Table of Contents 

I. Executive Summary 

II. Hearing Participants 

III. Introduction 

IV. Background 

 A. Statutory and Regulatory Requirements 

1. Risk-Based, Multi-Tiered Approach to Regulation 

2. Regulatory Requirements for ECMs 

3. Differences Between ECMs and DCMs 

 B. Evolution of ECMs Since 2000 

 C. Price Discovery on ICE 

 D. Economic Analysis of Price Discovery on NYMEX and ICE 

 E. ECMs and Market Surveillance 

1. Focus of Commission Surveillance of Energy Markets 

2. Information Received from DCMs 

3. Special Calls to ICE 

V. The Commission’s ECM Hearing 

 

VI. Findings and Recommendations 

 A. Commission Findings 

 B. Commission Legislative Recommendations 

 

 C. Other Recommendations
I. Executive Summary 

On September 18, 2007, the Commodity Futures Trading Commission (CFTC or Commission) 

held a hearing to examine the oversight of trading on regulated futures exchanges (designated 

contract markets or DCMs) and exempt commercial markets (ECMs). Witnesses included 

Commission staff, representatives of DCMs and ECMs, and representatives of a broad spectrum 

of market users and consumers. 

ECMs came into being through the Commodity Futures Modernization Act of 2000 (CFMA), 

which amended the Commodity Exchange Act (CEA or Act) and replaced the “one-size-fits-all” 

supervisory framework for futures trading with a risk-based, tiered structure in which the level of 

regulation is tailored to the type of market and the risks associated with it. While there are small 

start-up ECMs, some ECMs have taken on the characteristics of DCMs. Of particular note to 

Commission staff is the development by the InterContinental Exchange (ICE) of a “look-alike” 

natural gas contract with a settlement price linked to the settlement price of the New York 

Mercantile Exchange (NYMEX) natural gas benchmark futures contract. Such linkage increases 

the possibility that the ECM contract is serving a significant price discovery role and could 

provide incentive to manipulate the settlement price of the DCM contract. 

The Commission’s hearing focused on a number of issues, including the tiered regulatory 

approach of the CFMA and whether this risk-based model is beneficial; the similarities and 

differences between ECMs and DCMs; the associated regulatory risks of each market category; 

the types of regulatory or legislative changes that may be appropriate to address identified risks; 

and the impact that regulatory or legislative changes might have on the U.S. futures industry and 

the global competitiveness of the U.S. financial industry. 

While many testified that the tiered regulatory structure of the CFMA was successful and should 

not be eliminated, witnesses also described concerns associated with the current regulatory 

structure governing ECMs and the regulatory disparity between DCMs and ECMs. Witnesses 

raised concern that this disparity increased the susceptibility of the markets to manipulation and 

disadvantaged the competitive posture of regulated exchanges that offer virtually identical 

products. Generally, most witnesses believed that some changes to the ECM provisions may be 

appropriate, as long as they are prudently targeted and do not adversely affect the ability of 

established ECMs to innovate and grow. 

Based upon the hearing and its experience and expertise in these areas, the Commission finds 

that the risk-based, tiered approach has operated effectively. ECMs have proven popular for new 

start-up markets and have provided competition for DCMs, spurring them toward innovations of 

their own. 

To the extent that trading volume on an ECM contract remains low and its prices are not 

significantly relied upon by other markets, the current level of regulation is appropriate. When 

an ECM contract matures and begins to serve a significant price discovery function for 

transactions in commodities in interstate commerce, the futures contract warrants some increased 

oversight to deter and prevent price manipulation or other disruptions to market integrity. This 

2
also will help to ensure “fair competition” among certain ECMs and DCMs that are trading 

similar products and are vying for the same business. 

Based upon the foregoing, the Commission recommends the following legislative changes for 

ECM contracts that are determined to serve a significant price discovery function: 

1. Large Trader Position Reporting - An ECM contract that is determined to serve a 

significant price discovery function should be subject to large trader position reporting 

requirements comparable to those that currently apply to all DCM contracts. A large 

trader reporting system would enable the Commission’s market surveillance staff to 

monitor positions on a daily basis to detect and deter possible manipulative schemes. 

2. Position Limits and/or Accountability Level Regime - An ECM should be required to 

adopt position limits or accountability levels, as appropriate, for a listed contract that 

serves a significant price discovery function similar to the limits on DCMs. 

3. Self Regulatory Oversight - An ECM should be required to monitor trading of a listed 

contract that serves a significant price discovery function to detect and prevent 

manipulation, price distortion, and disruptions of the delivery or cash-settlement process. 

4. Emergency Authority - The Commission and ECM should be provided with emergency 

authority to alter or supplement contract rules, liquidate open positions, and suspend or 

curtail trading in any listed contract that serves a significant price discovery function. 

These authorities would be essential tools for the Commission and an ECM to prevent 

manipulation and disruptions of the delivery or cash-settlement process. 

 

The determination of whether an ECM contract serves a significant price discovery function 

should focus on the following factors: (1) Material Liquidity - trading volume in the ECM 

contract must be significant enough to affect regulated markets or to become a pricing 

benchmark; and (2) Linkage/Material Price Reference - the relevant ECM contract must either 

be influencing other markets and transactions through this linkage or be materially referenced by 

others in interstate commerce on a frequent and recurring basis. 

In addition, to promote greater understanding of trading in energy futures products, the 

Commission intends to: (1) establish an Energy Markets Advisory Committee to conduct public 

meetings on issues affecting energy producers, distributors, market users and consumers; and (2) 

work closely with the Federal Energy Regulatory Commission (FERC) to educate and develop 

best practices for utilities and others who use NYMEX settlement prices as hedging vehicles and 

benchmarks in pricing their energy products. 

3
II. Hearing Participants 

CFTC Commissioners 

• Walter L. Lukken – Acting Chairman 

• Michael V. Dunn – Commissioner 

• Jill E. Sommers – Commissioner 

• Bartholomew H. Chilton – Commissioner 

 Panel I – CFTC Staff Witnesses 

• Terry S. Arbit – General Counsel 

• John F. Fenton – Deputy Director for Market Surveillance, Division of Market Oversight 

• Jeffrey H. Harris – Chief Economist 

• Richard A. Shilts – Director, Division of Market Oversight 

 

Panel II – Trading Facilities 

• Craig S. Donohue – Chief Executive Officer and Director, CME Group, Inc. 

