24586 Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 

1 74 FR 52188 (October 9, 2009). 

2 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

No. 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. 

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. 

matters relevant to the work of the 

ITAC); and ensuring that the ITAC is 

balanced in terms of points of view, 

demographics, geography, and entity or 

organization size. 

This notice is issued pursuant to the 

Federal Advisory Committee Act (5 

U.S.C., app. 2), 19 U.S.C. 2155, and 41 

CFR part 102–3 relating to advisory 

committees. 

Dated: April 28, 2010. 

Nicole Y. Lamb-Hale, 

Assistant Secretary for Manufacturing and 

Services. 

[FR Doc. 2010–10495 Filed 5–4–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the San Juan 

Financial Basis Contract Traded on the 

IntercontinentalExchange, Inc., Does 

Not Perform 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 

San Juan Financial Basis (‘‘SNJ’’) 

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 SNJ contract 

does not perform a significant price 

discovery function. Authority for this 

action is found in section 2(h)(7) of the 

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective Date: 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 price 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 a 

determination 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 SNJ contract 

performs a significant price discovery 

function and requested comment from 

interested parties.7 Comments were 

received from Industrial Energy 

Consumers of America (‘‘IECA’’), 

Working Group of Commercial Energy 

Firms (‘‘WGCEF’’), Platts, ICE, 

Economists Incorporated (‘‘EI’’), Natural 

Gas Supply Association (‘‘NGSA’’), 


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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.’’ McGraw-Hill, through its 

division Platts, compiles and calculates monthly 

natural gas price indices from natural gas trade data 

submitted to Platts by energy marketers. Platts 

includes those price indices in its monthly Inside 

FERC’s Gas Market Report (‘‘Inside FERC’’). ICE is 

an exempt commercial market, 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/2009/09-013.html. 

9FERC stated that the SNJ contract is cash settled 

and does not contemplate the 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 07. 

10 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 SNJ contract. 

Arbitrage was not identified as a possible criterion. 

As a result, arbitrage will not be discussed further 

in this document and the associated Order. 11 17 CFR part 36, Appendix A. 

Federal Energy Regulatory Commission 

(‘‘FERC’’) and Financial Institutions 

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

letters from FERC9 and Platts did not 

directly address the issue of whether or 

not the SNJ contract is a SPDC; IECA 

expressed the opinion that the SNJ 

contract did perform a significant price 

discovery function; and thus, should be 

subject to the requirements of the core 

principles enumerated in Section 2(h)(7) 

of the Act, but did not elaborate on its 

reasons for saying so or directly address 

any of the criteria. The remaining 

comment letters raised substantive 

issues with respect to the applicability 

of section 2(h)(7) to the SNJ contract and 

generally expressed the opinion that the 

SNJ contract is not a SPDC because it 

does not meet the material price 

reference, price linkage and material 

liquidity criteria for SPDC 

determination. These comments are 

more extensively discussed below, as 

applicable. 

III. Section 2(h)(7) of the CEA 

The Commission is directed by 

section 2(h)(7) of the CEA to consider 

the following criteria in determining a 

contract’s significant price discovery 

function: 

• Price Linkage—the extent to which 

the agreement, contract or transaction 

uses or otherwise relies on a daily or 

final settlement price, or other major 

price parameter, of a contract or 

contracts listed for trading on or subject 

to the rules of a designated contract 

market (‘‘DCM’’) or derivatives 

transaction execution facility (‘‘DTEF’’), 

or a SPDC traded on an electronic 

trading facility, to value a position, 

transfer or convert a position, cash or 

financially settle a position, or close out 

a position. 

• Arbitrage—the extent to which the 

price for the agreement, contract or 

transaction is sufficiently related to the 

price of a contract or contracts listed for 

trading on or subject to the rules of a 

designated 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.10 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.11 For example, for 

contracts that are linked to other 

contracts or that may be arbitraged with 

other contracts, the Commission will 

consider whether the price of the 

potential SPDC moves in such harmony 

with the other contract that the two 

markets essentially become 

interchangeable. This co-movement of 

prices would be an indication that 

activity in the contract had reached a 

level sufficient for the contract to 

perform a significant price discovery 

function. In evaluating a contract’s price 

discovery role as a price reference, the 

Commission will consider the extent to 

which, on a frequent and recurring 

basis, bids, offers or transactions are 

directly based on, or are determined by 

referencing, the prices established for 

the contract. 

