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[Federal Register: May 4, 2010 (Volume 75, Number 85)]
[Notices]               
[Page 23718-23728]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04my10-65]                         

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COMMODITY FUTURES TRADING COMMISSION

 
Orders Finding That the Henry Financial Basis Contract, Henry 
Financial Index Contract and Henry Financial Swing Contract Traded on 
the IntercontinentalExchange, Inc., Do Not Perform a Significant Price 
Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

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SUMMARY: On October 20, 2009, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment in the Federal 
Register \1\ a notice of its intent to undertake a determination 
whether the Henry Financial Basis (``HEN'') contract, Henry Financial 
Index (``HIS'') contract and Henry Financial Swing (``HHD'') contract 
traded on the IntercontinentalExchange, Inc. (``ICE''), an exempt 
commercial market (``ECM'') under sections 2(h)(3)-(5) of the Commodity 
Exchange Act (``CEA'' or the ``Act''), perform a significant price 
discovery function pursuant to section 2(h)(7) of the CEA. The 
Commission undertook this review based upon an initial evaluation of 
information and data provided by ICE as well as other available 
information. The Commission has reviewed the entire record in this 
matter, including all comments received, and has determined to issue 
orders finding that the HEN, HIS and HHD contracts do not perform a 
significant price discovery function. Authority for this action is 
found in section 2(h)(7) of the CEA and Commission rule 36.3(c) 
promulgated thereunder.
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    \1\ 74 FR 53720 (October 20, 2009).

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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. E-mail: 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).
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    \2\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008).
    \3\ 7 U.S.C. 1a(29).
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    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

[[Page 23719]]

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.
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    \4\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.
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    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\
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    \5\ Public 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).
    \6\ For 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.
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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 
HEN, HIS and HHD contracts performs a significant price discovery 
function and requested comment from interested parties.\7\ Comments \8\ 
were received from the Federal Energy Regulatory Commission (``FERC''), 
Platts,\9\ Public Utility Commission of Texas (``PUCT'') and ICE. The 
comment letters from FERC,\10\ Platts and PUCT \11\ did not directly 
address the issue of whether or not the HEN, HIS and HHD contracts are 
SPDCs; ICE's comments raised substantive issues with respect to the 
applicability of section 2(h)(7) to the subject contracts. Generally, 
ICE asserted that its HEN, HIS and HHD contracts are not SPDCs as they 
do not meet any of the criteria for SPDC determination (CL 03). ICE's 
comments are more extensively discussed below, as applicable.
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    \7\ The Commission's Part 36 rules establish, among other 
things, procedures by which the Commission makes and announces its 
determination whether a specific ECM contract serves a significant 
price discovery function. Under those procedures, the Commission 
publishes a notice in the Federal Register that it intends to 
undertake a determination whether a specified agreement, contract or 
transaction performs a significant price discovery function and to 
receive written data, views and arguments relevant to its 
determination from the ECM and other interested persons.
    \8\ The comment letters are available on the Commission's Web 
site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-027.html.
    \9\ 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'').
    \10\ FERC stated that the HEN, HIS and HHD contracts are cash-
settled and that none of them contemplates 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.
    \11\ PUCT noted that it oversees the Electric Reliability 
Council of Texas, much like FERC oversees independent system 
operators. The mission of PUCT is ``to ensure nondiscriminatory 
access to the [electricity] transmission and distribution systems, 
to ensure the reliability and adequacy of the regional electrical 
network and to perform other essential market functions.'' CL 04.
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III. Section 2(h)(7) of the CEA

    The Commission is directed by section 2(h)(7) of the CEA to 
consider the following criteria in determining a contract's significant 
price discovery function:
     Price Linkage--the extent to which the agreement, contract 
or transaction uses or otherwise relies on a daily or final settlement 
price, or other major price parameter, of a contract or contracts 
listed for trading on or subject to the rules of a designated contract 
market (``DCM'') or derivatives transaction execution facility 
(``DTEF''), or a SPDC traded on an electronic trading facility, to 
value a position, transfer or convert a position, cash or financially 
settle a position, or close out a position.
     Arbitrage--the extent to which the price for the 
agreement, contract or transaction is sufficiently related to the price 
of a contract or contracts listed for trading on or subject to the 
rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of 
an electronic trading facility, so as to permit market participants to 
effectively arbitrage between the markets by simultaneously maintaining 
positions or executing trades in the contracts on a frequent and 
recurring basis.
     Material price reference--the extent to which, on a 
frequent and recurring basis, bids, offers or transactions in a 
commodity are directly based on, or are determined by referencing or 
consulting, the prices generated by agreements, contracts or 
transactions being traded or executed on the electronic trading 
facility.
     Material liquidity--the extent to which the volume of 
agreements, contracts or transactions in a commodity being traded on 
the electronic trading facility is sufficient to have a material effect 
on other agreements, contracts or transactions listed for trading on or 
subject to the rules of a DCM, DTEF or electronic trading facility 
operating in reliance on the exemption in section 2(h)(3).
    Not all criteria must be present to support a determination that a 
particular contract performs a significant price discovery function, 
and one or more criteria may be inapplicable to a particular 
contract.\12\ 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

[[Page 23720]]