• Peter Krenkel – President, Natural Gas Exchange, Inc. 

• James E. Newsome – President and Chief Executive Officer, New York Mercantile 

Exchange 

• Richard L. Sandor – Chairman and Chief Executive Officer, Chicago Climate Exchange 

• Jeffrey C. Sprecher – Chairman and Chief Executive Officer, InterContinental Exchange, 

Inc. 

 

Panel III – Market Users 

• Laura Campbell – Assistant Manager for Energy Resources, Memphis Light Gas & 

Water; Member, American Public Gas Association 

• John M. Damgard – President, Futures Industry Association 

• R. “Skip” Horvath – President, The Natural Gas Supply Association 

• Russ Stolle – Senior Vice President, Global Public Affairs and Communication, 

Huntsman Corporation 

 

Panel IV – Market Users 

• Mark Cooper – Director of Research, Consumer Federation of America 

• Sean Cota – President, Cota & Cota, Inc.; President, New England Fuel Institute; 

Northeast Chair, Petroleum Marketers Association of America 

• John G. Gaine – President, Managed Funds Association 

• Greg Zerzan – Counsel and Head of Global Public Policy, International Swaps and 

Derivatives Association, Inc. 

4
III. Introduction 

On September 18, 2007, the Commodity Futures Trading Commission (CFTC or Commission) 

held a hearing to examine the oversight of trading on regulated futures exchanges (DCMs) and 

exempt commercial markets (ECMs).1 An ECM is a relatively new type of derivatives market 

that came into being by virtue of the provisions of the Commodity Futures Modernization Act of 

2000 (CFMA). Although ECMs are subject to certain recordkeeping and reporting requirements, 

as well as the anti-fraud and anti-manipulation provisions of the Commodity Exchange Act 

(CEA or Act), they are not considered to be “regulated” markets.2

 

The Commission’s review of trading on ECMs was prompted by several factors. One 

consideration was that nearly seven years have passed since adoption of the CFMA. Over this 

period, derivatives markets generally, and ECMs in particular, have continued to grow and 

evolve. Thus, the Commission determined that it was appropriate to review and evaluate how 

well the Act’s ECM provisions are functioning and whether any adjustments may be needed. In 

addition, recent energy market volatility has raised questions regarding the role that trading on 

ECMs plays in these vital markets.3

 Concerns among lawmakers regarding energy markets have 

prompted a number of legislative proposals currently pending before Congress that would amend 

the Act’s ECM provisions. In addition, the anticipated introduction of CFTC reauthorization 

legislation, which may also include amendments to the Act’s ECM provisions, provides an 

opportunity for the Commission to weigh in on this important topic. As such, the Commission’s 

review and report is intended to inform this debate in Congress. 

Witnesses at the hearing included Commission staff, representatives of DCMs and ECMs, and 

representatives of a broad spectrum of market users and consumer groups. This report provides 

information regarding the relevant regulatory structure, reviews the testimony given at the 

hearing, and presents the Commission’s findings and recommendations based on the hearing 

testimony and the Commission’s expertise and experience administering the Act. 

 

1

 In lieu of attaching lengthy appendices to this report, the Commission has posted a transcript of the hearing, copies 

of the witnesses’ written statements and exhibits, and other relevant background materials on its website at 

http://www.cftc.gov/newsroom/cftcevents/2007/event091807.html. 

2 See 7 U.S.C. § 2(h)(5)(F) (prohibiting ECMs from representing that they are registered with, designated, 

recognized, licensed, or approved by the Commission). 

3 See e.g., The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat, 

Staff Report by the Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and 

Government Affairs, 109th Cong, 2nd Sess., June 27, 2007. 

5
IV. Background 

A. Statutory and Regulatory Requirements 

 1. Risk-Based, Multi-Tiered Approach to Regulation 

The CFMA amended the Act to replace the historical “one-size-fits-all” supervisory framework 

for futures trading with a risk-based statutory structure in which the level of regulation is tailored 

to the type of market and the risks associated with that market. Based on recommendations from 

a report of the President’s Working Group on Financial Markets (PWG)4, the CFMA also 

provided much-needed legal certainty to the burgeoning over-the-counter (OTC) markets by 

creating statutory exclusions and exemptions from regulation for swaps and other OTC 

derivatives. The new framework was intended to create a regulatory environment that would 

promote continued growth and innovation in both the exchange and OTC derivatives markets 

and foster competition in a rapidly changing global marketplace. 

Drawing from the Commission’s “New Regulatory Framework,” which was finalized just prior 

to the enactment of the CFMA5, Congress codified in the CFMA a multi-tiered market 

framework in which the level of oversight applied is based primarily on the nature of the 

commodity being traded and the participants who are trading. In general, where access to a 

trading facility is restricted to more sophisticated traders or commercial participants, or where 

the type of commodity being traded poses a relatively low risk of susceptibility to manipulation, 

regulatory oversight is reduced to reflect the reduced need for supervision of that market. 

Markets with unrestricted commodity offerings open to all types of participants (DCMs) are 

subject to the highest level of regulatory oversight. 7 U.S.C. §§ 7, et seq. 

The CFMA also created an exchange category called a derivatives transaction execution facility 

(DTEF). 7 U.S.C. §§ 7a, et seq. There are two types of DTEF – retail and commercial. DTEFs 

have fewer regulatory requirements than those for DCMs, but are subject to differing limitations 

on eligible traders and the commodities that may be traded. Although subject to a lighter 

regulatory regime than the DCM, the DTEFs must have compliance and surveillance programs, 

and must undertake significant self-regulatory responsibilities, including establishing and 

enforcing rules to deter trading abuses and monitoring the market to ensure orderly trading.6

A third market category created by the CFMA is the exempt board of trade (EBOT). 7 U.S.C. 

