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55 5 U.S.C. 601 et seq. 

56 66 FR 42256, 42268 (Aug. 10, 2001). 

57 7 U.S.C. 1a(29). 

58Because ICE already lists for trading a contract 

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

that was previously declared by the Commission to 

be a SPDC, ICE must submit a written 

demonstration of compliance with the Core 

Principles within 30 calendar days of the date of 

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

1 74 FR 53723 (October 20, 2009). 

2 7 U.S.C. 1a(29). 

3 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. The Commission has considered 

the costs and benefits in light of the 

specific provisions of section 15(a) of 

the Act and has concluded that the 

Order, required by Congress to 

strengthen federal oversight of exempt 

commercial markets and to prevent 

market manipulation, is necessary and 

appropriate to accomplish the purposes 

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

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorizes the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 55 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.56 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

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

this Order, taken in connection with 

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

36 rules, will not have a significant 

impact on a substantial number of small 

entities. 

VI. Order 

a. Order Relating to the ICE HSC 

Financial Basis Contract 

After considering the complete record 

in this matter, including the comment 

letters received in response to its 

request for comments, the Commission 

has determined to issue the following 

Order: 

The Commission, pursuant to its 

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

Act, hereby determines that the HSC 

Financial Basis contract, traded on the 

IntercontinentalExchange, Inc., satisfies 

the statutory material liquidity and 

material price reference criteria for 

significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the HSC 

Financial Basis contract, the nine core 

principles established by new section 

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

IntercontinentalExchange, Inc., shall be 

and is considered a registered entity 57

with respect to the HSC Financial Basis 

contract and is subject to all the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., 

commence with the issuance of this 

Order.58

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10341 Filed 5–4–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the Socal Border 

Financial Basis Contract Traded on the 

IntercontinentalExchange, Inc., 

Performs a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final order. 

SUMMARY: On October 20, 2009, the 

Commodity Futures Trading 

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

published for comment in the Federal 

Register 1 a notice of its intent to 

undertake a determination whether the 

Socal Border Financial Basis (‘‘SCL’’) 

contract traded on the 

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

an exempt commercial market (‘‘ECM’’) 

under sections 2(h)(3)–(5) of the 

Commodity Exchange Act (‘‘CEA’’ or the 

‘‘Act’’), performs a significant price 

discovery function pursuant to section 

2(h)(7) of the CEA.2 The Commission 

undertook this review based upon an 

initial evaluation of information and 

data provided by ICE as well as other 

available information. The Commission 

has reviewed the entire record in this 

matter, including all comments 

received, and has determined to issue 

an order finding that the SCL contract 

performs a significant price discovery 

function. Authority for this action is 

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

Commission rule 36.3(c) promulgated 

thereunder. 

DATES: Effective date: April 28, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

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

Senior Special Counsel, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5133. E-mail: 

snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 3

significantly broadened the CFTC’s 

regulatory authority with respect to 

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

the CEA, a new regulatory category— 


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4 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

5Public Law 110–246 at 13203; Joint Explanatory 

Statement of the Committee of Conference, H.R. 

Rep. No. 110–627, 110 Cong., 2d Sess. 978, 986 

(Conference Committee Report). See also 73 FR 

75888, 75894 (Dec. 12, 2008). 

6For an initial SPDC, ECMs have a grace period 

of 90 calendar days from the issuance of a SPDC 

determination order to submit a written 

demonstration of compliance with the applicable 

core principles. For subsequent SPDCs, ECMs have 

a grace period of 30 calendar days to demonstrate 

core principle compliance. 

7The Commission’s Part 36 rules establish, 

among other things, procedures by which the 

Commission makes and announces its 

determination whether a specific ECM contract 

serves a significant price discovery function. Under 

those procedures, the Commission publishes a 

notice in the Federal Register that it intends to 

undertake a determination whether a specified 

agreement, contract or transaction performs a 

significant price discovery function and to receive 

written data, views and arguments relevant to its 

determination from the ECM and other interested 

persons. 

8FERC is an independent federal regulatory 

agency that, among other things, regulates the 

interstate transmission of natural gas, oil and 

electricity. McGraw-Hill, through its division Platts, 

compiles and calculates monthly natural gas price 

indices from natural gas trade data submitted to 

Platts by energy marketers. Platts includes those 

price indices in its monthly Inside FERC’s Gas 

Market Report (‘‘Inside FERC’’). ICE is an exempt 

commercial market, as noted above. The comment 

letters are available on the Commission’s Web site: 

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

federalregister/federalregistercomments/2009/09- 

028.html. 

9FERC stated that the SCL contract is cash settled 

and does not contemplate the actual physical 

delivery of natural gas. Accordingly, FERC 

expressed the opinion that a determination by the 

Commission that a contract performs a significant 

price discovery function ‘‘would not appear to 

conflict with FERC’s exclusive jurisdiction under 

the Natural Gas Act (NGA) over certain sales of 

natural gas in interstate commerce for resale or with 

its other regulatory responsibilities under the NGA’’ 

and further that ‘‘FERC staff will continue to 

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

CFTC’’ should any such potential conflict arise. CL 

01. 

