23710 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

35 7 U.S.C. 19(a). 

36 5 U.S.C. 601 et seq. 

37 66 FR 42256, 42268 (Aug. 10, 2001). 

38 7 U.S.C. 1a(29). 

39Because ICE already lists for trading a contract 

(i.e., the Henry Financial LD1 Fixed Price contract) 

that was previously declared by the Commission to 

be a SPDC, ICE must submit a written 

demonstration of compliance with the Core 

Principles within 30 calendar days of the date of 

this Order. 17 CFR 36.3(c)(4). 

1 74 FR 52210 (October 9, 2009). 

assigned OMB control number 3038– 

0060 to this collection of information. 

b. Cost-Benefit Analysis 

Section 15(a) of the CEA 35 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

an order under the Act. By its terms, 

section 15(a) does not require the 

Commission to quantify the costs and 

benefits of an order or to determine 

whether the benefits of the order 

outweigh its costs; rather, it requires 

that the Commission ‘‘consider’’ the 

costs and benefits of its actions. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. The Commission has considered 

the costs and benefits in light of the 

specific provisions of section 15(a) of 

the Act and has concluded that the 

Order, required by Congress to 

strengthen federal oversight of exempt 

commercial markets and to prevent 

market manipulation, is necessary and 

appropriate to accomplish the purposes 

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

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorizes the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 36 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.37 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

certifies pursuant to 5 U.S.C. 605(b) that 

this Order, taken in connection with 

section 2(h)(7) of the Act and the Part 

36 rules, will not have a significant 

impact on a substantial number of small 

entities. 

VI. Order 

a. Order Relating to the ICE NWP 

Rockies Financial Basis Contract 

After considering the complete record 

in this matter, including the comment 

letters received in response to its 

request for comments, the Commission 

has determined to issue the following: 

The Commission, pursuant to its 

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

Act, hereby determines that the NWP 

Rockies Financial Basis contract, traded 

on the IntercontinentalExchange, Inc., 

satisfies the statutory material liquidity 

and material price reference criteria for 

significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the NWP 

Rockies Financial Basis contract, the 

nine core principles established by new 

section 2(h)(7)(C). Additionally, the 

IntercontinentalExchange, Inc., shall be 

and is considered a registered entity 38

with respect to the NWP Rockies 

Financial Basis contract and is subject 

to all the provisions of the Commodity 

Exchange Act applicable to registered 

entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., 

commence with the issuance of this 

Order.39

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10304 Filed 5–3–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the ICE PG&E 

Citygate Financial Basis Contract 

Traded on the 

IntercontinentalExchange, Inc., 

Performs a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final order. 

SUMMARY: On October 9, 2009, the 

Commodity Futures Trading 

Commission (‘‘CFTC’’ or ‘‘Commission’’) 

published for comment in the Federal 

Register 1 a notice of its intent to 

undertake a determination whether the 

PG&E Citygate Financial Basis (‘‘PGE’’) 

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 PGE contract 

performs a significant price discovery 

function. Authority for this action is 

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

Commission rule 36.3(c) promulgated 

thereunder. 

DATES: Effective date: April 28, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

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Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23711 

2 Incorporated as Title XIII of the Food, 

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

8 IECA describes itself as an ‘‘association of 

leading manufacturing companies’’ whose 

membership ‘‘represents a diverse set of industries 

including: plastics, cement, paper, food processing, 

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

industrial gases, pharmaceutical, aluminum and 

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

group of commercial firms in the domestic energy 

industry whose primary business activity is the 

physical delivery of one or more energy 

commodities to customers, including industrial, 

commercial and residential consumers’’ and whose 

membership consists of ‘‘energy producers, 

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

above. EI is an economic consulting firm with 

offices located in Washington, DC, and San 

Francisco, CA. NGSA is an industry association 

comprised of natural gas producers and marketers. 

FERC is an independent federal regulatory agency 

that, among other things, regulates the interstate 

transmission of natural gas, oil and electricity. FIEG 

describes itself as an association of investment and 

commercial banks who are active participants in 

various sectors of the natural gas markets, 

‘‘including acting as marketers, lenders, 

underwriters of debt and equity securities, and 

proprietary investors.’’ The comment letters are 

available on the Commission’s Web site: http:// 

www.cftc.gov/lawandregulation/federalregister/ 

federalregistercomments/2009/09-023.html. 9FERC stated that the PGE contract is cash settled 

and does not contemplate actual physical delivery 

of natural gas. Accordingly, FERC expressed the 

opinion that a determination by the Commission 

that a contract performs a significant price 

discovery function ‘‘would not appear to conflict 

with FERC’s exclusive jurisdiction under the 

Natural Gas Act (NGA) over certain sales of natural 

gas in interstate commerce for resale or with its 

other regulatory responsibilities under the NGA’’ 

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

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

the CFTC’’ should any such potential conflict arise. 

CL 06 (references the number of the comment letter 

(‘‘CL’’) in the public record). 10 IECA stated that the subject ICE contract should 

‘‘be required to come into compliance with core 

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

and with other statutory provisions applicable to 

registered entities. [This contract] should be subject 

to the Commission’s position limit authority, 

emergency authority and large trader reporting 

requirements, among others.’’ CL 01. 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. Telephone: (202) 418–5515. Email: gprice@cftc.gov; or Susan Nathan, 

Senior Special Counsel, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5133. E-mail: 

snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 2

significantly broadened the CFTC’s 

regulatory authority with respect to 

ECMs by creating, in section 2(h)(7) of 

the CEA, a new regulatory category— 

ECMs on which significant price 

discovery contracts (‘‘SPDCs’’) are 

traded—and treating ECMs in that 

category as registered entities under the 

CEA.3 The legislation authorizes the 

CFTC to designate an agreement, 

contract or transaction as a SPDC if the 

Commission determines, under criteria 

established in section 2(h)(7), that it 

performs a significant price discovery 

function. When the Commission makes 

such a determination, the ECM on 

which the SPDC is traded must assume, 

with respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the Act and 

Commission regulations, and must 

comply with nine core principles 

established by new section 2(h)(7)(C). 

