0 9~J.. 7 Received CFTC 

R~~orps Section 

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C.F.T.C. ~ OFFICE OF THE SECRETARIAT 

2009 NDU 9 ArJ 10 1~ ICe A1lanta Calgary Chicago Houston London New York Singapore 

Mr. David Stawick 

Secretary 

November 4, 2009 

Commodity Futures Trading Commission 

1155 2181 Street, NW 

Washington, DC 20581 COMMENT 

RE: Determination whether the Henry Financial Swing Swap contract, the Henry 

Financial Basis Swap contract and the Henry Financial Index Swap contract 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 Henry Financial Swing Swap contract 

("HHD"), the Henry Financial Basis Swap contract ("HEN") and the He:riry Financial 

Index Swap contracts ("HIS") 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 

determines that these contracts serve as a significant price discovery contracts ("SPDC"). 

In addition to the absence of minimum liquidity thresholds, the inability of a basis swap 

to affect pricing on a designated contract market and the lack of a material price reference 

precludes this contract 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 

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 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 

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? 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 HHD, HEN and HIS serve a significant price discovery function. 

The Henry Financial Basis Contract, Henry Financial Index Contracts and the Henry 

Financial Swing Contract 

The HEN contract is a monthly contract that is cash settled to the difference 

between the Platt's Inside FERC Gas Market Report and the final settlement price of the 

NYMEX/CME physically delivered natural gas contract ("NG"). The HEN contract 

gives traders the ability to hedge the differential between the NYMEX NG contract, 

which serves as a proxy for the U.S. price of natural gas and the physical price of natural 

gas at the Henry Hub. Like the HEN contract, the HIS contract is a cash settled monthly 

contract; however, the HIS settles to the difference between Platt's Gas Daily and Platt's 

Inside FERC Gas Market Report. The majority of the HEN and HIS contracts are 

executed in combination. 

The HHD contract differs from the HEN and HIS contracts. The HHD is a daily 

contract that settles on the spot price which is established by a daily price survey 

published in Platt's Gas Daily. In essence, the HHD contract is a daily cash-settled spot 

contract that trades over 65 consecutive calendar days. 

The CFTC's Analysis 

The CFTC believes that the HEN contract could potentially serve a significant 

price discovery function based upon three factors: (1) material liquidity; (2) material 

price reference; and{3) price linkage. The CFTC believes that the HIS contract could 

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 Commodity Futures Trading Commission, Report of the Oversight ofTrading on Regulated Futures 

Exchanges and Exempt Commercial Markets (October 2007) 

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serve a significant price discovery function based upon two factors: (1) material liquidity 

and (2) material price reference. Finally, the CFTC believes that the HHD could serve a 

significant price discovery function for four reasons: (1) material liquidity; (2) material 

price reference; (3) price linkage; and ( 4) a potential to arbitrage between the NG contract 

and the HHD contract. ICE does not believe that the HEN, HIS, and HHD contracts meet 

these tests. 

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". 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".4 Finally, as Congress 

mandated in the Farm Bill, "the Commission should not make a determination 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 

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). 

3 
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solely for clearing purposes. For the HEN basis swap, only about 70% of all trades were 

actually executed on the ICE platform; similarly, for the HIS index swap, only about 74% 

of all trades were actually executed on the ICE platform. Finally, for the HHD swing 

swap, 81% of the trades actually executed on the ICE platform occurred in the single 

most liquid, usually prompt, month of the contract. 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 36% of all HEN; 40% of 

the HIS and 78% of the HHD volume was actually executed on the ICE platform. 

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

made in all 120 months of each contract or in the case of the HHD contract, in all 

contract days. Furthermore, some of the trades were executed in seasonal (summer or 

winter) 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. For the HEN and HIS basis swap, 98% of 

the trades and volume actually executed on the ICE platform occurred in the single most 

liquid, usually prompt, 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 steam of prices" can be observed. According to the statistics cited by the 

CFTC, the HEN basis swap traded an average of 10 times per day, but only 69% (98% x 

70%) of these trades (and an even lower 35% of total volume) were actually executed on 

the ICE platform in the single most liquid, usually prompt, month of the contract. Given 

an eight hour trading day6

, this means that the HEN basis swap traded only about once 

every 70 minutes. 

