Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Notices 24641 

1HSC refers to the Houston Ship Channel, a 

conduit for ocean going vessels between the city of 

Houston, Texas, and the Gulf of Mexico. 

2 74 FR 52206 (October 9, 2009). 

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

4 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

No. 110–246, 122 Stat. 1624 (June 18, 2008). 

5 7 U.S.C. 1a(29). 

6 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

7Public 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). 

8For 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. 

9The 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. 

10 IECA describes itself as an ‘‘association of 

leading manufacturing companies’’ whose 

membership ‘‘represents a diverse set of industries 

including: plastics, cement, paper, food processing, 

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

industrial gases, pharmaceutical, aluminum and 

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

group of commercial firms in the domestic energy 

industry whose primary business activity is the 

physical delivery of one or more energy 

commodities to customers, including industrial, 

commercial and residential consumers’’ and whose 

membership consists of ‘‘energy producers, 

marketers and utilities.’’ 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 

Continued 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the HSC1 Financial 

Basis Contract Traded on the 

IntercontinentalExchange, Inc., 

Performs a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final Order. 

SUMMARY: On October 9, 2009, the 

Commodity Futures Trading 

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

published for comment in the Federal 

Register 2 a notice of its intent to 

undertake a determination whether the 

HSC Financial Basis (‘‘HXS’’) 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.3

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 HXS 

contract performs a significant price 

discovery function. Authority for this 

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

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective Date: April 28, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

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

Senior Special Counsel, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5133. E-mail: 

snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 4

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.5 The legislation authorizes the 

CFTC to designate an agreement, 

contract or transaction as a SPDC if the 

Commission determines, under criteria 

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

performs a significant price discovery 

function. When the Commission makes 

such a determination, the ECM on 

which the SPDC is traded must assume, 

with respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the Act and 

Commission regulations, and must 

comply with nine core principles 

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

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.6 As relevant here, rule 36.3 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

promptly concerning any contract 

traded in reliance on the exemption in 

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

five trades per day or more over the 

most recent calendar quarter, and for 

which the exchange sells its price 

information regarding the contract to 

market participants or industry 

publications, or whose daily closing or 

settlement prices on 95 percent or more 

of the days in the most recent quarter 

were within 2.5 percent of the 

contemporaneously determined closing, 

settlement or other daily prices of 

another contract. 

Commission rule 36.3(c)(3) 

established the procedures by which the 

Commission makes and announces its 

determination whether a particular ECM 

contract serves a significant price 

discovery function. Under those 

procedures, the Commission will 

publish notice in the Federal Register 

that it intends to undertake an 

evaluation whether the specified 

agreement, contract or transaction 

performs a significant price discovery 

function and to receive written views, 

data and arguments relevant to its 

determination from the ECM and other 

interested persons. Upon the close of 

the comment period, the Commission 

will consider, among other things, all 

relevant information regarding the 

subject contract and issue an order 

announcing and explaining its 

determination whether or not the 

contract is a SPDC. The issuance of an 

affirmative order signals the 

effectiveness of the Commission’s 

regulatory authorities over an ECM with 

respect to a SPDC; at that time such an 

ECM becomes subject to all provisions 

of the CEA applicable to registered 

entities.7 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4).8

II. Notice of Intent To Undertake SPDC 

Determination 

On October 9, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the HXS contract 

performs a significant price discovery 

function, and requested comment from 

interested parties.9 Comments were 

received from the Industrial Energy 

Consumers of America (‘‘IECA’’), 

Working Group of Commercial Energy 

Firms (‘‘WGCEF’’), Platts, ICE, 

Economists Incorporated (‘‘EI’’), Natural 

Gas Supply Association (‘‘NGSA’’), 

Federal Energy Regulatory Commission 

(‘‘FERC’’), and Financial Institutions 

Energy Group (‘‘FIEG’’).10 The comment 


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includes those price indices in its monthly Inside 

FERC’s Gas Market Report (‘‘Inside FERC’’). ICE is 

an ECM, as noted above. EI is an economic 

consulting firm with offices located in Washington, 

DC, and San Francisco, CA. NGSA is an industry 

association comprised of natural gas producers and 

marketers. FERC is an independent federal 

regulatory agency that, among other things, 

regulates the interstate transmission of natural gas, 

oil and electricity. FIEG describes itself as an 

association of investment and commercial banks 

who are active participants in various sectors of the 

natural gas markets, ‘‘including acting as marketers, 

lenders, underwriters of debt and equity securities, 

and proprietary investors.’’ The comment letters are 

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

www.cftc.gov/lawandregulation/federalregister/ 

federalregistercomments/2009/09–019.html 

11FERC stated that the HXS contract is cash 

settled and does not contemplate actual physical 

delivery of natural gas. Accordingly, FERC 

expressed the opinion that a determination by the 

Commission that a contract performs a significant 

price discovery function ‘‘would not appear to 

conflict with FERC’s exclusive jurisdiction under 

the Natural Gas Act (NGA) over certain sales of 

natural gas in interstate commerce for resale or with 

its other regulatory responsibilities under the NGA’’ 

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

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

the CFTC’’ should any such potential conflict arise. 

CL 07. 

