Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 24633 

47 7 U.S.C. 1a(29). 

1 74 FR 52198 (October 9, 2009). 

2 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

110–246, 122 Stat. 1624 (June 18, 2008). 

3 7 U.S.C. 1a(29). 

4 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

5Public 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). 

6For an initial SPDC, ECMs have a grace period 

of 90 calendar days from the issuance of a SPDC 

Continued 

liquidity criterion since it cannot be 

used alone for SPDC determination. 

Consistent with this determination, 

the IntercontinentalExchange, Inc., is 

not considered a registered entity 47

with respect to the TETCO–M3 

Financial Basis contract and is not 

subject to the provisions of the 

Commodity Exchange Act applicable to 

registered entities. Further, the 

obligations, requirements and timetables 

prescribed in Commission rule 

36.3(c)(4) governing core principle 

compliance by the 

IntercontinentalExchange, Inc., are not 

applicable to the TETCO–M3 Financial 

Basis contract with the issuance of this 

Order. 

This Order is based on the 

representations made to the 

Commission by the 

IntercontinentalExchange, Inc., dated 

July 27, 2009, and November 13, 2009, 

and other supporting material. Any 

material change or omissions in the 

facts and circumstances pursuant to 

which this order is granted might 

require the Commission to reconsider its 

current determination that the TETCO– 

M3 Financial Basis contract is not a 

significant price discovery contract. 

Additionally, to the extent that it 

continues to rely upon the exemption in 

Section 2(h)(3) of the Act, the 

IntercontinentalExchange, Inc., must 

continue to comply with all of the 

applicable requirements of Section 

2(h)(3) and Commission Regulation 

36.3. 

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10330 Filed 5–4–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the ICE Chicago 

Financial Basis Contract Traded on the 

IntercontinentalExchange, Inc., 

Performs a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final Order. 

SUMMARY: On October 9, 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 

Chicago Financial Basis (‘‘DGD’’) 

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 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 

an order finding that the DGD contract 

performs a significant price discovery 

function. Authority for this action is 

found in section 2(h)(7) of the CEA and 

Commission rule 36.3(c) promulgated 

thereunder. 

DATES: Effective date: April 28, 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. Email: 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’’) 2

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.3 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). 

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.4 As relevant here, rule 36.3 

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 prices of 

another contract. 

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.5 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4).6


sroberts on DSKD5P82C1PROD with NOTICES
24634 Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 

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. 

7The 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. 

8 IECA describes itself as an ‘‘association of 

leading manufacturing companies’’ whose 

membership ‘‘represents a diverse set of industries 

including: plastics, cement, paper, food processing, 

brick, chemicals, fertilizer, insulation, steel, glass, 

industrial gases, pharmaceutical, aluminum and 

brewing.’’ WGCEF describes itself as ‘‘a diverse 

group of commercial firms in the domestic energy 

industry whose primary business activity is the 

physical delivery of one or more energy 

commodities to customers, including industrial, 

commercial and residential consumers’’ and whose 

membership consists of ‘‘energy producers, 

marketers and utilities.’’ ICE is an ECM, as noted 

above. EI is an economic consulting firm with 

offices located in Washington, DC, and San 

Francisco, CA. NGSA is an industry association 

comprised of natural gas producers and marketers. 

FERC is an independent federal regulatory agency 

that, among other things, regulates the interstate 

transmission of natural gas, oil and electricity. 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.’’ The comment letters are 

available on the Commission’s website: http:// 

www.cftc.gov/lawandregulation/federalregister/ 

federalregistercomments/2009/09–017.html. 

9FERC stated that the DGD contract is cash 

settled and does not contemplate actual physical 

delivery of natural gas. Accordingly, FERC 

expressed the opinion that a determination by the 

Commission that a contract performs a significant 

price discovery function ‘‘would not appear to 

conflict with FERC’s exclusive jurisdiction under 

the Natural Gas Act (NGA) over certain sales of 

natural gas in interstate commerce for resale or with 

its other regulatory responsibilities under the NGA’’ 

and further that, ‘‘the FERC staff will continue to 

monitor for any such conflict * * * [and] advise the 

CFTC’’ should any such potential conflict arise. CL 

06. 

10 IECA stated that the subject ICE contract should 

‘‘be required to come into compliance with core 

principles mandated by Section 2(h)(7) of the Act 

and with other statutory provisions applicable to 

registered entities. [This contract] should be subject 

to the Commission’s position limit authority, 

emergency authority and large trader reporting 

requirements, among others.’’ CL 01. 

11 In its October 9, 2009, Federal Register release, 

the Commission identified material price reference, 

price linkage and material liquidity as the possible 

criteria for SPDC determination of the DGD 

contract. Arbitrage was not identified as a possible 

criterion and will not be discussed further in this 

document or the associated Order. 

12 17 CFR part 36, Appendix A. 

