,. 

HUNTON& 

WILLIAMS 

October 26, 2009 

David A. Stawick, Secretary 

Received CFTC 

Recqrcls 1Section 

J6fCJ7t IJ7 

COMMENT 

HUNTON & WILLIAMS LLP 

1900 K STREET, N.W. 

WASHINGTON, D.C. 20006-1109 

TEL 202 • 955 • 1500 

FAX 202 • 778 • 2201 

MARK W. MENEZES 

DAVID T. MCINDOE 

R. MICHAEL SWEENEY, JR. 

EMAIL: mmenezes@hunton.com 

dmcindoe@hunton.co~ 

rsweeney@hunton.confS 

FILE NO: 76142.2 

Commodity Futures Trading Commission 

Three Lafayette Center 

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Re: Significant Price Discovery Contract Proceeding, Waha Financial Basis Contract 

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On behalf ofthe Working Group of Commercial Energy Firms (the "Working 

Group"), Hunton & Williams LLP submits the following comments in response to the request 

for public comment set forth in the Notice oflntent ("NOI") issued by the Commodity 

Futures Trading Commission ("CFTC" or "Commission") and published in the Federal 

Register on October 6, 2009,1 addressing whether the Waha Financial Basis Contract ("WAH 

Contract") offered for trading on the IntercontinentalExchange, Inc. ("ICE") performs a 

significant price discovery function. 

The Working Group is 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. 

Members of the Working Group consist of energy producers, marketers and utilities. The 

Working Group considers and responds to requests for public comment regarding legislative 

and regulatory developments with respect to the trading of energy commodities, including 

derivatives and other contracts that reference energy commodities. 

Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of the Commodity Exchange Act and 

Commission Rule 36.3(c)(3), to Undertake a Determination Whether the Waha Financial Basis Contract, Offered 

for Trading on the Intercontinenta!Exchange, Inc., Peiforms a Significant Price Discovery Function, 74 Fed. Reg. 

52,202 (Oct. 9, 2009). 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 26, 2009 

Page 2 

As discussed further in these comments, the Working Group does not believe that the 

WAH Contract serves a significant price discovery function and should not be designated as a 

significant price discovery contract ("SPDC") at this time. 

I. COMMISSION AUTHORITY AND DISCRETION TO DESIGNATE CONTRACTS AS SPDCS. 

In 2000, Congress enacted the Commodity Futures Modernization Act ("CFMA"),2 

which amended the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 1 et seq., to create a 

tiered approach to the regulation of futures and derivatives markets to replace the CEA's 

then-existing "one size fits all" regulatory framework. As part of this tiered approach, the 

CFMA created exempt commercial markets ("ECMs"). ECMs are principal-to-principal 

electronic trading platforms designed to encourage electronic trading of derivatives by 

sophisticated market participants. ECMs were subject to limited Commission regulation and 

oversight under the CFMA amendments to the CEA. 

In June 2008, Title XIII ofthe Food, Conservation and Energy Act of20083 

was 

enacted and, in relevant part, amended the CEA to include new Section 2(h)(7).4 CEA 

Section 2(h)(7) expanded the Commission's limited authority over ECMs to identify and list 

contracts that serve a significant price discovery function. 5 Specifically, this provision sets 

forth enumerated factors that the Commission must consider when determining whether a 

contract performs a significant price discovery function: (1) Price Linkage; (2) Arbitrage; (3) 

Material Price Reference; ( 4) Material Liquidity; and (5) Other Factors. 

The purpose of new CEA Section 2(h)(7) is to make the regulation of certain contracts 

traded on ECMs similar to the Commission's regulation of those contracts traded on 

designated contract markets ("DCMs"). Accordingly, in situations where the Commission 

determines that ECM contracts serve a significant price discovery function similar to 

contracts traded on a DCM, those contracts are subject to comparable regulation. 

On March 23, 2009, the Commission issued a final rule implementing the provisions 

of new CEA Section 2(h)(7) subjecting ECMs with SPDCs to self-regulatory and reporting 

requirements, as well as certain Commission oversight authorities, with respect to those 

contracts.6 The SPDC Final Rule became effective on April22, 2009. Among other things, 

Incorporated as Appendix E of the Consolidated Appropriations Act of200l, Pub. L. No. 106-554, 114 

Stat. 2763 (Dec. 21, 2000). 

Title XIII ofthe Food, Conservation and Energy Act of2008, Pub. L. No. 110-246, 122 Stat. 1623 (June 

18, 2008) (the "Reauthorization Act"). 

4 7 U.S.C. § 2(h)(7). 