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.4 As relevant here, rule 36.3 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

promptly concerning any contract 

traded in reliance on the exemption in 

section 2(h)(3) of the CEA that averaged 

five trades per day or more over the 

most recent calendar quarter, and for 

which the exchange sells its price 

information regarding the contract to 

market participants or industry 

publications, or whose daily closing or 

settlement prices on 95 percent or more 

of the days in the most recent quarter 

were within 2.5 percent of the 

contemporaneously determined closing, 

settlement or other daily prices of 

another contract. 

Commission rule 36.3(c)(3) 

established the procedures by which the 

Commission makes and announces its 

determination whether a particular ECM 

contract serves a significant price 

discovery function. Under those 

procedures, the Commission will 

publish notice in the Federal Register 

that it intends to undertake an 

evaluation whether the specified 

agreement, contract or transaction 

performs a significant price discovery 

function and to receive written views, 

data and arguments relevant to its 

determination from the ECM and other 

interested persons. Upon the close of 

the comment period, the Commission 

will consider, among other things, all 

relevant information regarding the 

subject contract and issue an order 

announcing and explaining its 

determination whether or not the 

contract is a SPDC. The issuance of an 

affirmative order signals the 

effectiveness of the Commission’s 

regulatory authorities over an ECM with 

respect to a SPDC; at that time such an 

ECM becomes subject to all provisions 

of the CEA applicable to registered 

entities.5 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

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

II. Notice of Intent To Undertake SPDC 

Determination 

On October 9, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the PGE contract 

performs a significant price discovery 

function, and requested comment from 

interested parties.7 Comments were 

received from the Industrial Energy 

Consumers of America (‘‘IECA’’), 

Working Group of Commercial Energy 

Firms (‘‘WGCEF’’), ICE, Economists 

Incorporated (‘‘EI’’), Natural Gas Supply 

Association (‘‘NGSA’’), Federal Energy 

Regulatory Commission (‘‘FERC’’), and 

Financial Institutions Energy Group 

(‘‘FIEG’’).8 The comment letter from 

FERC9 did not directly address the 

issue of whether or not the PGE contract 

is a SPDC; IECA concluded that the PGE 

contract is a SPDC, but did not provide 

a basis for its conclusion.10 The other 

parties’ comments raised substantive 

issues with respect to the applicability 

of section 2(h)(7) to the PGE contract, 

generally asserting that the PGE contract 

is not a SPDC as it does not meet the 

material liquidity, material price 

reference and price linkage criteria for 

SPDC determination. Those comments 

are more extensively discussed below, 

as applicable. 

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

The Commission is directed by 

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

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23712 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

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

the Commission identified material price reference, 

price linkage and material liquidity as the possible 

criteria for SPDC determination of the PGE contract. 

Arbitrage was not identified as a possible criterion 

and will not be discussed further in this document 

or the associated Order. 12 17 CFR 36, Appendix A. 

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

or more natural gas pipelines are connected. Hubs 

also serve as pricing points for natural gas at the 

particular locations. 

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

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

the following criteria in determining a 

contract’s significant price discovery 

function: 

• Price Linkage—the extent to which 

the agreement, contract or transaction 

uses or otherwise relies on a daily or 

final settlement price, or other major 

price parameter, of a contract or 

contracts listed for trading on or subject 

to the rules of a designated contract 

market (‘‘DCM’’) or derivatives 

transaction execution facility (‘‘DTEF’’), 

or a SPDC traded on an electronic 

trading facility, to value a position, 

transfer or convert a position, cash or 

financially settle a position, or close out 

a position. 

• Arbitrage—the extent to which the 

price for the agreement, contract or 

transaction is sufficiently related to the 

price of a contract or contracts listed for 

trading on or subject to the rules of a 

DCM or DTEF, or a SPDC traded on or 

subject to the rules of an electronic 

trading facility, so as to permit market 

participants to effectively arbitrage 

between the markets by simultaneously 

maintaining positions or executing 

trades in the contracts on a frequent and 

recurring basis. 

• Material price reference—the extent 

to which, on a frequent and recurring 

basis, bids, offers or transactions in a 

commodity are directly based on, or are 

determined by referencing or 

consulting, the prices generated by 

agreements, contracts or transactions 

being traded or executed on the 

electronic trading facility. 

• Material liquidity—the extent to 

which the volume of agreements, 

contracts or transactions in a 

commodity being traded on the 

electronic trading facility is sufficient to 

have a material effect on other 

agreements, contracts or transactions 

listed for trading on or subject to the 

rules of a DCM, DTEF or electronic 

trading facility operating in reliance on 

the exemption in section 2(h)(3). 

Not all criteria must be present to 

support a determination that a 

particular contract performs a 

significant price discovery function, and 

one or more criteria may be inapplicable 

to a particular contract.11 Moreover, the 

statutory language neither prioritizes the 

criteria nor specifies the degree to 

which a SPDC must conform to the 

various criteria. In Guidance issued in 

connection with the Part 36 rules 

governing ECMs with SPDCs, the 

Commission observed that these criteria 

do not lend themselves to a mechanical 

checklist or formulaic analysis. 

Accordingly, the Commission has 

indicated that in making its 

determinations it will consider the 

circumstances under which the 

presence of a particular criterion, or 

combination of criteria, would be 

sufficient to support a SPDC 

determination.12 For example, for 

contracts that are linked to other 

contracts or that may be arbitraged with 

other contracts, the Commission will 

consider whether the price of the 

potential SPDC moves in such harmony 

with the other contract that the two 

markets essentially become 

interchangeable. This co-movement of 

prices would be an indication that 

activity in the contract had reached a 

level sufficient for the contract to 

perform a significant price discovery 

function. In evaluating a contract’s price 

discovery role as a price reference, the 

Commission will consider the extent to 

which, on a frequent and recurring 

basis, bids, offers or transactions are 

directly based on, or are determined by 

referencing, the prices established for 

the contract. 

