Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23729 

1The acronym ‘‘Phys’’ indicates physical delivery 

of natural gas. 

2The acronym ‘‘BS’’ indicates that the contract is 

a cash-settled basis swap. 

3The acronym ‘‘LD1’’ indicates the final 

settlement price of the New York Mercantile 

Exchange’s (‘‘NYMEX’s’’) physically-delivered 

Henry Hub Natural Gas futures contract for the 

corresponding contract month, which is expressed 

in U.S. dollars and cents per million British thermal 

units (mmBtu). 

4The acronym ‘‘AB–NIT’’ refers to the Alberta, 

Canada, market center and Nova Inventory Transfer 

hub. 

5 ‘‘Union-Dawn’’ refers to the Union Gas, Ltd.’s, 

Dawn hub, which is located in Canada across the 

U.S. border from Detroit, Michigan. 

6The acronym ‘‘FP’’ refers to a fixed-price 

contract. 

7The abbreviation CA/GJ refers the Canadian 

dollars per gigajoule, which is a unit of measure for 

energy. One GJ is equal to 0.9478 mmBtu. 

8The acronym ‘‘ID’’ refers to an index contract. 

9The term ‘‘7a’’ refers to a price index that is 

computed as a volume-weighted average of 

transactions that occur on the Natural Gas 

Exchange’s trading platform during a particular 

calendar month. Such transactions specify the 

physical delivery of natural gas at the AB–NIT hub 

in the following calendar month. 

10 74 FR 53724 (October 20, 2009). 

11 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

12 7 U.S.C. 1a(29). 

13 74 FR 12178 (Mar. 23, 2009); these rules 

became effective on April 22, 2009. 

14Public 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). 

15For 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. 

COMMODITY FUTURES TRADING 

COMMISSION 

Orders Finding that the (1) Phys,1 BS,2

LD1 3 (US/MM), AB–NIT;4 (2) Phys, BS, 

LD1 (US/MM), Union-Dawn; 5 (3) Phys, 

FP,6 (CA/GJ),7 AB–NIT; (4) Phys, FP, 

(US/MM), Union-Dawn; and (5) Phys, 

ID,8 7a 9 (CA/GJ), AB–NIT Contracts, 

Offered for Trading on the Natural Gas 

Exchange, 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 10 a notice of its intent to 

undertake a determination whether the 

(1) Phys, BS, LD1 (US/MM), AB–NIT 

(‘‘Alberta Basis’’); (2) Phys, BS, LD1 (US/ 

MM), Union-Dawn (‘‘Union-Dawn 

Basis’’); (3) Phys, FP, (CA/GJ), AB–NIT 

(‘‘Alberta Fixed-Price’’); (4) Phys, FP, 

(US/MM), Union-Dawn (‘‘Union-Dawn 

Fixed-Price’’); and (5) Phys, ID, 7a (CA/ 

GJ), AB–NIT (‘‘7a Index’’) contracts, 

which are listed for trading on the 

Natural Gas Exchange, Inc. (‘‘NGX’’), 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 NGX 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 Alberta Basis, 

Union-Dawn Basis, Alberta Fixed-Price, 

Union-Dawn Fixed-Price and 7a Index 

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’’) 11

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.12 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.13 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 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.14 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4).15

II. Notice of Intent To Undertake SPDC 

Determination 

On October 20, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the Alberta 

Basis, Union-Dawn Basis, Alberta Fixedmstockstill on DSKH9S0YB1PROD with NOTICES

23730 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

16The 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. 17FERC is an independent Federal regulatory 

agency that, among other things, regulates the 

interstate transmission of natural gas, oil and 

electricity. NGX is Canada’s leading energy 

exchange and North America’s largest physical 

clearing and settlement facility; NGX is wholly 

owned by the TMX Group, Inc. 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.’’ 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 website: comment 

letters are available on the Commission’s Web site: 

http://www.cftc.gov/lawandregulation/ 

federalregister/federalregistercomments/2009/ 

09-029.html. 

18FERC stated that the subject contracts call for 

physical delivery of natural gas in Canada, and thus 

do not appear to be interstate commerce under the 

Natural Gas Act (‘‘NGA’’). Accordingly, FERC 

expressed the opinion that a determination by the 

Commission that any of the contracts performs a 

significant price discovery function ‘‘would not 

appear to conflict with FERC’s exclusive 

jurisdiction under 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. 

CL01. 

19WGCEF did not address whether the Alberta 

Fixed Price or Union-Dawn Fixed Price contracts 

are SPDCs. 

20 In its October 20, 2009, Federal Register 

release, the Commission identified material price 

reference, price linkage and material liquidity as the 

possible criteria for SPDC determination of the 

Alberta Basis and Union-Dawn Basis contracts 

(arbitrage was not identified as a possible criterion). 

With respect to the Alberta Fixed-Price, UnionDawn Fixed-Price and 7a Index contracts, the 

Federal Register release identified material price 

reference and material liquidity as the possible 

criteria for SPDC determination (price linkage and 

arbitrage were not identified as possible criteria). 

The criteria not indentified in the initial release 

will not be discussed further in this document or 

the associated Orders. 

21 17 CFR part 36, Appendix A. 

Price, Union-Dawn Fixed Price and 7a 

Index contracts perform a significant 

price discovery function and requested 

comment from interested parties.16

Comments were received from the 

Federal Energy Regulatory Commission 

(‘‘FERC’’), NGX and Working Group of 

Commercial Energy Firms (‘‘WGCEF’’).17

The comment letter from FERC18 did 

not directly address the issue of whether 

or not the subject contracts are SPDCs. 

NGX stated that the subject contracts 

lack sufficient liquidity to perform a 

significant price discovery function. 

WGCEF argued that the Alberta Basis 

and Union-Dawn Basis contracts fail to 

meet the material price reference, price 

linkage and material liquidity criteria 

for SPDC determination. Similarly, the 

7a Index contracts lack sufficient 

liquidity to perform a significant price 

discovery function.19 NGX’s and the 

Working Group’s comments are more 

extensively discussed below, as 

applicable. 

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

The Commission is directed by 

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

the following criteria in determining a 

contract’s significant price discovery 

function: 

• Price Linkage—the extent to which 

the agreement, contract or transaction 

uses or otherwise relies on a daily or 

final settlement price, or other major 

price parameter, of a contract or 

contracts listed for trading on or subject 

to the rules of a designated contract 

market (‘‘DCM’’) or derivatives 

transaction execution facility (‘‘DTEF’’), 

or a SPDC traded on an electronic 

trading facility, to value a position, 

transfer or convert a position, cash or 

financially settle a position, or close out 

a position. 

• Arbitrage—the extent to which the 

price for the agreement, contract or 

transaction is sufficiently related to the 

price of a contract or contracts listed for 

trading on or subject to the rules of a 

DCM or DTEF, or a SPDC traded on or 

subject to the rules of an electronic 

trading facility, so as to permit market 

participants to effectively arbitrage 

between the markets by simultaneously 

maintaining positions or executing 

trades in the contracts on a frequent and 

recurring basis. 

• Material price reference—the extent 

to which, on a frequent and recurring 

basis, bids, offers or transactions in a 

commodity are directly based on, or are 

determined by referencing or 

consulting, the prices generated by 

agreements, contracts or transactions 

being traded or executed on the 

electronic trading facility. 

• Material liquidity—the extent to 

which the volume of agreements, 

contracts or transactions in a 

commodity being traded on the 

electronic trading facility is sufficient to 

have a material effect on other 

agreements, contracts or transactions 

listed for trading on or subject to the 

rules of a DCM, DTEF or electronic 

trading facility operating in reliance on 

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

Not all criteria must be present to 

support a determination that a 

particular contract performs a 

significant price discovery function, and 

one or more criteria may be inapplicable 

to a particular contract.20 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.21 For example, for 

contracts that are linked to other 

contracts or that may be arbitraged with 

other contracts, the Commission will 

consider whether the price of the 

potential SPDC moves in such harmony 

with the other contract that the two 

markets essentially become 

interchangeable. This co-movement of 

prices would be an indication that 

activity in the contract had reached a 

level sufficient for the contract to 

perform a significant price discovery 

function. In evaluating a contract’s price 

discovery role as a price reference, the 

Commission the extent to which, on a 

frequent and recurring basis, bids, offers 

or transactions are directly based on, or 

are determined by referencing, the 

prices established for the contract. 

IV. Findings and Conclusions 

The Commission’s findings and 

conclusions with respect to the Alberta 

Basis, Union-Dawn Basis, Alberta FixedPrice, Union-Dawn Fixed-Price and 7a 

Index contracts are discussed separately 

below. 

a. The Phys, BS, LD1 (US/MM), AB–NIT 

(Alberta Basis Contract) and the SPDC 

Indicia 

The Alberta Basis contract calls for 

the physical delivery of natural gas 

based on the final settlement price for 

New York Mercantile Exchange’s 

(‘‘NYMEX’s’’) Henry Hub physicallydelivered Natural Gas (‘‘NG’’) futures 

contract for the specified calendar 

month, plus or minus the price 

differential (basis) between the Alberta 

delivery point and the Henry Hub. 

There is no standard size for the Alberta 

Basis contract, although a minimum 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23731 

22The 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. 

23See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

24See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf 

25Basis 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. 

26As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion is not discussed 

in reference to the Alberta Basis contract. 27 17 CFR part 36, Appendix A. 

volume of 100 million British thermal 

units (‘‘mmBtu’’) is required in 

increments of 100 units per day. The 

Alberta Basis contract is listed for 60 

consecutive calendar months. 

The Henry Hub,22 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.23 Some of the major trading 

centers include Alberta, Northwest 

Rockies, Southern California border and 

the Houston Ship Channel. For 

locations that are directly connected to 

the Henry Hub by one or more pipelines 

and where there typically is adequate 

shipping capacity, the price at the other 

locations usually directly tracks the 

price at the Henry Hub, adjusted for 

transportation costs. However, at other 

locations that are not directly connected 

to the Henry Hub or where shipping 

capacity is limited, the prices at those 

locations often diverge from the Henry 

Hub price. Furthermore, one local price 

may be significantly different than the 

price at another location even though 

the two markets’ respective distances 

from the Henry Hub are the same. The 

reason for such pricing disparities is 

that a given location may experience 

supply and demand factors that are 

specific to that region, such as 

differences in pipeline shipping 

capacity, unusually high or low demand 

for heating or cooling or supply 

disruptions caused by severe weather. 