II. Notice of Intent To Undertake SPDC 

Determination 

On October 9, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the DGD 

contract performs a significant price 

discovery function, and requested 

comment from interested parties.7

Comments were received from the 

Industrial Energy Consumers of America 

(‘‘IECA’’), Working Group of Commercial 

Energy Firms (‘‘WGCEF’’), ICE, 

Economists Incorporated (‘‘EI’’), Natural 

Gas Supply Association (‘‘NGSA’’), 

Federal Energy Regulatory Commission 

(‘‘FERC’’), and Financial Institutions 

Energy Group (‘‘FIEG’’).8 The comment 

letter from FERC9 did not directly 

address the issue of whether or not the 

DGD contract is a SPDC; IECA 

concluded that the DGD contract is a 

SPDC, but did not provide a basis for its 

conclusion.10 The other parties’ 

comments raised substantive issues 

with respect to the applicability of 

section 2(h)(7) to the DGD contract, 

generally asserting that the DGD 

contract is not a SPDC as it does not 

meet the material liquidity, material 

price reference and price linkage criteria 

for SPDC determination. Those 

comments are more extensively 

discussed below, as applicable. 

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 

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.11 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.12 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 will consider 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. 

IV. Findings and Conclusions 

a. The Chicago (DGD) Financial Basis 

Contract and the SPDC Indicia 

The DGD contract is cash settled 

based on the difference between the 

bidweek price index for the price of 

natural gas at the Chicago hub for the 

month of delivery, as published in 


sroberts on DSKD5P82C1PROD with NOTICES
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 24635 

13The term ‘‘hub’’ refers to a juncture where two 

or more natural gas pipelines are connected. Hubs 

also serve as pricing points for natural gas at the 

particular locations. 

14See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

15See http://www.nicor.com/en_us/commercial/ 

gas_xchange/chicago_hub.htm. 

16See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf 

17Basis contracts denote the difference in the 

price of natural gas at a specified location minus the 

price of natural gas at the Henry Hub. The 

differential can be either a positive or negative 

value. 

18As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion was not 

discussed in reference to the DGD contract. 

19The OTC Gas End of Day dataset includes daily 

settlement prices for natural gas contracts listed for 

all points in North America. 

Intelligence Press Inc.’s (‘‘IPI’s’’) Natural 

Gas Bidweek Survey, and the final 

settlement price of the New York 

Mercantile Exchange’s (‘‘NYMEX’s’’) 

physically-delivered Henry Hub natural 

gas futures contract for the same 

calendar month. The IPI bidweek price, 

which is published monthly, is based on 

a survey of cash market traders who 

voluntarily report to IPI data on fixedprice transactions for physical delivery 

of natural gas at the Chicago hub 

conducted during the last five business 

days of the month; such bidweek 

transactions specify the delivery of 

natural gas on a uniform basis 

throughout the following calendar 

month at the agreed-upon rate. The IPI 

bidweek index is published on the first 

business day of the calendar month in 

which the natural gas is to be delivered. 

The size of the DGD contract is 2,500 

million British thermal units (‘‘mmBtu’’), 

and the unit of trading is any multiple 

of 2,500 mmBtu. The DGD contract is 

listed for up to 72 calendar months 

commencing with the next calendar 

month. 

The Henry Hub,13 which is located in 

Erath, Louisiana, is the primary cash 

market trading and distribution center 

for natural gas in the United States. It 

also is the delivery point and pricing 

basis for the NYMEX’s actively traded, 

physically-delivered natural gas futures 

contract, which is the most important 

pricing reference for natural gas in the 

United States. The Henry Hub, which is 

operated by Sabine Pipe Line, LLC, 

serves as a juncture for 13 different 

pipelines. These pipelines bring in 

natural gas from fields in the Gulf Coast 

region and ship it to major consumption 

centers along the East Coast and 

Midwest. The throughput shipping 

capacity of the Henry Hub is 1.8 trillion 

mmBtu per day. 

In addition to the Henry Hub, there 

are a number of other locations where 

natural gas is traded. In 2008, there were 

33 natural gas market centers in North 

America.14 Some of the major trading 

centers include Alberta, Northwest 

Rockies, Southern California border and 

the Houston Ship Channel. For 

locations that are directly connected to 

the Henry Hub by one or more pipelines 

and where there typically is adequate 

shipping capacity, the price at the other 

locations usually directly tracks the 

price at the Henry Hub, adjusted for 

transportation costs. However, at other 

locations that are not directly connected 

to the Henry Hub or where shipping 

capacity is limited, the prices at those 

locations often diverge from the Henry 

Hub price. Furthermore, one local price 

may be significantly different than the 

price at another location even though 

the two markets’ respective distances 

from the Henry Hub are the same. The 

reason for such pricing disparities is 

that a given location may experience 

supply and demand factors that are 

specific to that region, such as 

differences in pipeline shipping 

capacity, unusually high or low demand 

for heating or cooling or supply 

disruptions caused by severe weather. 

