```

[Federal Register: July 21, 2010 (Volume 75, Number 139)]
[Notices]               
[Page 42380-42390]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jy10-38]                         

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COMMODITY FUTURES TRADING COMMISSION

 
Orders Finding That the SP-15 Financial Day-Ahead LMP Peak 
Contract and SP-15 Financial Day-Ahead LMP Off-Peak Contract Offered 
for Trading on the IntercontinentalExchange, Inc., Perform a 
Significant Price Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

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SUMMARY: On October 6, 2009, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment in the Federal 
Register \1\ a notice of its intent to

[[Page 42381]]

undertake a determination whether the SP-15 \2\ Financial Day-Ahead LMP 
Peak (``SPM'') contract and SP-15 Financial Day-Ahead LMP Off-Peak 
(``OFP'') 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 
SPM and OFP contracts perform a significant price discovery function. 
Authority for this action is found in section 2(h)(7) of the CEA and 
Commission rule 36.3(c) promulgated thereunder.
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    \1\ 74 FR 51264 (October 6, 2009).
    \2\ The acronym ``SP'' stands for ``South Path.''
    \3\ The Federal Register notice also requested comment on the 
SP-15 Financial Day-Ahead LMP Peak Daily (``SDP'') contract; SP-15 
Financial Day-Ahead LMP Off-Peak Daily (``SQP'') contract; SP-15 
Financial Swap Real Time LMP-Peak Daily (``SRP'') contract; NP-15 
Financial Day-Ahead LMP Peak Daily (``DPN'') contract and NP-15 
Financial Day-Ahead LMP Off-Peak Daily (``UNP'') contract; these 
contracts will be addressed in a separate Federal Register release.

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DATES: Effective Date: July 9, 2010.

FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist, 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5515. E-mail: gprice@cftc.gov; or Susan Nathan, 
Senior Special Counsel, Division of Market Oversight, same address. 
Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \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).
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    \4\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 
2008).
    \5\ 7 U.S.C. 1a(29).
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    On March 16, 2009, the CFTC promulgated final rules implementing 
the provisions of the Reauthorization Act.\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.
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    \6\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.
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    Commission rule 36.3(c)(3) established the procedures by which the 
Commission makes and announces its determination whether a particular 
ECM contract serves a significant price discovery function. Under those 
procedures, the Commission will publish notice in the Federal Register 
that it intends to undertake an evaluation whether the specified 
agreement, contract or transaction performs a significant price 
discovery function and to receive written views, data and arguments 
relevant to its determination from the ECM and other interested 
persons. Upon the close of the comment period, the Commission will 
consider, among other things, all relevant information regarding the 
subject contract and issue an order announcing and explaining its 
determination whether or not the contract is a SPDC. The issuance of an 
affirmative order signals the effectiveness of the Commission's 
regulatory authorities over an ECM with respect to a SPDC; at that time 
such an ECM becomes subject to all provisions of the CEA applicable to 
registered entities.\7\ The issuance of such an order also triggers the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4).\8\
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    \7\ Public Law 110-246 at 13203; Joint Explanatory Statement of 
the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d 
Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888, 
75894 (Dec. 12, 2008).
    \8\ For an initial SPDC, ECMs have a grace period of 90 calendar 
days from the issuance of a SPDC determination order to submit a 
written demonstration of compliance with the applicable core 
principles. For subsequent SPDCs, ECMs have a grace period of 30 
calendar days to demonstrate core principle compliance.
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II. Notice of Intent To Undertake SPDC Determination

    On October 6, 2009, the Commission published in the Federal 
Register notice of its intent to undertake a determination whether the 
SPM and OFP 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''), 
Electric Power Supply Association (``EPSA''), Financial Institutions 
Energy Group (``FIEG''), Working Group of Commercial Energy Firms 
(``WGCEF''), ICE, California Public Utilities Commission (``CPUC''), 
Edison Electric Institute (``EEI''), Western Power Trading Forum 
(``WPTF'') and Public Utility Commission of Texas (``PUCT'').\11\ The 
comment letters from

[[Page 42382]]

FERC \12\ and PUCT did not directly address the issue of whether or not 
the subject contracts are SPDCs. CPUC stated that the subject contracts 
are SPDCs but did not provide reasons for how the contracts meet the 
criteria for SPDC determination. The remaining comment letters raised 
substantive issues with respect to the applicability of section 2(h)(7) 
to the subject contracts and generally expressed the opinion that the 
contracts are not SPDCs because they do not meet the material price 
reference or material liquidity criteria for SPDC determination. These 
comments are more extensively discussed below, as applicable.
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    \9\ As noted above, the Federal Register notice also requested 
comment on the SP-15 Financial Day-Ahead LMP Peak Daily (``SDP'') 
contract; SP-15 Financial Day-Ahead LMP Off-Peak Daily (``SQP'') 
contract; SP-15 Financial Swap Real Time LMP-Peak Daily (``SRP'') 
contract; NP-15 Financial Day-Ahead LMP Peak Daily (``DPN'') 
contract and NP-15 Financial Day-Ahead LMP Off-Peak Daily (``UNP'') 
contract. These contracts will be addressed in a separate Federal 
Register release.
    \10\ The Commission's Part 36 rules establish, among other 
things, procedures by which the Commission makes and announces its 
determination whether a specific ECM contract serves a significant 
price discovery function. Under those procedures, the Commission 
publishes a notice in the Federal Register that it intends to 
undertake a determination whether a specified agreement, contract or 
transaction performs a significant price discovery function and to 
receive written data, views and arguments relevant to its 
determination from the ECM and other interested persons.