As a consequence, local natural gas 

prices can differ from the Henry Hub 

price by more than the cost of shipping 

and such price differences can vary in 

an unpredictable manner. 

The Alberta hub is far removed from 

the Henry Hub and is not directly 

connected to the Henry Hub by an 

existing pipeline. Located in the 

Canadian province of Alberta, the 

Alberta natural gas market is a major 

connection point for long-distance 

transmission systems that ship natural 

gas to points throughout Canada and the 

United States. The Alberta province is 

Canada’s dominant natural gas 

producing region; six of the nine 

Canadian market centers are located in 

the Alberta province. The throughput 

capacity at the AECO–C hub is ten 

billion cubic feet per day. Moreover, the 

number of pipeline interconnections at 

that hub was four in 2008. Lastly, the 

AECO–C hub’s capacity is 20.4 billion 

cubic feet per day.24

The local price at the Alberta hub 

typically differs from the price at the 

Henry Hub. Thus, the price of the Henry 

Hub physically-delivered futures 

contract is an imperfect proxy for the 

Alberta price. Moreover, exogenous 

factors, such as adverse weather, can 

cause the Alberta gas price to differ from 

the Henry Hub price by an amount that 

is more or less than the cost of shipping, 

making the NYMEX Henry Hub futures 

contract even less precise as a hedging 

tool than desired by market participants. 

Basis contracts 25 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 NG contract’s final settlement 

price). 

In its October 20, 2009, Federal 

Register notice, the Commission 

identified material price reference, price 

linkage and material liquidity as the 

potential SPDC criteria applicable to the 

Alberta Basis contract.26 Each of these 

criteria is discussed below. 

1. Material Price Reference Criterion 

The Commission’s October 20, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for a SPDC determination with 

respect to the Alberta Basis contract. 

The Commission noted that NGX forged 

an alliance with the 

IntercontinentalExchange, Inc., (‘‘ICE’’) 

to use the ICE’s matching engine to 

complete transactions in physical 

natural gas contracts traded on NGX. In 

return, NGX agreed to provide clearing 

services for such transactions. As part of 

the agreement, NGX provides ICE with 

transaction data, which are then made 

available to market participants on a 

paid basis. ICE offers NGX’s price data 

in several packages, which vary in terms 

of the amount of available historical 

data. For example, the ICE offers the 

‘‘OTC Gas End of Day’’ data package 

with access to all price data, or just 

current prices plus a selected number of 

months (i.e., 12, 24, 36, or 48 months) 

of historical data. 

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.27

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 

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23732 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

28 In the third quarter of 2009, 6,320 separate 

trades occurred on ICE’s electronic platform in its 

AECO Financial Basis contract, resulting in a daily 

average of 95.8 trades. During the same period, the 

ICE contract had a total trading volume on its 

electronic platform of 736,412 contracts (which was 

an average of 11,158 contracts per day). As of 

September 30, 2009, open interest in the ICE AECO 

Financial Basis contract was 483,561 contracts. 

29CL 02. 

30 Id. 

31 73 FR 75892 (December 12, 2008) 32Appendix A to the Part 36 rules. 

participants in pricing cash market 

transactions. 

The Alberta hub is a major trading 

center for natural gas in North America. 

Traders, including producers, keep 

abreast of the prices of the Alberta 

market center when conducting cash 

deals. However, ICE’s cash-settled 

AECO Financial Basis contract is used 

more widely as a price reference than 

the NGX Alberta Basis contract. Traders 

look to ICE contract’s competitively 

determined price as an indication of 

expected values of natural gas at the 

Alberta hub when entering into cash 

market transactions for natural gas, 

especially those trades providing for 

physical delivery in the future. 

Moreover, traders use ICE’s AECO 

Financial Basis contract, as well as other 

basis contracts, to hedge cash market 

positions and transactions. The 

substantial volume of trading and open 

interest in the ICE contract attests to its 

use for this purpose.28 In contrast, 

trading volume in the NGX Alberta 

Basis contract is much smaller than in 

ICE’s cash-settled version of the 

contract. In this regard, total trading 

volume in the NGX Alberta Basis 

contract in the third quarter of 2009 was 

equivalent to 52,158 NYMEX 

physically-delivered natural gas 

contracts, which has a size of 10,000 

mmBtu. 

Accordingly, although the Alberta 

Hub is a major trading center for natural 

gas and, as noted, NGX provides price 

information for the Alberta Basis 

contract to ICE which sells it, the 

Commission has found upon further 

evaluation that the Alberta Basis 

contract is not routinely consulted by 

industry participants in pricing cash 

market transactions and thus does not 

meet the Commission’s Guidance for the 

material price reference criterion. In this 

regard, the ICE AECO natural gas futures 

contract is routinely consulted by 

industry participants in pricing cash 

market transactions at this location. 

Because both the NGX and the ICE 

contracts basically price the same 

commodity at the same location and 

time and the ICE contract has 

significantly higher trading volume and 

open interest, it is not necessary for 

market participants to independently 

refer to the NGX Alberta Basis contract 

for pricing natural gas at this location. 

Thus, the Alberta Basis contract does 

not satisfy the direct price reference test 

for existence of material price reference. 

Furthermore, the Commission notes that 

publication of the Alberta Basis 

contract’s prices is not indirect evidence 

of material price reference. The Alberta 

Basis contract’s prices are published 

with those of numerous other contracts, 

including ICE’s AECO Financial Basis 

contract, which are of more interest to 

market participants. Thus, the 

Commission has concluded that traders 

likely do not specifically purchase ICE 

data packages for the NGX Alberta Basis 

contract’s prices and do not consult 

such prices on a frequent and recurring 

basis in pricing cash market 

transactions. 

i. Federal Register Comments 

NGX states its opinion that the 

Alberta Basis contract does not satisfy 

the material price reference criteria 

because the contract lacks sufficient 

liquidity, and ‘‘the consideration of 

liquidity is implicitly understood to be 

a relevant, if not fundamental factor, 

where material price reference is being 

considered.’’ 29 Furthermore, NGX 

opined that the Commission purported 

‘‘to adopt a threshold as low as 5, 10 or 

20 trades per day as sufficiently material 

to attract a SPDC designation.’’ 30 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’’ 31 rather than solely relying 

upon an ECM on its own to identify any 

such potential SPDCs to the 

Commission. Thus, any contract that 

meets this threshold may be subject to 

scrutiny as a potential SPDC. However, 

this does not mean that the contract will 

be found to be a SPDC merely because 

it met the reporting threshold. WGCEF 

states that there is no direct evidence 

that any contracts on any market settle 

to or reference the NGX Alberta Basis 

price. Moreover, WGCEF ‘‘does not 

believe the fact that ICE publishes the 

settlement prices of NGX physical 

transactions constitutes sufficient 

evidence of a Material Price Reference 

necessary to satisfy the requirements of 

CEA Section 2(h)(7)(B)(iii).’’ It notes that 

the publication of NGX price data by 

ICE is the result of a unique 

arrangement between ICE and NGX, 

whereby ICE serves as the exclusive 

trading platform for NGX contracts and 

NGX does not publish any trade data on 

its own website. ‘‘Given this unique 

arrangement,’’ WGCEF asserts, ‘‘it is only 

logical that ICE publishes transaction 

data regarding the NGX physical deals 

in its ‘‘OTC Gas End of Day’’ 

publication.’’ As noted above, the 

Commission believes that publication of 

the Alberta Basis contract’s prices is not 

indirect evidence of material price 

reference. The Alberta Basis contract’s 

prices are published with those of 

numerous other contracts, including 

ICE’s AECO Financial Basis contract, 

which are of more interest to market 

participants. As a result, the 

Commission has concluded that traders 

likely do not specifically purchase ICE 

data packages for the NGX Alberta Basis 

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 NGX Alberta Basis 

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 Alberta Basis contract’s price (direct 

evidence). Moreover, while the Alberta 

Basis contract’s price data is sold to 

market participants, market participants 

likely do not specifically purchase the 

ICE data packages for the Alberta 

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 20, 2009, Federal 

Register notice, the Commission 

identified price linkage as a potential 

basis for a SPDC determination with 

respect to the Alberta Basis contract. In 

this regard, the final settlement of the 

Alberta Basis contract is based, in part, 

on the final settlement price of 

NYMEX’s Henry Hub physically 

delivered NG futures contract, where 

NYMEX is registered with the 

Commission as a DCM. 

The Commission’s Guidance on 

Significant Price Discovery Contracts 

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.’’ 32 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 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23733 

33Second quarter 2009 data was submitted to the 

Commission in a different format than in later 

filings. In this regard total trading volume and total 

number of trades per quarter were not identified. 

34Based on the Commission’s experience, a 

minor futures contract is, generally, one that has a 

quarterly trading volume of 100,000 contracts or 

less. 35 In establishing guidance to illustrate how it 

will evaluate the various criteria, or combinations 

of criteria, when determining whether a contract is 

an 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 UnionDawn Basis 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 an SPDC determination. 

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.’’ 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 SPDC 

(‘‘minimum threshold’’). 

To assess whether the Alberta Basis 

contract meets the price linkage 

criterion, Commission staff obtained 

price data from NGX and performed the 

statistical tests cited above. Staff found 

that, while the Alberta Basis 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 

Alberta price (derived by adding the 

NYMEX Henry Hub Natural Gas price to 

the Alberta 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, none of the Alberta Basis natural 

gas prices derived from the NGX 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 Alberta Basis 

contract fails to meet the volume 

threshold requirement. In particular, the 

total trading volume in the NYMEX NG 

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 NGX 

centralized market in the Alberta Basis 

contract during the same period was 

52,168 NYMEX-equivalent contracts. 