As a consequence, local natural gas 

prices can differ from the Henry Hub 

price by more than the cost of shipping 

and such price differences can vary in 

an unpredictable manner. 

The Chicago hub, operated by Nicor, 

Inc., serves as an interconnection point 

for eight interstate pipelines. The firms 

that service the Chicago area are ANR 

Pipeline Company, Natural Gas Pipeline 

Company of America, Northern Border 

Pipe Line, Northern Natural Gas 

Company, Midwestern Gas 

Transmission Company, Alliance 

Pipeline, Panhandle Eastern Pipeline 

Company, and Horizon Pipeline.15 The 

Chicago Market Center, which includes 

the Chicago hub, had an estimated 

throughput capacity of 100 million 

cubic feet per day in 2008. Moreover, 

the number of pipeline interconnections 

at the Chicago Market Center was eight 

in 2008, up from seven in 2003. Lastly, 

the pipeline interconnection capacity of 

the Chicago Market Center in 2008 was 

2.4 billion cubic feet per day, which 

constituted a 9 percent increase over the 

pipeline interconnection capacity in 

2003.16 The Chicago hub is far removed 

from the Henry Hub but is not directly 

connected to the Henry Hub by an 

existing pipeline. 

The local price at the Chicago hub 

typically differs from the price at the 

Henry Hub. Thus, the price of the Henry 

Hub physically-delivered futures 

contract is an imperfect proxy for the 

Chicago price. Moreover, exogenous 

factors, such as adverse weather, can 

cause the Chicago gas price to differ 

from the Henry Hub price by an amount 

that is more or less than the cost of 

shipping, making the NYMEX Henry 

Hub futures contract even less precise as 

a hedging tool than desired by market 

participants. Basis contracts 17 allow 

traders to more accurately discover 

prices at alternative locations and hedge 

price risk that is associated with natural 

gas at such locations. In this regard, a 

position at a local price for an 

alternative location can be established 

by adding the appropriate basis swap 

position to a position taken in the 

NYMEX physically-delivered Henry 

Hub contract (or in the NYMEX or ICE 

Henry Hub look-alike contract, which 

cash settle based on the NYMEX 

physically-delivered natural gas 

contract’s final settlement price). 

In its October 9, 2009, Federal 

Register notice, the Commission 

identified material price reference, price 

linkage and material liquidity as the 

potential SPDC criteria applicable to the 

DGD contract. Each of these criteria is 

discussed below.18

1. Material Price Reference Criterion. 

The Commission’s October 9, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for a SPDC determination with 

respect to this contract. The 

Commission considered the fact that ICE 

maintains exclusive rights over IPI’s 

bidweek price indices. As a result, no 

other exchange can offer such a basis 

contract based on IPI’s Chicago bidweek 

index. While other third-party price 

providers produce natural gas price 

indices for this and other trading 

centers, market participants indicate 

that the IPI Chicago bidweek index is 

highly regarded for this particular 

location and should market participants 

wish to establish a hedged position 

based on this index, they would need to 

do so by taking a position in the ICE 

DGD swap since ICE has the right to the 

IPI index for cash settlement purposes. 

In addition, 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 

‘‘Midcontinent Gas End of Day’’ and 

‘‘OTC Gas End of Day’’ 19 packages 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 


sroberts on DSKD5P82C1PROD with NOTICES
24636 Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 

20 17 CFR part 36, Appendix A. 

21http://www.eia.doe.gov/pub/oil_gas/natural

_gas/feature_articles/2003/market_hubs/ 

mkthubsweb.html 

22 In addition to referencing ICE prices, natural 

gas market firms participating in the Chicago 

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 

when entering into natural gas transactions. 

23CL 03. 

24CL 03. 

historical data. These two packages 

include price data for the DGD contract. 

The Commission 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.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. 

The Chicago hub is a particularly 

important trading center and pricing 

point for natural gas in the United 

States. It is one of only two market 

centers (the other is ANR’s Joliet Hub) 

located in the Midwest region. The 

Chicago Hub is strategically located at a 

point where eight major interstate 

pipelines transporting natural gas from 

Canada, the Southwest, and the Gulf of 

Mexico converge. In particular, it is 

linked with three pipelines that also 

transport gas from the Henry Hub in 

Louisiana. As a result, Chicago prices 

are often compared with those at the 

Henry Hub in analyzing bias differences 

between the two points during heavy 

demand periods.21

Traders, including producers, keep 

abreast of the prices of the DGD contract 

when conducting cash deals. These 

traders look to a competitively 

determined price as an indication of 

expected values of natural gas at the 

Chicago hub when entering into cash 

market transaction for natural gas, 

especially those trades providing for 

physical delivery in the future. Traders 

use the ICE DGD contract, as well as 

other ICE basis swap contracts, to hedge 

cash market positions and 

transactions—activities which enhance 

the DGD contract’s price discovery 

utility. The substantial volume of 

trading and open interest in the DGD 

contract appears to attest to its use for 

this purpose. While the DGD 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 critical 

factor in conducting OTC transactions.22

As a result, the DGD contract satisfies 

the direct price reference test. 

