23686 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

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

47 66 FR 42256, 42268 (Aug. 10, 2001). 48 7 U.S.C. 1a(29). 

1 74 FR 42052 (August 20, 2009). 

2 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

market integrity, both on the ECM itself 

and in any related futures contracts 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorize the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

The Commission has concluded that 

ICE’s MLN contract, which is the subject 

of the attached Order, is not a SPDC; 

accordingly, the Commission’s Order 

imposes no additional costs and no 

additional statutorily or regulatory 

mandated responsibilities on the ECM. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 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. Order 

a. Order Relating to the Malin 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 Malin 

Financial Basis contract, traded on the 

IntercontinentalExchange, Inc., does not 

at this time satisfy the material price 

reference, price linkage or material 

liquidity criteria for significant price 

discovery contracts. Consistent with this 

determination, the 

IntercontinentalExchange, Inc., is not 

considered a registered entity 48 with 

respect to the Malin Financial Basis 

contract and is not subject to the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., are not 

applicable to the Malin Financial Basis 

contract with the issuance of this Order. 

This Order is based on the 

representations made to the 

Commission by the 

IntercontinentalExchange, Inc., dated 

July 27, 2009, and November 13, 2009, 

and other supporting material. Any 

material change or omissions in the 

facts and circumstances pursuant to 

which this order is granted might 

require the Commission to reconsider its 

current determination that the Malin 

Financial Basis contract is not a 

significant price discovery contract. 

Additionally, to the extent that it 

continues to rely upon the exemption in 

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

IntercontinentalExchange, Inc., must 

continue to comply with all of the 

applicable requirements of Section 

2(h)(3) and Commission Regulation 

36.3. 

Issued in Washington, DC on April 28, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10306 Filed 5–3–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the Carbon 

Financial Instrument Contract Offered 

for Trading on the Chicago Climate 

Exchange, Inc. Does Not Perform a 

Significant Price Discovery Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final order. 

SUMMARY: On August 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 

Carbon Financial Instrument (‘‘CFI’’) 

contract offered for trading on the 

Chicago Climate Exchange, Inc. (‘‘CCX’’), 

an exempt commercial market (‘‘ECM’’) 

under Section 2(h)(3)–(5) of the 

Commodity Exchange Act (‘‘CEA’’ or the 

‘‘Act’’), performs a significant price 

discovery function pursuant to section 

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

undertook this review based upon an 

initial evaluation of information and 

data provided by CCX. The Commission 

has reviewed public comments and the 

entire record in this matter and has 

determined to issue an order finding 

that the CCX CFI contract, at this time, 

does not perform a significant price 

discovery function. Authority for this 

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

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective date: April 28, 2010. 

FOR FURTHER INFORMATION CONTACT: Irina 

Leonova, Financial Economist, Division 

of Market Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street, NW., 

Washington, DC 20581. Telephone: 

(202) 418–5646. Email: 

ileonova@cftc.gov, or Gregory K. Price, 

Industry Economist, Division of Market 

Oversight, same address. Telephone: 

(202) 418–5515. E-mail: gprice@cftc.gov, 

or Susan Nathan, Senior Special 

Counsel, Division of Market Oversight, 

same address. Telephone: (202) 418– 

5133. E-mail: snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 2

significantly broadened the CFTC’s 

regulatory authority with respect to 

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

the CEA, a new regulatory category— 

ECMs on which significant price 

discovery contracts (‘‘SPDCs’’) are 

traded—and treating ECMs in that 

category as registered entities under the 

CEA. The legislation authorizes the 

CFTC to designate an agreement, 

contract or transaction traded on an 

ECM 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 

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3 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

4Public 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). 

5For an initial SPDC determination, 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 SPDC 

determinations, ECMs have a grace period of 30 

calendar days to demonstrate core principle 

compliance. 

6The 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. 

7The comment letters are available on the 

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

lawandregulation/federalregister/ 

federalregistercomments/2009/09-010.html. 

8Appendix A to Part 36, 17 CFR part 36 (2009). 

9 17 CFR part 36, appendix A. 