Thus, centralized-market trades in the 

Alberta Basis contract amounted to less 

than the minimum threshold. 

i. Federal Register Comments 

NGX states its belief that the Alberta 

Basis contract does not meet the price 

linkage factor because there is 

insufficient trading activity in this 

contract. 

WGCEF acknowledges that the 

Alberta Basis contract is technically 

linked to the NYMEX Henry Hub NG 

contract. However, WGCEF contends 

that a comparison of the Alberta Basis 

contract price with NYMEX NG 

settlement prices from July 21, 2009 

through November 2, 2009 clearly 

establishes that prices for these 

contracts are not substantially the same 

and do not move substantially in 

conjunction with one another. 

ii. Conclusion Regarding the Price 

Linkage Criterion 

The Commission finds that the NGX 

Alberta Basis contract does not meet the 

price linkage criterion because it fails 

the price relationship and volume test 

provided for in the Commission’s 

Guidance. 

3. Material Liquidity Criterion 

As noted above, in its October 20, 

2009, Federal Register notice, the 

Commission identified material 

liquidity, price linkage and material 

price reference as potential criteria for 

SPDC determination of the AB contract. 

To assess whether a contract meets the 

material liquidity criterion, the 

Commission first examines trading 

activity as a general measurement of the 

contract’s size and potential importance. 

If the Commission finds that the 

contract in question meets a threshold 

of trading activity that would render it 

of potential importance, the 

Commission will then perform a 

statistical analysis to measure the effect 

that changes to the subject-contract’s 

prices potentially may have on prices 

for other contracts listed on an ECM or 

a DCM. 

With respect to the material liquidity 

criterion, the Commission noted that the 

average number of transactions in the 

Alberta Basis nearby month contract 

was 23.2 trades per day in the second 

quarter of 2009. During the same period, 

the Alberta Basis contract had an 

average daily trading volume of 

5,869,000 mmBtu (or 587 NYMEXequivalent contracts of 10,000 mmBtu 

size). Moreover, open interest as of June 

30, 2009, was 150,213,600 mmBtu in the 

nearby month (15,021 NYMEX 

equivalents) and 10,112,200 mmBtu 

(1,011 NYMEX equivalents) for delivery 

two months out.33

In a subsequent filing, NGX reported 

that in the third quarter of 2009 the total 

number of transactions was 2,640 trades 

(an average of 40 trades per day). 

Trading volume in the third quarter of 

2009 was 521,580,000 mmBtu (52,158 

NYMEX-equivalent contracts) or an 

average of 7,900,000 mmBtu (790 

NYMEX-equivalent contracts) on a daily 

basis. As of September 30, 2009, open 

interest in the Alberta Basis contract 

was 6,440,000 mmBtu (644 NYMEXequivalent contracts). 

The number of trades per day 

remained relatively low from the second 

to third quarters of 2009, and averaged 

only slightly more than the reporting 

level of five trades per day. Moreover, 

trading activity in the Alberta Basis 

contract, as characterized by total 

quarterly volume, indicates that the 

Alberta Basis contract experiences 

trading activity that is similar to that of 

minor futures markets.34 Thus, the 

Alberta Basis contract does not meet a 

threshold of trading activity that would 

render it of potential importance and no 

additional statistical analysis is 

warranted.35

i. Federal Register Comments 

NGX stated in its comment letter that 

the Alberta Basis contract does not meet 

the material liquidity criterion for SPDC 

determination for a number of reasons. 

First, NGX opined that the 

Commission ‘‘seems to have applied a 

threshold for ‘material liquidity’ that is 

extremely low, and in general 

insufficient to support a determination 

that these contracts are no longer 

emerging markets but in fact serve a 

significant price discovery function.’’ 

NGX also noted that the Commission’s 

Guidance states that material liquidity 

was intended to be a ‘‘broad concept that 

captures the ability to transact 

immediately with little or no price 

concession.’’ The Guidance also states 

that where ‘‘material liquidity exists, a 

more or less continuous stream of prices 

can be observed and the prices should 

be similar,’’ such as ‘‘where trades occur 

multiple times per minute.’’ NGX then 

opined that ‘‘[t]he levels of liquidity 

mstockstill on DSKH9S0YB1PROD with NOTICES

23734 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

36 73 FR 75892 (December 12, 2008). 

37See 73 FR 75888, 75893 (Dec. 12, 2008). 

38The 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. 

39See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 40See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

outlined above for the Proposed 

Contracts cannot be what Congress 

intended in establishing the dividing 

line between contracts ripe for 

regulation and those still emerging and 

in need of further incubation.’’ 

WGCEF used arguments similar to 

those of NGX in opining that the Alberta 

Basis contract does not meet the 

material liquidity criterion. For 

example, WGCEF stated that the Alberta 

Basis contract does not have an effect on 

other contracts that are listed for 

trading, particularly the NYMEX NG 

contract. WGCEF pointed out the 

Commission’s Guidance which states 

that a ‘‘continuous stream of prices’’ 

should be observed in markets with 

material liquidity. In addition, WGCEF 

indicated that in liquid markets 

observed prices should be similar to 

each other and that transactions should 

occur multiple times per minute; ‘‘the 

trade frequency of the Alberta Basis 

Contract in terms of multiple trades per 

minute is very low.’’ In this regard, the 

Commission notes that it 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’’ 36 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. 

Furthermore, 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.’’ 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the Alberta Basis 

contract does not meet the material 

liquidity criterion. 

4. Overall Conclusion Regarding the 

Alberta Basis Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the NGX Alberta Basis 

contract does not perform a significant 

price discovery function under the 

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

the CEA. Specifically, the Commission 

has determined that the NGX Alberta 

Basis contract does not meet the 

material price reference, price linkage, 

or material liquidity criteria at this time. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

Alberta Basis contract is not a SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard NGX as a registered entity in 

connection with its Alberta Basis 

contract.37 Accordingly, with respect to 

its Alberta Basis contract, NGX is not 

required to comply with the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4) for ECMs 

with SPDCs. However, NGX must 

continue to comply with the applicable 

reporting requirements for ECMs. 

b. The Phys, BS, LD1 (US/MM), UnionDawn (Union-Dawn Basis) Contract and 

the SPDC Indicia 

The NGX Union-Dawn Basis contract 

is a monthly contract that calls for 

physical delivery of natural gas based 

on the final settlement price for 

NYMEX’s Henry Hub physicallydelivered natural gas futures contract for 

the specified calendar month, plus or 

minus the price differential (basis) 

between the Dawn delivery point and 

the Henry Hub. There is no standard 

size for the Union-Dawn Basis contract, 

although a minimum volume of 100 

mmBtu is required in increments of 100 

units per day. The Union-Dawn Basis 

contract is listed for 60 consecutive 

calendar months. 

The Henry Hub,38 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.39 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. 

Union Gas, Ltd., is a major Canadian 

natural gas storage, transmission, and 

distribution company based in Ontario, 

Canada. Union Gas offers premium 

storage and transportation services to 

customers at the Dawn hub, which is 

the largest underground storage facility 

in Canada and one of the largest in 

North America. The Dawn hub offers 

customers an important link for natural 

gas moving from Western Canadian and 

U.S. supply basins to markets in central 

Canada and the northeast United States. 

The throughput capacity at the Dawn 

hub is 9.3 billion cubic feet per day. 

Moreover, the number of pipeline 

interconnections at that hub was ten in 

2008. Lastly, the Dawn hub’s capacity is 

12.8 billion cubic feet per day.40

The local price at the Dawn hub 

typically differs from the price at the 

Henry Hub. Thus, the price of the Henry 

Hub physically-delivered futures 

contract is an imperfect proxy for the 

Dawn price. Moreover, exogenous 

factors, such as adverse weather, can 

cause the Dawn 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 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23735 

41Basis 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. 

42As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion is not discussed 

in reference to the Union-Dawn Basis contract. 

43 17 CFR part 36, Appendix A. 

44 In the third quarter of 2009, the Union-Dawn 

Basis contract had a total trading volume that was 

equivalent to 28,090 NYMEX physically-delivered 

NG futures contracts (the size of one NYMEX NG 

contract is 10,000 mmBtu); the Union-Dawn 

contract also had an open interest equivalent to 

2,948 NYMEX NG futures contracts. 45CL 03. 

contract even less precise as a hedging 

tool than desired by market participants. 

Basis contracts 41 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 20, 2009, Federal 

Register notice, the Commission 

identified material price reference, price 

linkage and material liquidity as the 

potential SPDC criteria applicable to the 

Union-Dawn Basis contract. Each of 

these criteria is discussed below.42

1. Material Price Reference Criterion 

The Commission’s October 20, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for a SPDC determination with 

respect to this contract. The 

Commission noted that NGX forged an 

alliance with ICE to use ICE’s matching 

engine to complete transactions in 

physical natural gas contracts traded on 

NGX. In return, NGX agreed to provide 

the clearing services for such 

transactions. As part of the agreement, 

NGX provides ICE with transaction data, 

which are then made available to market 

participants on a paid basis. ICE offers 

the NGX data in several packages, 

which vary in terms of the amount of 

available historical data. For example, 

the ICE offers the ‘‘OTC Gas End of Day’’ 

data 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. 

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.43

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 Union-Dawn hub is a relatively 

important trading center for natural gas 

in North America. Traders use the NGX 

Union-Dawn Basis contract to hedge 

cash market positions and transactions. 

Nevertheless, the relatively small 

volume of trading and open interest 44 in 

the Union-Dawn Basis contract does not 

support a finding that the contract is 

consulted on a frequent and recurring 

basis in establishing cash market 

transaction prices. Thus, the UnionDawn Basis contract does not satisfy the 

direct price reference test for existence 

of material price reference. Furthermore, 

the Commission notes that publication 

of the Union-Dawn Basis contract’s 

prices is not indirect evidence of 

material price reference. The UnionDawn Basis contract’s prices are 

published with those of numerous other 

contracts, including ICE’s AECO 

Financial Basis contract, which are of 

more interest to market participants. 