In terms of indirect price reference, 

ICE sells the DGD contract’s prices as 

part of a broad package. The 

Commission notes that the Chicago hub 

is a major natural gas trading point, and 

the DGD contract’s prices are well 

regarded in the industry as indicative of 

the value of natural gas at the Chicago 

hub. Accordingly, the Commission 

believes that it is reasonable to conclude 

that market participants are purchasing 

the data packages that include the DGD 

contract’s prices in substantial part 

because the DGD contract 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 

DGD contract meets the indirect price 

reference test. 

NYMEX lists a futures contract that is 

comparable to the ICE DGD contract on 

its ClearPort platform. However, unlike 

the ICE contract, none of the trades in 

the NYMEX, Chicago Basis Swap (Platts 

IFERC) futures contract 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 the NYMEX 

Chicago Basis Swap futures contract are 

influenced, in part, by the daily 

settlement prices of the ICE DGD 

contract. This is because NYMEX 

determines the daily settlement prices 

for its natural gas basis swap contracts 

through a survey of cash market voice 

brokers. Voice brokers, in turn, refer to 

the ICE DGD price, among other 

information, as an important indicator 

as to where the market is trading. 

Therefore, the ICE DGD price influences 

the settlement price for the NYMEX 

Chicago Basis Swap futures contract. 

This is supported by an analysis of the 

daily settlement prices for the NYMEX 

and ICE Chicago contracts. In this 

regard, 97 percent of the daily 

settlement prices for the NYMEX 

Chicago Basis Swap futures contract are 

within one standard deviation of the 

DGD contract’s price settlement prices. 

Lastly, the fact that the DGD contract 

does not meet the price linkage criterion 

(discussed below) bolsters the argument 

for material price reference. As noted 

above, the Henry Hub is the pricing 

reference for natural gas in the United 

States. However, regional market 

conditions may cause the price of 

natural gas in another area of the 

country to diverge by more than the cost 

of transportation, thus making the 

Henry Hub price an imperfect proxy for 

the local gas price. The more variable 

the local natural gas price is, the more 

traders need to accurately hedge their 

price risk. Basis swap contracts provide 

a means of more accurately pricing 

natural gas at a location other than the 

Henry Hub. An analysis of Chicago 

natural gas prices showed that 47 

percent of the observations were more 

than 2.5 percent different than the 

contemporaneous Henry Hub prices. 

The average Chicago basis value 

between January 2008 and September 

2009 was ¥$0.06 per mmBtu with a 

variance of $0.04 per mmBtu. 

i. Federal Register Comments 

ICE stated in its comment letter that 

the DGD contract does not meet the 

material price reference criterion for 

SPDC determination. ICE argued that 

the Commission appeared to base the 

case that the DGD contract is potentially 

a SPDC on two disputable assertions. 

First, in issuing its notice of intent to 

determine whether the DGD contract is 

a SPDC, the CFTC cited a general 

conclusion in its ECM study ‘‘that 

certain market participants referred to 

ICE as a price discovery market for 

certain natural gas contracts.’’ 23 ICE 

states that CFTC’s conclusion is ‘‘hard to 

quantify as the ECM report does not 

mention’’ this contract as a potential 

SPDC. ‘‘It is unknown which market 

participants made this statement in 

2007 or the contracts that were 

referenced.’’ 24 In response to the above 

comment, the Commission notes that it 

cited the ECM study’s general finding 


sroberts on DSKD5P82C1PROD with NOTICES
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 24637 

25Futures and swaps based on other Chicago 

indices have not met with the same market 

acceptance as the DGD contract. For example, 

NYMEX lists a basis swap contract that is 

comparable to the DGD contract with the exception 

that it uses a different price index for cash 

settlement. Open interest as of September 30, 2009, 

was approximately 19,000 contracts in the NYMEX 

Chicago Basis Swap contract versus about 134,000 

contracts in ICE’s DGD contract. Moreover, there 

has been no centralized-market trading in the 

NYMEX Chicago Basis Swap contract, so that 

contract does not serve as a source of price 

discovery for cash market traders with natural gas 

at that location. 26Appendix A to the Part 36 rules. 

that some ICE natural gas contracts 

appear to be regarded as price discovery 

markets merely as an indicia 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. 

Second, ICE argued that the 

Commission should not base a 

determination that the DGD contract is 

a SPDC on the fact that this contract has 

the exclusive right to base its settlement 

on the IPI Chicago Index price. While 

the Commission acknowledges that 

there are other firms that produce price 

indices for the Chicago market, as it 

notes above, market participants 

indicate that the IPI Index is very highly 

regarded and should they wish to 

establish a hedged position based on 

this index, they would need to do so by 

taking a position in the ICE DGD swap 

since ICE has the exclusive right to use 

the IPI index.25

WGCEF, NGSA, EI and FIEG all stated 

that the DGD contract does not satisfy 

the material price reference criterion. 

