38478 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

47 5 U.S.C. 601 et seq. 48 66 FR 42256, 42268 (Aug. 10, 2001). 

49 7 U.S.C. 1a(29). 

50Because 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). 

51 7 U.S.C. 1a(29). 

52Because 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 51261 (October 6, 2009). 

2The acronym ‘‘Mid-C’’ stands for Mid-Columbia. 

3The Federal Register notice also requested 

comment on the Mid-C Financial Peak (‘‘MDC’’) 

contract and Mid-C Financial Off-Peak (‘‘OMC’’) 

contract; these contracts will be addressed in a 

separate Federal Register release. 

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’’) 47 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.48 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 Mid-C Financial 

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 Mid-C 

Financial 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 MidC Financial 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 49

with respect to the Mid-C Financial 

Peak contract and is subject to all the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., 

commence with the issuance of this 

Order.50

b. Order Relating to the Mid-C Financial 

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 Mid-C 

Financial 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 MidC Financial 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 51

with respect to the Mid-C Financial OffPeak contract and is subject to all the 

provisions of the Commodity Exchange 

Act applicable to registered entities. 

Further, the obligations, requirements 

and timetables prescribed in 

Commission rule 36.3(c)(4) governing 

core principle compliance by the 

IntercontinentalExchange, Inc., 

commence with the issuance of this 

Order.52

Issued in Washington, DC, on June 25, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–16212 Filed 7–1–10; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Orders Finding That the Mid-C 

Financial Peak Daily Contract and MidC Financial Off-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 6, 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 

Mid-C2 Financial Peak Daily (‘‘MPD’’) 

contract and Mid-C Financial Off-Peak 

Daily (‘‘MXO’’) contract,3 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 MPD and MXO 

contracts do not perform a significant 

price discovery function. Authority for 

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

the CEA and Commission rule 36.3(c) 

promulgated thereunder. 

DATES: Effective Date: June 25, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Gregory K. Price, Industry Economist, 

Division of Market Oversight, 

Commodity Futures Trading 


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4 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Public Law 

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

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

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

effective on April 22, 2009. 

7Public Law 110–246 at 13203; Joint Explanatory 

Statement of the Committee of Conference, H.R. 

Rep. No. 110–627, 110 Cong., 2d Sess. 978, 986 

(Conference Committee Report). See also 73 FR 

75888, 75894 (Dec. 12, 2008). 

8For an initial SPDC, ECMs have a grace period 

of 90 calendar days from the issuance of a SPDC 

determination order to submit a written 

demonstration of compliance with the applicable 

core principles. For subsequent SPDCs, ECMs have 

a grace period of 30 calendar days to demonstrate 

core principle compliance. 

9As noted above, the Federal Register notice also 

requested comment on the Mid-C Financial Peak 

(‘‘MDC’’) contract and Mid-C Financial Off-Peak 

(‘‘OMC’’) contract. The MDC and OMC contracts 

will be addressed in a separate Federal Register 

release. 

10The 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. 

11FERC is an independent federal regulatory 

agency that, among other things, regulates the 

interstate transmission of natural gas, oil and 

electricity. FIEG describes itself as an association of 

investment and commercial banks who are active 

participants in various sectors of the natural gas 

markets, ‘‘including acting as marketers, lenders, 

underwriters of debt and equity securities, and 

proprietary investors.’’ WGCEF describes itself as ‘‘a 

diverse group of commercial firms in the domestic 

energy industry whose primary business activity is 

the physical delivery of one or more energy 

commodities to customers, including industrial, 

commercial and residential consumers’’ and whose 

membership consists of ‘‘energy producers, 

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

shareholder-owned electric companies, 

international affiliates and industry associates 

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

describes itself as a ‘‘broad-based membership 

organization dedicated to encouraging competition 

in the Western power markets * * * WTPF strives 

to reduce the long-run cost of electricity to 

consumers throughout the region while maintaining 

the current high level of system reliability.’’ 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/2009/09–011.html. 

12FERC expressed the opinion that a 

determination by the Commission that either 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.’’ 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

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

Senior Special Counsel, Division of 

Market Oversight, same address. 

Telephone: (202) 418–5133. E-mail: 

snathan@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The CFTC Reauthorization Act of 

2008 (‘‘Reauthorization Act’’) 4

significantly broadened the CFTC’s 

regulatory authority with respect to 

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

the CEA, a new regulatory category— 

ECMs on which significant price 

discovery contracts (‘‘SPDCs’’) are 

traded—and treating ECMs in that 

category as registered entities under the 

CEA.5 The legislation authorizes the 

CFTC to designate an agreement, 

contract or transaction as a SPDC if the 

Commission determines, under criteria 

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

performs a significant price discovery 

function. When the Commission makes 

such a determination, the ECM on 

which the SPDC is traded must assume, 

with respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the Act and 

Commission regulations, and must 

comply with nine core principles 

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

On March 16, 2009, the CFTC 

promulgated final rules implementing 

the provisions of the Reauthorization 

Act.6 As relevant here, rule 36.3 

imposes increased information reporting 

requirements on ECMs to assist the 

Commission in making prompt 

assessments whether particular ECM 

contracts may be SPDCs. In addition to 

filing quarterly reports of its contracts, 

an ECM must notify the Commission 

promptly concerning any contract 

traded in reliance on the exemption in 

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

five trades per day or more over the 

most recent calendar quarter, and for 

which the exchange sells its price 

information regarding the contract to 

market participants or industry 

publications, or whose daily closing or 

settlement prices on 95 percent or more 

of the days in the most recent quarter 

were within 2.5 percent of the 

contemporaneously determined closing, 

settlement or other daily 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.7 The issuance of such an order 