Thus, the Commission has concluded 

that traders likely do not specifically 

purchase ICE data packages for the NGX 

Union-Dawn Basis contract’s prices and 

do not consult such prices on a frequent 

and recurring basis in pricing cash 

market transactions. 

i. Federal Register Comments 

NGX expressed the opinion that the 

Union Dawn Basis contract does not 

meet the material price reference 

criterion because there is insufficient 

trading activity in this contract. 

WGCEF stated that there is no 

evidence that the Union-Dawn Basis 

contract does not directly affect the 

‘‘settlement of the NYMEX NG Contract 

nor does it influence physical pricing at 

the Henry Hub.’’ 45 Moreover, there is no 

evidence that a contract in any market 

is tied directly or indirectly to the 

settlement price of the Union-Dawn 

Basis contract. With respect to indirect 

evidence, WGCEF believes that ICE’s 

publication of the NGX contract’s 

settlement prices does not ‘‘constitute 

sufficient evidence’’ of material price 

reference, and is simply an extension of 

the ‘‘unique [business] arrangement’’ 

between ICE and NGX. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the NGX Union-Dawn Basis 

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 Union-Dawn Basis contract’s price 

(direct evidence). Moreover, while the 

Union-Dawn Basis contract’s price data 

is sold to market participants, 

individuals likely do not specifically 

purchase the ICE data packages for the 

Union-Dawn Basis 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 20, 2009, Federal 

Register notice, the Commission 

identified price linkage as a potential 

basis for a SPDC determination with 

respect to the Union-Dawn Basis 

contract. In this regard, the final 

settlement of the Union-Dawn Basis 

contract is based, in part, on the final 

settlement price of the NYMEX’s Henry 

Hub 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 

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 pricemstockstill on DSKH9S0YB1PROD with NOTICES

23736 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

46Appendix A to the Part 36 rules. 

47Second quarter 2009 data was submitted to the 

Commission is a different format than in later 

filings. In this regard total trading volume and total 

number of trades per quarter were not identified. 

48Based on the Commission’s experience, a 

minor futures contract is, generally, one that has a 

quarterly trading volume of 100,000 contracts or 

less. 

49 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 UnionDawn Basis 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. 

linked contract.’’ 46 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.’’ 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 Union-Dawn 

contract meets the price linkage 

criterion, Commission staff obtained 

price data from NGX and performed the 

statistical tests cited above. Staff found 

that, while the Union-Dawn Basis 

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 

Union-Dawn price (derived by adding 

the NYMEX Henry Hub Natural Gas 

price to the Union-Dawn 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, 27.4 percent of the Union-Dawn 

Basis natural gas prices derived from the 

NGX 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 UnionDawn Basis contract fails to meet the 

volume threshold requirement. In 

particular, the total trading volume in 

the NYMEX NG 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 

NGX centralized market in the UnionDawn Basis contract during the same 

period was 28,090 NYMEX-equivalent 

contracts. Thus, centralized-market 

trades in the Union-Dawn Basis contract 

amounted to less than the minimum 

threshold. 

i. Federal Register Comments 

NGX states its belief that the Union 

Dawn Basis contract does not meet the 

price linkage factor because there is 

insufficient trading activity in this 

contract. WGCEF acknowledges that the 

Union-Dawn Basis is technically linked 

to the NYMEX physically-delivered NG 

futures contract. The Working Group 

notes that a comparison of the UnionDawn Basis with NYMEX NG settlement 

prices from July 21, 2009, through 

November 2, 2009, clearly establishes 

that these contracts are not substantially 

the same and do not move substantially 

in conjunction with one another. 

ii. Conclusion Regarding the Price 

Linkage Criterion 

The Commission finds that the UnionDawn Basis 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 20, 

2009, Federal Register notice, the 

Commission identified material 

liquidity, price linkage and material 

price reference as potential criteria for 

SPDC determination of the Union-Dawn 

Basis contract. To assess whether a 

contract meets the material liquidity 

criterion, the Commission first examines 

trading activity as a general 

measurement of the contract’s size and 

potential importance. If the Commission 

finds that the contract in question meets 

a threshold of trading activity that 

would render it of potential importance, 

the Commission will then perform a 

statistical analysis to measure the effect 

that changes to the subject-contract’s 

prices potentially may have on prices 

for other contracts listed on an ECM or 

a DCM. 

In its October 20, 2009, Federal 

Register release, the Commission noted 

that the total number of transactions 

executed on NGX’s electronic platform 

in the nearby month of the Union-Dawn 

Basis contract was 8.3 trades per day in 

the second quarter of 2009. During the 

same period, the Union-Dawn Basis 

contract had an average daily trading 

volume of 1,332,400 mmBtu (or 133 

NYMEX-equivalent contracts per day). 

Moreover, open interest as of June 30, 

2009, was 28,203,800 mmBtu (2,820 

NYMEX-equivalent contracts) in the 

nearby contract month and 12,908,400 

mmBtu (1,291 NYMEX-equivalent 

contracts) for delivery two months 

out.47

In a subsequent filing, NGX reported 

that total trading volume in the third 

quarter of 2009 was 28,090 contracts (or 

425 contracts on a daily basis). In term 

of number of transactions, 1,831 trades 

occurred in the third quarter of 2009 (28 

trades per day). As of September 30, 

2009, open interest in the Union-Dawn 

Basis contract was 23,289 NYMEXequivalent contracts. 

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 Union-Dawn 

Basis contract, as characterized by total 

quarterly volume, indicates that the 

Union-Dawn Basis contract experiences 

trading activity similar to that of minor 

futures markets.48 Thus, the UnionDawn Basis contract does not meets a 

threshold of trading activity that would 

render it of potential importance and no 

additional statistical analysis is 

warranted.49

i. Federal Register Comments 

NGX stated in its comment letter that 

the Union-Dawn Basis contract does not 

meet the material liquidity criterion for 

SPDC determination for a number of 

reasons. 

First, NGX opined that the 

Commission ‘‘seems to have applied a 

threshold for ‘material liquidity’ that is 

extremely low, and in general 

insufficient to support a determination 

that these contracts are no longer 

emerging markets but in fact serve a 

significant price discovery function’’. 

NGX also noted that the Commission’s 

Guidance states that material liquidity 

was intended to be a ‘‘broad concept that 

captures the ability to transact 

immediately with little or no price 

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50 73 FR 75892 (December 12, 2008). 

51See 73 FR 75888, 75893 (Dec. 12, 2008). 

52See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

53See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf 

54As noted above, the Commission did not find 

an indication of arbitrage and price linkage in 

Continued 

concession.’’ The Guidance also states 

that where ‘‘material liquidity exists, a 

more or less continuous stream of prices 

can be observed and the prices should 

be similar’’, such as ‘‘where trades occur 

multiple times per minute.’’ NGX then 

opined that ‘‘[t]he levels of liquidity 

outlined above for the Proposed 

Contracts cannot be what Congress 

intended in establishing the dividing 

line between contracts ripe for 

regulation and those still emerging and 

in need of further incubation. 

The WGCEF used arguments similar 

to those of NGX in opining that the 

Union-Dawn Basis contract does not 

meet the material liquidity criterion. In 

addition, WGCEF noted that to be 

materially liquid, a contract must have 

‘‘a material effect of other contracts’’ and 

have ‘‘sufficient liquidity to perform a 

significant price discovery function.’’ 

WGCEF stated that the Union-Dawn 

Basis contract lacks both of those 

features. 

In this regard, the Commission notes 

that it 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’’ 50 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. 

Furthermore, 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.’’ 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the Union-Dawn 

Basis contract does not meet the 

material liquidity criterion. 

4. Overall Conclusion Regarding the 

Union-Dawn Basis Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the Union-Dawn Basis 

contract does not perform a significant 

price discovery function under the 

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

the CEA. Specifically, the Commission 

has determined that the Union-Dawn 

Basis contract does not meet the 

material price reference, price linkage, 

or material liquidity criteria at this time. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

Union-Dawn Basis contract is not a 

SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard NGX as a registered entity in 

connection with its Union-Dawn Basis 

contract.51 Accordingly, with respect to 

its Union-Dawn Basis contract, NGX is 

not required to comply with the 

obligations, requirements and timetables 

prescribed in Commission rule 

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

However, NGX must continue to comply 

with the applicable reporting 

requirements for ECMs. 

c. The Phys, FP, (CA/GJ), AB–NIT 

(Alberta Fixed Price) Contract and the 

SPDC Indicia 

The Alberta Fixed-Price contract calls 

for physical delivery of natural gas at 

the Alberta hub over a number of 

different time periods. This contract 

allows delivery of natural gas during the 

following day, Friday plus two or three 

days, Saturday plus three or four days, 

Sunday plus two days, the remainder of 

the month, throughout the nearby 

calendar month, and during a specific 

future calendar month. Each delivery 

period is considered to be a separate 

contract, and market participants value 

each delivery period separately. 

However, overlapping delivery days are 

considered fungible, and, thus, may be 

offset by traders. There is no standard 

size for the Alberta Fixed-Priced 

contract, although a minimum volume 

of 94.78 mmBtu is required in 

increments of 100 units per day. The 

NGX lists the Alberta Fixed-Price 

contract for 60 calendar months. 

As noted above, the primary pricing 

point for natural gas in North America 

is the Henry Hub, which is located in 

Erath, Louisiana. 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.52 Some of the 

major trading centers include Alberta, 

Northwest Rockies, Southern California 

border and the Houston Ship Channel. 

For locations that are directly connected 

to the Henry Hub by one or more 

pipelines and where there typically is 

adequate shipping capacity, the price at 

the other locations usually directly 

tracks the price at the Henry Hub, 

adjusted for transportation costs. 

However, at other locations that are not 

directly connected to the Henry Hub or 

where shipping capacity is limited, the 

prices at those locations often diverge 

from the Henry Hub price. Furthermore, 

one local price may be significantly 

different than the price at another 

location even though the two markets’ 

respective distances from the Henry 

Hub are the same. The reason for such 

pricing disparities is that a given 

location may experience supply and 

demand factors that are specific to that 

region, such as differences in pipeline 

shipping capacity, unusually high or 

low demand for heating or cooling or 

supply disruptions caused by severe 

weather. As a consequence, local 

natural gas prices can differ from the 

Henry Hub price by more than the cost 

of shipping and such price differences 

can vary in an unpredictable manner. 

