Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38487 

42 7 U.S.C. 1a(29). 1 74 FR 53728 (October 20, 2009). 

2 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Pub. L. No. 

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

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

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

effective on April 22, 2009. 

Commission by the 

IntercontinentalExchange, Inc., dated 

July 27, 2009, and March 24, 2010, 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 Mid-C Financial 

Peak Daily contract is not a significant 

price discovery contract. Additionally, 

to the extent that it continues to rely 

upon the exemption in Section 2(h)(3) 

of the Act, the 

IntercontinentalExchange, Inc., must 

continue to comply with all of the 

applicable requirements of Section 

2(h)(3) and Commission Regulation 

36.3. 

b. Order Relating to the Mid-C Financial 

Off-Peak Daily 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 Mid-C 

Financial Off-Peak Daily contract, 

traded on the IntercontinentalExchange, 

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 

IntercontinentalExchange, Inc., is not 

considered a registered entity 42 with 

respect to the Mid-C Financial Off-Peak 

Daily contract and is not subject to the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., are not 

applicable to the Mid-C Financial OffPeak Daily contract with the issuance of 

this Order. 

This Order is based on the 

representations made to the 

Commission by the 

IntercontinentalExchange, Inc., July 27, 

2009, and March 24, 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 Mid-C Financial 

Off-Peak Daily contract is not a 

significant price discovery contract. 

Additionally, to the extent that it 

continues to rely upon the exemption in 

Section 2(h)(3) of the Act, the 

IntercontinentalExchange, Inc., must 

continue to comply with all of the 

applicable requirements of Section 

2(h)(3) and Commission Regulation 

36.3. 

Issued in Washington, DC on June 25, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–16206 Filed 7–1–10; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the Fuel Oil-180 

Singapore Swap Contract Traded on 

the IntercontinentalExchange, Inc., 

Does Not Perform a Significant Price 

Discovery Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final Order. 

SUMMARY: On October 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 

Fuel Oil-180 Singapore Swap (‘‘SZS’’) 

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 SZS contract 

does not perform a significant price 

discovery function. Authority for this 

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

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective Date: June 25, 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 an SPDC if the 

Commission determines, under criteria 

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

performs a significant price discovery 

function. When the Commission makes 

such a determination, the ECM on 

which the SPDC is traded must assume, 

with respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the Act and 

Commission regulations, and must 

comply with nine core principles 

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

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.4 As relevant here, rule 36.3 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

promptly concerning any contract 

traded in reliance on the exemption in 

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

five trades per day or more over the 

most recent calendar quarter, and for 

which the exchange sells its price 

information regarding the contract to 

market participants or industry 

publications, or whose daily closing or 

settlement prices on 95 percent or more 

of the days in the most recent quarter 

were within 2.5 percent of the 

contemporaneously determined closing, 

settlement or other daily price of 

another contract. 

Commission rule 36.3(c)(3) 

established the procedures by which the 

Commission makes and announces its 

determination whether a particular ECM 

contract serves a significant price 

discovery function. Under those 


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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. 

8WGCEF describes itself as ‘‘a diverse group of 

commercial firms in the domestic energy industry 

whose primary business activity is the physical 

delivery of one or more energy commodities to 

customers, including industrial, commercial and 

residential consumers’’ and whose membership 

consists of ‘‘energy producers, marketers and 

utilities.’’ McGraw-Hill, through its division Platts, 

compiles and calculates monthly energy price 

indices from energy trade data submitted to Platts 

by energy marketers. ICE is an exempt commercial 

market, as noted above. SIETCO, a subsidiary of 

Royal Dutch Shell Oil Company (Shell Oil) located 

in Singapore, handles exports and trading of Shell 

Oil petroleum products in the Asia-Pacific region. 

The comment letters are available on the 

Commission’s Web site: http://www.cftc.gov/ 

lawandregulation/federalregister/ 

federalregistercomments/2009/09-030.html. 