ECMs on which significant price 

discovery contracts (‘‘SPDCs’’) are 

traded—and treating ECMs in that 

category as registered entities under the 

CEA. The legislation authorizes the 

CFTC to designate an agreement, 

contract or transaction as a SPDC if the 

Commission determines, under criteria 

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

performs a significant price discovery 

function. When the Commission makes 

such a determination, the ECM on 

which the SPDC is traded must assume, 

with respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the Act and 

Commission regulations, and must 

comply with nine core principles 

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

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.4 As relevant here, rule 36.3 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

promptly concerning any contract 

traded in reliance on the exemption in 

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

five trades per day or more over the 

most recent calendar quarter, and for 

which the exchange sells its price 

information regarding the contract to 

market participants or industry 

publications, or whose daily closing or 

settlement prices on 95 percent or more 

of the days in the most recent quarter 

were within 2.5 percent of the 

contemporaneously determined closing, 

settlement or other daily prices of 

another contract. 

Commission rule 36.3(c)(3) 

established the procedures by which the 

Commission makes and announces its 

determination whether a particular ECM 

contract serves a significant price 

discovery function. Under those 

procedures, the Commission will 

publish notice in the Federal Register 

that it intends to undertake an 

evaluation whether the specified 

agreement, contract or transaction 

performs a significant price discovery 

function and to receive written views, 

data and arguments relevant to its 

determination from the ECM and other 

interested persons. Upon the close of 

the comment period, the Commission 

will consider, among other things, all 

relevant information regarding the 

subject contract and issue an order 

announcing and explaining its 

determination whether or not the 

contract is a SPDC. The issuance of an 

affirmative order signals the 

effectiveness of the Commission’s 

regulatory authorities over an ECM with 

respect to a SPDC; at that time such an 

ECM becomes subject to all provisions 

of the CEA applicable to registered 

entities.5 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

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

II. Notice of Intent To Undertake SPDC 

Determination 

On October 20, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the SCL contract 

performs a significant price discovery 

function and requested comment from 

interested parties.7 Comments were 

received from the Federal Energy 

Regulatory Commission (‘‘FERC’’), Platts 

and ICE.8 The comment letters from 

FERC9 and Platts did not directly 

address the issue of whether or not the 

SCL contract is a SPDC; ICE’s comments 

raised substantive issues with respect to 

the applicability of section 2(h)(7) to the 

SCL contract. Generally, ICE asserted 

that its SCL contract is not a SPDC as 

it does not meet the material liquidity, 

material price reference and price 

linkage criteria for SPDC determination 

(CL 03). ICE’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). 


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10 In its October 20, 2009, Federal Register 

release, the Commission identified material 

liquidity, material price reference and price linkage 

as the possible criteria for SPDC determination of 

the SCL contract. Arbitrage was not identified as a 

possible criterion and will not be discussed further 

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

12The term ‘‘hub’’ refers to a juncture where two 

or more natural gas pipelines are connected. Hubs 

also serve as pricing points for natural gas at the 

particular locations. 

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

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

14The Socal Border hub typically includes fixedprice gas delivered into Southern California Gas 

Co.’s pipeline system from El Paso Corp.’s pipeline 

at Topock and Blythe, CA/Ehrenberg, AZ; from 

Kern River Gas Transmission Co.’s pipeline at 

Wheeler Ridge and Kramer Junction, CA; and from 

Questar Pipeline Co.’s Southern Trail Pipeline at 

Needles, CA. The Socal price index includes 

deliveries from Pacific Gas and Electric at several 

points, including the Kern River station and Pisgah/ 

Daggett, as well as in-state production. 

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

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

16Basis contracts denote the difference in the 

price of natural gas at a specified location minus the 

price of natural gas at the Henry Hub. The 

differential can be either a positive or negative 

value. 

17Commercial activity in natural gas basis swap 

contracts is evidenced by large positions held by 

energy trading firms in the comparable NYMEX 

ClearPort basis swap contract for the Socal hub. 

Not all criteria must be present to 

support a determination that a 

particular contract performs a 

significant price discovery function, and 

one or more criteria may be inapplicable 

to a particular contract.10 Moreover, the 

statutory language neither prioritizes the 

criteria nor specifies the degree to 

which a SPDC must conform to the 

various criteria. In Guidance issued in 

connection with the Part 36 rules 

governing ECMs with SPDCs, the 

Commission observed that these criteria 

do not lend themselves to a mechanical 

checklist or formulaic analysis. 

Accordingly, the Commission has 

indicated that in making its 

determinations it will consider the 

circumstances under which the 

presence of a particular criterion, or 

combination of criteria, would be 

sufficient to support a SPDC 

determination.11 For example, for 

contracts that are linked to other 

contracts or that may be arbitraged with 

other contracts, the Commission will 

consider whether the price of the 

potential SPDC moves in such harmony 

with the other contract that the two 

markets essentially become 

interchangeable. This co-movement of 

prices would be an indication that 

activity in the contract had reached a 

level sufficient for the contract to 

perform a significant price discovery 

function. In evaluating a contract’s price 

discovery role as a price reference, the 

Commission will consider whether cash 

market participants are quoting bid or 

offer prices or entering into transactions 

at prices that are set either explicitly or 

implicitly at a differential to prices 

established for the contract. 