The Alberta hub is far removed from 

the Henry Hub and is not directly 

connected to the Henry Hub by an 

existing pipeline. Located in the 

Canadian province of Alberta, the 

Alberta natural gas market is a major 

connection point for long-distance 

transmission systems that ship natural 

gas to points throughout Canada and the 

United States. The Alberta province is 

Canada’s dominant natural gas 

producing region; six of the nine 

Canadian market centers are located in 

the Alberta province. The throughput 

capacity at the AECO–C hub is ten 

billion cubic feet per day. Moreover, the 

number of pipeline interconnections at 

that hub was four in 2008. Lastly, the 

AECO–C hub’s capacity is 20.4 billion 

cubic feet per day.53

The local price at the Alberta hub 

typically differs from the price at the 

Henry Hub. Thus, the price of the Henry 

Hub physically-delivered futures 

contract is an imperfect proxy for the 

Alberta price. Moreover, exogenous 

factors, such as adverse weather, can 

cause the Alberta gas price to differ from 

the Henry Hub price by an amount that 

is more or less than the cost of shipping, 

making the NYMEX Henry Hub futures 

contract even less precise as a hedging 

tool than desired by market participants. 

In its October 20, 2009, Federal 

Register notice, the Commission 

identified material liquidity and 

material price reference as the potential 

SPDC criteria applicable to the Alberta 

Fixed-Price contract. Each of these 

factors is discussed below.54

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23738 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

connection with this contract; accordingly, those 

criteria are not discussed in reference to the Alberta 

Fixed-Price contract. 

55 17 CFR part 36, Appendix A. 

56 In the third quarter of 2009, 6,320 separate 

trades occurred on ICE’s electronic platform, 

resulting in a daily average of 95.8 trades. During 

the same period, the ICE contract had a total trading 

volume on its electronic platform of 736,412 

contracts (which was an average of 11,158 contracts 

per day). Open interest in ICE’s AECO Financial 

Basis Contract was 483,561 contracts as of 

September 30, 2009. 

57Trading volume in the ICE AECO Financial 

Basis contract during the third quarter of 2009 was 

equivalent to 184,103 NYMEX NG contracts. 

58The Alberta natural gas price can be derived 

using the Alberta Basis contract and the NYMEX 

Henry Hub NG contract. In this regard, the imputed 

price is the Henry Hub price plus or minus the basis 

at Alberta, as indicated by the NGX Alberta Basis 

contract. 

1. Material Price Reference Criterion 

The Commission’s October 20, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for a SPDC determination with 

respect to this contract. The 

Commission noted that the NGX forged 

an alliance with ICE to use the ICE’s 

matching engine to complete 

transactions in physical gas contracts 

traded on NGX. In return, the NGX 

agreed to provide the clearing services 

for such transactions. As part of the 

agreement, NGX provides the ICE with 

transaction data, which are then made 

available to market participants on a 

paid basis. The ICE offers the NGX data 

in several packages, which vary in terms 

of the amount of available historical 

data. For example, the ICE offers the 

‘‘OTC Gas End of Day’’ data package 

with access to all price data, or just 

current prices plus a selected number of 

months (i.e., 12, 24, 36, or 48 months) 

of historical data. 

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.55

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 Alberta hub is a major trading 

center for natural gas in North America. 

Traders, including producers, keep 

abreast of the prices of the Alberta 

market center when conducting cash 

deals. However, ICE’s cash-settled 

AECO Financial Basis contract is used 

more widely as a price reference than 

the NGX Alberta Fixed-Price contract. 

Traders look to the ICE contract’s 

competitively determined price as an 

indication of expected values of natural 

gas at the Alberta hub when entering 

into cash market transactions for natural 

gas, especially those trades providing 

for physical delivery in the future. 

Traders use ICE’s AECO Financial Basis 

contract, as well as other basis contracts, 

to hedge cash market positions and 

transactions. The substantial volume of 

trading and open interest in the ICE 

contract attests to its use for this 

purpose.56 In contrast, trading volume 

in the NGX Alberta Fixed-Price contract 

is much smaller than in ICE’s AECO 

Financial Basis contract. In this regard, 

total trading volume in the NGX Alberta 

Fixed Price contract in the third quarter 

of 2009 was equivalent to 50,313 

NYMEX physically-delivered NG 

contracts, which has a size of 10,000 

mmBtu.57

Accordingly, although the Alberta 

Hub is a major trading center for natural 

gas and, as noted, NGX provides price 

information for the Alberta Fixed Price 

contract to ICE which sells it, the 

Commission has found upon further 

evaluation that the Alberta Fixed Price 

contract is not routinely consulted by 

industry participants in pricing cash 

market transactions and thus does not 

meet the Commission’s Guidance for the 

material price reference criterion. In this 

regard, the ICE AECO Financial Basis 

contract is routinely consulted by 

industry participants in pricing cash 

market transactions at this location. 

Because both the NGX and the ICE 

contracts basically price the same 

commodity at the same location and 

time 58 and the ICE contract has 

significantly higher trading volume and 

open interest, it is not necessary for 

market participants to independently 

refer to the NGX Alberta Fixed-Price 

contract for pricing natural gas at this 

location. Thus, the Alberta Fixed-Price 

contract does not satisfy the direct price 

reference test for existence of material 

price reference. Furthermore, the 

Commission notes that publication of 

the NGX Alberta Fixed-Price contract’s 

prices is not indirect evidence of 

material price reference. The NGX 

Alberta Fixed-Price contract’s prices are 

published with those of numerous other 

contracts, which are of more interest to 

market participants. Thus, the 

Commission has concluded that traders 

likely do not specifically purchase the 

ICE data packages for the NGX Alberta 

Fixed-Price contract’s prices and do not 

consult such prices on a frequent and 

recurring basis in pricing cash market 

transactions. 

i. Federal Register Comments 

NGX states its belief that the Alberta 

Fixed Price contract does not meet the 

material price reference factor because 

there is insufficient trading activity in 

this contract. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the NGX Alberta Fixed-Price 

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 Alberta Fixed Price contract’s price 

(direct evidence). Moreover, while the 

Alberta Fixed-Price contract’s price data 

is sold to market participants, market 

participants likely do not specifically 

purchase the ICE data packages for the 

Alberta Fixed-Price contract’s prices 

and do not consult such prices on a 

frequent and recurring basis in pricing 

cash market transactions (indirect 

evidence). 

2. Material Liquidity Criterion 

As noted above, in its October 20, 

2009, Federal Register notice, the 

Commission identified material 

liquidity and material price reference as 

potential criteria for SPDC 

determination of the Alberta Fixed-Price 

contract. With respect to the material 

liquidity criterion, the Commission 

noted that the total number of 

transactions executed in the contract on 

NGX’s electronic platform during the 

second quarter of 2009 was 122.1, 36.0, 

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59Second quarter 2009 data was submitted to the 

Commission is a different format than in later 

filings. In this regard total trading volume and total 

number of trades per quarter were not identified. 

60Based on the Commission’s experience, a 

minor futures contract is, generally, one that has a 

quarterly trading volume of 100,000 contracts or 

less. 

61 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 Alberta 

Fixed-Price 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. 

62 73 FR 75892 (December 12, 2008). 63See 73 FR 75888, 75893 (Dec. 12, 2008). 

7.0, 30.1, 7.4, 68.6 and 12.8 trades for 

the following delivery periods— 

following day, Friday plus two days, 

Friday plus three days, Saturday plus 

three days, Saturday plus four days, 

Sunday plus two days, remainder of the 

month, nearby calendar month, and any 

single future calendar month, 

respectively. During the same period, 

the Alberta Fixed-Price contract had a 

total trading volume of 1,209,505 

mmBtu; 821,565 mmBtu; 223,874 

mmBtu; 754,175 mmBtu; 672,568 

mmBtu; 6,634,030 mmBtu; and 

1,233,958 mmBtu for the following 

delivery periods—next day, Friday plus 

two days, Friday plus three days, 

Saturday plus three days, Saturday plus 

four days, Sunday plus two days, 

remainder of the month, nearby 

calendar month, and any single future 

calendar month, respectively. Moreover, 

the net open interest as of June 30, 2009, 

was 96,003,450 mmBtu for next-month 

delivery. For delivery two months out, 

the open interest was 54,456,997 

mmBtu.59

In a subsequent filing NGX reported 

that total trading volume in the third 

quarter of 2009 was 50,313 contracts (or 

762 contracts on a daily basis). In term 

of number of transactions, 4,694 trades 

occurred in the third quarter of 2009 (73 

trades per day), for those Alberta FixedPrice contracts that specify delivery in 

the spot month. As of September 30, 

2009, open interest in the Alberta FixedPrice contract was 23,961 NYMEXequivalent contracts. 

The average number of trades per day 

in the second and third quarters of 2009 

was only moderately above the 

minimum reporting level (5 trades per 

day). Moreover, trading activity in the 

Alberta Fixed-Price contract, as 

characterized by total quarterly volume, 

indicates that the Alberta Fixed-Price 

contract experiences trading activity 

similar to that of minor futures 

markets.60 Thus, the Alberta Fixed-Price 

contract does not meets a threshold of 

trading activity that would render it of 

potential importance and no additional 

statistical analysis is warranted.61

i. Federal Register Comments 

NGX stated in its comment letter that 

the Alberta Fixed-Price contract does 

not meet the material liquidity criterion 

for SPDC determination for a number of 

reasons. 

First, NGX opined that the 

Commission ‘‘seems to have applied a 

threshold for ‘‘material liquidity’’ that is 

extremely low, and in general 

insufficient to support a determination 

that these contracts are no longer 

emerging markets but in fact serve a 

significant price discovery function.’’ 

