~)CMEGroup A CME/Chlcqo ao.d ol T..-/NYMEX Company 

Craig S. Donohue 

Chief Executive Officer 

February 10, 2009 

VIA ELECTRONIC MAIL 

David Stawick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21 51 Street, NW 

Washington, DC 20581 

secretary@cftc.gov 

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Re: Proposed Rules for Significant Price Discovery Contracts on Exempt Commercial Markets 

- 73 Fed. Reg. 75888 (December 12. 2008) 

Dear Mr. Stawick: 

CME Group, Inc. ("CME Group") appreciates the opportunity to comment on the Commodity Futures 

Trading Commission's ("CFTC" or the "Commission") proposed rulemaking ("Proposal") with respect to 

Significant Price Discovery Contracts ("SPDC") on Exempt Commercial Markets ("ECM"). In its Proposal, 

the CFTC set forth proposed new rules to implement the CFTC Reauthorization Act of 2008 

("Reauthorization Act"). The Commission also proposes to amend existing regulations for registered 

entities to clarify that such regulations will be applicable to ECMs with SPDCs. 

CME Group was formed by the merger of Chicago Mercantile Exchange Holdings Inc. and CBOT 

Holdings Inc. in 2007, and subsequently merged with NYMEX Holdings, Inc. in 2008. CME Group is the 

parent of four designated contract markets ("DCM"): (1) the Chicago Mercantile Exchange ("CME"); (2) 

the Chicago Board of Trade ("CBOT"); (3) the New York Mercantile Exchange, Inc. ("NYMEX"); and (4) 

the Commodity Exchange, Inc. ("COMEX"). CME is also among the largest Derivatives Clearing 

Organ•zations ("DCC") in the world. CME Group serves the risk management needs of customers around 

the globe. As an international marketplace, CME Group brings buyers and sellers together on the CME 

Globex® electronic trading platform and on trading floors in Chicago and New York. CME Group offers 

the widest range of benchmark products available across all major asset classes, including futures and 

options based on interest rates, equity indexes, foreign exchange, energy, emissions, agricultural 

commodities, metals, and alternative investment products such as weather and real estate. 

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Mr. David Stawick 

February 10, 2009 

Page2 

Background 

The CFTC sets the stage for its proposed new rules and proposed Guidance on Significant Price 

Discovery Contracts ("Guidance") by setting out a detailed background. In its review, the CFTC 

summarizes the multi-tiered regulatory scheme for trading facilities provided by the landmark Commodity 

Futures Modernization Act of 2000 ("CFMA"); the changing ECM landscape; the CFTC's oversight of 

ECMs, its ECM empirical study and its subsequent ECM hearing; and finally the Commission's legislative 

recommendations that led to the Reauthorization Act. Given the new regulatory structure that is set forth 

in the Proposal, which distinguishes between SPDCs that are cleared and those that are uncleared, there 

is merit in reviewing the background on this point. 

Congress determined to amend the Commodity Exchange Act ("CEA") because a broad consensus 

developed within the derivatives community as well as within Congress that when a contract traded on an 

ECM matured and began to serve a significant price discovery function for transactions in commodities in 

interstate commerce: 

"the contract warranted increased oversight to deter and prevent price manipulation or other disruptions 

to market integrity, both on the ECM itself and in any related futures contracts trading on DCMs. Such 

increased oversight would also help to ensure fair competition among ECMs and DCMs trading similar 

products and competing for the same business." (Proposal at 75891.) 

This concern respecting market manipulation and other disruptions to market integrity applies regardless 

of whether a transaction in a SPDC is cleared or uncleared. 

The CFTC's background discussion briefly summarized a study by the CFTC's Office of Chief Economist 

("OCE"). That study reviewed the relationship between natural gas contracts trading on ICE1 and 

NYMEX. OCE collected transaction prices for ICE and NYMEX natural gas contracts between January 3, 

2006, and December 31, 2006, and evaluated trading for 12 separate contract months in each market. 

OCE concluded that, based on the data reviewed, both ICE and NYMEX are significant price discovery 

venues for natural gas futures contracts. OCE's study focused on all price activity in the relevant ICE 

natural gas contract and did not restrict its analysis to cleared trades in that contract. 