also triggers the obligations, 

requirements and timetables prescribed 

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

II. Notice of Intent To Undertake SPDC 

Determination 

On October 6, 2009, the Commission 

published in the Federal Register notice 

of its intent to undertake a 

determination whether the MPD and 

MXO contracts 9 perform a significant 

price discovery function and requested 

comment from interested parties.10

Comments were received from the 

Federal Energy Regulatory Commission 

(‘‘FERC’’), Financial Institutions Energy 

Group (‘‘FIEG’’), Working Group of 

Commercial Energy Firms (‘‘WGCEF’’), 

Edison Electric Institute (‘‘EEI’’), ICE, 

Western Power Trading Forum 

(‘‘WPTF’’) and Public Utility 

Commission of Texas (‘‘PUCT’’).11 The 

comment letters from FERC 12 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 MPD and MXO contracts 

and generally expressed the opinion 

that the contracts are not SPDCs because 

they does not meet the material price 

reference or material liquidity criteria 

for SPDC determination. These 

comments are more extensively 

discussed below, as applicable. 


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13 In its October 6, 2009, Federal Register release, 

the Commission identified material price reference 

and material liquidity as the possible criteria for 

SPDC determination of the MPD and MXO 

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. 14 17 CFR 36, Appendix A. 

15http://www.wpuda.org/publications/ 

connections/hydro/River%20Riders.pdf. 

16The federal dams are Grand Coulee and Chief 

Joseph. The remaining dams are Wells (operated by 

the Douglas PUD), Rocky Reach and Rock Island 

(operated by the Chelan PUD), and Wanapum and 

Priest Rapids (operated by the Grant PUD). The 

term ‘‘PUD’’ stands for publically-owned utility, 

which provides essential services within a specified 

area. 

17http://www.wpuda.org/publications/ 

connections/hydro/River%20Riders.pdf. 

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

The Commission is directed by 

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

the following criteria in determining a 

contract’s significant price discovery 

function: 

• Price Linkage—the extent to which 

the agreement, contract or transaction 

uses or otherwise relies on a daily or 

final settlement price, or other major 

price parameter, of a contract or 

contracts listed for trading on or subject 

to the rules of a designated contract 

market (‘‘DCM’’) or derivatives 

transaction execution facility (‘‘DTEF’’), 

or a SPDC traded on an electronic 

trading facility, to value a position, 

transfer or convert a position, cash or 

financially settle a position, or close out 

a position. 

• Arbitrage—the extent to which the 

price for the agreement, contract or 

transaction is sufficiently related to the 

price of a contract or contracts listed for 

trading on or subject to the rules of a 

DCM or DTEF, or a SPDC traded on or 

subject to the rules of an electronic 

trading facility, so as to permit market 

participants to effectively arbitrage 

between the markets by simultaneously 

maintaining positions or executing 

trades in the contracts on a frequent and 

recurring basis. 

• Material price reference—the extent 

to which, on a frequent and recurring 

basis, bids, offers or transactions in a 

commodity are directly based on, or are 

determined by referencing or 

consulting, the prices generated by 

agreements, contracts or transactions 

being traded or executed on the 

electronic trading facility. 

• Material liquidity—the extent to 

which the volume of agreements, 

contracts or transactions in a 

commodity being traded on the 

electronic trading facility is sufficient to 

have a material effect on other 

agreements, contracts or transactions 

listed for trading on or subject to the 

rules of a DCM, DTEF or electronic 

trading facility operating in reliance on 

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

Not all criteria must be present to 

support a determination that a 

particular contract performs a 

significant price discovery function, and 

one or more criteria may be inapplicable 

to a particular contract.13 Moreover, the 

statutory language neither prioritizes the 

criteria nor specifies the degree to 

which a SPDC must conform to the 

various criteria. In Guidance issued in 

connection with the Part 36 rules 

governing ECMs with SPDCs, the 

Commission observed that these criteria 

do not lend themselves to a mechanical 

checklist or formulaic analysis. 

Accordingly, the Commission has 

indicated that in making its 

determinations it will consider the 

circumstances under which the 

presence of a particular criterion, or 

combination of criteria, would be 

sufficient to support a SPDC 

determination.14 For example, for 

contracts that are linked to other 

contracts or that may be arbitraged with 

other contracts, the Commission will 

consider whether the price of the 

potential SPDC moves in such harmony 

with the other contract that the two 

markets essentially become 

interchangeable. This co-movement of 

prices would be an indication that 

activity in the contract had reached a 

level sufficient for the contract to 

perform a significant price discovery 

function. In evaluating a contract’s price 

discovery role as a price reference, the 

Commission 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 MPD 

and MXO contracts are discussed 

separately below: 

a. The Mid-C Financial Peak Daily 

(MPD) Contract and the SPDC Indicia 

The MPD contract is cash settled 

based on the peak, day-ahead price 

index for the specified day, as published 

by ICE in its ‘‘ICE Day Ahead Power 

Price Report,’’ which is available on the 

ECM’s Web site. The daily peak-hour 

electricity price index is a volumeweighted average of qualifying, dayahead, peak-hour power transactions at 

the Mid-Columbia hub that are traded 

on the ICE platform from 6 a.m. to 11 

a.m. CST on the publication date. The 

ICE transactions on which the price 

index is based specify the physical 

delivery of power. The size of the MPD 

contract is 400 megawatt hours 

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

for 38 consecutive days. 