10Appendix A to Part 36, 17 CFR 36 (2009). 

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.3 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 regarding 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 that either: (1) had its price 

information sold by the exchange to 

market participants or industry 

publications or (2) had daily closing or 

settlement prices which were within 

2.5% of the contemporaneously 

determined closing, settlement or other 

daily price of another contract on 95 

percent or more of the days in the most 

recent quarter. 

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 publishes 

notice in the Federal Register that it 

intends to undertake a determination 

whether the specified agreement, 

contract or transaction performs a 

significant price discovery function and 

receives written views, data and 

arguments relevant to its determination 

from the ECM and other interested 

persons. The Commission, within a 

reasonable period of time after the close 

of the comment period, considers all 

relevant information and issues an order 

announcing and explaining its 

determination. The issuance of an 

affirmative order subjects an ECM with 

a SPDC to the full application of the 

Commission’s regulatory authorities; at 

that time, such an ECM becomes subject 

to all provisions of the CEA applicable 

to registered entities.4 The issuance of 

such an order also triggers the 

obligations, requirements and timetables 

prescribed in Commission Rule 

36.3(c)(4).5

II. Notice of Intent To Undertake SPDC 

Determination 

On August 20, 2009, the Commission 

published in the Federal Register a 

notice of its intent to undertake a 

determination whether the CCX’s CFI 

contract performs a significant price 

discovery function, and requested 

comment from interested parties.6

Comments were received from the 

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

Jeremy D. Weinstein, Esq. (‘‘Weinstein’’); 

the California Forestry Association 

(‘‘CFA’’); and Scott DeMonte 

(‘‘DeMonte’’).7 The comments are more 

extensively discussed below in the 

Analysis Section. 

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

The Commission is directed by 

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

as appropriate, the following factors in 

determining whether a contract 

performs a 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, 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 the 

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 factors must be present to 

support a determination that a 

particular contract performs a 

significant price discovery function. 

Moreover, the statutory language neither 

prioritizes the factors nor specifies the 

degrees to which a SPDC must conform 

to the various factors. In Guidance 

issued in connection with the Part 36 

rules governing ECMs with SPDCs, the 

Commission observed that these factors 

do not lend themselves to a mechanical 

checklist or formulaic analysis.8

Accordingly, the Commission has 

indicated that in making its 

determination it will consider the 

circumstances under which the 

presence of a particular factor, or 

combination of factors, would be 

sufficient to support a SPDC 

determination.9 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.10 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. 

IV. The CCX CFI Contract 

CCX, launched in 2003, operates the 

only North American voluntary, legally 

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11CCX membership categories: 

Members: Entities with direct greenhouse gas 

(GHG) emissions. Members make a legally binding 

commitment to the CCX Emission Reduction 

Schedule and are subject to annual emissions 

verification by FINRA. Indirect emissions are an 

opt-in. 

Registry Participant Members: Entities with direct 

GHG emissions that establish a CCX Registry 

account of their emissions and undergo data 

verification. Standardized independent third-party 

data verification is provided by FINRA on an 

annual or multi-annual basis. 

Associate Members: Office-based businesses or 

institutions with negligible direct GHG emissions. 

Associate Members commit to report and fully 

offset 100 percent of indirect emissions associated 

with energy purchases and business travel from 

year of entry through 2010 and emissions data are 

verified by FINRA. 

Offset Providers: Owners of title to qualifying 

offset projects that sequester, destroy or reduce 

GHG emissions. Offset Providers register and sell 

offsets directly on the CCX. 

Offset Aggregators: Entities that serve as the 

administrative representative, on behalf of offset 

project owners, of multiple offset-generating 

projects. Offset projects involving less than 10,000 

metric tons of carbon dioxide equivalent per year 

should be registered and sold through an Offset 

Aggregator. 

Liquidity Providers: Entities or individuals who 

trade on CCX for purposes other than complying 

with the CCX Emission Reduction Schedule, such 

as market makers and proprietary trading groups. 

Exchange Participants: Entities or individuals 

who purchase CFI contracts and retire them to 

offset emissions associated with special events or 

other specified activities. 