IV. Findings and Conclusions 

a. The Socal Border Financial Basis 

(SCL) Contract and the SPDC Indicia 

The SCL contract is cash settled based 

on the difference between the price of 

natural gas at the Southern California 

Border hub for the month of delivery, as 

published in Intelligence Press Inc.’s 

(‘‘IPI’s’’) Natural Gas Bidweek Survey, 

and the final settlement price for New 

York Mercantile Exchange’s 

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

the same specified calendar month. The 

IPI bidweek price, which is published 

monthly, is based on a survey of cash 

market traders who voluntarily report to 

IPI data on fixed-price transactions for 

physical delivery of natural gas at the 

Socal Border hub conducted during the 

last five business days of the month; 

such bidweek transactions specify the 

delivery of natural gas on a uniform 

basis throughout the following calendar 

month at the agreed upon rate. The IPI 

bidweek index is published on the first 

business day of the calendar month in 

which the natural gas is to be delivered. 

The size of the SCL contract is 2,500 

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

and the unit of trading is any multiple 

of 2,500 mmBtu. The SCL contract is 

listed for up to 120 calendar months 

commencing with the next calendar 

month. 

The Henry Hub,12 which is located in 

Erath, Louisiana, is the primary cash 

market trading and distribution center 

for natural gas in the United States. It 

also is the delivery point and pricing 

basis for the NYMEX’s actively traded, 

physically-delivered natural gas futures 

contract, which is the most important 

pricing reference for natural gas in the 

United States. The Henry Hub, which is 

operated by Sabine Pipe Line, LLC, 

serves as a juncture for 13 different 

pipelines. These pipelines bring in 

natural gas from fields in the Gulf Coast 

region and ship it to major consumption 

centers along the East Coast and 

Midwest. The throughput shipping 

capacity of the Henry Hub is 1.8 trillion 

mmBtu per day. 

In addition to the Henry Hub, there 

are a number of other locations where 

natural gas is traded. In 2008, there were 

33 natural gas market centers in North 

America.13 Some of the major trading 

centers include Alberta, Northwest 

Rockies, Socal 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 Socal Border hub is located in 

Southern California on the border with 

Arizona.14 The California Energy Hub, a 

market center that includes the Socal 

Border Hub, had an estimated 

throughput capacity of 900 million 

cubic feet per day. Moreover, the 

number of pipeline interconnections at 

the California Energy Hub was 12 in 

2008, up from five in 2003. Lastly, the 

pipeline interconnection capacity of the 

California Energy Hub in 2008 was 

6,784 million cubic feet per day, which 

constituted a 47 percent increase over 

the pipeline interconnection capacity in 

2003.15 The Socal Border hub is far 

removed from the Henry Hub and is not 

directly connected to the Henry Hub by 

an existing pipeline. 

For all these reasons, the local price 

at the Socal hub typically differs from 

the price at the Henry Hub. Thus, the 

price of the Henry Hub physicallydelivered futures contract is an 

imperfect proxy for the Socal Border 

price. Moreover, exogenous factors, 

such as adverse weather, can cause the 

Socal gas price to differ from the Henry 

Hub price by an amount that is more or 

less than the cost of shipping, making 

the NYMEX Henry Hub futures contract 

even less precise as a hedging tool than 

desired by market participants. Basis 

contracts 16 allow traders to more 

accurately discover prices at alternative 

locations and hedge price risk that is 

associated with natural gas at such 

locations.17 In this regard, a position at 


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18As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion was not 

discussed in reference to the SCL contract. 

19The OTC Gas End of Day dataset includes daily 

settlement prices for natural gas contracts listed for 

all points in North America. 

20 In addition to referencing ICE prices, natural 

gas market firms participating in the Socal market 

may rely on other cash market quotes as well as 

industry publications and price indices that are 

published by third-party price reporting firms in 

entering into natural gas transactions. 

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 liquidity, price 

linkage and material price reference as 

the potential SPDC criteria applicable to 

the SCL contract. Each of these criteria 

is discussed below.18

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 considered the fact that ICE 

maintains exclusive rights over IPI’s 

bidweek price indices. As a result, no 

other exchange can offer such a basis 

contract based on IPI’s Socal bidweek 

index. While other third-party price 

providers produce natural gas price 

indices for this and other trading 

centers, market participants indicate 

that the IPI Socal bidweek index is 

highly regarded for this particular 

location and should market participants 

wish to establish a hedged position 

based on this index, they would need to 

do so by taking a position in the ICE 

SCL swap since ICE has the right to the 

IPI index for cash settlement purposes. 

In addition, ICE sells its price data to 

market participants in a number of 

different packages which vary in terms 

of the hubs covered, time periods, and 

whether the data are daily only or 

historical. For example, ICE offers the 

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

End of Day’’ 19 packages with access to 

all price data or just current prices plus 

a selected number of months (i.e., 12, 

24, 36 or 48 months) of historical data. 

These two packages include price data 

for the SCL contract. 

The Socal Border hub is a major 

trading center for natural gas in the 

United States. Traders, including 

producers, keep abreast of the prices of 

the SCL contract when conducting cash 

deals. These traders look to a 

competitively determined price as an 

indication of expected values of natural 

gas at the Socal Border when entering 

into cash market transactions for natural 

gas, especially those trades providing 

for physical delivery in the future. 

