Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38469 

1 74 FR 51261 (October 6, 2009). 

2The acronym ‘‘Mid-C’’ stands for Mid-Columbia. 

3The Federal Register notice also requested 

comment on the Mid-C Financial Peak Daily 

(‘‘MPD’’) contract and Mid-C Financial Off-Peak 

Daily (‘‘MXO’’) contract. Those contracts will be 

reviewed in a separate Federal Register release. 

4 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Pub. L. 110– 

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

5 7 U.S.C. 1a(29). 

6 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

Department of the Army Research, 

Development, and Engineering 

Command. 

NSN: 7510–00–272–9804—Envelope, 

Transparent. 

NPA: Bestwork Industries for the Blind, Inc., 

Runnemede, NJ. 

Contracting Activity: Federal Acquisition 

Service, GSA/FSS OFC SUP CTR—Paper 

Products, New York, NY. 

Coverage: B—List for the Broad Government 

Requirement as aggregated by the 

General Services Administration. 

Service 

Service Type/Location: Janitorial, Customs 

and Border Protection, B.P. Sector 

Maintenance, 398 E. Aurora Drive, El 

Centro, CA. 

NPA: ARC–Imperial Valley, El Centro, CA. 

Contracting Activity: Bureau of Customs and 

Border Protection, Office of 

Procurement, Washington, DC. 

Deletions 

On 5/7/2010 (75 FR 25210–25211), 

the Committee for Purchase From 

People Who Are Blind or Severely 

Disabled published notice of proposed 

deletions from the Procurement List. 

After consideration of the relevant 

matter presented, the Committee has 

determined that the services listed 

below are no longer suitable for 

procurement by the Federal Government 

under 41 U.S.C. 46–48c and 41 CFR 51– 

2.4. 

Regulatory Flexibility Act Certification 

I certify that the following action will 

not have a significant impact on a 

substantial number of small entities. 

The major factors considered for this 

certification were: 

1. The action will not result in 

additional reporting, recordkeeping or 

other compliance requirements for small 

entities. 

2. The action may result in 

authorizing small entities to furnish the 

services to the Government. 

3. There are no known regulatory 

alternatives which would accomplish 

the objectives of the Javits-WagnerO’Day Act (41 U.S.C. 46–48c) in 

connection with the services deleted 

from the Procurement List. 

End of Certification 

Accordingly, the following services 

are deleted from the Procurement List: 

Services 

Service/Location: Medical Transcription, 

Veterans Affairs Medical Center, 7305 N. 

Military Trail, West Palm Beach, FL. 

NPA: Gulfstream Goodwill Industries, Inc., 

West Palm Beach, FL. 

Contracting Activity: Department of Veterans 

Affairs, Nac, Hines, IL. 

Service Type/Location: Janitorial/Custodial, 

Fort McPherson: U.S. Army Health 

Clinic, Buildings 100, 101, 105, 162, 163, 

165, 170, 170A and 170B, Fort 

McPherson, GA. 

NPA: WORKTEC, Jonesboro, GA. 

Contracting Activity: Dept of the Army, XR 

W40M NATL REGION CONTRACT OFC, 

Washington, DC. 

Barry S. Lineback, 

Director, Business Operations. 

[FR Doc. 2010–16103 Filed 7–1–10; 8:45 am] 

BILLING CODE 6353–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Orders Finding That the Mid-C 

Financial Peak Contract and Mid-C 

Financial Off-Peak Contract, Offered 

for Trading on the 

IntercontinentalExchange, Inc., 

Perform a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final orders. 

SUMMARY: On October 6, 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 

Mid-C2 Financial Peak (‘‘MDC’’) contract 

and Mid-C Financial Off-Peak (‘‘OMC’’) 

contract,3 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 MDC and OMC 

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. 

DATES: Effective date: June 25, 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’’) 4

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.5 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.6 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 price of 

another contract. 


emcdonald on DSK2BSOYB1PROD with NOTICES
38470 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

7Pub. L. 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). 8For 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. 9As noted above, the Federal Register notice also 

requested comment on the Mid-C Financial Peak 

Daily (‘‘MPD’’) contract and Mid-C Financial OffPeak Daily (‘‘MXO’’) contract. The MPD and MXO 

contracts will be addressed in a separate Federal 

Register release. 

10The 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. 