IV. Findings and Conclusions 

The San Juan Financial Basis (SNJ) 

Contract and the SPDC Indicia 

The SNJ contract is cash settled based 

on the difference between the bidweek 

price index for a particular calendar 

month at the San Juan Basin on El Paso 

Natural Gas Company’s pipeline, as 

published in Platts’ Inside FERC’s Gas 

Market Report, and the final settlement 

price of the New York Mercantile 

Exchange’s (‘‘NYMEX’s’’) physicallydelivered Henry Hub natural gas futures 

contract for the same calendar month. 

The Platts bidweek price, which is 

published monthly, is based on a survey 

of cash market traders who voluntarily 

report to Platts data on their fixed-price 

transactions conducted during the last 

five business days of the month for 

physical delivery of natural gas at the 

San Juan Basin; such bidweek 

transactions specify the delivery of 

natural gas on a uniform basis 

throughout the following calendar 

month at the agreed upon rate. The 

Platts bidweek index is published on 

the first business day of the calendar 

month in which the natural gas is to be 

delivered. The size of the SNJ contract 

is 2,500 million British thermal units 

(‘‘mmBtu’’), and the unit of trading is 

any multiple of 2,500 mmBtu. The SNJ 


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12The 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. 

13See http://www.eia.doe.gov/pub/oil_gas/

natural_gas/feature_articles/2009/ngmarketcenter/

ngmarketcenter.pdf. 

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

natural_gas/analysis_publications/ngpipeline/

western.html. 15See http://www.eia.doe.gov/pub/oil_gas/

natural_gas/feature_articles/2009/ngmarketcenter/

ngmarketcenter.pdf. 16Basis 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. 

17As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion was not 

discussed in reference to the SNJ contract. 18The OTC Gas End of Day dataset includes daily 

settlement prices for natural gas contracts listed for 

all points in North America. 

19http://www.cftc.gov/ucm/groups/public/@

newsroom/documents/file/pr5403-07_

ecmreport.pdf. 

20 17 CFR part 36, Appendix A. 

contract is listed for up to 72 

consecutive calendar months. 

The Henry Hub,12 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.13 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 supply of natural gas in the San 

Juan Basin (encompassing the fourcorner region of northwestern New 

Mexico, northeastern Arizona, and 

portions of Colorado and Utah) 

primarily comes from New Mexico 

natural gas production plants in the 

cities of Blanco, Chaco, Rio Vista, 

Milagro and Valverde. The El Paso 

Natural Gas Company’s pipeline system, 

which is the largest natural gas pipeline 

system in the Western region of the 

United States, transports natural gas 

from the San Juan Basin production area 

to California, Arizona, and the Arizona/ 

Nevada state border.14

The Blanco hub, a market center that 

includes the San Juan Basin, had an 

estimated throughput capacity of 1.2 

billion cubic feet per day in 2008. 

Moreover, the number of pipeline 

interconnections at the San Juan Basin 

hub was 10 in 2008. Lastly, the pipeline 

interconnection capacity of the San Juan 

Basis hub in 2008 was 4.2 billion cubic 

feet per day, which constituted a 22 

percent increase over the pipeline 

interconnection capacity in 2003.15 The 

San Juan Basin is far removed from the 

Henry Hub and is not directly 

connected to the Henry Hub. 

Natural gas prices at the San Juan 

Basin typically differ from those at the 

Henry Hub. Thus, the price of the Henry 

Hub physically-delivered futures 

contract is an imperfect proxy for the 

SNJ price. Moreover, exogenous factors, 

such as adverse weather, can cause the 

SNJ gas price to differ from the Henry 

Hub price by an amount that is more or 

less than the cost of shipping, making 

the NYMEX Henry Hub futures contract 

even less precise as a hedging tool than 

desired by market participants. Basis 

contracts 16 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 physicallydelivered natural gas contract’s final 

settlement price). 