12 IECA stated that the subject ICE contract should 

‘‘be required to come into compliance with core 

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

and with other statutory provisions applicable to 

registered entities. [This contract] should be subject 

to the Commission’s position limit authority, 

emergency authority and large trader reporting 

requirements, among others.’’ CL 01. 

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

the Commission identified material price reference, 

price linkage and material liquidity as the possible 

criteria for SPDC determination of the HXS 

contract. Arbitrage was not identified as a possible 

criterion and will not be discussed further in this 

document or the associated Order. 

14 17 CFR part 36, Appendix A. 

15The term ‘‘hub’’ refers to a juncture where two 

or more natural gas pipelines are connected. Hubs 

also serve as pricing points for natural gas at the 

particular locations. 

letters from FERC11 and Platts did not 

directly address the issue of whether or 

not the HXS contract is a SPDC; IECA 

concluded that the HXS contract is a 

SPDC, but did not provide a basis for its 

conclusion.12 The other parties’ 

comments raised substantive issues 

with respect to the applicability of 

section 2(h)(7) to the HXS contract, 

generally asserting that the HXS 

contract is not a SPDC as it does not 

meet the material liquidity, material 

price reference and price linkage criteria 

for SPDC determination. Those 

comments are more extensively 

discussed below, as applicable. 

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

The Commission is directed by 

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

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.13 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.14 For example, for 

contracts that are linked to other 

contracts or that may be arbitraged with 

other contracts, the Commission will 

consider whether the price of the 

potential SPDC moves in such harmony 

with the other contract that the two 

markets essentially become 

interchangeable. This co-movement of 

prices would be an indication that 

activity in the contract had reached a 

level sufficient for the contract to 

perform a significant price discovery 

function. In evaluating a contract’s price 

discovery role as a price reference, the 

Commission will consider the extent to 

which, on a frequent and recurring 

basis, bids, offers or transactions are 

directly based on, or are determined by 

referencing, the prices established for 

the contract. 

IV. Findings and Conclusions 

a. The HSC Financial Basis (HXS) 

Contract and the SPDC Indicia 

The HXS contract is cash settled 

based on the difference between the 

price of natural gas at the HSC for the 

month of delivery, as published in 

Platts’ Inside FERC’s Gas Market Report, 

and the final settlement price of the 

New York Mercantile Exchange’s 

(‘‘NYMEX’s’’) Henry Hub physicallydelivered 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 fixed-price 

transactions for physical delivery of 

natural gas at the HSC conducted during 

the last five business days of the month; 

such bidweek transactions specify the 

delivery of natural gas on a uniform 

basis throughout the following calendar 

month at the agreed upon rate. The 

Platt’s 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 HXS contract 

is 2,500 million British thermal units 

(‘‘mmBtu’’), and the unit of trading is 

any multiple of 2,500 mmBtu. The HXS 

contract is listed for up to 84 calendar 

months commencing with the next 

calendar month. 

The Henry Hub,15 which is located in 

Erath, Louisiana, is the primary cash 

market trading and distribution center 

for natural gas in the United States. It 

also is the delivery point and pricing 

basis for the NYMEX’s actively traded, 

physically-delivered natural gas futures 

contract, which is the most important 

pricing reference for natural gas in the 

United States. The Henry Hub, which is 

operated by Sabine Pipe Line, LLC, 

serves as a juncture for 13 different 


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

natural_gas/feature_articles/2009/ngmarketcenter/ 

ngmarketcenter.pdf. 

17http://www.aep.com/newsroom/newsreleases/ 

?id=952. 

18http://www.energytransfer.com/midstream

_ops.aspx. 

19Basis contracts denote the difference in the 

price of natural gas at a specified location minus the 

price of natural gas at the Henry Hub. The 

differential can be either a positive or negative 

value. 

20As noted above, the Commission did not find 

an indication of arbitrage in connection with this 

contract; accordingly, that criterion was not 

discussed in reference to the HXS contract. 

21The OTC Gas End of Day dataset includes daily 

settlement prices for natural gas contracts listed for 

all points in North America. 

22http://www.cftc.gov/ucm/groups/public/ 

@newsroom/documents/file/pr5403-07

_ecmreport.pdf. 

23 17 CFR part 36, Appendix A. 

pipelines. These pipelines bring in 

natural gas from fields in the Gulf Coast 

region and ship it to major consumption 

centers along the East Coast and 

Midwest. The throughput shipping 

capacity of the Henry Hub is 1.8 trillion 

mmBtu per day. 

In addition to the Henry Hub, there 

are a number of other locations where 

natural gas is traded. In 2008, there were 

33 natural gas market centers in North 

America.16 Some of the major trading 

centers include Alberta, Northwest 

Rockies, Southern California border and 

the HSC. For locations that are directly 

connected to the Henry Hub by one or 

more pipelines and where there 

typically is adequate shipping capacity, 

the price at the other locations usually 

directly tracks the price at the Henry 

Hub, adjusted for transportation costs. 

However, at other locations that are not 

directly connected to the Henry Hub or 

where shipping capacity is limited, the 

prices at those locations often diverge 

from the Henry Hub price. Furthermore, 

one local price may be significantly 

different than the price at another 

location even though the two markets’ 

respective distances from the Henry 

Hub are the same. The reason for such 

pricing disparities is that a given 

location may experience supply and 

demand factors that are specific to that 

region, such as differences in pipeline 

shipping capacity, unusually high or 

low demand for heating or cooling or 

supply disruptions caused by severe 

weather. As a consequence, local 

natural gas prices can differ from the 

Henry Hub price by more than the cost 

of shipping and such price differences 

can vary in an unpredictable manner. 