11FERC 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.’’ 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.’’ EEI is the ‘‘association of 

shareholder-owned electric companies, 

international affiliates and industry associates 

worldwide.’’ ICE is an ECM, as noted above. WPTF 

describes itself as a ‘‘broad-based membership 

organization dedicated to encouraging competition 

in the Western power markets * * * WTPF strives 

to reduce the long-run cost of electricity to 

consumers throughout the region while maintaining 

the current high level of system reliability.’’ 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 website: http://www.cftc.gov/lawand

regulation/federalregister/federalregistercomments/

2009/09-011.html 

12FERC expressed the opinion that a 

determination by the Commission that either 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.’’ 

13 In its October 6, 2009, Federal Register release, 

the Commission identified material price reference 

and material liquidity as the possible criteria for 

SPDC determination of the MDC and OMC 

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. 

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.7 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4).8

II. Notice of Intent To Undertake SPDC 

Determination 

On October 6, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the MDC and 

OMC contracts 9 perform a significant 

price discovery function and requested 

comment from interested parties.10

Comments were received from the 

Federal Energy Regulatory Commission 

(‘‘FERC’’), Financial Institutions Energy 

Group (‘‘FIEG’’), Working Group of 

Commercial Energy Firms (‘‘WGCEF’’), 

Edison Electric Institute (‘‘EEI’’), ICE, 

Western Power Trading Forum 

(‘‘WPTF’’) and Public Utility 

Commission of Texas (‘‘PUCT’’).11 The 

comment letters from FERC12 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 MDC and OMC 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. 

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.13 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 


emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38471 

14 17 CFR Part 36, Appendix A. 

15http://www.wpuda.org/publications/

connections/hydro/River%20Riders.pdf. 

16The federal dams are Grand Coulee and Chief 

Joseph. The remaining dams are Wells (operated by 

the Douglas PUD), Rocky Reach and Rock Island 

(operated by the Chelan PUD), and Wanapum and 

Priest Rapids (operated by the Grant PUD). The 

term ‘‘PUD’’ stands for a publically-owned utility 

which provides essential services within a specified 

area. 

17http://www.wpuda.org/publications/

connections/hydro/River%20Riders.pdf. 18 17 CFR Part 36, Appendix A. 

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.14 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. 

IV. Findings and Conclusions 

The Commission’s findings and 

conclusions with respect to the MDC 

and OMC contracts are discussed 

separately below: 

a. The Mid-C Financial Peak (MDC) 

Contract and the SPDC Indicia 

The MDC contract is cash settled 

based on the arithmetic average of the 

peak, day-ahead power price indicies 

that are reported each day in the 

specified contract month. The daily 

price indicies are published by ICE in 

its ‘‘ICE Day Ahead Power Price Report,’’ 

which is available on the ECM’s 

website. The peak-hour electricity price 

index on a particular day is calculated 

as the volume-weighted average of 

qualifying, day-ahead, peak-hour power 

transactions at the Mid-Columbia hub 

that are traded on the ICE platform from 

6 a.m. to 11 a.m. CST on the publication 

date. The ICE transactions on which the 

daily price index is based specify the 

physical delivery of power. The size of 

the MDC contract is 400 megawatt hours 

(‘‘MWh’’), and the MDC contract is listed 

for 86 months. 

As the Columbia River flows through 

Washington State, it encounters two 

federal and nine privately-owned 

hydroelectric dams that generate close 

to 20,000 MW of power in the 

Northwest.15 With another three dams 

in British Columbia, Canada, and many 

more on its various tributaries, the 

Columbia River is the largest powerproducing river in North America. A 

major goal of the participants in the 

Mid-C electricity market is to maximize 

the Columbia River’s potential, along 

with protecting and enhancing the nonpower uses of the river. The reliability 

of the electricity grid in the Northwest 

is coordinated by the Northwest 

PowerPool (‘‘NWPP’’), which is a 

voluntary organization comprised of 

major generating utilities serving the 

Northwestern United States as well as 

British Columbia and Alberta, Canada. 