In its October 9, 2009, Federal 

Register notice, the Commission 

identified material price reference, price 

linkage and material liquidity as the 

potential SPDC criteria applicable to the 

SNJ contract. Each of these criteria is 

discussed below.17

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 

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’’ 18 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 SNJ 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’’) 19 found that in 

general, market participants view the 

ICE as a price discovery market for 

certain natural gas contracts. The study 

did not specify which markets 

performed this function; nevertheless, 

the Commission determined that the 

SNJ contract, while not mentioned by 

name in the ECM Study, might warrant 

further study. 

The Commission will rely on one of 

two sources of evidence—direct or 

indirect—to determine that the price of 

a contract is being used as a material 

price reference and therefore, serving a 

significant price discovery function.20

With respect to direct evidence, the 

Commission will consider the extent to 

which, on a frequent and recurring 

basis, cash market bids, offers or 

transactions are directly based on or 

quoted at a differential to, the prices 

generated on the ECM in question. 

Direct evidence may be established 

when cash market participants are 

quoting bid or offer prices or entering 

into transactions at prices that are set 

either explicitly or implicitly at a 

differential to prices established for the 

contract in question. Cash market prices 

are set explicitly at a differential to the 

section 2(h)(3) contract when, for 


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21As noted above, IECA expressed the opinion 

that the SNJ contract met the criteria for SPDC 

determination but did not provide its reasoning. 

22CL 04. 

23CL 05. 

24CL 02. 25Appendix A to the Part 36 rules. 

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. 

Following the issuance of the Federal 

Register release, the Commission further 

evaluated ICE’s data offerings and their 

use by industry participants. Although 

the San Juan Basin is a major trading 

center for natural gas in the United 

States and, as noted, ICE sells price 

information for the SNJ contract, the 

Commission has found upon further 

evaluation that the cash market 

transactions are not being directly based 

or quoted as a differential to the SNJ 

contract nor is that contract routinely 

consulted by industry participants in 

pricing cash market transactions. Thus, 

the contract does not meet the 

Commission’s Guidance for the material 

price reference criterion. Moreover, 

there are other trading points in the 

same general vicinity, such as the Waha 

hub, that are referenced more 

frequently. Thus, it is not necessary for 

market participants to independently 

refer to the SNJ contract for pricing 

natural gas at this location. In these 

circumstances, the SNJ contract does 

not satisfy the direct price reference test 

for existence of material price reference. 

Furthermore, the Commission notes that 

publication of the SNJ contract’s prices 

is not indirect evidence of material price 

reference. The SNJ contract’s prices are 

published with those of numerous other 

contracts, which are of more interest to 

market participants. Due to the lack of 

importance of the San Juan Basin, the 

Commission has concluded that traders 

likely do not specifically purchase the 

ICE data packages for the SNJ contract’s 

prices and do not consult such prices on 

a frequent and recurring basis in pricing 

cash market transactions. 

i. Federal Register Comments 

As noted above, WGCEF, ICE, EI, 

NGSA and FIEG addressed the question 

of whether the SNJ contract met the 

material price reference criterion for a 

SPDC.21 The commenters argued that 

because the SNJ contract is cash-settled, 

it cannot truly serve as an independent 

‘‘reference price’’ for transactions in 

natural gas at this location. Rather, the 

commenters argue, the underlying cash 

price series against which the ICE SNJ 

contract is settled (in this case, the 

Inside FERC’s Gas Market Report price 

for natural gas at this location) is the 

authentic reference price and not the 

ICE contract itself. The Commission 

believes that this interpretation of price 

reference is too limiting 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 

San Juan Basin is a significant trading 

center for natural gas in North America. 

However, traders do not consider the 

San Juan Basin to be as important as 

other natural gas trading points, such as 

the Waha hub and Henry Hub. 

ICE 22 also argued that the 

Commission appeared to base the case 

that the SNJ contract is potentially a 

SPDC on a disputable assertion. In 

issuing its notice of intent to determine 

whether the SNJ 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. 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. 

Both EI 23 and WGCEF 24 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 SNJ contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the SNJ prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the SNJ 

prices have substantial value to them. 