Section 13204(c) of the Reauthorization Act requires the Commission to identify contracts that it deems 

appropriate for designation as SPDCs within 180 days after issuing rules implementing new CEA Section 2(h)(7). 

See Significant Price Discovery Contracts on Exempt Commercial Markets, 74 Fed. Reg. 12,178 (Mar. 

23, 2009) ("SPDC Final Rule"); 17 C.F.R. § 36.3 (2009). 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 26, 2009 

Page 3 

the Commission adopted regulations establishing the procedures and the standards by which 

it will determine whether an ECM contract performs a significant price discovery function 

and provided guidance with respect to compliance with nine statutory core principles 

applicable to ECMs. 7 

The Commission has broad discretion when determining whether to designate a 

contract as a SPDC. Importantly, not all of the various statutory factors must be present to 

support a determination that a contract performs a significant price discovery function. In 

this regard, CEA Section 2(h)(7) neither prioritizes nor specifies the degree to which a 

contract must conform to the various factors. 

II. PROPOSED DESIGNATION OF THEW AH CONTRACT AS AN SPDC. 

The WAH contract is cash settled based on the difference between the bidweek price 

index for a particular calendar month at the Waha, West Texas Hub, as published by Platts in 

its Inside FERC's Gas Market Report ("West Texas Hub"), and the final settlement price of the 

NYMEX physically-delivered Henry Hub (Louisiana) natural gas futures contract for the same 

calendar month ("NYMEX NG Contract"). The NOI states that the WAH Contract appears to 

satisfy the Material Liquidity, Price Linkage, and Material Price Reference factors required for 

SPDC designation. 8 

The Working Group fully supports the Commission's efforts to exercise in a 

disciplined and deliberate manner its statutory obligations under the Reauthorization Act to 

designate contracts traded on ECMs that meet the statutory criteria set forth in CEA Section 

2(h)(7) as SPDCs. However, as discussed below, it is not clear that the WAH Contract 

satisfies the Material Price Reference, Price Linkage, and Material Liquidity factors. 

Accordingly, the Working Group respectfully submits that the Commission should refrain 

from designating the WAH Contract as an SPDC. 

The Working Group respectfully submits that the designation of theW AH Contract as 

an SPDC will not further in a meaningful manner other policy concerns identified by the 

Commission to the extent that they relate to (a) protecting the NYMEX NG Contract and (b) 

the underlying physical markets at Henry Hub and West Texas Hub from excessive 

speculation or manipulation. The designation of the WAH Contract as an SPDC and the 

required imposition of position limits on this contract by ICE have the potential to harm 

liquidity regarding the NYMEX NG Contract and at the Henry Hub and West Texas Hub 

physical gas markets, which, in tum, could result in industrial, commercial and residential 

consumers incurring higher energy prices. 

!d. at§ 36.3(c)(3). 

NOI at p. 52,203. 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 26, 2009 

Page4 

Specifically, existing NYMEX-enforced accountability levels and position limits 

protect the NYMEX NG Contract and the underlying physical Henry Hub market from the 

effects of excessive speculation and manipulation. 9 In addition, physical pricing at Henry 

Hub is also protected from excessive speculation in over-the-counter ("OTC") derivatives 

markets through position limits enforced by ICE for the Henry Financial LD 1 Fixed Price 

contract that was recently designated as an SPDC. 10 

The Commission also has ample authority under CEA Section 9(a)(2) to protect 

against entities engaged in CFTC-jurisdictional activities from manipulating physical prices 

at Henry Hub and at the West Texas Hub. 11 This authority is complemented by the Federal 

Energy Regulatory Commission's ("FERC") jurisdiction under the Natural Gas Act 

("NGA''), 15 U.S.C. § 717 et seq., to regulate wholesale, physical natural gas markets and 

FERC's broad authority to prohibit the manipulation of natural gas markets under NGA 

Section 4A, 15 U.S.C. § 717c-1. 

A. MATERIAL PRICE REFERENCE. 

The NOI states that the WAH Contract may perform a significant price discovery 

function as it appears to satisfy the Material Price Reference factor. CEA Section 

2(h)(7)(B)(iii) requires the Commission to consider "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, the prices generated" by the ECM. 12 Guidance set forth in 

Appendix A to Section 36 of the Commission's regulations states that the Commission will 

rely on one of two sources of evidence, direct or indirect, that the contract is a Material Price 

Reference. 13 A direct reference would be whether the cash market quotes the ECM 

contract. 14 An indirect reference would be whether an industry publication quotes the ECM 

contract's price. 15 The WAH Contract does not meet either of these standards. 

