42390 Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 

45 7 U.S.C. 1a(29). 

46Because 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). 

47 7 U.S.C. 1a(29). 

48Because 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 54966 (October 26, 2009). 

2The acronym ‘‘PJM’’ stands for Pennsylvania 

New Jersey Maryland Interconnection, LLC (‘‘PJM 

Interconnection’’), and signifies the regional 

electricity transmission organization (‘‘RTO’’) that 

coordinates the generation and distribution of 

electricity in all or parts of 13 states and the District 

of Columbia. 

3The acronym ‘‘WH’’ signifies the PJM’s Western 

Hub. 

4The Federal Register notice also requested 

comment on the PJM WH Real Time Peak Daily 

(‘‘PDP’’) contract, PJM WH Day Ahead LMP Peak 

Daily (‘‘PDA’’) contract and PJM WH Real Time OffPeak Daily (‘‘ODP’’) contract. Those contracts will be 

addressed in a separate Federal Register release. 

5 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

6 7 U.S.C. 1a(29). 

7 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

Act, hereby determines that the SP–15 

Financial Day-Ahead LMP Peak 

contract, traded on the 

IntercontinentalExchange, Inc., satisfies 

the material price preference and 

material liquidity criteria for significant 

price discovery contracts. Consistent 

with this determination, and effective 

immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the SP–15 

Financial Day-Ahead LMP Peak 

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 45

with respect to the SP–15 Financial 

Day-Ahead LMP Peak contract and is 

subject to all the provisions of the 

Commodity Exchange Act applicable to 

registered entities. 

Further with respect to the SP–15 

Financial Day-Ahead LMP Peak 

contract, 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.46

b. Order Relating to the SP–15 Financial 

Day-Ahead LMP Off-Peak 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 SP–15 

Financial Day-Ahead LMP Off-Peak 

contract, traded on the 

IntercontinentalExchange, Inc., satisfies 

the statutory material price reference 

and material liquidity criteria for 

significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the SP–15 

Financial Day-Ahead LMP Off-Peak 

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 47

with respect to the SP–15 Financial 

Day-Ahead LMP Off-Peak contract and 

is subject to all the provisions of the 

Commodity Exchange Act applicable to 

registered entities. 

Further with respect to the SP–15 

Financial Day-Ahead LMP Off-Peak 

contract, 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.48

Issued in Washington, DC, on July 9, 2010, 

by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–17747 Filed 7–20–10; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Orders Finding That the PJM WH Real 

Time Peak Contract and PJM WH Real 

Time Off-Peak Contract Offered for 

Trading on the 

IntercontinentalExchange, Inc., 

Perform a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final orders. 

SUMMARY: On October 26, 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 

PJM 2 WH 3 Real Time Peak (‘‘PJM’’) 

contract and PJM WH Real Time OffPeak (‘‘OPJ’’) contract,4 which are listed 

for trading 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 PJM and OPJ 

contracts perform a significant price 

discovery function. Authority for this 

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

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective Date: July 9, 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’’) 5

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.6 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.7 As relevant here, rule 36.3 


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Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 42391 

8Public 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). 

9For 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. 

10As noted above, the Federal Register notice 

also requested comment on the PJM WH Real Time 

Peak Daily (‘‘PDP’’) contract, PJM WH Day Ahead 

LMP Peak Daily (‘‘PDA’’) contract and PJM WH Real 

Time Off-Peak Daily (‘‘ODP’’) contract. Those 

contracts will be addressed in a separate Federal 

Register release. 

11The 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. 

12PJM Interconnection, as noted above, is the 

RTO that coordinates the generation and 

distribution of electricity in all or parts of 13 states 

and the District of Columbia. FERC is an 

independent federal regulatory agency that, among 

other things, regulates the interstate transmission of 

natural gas, oil and electricity. EPSA describes itself 

as the ‘‘national trade association representing 

competitive power suppliers, including generators 

and marketers.’’ 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.’’ EEI is the ‘‘association of 

shareholder-owned electric companies, 

international affiliates and industry associates 

worldwide.’’ ICE is an ECM, as noted above. PUCT 

is the independent organization that oversees the 

Electric Reliability Council of Texas (‘‘ERCOT’’) to 

‘‘ensure nondiscriminatory access to the 

transmission and distribution systems, to ensure the 

reliability and adequacy of the regional electrical 

network, and to perform other essential market 

functions.’’ The comment letters are available on the 

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

lawandregulation/federalregister/ 

federalregistercomments/2009/09–032.html. 

13PJM Interconnection stated that it ‘‘takes no 

position as to whether the ICE [contracts] * * * 

perform significant price discovery functions.’’ 

14FERC expressed the opinion that a 

determination by the Commission that any of the 

subject contracts performs a significant price 

discovery function ‘‘would not appear to conflict 

with FERC’s exclusive jurisdiction under the 

Federal Power Act (FPA) over the transmission or 

sale for resale of electric energy in interstate 

commerce or with its other regulatory 

responsibilities under the FPA’’ and further that 

‘‘FERC staff will monitor proposed SPDC 

determinations and advise the CFTC of any 

potential conflicts with FERC’s exclusive 

jurisdiction over RTOs, [(regional transmission 

organizations)], ISOs [(independent system 

operators)] or other jurisdictional entities.’’ 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

promptly concerning any contract 

traded in reliance on the exemption in 

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

five trades per day or more over the 

most recent calendar quarter, and for 

which the exchange sells its price 

information regarding the contract to 

market participants or industry 

publications, or whose daily closing or 

settlement prices on 95 percent or more 

of the days in the most recent quarter 

were within 2.5 percent of the 

contemporaneously determined closing, 

settlement or other daily price of 

another contract. 

