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LICe Allan ta Calgary Chicago Houston London ~Jew York Singapore OFC. OF THE SECRETARIAT 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, NW 

Washington, DC 20581 

COMMENT 

RE: Comments on Proposed Rules Implementing the CFTC Reauthorization Act of 

2008. 

Dear Mr. Stawick: 

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

the Commission's proposed rulemaking on Significant Price Discovery Contracts on 

Exempt Commercial Markets. The Commission's proposed rulemaking would 

implement the CFfC Reauthorization Act of 20081 and provide exempt commercial 

markets with self regulatory authority with respect to contracts that serve a significant 

price discovery :fi.m.ction ("SPDC"). 

ICE was established in 2000 as an over-the-counter (OTC) market. Since that 

time, ICE has grown significantly, through organic market growth fostered by product, 

technology and trading innovation, and by acquisition of futures exchanges that have 

broadened its product offerings. Today, ICE operates a leading global marketplace in 

futures and OTC derivatives across a variety of product classes, including agricultural 

and energy commodities, foreign exchange and equity indexes. ·Commercial hedgers use 

our products to manage risk and investors provide necessary liquidity to the markets. 

Headquartered in Atlanta, ICE has offices in New York, Chicago, Houston, London, 

Singapore and Calgary. 

ICE hosts four separate markets on its electronic trading platform: an OTC energy 

market and three regulated futUres exchanges. ICE's OTC market operates under the 

CEA as an "exempt commercial market," or ECM. As an ECM, ICE's OTC market 

would be subject to the proposed rules. 

Market participants - including energy producers, distributors and consumers 

have benefited significantly from the regulatory :flexibility embodied in the 

Commodity Futures Modernization Act (CFMA) through the ECM structure established 

Wlder section 2(h)(3) of the Act. Section 2(h)(3) has facilitated the development of 

robust and transparent OTC markets where only opaque markets had previously existed, 

Title xm of the Food. Conservation and Energy Act of2008, Pub. L. No. 110-246, 122 Stat. 

1624 (June 18, 2008). 

lntercontmentaiExchange 

2100 RlverEdge Parkway pl1ono! no 857 4700 

Suite soo fax no 951 1307 

Atlanta, GA 30328 on&ne www.theice.com 

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and has permitted commercial and professional market users to hedge risk in a more 

efficient and cost effective manner. Energy market participants bene:fi~ to a degree 

unmatched by other derivative markets, from the fierce competition among multiple 

exchanges, clearinghouses, and brokers. 

As the Conimission noted in its October 2007 Report on the Oversight of Trading 

on Regulated Futures Exchanges and Exempt Commercial Marketr (ECM Report), 

ECMs serve an important role in the Commission's multi-tiered regulatory structure. In 

devising this regulatory structure, Congress recognized that there are substantial 

differences between ICE's OTC market, other portions of the OTC marke~ and 

designated contract markets. ICE's OTC market, by law, is a "principals only'' market in 

which participants must execute trades in their own names -on the system. In addition, the 

market is available solely to sophisticated market participants, and unlike other OTC 

market venues, ICE maintains trading records of all transactions that occur in its 

· marketplace for prompt regulatory review. 

As ECMs have grown and developed since passage of the CFMA, however, new 

regulatory challenges have emerged, and ICE supports Congress and the Commission's 

efforts to create a tailored approach to ECM regulation. A-gainst this backdrop, ICE 

offers the following comments for consideration by the Commission in adopting final 

ECMrules. 

Prooosed Core Principle IV --Position Limitations or Accountability. 

Volume Accountability Test 

In general, ICE agrees with the Commission's articulation of the ECM's 

responsibilities under Core Principle IV to set position limits or accountability rules for 

SPDCs. In the acceptable practices for Core Principle IV, the Commission proposes that 

ECMs with "clearable" contracts (contracts that may be executed bilaterally betweens 

parties or cleared,. depending on the preference of the trading party) adopt volume 

accountability levels for bilaterally traded contracts equal to the spot month speculative 

position limit that would be adopted for the cleared version of the contract. The 

acceptable practice goes on to provide that in enforcing a volume accountability level, 

ECMs would keep track of each trader's uncleared/bilaterally traded SPDC transactions 

on a net basis, with netting of uncleared/bilaterally traded positions only being permitted 

if the uncleared transactions were conducted with 1he same counterparty. In the event 

that a particular traders uncleared/bilaterally traded contracts exceeded the accountability 

2 http://www.cftc.gov/stellent/groups/public/@newsroom/documents/:file/pr5403-

07 _ ecmreport.pdf 

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level, the proposed rules would require the ECM to initiate an investigation to determine 

whether the trading activity is justified, and following the general recommendations for 

position accountability, could require the ECM to require traders. to reduce the volume of 

uncleared trades. 