The commenters argued that other 

contracts (physical or financial) are not 

indexed basis the ICE DGD contract 

price, but rather are indexed based on 

the underlying cash price series against 

which the ICE DGD contract is settled. 

Thus, they contend that the underlying 

cash price series is the authentic 

reference price and not the ICE contract 

itself. The Commission believes that this 

interpretation of price reference is too 

limiting in that it only considers the 

final index value on which the contract 

is cash settled after trading ceases. 

Instead, the Commission believes that a 

cash-settled derivatives contract could 

meet the price reference criteria 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. 

As noted above, the Chicago market is 

a major trading center for natural gas in 

North America. Traders, including 

producers, keep abreast of the prices of 

the DGD contract when conducting cash 

deals. These traders look to a 

competitively determined price as an 

indication of expected values of natural 

gas at Chicago when entering into cash 

market transaction for natural gas, 

especially those trades that provide for 

physical delivery in the future. Traders 

use the ICE DGD contract to hedge cash 

market positions and transactions, 

which enhances the DGD contract’s 

price discovery utility. While the DGD 

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. 

Both EI and WGCEF stated that 

publication of price data in a package 

format is a weak justification for 

material price reference. These 

commenters argue that market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

such as those for the DGD contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the DGD prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the DGD 

prices have substantial value to them. 

The Commission notes that the Chicago 

hub is a major natural gas trading point, 

and the DGD contract’s prices are well 

regarded in the industry as indicative of 

the value of natural gas at Chicago. 

Accordingly, the Commission believes 

that it is reasonable to conclude that 

market participants are purchasing the 

data packages that include the DGD 

contract’s prices in substantial part 

because the DGD contract prices have 

particular value to them. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the DGD contract meets the 

material price reference criterion 

because cash market transactions are 

being priced on a frequent and recurring 

basis at a differential to the DGD 

contract’s price (direct evidence). 

Moreover, the ECM (i.e., ICE) sells the 

DGD contract’s price data to market 

participants and it is reasonable to 

conclude that market participants are 

purchasing the data packages that 

include the DGD contract’s prices in 

substantial part because the DGD 

contract prices have particular value to 

them. Furthermore, such prices are 

consulted on a frequent and reoccurring 

basis by industry participants in pricing 

cash market transactions (indirect 

evidence). 

2. Price Linkage Criterion. 

In its October 9, 2009, Federal 

Register notice, the Commission 

identified price linkage as a potential 

basis for a SPDC determination with 

respect to the DGD contract. In this 

regard, the final settlement of the DGD 

contract is based, in part, on the final 

settlement price of NYMEX’s 

physically-delivered natural gas futures 

contract, where NYMEX is registered 

with the Commission as a DCM. 

The Commission’s Guidance on 

Significant Price Discovery Contracts 26

notes that a ‘‘price-linked contract is a 

contract that relies on a contract traded 

on another trading facility to settle, 

value or otherwise offset the pricelinked contract.’’ Furthermore, the 

Guidance notes that, ‘‘[f]or a linked 

contract, the mere fact that a contract is 

linked to another contract will not be 

sufficient to support a determination 

that a contract performs a significant 

price discovery function. To assess 

whether such a determination is 

warranted, the Commission will 

examine the relationship between 

transaction prices of the linked contract 

and the prices of the referenced 

contract. The Commission believes that 

where material liquidity exists, prices 

for the linked contract would be 

observed to be substantially the same as 

or move substantially in conjunction 

with the prices of the referenced 

contract.’’ Furthermore, the Guidance 

proposes a threshold price relationship 

such that prices of the ECM linked 

contract will fall within a 2.5 percent 

price range for 95 percent of 

contemporaneously determined closing, 

settlement or other daily prices over the 

most recent quarter. Finally, the 

Commission also stated in the Guidance 

that it would consider a linked contract 

that has a trading volume equivalent to 

5 percent of the volume of trading in the 

contract to which it is linked to have 

sufficient volume potentially to be 

deemed a SPDC (‘‘minimum threshold’’). 

To assess whether the DGD contract 

meets the price linkage criterion, 

Commission staff obtained price data 

from ICE and performed the statistical 

tests cited above. Staff found that while 

the Chicago price is determined, in part, 

by the final settlement price of the 

NYMEX physically-delivered natural 

gas futures contract (a DCM contract), 

the Chicago price is not within 2.5 

percent of the settlement price of the 

corresponding NYMEX Henry Hub 

natural gas futures contract on 95 

percent of the days. Specifically, during 

the third quarter of 2009, 53 percent of 


sroberts on DSKD5P82C1PROD with NOTICES
24638 Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 

27The DGD contract is one-quarter the size of the 

NYMEX Henry Hub physically-delivered futures 

contract. 