IV. Findings and Conclusions 

a. The PG&E Citygate (PGE) Financial 

Basis Contract and the SPDC Indicia 

The PGE contract is cash settled based 

on the difference between the bidweek 

price index for the price of natural gas 

at the PG&E Citygate for the month of 

delivery, as published in Intelligence 

Press Inc.’s (‘‘IPI’s’’) Natural Gas 

Bidweek Survey, and the final 

settlement price of the New York 

Mercantile Exchange’s (‘‘NYMEX’s’’) 

physically-delivered Henry Hub natural 

gas futures contract for the same 

calendar month. The IPI bidweek price, 

which is published monthly, is based on 

a survey of cash market traders who 

voluntarily report to IPI data on fixedprice transactions for physical delivery 

of natural gas at the PG&E Citygate 

conducted during the last five business 

days of the month; such bidweek 

transactions specify the delivery of 

natural gas on a uniform basis 

throughout the following calendar 

month at the agreed upon rate. The IPI 

bidweek index is published on the first 

business day of the calendar month in 

which the natural gas is to be delivered. 

The size of the PGE contract is 2,500 

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

and the unit of trading is any multiple 

of 2,500 mmBtu. The PGE contract is 

listed for up to 72 calendar months 

commencing with the next calendar 

month. 

The Henry Hub,13 which is located in 

Erath, Louisiana, is the primary cash 

market trading and distribution center 

for natural gas in the United States. It 

also is the delivery point and pricing 

basis for the NYMEX’s actively traded, 

physically-delivered natural gas futures 

contract, which is the most important 

pricing reference for natural gas in the 

United States. The Henry Hub, which is 

operated by Sabine Pipe Line, LLC, 

serves as a juncture for 13 different 

pipelines. These pipelines bring in 

natural gas from fields in the Gulf Coast 

region and ship it to major consumption 

centers along the East Coast and 

Midwest. The throughput shipping 

capacity of the Henry Hub is 1.8 trillion 

mmBtu per day. 

In addition to the Henry Hub, there 

are a number of other locations where 

natural gas is traded. In 2008, there were 

33 natural gas market centers in North 

America.14 Some of the major trading 

centers include Alberta, Northwest 

Rockies, Southern California border and 

the Houston Ship Channel. For 

locations that are directly connected to 

the Henry Hub by one or more pipelines 

and where there typically is adequate 

shipping capacity, the price at the other 

locations usually directly tracks the 

price at the Henry Hub, adjusted for 

transportation costs. However, at other 

locations that are not directly connected 

to the Henry Hub or where shipping 

capacity is limited, the prices at those 

locations often diverge from the Henry 

Hub price. Furthermore, one local price 

may be significantly different than the 

price at another location even though 

the two markets’ respective distances 

from the Henry Hub are the same. The 

reason for such pricing disparities is 

that a given location may experience 

supply and demand factors that are 

specific to that region, such as 

differences in pipeline shipping 

capacity, unusually high or low demand 

for heating or cooling or supply 

disruptions caused by severe weather. 

As a consequence, local natural gas 

prices can differ from the Henry Hub 

price by more than the cost of shipping 

and such price differences can vary in 

an unpredictable manner. 

The PG&E Citygate is part of the 

Golden Gate Market Center, which is 

located in Northern California. The 

Golden Gate Market Center offers seven 

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15The cash market transactions included in the 

comparable Platts index are those fixed-price gas 

deliveries from Pacific Gas and Electric’s intrastate 

transmission system to citygates on PG&E’s local 

distribution system in Northern California. 

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

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf 

17Basis contracts denote the difference in the 

price of natural gas at a specified location minus the 

price of natural gas at the Henry Hub. The 

differential can be either a positive or negative 

value. 

18As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion was not 

discussed in reference to the PGE contract. 

19The OTC Gas End of Day dataset includes daily 

settlement prices for natural gas contracts listed for 

all points in North America. 

20 17 CFR part 36, appendix A. 

21 In addition to referencing ICE prices, natural 

gas market firms participating in the PG&E Citygate 

market may rely on other cash market quotes as 

well as industry publications and price indices that 

are published by third-party price reporting firms 

when entering into natural gas transactions. 

different transaction points, which are 

Malin, Citygate, Kern River Station, 

High Desert Lateral, Daggett, Southern 

Trails and Topock. Citygate serves as 

interconnection between the backbone 

pipeline system and the local 

transmission and distribution lines.15

The Golden Gate Market Center had an 

estimated throughput capacity of two 

billion cubic feet per day in 2008. 

Moreover, the number of pipeline 

interconnections at the Golden Gate 

Market Center was nine in 2008, up 

from eight in 2003. Lastly, the pipeline 

interconnection capacity of the Golden 

Gate Market Center in 2008 was 6 

billion cubic feet per day, which 

constituted a 32 percent increase over 

the pipeline interconnection capacity in 

2003.16 The PG&E Citygate is far 

removed from the Henry Hub and is not 

directly connected to the Henry Hub by 

an existing pipeline. 

The local price at the PG&E Citygate 

typically differs from the price at the 

Henry Hub. Thus, the price of the Henry 

Hub physically-delivered futures 

contract is an imperfect proxy for the 

PG&E Citygate price. Moreover, 

exogenous factors, such as adverse 

weather, can cause the PG&E Citygate 

gas price to differ from the Henry Hub 

price by an amount that is more or less 

than the cost of shipping, making the 

NYMEX Henry Hub futures contract 

even less precise as a hedging tool than 

desired by market participants. Basis 

contracts 17 allow traders to more 

accurately discover prices at alternative 

locations and hedge price risk that is 

associated with natural gas at such 

locations. In this regard, a position at a 

local price for an alternative location 

can be established by adding the 

appropriate basis swap position to a 

position taken in the NYMEX 

physically-delivered Henry Hub 

contract (or in the NYMEX or ICE Henry 

Hub look-alike contract, which cash 

settle based on the NYMEX 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 

PGE contract. Each of these criteria is 

discussed below.18

1. Material Price Reference Criterion 

The Commission’s October 9, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for a SPDC determination with 

respect to this contract. The 

Commission considered the fact that ICE 

maintains exclusive rights over IPI’s 

bidweek price indices. As a result, no 

other exchange can offer such a basis 

contract based on IPI’s PG&E Citygate 

bidweek index. While other third-party 

price providers produce natural gas 

price indices for this and other trading 

centers, market participants indicate 

that the IPI PG&E Citygate bidweek 

index is highly regarded for this 

particular location and should market 

participants wish to establish a hedged 

position based on this index, they 

would need to do so by taking a position 

in the ICE PGE swap since ICE has the 

right to the IPI index for cash settlement 

purposes. In addition, ICE sells its price 

data to market participants in a number 

of different packages which vary in 

terms of the hubs covered, time periods, 

and whether the data are daily only or 

historical. For example, ICE offers ‘‘West 

Gas End of Day’’ and ‘‘OTC Gas End of 

Day’’ 19 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 PGE 

contract. 