Traders use the ICE SCL contract, as 

well as other ICE basis swap contracts, 

to hedge cash market positions and 

transactions—activities which enhance 

the SCL contract’s price discovery 

utility. The substantial volume of 

trading and open interest in the SCL 

contract appears to attest to its use for 

this purpose. While the SCL contract’s 

settlement prices may not be the only 

factor influencing spot and forward 

transactions, natural gas traders 

consider the ICE price to be a critical 

factor in conducting OTC transactions.20

NYMEX lists a futures contract that is 

comparable to the ICE SCL contract on 

its ClearPort platform. However, unlike 

the ICE contract, none of the trades in 

the NYMEX SoCal Basis Swap are 

executed in NYMEX’s centralized 

marketplace; instead, all of the 

transactions originate as bilateral swaps 

that are submitted to NYMEX for 

clearing. The daily settlement prices of 

the NYMEX SoCal Basis Swap contract 

are influenced, in part, by the daily 

settlement prices of the ICE SCL 

contract. This is because NYMEX 

determines the daily settlement prices 

for its natural gas basis swap contracts 

through a survey of cash market voice 

brokers. Voice brokers, in turn, refer to 

the ICE SCL price, among other 

information, as an important indicator 

as to where the market is trading. 

Therefore, the ICE SCL price influences 

the settlement price for the NYMEX 

SoCal Basis Swap contract. This is 

supported by an analysis of the daily 

settlement prices for the NYMEX and 

ICE Socal basis swap contracts. In this 

regard, 99 percent of the daily 

settlement prices for the NYMEX SoCal 

Basis Swap contract are within one 

standard deviation of the SCL contract’s 

settlement prices. 

Lastly, the fact that the SCL contract 

does not meet the price linkage criterion 

(discussed below) bolsters the argument 

for material price reference. As noted 

above, the Henry Hub is the pricing 

reference for natural gas in the United 

States. However, regional market 

conditions may cause the price of 

natural gas in another area of the 

country to diverge by more than the cost 

of transportation, thus making the 

Henry Hub price an imperfect proxy for 

the local gas price. The more variable 

the local natural gas price is, the more 

traders need to accurately hedge their 

price risk. Basis swap contracts provide 

a means of more accurately pricing 

natural gas at a location other than the 

Henry Hub. An analysis of Socal natural 

gas prices showed that 93 percent of the 

observations were more than 2.5 percent 

different that the contemporaneous 

Henry Hub prices. Specifically, the 

average Socal basis value between 

January 2008 and September 2009 was 

¥$0.78 per mmBtu with a variance of 

$0.29 per mmBtu. 

i. Federal Register Comments 

As noted above, ICE was the sole 

respondent which addressed the 

question of whether the SCL contract is 

a SPDC. ICE stated in its comment letter 

that the SCL contract does not meet the 

material price reference criterion for 

SPDC determination. ICE argued that 

the Commission appeared to base the 

case that the SCL contract is potentially 

a SPDC on two disputable assertions. 

First, in issuing its notice of intent to 

determine whether the SCL contract is 

a SPDC, the CFTC cited a general 

conclusion in its ECM study ‘‘that 

certain market participants referred to 

ICE as a price discovery market for 

certain natural gas contracts.’’ ICE states 

that, ‘‘Basing a material price reference 

determination on general statements 

made in a two year old study does not 

seem to meet Congress’ intent that the 

CFTC use its considerable expertise to 

study the OTC markets.’’ In response to 

the above comment, the Commission 

notes that it cited the ECM study’s 

general finding that some ICE natural 

gas contracts appear to be regarded as 

price discovery markets merely as an 

indicia that an investigation of certain 

ICE contracts may be warranted, and 

was not intended to serve as the sole 

basis for determining whether or not a 

particular contract meets the material 

price reference criterion. 

Second, ICE argued that the 

Commission should not base a 

determination that the SCL contract is a 

SPDC merely because this contract has 

the exclusive right to base its settlement 

on the IPI Socal Border Index price. 

While the Commission acknowledges 

that there are other firms that produce 

price indices for the Socal hub, as it 

notes above, market participants 

indicate that the IPI Index is very highly 

regarded and should they wish to 

establish a hedged position based on 

this index, they would need to do so by 

taking a position in the ICE SCL swap 


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21Futures and swaps based on other Socal indices 

have not met with the same market acceptance as 

the SCL contract. For example, NYMEX lists a basis 

swap contract that is comparable to the SCL 

contract with the exception that it uses a different 

price index for cash settlement. Open interest as of 

September 30, 2009, was approximately 75,000 

contracts in the NYMEX SoCal Basis Swap contract 

versus nearly 400,000 contracts in ICE’s SCL 

contract. Moreover, there has been no centralizedmarket trading in the NYMEX Socal Basis Swap 

contract, so that contract does not serve as a source 

of price discovery for cash market traders with 

natural gas at that location. 

22Appendix A to the Part 36 rules. 

23The SCL contract is one-quarter the size of the 

NYMEX Henry Hub physically-delivered futures 

contract. 

24The acronym stands for Houston Ship Channel. 

25As noted above, the material liquidity criterion 

speaks to the effect that transactions in the potential 

SPDC may have on trading in ‘‘agreements, 

contracts and transactions listed for trading on or 

subject to the rules of a designated contract market, 

a derivatives transaction execution facility, or an 

electronic trading facility operating in reliance on 

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

since ICE has the exclusive right to use 

the IPI index.21

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the SCL contract meets the 

material price reference criterion 

because it is referenced and consulted 

on a frequent and recurring basis by 

cash market participants when pricing 

transactions (direct evidence). 