28CL 05. 

29CL 04. 

30CL 02. 

31CL 03. 

32CL 07. 

33As noted above, the material liquidity criterion 

speaks to the effect that transactions in the potential 

SPDC may have on trading in ‘‘agreements, 

contracts and transactions listed for trading on or 

subject to the rules of a designated contract market, 

a derivatives transaction execution facility, or an 

electronic trading facility operating in reliance on 

the exemption in section 2(h)(3) of the Act.’’ 

34 ICE does not differentiate between open 

interest created by a transaction executed on its 

trading platform versus that created by a transaction 

executed off its trading platform. 

35See Commission Rule 36.3(c)(2), 17 CFR 

36.3(c)(2). 

36By way of comparison, the number of contracts 

traded in the DGD contract is similar to that 

exhibited on a liquid futures market and is roughly 

equivalent to the volume of trading for the Chicago 

Board of Trade’s Oats contract during this period. 

37By way of comparison, open interest in the 

DGD contract is similar to that exhibited on a liquid 

futures market and is roughly equivalent to that in 

the Chicago Board of Trade’s soybean meal futures 

contract. 

the Chicago natural gas prices derived 

from the ICE basis values were within 

2.5 percent of the daily settlement price 

of the NYMEX Henry Hub futures 

contract. In addition, staff finds that the 

DGD contract fails to meet the volume 

threshold requirement. In particular, the 

total trading volume in the NYMEX 

Natural Gas contract during the third 

quarter of 2009 was 14,022,963 

contracts, with 5 percent of that number 

being 701,148 contracts. The number of 

trades on the ICE centralized market in 

the DGD contract during the same 

period was 63,499 contracts (equivalent 

to 15,875 NYMEX contracts, given the 

size difference).27 Thus, centralizedmarket trades in the DGD contract 

amounted to less than the minimum 

threshold. 

Due to the specific criteria that a 

given ECM contract must meet to fulfill 

the price linkage criterion, the 

requirements, for all intents and 

purposes, exclude ECM contracts that 

are not near facsimiles of DCM 

contracts. That is, even though an ECM 

contract may specifically use a DCM 

contract’s settlement price to value a 

position, which is the case of the DGD 

contract, a substantive difference 

between the two price series would rule 

out the presence of price linkage. In this 

regard, an ECM contract that is priced 

and traded as if it is a functional 

equivalent of a DCM contract likely will 

have a price series that mirrors that of 

the corresponding DCM contract. In 

contrast, for contracts that are not lookalikes of DCM contracts, it is reasonable 

to expect that the two price series would 

be divergent. The Chicago hub and the 

Henry Hub are located in two different 

areas of the United States. The Henry 

Hub primarily is a supply center while 

Chicago primarily is a demand center. 

These differences contribute to the 

divergence between the two price series 

and, as discussed below, increase the 

likelihood that the ‘‘basis’’ contract is 

used for material price reference. 

i. Federal Register Comments 

NGSA 28 stated that the DGD contract 

does not meet the price linkage criterion 

because basis contracts, including the 

DGD contract, are not equivalent to the 

NYMEX physically-delivered Henry 

Hub contract. EI 29 also noted that the 

DGD and NYMEX natural gas contracts 

are not economically equivalent and 

that the DGD contract’s volume is too 

low to affect the NYMEX natural gas 

futures contract. WGCEF 30 stated that 

the Chicago price is determined, in part, 

by the final settlement price of the 

NYMEX Henry Hub futures contract. 

However, WGCEF goes on to state that 

the DGD contract ‘‘(a) is not 

substantially the same as the NYMEX 

[natural gas futures contract] * * * nor 

(b) does it move substantially in 

conjunction’’ with the NYMEX natural 

gas futures contract. ICE 31 opined that 

the DGD contract’s trading volume is too 

low to affect the price discovery process 

for the NYMEX natural gas futures 

contract. In addition, ICE states that the 

DGD contract simply reflects a price 

differential between Chicago hub and 

the Henry Hub; ‘‘there is no price 

linkage as contemplated by Congress or 

the CFTC in its rulemaking.’’ FIEG 32

acknowledged that the DGD contract is 

a locational spread that is based in part 

on the NYMEX natural gas futures price, 

but also questioned the significance of 

this fact relative to the price linkage 

criterion since the key component of the 

spread is the price at the Chicago hub 

and not the NYMEX physicallydelivered natural gas futures price. 

ii. Conclusion Regarding the Price 

Linkage Criterion 

Based on the above, the Commission 

finds that the DGD contract does not 

meet the price linkage criterion because 

it fails the price relationship and 

volume tests provided for in the 

Commission’s Guidance. 