As the Columbia River flows through 

Washington State, it encounters two 

federal and nine privately-owned 

hydroelectric dams generating a total of 

close to 20,000 MW of power in the 

Northwest.15 With another three dams 

in British Columbia, Canada, and many 

more on its various tributaries, the 

Columbia River is the largest powerproducing river in North America. A 

major goal of the participants in the 

Mid-C electricity market is to maximize 

the Columbia River’s potential, along 

with protecting and enhancing the nonpower uses of the river. The reliability 

of the electricity grid in the Northwest 

is coordinated by the Northwest 

PowerPool (‘‘NWPP’’), which is a 

voluntary organization comprised of 

major generating utilities serving the 

Northwestern United States, as well as 

British Columbia and Alberta, Canada. 

One stretch of the Columbia River 

between the Grand Coulee Dam and 

Priests Rapids Dam is governed by the 

Mid-Columbia Hourly Coordination 

Agreement (‘‘MCHCA’’). The MCHCA 

covers seven dams 16 and nearly 13,000 

MW of generation. Specifically, the 

agreement defines how the Chelan, 

Douglas and Grant PUDs coordinate 

operations with the Bonneville Power 

Administration to maximize power 

generation while reducing fluctuations 

in the river’s flow. A number of other 

utilities that buy power from the PUDs 

have also signed onto the agreement. 

This agreement was signed into effect in 

1972 and renewed for 20 years in 

1997.17

In general, electricity is bought and 

sold in an auction setting on an hourly 

basis at various points along the 

electrical grid. The price of electricity at 

a particular point on the grid is called 

the locational marginal price (‘‘LMP’’), 

which includes the costs of producing 

the electricity, as well as congestion and 

line losses. Thus, an LMP reflects 

generation costs as well as the actual 

cost of supplying and delivering 

electricity to a specific point on the grid. 

Electricity is traded in a day-ahead 

market as well as a real-time market. 

Typically, the bulk of energy 

transactions occur in the day-ahead 

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 dayVerDate Mar<15>2010 18:27 Jul 01, 2010 Jkt 220001 PO 00000 Frm 00025 Fmt 4703 Sfmt 4703 E:\FR\FM\02JYN1.SGM 02JYN1

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18 17 CFR 36, Appendix A. 

ahead quotes for power are based 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 too much 

power or too little power. A real-time 

auction is operated to alleviate this 

problem by servicing as a balancing 

mechanism. Specifically, electricity 

traders use the real-time market to sell 

excess electricity and buy additional 

power to meet demand. Only a 

relatively small amount of electricity is 

traded in the real-time market compared 

with the day-ahead market. 

1. Material Price Reference Criterion 

The Commission’s October 6, 2009, 

Federal Register notice identified 

material price reference and material 

liquidity as the potential basis for a 

SPDC determination with respect to the 

MPD contract. The Commission 

considered the fact that ICE sells its 

price data to market participants in a 

number of different packages which 

vary in terms of the hubs covered, time 

periods, and whether the data are daily 

only or historical. For example, ICE 

offers the ‘‘West 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 MPD 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 MPD contract, 

while not mentioned by name in the 

ECM Study, might warrant further 

review. 

The Commission explains in its 

Guidance to the Part 36 rules 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.18 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 Mid-C power market is a major 

pricing center for electricity on the West 

Coast. Traders, including producers, 

keep abreast of the electricity prices in 

the Mid-C power market when 

conducting cash deals. However, ICE’s 

Mid-C Financial Peak (‘‘MDC’’) contract, 

which is a monthly contract, is used 

more widely as a source of pricing 

information for electricity than the 

daily, peak-hour contract (i.e., the MPD 

contract). Specifically, the MDC contract 

prices power at the Mid-C trading point 

based on the simple average of the daily 

peak-hour prices over the entire month, 

as reported by ICE. Moreover, the MDC 

contract is listed for up to 86 calendar 

months. Thus, market participants can 

use the MDC contract to lock-in 

electricity prices far into the future. In 

contrast, the MPD contract is listed for 

a much shorter length of time—up to 38 

days in the future. With such a limited 

timeframe, the forward pricing 

capability of the MPD contract is much 

more constrained than that of the MDC 

contract. Traders use monthly power 

contracts like the MDC contract to price 

electricity commitments in the future, 

where such commitments are based on 

long range forecasts of power supply 

and demand. As actual generation and 

usage nears, market participants have a 

better understanding of actual power 

supply and needs. As a result, traders 

can modify previously-established 

hedges with the daily power contracts, 

like the MPD contract. 