9 In its October 20, 2009, Federal Register release, 

the Commission identified material price reference 

and material liquidity as the possible criteria for 

SPDC determination of the SZS contract. Price 

linkage and Arbitrage were not identified as 

possible criteria. As a result, price linkage and 

arbitrage will not be discussed further in this 

document and the associated Order. 

10 17 CFR 36, Appendix A. 

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 SZS contract 

performs a significant price discovery 

function and requested comment from 

interested parties.7 Comments were 

received from Working Group of 

Commercial Energy Firms (‘‘WGCEF’’), 

Platts, ICE and Shell International 

Eastern Trading Company (‘‘SIETCO).8

The comment letter from Platts did not 

directly address the issue of whether or 

not the SZS contract is a SPDC. The 

remaining comment letters raised 

substantive issues with respect to the 

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

SZS contract and generally expressed 

the opinion that the SZS contract is not 

a SPDC because it does not meet the 

material price reference and material 

liquidity criteria for SPDC 

determination. These comments are 

more extensively discussed below, as 

applicable. 

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

The Commission is directed by 

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

the following criteria in determining a 

contract’s significant price discovery 

function: 

• Price Linkage—the extent to which 

the agreement, contract or transaction 

uses or otherwise relies on a daily or 

final settlement price, or other major 

price parameter, of a contract or 

contracts listed for trading on or subject 

to the rules of a designated contract 

market (‘‘DCM’’) or derivatives 

transaction execution facility (‘‘DTEF’’), 

or a SPDC traded on an electronic 

trading facility, to value a position, 

transfer or convert a position, cash or 

financially settle a position, or close out 

a position. 

• Arbitrage—the extent to which the 

price for the agreement, contract or 

transaction is sufficiently related to the 

price of a contract or contracts listed for 

trading on or subject to the rules of a 

designated DCM or DTEF, or a SPDC 

traded on or subject to the rules of an 

electronic trading facility, so as to 

permit market participants to effectively 

arbitrage between the markets by 

simultaneously maintaining positions or 

executing trades in the contracts on a 

frequent and recurring basis. 

• Material price reference—the extent 

to which, on a frequent and recurring 

basis, bids, offers or transactions in a 

commodity are directly based on, or are 

determined by referencing or 

consulting, the prices generated by 

agreements, contracts or transactions 

being traded or executed on the 

electronic trading facility. 

• Material liquidity—the extent to 

which the volume of agreements, 

contracts or transactions in a 

commodity being traded on the 

electronic trading facility is sufficient to 

have a material effect on other 

agreements, contracts or transactions 

listed for trading on or subject to the 

rules of a DCM, DTEF or electronic 

trading facility operating in reliance on 

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

Not all criteria must be present to 

support a determination that a 

particular contract performs a 

significant price discovery function, and 

one or more criteria may be inapplicable 

to a particular contract.9 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.10 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 

The Fuel Oil-180 Singapore Swap (SZS) 

Contract and the SPDC Indicia 

The SZS contract specifies 1,000 

metric tons of 180 CentiStokes (cst) 

Singapore high-sulfur fuel oil. The 

contract is cash-settled based on the 


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11The term ‘‘FOB’’ indicates ‘‘free on board.’’ In 

other words, the seller will pay for transportation 

of the product to the port of Singapore, as well as 

the cost of loading the fuel oil onto the cargo ship 

(this includes inland hauling charges, customs 

clearance, origin documentation charges, demurrage 

(if any), and origin port handling charges—in this 

case Singapore). 

12Bunker fuel gets its name from the containers 

on ships and in ports that it is stored in; in the days 

of steam they were coal bunkers but now they are 

bunker-fuel tanks. The Australian Customs and the 

Australian Tax Office define a bunker fuel as the 

fuel that powers the engine of a ship or aircraft. 

