Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23697 

1 74 FR 52196 (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 

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. 

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 NGPL TxOk 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 NGPL 

TxOk 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. 2010–10308 Filed 5–3–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the AECO 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 

AECO Financial Basis (‘‘AEC’’) 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 AEC 

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

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 AEC contract 

performs a significant price discovery 

function and requested comment from 

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23698 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

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 Web site: http:// 

www.cftc.gov/lawandregulation/federalregister/

federalregistercomments/2009/09-016.html. 

9FERC stated that the AEC 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 ‘‘FERC staff will continue to 

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

CFTC’’ should any such potential conflict arise. CL 

06. 

10CL 01. 

11CL 08. 

12 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. 

13 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 AEC contract. 

Arbitrage was not identified as a possible criterion 

and will not be discussed further in this document 

or the associated Order. 14 17 CFR part 36, appendix A. 

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’’), 

Financial Institutions Energy Group 

(‘‘FIEG’’) and an anonymous individual.8

The comment letter from FERC9 did not 

directly address the issue of whether or 

not the AEC contract is a SPDC; IECA 10

and the anonymous commenter 11

concluded that the AEC contract is a 

SPDC, but did not provide a basis for 

their conclusions.12 The other parties’ 

comments raised substantive issues 

with respect to the applicability of 

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

generally asserting that the AEC 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, 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 

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 will consider whether 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. 

IV. Findings and Conclusions 

a. The AECO Financial Basis (AEC) 

Contract and the SPDC Indicia 

The AEC contract is cash settled 

based on the difference between the 

AECO–C & Nova Inventory Transfer 

(Alberta) price index for natural gas in 

the month of production, as reported in 

the first publication of the month of 

Canadian Enerdata, Ltd.’s Canadian Gas 

Price Reporter (‘‘CGPR’’) and the final 

settlement price for the New York 

Mercantile Exchange’s (‘‘NYMEX’s’’) 

Henry Hub physically-delivered natural 

gas futures contract for the same 

specified calendar month. The 

transactions used to calculate the 

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15The 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. 

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

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

17See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

18Basis 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. 

19As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion is not discussed 

in reference to the AEC contract. 

20The OTC Gas End of Day dataset includes daily 

settlement prices for natural gas contracts listed for 

all points in North America. 

monthly Alberta price index are those 

that are conducted on the Natural Gas 

Exchange (‘‘NGX’’) in a given month and 

specify the delivery of natural gas at the 

Alberta hub in the following month. The 

Alberta price index is computed as the 

volume-weighted average of the 

applicable natural gas transactions. The 

size of the AEC contract is 2,500 million 

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

the unit of trading is any multiple of 

2,500 mmBtu. The AEC contract is 

listed for up to 120 calendar months 

commencing with the next calendar 

month. 

The Henry Hub,15 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.16 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 Alberta hub is far removed from 

the Henry Hub and is not directly 

connected to the Henry Hub by an 

existing pipeline. Located in the 

Canadian province of Alberta, the 

Alberta natural gas market is a major 

connection point for long-distance 

transmission systems that ship natural 

gas to points throughout Canada and the 

United States. The Alberta province is 

Canada’s dominant natural gas 

producing region; six of the nine 

Canadian market centers are located in 

the Alberta province. The throughput 

capacity at the AECO–C hub is ten 

billion cubic feet per day. Moreover, the 

number of pipeline interconnections at 

that hub was four in 2008. Lastly, the 

AECO–C hub’s capacity is 20.4 billion 

cubic feet per day.17

The local price at the Alberta 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 

Alberta price. Moreover, exogenous 

factors, such as adverse weather, can 

cause the Alberta 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 contracts18 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 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 

AEC contract. Each of these criteria is 

discussed below.19

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 using 

CGPR’s Alberta price index for cash 

settlement purposes. As a result, no 

other exchange can offer such a basis 

contract based on CGPR’s Alberta price 

index. While other third-party price 

providers produce natural gas price 

indices for this and other trading 

centers, market participants indicate 

that the CGPR price 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 AEC 

contract since ICE has the right to the 

CGPR 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 

‘‘West Gas End of Day’’ and OTC Gas 

End of Day’’ 20 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 historical data. 