Moreover, the ECM sells the SCL 

contract’s price data to market 

participants (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 SCL contract. In this 

regard, the final settlement of the SCL 

contract is based, in part, on the final 

settlement price of the NYMEX’s 

physically-delivered natural gas futures 

contract, where the NYMEX is 

registered with the Commission as a 

DCM. 

The Commission’s Guidance on 

Significant Price Discovery Contracts 22

notes that a ‘‘price-linked contract is a 

contract that relies on a contract traded 

on another trading facility to settle, 

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

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

contract, the mere fact that a contract is 

linked to another contract will not be 

sufficient to support a determination 

that a contract performs a significant 

price discovery function. To assess 

whether such a determination is 

warranted, the Commission will 

examine the relationship between 

transaction prices of the linked contract 

and the prices of the referenced 

contract. The Commission believes that 

where material liquidity exists, prices 

for the linked contract would be 

observed to be substantially the same as 

or move substantially in conjunction 

with the prices of the referenced 

contract.’’ Furthermore, the Guidance 

proposes a threshold price relationship 

such that prices of the ECM linked 

contract will fall within a 2.5 percent 

price range for 95 percent of 

contemporaneously determined closing, 

settlement or other daily prices over the 

most recent quarter. Finally, the 

Commission also stated in the Guidance 

that it would consider a linked contract 

that has a trading volume equivalent to 

5 percent of the volume of trading in the 

contract to which it is linked to have 

sufficient volume potentially to be 

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

To assess whether the SCL contract 

meets the price linkage criterion, 

Commission staff obtained price data 

from ICE and performed the statistical 

tests cited above. Staff found that, while 

the Socal Border price is determined, in 

part, by the final settlement price of the 

NYMEX physically-delivered natural 

gas futures contract (a DCM contract), 

the Socal hub price is not within 2.5 

percent of the settlement price of the 

corresponding NYMEX Henry Hub 

natural gas futures contract on 95 

percent or more of the days. 

Specifically, during the third quarter of 

2009, only 7 percent of the Socal Border 

natural gas prices derived from the ICE 

basis values were within 2.5 percent of 

the daily settlement price of the NYMEX 

Henry Hub futures contract. In addition, 

staff found that the SCL contract fails to 

meet the volume threshold requirement. 

In particular, the total trading volume in 

the NYMEX physically-delivered 

natural gas contract during the third 

quarter of 2009 was 14,022,963 

contracts, with 5 percent of that number 

being 701,148 contracts. The number of 

trades on the ICE centralized market in 

the SCL contract during the same period 

was 507,870 contracts (equivalent to 

126,967 NYMEX contracts, given the 

size difference).23 Thus, centralizedmarket trades in the SCL contract 

amounted to less than the minimum 

threshold. 

Due to the specific criteria that a 

given ECM contract must meet to fulfill 

the price linkage criterion, the 

requirements, for all intents and 

purposes, exclude ECM contracts that 

are not near facsimiles of DCM contracts 

even though the ECM contract may 

specifically use the settlement price to 

value a position, which is the case of the 

SCL contract. In this regard, an ECM 

contract that is priced and traded as if 

it is a functional equivalent of a DCM 

contract likely will have a price series 

that mirrors that of the corresponding 

DCM contract. In contrast, for contracts 

that are not look-alikes of DCM 

contracts, it is reasonable to expect that 

the two price series would be divergent. 

The Socal Border hub and the Henry 

Hub are located in two different areas of 

the United States. Moreover, the Henry 

Hub is primarily a supply center while 

Southern California is a demand center. 

These differences contribute to the 

divergence between the two price series 

and, as discussed below, increase the 

likelihood that the ‘‘basis’’ contract is 

used for material price reference. 

i. Federal Register Comments 

As noted above, ICE was the sole 

respondent which addressed the 

question of whether the SCL contract is 

a SPDC. ICE stated in its comment letter 

that the SCL contract does not meet the 

price linkage criterion for SPDC 

determination because it fails the 

volume test provided in the 

Commission’s Guidance. 

ii. Conclusion Regarding the Price 

Linkage Criterion 

Based on the above, the Commission 

finds that the SCL contract does not 

meet the price linkage criterion because 

it fails the price relationship and 

volume tests provided for in the 

Commission’s Guidance. 

3. Material Liquidity Criterion 

To assess whether the SCL contract 

meets the material liquidity criterion, 

the Commission first examined volume 

and open interest data provided to it by 

ICE as a general measurement of the 

SCL market’s size and potential 

importance, and second performed a 

statistical analysis to measure the effect 

that changes to SCL prices potentially 

may have on prices for the NYMEX 

Henry Hub Natural Gas (a DCM 

contract), the ICE AECO Financial Basis 

contract (an ECM contract) and the 

HSC24 Financial Basis contract (an ECM 

contract).25

The Commission’s Guidance 

(Appendix A to Part 36) notes that 

‘‘[t]raditionally, objective measures of 

trading such as volume or open interest 

have been used as measures of 

liquidity.’’ In this regard, the 

Commission in its October 20, 2009, 

Federal Register notice referred to 

second quarter 2009 trading statistics 

that ICE had submitted for its SCL 

contract. Based upon on a required 

quarterly filing made by ICE on July 27, 

2009, the total number of SCL trades 


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26 ICE does not differentiate between open 

interest created by a transaction executed on its 

trading platform versus that created by a transaction 

executed off its trading platform. 74 FR 53723 

(October 20, 2009). 

27See Commission Rule 36.3(c)(2), 17 CFR 

36.3(c)(2). 