See <<http://www.nymex.com/NG spec.aspx>>. The NYMEX-enforced accountability levels and 

position limits for the NYMEX NG Contract are "12,000 net futures, but not to exceed 1,000 in the last three days 

of trading in the spot month." 

10 See Order Finding that the ICE Henry Financial LDJ Fixed Price Contract Traded on the 

Intercontinenta/Exchange, Inc., Performs a Significant Price Discovery Function, Final Order, 74 Fed. Reg. 

37,988 (July 30, 2009). 

II 7 U.S.C. § 9(a)(2). 

12 

13 

14 

15 

7 U.S.C. § 2(h)(7)(B)(iii). 

17 C.F.R. Part 36, Appendix A (2009) (Guidance on Significant Price Discovery Contracts). 

/d. 

/d. 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 26, 2009 

Page 5 

1. Direct Reference. 

There are no other related contracts traded in any market that settle to, or reference, 

the WAH Contract. The Material Price Reference for the WAH Contract itself is derived 

from physical transactions that create the bidweek price index for the West Texas Hub and 

the settlement price for NYMEX NG Contract. Neither the West Texas Hub nor the NYMEX 

NG Contract are based on theW AH Contract. Although theW AH Contract is influenced by 

these direct references, the WAH Contract itself neither influences the settlement of the 

NYMEX NG Contract nor does it influence physical pricing at Henry Hub or the West Texas 

Hub. 

2. Indirect Reference. 

As to the indirect reference regarding whether an industry publication quotes the ECM 

contract's price, the only publication to which the CFTC refers is the "OTC Gas End of Day," 

ICE publication. It is logical that ICE would publish the prices of its own contracts, as would 

any other contract market. However, the fact that ICE publishes the settlement prices of its 

own contracts does not constitute sufficient evidence of a Material Price Reference necessary 

to satisfy the requirements of CEA Section 2(h)(7)(B)(iii). The only price reference that 

market participants rely on are the physical prices published by Inside FERC for the West 

Texas Hub and the settlement price for the NYMEX NG Contract available through 

NYMEX. There is no evidence whatsoever that a contract in any market is tied directly or 

indirectly to the settlement price of the WAH Contract. 

B. PRICE LINKAGE. 

To establish Price Linkage, an agreement, contract or transaction must use or otherwise 

rely on a settlement price or other major price parameter of a contract(s) listed for trading on a 

DCM or an SPDC on an ECM. 16 As noted in the NOI, the WAH Contract is technically linked 

to the NYMEX NG Contract. Notwithstanding this partial linkage, theW AH Contract does 

not appear to perform a significant price discovery function. 

Guidance set forth in Appendix A of Part 36 of the Commission's regulations is 

instructive in this regard as it states, in relevant part, that: 

16 

A price-linked contract is a contract that relies on a contract traded 

on another trading facility to settle, value or otherwise offset the 

price linked contract. The link may involve one-to-one linkage, in 

that the value of the linked contract is based on a single contract's 

price, or it may involve multiple contracts. 

17 C.F.R. § 36, Appendix A(B). 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 26, 2009 

Page6 

For a linked contract, the mere fact that a contract is linked to 

another contract will not be sufficient to support a determination 

that a contract performs a significant price discovery function. To 

assess whether such a determination is warranted, the Commission 

will examine the relationship between transaction prices of the 

linked contract and prices of the referenced contract. The 

Commission believes where material liquidity exists, prices for the 

linked contract would be observed to be substantially the same as 

or move substantially in conjunction with prices of the referenced 

contract(s). 17 

As established below, publicly-available, empirical data shows that the WAH Contract 

(a) is not substantially the same as the NYMEX NG Contract nor (b) does it move substantially 

in conjunction with NYMEX NG Contract. 

A head-to-head comparison ofthe WAH Contract with the NYMEX NG Contract 

settlement prices published during the 75-day period beginning July 10, 2009 through October 

23, 2009, clearly establishes that these contracts are not "substantially the same." For example, 

the price for the November NYMEX NG Contract during this period is approximately 

$5.00/mmbtu. In contrast, the basis price ofthe WAH Contract is approximately $.42/mmbtu 

below the NYMEX NG Contract price. Price data published during this period also provides 

evidence that the WAH Contract does not "move substantially in conjunction with" the 

NYMEX NG Contract. Specifically, the correlation of the daily changes between the NYMEX 

NG Contract and the WAH Contract is negative 35 percent for this period. 