These two packages include price data 

for the AEC contract. 

The Alberta hub is a major trading 

center for natural gas in North America. 

Traders, including producers, keep 

abreast of the prices of the AEC contract 

when conducting cash deals. These 

traders look to a competitively 

determined price as an indication of 

expected values of natural gas at the 

Alberta hub when entering into cash 

market transactions for natural gas, 

especially those trades providing for 

physical delivery in the future. Traders 

use the ICE AEC contract, as well as 

other ICE basis swap contracts, to hedge 

cash market positions and 

transactions—activities which enhance 

the AEC contract’s price discovery 

utility. The substantial volume of 

trading and open interest in the AEC 

contract appears to attest to its use for 

this purpose. While the AEC contract’s 

settlement prices may not be the only 

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21 In addition to referencing ICE prices, natural 

gas market firms participating in the Alberta 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. 

22Futures and swaps based on other Alberta 

indices have not met with the same market 

acceptance as the ICE AEC contract. For example, 

NYMEX previously listed a basis swap contract that 

was comparable to the AEC contract. However, 

ICE’s exclusive agreement with Enerdata forced 

NYMEX to delist its contract because NYMEX could 

not find a suitable alternative price index. Up until 

the point of being delisted, there was no 

centralized-market trading in the NYMEX version of 

the AEC contract, so it never served as a source of 

price discovery for cash market traders with natural 

gas at the Alberta hub. 23Appendix A to the Part 36 rules. 

factor influencing spot and forward 

transactions, natural gas traders 

consider the ICE price to be a critical 

factor in conducting OTC transactions.21

Lastly, the fact that the AEC 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 Alberta 

natural gas prices showed that 98 

percent of the observations were more 

than 2.5 percent different than the 

contemporaneous Henry Hub prices. 

Specifically, the average Alberta basis 

value between January 2008 and 

September 2009 was ¥$0.87 per mmBtu 

with a variance of $0.21 per mmBtu. 

i. Federal Register Comments 

ICE stated in its comment letter that 

the AEC contract does not meet the 

material price reference criterion for 

SPDC determination. ICE argued that 

the Commission appeared to base the 

case that the AEC contract is potentially 

a SPDC on two disputable assertions. 

First, in issuing its notice of intent to 

determine whether the AEC 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.’’ ICE states 

that CFTC’s reason 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.’’ In 

response to the above comment, the 

Commission notes that it cited the ECM 

study’s general finding 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, and 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 AEC contract is 

a SPDC merely because this contract has 

the exclusive right to base its settlement 

on the CGPR Alberta price index. While 

the Commission acknowledges that 

there are other firms that produce price 

indices for the Alberta hub, market 

participants indicate that the CGPR 

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 AEC swap since ICE has the 

exclusive right to use the CGPR index.22

WGCEF, NGSA, EI and FIEG all stated 

that the AEC contract does not satisfy 

the material price reference criterion. 

The commenters argued that other 

contracts (physical or financial) are not 

indexed basis the ICE AEC contract 

price, but rather are indexed based on 

the underlying cash price series against 

which the ICE AEC 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 Alberta hub is a 

major trading center for natural gas in 

North America. Traders, including 

producers, keep abreast of the prices of 

the AEC contract when conducting cash 

deals. These traders look to a 

competitively determined price as an 

indication of expected values of natural 

gas at the Alberta hub when entering 

into cash market transaction for natural 

gas, especially those trades that provide 

for physical delivery in the future. 

Traders use the ICE AEC contract to 

hedge cash market positions and 

transactions, which enhances the AEC 

contract’s price discovery utility. While 

the AEC 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 AEC contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the AEC prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the AEC 

prices have substantial value to them. 