Bunker A is No. 2 fuel oil, bunker B is No. 4 or 

No. 5 and bunker C is No. 6. Since No. 6 is the most 

common, the term ‘‘bunker fuel’’ is often used as a 

synonym for No. 6. No. 5 fuel oil is also called navy 

special fuel oil or just navy special, No. 6 or 5 are 

also called furnace fuel oil (‘‘FFO’’); the high 

viscosity requires heating, usually by a re-circulated 

low pressure steam system, before the oil can be 

pumped from a bunker tank. 

13As noted above, the Commission did not find 

any indication of price linkage or arbitrage in 

connection with this contract; accordingly, those 

criteria were not discussed in reference to the SZS 

contract. 

14http://www.cftc.gov/ucm/groups/public/ 

@newsroom/documents/file/pr5403- 

07_ecmreport.pdf. 

15 17 CFR 36, Appendix A. 

arithmetic average of the means between 

the daily high and low price quotations 

for ‘‘HSFO 180 CST’’ delivered in the 

specified calendar month, published 

under the ‘‘Singapore’’ heading in Platts’ 

Asia-Pacific/Arab Gulf Marketscan. The 

SZS contract specifies the delivery of 

high-sulfur fuel oil in Singapore on an 

FOB basis.11 The SZS contract is listed 

for up to 60 consecutive calendar 

months beginning with the next 

calendar month. 

After crude oil is extracted from the 

ground and brought to a refinery, it goes 

through a process called fractional 

distillation. During fractional 

distillation, the oil is heated, causing 

different types of oil within the crude to 

separate as they have different boiling 

points. Classically, fractional distillation 

is accomplished in a distillation 

column, which siphons off various 

fractions as they precipitate out. During 

fractional distillation, oil refineries can 

also use catalysts to ‘‘crack’’ the 

hydrocarbon chains in the crude oil to 

create specific oil fractions. 

Fuel oil is a fraction obtained from 

petroleum distillation, either as a 

distillate or a residue. Fuel oil is made 

of long hydrocarbon chains, particularly 

alkanes, cycloalkanes and aromatics. 

Technically, different grades of fuel oil 

exist; fuel oil is classified into six 

classes, numbered 1 through 6, 

according to its boiling point, 

composition and purpose. Broadly 

speaking, fuel oil is any liquid 

petroleum product that is burned in a 

furnace or boiler for the generation of 

heat or used in an engine for the 

generation of power, except oils having 

a flash point of approximately 104 

degrees Fahrenheit and oils burned in 

cotton or wool-wick burners. Thus, fuel 

oils can include kerosene, diesel, and 

heating oil. However, the term ‘‘fuel oil’’ 

typically is used in a stricter sense to 

refer to the heavy commercial fuel that 

is obtained from crude oil, which is 

thicker than gasoline and naphtha. 

No. 5 fuel oil and No. 6 fuel oil are 

called residual fuel oils (‘‘RFO’’) or 

heavy fuel oils. More No. 6 oil is 

produced compared to No. 5 oil, thus 

the terms heavy fuel oil and residual 

fuel oil are sometimes used as names for 

No. 6. No. 5 fuel oil is a mixture of 75– 

80 percent No. 6 oil and 25–20 diesel 

fuel (No. 2 oil). No. 6 oil may also 

contain a small amount of No. 2 to get 

it to meet specifications. 

Heavy fuel oils, also known as bunker 

fuels,12 are used for powering marine 

vessels. The hydrocarbon chains in 

bunker fuel are very long, and this fuel 

is highly viscous as a result. The thick 

fuel is difficult for most engines to burn 

since it must be heated before it will 

combust, so it tends to be used in large 

engines like those on board ships. Ships 

have enough space to heat bunker fuel 

before feeding it into their engines, and 

their extremely sophisticated engines 

are capable of burning a wide range of 

fuels, including low quality bunker fuel. 

The principal market for Singapore 

high-sulfur fuel oil 180 cst is the AsiaPacific region. 