    \11\ FERC is an independent federal regulatory agency that, 
among other things, regulates the interstate transmission of natural 
gas, oil and electricity. EPSA describes itself as the ``national 
trade association representing competitive power suppliers, 
including generators and marketers.'' FIEG describes itself as an 
association of investment and commercial banks who are active 
participants in various sectors of the natural gas markets, 
``including acting as marketers, lenders, underwriters of debt and 
equity securities, and proprietary investors.'' 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. CPUC is a 
``constitutionally established agency charged with the 
responsibility for regulating electric corporations within the State 
of California.'' EEI is the ``association of shareholder-owned 
electric companies, international affiliates and industry associates 
worldwide.'' 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 Web site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-012.html.
    \12\ FERC 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.''
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III. Section 2(h)(7) of the CEA

    The Commission is directed by section 2(h)(7) of the CEA to 
consider the following criteria in determining a contract's significant 
price discovery function:
     Price Linkage -- the extent to which the agreement, 
contract or transaction uses or otherwise relies on a daily or final 
settlement price, or other major price parameter, of a contract or 
contracts listed for trading on or subject to the rules of a designated 
contract market (``DCM'') or derivatives transaction execution facility 
(``DTEF''), or a SPDC traded on an electronic trading facility, to 
value a position, transfer or convert a position, cash or financially 
settle a position, or close out a position.
     Arbitrage--the extent to which the price for the 
agreement, contract or transaction is sufficiently related to the price 
of a contract or contracts listed for trading on or subject to the 
rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of 
an electronic trading facility, so as to permit market participants to 
effectively arbitrage between the markets by simultaneously maintaining 
positions or executing trades in the contracts on a frequent and 
recurring basis.
     Material price reference--the extent to which, on a 
frequent and recurring basis, bids, offers or transactions in a 
commodity are directly based on, or are determined by referencing or 
consulting, the prices generated by agreements, contracts or 
transactions being traded or executed on the electronic trading 
facility.
     Material liquidity--the extent to which the volume of 
agreements, contracts or transactions in a commodity being traded on 
the electronic trading facility is sufficient to have a material effect 
on other agreements, contracts or transactions 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 the extent to which, on a frequent 
and recurring basis, bids, offers or transactions are directly based 
on, or are determined by referencing, the prices established for the 
contract.
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    \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 SPM 
and OFP 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.
    \14\ 17 CFR 36, Appendix A.
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IV. Findings and Conclusions

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

a. The SP-15 Financial Day-Ahead LMP Peak (SPM) Contract and the SPDC 
Indicia

    The SPM contract is cash settled based on the arithmetic average of 
peak-hour, day-ahead locational marginal prices (``LMPs'') \15\ posted 
by the California ISO \16\ (``CAISO'') for the SP-15 Existing Zone 
Generation (``EZ Gen'') hub for all peak hours during the contract 
month. The LMPs are derived from power trades that result in physical 
delivery. The size of the SPM contract is 400 megawatt hours (``MWh''), 
and the SPM contract is listed for up to 110 calendar months.
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    \15\ An LMP represents the additional cost associated with 
producing an incremental amount of electricity. LMPs account for 
generation costs, congestion along the transmission lines, and 
electricity loss.
    \16\ The acronym ``ISO'' signifies ``Independent System 
Operator,'' which is an entity that coordinates electricity 
generation and transmission, as well as grid reliability, throughout 
its service area.
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    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various point along the electrical grid. An LMP 
associated with a specific hour is derived as a volume-weighted average 
price of all of the transactions where electricity is to be supplied 
and consumed during that hour.
    Electricity is traded in a day-ahead market as well as a real-time 
market. Typically, the bulk of 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

[[Page 42383]]

quotes offered in advance. Because the power quotes are dependent on 
estimates of supply and demand, electricity needs usually are not 
perfectly satisfied in the day-ahead market. In this regard, on the day 
the electricity is transmitted and used, auction participants typically 
realize that they bought or sold either too much power or too little 
power. A real-time auction is operated to alleviate this problem by 
serving as a balancing mechanism. Specifically, electricity traders use 
the real-time market to sell excess electricity and buy additional 
power to meet demand. Only a relatively small amount of electricity is 
traded in the real-time market as compared to the day-ahead market.
    Path 15 is an 84-mile portion of the north-south power transmission 
corridor in California, forming part of the Pacific AC Intertie and the 
California-Oregon Transmission Project.\17\ Path 15, along with the 
Pacific DC Intertie running far to the east, completes an important 
transmission interconnection between the hydroelectric plants to the 
north and the fossil fuel plants to the south. Path 15 currently 
consists of three lines at 500 kilovolts (``kV'') and four lines at 230 
kV.\18\ The 500 kV lines connect Los Banos to Gates (two lines) and Los 
Banos to Midway (one line); all four 230 kV lines have Gates at one end 
with the other ends terminating at the Panoche 1, Panoche 
2, Gregg, or McCall substations. ``NP-15'' refers to the 
northern half of Path 15; conversely, ``SP-15'' refers to the lower 
half of Path 15.
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    \17\ The Pacific Intertie comprises three alternating current 
(``AC'') lines and one direct current (``DC'') line. Together, these 
lines comprise the largest single electricity transmission program 
in the United States. The northern end of the DC line is at the 
Bonneville Power Administration's Celilo Converter Station, which is 
just south of The Dalles Dam about 90 miles east of Portland. The 
southern end is 846 miles away at the Sylmar Converter Station on 
the northern outskirts of Los Angeles. That station is operated by 
utilities including the Los Angeles Department of Water and Power 
(``LADWP'') and Southern California Edison. The AC lines follow 
generally the same path but terminate in Northern California. Only a 
few parties actually own the Intertie, but numerous entities have 
contracts to share its transmission capacity. The California-
California border is a dividing line for Intertie ownership and 
capacity sharing. Depending on seasonal conditions, the Intertie is 
capable of transmitting up to 7,900 MW--4,800 MW of AC power (1,600 
MW of this amount is in the California-Oregon Transmission Project, 
also known as the ``Third AC Line'') and 3,100 MW of DC power. Over 
the past five years, the limit has ranged between about 6,300 MW and 
7,900 MW. Most of the power transmitted on the Intertie is surplus 
to regional needs, but some firm power also is transmitted. See 
http://www.nwcouncil.org/LIBRARY/2001/2001-11.pdf.
