1!1'~--·. 

COMMENT·~ 

C.F.T.C. 

OFFICE OF THE SECRETARIAT 

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Mr. David Stawick 

Secretary 

November 4, 2009 

Commodity Futures Trading Commission 

1155 2151 Street, NW 

Washington, DC 20581 

lllllfvld CFTC 

ftiDDI'dl Section 11/~/C>( 

RE: Determination whether the Singapore 180cst Fuel Oil swap serves a Significant 

Price Discovery Function 

Dear Mr. Stawick: 

IntercontinentalExchange, Inc. ("ICE") welcomes the opportunity to comment on 

the Commodity Futures Trading Commission's ("CFTC" or "Commission") notice of 

intent ("notice") to determine whether the Singapore 180cst Fuel Oil Swap ("SZS") 

serves a signi~cant p1ice discovery function. 

ICE believes that the Singapore Fuel Oil swap ("SZS") does not serve a 

significant price discovery function, as described herein, and that the Commission may 

exceed its jurisdiction if it detennines that these contracts serve as a significant price 

discovery contracts ("SPDC"). In addition to the absence of minimum liquidity 

thresholds and the lack of a material p1ice reference precludes this contract from 

perfonning a significant price discovery role. 

Background 

In 2000, the Commodity Futures Modemization Act ("CFMA") created a system 

oftiered regulation to replace a "one size fits all" regulatory scheme. As pat1 of the 

tiered regulatory scheme, Congress created exempt commercial markets ("ECMs"), 

which are principle to principle electronic trading platfonns that serve sophisticated 

market pmiicipants. ECMs were designed to encourage electronic trading of derivatives. 

Given the sophisticated status of the participants, ECMs were subject to light touch 

regulation by the CFTC. The CFTC Reauthorization Act of2008 1 expanded the CFTC's 

authority over ECMs that list contracts that serve a significant price discovery function. 

Congress directed the Commission to consider five criteria when making the significant 

price discovery detennination: (I) Price Linkage; (2) Arbitrage; (3) Material Price 

Reference; (4) Material Liquidity; and (5) Other Factors. It is impm1ant to note that 

Congress gave the CFTC this authority over ECMs to capture two types of contracts: (I) 

contracts that trade with enough volume to impact trading on a designated contract 

Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 

1623 (June 18, 2008). 

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market C'DCM"); or (2) contracts that trade with enough volume to be quoted as an 

independent price reference by the public.2 It is clear that -by giving the CFTC tailored 

authority- Congress intended to keep the CFMA's tiered regulatory structure. Further, as 

stated by the CFTC in it's 2007 Report on the Oversight of Trading on Regulated Futures 

Exchanges and Exempt Commercial Markets: "[t]he 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 against this backdrop that the Commission makes its determination whether 

the SZS Contract serves a significant price discovery function. 

The Singapore 180cst Fuel Oil Swap 

The SZS contract in the CFTC's notice of intent is a cash settled contract based 

on an index of the price of the Singapore high-sulfur fuel oil. The index is created by 

Platts' Asia-Pacific/Arab GulfMarketscan. The price is derived fi:om the arithmetic 

average of the means between the daily high and low price quotations for Singapore 

delivered high sulfur fuel oil. 

As the name implies, the Singapore 180cst Fuel Oil Swap is not a United States 

Contract. 99.47% ofSZS traders are based outside ofthe United States. ICE listed the 

contract in order to bring transparency and efficient execution to a voice brokered market 

in Asia. At the outset, the Commission should consider whether overregulation of this 

product will drive trading back overseas and to non-transparent venues. 

The CFTC 's Analysis 

The CFTC believes that the SZS contract could potentially serve a significant 

price discovery function based upon three factors: (1) material liquidity; (2) material 

price reference; and (3) price linkage. ICE believes the SZS contract does not meet any 

of these tests. 

Material Liquidity 

To prove material liquidity, the Commission needs to detem1ine that the contract 

traded on the ECM must trade with sufficient volume "to have a material effect on other 

agreements, contracts, or transactions listed for trading ... on a designated contract 

2 The Joint Explanatory Statement ofthe Committee of Agriculture Conference, H.R. Rep. No. 1110 627, 

I I 0 Cong., 2nd Sess. at 978-86 (2008). 