As mentioned above, the Commission 

notes that publication of the SNJ 

contract’s prices is not indirect evidence 

of routine dissemination. The SNJ 

contract’s prices are published with 

those of numerous other contracts, 

which are of more interest to market 

participants. Due to the lack of 

importance of the San Juan Basin, the 

Commission has concluded that traders 

likely do not specifically purchase the 

ICE data packages for the SNJ contract’s 

prices and do not consult such prices on 

a frequent and recurring basis in pricing 

cash market transactions. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the SNJ contract does not 

meet the material price reference 

criterion because cash market 

transactions are not priced either 

explicitly or implicitly on a frequent 

and recurring basis at a differential to 

the SNJ contract’s price (direct 

evidence). Moreover, while the ECM 

sells the SNJ contract’s price data to 

market participants, market participants 

likely do not specifically purchase the 

ICE data packages for the SNJ contract’s 

prices and do not consult such prices on 

a frequent and recurring basis in pricing 

cash market transactions (indirect 

evidence). 

2. Price Linkage Criterion 

In its October 9, 2009, Federal 

Register notice, the Commission 

identified price linkage as a potential 

basis for a SPDC determination with 

respect to the SNJ contract. In this 

regard, the final settlement of the SNJ 

contract is based, in part, on the final 

settlement price of NYMEX’s 

physically-delivered natural gas futures 

contract, where NYMEX is registered 

with the Commission as a DCM. 

The Commission’s Guidance on 

Significant Price Discovery Contracts 25

notes that a ‘‘price-linked contract is a 

contract that relies on a contract traded 

on another trading facility to settle, 

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

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


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26The size of the NYMEX Henry Hub physicallydelivered natural gas futures contract is 10,000 

mmBtu. The SNJ contract has a trading unit of 2,500 

mmBtu, which is one-quarter the size of the 

NYMEX Henry Hub contract. 

27Supplemental data subsequently submitted by 

the ICE indicated that block trades are included in 

the on-exchange trades; block trades comprise 61.4 

percent of all transactions in the SNJ contract. 

28As noted above, IECA expressed the opinion 

that the SNJ contract met the criteria for SPDC 

determination but did not provide its reasoning. 

29 74 FR 52188 (October 9, 2009). 

30Staff 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. 

31 In establishing guidance to illustrate how it 

will evaluate the various criteria, or combinations 

of criteria, when determining whether a contract is 

a SPDC, the Commission made clear that ‘‘material 

liquidity itself would not be sufficient to make a 

determination that a contract is a [SPDC], * * * but 

combined with other factors it can serve as a 

guidepost indicating which contracts are 

functioning as [SPDCs].’’ For the reasons discussed 

above, the Commission has found that the SNJ 

contract does not meet either the price linkage or 

material price reference criterion. In light of this 

finding and the Commission’s Guidance cited 

above, there is no need to evaluate further the 

material liquidity criteria since it cannot be used 

alone as a basis for a SPDC determination. 

contract, the mere fact that a contract is 

linked to another contract will not be 

sufficient to support a determination 

that a contract performs a significant 

price discovery function. To assess 

whether such a determination is 

warranted, the Commission will 

examine the relationship between 

transaction prices of the linked contract 

and the prices of the referenced 

contract. The Commission believes that 

where material liquidity exists, prices 

for the linked contract would be 

observed to be substantially the same as 

or move substantially in conjunction 

with the prices of the referenced 

contract.’’ Furthermore, the Guidance 

proposes a threshold price relationship 

such that prices of the ECM linked 

contract will fall within a 2.5 percent 

price range for 95 percent of 

contemporaneously determined closing, 

settlement or other daily prices over the 

most recent quarter. Finally, the 

Commission also stated in the Guidance 

that it would consider a linked contract 

that has a trading volume equivalent to 

5 percent of the volume of trading in the 

contract to which it is linked to have 

sufficient volume to be deemed a SPDC 

(‘‘minimum threshold’’). 

