Received CFTC 

Records Section 

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ICe Atlanta Calgary Chicago Houston London 

Mr. David Stawick 

Secretary 

October 21, 2009 

Commodity Futures Trading Commission 

1155 21 81 Street, NW 

Washington, DC 20581 

ReceivedCFTC 

Records ~tion 

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COMMENT 

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RE: Determination whether the Carbon Financial Instrument Contract serves a N ; :-n 

Significant Price Discovery Function 

Dear Mr. Stawick: 

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IntercontinentalExchange, Inc. ("ICE") welcomes the opportunity to comm~ on~ 

the Commodity Futures Trading Commission's ("CFTC" or "Commission") notice of 

intent ("notice") to determine whether the following contracts serve a significant price 

discovery function: 

• SP-15 Financial Day-Ahead LMP Peak ("SPM") contract, SP-15 Financial DayAhead LMP Peak Daily ("SDP") contract, SP-15 Financial Day-Ahead LMP OffPeak Daily ("SQP") contract; SP-15 Financial Swap Real Time LMP- Peak Daily 

("SRP") contract, SP-15 Financial Day-Ahead LMP Off-Peak ("OFP") contract 

(collectively the SP-15 contracts) 

• NP-15 Financial Day-Ahead LMP Peak Daily ("DPN") contract, NP-15 Financial 

Day-Ahead LMP Off-Peak Daily ("UNP") (collectively, the NP-15 contracts) 

• Mid-C Financial Peak contract ("MDC"), Mid-C Financial Peak Daily ("MPD"), 

Mid-C Financial Off-Peak ("OMC") contract, Mid-C Financial Off-Peak Daily 

("MXO") Mid-C contract (collectively, the Mid-C contracts) 

ICE believes that these contracts do not serve a significant price discovery function, and 

that the Commission may exceed its jurisdiction if it determines that these contracts serve 

as a significant price discovery contracts ("SPDC"). In addition to the absence of 

minimum liquidity thresholds, the existence of pricing regimes established under the 

Federal Energy Regulatory Commission, which include locational marginal pricing and 

independent systems operators further precludes many of 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 principle to principle electronic trading platforms that serve sophisticated 

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

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 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 ("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. 

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

the NP-15, SP-15, and Mid-C contracts serve a significant price discovery function. 

The NP-15, SP-15, and Mid-C Contracts 

ICE was formed 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 formerly 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 ofthe 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. In California, the ISO, CAISO, 

operates the "physical market" and determines locational marginal pricing ("LMP") in an 

effort to maximize the efficient use of the power grid. Following the CAISO Market 

Redesign and Technology Upgrade ("MRTU"), the ICE contracts for NP-15 and SP-15 

were designed to settle on the LMP price as determined by CAISO. Both contracts are 

cash-settled and neither plays a role in determining the LMP. 

The Mid-Columbia contract, or Mid-C, is also a cash-settled contract, but rather 

than settling on a price determined by an ISO, it settles on the prices published in the 

"ICE Day Ahead Power Price Report". The ICE Day Ahead Power Price Report is an 

index of the physical trades in Mid-C reported independently to ICE by market 

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

1623 (June 18, 2008). 2 The Joint Explanatory Statement of the Committee of Agriculture Conference, H.R. Rep. No. 

Ill 0 627, II 0 Cong., 2"ct Sess. at 978-86 (2008). 

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participants. The Mid-C contract thus reflects the physically-settled market, and does not 

play a role in establishing the price upon which it settles. 

The CFTC's Analysis 

The CFTC believes that the NP-15, SP-15, and Mid-C could potentially serve a 

significant price discovery function based upon two factors: (1) the NP-15, SP-15, and 

Mid-C contracts are materially liquid; and.(2) the NP-15, SP-15, and Mid-C contracts 

serve as a material price reference. ICE believes that these contracts do not meet either 

test. 

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 effec't on other 

agreements, contracts, or transactions listed for trading ... on a designated contract 

market" or ECM. There are no comparable power contracts listed for trading on another 

ECM or DCM that trade with any liquidity, thus the NP-15, SP-15, and Mid-C contracts 

must be decided on their merits. The Commission has issued guidelines stating 

"[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"? 

In the notice of intent, the CFTC seems to have adopted a five trade per day test 

for material liquidity. The CFTC's test includes trades made in all months, thus, just five 

trades spread out over, for example, a 110 month trading period would meet this test. 

This very low threshold is at odds with Congress's intent that the CFTC include "material 

liquidity" in its analysis for significant price discovery. At the very least, the CFTC 

should reconcile how five trades per day equate to a "more or less continuous steam of 

prices" as mentioned above. 

In the analysis of the SP-15, NP-15, and Mid-C contracts, it should be noted that 

these contracts only trade on the ECM platform a couple of times per day. For example, 

the OMC contract trades roughly six trades per day. However, the analysis does not state 

that nearly 80% of these transactions are not executed on the ECM, but rather are 

executed off-exchange and blocked into ICE for clearing. Similarly, in the MDC contract 

only 35% of its trades are executed on the ECM, and in the SP-15 and NP-15 contracts, 

the majority of the SPM and OFP transactions are executed off-exchange and blocked in 

for clearing. For these contracts, position limits on trading would effectively be clearing 

limitations. Furthermore, with all of the contracts, a trade every couple of hours does not 

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

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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 NP-15, SP-15 

and Mid-C contracts serve as material price references. 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 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 SP-15 and NP-15 contracts, the CAISO determines the price of the 

underlying cash market. This is explained in the CAISO MRTU. Therefore the cleared 

price of electricity in CAISO for each hour, the LMP, reflects natural forces of supply and 

demand for the physical commodity at each pricing point. The ICE swaps market does not, 

and cannot, influence the LMP in CAISO. The only factors CAISO takes into consideration 

in setting the LMP for each hour is the available supply of physical electricity and the 

available demand for physical electricity. 

The Mid-C contracts settle on an ICE index of physical market trades. This is akin to 

an LMP determined by an ISO. The Mid-C cash-settled swaps reflect the physical market 

price, not vice versa and, like the SP-15 and NP-15 contracts, do not affect the price of the 

underlying cash market. 

It is clear that the NP-15 and SP-15 do not serve as a material price reference as 

the CAISO sets the price of power independently of the financially-settled power swaps. 

Further, the Mid-C, NP-15, and SP-15 do not meet the Commission's own test for 

material liquidity. On this basis, the Commission should not deem these contracts as 

significant price discovery contracts. 

Thank you for the opportunity to comment. 

Sincerely, 

R. Trabue Bland 

Director of Regulatory Affairs 

Assistant General Counsel 

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