Federal Register / Vol. 74, No. 201 / Tuesday, October 20, 2009 / Notices 53723 

1 74 FR 12178 (Mar. 23, 2009); these rules became 

effective on April 22, 2009. 

2The Commission may commence this process on 

its own initiative or on the basis of information 

provided to it by an ECM pursuant to the 

notification provisions of Commission rule 

36.3(c)(2). 

3Where appropriate, the Commission may choose 

to interview market participants regarding their 

impressions of a particular contract. Further, while 

they may not provide direct evidentiary support 

with respect to a particular contract, the 

Commission may rely for background and context 

on resources such as its October 2007 Report on the 

Oversight of Trading on Regulated Futures 

Exchanges and Exempt Commercial Markets (‘‘ECM 

Study’’). http://www.cftc.gov/stellent/groups/ 

public/@newsroom/documents/file/pr5403– 

07_ecmreport.pdf. 

4 7 U.S.C. 2(h)(7)(C). 

COMMODITY FUTURES TRADING 

COMMISSION 

Notice of Intent, Pursuant to the 

Authority in Section 2(h)(7) of the 

Commodity Exchange Act and 

Commission Rule 36.3(c)(3), To 

Undertake a Determination Whether 

the Socal Border Financial Basis 

Contract, Offered for Trading on the 

IntercontinentalExchange, Inc., 

Performs a Significant Price Discovery 

Function 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of action and request for 

comment. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is undertaking a review 

to determine whether the Socal Border 

Financial Basis (‘‘SCL’’) contract, 

offered 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’’), performs a significant price 

discovery function. Authority for this 

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

CEA and Commission rule 36.3(c) 

promulgated thereunder. In connection 

with this evaluation, the Commission 

invites comment from interested parties. 

DATES: Comments must be received on 

or before November 4, 2009. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

• Follow the instructions for 

submitting comments. Federal 

eRulemaking Portal: http:// 

www.regulations.gov. 

• E-mail: secretary@cftc.gov. Include 

Socal Border Financial Basis (SCL) 

Contract in the subject line of the 

message. 

• Fax: (202) 418–5521. 

• Mail: Send to David A. Stawick, 

Secretary, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

• Courier: Same as mail above. 

All comments received will be posted 

without change to http:// 

www.CFTC.gov/. 

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 

On March 16, 2009, the CFTC 

promulgated final rules implementing 

provisions of the CFTC Reauthorization 

Act of 2008 (‘‘Reauthorization Act’’) 1

which subjects ECMs with significant 

price discovery contracts (‘‘SPDCs’’) to 

self-regulatory and reporting 

requirements, as well as certain 

Commission oversight authorities, with 

respect to those contracts. Among other 

things, these rules and rule amendments 

revise the information-submission 

requirements applicable to ECMs, 

establish procedures and standards by 

which the Commission will determine 

whether an ECM contract performs a 

significant price discovery function, and 

provide guidance with respect to 

compliance with nine statutory core 

principles applicable to ECMs with 

SPDCs. These rules became effective on 

April 22, 2009. 

In determining whether an ECM’s 

contract is or is not a SPDC, the 

Commission will evaluate the contract’s 

material liquidity, price linkage to other 

contracts, potential for arbitrage with 

other contracts traded on designated 

contract markets or derivatives 

transaction execution facilities, use of 

the ECM contract’s prices to execute or 

settle other transactions, and other 

factors. 

In order to facilitate the Commission’s 

identification of possible SPDCs, 

Commission rule 36.3(c)(2) requires that 

an ECM operating in reliance on section 

2(h)(3) promptly notify the Commission 

and provide supporting information or 

data concerning any contract: (i) That 

averaged five trades per day or more 

over the most recent calendar quarter; 

and (ii) (A) for which the ECM sells 

price information regarding the contract 

to market participants or industry 

publications; or (B) 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 agreement. 

II. Determination of a SPDC 

A. The SPDC Determination Process 

Commission rule 36.3(c)(3) 

establishes the procedures by which the 

Commission makes and announces its 

determination on whether a specific 

ECM contract serves a significant price 

discovery function. Under those 

procedures, the Commission will 

publish a notice in the Federal Register 

that it intends to undertake a 

determination as to whether the 

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.2

After prompt consideration of all 

relevant information,3 the Commission 

will, within a reasonable period of time 

after the close of the comment period, 

issue an order explaining its 

determination. Following the issuance 

of an order by the Commission that the 

ECM executes or trades an agreement, 

contract, or transaction that performs a 

significant price discovery function, the 

ECM must demonstrate, with respect to 

that agreement, contract, or transaction, 

compliance with the core principles 

under section 2(h)(7)(C) of the CEA 4

and the applicable provisions of Part 36. 

If the Commission’s order represents the 

first time it has determined that one of 

the ECM’s contracts performs a 

significant price discovery function, the 

ECM must submit a written 

demonstration of its compliance with 

the core principles within 90 calendar 

days of the date of the Commission’s 

order. For each subsequent 

determination by the Commission that 

the ECM has an additional SPDC, the 

ECM must submit a written 

demonstration of its compliance with 

the core principles within 30 calendar 

days of the Commission’s order. 

B. Socal Border Financial Basis Contract 

The SCL contract is a monthly 

contract that is cash settled based on the 

difference between the price of natural 

gas at the Southern California Border 

hub for the month of delivery in the first 

publication of the month, as published 

in Intelligence Press Inc’s (‘‘IPI’s’’) 

Natural Gas Bidweek Survey, and the 

final settlement price for New York 

Mercantile Exchange’s (‘‘NYMEX’s’’) 


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53724 Federal Register / Vol. 74, No. 201 / Tuesday, October 20, 2009 / Notices 

5 17 CFR Part 36, Appendix A. 