12 74 FR 42054 (Aug. 20, 2009).The Commission 

did not identify either price linkage or arbitrage as 

the possible criteria for the CCX CFI contact to be 

a SPDC. Accordingly, those criteria will not be 

discussed further in this Order. 

13 74 FR 42054 (Aug. 20, 2009). 

14The Commission will rely on one of two 

sources of evidence—direct or indirect—to 

determine a SPDC. Direct evidence can be cash 

market transactions that are frequently based on or 

quoted as a differential to the potential SPDC. 

Indirect evidence includes contracts whose price 

series are routinely disseminated in industry 

publications or are sold to market participants by 

the ECM. 

15Because this shift in focus did not alter either 

the analysis or conclusion or otherwise suggest the 

need for further comment, the Commission did not 

republish its original notice of intent to make a 

SPDC determination with respect to the CCX CFI 

contract. 

16See supra note 7. Specifically, the California 

Forestry Association offered the opinion that all the 

over-the-counter voluntary carbon trading occurring 

now serves a significant price discovery function. 

CL 02. Scott DeMonte advises the Commission to 

‘‘fix the manipulation’’ in [its] exchanges’’ and 

binding integrated trading system to 

reduce emissions of six major 

greenhouse gases, with offset projects 

worldwide. CCX offers a cap and trade 

system whose members 11 make a 

legally binding emission reduction 

commitment. Members are allocated 

annual emission allowances in 

accordance with their emissions 

baseline and the CCX emission 

reduction schedule. Members who 

reduce beyond their targets have surplus 

allowances to sell or bank; those who do 

not meet the targets must comply by 

purchasing CCX CFIs. The CCX CFI 

contract is a cash market instrument and 

not a derivatives contract. The Chicago 

Climate Futures Exchange (CCFE), a 

subsidiary of CCX that operates as a 

DCM, lists derivatives (futures and 

option contracts) on CCX CFIs. 

The size of the CCX CFI contract is 

100 metric tons (MT) of CO2-equivalent 

emissions. A CCX CFI contract involves 

the immediate delivery of, and payment 

for, vintage specific CCX carbon dioxide 

(CO2) emission allowances called CFIs. 

Earlier dated vintages may be delivered 

against later vintage trades. Transactions 

(with exception of bilateral agreements) 

are cleared on trade day. Full contract 

value settlement occurs on the next 

business day. CCX substitutes as a 

counterparty to all transactions and 

guarantees performance until settlement 

is completed. 

Based upon a required quarterly 

notification filed on October 15, 2009, 

(mandatory under Rule 36.3(c)(2)), the 

CCX reported that, with respect to its 

CFI contract, an average of 8 trades per 

day occurred in the third quarter of 

2009. During the same period, the CFI 

had an average daily trading volume of 

1,141 contracts. In the second quarter of 

2009, market participants traded the CFI 

contract on average 15 times per day 

with an average daily trading volume of 

1,235 contracts. Because the CCX CFI is 

a cash market instrument, open interest 

figures are not applicable. 

V. Analysis 

A. The Statutory Criteria 

In its notice of intent to undertake a 

determination whether the CCX CFI 

contract performs a significant price 

discovery function, the Commission 

indicated that the CCX CFI contract 

might satisfy the material price 

reference and material liquidity criteria 

for SPDC determination.12 Further 

analysis reveals that the CCX CFI 

contract does not meet either criterion. 

Material Price Reference Criterion 

The Commission has concluded that 

the CCX CFI contract does not meet the 

material price reference criterion for 

SPDC determination. As noted in the 

original Federal Register notice, the CFI 

market is solely a CCX-created entity.13

The CCX designed all of the parameters 

of this carbon emission reduction 

program, and it established the rules for 

membership in the ECM, allowance 

trading, and the creation of offsets. 