NGX also noted that the Commission’s 

Guidance states that material liquidity 

was intended to be a ‘‘broad concept that 

captures the ability to transact 

immediately with little or no price 

concession’’. The Guidance also states 

that where ‘‘material liquidity exists, a 

more or less continuous stream of prices 

can be observed and the prices should 

be similar’’, such as ‘‘where trades occur 

multiple times per minutes. NGX then 

opined that ‘‘[t]he levels of liquidity 

outlined above for the Proposed 

Contracts cannot be what Congress 

intended in establishing the dividing 

line between contracts ripe for 

regulation and those still emerging and 

in need of further incubation. 

In this regard, the Commission notes 

that it 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’’ 62 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. 

Furthermore, 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.’’ 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the Alberta 

Fixed-Price contract does not meet the 

material liquidity criterion. 

3. Overall Conclusion Regarding the 

Alberta Fixed-Price Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the Alberta Fixed-Price 

contract does not perform a significant 

price discovery function under the 

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

the CEA. Specifically, the Commission 

has determined that the Alberta FixedPrice contract does not meet the 

material price reference or material 

liquidity criteria at this time. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

Alberta Fixed-Price contract is not a 

SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard NGX as a registered entity in 

connection with its Alberta Fixed-Price 

contract.63 Accordingly, with respect to 

its Alberta Fixed-Price contract, NGX is 

not required to comply with the 

obligations, requirements and timetables 

prescribed in Commission rule 

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

However, NGX must continue to comply 

with the applicable reporting 

requirements. 

d. The Phys, FP, (US/MM), Union-Dawn 

(Union-Dawn Fixed-Price) Contract and 

the SPDC Indicia 

The Union-Dawn Fixed-Price contract 

calls for physical delivery of natural gas 

at the Dawn hub over two different time 

periods: The following day and 

Saturday plus three days. Each delivery 

period is considered to be a separate 

contract, and the market participants 

value each delivery period separately. 

However, overlapping delivery days are 

considered fungible, and, thus, may be 

offset by traders. There is no standard 

size for the Union-Dawn Fixed-Priced 

contract, although a minimum volume 

of 100 mmBtu required in increments of 

100 units per day. The NGX lists the 

Union-Dawn Fixed-Price contract for 60 

calendar months. 

Union Gas, Ltd., is a major Canadian 

natural gas storage, transmission, and 

distribution company based in Ontario, 

Canada. Union Gas offers premium 

storage and transportation services to 

customers at the Dawn hub, which the 

largest underground storage facility in 

Canada and one of the largest in North 

America. The Dawn hub offers 

customers an important link for natural 

gas moving from Western Canadian and 

U.S. supply basins to markets in central 

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64See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

65As noted above, the Commission did not find 

an indication of arbitrage and price linkage in 

connection with this contract; accordingly, those 

criteria are not discussed in reference to the UnionDawn Fixed-Price contract. 

66 17 CFR part 36, Appendix A. 

67 In the third quarter of 2009, the Union-Dawn 

Fixed-Price contract had a total trading volume that 

was equivalent to 145 NYMEX physically-delivered 

NG futures contracts (the size of one NYMEX NG 

contract is 10,000 mmBtu); the Union-Dawn 

contract also had an open interest equivalent to 

1,738 NYMEX NG futures contracts. 

68Second quarter 2009 data was submitted to the 

Commission is a different format than in later 

filings. In this regard total trading volume and total 

number of trades per quarter were not identified. 

69Approximately 96 percent of the contracted 

natural gas volume was specified for delivery on 

either the next day or on the weekend. The 

remaining volume was to be delivered over the 

specified month or during the remainder of the 

current month. 

70Nearly all (more than 99 percent) of the trades 

were in contracts that specified next-day or 

weekend delivery of natural gas. 

Canada and the northeast United States. 

The throughput capacity at the Dawn 

hub is 9.3 billion cubic feet per day. 

Moreover, the number of pipeline 

interconnections at that hub was ten in 

2008. Lastly, the Dawn hub’s capacity is 

12.8 billion cubic feet per day.64

In its October 20, 2009, Federal 

Register notice, the Commission 

identified material liquidity and 

material price reference as the potential 

SPDC criteria applicable to the UnionDawn Fixed-Price contract. Each of 

these factors is discussed below.65

1. Material Price Reference Criterion 

The Commission’s October 20, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for a SPDC determination with 

respect to this contract. The 

Commission noted that NGX forged an 

alliance with ICE to use the ICE’s 

matching engine to complete 

transactions in physical gas contracts 

traded on NGX. In return, the NGX 

agreed to provide the clearing services 

for such transactions. As part of the 

agreement, NGX provides the ICE with 

transaction data, which are then made 

available to market participants on a 

paid basis. The ICE offers the NGX data 

in several packages, which vary in terms 

of the amount of available historical 

data. For example, the ICE offers the 

‘‘OTC Gas End of Day’’ data 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. 

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.66

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 Dawn hub is a major trading 

center for natural gas in the United 

States. Traders use the NGX UnionDawn Fixed-Price contract to hedge 

cash market positions and transactions. 

Nevertheless, the relatively small 

volume of trading and open interest 67 in 

the Union-Dawn Fixed-Price contract 

does not support a finding that the 

contract is consulted on a frequent and 

recurring basis in establishing cash 

market transaction prices. Thus, the 

Union-Dawn Fixed-Price contract does 

not satisfy the direct price reference test 

for existence of material price reference. 

Furthermore, the Commission notes that 

publication of the Union-Dawn FixedPrice contract’s prices is not indirect 

evidence of material price reference. 

The Union-Dawn Fixed-Price contract’s 

prices are published with those of 

numerous other contracts, which are of 

more interest to market participants. 

Thus, the Commission has concluded 

that traders likely do not specifically 

purchase ICE data packages for the NGX 

Union-Dawn Fixed-Price contract’s 

prices and do not consult such prices on 

a frequent and recurring basis in pricing 

cash market transactions. 

i. Federal Register Comments 

NGX states its belief that the Union 

Dawn Fixed Price contract does not 

meet the material price reference factor 

because there is insufficient trading 

activity in this contract. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the NGX Union-Dawn FixedPrice 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 Union-Dawn FixedPrice contract’s price (direct evidence). 

Moreover, while the Union-Dawn FixedPrice contract’s price data is sold to 

market participants, traders likely do 

not specifically purchase the ICE data 

packages for the NGX Union-Dawn 

Fixed-Price contract’s prices and do not 

consult such prices on a frequent and 

recurring basis in pricing cash market 

transactions (indirect evidence). 

2. Material Liquidity Criterion 

As noted above, in its October 20, 

2009, Federal Register notice, the 

Commission identified material 

liquidity and material price reference as 

potential criteria for SPDC 

determination of the Union-Dawn 

Fixed-Price contract. With respect to the 

material liquidity criterion, the 

Commission noted that the total number 

of transactions executed on NGX’s 

electronic platform in the Union-Dawn 

Fixed-Price contract during the second 

quarter of 2009 was 114.1 trades and 

23.9 trades for next-day delivery and 

delivery Saturday plus the next three 

days, respectively. During the same 

period, the Union-Dawn Fixed-Price 

contract had an average daily trading 

volume of 812,800 mmBtu and 458,000 

mmBtu for the delivery periods next day 

and Saturday plus three days, 

respectively. Moreover, the net open 

interest as of June 30, 2009, was 

2,241,600 mmBtu for next-day delivery 

(equivalent to 224 NYMEX NG 

contracts).68

In a subsequent filing, NGX reported 

that total trading volume in the third 

quarter of 2009 was the equivalent of 

8,333 NYMEX NG contracts (or 130 

contracts on a daily basis).69 In term of 

number of transactions, 7,899 trades 

occurred over the entire third quarter, 

which equates to 123 trades per day.70

As of September 30, 2009, open interest 

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Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23741 

71Based on the Commission’s experience, a 

minor futures contract is, generally, one that has a 

quarterly trading volume of 100,000 contracts or 

less. 72 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 Alberta 

Fixed-Price 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. 

73 73 FR 75892 (December 12, 2008). 

74See 73 FR 75888, 75893 (Dec. 12, 2008). 

75See http://www.eia.doe.gov/pub/oil_gas/ 

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

76As noted above, the Commission did not find 

an indication of arbitrage and price linkage in 

connection with this contract; accordingly, those 

criteria are not discussed in reference to the 7a 

Index contract. 

in the Union-Dawn Fixed-Price contract 

was 1,738 NYMEX NG contracts. 

The Commission notes that while 

trading activity in the Union-Dawn 

Fixed-Price appears to be substantial, it 

is important to keep in mind that the 

majority of trades involve close to 

immediate delivery, many times on a 

daily basis. With deliveries occurring 

each day, it is reasonable that more 

contracts would be traded compared to 

those contracts that specify delivery 

over an entire month. Moreover, trading 

activity in the Union-Dawn Fixed-Price 

contract, as characterized by total 

quarterly volume, indicates that the 

Union-Dawn Fixed-Price contract 

experiences less trading activity than 

minor futures markets.71 Thus, the 

Union-Dawn Fixed-Price contract does 

not meets a threshold of trading activity 

that would render it of potential 

importance and no additional statistical 

analysis is warranted.72

i. Federal Register Comments 

NGX stated in its comment letter that 

the Union-Dawn Fixed-Price contract 

does not meet the material liquidity 

criterion for SPDC determination for a 

number of reasons. 

First, NGX opined that the 

Commission ‘‘seems to have applied a 

threshold for ‘‘material liquidity’’ that is 

extremely low, and in general 

insufficient to support a determination 

that these contracts are no longer 

emerging markets but in fact serve a 

significant price discovery function’’. 

NGX also noted that the Commission’s 

Guidance states that material liquidity 

was intended to be a ‘‘broad concept that 

captures the ability to transact 

immediately with little or no price 

concession’’. The Guidance also states 

that where ‘‘material liquidity exists, a 

more or less continuous stream of prices 

can be observed and the prices should 

be similar’’, such as ‘‘where trades occur 

multiple times per minutes. NGX then 

opined that ‘‘[t]he levels of liquidity 

outlined above for the Proposed 

Contracts cannot be what Congress 

intended in establishing the dividing 

line between contracts ripe for 

regulation and those still emerging and 

in need of further incubation. 

In this regard, the Commission notes 

that it 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’’ 73 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. 