To assess whether the SNJ 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 SNJ contract price is determined, in 

part, by the final settlement price of the 

NYMEX physically-delivered natural 

gas futures contract (a DCM contract), 

the imputed SNJ location price (derived 

by adding the NYMEX Henry Hub 

Natural Gas price to the ICE SNJ basis 

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 2.2 percent of the 

SNJ 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 SNJ 

contract fails to meet the volume 

threshold requirement. In particular, the 

total trading volume in the NYMEX 

Natural Gas contract during the third 

quarter of 2009 was 14,022,963 

contracts, with 5 percent of that number 

being 701,148 contracts. Trades on the 

ICE centralized market in the SNJ 

contract during the same period was 

35,836 contracts (equivalent to 8,959 

NYMEX contracts, given the size 

difference).26 Thus, centralized-market 

trades in the SNJ contract amounted to 

less than the minimum volume 

threshold.27

i. Federal Register Comments 

As noted above, WGCEF, ICE, EI, 

NGSA and FIEG addressed the question 

of whether the SNJ contract met the 

price linkage criterion for a SPDC.28

Each of the commenters expressed the 

opinion that the SNJ contract did not 

appear to meet the above-discussed 

Commission guidance regarding the 

price relationship and/or the minimum 

volume threshold relative to the DCM 

contract to which the SNJ is linked. 

Based on its analysis discussed above, 

the Commission agrees with this 

assessment. 

ii. Conclusion Regarding the Price 

Linkage Criterion 

Based on the above, the Commission 

finds that the SNJ 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 

As noted above, in its October 9, 

2009, Federal Register notice, the 

Commission identified material price 

reference, price linkage and material 

liquidity as potential criteria for SPDC 

determination of the SNJ contract. To 

assess whether a contract meets the 

material liquidity criterion, the 

Commission first examines trading 

activity as a general measurement of the 

contract’s size and potential importance. 

If the Commission finds that the 

contract in question meets a threshold 

of trading activity that would render it 

of potential importance, the 

Commission will then perform a 

statistical analysis to measure the effect 

that the prices of the subject contract 

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 SNJ contract was 391 in the second 

quarter of 2009, resulting in a daily 

average of 6.1 trades. During the same 

period, the SNJ contract had a total 

trading volume of 30,722 contracts and 

an average daily trading volume of 480 

contracts. Moreover, open interest as of 

June 30, 2009, was 49,105 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.29

In a subsequent filing dated 

November 13, 2009, ICE reported that 

total trading volume in the third quarter 

of 2009 was 35,836 contracts (or 543 

contracts on a daily basis). In terms of 

number of transactions, 402 trades 

occurred in the third quarter of 2009 

(6.1 trades per day). As of September 30, 

2009, open interest in the SNJ contract 

was 59,123 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. 

As indicated above, the average 

number of trades per day in the second 

and third quarters of 2009 was only 

slightly above the minimum reporting 

level (5 trades per day). Moreover, 

trading activity in the SNJ contract, as 

characterized by total quarterly volume, 

indicates that the SNJ contract 

experiences trading activity similar to 

that of other thinly-traded contracts.30

Thus, the SNJ contract does not meet a 

threshold of trading activity that would 

render it of potential importance and no 

additional statistical analysis is 

warranted.31

i. Federal Register Comments 

As noted above, WGCEF, ICE, EI, 

NGSA and FIEG addressed the question 

of whether the SNJ contract met the 


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32As noted above, IECA expressed the opinion 

that the SNJ contract met the criteria for SPDC 

determination but did not provide its reasoning. 

33CL 02. 

34CL 04. 

35CL 05. 

36CL 08. 

37CL 06. 

38 73 FR 75892 (December 12, 2008). 

39 In addition, both EI and 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 9, 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 61.4 percent of all transactions in the SNJ 

contract. The Commission acknowledges that the 

open interest information it provided in its October 

9, 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. 

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

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

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

material liquidity criterion for a SPDC.32

These commenters stated that the SNJ 

contract does not meet the material 

liquidity criterion for SPDC 

determination for a number of reasons. 

WGCEF,33 ICE 34 and EI 35 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 SNJ 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.’’ 

WGCEF, FIEG 36 and NGSA 37 noted 

that the SNJ contract represents a 

differential, which does not affect other 

contracts, including the NYMEX Henry 

Hub contract and physical gas contracts. 