Based on these attributes, staff 

considered whether traders look to the 

CCX as a source of price information 

and price discovery for the CFI or the 

U.S. carbon market in general that 

would either be a direct or an indirect 

source of evidence of the material price 

reference. Staff concluded that it 

appears that CCX CFI prices are not 

used as a price reference to the U.S. 

carbon market due to the relatively 

small market share of the CCX CFI 

program in the overall U.S. carbon 

market, the limited potential for the CFI 

program to be folded into a national 

carbon reduction program, and 

significant price volatility of the CCX 

CFI instrument. As part of its material 

price reference analysis, Commission 

staff considered comments filed 

pursuant to the request for comment 

and all other relevant information.14

Material Liquidity Criterion 

The Commission’s decision to 

undertake a review to determine 

whether the CCX CFI contract performs 

a significant price discovery function 

was based on CCX’s required initial 

quarterly notification filed on July 1, 

2009. At that time, CCX reported that, 

with respect to all CFI trades combined 

(aggregate of vintages 2003–2010), an 

average of 15 separate trades per day 

occurred in the second quarter of 2009. 

Subsequent to the publication of the 

Commission’s Federal Register notice 

announcing its intent to undertake a 

SPDC review, however, CCX amended 

its filing to show the number of trades 

per day for each vintage, and clarified 

that the exchange lists and trades CFI 

contract vintages individually and 

provides a vintage-specific closing price 

for each CFI vintage contract. In these 

circumstances, the Commission 

recognizes that the CCX CFI vintagespecific contracts should not be 

aggregated, but rather should be treated 

individually for the purpose of a SPDC 

analysis. Accordingly, the Commission 

has analyzed each individual vintage of 

the CCX CFIs to determine whether any 

of them are SPDCs.15

The Commission’s evaluation of the 

supplemental data indicates that the 

CCX CFI vintage specific contracts 

(2003–2010 vintages) do not meet the 

material liquidity criterion for a SPDC; 

the average number of trades per day 

per vintage was only one contract, well 

below the five trades per day reporting 

threshold established by the 

Commission. 

B. Comments Received 

The Commission received four 

responses to its request for comments. 

Two of the comment letters addressed 

issues beyond the scope of the instant 

matter;16 two raised substantive issues 

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requests that firms be required to have collateral in 

excess of two times their average end of daily trade 

value in order to participate in this market. CL 01. 

17See supra note 7. The commenters who raised 

substantive issues with respect to the applicability 

of section 2(h)(7) to the CFI contract are Jeremy D. 

Weinstein, Esq., owner of the law offices of Jeremy 

D. Weinstein, a professional corporation located in 

Walnut Creek, California and 

IntercontinentalExchange, Inc., operator of 

regulated exchanges, trading platforms and clearing 

houses serving the global markets for agricultural, 

credit, currency, emissions, energy and equity 

index markets headquartered in Atlanta, Georgia, 

U.S. 

18There are a number of interpretations of the 

additionality concept in application to the 

environmental offset projects. The most popular 

interpretations are ‘‘environmental additionality’’ 

where a project is additional if the emissions from 

the project are lower than the baseline, and ‘‘project 

additionality’’ where the project must not have 

happened without the Clean Development 

Mechanism (CDM). 

19Leakage generally refers to the increase in 

emissions outside the project boundary that occurs 

as a consequence of the project activity’s 

implementation. 20Section 2(h)(7)(D)(ii), 7 U.S.C. 2(h)(7)(D)(ii). 

21 44 U.S.C. 3507(d). 22 7 U.S.C.19(a). 

with respect to the applicability of 

section 2(h)(7) to the CFI contract.17

Weinstein opines that the CCX offset 

project protocols ‘‘do not conform to the 

stringent additionality 18 and leakage 

standards 19 that are in the carbon offset 

contracts * * * accepted by the broader 

market.’’ Consequently, Mr. Weinstein 

asserts that ‘‘the absence from the CCX 

CFI contract of the most essential 

requirements for commonality with 

other carbon offset contract prevents 

market participants from using the CFI 

contracts for material price reference, 

arbitrage, and settlement and execution 

of transactions.’’ The environmental 

requirements of the CCX offset protocols 

are beyond the scope of the Commission 

authority, and this inquiry was limited 

to an evaluation whether the CCX CFI 

contract might satisfy the material 

liquidity and material price reference 

statutory criterion for a SPDC 

determination. 

