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Received CFTC 

Records Section 

Jlj;f/o1 

November 6, 2009 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, NW 

Washington, DC 20581 

C.f.T.C. 'T 

OFT. HE sECREiAtUI4: 

OFFICE 

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COMMENT 

RE: Determination whether the PJM contracts serve 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 PJM Real Time Peak Daily (''PDP") contract; 

PJM WH Real Time Peak ("PJM") contract; PJM WH Real Time Off-Peak (''OPJ") 

contract; PJM WH Day Ahead LMP Peak Daily ("PDA") contract; and the PJM WH 

Real Time Off-Peak Daily ("ODP") contract (collectively "'PJM contracts") serve a 

significant price discovery function. 

ICE believes that these contracts do 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 

price reference preclude these contracts from a significant price discovery role. 

Background 

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

of tiered regulation to replace a "one size fits all" regulatory scheme. As part of the 

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

which are ptinciple to principle electronic trading platforms that serve sophisticated 

market participants. ECMs were designed to encourage electronic trading of de1ivatives. 

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

regulation by the CFTC. The CFTC Reauthorization Act of20081 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: (1) Price Linkage; (2) Arbitrage; (3) Mate1ial Price 

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

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

18, 2008). 

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Congress gave the CFTC this authority over ECMs to capture two types of contracts: (1) 

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

market ("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 PJM contracts serve a significant price discovery function. 

The P JM Contracts 

ICE was fonned as an electronic platform to increase the transparency and 

liquidity in the wholesale power and natural gas markets. Over the years, ICE has been 

an innovator in the power markets, including screen-based trading to provide more 

visibility into fom1erly opaque markets, as well as the development of the first cleared 

power swaps, bringing needed risk management practices including daily mark-to-market 

and reduction in counterparty risk. In addition to these enhancements, the power markets 

have evolved significantly over the past decade as a result of regulation. Following the 

passage of the Federal Energy Policy Act of 1992, the Federal Energy Regulatory 

Commission has encouraged the formation of Independent System Operators ("ISO") to 

ensure the safe and reliable transportation of electricity. 

The PJM (Pennsylvania-New Jersey-Maryland) regional transmission 

organization (RTO) distributes power to thirteen states and the District of Columbia. 

PJM fonned the first ISO in 1997 to operate the transmission systems and to create a bid 

based energy market. PJM, regulated by the Federal Energy Regulatory Commission, 

creates the locational marginal prices ("LMP") that the P JM contracts reference. 

The CFTC 's Analysis 

The CFTC believes that the PJM contracts could potentially serve a significant 

price discovery function based upon two factors: (1) material liquidity and (2) material 

price reference. ICE does not believe that the P JM contracts meet these tests. 

2 The Joint Explanatory Statement of the Committee of Agriculture Conference, H.R. Rep. No. I II 0 at 

627, 110 Cong., 2"d Sess. at 978-86 (2008). 

3 Commodity Futures Trading Commission, Report of the Oversight ofTi·ading on Regulated Futures 

Exchanges and Exempt Commercial Markets (October 2007) 

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Material Liquidity 

To prove material liquidity, the Commission needs to determine 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. The Commission has issued guidelines stating "liquidity is a broad 

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

concession". Fm1her, "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 Fann Bill, "the Commission should not make a detem1ination that an 

agreement, contract, or transaction performs 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 originally 

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. If the CFTC has decided to abandon its rulemaking on Significant Price 

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

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

intent in promulgating the Significant Price Discovery Test of the Farm Bill. 

Moreover, the statistics 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) platform and therefore make no 

contribution to price 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 example, in the PJM contract, only 68% of all trades 

were executed on ICE OTC platfom1. Similarly, for the OPJ contract only 47% ofthe all 

trades were executed on the screen. 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 volume-basis, only about 53% of the total PJM volume was actually 

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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executed on the ICE platfonn. For the OPJ contract, only 28% of total volume was 

executed on the ICE platfom1. Even a daily contract, like ODP, had a significant amount 

of volume (47%) executed off exchange. 

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

made in all months of each contract or all days of each daily or day ahead contract. 

Furthennore, some of the trades were executed in seasonal (summer or winter) or 

quarterly or calendar year strips that trade separately from and in addition to the contract 

months. 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. This is especially true in weather-sensitive 

markets like natural gas and electric power where seasonal prices vary widely. For the 

PJM contract, only 20% of the trades actually executed on the ICE platfonn occurred in 

the single most liquid month of the contract. However, again, from the more important 

volume-standpoint, only 13% of all PJM volume actually executed on the ICE platform 

occurred in the single most liquid month of the contract. Similarly, for the OPJ contract, 

only 21% of trades and 10% of volume actually executed on the ICE platfonn occurred in 

the single most liquid 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 stream of prices" can be observed. According to the statistics cited by the 

CFTC, the PJM contract traded an average of 124 times per day, but only 14% (68% x 

20%) of these trades (and an even lower 7% of total volume) were actually executed on 

the ICE platform in the single most liquid month of the contract. Given an eight hour 

trading day6

, this means that the most liquid month of the PJM contract traded only about 

once every 28 minutes on the ICE platfonn. Similarly, the OPJ contract traded 6.8 times 

per day, but since only 10% (47% x 21 %) ofthose trades was executed on the ICE 

platfonn in the most liquid month, the actual number of trades was less than one per day. 