The Commission will rely on one of 

two sources of evidence—direct or 

indirect—to determine that the price of 

a contract was being used as a material 

price reference and therefore, serving a 

significant price discovery function.20

With respect to direct evidence, the 

Commission will consider the extent to 

which, on a frequent and recurring 

basis, cash market bids, offers or 

transactions are directly based on or 

quoted at a differential to, the prices 

generated on the ECM in question. 

Direct evidence may be established 

when cash market participants are 

quoting bid or offer prices or entering 

into transactions at prices that are set 

either explicitly or implicitly at a 

differential to prices established for the 

contract in question. Cash market prices 

are set explicitly at a differential to the 

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

instance, they are quoted in dollars and 

cents above or below the reference 

contract’s price. Cash market prices are 

set implicitly at a differential to a 

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

instance, they are arrived at after adding 

to, or subtracting from the section 

2(h)(3) contract, but then quoted or 

reported at a flat price. With respect to 

indirect evidence, the Commission will 

consider the extent to which the price 

of the contract in question is being 

routinely disseminated in widely 

distributed industry publications—or 

offered by the ECM itself for some form 

of remuneration—and consulted on a 

frequent and recurring basis by industry 

participants in pricing cash market 

transactions. 

The PG&E Citygate is a major trading 

center for natural gas in the United 

States. Traders, including producers, 

keep abreast of the prices of the PGE 

contract when conducting cash deals. 

These traders look to a competitively 

determined price as an indication of 

expected values of natural gas at the 

PG&E Citygate when entering into cash 

market transaction for natural gas, 

especially those trades providing for 

physical delivery in the future. Traders 

use the ICE PGE contract, as well as 

other ICE basis swap contracts, to hedge 

cash market positions and 

transactions—activities which enhance 

the PGE contract’s price discovery 

utility. The substantial volume of 

trading and open interest in the PGE 

contract appears to attest to its use for 

this purpose. While the PGE contract’s 

settlement prices may not be the only 

factor influencing spot and forward 

transactions, natural gas traders 

consider the ICE price to be a critical 

factor in conducting OTC transactions.21

As a result, the PGE contract satisfies 

the direct price reference test. 

In terms of indirect price reference, 

ICE sells the PGE contract’s prices as 

part of a broad package. The 

Commission notes that the PG&E 

Citygate is a major natural gas trading 

point, and the PGE contract’s prices are 

well regarded in the industry as 

indicative of the value of natural gas at 

the PG&E Citygate. Accordingly, the 

Commission believes that it is 

reasonable to conclude that market 

participants are purchasing the data 

packages that include the PGE contract’s 

prices in substantial part because the 

PGE contract prices have particular 

value to them. Moreover, such prices are 

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23714 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

22CL 03. 

23CL 03. 

24Futures and swaps based on other PG&E 

Citygate indices have not met with the same market 

acceptance as the PGE contract. For example, 

NYMEX lists a basis swap contract that is 

comparable to the PGE contract with the exception 

that it uses a different price index for cash 

settlement. Open interest as of September 30, 2009, 

was approximately 19,000 contracts in the NYMEX 

PG&E Citygate Basis Swap contract versus about 

167,000 contracts in ICE’s PGE contract. Moreover, 

there has been no centralized-market trading in the 

NYMEX PG&E Citygate Basis Swap contract, so that 

contract does not serve as a source of price 

discovery for cash market traders with natural gas 

at that location. 

consulted on a frequent and reoccurring 

basis by industry participants in pricing 

cash market transactions. In light of the 

above, the PGE contract meets the 

indirect price reference test. 

NYMEX lists a futures contract that is 

comparable to the ICE PGE contract on 

its ClearPort platform. However, unlike 

the ICE contract, none of the trades in 

the NYMEX, PG&E Citygate Basis Swap 

(Platts IFERC) futures contract are 

executed in NYMEX’s centralized 

marketplace; instead, all of the 

transactions originate as bilateral swaps 

that are submitted to NYMEX for 

clearing. The daily settlement prices of 

the NYMEX PG&E Citygate Basis Swap 

futures contract are influenced, in part, 

by the daily settlement prices of the ICE 

PGE contract. This is because NYMEX 

determines the daily settlement prices 

for its natural gas basis swap contracts 

through a survey of cash market voice 

brokers. Voice brokers, in turn, refer to 

the ICE PGE price, among other 

information, as an important indicator 

as to where the market is trading. 

Therefore, the ICE PGE price influences 

the settlement price for the NYMEX 

PG&E Citygate Basis Swap futures 

contract. This is supported by an 

analysis of the daily settlement prices 

for the NYMEX and ICE PG&E Citygate 

contracts. In this regard, 97 percent of 

the daily settlement prices for the 

NYMEX PG&E Citygate Basis Swap 

futures contract are within one standard 

deviation of the PGE contract’s price 

settlement prices. 

Lastly, the fact that the PGE contract 

does not meet the price linkage criterion 

(discussed below) bolsters the argument 

for material price reference. As noted 

above, the Henry Hub is the pricing 

reference for natural gas in the United 

States. However, regional market 

conditions may cause the price of 

natural gas in another area of the 

country to diverge by more than the cost 

of transportation, thus making the 

Henry Hub price an imperfect proxy for 

the local gas price. The more variable 

the local natural gas price is, the more 

traders need to accurately hedge their 

price risk. Basis swap contracts provide 

a means of more accurately pricing 

natural gas at a location other than the 

Henry Hub. An analysis of PG&E 

Citygate natural gas prices showed that 

55 percent of the observations were 

more than 2.5 percent different than the 

contemporaneous Henry Hub prices. 