One stretch of the Columbia River 

between the Grand Coulee Dam and 

Priests Rapids Dam is governed by the 

Mid-Columbia Hourly Coordination 

Agreement (‘‘MCHCA’’). The MCHCA 

includes seven dams 16 and nearly 

13,000 MW of generation. Specifically, 

the agreement defines how the Chelan, 

Douglas and Grant PUDs coordinate 

their operations with the Bonneville 

Power Administration so as to maximize 

power generation while reducing 

fluctuations in the river’s flow. A 

number of other utilities that buy power 

from the PUDs have also signed onto the 

agreement. The MCHCA was signed into 

effect in 1972 and renewed in 1997 for 

another 20 years.17

In general, electricity is bought and 

sold in an auction setting on an hourly 

basis at various point along the 

electrical grid. The price of electricity at 

a particular point on the grid is called 

the locational marginal price (‘‘LMP’’), 

which includes the cost of producing 

the electricity, as well as congestion and 

line losses. Thus, an LMP reflects 

generation costs as well as the actual 

cost of supplying and delivering 

electricity to a specific point along the 

grid. 

Electricity is traded in a day-ahead 

market as well as in a real-time market. 

Typically, the bulk of the energy 

transactions occur in the day-ahead 

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 

quotes are based on supply and demand 

estimates, electricity needs usually are 

not perfectly satisfied in the day-ahead 

market. On the day the electricity is 

transmitted and used, auction 

participants typically realize that they 

bought or sold either too much or too 

little power. A real-time auction is 

operated in the Mid-C market to 

alleviate this problem by servicing as a 

balancing mechanism. In this regard, 

electricity traders use the real-time 

market to sell excess electricity and buy 

additional power to meet demand. Only 

a relatively small amount of electricity 

is traded in the real-time market 

compared with the day-ahead market. 

1. Material Price Reference Criterion 

The Commission’s October 6, 2009, 

Federal Register notice identified 

material price reference and material 

liquidity as the potential basis for a 

SPDC determination with respect to the 

MDC contract. 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 ‘‘West 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 MDC 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 MDC contract, 

while not mentioned by name in the 

ECM Study, might warrant further 

review. 

The Commission explains in its 

Guidance to the Part 36 rules 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.18 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 


emcdonald on DSK2BSOYB1PROD with NOTICES
38472 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

19 In addition to referencing ICE prices, firms 

participating in the Mid-C 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. 

20 In contrast, third-party price reporting firms 

typically compute their power index prices from 

transaction information that is voluntarily 

submitted by traders. It is possible that one trader 

could submit the same transaction data to multiple 

price reporting firms, whereby increasing the 

likelihood that price indices from different firms are 

similar in value. However, it is more plausible that 

the third-party price reporters’ price indices would 

be similar but not exactly the same because 

different traders are polled. 

21The MPD contract is cash settled based on the 

peak, day-ahead price index for the specified day, 

as published by ICE in its ‘‘ICE Day Ahead Power 

Price Report,’’ which is available on the ECM’s 

website. The daily peak-hour electricity price index 

is a volume-weighted average of qualifying, dayahead, peak-hour power contracts at the MidColumbia hub that are traded on the ICE platform 

from 6 a.m. to 11 a.m. CST on the publication date. 

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 Mid-C power market is a major 

pricing center for electricity on the West 

Coast. Traders, including producers, 

keep abreast of the electricity prices in 

the Mid-C power market when 

conducting cash deals. These traders 

look to a competitively determined 

price as an indication of expected 

values of power at the Mid-C hub when 

entering into cash market transaction for 

electricity, especially those trades 

providing for physical delivery in the 

future. Traders use the ICE MDC 

contract, as well as other ICE power 

contracts, to hedge cash market 

positions and transactions—activities 

which enhance the MDC contract’s price 

discovery utility. The substantial 

volume of trading and open interest in 

the MDC contract appears to attest to its 

use for this purpose. While the MDC 

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.19

Accordingly, the MDC contract satisfies 

the direct price reference test. 

The direct price reference finding also 

is supported by the uniqueness of the 

ICE electricity prices for the Mid-C 

market. Day-ahead and real-time 

electricity prices are reported by a 

number of sources, including thirdparty price providers (e.g., Dow Jones & 

Company). ICE’s Mid-C price indices are 

unique in that they are derived from 

transactions completed on ICE’s 

electronic system. Moreover, ICE is the 

only entity that has access to such 

transaction data. Thus, it is not possible 

for any other firm to replicate ICE’s 

indices.20

The fact that ICE’s MDC monthly 

contract is used more widely as a source 

of pricing information rather than the 

daily contract (i.e., the MPD contract)21

bolsters the finding of direct price 

reference. In this regard, the MDC 

contract prices power at the Mid-C up 

to 86 calendar months in the future. 