28By way of comparison, the number of contracts 

traded in the SCL contract is similar to that 

exhibited on a liquid futures market and is roughly 

equivalent to the volume of trading for the ICE 

Futures U.S. Cotton No. 2 futures contract during 

this period. 

29By way of comparison, open interest in the SCL 

contract is roughly equivalent to that in the Chicago 

Board of Trade’s soybean contract and the 

Commodity Exchange’s Gold futures contract. 

30Specifically, the Commission econometrically 

estimated a vector autoregression model using daily 

natural gas price levels. A vector autoregression 

model is an econometric model used to capture the 

dependencies and interrelationships among 

multiple time series, generalizing the univariate 

autoregression model. The estimated model 

displays strong diagnostic evidence of statistical 

adequacy. In particular, the model’s impulse 

response function was shocked with a one-time rise 

in Socal price. The simulation results suggest that, 

on average over the sample period, a one percent 

rise in the Socal natural gas price elicited a 0.8 

percent increase in the NYMEX Henry Hub price, 

as well as a 0.8 percent increase in each of the other 

two modeled natural gas prices. These multipliers 

of response emerge with noticeable statistical 

strength or significance. Based on such long run 

sample patterns, if the Socal price rises by 10 

percent, then the price of NYMEX Henry Hub 

natural gas futures contract, as well as those for the 

Alberta and HSC hubs, each would rise by about 

8 percent. 

31Natural gas prices at the Alberta, HSC, and 

Socal trading centers were obtained by adding the 

daily settlement prices of ICE’s AECO Financial 

Basis, HSC Financial Basis and Socal Border 

Financial Basis contracts, respectively, to the 

contemporaneous daily settlement prices of the 

NYMEX Henry Hub physically-delivered natural 

gas futures contract. 

32 73 FR 75892 (December 12, 2008). 

33Supplemental data supplied by ICE confirmed 

that block trades in the third quarter of 2009 were 

in addition to the trades that were conducted on the 

electronic platform; block trades comprised 45.7 

percent of all transactions in the SCL contract. 

executed on ICE’s electronic trading 

platform was 8,102 in the second 

quarter of 2009, resulting in a daily 

average of 126.6 trades. During the same 

period, the SCL contract had a total 

trading volume on ICE’s electronic 

trading platform of 612,452 contracts 

and an average daily trading volume of 

9,569 contracts. Moreover, the open 

interest as of June 30, 2009, was 417,121 

contracts, which included trades 

executed on ICE’s electronic trading 

platform, as well as trades executed off 

of ICE’s electronic trading platform and 

then brought to ICE for clearing.26

Subsequent to the October 20, 2009, 

Federal Register notice, ICE submitted 

another quarterly notification filed on 

November 13, 2009,27 with updated 

trading statistics. Specifically, with 

respect to its SCL contract, 7,080 

separate trades occurred on its 

electronic platform in the third quarter 

of 2009, resulting in a daily average of 

107.3 trades. During the same period, 

the SCL contract had a total trading 

volume on its electronic platform of 

507,870 contracts (which was an 

average of 7,695 contracts per day).28 As 

of September 30, 2009, open interest in 

the SCL contract was 398,875 

contracts.29 Reported open interest 

included positions resulting from trades 

that were executed on ICE’s electronic 

platform, as well as trades that were 

executed off of ICE’s electronic platform 

and brought to ICE for clearing. 

In Appendix A to Part 36, the material 

liquidity criterion for SPDC 

determination specifies that an ECM 

contract should have a material effect on 

another contract. To measure the effect 

that the SCL contract potentially could 

have on a DCM contract, or on another 

ECM contract, Commission staff 

performed a statistical analysis 30 using 

daily settlement prices (between January 

2, 2008, and September 30, 2009) for the 

NYMEX Henry Hub natural gas contract 

(a DCM contract) and price levels for the 

Alberta, Houston Ship Channel (‘‘HSC’’), 

and Socal market centers.31 The 

simulation results suggest that, on 

average over the sample period, a one 

percent rise in the Socal natural gas 

price elicited a 0.8 percent increase in 

each of the Alberta, HSC, and NYMEX 

Henry Hub prices. 

i. Federal Register Comments 

As noted above, ICE was the sole 

respondent which addressed the 

question of whether the SCL contract is 

a SPDC. ICE stated in its comment letter 

that the SCL contract does not meet the 

material liquidity criterion for SPDC 

determination for a number of reasons. 

First, ICE opined that the Commission 

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

is materially liquid. It is worth noting 

that ICE originally suggested that the 

CFTC use a five trades-per-day 

threshold as the basis for an ECM to 

report trade data to the CFTC.’’ In this 

regard, the Commission adopted a five 

trades-per-day threshold as a reporting 

requirement to enable it to 

‘‘independently be aware of ECM 

contracts that may develop into 

SPDCs’’ 32 rather than solely relying 

upon an ECM on its own to identify any 

such potential SPDCs to the 

Commission. Thus, any contract that 

meets this threshold may be subject to 

scrutiny as a potential SPDC; the 

threshold is not intended to define 

liquidity in a broader sense. As noted 

above, the Commission is basing a 

finding of material liquidity for the ICE 

SCL contract, in part, on the fact that 

there were over 100 trades per day on 

average in the SCL contract during the 

last two reporting quarters of 2009, 

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

comment. In addition, the Commission 

notes that the number of contracts per 

transaction in the SCL contract is high 

(approximately 72 contracts per 

transaction) and thus, as noted, trading 

volume (measured in contract units) is 

substantial. The SCL contract also has 

substantial open interest. 