3 Commodity Futures Trading Commission, Report of the Oversight ofTrading on Regulated Futures 

Exchanges and Exempt Commercial Markets (October 2007) 

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market" or ECM. The Commission has issued guidelines stating "[l]iquidity is a broad 

concept that captures the ability to transact immediately with little or no price 

concession". Further, "in markets where material liquidity exists, a more or less 

continuous stream of prices can be observed and the prices should be similar," for 

example, "a market where trades occur multiple times per minute".4 Finally, as Congress 

mandated in the Farm Bill, "the Commission should not make a detem1ination that an 

agreement, contract, or transaction perfonns a significant price discovery function on the 

basis of the price linkage factor unless the agreement, contract, or transaction has 

sufficient volume to impact other regulated contracts or to become an independent price 

reference or benchmark that is regularly utilized by the public. "5 

In the notice of intent, the CFTC seems to have adopted a five trade-per-day test 

to determine whether a contract is materially liquid. It is worth noting that ICE 01iginally 

suggested that the CFTC use a five trades-per-day threshold as the basis for an ECM to 

report trade data to the CFTC. This arbitrarily low threshold is appropriate for reporting 

purposes as it captures nearly every ECM contract, but it is at odds with Congress's intent 

that the CFTC include "material liquidity" in its requirements for significant price 

discovery. Ifthe CFTC has decided to abandon its rulemaking on Significant Price 

Discovery Contracts, then it should, at the very least, propose revisions Part 36 in order to 

allow the public to comment on whether the CFTC's new threshold meets Congress' 

intent in promulgating the Significant P1ice Discovery Test of the Fann Bill. 

Moreover, the statistics requested by the CFTC and provided by ICE have been 

misinterpreted and misapplied. First, these trades-per-day statistics requested by the 

CFTC and provided by ICE include transactions that were not even executed on the ICE 

2(h)(3) platfonn and therefore make no contribution to ptice discovery. Rather, these 

transactions were executed via voice brokers in the over the counter market and 

submitted to ICE sometime after-the-fact solely for clearing purposes. For the SZS 

Singapore swap, only about 69% of all trades were actually executed on the ICE 

platform. However, volume, rather than number of trades, is a much more meaningful 

indicator of actual liquidity and therefore price discovery. In deciding whether or not to 

participate in a market, traders consider volume, not number of trades. On a volumebasis, only about 59% of all SZS volume was actually executed on the ICE platform. 

Second, the CFTC's figures, as requested of and provided by ICE, include trades 

made in all 60 months of each contract. The more appropriate method of determining 

liquidity is to examine the activity in a single traded month or strip of a given contract. 

The merit of this argument is obvious when you consider that liquidity in a January 

contract is of no help to a trader who needs to liquidate an October position. For the SZS 

4 Appendix A to Part 36, 17 C.F.R. 36 (2009). 5 Title XIII of the Food, Conservation and Energy Act of2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 

18, 2008). 

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Singapore swap, only 37% of the trades actually executed on the ICE platform occurred 

in the single most liquid, usually prompt, month of the contract. However, again, from 

the more important volume-standpoint, only 30% of all SZS volume actually executed on 

the ICE platfonn occurred in the single most liquid, usually prompt, month of the 

contract. 

The trades-per-day statistics used by the CFTC must be adjusted for both of the 

factors described above before even considering whether or not a "more or less 

continuous steam of prices" can be observed. According to the statistics cited by the 

CFTC, the SZS Singapore swap traded an average of 30 times per day, but only 26% 

(69% x 37%) of these trades (and an even lower 18% of total volume) were actually 

executed on the ICE platfonn in the single most liquid, usually prompt, month of the 

contract. Given an eight hour trading dal, this means that the SZS Singapore swap 

traded only about once every 62 minutes. Clearly, such a low level ofliquidity does not 

represent an "ability to transact immediately" or "a more or less continuous stream of 

prices" and certainly not "a market where trades occur multiple times per minute." In 

comparison, the single most liquid, usually prompt, month of the ICE Henry Hub LD 1 

natural gas contract traded, on average, over 4,000 times per day on the ICE platfonn 

alone. 