FIEG and WGCEF also noted that the 

SNJ contract’s trading volume 

represents only a fraction of natural gas 

trading. 

ICE opined that the Commission 

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

is materially liquid. It is worth noting 

that ICE originally suggested that the 

CFTC use a five trades-per-day 

threshold as the basis for an ECM to 

report trade data to the CFTC.’’ 

Furthermore, FIEG cautioned the 

Commission in using a reporting 

threshold as a measure of liquidity. 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’’ 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 but this 

does not mean that the contract will be 

found to be a SPDC merely because it 

met the reporting threshold. 

ICE and EI proposed 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 

a ‘‘more appropriate method of 

determining liquidity is to examine the 

activity in a single traded month or strip 

of a given contract.’’ 39 A similar 

argument was made by EI, which 

observed that the five-trades-per-day 

number ‘‘is highly misleading * * * 

because the contracts can be offered for 

as long as 120 months, [thus] the 

average per day for an individual 

contract may be less than 1 per day.’’ 

It is the Commission’s opinion that 

liquidity, as it pertains to the SNJ 

contract, is typically a function of 

trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the ICE SNJ contract itself 

would be considered liquid. In any 

event, in light of the fact that the 

Commission has found that the SNJ 

contract does not meet the material 

price reference or price linkage criteria, 

according to the Commission’s 

Guidance, it would be unnecessary to 

evaluate whether the SNJ contract meets 

the material liquidity criterion since it 

cannot be used alone for SPDC 

determination. 

ii. Conclusion Regarding Material 

Liquidity 

The Commission has found that the 

SNJ contract does not meet the material 

liquidity criterion. 

4. Overall Conclusion 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the SNJ contract does 

not perform a significant price discovery 

function under the criteria established 

in section 2(h)(7) of the CEA. 

Specifically, the SNJ contract does not 

meet the material price reference, price 

linkage or material liquidity criteria. 

Accordingly, the Commission will issue 

the attached Order declaring that the 

SNJ contract is not a SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard ICE as a registered entity in 

connection with its SNJ contract.40

Accordingly, with respect to its SNJ 

contract, ICE is not required to comply 

with the obligations, requirements and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs with SPDCs. 

However, ICE must continue to comply 

with the applicable reporting 

requirements. 

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. 

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 


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43 5 U.S.C. 601 et seq. 

44 66 FR 42256, 42268 (Aug. 10, 2001). 

45 7 U.S.C. 1a(29). 1 74 FR 52186 (October 9, 2009). 

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 fining 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. 

Amendments to 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. 

The Commission has concluded that 

ICE’s SNJ contract, which is the subject 

of the attached Order, is not a SPDC; 

accordingly, the Commission’s Order 

imposes no additional costs and no 

additional statutorily or regulatory 

mandated responsibilities on the ECM. 

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 exempt commercial markets. 

The Commission previously has 

determined that exempt commercial 

markets 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. 

VI. Order 

Order Regarding the San Juan Financial 

Basis Contract 

After considering the complete record 

in this matter, including the comment 

letters received in response to its 

request for comments, the Commission 

has determined to issue the following 

Order: 

The Commission, pursuant to its 

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

Act, hereby determines that the San 

Juan Financial Basis contract, traded on 

the IntercontinentalExchange, Inc., does 

not at this time satisfy the material price 

reference, price linkage and material 

liquidity criteria for significant price 

discovery contracts. Consistent with this 

determination, the 

IntercontinentalExchange, Inc., is not 

considered a registered entity 45 with 

respect to the San Juan Financial Basis 

contract and is not subject to the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., are not 

applicable to the San Juan Basin 

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 San Juan 

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. 2010–10343 Filed 5–4–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding that the TETCO–M3 

Financial Basis Contract Traded on the 

IntercontinentalExchange, Inc., Does 

Not Perform 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 

TETCO–M3 Financial Basis (‘‘TMT’’) 

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 TMT contract 

does not perform a significant price 

discovery function. Authority for this 

action is found in section 2(h)(7) of the 

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective Date: 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: 


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