Commission rule 36.3(c)(3) 

established the procedures by which the 

Commission makes and announces its 

determination whether a particular ECM 

contract serves a significant price 

discovery function. Under those 

procedures, the Commission will 

publish notice in the Federal Register 

that it intends to undertake an 

evaluation whether the specified 

agreement, contract or transaction 

performs a significant price discovery 

function and to receive written views, 

data and arguments relevant to its 

determination from the ECM and other 

interested persons. Upon the close of 

the comment period, the Commission 

will consider, among other things, all 

relevant information regarding the 

subject contract and issue an order 

announcing and explaining its 

determination whether or not the 

contract is a SPDC. The issuance of an 

affirmative order signals the 

effectiveness of the Commission’s 

regulatory authorities over an ECM with 

respect to a SPDC; at that time such an 

ECM becomes subject to all provisions 

of the CEA applicable to registered 

entities.8 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

in Commission rule 36.3(c)(4).9

II. Notice of Intent To Undertake SPDC 

Determination 

On October 26, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the PJM and OPJ 

contracts 10 perform a significant price 

discovery function and requested 

comment from interested parties.11

Comments were received from PJM 

Interconnection, Federal Energy 

Regulatory Commission (‘‘FERC’’), 

Electric Power Supply Association 

(‘‘EPSA’’), Financial Institutions Energy 

Group (‘‘FIEG’’), Edison Electric Institute 

(‘‘EEI’’), ICE and Public Utility 

Commission of Texas (‘‘PUCT’’).12 The 

comment letters from PJM 

Interconnection,13 FERC14 and PUCT 

did not directly address the issue of 

whether or not the subject contracts are 

SPDCs. The remaining comment letters 

raised substantive issues with respect to 

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

subject contracts and generally 

expressed the opinion that the contracts 

are not SPDCs because they do not meet 

the material price reference or material 

liquidity criteria for SPDC 

determination. These comments are 

more extensively discussed below, as 

applicable. 

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

The Commission is directed by 

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

the following criteria in determining a 

contract’s significant price discovery 

function: 

• Price Linkage—the extent to which 

the agreement, contract or transaction 

uses or otherwise relies on a daily or 

final settlement price, or other major 

price parameter, of a contract or 

contracts listed for trading on or subject 

to the rules of a designated contract 

market (‘‘DCM’’) or derivatives 

transaction execution facility (‘‘DTEF’’), 

or a SPDC traded on an electronic 

trading facility, to value a position, 

transfer or convert a position, cash or 

financially settle a position, or close out 

a position. 

• Arbitrage—the extent to which the 

price for the agreement, contract or 

transaction is sufficiently related to the 

price of a contract or contracts listed for 

trading on or subject to the rules of a 

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 


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42392 Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 

15 In its October 26, 2009, Federal Register 

release, the Commission identified material price 

reference and material liquidity as the possible 

criteria for SPDC determination of the PJM and OPJ 

contracts. Arbitrage and price linkage were not 

identified as possible criteria. As a result, arbitrage 

and price linkage will not be discussed further in 

this document and the associated Orders. 

16 17 CFR 36, Appendix A. 

17An LMP represents the additional cost 

associated with producing an incremental amount 

of electricity. LMPs account for generation costs, 

congestion along the transmission lines, and 

electricity loss. 

18http://www.ferc.gov/market-oversight/mktelectric/pjm.asp. 

19http://www.ferc.gov/market-oversight/mktelectric/pjm/2010/05-2010-elec-pjm-archive.pdf. 

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.15 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.16 For example, for 

contracts that are linked to other 

contracts or that may be arbitraged with 

other contracts, the Commission will 

consider whether the price of the 

potential SPDC moves in such harmony 

with the other contract that the two 

markets essentially become 

interchangeable. This co-movement of 

prices would be an indication that 

activity in the contract had reached a 

level sufficient for the contract to 

perform a significant price discovery 

function. In evaluating a contract’s price 

discovery role as a price reference, the 

Commission the extent to which, on a 

frequent and recurring basis, bids, offers 

or transactions are directly based on, or 

are determined by referencing, the 

prices established for the contract. 

IV. Findings and Conclusions 

The Commission’s findings and 

conclusions with respect to the PJM and 

OPJ contracts are discussed separately 

below. 

a. The PJM WH Real Time Peak (PJM) 

Contract and the SPDC Indicia 

The PJM contract is cash settled based 

on the arithmetic average of peak-hour, 

real-time locational marginal prices 

(‘‘LMPs’’) 17 published by PJM 

Interconnection for its Western Hub for 

all peak hours during the contract 

month. The hourly LMPs are derived 

from power trades that result in 

physical delivery. The size of the PJM 

contract is 800 megawatt hours 

(‘‘MWh’’), and the PJM contract is listed 

for 110 calendar months. 

In general, electricity is bought and 

sold in an auction setting on an hourly 

basis at various point along the 

electrical grid. An LMP associated with 

a specific hour is calculated as the 

volume-weighted average price of all of 

the transactions where electricity is to 

be supplied and consumed during that 

hour. 

Electricity is traded in a day-ahead 

market as well as a real-time market. 

The day-ahead market establishes prices 

for electricity that is to be delivered 

during the specified hour on the 

following day. Day-ahead prices are 

determined based on generation and 

energy transaction quotes offered in 

advance. Because the offers and bids are 

dependent on estimates of supply and 

demand, electricity needs usually are 

not perfectly satisfied in the day-ahead 

market. In this regard, on the day the 

electricity is transmitted and used, 

auction participants typically realize 

that they bought or sold either too much 

power or too little power. A real-time 

auction is operated to alleviate this 

problem by serving as a balancing 

mechanism. Specifically, electricity 

traders use the real-time market to sell 

excess electricity and buy additional 

power to meet demand. 

PJM Interconnection is an RTO that 

coordinates the movement of wholesale 

electricity in all or parts of Delaware, 

Illinois, Indiana, Kentucky, Maryland, 

Michigan, New Jersey, North Carolina, 

Ohio, Pennsylvania, Tennessee, 

Virginia, West Virginia and the District 

of Columbia. PJM Interconnection’s 

transmission network is the largest 

centrally-dispatched grid in North 

America. PJM Interconnection 

dispatches about 163,500 MW of 

generating capacity over 56,350 miles of 

transmission lines and serves more than 

51 million customers. The RTO’s 

members, totaling more than 500, 

include power generators, transmission 

owners, electricity distributors, power 

marketers and large consumers. 

PJM Interconnection is responsible for 

operating a competitive wholesale 

electricity market as well as maintaining 

the reliability of the grid. The RTO acts 

as a neutral, independent party, and its 

activities are regulated by FERC. The 

company coordinates the continuous 

buying, selling and delivery of 

wholesale electricity through robust, 

open and competitive spot markets. In 

operating the markets, PJM balances the 

needs of suppliers, wholesale customers 

and other market participants, and it 

continuously monitors market behavior. 

Electricity is priced at individual 

points along the transmission network 

called nodes. An electric grid has many 

interconnections or buses. RTOs group 

certain buses together to form hubs, 

which do not necessarily follow along 

state lines or geographic boundaries. 

Power also is priced at the hub level and 

serves as a basis for trading electricity. 