    \18\ The third 500 kV line was installed between 2003 and 2004 
in order to relieve constraints on the existing north-south 
transmission lines. This capacity constraint contributed to the 
California energy crisis in 2000 and 2001. See http://www.wapa.gov/sn/ops/transmission/path15/factSheet.pdf.
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    When the weather is hot in California and the Desert Southwest, it 
is comparatively cool in the Pacific Northwest. Conversely, when the 
weather is cold in the Pacific Northwest it is comparatively warm in 
California and the Desert Southwest. Consumers on the West Coast take 
advantage of seasonal weather differences to share large amounts of 
power between the Desert Southwest and the Pacific Northwest. In the 
spring and summer, when generators (mostly hydroelectric plants) 
generally have surplus power in the Northwest and temperatures climb in 
the Southwest, power is shipped south to help meet increasing power 
demand, particularly for air conditioning. Conversely in the winter, 
when generators in the Southwest generally have surplus power and 
temperatures drop in the Northwest, power is shipped north to meet 
increasing electricity demand, particularly for heating.
    CAISO is charged with operating the high-voltage grid in 
California. Because CAISO's service area is basically the entire state 
of California, it is responsible for serving millions of businesses and 
households, particularly in the Los Angeles and San Francisco areas. 
CAISO's current mission is to ensure the efficient and reliable 
operation of the power grid, provide fair and open transmission access, 
promote environmental stewardship, facilitate effective markets, 
promote infrastructure development and support the timely and accurate 
dissemination of information. CAISO is responsible for operating the 
hourly auctions in which the power is traded, and CAISO publishes LMP 
data on its Web site.
1. Material Price Reference Criterion
    The Commission's October 6, 2009, Federal Register notice 
identified the SPM contract as a potential SPDC based on the material 
price reference and material liquidity statutory criteria. The 
Commission considered the fact that ICE sells its price data to market 
participants in a number of different packages which vary in terms of 
the hubs covered, time periods, and whether the data are daily only or 
historical. For example, ICE offers the ``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 SPM 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 SPM contract, while not mentioned by name in the ECM Study, 
warranted further review.
    The Commission explains in its Guidance to the statutory criteria 
that in evaluating a contract under the material price reference 
criterion, it will rely on one of two sources of evidence--direct or 
indirect--to determine that the price of a contract was being used as a 
material price reference and therefore, serving a significant price 
discovery function.\19\ With respect to direct evidence, the Commission 
will consider the extent to which, on a frequent and recurring basis, 
cash market bids, offers or transactions are directly based on or 
quoted at a differential to, the prices generated on the ECM in 
question. Direct evidence may be established when cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract in question. Cash 
market prices are set explicitly at a differential to the section 
2(h)(3) contract when, for instance, they are quoted in dollars and 
cents above or below the reference contract's price. Cash market prices 
are set implicitly at a differential to a section 2(h)(3) contract 
when, for instance, they are arrived at after adding to, or subtracting 
from the section 2(h)(3) contract, but then quoted or reported at a 
flat price. With respect to indirect evidence, the Commission will 
consider the extent to which the price of the contract in question is 
being routinely disseminated in widely distributed industry 
publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry participants in pricing cash market transactions.
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    \19\ 17 CFR 36, Appendix A.
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    The SP-15 power market is a major pricing center for electricity on 
the West Coast. Traders, including producers, keep abreast of the 
electricity prices in the SP-15 power market when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of power at the SP-15 hub when entering 
into cash market transactions for electricity, especially those trades 
providing for physical delivery in the

[[Page 42384]]

future. Traders use the ICE SPM contract, as well as other ICE power 
contracts, to hedge cash market positions and transactions--activities 
which enhance the SPM contract's price discovery utility. The 
substantial volume of trading and open interest in the SPM contract 
appears to attest to its use for this purpose. While the SPM 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.\20\ As a result, the 
SPM contract satisfies the direct price reference test.
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    \20\ In addition to referencing ICE prices, firms participating 
in the SP-15 power market may rely on other cash market quotes as 
well as industry publications and price indices that are published 
by third-party price reporting firms in entering into power 
transactions.
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    The fact that ICE's SPM monthly contract is used more widely as a 
source of pricing information rather than the daily contract (i.e., the 
SDP contract) \21\ bolsters the argument that it serves as a direct 
price reference. In this regard, the SPM contract prices power at the 
SP-15 hub up to almost five years into the future. Thus, market 
participants can use the SPM contract to lock-in electricity prices far 
into the future. Traders use monthly power contracts like the SPM 
contract to price future electric power commitments, where such 
commitments are based on long range forecasts of power supply and 
demand. In contrast, the SDP contract is listed for a much shorter 
length of time--up to 75 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 SDP contract.
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    \21\ The SDP contract is cash settled based on the arithmetic 
average of peak-hour, day-ahead LMPs posted by CAISO for the SP-15 
EZ Gen hub for all peak hours on the day prior to generation. The 
LMPs are derived from power trades that result in physical delivery. 
The size of the SDP contract is 400 MWh, and the SDP contract is 
listed for 75 consecutive calendar days.
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    The Commission notes that SP-15 is a major trading point for 
electricity, and the SPM contract's prices are well regarded in the 
industry as indicative of the value of power at the SP-15 hub. 