The Commission notes that the Alberta 

hub is a major natural gas trading point, 

and the AEC contract’s prices are well 

regarded in the industry as indicative of 

the value of natural gas at the Alberta 

hub. Accordingly, the Commission 

believes that it is reasonable to conclude 

that market participants are purchasing 

the data packages that include the AEC 

contract’s prices in substantial part 

because the AEC contract prices have 

particular value to them. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the AEC contract meets the 

material price reference criterion 

because it is referenced on a frequent 

and recurring basis by cash market 

participants when pricing transactions 

(direct evidence). Moreover, the ECM 

sells the AEC contract’s price data to 

market participants (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 AEC contract. In this 

regard, the final settlement of the AEC 

contract is based, in part, on the final 

settlement price of the NYMEX’s 

physically-delivered natural gas futures 

contract, where the NYMEX is 

registered with the Commission as a 

DCM. 

The Commission’s Guidance on 

Significant Price Discovery Contracts 23

notes that a ‘‘price-linked contract is a 

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24The AEC contract is one-quarter the size of the 

NYMEX Henry Hub physically-delivered futures 

contract. 

25The acronym stands for Houston Ship Channel. 

26As 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. 

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 

which 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 AEC 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 Alberta price is determined, in part, 

by the final settlement price of the 

NYMEX physically-delivered natural 

gas futures contract (a DCM contract), 

the Alberta hub price is not within 2.5 

percent of the settlement price of the 

corresponding NYMEX Henry Hub 

natural gas futures contract on 95 

percent or more of the days. 

Specifically, during the third quarter of 

2009, only 2.4 percent of the Alberta 

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 found that the AEC contract fails to 

meet the volume threshold requirement. 

In particular, the total trading volume in 

the NYMEX physically delivered 

natural gas contract during the third 

quarter of 2009 was 14,022,963 

contracts, with 5 percent of that number 

being 701,148 contracts. Trades on the 

ICE centralized market in the AEC 

contract during the same period was 

736,412 contracts (equivalent to 184,103 

NYMEX contracts, given the size 

difference).24 Thus, centralized-market 

trades in the AEC 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 

even though the ECM contract may 

specifically use the settlement price to 

value a position, which is the case of the 

AEC contract. 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 look-alikes of DCM 

contracts, it is reasonable to expect that 

the two price series would be divergent. 

The Alberta hub and the Henry Hub are 

located in two different areas of North 

America. Moreover, both hubs are 

supply centers, where the Alberta hub 

handles a throughput volume that is ten 

times that of the Henry Hub. These 

differences contribute to the divergence 

between the two price series and, as 

discussed above, increase the likelihood 

that the ‘‘basis’’ contract is used for 

material price reference. 

i. Federal Register Comments 

NGSA stated that the AEC contract 

does not meet the price linkage criterion 

because basis contracts, including the 

AEC contract, are not equivalent to the 

NYMEX physically-delivered Henry 

Hub contract. EI also noted that the AEC 

and NYMEX natural gas contracts are 

not economically equivalent and that 

the AEC contract’s volume is too low to 

affect the NYMEX natural gas futures 

contract. WGCEF stated that the Alberta 

price is determined, in part, by the final 

settlement price of the NYMEX Henry 

Hub futures contract. However, WCEF 

goes on to state that the AEC 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 opined 

that the AEC 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 AEC contract simply reflects a 

price differential between Alberta and 

the Henry Hub; ‘‘there is no price 

linkage as contemplated by Congress or 

the CFTC in its rulemaking.’’ FIEG 

acknowledged that the AEC 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 Alberta 

location 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 AEC 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 AEC 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 

AEC market’s size and potential 

importance, and second performed a 

statistical analysis to measure the effect 

that changes to AEC prices potentially 

may have on prices for the NYMEX 

Henry Hub Natural Gas (a DCM 

contract), the ICE Socal Border 

Financial Basis (‘‘SCL’’) contract (an 

ECM contract) and the ICE HSC25

Financial Basis contract (an ECM 

contract).26

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 AEC 

contract. Based upon on a required 

quarterly filing made by ICE on July 27, 

2009, the total number of AEC trades 

executed on ICE’s electronic trading 

platform was 7,263 in the second 

quarter of 2009, resulting in a daily 

average of 113.5 trades. During the same 

period, the AEC contract had a total 

trading volume on ICE’s electronic 

trading platform of 806,438 contracts 

and an average daily trading volume of 

12,601 contracts. Moreover, the open 

interest as of June 30, 2009, was 443,402 

contracts, which includes trades 

executed on ICE’s electronic trading 

platform, as well as trades executed off 

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27 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. 74 FR 52196 

(October 9, 2009). 28See Commission Rule 36.3(c)(2), 17 CFR 

36.3(c)(2). 29By way of comparison, the number of contracts 

traded in the AEC contract is similar to that 

exhibited on a liquid futures market and is roughly 

equivalent to the volume of trading for the ICE US 

Coffee ‘‘C’’ and Cocoa contracts during this period. 