The HSC is part of the Port of Houston 

and, as noted above, serves as a conduit 

between the Gulf of Mexico and the city 

of Houston, Texas, which is one of the 

largest industrial natural gas consuming 

areas in the United States. The 4,200- 

mile Houston Pipeline, with a capacity 

of approximately 2.4 billion cubic feet 

per day, connects local gas distribution 

companies, electric generation plants 

and industrial consumers to one of the 

largest domestic supply basins in 

Texas.17 The Houston Pipeline 

Company serves the HSC market, the 

city of Houston, the Katy Hub, 

Beaumont/Port Arthur complex, Texas 

City and Corpus Christi and includes 

the Bammel Gas Storage Facility, one of 

the largest underground reservoir 

storage fields in North America with 

118 billion cubic feet of natural gas 

storage capacity.18 The cash market 

transactions included in the Platts index 

are those for fixed-price gas deliveries 

extending from the east side of Houston 

to Galveston Bay and northeastward to 

the Port Arthur/Beaumont, Texas, area. 

While the HSC shares some of the same 

market fundamentals as the Henry Hub, 

prices at the HSC are reflective of the 

local market, which is driven by 

Houston’s industrial consumers. 

The local price at the HSC typically 

differs from the price at the Henry Hub. 

Thus, the price of the Henry Hub 

physically-delivered futures contract is 

an imperfect proxy for the HSC price. 

Moreover, despite the proximity of the 

HSC to the Henry Hub, exogenous 

factors such as severe weather events 

can cause the HXS gas price to differ 

from the Henry Hub price by an amount 

that is more or less than the cost of 

shipping, making the NYMEX Henry 

Hub futures contract even less precise as 

a hedging tool than desired by market 

participants. Basis contracts 19 allow 

traders to more accurately discover 

prices at alternative locations and hedge 

price risk that is associated with natural 

gas at such locations. In this regard, a 

position at a local price for an 

alternative location can be established 

by adding the appropriate basis swap 

position to a position taken in the 

NYMEX physically-delivered Henry 

Hub contract (or in the NYMEX or ICE 

Henry Hub look-alike contract, which 

cash settle based on the NYMEX 

physically-delivered natural gas 

contract’s final settlement price). 

In its October 9, 2009, Federal 

Register notice, the Commission 

identified material price reference, price 

linkage and material liquidity as the 

potential SPDC criteria applicable to the 

HXS contract. Each of these criteria is 

discussed below.20

1. Material Price Reference Criterion. 

The Commission’s October 9, 2009, 

Federal Register notice identified 

material price reference as a potential 

basis for an 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, ICE 

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

Gas End of Day’’ 21 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 HXS 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’’) 22 found that in 

general, market participants view the 

ICE as a price discovery market for 

certain natural gas contracts. The study 

did not specify which markets 

performed this function; nevertheless, 

the Commission determined that the 

HXS contract, while not mentioned by 

name in the ECM Study, might warrant 

further study. 

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.23

With respect to direct evidence, the 

Commission will consider the extent to 

which, on a frequent and recurring 

basis, cash market bids, offers or 

transactions are directly based on or 

quoted at a differential to, the prices 

generated on the ECM in question. 

Direct evidence may be established 

when cash market participants are 

quoting bid or offer prices or entering 

into transactions at prices that are set 

either explicitly or implicitly at a 

differential to prices established for the 

contract in question. Cash market prices 

are set explicitly at a differential to the 

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

instance, they are quoted in dollars and 

cents above or below the reference 

contract’s price. Cash market prices are 

set implicitly at a differential to a 

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

instance, they are arrived at after adding 

to, or subtracting from the section 

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

reported at a flat price. With respect to 

indirect evidence, the Commission will 

consider the extent to which the price 

of the contract in question is being 

routinely disseminated in widely 

distributed industry publications—or 

offered by the ECM itself for some form 

of remuneration—and consulted on a 

frequent and recurring basis by industry 


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24Source: ICE filings dated July 27, 2009, and 

November 13, 2009. 

25 In addition to referencing ICE prices, natural 

gas market firms participating in the HSC market 

may rely on other cash market quotes as well as 

industry publications and price indices that are 

published by third-party price reporting firms in 

entering into natural gas transactions. 

26CL 04. 

27CL 04. 

28CL 02. 

29CL 06. 

30CL 05. 

31CL 08 

participants in pricing cash market 

transactions. 

The HSC is a major trading center for 

natural gas in the United States. 

Traders, including producers, keep 

abreast of the prices of the HXS contract 

when conducting cash deals. These 

traders look to a competitively 

determined price as an indication of 

expected values of natural gas at the 

HSC when entering into cash market 

transaction for natural gas, especially 

those trades providing for physical 

delivery in the future. Traders use the 

ICE HXS contract, as well as other ICE 

basis swap contracts, to hedge cash 

market positions and transactions— 

activities which enhance the HXS 

contract’s price discovery utility. The 

substantial volume of trading and open 

interest 24 in the HXS contract appears 

to attest to its use for this purpose. 