The Commission explained in its 

Guidance that a contract meeting the 

material price reference criterion would 

routinely be consulted by industry 

participants in pricing cash market 

transactions. Although the Mid-C is a 

major trading center for electricity and, 

as noted, ICE sells price information for 

the MPD contract, the MPD contract is 

not consulted in this manner and does 

not satisfy the material price reference 

criterion. Thus, the MPD contract does 

not satisfy the direct price reference test 

for existence of material price reference. 

Furthermore, the Commission notes that 

publication of the MPD contract’s prices 

is not indirect evidence of material price 

reference. The MPD contract’s prices are 

published with those of numerous other 

contracts, including ICE’s monthly 

electricity contracts, which are of more 

interest to market participants. In these 

circumstances, the Commission has 

concluded that traders likely do not 

specifically purchase ICE data packages 

for the MPD contract’s prices and do not 

consult such prices on a frequent and 

recurring basis in pricing cash market 

transactions. 

i. Federal Register Comments: 

WGCEF, WPTF, EEI and ICE stated 

that no other contract directly references 

or settles to the MPD contract’s price. 

Moreover, the commenters argued that 

the underlying cash price series against 

which the MPD contract is settled (in 

this case, the peak Mid-C electricity 

price on a particular day, which is 

derived from cash market transactions) 

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 on a 

frequent and recurring basis’’ the 

derivatives contract when pricing 

forward, fixed-price commitments or 

other cash-settled derivatives that seek 

to ‘‘lock in’’ a fixed price for some future 

point in time to hedge against adverse 

price movements. As noted above, while 

the Mid-C is a major power market, 

traders do not consider the daily peakhour Mid-C price to be as important as 

the electricity price associated with the 

monthly contract. 

In addition, WGCEF stated that the 

publication of price data for the MPD 

contract price is weak justification for 

material price reference. This 

commenter argued that market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

such as those for the MPD contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the MPD prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 


emcdonald on DSK2BSOYB1PROD with NOTICES
38482 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

19 74 FR 51261 (October 6, 2009). 

20Staff 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. 

21 In establishing guidance to illustrate how it 

will evaluate the various criteria, or combinations 

of criteria, when determining whether a contract is 

a SPDC, the Commission made clear that ‘‘material 

liquidity itself would not be sufficient to make a 

determination that a contract is a [SPDC],* * * but 

combined with other factors it can serve as a 

guidepost indicating which contracts are 

functioning as [SPDCs].’’ [17 CFR 36, Appendix A]. 

For the reasons discussed above, the Commission 

has found that the MPD contract does not meet the 

material price reference criterion. In light of this 

finding and the Commission’s Guidance cited 

above, there is no need to evaluate further the 

material liquidity criteria since the Commission 

believes it is not useful as the sole basis for a SPDC 

determination. 

22 Guidance, supra. 

23 73 FR 75892 (December 12, 2008). 

data sets because they find the MPD 

prices have substantial value to them. 

As noted above, the Commission notes 

that publication of the MPD contract’s 

prices is not indirect evidence of routine 

dissemination. The MPD contract’s 

prices are published with those of 

numerous other contracts, which are of 

more interest to market participants. 

Due to the lack of importance of daily 

power contracts relative to monthly 

contracts, the Commission has 

concluded that traders likely do not 

specifically purchase the ICE data 

packages for the MPD contract’s prices 

and do not consult such prices on a 

frequent and recurring basis in pricing 

cash market transactions. 

Lastly, EEI criticized that the ECM 

Study did not specifically identify the 

MPD 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 

Based on the above, the Commission 

finds that the ICE MPD contract does 

not meet the material price reference 

criterion because cash market 

transactions are not priced either 

explicitly or implicitly on a frequent 

and recurring basis at a differential to 

the MPD contract’s price (direct 

evidence). Moreover, while the MPD 

contract’s price data is sold to market 

participants, those individuals likely do 

not purchase the ICE data packages 

specifically for the MPD contract’s 

prices and do not 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 6, 

2009, Federal Register notice, the 

Commission identified material price 

reference and material liquidity as 

potential criteria for SPDC 

determination of the MPD contract. 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 total number of transactions 

executed on ICE’s electronic platform in 

the MPD contract was 1,294 in the 

second quarter of 2009, resulting in a 

daily average of 20.2 trades. During the 

same period, the MPD contract had a 

total trading volume of 18,862 contracts 

and an average daily trading volume of 

294.7 contracts. Moreover, open interest 

as of June 30, 2009, was 826 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.19

In a subsequent filing dated March 24, 

2010, ICE reported that total trading 

volume in the fourth quarter of 2009 

was 19,574 contracts (or 301 contracts 

on a daily basis). In terms of number of 

transactions, 1,108 trades occurred in 

the fourth quarter of 2009 (17 trades per 

day). As of December 31, 2009, open 

interest in the MPD contract was 550 

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 

remained relatively low between the 

second and fourth quarters of 2009 and 

averaged only slightly more than the 

reporting level of five trades per day. 