C. MATERIALLIOUIDITY. 

To meet the Material Liquidity test, CEA Section 2(h)(7)(B)(iv) requires 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 

market" or ECM. 18 The Commission also states "[l]iquidity is a broad concept that captures 

the ability to transact immediately with little or no price concession." 19 As demonstrated 

below, the WAH Contract lacks both (a) a material effect on other contracts and (b) sufficient 

liquidity to perform a significant price discovery function. 

17 

18 

19 

17 C.F.R. § 36, Appendix A(B)(2) (emphasis added). 

7 U.S.C. § 2(h)(7)(B)(iv). 

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

David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 26, 2009 · 

Page 7 

1. No Material Affect on Other Contracts Listed for Trading. 

Trading in the WAH Contract has no affect whatsoever on any contract listed for 

trading on a DCM, ECM or even in the OTC market. As noted in Section II.A., above, there 

is no evidence of other related contracts traded in any market that settle to, or reference, the 

WAH Contract. Although the WAH Contract is influenced by physical transactions in the 

West Texas Hub or the settlement of the NYMEX NG Contract, it has no affect on the 

NYMEX NG Contract itself or on the actual prices of natural gas at Henry Hub or at the West 

Texas Hub. 20 · 

2. Liquidity in the WAH Contract is Insufficient for Designation as an 

SPDC. 

Guidance set forth in Appendix A to Section 36 of the Commission's regulations 

states, in relevant part, that "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, 

to "a market where trades occur multiple times per minute." The quoted language indicates 

two factors that can show liquidity: (a) a narrow bid/ask spread, and (b) a trade frequency of 

multiple trades per minute. 21 The NOI does not address either of these factors. Rather, it 

states that the WAH Contract was transacted on an average daily basis of 18.2 times. Based 

on the average daily trade data set forth in the NOI, the trade frequency ofthe WAH Contract 

in terms of multiple trades per minute is extremely low. Because neither factor is presented 

by the WAH Contract, trading in this contract fails to meet this standard. 

III. 30-DA Y COMMENT PERIOD. 

The NOI relating to this contract was posted in the Federal Register on October 9, 

2009, the same day as similar NOis proposing to designate twelve other ICE gas contracts as 

SPDCs. A 15-day comment period was established for all ofthe NOis published on October 

9th, thus providing the Working Group and other interested stakeholders only 15 days to 

consider, develop, and submit comments regarding thirteen separate contracts. In addition to 

these thirteen contracts, the CFTC has issued during this time several other NO Is seeking to 

20 As discussed in Section II.A, above, the Commission possesses broad existing statutory and regulatory 

authority to protect against excessive speculation and manipulation involving the NYMEX NG Contract which, in 

tum, could result in the manipulation of physical prices at Henry Hub. Additionally, it possesses broad antimanipulation authority to address jurisdictional activity could result in the manipulation of physical pricing at 

Henry Hub or at the West Texas Hub. This authority complements PERC's jurisdiction under the NGA over 

wholesale, physical gas markets and its own broad anti-manipulation authority under NGA Section 4A. 

21 Because the NOI does not expressly address how the WAH Contract satisfies the guidance in Appendix 

A of the Commission's regulation for Material Liquidity (i.e., narrow bid/ask spread and trade frequency of 

multiple trades per minute), the OTC Working Group respectfully submits that the Commission expressly identifY 

the criteria supporting its view that the WAH Contract appears to meet the Material Liquidity factor. 
• • 1 ' 

David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 26, 2009 

Page 8 

designate additional power and gas contracts as SPDCs; again, establishing only a 15-day 

comment period. 

Although the Working Group appreciates the CFTC's interest in prompt and timely 

action on this issue, the Working Group believes that, in light of such ongoing and 

overlapping activity, 15 days is inadequate to allow for the development of public comments 

that fully and properly consider the specific circumstances of each contract. As such, the 

Working Group respectfully requests that the CFTC consider establishing a 30-day comment 

period for subsequent NOI issuances related to the designation of power and gas contracts as 

SPDCs. 

IV. CONCLUSION. 

The Working Group appreciates this opportunity to comment, and requests that the 

Commission consider these comments as it develops a final rule in this proceeding. Given 

the limited time provided for public comment, the Working Group expressly reserves the 

right to supplement these comments as deemed necessary and appropriate. 

76142.000003 EMF _us 28817554vl 

Respectfully Submitted, 

Is/ Mark W. Menezes 

Mark W. Menezes 

David T. Mcindoe 

R. Michael Sweeney, Jr. 

Counsel for the 

Working Group of Commercial Energy Firms