The average PG&E Citygate basis value 

between January 2008 and September 

2009 was ¥$0.16 per mmBtu with a 

variance of $0.10 per mmBtu. 

i. Federal Register Comments 

ICE stated in its comment letter that 

the PGE contract does not meet the 

material price reference criterion for 

SPDC determination. ICE argued that 

the Commission appeared to base the 

case that the PGE contract is potentially 

a SPDC on two disputable assertions. 

First, in issuing its notice of intent to 

determine whether the PGE 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.’’ 22 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.’’ 23 In response to the above 

comment, the Commission notes that it 

cited the ECM study’s general finding 

that some ICE natural gas contracts 

appear to be regarded as price discovery 

markets merely as an indicia that an 

investigation of certain ICE contracts 

may be warranted, and was not 

intended to serve as the sole basis for 

determining whether or not a particular 

contract meets the material price 

reference criterion. 

Second, ICE argued that the 

Commission should not base a 

determination that the PGE contract is a 

SPDC on the fact that this contract has 

the exclusive right to base its settlement 

on the IPI PG&E Citygate Index price. 

While the Commission acknowledges 

that there are other firms that produce 

price indices for the PG&E Citygate, as 

it notes above, market participants 

indicate that the IPI Index is very highly 

regarded and should they wish to 

establish a hedged position based on 

this index, they would need to do so by 

taking a position in the ICE PGE swap 

since ICE has the exclusive right to use 

the IPI index.24

WGCEF, NGSA, EI and FIEG all stated 

that the PGE contract does not satisfy 

the material price reference criterion. 

The commenters argued that other 

contracts (physical or financial) are not 

indexed based on the ICE PGE contract 

price, but rather are indexed based on 

the underlying cash price series against 

which the ICE PGE contract is settled. 

Thus, they contend that the underlying 

cash price series is the authentic 

reference price and not the ICE contract 

itself. The Commission believes that this 

interpretation of price reference is too 

limiting in that it only considers the 

final index value on which the contract 

is cash settled after trading ceases. 

Instead, the Commission believes that a 

cash-settled derivatives contract could 

meet the price reference criteria if 

market participants ‘‘consult on a 

frequent and recurring basis’’ the 

derivatives contract when pricing 

forward, fixed-price commitments or 

other cash-settled derivatives that seek 

to ‘‘lock in’’ a fixed price for some future 

point in time to hedge against adverse 

price movements. 

As noted above, the PG&E Citygate is 

a major trading center for natural gas in 

North America. Traders, including 

producers, keep abreast of the prices of 

the PGE contract when conducting cash 

deals. These traders look to a 

competitively determined price as an 

indication of expected values of natural 

gas at the PG&E Citygate when entering 

into cash market transaction for natural 

gas, especially those trades that provide 

for physical delivery in the future. 

Traders use the ICE PGE contract to 

hedge cash market positions and 

transactions, which enhances the PGE 

contract’s price discovery utility. While 

the PGE contract’s settlement prices 

may not be the only factor influencing 

spot and forward transactions, natural 

gas traders consider the ICE price to be 

a crucial factor in conducting OTC 

transactions. 

Both EI and WGCEF stated that 

publication of price data in a package 

format is a weak justification for 

material price reference. These 

commenters argue that market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

such as those for the PGE contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the PGE prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the PGE 

prices have substantial value to them. 

The Commission notes that the PG&E 

Citygate is a major natural gas trading 

point, and the PGE contract’s prices are 

well regarded in the industry as 

indicative of the value of natural gas at 

the PG&E Citygate. Accordingly, the 

Commission believes that it is 

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Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23715 

25Appendix A to the Part 36 rules. 

26The PGE contract is one-quarter the size of the 

NYMEX Henry Hub physically-delivered futures 

contract. 

27CL 05. 

28CL 04. 

29CL 02. 

30CL 03. 

31CL 07. 

reasonable to conclude that market 

participants are purchasing the data 

packages that include the PGE contract’s 

prices in substantial part because the 

PGE contract prices have particular 

value to them. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the PGE contract meets the 

material price reference criterion 

because cash market transactions are 

being priced on a frequent and recurring 

basis at a differential to the PGE 

contract’s price (direct evidence). 

Moreover, the ECM sells the PGE 

contract’s price data to market 

participants and it is reasonable to 

conclude that market participants are 

purchasing the data packages that 

include the PGE contract’s prices in 

substantial part because the PGE 

contract prices have particular value to 

them. Furthermore, such prices are 

consulted on a frequent and reoccurring 

basis by industry participants in pricing 

cash market transactions (indirect 

evidence). 

2. Price Linkage Criterion 

In its October 9, 2009, Federal 

Register notice, the Commission 

identified price linkage as a potential 

basis for a SPDC determination with 

respect to the PGE contract. In this 

regard, the final settlement of the PGE 

contract is based, in part, on the final 

settlement price of the NYMEX’s 

physically-delivered natural gas futures 

contract, where the NYMEX is 

registered with the Commission as a 

DCM. 