3. Material Liquidity Criterion. 

To assess whether the DGD contract 

meets the material liquidity criterion, 

the Commission first examined volume 

and open interest data provided to it by 

ICE as a general measurement of the 

DGD market’s size and potential 

importance, and second performed a 

statistical analysis to measure the effect 

that changes to DGD prices potentially 

may have on prices for the NYMEX 

Henry Hub Natural Gas (a DCM 

contract), the ICE Permian Financial 

Basis contract (an ECM contract), ICE 

Waha Financial Basis contract (an ECM 

contract) and ICE NGPL TxOk Financial 

Basis contract (an ECM contract).33

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 

Commission in its October 9, 2009, 

Federal Register notice referred to 

second quarter 2009 trading statistics 

that ICE had submitted for its DGD 

contract. Based upon on a required 

quarterly filing made by ICE on July 27, 

2009, the total number of DGD trades 

executed on ICE’s electronic trading 

platform was 1,572 in the second 

quarter of 2009, resulting in a daily 

average of 24.6 trades. During the same 

period, the DGD contract had a total 

trading volume on ICE’s electronic 

trading platform of 146,193 contracts 

and an average daily trading volume of 

2,284,3 contracts. Moreover, the open 

interest as of June 30, 2009, was 127,744 

contracts, which includes 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.34

Subsequent to the October 9, 2009, 

Federal Register notice, ICE submitted 

another quarterly notification filed on 

November 13, 2009,35 with updated 

trading statistics. Specifically, with 

respect to its DGD contract, 782 separate 

trades occurred on its electronic 

platform in the third quarter of 2009, 

resulting in a daily average of 11.8 

trades. During the same period, the DGD 

contract had a total trading volume on 

its electronic platform of 63,499 

contracts (which was an average of 962 

contracts per day).36 As of September 

30, 2009, open interest in the DGD 

contract was 134,031 37 contracts. 

Reported open interest included 

positions resulting from trades that were 

executed on ICE’s electronic platform, 

as well as trades that were executed off 

of ICE’s electronic platform and brought 

to ICE for clearing. 

In the Guidance, the Commission 

stated that material liquidity can be 

identified by the impact liquidity 

exhibits through observed prices. Thus, 

to make a determination whether the 

DGD contract has such material impact, 

the Commission reviewed the relevant 


sroberts on DSKD5P82C1PROD with NOTICES
Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 24639 

38Staff 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. 

39Specifically, Commission staff econometrically 

estimated a vector autoregression (VAR) model 

using daily settlement prices. A vector 

autoregression model is an econometric model used 

to capture the evolution and the interdependencies 

between multiple time series, generalizing the 

univariate autoregression models. The estimated 

model displays strong diagnostic evidence of 

statistical adequacy. In particular, the model’s 

impulse response function was shocked with a onetime rise in DGD contract’s price. The simulation 

results suggest that, on average over the sample 

period, a one percent rise in the DGD contract’s 

price elicited a 1percent increase in the NYMEX 

Henry Hub and the ICE NGPL TxOk, Permian and 

Waha prices. These multipliers of response emerge 

with noticeable statistical strength or significance. 

Based on such long run sample patterns, if the DGD 

contract’s price rises by 10 percent, then the price 

of the other contracts each would rise by about 10 

percent. 

40CL 02. 

41CL 05. 

42CL 07. 

43Supplemental data supplied by the ICE 

confirmed that block trades in the third quarter of 

2009 were in addition to the trades that were 

conducted on the electronic platform; block trades 

comprised 64 percent of all transactions in the DGD 

contract. 

trading statistics (noted above). In this 

regard, the average number trades per 

day in the second and third quarters of 

2009 were above the minimum 

reporting level (5 trades per day). 

Moreover, trading activity in the DGD 

contract, as characterized by total 

quarterly volume, indicates that the 

DGD contract experiences trading 

activity similar to that of other thinlytraded contracts.38 However, the DGD 

contract has substantial open interest. 

This factor coupled with the importance 

of this trading center as a price reference 

point, makes it reasonable to infer that 

the DGD contract could have a material 

effect on other ECM contracts or on 

DCM contracts. 

To measure the effect that the DGD 

contract potentially could have on a 

DCM contract, or on another ECM 

contract, Commission staff performed a 

statistical analysis 39 using daily 

settlement prices (between January 2, 

2008, and September 30, 2009) for the 

DGD contract, as well as for the NYMEX 

Henry Hub natural gas contract (a DCM 

contract) and the ICE Waha Financial 

Basis, ICE Permian Financial Basis and 

ICE NGPL TxOk Financial Basis 

contracts (ECM contracts). The 

simulation results suggest that, on 

average over the sample period, a one 

percent rise in the DGD contract’s price 

elicited a 1 percent increase in each of 

the other contracts’ prices. 

i. Federal Register Comments 

As noted above, comments were 

received from seven individuals and 

organizations, with five comments being 

directly applicable to the SPDC 

determination of the ICE DGD contract. 

WGCEF, EI, FIEG, ICE and NGSA 

generally agreed that the DGD contract 

does not meet the material liquidity 

criterion. 