ICE also stated that ‘‘the statistics 

[provided by ICE] have been 

misinterpreted and misapplied.’’ In 

particular, ICE stated that the volume 

figures used in the Commission’s 

analysis (cited above) ‘‘include trades 

made in all 120 months of each 

contract’’ as well as in strips of contract 

months, and a ‘‘more appropriate 

method of determining liquidity is to 

examine the activity in a single traded 

month or strip of a given contract.’’ 

Furthermore, ICE noted that for the SCL 

contract, ‘‘about 29% of the trades 

occurred in the single most liquid, 

usually prompt, month of the contract.’’ 

It is the Commission’s opinion that 

liquidity, as it pertains to the SCL 

contract, is typically a function of 

trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the SCL contract itself 

would be considered liquid. ICE’s 

analysis of its own trade data confirms 

this to be the case for the SCL contract, 

and thus, the Commission believes that 

it applied the statistical data cited above 

in an appropriate manner for gauging 

material liquidity. 

In addition, ICE stated that the tradesper-day statistics that it provided to the 

Commission in its quarterly filing and 

which are cited above includes 2(h)(1) 

transactions, which were not completed 

on the electronic trading platform and 

should not be considered in the SPDC 

determination process. The Commission 

staff asked ICE to review the data it sent 

in its quarterly filings. In response, ICE 

confirmed that the volume data it 

provided and which the Commission 

cited in its October 20, 2009, Federal 

Register notice, as well as the additional 

volume information it cites above, 

includes only transaction data executed 

on ICE’s electronic trading platform.33

The Commission acknowledges that the 

open interest information it cites above 

includes transactions made off the ICE 

platform. However, once open interest is 

created, there is no way for ICE to 

differentiate between ‘‘on-exchange’’ 

versus ‘‘off-exchange’’ created positions, 

and all such positions are fungible with 

one another and may be offset in any 


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34See 73 FR 75888, 75893 (Dec. 12, 2008). 

35 44 U.S.C. 3507(d). 36 7 U.S.C. 19(a). 

37 5 U.S.C. 601 et seq. 

38 66 FR 42256, 42268 (Aug. 10, 2001). 

39 7 U.S.C. 1a(29). 

way agreeable to the position holder 

regardless of how the position was 

initially created. 

ii. Conclusion Regarding Material 

Liquidity 

Based on the above, the Commission 

concludes that the SCL contract meets 

the material liquidity criterion in that 

there is sufficient trading activity in the 

SCL contract to have a material effect on 

‘‘other agreements, contracts or 

transactions listed for trading on or 

subject to the rules of a designated 

contract market * * * or an electronic 

trading facility operating in reliance on 

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

Act’’ (that is, an ECM). 

4. Overall Conclusion 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the SCL contract 

performs a significant price discovery 

function under two of the four criteria 

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

CEA. Although the Commission has 

determined that the SCL contract does 

not meet the price linkage criterion at 

this time, the Commission has 

determined that the SCL contract does 

meet both the material liquidity and 

material price reference criteria. 

Accordingly, the Commission will issue 

the attached Order declaring that the 

SCL contract is a SPDC. 

Issuance of this Order signals the 

immediate effectiveness of the 

Commission’s authorities with respect 

to ICE as a registered entity in 

connection with its SCL contract,34 and 

triggers the obligations, requirements— 

both procedural and substantive—and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs. 

V. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 35 imposes certain requirements 

on Federal agencies, including the 

Commission, in connection with their 

conducting or sponsoring any collection 

of information as defined by the PRA. 

Certain provisions of Commission rule 

36.3 impose new regulatory and 

reporting requirements on ECMs, 

resulting in information collection 

requirements within the meaning of the 

PRA. OMB previously has approved and 

assigned OMB control number 3038– 

0060 to this collection of information. 

b. Cost-Benefit Analysis 

Section 15(a) of the CEA 36 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

an order under the Act. By its terms, 

section 15(a) does not require the 

Commission to quantify the costs and 

benefits of an order or to determine 

whether the benefits of the order 

outweigh its costs; rather, it requires 

that the Commission ‘‘consider’’ the 

costs and benefits of its actions. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. The Commission has considered 

the costs and benefits in light of the 

specific provisions of section 15(a) of 

the Act and has concluded that the 

Order, required by Congress to 

strengthen federal oversight of exempt 

commercial markets and to prevent 

market manipulation, is necessary and 

appropriate to accomplish the purposes 

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

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorizes the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 37 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.38 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

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

this Order, taken in connection with 

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

36 rules, will not have a significant 

impact on a substantial number of small 

entities. 

VI. Order 

a. Order Relating to the ICE Socal 

Border Financial Basis Contract 

After considering the complete record 

in this matter, including the comment 

letters received in response to its 

request for comments, the Commission 

has determined to issue the following: 

The Commission, pursuant to its 

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

Act, hereby determines that the Socal 

Border Financial Basis contract, traded 

on the IntercontinentalExchange, Inc., 

satisfies the statutory material liquidity 

and material price reference criteria for 

significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the ICE 

Socal Border Financial Basis contract, 

the nine core principles established by 

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

IntercontinentalExchange, Inc., shall be 

and is considered a registered entity 39

with respect to the Socal Border 

Financial Basis contract and is subject 

to all the provisions of the Commodity 

Exchange Act applicable to registered 

entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 


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40Because ICE already lists for trading a contract 

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

that was previously declared by the Commission to 

be a SPDC, ICE must submit a written 

demonstration of compliance with the Core 

Principles within 30 calendar days of the date of 

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

1 74 FR 52202 (October 9, 2009). 