While the HXS contract’s settlement 

prices may not be the only factor 

influencing spot and forward 

transactions, natural gas traders 

consider the ICE price to be a critical 

factor in conducting OTC transactions.25

As a result, the HXS contract satisfies 

the direct price reference test. 

In terms of indirect price reference, 

ICE sells the HXS contract’s prices as 

part of a broad package. The 

Commission notes that the HSC is a 

major natural gas trading point, and the 

HXS contract’s prices are well regarded 

in the industry as indicative of the value 

of natural gas at the HSC. Accordingly, 

the Commission believes that it is 

reasonable to conclude that market 

participants are purchasing the data 

packages that include the HXS 

contract’s prices in substantial part 

because the HXS contract prices have 

particular value to them. Moreover, 

such prices are consulted on a frequent 

and recurring basis by industry 

participants in pricing cash market 

transactions. In light of the above, the 

HXS contract meets the indirect price 

reference test. 

NYMEX lists a futures contract that is 

comparable to the ICE HXS contract on 

its ClearPort platform called the 

Houston Ship Channel Natural Gas 

Basis Swap (Platts IFERC) futures 

contract. However, unlike the ICE HXS 

contract, none of the trades in the 

NYMEX version of the contract are 

executed in NYMEX’s centralized 

marketplace; instead, all of the 

transactions originate as bilateral swaps 

that are submitted to NYMEX for 

clearing. The daily settlement prices of 

the NYMEX HSC basis swap contract 

are influenced, in part, by the daily 

settlement prices of the ICE HXS 

contract. This is because NYMEX 

determines the daily settlement prices 

for its natural gas basis swap contracts 

through a survey of cash market voice 

brokers. Voice brokers, in turn, refer to 

the ICE HXS price, among other 

information, as an important indicator 

as to where the market is trading. 

Therefore, the ICE HXS price influences 

the settlement price for the NYMEX 

HSC basis swap contract. This is 

supported by an analysis of the daily 

settlement prices for the NYMEX HSC 

basis swap contract and the ICE HXS 

contract. In this regard, 96 percent of the 

daily settlement prices for the NYMEX 

HSC basis swap contract are within one 

standard deviation of the HXS contract’s 

price settlement prices. 

Lastly, the fact that the HXS contract 

does not meet the price linkage criterion 

(discussed below) bolsters the argument 

for material price reference. As noted 

above, the Henry Hub is the pricing 

reference for natural gas in the United 

States. However, regional market 

conditions may cause the price of 

natural gas in another area of the 

country to diverge by more than the cost 

of transportation, thus making the 

Henry Hub price an imperfect proxy for 

the local gas price. The more variable 

the local natural gas price is, the more 

traders need to accurately hedge their 

price risk. Basis swap contracts provide 

a means of more accurately pricing 

natural gas at a location other than the 

Henry Hub. An analysis of HSC natural 

gas prices (based on the HXS contract’s 

settlement prices) showed that 64.6 

percent of the observations were more 

than 2.5 percent different that the 

contemporaneous Henry Hub prices. 

The average HSC basis value between 

January 2008 and September 2009 was 

¥$0.26 per mmBtu with a variance of 

$0.03 per mmBtu. 

i. Federal Register Comments 

ICE stated in its comment letter that 

the HXS contract does not meet the 

material price reference criterion for 

SPDC determination. ICE argued that 

the Commission appeared to base the 

case that the HXS contract is potentially 

a SPDC on what it characterizes as a 

disputable assertion. In issuing its 

notice of intent to determine whether 

the HXS 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.’’ 26 ICE stated that CFTC’s 

reason is ‘‘hard to quantify as the ECM 

report does not mention’’ this contract as 

a potential SPDC. ‘‘It is unknown which 

market participants made this statement 

in 2007 or the contracts that were 

referenced.’’ 27 In response to the above 

comment, the Commission notes that it 

cited the ECM study’s general finding 

that some ICE natural gas contracts 

appear to be regarded as price discovery 

markets merely as indicia that an 

investigation of certain ICE contracts 

may be warranted, and were not 

intended to serve as the sole basis for 

determining whether or not a particular 

contract meets the material price 

reference criterion. 

WGCEF,28 NGSA,29 EI 30 and FIEG 31

all stated that the HXS contract does not 

satisfy the material price reference 

criterion. The commenters argued that 

other contracts (physical or financial) 

are not indexed based on the ICE HXS 

contract price, but rather are indexed 

based on the underlying cash price 

series against which the ICE HXS 

contract is settled. Thus, they contend 

that the underlying cash price series is 

the authentic reference price and not the 

ICE contract itself. The Commission 

believes that this interpretation of price 

reference is too limiting in that it only 

considers the final index value on 

which the contract is cash settled after 

trading ceases. Instead, the Commission 

believes that a cash-settled derivatives 

contract could meet the price reference 

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 HSC is a major 

trading center for natural gas in North 

America. Traders, including producers, 

keep abreast of the prices of the HXS 

contract when conducting cash deals. 

These traders look to a competitively 

determined price as an indication of 

expected values of natural gas at the 

HSC when entering into cash market 

transaction for natural gas, especially 

those trades that provide for physical 

delivery in the future. Traders use the 

ICE HXS contract to hedge cash market 

positions and transactions, which 

enhances the HXS contract’s price 

discovery utility. While the HXS 


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32Appendix A to the Part 36 rules. 