6 44 U.S.C. 3507(d). 

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

1The acronym ‘‘Phys’’ indicates physical delivery 

of natural gas. 

2The acronym ‘‘BS’’ indicates that the contract is 

a cash-settled basis swap. 

Henry Hub physically-delivered natural 

gas futures contract for the same 

specified calendar month. The size of 

the SCL contract is 2,500 million British 

thermal units (‘‘mmBtu’’), and the unit 

of trading is any multiple of 2,500 

mmBtu. The SCL contract is listed for 

up to 120 calendar months commencing 

with the next calendar month. 

Based upon a required quarterly 

notification filed on July 27, 2009 

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

ICE reported that, with respect to its 

SCL contract, the total number of trades 

was 8,102 in the second quarter of 2009, 

resulting in a daily average of 126.6 

trades. During the same period, the SCL 

contract had a total trading volume of 

612,452 contracts and an average daily 

trading volume of 9,569 contracts. 

Moreover, the open interest as of June 

30, 2009, was 417,121 contracts. 

It appears that the SCL contract may 

satisfy the material liquidity, price 

linkage, and material price reference 

factors for SPDC determination. With 

respect to material liquidity, trading in 

the SCL contract averaged more than 

9,000 contracts on a daily basis, with 

more than 100 separate transactions 

each day. In addition, the open interest 

in the subject contract was substantial. 

In regard to price linkage, the final 

settlement of the SCL contract is based, 

in part, on the final settlement price of 

the NYMEX’s physically-delivered 

natural gas contract, where the NYMEX 

is registered with the Commission as a 

designated contract market (‘‘DCM’’). In 

terms of material price reference, the 

ICE maintains exclusive rights over IPI’s 

bidweek price indices. As a result, no 

other exchange can offer such a basis 

contract based on IPI’s Socal bidweek 

index. While other third-party price 

providers produce natural gas price 

indices for a variety of trading centers, 

those indices may not be the same in 

value or quality as IPI’s price indices; 

each company’s bidweek indices are 

based on transactions that are 

consummated during the last five days 

of the month prior to delivery and are 

voluntarily submitted by traders. In 

addition, the ICE sells its price data to 

market participants in a number of 

different packages which vary in terms 

of the hubs covered, time periods, and 

whether the data are daily only or 

historical. For example, the ICE offers 

‘‘West Gas End of Day’’ and ‘‘OTC Gas 

End of Day’’ with access to all price data 

or just 12, 24, 36, or 48 months of 

historical data. 

III. Request for Comment 

In evaluating whether an ECM’s 

agreement, contract, or transaction 

performs a significant price discovery 

function, section 2(h)(7) of the CEA 

directs the Commission to consider, as 

appropriate, four specific criteria: Price 

linkage, arbitrage, material price 

reference, and material liquidity. As it 

explained in Appendix A to the Part 36 

rules,5 the Commission, in making 

SPDC determinations, will apply and 

weigh each factor, as appropriate, to the 

specific contract and circumstances 

under consideration. 

As part of its evaluation, the 

Commission will consider the written 

data, views, and arguments from any 

ECM that lists the potential SPDC and 

from any other interested parties. 

Accordingly, the Commission requests 

comment on whether the ICE’s SCL 

contract performs a significant price 

discovery function. Commenters’ 

attention is directed particularly to 

Appendix A of the Commission’s Part 

36 rules for a detailed discussion of the 

factors relevant to a SPDC 

determination. The Commission notes 

that comments which analyze the 

contract in terms of these factors will be 

especially helpful to the determination 

process. In order to determine the 

relevance of comments received, the 

Commission requests that commenters 

explain in what capacity are they 

knowledgeable about one or several of 

the subject contracts. 

IV. Related Matters 

A. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 6 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 7 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 such an order or to determine 

whether the benefits of such an 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 bulk of the costs imposed by the 

requirements of Commission Rule 36.3 

relate to significant and increased 

information-submission and reporting 

requirements adopted in response to the 

Reauthorization Act’s directive that the 

Commission take an active role in 

determining whether contracts listed by 

ECMs qualify as SPDCs. The enhanced 

requirements for ECMs will permit the 

Commission to acquire the information 

it needs to discharge its newlymandated responsibilities and to ensure 

that ECMs with SPDCs are identified as 

entities with the elevated status of 

registered entity under the CEA and are 

in compliance with the statutory terms 

of the core principles of section 

2(h)(7)(C) of the Act. The primary 

benefit to the public is to enable the 

Commission to discharge its statutory 

obligation to monitor for the presence of 

SPDCs and extend its oversight to the 

trading of SPDCs. 

Issued in Washington, DC, on October 14, 

2009 by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. E9–25192 Filed 10–19–09; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Notice of Intent, Pursuant to the 

Authority in Section 2(h)(7) of the 

Commodity Exchange Act and 

Commission Rule 36.3(c)(3), To 

Undertake a Determination Whether 

the (1) Phys, BS, LD1 (US/MM), AB–NIT 

Contract, et al., Offered for Trading on 

the Natural Gas Exchange, Inc., 

Perform Significant Price Discovery 

Functions 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of action and request for 

comment. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is undertaking a review 

to determine whether the (1) Phys,1 BS,2


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