ICE expressed an opinion that ‘‘the 

CFI does not serve a significant price 

discovery function and the Commission 

may exceed its jurisdiction if it 

determines that the CFI serves as a 

significant price discovery contract.’’ 

ICE observed that the CCX CFI contract 

fails the threshold for material liquidity 

because ‘‘each [CCX CFI contract] 

vintage may trade less than twice a day.’’ 

Consequently, ICE concluded that ‘‘a 

trade every couple of hours does not 

equate to the ‘‘ability to transact 

immediately’’ or ‘‘a more or less 

continuous stream of prices.’’ As noted 

above, after a thorough review of 

supplemental data provided for the CCX 

CFI contract, Commission staff 

concluded that different CCX CFI 

vintages should be considered as 

separate CCX contracts. When analyzed 

in this manner, the CCX CFI contracts 

do not meet the material liquidity 

criterion for SPDC determination. 

When analyzing the material price 

reference factor for a CCX CFI SPDC 

determination, ICE commented that 

‘‘under the Commission’s theory, any 

spot contract automatically serves as a 

material price reference, simply because 

the contract references itself’’ (emphasis 

in original). Additionally, ICE expresses 

an opinion that ‘‘by making this 

determination [the CCX CFI contract is 

a SPDC], the Commission is broadly 

asserting jurisdiction over the spot 

market if the spot contract is 

electronically traded.’’ In response, the 

Commission notes that Section 2(h)(7), 

refers to ‘‘any agreement, contract or 

transaction conducted in reliance on the 

exemption’’ in Section 2(h)(3) and does 

not require that the Commission find 

that a potential SPDC contract is a 

commodity futures or options contract. 

The determination to list particular 

instruments in reliance on the Section 

2(h)(3) exemption is made by the ECM, 

not the Commission, when the ECM 

files notice with the Commission, under 

Section 2(h)(5), of its reliance on such 

exemption. Section 2(i) of the CEA 

reinforces the view that instruments 

traded on 2(h)(3) markets may include 

non-futures products; that section states 

that there is no presumption that an 

agreement, contract or transaction 

exempted under section 2(h)(3) ‘‘is or 

would otherwise be subject to this 

chapter.’’ 

VI. Findings and Conclusion 

In consideration of the initial and 

supplemental information provided by 

CCX, the comments received in 

connection with the Federal Register 

notice and all other relevant 

information, the Commission has 

determined that the CCX CFI contract 

does not, at this time, perform a 

significant price discovery function. 

Accordingly, as set forth in the 

Commission’s Order, CCX is not 

required to comply with Commission 

Rule 36.3(c)(4) applicable to ECMs with 

SPDCs, or otherwise to assume the 

statutory and regulatory responsibilities 

of a registered entity with respect to the 

CFI contract. The Reauthorization Act 

amended the CEA to require that the 

Commission evaluate not less than 

annually all agreements, contracts and 

transactions conducted on an ECM in 

reliance on the exemption in section 

2(h)(3) to determine whether they serve 

a significant price discovery function.20

In addition, the Commission routinely 

monitors contracts traded or executed in 

reliance on section 2(h)(3) and reviews 

all ECM submissions on an ongoing 

basis for the presence of SPDCs. 

Accordingly, like all ECMs, CCX 

remains responsible for compliance 

with the reporting requirements 

described in Rule 36.3(a) and (b). 

VII. Related Matters 

A. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 21 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 final 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 22 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 action. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any 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 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 and 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 

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23690 Federal Register / Vol. 75, No. 85 / Tuesday, May 4, 2010 / Notices 

1 74 FR 52208 (October 9, 2009). 

2 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

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

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

effective on April 22, 2009. 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issuance of 

a SPDC Order increases transparency 

and helps to ensure fair competition 

among ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Amendments to section 4(i) of the CEA 

authorize the Commission to require 

large trader reports for SPDCs listed on 

ECMs. These increased ECM 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

The Commission has concluded that 

the Chicago Climate Exchange’s Carbon 

Financial Instrument contract that is the 

subject of the attached Order is not a 

SPDC; accordingly, the Commission’s 

Order impose no additional costs and 

no additional statutorily or regulatory 

mandated responsibilities on the ECM. 