30By way of comparison, open interest in the 

AEC contract is similar to that exhibited on a liquid 

futures market and is roughly equivalent to that in 

the Commodity Exchange’s Gold contract and the 

Chicago Board of Trade’s soybean contract. 

31Specifically, Commission staff econometrically 

estimated a vector autoregression model using daily 

natural gas price levels. A vector autoregression 

model is an econometric model used to capture the 

dependencies and interrelationships among 

multiple time series, generalizing the univariate 

autoregression model. The estimated model 

displays strong diagnostic evidence of statistical 

adequacy. In particular, the model’s impulse 

response function was shocked with a one-time rise 

in Alberta price. The simulation results suggest 

that, on average over the sample period, a one 

percent rise in the Alberta natural gas price elicited 

a 0.9 percent increase in the NYMEX Henry Hub 

price and the Southern California border gas price, 

as well as a 0.8 percent increase in HSC gas prices. 

These multipliers of response emerge with 

noticeable statistical strength or significance. Based 

on such long run sample patterns, if the Alberta 

price rises by 10 percent, then the price of NYMEX 

Henry Hub natural gas futures contract and the 

Sothern California gas price each would rise by 

about 9 percent; a 10 percent rise in the Alberta gas 

price would lead to a rise in the HSC contract’s 

price by about 9 percent. 

32Natural gas prices at the Alberta, HSC, and 

Socal trading centers were obtained by adding the 

daily settlement prices of ICE’s AECO Financial 

Basis, HSC Financial Basis and Socal Border 

Financial Basis contracts, respectively, to the 

contemporaneous daily settlement prices of the 

NYMEX Henry Hub physically-delivered natural 

gas futures contract. 

33CL 02. 

34CL 05. 

35CL 07. 

36CL 03. 

37 73 FR 75892 (December 12, 2008). 38CL 04. 

of ICE’s electronic trading platform and 

then brought to ICE for clearing.27

Subsequent to the October 9, 2009, 

Federal Register notice, ICE submitted 

another quarterly notification filed on 

November 13, 2009,28 with updated 

trading statistics. Specifically, with 

respect to its AEC contract, 6,320 

separate trades occurred on its 

electronic platform in the third quarter 

of 2009, resulting in a daily average of 

95.8 trades. During the same period, the 

AEC contract had a total trading volume 

on its electronic platform of 736,412 

contracts (which was an average of 

11,158 contracts per day).29 As of 

September 30, 2009, open interest in the 

AEC contract was 483,561 30 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 Appendix A to Part 36, the material 

liquidity criterion for SPDC 

determination specifies that an ECM 

contract should have a material effect on 

another contract. To measure the effect 

that the AEC contract has on a DCM 

contract, or on another ECM contract, 

Commission staff performed a statistical 

analysis 31 of ICE and NYMEX price data 

using daily settlement prices (between 

January 2, 2008, and September 30, 

2009) for the NYMEX Henry Hub 

natural gas contract (a DCM contract) 

and the ICE Socal Border Financial 

Basis and HSC Financial Basis contracts 

(ECM contracts).32 The simulation 

results suggest that, on average over the 

sample period, a one percent rise in the 

AEC contract’s price elicited a 0.8 

percent to 0.9 percent increase in each 

of the NYMEX Henry Hub, ICE SCL and 

ICE HSC contracts’ prices. 

i. Federal Register Comments 

As noted above, comments were 

received from eight individuals and 

organizations, with five comments being 

directly applicable to the SPDC 

determination of the ICE AEC contract. 

WGCEF, EI, FIEG, ICE and NGSA 

generally agreed that the AEC contract 

does not meet the material liquidity 

criterion. 

