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BY ELECTRONIC TRANSMISSION 

Mr. David Stawick 

Secretary of the Commission 

Office of the Secretariat 

January 5, 2009 

Commodity Futures Trading Commission 

Three Lafayette Centre 

COMMENT 

1155 21st Street, NW 

Washington, DC 20581 

Re: Proposed Rules for Trading Off the Centralized Market 

Dear Mr. Stawick: 

ICE Futures U.S., Inc. ("ICE Futures" or {'-ExchangelL) submits this letter-inresponse to the Commission's Request for Comments appearing in 73 Fed, Reg. 54097, 

et seq. (September 18, 2008) (the "RFC") concerning the proposed amendments to 

Regulation 1.38 and guidance and acceptable practices for compliance with Core 

Principle 9 under the Commodity Exchange Act, as amended (the II Act") as it relates to 

Regulation 1.38. 

ICE Futures is a designated contract market (

11DCM") under the Act which 

provides a marketplace for trading in agricultural, equity index and currency contracts. 

ICE Futures offers these markets to participants around the world through a technology 

infrastructure and trading platform operated by its parent, IntercontinentalExchange, 

Inc. and an open-outcry trading floor maintained in NewYork. The members and 

participants of ICE Futures represent a diverse range of market users including floor 

brokers, commercial hedgers, futures commission merchants, commodity trading 

advisors and broker-dealers. 

The RFC reflects the Commission's careful consideration of the comments 

received in response to the July 1, 2004 Notice of Proposed Rulemaking (the 11NPR"), 

ICE Futures U.S., Inc .• a designated contliKt market 

under the commodity Exchange Act, a> amended. 

ICE Futures U.S., Inc. 

World Financial Center 

One North End Ave 

New York, NY 10282 

phone 212 748 4000 

Ia> 212 742 6981 

online W\VW.theice.com 
which had addressed Regulation 1.38 and Core Principle 9 under the Act. We commend 

the Commission for incorporating into the RFC many of the comments that were 

submitted in response to the 2004 NPR. As an example, the Commission has revised the 

former "one size fits all" standard for setting the appropriate minimum size of block 

trades, and is proposing that DCMs analyze the product and the marketplace when 

setting and revising the minimum size threshold. However, the Exchange is troubled by 

some of the standards identified in the Acceptable Practices, insofar as they are not 

consistent with long-standing Exchange rules or industry practice, and the rationale 

underlying their inclusion is not explained in the RFC. The particular areas of concern 

are discussed below. 

Pricing of Exchange of Futures for Commodities or for Derivative Positions 

In the RFC the Commission sets out the following guidance and acceptable 

practice regarding the pricing of exchange of futures for commodities or for derivative 

positions ("EFPs"), without any discussion or explanation as to why this should be the 

case: 

"The price differential between the futures leg and the commodities leg or derivatives 

position should reflect commercial realities, and at least one leg of the transaction should 

be priced at the prevailing market price."(emphasis added) 

ICE Futures disagrees with the assertion that the pricing of EFP transactions should 

have such a limitation, and notes that no such requirement exists under its rules today. 

The RFC injects this new requirement without any explanation of why there should be 

restrictions on the flexible EFP pricing enjoyed by traders today. EFP transactions have 

a long history in the futures industry. Traditionally, EFPs were executed when the 

physical commodity being delivered didn't meet the standards for delivery under the 

terms of the futures contract being exchanged. The commercial, who owned the 

physical and a short futures position, would arrange with another commercial entity 

that wanted the physical and had a long futures position, to switch ownership of the 

physical and their respective futures positions. In essence, it was a delivery off the 

exchange. Pricing of the physical would take into consideration various factors, 

including the inability to meet the standards for exchange delivery, which by its very 

nature meant that the price would be different than the prevailing market price. 

EFPs have evolved from their traditional purpose along with the growth and evolution 

of the derivatives markets, and are used to open as well as close out positions. Today in 

the agricultural markets traded at ICE Futures, commercial users may enter into long 

term forward contracts which slowly unwind as monthly deliveries of the physical take 

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place and there is no longer a need to hedge that delivery month. EFPs are the 

mechanism by which these long term forward contracts are unwound. The pricing 

terms of the forward contracts may be agreed to long before the EFPs are transacted and 

reflect the needs of the parties, not necessarily the prevailing market price on a date in 

the future. 

