price data for the 
OPJ contract price is weak justification for material price reference. 
Market participants generally do not purchase ICE data sets for one 
contract's prices. Instead, traders are interested in the settlement 
prices, so the fact that ICE sells the OPJ prices as part of a broad 
package is not conclusive evidence that market participants are buying 
the ICE data sets because the OPJ prices have substantial value to 
them. The Commission notes that publication of the OPJ contract's 
prices is indirect evidence of routine dissemination. Thus, the 
Commission has concluded that traders likely specifically purchase the 
ICE data packages for the OPJ contract's prices and consult such prices 
on a frequent and recurring basis in pricing cash market transactions.
    Lastly, ICE and EEI criticized the Commission's reliance on the ECM 
Study since it did not specifically identify the OPJ contract as a 
contract that is referred to by market participants on a frequent and 
recurring basis. 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:
    The Commission finds that the ICE OPJ 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 OPJ contract's price (direct evidence). Moreover, 
the OPJ contract's price data are sold to market participants, and 
those individuals likely purchase the ICE data packages specifically 
for the OPJ 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 26, 2009, Federal Register notice, 
the Commission identified the OJP contract as a potential SPDC based on 
the material price reference and material liquidity criteria. 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.
    The Commission's Guidance (Appendix A to Part 36) notes that 
``[t]raditionally, objective measures of trading such as volume or open 
interest have been used as measures of liquidity.'' in this regard, the 
total number of transactions executed on ICE's electronic platform in 
the OPJ contract was 437 in the second quarter of 2009, resulting in a 
daily average of 6.8 trades. During the same period, the OPJ contract 
had a total trading volume of 325,799 contracts and an average daily 
trading volume of 5,090.6 contracts. Moreover, open interest as of June 
30, 2009, was 2,976,492 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.\37\
---------------------------------------------------------------------------

    \37\ 74 FR 54966 (October 26, 2009).
---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 622,984 
contracts (or 9,584.4 contracts on a daily basis). In terms of number 
of transactions, 456 trades occurred in the fourth quarter of 2009 (7.0 
trades per day). As of December 31, 2009, open interest in the OPJ 
contract was 3,293,899 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 substantial during the period 
between the second and fourth quarters of 2009. In addition, trading 
activity in the OPJ contract, as characterized by total quarterly 
volume, indicates that the OPJ contract experiences trading activity 
that is greater than that of thinly-traded futures markets.\38\ Thus, 
it is reasonable to infer that the OPJ contract could have a material 
effect on other ECM contracts or on DCM contracts.
---------------------------------------------------------------------------

    \38\ 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 PJM contract could have on another 
ECM contract staff performed a statistical analysis \39\ using daily 
settlement prices

[[Page 42398]]

(between July 1, 2008 and December 31, 2009) for the ICE PJM and OPJ 
contracts. The simulation suggests that, on average over the sample 
period, a one percent rise in the OPJ contract's price elicited a 0.47 
percent increase in ICE PJM contract's price.
---------------------------------------------------------------------------

    \39\ 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 PJM and OPJ 
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 OPJ 
contract's price elicited a 0.47 percent rise in PJM contract's 
price.
---------------------------------------------------------------------------

    i. Federal Register Comments:
    ICE stated that the OPJ contract lacks a sufficient number of 
trades to meet the material liquidity criterion. Along with EPSA and 
EEI, ICE argued that the OPJ contract cannot have a material effect on 
DCM contracts or other ECM contracts because these other contracts do 
not cash settle to the OPJ contract's price. Instead, the DCM contracts 
and the OPJ contract are both cash settled based on physical 
transactions, which neither the ECM nor the DCM contracts can 
influence. On the contrary, the Commission's statistical analysis shows 
that changes in the ICE OPJ contract's price significantly influences 
the prices of other ECM contracts (namely, the PJM contract). In this 
regard, a one-percent rise in the OPJ contract's price leads to a 0.47 
percent rise in PJM contract's price.
    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 OPJ 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.'' \40\
---------------------------------------------------------------------------

    \40\ 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'' \41\ 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.
---------------------------------------------------------------------------

    \41\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE also argued 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.'' \42\ It is the Commission's opinion that 
liquidity, as it pertains to the OPJ contract, is typically a function 
of trading activity in particular lead months and, given sufficient 
liquidity in such months, the ICE OPJ contract itself would be 
considered liquid. ICE's analysis of its own trade data confirms this 
to be the case for the OPJ contract, and thus, the Commission believes 
that it applied the statistical data cited above in an appropriate 
manner for gauging material liquidity.
---------------------------------------------------------------------------

    \42\ 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 26, 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 72 percent of all 
transactions in the OPJ contract (as of the fourth quarter of 2009). 
Commission acknowledges that the open interest information it 
provided in its October 26, 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 OPJ 
contract satisfies the material liquidity criterion. Specifically, 
there is sufficient trading activity in the OPJ 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 OPJ Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the ICE OPJ 
contract performs a significant price discovery function under the two 
of the four criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the OPJ contract meets 
the material price reference and material liquidity criteria. 
Accordingly, the Commission is issuing the attached Order declaring 
that the PJM 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 OPJ contract,\43\ and triggers the obligations, 
requirements--both procedural and substantive--and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs.
---------------------------------------------------------------------------

    \43\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

V. Related Matters

a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \44\ 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.
---------------------------------------------------------------------------

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

b. Cost-Benefit Analysis

    Section 15(a) of the CEA \45\ 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

[[Page 42399]]

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.
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    \45\ 7 U.S.C. 19(a).
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    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 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'') \46\ 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.\47\ 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.
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    \46\ 5 U.S.C. 601 et seq.
    \47\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Orders

a. Order Relating to the PJM WH Real Time 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 PJM WH Real Time Peak contract, 
traded on the IntercontinentalExchange, Inc., satisfies the material 
price preference 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 PJM WH Real Time 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 \48\ with respect to the PJM WH Real Time Peak contract and is 
subject to all the provisions of the Commodity Exchange Act applicable 
to registered entities.
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    \48\ 7 U.S.C. 1a(29).
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    Further with respect to the PJM WH Real Time Peak contract, 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.\49\
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    \49\ 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).
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b. Order Relating to the PJM WH Real Time 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 PJM WH Real Time 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 PJM WH Real Time 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 \50\ with respect to the PJM WH 
Real Time Off-Peak contract and is subject to all the provisions of the 
Commodity Exchange Act applicable to registered entities.
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    \50\ 7 U.S.C. 1a(29).
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    Further with respect to the PJM WH Real Time Off-Peak contract, 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.\51\
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    \51\ 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 July 9, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-17743 Filed 7-20-10; 8:45 am]
BILLING CODE 6351-01-P
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