Furthermore, 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.’’ 

ii. Conclusion Regarding Material 

Liquidity 

Based on the above, the Commission 

finds that the NGX Union-Dawn FixedPrice contract does not meet the 

material liquidity criterion. 

3. Overall Conclusion Regarding the 

Union-Dawn Fixed-Price Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the Union-Dawn FixedPrice contract does not perform a 

significant price discovery function 

under the criteria established in section 

2(h)(7) of the CEA. Specifically, the 

Commission has determined that the 

NGX Union-Dawn Fixed-Price contract 

does not meet the material price 

reference or material liquidity criteria at 

this time. Accordingly, the Commission 

is issuing the attached Order declaring 

that the Union-Dawn Fixed-Price 

contract is not a SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard NGX as a registered entity in 

connection with its Union-Dawn FixedPrice contract.74 Accordingly, with 

respect to its Union-Dawn Fixed-Price 

contract, NGX is not required to comply 

with the obligations, requirements and 

timetables prescribed in Commission 

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

However, NGX must continue to comply 

with the applicable reporting 

requirements for ECMs. 

e. The Phys, ID, 7a (CA/GJ), AB–NIT (7a 

Index) Contract and the SPDC Indicia 

The NGX 7a Index contract calls for 

physical delivery of natural gas at the 

Alberta, Canada, trading hub during the 

specified calendar month. When trading 

this contract, market participants price 

the difference between the anticipated 

value of natural gas at the time of 

delivery and the average of actual trades 

on the NGX system. The average of 

transactions on the NGX system is 

reported as a volume-weighted average 

price index in the first publication of 

the delivery month of Canadian 

Enerdata, Ltd.’s Canadian Gas Price 

Reporter. At the time of delivery, the 

negotiated price premium or discount is 

added or subtracted to the published 

index price. There is no standard size 

for the 7a Index contract, although a 

minimum volume of 94.78 mmBtu is 

required in increments of 100 units per 

day. The NGX lists the 7a Index contract 

for 60 calendar months. 

Located in the Canadian province of 

Alberta, the Alberta natural gas market 

is a major connection point for longdistance transmission systems that ship 

natural gas to points throughout Canada 

and the United States. The Alberta 

province is Canada’s dominant natural 

gas producing region; six of the nine 

Canadian market centers are located in 

the Alberta province. The throughput 

capacity at the AECO–C hub is ten 

billion cubic feet per day. Moreover, the 

number of pipeline interconnections at 

that hub was four in 2008. Lastly, the 

AECO–C hub’s capacity is 20.4 billion 

cubic feet per day.75

In its October 20, 2009, Federal 

Register notice, the Commission 

identified material liquidity and 

material price reference as the potential 

SPDC criteria applicable to the 7a Index 

contract. Each of these factors is 

discussed below.76

1. Material Price Reference Criterion 

The Commission’s October 20, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for a SPDC determination with 

respect to this contract. The 

Commission noted that NGX forged an 

alliance with ICE to use ICE’s matching 

engine to complete transactions in 

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77 17 CFR part 36, Appendix A. 

78 In the third quarter of 2009, 6,320 separate 

trades occurred on ICE’s electronic platform, 

resulting in a daily average of 95.8 trades. During 

the same period, the ICE contract had a total trading 

volume on its electronic platform of 736,412 

contracts (which was an average of 11,158 contracts 

per day). As of September 30, 2009, open interest 

in the ICE AECO Financial Basis contract was 

483,561 contracts. 

79Second quarter 2009 data was submitted to the 

Commission is a different format than in later 

filings. In this regard total trading volume and total 

number of trades per quarter were not identified. 

physical gas contracts traded on NGX. 

In return, NGX agreed to provide the 

clearing services for such transactions. 

As part of the agreement, NGX provides 

ICE with transaction data, which are 

then made available to market 

participants on a paid basis. ICE offers 

the NGX data in several packages, 

which vary in terms of the amount of 

available historical data. For example, 

the ICE offers the ‘‘OTC Gas End of Day’’ 

data 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. 

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.77

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 Alberta hub is a major trading 

center for natural gas in North America. 

Traders, including producers, keep 

abreast of the prices of the Alberta 

market center when conducting cash 

deals. However, ICE’s cash-settled 

AECO Financial Basis contract is used 

more widely as a price reference than 

the NGX 7a Index contract. Traders look 

to the ICE contract’s competitively 

determined price as an indication of 

expected values of natural gas at the 

Alberta hub when entering into cash 

market transactions for natural gas, 

especially those trades providing for 

physical delivery in the future. Traders 

use ICE’s Alberta contract, as well as 

other basis contracts, to hedge cash 

market positions and transactions. The 

substantial volume of trading and open 

interest in the ICE contract attests to its 

use for this purpose.78 In contrast, 

trading volume in the 7a Index contract 

is much smaller than in ICE’s cashsettled version of the contract. In this 

regard, total trading volume in the NGX 

7a Index contract in the third quarter of 

2009 was equivalent to 1,946 NYMEX 

physically-delivered natural gas 

contracts, which has a size of 10,000 

mmBtu. 

Accordingly, although the Alberta 

Hub is a major trading center for natural 

gas and, as noted, NGX provides price 

information for the 7a Index contract to 

ICE which sells it, the Commission has 

found upon further evaluation that the 

7a Index contract is not routinely 

consulted by industry participants in 

pricing cash market transactions and 

thus does not meet the Commission’s 

Guidance for the material price 

reference criterion. In this regard, the 

ICE AECO Financial Basis contract is 

routinely consulted by industry 

participants in pricing cash market 

transactions at this location. Because 

both the NGX and the ICE contracts 

basically price the same commodity at 

the same location and time and the ICE 

contract has significantly higher trading 

volume and open interest, it is not 

necessary for market participants to 

independently refer to the 7a Index 

contract for pricing natural gas at this 

location. Thus, the 7a Index contract 

does not satisfy the direct price 

reference test for existence of material 

price reference. Furthermore, the 

Commission notes that publication of 

the 7a Index contract’s prices is not 

indirect evidence of material price 

reference. The 7a Index contract’s prices 

are published with those of numerous 

other contracts, which are of more 

interest to market participants. Thus, 

the Commission has concluded that 

traders likely do not specifically 

purchase the ICE data packages for the 

7a Index contract’s prices and do not 

consult such prices on a frequent and 

recurring basis in pricing cash market 

transactions. 

i. Federal Register Comments 

NGX expressed the opinion that the 

7a Index contract does not meet the 

material price reference criteria because 

it lacks sufficient trading activity. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the NGX 7a Index 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 7a Index contract’s price (direct 

evidence). Moreover, while the 7a Index 

contract’s price data is sold to market 

participants, market participants likely 

do not specifically purchase the ICE 

data packages for the 7a Index contract’s 

prices and do not consult such prices on 

a frequent and recurring basis in pricing 

cash market transactions (indirect 

evidence). 

2. Material Liquidity Criterion 

As noted above, in its October 20, 

2009, Federal Register notice, the 

Commission identified material 

liquidity and material price reference as 

potential criteria for SPDC 

determination of the 7a Index contract. 

To assess whether a contract meets the 

material liquidity criterion, the 

Commission first examines trading 

activity as a general measurement of the 

contract’s size and potential importance. 

If the Commission finds that the 

contract in question meets a threshold 

of trading activity that would render it 

of potential importance, the 

Commission will then perform a 

statistical analysis to measure the effect 

that changes to the subject-contract’s 

prices potentially may have on prices 

for other contracts listed on an ECM or 

a DCM. 

The Commission noted that the 

average number of transactions in the 7a 

Index contract was 10.9 in the second 

quarter of 2009. During the same period, 

the 7a Index contract had an average 

daily trading volume of 2,438,627 

mmBtu (244 NYMEX-equivalent 

contracts of 10,000 mmBtu size). 

Moreover, the net open interest as of 

June 30, 2009, was 6,287,794 mmBtu 

(629 NYMEX-equivalent contracts of 

10,000 mmBtu size) for delivery in the 

following month.79

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80Based on the Commission’s experience, a 

minor futures contract is, generally, one that has a 

quarterly trading volume of 100,000 contracts or 

less. 81 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 TCO 

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. 

82 73 FR 75892 (December 12, 2008). 

83See 73 FR 75888, 75893 (Dec. 12, 2008). 

84 44 U.S.C. 3507(d). 85 7 U.S.C. 19(a). 

In a subsequent filing dated 

November 13, 2009, NGX reported that 

total trading volume in the third quarter 

of 2009 was 1,964 NYMEX-equivalent 

contracts. In terms of number of 

transactions, 1,056 trades occurred in 

the third quarter of 2009 (an average of 

17 trades per day). As of September 30, 

2009, open interest in the 7a Index 

contract was 14,355 NYMEX-equivalent 

contracts. 

The Commission notes that trading 

activity in the 7a Index contract 

increased between the second and third 

quarters of 2009. In any case, the 

number of trades per day was only 

slightly more than the minimum 

reporting threshold (5 trades per day). 

Moreover, trading activity in the 7a 

Index contract, as characterized by total 

quarterly volume, indicates that the 

Index contract experiences trading 

activity similar to that of minor futures 

markets.80 Thus, the 7a Index contract 

does not meets a threshold of trading 

activity that would render it of potential 

importance and no additional statistical 

analysis is warranted.81

i. Federal Register Comments 

NGX stated in its comment letter that 

the 7a Index contract does not meet the 

material liquidity criterion for SPDC 

determination for a number of reasons. 

First NGX opined that the 

Commission ‘‘seems to have applied a 

threshold for ‘‘material liquidity’’ that is 

extremely low, and in general 

insufficient to support a determination 

that these contracts are no longer 

emerging markets but in fact serve a 

significant price discovery function’’. 

NGX also noted that the Commission’s 

Guidance states that material liquidity 

was intended to be a ‘‘broad concept that 

captures the ability to transact 

immediately with little or no price 

concession.’’ The Guidance also states 

that where ‘‘material liquidity exists, a 

more or less continuous stream of prices 

can be observed and the prices should 

be similar’’, such as ‘‘where trades occur 

multiple times per minutes. NGX then 

opined that ‘‘[t]he levels of liquidity 

outlined above for the Proposed 

Contracts cannot be what Congress 

intended in establishing the dividing 

line between contracts ripe for 

regulation and those still emerging and 

in need of further investigation. 