Accordingly, the Commission believes that it is reasonable to conclude 
that market participants purchase the data packages that include the 
SPM contract's prices in substantial part because the SPM contract's 
prices have particular value to them. Moreover, such prices are 
consulted on a frequent and recurring basis by industry participants in 
pricing cash market transactions. In these circumstances, the SPM 
contract meets the indirect price reference test.
    i. Federal Register Comments:
    WGCEF, EPSA, WPTF, FIEG, EEI and ICE stated that no other contract 
directly references or settles to the SPM contract's price. Moreover, 
the commenters argued that the underlying cash price series against 
which the SPM contract is settled (in this case, the average day-ahead 
peak-hour SP-15 electricity prices over the contract month, which is 
derived from cash market transactions) is the authentic reference price 
and not the ICE contract itself. The Commission believes that this 
interpretation of price reference is too narrow and believes that a 
cash-settled derivatives contract could meet the price reference 
criterion if market participants ``consult on a frequent and recurring 
basis'' the derivatives contract when pricing forward, fixed-price 
commitments or other cash-settled derivatives that seek to ``lock in''a 
fixed price for some future point in time to hedge against adverse 
price movements.
    As noted above, the SP-15 hub is a major trading center for 
electricity in the western United States. Traders, including producers, 
keep abreast of the prices of the SPM contract when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of electricity at the SP-15 hub when 
entering into cash market transaction for power, especially those 
trades that provide for physical delivery in the future. Traders use 
the ICE SPM contract to hedge cash market positions and transactions, 
which enhances the SPM contract's price discovery utility. While the 
SPM 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 and EPSA stated that the publication of price 
data for the SPM contract price is weak justification for material 
price reference. Market participants generally do not purchase ICE data 
sets for one contract's prices, such as those for the SPM contract. 
Instead, traders are interested in the settlement prices, so the fact 
that ICE sells the SPM prices as part of a broad package is not 
conclusive evidence that market participants are buying the ICE data 
sets because they find the SPM prices have substantial value to them. 
As noted above, the Commission notes that publication of the SPM 
contract's prices is indirect evidence of routine dissemination. The 
SPM 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 
SPM contract's prices and consult such prices on a frequent and 
recurring basis in pricing cash market transactions.
    Lastly, EEI argued that the ECM Study did not specifically identify 
the SPM contract as a contract that is referred to by market 
participants on a frequent and recurring basis. In response, the 
Commission notes that it cited the ECM Study's general finding that 
some ICE electricity contracts appear to be regarded as price discovery 
markets merely as indication that an investigation of certain ICE 
contracts may be warranted. The ECM Study was not intended to serve as 
the sole basis for determining whether or not a particular contract 
meets the material price reference criterion.
    ii. Conclusion Regarding Material Price Reference:
    The Commission finds that the ICE SPM 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 SPM contract's price (direct evidence). Moreover, 
the SPM contract's price data are sold to market participants, and 
those individuals likely purchase the ICE data packages specifically 
for the SPM 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 the SPM contract as a potential SPDC based on 
the material price reference and material liquidity criteria. To assess 
whether a contract meets the material liquidity criterion, the 
Commission first examines trading activity as a general measurement of 
the contract's size and potential importance. If the Commission finds 
that the contract in question meets a threshold of trading activity 
that would render it of potential importance, the Commission will then 
perform a statistical analysis to measure the effect that changes to 
the subject-contract's prices potentially may have on prices for other 
contracts listed on an ECM or a DCM.
    The total number of transactions executed on ICE's electronic 
platform in the SPM contract was 3,235 in the second quarter of 2009, 
resulting in a daily average of 50.5 trades. During the same period, 
the SPM contract had a

[[Page 42385]]

total trading volume of 143,717 contracts and an average daily trading 
volume of 2,245.6 contracts. Moreover, open interest as of June 30, 
2009, was 460,583 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.\22\
---------------------------------------------------------------------------

    \22\ 74 FR 51264 (October 6, 2009).
---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 311,819 
contracts (or 4,797.2 contracts on a daily basis). In terms of number 
of transactions, 6,199 trades occurred in the fourth quarter of 2009 
(95.4 trades per day). As of December 31, 2009, open interest in the 
SPM contract was 622,503 contracts, which included trades executed on 
ICE's electronic trading platform, as well as trades executed off of 
ICE's electronic trading platform and then brought to ICE for clearing.
    The number of trades per day was substantial between the second and 
fourth quarters of 2009. In addition, trading activity in the SPM 
contract, as characterized by total quarterly volume, indicates that 
the SPM contract experiences trading activity that is greater than that 
of thinly-traded futures markets.\23\ Thus, it is reasonable to infer 
that the SPM contract could have a material effect on other ECM 
contracts or on DCM contracts.
---------------------------------------------------------------------------

    \23\ Staff has advised the Commission that in its experience, a 
thinly-traded contract is, generally, one that has a quarterly 
trading volume of 100,000 contracts or less. In this regard, in the 
third quarter of 2009, physical commodity futures contracts with 
trading volume of 100,000 contracts or fewer constituted less than 
one percent of total trading volume of all physical commodity 
futures contracts.
---------------------------------------------------------------------------

    To measure the effect that the SPM contract potentially could have 
on another ECM contract staff performed a statistical analysis \24\ 
using daily settlement prices (between July 1, 2008 and December 31, 
2009) for the ICE SPM and OFP contracts. The simulation suggest that, 
on average over the sample period, a one percent rise in the SPM 
contract's price elicited a 0.7 percent increase in ICE OFP contract's 
price.
---------------------------------------------------------------------------

    \24\ Specifically, Commission staff econometrically estimated a 
cointegrated vector autoregression (CVAR) model using daily 
settlement prices. CVAR methods permit a dichotomization of the data 
relationships into long run equilibrium components (called the 
cointegration space or cointegrating relationships) and a short run 
component. A CVAR model was chosen over the more traditional vector 
autoregression model in levels because the statistical properties of 
the data (lack of stationarity and ergodicity) precluded the more 
traditional modeling treatment. Moreover, the statistical properties 
of the data necessitated the modeling of the contracts' prices as a 
CVAR model containing both first differences (to handle 
stationarity) and an error-correction term to capture long run 
equilibrium relationships. The prices were treated as a single 
reduced-form model in order to test hypothesis that power prices in 
the same market affect each other. The prices of ICE's SPM and OFP 
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 SPM 
contract's price elicited a 0.7 percent rise in OFP contract's 
price.