ICE recommends that the Commission not adopt this acceptable practice in its 

final rulemaking. The Commission's rationale for requiring the volume accountability 

test is that ''uncleared transactions in SPDCs ~otentially play an important role. in risk 

management strategies and price formation." This is a marked change from the 

Commission's ECM Report, which observed, "[T]here [does not] appear to be a 

widespread call for further regulating the voice-broker ot bilateral OTC markets due to 

the lack of price discovery occurring on these markets and the ability of the Commission 

to receive certain cleared pricing data and other information regarding these transactions 

from market participants on a case-by-case basis . ..4 Following this, Congress gave ECMs 

reasonable discretion to taking into account the differences between cleared and 

uncleared transactions when complying with Core Principle IV. 5 

Market participants need to have legal certainty with regard to bilateral hedges. The 

proposed volume accountability levels and accompanying potential for a third party, ICE, 

to interfere with a bilateral transaction at any point in. the life of the transaction 

challenges this legal certainty. Market participants would likely take these trades off 

exchange simply to avoid this legal uncertainty, thereby reducing ECM liquidity and 

transparency to the regulator and eliminating the Commis~ion's ability to easily obtain 

integrated market data from the ECM. Importantly, the proposed volume accountability 

levels would harm innocent counterparties, who have entered. into a transaction with a 

party who at some point exceeded the volume accountability test. Moreover, as the 

Commission has repeatedly pointed out, the Large Trader Position ·Report is the 

cornerstone of DCM mmket monitoring. The focus is on positions held, not volume 

transacted Even within DCM core principles, there is no identified need or 

corresponding regulation that requires specific scrutiny of finns trading above a volume 

threshold. Such a requirement for ECMs concerning bilateral volumes is therefore 

unprecedented and, more importantly, suspect in its utility in that non-ECM volumes 

would not be known by the ECM and would likely be where transactions of this nature 

are driven by such a requirement. 

To be clear, ICE is not arguing that bilateral· markets on ECMs should go 

unmonitored -- they would be affinnatively monitored in connection with administering 

position accountability levels and position limits in connection with the cleared contracts 

as DCMs do today. However, we do not believe that there should be a separate 

3 

4 

s 

73 FR 75888, 75896 (December 12, 2008) 

ECM Report, pg. 17. 

Public Law 110-246 at sec 13201 (2008) 

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regulatory accountability regime applied to bilateral contracts. The volume 

aCCOWltability regime would offer very little regulatory benefit to the Commission while 

encouraging participants to take bilateral transactions to opaque portions of the OTC 

market. 

On ICE's ECM, many contracts are clearable. Of those contracts for which ICE 

offers clearing, an overwhelming and growing majority of contracts are traded on a 

cleared basis rather than traded bilaterally. In fact, in January 2009, over 98% of all 

Henry Hub swap volume executed on the ICE Platfmm. was cleared. Moreover, of the 

less than 2% of total volume that was bilaterally executed (uncleared), it is possible and 

even likely that some portion of such trading volume was later blocked into ICEBlock or 

NYMEX Clearport to be cleared and, therefore, would have been included in the ICE or 

NYMEX position limit regime, respectively. Neither ICE nor NYMEXhave any way of 

avoiding this double counting ofbilateral volumes. 

The small percentage of bilateral transactions that are executed on the ICE 

Platform is typically between commercial participants who have longstanding ISDA 

master agreements and established credit lines in place. Even ·among this subset of 

commercial firms, bilaterally executed transactions: accounted for lesstb.an.lO% of their 

total Henry Hub swap volume executed on the· ICE Platform :iliJanuary 2009. Further, 

the Commission should note the following key aspects of the ICE trading platform that 

render bilateral volumes less relevant' from a market integrity perspective: 

1. All bids and offers are anonymous and executed in first in first-in, first-out order; 

in other words, a trader should not know who the potential counterparty is when 

transacting bilaterally. 

2. All orders entered into the ICE Henry Hub swap market must be clearable. In 

other words, a trader cannot enter a bilateral-only order and has no means to 

ensure or even expect bilateral execution. 

3. The settlement method, cleared or bilatera~ for a given transaction, is not 

revealed to the trader until after the trade is executed. (Settlement method is 

determined automatically by the ICE Platform at the moment of execution based 

upon (i) preset preferences of the parties for cleared or bilateral trading with 

regard to the other party (Note: if one party prefers cleared settlement and the 

other party prefers bilateral settlement, the trade is cleared), and (ii) the level of 

m.used bilateral credit remaining in each party's credit line with the other. 

In addition, the specific methodology proposed by the Commission for implementing 

the Volume Accountability Test is problematic. For example, in the Henry Hub swap 

market, a trader has no way of knowing prior to execution who its counterparty would be 

or whether settlement would be cleared or bilateral. Thus, there is no way for a trader to 

force bilateral settlement generally let alone with a specific counterparty. Therefore, a 

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Volume Accountability Test that only permits netting of trades with the same· bilateral 

counterparty is problematic and potentially misleading. Bilateral volumes among 

multiple counterparties should be equally available to net as with the same counteqlarty. 