Thus, market participants can use the 

MDC contract to lock-in electricity 

prices far into the future. Traders use 

monthly power contracts like the MDC 

contract to price future power electricity 

commitments, where such commitments 

are based on long range forecasts of 

power supply and demand. In contrast, 

the MPD 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 MPD contract. 

The Commission notes that the MidC is a major trading point for electricity, 

and the MDC contract’s prices are well 

regarded in the industry as indicative of 

the value of power at the Mid-C hub. 

Accordingly, Commission staff believes 

that it is reasonable to conclude that 

market participants purchase the data 

packages that include the MDC 

contract’s prices in substantial part 

because the MDC 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 

MDC contract meets the indirect price 

reference test. 

i. Federal Register Comments 

WGCEF, WPTF, EEI and ICE stated 

that no other contract directly references 

or settles to the MDC contract’s price. 

Moreover, the commenters argued that 

the underlying cash price series against 

which the MDC contract is settled (in 

this case, the average of peak-hour MidC electricity prices over the contract 

month, which are derived from physical 

transactions) 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 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 Mid-C hub is a 

major trading center for electricity in the 

western United States. Traders, 

including producers, keep abreast of the 

prices of the MDC contract when 

conducting cash deals. These traders 

look to a competitively determined 

price as an indication of expected 

values of electricity at the Mid-C hub 

when entering into cash market 

transaction for power, especially those 

trades that provide for physical delivery 

in the future. Traders use the ICE MDC 

contract to hedge cash market positions 

and transactions, which enhances the 

MDC contract’s price discovery utility. 

While the MDC 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, WGCEF stated that the 

publication of price data for the MDC 

contract price is weak justification for 

material price reference. This 

commenter argued that market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

such as those for the MDC contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the MDC prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the MDC 

prices have substantial value to them. 

As noted above, the Commission notes 

that publication of the MDC contract’s 

prices is indirect evidence of routine 

dissemination. The MDC contract’s 

prices, while sold as a package, are of 

particular interest to market 

participants. Thus, the Commission has 


emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38473 

22As 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.’’ 

23 74 FR 51261 (October 6, 2009). 

24Staff 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. 

25Specifically, 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 MDC and OMC 

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 MDC contract’s price 

elicited a 1.09 percent rise in OMC contract’s price. 

26 Guidance, supra. 

concluded that traders likely purchase 

the ICE data packages specifically for 

the MDC contract’s prices and consult 

such prices on a frequent and recurring 

basis in pricing cash market 

transactions. 

Lastly, EEI observed that the ECM 

Study did not specifically identify the 

MDC contract as a contract that is 

referred to by market participants on a 

frequent and recurring basis. The 

Commission 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, and 

did not 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 

Based on the above, the Commission 

finds that the ICE MDC 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 MDC contract’s price 

(direct evidence). Moreover, the MDC 

contract’s price data are sold to market 

participants, and those individuals 

likely purchase the ICE data packages 

specifically for the MDC 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 6, 

2009, Federal Register notice, the 

Commission identified material price 

reference and material liquidity as 

potential criteria for SPDC 

determination of the MDC contract. 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.22

The total number of transactions 

executed on ICE’s electronic platform in 

the MDC contract was 2,022 in the 

second quarter of 2009, resulting in a 

daily average of 31.6 trades. During the 

same period, the MDC contract had a 

total trading volume of 67,400 contracts 

and an average daily trading volume of 

1,053.1 contracts. Moreover, open 

interest as of June 30, 2009, was 169,851 

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.23

In a subsequent filing dated March 24, 

2010, ICE reported that total trading 

volume in the fourth quarter of 2009 

was 142,700 contracts (or 2,195 

contracts on a daily basis). In terms of 

number of transactions, 2,975 trades 

occurred in the fourth quarter of 2009 

(46 trades per day). As of December 31, 

2009, open interest in the MDC contract 

was 221,608 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. 

Trading activity in the MDC contract, 

as characterized by total quarterly 

volume, indicates that the MDC contract 

experiences trading activity that is 

significantly greater than that of minor 

futures markets.24 Thus, it is reasonable 

to infer that the MDC contract could 

have a material effect on other ECM 

contracts or on DCM contracts. 

