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Received CFTC 

R~r~s Section 

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C.F.T.C. 

Atlanta Ca!9"'Y Chicago Houston Londo,-, ~fF:f"CESOf't>ff!E SECRETARIAl 

September 4, 20092009 SEP 11 PrJ 1 05 

·····.· 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, NW 

COMMENT 

.·• 

Washington, DC 20581 

RE: Determination whether the Carbon Financial Instrument Contract serves a 

Significant Price Discovery Function 

Dear Mr. Stawick: 

The 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 Carbon Financial Instrument Contract 

("CFI") traded on the Chicago Climate Exchange serves a significant price discovery 

function. ICE believes that the CFI does not serve a significant price discovery function 

and that Commission may exceed its jurisdiction if it determines that the CFI serves as a 

significant price discovery contract ("SPDC"). 

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, which are 

principle to principle electronic trading platforms that serve sophisticated market 

participants. ECMs were designed to encourage electronic trading of derivatives. Given 

the sophisticated status ofthe 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 determination: (1) Price Linkage; (2) Arbitrage; (3) Material Price Reference; 

(4) Material Liquidity; and (5) Other Factors. It is important to note that 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 or (2) 

contracts that trade with enough volume to be quoted as an independent price reference 

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

1623 (June 18, 2008). 

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by the public. 2 It is clear that by giving the CFTC tailored authority that Congress 

intended to keep the CFMA's tiered regulatory structure. 

It is against this backdrop that the Commission makes its determination whether 

the CFI serves a significant price discovery function. 

The CFI Contract 

Even in the diverse swaps market, the CFI is a unique contract. The CFI is part of 

the CCX' s innovative program to reduce carbon emissions through a voluntary offset 

program. The contract represents an offset of 1,000 metric tons of carbon dioxide. To 

create the CFI, CCX enters into contracts with participants to reduce carbon dioxide 

emissions through offset projects or technological improvements. 

The physically-delivered CFI is neither a futures contract or a swap. First, and 

foremost, it is a spot contract. As the CFTC's notice points out, there is no open interest 

in the CFI. The CFI requires immediate delivery and payment on the following day. 

Second, the CFI doesn't "expire" like a futures contract or swap, CFI trades in dated 

"vintages" which recognize the carbon offset compliance year. The CCX does trade a 

futures product on its designated contract market, CCFE, which should not be confused 

with the spot contract listed on the ECM. 

The CFTC's Analysis of the CFJ Contract as a Potential SPDC 

The CFTC believes that the CFI serves a significant price discovery function 

based upon two reasons: (1) the CFI contract is materially liquid and (2) the CFI serves as 

a material price reference. A reading of the Reauthorization Act and the Commission's 

SPDC rules demonstrates that the CFI contract meets neither of these tests. 

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. Leaving aside the fact there is no comparable CFI contract listed for 

trading on another ECM or DCM, the CFI fails the Commission's test for material 

liquidity outlined in its rules. 3 The Commission states "[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." 

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

1110 627, 110 Cong., 2nd Sess. at 978-86 (2008). 3 Appendix A to Part 36, 17 C.F.R. 36 (2009). 
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The CFI contract traded, on average, 15 times per day in the second quarter of 

2009. Presumably, this figure sums every vintage of the CFI contract (presently eight are 

listed on the CCX website). 4 Thus, each vintage may trade less than twice a day. Further, 

the CCX is open for 5Yz hours per day. Therefore, a trade occurs on average every 2% 

hours. This certainly fails the Commission (and Congress') threshold for material 

liquidity. A trade every couple of hours does not equate to the "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." 

The second basis for the Commission's determination is that the CFI serves as a 

material price reference. 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 determined by referencing, the prices generated" by the ECM. 

The Commission elaborates on this by saying that it will rely on one oftwo 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. 

The Commission, in determining that the CFI serves a material price reference, 

relies on the fact that the CFI is a spot contract. The only "cash" market that uses the CFI 

as a price benchmark is the CCX. The only traders that refer to the CFI trade on CCX. 

Under the Commission's theory, any spot contract automatically serves as a material 

price reference, simply because the contract references itself The Commission points 

out that the CCX is the only entity that lists a CFI contract. While that may be true, there 

are numerous carbon offset programs that are similar to the CFI. 5 In any event, sole 

listing alone of a contract is not and should not be a material price reference determinant. 

It is clear that the CFI does not serve as a material price reference. Further, the 

CFI does not meet the Commission's own test for material liquidity. On this basis, the 

Commission should not deem the CFI contract a significant price discovery contract. 

The CFI is a Spot Contract and Outside of CFTC Jurisdiction 

The CFI, having no open interest and settling the next day, is a spot contract. 6 In 

asserting jurisdiction, the Commission relies on the "agreement, contract or transaction" 

language from Section 2(h)(7) of the Commodity Exchange Act, finding that the 

4 www.chicagoclimatex.com 

5 Currently, there are a number of regional carbon cap and trade programs, such as the Western 

Climate Initiative. 6 See, e.g., CFTC v. Frankwell Bullion Ltd., 99 F.3d 299 (9th Cir. I 996), aff'g [I 994-I 996 Transfer 

Binder] Comm. Fut. L. Rep. (CCH) 26,222 (N.D. Cal. I994). 
language does not require the Commission to determine whether the potential SPDC is 

within the Commission's jurisdiction. 7 By making this determination, the Commission is 

broadly asserting jurisdiction over the spot market if the spot contract is electronically 

traded. 

This finding could lead to adverse consequences for the Commission's market 

oversight, confuse long-held jurisdictional expectations, and duplicate regulation. For 

example, FERC regulates physical spot and forward natural gas and electricity markets, 

including Independent System Operators' (ISO) real-time and day-ahead electricity 

markets. The latter clearly meet material liquidity and price reference criteria for SPDCs. 

Though no ISO has registered as an ECM, many do offer financially-settled instruments, 

like transmission or congestion rights, for trading. Given that the language in la of the 

CEA defining "trading facility" uses the same "agreement, contract or transaction" 

wording, the Commission's interpretation may lead to unintended consequences. If an 

ISO in the electricity market allows users to trade congestion rights, the CFTC could also 

assert or be expected to assert jurisdiction over the ISO spot markets if they meet SPDC 

criteria. 

Conclusion 

The CFTC Reauthorization Act struck the appropriate balance between ECM and 

non-ECM (physical spot and forward markets) market oversight. If the Commission 

notifies a trading facility listing a spot contract that that contract is deemed an SPDC, we 

presume the trading facility would withdraw its ECM notification with regard to the spot 

contract in question. 

7 

Thank you for the opportunity to comment. 

Sincerely, 

R. Trabue Bland 

Director of Regulatory Affairs 

Assistant General Counsel 

42 Fed. Reg 42052 at 42054 (August 20, 2009).