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.\13\ 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.
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    \12\ 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 HEN contract (arbitrage was not identified as a possible 
criterion). With respect to the HIS contract, the Federal Register 
release identified material liquidity and material price reference 
as possible criteria for SPDC determination (price linkage and 
arbitrage were not identified as possible criteria). With respect to 
the HHD contract, the Federal Register release identified material 
liquidity, arbitrage and material price reference as possible 
criteria for SPDC determination (price linkage was not identified as 
a possible criterion). The criteria not indentified in the initial 
release will not be discussed further in this document or the 
associated Orders.
    \13\ 17 CFR part 36, Appendix A.
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IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the Henry 
Financial Basis (HEN) contract, the Henry Financial Index (HIS) 
contract and the Henry Financial Swing (HHD) contract are discussed 
separately below.

a. The Henry Financial Basis (HEN) Contract and the SPDC Indicia

    The ICE HEN contract is cash settled based on the difference 
between the bidweek price of natural gas at the Henry Hub for the 
contract-specified month of delivery, as reported in Platts' Inside 
FERC's Gas Market Report, and the final settlement price for New York 
Mercantile Exchange's (``NYMEX's'') Henry Hub physically-delivered 
natural gas futures contract for the same specified calendar month. The 
Platts bidweek price, which is published monthly, is based on a survey 
of cash market traders who voluntarily report to Platts data on their 
fixed-price transactions conducted during the last five business days 
of the month for physical delivery of natural gas at the Henry Hub; 
such bidweek transactions specify the delivery of natural gas on a 
uniform basis throughout the following calendar month at the agreed 
upon rate. The Platts bidweek index is published on the first business 
day of the calendar month in which the natural gas is to be delivered. 
The size of the HEN contract is 2,500 million British thermal units 
(``mmBtu''), and the unit of trading is any multiple of 2,500 mmBtu. 
The HEN contract is listed for up to 72 calendar months commencing with 
the next calendar month.
    The Henry Hub,\14\ 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 Henry Hub 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 move 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.
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    \14\ The term ``hub'' refers to a juncture where two or more 
natural gas pipelines are connected. Hubs also serve as pricing 
points for natural gas.
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    The HEN contract price measures the discrepancy between two Henry 
Hub-related prices, where one price is a futures price and the other is 
a forward cash price. Traders may make commitments to buy or sell 
natural gas at the Henry Hub using the NYMEX Henry Hub natural gas 
futures contract, which specifies physical delivery. Because the NYMEX 
futures contract is listed for at least twelve years, market 
participants can make such decisions a long time before delivery 
actually occurs, since they can have an effective hedge in place to 
offset price risk associated with long-dated cash market commitments. 
While the futures price and the bidweek price both reflect the price of 
natural gas during the following month, the two values may not be 
equal. This is because the NYMEX futures contract stops trading three 
business days prior to first business day of the delivery month. In 
contrast, the bidweek price is derived from cash market deals 
consummated during the last five business days of the month that 
specify physical delivery during the following calendar month. Thus, it 
is possible that the bidweek price could include two additional days of 
market information, which could result in a price that is significantly 
higher or lower than the futures price. The ICE HEN contract can be 
used to more accurately price natural gas in the delivery month. For 
example, a firm may lock in its November 2009 needs by taking a long 
position in the November 2009 contract. Assume that the futures 
position is established at $4.00 per mmBtu. This means that the gas was 
purchased at $4, which may be higher or lower than the spot price 
during the delivery month. During the final few days in October, the 
November 2009 natural gas contract stops trading and the November 
bidweek price is determined. Assume that the weather forecast calls for 
warmer than normal temperatures in the area, causing the futures price 
to fall and settle on October 27 at $3.90 per mmBtu, resulting in a 
loss of $0.10 per mmBtu on the futures side. Market sentiment of a 
strong downward pressure on gas prices may persist, leading spot 
transactions for next-month delivery to be priced even lower than the 
futures settlement price. In this regard, the bidweek price is 
determined as a volume weighted average of fixed-price transactions for 
November 2009 delivery that were conducted between October 25, 2009, 
and October 29, 2009. If the bidweek price ends up being at $3.75 per 
mmBtu, the firm will incur an additional loss of $0.15 per mmBtu 
because of falling spot prices. By taking a position in the ICE HEN 
contract, the firm can mitigate some of the losses by accounting for 
the difference between the final settlement price and the bidweek 
price.\15\
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    \15\ If the firm simultaneously takes positions involving the 
NYMEX futures contract and the ICE HEN basis contract, the firm will 
be able to price the natural gas at the bidweek price.
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    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 HEN 
contract. Each of these criteria is discussed below.\16\
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    \16\ As noted above, the Commission did not find an indication 
of arbitrage in connection with this contract; accordingly, that 
criterion is not discussed in reference to the HEN contract.
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1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission noted that 
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 ``Gulf Gas End of Day'' and ``OTC Gas End of Day'' \17\ 
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

[[Page 23721]]