To measure the potential effect of the 

MDC contract on another ECM contract 

staff performed a statistical analysis 25

using daily settlement prices between 

July 1, 2008, and December 31, 2009, for 

the ICE MDC and OMC contracts. The 

simulation suggests that, on average 

over the sample period, a one percent 

rise in the MDC contract’s price elicited 

a 1.09 percent increase in ICE OMC 

contract’s price. 

i. Federal Register Comments 

ICE and WGCEF stated that the MDC 

contract lacks a sufficient number of 

trades to meet the material liquidity 

criterion. These two commenters, along 

with WPTF, FEIG and EEI argued that 

the MDC contract cannot have a 

material effect on other contracts, such 

as those listed for trading by the New 

York Mercantile Exchange (‘‘NYMEX’’), 

a DCM. The commenters pointed out 

that it is not possible for the MDC 

contract to affect a DCM contract 

because price linkage and the potential 

for arbitrage do not exist. The DCM 

contracts do not cash settle based on the 

MDC contract’s price. Instead, the DCM 

contracts and the MDC contract are both 

cash settled based on physical 

transactions, which the ECM and DCM 

contracts cannot influence. The 

Commission’s statistical analysis shows 

that changes in the ICE MDC contract’s 

price significantly influences the prices 

of other ECM contracts (namely, the 

OMC contract). 

WGCEF and 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 MDC 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.’’ 26

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 


emcdonald on DSK2BSOYB1PROD with NOTICES
38474 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

27 73 FR 75892 (December 12, 2008). 

28 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 6, 2009, Federal Register 

notice included 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; 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 54 percent of all transactions in the MDC 

contract. The Commission acknowledges that the 

open interest information it provided in its October 

6, 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. 

29See 73 FR 75888, 75893 (Dec. 12, 2008). 

30http://www.wpuda.org/publications/ 

connections/hydro/River%20Riders.pdf. 

31The federal dams are Grand Coulee and Chief 

Joseph. The remaining dams are Wells (operated by 

the Douglas PUD), Rocky Reach and Rock Island 

(operated by the Chelan PUD), and Wanapum and 

Priest Rapids (operated by the Grant PUD). 

32http://www.wpuda.org/publications/ 

connections/hydro/River%20Riders.pdf. 

requirement to enable it to 

‘‘independently be aware of ECM 

contracts that may develop into 

SPDCs’’ 27 rather than solely relying 

upon an ECM to identify 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. 

ICE asserted 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.’’ 28 It is the Commission’s 

opinion that liquidity, as it pertains to 

the MDC contract, is typically a function 

of trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the ICE MDC contract 

itself would be considered liquid. 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the MDC meets 

the material liquidity criterion. 

Specifically, there is sufficient trading 

activity in the MDC 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.’’ 

3. Overall Conclusion Regarding the 

MDC Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the MDC contract 

performs a significant price discovery 

function under two of the four criteria 

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

CEA. The Commission has concluded 

that the MDC contract meets both the 

material price reference and material 

liquidity criteria. Accordingly, the 

Commission is issuing the attached 

Order declaring that the MDC 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 MDC contract,29 and 

triggers the obligations, requirements— 

both procedural and substantive—and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs. 

b. The Mid-C Financial Off-Peak (OMC) 

Contract and the SPDC Indicia 

The OMC contract is cash settled 

based on the arithmetic average of the 

off-peak, day-ahead power price indices 

that are reported each day in the 

specified contract month. The daily 

price indices are published by ICE in its 

‘‘ICE Day Ahead Power Price Report,’’ 

which is available on the ECM’s 

website. The off-peak hour electricity 

price index on a particular day is 

calculated as the volume-weighted 

average of qualifying, day-ahead, offpeak hour power transactions at the 

Mid-Columbia hub that are traded on 

the ICE platform from 6 a.m. to 11 a.m. 

CST on the publication date. The ICE 

transactions on which the price index is 

based specify the physical delivery of 

power. The size of the OMC contract is 

25 MWh, and the OMC contract is listed 

for 86 months. 

As the Columbia River flows through 

Washington State, it encounters two 

federal and nine privately-owned 

hydroelectric dams that generate close 

to 20,000 MW of power in the 

Northwest.30 With another three dams 

in British Columbia, Canada, and many 

more on its various tributaries, the 

Columbia River is the largest powerproducing river in North America. A 

major goal of the participants in the 

Mid-C electricity market is to maximize 

the Columbia River’s potential, along 

with protecting and enhancing the nonpower uses of the river. The reliability 

of the electricity grid in the Northwest 

is coordinated by the NWPP. 