The HIS index swap traded an average of8 times per day, according to the CFTC, 

but only 73% (98% x 74%) of these trades (and an even lower 39% of total volume) were 

actually executed on the ICE platform in the single most liquid, usually prompt, month of 

the contract. Again, given an eight hour trading day, this means that the HIS index swap 

traded only about once every 82 minutes. 

Finally, according to the statistics cited by the CFTC, the HHD swing swap traded 

an average of 82 times per day, but only 78% of total volume was actually executed on 

the ICE platform in the single most liquid, usually prompt, month of the contract. Given 

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

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an eight hour trading day, this means that the HHD swing swap traded only about once 

every 6 minutes. 

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 LDI natural gas contract traded, on 

average, over 4,000 times per day on the ICE platform alone. 

In conclusion, it is clear that the HEN, HIS, or HHD contracts do not meet the 

material liquidity standard as contemplated by Congress or the CFTC in its SPDC 

rulemaking. 

Material Price Reference 

The second basis for the Commission's determination is that the HEN, HHD and 

HIS contracts serves as a material 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 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 HEN, HIS and HHD contracts, the CFTC relies on one reason for material 

price reference: (I) that "the Commission's ECM study, in general, stated that certain 

market participants referred to ICE as a price discovery market for certain natural gas 

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 LDI 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" from the legal 

meaning of "price discovery". Congress, in writing the Farm Bill, ordered the CFTC to 

undertake a very important 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. Finally, all three contracts fail the CFTC's material liquidity test and by the 

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

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Price Linkage 

The third basis for the CFTC's determination that HEN and HHD are significant 

price discovery contracts is that they are price linked to the NYMEX/CME natural gas 

futures contract (NG). As stated above, Congress instructed that the "Commission 

should not make a determination 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." The notice of intent implies that any price linkage is significant, even if it 

does not affect price discovery on a DCM. This analysis misses Congress' intent in the 

significant price discovery legislation. The intent, plainly stated above, was to capture 

contracts that could affect price discovery on a DCM. A basis swap uses the NG price 

only as a reference to create the basis price. As an analogy, implying price linkage on a 

basis swap is akin to stating that the price at a local pump in Mississippi affects the global 

price of crude oil. Further, using the CFTC's interpretation of price linkage, given that 

the HEN and HHD is priced in dollars, then the HEN and HHD contract could be "price 

linked" to a U.S. Dollar futures contract traded on a DCM. This is neither a rational 

result nor Congress' intent. In addition, each contract trades on screen only a few times 

per day, it is hard to see how they affects price discovery in the NG contract. Finally, 

these contracts settle on reference prices that are established by index providers and not 

determined by the ECM or any other DCM as required under the SPDC guidelines. 

Arbitrage 

Finally, the CFTC bases its HHD significant price discovery determination on the 

possibility that traders can arbitrage between the HHD and NG contracts. While the price 

between the.HHD and CME's NG contract is loosely correlated, arbitrage is not viable 

given the HHD's product design. Unlike the NG, ICE's HHD is a "decaying" product 

that expires daily throughout its contract term. The HHD typically trades "balance of 

month" therefore using multiple daily settlement prices. In fact, the majority of HHD 

trades are intra-month after the NG contract has already been priced. For example, the 

November NG contract expired on October 28th at $4.898 but the HDD continues to 

trade November contracts as "balance of month". On November 3rd, the HDD was 27 

individually settled contracts- one for each day from November 4 through November 30. 

Subsequently on November 4th, the HDD decays into a 26 contract series (November 5 

through November 30). Over the remaining term, each day will produce one contract 

expiration which is final settled to the Platts Gas Daily's day ahead physical price as 

published in McGraw Hills' daily newsletter. Moreover, the full prompt month HHD 

series rarely trades until the last week of the month. Finally, for significance, the HHD 

must affect the final settlement price of the NG contract. As noted above, the HHD's thin 

liquidity and decaying behavior could not possibly influence the spot month NG price. 

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Conclusion 

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

is clear that the HEN, HIS, and HHD do not serve as a material price reference or trade 

with material liquidity. Further, the HEN and HHD can not be price linked to a 

designated contract market. Finally, the HHD can not be arbitraged with the NG contract. 

Therefore, the Commission should not deem these contracts as significant price discovery 

contracts. Congress ordered the Commission to review the electronic OTC markets for 

contracts that serve a significant price discovery function. Overreaching 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 perform 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. 

Sincerely, 

R. Trabue Bland 

Director ofRegulatory Affairs 

Assistant General Counsel 

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