§§ 7a-3, et seq. Unlike DCMs and DTEFs, EBOTs are not registered with, or designated by, the 

Commission. EBOTs are exempt from most provisions of the CEA (other than its anti-fraud and 

anti-manipulation prohibitions), but are subject to certain commodity and participant restrictions. 

 

4 Over-the-Counter Derivatives Markets and the Commodity Exchange Act, Report of the President’s Working 

Group on Financial Markets, November 1999. 

5

 See A New Regulatory Framework for Multilateral Transaction Execution Facilities, Intermediaries and Clearing 

Organizations, 65 Fed. Reg. 77962 (CFTC December 13, 2000) (adopting final rules); and 65 Fed. Reg. 82272 

(CFTC December 28, 2000) (withdrawing final rules to determine their compatibility with the CFMA). 

6

 To date, no trading facility has applied to the Commission to register as a DTEF. 

6
Specifically, the commodities that can be traded on an EBOT are those defined as “excluded 

commodities,” such as an interest rate, exchange rate, credit risk or measure, debt, measure of 

inflation or other macroeconomic index or measure. 7 U.S.C. § 1a(13). EBOTs must limit 

access to certain institutional and sophisticated persons defined as “eligible contract 

participants.” 7 U.S.C. § 1a(12).7

In addition to creating three new market categories, the CFMA created several exclusions from 

regulation for certain swaps and other derivatives traded OTC on a bilateral basis.8

 These 

provisions reflected the view, consistent with the PWG report and various Congressional and 

Commission actions during the preceding decade, that off-exchange transactions for certain 

commodities between sophisticated counterparties do not necessarily require the full weight of 

the protections that the CEA provides for transactions executed on DCMs.9

Finally, the CFMA provided a separate exemption for transactions executed on ECMs under 

section 2(h) of the Act. 7 U.S.C. §§ 2(h)(3)-(5).10 This exemption retains for the CFTC certain 

residual authorities over these transactions. To qualify for the ECM exemption, the transactions 

are required to be executed on electronic trading facilities on which multiple persons have the 

ability to trade contracts by accepting bids and offers from multiple other participants. The 

commodities eligible to be traded on an ECM are limited to “exempt commodities,” which 

exclude agricultural and financial products but include primarily energy, metals, chemicals, and 

emission allowances. 7 U.S.C. § 1a(14). Under this exemption, ECMs must limit access to a 

 

7

 The term “eligible contract participant” (ECP) refers to institutional and highly accredited participants such as, 

among others, financial institutions, registered investment companies, corporations, partnerships, trusts, and 

individuals having total assets exceeding $10,000,000. 

8

 For example, Section 2(g) created an exclusion from the CEA for swaps entered into between ECPs. 7 U.S.C. 

§ 2(g). Similarly excluded are transactions between ECPs involving excluded commodities that are not executed on 

a trading facility. 7 U.S.C. § 2(d)(1). As pertains to energy commodities, where manipulation can be a concern, 

CEA Section 2(h)(1) provides that bilateral energy transactions entered into between certain defined commercial 

entities are exempt from the CEA, except for the CEA’s anti-fraud and anti-manipulation prohibitions. 7 U.S.C. 

§ 2(h)(1). 

9 See e.g., Policy Statement Concerning Swap Transactions, 54 Fed. Reg. 30,694 (CFTC July 21, 1989) (stating that 

“at this time most swap transactions, although possessing elements of futures or options contracts, are not 

appropriately regulated as such under the CEA....”); Exemption for Certain Contracts Involving Energy Products, 

58 Fed. Reg. 21286 (CFTC April 20, 1993) (granting an exemption for certain contracts involving covered energy 

products entered into between commercial participants) (“Energy Exemption”). The Energy Exemption was part of 

a series of Commission orders issued pursuant to the Futures Trading Practices Act of 1992, which provided the 

Commission with explicit exemptive authority to be utilized as “a means of providing certainty and stability to 

existing and emerging markets so that financial innovation and market development can proceed in an effective and 

competitive manner.” H. Rep. No. 102-978, 102d Cong., 2d Sess. at 81 (1992). 

10 The current language of Section 2(h) initially passed the House of Representatives on October 19, 2000 by a vote 

of 377-4 (146 CR H10411, October 19, 2000) with a Statement of Administrative Policy in support of the 

legislation. This identical language was again passed as part of the CFMA in HR 4577 by both the House and the 

Senate on December 14 and 15, 2000, respectively (146 CR H2181, December 14, 2000 and 146 CR S11866, 

December 15, 2000). 

7
subset of ECPs defined as “eligible commercial entities” (ECEs) that trade on their own behalf. 

7 U.S.C. § 1a(11).11 

Because ECMs are trading facilities where commercial and sophisticated entities, on a principalto-principal basis, come together to trade commodities where manipulation can be a concern, 

they occupy their own niche in the risk-based, multi-tiered spectrum of regulation under the Act. 

As such, they are subject to greater regulatory requirements than EBOTs or bilateral OTC 

transactions, yet are not regulated to the same degree as DCMs or DTEFs. 

 2. Regulatory Requirements for ECMs 

ECMs are subject to certain recordkeeping and reporting requirements under the CEA. For 

example, an ECM must maintain for five years, and make available for inspection upon request 

by the Commission, records of its activities related to its business as a trading facility. 7 U.S.C. 

§ 2(h)(5)(B)(ii). More specifically, under Commission Rule 36.3, an ECM must identify to the 

Commission those transactions for which it intends to rely on the exemption in § 2(h)(3) of the 

Act and which averaged five trades per day or more over the most recent calendar quarter. For 

all such transactions, the ECM must provide to the Commission weekly reports showing certain 

basic trading information, or provide the Commission with electronic access that would allow the 

Commission to compile the same information. 17 C.F.R. § 36.3. 

An ECM must also provide to the Commission, upon special call, any information relating to its 

business that the Commission determines is appropriate to enforce the anti-fraud and antimanipulation provisions of the CEA, to evaluate a systemic market event, or to obtain 

information on behalf of another federal financial regulator. 7 U.S.C. § 2(h)(5)(B)(iii). 