One stretch of the Columbia River 

between the Grand Coulee Dam and 

Priests Rapids Dam is governed by the 

MCHCA. The MCHCA includes seven 

dams 31 and nearly 13,000 MW of 

generation. Specifically, the agreement 

defines how the Chelan, Douglas and 

Grant PUDs coordinate their operations 

with the Bonneville Power 

Administration to maximize power 

generation while reducing fluctuations 

in the river’s flow. A number of other 

utilities that buy power from the PUDs 

have also signed onto the agreement. 

The MCHCA agreement was signed into 

effect in 1972 and renewed in 1997 for 

20 years.32

In general, electricity is bought and 

sold in an auction setting on an hourly 

basis at various point along the 

electrical grid. The price of electricity at 

a particular point on the grid is called 

the LMP, which includes the cost of 

producing the electricity, as well as 

congestion and line losses. Thus, an 

LMP reflects generation costs as well as 

the actual cost of supplying and 

delivering electricity to a specific point 

along the grid. 

Electricity is traded in a day-ahead 

market as well as a real-time market. 

Typically, the bulk of the energy 

transactions occur in the day-ahead 

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 

quotes are based on estimates of supply 

and demand, electricity needs usually 

are not perfectly satisfied in the dayahead market. On the day the electricity 

is transmitted and used, auction 

participants usually realize that they 

bought or sold either too much power or 

too little power. A real-time auction is 

operated in the Mid-C market to 

alleviate this problem by servicing as a 

balancing mechanism. In this regard, 

electricity traders use the real-time 

market to sell excess electricity and buy 

additional power to meet demand. Only 

a relatively small amount of electricity 

is traded in the real-time market 

compared with the day-ahead market. 


emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38475 

33 17 CFR Part 36, Appendix A. 

34 In addition to referencing ICE prices, firms 

participating in the Mid-C 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. 

35 In contrast, third-party price reporting firms 

typically compute their power index prices from 

transaction information that is voluntarily 

submitted by traders. It is possible that one trader 

could submit the same transaction data to multiple 

price reporting firms, whereby increasing the 

likelihood that price indices from different firms are 

similar in value. However, it is more plausible that 

the third-party price reporters’ price indices would 

be similar but not exactly the same because 

different traders are polled. 

36The MXO contract is cash settled based on the 

off-peak, day-ahead price index for the specified 

day, as published by ICE in its ‘‘ICE Day Ahead 

Power Price Report,’’ which is available on the 

ECM’s website. The daily, off-peak hour electricity 

price index is a volume-weighted average of 

qualifying, day-ahead, off-peak hour power 

contracts at the Mid-Columbia hub that are traded 

on the ICE platform from 6 a.m. to 11 a.m. CST on 

the publication date. 

1. Material Price Reference Criterion 

The Commission’s October 6, 2009, 

Federal Register notice identified 

material price reference and material 

liquidity as the potential basis for a 

SPDC determination with respect to the 

OMC contract. 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 ‘‘West 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 OMC 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 OMC contract, 

while not mentioned by name in the 

ECM Study, might warrant further 

review. 

The Commission explains in its 

Guidance to the Part 36 rules 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.33 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 Mid-C power market is a major 

pricing center for electricity on the West 

Coast. Traders, including producers, 

keep abreast of the electricity prices in 

the Mid-C power market when 

conducting cash deals. These traders 

look to a competitively determined 

price as an indication of expected 

values of power at the Mid-C hub when 

entering into cash market transaction for 

electricity, especially those trades 

providing for physical delivery in the 

future. Traders use the ICE OMC 

contract, as well as other ICE power 

contracts, to hedge cash market 

positions and transactions—activities 

which enhance the OMC contract’s 

price discovery utility. The substantial 

volume of trading and open interest in 

the OMC contract appears to attest to its 

use for this purpose. While the OMC 

contract’s settlement prices may not be 

the only factor influencing spot and 

forward transactions, power traders 

consider the ICE price to be a critical 

factor in conducting OTC transactions.34

As a result, the OMC contract satisfies 

the direct price reference test. 

Another reason that bolsters the direct 

price reference claim is related to the 

uniqueness of the ICE electricity prices 

for the Mid-C market. Day-ahead and 

real-time electricity prices are reported 

by a number of sources, including thirdparty price providers (e.g., Dow Jones & 

Company). ICE’s Mid-C price indices are 

unique in that they are derived from 

transactions completed on ICE’s 

electronic system. Moreover, ICE is the 

only entity that has access to such 

transaction data. Thus, it is not possible 

for any other firm to replicate ICE’s 

indices.35

The fact that ICE’s OMC contract is 

used more widely as a source of pricing 

information rather than the daily 

contract (i.e., the MXO contract) 36

reinforces the argument for direct price 

reference. In this regard, the OMC 

contract is a monthly contact that prices 

power at the Mid-C up to 86 calendar 

months in the future. Thus, market 

participants can use the OMC contract 

to lock-in electricity prices far into the 

future. In contrast, the MXO contract is 

listed for a much shorter length of 

time—up to 70 days in the future. 