WGCEF also stated that the 7a 

contract lacks sufficient liquidity to 

perform a significant price discovery 

function. They cite the data in the 

Notice of Intent as evidence that trade 

frequency in terms of multiple trades 

per day is extremely low. 

In this regard, the Commission notes 

that it 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’’ 82 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. 

Furthermore, 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.’’ 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the 7a Index 

contract does not meet the material 

liquidity criterion. 

3. Overall Conclusion Regarding the 7a 

Index Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the 7a Index contract 

does not perform a significant price 

discovery function under the criteria 

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

CEA. Specifically, the Commission has 

determined that the 7a Index contract 

does not meet the material price 

reference or material liquidity criteria at 

this time. Accordingly, the Commission 

will issue the attached Order declaring 

that the 7a Index contract is not a SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard NGX as a registered entity in 

connection with its 7a Index contract.83

Accordingly, with respect to its 7a Index 

contract NGX is not required to comply 

with the obligations, requirements and 

timetables prescribed in Commission 

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

However, NGX must continue to comply 

with the applicable reporting 

requirements. 

V. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 84 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 CEA85 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

an order under the Act. By its terms, 

section 15(a) does not require the 

Commission to quantify the costs and 

benefits of an order or to determine 

whether the benefits of the order 

outweigh its costs; rather, it requires 

that the Commission ‘‘consider’’ the 

costs and benefits of its actions. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. 

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

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23744 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

86 5 U.S.C. 601 et seq. 

87 66 FR 42256, 42268 (Aug. 10, 2001). 88 7 U.S.C. 1a(29). 

89 7 U.S.C. 1a(29). 

90 7 U.S.C. 1a(29). 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorize the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

The Commission has concluded that 

NGX’s Alberta Basis, Union-Dawn Basis, 

Alberta Fixed-Price, Union-Dawn FixedPrice and 7a Index contracts that are the 

subject of the attached Orders are not 

SPDCs; accordingly, the Commission’s 

Orders impose no additional costs and 

no additional statutorily or regulatory 

mandated responsibilities on the ECM. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 86 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.87 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

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

these Orders, taken in connection with 

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

36 rules, will not have a significant 

impact on a substantial number of small 

entities. 

VI. Orders 

a. Order Relating to the Phys, BS, LD1 

(US/MM), AB–NIT 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 Phys, 

BS, LD1 (US/MM), AB–NIT contract, 

traded on the Natural Gas Exchange, 

Inc., does not at this time satisfy the 

material price preference, price linkage 

or material liquidity criteria for 

significant price discovery contracts. 

Consistent with this determination, the 

Natural Gas Exchange, Inc., is not 

considered a registered entity 88 with 

respect to the Phys, BS, LD1 (US/MM), 

AB–NIT 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 

Natural Gas Exchange, Inc., are not 

applicable to the Phys, BS, LD1 (US/ 

MM), AB/NIT contract with the 

issuance of this Order. 

This Order is based on the 

representations made to the 

Commission by the Natural Gas 

Exchange, Inc., dated August 25, 2009, 

and October 15, 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 Phys, BS, LD1 

(US/MM), AB–NIT 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 Natural 

Gas Exchange, Inc., must continue to 

comply with all of the applicable 

requirements of Section 2(h)(3) and 

Commission Regulation 36.3. 

b. Order Relating to the Phys, BS, LD1 

(US/MM), Union-Dawn 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 Phys, 

BS, LD1 (US/MM), Union-Dawn 

contract, traded on the Natural Gas 

Exchange, Inc., does not at this time 

satisfy the material price reference, 

price linkage or material liquidity 

criteria for significant price discovery 

contracts. Consistent with this 

determination, the Natural Gas 

Exchange, Inc., is not considered a 

registered entity 89 with respect to the 

Phys, BS, LD1 (US/MM), Union-Dawn 

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 

Natural Gas Exchange, Inc., are not 

applicable to the Phys, BS, LD1 (US/ 

MM), Union-Dawn contract with the 

issuance of this Order. 

This Order is based on the 

representations made to the 

Commission by the Natural Gas 

Exchange, Inc., August 25, 2009, and 

October 15, 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 Phys, BS, LD1 

(US/MM), Union-Dawn 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 Natural 

Gas Exchange, Inc., must continue to 

comply with all of the applicable 

requirements of Section 2(h)(3) and 

Commission Regulation 36.3. 

c. Order Relating to the Phys, FP, (CA/ 

GJ), AB–NIT 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 Phys, 

FP, (CA/GJ), AB–NIT contract, traded on 

the Natural Gas Exchange, Inc., does not 

at this time satisfy the material price 

reference or material liquidity reference 

criteria for significant price discovery 

contracts. Consistent with this 

determination, the Natural Gas 

Exchange, Inc., is not considered a 

registered entity 90 with respect to the 

Phys, FP, (CA/GJ), AB–NIT 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 Natural Gas 

Exchange, Inc., are not applicable to the 

Phys, FP, (CA/GJ), AB–NIT contract 

with the issuance of this Order. 

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Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 23745 

91 7 U.S.C. 1a(29). 92 7 U.S.C. 1a(29). 

This Order is based on the 

representations made to the 

Commission by the Natural Gas 

Exchange, Inc., dated August 25, 2009, 

and October 15, 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 Phys, FP, (CA/ 

GJ), AB–NIT 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 Natural Gas Exchange, 

Inc., must continue to comply with all 

of the applicable requirements of 

Section 2(h)(3) and Commission 

Regulation 36.3. 

d. Order Relating to the Phys, FP, (US/ 

MM), Union-Dawn 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 Phys, 

FP, (US/MM), Union-Dawn contract, 

traded on the Natural Gas Exchange, 

Inc., does not at this time satisfy the 

material price reference or material 

liquidity criteria for significant price 

discovery contracts. Consistent with this 

determination, the Natural Gas 

Exchange, Inc., is not considered a 

registered entity 91 with respect to the 

Phys, FP, (US/MM), Union-Dawn 

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 

Natural Gas Exchange, Inc., are not 

applicable to the Phys, FP, (US/MM), 

Union-Dawn contract with the issuance 

of this Order. 

This Order is based on the 

representations made to the 

Commission by the Natural Gas 

Exchange, Inc., dated August 25, 2009, 

and October, 15, 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 Phys, FP, (US/ 

MM), Union-Dawn 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 Natural 

Gas Exchange, Inc., must continue to 

comply with all of the applicable 

requirements of Section 2(h)(3) and 

Commission Regulation 36.3. 

e. Order Relating to the Phys, ID, 7a 

(CA/GJ), AB–NIT 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 Phys, 

ID, 7a (CA/GJ), AB–NIT contract, traded 

on the Natural Gas Exchange, Inc., does 

not at this time satisfy the material price 

reference or material liquidity criteria 

for significant price discovery contracts. 

Consistent with this determination, the 

Natural Gas Exchange, Inc., is not 

considered a registered entity 92 with 

respect to the Phys, ID, 7a (CA/GJ), AB– 

NIT 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 

Natural Gas Exchange, Inc., are not 

applicable to the Phys, ID, 7a (CA/GJ), 

AB–NIT contract with the issuance of 

this Order. 

This Order is based on the 

representations made to the 

Commission by the Natural Gas 

Exchange, Inc., dated August 25, 2009, 

and October 15, 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 Phys, ID, 7a (CA/ 

GJ), AB–NIT 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 Natural Gas Exchange, 

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. 2010–10314 Filed 5–3–10; 8:45 am] 

BILLING CODE P 

CONSUMER PRODUCT SAFETY 

COMMISSION 

[CPSC Docket No. 10–C0003] 

Jo-Ann Stores, Inc., Provisional 

Acceptance of a Settlement Agreement 

and Order 

AGENCY: Consumer Product Safety 

Commission. 

ACTION: Notice. 

SUMMARY: It is the policy of the 

Commission to publish settlements 

which it provisionally accepts under the 

Consumer Product Safety Act in the 

Federal Register in accordance with the 

terms of 16 CFR 1118.20(e). Published 

below is a provisionally-accepted 

Settlement Agreement with Jo-Ann 

Stores, Inc., containing a civil penalty of 

$50,000.00. 

DATES: Any interested person may ask 

the Commission not to accept this 

agreement or otherwise comment on its 

contents by filing a written request with 

the Office of the Secretary by May 19, 

2010. 

ADDRESSES: Persons wishing to 

comment on this Settlement Agreement 

should send written comments to the 

Comment 10–C0003, Office of the 

Secretary, Consumer Product Safety 

Commission, 4330 East West Highway, 

Room 820, Bethesda, Maryland 20814– 

4408. 

FOR FURTHER INFORMATION CONTACT: 

Sean R. Ward, Trial Attorney, Division 

of Compliance, Office of the General 

Counsel, Consumer Product Safety 

Commission, 4330 East West Highway, 

Bethesda, Maryland 20814–4408; 

telephone (301) 504–7602. 

SUPPLEMENTARY INFORMATION: The text of 

the Agreement and Order appears 

below. 

Dated: April 28, 2010. 

Todd A. Stevenson, 

Secretary. 

In the Matter of Jo-Ann Stores, Inc. 

Settlement Agreement 

1. In accordance with 16 CFR 1118.20, 

Jo-Ann Stores, Inc. (‘‘Jo-Ann’’) and the 

staff (‘‘Staff’’) of the United States 

Consumer Product Safety Commission 

(‘‘CPSC’’ or the ‘‘Commission’’) enter into 

this Settlement Agreement 

(‘‘Agreement’’). The Agreement and the 

incorporated attached Order (‘‘Order’’) 

settle the Staff’s allegations set forth 

below. 

Parties 

2. The Commission is an independent 

federal regulatory agency established 

pursuant to the Consumer Product 

mstockstill on DSKH9S0YB1PROD with NOTICES