PJM Interconnnection has 11 hubs, 

including AEP GEN, AEP–Dayton, 

Chicago GEN, Chicago, Dominion, 

Eastern, Northern Illinois, New Jersey, 

Ohio, West INT and Western Hub.18 The 

Western Hub is basket of 109 buses that 

stretch all the way from Erie, PA, to 

Washington, DC.19

1. Material Price Reference Criterion 

The Commission’s October 26, 2009, 

Federal Register notice identified the 

PJM contract as a potential SPDC based 

on the material price reference and 

material liquidity criteria. 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 the ‘‘East Power of Day’’ package 

with access to all price data or just 

current prices plus a selected number of 

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

historical data. This package includes 

price data for the PJM 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’’) found that in 

general, market participants view ICE as 

a price discovery market for certain 

electricity contracts. The study did not 

specify which markets performed this 

function; nevertheless, the Commission 

determined that the PJM contract, while 

not mentioned by name in the ECM 

Study, warranted further review. 

The Commission explains in its 

Guidance to the statutory criteria that in 

evaluating a contract under the material 

price reference criterion, it 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 


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Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 42393 

20 17 CFR 36, Appendix A. 

21 In addition to referencing ICE prices, firms 

participating in PJM’s Western hub power 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 power transactions. 

22The PDP contract is cash settled based on the 

arithmetic average of peak-hour, real-time LMPs 

posted by PJM for the Western hub for all peak 

hours on the day of generation. The LMPs are 

derived from power trades that result in physical 

delivery. The size of the SDP contract is 800 MWh, 

and the PDP contract is listed for 38 consecutive 

calendar days. 

23The price data covered the period December 

2008 through December 2009. 

24 In this case, the average of the real-time peakhour Western hub electricity prices over the 

contract month, which are derived from cash 

market transactions. 

material price reference and therefore, 

serving a significant price discovery 

function.20 With respect to direct 

evidence, the Commission will consider 

the extent to which, on a frequent and 

recurring basis, cash market bids, offers 

or transactions are directly based on or 

quoted at a differential to, the prices 

generated on the ECM in question. 

Direct evidence may be established 

when cash market participants are 

quoting bid or offer prices or entering 

into transactions at prices that are set 

either explicitly or implicitly at a 

differential to prices established for the 

contract in question. Cash market prices 

are set explicitly at a differential to the 

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

instance, they are quoted in dollars and 

cents above or below the reference 

contract’s price. Cash market prices are 

set implicitly at a differential to a 

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

instance, they are arrived at after adding 

to, or subtracting from the section 

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

reported at a flat price. With respect to 

indirect evidence, the Commission will 

consider the extent to which the price 

of the contract in question is being 

routinely disseminated in widely 

distributed industry publications—or 

offered by the ECM itself for some form 

of remuneration—and consulted on a 

frequent and recurring basis by industry 

participants in pricing cash market 

transactions. 

The PJM Western hub is a major 

pricing center for electricity in the 

eastern portion of the United States. 

Traders, including producers, keep 

abreast of the electricity prices at PJM’s 

Western Hub when conducting cash 

deals. These traders look to a 

competitively determined price as an 

indication of expected values of power 

at the Western Hub when entering into 

cash market transaction for electricity, 

especially those trades providing for 

physical delivery in the future. 

Furthermore, power prices in other 

neighboring markets, such as New York 

ISO’s Zone A (Western New York), Zone 

G (Hudson Valley region) and Zone J 

(New York City) as well as Midwest 

ISO’s Cinergy hub are typically based 

implicitly relative to the prices reported 

for PJM Interconnection’s Western hub. 

Traders use the ICE PJM contract, as 

well as other ICE power contracts, to 

hedge cash market positions and 

transactions—activities which enhance 

the PJM contract’s price discovery 

utility. The substantial volume of 

trading and open interest in the PJM 

contract appears to attest to its use for 

this purpose. While the PJM contract’s 

settlement prices may not be the only 

factor influencing spot and forward 

transactions, electricity traders consider 

the ICE price to be a critical factor in 

conducting OTC transactions.21 In these 

circumstances, the PJM contract satisfies 

the direct price reference test. 

The fact that ICE’s PJM monthly 

contract is used more widely as a source 

of pricing information than the daily 

contract (i.e., the ‘‘PDP’’ contract) 22

bolsters the argument that it serves as a 

direct price reference. In this regard, 

PJM contract prices power at the 

Western hub up to almost ten years into 

the future. Thus, market participants 

can use the PJM contract to lock in 

electricity prices far into the future. 

Traders use monthly power contracts 

like the PJM contract to price future 

power electricity commitments, where 

such commitments are based on longrange forecasts of power supply and 

demand. In contrast, the PDP contract is 

listed for a much shorter length of 

time—up to 38 days in the future. As 

generation and usage nears, market 

participants have a better understanding 

of actual power supply and needs. As a 

result, they can modify previouslyestablished hedges with daily contracts, 

like the PDP contract. 

The Commission notes that the 

Western hub is a major trading point for 

electricity, and that the PJM contract’s 

prices are well regarded in the industry 

as indicative of the value of power at the 

Western hub. Accordingly, the 

Commission believes that it is 

reasonable to conclude that market 

participants purchase the data packages 

that include the PJM contract’s prices in 

substantial part because the PJM 

contract’s 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 PJM contract also meets the 

indirect price reference test. 

The New York Mercantile Exchange 

(‘‘NYMEX’’) lists a futures contract on its 

ClearPort platform— the PJM Western 

Hub Peak Calendar-Month Real-Time 

LMP Swap futures contract —that is 

comparable to the ICE PJM contract. 

However, unlike the ICE contract, none 

of the trades in the NYMEX version 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 

NYMEX’s monthly, peak-hour Western 

hub contract are influenced, in part, by 

the daily settlement prices of the ICE 

PJM contract. NYMEX determines the 

daily settlement prices for its power 

contracts through a survey of cash 

market voice brokers. Voice brokers, in 

turn, refer to the ICE PJM price, among 

other information, as an important 

indicator as to where the market is 

trading. In this manner, the ICE PJM 

price influences the settlement price for 

the NYMEX monthly, peak-hour 

Western hub power contract. This 

conclusion is supported by an analysis 

of the daily settlement prices for the 

PJM contract and the NYMEX 

equivalent which indicates that 81 

percent of the daily settlement prices 23

for the NYMEX version of the contract 

are within one standard deviation of the 

PJM contract’s price settlement prices. 

i. Federal Register Comments: 

EPSA, FIEG, EEI and ICE stated that 

no other contract directly references or 

settles to the PJM contract’s price. 