Moreover, trading activity in the MPD 

contract, as characterized by total 

quarterly volume, indicates that the 

MPD contract experiences trading 

activity that is similar to that of minor 

futures markets.20 Thus, the MPD 

contract does not meet a threshold of 

trading activity that would render it of 

potential importance and no additional 

statistical analysis is warranted.21

i. Federal Register Comments 

ICE and WGCEF stated that the MPD 

contract lacks a sufficient number of 

trades to meet the material liquidity 

criterion. These two commenters, along 

with WPTF, FEIG and EEI argued that 

the MPD contract cannot have a material 

effect on other contracts, such as those 

listed for trading by the New York 

Mercantile Exchange (‘‘NYMEX’’), a 

DCM. The commenters pointed out that 

it is not possible for the MPD contract 

to affect a DCM contract because price 

linkage and the potential for arbitrage 

do not exist. The DCM contracts do not 

cash settle to the MPD contract’s price. 

Instead, the DCM contracts and the MPD 

contract are both cash settled based on 

physical transactions, which neither the 

ECM or the DCM contracts can 

influence. 

WGCEF and 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 MPD 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.’’ 22

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’’ 23 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 


emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38483 

24 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 6, 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 28 percent (fourth quarter of 2009) of all 

transactions in the MPD contract. Commission 

acknowledges that the open interest information it 

provided in its October 6, 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 ‘‘onexchange’’ 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. 

25See 73 FR 75888, 75893 (Dec. 12, 2008). 

26http://www.wpuda.org/publications/ 

connections/hydro/River%20Riders.pdf. 

27The federal dams are Grand Coulee and Chief 

Joseph. The remaining dams are Wells (operated by 

the Douglas PUD), Rocky Reach and Rock Island 

(operated by the Chelan PUD), and Wanapum and 

Priest Rapids (operated the Grant PUD). 28http://www.wpuda.org/publications/ 

connections/hydro/River%20Riders.pdf. 

SPDC merely because it met the 

reporting threshold. 

ICE proposed 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.’’ 24 It is the Commission’s 

opinion that liquidity, as it pertains to 

the MPD contract, is typically a function 

of trading activity in particular lead 

days and, given sufficient liquidity in 

such days, the ICE MPD contract itself 

would be considered liquid. In any 

event, in light of the fact that the 

Commission has found that the MPD 

contract does not meet the material 

price reference criterion, according to 

the Commission’s Guidance, it would be 

unnecessary to evaluate whether the 

MPD contract meets the material 

liquidity criterion since it cannot be 

used alone for SPDC determination. 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the MPD contract 

does not meet the material liquidity 

criterion. 

3. Overall Conclusion Regarding the 

MPD Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the ICE MPD contract 

does not perform a significant price 

discovery function under the criteria 

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

CEA. Specifically, the Commission has 

determined that the MPD contract does 

not meet the material price reference or 

material liquidity criteria at this time. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

MPD contract is not a SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard ICE as a registered entity in 

connection with its MPD contract.25

Accordingly, with respect to its MPD 

contract, ICE is not required to comply 

with the obligations, requirements and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs with SPDCs. 

However, ICE must continue to comply 

with the applicable reporting 

requirements for ECMs. 

b. The Mid-C Financial Off-Peak Daily 

(MXO) Contract and the SPDC Indicia 

The MXO contract is cash settled 

based on the off-peak, day-ahead price 

index for the specified day, as published 

by ICE in its ‘‘ICE Day Ahead Power 

Price Report,’’ which is available on the 

ECM’s website. The daily, off-peak hour 

electricity price index is a volumeweighted average of qualifying, dayahead, off-peak hour power transactions 

at the Mid-Columbia hub that are traded 

on the ICE platform from 6 a.m. to 

11a.m. CST on the publication date. The 

ICE transactions on which the price 

index is based specify the physical 

delivery of power. The size of the MXO 

contract is 25 MWh, and the MXO 

contract is listed for 70 consecutive 

days. 

As the Columbia River flows through 

Washington State, it encounters two 

federal and nine privately-owned 

hydroelectric dams generating close to 

20,000 MW of power for the 

Northwest.26 With another three dams 

in British Columbia, Canada, and many 

more on its various tributaries, the 

Columbia River is the largest powerproducing river in North America. A 

major goal of the participants in the 

Mid-C electricity market is to maximize 

the Columbia River’s potential, along 

with protecting and enhancing the nonpower uses of the river. The reliability 

of the electricity grid in the Northwest 

is coordinated by the NWPP. 

One stretch of the Columbia River 

between the Grand Coulee Dam and 

Priests Rapids Dam is governed by the 

MCHCA. The MCHCA covers seven 

dams 27 and nearly 13,000 MW of 

generation. Specifically, the agreement 

defines how the Chelan, Douglas and 

Grant PUDs coordinate operations with 

the Bonneville Power Administration to 

maximize power generation while 

reducing fluctuations in the river’s flow. 

A number of other utilities that buy 

power from the PUDs have also signed 

onto the agreement. This agreement was 

signed into effect on 1972 and renewed 

for 20 years in 1997.28

In general, electricity is bought and 

sold in an auction setting on an hourly 

basis at various point along the 

electrical grid. The price of electricity at 

a particular point on the grid is called 

the LMP, which includes the cost of 

producing the electricity, as well as 

congestion and line losses. Thus, and 

LMP reflects generation costs as well as 

the actual cost of supplying and 

delivering electricity to a specific point 

on the grid. 

Electricity is traded in a day-ahead 

market as well as a real-time market. 