Commission staff has issued several special calls to the InterContinental Exchange, an ECM 

generally referred to as “ICE” (discussed infra, section IV(D)(3)). 

Finally, an ECM must also maintain a record of any allegations or complaints it receives 

concerning suspected fraud or manipulation, and provide the Commission with a copy of the 

record of each complaint that alleges facts that would constitute a violation of the CEA or 

Commission Regulations. 17 C.F.R. § 36.3. 

 3. Differences Between ECMs and DCMs 

Though ECMs are subject to the foregoing regulatory requirements, the CEA does not subject 

them to the level of transparency and Commission oversight associated with DCMs. DCMs 

must satisfy specified criteria to become designated, and then must demonstrate compliance with 

core principles on a continuing basis. While the CEA provides flexibility in how DCMs choose 

to comply with the core principles, the core principles mandate that DCMs undertake significant 

supervisory responsibility with respect to trading on their markets. For example, DCMs may list 

for trading only those contracts that are not readily susceptible to manipulation and must have 

 

11 ECE refers to, among others, an entity that has a demonstrable ability to make or take delivery of an underlying 

commodity, incurs risks related to the commodity, or is a dealer that regularly provides risk management, hedging 

services, or market-making activities. ECEs can be funds, but cannot be individuals. 

8
rules and procedures for preventing market manipulation. Further, DCMs are required to adopt 

position limit or accountability rules, where necessary and appropriate, in order to address the 

potential for market manipulation or congestion. DCMs also must have compliance and 

surveillance programs, which the Commission evaluates through its rule enforcement reviews. 

These statutory requirements do not apply to ECMs. The CEA does not require ECMs to 

monitor trading on their markets. Nor does the CEA provide the Commission with emergency 

authority over ECMs in order to force a reduction or liquidation of positions, or alter or 

supplement trading rules. The Commission has this authority over DCMs. 

The CEA gives the Commission the authority to determine whether an ECM contract performs a 

significant price discovery function for transactions in an underlying cash market. Such a 

determination, however, does not trigger any self-regulatory responsibilities for the ECM, or 

additional oversight authority for the Commission, akin to that existing for DCMs. The 

determination triggers only an obligation by the ECM to publicly disseminate certain specified 

information such as contract terms and conditions, trading volume, open interest, and opening 

and closing prices or price ranges. 7 U.S.C. § 2(h)(4)(D); 17 C.F.R. §36.3. 

B. Evolution of ECMs Since 2000 

The first ECMs that notified the Commission of their intent to operate generally were simple 

trading platforms, resembling in many ways business-to-business facilities for large commercial 

firms. Their key role was to facilitate the execution of trades between commercial counterparties 

by offering an anonymous and efficient electronic matching system believed to be superior to the 

existing voice broker system, and to provide for a competitive advantage in the bilateral OTC 

market, especially for energy products. 

Initially, most ECMs were relatively small operations and their trading volumes were small 

compared to DCMs. The first ECMs did not offer a clearing component – they addressed issues 

related to the financial integrity of transactions by setting up credit filters that allowed traders to 

limit their counterparties to a customized list of traders. In addition, the contracts listed on early 

ECMs were not linked to contracts listed on DCMs and consequently did not affect the 

Commission’s oversight of trading activity on DCMs. 

Since 2001, 20 companies have notified the Commission that they intend to operate as ECMs. 

Many of these companies trade, or plan to trade, energy-related products – mostly natural gas, 

petroleum products and electricity. The first two facilities to file notices in 2001 were the 

International Maritime Exchange (Imarex), a Norwegian market, and ICE, located in Atlanta. 

Currently, eight of the 20 ECMs that filed a notice are active. 

Based on CFTC staff interviews of market participants and on testimony given at the September 

18 hearing, it appears that for many ECMs, the majority of their business comes from nonregulated institutional traders. Moreover, companies elect to become an ECM rather than a 

DCM or DTEF largely because of the reduced regulatory burden. ECMs view this reduced 

regulatory burden as being more amenable to their business operations and goals because 

becoming an ECM allows a market to expand into electronic trading under a less demanding 

9
regulatory scheme. It also appears that markets have not used the ECM category as a stepping 

stone to eventually become a more regulated exchange, such as a DTEF or a DCM; ECMs have 

tended to remain ECMs. 

During the last few years, there have been a number of changes in the ECM landscape. While 

some ECMs continue to be small, start-up type ventures, there are ECMs that have taken on 

some of the characteristics of DCMs. Significantly, five of the eight active ECMs now offer a 

clearing component that is widely utilized by their participants to obtain an efficient and 

effective means to manage credit risk.12 There also have been changes in the types of traders 

that participate on ECMs, i.e., certain exchange floor brokers and floor traders now are 

considered ECEs and are able to participate on ECMs subject to certain conditions.13 Also, 

ECM trading communities now include many non-commercial traders, such as large hedge 

funds, which constitute a significant part of the overall activity and open interest in certain ECM 

ontracts. 

e 

ment 

. 

the underlying 

CM futures contract to benefit positions in the “look-alike” ECM contract. 

C. Price Discovery on ICE 

r 

d 

e 

nd flow-through processing whereby trades are automatically reflected in firms’ balance sheets. 

 as 

 

c

Although ECMs have been evolving over time to adopt some characteristics of DCMs, th

linkage of ECM contract settlement prices to DCM futures contract settlement prices – a 

relatively recent development – has raised the question of whether the CFTC has the necessary 

authority to police these markets for manipulation and abuse. The linkage of contract settle

prices was not contemplated at the time of the CFMA nor at the time of the Commission’s 

rulemaking concerning when an ECM contract performs a significant price discovery function

Of special concern to the CFTC staff today is the existence of ECM cash-settled “look-alike” 

contracts that could provide an incentive to manipulate the settlement price of 

D

Utilizing these linked “look-alike” contracts, one ECM in particular, ICE, has become a majo

trading venue for natural gas in direct competition with the New York Mercantile Exchange 

(NYMEX) natural gas benchmark futures contract. Based on the comments of many traders an

voice brokers, there appears to be an emerging consensus that ICE is a price discovery market 

for certain natural gas and electricity contracts. In addition, Commission staff has found that th

traders on ICE are virtually the same as the traders on NYMEX. All of the top 25 natural gas 

traders on NYMEX are also significant traders on ICE. ICE’s popularity seems to stem from a 

number of factors, including adequate liquidity and transparency in certain markets, ease of use, 

a

For the Henry Hub natural gas market, market participants generally view ICE and NYMEX

essentially a single market and look to both ICE and NYMEX when determining where to 

execute a trade at the best price. ICE offers a cash-settled contract based on the final settlement 

12 Amending the law to allow clearing of OTC derivatives was one of the key recommendations made by the PWG 

Report in 1999. 