Fuel oil is transported worldwide by 

fleets of supertankers making deliveries 

to suitably sized strategic ports such as 

Houston, Singapore, and Rotterdam. 

Where a convenient seaport does not 

exist, inland transport may be achieved 

with the use of barges. 

Market participants keep abreast of 

fuel oil prices worldwide in order to 

take advantage of arbitrage 

opportunities. In this regard, 

international fuel oil prices are 

compared with those in the trader’s 

home port after accounting for 

transportation costs. Market participants 

may find it profitable to ship fuel oil 

from one market to another. For 

example, it is sometimes profitable to 

ship fuel oil from the Gulf Coast of the 

United States to Singapore. Such 

conditions do not exist all of the time; 

in fact, a trader may realize this 

opportunity only a few times per year. 

In its October 20, 2009, Federal 

Register notice, the Commission 

identified material price reference and 

material liquidity as the SPDC criteria 

potentially applicable to the SZS 

contract. Each of these criteria is 

discussed below.13

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 

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, the ICE 

offers the ‘‘OTC Oil End of Day’’ data 

package with access to all price data or 

just 12, 24, 36, or 48 months of 

historical data. This package includes 

price data for the SZS contract. 

The Commission also noted that its 

October 2007 Report on the Oversight of 

Trading on Regulated Futures 

Exchanges and Exempt Commercial 

Markets (‘‘ECM Study’’) 14 found that in 

general, market participants view the 

ICE as a price discovery market for 

certain energy contracts. The study did 

not specify which markets performed 

this function; nevertheless, the 

Commission determined that the SZS 

contract, while not mentioned by name 

in the ECM Study, might warrant further 

review. 

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.15

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 


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16 74 FR 53728 (October 20, 2009). 

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. 

Although Singapore has one of the 

most utilized ports in the world and ICE 

sells price data for its SZS contract, the 

Commission has found upon further 

evaluation that cash market transactions 

are not being directly based or quoted as 

a differential to the SZS contract nor is 

that contract routinely consulted by 

industry participants in pricing cash 

market transactions. In this regard, 

traders use the SZS contract’s price as 

an indicator of arbitrage potential 

between two fuel oil markets (e.g., 

Singapore and the U.S. Gulf Coast). But 

because the market conditions are not 

always such that diverting fuel oil from 

one market to Singapore is profitable, 

traders do not regularly keep track of the 

SZS contract’s prices. Instead, traders 

refer to the SZS contract on an 

occasional basis and during periods 

when it is historically profitable to ship 

fuel oil to Singapore. Cash market 

transactions are not priced on a frequent 

and recurring basis at a differential to 

the SZS contract’s price. Moreover, 

market participants likely do not 

specifically purchase the ICE data 

packages for the SZS contract’s prices 

and do not consult such prices on a 

frequent and recurring basis in pricing 

cash market transactions. Thus, the SZS 

contract does not meet the 

Commission’s Guidance for the material 

price reference criterion. 

i. Federal Register Comments 

ICE and SIETCO addressed the 

question of whether the SZS contract 

met the material price reference 

criterion for a SPDC. The commenters 

argued that the underlying cash price 

series against which the ICE SZS 

contract is settled (in this case, the 

Platts price for 180 cst fuel oil in 

Singapore) is the authentic reference 

price and not the ICE contract itself. 

Consequently, the commenters maintain 

that the only price which is referenced 

and relied upon by market participants 

for this product is the one published by 

Platts. Commission staff believes that 

this interpretation of price reference is 

too limiting in that it only considers the 

average index value on which the 

contract is cash settled after trading 

ceases. Instead, the Commission 

believes that a cash-settled derivatives 

contract could meet the price reference 

criterion if market participants ‘‘consult 

on a frequent and recurring basis’’ the 

derivatives contract when pricing 

forward, fixed-price commitments or 

other cash-settled derivatives that seek 

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

point in time to hedge against adverse 

price movements. As noted above, the 

port of Singapore is a significant trading 

center for 180 cst fuel oil in the Asian 

market. However, traders do not consult 

the SZS contract’s price on a frequent 

and recurring basis since the potential 

for arbitrage between fuel oil market 

centers worldwide is sporadic and 

infrequent. 