1 As noted in the Proposal, "Intercontinental Exchange, or ICE, consists of four separate entities: ICE 

OTC, to which this document refers, is an ECM trading energy products. ICE Future Europe trades 

energy futures and is regulated by the Financial Services Authority of Great Britain; ICE Futures US 

focuses primarily on futures based on soft commodities (e.g., coffee, sugar, cocoa, cotton) and financial 

futures and is regulated by the CFTC; ICE Futures Canada trades futures and options and is regulated by 

the Manitoba Securities Commission." n .19 at 75889. 
Mr. David Stawick 

February 10, 2009 

Page 3 

Furthermore, when the CFTC undertook increased surveillance of trading of certain ICE natural gas swap 

contracts, the Commission did not limit itself to reviewing activity in cleared trades in such products. 

Indeed, in the second of three special calls that the CFTC issued to ICE, the Commission specifically 

sought individual trader position data in addition to the positions held with clearing members, which had 

been requested in the first special call. 

Following the CFTC's September 18, 2007, hearing, the Commission subsequently published a report in 

October 2007, the Report on the Oversight of Trading o.n Regulated Futures Exchanges and Exempt 

Commercial Markets ("ECM Report"), setting forth its findings and legislative recommendations. Among 

the four recommendations in that report, with regard to an ECM contract determined to perform a 

significant price discovery function, the CFTC recommended that such contracts be subject to large trader 

reporting requirements and, as appropriate, position limits or accountability levels comparable to 

requirements on DCM contracts. The CFTC did not restrict such recommendations to cleared trades but 

made them applicable to IDJ. activity in the ECM contract. 

Congress did not limit the requirements on SPDCs to cleared contracts; it gave the CFTC flexibility and 

discretion with regard to the scope of these new requirements. 2 It is reasonable to conclude that the 

flexibility granted to the CFTC was to be exercised in accordance with the findings of the ECM Report as 

well as with the testimony by CFTC officials. Nothing presented to Congress by the CFTC suggested that 

regulation of SPDCs should be limited to those trades that were cleared. To the contrary, a case was 

presented to Congress that narrowing position limit rules to cleared trades would create a loophole and 

encourage market participants to avoid the position limits and other requirements by choosing not to clear 

transactions. 

In light of the above, this comment letter will focus principally on the position limiUievel and large trader 

reporting requirements set forth in the Proposal. These new requirements go to the very heart of the new 

obligations that Congress has imposed on ECMs. 

2 Pursuant to paragraph (D) of new Subsection (7) of Section 2(h), Congress merely provided that the 

Commission shall "take into consideration the differences" between cleared and uncleared trades when 

reviewing the implementation of the Core Principles by an electronic trading facility. This consideration is 

reasonable given that the CFTC's previous experience with such requirements only related to contracts 

executed on a DCM that are required to be cleared on a DCO. Thus, the imposition of requirements on 

uncleared trades and monitoring of the implementation of such requirements is an issue of first 

impression for the Commission. Similarly, while Paragraph (C)(ii) of Subsection (7) gives the electronic 

trading facility reasonable discretion, including with respect to cleared and uncleared trades, in 

establishing the manner of compliance with the core principles, this discretion was only intended to 

provide the same general level of discretion available to DCMs operating under a Core Principles 

oversight regime. 
Mr. David Stawick 

February 10, 2009 

Page4 

Position Limits and Accountability Levels 

We commend the Commission on a number of aspects of the proposed acceptable practices for 

compliance with Core Principle IV (POSITION LIMITATIONS OR ACCOUNTABILITY}. We agree with the 

CFTC that for an SPDC in an exempt commodity, it will be necessary to have hard speculative position 

limits in the spot month and position accountability levels should be established for non-spot individual 

months and for all months combined. We also agree that an ECM that lists a SPDC that is "economically 

equivalent" to another SPDC or to a contract traded on a DCM should set the spot month limit for its 

SPDC at the same level as that in place for the economically equivalent contract. Finally, we agree that 

the ECM should have account aggregation rules in place for SPDCs that apply to accounts under 

common ownership or control or that are traded according to an express or implied agreement. 