Traders use monthly power contracts 

like the OMC contract to price future 

power electricity commitments, where 

such commitments are based on long 

range forecasts of power supply and 

demand. As generation and usage nears, 

market participants have a better 

understanding of generation capacity 

actual power needs. As a result, they 

can modify previously-established 

hedges with daily contracts, like the 

MXO contract. 

The Commission notes that the MidC is a major trading point for electricity, 

and the OMC contract’s prices are well 

regarded in the industry as indicative of 

the value of power at the Mid-C hub. 

Accordingly, Commission staff believes 

that it is reasonable to conclude that 

market participants purchase the data 

packages that include the OMC 

contract’s prices in substantial part 

because the OMC 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 

OMC contract meets the indirect price 

reference test. 

i. Federal Register Comments 

WGCEF, WPTF, EEI and ICE stated 

that no other contract directly references 

or settles to the OMC contract’s price. 

Moreover, the commenters argued that 

the underlying cash price series against 

which the OMC contract is settled (in 

this case, the average of peak Mid-C 

electricity prices over the contract 

month, which are derived from cash 

market transactions) 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 cashsettled derivatives contract could meet 

the price reference criterion if market 

participants ‘‘consult on a frequent and 


emcdonald on DSK2BSOYB1PROD with NOTICES
38476 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

37As 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.’’ 

38 74 FR 51261 (October 6, 2009). 

39Staff 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. 

40Specifically, 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 

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 OMC and MDC 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 OMC contract’s price elicited a 

0.915 percent rise in MDC contract’s price. 

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 Mid-C hub is a 

major trading center for electricity in the 

western United States. Traders, 

including producers, keep abreast of the 

prices of the OMC contract when 

conducting cash deals. These traders 

look to a competitively determined 

price as an indication of expected 

values of electricity at the Mid-C hub 

when entering into cash market 

transaction for power, especially those 

trades that provide for physical delivery 

in the future. Traders use the ICE OMC 

contract to hedge cash market positions 

and transactions, which enhances the 

OMC contract’s price discovery utility. 

While the OMC 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, WGCEF stated that the 

publication of price data for the OMC 

contract price is weak justification for 

material price reference. This 

commenter argued that market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

such as those for the OMC contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the OMC prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the OMC 

prices have substantial value to them. 

As noted above, the Commission notes 

that publication of the OMC contract’s 

prices is indirect evidence of routine 

dissemination. The OMC contract’s 

prices, while sold as a package, are of 

particular interest to market 

participants. Thus, the Commission has 

concluded that traders likely 

specifically purchase the ICE data 

packages for the OMC contract’s prices 

and consult such prices on a frequent 

and recurring basis in pricing cash 

market transactions. 

Lastly, EEI criticized that the ECM 

Study did not specifically identify the 

OMC 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 

Based on the above, the Commission 

finds that the ICE OMC 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 OMC contract’s price 

(direct evidence). Moreover, the OMC 

contract’s price data are sold to market 

participants, and those individuals 

likely purchase the ICE data packages 

specifically for the OMC 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 6, 2009, Federal 

Register notice, the Commission 

identified material price reference and 

material liquidity as potential criteria 

for SPDC determination of the OMC 

contract. 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.37

The total number of transactions 

executed on ICE’s electronic platform in 

the OMC contract was 443 in the second 

quarter of 2009, resulting in a daily 

average of 6.9 trades. During the same 

period, the OMC contract had a total 

trading volume of 185,950 contracts and 

an average daily trading volume of 

2,905.5 contracts. Moreover, open 

interest as of June 30, 2009, was 

1,105,361 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.38

In a subsequent filing dated March 24, 

2010, ICE reported that total trading 

volume in the fourth quarter of 2009 

was 213,862 contracts (or 3,290 

contracts on a daily basis). In terms of 

number of transactions, 327 trades 

occurred in the fourth quarter of 2009 (5 

trades per day). As of December 31, 

2009, open interest in the OMC contract 

was 1,249,165 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 

relatively low between the second and 

fourth quarters of 2009. However, 

trading activity in the OMC contract, as 

characterized by total quarterly volume, 

indicates that the MDC contract 

experiences trading activity that is 

greater than that of minor futures 

markets.39 Thus, it is reasonable to infer 

that the OMC contract could have a 

material effect on other ECM contracts 

or on DCM contracts. 