33The HXS contract is one-quarter the size of the 

NYMEX Henry Hub physically-delivered futures 

contract. 34CL 06. 35CL 05. 36CL 02. 

contract’s settlement prices may not be 

the only factor influencing spot and 

forward transactions, natural gas traders 

consider the ICE price to be a crucial 

factor in conducting OTC transactions. 

Both EI and WGCEF stated that 

publication of price data in a package 

format is a weak justification for 

material price reference. These 

commenters argue that market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

so the fact that ICE sells the HXS prices 

as part of a broad package is not 

conclusive evidence that market 

participants are buying the ICE data sets 

because they find the HXS prices have 

substantial value to them. The 

Commission notes that the HSC is a 

major natural gas trading point, and the 

HXS contract’s prices are well regarded 

in the industry as indicative of the value 

of natural gas at the HSC. Accordingly, 

the Commission believes that it is 

reasonable to conclude that market 

participants are purchasing the data 

packages that include the HXS 

contract’s prices in substantial part 

because the HXS contract prices have 

particular value to them. 

ii. Conclusion Regarding Material Price 

Reference 

Based on the above, the Commission 

finds that the HXS contract meets the 

material price reference criterion 

because cash market transactions are 

being priced on a frequent and recurring 

basis at a differential to the HXS 

contract’s price (direct evidence). 

Moreover, the ECM sells the HXS 

contract’s price data to market 

participants and it is reasonable to 

conclude that market participants are 

purchasing the data packages that 

include the HXS contract’s prices in 

substantial part because the HXS 

contract prices have particular value to 

them. Furthermore, such prices are 

consulted on a frequent and recurring 

basis by industry participants in pricing 

cash market transactions (indirect 

evidence). 

2. Price Linkage Criterion. 

In its October 9, 2009, Federal 

Register notice, the Commission 

identified price linkage as a potential 

basis for a SPDC determination with 

respect to the HXS contract. In this 

regard, the final settlement of the HXS 

contract is based, in part, on the final 

settlement price of the NYMEX’s 

physically-delivered natural gas futures 

contract, where the NYMEX is 

registered with the Commission as a 

DCM. 

The Commission’s Guidance on 

Significant Price Discovery Contracts 32

notes that a ‘‘price-linked contract is a 

contract that relies on a contract traded 

on another trading facility to settle, 

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

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

contract, the mere fact that a contract is 

linked to another contract will not be 

sufficient to support a determination 

that a contract performs a significant 

price discovery function. To assess 

whether such a determination is 

warranted, the Commission will 

examine the relationship between 

transaction prices of the linked contract 

and the prices of the referenced 

contract. The Commission believes that 

where material liquidity exists, prices 

for the linked contract would be 

observed to be substantially the same as 

or move substantially in conjunction 

with the prices of the referenced 

contract.’’ Furthermore, the Guidance 

proposes a threshold price relationship 

such that prices of the ECM linked 

contract will fall within a 2.5 percent 

price range for 95 percent of 

contemporaneously determined closing, 

settlement or other daily prices over the 

most recent quarter. Finally, the 

Commission also stated in the Guidance 

that it would consider a linked contract 

that has a trading volume equivalent to 

5 percent of the volume of trading in the 

contract to which it is linked to have 

sufficient volume potentially to be 

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

To assess whether the HXS contract 

meets the price linkage criterion, 

Commission staff obtained price data 

from ICE and performed the statistical 

tests cited above. Staff found that while 

the HXS contract’s price is determined, 

in part, by the final settlement price of 

the NYMEX physically-delivered 

natural gas futures contract (a DCM 

contract), the natural gas price at the 

HSC is not within 2.5 percent of the 

settlement price of the corresponding 

NYMEX Henry Hub natural gas futures 

contract on 95 percent of the days. 

Specifically, during the third quarter of 

2009, only 35.4 percent of the HSC 

natural gas prices derived from the ICE 

basis values were within 2.5 percent of 

the daily settlement price of the NYMEX 

Henry Hub futures contract. In addition, 

staff found that the HXS contract fails to 

meet the volume threshold requirement. 

In particular, the total trading volume in 

the NYMEX Natural Gas contract during 

the third quarter of 2009 was 14,022,963 

contracts, with 5 percent of that number 

being 701,148 contracts. The number of 

trades on the ICE centralized market in 

the HXS contract during the same 

period was 271,056 contracts 

(equivalent to 67,764 NYMEX contracts, 

given the size difference).33 Thus, 

centralized-market trades in the HXS 

contract amounted to less than the 

minimum threshold. 