That stated, we have grave concerns with regard to the proposed guidance in Appendix B for compliance 

with Core Principle IV that would only require spot month limits for cleared trades. For uncleared trades, 

the CFTC is proposing to require a "volume accountability level" ("VAL"). Under the terms of the Proposal, 

the VAL would need to be set by the ECM at the same level as the spot month limit. Other than the new 

name or reference, it appears that a VAL otherwise would operate in the same manner as a position 

accountability level. 3 While the ECM would have a general duty to monitor the VAL, there is no 

requirement anywhere in the Proposal that provides for any interaction between the monitoring of the 

cleared trades under the hard limit and the monitoring of the uncleared trades under the more flexible 

VAL. 

The Commission states that "[u]ncleared transactions in SPDCs potentially play an important role in risk 

management strategies and price formation." (emphasis added.) p. 75896. However, there is no analysis 

or explanation describing why this role is only a potential one. When a trade in a SPDC contract is 

executed on an ECM, the price information on that trade generally is made available to other eligible 

commercial entities ("ECE") qualified to trade on that platform on a real-time or near real-time basis. The 

ECM does not delay distributing this information on an executed trade until there is clarification as to 

whether or not a particular trade will be cleared. It is reasonable to presume that the ECM does not utilize 

such a delay because the later status (of whether a trade is cleared or uncleared) has no real bearing on 

the value to the market of the price information reflected in that trade. Consequently, the distinction being 

3 In this regard, the Proposal provides that "the electronic trading facility should initiate an investigation to 

determine whether the individual's trading activity is justified and is not intended to manipulate the 

market" and that "as part of its investigation, the electronic trading facility should inquire about the trader's 

rationale for holding a position in excess of the accountability levels." p. 75916. Historicall)(, DCMs have 

had broad discretion in initiating inquiries once an accountability level has been exceeded; this flexibility is 

reflected in the relevant DCM rules. For example, NYMEX Rule 9.26(A)(1) requires, inter alia, any person 

who owns or controls positions in excess of the prescribed levels to "promptly supply to the Exchange 

such information as the Exchange may request. .. " (emphasis added.). While we believe that SPDCs on 

ECMS should be subject to comparable standards to those applicable for DCMs, we do not believe that 

they should be subject to heightened standards exceeding those imposed on DCMs. 
Mr. David Stawick 

February 10, 2009 

PageS 

advanced for the first time in the Proposal between cleared and uncleared trades is clearly at odds to and 

inconsistent with the CFTC's prior analysis and guidance to Congress. 

The spot month limits set by rule by DCMs are typically determined in close consultation with CFTC staff 

prior to the filing of the applicable rule amendments. In general, the guidance from CFTC staff has been 

that, absent the approval of a hedge exemption from the spot month limit, any position in excess of the 

established position limit is deemed by the CFTC to be of sufficient market integrity concern that such a 

position must be regarded as a rule violation necessitating an SRO response to deter any further 

instances of exceeding that specified position limit quantity. 

Yet, under the Proposal, even without an ECE obtaining a hedge exemption from the ECM, the ECE 

automatically would be able to maintain open positions in the SPDC that would be at least double the size 

of what otherwise would be permissible for the "economically equivalent" contract on a DCM. Moreover, 

as long as the ECE could present some evidence to the ECM that it was not intending to manipulate the 

market, it would be permitted to maintain an even larger number of positions without a hedge exemption. 

Cleared and uncleared trades are all in the same SPDC and pose the same market integrity concern. 

However, because the Proposal would establish a lesser standard for one category of SPDCs, the CFTC 

seems to be signaling that market integrity is of lesser interest for these contracts. We disagree. 

Congress passed the Reauthorization Act because it understood that, once a contract was deemed to be 

a SPDC, such a contract raised the same level of market integrity public policy interests and concerns as 

contracts traded on a DCM. However, under the approach set forth in the Proposal, the standards in 

effect at an ECM for a SPDC would be inherently more lax than the requirements applicable for a contract 

trading on a DCM. The proposed approach perpetuates the tilted competitive field that provided an 

incentive for market participants to shift trading activity from the regulated DCM to the unregulated and 

less transparent ECM. It also impairs the ability of DCMs to fulfill their responsibilities to prevent market 

distortions. 