Typically, the bulk of the energy 

transactions occur in the day-ahead 

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 dayahead price quotes are based on 

estimates of supply and demand, 

electricity needs usually are not 

perfectly satisfied in the day-ahead 

market. On the day electricity is 

generated and used, auction participants 

usually realize that they bought or sold 

either too much or too little power. A 

real-time auction is operated in the MidC market to alleviate this problem. In 

this regard, electricity traders use the 

real-time market to sell excess 

electricity and buy additional power to 

meet demand. Only a relatively small 

amount of electricity is traded in the 

real-time market compared with the 

day-ahead market. 

1. Material Price Reference Criterion 

The Commission’s October 6, 2009, 

Federal Register notice identified 

material price reference and material 

liquidity as the potential basis for a 

SPDC determination with respect to the 

MXO contract. The Commission 

considered the fact that ICE sells its 

price data to market participants in a 

number of different packages which 

vary in terms of the hubs covered, time 

periods, and whether the data are daily 


emcdonald on DSK2BSOYB1PROD with NOTICES
38484 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

29 17 CFR 36, Appendix A. 

only or historical. For example, ICE 

offers the ‘‘West 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 MXO 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 MXO contract, 

while not mentioned by name in the 

ECM Study, might warrant further 

analysis. 

The Commission has explained in 

Guidance that it will rely on one of two 

sources of evidence—direct or 

indirect—to determine that the price of 

a contract is being used as a material 

price reference and therefore, serving a 

significant price discovery function.29

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 Mid-C power market is a major 

pricing center for electricity on the West 

Coast. Traders, including producers, 

keep abreast of the electricity prices in 

the Mid-C power market when 

conducting cash deals. However, ICE’s 

Mid-C Financial Off-Peak (‘‘OMC’’) 

contract, which is a monthly contract, is 

used more widely as a source of pricing 

information for electricity in that market 

than the daily off-peak hour contract 

(i.e., the MXO contract). In this regard, 

OMC contract prices power at the MidC trading point based on the simple 

average of the daily off-peak hour prices 

over the entire month, as reported by 

ICE. Moreover, the OMC contract is 

listed for up to 86 calendar months. 

Market participants can use the OMC 

contract to lock-in off-peak electricity 

prices far into the future. In contrast, the 

MXO contract is listed for a much 

shorter length of time—up to 70 days in 

the future. With such a limited 

timeframe, the forward pricing 

capability of the MXO contract is 

constrained relative to that of the OMC 

contract. Traders likely use monthly 

power contracts like the OMC contract 

to price electricity commitments in the 

future. Such commitments are based on 

long range forecasts of power supply 

and demand. As the time of generation 

and consumption nears, market 

participants have a better understanding 

of actual power supply and needs. As a 

result, traders can modify previouslyestablished hedges with the daily power 

contracts, like the MXO contract. 

The Commission explained in its 

Guidance that a contract meeting the 

material price reference criterion would 

routinely be consulted by industry 

participants in pricing cash market 

transactions. Although the Mid-C is a 

major trading center for electricity and, 

as noted, ICE sells price information for 

the MXO contract, the Commission 

found upon further evaluation that the 

MXO contract is not routinely consulted 

by industry participants in pricing cash 

market transactions. Furthermore, the 

Commission notes that publication of 

the MXO contract’s prices is not indirect 

evidence of material price reference. 

The MXO contract’s prices are 

published with those of numerous other 

contracts, including ICE’s OMC 

contract, which are of more interest to 

market participants. Thus, the 

Commission has concluded that traders 

likely do not specifically purchase ICE 

data packages for the MXO contract’s 

prices and do not consult such prices on 

a frequent and recurring basis in pricing 

cash market transactions. 

i. Federal Register Comments 

WGCEF, WPTF, EEI and ICE stated 

that no other contract directly references 

or settles to the MXO contract’s price. 

Moreover, the commenters argued that 

the underlying cash price series against 

which the MXO contract is settled (in 

this case, the off-peak Mid-C electricity 

price on a particular day, which is 

derived from cash market transactions) 

is the authentic reference price and not 

the ICE contract itself. Commission staff 

believes that this interpretation of price 

reference is too limiting 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. As noted above, while 

the Mid-C is a major power market, 

traders do not consider the daily offpeak hour Mid-C price to be as 

important as the electricity price 

associated with the average monthly offpeak price. 

In addition, WGCEF stated that the 

publication of price data for the MXO 

contract price reference is weak 

justification for material price reference. 

This commenter argued that market 

participants generally do not purchase 

ICE data sets for one contract’s prices, 

such as those for the MXO contract. 

Instead, traders are interested in the 

settlement prices, so the fact that ICE 

sells the MXO prices as part of a broad 

package is not conclusive evidence that 

market participants are buying the ICE 

data sets because they find the MXO 

prices have substantial value to them. 

As mentioned above, the Commission 

notes that publication of the MXO 

contract’s prices is not indirect evidence 

of routine dissemination. The MXO 

contract’s prices are published with 

those of numerous other contracts, 

which are of more interest to market 

participants. Due to the lack of 

importance of daily power contracts 

relative to monthly power contracts, the 

Commission has concluded that traders 

likely do not specifically purchase the 

ICE data packages for the MXO 

contract’s prices and do not consult 

such prices on a frequent and recurring 

basis in pricing cash market 

transactions. 