13 Among other things, a floor broker or floor trader seeking to qualify as an ECE must be a member of a DCM or 

have trading privileges on a DCM, and must either be an ECP or have its trades on the ECM guaranteed by a 

clearing member that is a member of a Commission-registered derivatives clearing organization and is an ECP. 

68 FR 2319 (January 16, 2003). 

10
price of the NYMEX Henry Hub physically-delivered contract. In addition, ICE lists a con

that cash-settles based on the final settlement price of the NYMEX Henry Hub natural gas 

contract on the penultimate day. Lastly, ICE offers a Henry Hub penultimate natural gas optio

contract. Traders use NYMEX physical and cash-settled contracts as well as ICE 

tract 

n 

Henry Hub 

ok-alike contracts depending on where they can get the best price for liquidity. 

D. Economic Analysis of Price Discovery on NYMEX and ICE 

ice 

ng price discovery as the process by which new 

formation is incorporated into prices. 

ue. 

xchanges, it is possible to find that both 

enues are, at various times, price discovery venues. 

ed 

hip 

, ICE and NYMEX are both significant price discovery venues for natural gas 

tures contracts. 

ough 

t 

al 

lo

The Commission’s Office of the Chief Economist (OCE) conducted an empirical study of the 

relationship of the natural gas contracts that trade on ICE and NYMEX. OCE evaluated pr

discovery in the natural gas market, viewi

in

When conducting economic analysis of price discovery, a determination that informed traders 

prefer to trade at one venue over another implies the preferred venue is a price discovery ven

It follows that if venue A is preferred, then price changes there will more likely reflect new 

information and those changes at venue A should precede changes at venue B. This insight 

implies that price leadership - that is, a statistical pattern whereby price changes at one exchange

precede changes at another exchange - can be interpreted as revealing where price discovery is

occurring. Since price leadership can shift between e

v

Turning to its specific price discovery analysis, OCE collected transaction prices for ICE and 

NYMEX natural gas contracts from January 3, 2006 through December 31, 2006 and evaluat

trading for 20 contract months when trading on each market was appropriately active. OCE 

examined the timing of price changes on ICE and NYMEX to draw inferences about where 

information arrives first. If price changes on one venue consistently “led” those on the other 

venue, then OCE concluded that informed traders preferred trading at that “leading” venue and 

inferred that market to be “discovering” prices. OCE found that ICE exhibited price leaders

with respect to NYMEX on 20 percent of the contract-days, with NYMEX exhibiting price 

leadership on 63 percent of the contract-days. OCE concluded that these results suggest that, in 

an economic sense

fu

As part of OCE’s broad analysis of price discovery, OCE first analyzed the mix of hedgers and

speculators trading in various markets. The OCE analysis shows that from July 2004 thr

July 2007 (a period that experienced significant growth in ICE natural gas trading) noncommercial trading (trading by swap dealers and managed money traders) of natural gas futures 

on NYMEX grew from 42 percent to 52 percent. OCE then compiled similar statistics for active

contracts that face minimal ECM competition (corn, heating oil and crude oil). OCE found tha

the increase in market share by non-commercial traders in natural gas on NYMEX is broadly 

consistent with similar increases in market share by non-commercial traders in the corn, heating

oil and crude oil markets facing minimal ECM competition. Non-commercial trading interest 

has risen across the board, with both managed money traders and non-reportable trades driving 

this increase in all markets. In this light, the changing composition of traders in NYMEX natur

gas futures trading from 2004-2007 largely represents a market-wide trend toward greater non11
commercial trading. As such, OCE concluded that the existence and growth in trading of ICE 

natural gas contracts does not appear to be a factor in the changing composition of traders in the 

broader natural gas market. 

E. ECMs and Market Surveillance 

1. Focus of Commission Surveillance of Energy Markets 

s 

r 

r transparency into the trading activity on ICE for those contracts linked to NYMEX 

contracts. 

2. Information Received From DCMs 

e 

ent of total 

pen interest in the NYMEX Henry Hub natural gas contract during the past year. 

ed in the 

TC market, through voice brokers, and are then submitted to Clearport for clearing. 

taff 

ity during key trading periods, especially during the 

losing range of the final trading day. 

 

The Commission’s surveillance of natural gas energy markets focuses on the regulated future

markets at NYMEX. This approach reflects the mandate of the CEA, as DCM contracts are 

subject to both the CEA reporting requirements that underlie the Commission’s large trade

reporting system (LTRS) and the statutory provision that enables the Commission to take 

emergency actions in the case of “threatened or actual market manipulations and corners.”14 By 

comparison, while natural gas transactions on ECMs are subject to the CEA’s anti-manipulation 

prohibition, they are not subject to these reporting and emergency action provisions. As a result 

of this disparity, the CFTC surveillance staff finds it increasingly difficult to properly police the 

regulated markets at NYMEX. To accomplish appropriate surveillance levels, Commission staff 

needs furthe

The centerpiece of the Commission’s market surveillance program is its LTRS. Under th

LTRS, clearing members, futures commission merchants (FCMs), and foreign brokers – 

collectively called “reporting firms” – file daily reports with the CFTC showing futures and 

option positions held in accounts they carry that are at or above specific reporting levels set by 

the CFTC. These reporting levels vary by market, from as low as 25 contracts for small markets 

to as high as 3,000 contracts. The reporting level for NYMEX natural gas futures markets is 200

contracts. The data provided in these reports in aggregate has covered about 97 perc

o

DCMs are required to provide daily data showing aggregate positions and trading cleared by 

each clearing member, shown separately for house and individual customer positions. These 

data include all positions in futures markets at the DCM, but do not reflect the size or identity of

customer positions. The Commission also receives large-trader reporting for contracts that are 

cleared through NYMEX’s Clearport facility. Typically, these transactions are execut

O

In addition, the Commission receives from all DCMs, including NYMEX, daily transaction data,

which provide a complete audit trail of all trades that occur in DCM markets. Surveillance s

uses this data to scrutinize trading activ

c

14 7 U.S. C. § 12(a)(9). 