In August of 2006, NYMEX proactively took steps to maintain the integrity of its markets by ordering 

Amaranth to reduce its open positions in the Natural Gas futures contract. Amaranth did so, but Amaranth 

then sharply increased its positions on the unregulated and nontransparent ICE electronic trading 

platform. Because the ICE and NYMEX trading markets for natural gas are tightly linked components of a 

broader natural gas derivatives market, Amaranth's response to NYMEX's regulatory. directive did not 

reduce Amaranth's overall market risk nor the risk of Amaranth's guaranteeing clearing member. 

Furthermore, the integrity of NYMEX markets continued to be affected by and exposed to Amaranth's 

outsized positions in the natural gas market. Moreover, NYMEX had no efficient means to monitor 

Amaranth's positions on ICE or to take steps to require Amaranth to reduce its participation in that trading 

venue. 

Under the Proposal, an ECM would be required to establish a spot month limit on cleared positions. 

Nonetheless, as noted previously, the Proposal also would in effect allow ECEs to begin with positions 

that could be at least double of those that could be maintained on a DCM for essentially the same 
Mr. David Stawick 

February 10, 2009 

Page6 

contract. The only apparent justification in the Proposal for this disparate treatment was the comment that 

the CFTC is: 

"cognizant of the fact that uncleared trades conducted on the ECM may be offset by 

trades done off the facility. Such offsetting transactions consummated outside of an 

ECM typically are not reported to the facility. Thus, the ECM likely would find it difficult 

to net uncleared transactions and maintain records of traders' uncleared positions in a 

given SPDC." p. 75896. 

We understand that it could be impracticable to require ECEs routinely to report all of their OTC positions 

in contracts similar to a SPDC to the ECM. However, in our view, imposing different regulatory 

requirements between cleared and uncleared trades that are executed on the ECM does not sufficiently 

enhance the integrity of the ECM-traded contract as was intended by Congress. In fact, the Proposal 

essentially presents a non-competitive, inequitable and potentially unworkable solution to a market issue 

deemed serious enough by Congress to warrant prompt legislative action. 

We believe that the scope of the regulation should be consistent with the Congressional purpose. 

Consequently, we believe strongly that there should be one position limit and one associated set of 

accountability levels for non spot contracts that applies across all activity for a SPDC, including all cleared 

trades (whether executed on the system or submitted as block trades) in that SPDC as well as any 

uncleared trades executed on the system in that SPDC. 

It is true that, as noted above by the Commission, uncleared trades can be offset by trading done off the 

facility. But cleared trades similarly can be hedged or offset by trading done off the facility as well. 

Therefore, even the netting that is applicable to cleared trades is subject to some approximation. In light 

of this reality, we believe that potential concerns about positions being hedged or offset off the facility are 

best addressed by having one uniform standard that applies to both cleared and uncleared trades and 

then allowing ECEs to provide data on offsetting positions in the context of their ongoing hedge 

exemptions from position limits that presumably would be maintained by many ECEs who are active on 

the system. This should significantly reduce the extent of reporting to the ECM of OTC transactions 

executed off the facility but would still provide for a seamless and consistent treatment across all activity 

on the ECM in the SPDC that fully addresses the market and price impact of such activity. Furthermore, 

non spot-positions subject to position accountability would be applicable to both cleared and uncleared 

trades and would be subject to review and appropriate action by the ECM. 

Congress concluded last year that once a contract is deemed to be a SPDC, the regulatory safeguards in 

place for that SPDC on the ECM needed to be essentially similar to an "economically equivalent" contract 

that is listed for trading on the DCM. Given that a SPDC might be linked to a contract traded on a DCM 

through arbitrage or through linkage to a DCM settlement price, it is difficult to understand why Congress 

would want any other result to govern. 
Mr. David Stawick 

February 10, 2009 

Page? 

Large Trader Reporting 

Under the acceptable practices for compliance with to Core Principle IV in Appendix 8 the Commission 

notes in (b)(8)(ii) that an ECM should establish an effective program for enforcement of position limits for 

SPDCs, which should include a large trader reporting system to monitor and enforce daily compliance 

with position limit rules. These acceptable practices do not establish any reporting requirements to 

facilitate daily monitoring of the VALs that are proposed for uncleared trades in an SPDC. As noted 

above, we believe strongly that it is necessary for both cleared and uncleared trades to be included within 

the scope of the position limit and position accountability level rules. Accordingly, consistent with that 

recommended approach, we believe that Appendix 8 should be revised to make clear that daily large 

trade reporting should be implemented for all cleared trades and also for all uncleared trades that are 

executed on the system. 