historical data. These two packages include price data for the HEN 
contract.
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    \17\ The OTC Gas End of Day dataset includes daily settlement 
prices for natural gas contracts listed for all points in North 
America.
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    Although the Henry Hub is a major trading center for natural gas in 
the United States and, as noted, ICE sells price information for the 
HEN contract, the Commission has found upon further evaluation that the 
HEN contract is not routinely consulted by industry participants in 
pricing cash market transactions and thus does not meet the 
Commission's Guidance for the material price reference criterion. In 
this regard, the NYMEX Henry Hub physically delivered natural gas 
futures contract is routinely consulted by industry participants in 
pricing cash market transactions at this location. Because both the HEN 
and the NYMEX contracts basically price the same commodity at the same 
location and time and the NYMEX contract has significantly higher 
trading volume and open interest,\18\ it is not necessary for market 
participants to independently refer to the HEN contract for pricing 
natural gas at this location. Furthermore, the Commission notes that 
publication of the HEN contract's prices is not indirect evidence of 
routine dissemination. The HEN contract's prices are published with 
those of numerous other contracts, which are of more interest to market 
participants.\19\ The Commission cannot surmise whether or not traders 
specifically purchase the ICE data packages for the HEN contract's 
prices.
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    \18\ Trading data was obtained by the Commission using the 
Integrated Surveillance System.
    \19\ The Commission will rely on one of two sources of 
evidence--direct or indirect--to determine a SPDC. Direct evidence 
can be cash market transactions that are frequently based on or 
quoted as a differential to the potential SPDC. Indirect evidence 
includes contracts whose price series are routinely disseminated in 
industry publications or are sold to market participants by the ECM.
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i. Federal Register Comments
    As noted above, ICE was the sole respondent which addressed the 
question of whether the HEN contract is a SPDC. ICE stated in its 
comment letter that the HEN contract does not meet the material price 
reference criterion for SPDC determination. ICE stated that the 
Commission appeared to base the case that the HEN contract is 
potentially a SPDC on a disputable assertion. In issuing its notice of 
intent to determine whether the HEN 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 ``[b]asing 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.'' The Commission cited 
the ECM study's general finding that some ICE natural gas contracts 
appear to be regarded as price discovery markets as an indication that 
an investigation of certain ICE contracts may be warranted; the ECM 
study was not intended to serve as the sole basis for determining 
whether or not a particular contract meets the material price reference 
criterion.
ii. Conclusion Regarding Material Price Reference
    The Commission finds that the HEN contract does not meet the 
material price reference criterion because it is not routinely 
consulted by cash market participants when pricing transactions at the 
Henry Hub (direct evidence is not supported). Moreover, the ECM sells 
the HEN contract's price data along with those of other contracts, 
which are of more interest to market participants (indirect evidence is 
not supported).
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 HEN contract. In this regard, the final settlement 
of the HEN contract is based, in part, on the final settlement price of 
the NYMEX's Henry Hub physically-delivered natural gas futures 
contract, where the NYMEX is registered with the Commission as a DCM.
    The Commission's Guidance on Significant Price Discovery Contracts 
\20\ 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 price-linked 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.'' 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'').
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    \20\ Appendix A to the Part 36 rules.
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    To assess whether the HEN contract meets the price linkage 
criterion, Commission staff obtained price data from ICE and performed 
the statistical tests cited above. Staff found that the Henry Hub 
futures/cash price differential is determined in part by the final 
settlement price of the NYMEX Henry Hub physically-delivered natural 
gas futures contract (a DCM contract) and that the derived Henry Hub 
prices (using the NYMEX Henry Hub natural gas futures contract's 
settlement prices and the Henry Hub cash price differentials) are 
within 2.5 percent of the settlement prices 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, 100 percent of 
the Henry Hub natural gas prices derived from the HEN values were 
within 2.5 percent of the daily settlement price of NYMEX Henry Hub 
natural gas futures contract. However, staff found that the HEN 
contract fails to meet the volume threshold requirement. In particular, 
the total trading volume in the NYMEX Henry Hub natural gas futures 
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 HEN contract during the 
same period totaled 173,973 contracts (equivalent to 43,493 NYMEX 
futures contracts, given the size difference).\21\ Thus, total amount 
of centralized-market trades in the HEN contract was significantly 
below the minimum threshold.
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    \21\ The HEN contract is one-quarter the size of the NYMEX Henry 
Hub physically-delivered futures contract.
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i. Federal Register Comments
    ICE was the sole respondent which addressed the question of whether 
the HEN contract is a SPDC. ICE stated in its comment letter that the 
HEN contract does not meet the price linkage criterion for SPDC 
determination because it fails the volume test provided in the 
Commission's Guidance.

[[Page 23722]]