Moreover, the commenters argued that 

the underlying cash price series against 

which the PJM contract is settled 24 is 

the authentic reference price and not the 

ICE contract itself. Commission staff 

believes that this interpretation of price 

reference is too narrow and believes that 

a cash-settled derivatives contract could 

meet the price reference criterion if 

market participants ‘‘consult [the 

derivatives contract] on a frequent and 

recurring basis’’ when pricing forward, 

fixed-price commitments or other cashsettled derivatives that seek to ‘‘lock in’’ 

a fixed price for some future point in 

time to hedge against adverse price 

movements. 

As noted above, PJM’s Western hub is 

a major trading center for electricity in 

the eastern United States. Traders, 

including producers, keep abreast of the 

prices of the PJM contract when 

conducting cash deals. These traders 

look to a competitively determined 

price as an indication of expected 

values of electricity at the Western hub 

when entering into cash market 

transaction for power, especially those 

trades that provide for physical delivery 

in the future. Traders use the ICE PJM 


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42394 Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 

25 74 FR 54966 (October 26, 2009). 

26Staff 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. 

27Specifically, Commission staff econometrically 

estimated a cointegrated vector autoregression 

(CVAR) model using daily settlement prices. CVAR 

methods permit a dichotomization of the data 

relationships into long run equilibrium components 

(called the cointegration space or cointegrating 

relationships) and a short run component. A CVAR 

model was chosen over the more traditional vector 

autoregression model in levels because the 

statistical properties of the data (lack of stationarity 

and ergodicity) precluded the more traditional 

modeling treatment. Moreover, the statistical 

properties of the data necessitated the modeling of 

the contracts’ prices as a CVAR model containing 

both first differences (to handle stationarity) and an 

error-correction term to capture long run 

equilibrium relationships. The prices were treated 

as a single reduced-form model in order to test 

hypothesis that power prices in the same market 

affect each other. The prices of ICE’s PJM and OPJ 

contracts are positively related to each other in a 

cointegrating relationship and display a high level 

of statistical strength. On average during the sample 

period, each percentage rise in PJM contract’s price 

elicited a 2.15 percent rise in OPJ contract’s price. 

contract to hedge cash market positions 

and transactions, which enhances the 

PJM contract’s price discovery utility. 

While the PJM 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. 

In addition, EPSA stated that the 

publication of price data for the PJM 

contract price is a weak justification for 

material price reference because market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

such as those for the PJM contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the PJM prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the PJM 

prices have substantial value. As noted 

above, the Commission recognizes that 

publication of the PJM contract’s prices 

is indirect evidence of routine 

dissemination. Thus, the Commission 

has concluded that traders likely 

purchase the ICE data packages 

specifically for the PJM contract’s prices 

and consult such prices on a frequent 

and recurring basis in pricing cash 

market transactions. 

Lastly, ICE and EEI criticized the ECM 

Study since it did not specifically 

identify the PJM contract as a contract 

that is referred to by market participants 

on a frequent and recurring basis. In 

response, the Commission notes that it 

cited the ECM Study’s general finding 

that some ICE electricity contracts 

appear to be regarded as price discovery 

markets merely as 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 ICE 

PJM contract meets the material price 

reference criterion because cash market 

transactions are priced either explicitly 

or implicitly on a frequent and recurring 

basis at a differential to the PJM 

contract’s price (direct evidence). 

Moreover, the PJM contract’s price data 

are sold to market participants, and 

those individuals likely purchase the 

ICE data packages specifically for the 

PJM contract’s prices and consult such 

prices on a frequent and recurring basis 

in pricing cash market transactions 

(indirect evidence). 

2. Material Liquidity Criterion 

In its October 26, 2009, Federal 

Register notice, the Commission 

identified the PJM contract as a 

potential SPDC based on the material 

price reference and material liquidity 

criteria. To assess whether a contract 

meets the material liquidity criterion, 

the Commission first examines trading 

activity as a general measurement of the 

contract’s size and potential importance. 

If the Commission finds that the 

contract in question meets a threshold 

of trading activity that would render it 

of potential importance, the 

Commission will then perform a 

statistical analysis to measure the effect 

that changes to the subject-contract’s 

prices potentially may have on prices 

for other contracts listed on an ECM or 

a DCM. 

The Commission’s Guidance to the 

statutory criteria (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 total number of transactions 

executed on ICE’s electronic platform in 

the PJM contract was 7,990 in the 

second quarter of 2009, resulting in a 

daily average of 124.8 trades. During the 

same period, the PJM contract had a 

total trading volume of 268,489 

contracts and an average daily trading 

volume of 4,195.1 contracts. Moreover, 

open interest as of June 30, 2009, was 

318,788 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.25

In a subsequent filing dated March 24, 

2010, ICE reported that total trading 

volume in the fourth quarter of 2009 

was 371,885 contracts (or 5,721.3 

contracts on a daily basis). In terms of 

number of transactions, 9,913 trades 

occurred in the fourth quarter of 2009 

(152.5 trades per day). As of December 

31, 2009, open interest in the PJM 

contract was 344,754 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. 

The number of trades per day was 

substantial during the period between 

the second and fourth quarters of 2009. 

In addition, trading activity in the PJM 

contract, as characterized by total 

quarterly volume, indicates that the PJM 

contract experiences trading activity 

that is greater than that of thinly-traded 

futures markets.26 Thus, it is reasonable 

to infer that the PJM contract could have 

a material effect on other ECM contracts 

or on DCM contracts. 

To measure the effect that the PJM 

contract potentially could have on 

another ECM contract staff performed a 

statistical analysis 27 using daily 

settlement prices (between July 1, 2008 

and December 31, 2009) for the ICE PJM 

and OPJ contracts. The simulation 

suggest that, on average over the sample 

period, a one percent rise in the PJM 

contract’s price elicited a 2.15 percent 

increase in ICE OPJ contract’s price. 

i. Federal Register Comments: 

ICE stated that the PJM contract lacks 

a sufficient number of trades to meet the 

material liquidity criterion. Along with 

EPSA and EEI, ICE argued that the PJM 

contract cannot have a material effect on 

DCM contracts or other ECM contracts 

because these other contracts do not 

cash settle to the PJM contract’s price. 