To measure the effect that the OMC 

contract potentially could have on 

another ECM contract, staff performed a 

statistical analysis 40 using daily 

settlement prices between July 1, 2008, 

and December 31, 2009, for the ICE 

OMC and MDC contracts. The 

simulation suggests that, on average 

over the sample period, a one percent 


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Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38477 

41 Guidance, supra. 

42 73 FR 75892 (December 12, 2008). 

43 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 6, 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 82 percent of all transactions in the OMC 

contract. Commission acknowledges that the open 

interest information it provided in its October 6, 

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 ‘‘offexchange’’ 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. 

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

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

46 7 U.S.C. 19(a). 

rise in the OMC contract’s price elicited 

a 0.915 percent increase in ICE MDC 

contract’s price. 

i. Federal Register Comments 

ICE and WGCEF stated that the OMC 

contract lacks a sufficient number of 

trades to meet the material liquidity 

criterion. These two commenters, along 

with WPTF, FEIG and EEI argued that 

the OMC contract cannot have a 

material effect on other contracts, such 

as those listed for trading by NYMEX. 

The commenters pointed out that it is 

not possible for the OMC contract to 

affect a DCM contract because price 

linkage and the potential for arbitrage 

do not exist. The DCM contracts do not 

cash settle to the OMC contract’s price. 

Instead, the DCM contracts and the 

OMC contract are both cash settled 

based on physical transactions, which 

the ECM and DCM contracts cannot 

influence. The Commission’s statistical 

analysis shows that changes in the ICE 

OMC contract’s price significantly 

influence the prices of other ECM 

contracts (namely, the MDC contract). 

WGCEF and 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 OMC contract did 

not meet this standard of liquidity. 

While a continuous stream of prices 

would indeed be an indication of 

liquidity for certain markets, 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.’’ 41

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’’ 42 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. 

ICE also asserted 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.43 It is the Commission’s 

opinion that liquidity, as it pertains to 

the OMC contract, is typically a 

function of trading activity in particular 

lead months and, given sufficient 

liquidity in such months, the ICE OMC 

contract itself would be considered 

liquid. 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the OMC meets 

the material liquidity criterion. 

Specifically, there is sufficient trading 

activity in the OMC 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 

OMC Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the OMC contract 

performs a significant price discovery 

function under two of the four criteria 

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

CEA. The Commission has concluded 

that the OMC contract meets both the 

material price reference and material 

liquidity criteria. Accordingly, the 

Commission is issuing the attached 

Order declaring that the OMC 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 OMC 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. 

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 


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38478 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

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). 

51 7 U.S.C. 1a(29). 

52Because 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). 

1 74 FR 51261 (October 6, 2009). 

2The acronym ‘‘Mid-C’’ stands for Mid-Columbia. 

3The Federal Register notice also requested 

comment on the Mid-C Financial Peak (‘‘MDC’’) 

contract and Mid-C Financial Off-Peak (‘‘OMC’’) 

contract; these contracts will be addressed in a 

separate Federal Register release. 

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’’) 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 

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. 

VI. Orders 

a. Order Relating to the Mid-C Financial 

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 Mid-C 

Financial 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 MidC Financial 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 49

with respect to the Mid-C Financial 

Peak 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

b. Order Relating to the Mid-C Financial 

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 Mid-C 

Financial 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 MidC Financial 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 51

with respect to the Mid-C Financial OffPeak 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.52

Issued in Washington, DC, on June 25, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–16212 Filed 7–1–10; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Orders Finding That the Mid-C 

Financial Peak Daily Contract and MidC Financial Off-Peak Daily Contract, 

Offered for Trading on the 

IntercontinentalExchange, Inc., Do Not 

Perform a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final orders. 

SUMMARY: On October 6, 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 

Mid-C2 Financial Peak Daily (‘‘MPD’’) 

contract and Mid-C Financial Off-Peak 

Daily (‘‘MXO’’) contract,3 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 MPD and MXO 

contracts do not 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. 

DATES: Effective Date: June 25, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

Commodity Futures Trading 


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