Due to the specific criteria that a 

given ECM contract must meet to fulfill 

the price linkage criterion, the 

requirements, for all intents and 

purposes, exclude ECM contracts that 

are not near facsimiles of DCM 

contracts. That is, even though an ECM 

contract may specifically use a DCM’s 

contract’s settlement price to value a 

position, which is the case of the HXS 

contract, a substantive difference 

between the two price series would rule 

out the presence of price linkage. In this 

regard, an ECM contract that is priced 

and traded as if it is a functional 

equivalent of a DCM contract likely will 

have a price series that mirrors that of 

the corresponding DCM contract. In 

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

to expect that the two price series would 

be divergent. The HSC and the Henry 

Hub are both located in Gulf Coast 

region of the United States. The Henry 

Hub and the HSC are both primarily 

supply centers, but the latter point is 

affected by heavy commercial demand 

in the local area. In contrast, the Henry 

Hub mainly serves as a distribution 

point for natural gas that will be 

consumed at various locations 

throughout the United States. These 

differences contribute to the divergence 

between the two price series and, as 

discussed below, increase the likelihood 

that the ‘‘basis’’ contract is used for 

material price reference. 

i. Federal Register Comments 

NGSA 34 stated that the HXS contract 

does not meet the price linkage criterion 

because basis contracts, including the 

HXS contract, are not equivalent to the 

NYMEX physically-delivered Henry 

Hub contract. EI 35 also noted that the 

HXS and NYMEX natural gas contracts 

are not economically equivalent and 

that the HXS contract’s volume is too 

low to affect the NYMEX natural gas 

futures contract. WGCEF 36 stated that 

the HXS contract’s price is determined, 

in part, by the final settlement price of 

the NYMEX Henry Hub futures contract. 

However, WGCEF goes on to state that 

the HXS contract ‘‘(a) is not substantially 

the same as the NYMEX [natural gas 


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37CL 04. 38CL 08. 39As noted above, the material liquidity criterion 

speaks to the effect that transactions in the potential 

SPDC may have on trading in ‘‘agreements, 

contracts and transactions listed for trading on or 

subject to the rules of a designated contract market, 

a derivatives transaction execution facility, or an 

electronic trading facility operating in reliance on 

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

40The volume of trading was comparable to that 

of the Chicago Mercantile Exchange Feeder Cattle 

futures contract and the NYMEX Platinum futures 

contract for the same period. 

41 ICE does not differentiate between open 

interest created by a transaction executed on its 

trading platform versus that created by a transaction 

executed off its trading platform. The size of the 

HXS open interest was comparable to that of the 

NYMEX No. 2 Heating Oil futures and the CME 

Live Cattle futures contracts for the same period. 

42See Commission Rule 36.3(c)(2), 17 CFR 

36.3(c)(2). 

43Staff 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. 

44Specifically, the Commission econometrically 

estimated a vector autoregression (VAR) model 

using daily settlement prices. A vector 

autoregression model is an econometric model used 

to capture the evolution and the interdependencies 

between multiple time series, generalizing the 

univariate autoregression models. The estimated 

model displays strong diagnostic evidence of 

statistical adequacy. In particular, the model’s 

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

results suggest that, on average over the sample 

period, a one percent rise in the HXS contract’s 

price elicited a 0.98 percent increase in the NYMEX 

Henry Hub and Socal Border prices, as well as 0.91 

percent increase in the AECO price. These 

multipliers of response emerge with noticeable 

statistical strength or significance. Based on such 

long run sample patterns, if the HXS contract’s 

price rises by 10 percent, then the prices of NYMEX 

Henry Hub natural gas futures contract and Socal 

Border Financial Basis contract would each rise by 

9.1 percent, and the price of the AECO Financial 

Basis contract would rise by 9.8 percent. 

45CL 02. 

46CL 06. 

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

move substantially in conjunction’’ with 

the NYMEX natural gas futures contract. 

ICE 37 pronounced that the HXS 

contract’s trading volume is too low to 

affect the price discovery process for the 

NYMEX natural gas futures contract. In 

addition, ICE stated that the HXS 

contract simply reflects a price 

differential between Houston Ship 

Channel and the Henry Hub; ‘‘there is no 

price linkage as contemplated by 

Congress or the CFTC in its 

rulemaking.’’ FIEG 38 acknowledged that 

the HXS contract is a locational spread 

that is based in part on the NYMEX 

natural gas futures price, but also 

questioned the significance of this fact 

relative to the price linkage criterion 

since the key component of the spread 

is the price at the HSC and not the 

NYMEX physically-delivered natural 

gas futures price. 

ii. Conclusion Regarding the Price 

Linkage Criterion 

Based on the above, the Commission 

finds that the HXS contract does not 

meet the price linkage criterion because 

it fails the price relationship and 

volume tests provided for in the 

Commission’s Guidance. 