---------------------------------------------------------------------------

    i. Federal Register Comments:
    ICE and WGCEF stated that the SPM contract lacks a sufficient 
number of trades to meet the material liquidity criterion. These two 
commenters, along with WPTF, EPSA, FIEG and EEI argued that the SPM 
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 SPM 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 SPM contract's price. Instead, the DCM contracts and the 
SPM contract are both cash settled based on physical transactions, 
which neither the ECM or the DCM contracts can influence. The 
Commission's statistical analysis shows that changes in the ICE SPM 
contract's price significantly influences the prices of other ECM 
contracts (namely, the OFP 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 SPM 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.'' \25\
---------------------------------------------------------------------------

    \25\ Guidance, supra.
---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade 
per day test for material liquidity.'' To the contrary, the Commission 
adopted a five trades-per-day threshold as a reporting requirement to 
enable it to ``independently be aware of ECM contracts that may develop 
into SPDCs'' \26\ 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.
---------------------------------------------------------------------------

    \26\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE argued that the statistics provided by ICE were misinterpreted 
and misapplied by the Commission. In particular, ICE stated that the 
volume figures used in the Commission's analysis (cited above) 
``include trades made in all months'' as well as in strips of contract 
months. ICE suggested that a more appropriate method of determining 
liquidity is to examine the activity in a single traded month of a 
given contract.'' \27\ It is the Commission's opinion that liquidity, 
as it pertains to the SPM contract, is typically a function of trading 
activity in particular lead months and, given sufficient liquidity in 
such months, the ICE SPM contract itself would be considered liquid. 
ICE's analysis of its own trade data confirms this to be the case for 
the SPM contract, and thus, the Commission believes that it applied the 
statistical data cited above in an appropriate manner for gauging 
material liquidity.
---------------------------------------------------------------------------

    \27\ 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 66 percent of all 
transactions in the SPM contract (as of the fourth quarter of 2009). 
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.
---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity:
    For the reasons discussed above, the Commission finds that the SPM 
satisfies the material liquidity criterion. Specifically, there is 
sufficient trading activity in the SPM 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[hellip]or an electronic trading facility operating in reliance 
on the exemption in section 2(h)(3) of the Act.''

[[Page 42386]]

3. Overall Conclusion Regarding the SPM Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the ICE SPM 
contract performs a significant price discovery function under two of 
the four criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the SPM contract meets 
the material price reference and material liquidity criteria at this 
time. Accordingly, the Commission is issuing the attached Order 
declaring that the SPM 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 SPM contract,\28\ and triggers the obligations, 
requirements--both procedural and substantive--and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs.
---------------------------------------------------------------------------

    \28\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

b. The SP-15 Financial Day-Ahead LMP Off-Peak (OFP) Contract and the 
SPDC Indicia

    The OFP contract is cash settled based on the arithmetic average of 
off-peak hour, day-ahead LMPs posted by CAISO for the SP-15 EZ Gen hub 
for all peak hours during the contract month. The LMPs are derived from 
power trades that result in physical delivery. The size of the OFP 
contract is 25 MWh, and the SPM contract is listed for up to 86 
calendar months.
    In general, electricity is bought and sold in an auction setting on 
an hourly basis at various points along the electrical grid. An LMP 
associated with a specific hour is derived as a volume-weighted average 
price of all of the transactions where electricity is to be supplied 
and consumed during that hour.
    Electricity is traded in a day-ahead market as well as a real-time 
market. Typically, the bulk of 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 power quotes are 
dependent on estimates of supply and demand, electricity needs usually 
are not perfectly satisfied in the day-ahead market. Consequently, on 
the day the electricity is transmitted and used, auction participants 
typically realize that they bought or sold either too much power or too 
little power. A real-time auction is operated to alleviate this problem 
by serving as a balancing mechanism. Specifically, electricity traders 
use the real-time market to sell excess electricity and buy additional 
power to meet demand. Only a relatively small amount of electricity is 
traded in the real-time market as compared to the day-ahead market.
    Path 15 is an 84-mile portion of the north-south power transmission 
corridor in California, forming part of the Pacific AC Intertie and the 
California-Oregon Transmission Project.\29\ Path 15, along with the 
Pacific DC Intertie running far to the east, completes an important 
transmission interconnection between the hydroelectric plants to the 
north and the fossil fuel plants to the south. Path 15 currently 
consists of three lines at 500 kilovolts (``kV'') and four lines at 230 
kV.\30\ The 500 kV lines connect Los Banos to Gates (two lines) and Los 
Banos to Midway (one line); all four 230 kV lines have Gates at one end 
with the other ends terminating at the Panoche 1, Panoche 
2, Gregg, or McCall substations. ``NP-15'' refers to the 
northern half of Path 15; conversely, ``SP-15'' refers to the lower 
half of Path 15.
---------------------------------------------------------------------------

    \29\ The Pacific Intertie comprises three alternating current AC 
lines and one direct current DC line. Together, these lines comprise 
the largest single electricity transmission program in the United 
States. The northern end of the DC line is at the Bonneville Power 
Administration's Celilo Converter Station, which is just south of 
The Dalles Dam about 90 miles east of Portland. The southern end is 
846 miles away at the Sylmar Converter Station on the northern 
outskirts of Los Angeles. That station is operated by utilities 
including LADWP and Southern California Edison. The AC lines follow 
generally the same path but terminate in Northern California. Only a 
few parties actually own the Intertie, but numerous entities have 
contracts to share its transmission capacity. The California-Oregon 
border is a dividing line for Intertie ownership and capacity 
sharing. Depending on seasonal conditions, the Intertie is capable 
of transmitting up to 7,900 MW-4,800 MW of AC power (1,600 MW of 
this amount is in the California-Oregon Transmission Project, also 
known as the Third AC Line) and 3,100 MW of DC power. Over the past 
five years, the limit has ranged between about 6,300 MW and 7,900 
MW. Most of the power transmitted on the Intertie is surplus to 
regional needs, but some firm power also is transmitted. See http://www.nwcouncil.org/LIBRARY/2001/2001-11.pdf.