Lastly, EEI observed that the ECM 

Study did not specifically identify the 

MXO 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. 


emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38485 

30 74 FR 51261 (October 6, 2009). 

31Staff 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. 

32 In establishing guidance to illustrate how it 

will evaluate the various criteria, or combinations 

of criteria, when determining whether a contract is 

a SPDC, the Commission observed that ‘‘material 

liquidity itself would not be sufficient to make a 

determination that a contract is a [SPDC], * * * but 

combined with other factors it can serve as a 

guidepost indicating which contracts are 

functioning as [SPDCs].’’ For the reasons discussed 

above, the Commission has found that the MXO 

contract does not meet the material price reference 

criterion. In light of this finding and the 

Commission’s Guidance cited above, there is no 

need to evaluate further the material liquidity 

criteria since the Commission believes it is not 

useful as the sole basis for a SPDC determination. 

33 Guidance, supra. 

34 73 FR 75892 (December 12, 2008). 

35 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 6, 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 61 percent of all transactions in the MXO 

contract (fourth quarter of 2009). Commission 

acknowledges that the open interest information it 

provided in its October 6, 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 ‘‘onexchange’’ versus ‘‘off-exchange’’ created positions, 

and all such positions are fungible with one another 

and may be offset in any way agreeable to the 

position holder regardless of how the position was 

initially created. 

ii. Conclusion Regarding Material 

Price Reference: 

Based on the above, the Commission 

finds that the ICE MXO contract does 

not meet the material price reference 

criterion because cash market 

transactions are not priced either 

explicitly or implicitly on a frequent 

and recurring basis at a differential to 

the MXO contract’s price (direct 

evidence). Moreover, while the MXO 

contract’s price data is sold to market 

participants, those individuals likely do 

not specifically purchase the ICE data 

packages for the MXO contract’s prices 

and do not 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 6, 

2009, Federal Register notice, the 

Commission identified material price 

reference and material liquidity as 

potential criteria for SPDC 

determination of the MXO contract. 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 total number of transactions 

executed on ICE’s electronic platform in 

the MXO contract was 437 in the second 

quarter of 2009, resulting in a daily 

average of 6.8 trades. During the same 

period, the MXO contract had a total 

trading volume of 61,688 contracts and 

an average daily trading volume of 963.9 

contracts. Moreover, open interest as of 

June 30, 2009, was 826 contracts, which 

included trades executed on ICE’s 

electronic trading platform, as well as 

trades executed off of ICE’s electronic 

trading platform and then brought to 

ICE for clearing. In this regard, ICE does 

not differentiate between open interest 

created by a transaction executed on its 

trading platform and that created by a 

transaction executed off its trading 

platform.30

In a subsequent filing dated March 24, 

2010, ICE reported that total trading 

volume in the fourth quarter of 2009 

was 19,216 contracts (or 296 contracts 

on a daily basis). In terms of number of 

transactions, 123 trades occurred in the 

fourth quarter of 2009 (1.9 trades per 

day). As of December 31, 2009, open 

interest in the MXO contract was 2,528 

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 fell 

below minimum reporting level of five 

trades per day in the fourth quarters of 

2009. Moreover, trading activity in the 

MXO contract, as characterized by total 

quarterly volume, indicates that the 

MXO contract experiences trading 

activity that is similar to that of minor 

futures markets.31 Thus, the MXO 

contract does not meet a threshold of 

trading activity that would render it of 

potential importance and no additional 

statistical analysis is warranted.32

i. Federal Register Comments 

ICE and WGCEF stated that the MXO 

contract lacks a sufficient number of 

trades to meet the material liquidity 

criterion. These two commenters, along 

with WPTF, FEIG and EEI argued that 

the MXO contract cannot have a 

material effect on other contracts, such 

as those listed for trading by NYMEX. 

The commenters pointed out that it is 

not possible for the MXO contract to 

affect a DCM contract because price 

linkage and the potential for arbitrage 

do not exist. The DCM contracts do not 

cash settle to the MXO contract’s price. 

Moreover, the DCM contracts and the 

MXO contract are both cash settled 

based on physical transactions, which 

the contracts cannot influence. 

WGCEF and 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 MXO 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.’’ 33

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’’34 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 proposed 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.35 It is the Commission’s 

opinion that liquidity, as it pertains to 

the MXO contract, is typically a 

function of trading activity in particular 

lead days and, given sufficient liquidity 


emcdonald on DSK2BSOYB1PROD with NOTICES
38486 Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 

36See 73 FR 75888, 75893 (Dec. 12, 2008). 

37 44 U.S.C. 3507(d). 38 7 U.S.C. 19(a). 

39 5 U.S.C. 601 et seq. 

40 66 FR 42256, 42268 (Aug. 10, 2001). 

41 7 U.S.C. 1a(29). 

in such days, the ICE MXO contract 

itself would be considered liquid. In any 

event, in light of the fact that the 

Commission has found that the MXO 

contract does not meet the material 

price reference criterion, according to 

the Commission’s Guidance, it would be 

unnecessary to evaluate whether the 

MXO contract meets the material 

liquidity criterion since it cannot be 

used alone for SPDC determination. 

ii. Conclusion Regarding Material 

Liquidity 

For the reasons discussed above, the 

Commission finds that the MXO 

contract does not meet the material 

liquidity criterion. 