12
Staff from the Commission’s Division of Clearing and Intermediary Oversight also uses this 

trading data to grity of futures firms and the clearing system to ensure 

at trading losses do not trigger defaults that may lead to a contagion event in the markets. 

e 

rimarily to assist 

e Commission in its surveillance of the NYMEX natural gas contract. They were not issued as 

r 

ission receives from NYMEX. The Commission 

as been receiving responsive data from ICE since October 10, 2006. With this data, market 

ible 

e 

traightrmation responsive to 

ese first two special calls in the standard electronic format used for Commission large trader 

 begins to receive this data, staff will be able to monitor 

trading activity on ICE during these crucial last two days, in conjunction with its analysis of 

 

 monitor the financial inte

th

3. Special Calls to ICE 

In order to obtain analogous trader information from ECMs, the Commission must issue special 

calls. To date, the Commission has issued three special calls to ICE for information related to 

ICE’s cleared natural gas swap contracts that are cash-settled based on the settlement price of th

NYMEX physical delivery natural gas contract. The special calls were issued p

th

part of an investigation of any particular market participant or trading activity on either ICE or 

NYMEX, nor were they issued to conduct regular market surveillance of ICE. 

A special call issued on September 28, 2006 requested daily clearing member position data fo

ICE’s natural gas swap contracts, broken out between house and aggregate customer positions, 

which is similar to information that the Comm

h

surveillance staff can see all cleared positions at the clearing member level, but it is not poss

to determine individual customer positions. 

To obtain daily individual trader positions, the Commission issued a further special call on 

December 1, 2006 and has been receiving responsive data since February 15, 2007. While the 

data received is similar to large trader reporting for DCMs, the methodology for reporting is very

different. As noted above, large trader reporting for products traded on DCMs is done by the 

carrying firms, generally FCMs for U.S. traders, and foreign brokers for non-U.S. traders. Sinc

the reporting firms have exact data regarding customer positions, this reporting is fairly s

forward and highly accurate. ICE, however, is a non-intermediated market and therefore does 

not receive position reporting from firms. Therefore, in order to comply with the special call, 

ICE developed an algorithm to infer open positions from the sum of all trading by each 

individual trader. While this approach is innovative and has provided valuable information, it is 

not as accurate as traditional large trader reporting. ICE is providing info

th

reporting, which allows staff quickly to integrate this data into its computer surveillance systems 

and to examine traders’ consolidated positions on NYMEX and ICE.15 

The most recent special call to ICE was issued on September 5, 2007 and requires ICE to provide 

all cleared transaction data for its Henry Hub swap contracts and identify counterparties for the 

final two trading sessions prior to the expiration of prompt month Henry Hub natural gas 

products. This data is similar to transaction data that the Commission receives from NYMEX for

all trading days. When the Commission

15 The CFTC is receiving all trade data regarding the relevant ICE contracts, while DCMs provide data for only 

large traders. Overall, the data the CFTC currently receives typically covers roughly 80 to 90 percent of the affected 

market. 

13
NYMEX trading, to provide more complete coverage to counter possible manipulative schemes 

that could impact trading on NYMEX. 

14
V. The Commission’s ECM Hearing 

The Commission’s hearing focused on a number of issues, including the tiered regulatory 

approach of the CFMA and whether this risk-based model is beneficial; the similarities and 

differences between ECMs and DCMs; the associated regulatory risks of each market category; 

the types of regulatory or legislative changes that may be appropriate to address identified risks

and the impact that regulatory or legislative changes might have on the U.S. futures indust

the global competitiveness of the U.S. financial industry. The hearing focused largely on

markets and trading of energy products on ECMs and DCMs. 

; 

ry and 

 energy 

any of the witnesses discussed the benefits of competition, innovation, and enhanced market 

ay 

e 

cessful 

 that DCMs operate under more stringent 

gulatory requirements and responsibilities than ECMs, concerns that energy trading on ECMs 

alf 

at 

d 

mers 

nd energy traders with the consumer ultimately paying the price (Cota at 239). 

ied 

ith 

customers suffer harm” (Id. at 174). 

M

transparency. Generally, the majority view was that some revisions to the ECM provisions m

be appropriate, as long as the revisions are prudently targeted and do not adversely affect the 

ability of established ECMs and start-up ECMs to innovate and potentially to grow into matur

markets. 

While many witnesses testified that the tiered regulatory structure of the CFMA was suc

and should not be eliminated, witnesses also described concerns associated with the current 

regulatory structure governing ECMs and the regulatory disparity between DCMs and ECMs. 

These concerns included competitiveness concerns

re

contributes to price volatility, and concerns that some market participants and consumers have 

lost confidence in the integrity of the energy markets. 

Addressing price volatility and consumer confidence, Laura Campbell, testifying both on beh

of Memphis Light Gas and Water and the American Public Gas Association (APGA), stated th

“APGA’s members have lost confidence that the prices for natural gas [in] the futures [and] 

economically linked over-the-counter markets are accurate reflections of supply and demand”

(Campbell at 172). Mark Cooper, representing the Consumer Federation of America, noted that 

“the lack of regulation of trading . . . has influenced the price of natural gas in a volatile an

upward direction” (Cooper at 218). Further, Sean Cota, representing the Petroleum Marketers 

Association of America, described energy price volatility as a “rollercoaster ride” for consu

a

Addressing competition and innovation, Dr. James Newsome, President of NYMEX, testif

that the current structure has led to innovations and technology advancements that forced 

NYMEX to change to become more competitive (Newsome at 111). From the market user 

perspective, Ms. Campbell testified that the ability to view trading at ICE on a daily basis has 

fundamentally changed the way her company purchases gas and that she would be hesitant to 

lose the benefits her company has experienced as a result (Campbell at 201). Nevertheless, Ms. 