    \30\ The third 500 kV line was installed between 2003 and 2004 
in order to relieve constraints on the existing north-south 
transmission lines. This capacity constraint contributed to the 
California energy crisis in 2000 and 2001. See http://www.wapa.gov/sn/ops/transmission/path15/factSheet.pdf.
---------------------------------------------------------------------------

    When the weather is hot in California and the Desert Southwest, it 
is comparatively cool in the Pacific Northwest. Conversely, when the 
weather is cold in the Pacific Northwest it is comparatively warm in 
California and the Desert Southwest. Consumers on the West Coast take 
advantage of seasonal weather differences to share large amounts of 
power between the Desert Southwest and the Pacific Northwest. In the 
spring and summer, when generators (mostly hydroelectric plants) 
generally have surplus power in the Northwest and temperatures climb in 
the Southwest, power is shipped south to help meet increasing power 
demand, particularly for air conditioning. Conversely in the winter, 
when generators in the Southwest generally have surplus power and 
temperatures drop in the Northwest, power is shipped north to meet 
increasing electricity demand, particularly for heating.
    CAISO is charged with operating the high-voltage grid in 
California. Because CAISO's service area is basically the entire state 
of California, it is responsible for serving millions of businesses and 
households, particularly in the Los Angeles and San Francisco areas. 
CAISO's current mission is to ensure the efficient and reliable 
operation of the power grid, provide fair and open transmission access, 
promote environmental stewardship, facilitate effective markets, 
promote infrastructure development and support the timely and accurate 
dissemination of information. CAISO is also responsible for operating 
the hourly auctions in which the power is traded and publishing the LMP 
data on its Web site.
1. Material Price Reference Criterion
    The Commission's October 6, 2009, Federal Register notice 
identified the OFP contract as a potential SPDC based on the material 
price reference and material liquidity criteria. The Commission 
considered the fact that ICE sells its price data to market 
participants in a number of different packages which vary in terms of 
the hubs covered, time periods, and whether the data are daily only or 
historical. For example, ICE offers the ``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 OFP 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 OFP contract, while not mentioned by name in the 
ECM Study, warranted further review.

[[Page 42387]]

    The Commission explains in its Guidance to the statutory criteria 
that in evaluating a contract under the material price reference 
criterion, it will rely on one of two sources of evidence--direct or 
indirect--to determine that the price of a contract was being used as a 
material price reference and therefore, serving a significant price 
discovery function.\31\ 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.
---------------------------------------------------------------------------

    \31\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------

    The SP-15 power market is a major pricing center for electricity on 
the West Coast. Traders, including producers, keep abreast of the 
electricity prices in the SP-15 power market when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of power at the SP-15 hub when entering 
into cash market transaction for electricity, especially those trades 
providing for physical delivery in the future. Traders use the OFP 
contract, as well as other ICE power contracts, to hedge cash market 
positions and transactions--activities which enhance the OFP contract's 
price discovery utility. The substantial volume of trading and open 
interest in the OFP contract appear to attest to its use for this 
purpose. While the OFP 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.\32\ In these circumastances, the OFP contract satisfies 
the direct price reference test.
---------------------------------------------------------------------------

    \32\ In addition to referencing ICE prices, firms participating 
in the SP-15 power market may rely on other cash market quotes as 
well as industry publications and price indices that are published 
by third-party price reporting firms in entering into power 
transactions.
---------------------------------------------------------------------------

    The fact that ICE's OFP monthly contract is used more widely as a 
source of pricing information rather than the daily contract (i.e., the 
SQP contract) \33\ is further evidence of direct price reference. In 
this regard, OFP contract prices power at the SP-15 hub up to six years 
into the future. Thus, market participants can use the OFP contract to 
lock-in electricity prices far into the future. Traders use monthly 
power contracts like the OFP contract to price future power electricity 
commitments, where such commitments are based on long range forecasts 
of power supply and demand. In contrast, the SQP 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 SQP 
contract.
---------------------------------------------------------------------------

    \33\ The SDP contract is cash settled based on the arithmetic 
average of peak-hour, day-ahead LMPs posted by CAISO for the SP-15 
EZ Gen hub for all peak hours on the day prior to generation. The 
LMPs are derived from power trades that result in physical delivery. 
The size of the SDP contract is 400 MWh, and the SDP contract is 
listed for 75 consecutive calendar days.
---------------------------------------------------------------------------

    The Commission notes that SP-15 is a major trading point for 
electricity, and the OFP contract's prices are well regarded in the 
industry as indicative of the value of power at the SP-15 hub. 
Accordingly, the Commission believes that it is reasonable to conclude 
that market participants purchase the data packages that include the 
OFP contract's prices in substantial part because the SPM contract's 
prices have particular value to them. Moreover, such prices are 
consulted on a frequent and recurring basis by industry participants in 
pricing cash market transactions. In light of the above, the OFP 
contract satisfies the indirect price reference test.
    i. Federal Register Comments:
    WGCEF, EPSA, WPTF, FIEG, EEI and ICE stated that no other contract 
directly references or settles to the OFP contract's price. Moreover, 
the commenters argued that the underlying cash price series against 
which the SPM contract is settled (in this case, the average day-ahead 
peak-hour SP-15 electricity prices over the contract month, which is 
derived from cash market transactions) is the authentic reference price 
and not the ICE contract itself. The Commission believes that this 
interpretation of price reference is too narrow and believes that a 
cash-settled derivatives contract could meet the price reference 
criterion if market participants ``consult on a frequent and recurring 
basis'' the derivatives contract when pricing forward, fixed-price 
commitments or other cash-settled derivatives that seek to ``lock in'' 
a fixed price for some future point in time to hedge against adverse 
price movements.