ii. Conclusion Regarding the Price Linkage Criterion
    The Commission finds that the HEN contract does not meet the price 
linkage criterion because it fails the volume test provided for in the 
Commission's Guidance.
3. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity, price linkage and 
material price reference as potential criteria for SPDC determination 
of the HEN contract. With respect to the material liquidity criterion, 
the Commission noted that the total number of transactions executed on 
ICE's electronic platform in the HEN contract was 538 in the second 
quarter of 2009, resulting in a daily average of 8.4 trades. During the 
same period, the HEN contract had a total trading volume of 78,780 
contracts and an average daily trading volume of 1,232 contracts. 
Moreover, open interest as of June 30, 2009, was 128,504 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.\22\ In a subsequent filing dated November 13, 
2009, ICE reported that total trading volume in the third quarter of 
2009 was 173,973 contracts (or 2,636 contracts on a daily basis). In 
term of number of transactions, 1,174 trades occurred in the third 
quarter of 2009 (17.8 trades per day). As of September 30, 2009, open 
interest in the HEN contract was 160,804 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.
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    \22\ 74 FR 53720 (October 20, 2009).
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    The Commission notes that trading activity in the HEN contract 
increased between the second and third quarters of 2009. However, the 
number of trades per day remained relatively low and only slightly more 
than the reporting level of five trades per day. Moreover, the 
Commission notes that the number of contracts traded is comparable to 
that experienced in a relatively small futures market, such as the 
NYMEX Platinum and ICE US Frozen Concentrated Orange Juice contracts. 
Accordingly, the data at best provides weak evidence that the HEN 
contract meets the material liquidity criterion.\23\
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    \23\ 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 HEN contract does not meet either the 
price linkage or material price reference criterion. In light of 
this finding and the Commission's Guidance cited above, there is no 
need to evaluate further the material liquidity criteria since it 
cannot be used alone as a basis for a SPDC determination.
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i. Federal Register Comments
    As noted above, ICE was the sole respondent which addressed the 
question of whether the HEN contract is a SPDC. ICE stated in its 
comment letter that the HEN 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-per-day 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.'' On the contrary, 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'' \24\ rather than solely relying upon an ECM on its own to 
identify any such potential SPDCs to the Commission. While a contract 
that meets this threshold may be subject to scrutiny as a potential 
SPDC, the threshold is not a test for material liquidity. As noted 
above, the Commission has not reached a decision regarding material 
liquidity because, regardless of the relatively large quarterly trading 
volume in the HEN contract, material liquidity alone is not sufficient 
to support a SPDC determination.
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    \24\ 73 FR 75892 (December 12, 2008).
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    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 HEN contract, ``98% of the trades and volume actually executed on 
the ICE platform occurred in the single most liquid, usually prompt, 
month of the contract.''
    It is the Commission's opinion that liquidity, as it relates to the 
HEN contract, is typically a function of trading activity in particular 
lead months and, given sufficient liquidity in such months, the HEN 
contract itself would be considered liquid. ICE's analysis of its own 
trade data confirms this to be the case for the HEN 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 trades-per-day statistics that it 
provided to the Commission in its quarterly filing and which are cited 
above includes 2(h)(1) transactions, which were not completed on the 
electronic trading platform and should not be considered in the SPDC 
determination process. Commission staff asked ICE to review the data it 
sent in its quarterly filings. In response, ICE confirmed that the 
volume data it provided and which the Commission cited in its October 
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.\25\ 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 way agreeable to the position 
holder regardless of how the position was initially created.
---------------------------------------------------------------------------

    \25\ Supplemental 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 62.2 percent of all transactions in the HEN contract.
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds at best weak 
evidence that the HEN contract meets the material liquidity criterion. 
However, because the HEN contract does not meet either the price 
linkage or material price reference criterion, it is not possible to 
declare the HEN contract a SPDC since material liquidity cannot be used 
alone as a basis for a SPDC determination.
4. Overall Conclusion the HEN Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the HEN contract 
does not perform a significant price discovery

[[Page 23723]]

function under the criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the HEN contract does 
not meet the material price reference and price linkage criteria at 
this time, and there is at best weak evidence that it meets the 
material liquidity criterion, which is not sufficient by itself to 
support a SPDC determination. Accordingly, the Commission will issue 
the attached Order declaring that the HEN 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 HEN 
contract.\26\ Accordingly, with respect to its HEN 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.
---------------------------------------------------------------------------

    \26\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

b. The Henry Financial Index (HIS) Contract and the SPDC Indicia
    The ICE HIS contract is cash settled based on the arithmetic 
average of the daily natural gas prices at the Henry Hub, as quoted in 
the ``Daily Price Survey'' table of Platts' Gas Daily during the 
specified month, less the Platts bidweek price that is reported in the 
first issue of Inside FERC's Gas Market Report in which the natural gas 
is delivered. The Platts prices are based on the fixed-price cash 
market transactions that are voluntarily reported by traders. As noted 
above, the Platts bidweek price is based on a survey of cash market 
traders who voluntarily report data on their fixed-price transactions 
conducted during the last five business days of the month for physical 
delivery of natural gas at the Henry Hub on a uniform basis throughout 
the following calendar month. The Platts bidweek index is published on 
the first business day of the calendar month in which the natural gas 
is to be delivered. The Gas Daily price is for next-day delivery of 
natural gas at the Henry Hub. The size of the HIS contract is 2,500 
mmBtu, and the unit of trading is any multiple of 2,500 mmBtu. The HIS 
contract is listed for 36 calendar months.
    The index used to settle the HIS contract measures the discrepancy 
between two cash market prices for natural gas, where one (the Platts 
bidweek price) is a fixed forward price that locks in the price paid 
for gas deliveries made on each calendar day of the following month. 
The other price (the Platts Daily Price Survey) is a calendar month 
average of the daily spot price for gas deliveries made during the same 
month. The forward and average spot prices may differ from each other 
as new market conditions unfold during the month in which deliveries 
are made.
    For example, assume that a firm prices natural gas that is going to 
be delivered at the Henry Hub in November 2009 at the bidweek price. 
The NYMEX Henry Hub futures can be used to procure the physical gas, 
and HEN contract can be overlayed in order to achieve the bidweek 
price. If there is a potential that the average daily price during the 
delivery month may differ from the bidweek price, the firm can add the 
HIS contract to the NYMEX futures/ICE HEN combination to achieve a 
price that is based on actual daily prices rather than a forward spot 
price that applies to all business days in the delivery month. As a 
result, the HIS contract allows commercial participants to price 
natural gas more accurately during the delivery period.
    In its October 20, 2009, Federal Register notice, the Commission 
identified material liquidity and material price reference as the 
potential SPDC criteria applicable to the HIS contract. Each of these 
factors is discussed below.\27\
---------------------------------------------------------------------------

    \27\ As noted above, the Commission did not find an indication 
of arbitrage and price linkage in connection with this contract; 
accordingly, those criteria are not discussed in reference to the 
HIS contract.
---------------------------------------------------------------------------