WGCEF 40 and NGSA 41 both stated 

that the DGD contract does not 

materially affect other contracts that are 

listed for trading on DCMs or ECMs, as 

well as other over-the-counter contracts. 

Instead, the DGD contract is influenced 

by the underlying Chicago cash price 

index and the final settlement price of 

the NYMEX Henry Hub natural gas 

futures contract, not vice versa. FIEG 42

stated that the DGD contract cannot 

have a material effect on NYMEX 

contract because the DGD contract 

trades on a differential and represents 

‘‘one leg (and not the relevant leg) of the 

locational spread.’’ The Commission’s 

statistical analysis shows that changes 

in the ICE DGD contract’s price 

significantly influences the prices of 

other contracts that are traded on DCMs 

and ECMs. 

First, ICE opined that the Commission 

‘‘seems to have adopted a five trade-perday test to determine whether a contract 

is materially liquid. It is worth noting 

that ICE originally suggested that the 

CFTC use a five trades-per-day 

threshold as the basis for an ECM to 

report trade data to the CFTC.’’ In this 

regard, 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’’ 

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. As noted above, the Commission 

is basing a finding of material liquidity 

for the ICE DGD contract, in part, on the 

fact that the Chicago hub is an 

important pricing point and changes in 

the DGD contract’s prices significantly 

affect those of other ECM contracts and 

DCM contracts. The DGD contract also 

has significant open interest. 

ICE implied 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 [72] months of * * * [the] 

contract’’ as well as in strips of contract 

months, and a ‘‘more appropriate 

method of determining liquidity is to 

examine the activity in a single traded 

month or strip of a given contract.’’ ICE 

stated that only about 25 to 40 percent 

of the trades occurred in the single most 

liquid, usually prompt, month of the 

contract. 

It is the Commission’s opinion that 

liquidity, as it pertains to the DGD 

contract, is typically a function of 

trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the DGD contract itself 

would be considered liquid. ICE’s 

analysis of its own trade data confirms 

this to be the case for the DGD contract, 

and thus, the Commission believes that 

it applied the statistical data cited above 

in an appropriate manner for gauging 

material liquidity. 

In addition, EI and ICE stated that the 

trades-per-day statistics that it provided 

to the Commission in its quarterly filing 

and which are cited above includes 

2(h)(1) transactions, which were not 

completed on the electronic trading 

platform and should not be considered 

in the SPDC determination process. 

Commission staff asked ICE to review 

the data it sent in its quarterly filings. 

In response, ICE confirmed that the 

volume data it provided and which the 

Commission cited in its October 9, 2009, 

Federal Register notice, as well as the 

additional volume information it cites 

above, includes only transaction data 

executed on ICE’s electronic trading 

platform. The Commission 

acknowledges that the open interest 

information it cites above includes 

transactions made off the ICE 

platform.43 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 

Based on the above, the Commission 

concludes that the DGD contract meets 

the material liquidity criterion in that 

there is sufficient trading activity in the 

DGD 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). 


sroberts on DSKD5P82C1PROD with NOTICES
24640 Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 

44See 73 FR 75888, 75893 (Dec. 12, 2008). 

45 44 U.S.C. 3507(d). 

46 7 U.S.C. 19(a). 47 5 U.S.C. 601 et seq. 

48 66 FR 42256, 42268 (Aug. 10, 2001). 

49 7 U.S.C. 1a(29). 

50Because 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). 

4. Overall Conclusion 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the DGD contract 

performs a significant price discovery 

function under two of the four criteria 

established in section 2(h)(7) of the 

CEA. Although the Commission has 

determined that the DGD contract does 

not meet the price linkage criterion at 

this time, the Commission has 

concluded that the DGD contract does 

meet both the material liquidity and 

material price reference criteria. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

DGD 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 DGD contract,44 and 

triggers the obligations, requirements— 

both procedural and substantive—and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs. 

V. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 45 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. 

b. Cost-Benefit Analysis 

Section 15(a) of the CEA 46 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 

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. The Commission has considered 

the costs and benefits in light of the 

specific provisions of section 15(a) of 

the Act and has concluded that the 

Order, required by Congress to 

strengthen federal oversight of exempt 

commercial markets and to prevent 

market manipulation, is necessary and 

appropriate to accomplish the purposes 

of section 2(h)(7) of the Act. 

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 authorizes 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’’) 47 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.48 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 

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. 

VI. Order 

a. Order Relating to the Chicago 

Financial Basis 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 Chicago 

Financial Basis contract, traded on the 

IntercontinentalExchange, Inc., satisfies 

the statutory material liquidity and 

material price reference criteria for 

significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the 

Chicago Financial Basis 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 49

with respect to the Chicago Financial 

Basis contract and is subject to all the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, 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.50

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10344 Filed 5–4–10; 8:45 am] 

BILLING CODE P 


sroberts on DSKD5P82C1PROD with NOTICES