Instead, the DCM contracts and the PJM 

contract are both cash settled based on 

physical transactions, which neither the 

ECM or the DCM contracts can 

influence. The Commission’s statistical 

analysis shows that changes in the ICE 

PJM contract’s price significantly 

influences the prices of other ECM 

contracts (namely, the OPJ contract). In 

this regard, a one-percent rise in the 

PJM contract’s price leads to a 2.15 

percent rise in OPJ contract’s price. 


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Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 42395 

28 Guidance, supra. 

29 73 FR 75892 (December 12, 2008). 

30 In addition, ICE stated that the trades-per-day 

statistics that it provided to the Commission in its 

quarterly filing and which were cited in the 

Commission’s October 26, 2009, Federal Register 

notice includes 2(h)(1) transactions, which were not 

completed on the electronic trading platform and 

should not be considered in the SPDC 

determination process. The Commission staff asked 

ICE to review the data it sent in its quarterly filings; 

ICE confirmed that the volume data it provided and 

which the Commission cited includes only 

transaction data executed on ICE’s electronic 

trading platform. As noted above, supplemental 

data supplied by ICE confirmed that block trades 

are in addition to the trades that were conducted 

on the electronic platform; block trades comprise 

about 49 percent of all transactions in the PJM 

contract (as of the fourth quarter of 2009). 

Commission acknowledges that the open interest 

information it provided in its October 26, 2009, 

Federal Register notice includes transactions made 

off the ICE platform. However, once open interest 

is created, there is no way for ICE to differentiate 

between ‘‘on-exchange’’ versus ‘‘off-exchange’’ 

created positions, and all such positions are 

fungible with one another and may be offset in any 

way agreeable to the position holder regardless of 

how the position was initially created. 

31See 73 FR 75888, 75893 (Dec. 12, 2008). 

ICE noted that the Commission’s 

Guidance had posited concepts of 

liquidity that generally assumed a fairly 

constant stream of prices throughout the 

trading day, and noted that the 

relatively low number of trades per day 

in the PJM contract did not meet this 

standard of liquidity. The Commission 

observes that a continuous stream of 

prices would indeed be an indication of 

liquidity for certain markets but the 

Guidance also notes that ‘‘quantifying 

the levels of immediacy and price 

concession that would define material 

liquidity may differ from one market or 

commodity to another.’’ 28

ICE opined that the Commission 

‘‘seems to have adopted a five trade per 

day test for material liquidity.’’ To 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’’ 29 rather than solely relying 

upon an ECM on its own to identify any 

such potential SPDCs to the 

Commission. Thus, any contract that 

meets this threshold may be subject to 

scrutiny as a potential SPDC; however, 

the contract will not be found to be a 

SPDC merely because it met the 

reporting threshold. 

ICE argued 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 months’’ as well as in strips 

of contract months. ICE suggested that a 

more appropriate method of 

determining liquidity is to examine the 

activity in a single traded month of a 

given contract.’’ 30 It is the Commission’s 

opinion that liquidity, as it pertains to 

the PJM contract, is typically a function 

of trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the ICE PJM contract itself 

would be considered liquid. ICE’s 

analysis of its own trade data confirms 

this to be the case for the PJM contract, 

and thus, the Commission believes that 

it applied the statistical data cited above 

in an appropriate manner for gauging 

material liquidity. 

ii. Conclusion Regarding Material 

Liquidity: 

For the reasons discussed above, the 

Commission finds that the PJM contract 

meets the material liquidity criterion. 

Specifically, there is sufficient trading 

activity in the PJM 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). 

3. Overall Conclusion Regarding the 

PJM Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the ICE PJM contract 

performs a significant price discovery 

function under two of the four criteria 

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

CEA. Specifically, the Commission has 

determined that the PJM contract meets 

the material price reference and material 

liquidity criteria at this time. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

PJM 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 PJM contract,31 and 

triggers the obligations, requirements— 

both procedural and substantive—and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs. 

b. The PJM WH Real Time Off-Peak 

(OPJ) Contract and the SPDC Indicia 

The OPJ contract is cash settled based 

on the arithmetic average of off-peak 

hour, real-time LMPs published by PJM 

Interconnection for its Western Hub for 

all off-peak hours during the contract 

month. The hourly LMPs are derived 

from power trades that result in 

physical delivery. The size of the OPJ 

contract is 50 MWh, and the OPJ 

contract is listed for up to 86 calendar 

months. 

In general, electricity is bought and 

sold in an auction setting on an hourly 

basis at various points along the 

electrical grid. An LMP associated with 

a specific hour is calculated as the 

volume-weighted average price of all of 

the transactions where electricity is to 

be supplied and consumed during that 

hour. 

Electricity is traded in a day-ahead 

market as well as a real-time market. 

The day-ahead market establishes prices 

for electricity that is to be delivered 

during the specified hour on the 

following day. Day-ahead prices are 

determined based on generation and 

energy transaction quotes offered in 

advance. Because the offers and bids are 

dependent on estimates of supply and 

demand, electricity needs usually are 

not perfectly satisfied in the day-ahead 

market. In this regard, on the day the 

electricity is transmitted and used, 

auction participants typically realize 

that they bought or sold either too much 

power or too little power. A real-time 

auction is operated to alleviate this 

problem by serving as a balancing 

mechanism. Specifically, electricity 

traders use the real-time market to sell 

excess electricity and buy additional 

power to meet demand. 

PJM Interconnection is an RTO that 

coordinates the movement of wholesale 

electricity in all or parts of Delaware, 

Illinois, Indiana, Kentucky, Maryland, 

Michigan, New Jersey, North Carolina, 

Ohio, Pennsylvania, Tennessee, 

Virginia, West Virginia and the District 

of Columbia. PJM Interconnection’s 

transmission network is the largest 

centrally dispatched grid in North 

America. PJM Interconnection 

dispatches about 163,500 MW of 

generating capacity over 56,350 miles of 

transmission lines and serves more than 

51 million customers. The RTO’s 

members, totaling more than 500, 

include power generators, transmission 

owners, electricity distributors, power 

marketers and large consumers. 

PJM Interconnection is responsible for 

operating a competitive wholesale 

electricity market as well as maintaining 

the reliability of the grid. The RTO acts 

as a neutral, independent party, and its 

activities are monitored by FERC. The 

company coordinates the continuous 

buying, selling and delivery of 

wholesale electricity through robust, 

open and competitive spot markets. In 

operating the markets, PJM balances the 

needs of suppliers, wholesale customers 

and other market participants, and it 

continuously monitors market behavior. 