3. Material Liquidity Criterion 

To assess whether the HXS contract 

meets the material liquidity criterion, 

the Commission first examined volume 

and open interest data provided to it by 

ICE as a general measurement of the 

HXS contract’s size and potential 

importance, and second performed a 

statistical analysis to measure the effect 

that changes to HXS prices potentially 

may have on prices for the NYMEX 

Henry Hub Natural Gas (a DCM 

contract), the ICE AECO Financial Basis 

contract (an ECM contract) and the 

Socal Border Financial Basis contract 

(an ECM contract).39

The Commission’s Guidance 

(Appendix A to Part 36) notes that 

‘‘[t]raditionally, objective measures of 

trading such as volume or open interest 

have been used as measures of 

liquidity.’’ In this regard, the 

Commission in its October 9, 2009, 

Federal Register notice referred to 

second quarter 2009 trading statistics 

that ICE had submitted for its HXS 

contract. Based upon on a required 

quarterly filing made by ICE on July 27, 

2009, the total number of HXS trades 

executed on ICE’s electronic trading 

platform was 2,524 in the second 

quarter of 2009, resulting in a daily 

average of 39.4 trades. During the same 

period, the HXS contract had a total 

trading volume on ICE’s electronic 

trading platform of 209,010 contracts 

and an average daily trading volume of 

3,265.8 contracts.40 Moreover, the open 

interest as of June 30, 2009, was 313,594 

contracts, which includes trades 

executed on ICE’s electronic trading 

platform, as well as trades executed off 

of ICE’s electronic trading platform and 

then brought to ICE for clearing.41

Subsequent to the October 9, 2009, 

Federal Register notice, ICE submitted 

another quarterly notification filed on 

November 13, 2009 42 with updated 

trading statistics. Specifically, with 

respect to its HXS contract, 2,894 

separate trades occurred on its 

electronic platform in the third quarter 

of 2009, resulting in a daily average of 

43.8 trades. During the same period, the 

HXS contract had a total trading volume 

on its electronic platform of 271,056 

contracts (which was an average of 

4,107 contracts per day). As of 

September 30, 2009, open interest in the 

HXS contract was 309,740 contracts. 

Reported open interest included 

positions resulting from trades that were 

executed on ICE’s electronic platform, 

as well as trades that were executed off 

of ICE’s electronic platform and brought 

to ICE for clearing. 

In the Guidance, the Commission 

stated that material liquidity can be 

identified by the impact liquidity 

exhibits through observed prices. Thus, 

to make a determination whether the 

HXS contract has such material impact, 

the Commission reviewed the relevant 

trading statistics (noted above). In this 

regard, the average number trades per 

day in the second and third quarters of 

2009 were well above the minimum 

reporting level (5 trades per day). 

Moreover, trading activity in the HXS 

contract, as characterized by total 

quarterly volume, indicates that the 

HXS contract experiences greater 

trading activity than in thinly-traded 

contracts.43 Thus, it is reasonable to 

infer that the HXS contract could have 

a material effect on other ECM contracts 

or on DCM contracts. 

To measure the effect that the HXS 

contract potentially could have on a 

DCM contract, or on another ECM 

contract, Commission staff performed a 

statistical analysis 44 using daily 

settlement prices (between January 2, 

2008, and September 30, 2009) for the 

ICE HXS contract, as well as for the 

NYMEX Henry Hub natural gas contract 

(a DCM contract), the ICE AECO 

Financial Basis and Socal Financial 

Basis contracts (ECM contracts). The 

simulation results suggest that, on 

average over the sample period, a one 

percent rise in the HXS contract’s price 

elicited a nearly equivalent increase in 

each of the NYMEX Henry Hub, ICE 

AECO and ICE Socal Border prices. 

i. Federal Register Comments 

As noted above, comments were 

received from seven individuals and 

organizations, with five comments being 

directly applicable to the SPDC 

determination of the ICE HXS contract. 

WGCEF, EI, FIEG, ICE and NGSA 

generally agreed that the HXS contract 

does not meet the material liquidity 

criterion. 

WGCEF 45 and NGSA 46 both stated 

that the HXS contract does not 

materially affect other contracts that are 

listed for trading on DCMs or ECMs, as 

well as other over-the-counter contracts. 

Instead, the HXS contract is influenced 

by the underlying HSC cash price index 


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47CL 07. 

48CL 04. 

49CL 05. 

50CL 04. 

51Supplemental data supplied by the ICE 

confirmed that block trades in the third quarter of 

2009 were in addition to the trades that were 

conducted on the electronic platform; block trades 

comprised 65% of all transactions in the HXS 

contract. 

52See 73 FR 75888, 75893 (Dec. 12, 2008). 

53 44 U.S.C. 3507(d). 

54 7 U.S.C. 19(a). 

and the final settlement price of the 

NYMEX Henry Hub natural gas futures 

contract, not vice versa. FIEG 47 stated 

that the HXS contract cannot have a 

material effect on NYMEX contract 

because the HXS contract trades on a 

differential and represents ‘‘one leg (and 

not the relevant leg) of the locational 

spread.’’ The Commission’s statistical 

analysis shows that changes in the ICE 

HXS contract’s price significantly 

influences the prices of other contracts 

that are traded on DCMs and ECMs. 

ICE 48 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’’ 

rather than solely relying upon an ECM 

on its own to identify any such potential 

SPDCs to the Commission. Thus, any 

contract that meets this threshold may 

be subject to scrutiny as a potential 

SPDC, the threshold is not intended to 

define liquidity in a broader sense. As 

noted above, the Commission is basing 

a finding of material liquidity for the 

ICE HXS contract, in part, on the fact 

that there have been over 40 trades per 

day on average in the HXS contract 

during the second and third quarters of 

2009, which is far more than the five 

trades-per-day that is cited in the ICE 

comment. In addition, the Commission 

notes that the number of contracts per 

transaction in the HXS contract is high 

(approximately 93 contracts per 

transaction) and thus, as noted, trading 

volume (measured in contract units) is 

substantial. The HXS contract also has 

significant open interest. 

ICE implied that the statistics 

provided by ICE were misinterpreted 

and misapplied by the Commission. In 

particular, ICE stated that the volume 

figures used in the Commission’s 

analysis (cited above) ‘‘include trades 

made in all [84] 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.’’ 