    As noted above, the SP-15 hub is a major trading center for 
electricity in the western United States. Traders, including producers, 
keep abreast of the prices of the OFP contract when conducting cash 
deals. These traders look to a competitively determined price as an 
indication of expected values of electricity at the SP-15 hub when 
entering into cash market transactions for power, especially those 
trades that provide for physical delivery in the future. Traders use 
the ICE OFP contract to hedge cash market positions and transactions, 
which enhances the OFP contract's price discovery utility. While the 
OFP 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 and EPSA stated that the publication of price 
data for the OFP contract price is weak justification for material 
price reference. Market participants generally do not purchase ICE data 
sets for one contract's prices, such as those for the OFP contract. 
Instead, traders are interested in the settlement prices, so the fact 
that ICE sells the OFP prices as part of a broad package is not 
conclusive evidence that market participants are buying the ICE data 
sets because they find the OFP prices have substantial value to them. 
As noted above, the Commission notes that publication of the OFP 
contract's prices is indirect evidence of routine dissemination. The 
OFP contract's prices, while sold as a package, are of particular 
interest to market participants. Thus, the Commission has concluded 
that traders likely purchase the ICE data packages specifically for the 
OFP contract's prices and consult such prices on a frequent and 
recurring basis in pricing cash market transactions.
    Lastly, EEI argued that the ECM Study did not specifically identify 
the OFP contract as a contract that is referred to by market 
participants on a frequent and recurring basis. The Commission notes

[[Page 42388]]

that it cited the ECM Study's general finding that some ICE electricity 
contracts appear to be regarded as price discovery markets merely as 
indication that an investigation of certain ICE contracts may be 
warranted. The ECM Study was not intended to serve as the sole basis 
for determining whether or not a particular contract meets the material 
price reference criterion.
    ii. Conclusion Regarding Material Price Reference:
    The Commission finds that the ICE OFP 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 OFP contract's price (direct evidence). Moreover, 
the OFP contract's price data are sold to market participants, and 
those individuals likely purchase the ICE data packages specifically 
for the OFP 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 the OFP contract as a potential SPDC based on 
the material price reference and material liquidity criteria. To assess 
whether a contract meets the material liquidity criterion, the 
Commission first examines trading activity as a general measurement of 
the contract's size and potential importance. If the Commission finds 
that the contract in question meets a threshold of trading activity 
that would render it of potential importance, the Commission will then 
perform a statistical analysis to measure the effect that changes to 
the subject-contract's prices potentially may have on prices for other 
contracts listed on an ECM or a DCM.
    The total number of transactions executed on ICE's electronic 
platform in the OFP contract was 187 in the second quarter of 2009, 
resulting in a daily average of 2.9 trades. During the same period, the 
OFP contract had a total trading volume of 116,559 contracts and an 
average daily trading volume of 1,793.2 contracts. Moreover, open 
interest as of June 30, 2009, was 1,408,870 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.\34\
---------------------------------------------------------------------------

    \34\ 74 FR 51264 (October 6, 2009).
---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that 
total trading volume in the fourth quarter of 2009 was 406,418 
contracts (or 6,252.6 contracts on a daily basis). In terms of number 
of transactions, 329 trades occurred in the fourth quarter of 2009 (5.1 
trades per day). As of December 31, 2009, open interest in the OFP 
contract was 2,009,556 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 during the period between the second 
and fourth quarters of 2009 was not substantial. However, trading 
activity in the OFP contract, as characterized by total quarterly 
volume, indicates that the OFP contract experiences trading activity 
that is greater than that of thinly-traded futures markets.\35\ Thus, 
it is reasonable to infer that the OFP contract could have a material 
effect on other ECM contracts or on DCM contracts.
---------------------------------------------------------------------------

    \35\ Staff has advised the Commission that in its experience, a 
thinly-traded contract is, generally, one that has a quarterly 
trading volume of 100,000 contracts or less. In this regard, in the 
third quarter of 2009, physical commodity futures contracts with 
trading volume of 100,000 contracts or fewer constituted less than 
one percent of total trading volume of all physical commodity 
futures contracts.
---------------------------------------------------------------------------

    To measure the effect that the SPM contract potentially could have 
on another ECM contract staff performed a statistical analysis \36\ 
using daily settlement prices (between July 1, 2008 and December 31, 
2009) for the ICE SPM and OFP contracts. The simulation suggest that, 
on average over the sample period, a one percent rise in the OFP 
contract's price elicited a 1.4 percent increase in ICE SPM contract's 
price.
---------------------------------------------------------------------------

    \36\ Specifically, Commission staff econometrically estimated a 
cointegrated vector autoregression (CVAR) model using daily 
settlement prices. CVAR methods permit a dichotomization of the data 
relationships into long run equilibrium components (called the 
cointegration space or cointegrating relationships) and a short run 
component. A CVAR model was chosen over the more traditional vector 
autoregression model in levels because the statistical properties of 
the data (lack of stationarity and ergodicity) precluded the more 
traditional modeling treatment. Moreover, the statistical properties 
of the data necessitated the modeling of the contracts' prices as a 
CVAR model containing both first differences (to handle 
stationarity) and an error-correction term to capture long run 
equilibrium relationships. The prices were treated as a single 
reduced-form model in order to test the hypothesis that power prices 
in the same market affect each other. The prices of ICE's SPM and 
OFP 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 OFP contract's price elicited a 1.4 percent rise in SPM 
contract's price.
---------------------------------------------------------------------------

    i. Federal Register Comments:
    ICE and WGCEF stated that the OFP contract lacks a sufficient 
number of trades to meet the material liquidity criterion. These two 
commenters, along with WPTF, EPSA, FIEG and EEI argued that the OFP 
contract cannot have a material effect on other contracts, such as 
those listed for trading by the NYMEX. The commenters pointed out that 
it is not possible for the OFP 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 OFP contract's price. Instead, 
the DCM contracts and the OFP contract are both cash settled based on 
physical transactions, which neither the ECM or the DCM contracts can 
influence. The Commission's statistical analysis shows that changes in 
the ICE OFP contract's price significantly influences the prices of 
other ECM contracts (namely, the SPM 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 OFP 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.''\37\
---------------------------------------------------------------------------

    \37\ Guidance, supra.