Electricity is priced at individual 

points along the transmission network 


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42396 Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 

32http://www.ferc.gov/market-oversight/mktelectric/pjm.asp. 

33http://www.ferc.gov/market-oversight/mktelectric/pjm/2010/05–2010-elec-pjm-archive.pdf. 

34 17 CFR 36, Appendix A. 

35 In addition to referencing ICE prices, firms 

participating in PJM’s Western hub power 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 power transactions. 

36The price data covered the period December 

2008 through December 2009. 

called nodes. An electric grid has many 

interconnections or buses. RTOs group 

certain buses together to form hubs for 

pricing and trading purposes, and these 

hubs do not necessarily follow along 

state lines or geographic boundaries. 

Power also is priced at the hub level and 

serves as a basis for trading electricity. 

PJM Interconnnection has 11 hubs, 

including AEP GEN, AEP–Dayton, 

Chicago GEN, Chicago, Dominion, 

Eastern, Northern Illinois, New Jersey, 

Ohio, West INT and Western Hub.32 The 

Western Hub is a basket of 109 buses 

that stretch all the way from Erie, PA, 

to Washington, DC.33

1. Material Price Reference Criterion 

The Commission’s October 26, 2009, 

Federal Register notice identified the 

OJP contract as a potential SPDC based 

on the material price reference and 

material liquidity criteria. 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 the ‘‘East Power of Day’’package 

with access to all price data or just 

current prices plus a selected number of 

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

historical data. This package includes 

price data for the OPJ contract. 

The Commission also noted that its 

October 2007 ECM Study found that in 

general, market participants view ICE as 

a price discovery market for certain 

electricity contracts. The study did not 

specify which markets performed this 

function; nevertheless, the Commission 

determined that the OPJ contract, while 

not mentioned by name in the ECM 

Study, warranted further review. 

The Commission explains in its 

Guidance to the statutory criteria that in 

evaluating a contract under the material 

price reference criterion, it 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.34 With respect to direct 

evidence, the Commission will consider 

the extent to which, on a frequent and 

recurring basis, cash market bids, offers 

or transactions are directly based on or 

quoted at a differential to, the prices 

generated on the ECM in question. 

Direct evidence may be established 

when cash market participants are 

quoting bid or offer prices or entering 

into transactions at prices that are set 

either explicitly or implicitly at a 

differential to prices established for the 

contract in question. Cash market prices 

are set explicitly at a differential to the 

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

instance, they are quoted in dollars and 

cents above or below the reference 

contract’s price. Cash market prices are 

set implicitly at a differential to a 

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

instance, they are arrived at after adding 

to, or subtracting from the section 

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

reported at a flat price. With respect to 

indirect evidence, the Commission will 

consider the extent to which the price 

of the contract in question is being 

routinely disseminated in widely 

distributed industry publications—or 

offered by the ECM itself for some form 

of remuneration—and consulted on a 

frequent and recurring basis by industry 

participants in pricing cash market 

transactions. 

PJM’s Western hub is a major pricing 

center for electricity in the eastern 

portion of the United States. Traders, 

including producers, keep abreast of the 

electricity prices at PJM’s Western hub 

when conducting cash deals. These 

traders look to a competitively 

determined price as an indication of 

expected values of power at the Western 

hub when entering into cash market 

transactions for electricity, especially 

those trades providing for physical 

delivery in the future. Furthermore, 

power prices in other neighboring 

markets, such as New York ISO’s Zone 

A (Western New York), Zone G (Hudson 

Valley region) and Zone J (New York 

City) as well as Midwest ISO’s Cinergy 

hub, are typically based implicitly 

relative to the prices reported for PJM 

Interconnection’s Western hub. Traders 

use the ICE OPJ contract, as well as 

other ICE power contracts, to hedge cash 

market positions and transactions— 

activities which enhance the OPJ 

contract’s price discovery utility. The 

substantial volume of trading and open 

interest in the OPJ contract appears to 

attest to its use for this purpose. While 

the OPJ contract’s settlement prices may 

not be the only factor influencing spot 

and forward transactions, electricity 

traders consider the ICE price to be a 

critical factor in conducting OTC 

transactions.35 As a result, the OPJ 

contract satisfies the direct price 

reference test. 

The fact that ICE’s OPJ monthly 

contract is used widely as a source of 

pricing information is further evidence 

of direct price reference. In this regard, 

OPJ contract prices power at the 

Western hub about seven years into the 

future. Thus, market participants can 

use the OPJ contract to lock-in 

electricity prices far into the future. 

Traders use monthly power contracts 

like the OPJ contract to price future 

power electricity commitments, where 

such commitments are based on longrange forecasts of power supply and 

demand. 

The Commission notes that the 

Western hub is a major trading point for 

electricity, and the OPJ contract’s prices 

are well regarded in the industry as 

indicative of the value of off-peak power 

at the Western hub. Accordingly, the 

Commission believes that it is 

reasonable to conclude that market 

participants purchase the data packages 

that include the OPJ contract’s prices in 

substantial part because the OPJ 

contract’s 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 OPJ contract meets the 

indirect price reference test. 

NYMEX lists a futures contract that is 

comparable to the ICE OPJ contract on 

its ClearPort platform called the PJM 

Western Hub Off-Peak Calendar-Month 

Real-Time LMP Swap futures contract. 

However, unlike the ICE contract, none 

of the trades in the NYMEX version 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 

NYMEX’s monthly, off-peak hour 

Western hub contract are influenced, in 

part, by the daily settlement prices of 

the ICE OPJ contract. This is because 

NYMEX determines the daily settlement 

prices for its power contracts through a 

survey of cash market voice brokers. 

Voice brokers, in turn, refer to the ICE 

OPJ price, among other information, as 

an important indicator as to where the 

market is trading. Therefore, the ICE OPJ 

price influences the settlement price for 

the NYMEX monthly, off-peak hour 

Western hub power contract. This 

conclusion is supported by an analysis 

of the daily settlement prices for the OPJ 

contract and the NYMEX equivalent 

which demonstrates that 94 percent of 

the daily settlement prices 36 for the 


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Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 42397 

37 74 FR 54966 (October 26, 2009). 

38Staff 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. 