The Commission’s Guidance on 

Significant Price Discovery Contracts 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 

contract, the mere fact that a contract is 

linked to another contract will not be 

sufficient to support a determination 

that a contract performs a significant 

price discovery function. To assess 

whether such a determination is 

warranted, the Commission will 

examine the relationship between 

transaction prices of the linked contract 

and the prices of the referenced 

contract. The Commission believes that 

where material liquidity exists, prices 

for the linked contract would be 

observed to be substantially the same as 

or move substantially in conjunction 

with the prices of the referenced 

contract.’’ Furthermore, the Guidance 

proposes a threshold price relationship 

such that prices of the ECM linked 

contract will fall within a 2.5 percent 

price range for 95 percent of 

contemporaneously determined closing, 

settlement or other daily prices over the 

most recent quarter. Finally, the 

Commission also stated in the Guidance 

that it would consider a linked contract 

that has a trading volume equivalent to 

5 percent of the volume of trading in the 

contract to which it is linked to have 

sufficient volume potentially to be 

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

To assess whether the PGE 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 PG&E Citygate price is determined, 

in part, by the final settlement price of 

the NYMEX physically-delivered 

natural gas futures contract (a DCM 

contract), the PG&E Citygate price is not 

within 2.5 percent of the settlement 

price of the corresponding NYMEX 

Henry Hub natural gas futures contract 

on 95 percent of the days. Specifically, 

during the third quarter of 2009, 45 

percent of the PG&E Citygate natural gas 

prices derived from the ICE basis values 

were within 2.5 percent of the daily 

settlement price of the NYMEX Henry 

Hub futures contract. In addition, staff 

finds that the PGE contract fails to meet 

the volume threshold requirement. In 

particular, the total trading volume in 

the NYMEX Natural Gas contract during 

the third quarter of 2009 was 14,022,963 

contracts, with 5 percent of that number 

being 701,148 contracts. The number of 

trades on the ICE centralized market in 

the PGE contract during the same period 

was 108,468 contracts (equivalent to 

27,117 NYMEX contracts, given the size 

difference).26 Thus, centralized-market 

trades in the PGE contract amounted to 

less than the minimum threshold. 

Due to the specific criteria that a 

given ECM contract must meet to fulfill 

the price linkage criterion, the 

requirements, for all intents and 

purposes, exclude ECM contracts that 

are not near facsimiles of DCM 

contracts. That is, even though an ECM 

contract may specifically use a DCM 

contract’s settlement price to value a 

position, which is the case of the PGE 

contract, a substantive difference 

between the two price series would rule 

out the presence of price linkage. In this 

regard, an ECM contract that is priced 

and traded as if it is a functional 

equivalent of a DCM contract likely will 

have a price series that mirrors that of 

the corresponding DCM contract. In 

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

to expect that the two price series would 

be divergent. The PG&E Citygate and the 

Henry Hub are located in two different 

areas of the United States. The Henry 

Hub primarily is a supply center while 

the PG&E Citygate primarily is a 

demand center. These differences 

contribute to the divergence between 

the two price series and, as discussed 

below, increase the likelihood that the 

‘‘basis’’ contract is used for material 

price reference. 

i. Federal Register Comments 

NGSA 27 stated that the PGE contract 

does not meet the price linkage criterion 

because basis contracts, including the 

PGE contract, are not equivalent to the 

NYMEX physically-delivered Henry 

Hub contract. EI 28 also noted that the 

PGE and NYMEX natural gas contracts 

are not economically equivalent and 

that the PGE contract’s volume is too 

low to affect the NYMEX natural gas 

futures contract. WGCEF 29 stated that 

the PG&E Citygate price is determined, 

in part, by the final settlement price of 

the NYMEX Henry Hub futures contract. 

However, WGCEF goes on to state that 

the PGE contract ‘‘(a) is not substantially 

the same as the NYMEX [natural gas 

futures contract] * * * nor (b) does it 

move substantially in conjunction’’ with 

the NYMEX natural gas futures contract. 

ICE 30 opined that the PGE contract’s 

trading volume is too low to affect the 

price discovery process for the NYMEX 

natural gas futures contract. In addition, 

ICE states that the PGE contract simply 

reflects a price differential between 

PG&E Citygate and the Henry Hub; 

‘‘there is no price linkage as 

contemplated by Congress or the CFTC 

in its rulemaking.’’ FIEG 31

acknowledged that the PGE contract is 

a locational spread that is based in part 

on the NYMEX natural gas futures price, 

but also questioned the significance of 

this fact relative to the price linkage 

criterion since the key component of the 

spread is the price at the PG&E Citygate 

location and not the NYMEX physicallydelivered natural gas futures price. 

ii. Conclusion Regarding the Price 

Linkage Criterion 

Based on the above, the Commission 

finds that the PGE contract does not 

meet the price linkage criterion because 

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23716 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

32As noted above, the material liquidity criterion 

speaks to the effect that transactions in the potential 

SPDC may have on trading in ‘‘agreements, 

contracts and transactions listed for trading on or 

subject to the rules of a designated contract market, 

a derivatives transaction execution facility, or an 

electronic trading facility operating in reliance on 

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

33 ICE does not differentiate between open 

interest created by a transaction executed on its 

trading platform versus that created by a transaction 

executed off its trading platform. 

34See Commission Rule 36.3(c)(2), 17 CFR 

36.3(c)(2). 

35By way of comparison, the number of contracts 

traded in the PGE contract is similar to that 

exhibited on a liquid futures market and is roughly 

equivalent to the volume of trading for the NYMEX 

Palladium futures contract during this period. 

36By way of comparison, open interest in the PGE 

contract is similar to that exhibited on a liquid 

futures market and is roughly equivalent to that in 

the Chicago Board of Trade’s soybean meal futures 

contract. 

37Staff 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. 

38Specifically, Commission staff econometrically 

estimated a vector autoregression (VAR) model 

using daily settlement prices. A vector 

autoregression model is an econometric model used 

to capture the evolution and the interdependencies 

between multiple time series, generalizing the 

univariate autoregression models. The estimated 

model displays strong diagnostic evidence of 

statistical adequacy. In particular, the model’s 

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

results suggest that, on average over the sample 

period, a one-percent rise in the PGE contract’s 

price elicited a 1.1 percent increase in the NYMEX 

Henry Hub and Malin prices, as well as a one 

percent increase in the Rockies contract’s price. 

These multipliers of response emerge with 

noticeable statistical strength or significance. Based 

on such long run sample patterns, if the PGE 

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

of NYMEX Henry Hub natural gas futures contract, 

as well as those for the ICE basis swap contracts 

based on the Rockies and Malin hubs, each would 

rise by about 10 percent to 11 percent. 

39CL 02. 

40CL 05. 