Self Regulatory Obligations 

In the proposed guidance to Core Principle IV, the Commission proposes that the 

ECM establish the same speculative position limits for SPDCs that are "economically 

equivalent" to contracts traded on a DCM. ICE recommends that the Commission not 

adopt this acceptable practice. 

As the Commission has noted, self~regulatory organizations ("SROs") serve as 

"front line" regulators in derivatives' markets. 6 As such, SROs should be given 

deference in monitoring their markets. The Commission's proposed acceptable practice 

would permanently shift ECMs' self-regulatory obligations to one DCM for 

economically equivalent contracts and concentrate self~regulatory responsibilities in 

possibly one entity. The Reauthorization Act cleai:'lyindicates that Congress intended that 

ECMs have discretion in discharging their self regulatory obligations by, .for example, 

allowing ECMs to take into account the difference between cleared ·and ·uncleared 

contracts when complying with certain core principles.7 To be clear, ·ICE is not 

suggesting that there should not be a high correlation between the position limits set in 

each market, or even a presumption in regulatory dialog with the CFTC .that they should 

be the same. ICE is merely objecting to the automatic nature of the process and the 

opportunity for a dominant DCM to potentially use its position limits in an anticompetitive manner. 

Further, as comments in previous rulemakings have noted,· determining 

"economic equivalency'' between futures contracts is difficult. 8 The Commission should 

recognize that competing markets that list economically .equivalent contracts may attract 

completely different market participants. ICE's ECM and CME's market participants do 

overlap, but they are not the same, partly because ECM participants must be Eligible 

Commercial Entities. 

In addition, the proposed acceptable practices do not allow for the possibility that 

the ECM is the dominant market. For example, an ECM could list an SPDC which 

captures most of a market's liquidity, while a DCM could list an "economically 

equivalent" contract. Under the proposed acceptable guidance, however, the DCM would 

determine the position limits and position accountability levels for the dominant ECM. 

6 

7 

71 Fed. Reg. 38740 (June 7, 2006). 

Public Law 110-246 at sec. 13201. 

8 See, Comment of the Chicago Mercantile Exchange, submitted Febrwuy 1, 2008. 

ht!p://www.c:ftc.goy/stellentleroyps/public/@hfederaJregister/docum.ents/frcomment/07-014c038.pdf 

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The automatic Jinkjng of DCM and ECM position limits could also lead to 

abusive and anticompetitive practices by a dominant DCM market. For example, a 

DCM with dominant market share could set position limits so low that it would 

effectively strangle the ECM's market, eliminate competition in the process, and then readjust position limits to appropriate levels after having drained liquidity from the ECM's 

markets. ICE's respectfully submits that the very essence of SRO responsibilities is to 

allow the SRO to self-regulate, and that appropriate position limits and accountability 

levels can be set in dialog with the Commission which can itself take into account 

existing position and accountability levels at the DCM in that dialog. 

Position Accountability Levels 

The Commission has proposed that ECMs adopt non-spot month and all monthcombined position limits in lieu of position accountability levels.. ICE notes that DCMs 

do not have a similar acceptable practice and there is not industry consensus on the value . 

of position limits versus position accountability levels. 9 Position accountability levels can 

serve a valuable for managing positions in non spot months~ For example, CME has spot 

month position accountability levels and all month position accountability levels for 

some exempt commodities and position limits for others.10 ICE · beli~ves that the 

Commission should address this acceptable practice in a separate rulem.aking where 

DCMs can have the opportunity to comment on adopting position limits for non-spot 

months. 

Period for Compliance 

The Commission proposes that ECMs have ninety calendar days for compliance 

following the determination of SPDC, and fifteen calendar days to comply following . 

each subsequent determination of an SPDC. Generally, this is sufficient time for the 

ECM to comply with the core principles. However, because many clearing firms 

outsource large trader reporting to third parties, the Commission should consider whether 

fifteen calendar days is enough time for clearing firms to meet the reporting 

requirements. ICE would respectfully request that more time be allocated for compliance 

to ensure that clearing firms can meet the reporting requirements and that no disruptions 

to markets occur. ICE believes that 45 days would be sufficient 

9 See, e.g., comments pursuant to the Commission's proposed changes to Part 150. 72 Fed. Reg 

65483 (November 21, 2007}. 

10 http://www.nymex.com/rule_main.aspx?pg= 13 

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Conclusion 

Ag~ ICE commends the Commission for its work in implementing the 

Reauthorization Act The ReauthoP-zation Act strikes a fair balance in regulating ECMs 

while recognizing the benefits that ECMs offer to the derivatives markets. 

t:~-rt-- Senior Vice President and General Counsel 

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