---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade 
per day test for material liquidity.'' To the contrary, the Commission 
adopted a five trades-per-day threshold as a reporting requirement to 
enable it to ``independently be aware of ECM contracts that may develop 
into SPDCs'' \38\ 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.
---------------------------------------------------------------------------

    \38\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    ICE argued that the statistics provided by ICE were misinterpreted 
and misapplied by the Commission. In particular, ICE stated that the 
volume figures used in the Commission's analysis (cited above) 
``include trades

[[Page 42389]]

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.'' 
\39\ It is the Commission's opinion that liquidity, as it pertains to 
the SPM contract, is typically a function of trading activity in 
particular lead months and, given sufficient liquidity in such months, 
the ICE OFP contract itself would be considered liquid. ICE's analysis 
of its own trade data confirms this to be the case for the OFP 
contract, and thus, the Commission believes that it applied the 
statistical data cited above in an appropriate manner for gauging 
material liquidity.
---------------------------------------------------------------------------

    \39\ 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 79 percent of all 
transactions in the OFP contract (as of the fourth quarter of 2009). 
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.
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    ii. Conclusion Regarding Material Liquidity:
    For the reasons discussed above, the Commission finds that the OFP 
meets the material liquidity criterion. Specifically, there is 
sufficient trading activity in the OFP 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 OFP Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the ICE OFP 
contract performs a significant price discovery function under the two 
of the four criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the OFP contract meets 
the material price reference and material liquidity criteria at this 
time. Accordingly, the Commission is issuing the attached Order 
declaring that the OFP 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 OFP contract,\40\ and triggers the obligations, 
requirements--both procedural and substantive--and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs.
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    \40\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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V. 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.
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    \41\ 44 U.S.C. 3507(d).
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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.
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    \42\ 7 U.S.C. 19(a).
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    When a futures contract begins to serve a significant price 
discovery function, that contract, and the ECM on which it is traded, 
warrants increased oversight to deter and prevent price manipulation or 
other disruptions to market integrity, both on the ECM itself and in 
any related futures contracts trading on DCMs. An Order finding that a 
particular contract is a SPDC triggers this increased oversight and 
imposes obligations on the ECM calculated to accomplish this goal. The 
increased oversight engendered by the issue of a SPDC Order increases 
transparency and helps to ensure fair competition among ECMs and DCMs 
trading similar products and competing for the same business. Moreover, 
the ECM on which the SPDC is traded must assume, with respect to that 
contract, all the responsibilities and obligations of a registered 
entity under the CEA and Commission regulations. Additionally, the ECM 
must comply with nine core principles established by section 2(h)(7) of 
the Act--including the obligation to establish position limits and/or 
accountability standards for the SPDC. Section 4(i) of the CEA 
authorize the Commission to require reports for SPDCs listed on ECMs. 
These increased responsibilities, along with the CFTC's increased 
regulatory authority, subject the ECM's risk management practices to 
the Commission's supervision and oversight and generally enhance the 
financial integrity of the markets.

c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \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 these Orders, taken in connection with section 2(h)(7) of the Act 
and the Part 36 rules, will not have a significant impact on a 
substantial number of small entities.
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    \43\ 5 U.S.C. 601 et seq.
    \44\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Orders

a. Order Relating to the SP-15 Financial Day-Ahead LMP 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

[[Page 42390]]

Act, hereby determines that the SP-15 Financial Day-Ahead LMP Peak 
contract, traded on the IntercontinentalExchange, Inc., satisfies the 
material price preference and material liquidity criteria for 
significant price discovery contracts. Consistent with this 
determination, and effective immediately, the IntercontinentalExchange, 
Inc., must comply with, with respect to the SP-15 Financial Day-Ahead 
LMP 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 \45\ with respect to the SP-15 
Financial Day-Ahead LMP Peak contract and is subject to all the 
provisions of the Commodity Exchange Act applicable to registered 
entities.
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    \45\ 7 U.S.C. 1a(29).
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    Further with respect to the SP-15 Financial Day-Ahead LMP Peak 
contract, the obligations, requirements and timetables prescribed in 
Commission rule 36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., commence with the issuance of this 
Order.\46\
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    \46\ Because ICE already lists for trading a contract (i.e., the 
Henry Financial LD1 Fixed Price contract) that was previously 
declared by the Commission to be a SPDC, ICE must submit a written 
demonstration of compliance with the Core Principles within 30 
calendar days of the date of this Order. 17 CFR 36.3(c)(4).
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b. Order Relating to the SP-15 Financial Day-Ahead LMP 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 SP-15 Financial Day-Ahead LMP 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 SP-15 Financial Day-Ahead 
LMP 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 \47\ with respect to the 
SP-15 Financial Day-Ahead LMP Off-Peak contract and is subject to all 
the provisions of the Commodity Exchange Act applicable to registered 
entities.
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    \47\ 7 U.S.C. 1a(29).
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    Further with respect to the SP-15 Financial Day-Ahead LMP Off-Peak 
contract, the obligations, requirements and timetables prescribed in 
Commission rule 36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., commence with the issuance of this 
Order.\48\
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    \48\ Because ICE already lists for trading a contract (i.e., the 
Henry Financial LD1 Fixed Price contract) that was previously 
declared by the Commission to be a SPDC, ICE must submit a written 
demonstration of compliance with the Core Principles within 30 
calendar days of the date of this Order. 17 CFR 36.3(c)(4).

    Issued in Washington, DC, on July 9, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-17747 Filed 7-20-10; 8:45 am]
BILLING CODE 6351-01-P
```