1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission noted that 
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 ``Gulf Gas End of Day'' and ``OTC Gas End of Day'' 
\28\ 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 HIS contract.
---------------------------------------------------------------------------

    \28\ The OTC Gas End of Day dataset includes daily settlement 
prices for natural gas contracts listed for all points in North 
America.
---------------------------------------------------------------------------

    Although the Henry Hub is a major trading center for natural gas in 
the United States, and as noted ICE does sell price information for the 
HIS contract, the Commission has found upon further evaluation that the 
HIS contract is not ``routinely consulted by industry participants in 
pricing cash market transactions'' and thus does not meet the 
Commission's guidance for the material price reference criterion. In 
this regard, the NYMEX Henry Hub natural gas futures contract is 
routinely consulted by industry participants in pricing cash market 
transactions at this location. Because both the HIS and the NYMEX 
contracts basically price the same commodity at the same location and 
time and the NYMEX futures contract has significantly higher trading 
volume and open interest, it is not necessary for market participants 
to independently refer to the HIS contract for pricing natural gas at 
this location. Furthermore, the Commission notes that publication of 
the HIS contract's prices is not indirect evidence of routine 
dissemination. The HIS contract's prices are published with those of 
numerous other contracts, which are of more interest to market 
participants.\29\ The Commission cannot surmise whether or not traders 
specifically purchase the ICE data packages for the HIS contract's 
prices.
---------------------------------------------------------------------------

    \29\ The Commission will rely on one of two sources of 
evidence--direct or indirect--to determine a SPDC. Direct evidence 
can be cash market transactions that are frequently based on or 
quoted as a differential to the potential SPDC. Indirect evidence 
includes contracts whose price series are routinely disseminated in 
industry publications or are sold to market participants by the ECM.
---------------------------------------------------------------------------

i. Federal Register Comments
    As noted above, ICE was the sole respondent which addressed the 
question of whether the HIS contract is a SPDC. ICE stated in its 
comment letter that the HIS contract does not meet the material price 
reference criterion for SPDC determination and, further, that the 
Commission's identification of the HIS contract as a potential SPDC is 
based on a disputable assertion. In issuing its notice of intent to 
determine whether the HIS 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 ``[b]asing 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.'' The Commission cited the ECM study's general finding 
that some ICE natural gas contracts appear to be regarded as price 
discovery markets as an indication that an investigation of certain ICE 
contracts may be warranted; the ECM study was not intended to serve as 
the sole basis for determining whether or not a particular contract 
meets the material price reference criterion.

[[Page 23724]]

ii. Conclusion Regarding Material Price Reference
    The Commission finds that the HIS contract does not meet the 
material price reference criterion because it is not routinely 
consulted by cash market participants when pricing transactions at the 
Henry Hub (direct evidence is not supported). Moreover, the ECM sells 
the HIS contract's price data along with those of other contracts, 
which are of more interest to market participants (indirect evidence is 
not supported).
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 HIS 
contract. With respect to the material liquidity criterion, the 
Commission noted that the total number of transactions executed on 
ICE's electronic platform in the HIS contract was 550 in the second 
quarter of 2009, resulting in a daily average of 8.6 trades. During the 
same period, the HIS contract had a total trading volume of 79,330 
contracts and an average daily trading volume of 1,239 contracts. 
Moreover, open interest as of June 30, 2009, was 127,346 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.\30\ In a subsequent filing dated November 13, 
2009, ICE reported that total trading volume in the third quarter of 
2009 was 178,649 contracts (or 2,707 contracts on a daily basis). In 
term of number of transactions, 1,250 trades occurred in the third 
quarter of 2009 (18.9 trades per day). As of September 30, 2009, open 
interest in the HIS contract was 255,496 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.
---------------------------------------------------------------------------

    \30\ 74 FR 53720 (October 20, 2009).
---------------------------------------------------------------------------

    The Commission notes that trading activity in the HIS contract 
increased between the second and third quarters of 2009. However, the 
number of trades per day remained relatively low and only slightly more 
than the reporting level of five trades per day. Moreover, the 
Commission notes that the number of contracts traded is comparable to 
that experienced in a relatively small futures market, such as the 
NYMEX Platinum and ICE U.S. Frozen Concentrated Orange Juice contracts. 
Accordingly, the data at best provides weak evidence that the HIS 
contract meets the material liquidity criterion.\31\
---------------------------------------------------------------------------

    \31\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the HIS contract does not meet either the 
price linkage or material price reference criterion. In light of 
this finding and the Commission's Guidance cited above, there is no 
need to evaluate further the material liquidity criteria since it 
cannot be used alone as a basis for a SPDC determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    As noted above, ICE was the sole respondent which addressed the 
question of whether the HIS contract is a SPDC. ICE stated in its 
comment letter that the HIS 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-per-day 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.'' On the contrary, 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. While a contract 
that meets this threshold may be subject to scrutiny as a potential 
SPDC, the threshold is not a test for material liquidity. As noted 
above, the Commission has not reached a decision regarding material 
liquidity because, regardless of the relatively large quarterly trading 
volume in the HIS contract, material liquidity alone is not sufficient 
to support a SPDC determination.
---------------------------------------------------------------------------