The dailies and day ahead contracts had similar low levels ofliquidity when 

considering that the CFTC totals include all 38 days of trading. The most liquid contract, 

the PJM daily real time contract, PDP, trades on average 228 times per day on the OTC 

platform, but this is spread out over 38 days. The most liquid day of the PDP contract, 

the next day market, accounts for 72% of trades. Thus in the most liquid daily contract, 

there is a trade on screen every 3 minutes. Liquidity drops steeply on the other daily 

contracts, with the PDA contract trading 16 times per day and the OPD contract trading 

11 times per day. This equates to a trade every 30 or 43 minutes, respectively. 

6 Note that ICE's OTC markets are actually open 22 hours. 

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Clearly, such a low level of liquidity 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 platfom1 alone. 

ln conclusion, it is clear that the PJM contracts do not meet the material liquidity 

standard as contemplated by Congress or the CFTC in its SPDC rulemaking. 

Matelial Price Reference 

The second basis for the Commission's determination is that the PJM contract 

serves as a matelial price reference. In this determination, Congress instructed 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 detetmined 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 PJM contracts, the CFTC relies on one reason for material ptice reference: 

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

referred to ICE as a price discovery market for certain power contracts." This argument 

is nearly impossible to respond to as the ECM report did not mention these contracts as a 

potential significant price discovery contract, instead focusing exclusively on the Henry 

Hub LD I natural gas swap. It is impossible to say which market participants made this 

statement in 2007 or the contracts that were referenced, or whether the participants 

distinguish "price transparency" fi"om the legal meaning of "price discove1y ". 

Congress, in promulgating the Farm Bill, ordered the CFTC to undertake a very 

impmtant analysis of the OTC energy markets. Basing a material price reference 

determination on general statements made in a two year old study does not meet 

Congress' intent that the CFTC use its considerable expertise to study the OTC markets. 

Moreover, this ephemeral analysis does not allow the public to comment effectively. 

For the PJM contracts, the P JM Independent System Operator ("ISO") detennines 

the price of the underlying cash market. Therefore the cleared price of electricity, the 

Locational Marginal Price or "LMP", in PJM for each hour reflects natural forces of realtime supply and demand for the physical conm1odity at each pricing point. The PJM 

contracts do not, and cannot, influence the LMP determined by the PJM ISO. As P JM 

states in their comment letter: "the ICE contracts do not determine LMPs in PJM's dayahead and real-time electricity markets. Rather, the prices of the ICE contracts are driven 

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by prices in PJM's LMP based markets." 7 While this is ctitically relevant for all !SOsettled electtic power swaps, it is especially so for daily contracts such as PDP, PDA, and 

ODP which are overwhelmingly traded on the day of and day before publication of 

LMPs. 

Also, if the CFTC determines, despite ICE's arguments to the contrary, that an 

ICE PJM contract qualifies as a SPDC, then similar derivatives offered and cleared by 

ISOs, such as financial transmission rights (FTR)8 and DA/RT virtual markets, 

presumably meet the same SPDC critetia requiring either SPDC designation and 

oversight by the CFTC or an equivalently prescriptive PERC framework featuring 

position limits and large trader reporting. These PJM ISO contracts, like the ICE PJM 

contracts, are cash-settled on ISO LMPs and cleared. 

Finally, the PJM contracts fail the CFTC's material liquidity test and by the plain 

intent of Congress, can not serve as a material price reference. 

Conclusion 

Based on the failure to meet virtually all of the criteria for SPDC determination, it 

is clear that the PJM contracts do not serve as a material price reference or trade with 

material liquidity. Therefore, the Commission should not deem this contract as a 

significant price discovery contracts. Congress ordered the Commission to review the 

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

Oven·eaching 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 bringing transparency and credit 

intermediation to the OTC markets, and should not be disadvantaged relative to the 

opaque, off-exchange markets where no such requirements exist. 

Thank you for the opportunity to comment. 

~ely, 

(h. ~hue Bland 

Director of Regulatory Affairs 

Assistant General Counsel 

7 http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-032.html 

6 http://www.pjm.com/markets-and-operations/ftr.aspx 

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