ICE argued that the Commission 

appeared to base the case that the SZS 

contract is potentially a SPDC on a 

disputable assertion. In issuing its 

notice of intent to determine whether 

the SZS 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 energy contracts.’’ ICE 

states that this argument is ‘‘nearly 

impossible to respond to as the ECM 

report did not mention the SZS 

[contract] as a potential significant price 

discovery contract. It is hard to say 

which market participants made this 

statement in 2007 or the contracts that 

were referenced * * * 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 

energy contracts appear to be regarded 

as price discovery markets merely as an 

indication that a further review 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. 

WGCEF argued that the SZS contract 

does not meet the direct evidence or the 

indirect evidence with respect to the 

material price reference criterion. With 

regard to direct evidence, WGCEF stated 

that ‘‘[t]here are no other related 

contracts traded in any market that 

settle to, or reference, the contract.’’ As 

noted above, this view of price reference 

is narrow. Nevertheless, while the 

Commission believes that price 

reference can include consultation on a 

frequent and recurring basis, the 

Commission has determined that such 

frequent and recurring consultation 

does not take place with respect to the 

SZS contract. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the SZS contract does not 

meet the material price reference 

criterion because cash market 

transactions are not priced on a frequent 

and recurring basis at a differential to 

the SZS contract’s price (direct 

evidence). Moreover, while the ECM 

sells the SZS contract’s price data to 

market participants, market participants 

likely do not specifically purchase the 

ICE data packages for the SZS 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 SZS contract. To 

assess whether a contract meets the 

material liquidity criterion, the 

Commission first examines trading 

activity as a general measurement of the 

contract’s size and potential importance. 

If the Commission finds that the 

contract in question meets a threshold 

of trading activity that would render it 

of potential importance, the 

Commission will then perform a 

statistical analysis to measure the effect 

that the prices of the subject contract 

potentially may have on prices for other 

contracts listed on an ECM or a DCM. 

The Commission noted that the total 

number of transactions executed on 

ICE’s electronic platform in the SZS 

contract was 1,957 in the second quarter 

of 2009, resulting in a daily average of 

30.6 trades. During the same period, the 

SZS contract had a total trading volume 

of 13,170 contracts and an average daily 

trading volume of 205.8 contracts. 

Moreover, open interest as of June 30, 

2009, was 11,356 contracts, which 

included trades executed on ICE’s 

electronic trading platform, as well as 

trades executed off of ICE’s electronic 

trading platform and then brought to 

ICE for clearing. In this regard, ICE does 

not differentiate between open interest 

created by a transaction executed on its 

trading platform and that created by a 

transaction executed off its trading 

platform.16

In a subsequent filing dated 

November 13, 2009, ICE reported that 

total trading volume in the third quarter 

of 2009 was 22,255 contracts (or 337 

contracts on a daily basis). In terms of 


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Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38491 

17 In this regard, supplemental data subsequently 

submitted by the ICE indicated that block trades are 

included in the on-exchange trades; block trades 

comprise 42.5 percent of all transactions in the SZS 

contract. 

18Staff has advised the Commission that in its 

experience, a thinly-traded contract is, generally, 

one that has a quarterly trading volume of 100,000 

contracts or less. In this regard, in the third quarter 

of 2009, physical commodity futures contracts with 

trading volume of 100,000 contracts or fewer 

constituted less than one percent of total trading 

volume of all physical commodity futures contracts. 

19 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 SZS 

contract does not meet the 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 the Commission believes it is not 

useful as the sole basis for a SPDC determination. 

17 CFR 36, Appendix A. 20 73 FR 75892 (December 12, 2008). 

21See 73 FR 75888, 75893 (Dec. 12, 2008). 