In conclusion, it is clear that the SZS Singapore contract does not meet the 

material liquidity standard as contemplated by Congress or the CFTC in its SPDC 

rulemaking. 

Material Price Reference 

The second basis for the Commission's detennination is that the SZS contract 

serves as a material price reference. In this detennination, Congress instructed the 

Commission to consider "the extent to which, on a fi:equent and recuning basis, bids, 

offers, or transactions in a commodity are directly based on, or are determined by 

referencing, the prices generated" by the ECM. The Commission elaborates on this by 

saying that it will rely on one of two sources of evidence, direct or indirect, that the 

contract is a material price reference. A direct reference would be whether the cash 

market quotes the ECM contract. An indirect reference would be whether an industry 

publication quotes the ECM's contract's price. 

For the SZS contract, the CFTC relies on one reason for material price reference: 

( 1) that "the Commission's ECM study, in general, stated that certain market pmticipants 

referred to ICE as a price discovery market for certain energy contracts "7 and or (2) that 

6 Note that ICE's OTC markets are actually open 22 hours. 7 See, e.g., 72 FR 53728 (October 20, 2009) (the Notice ofintent for the SZS contract). This follows 

every other power and basis swap detennination. 

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ICE uses an exclusive index to determine one component ofthe basis swap.8 The first 

reason proposed by the CFTC has been used as a justification for nearly every notice of 

intent the CFTC has issued for significant price discovery contracts. This argument is 

nearly impossible to respond to as the ECM report did not mention the SZS as a potential 

significant price discovery contract. It is hard to say which market participants made this 

statement in 2007 or the contracts that were referenced. Congress, in promulgating the 

Fam1 Bill, ordered the CFTC to undettake a very impmiant analysis of the OTC energy 

markets. Basing a material price reference determination on general statements made in a 

two year old study does not seem to meet Congress' intent that the CFTC use its 

considerable expe1iise to study the OTC markets. Moreover, this ephemera] analysis 

does not allow the public to comment effectively and borders on being arbitrary. 

The SZS contract settles on the Platts' Asia-Pacific/Arab GulfMarketscan index. 

Price discovery occurs in the physical trading of the Singapore fuel all, not in the cash 

settled swap that references the index. 

The SZS is not a US. based contract 

In the Farm Bill, Congress gave the Commission the authority to consider other 

factors that the Commission deems impmiant and there are at least three unique factors 

worth noting with regard to the SZS contract. First, the SZS contract is an Asian fuel oil 

swap traded ovetwhelmingly by Asian oil traders. Specifica11y, 99.5% of the SZS traders 

are not in the United States. Second, the swap settles on a cash market index based on 

delivery of fuel oil into Singapore, 9,000 miles from the U.S. 

Third, the SZS contract, as well as other non-US contracts, is cutTently listed on 

the ICE ECM and utilized by Asian pruiicipants largely because the level of U.S. 

regulation on such a clearly non-U.S. market has been reasonable to date. This rational 

and differentiated approach, as opposed to enforcing a "one size fits all", is a leading 

reason why U.S. companies have been successful in hosting and operating foreign 

markets. Over regulating foreign markets such as the SZS Singapore swap could cause 

Asian traders to migrate to a non-U.S. platfonn or retreat back to the voice brokered OTC 

market. In either case, the CFTC loses all data transparency and market oversight 

benefits it enjoys today. 

Given these very strong arguments and limited agency resources, the CFTC 

should not deem any such foreign market swap an SPDC. 

8 !d. 

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Conclusion 

It is clear that SZS does not serve as a material price reference. Fmiher, the SZS 

contract does not meet the CFTC 's criteria for material liquidity. On this basis, the 

Commission should not deem this contract as a significant price discovery contract. 

Finally, it is important to note that Congress ordered the Commission to review 

the electronic OTC markets for contracts that serve a significant price discovery function. 

Overreaching in this process could force OTC trading back to the opaque voice brokered 

markets. It is important for the Commission to remember that Exempt Commercial 

Markets perfonn a very important function in introducing transparency and credit 

intennediation to the OTC markets. 

Thank you for the opp01tunity to comment. 

O~ac/ zrabue Bland 

Director of Regulatory Affairs 

Assistant General Counsel 

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