November 4, 2009 

Mr. David Stawick 

Secretary 

c.F.T.C. T 

OFFICE OF T11E SECRETARIA 

2669 NOU . 5 Rrl 8 SS 

Commodity Futures Trading Commission 

1155 - 21st Street, NW 

Washington, DC 20581 

Cheryl Graden 

Chief Legal Counsel 

Natural Gas Exchange Inc. 

Suite 2330, 140 4111 Avenue S.W. 

Calgary, Alberta T2P 3N3 

T (416) 947-4359 

F (403) 234-4313 

cheryl.graden @tsx.com 

BY EMAIL 

COMMENT 

Re: Notice of Intent to determine whether certain contracts offered for trading on 

Natural Gas Exchange Inc. (''NGX") perform a significant price discovery function 

Dear Secretary Stawick: 

NGX is pleased to have the opportunity to comment on the Commodity Futures Trading 

Commission's (the "Commission") notice of intent (the "Notice") to determine whether the 

following contracts (the "Proposed Contracts") perform a significant price discovery function: 

• AB-NIT Physical Basis LD1 

• AB-NIT Physical Fixed Price 

• Union Dawn Physical Basis LD 1 

• Union Dawn Physical Fixed Price 

• AB-NIT Index 7a 

For the reasons described herein, it is NGX' s view that these contracts lack sufficient liquidity to 

perform a significant price discovery function. 

Background 

Material liquidity is a significant component in the analysis of whether contracts serve a 

significant price discovery function. While Aypendix A to Part 36 (Guidance on Significant 

Price Discovery Contracts ("the "Guidance")) of the rules and regulations regarding significant 

I !& C.F.R. 36 (2009). 
price discovery contracts ("SPDCs") specifies that "not all listed factors must be present to 

support a determination that a contract performs a significant price discovery function", it is 

stated that with respect to price linkage and arbitrage, "a significant amount of liquidity 

presumably would be necessary for a contract to perform a significant price discovery function in 

conjunction with these factors". With respect to "material price reference", in most cases the 

consideration of liquidity is implicitly understood to be a relevant, if not fundamental factor, 

where material price reference is being considered.2 

The centrality of material liquidity to any SPDC determination is also supported by the 

Commission's 2007 Report on the Oversight of Trading on Regulated Futures Exchanges and 

Exempt Commercial markets where it is stated that "the Commission believes that the CEA' s 

current level of regulation is appropriate for ECM contracts relying on the 2(h)(3) exemption 

when trading volume remains low and prices are not significantly relied upon by other markets".3 

It is worth noting that Congress revealed its intent that liquidity be an essential element of any 

SPDC determination in their grant of authority to the CFTC over two categories of ECM 

contracts; (i) contracts with enough volume to impact trading on a designated contract market; or 

(ii) contracts with enough volume to be quoted as an independent price reference by the public.4 

In each case sufficient volume was referenced as a necessary precondition to any finding that 

additional regulation of ECM contracts is warranted. 

The Proposed Contracts 

The Commission outlines in the Notice three bases upon which the AB-NIT basis and Union 

Dawn basis contracts may be SPDCs ((i) material liquidity; (ii) price linkage; and (iii) material 

price reference) and two bases upon which the AB-NIT fixed price, Union Dawn fixed price and 

AB-NIT index 7a may be SPDCs ((i) material liquidity; and (ii) material price reference). NGX 

submits that in the case of each of the Proposed Contracts a SPDC determination cannot be 

supported on price linkage and/or material price reference alone, without the contracts otherwise 

being "materially liquid". 

None of the Proposed Contracts qualify as sufficiently material to meet the threshold intended by 

Congress and supported by the SPDC rules. In particular, with respect to the Union Dawn and 

AB-NIT basis contracts, there were approximately 8 trades per day and approximately 23 trades 

per day, respectively, on average over a calendar quarter. Regarding the AB-NIT index contract, 

there were only approximately 10 trades per day on average over a calendar quarter. Liquidity in 

these and the other Proposed Contracts is immaterial with average trades per hour as low and 1 

and no higher than 15 trades per (trading) hour. Comparing these statistics in the context of the 

Henry Hub LD1 swap, NGX's highest volume (and trades per day) contracts comprise less than 

1 percent of the liquidity level of the Henry Hub LDl market. 

2 In the Guidance it is stated that "Under a Material Price Reference analysis, the Commission expects that material 

liquidity in the contract likely will be the primary motivation for a publisher to publish particular prices". 

3 Conunodity Futures Trading Commission, Report on the Oversight of Trading on Regulated Futures Exchanges 

and Exempt Commercial Markets (October 2007). 4 The Joint Explanatory Statement of the Conunittee of Agriculture conference, H.R. Rep. No. 1110 627, 110 Con g., 

2nd Sess. at 978-86 (2008). 

2 
The Commission seems to have applied a threshold for "material liquidity" that is extremely low, 

and in general insufficient to support a determination that these contracts are no longer emerging 

markets but in fact serve a significant price discovery function. Material liquidity, a difficult 

concept to defme based on the unique differences and subtle but important distinctions of some 

markets, was nonetheless intended to be a "broad concept that captures the ability to transact 

immediately with little or no price concession".5 In the Guidance it is also stated that to prove 

material liquidity, the contract must trade with sufficient volume "to have a material effect on 

other agreement, contracts, or transactions listed for trading" on another designated contract 

market or ECM. And where "material liquidity exists, a more less continuous stream of prices 

can be observed and the prices should be similar", such as ''where trades occur multiple times 

per minute". The levels of liquidity outlined above for the Proposed Contracts carmot be what 

Congress intended in establishing the dividing line between contracts ripe for full regulation and 

those still emerging and in need of further incubation. 

We believe the Commission may have extrapolated from the ECM "early reporting" regime 

(where there is a five trade per day threshold for ECM reporting purposes) and inappropriately 

adopted an arbitrary threshold of five trades per day as the standard for material liquidity under 

the new SPDC regime. Without more extensive analysis and testing the validity of this threshold 

through a public comment process, NGX submits that this low standard risks undoing the 

important distinction to be preserved under the Commodity Futures Modernization Act between 

mature markets and those that are still emerging. 

Conclusion 

NGX recognizes that a "one size fits all" approach to determining material liquidity under the 

new SPDC regime is not appropriate for the task of determining which ECM contracts genuinely 

perform significant price discovery functions. However, by purporting to adopt a threshold as 

low as 5, 10 or 20 trades per day as sufficiently material to attract a SPDC designation carmot be 

in alignment with the intent of Congress, who recognized the fundamental importance of 

preserving tiered regulation and the important distinction, from a regulatory perspective, between 

mature or significant markets and those that are still emerging. 

y~~ 

Cheryl Graden 

Chief Legal Counsel, NGX 

cc: Peter Krenke!, President, NGX 

5 Appendix A to Part 36, 17 C.F.R. 36 (2009). 

3