41CL 07. 

it fails the price relationship and 

volume tests provided for in the 

Commission’s Guidance. 

3. Material Liquidity Criterion 

To assess whether the PGE contract 

meets the material liquidity criterion, 

the Commission first examined volume 

and open interest data provided to it by 

ICE as a general measurement of the 

PGE market’s size and potential 

importance, and second performed a 

statistical analysis to measure the effect 

that changes to PGE prices potentially 

may have on prices for the NYMEX 

Henry Hub Natural Gas (a DCM 

contract), the ICE NWP Financial Basis 

contract (an ECM contract) and the ICE 

Malin Financial Basis contract (an ECM 

contract).32

The Commission’s Guidance 

(Appendix A to Part 36) notes that 

‘‘[t]raditionally, objective measures of 

trading such as volume or open interest 

have been used as measures of 

liquidity.’’ In this regard, the 

Commission in its October 9, 2009, 

Federal Register notice referred to 

second quarter 2009 trading statistics 

that ICE had submitted for its PGE 

contract. Based upon on a required 

quarterly filing made by ICE on July 27, 

2009, the total number of PGE trades 

executed on ICE’s electronic trading 

platform was 1,142 in the second 

quarter of 2009, resulting in a daily 

average of 17.8 trades. During the same 

period, the PGE contract had a total 

trading volume on ICE’s electronic 

trading platform of 99,418 contracts and 

an average daily trading volume of 

1,553.4 contracts. Moreover, the open 

interest as of June 30, 2009, was 150,299 

contracts, which includes trades 

executed on ICE’s electronic trading 

platform, as well as trades executed off 

of ICE’s electronic trading platform and 

then brought to ICE for clearing.33

Subsequent to the October 9, 2009, 

Federal Register notice, ICE submitted 

another quarterly notification filed on 

November 13, 2009,34 with updated 

trading statistics. Specifically, with 

respect to its PGE contract, 1,514 

separate trades occurred on its 

electronic platform in the third quarter 

of 2009, resulting in a daily average of 

22.9 trades. During the same period, the 

PGE contract had a total trading volume 

on its electronic platform of 108,468 

contracts (which was an average of 

1,643 contracts per day).35 As of 

September 30, 2009, open interest in the 

PGE contract was 166,981 36 contracts. 

Reported open interest included 

positions resulting from trades that were 

executed on ICE’s electronic platform, 

as well as trades that were executed off 

of ICE’s electronic platform and brought 

to ICE for clearing. 

In the Guidance, the Commission 

stated that material liquidity can be 

identified by the impact liquidity 

exhibits through observed prices. Thus, 

to make a determination whether the 

PGE contract has such material impact, 

the Commission reviewed the relevant 

trading statistics (noted above). In this 

regard, the average number trades per 

day in the second and third quarters of 

2009 were above the minimum 

reporting level (5 trades per day). 

Moreover, trading activity in the PGE 

contract, as characterized by total 

quarterly volume, indicates that the PGE 

contract experiences trading activity 

that generally exceeds that found in 

thinly-traded markets.37 Thus, it is 

reasonable to infer that the PGE contract 

could have a material effect on other 

ECM contracts or on DCM contracts. 

To measure the effect that the PGE 

contract potentially could have on a 

DCM contract, or on another ECM 

contract, Commission staff performed a 

statistical analysis 38 using daily 

settlement prices (between January 2, 

2008, and September 30, 2009) for the 

PGE contract, as well as for the NYMEX 

Henry Hub natural gas contract (a DCM 

contract) and the ICE NWP Rockies 

Financial Basis and ICE Malin Financial 

Basis contracts (ECM contracts). The 

simulation results suggest that, on 

average over the sample period, a one 

percent rise in the PGE contract’s price 

elicited a 1.1 percent increase in each of 

the NYMEX Henry Hub and ICE Malin 

prices, as well as a 1 percent increase in 

the Rockies price. 

i. Federal Register Comments 

As noted above, comments were 

received from seven individuals and 

organizations, with five comments being 

directly applicable to the SPDC 

determination of the ICE PGE contract. 

WGCEF, EI, FIEG, ICE and NGSA 

generally agreed that the PGE contract 

does not meet the material liquidity 

criterion. 

WGCEF 39 and NGSA 40 both stated 

that the PGE contract does not 

materially affect other contracts that are 

listed for trading on DCMs or ECMs, as 

well as other over-the-counter contracts. 

Instead, the PGE contract is influenced 

by the underlying PG&E Citygate cash 

price index and the final settlement 

price of the NYMEX Henry Hub natural 

gas futures contract, not vice versa. 

FIEG 41 stated that the PGE contract 

cannot have a material effect on NYMEX 

contract because the PGE contract trades 

on a differential and represents ‘‘one leg 

(and not the relevant leg) of the 

locational spread.’’ The Commission’s 

statistical analysis shows that changes 

in the ICE PGE contract’s price 

significantly influences the prices of 

other contracts that are traded on DCMs 

and ECMs. 

First, ICE opined that the Commission 

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

is materially liquid. It is worth noting 

that ICE originally suggested that the 

CFTC use a five trades-per-day 

threshold as the basis for an ECM to 

report trade data to the CFTC.’’ In this 

regard, the Commission adopted a five 

trades-per-day threshold as a reporting 

requirement to enable it to 

‘‘independently be aware of ECM 

contracts that may develop into SPDCs’’ 

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Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23717 

42Supplemental data supplied by the ICE 

confirmed that block trades in the third quarter of 

2009 were in addition to the trades that were 

conducted on the electronic platform; block trades 

comprised 63.4 percent of all transactions in the 

PGE contract. 

43See 73 FR 75888, 75893 (Dec. 12, 2008). 