WGCEF 33 and NGSA 34 both stated 

that the AEC 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 AEC contract is influenced 

by the underlying Alberta cash price 

index and the final settlement price of 

the NYMEX Henry Hub natural gas 

futures contract, not vice versa. FIEG 35

stated that the AEC contract cannot have 

a material effect on NYMEX contract 

because the AEC 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 

AEC contract’s price significantly 

influences the prices of other contracts 

that are traded on DCMs and ECMs. 

ICE 36 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’’ 37 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; the 

threshold is not intended to define 

liquidity in a broader sense. As noted 

above, the Division is basing a finding 

of material liquidity for the ICE AEC 

contract in part on the fact that there 

have been around 100 trades per day on 

average in the AEC contract during the 

second and third quarters of 2009, 

which is far more than the five tradesper-day that is cited in the ICE 

comment. 

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 months of each contract’’ as 

well as in strips of contract months, and 

the ‘‘more appropriate method of 

determining liquidity is to examine the 

activity in a single traded month or strip 

of a given contract.’’ Furthermore, ICE 

noted that for the AEC contract (and 

other basis swap contracts), ‘‘about 25– 

40% of the trades * * * occurred in the 

single most liquid, usually prompt, 

month of * * * [the] contract.’’ EI,38 and 

FIEG also noted that contract months 

should be considered separately rather 

than on an aggregated basis. When done 

so, none of the contract months meet the 

material liquidity criterion. 

It is the Commission’s opinion that 

liquidity, as it pertains to the AEC 

contract, is typically a function of 

trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the AEC contract itself 

would be considered liquid. ICE’s 

analysis of its own trade data confirms 

this to be the case for the AEC 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. The 

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 

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39Supplemental 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 32.4 percent of all transactions in the 

AEC contract. 

40See 73 FR 75888, 75893 (Dec. 12, 2008). 

41 44 U.S.C. 3507(d). 

42 7 U.S.C. 19(a). 

43 5 U.S.C. 601 et seq. 44 66 FR 42256, 42268 (Aug. 10, 2001). 

executed on ICE’s electronic trading 

platform.39 The Commission 

acknowledges that the open interest 

information it cites above 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. 

ii. Conclusion Regarding Material 

Liquidity 

Based on the above, the Commission 

concludes that the AEC contract meets 

the material liquidity criterion in that 

there is sufficient trading activity in the 

AEC 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). 

4. Overall Conclusion 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the AEC 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 AEC contract does 

not meet the price linkage criterion at 

this time, the Commission has 

determined that the AEC contract does 

meet both the material liquidity and 

material price reference criteria. 

Accordingly, the Commission will issue 

the attached Order declaring that the 

AEC 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 AEC contract,40 and 

triggers the obligations, requirements— 

both procedural and substantive—and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs. 

IV. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 41 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 42 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’’) 43 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.44 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. 

V. Order 

a. Order Relating to the ICE AECO 

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: 

The Commission, pursuant to its 

authority under section 2(h)(7) of the 

Act, hereby determines that the AECO 

Financial Basis contract, traded on the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the AECO 

Financial Basis contract, the nine core 

principles established by new section 

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45 7 U.S.C. 1a(29). 

46Because 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 54550 (October 22, 2009). 

2The acronym ‘‘NWP’’ indicates the Northwest 

Pipeline. 

3 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

4 7 U.S.C. 1a(29). 

5 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

6Pub. 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). 

7For 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. 

2(h)(7)(C). Additionally, 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., shall be 

and is considered a registered entity 45

with respect to the AECO 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.46

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10299 Filed 5–3–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the NWP Rockies 

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 22, 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 

NWP 2 Rockies Financial Basis (‘‘NWR’’) 

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 NWR 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. 

E-mail: gprice@cftc.gov; Christa 

Lachenmayr, Economist, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5252. E-mail: 

clachenmayr@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’’) 3

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.4 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.5 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.6 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4).7

II. Notice of Intent To Undertake SPDC 

Determination 

On October 22, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

mstockstill on DSKH9S0YB1PROD with NOTICES