    \32\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    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 HIS contract, ``98% of the trades and volume actually executed on 
the ICE platform occurred in the single most liquid, usually prompt, 
month of the contract.''
    It is the Commission's opinion that liquidity, with regard to the 
HIS contract, is typically a function of trading activity in particular 
lead months and, given sufficient liquidity in such months, the HIS 
contract itself would be considered liquid. ICE's analysis of its own 
trade data confirms this to be the case for the HIS 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 trades-per-day statistics that it 
provided to the Commission in its quarterly filing and which are cited 
above includes 2(h)(1) transactions, which were not completed on the 
electronic trading platform and should not be considered in the SPDC 
determination process. Commission staff asked ICE to review the data it 
sent in its quarterly filings. In response, ICE confirmed that the 
volume data it provided and which the Commission cited in its October 
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 way agreeable to the position 
holder regardless of how the position was initially created.
---------------------------------------------------------------------------

    \33\ Supplemental 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 59.7 percent of all transactions in the HIS contract.
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds weak evidence 
at best that the HIS contract meets the material liquidity criterion. 
However, because the HIS contract does not meet the material price 
reference criterion, it is not possible to declare the HIS contract a 
SPDC since material liquidity cannot be used alone as a basis for a 
SPDC determination.

[[Page 23725]]

3. Overall Conclusion
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the HIS 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 HIS contract does not meet the 
material price reference criterion at this time, and there is weak 
evidence at best that it meets the material liquidity criterion, which 
is not sufficient by itself to support a SPDC determination. 
Accordingly, the Commission will issue the attached Order declaring 
that the HIS 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 HIS 
contract.\34\ Accordingly, with respect to its HIS 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.
---------------------------------------------------------------------------

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

c. The Henry Financial Swing (HHD) Contract and the SPDC Indicia

    The ICE HHD contract is cash settled based on the spot index price 
for natural gas at the Henry Hub on a specified day, as reported in the 
``Daily Price Survey'' table of Platts' Gas Daily. The Platts index 
price is based on fixed-price cash market transactions that are 
voluntarily reported by traders. The size of the HHD contract is 2,500 
mmBtu, and the unit of trading is any multiple of 2,500 mmBtu. The HHD 
contract is listed for 65 consecutive calendar days.
    Swing contracts are cash-settled natural gas contracts that specify 
2,500 mmBtu of gas at a particular location on a specific day and is 
settled using a price index published by a third-party price reporter. 
The ICE HHD swing contract represents the spot price of natural gas at 
the Henry Hub on a particular day. Swing contracts allow traders to 
refine or lift hedges during the delivery month that were previously 
established using the NYMEX Henry Hub natural gas futures contract. 
Swing contracts are most useful after the NYMEX futures contract has 
stopped trading, which is just prior to the beginning of the delivery 
month. Physically-delivered and cash-settled transactions based on the 
NYMEX Henry Hub price involves natural gas that is delivered over the 
entire delivery month. If, for example, a firm's needs change and it no 
longer needs all of the natural gas for which it hedged (say it now 
requires only half of the originally hedged natural gas in the final 
week of the delivery month), then the HHD contract can be used to 
offset the part of the original hedge even though NYMEX futures 
contract has ceased trading.
    In its October 20, 2009, Federal Register notice, the Commission 
identified material liquidity, arbitrage and material price reference 
as the potential SPDC criteria applicable to the HHD contract. Each of 
these criteria is discussed below.\35\
---------------------------------------------------------------------------

    \35\ As noted above, the Commission did not find an indication 
of price linkage in connection with this contract; accordingly, that 
criterion is not discussed in reference to the HHD contract.
---------------------------------------------------------------------------

1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission noted that 
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 ``Gulf Gas End of Day'' and ``OTC Gas End of Day'' 
\36\ 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 HHD contract.
---------------------------------------------------------------------------

    \36\ The OTC Gas End of Day dataset includes daily settlement 
prices for natural gas contracts listed for all points in North 
America.
---------------------------------------------------------------------------

    Although the Henry Hub is a major trading center for natural gas in 
the United States and, as noted, ICE sells price information for the 
HHD contract, the Commission has found upon further evaluation that the 
HHD contract is not ``routinely consulted by industry participants in 
pricing cash market transactions'' and thus does not meet the 
Commission's guidance for the Material Price Reference criteria. In 
this regard, the NYMEX Henry Hub futures contract is routinely 
consulted by industry participants in pricing cash market transactions 
at this location, because both the HHD and the NYMEX contracts 
basically price the same commodity at the same location and the NYMEX 
contract has significantly higher trading volume and open interest, it 
is not necessary for market participants to independently refer to the 
HHD contract for pricing natural gas at this location. Furthermore, the 
Commission notes that publication of the HHD contract's prices is not 
indirect evidence of routine dissemination. The HHD contract's prices 
are published with those of numerous other contracts, which are of more 
interest to market participants.\37\ The Commission cannot surmise 
whether or not traders specifically purchase the ICE data packages for 
the HHD contract's prices.
---------------------------------------------------------------------------