Identification of SPDCs 

The Reauthorization Act sets forth four factors to be considered by the CFTC in determining whether a 

contract is a SPDC: price linkage, arbitrage, material price reference and material liquidity. There is no 

priority in this list in the statute, nor do all of the factors need to be present. As noted in the Proposal, the 

Conference Committee Report on the Reauthorization Act provides the Commission with flexibility in 

applying these criteria to particular contracts and markets. p. 75892. 

In general, we find the guidance on these factors set forth in proposed Appendix A to Part 36 to be 

thoughtful and well-reasoned. We do note (and appreciate) the Commission's emphasis on the flexibility 

that it has been accorded in this area. Thus, for example, for both the arbitrage and the price linkage 

factors, the CFTC proposes to use as a threshold a 2.5 per cent price range (between prices in the 

potential SPDC and the other related contract) for 95 per cent of closing or settlement prices over the 

most recent quarter; a linkage to another contract at this level therefore could potentially support a finding 

that an ECM contract was a SPDC. We believe that this is a reasonable test to use as a basic threshold. 

However, there may be instances where the CFTC staff could find that the available evidence supports a 

finding of a SPDC where for example, the data demonstrated a 2.5 per cent price range for 90 per cent of 

closing or settlement prices over the most recent quarter. As we understand it, Appendix A would provide 

Commission staff with sufficient guidance to review and assess such contracts. 

Timeframes for Identification of SPDCs and for Compliance with SPDC Requirements 

Under proposed new CFTC Rule 36.3(c)(3), the Commission would issue an order "[a]fter consideration 

of all relevant information. . .. " p. 75911. The Proposal does not, however, provide for a specific 

timeframe for rendering an order. In light of the market integrity concerns and public policy interests 

underlying the statutory revisions establishing new regulatory oversight requirements for SPDCs, we 

believe that it would be in the public interest for such determinations to be issued within a reasonable 

timeframe following the close of the comment period. We therefore suggest that the Commission 
Mr. David Stawick 

February 10, 2009 

PageS 

consider revising this proposed rule to include a provision under which, absent special circumstances, 

such orders generally would be issued within 60 days following the close of the comment period. 

We have a related concern respecting compliance with the applicable Core Principles. Under proposed 

subsection (4) of Rule 36.3(c), an ECM would have 90 days from the issuance of the CFTC's order to 

submit a written demonstration of compliance with the Core Principles. The market integrity interests and 

concerns associated with such Core Principles also need to be taken into account with regard to this time 

frame. In addition, it is reasonable to conclude that, from a programmatic perspective, ECMs are already 

on notice from the passage of the Reauthorization Act as to the possibility that one or more of their 

contracts may become a SPDC at some future date. Accordingly, we recommend that the Commission 

amend this timeframe from 90 to 45 days. Similarly, the CFTC proposes to allow a 90-day grace period 

(from the date of the ECM's implementation of its new rules) to market participants who have open 

positions in a SPDC contract. For the reasons noted above, we believe that the overall market would be 

better served with a 45-day grace period. 

CME Group thanks the Commission for the opportunity to comment on the Proposal. We would be happy 

to discuss any of these issues with the Commission. If you have any comments or questions, feel free to 

contact me at (312) 930-8275 or at Craig.Donohue@cmegroup.com; or Richard Lamm, Managing 

Director, Chief Regulatory Counsel at (312) 930-2041 or at Richard.Lamm@cmegroup.com; Thomas 

LaSala, Managing Director, NYMEX Chief Regulatory Officer, at (212) 299-2897 or at 

Thomas.Lasala@cmegroup.com; or Brian Regan, Managing Director, Regulatory Counsel at (212) 299-

2207 or at Brian.Regan@cmegroup.com. 

cc: Acting Chairman Michael Dunn 

Commissioner Walter Lukken 

Commissioner Jill E. Sommers 

Commissioner Bart Chilton 

Sincerely, 

&~_j!; f)IM~ Craig S. Donohue 

Susan Nathan, Senior Special Counsel, Division of Market Oversight (via e-mail)