39Specifically, Commission staff econometrically 

estimated a cointegrated vector autoregression 

(CVAR) model using daily settlement prices. CVAR 

methods permit a dichotomization of the data 

relationships into long run equilibrium components 

(called the cointegration space or cointegrating 

relationships) and a short run component. A CVAR 

model was chosen over the more traditional vector 

autoregression model in levels because the 

statistical properties of the data (lack of stationarity 

and ergodicity) precluded the more traditional 

modeling treatment. Moreover, the statistical 

properties of the data necessitated the modeling of 

the contracts’ prices as a CVAR model containing 

both first differences (to handle stationarity) and an 

Continued 

NYMEX version of the contract are 

within one standard deviation of the 

OPJ contract’s price settlement prices. 

i. Federal Register Comments: 

EPSA, FIEG, EEI and ICE stated that 

no other contract directly references or 

settles to the OPJ contract’s price. 

Moreover, the commenters argued that 

the underlying cash price series against 

which the OPJ contract is settled (in this 

case, the average of the real-time offpeak hour Western Hub electricity 

prices over the contract month, which 

are derived from cash market 

transactions) is the authentic reference 

price and not the ICE contract itself. The 

Commission believes that this 

interpretation of price reference is too 

narrow and 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. 

PJM’s Western hub is a major trading 

center for electricity in the eastern 

United States. Traders, including 

producers, keep abreast of the prices of 

the OPJ contract when conducting cash 

deals. These traders look to a 

competitively determined price as an 

indication of expected values of 

electricity at the Western hub when 

entering into cash market transaction for 

power, especially those trades that 

provide for physical delivery in the 

future. Traders use the ICE OPJ contract 

to hedge cash market positions and 

transactions, which enhances the OPJ 

contract’s price discovery utility. While 

the OPJ contract’s settlement prices may 

not be the only factor influencing spot 

and forward transactions, power traders 

consider the ICE price to be a crucial 

factor in conducting OTC transactions. 

In addition, EPSA stated that the 

publication of price data for the OPJ 

contract price is weak justification for 

material price reference. Market 

participants generally do not purchase 

ICE data sets for one contract’s prices. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the OPJ prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because the OPJ prices have 

substantial value to them. The 

Commission notes that publication of 

the OPJ contract’s prices is indirect 

evidence of routine dissemination. 

Thus, the Commission has concluded 

that traders likely specifically purchase 

the ICE data packages for the OPJ 

contract’s prices and consult such prices 

on a frequent and recurring basis in 

pricing cash market transactions. 

Lastly, ICE and EEI criticized the 

Commission’s reliance on the ECM 

Study since it did not specifically 

identify the OPJ contract as a contract 

that is referred to by market participants 

on a frequent and recurring basis. The 

Commission notes that it cited the ECM 

Study’s general finding that some ICE 

electricity contracts appear to be 

regarded as price discovery markets 

merely as 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 ICE 

OPJ contract meets the material price 

reference criterion because cash market 

transactions are priced either explicitly 

or implicitly on a frequent and recurring 

basis at a differential to the OPJ 

contract’s price (direct evidence). 

Moreover, the OPJ contract’s price data 

are sold to market participants, and 

those individuals likely purchase the 

ICE data packages specifically for the 

OPJ contract’s prices and consult such 

prices on a frequent and recurring basis 

in pricing cash market transactions 

(indirect evidence). 

2. Material Liquidity Criterion 

As noted above, in its October 26, 

2009, Federal Register notice, the 

Commission identified the OJP contract 

as a potential SPDC based on the 

material price reference and material 

liquidity criteria. To assess whether a 

contract meets the material liquidity 

criterion, the Commission first examines 

trading activity as a general 

measurement of the contract’s size and 

potential importance. If the Commission 

finds that the contract in question meets 

a threshold of trading activity that 

would render it of potential importance, 

the Commission will then perform a 

statistical analysis to measure the effect 

that changes to the subject-contract’s 

prices potentially may have on prices 

for other contracts listed on an ECM or 

a DCM. 

The Commission’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 total 

number of transactions executed on 

ICE’s electronic platform in the OPJ 

contract was 437 in the second quarter 

of 2009, resulting in a daily average of 

6.8 trades. During the same period, the 

OPJ contract had a total trading volume 

of 325,799 contracts and an average 

daily trading volume of 5,090.6 

contracts. Moreover, open interest as of 

June 30, 2009, was 2,976,492 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.37

In a subsequent filing dated March 24, 

2010, ICE reported that total trading 

volume in the fourth quarter of 2009 

was 622,984 contracts (or 9,584.4 

contracts on a daily basis). In terms of 

number of transactions, 456 trades 

occurred in the fourth quarter of 2009 

(7.0 trades per day). As of December 31, 

2009, open interest in the OPJ contract 

was 3,293,899 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. 

The number of trades per day was 

substantial during the period between 

the second and fourth quarters of 2009. 

In addition, trading activity in the OPJ 

contract, as characterized by total 

quarterly volume, indicates that the OPJ 

contract experiences trading activity 

that is greater than that of thinly-traded 

futures markets.38 Thus, it is reasonable 

to infer that the OPJ contract could have 

a material effect on other ECM contracts 

or on DCM contracts. 

To measure the effect that the PJM 

contract could have on another ECM 

contract staff performed a statistical 

analysis 39 using daily settlement prices 


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42398 Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 

error-correction term to capture long run 

equilibrium relationships. The prices were treated 

as a single reduced-form model in order to test 

hypothesis that power prices in the same market 

affect each other. The prices of ICE’s PJM and OPJ 

contracts are positively related to each other in a 

cointegrating relationship and display a high level 

of statistical strength. On average during the sample 

period, each percentage rise in OPJ contract’s price 

elicited a 0.47 percent rise in PJM contract’s price. 

40 Guidance, supra. 

41 73 FR 75892 (December 12, 2008). 

42 In addition, ICE stated that the trades-per-day 

statistics that it provided to the Commission in its 

quarterly filing and which were cited in the 

Commission’s October 26, 2009, Federal Register 

notice includes 2(h)(1) transactions, which were not 

completed on the electronic trading platform and 

should not be considered in the SPDC 

determination process. The Commission staff asked 

ICE to review the data it sent in its quarterly filings; 

ICE confirmed that the volume data it provided and 

which the Commission cited includes only 

transaction data executed on ICE’s electronic 

trading platform. As noted above, supplemental 

data supplied by ICE confirmed that block trades 

are in addition to the trades that were conducted 

on the electronic platform; block trades comprise 

about 72 percent of all transactions in the OPJ 

contract (as of the fourth quarter of 2009). 