2 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

3 7 U.S.C. 1a(29). 

4 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

5Public Law 110–246 at 13203; Joint Explanatory 

Statement of the Committee of Conference, H.R. 

Rep. No. 110–627, 110 Cong., 2d Sess. 978, 986 

(Conference Committee Report). See also 73 FR 

75888, 75894 (Dec. 12, 2008). 

6For an initial SPDC, ECMs have a grace period 

of 90 calendar days from the issuance of a SPDC 

determination order to submit a written 

demonstration of compliance with the applicable 

core principles. For subsequent SPDCs, ECMs have 

a grace period of 30 calendar days to demonstrate 

core principle compliance. 

7The Commission’s Part 36 rules establish, 

among other things, procedures by which the 

Commission makes and announces its 

determination whether a specific ECM contract 

serves a significant price discovery function. Under 

those procedures, the Commission publishes a 

notice in the Federal Register that it intends to 

undertake a determination whether a specified 

agreement, contract or transaction performs a 

significant price discovery function and to receive 

written data, views and arguments relevant to its 

determination from the ECM and other interested 

persons. 

core principle compliance by the 

IntercontinentalExchange, Inc., 

commence with the issuance of this 

Order.40

Issued in Washington, DC, on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10335 Filed 5–4–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the ICE Waha 

Financial Basis Contract Traded on the 

IntercontinentalExchange, Inc., 

Performs a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final order. 

SUMMARY: On October 9, 2009, the 

Commodity Futures Trading 

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

published for comment in the Federal 

Register 1 a notice of its intent to 

undertake a determination whether the 

Waha Financial Basis (‘‘WAH’’) contract, 

traded on the IntercontinentalExchange, 

Inc. (‘‘ICE’’), an exempt commercial 

market (‘‘ECM’’) under sections 2(h)(3)– 

(5) of the Commodity Exchange Act 

(‘‘CEA’’ or the ‘‘Act’’), performs a 

significant price discovery function 

pursuant to section 2(h)(7) of the CEA. 

The Commission undertook this review 

based upon an initial evaluation of 

information and data provided by ICE as 

well as other available information. The 

Commission has reviewed the entire 

record in this matter, including all 

comments received, and has determined 

to issue an order finding that the WAH 

contract performs a significant price 

discovery function. Authority for this 

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

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective Date: April 28, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

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

Senior Special Counsel, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5133. E-mail: 

snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 2

significantly broadened the CFTC’s 

regulatory authority with respect to 

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

the CEA, a new regulatory category— 

ECMs on which significant price 

discovery contracts (‘‘SPDCs’’) are 

traded—and treating ECMs in that 

category as registered entities under the 

CEA.3 The legislation authorizes the 

CFTC to designate an agreement, 

contract or transaction as a SPDC if the 

Commission determines, under criteria 

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

performs a significant price discovery 

function. When the Commission makes 

such a determination, the ECM on 

which the SPDC is traded must assume, 

with respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the Act and 

Commission regulations, and must 

comply with nine core principles 

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

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.4 As relevant here, rule 36.3 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

promptly concerning any contract 

traded in reliance on the exemption in 

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

five trades per day or more over the 

most recent calendar quarter, and for 

which the exchange sells its price 

information regarding the contract to 

market participants or industry 

publications, or whose daily closing or 

settlement prices on 95 percent or more 

of the days in the most recent quarter 

were within 2.5 percent of the 

contemporaneously determined closing, 

settlement or other daily prices of 

another contract. 

Commission rule 36.3(c)(3) 

established the procedures by which the 

Commission makes and announces its 

determination whether a particular ECM 

contract serves a significant price 

discovery function. Under those 

procedures, the Commission will 

publish notice in the Federal Register 

that it intends to undertake an 

evaluation whether the specified 

agreement, contract or transaction 

performs a significant price discovery 

function and to receive written views, 

data and arguments relevant to its 

determination from the ECM and other 

interested persons. Upon the close of 

the comment period, the Commission 

will consider, among other things, all 

relevant information regarding the 

subject contract and issue an order 

announcing and explaining its 

determination whether or not the 

contract is a SPDC. The issuance of an 

affirmative order signals the 

effectiveness of the Commission’s 

regulatory authorities over an ECM with 

respect to a SPDC; at that time such an 

ECM becomes subject to all provisions 

of the CEA applicable to registered 

entities.5 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

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

II. Notice of Intent to Undertake SPDC 

Determination 

On October 9, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the WAH 

contract performs a significant price 

discovery function, and requested 

comment from interested parties.7

Comments were received from the 

Industrial Energy Consumers of America 

(‘‘IECA’’), Working Group of Commercial 

Energy Firms (‘‘WGCEF’’), ICE, Platts, 

Economists Incorporated (‘‘EI’’), Federal 

Energy Regulatory Commission 

(‘‘FERC’’), and Financial Institutions 


sroberts on DSKD5P82C1PROD with NOTICES