22 44 U.S.C. 3507(d). 

number of transactions, 4,625 trades 

occurred in the third quarter of 2009 

(70.1 trades per day). As of September 

30, 2009, open interest in the SZS 

contract was 15,681 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.17

Trading activity in the SZS contract, 

as characterized by total quarterly 

volume, indicates that the SZS contract 

experiences trading activity similar to 

that of other thinly-traded contracts.18

Thus, the SZS contract does not meets 

a threshold of trading activity that 

would render it of potential importance 

and no additional statistical analysis is 

warranted.19

Federal Register Comments 

As noted above, WGCEF, ICE, and 

SIETCO addressed the question of 

whether the SZS contract met the 

material liquidity criterion for a SPDC. 

These commenters stated that the SZS 

contract does not meet the material 

liquidity criterion for SPDC 

determination for a number of reasons. 

ICE noted that the Commission’s 

Guidance had posited concepts of 

liquidity that generally assumed a fairly 

constant stream of prices throughout the 

trading day. 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.’’ 

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’’ 20 rather than solely relying 

upon an ECM on its own to identify any 

such potential SPDCs to the 

Commission. Thus, any contract that 

meets this threshold may be subject to 

scrutiny as a potential SPDC but this 

does not mean that the contract will be 

found to be a SPDC merely because it 

met the reporting threshold. 

ICE proposed that the statistics it 

provided were misinterpreted and 

misapplied by the Commission. In 

particular, ICE stated that the volume 

figures used in the Commission’s 

analysis (cited above) include trades 

made in all months of the contract as 

well as in strips of contract months, and 

a ‘‘more appropriate method of 

determining liquidity is to examine the 

activity in a single traded month or strip 

of a given contract.’’ 

It is the Commission’s opinion that 

liquidity, as it pertains to the SZS 

contract, is typically a function of 

trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the ICE SZS contract itself 

would be considered liquid. 

Nevertheless, in light of the fact that the 

Commission has found that the SZS 

contract does not meet the material 

price reference criterion, material 

liquidity cannot be used alone for SPDC 

determination. 

Additionally, ICE stated that the 

trades-per-day statistics that it provided 

to the Commission in its quarterly filing 

and which were cited in the 

Commission’s October 20, 2009, Federal 

Register notice includes 2(h)(1) 

transactions, which were not completed 

on the electronic trading platform and 

should not be considered in the SPDC 

determination process. SIETCO 

expressed a similar concern. In this 

respect, the Commission staff asked ICE 

to review the data it sent in its quarterly 

filings; ICE confirmed that the volume 

data it provided and which the 

Commission cited includes only 

transaction data executed on ICE’s 

electronic trading platform. As noted 

above, supplemental data supplied by 

ICE confirmed that block trades are in 

addition to the trades that were 

conducted on the electronic platform; 

block trades comprise about 42.5 

percent of all transactions in the SZS 

contract. The Commission 

acknowledges that the open interest 

information it provided in its October 

20, 2009, Federal Register notice 

includes transactions made off the ICE 

platform. However, once open interest is 

created, there is no way for ICE to 

differentiate between ‘‘on-exchange’’ 

versus ‘‘off-exchange’’ created positions, 

and all such positions are fungible with 

one another and may be offset in any 

way agreeable to the position holder 

regardless of how the position was 

initially created. 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission has found that the SZS 

contract does not meet the material 

price reference criterion. 

4. Overall Conclusion 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the SZS 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 SZS contract does 

not meet the material price reference 

criterion at this time. In light of this fact, 

according to the Commission’s 

Guidance, it would be unnecessary to 

evaluate whether the SZS contract 

meets the material liquidity criterion 

since the Commission believes it is not 

useful as the sole basis for a SPDC 

determination. Accordingly, the 

Commission is issuing the attached 

Order declaring that the SZS contract is 

not a SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard ICE as a registered entity in 

connection with its SZS contract.21

Accordingly, with respect to its SZS 

contract, ICE is not required to comply 

with the obligations, requirements and 

timetables prescribed in Commission 

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

However, ICE must continue to comply 

with the applicable reporting 

requirements for ECMs. 

V. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 22 imposes certain requirements 


emcdonald on DSK2BSOYB1PROD with NOTICES
38492 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

23 7 U.S.C. 19(a). 

24 5 U.S.C. 601 et seq. 

25 66 FR 42256, 42268 (Aug. 10, 2001). 26 7 U.S.C. 1a(29). 

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 23 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. 

Amendments to section 4(i) of the CEA 

authorize the Commission to require 

reports for SPDCs listed on ECMs. These 

increased responsibilities, along with 

the CFTC’s increased regulatory 

authority, subject the ECM’s risk 

management practices to the 

Commission’s supervision and oversight 

and generally enhance the financial 

integrity of the markets. 

The Commission has concluded that 

ICE’s SZS contract, which is the subject 

of the attached Order, is not a SPDC; 

accordingly, the Commission’s Order 

imposes no additional costs and no 

additional statutorily or regulatory 

mandated responsibilities on the ECM. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 24 requires that agencies 

consider the impact of their rules on 

small businesses. The requirements of 

CEA section 2(h)(7) and the Part 36 

rules affect exempt commercial markets. 

The Commission previously has 

determined that exempt commercial 

markets are not small entities for 

purposes of the RFA.25 Accordingly, the 

Chairman, on behalf of the Commission, 

hereby certifies pursuant to 5 U.S.C. 

605(b) that this Order, taken in 

connection with section 2(h)(7) of the 

Act and the Part 36 rules, will not have 

a significant impact on a substantial 

number of small entities. 

VI. Order 

Order Relating to the Fuel Oil-180 

Singapore Swap 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 Fuel 

Oil-180 Singapore Swap contract, traded 

on the IntercontinentalExchange, Inc., 

does not at this time satisfy the material 

price reference and material liquidity 

criteria for significant price discovery 

contracts. Moreover, under Commission 

Guidance material liquidity alone 

cannot support a significant price 

discovery finding for the Fuel Oil-180 

Singapore Swap contract. 

Consistent with this determination, 

the IntercontinentalExchange, Inc., is 

not considered a registered entity 26

with respect to the Fuel Oil-180 

Singapore Swap contract and is not 

subject to the provisions of the 

Commodity Exchange Act applicable to 

registered entities. Further, the 

obligations, requirements and timetables 

prescribed in Commission rule 

36.3(c)(4) governing core principle 

compliance by the 

IntercontinentalExchange, Inc., are not 

applicable to the Fuel Oil-180 Singapore 

Swap contract with the issuance of this 

Order. 

This Order is based on the 

representations made to the 

Commission by the 

IntercontinentalExchange, Inc., dated 

July 27, 2009, and November 13, 2009, 

and other supporting material. Any 

material change or omissions in the 

facts and circumstances pursuant to 

which this order is granted might 

require the Commission to reconsider its 

current determination that the Fuel Oil180 Singapore Swap contract is not a 

significant price discovery contract. 

Additionally, to the extent that it 

continues to rely upon the exemption in 

Section 2(h)(3) of the Act, the 

IntercontinentalExchange, Inc., must 

continue to comply with all of the 

applicable requirements of Section 

2(h)(3) and Commission Regulation 

36.3. 

Issued in Washington, DC on June 25, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–16209 Filed 7–1–10; 8:45 am] 

BILLING CODE 6351–01–P 

CONSUMER PRODUCT SAFETY 

COMMISSION 

Sunshine Act Meetings 

TIME AND DATE: Wednesday, June 30, 

2010, 2 p.m.–3 p.m. 

PLACE: Hearing Room 420, Bethesda 

Towers, 4330 East West Highway, 

Bethesda, Maryland. 

STATUS: Commission Meeting—Open to 

the Public. 


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