Commission acknowledges that the open interest 

information it provided in its October 26, 2009, 

Federal Register notice includes transactions made 

off the ICE platform. However, once open interest 

is created, there is no way for ICE to differentiate 

between ‘‘on-exchange’’ versus ‘‘off-exchange’’ 

created positions, and all such positions are 

fungible with one another and may be offset in any 

way agreeable to the position holder regardless of 

how the position was initially created. 

43See 73 FR 75888, 75893 (Dec. 12, 2008). 

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

45 7 U.S.C. 19(a). 

(between July 1, 2008 and December 31, 

2009) for the ICE PJM and OPJ contracts. 

The simulation suggests that, on average 

over the sample period, a one percent 

rise in the OPJ contract’s price elicited 

a 0.47 percent increase in ICE PJM 

contract’s price. 

i. Federal Register Comments: 

ICE stated that the OPJ contract lacks 

a sufficient number of trades to meet the 

material liquidity criterion. Along with 

EPSA and EEI, ICE argued that the OPJ 

contract cannot have a material effect on 

DCM contracts or other ECM contracts 

because these other contracts do not 

cash settle to the OPJ contract’s price. 

Instead, the DCM contracts and the OPJ 

contract are both cash settled based on 

physical transactions, which neither the 

ECM nor the DCM contracts can 

influence. On the contrary, the 

Commission’s statistical analysis shows 

that changes in the ICE OPJ contract’s 

price significantly influences the prices 

of other ECM contracts (namely, the PJM 

contract). In this regard, a one-percent 

rise in the OPJ contract’s price leads to 

a 0.47 percent rise in PJM contract’s 

price. 

ICE noted that the Commission’s 

Guidance had posited concepts of 

liquidity that generally assumed a fairly 

constant stream of prices throughout the 

trading day, and noted that the 

relatively low number of trades per day 

in the OPJ contract did not meet this 

standard of liquidity. The Commission 

observes that a continuous stream of 

prices would indeed be an indication of 

liquidity for certain markets but the 

Guidance also notes that ‘‘quantifying 

the levels of immediacy and price 

concession that would define material 

liquidity may differ from one market or 

commodity to another.’’ 40

ICE opined that the Commission 

‘‘seems to have adopted a five trade per 

day test for material liquidity.’’ To 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’’ 41 rather than solely relying 

upon an ECM on its own to identify any 

such potential SPDCs to the 

Commission. Thus, any contract that 

meets this threshold may be subject to 

scrutiny as a potential SPDC; however, 

the contract will not be found to be a 

SPDC merely because it met the 

reporting threshold. 

ICE also argued 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 months’’ as well as in strips 

of contract months. ICE suggested that a 

more appropriate method of 

determining liquidity is to examine the 

activity in a single traded month of a 

given contract.’’ 42 It is the Commission’s 

opinion that liquidity, as it pertains to 

the OPJ contract, is typically a function 

of trading activity in particular lead 

months and, given sufficient liquidity in 

such months, the ICE OPJ contract itself 

would be considered liquid. ICE’s 

analysis of its own trade data confirms 

this to be the case for the OPJ contract, 

and thus, the Commission believes that 

it applied the statistical data cited above 

in an appropriate manner for gauging 

material liquidity. 

ii. Conclusion Regarding Material 

Liquidity: 

For the reasons discussed above, the 

Commission finds that the OPJ contract 

satisfies the material liquidity criterion. 

Specifically, there is sufficient trading 

activity in the OPJ 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). 

3. Overall Conclusion Regarding the OPJ 

Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the ICE OPJ contract 

performs a significant price discovery 

function under the two of the four 

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

the CEA. Specifically, the Commission 

has determined that the OPJ contract 

meets the material price reference and 

material liquidity criteria. Accordingly, 

the Commission is issuing the attached 

Order declaring that the PJM 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 OPJ contract,43 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’’) 44 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 45 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 


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Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices 42399 

46 5 U.S.C. 601 et seq. 

47 66 FR 42256, 42268 (Aug. 10, 2001). 

48 7 U.S.C. 1a(29). 

49Because 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). 

50 7 U.S.C. 1a(29). 

51Because 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 54966 (October 26, 2009). 

2The acronym ‘‘PJM’’ stands for Pennsylvania 

New Jersey Maryland Interconnection, LLC (‘‘PJM 

Interconnection’’), and signifies the regional 

electricity transmission organization (‘‘RTO’’) that 

coordinates the generation and distribution of 

electricity in all or parts of 13 states and the District 

of Columbia. 

3The acronym ‘‘WH’’ signifies the PJM 

Interconnection’s Western Hub. 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. 

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

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. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 46 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.47 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

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

these Orders, taken in connection with 

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

36 rules, will not have a significant 

impact on a substantial number of small 

entities. 

VI. Orders 

a. Order Relating to the PJM WH Real 

Time Peak 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 PJM WH 

Real Time Peak contract, traded on the 

IntercontinentalExchange, Inc., satisfies 

the material price preference and 

material liquidity criteria for significant 

price discovery contracts. Consistent 

with this determination, and effective 

immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the PJM 

WH Real Time Peak 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 48

with respect to the PJM WH Real Time 

Peak contract and is subject to all the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further with respect to the PJM WH 

Real Time Peak contract, 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.49

b. Order Relating to the PJM WH Real 

Time Off-Peak 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 PJM WH 

Real Time Off-Peak contract, traded on 

the IntercontinentalExchange, Inc., 

satisfies the statutory material price 

reference and material liquidity criteria 

for significant price discovery contracts. 

Consistent with this determination, and 

effective immediately, the 

IntercontinentalExchange, Inc., must 

comply with, with respect to the PJM 

WH Real Time Off-Peak 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 50

with respect to the PJM WH Real Time 

Off-Peak contract and is subject to all 

the provisions of the Commodity 

Exchange Act applicable to registered 

entities. 

Further with respect to the PJM WH 

Real Time Off-Peak contract, 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.51

Issued in Washington, DC, on July 9, 2010, 

by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–17743 Filed 7–20–10; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Orders Finding That the PJM WH Real 

Time Peak Daily Contract, PJM WH 

Real Time Off-Peak Daily Contract and 

PJM WH Day Ahead LMP Peak Daily 

Contract Offered for Trading on the 

IntercontinentalExchange, Inc., Do Not 

Perform a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final orders. 

SUMMARY: On October 26, 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 

PJM 2 WH 3 Real Time Peak Daily 


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