Currently, our rules require that an EFP must consist of two separate, bona fide 

transactions in which the seller of the futures is the buyer of the physical or derivative 

product, and vice versa. To our knowledge, no exchange has a rule limiting the pricing 

of EFPs. EFP surveillance is, and always has been, based upon a review of the 

legitimacy of the two transactions, not an analysis of the price. The Commission is now 

introducing, via the Acceptable Practice, an entirely new element without any 

discussion of the purpose or reason behind it. It is unclear why a currently legitimate 

EFP should no longer qualify as such if it does not meet a new and arbitrarily imposed 

pricing standard. In addition, for those commercials that have long term forward 

contracts currently in place, the pricing requirement may interfere with their ability to 

unwind. To introduce a requirement that is at odds with long-standing industry 

practice, without any discussion of why the prevailing commercial practice should be 

rejected, is unwarranted and could be disruptive to the market. We urge the 

Commission to reconsider this position. 

Pricing and Recordation·of Block Trades Between Affiliated Parties 

All transactions executed between affiliated parties are required by ICE Futures 

to be done at arm's length, irrespective of the specific trade type. For example, Rule 

4.19 concerning cross trades and market surveillance procedures for reviewing EFPs 

specifically require that each affiliated party has separate business operations, separate 

decision makers and separate trading accounts which are not aggregated for position 

limit purposes. Once those standards are met, the transaction itself must meet the 

requirements applicable to the particular trade type under the Rules~ 

The Commission is now proposing to amend Regulation 1.38 by adding a pricing 

restriction on block trades executed between affiliated entities. The stated purpose of 

the pricing restriction is to establish objective criteria that will guard against affiliated 

parties engaging in potential trading abuses and collusive activity. The proposed 

pricing standard requires that the price "must be based on a competitive market price, 

either by falling within the contemporaneous bid/ask spread on the centralized market 

or calculated based on a contemporaneous market price in a related cash market." The 

Exchange does not believe that an objective pricing standard is essential to the 

legitimacy of a block trade transacted between affiliated parties. Rather, we believe that, 

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so long as the affiliated parties meet all of the criteria of the Exchange rules and 

procedures establishing the independence of the parties with respect to the transactionseparate operations, separate business purposes, separate decision makers and separate 

trading accounts - they should not be limited in pricing the transaction, other than to 

use a price that is fair and reasonable. Using the contemporaneous price from the 

centralized market is certainly one way to establish a fair and reasonable price for a 

block trade, but it is not the only way to do so, nor does it ensure that the transaction 

does not otherwise contravene applicable rules or law for reasons not readily apparent 

from the price alone. 

The pricing standard also poses impediments for the parties because block trades 

are not necessarily executed at times when the centralized market has a bid/ask price or 

the cash market is active. This is particularly true for agricultural commodities, in 

contrast to stock indexes and foreign exchange. Consequently, it may be difficult to say 

with any level of objectivity, what the prevailing market price is at a particular time on 

a specific day. In addition, the bid/ask in the electronic environment can change in 

milliseconds making it difficult to determine the appropriate bid/ask that existed at the 

time the block trade was agreed upon between the parties. Moreover, it may not be 

economically feasible for either party to execute at a price that would fall within the 

contemporaneous bid/ask spread or cash market price, but would be feasible to execute 

at a price that is considered fair and reasonable under all the circumstances. Finally, 

the number of contracts bid or offered in connection with the contemporaneous bid/ask 

spread may not be, and in fact is probably not, as high as the number of contracts that 

are part of a block trade. Therefore, the contemporaneous bid/ask spread may only be a 

representative price for a small portion of the entire block trade. 

Trading among affiliated parties has always been subject to a higher level of 

scrutiny because of the relationship between the parties and the opportunities that flow 

from it. The objective pricing criteria adds nothing to market surveillance, except that it 

would automatically render suspect an otherwise legitimate transaction that was not 

priced in accordance with the proposed standard. In light of the heightened scrutiny 

already directed to transactions between affiliated parties in general, the Commission's 

proposal to amend Regulation 1.38 to limit the prices at which affiliated parties can 

execute block trades injects a level of detail that is inconsistent with the agency's 

oversight role and the purpose of having flexible core principles. For that reason, we 

believe block trades between affiliated entities should be subject to the standard of "fair 

and reasonable" pricing as are block trades between non-affiliates. 

In addition, the Acceptable Practice requires that the Trade Register maintained 

by a DCM under Regulation 1.35 specifically identify block trades that are executed 

4 
between affiliated parties. There has never been any such requirement in Regulation 

1.35, and it is inappropriate to back-door such a requirement by making the safe harbor 

of the Acceptable Practice conditioned on compliance with this requirement. The 

Exchange can identify block trades between affiliated firms for surveillance purposes 

without flagging each such trade in its Trade Register. 

ICE Futures appreciates the opportunity to comment on the RFC and would be 

happy to provide any further information that the Commission may require. If you 

have any questions regarding this letter, please contact the undersigned at (212) 748-

4083. 

Very Truly Yours, 

4~? !Cl<:c:Lf&O 

Audrey R. Hirschfeld 

Senior Vice President and General Counsel 

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