Cambpell did suggest that the current law needs to be changed to provide the Commission w

the tools “to detect and deter potential manipulative activity before [APGA] members and their 

Peter Krenkel, President of the Natural Gas Exchange (NGX) testified that for NGX “innovation

is the key” and that it is critical that regulatory changes not impair the ability to innovate 

15
(Krenkel at 116). Along those same lines, Richard Sandor, Chairman and Chief Executiv

Officer of the Chicago Climate Exchange, credited the current regulatory structure with 

providing the ability to operate as an ECM without undue cost and with speed

e 

 to market for new 

ontracts that helped him form a new exchange (Sandor at 108). In his view, the legal costs of 

tified 

n period and the resulting innovation as providing a social benefit that 

ontributes to the United States economy (Zerzan at 242). 

There was little support for the option of simply deleting §§ 2(h)(3)-(5) from the Act.16 The 

witnesses who addressed this issue generally took the view that increased regulatory oversight 

might be appropriate for certain contracts traded on ECMs, such as contracts that are “highly 

linked and functionally equivalent [to] regulated DCM contracts” (Newsome at 87). Even 

Jeffrey Sprecher, Chairman and Chief Executive Officer of ICE, acknowledged that for certain 

ICE contracts that are “the economic equivalent of actively-traded futures contracts,” a 

“heightened level of DCM-like regulation ... may be appropriate” (Sprecher at 91). However, 

with respect to other ECM contracts having no nexus to DCM contracts, there was widespread 

support for retaining §§ 2(h)(3)-(5) in some form. 

Dr. Newsome testified that NYMEX does not believe that the case has been made for broadly 

extending regulation to ECM products that have not triggered “policy interests and concerns” 

(Newsome at 87). Along those lines, he testified that Congress should move forward with 

general criteria that capture the natural gas market as it currently exists and if other markets 

develop similarly, the CFTC should have the flexibility then to capture those markets as well 

(Newsome at 120). Mr. Krenkel agreed and supported the idea of flexible regulations able to 

accommodate different types of trade execution facilities given that from NGX’s perspective 

“the ECM regulatory framework has been successful” (Krenkel at 104). By way of example, Mr. 

Sprecher testified that while ICE’s one natural gas “look-alike” contract has gotten much 

attention, ICE trades 1,000 products on its platform, including lightly traded “exotic derivatives” 

and “niche products” that would not benefit from regulation as a DCM (Sprecher at 114). 

Witnesses supportive of the tiered regulatory approach of the CFMA recognized that the 

evolution of trading on ECMs deserves a close review by the Commission, particularly in 

markets where greater market transparency is necessary. Skip Horvath, President of the Natural 

Gas Supply Association, testified representing producers and marketers of natural gas. He 

attributed price volatility to the fact that supplies are “artificially constrained” due to gas-prone 

lands that are off limits, not to problems with the current regulatory system (Horvath at 169). He 

noted, however, that the current system can be improved, but should be done so prudently (Id. at 

170). Mr. Damgard testified that when trading occurs on multiple trading facilities, such as 

energy products on NYMEX and ICE, it is important that CFTC market surveillance has ready 

 

c

trying to develop innovative products under a highly regulated structure would “limit creativity”

(Id. at 115). Similarly, John Damgard, President of the Futures Industry Association, tes

that ECMs provide incubation periods for new kinds of trading and new kinds of markets 

(Damgard at 203). Greg Zerzan of the International Swaps and Derivatives Association 

recognized this incubatio

c

16 Only Craig Donahue, representing the CME Group, suggested that “the elimination of the [§ 2(h)(3)] exemption 

for unregulated commercial markets must be seriously considered (Donahue at 95-6). He argued that the case had 

not been made that eliminating the ECM category would impair innovation since “innovation can certainly occur in 

the context of a DTEF or . . . a DCM” (Id. at 112). 

16
access to all relevant large trader information (Damgard at 181). Similarly, John Gaine, 

resident of the Managed Funds Association (MFA), testified that MFA supports the CFTC and 

others “ evant surveillance data” (Gaine at 233). 

P

obtain[ing] access to all rel

While witnesses advocated some targeted changes, there did not appear to be a widespread call 

for further regulating the voice-broker or bilateral OTC markets due to the lack of price 

discovery occurring on these markets and the ability of the Commission to receive certain 

cleared pricing data and other information regarding these transactions from market participants 

on a case-by-case basis. 

17
VI. Findings and Recommendations 

A. Commission Findings 

Based upon the ECM hearing, staff interviews of industry participants, and its general experien

administering the CEA, the Commission believes that the CFMA’s tiered approach to the 

regulation of OTC and exchange markets

ce 

 has operated well. The scaling of regulation based 

pon the financial accreditation and sophistication of transaction parties, the type of commodity 

is 

ic 

ant to 

h to 

ets 

f the classes of markets created by the CFMA, the ECM category has proven to be particularly 

gh 

easures 

at the Commission uses to deter and detect manipulation and fraud on DCMs. 

ake 

new products or accelerating their pace of automation. 

he Commission believes that the CEA’s current level of regulation is appropriate for ECM 

u

underlying the transaction, and the method by which the transaction is undertaken has alleviated 

much of the legal uncertainty that surrounded derivatives trading before the CFMA. Th

structure sensibly ensures an appropriate degree of oversight for markets that serve a publ

interest due to their risk management and price discovery capabilities. It is also import

note that other jurisdictions around the world are adopting a similar tiered regulatory approac

compete with our markets as evidenced by the European Union’s implementation of the Mark

in Financial Instruments Directive (MiFID).17

O

popular for new start-up markets, with the Commission issuing 20 acknowledgement letters to

new ECMs since 2000. As was pointed out at the ECM hearing, new markets face regulatory 

hurdles to achieve and maintain DCM status, notwithstanding the CFMA’s establishment of a 

flexible, principles-based regulatory scheme for DCMs. By comparison, ECMs are largely 

unregulated with only residual authorities reserved for the Commission. For example, althou