3. Overall Conclusion Regarding the 

MXO Contract 

After considering the entire record in 

this matter, including the comments 

received, the Commission has 

determined that the ICE MXO contract 

does not perform a significant price 

discovery function under the criteria 

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

CEA. Specifically, the Commission has 

determined that the MXO contract does 

not meet the material price reference or 

material liquidity criteria at this time. 

Accordingly, the Commission is issuing 

the attached Order declaring that the 

MXO contract is not a SPDC. 

Issuance of this Order indicates that 

the Commission does not at this time 

regard ICE as a registered entity in 

connection with its MXO contract.36

Accordingly, with respect to its MXO 

contract, ICE is not required to comply 

with the obligations, requirements and 

timetables prescribed in Commission 

rule 36.3(c)(4) for ECMs with SPDCs. 

However, ICE must continue to comply 

with the applicable reporting 

requirements for ECMs. 

V. Related Matters 

a. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 37 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 CEA38 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

an order under the Act. By its terms, 

section 15(a) does not require the 

Commission to quantify the costs and 

benefits of an order or to determine 

whether the benefits of the order 

outweigh its costs; rather, it requires 

that the Commission ‘‘consider’’ the 

costs and benefits of its actions. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. 

When a futures contract begins to 

serve a significant price discovery 

function, that contract, and the ECM on 

which it is traded, warrants increased 

oversight to deter and prevent price 

manipulation or other disruptions to 

market integrity, both on the ECM itself 

and in any related futures contracts 

trading on DCMs. An Order finding that 

a particular contract is a SPDC triggers 

this increased oversight and imposes 

obligations on the ECM calculated to 

accomplish this goal. The increased 

oversight engendered by the issue of a 

SPDC Order increases transparency and 

helps to ensure fair competition among 

ECMs and DCMs trading similar 

products and competing for the same 

business. Moreover, the ECM on which 

the SPDC is traded must assume, with 

respect to that contract, all the 

responsibilities and obligations of a 

registered entity under the CEA and 

Commission regulations. Additionally, 

the ECM must comply with nine core 

principles established by section 2(h)(7) 

of the Act—including the obligation to 

establish position limits and/or 

accountability standards for the SPDC. 

Section 4(i) of the CEA authorizes the 

Commission to require reports for 

SPDCs listed on ECMs. These increased 

responsibilities, along with the CFTC’s 

increased regulatory authority, subject 

the ECM’s risk management practices to 

the Commission’s supervision and 

oversight and generally enhance the 

financial integrity of the markets. 

The Commission has concluded that 

the MPD and MXO contracts, which are 

the subject of the attached Orders, are 

not SPDCs; accordingly, the 

Commission’s Orders impose no 

additional costs and no additional 

statutorily or regulatory mandated 

responsibilities on the ECM. 

c. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 39 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.40 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 Mid-C Financial 

Peak Daily 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 Mid-C 

Financial Peak Daily contract, traded on 

the IntercontinentalExchange, Inc., does 

not at this time satisfy the material price 

preference or material liquidity criteria 

for significant price discovery contracts. 

Consistent with this determination, the 

IntercontinentalExchange, Inc., is not 

considered a registered entity 41 with 

respect to the Mid-C Financial Peak 

Daily 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 Mid-C Financial Peak 

Daily contract with the issuance of this 

Order. 

This Order is based on the 

representations made to the 


emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 127 / Friday, July 2, 2010 / Notices 38487 

42 7 U.S.C. 1a(29). 1 74 FR 53728 (October 20, 2009). 

2 Incorporated as Title XIII of the Food, 

Conservation and Energy Act of 2008, Pub. L. No. 

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. 

Commission by the 

IntercontinentalExchange, Inc., dated 

July 27, 2009, and March 24, 2010, 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 Mid-C Financial 

Peak Daily contract is not a significant 

price discovery contract. Additionally, 

to the extent that it continues to rely 

upon the exemption in Section 2(h)(3) 

of the Act, the 

IntercontinentalExchange, Inc., must 

continue to comply with all of the 

applicable requirements of Section 

2(h)(3) and Commission Regulation 

36.3. 

b. Order Relating to the Mid-C Financial 

Off-Peak Daily 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 Mid-C 

Financial Off-Peak Daily contract, 

traded on the IntercontinentalExchange, 

Inc., does not at this time satisfy the 

material price reference or material 

liquidity criteria for significant price 

discovery contracts. Consistent with this 

determination, the 

IntercontinentalExchange, Inc., is not 

considered a registered entity 42 with 

respect to the Mid-C Financial Off-Peak 

Daily 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 Mid-C Financial OffPeak Daily contract with the issuance of 

this Order. 

This Order is based on the 

representations made to the 

Commission by the 

IntercontinentalExchange, Inc., July 27, 

2009, and March 24, 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 Mid-C Financial 

Off-Peak Daily 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 June 25, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–16206 Filed 7–1–10; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Finding That the Fuel Oil-180 

Singapore Swap 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 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 

Fuel Oil-180 Singapore Swap (‘‘SZS’’) 

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 SZS 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: June 25, 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 an 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 

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 


emcdonald on DSK2BSOYB1PROD with NOTICES