    \37\ The Commission will rely on one of two sources of 
evidence--direct or indirect--to determine a SPDC. Direct evidence 
can be cash market transactions that are frequently based on or 
quoted as a differential to the potential SPDC. Indirect evidence 
includes contracts whose price series are routinely disseminated in 
industry publications or are sold to market participants by the ECM.
---------------------------------------------------------------------------

i. Federal Register Comments
    As noted above, ICE was the sole respondent which addressed the 
question of whether the HHD contract is a SPDC. ICE stated in its 
comment letter that the HHD contract does not meet the material price 
reference criterion for SPDC determination. ICE stated that the 
Commission appeared to base the case that the HHD contract is 
potentially a SPDC on a disputable assertion. First, in issuing its 
notice of intent to determine whether the HHD 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 ``[b]asing 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.'' The Commission cited 
the ECM study's general finding that some ICE natural gas contracts 
appear to be regarded as price discovery markets as an indication that 
an investigation of certain ICE contracts may be warranted; the ECM 
study was not intended to serve as the sole basis for determining 
whether or not a particular contract meets the material price reference 
criterion.
ii. Conclusion Regarding Material Price Reference
    The Commission finds that the HHD contract does not meet the 
material price reference criterion because it is not routinely 
consulted by cash market participants when pricing transactions at the 
Henry Hub (direct evidence is not supported). Moreover, the ECM sells 
the HHD contract's price data along with those of other contracts, 
which are of more interest to market participants (indirect evidence is 
not supported).
2. Arbitrage Criterion
    In its October 20, 2009, Federal Register notice, the Commission 
identified arbitrage as a potential basis

[[Page 23726]]

for a SPDC determination with respect to the HHD contract.
    The Commission's Guidance (Appendix A to Part 36) notes that ``the 
Commission will consider an arbitrage contract potentially to be a 
[SPDC] * * * if, over the most recent quarter, greater than 95 percent 
of the closing or settlement prices of the contract, which have been 
calculated using transaction prices, fall within 2.5 percent of the 
closing or settlement price of the contract or contracts which it could 
be arbitraged.'' As noted above, the HHD contract is a daily contract 
that reflects the spot price of natural gas at the Henry Hub and is 
listed for 65 calendar days. In contrast, the NYMEX Henry Hub natural 
gas futures contract is a pricing mechanism for natural gas in the 
future. The NYMEX Henry Hub natural gas futures contract is available 
for trading many months prior to the delivery period.
    Arbitrage between the ICE HHD and NYMEX Henry Hub physically-
delivered natural gas futures contract potentially is possible. 
However, the ability to arbitrage likely would be limited based on a 
number of factors. First, the HHD contract prices the value of natural 
gas on a single day while the NYMEX futures contract prices the value 
of gas over a calendar month. Second, the futures contract and the HHD 
contract are not always trading simultaneously. For example, the NYMEX 
futures contract trades many years before delivery while the HHD 
contract is listed out only 65 consecutive calendar days. Moreover, the 
HHD contract trades into the delivery month while the NYMEX futures 
contract stops trading three business days before the first business 
day of the delivery month. Even during the times where the two 
contracts are simultaneously traded, arbitrage between the two 
contracts likely would involve multiple HHD contract to cover a period 
of several days or weeks against a single NYMEX position, which would 
be rather cumbersome and probably not practicable. Due to the 
heterogeneous attributes of the two contracts, the test noted above to 
determine the similarity of the two price series was not performed.
i. Federal Register Comments
    As noted above, ICE was the sole respondent which addressed the 
question of whether the HHD contract is a SPDC. ICE stated in its 
comment letter that the HHD contract does not meet the arbitrage 
criterion because it is a `` `decaying' product that expires daily 
throughout its contract term. The HHD [contract] typically trades 
`balance of month' therefore using multiple daily settlement prices. In 
fact, the majority of HHD trades are intra-month after the * * * [NYMEX 
Henry Hub natural gas futures contract] has already been priced.''
ii. Conclusion Regarding the Arbitrage Criterion
    The HHD contract does not meet the arbitrage criterion because it 
prices natural gas on a daily basis while the NYMEX futures contract 
prices gas on a monthly basis. Moreover, the futures contract is used 
to discover prices while the HHD contract is used to modify or lift 
preexisting hedges.
3. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity, arbitrage and material 
price reference as potential criteria for SPDC determination of the HHD 
contract. With respect to the material liquidity criterion, the 
Commission noted that the total number of transactions executed on 
ICE's electronic platform in the HHD contract was 5,246 in the second 
quarter of 2009, resulting in a daily average of 82 trades. During the 
same period, the HHD contract had a total trading volume of 242,968 
contracts and an average daily trading volume of 3,796 contracts. 
Moreover, open interest as of June 30, 2009, was 20,173 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.\38\ In a subsequent filing dated November 13, 
2009, ICE reported that total trading volume in the third quarter of 
2009 was 407,037 contracts (or 6,167 contracts on a daily basis). In 
term of number of transactions, 10,376 trades occurred in the third 
quarter of 2009 (157.2 trades per day). As of September 30, 2009, open 
interest in the HHD contract was 25,418 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.
---------------------------------------------------------------------------

    \38\ 74 FR 53720 (October 20, 2009).
---------------------------------------------------------------------------

    The Commission notes that trading activity in the HHD contract 
increased between the second and third quarters of 2009. Moreover, the 
number of trades per day was quite large and was significantly greater 
than the reporting level of five trades per day. Furthermore, the 
number of contracts traded is comparable to the levels experienced in a 
moderately active futures market, such as the ICE US Cotton No. 2 
contract. Accordingly, the transaction data provide evidence that the 
HHD contract may meet the material liquidity criterion.\39\
---------------------------------------------------------------------------