VIII. Order 

Order Relating to the CCX CFI Contract 

After considering the complete record 

in this matter, including the comment 

letters received in response to its 

request for comments, the Commission 

has determined to issue the following: 

The Commission, pursuant to its 

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

Act, hereby determines that the Chicago 

Climate Exchange’s Carbon Financial 

Instrument contract that was submitted 

to the Commission by the Chicago 

Climate Exchange for review on July 1, 

2009 and October 15, 2009 does not, at 

this time, satisfy the statutory or 

regulatory requirements of a significant 

price discovery contract. Consistent 

with this determination, the Chicago 

Climate Exchange is not required at this 

time to comply with section 2(h)(7)(C) 

in connection with the Carbon Financial 

Instrument contract or the Part 36 

regulations applicable to exempt 

commercial markets with significant 

price discovery contracts, and is not 

required to assume the statutory or 

regulatory responsibilities required of 

registered entities with respect to the 

Carbon Financial Instrument contract. 

This order is based upon the 

representations made to the 

Commission by the Chicago Climate 

Exchange in filings dated July 1, 2009 

and October 15, 2009, and other 

supporting material. Any material 

change or omissions in the facts and 

circumstances pursuant to which this 

order is granted might require the 

Commission to reconsider its current 

determination that the Carbon Financial 

Instrument contract is not a significant 

price discovery contract. 

The Commission may, based upon 

information regarding the Carbon 

Financial Instrument contract reviewed 

under this Order that is submitted in 

required reports and filings, issue 

another notice of intent to undertake a 

significant price discovery contract 

determination for these contracts. 

Further, issuance of this Order does not 

affect the Chicago Climate Exchange’s 

continuing obligation to comply with all 

statutory and regulatory requirements 

applicable to 2(h)(3) markets, including 

all reporting requirements found in 

Commission Regulation 36.3. 

Issued in Washington, DC on April 28, 

2010 by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–10311 Filed 5–3–10; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the NGPL TxOk 

Financial Basis Contract Traded on the 

IntercontinentalExchange, Inc., Does 

Not Perform a Significant Price 

Discovery Function 

AGENCY: Commodity Futures Trading 

Commission 

ACTION: Final Order. 

SUMMARY: On October 9, 2009, the 

Commodity Futures Trading 

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

published for comment in the Federal 

Register 1 a notice of its intent to 

undertake a determination whether the 

NGPL TxOk Financial Basis (‘‘NTO’’) 

contract traded on the 

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

an exempt commercial market (‘‘ECM’’) 

under sections 2(h)(3)–(5) of the 

Commodity Exchange Act (‘‘CEA’’ or the 

‘‘Act’’), performs a significant price 

discovery function pursuant to section 

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

undertook this review based upon an 

initial evaluation of information and 

data provided by ICE as well as other 

available information. The Commission 

has reviewed the entire record in this 

matter, including all comments 

received, and has determined to issue 

an order finding that the NTO contract 

does not perform a significant price 

discovery function. Authority for this 

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

CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective date: April 28, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

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

Senior Special Counsel, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5133. E-mail: 

snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 2

significantly broadened the CFTC’s 

regulatory authority with respect to 

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

the CEA, a new regulatory category— 

ECMs on which significant price 

discovery contracts (‘‘SPDCs’’) are 

traded—and treating ECMs in that 

category as registered entities under the 

CEA.3 The legislation authorizes the 

CFTC to designate an agreement, 

contract or transaction as a SPDC if the 

Commission determines, under criteria 

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

performs a significant price discovery 

function. When the Commission makes 

such a determination, the ECM on 

which the SPDC is traded must assume, 

with respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the Act and 

Commission regulations, and must 

comply with nine core principles 

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

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.4 As relevant here, rule 36.3 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

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