Furthermore, ICE noted that for basis 

swaps, ‘‘about 25–40% of the trades 

occurred in the single most liquid, 

usually prompt, month of the contract.’’ 

It is the Commission’s opinion that 

liquidity, as it pertains to the HXS 

contract, is typically a function of 

trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the HXS contract itself 

would be considered liquid. ICE’s 

analysis of its own trade data confirms 

this to be the case for the HXS contract, 

and thus, the Commission believes that 

it applied the statistical data cited above 

in an appropriate manner for gauging 

material liquidity. 

In addition, EI 49 and ICE 50 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. ICE confirmed 

that the volume data it provided and 

which the Commission cited in its 

October 9, 2009, Federal Register notice 

as well as the additional volume 

information it cites above includes only 

transaction data executed on ICE’s 

electronic trading platform.51 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. 

ii. Conclusion Regarding Material 

Liquidity 

Based on the above, the Commission 

concludes that the HXS contract meets 

the material liquidity criterion in that 

there is sufficient trading activity in the 

HXS contract to have a material effect 

on ‘‘other agreements, contracts or 

transactions listed for trading on or 

subject to the rules of a designated 

contract market * * * or an electronic 

trading facility operating in reliance on 

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

Act’’ (that is, an ECM). 

4. Overall Conclusion 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the HXS contract 

performs a significant price discovery 

function under two of the four criteria 

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

CEA. Although the Commission has 

concluded that the HXS contract does 

not meet the price linkage criterion at 

this time, the Commission has 

determined that the HXS contract does 

meet both the material liquidity and 

material price reference criteria. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

HXS contract is a SPDC. 

Issuance of this Order signals the 

immediate effectiveness of the 

Commission’s authorities with respect 

to ICE as a registered entity in 

connection with its HXS contract,52 and 

triggers the obligations, requirements— 

both procedural and substantive—and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs. 

V. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 53 imposes certain requirements 

on Federal agencies, including the 

Commission, in connection with their 

conducting or sponsoring any collection 

of information as defined by the PRA. 

Certain provisions of Commission rule 

36.3 impose new regulatory and 

reporting requirements on ECMs, 

resulting in information collection 

requirements within the meaning of the 

PRA. OMB previously has approved and 

assigned OMB control number 3038– 

0060 to this collection of information. 

b. Cost-Benefit Analysis 

Section 15(a) of the CEA 54 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) 


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

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

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

58Because ICE already lists for trading a contract 

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

that was previously declared by the Commission to 

be a SPDC, ICE must submit a written 

demonstration of compliance with the Core 

Principles within 30 calendar days of the date of 

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

1 74 FR 53723 (October 20, 2009). 

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

3 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. The Commission has considered 

the costs and benefits in light of the 

specific provisions of section 15(a) of 

the Act and has concluded that the 

Order, required by Congress to 

strengthen federal oversight of exempt 

commercial markets and to prevent 

market manipulation, is necessary and 

appropriate to accomplish the purposes 

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

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorizes the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 55 requires that agencies 

consider the impact of their rules on 

small businesses. The requirements of 

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

rules affect ECMs. The Commission 

previously has determined that ECMs 

are not small entities for purposes of the 

RFA.56 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

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

this Order, taken in connection with 

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

36 rules, will not have a significant 

impact on a substantial number of small 

entities. 

VI. Order 

a. Order Relating to the ICE HSC 

Financial Basis Contract 

After considering the complete record 

in this matter, including the comment 

letters received in response to its 

request for comments, the Commission 

has determined to issue the following 

Order: 

The Commission, pursuant to its 

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

Act, hereby determines that the HSC 

Financial Basis contract, traded on the 

IntercontinentalExchange, Inc., satisfies 

the statutory material liquidity and 

material price reference criteria for 

significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the HSC 

Financial Basis contract, the nine core 

principles established by new section 

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

IntercontinentalExchange, Inc., shall be 

and is considered a registered entity 57

with respect to the HSC Financial Basis 

contract and is subject to all the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., 

commence with the issuance of this 

Order.58

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

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

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the Socal Border 

Financial Basis Contract Traded on the 

IntercontinentalExchange, Inc., 

Performs a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final order. 

SUMMARY: On October 20, 2009, the 

Commodity Futures Trading 

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

published for comment in the Federal 

Register 1 a notice of its intent to 

undertake a determination whether the 

Socal Border Financial Basis (‘‘SCL’’) 

contract traded on the 

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

an exempt commercial market (‘‘ECM’’) 

under sections 2(h)(3)–(5) of the 

Commodity Exchange Act (‘‘CEA’’ or the 

‘‘Act’’), performs a significant price 

discovery function pursuant to section 

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

undertook this review based upon an 

initial evaluation of information and 

data provided by ICE as well as other 

available information. The Commission 

has reviewed the entire record in this 

matter, including all comments 

received, and has determined to issue 

an order finding that the SCL contract 

performs a significant price discovery 

function. Authority for this action is 

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

Commission rule 36.3(c) promulgated 

thereunder. 

DATES: Effective date: April 28, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

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

Senior Special Counsel, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5133. E-mail: 

snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 3

significantly broadened the CFTC’s 

regulatory authority with respect to 

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

the CEA, a new regulatory category— 


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