    \39\ 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 HEN contract does not meet either the 
price linkage or material price reference criterion. In light of 
this finding and the Commission's Guidance cited above, there is no 
need to evaluate further the material liquidity criteria since it 
cannot be used alone as a basis for a SPDC determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    As noted above, ICE was the sole respondent which addressed the 
question of whether the HHD contract is a SPDC. ICE stated in its 
comment letter that the HHD 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-per-day 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.'' On the contrary, 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'' \40\ rather than solely relying upon an ECM on its own to 
identify any such potential SPDCs to the Commission. While a contract 
that meets this threshold may be subject to scrutiny as a potential 
SPDC, the threshold is not a test for material liquidity. As noted 
above, the Commission has not reached a decision regarding material 
liquidity because, regardless of the relatively large number of trades 
per day and the large quarterly trading volume in the HHD contract, 
material liquidity alone is not sufficient to support a SPDC 
determination.
---------------------------------------------------------------------------

    \40\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

    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

[[Page 23727]]

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 HHD contract, ``78% of 
the total volume was actually executed on the ICE platform in the 
single most liquid, usually prompt, month of the contract.''
    It is the Commission's opinion that liquidity, with regard to the 
HHD contract, is typically a function of trading activity in particular 
lead months and, given sufficient liquidity in such months, the HHD 
contract itself would be considered liquid. ICE's analysis of its own 
trade data confirms this to be the case for the HHD 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 trades-per-day statistics that it 
provided to the Commission in its quarterly filing and which are cited 
above includes 2(h)(1) transactions, which were not completed on the 
electronic trading platform and should not be considered in the SPDC 
determination process. Commission staff asked ICE to review the data it 
sent in its quarterly filings and 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.\41\ 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 way agreeable to the position 
holder regardless of how the position was initially created.
---------------------------------------------------------------------------

    \41\ Supplemental 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 1.2 percent of all transactions in the HHD contract.
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds that the HHD 
contract may meet the material liquidity criterion. However, because 
the HHD contract does not meet the material price reference or the 
arbitrage criterion, it is not possible to declare the HHD contract a 
SPDC since material liquidity cannot be used alone as a basis for SPDC 
determination.
4. Overall Conclusion
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the HHD 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 HHD contract does not meet the 
material price reference and arbitrage criteria at this time nor is 
material liquidity sufficient by itself to support a SPDC 
determination. Accordingly, the Commission will issue the attached 
Order declaring that the HHD 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 HHD 
contract.\42\ Accordingly, with respect to its HHD 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.
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    \42\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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V. Related Matters

a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \43\ 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.
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    \43\ 44 U.S.C. 3507(d).
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b. Cost-Benefit Analysis

    Section 15(a) of the CEA \44\ 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.
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    \44\ 7 U.S.C. 19(a).
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    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 
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 HEN, HIS and HHD contracts 
that are the subject of the attached Orders are not SPDCs; accordingly, 
the Commission's Orders impose no additional costs and no additional 
statutorily or regulatory mandated responsibilities on the ECM.

c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \45\ 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

[[Page 23728]]

are not small entities for purposes of the RFA.\46\ Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that these Orders, taken in connection with section 
2(h)(7) of the Act and the Part 36 rules, will not have a significant 
impact on a substantial number of small entities.
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    \45\ 5 U.S.C. 601 et seq.
    \46\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Orders

a. Order Relating to the ICE Henry 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 Henry Financial Basis contract, 
traded on the IntercontinentalExchange, Inc., does not at this time 
satisfy the material price reference and price linkage criteria for 
significant price discovery contracts. Moreover, under Commission 
Guidance material liquidity alone cannot support a significant price 
discovery finding for the Henry Financial Basis contract. Consistent 
with this determination, the IntercontinentalExchange, Inc., is not 
considered a registered entity \47\ with respect to the Henry Financial 
Basis contract and is not subject to the provisions of the Commodity 
Exchange Act applicable to registered entities. Further, the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., are not applicable to the Henry 
Financial Basis contract with the issuance of this Order.
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    \47\ 7 U.S.C. 1a(29).
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    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 Henry Financial Basis contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the IntercontinentalExchange, Inc., must continue to comply with all of 
the applicable requirements of Section 2(h)(3) and Commission 
Regulation 36.3.

b. Order Relating to the ICE Henry Financial Index 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 Henry Financial Index contract, 
traded on the IntercontinentalExchange, Inc., does not at this time 
satisfy the material price reference criterion for significant price 
discovery contracts. Moreover, under Commission Guidance material 
liquidity alone cannot support a significant price discovery finding 
for the Henry Financial Index contract. Consistent with this 
determination, the IntercontinentalExchange, Inc., is not considered a 
registered entity \48\ with respect to the Henry Financial Index 
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 Henry Financial Index contract with the 
issuance of this Order.
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    \48\ 7 U.S.C. 1a(29).
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    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 Henry Financial Index 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.

c. Order Relating to the ICE Henry Financial Swing 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 Henry Financial Swing contract, 
traded on the IntercontinentalExchange, Inc., does not at this time 
satisfy the material price reference and arbitrage criteria for 
significant price discovery contracts. Moreover, under Commission 
Guidance material liquidity alone cannot support a significant price 
discovery finding for the Henry Financial Swing contract. Consistent 
with this determination, the IntercontinentalExchange, Inc., is not 
considered a registered entity \49\ with respect to the Henry Financial 
Swing 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 Henry 
Financial Swing contract with the issuance of this Order.
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    \49\ 7 U.S.C. 1a(29).
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    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 Henry Financial Swing contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the IntercontinentalExchange, Inc., must continue to comply with all of 
the applicable requirements of Section 2(h)(3) and Commission 
Regulation 36.3.

    Issued in Washington, DC on April 28, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-10313 Filed 5-3-10; 8:45 am]
BILLING CODE P
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