44 44 U.S.C. 3507(d). 45 7 U.S.C. 19(a). 

rather than solely relying upon an ECM 

on its own to identify any such potential 

SPDCs to the Commission. Thus, any 

contract that meets this threshold may 

be subject to scrutiny as a potential 

SPDC. As noted above, the Commission 

is basing a finding of material liquidity 

for the ICE PGE contract, in part, on the 

fact that there have been more than 20 

trades per day on average in the PGE 

contract during the third quarter of 

2009, which is quadruple the five 

trades-per-day that is cited in the ICE 

comment. In addition, the Commission 

notes that the number of contracts per 

transaction in the PGE contract is high 

(approximately 72 contracts per 

transaction) and thus, as noted, trading 

volume (measured in contract units) is 

substantial. The PGE contract also has 

significant open interest. 

ICE implied that the statistics 

provided by ICE were misinterpreted 

and misapplied by the Commission. In 

particular, ICE stated that the volume 

figures used in the Commission’s 

analysis (cited above) ‘‘include trades 

made in all [72] months of * * * [the] 

contract’’ as well as in strips of contract 

months, and a ‘‘more appropriate 

method of determining liquidity is to 

examine the activity in a single traded 

month or strip of a given contract.’’ ICE 

stated that only about 25 to 40 percent 

of the trades occurred in the single most 

liquid, usually prompt, month of the 

contract. 

It is the Commission’s opinion that 

liquidity, as it pertains to the PGE 

contract, is typically a function of 

trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the PGE contract itself 

would be considered liquid. ICE’s 

analysis of its own trade data confirms 

this to be the case for the PGE contract, 

and thus, the Commission believes that 

it applied the statistical data cited above 

in an appropriate manner for gauging 

material liquidity. 

In addition, EI and ICE stated that the 

trades-per-day statistics that it provided 

to the Commission in its quarterly filing 

and which are cited above includes 

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

completed on the electronic trading 

platform and should not be considered 

in the SPDC determination process. 

Commission staff asked ICE to review 

the data it sent in its quarterly filings. 

In response, ICE confirmed that the 

volume data it provided and which the 

Commission cited in its October 9, 2009, 

Federal Register notice, as well as the 

additional volume information it cites 

above, includes only transaction data 

executed on ICE’s electronic trading 

platform. The Commission 

acknowledges that the open interest 

information it cites above includes 

transactions made off the ICE 

platform.42 However, once open interest 

is created, there is no way for ICE to 

differentiate between ‘‘on-exchange’’ 

versus ‘‘off-exchange’’ created positions, 

and all such positions are fungible with 

one another and may be offset in any 

way agreeable to the position holder 

regardless of how the position was 

initially created. 

ii. Conclusion Regarding Material 

Liquidity 

Based on the above, the Commission 

concludes that the PGE contract meets 

the material liquidity criterion in that 

there is sufficient trading activity in the 

PGE contract to have a material effect on 

‘‘other agreements, contracts or 

transactions listed for trading on or 

subject to the rules of a designated 

contract market * * * or an electronic 

trading facility operating in reliance on 

the exemption in section 2(h)(3) of the 

Act’’ (that is, an ECM). 

4. Overall Conclusion 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the PGE contract 

performs a significant price discovery 

function under two of the four criteria 

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

CEA. Although the Commission has 

determined that the PGE contract does 

not meet the price linkage criterion at 

this time, the Commission has 

concluded that the PGE contract does 

meet both the material liquidity and 

material price reference criteria. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

PGE 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 PGE contract,43 and 

triggers the obligations, requirements— 

both procedural and substantive—and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs. 

V. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 44 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 45 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

an order under the Act. By its terms, 

section 15(a) does not require the 

Commission to quantify the costs and 

benefits of an order or to determine 

whether the benefits of the order 

outweigh its costs; rather, it requires 

that the Commission ‘‘consider’’ the 

costs and benefits of its actions. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. The Commission has considered 

the costs and benefits in light of the 

specific provisions of section 15(a) of 

the Act and has concluded that the 

Order, required by Congress to 

strengthen federal oversight of exempt 

commercial markets and to prevent 

market manipulation, is necessary and 

appropriate to accomplish the purposes 

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

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

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23718 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

46 5 U.S.C. 601 et seq. 47 66 FR 42256, 42268 (Aug. 10, 2001). 

48 7 U.S.C. 1a(29). 

49Because ICE already lists for trading a contract 

(i.e., the Henry Financial LD1 Fixed Price contract) 

that was previously declared by the Commission to 

be a SPDC, ICE must submit a written 

demonstration of compliance with the Core 

Principles within 30 calendar days of the date of 

this Order. 17 CFR 36.3(c)(4). 

1 74 FR 53720 (October 20, 2009). 

2 Incorporated as Title XIII of the Food, 

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

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorizes the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 46 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.47 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

certifies pursuant to 5 U.S.C. 605(b) that 

this Order, taken in connection with 

section 2(h)(7) of the Act and the Part 

36 rules, will not have a significant 

impact on a substantial number of small 

entities. 

VI. Order 

a. Order Relating to the ICE PG&E 

Citygate 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 PG&E 

Citygate Financial Basis contract, traded 

on the IntercontinentalExchange, Inc., 

satisfies the statutory material liquidity 

and material price reference criteria for 

significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the PG&E 

Citygate Financial Basis contract, the 

nine core principles established by new 

section 2(h)(7)(C). Additionally, the 

IntercontinentalExchange, Inc., shall be 

and is considered a registered entity 48

with respect to the PG&E Citygate 

Financial Basis contract and is subject 

to all the provisions of the Commodity 

Exchange Act applicable to registered 

entities. Further, the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., 

commence with the issuance of this 

Order.49

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10305 Filed 5–3–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Orders Finding That the Henry 

Financial Basis Contract, Henry 

Financial Index Contract and Henry 

Financial Swing Contract Traded on 

the IntercontinentalExchange, Inc., Do 

Not Perform a Significant Price 

Discovery Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final orders. 

SUMMARY: On October 20, 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 

Henry Financial Basis (‘‘HEN’’) contract, 

Henry Financial Index (‘‘HIS’’) contract 

and Henry Financial Swing (‘‘HHD’’) 

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’’), 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 HEN, HIS and 

HHD contracts do not perform a 

significant price discovery function. 

Authority for this action is found in 

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

Commission rule 36.3(c) promulgated 

thereunder. 

DATES: Effective date: 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 

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