ECMs are required to retain basic records, to submit limited transaction data to the Commission 

for higher-volume contracts and to forward participant complaints to the Commission, they have

no self-regulatory obligations with respect to trading on their facilities. Similarly, while ECM 

transactions are subject to the CEA’s anti-manipulation and anti-fraud provisions18, ECMs and 

ECM participants are not subject to the same type of ongoing Commission oversight m

th

The lower level of regulation for ECMs has made that category an ideal platform for markets 

seeking a low-cost, effective “on-ramp” to launch new ideas for contract design and trading 

methodologies. As a result, ECMs can serve as incubators for new concepts to see if they t

hold in the marketplace. ECMs also can provide competition for DCMs, spurring established 

DCMs to respond to ECM initiatives with innovations of their own, whether it be developing 

T

contracts relying on the § 2(h)(3) exemption when trading volume remains low and their prices 

are not significantly relied upon by other markets. However, the Commission also believes that 

 

17 On October 2, 2007, the CFTC’s Global Markets Advisory Committee heard testimony from EU officials 

regarding the implementation of MiFID and the tiered regulatory categories that are being adopted as part of that 

effort. 

 

18 The Commission continues to support amending CEA Section 4b, 7 U.S.C. § 6b, to clarify the Commission’s 

s. 

authority to bring fraud actions involving principal-to-principal transactions that occur on ECMs. In the last 

Congress, such an amendment was included in reauthorization legislation reported by the Senate Committee on 

Agriculture, Nutrition and Forestry, and in reauthorization legislation passed by the House of Representative

18
when such an ECM contract matures and begins to serve a significant price discovery functi

for cash or futures market transactions in commodities in interstate commerce, the contract 

warrants some increased regulatory oversight in order to effectuate the CEA’s mandate that th

Commission “deter and prevent price manipulation or any other disruptions to market integrity.”

7 U.S.C. § 5. Without some increased oversight of trading in relevan

on 

e 

 

t mature ECM contracts, 

e Commission cannot adequately police the trading of DCM contracts to detect and deter price 

mplying with its self-regulatory 

bligations, and more acutely, in the ability of ECMs to allow traders to trade without limit, 

while D levels on their traders. Given the 

Commission’s duty to uphold “fair competition” among markets, this is an important 

the 

arket for any futures contract that performs a significant price discovery function. Prices that 

e 

ity 

public 

n 

 to prevent such 

arket abuses from occurring in ECM contracts and to detect them when they occur. 

phisticated traders does not eliminate the possibility that the exempt commodity contracts 

e 

th

manipulation and other trading abuses. 

Beyond addressing these supervisory risks, the current regulatory disparities between ECMs and

DCMs also create competitive concerns that may unfairly advantage ECMs due to the 

restrictions and responsibilities placed on DCMs that do not also apply to ECMs. These 

competitive concerns arise in the cost to a DCM of co

o

CMs must impose position limits or accountability 

19

consideration in the debate. 

The Commission believes that there is a strong public interest in ensuring the integrity of 

m

are established by transactions in a contract that serves as a significant price discovery vehicl

can affect the prices of commercial transactions and ultimately retail prices for the commod

underlying the contract. It was, of course, the interests of those who use futures markets for 

price discovery purposes that led Congress to establish a regulatory regime to protect the 

interest in the commerce affected by these markets.20 While the Commission currently has the 

authority to bring manipulation cases involving ECM transactions, that authority necessarily ca

only be used after the fact. The Commission has few regulatory tools available

m

The Commission notes that ECM participation is limited to eligible commercial entities – a fairly 

sophisticated group of market participants trading on their own behalf. Notwithstanding this 

limitation, the Commission believes that any significant price discovery function performed by 

an ECM contract requires a heightened level of oversight. Limiting ECM participation to 

so

traded on an ECM can be manipulated.21 Further, even if ECM participants do not require th

 

19 7 U.S.C. § 5. 

20 The Congressional Record is replete with discussion of the commercial importance of commodity futures trading. 

The record recognizes that commercial interests must be able to look to properly functioning commodity markets for 

arket information and products that facilitate the making of marketing, financing and distribution decisions. S. 

ng 

arkets for price basing and hedging. Hearings on S. 2485, S. 2578, S. 2837 and H.R. 

311 before the Senate Committee on Agriculture and Forestry, 93rd Cong., 2d Sess. at 234; see also 80 Cong. Rec. 

 under section 2(d)(2) of the Act, Congress did not impose an anti-manipulation prohibition on trading 

cilities that limit trading to eligible contract participants trading excluded commodities such as financials. 

m

Rep. No. 93-1131, at 12 (1974). The Congressional Record also indicates that an initial purpose behind regulati

commodity futures trading was to secure fair and orderly markets for producers, and later other commercial 

participants, who use the m

1

10739 (April 11, 1974). 

21 Congress recognized this as well when it imposed an anti-manipulation prohibition on ECM transactions. By 

contrast,

fa

19
type of customer safeguards typically associated with DCM trading, it does not obviate the 

public interest in protecting the significant price discovery function performed by an ECM 

ontract. Accordingly, the Commission believes that ECM contracts that become significant 

sources of price discovery should be f regulation than is now the case 

under §§ 2(h)(3)-(5) and the Commission’s Regulations thereunder. 

nergy 

arkets exhibit significant price discovery attributes. Thus, their direct impact on other parties 

and

disp ficial 

mar

In l der 

to d

perf

In f mpted to balance the public 

interest in allowing ECMs the opportunity to innovate and grow with the public interest in 

suff

fun

rep ns 

to m

sign

The

enti

not to 

all 

may

Onc ation is made that certain ECM contracts serve a significant price discovery 

function, the new regulatory status of those ECM contracts should be principles-based and 

sho 

this

 

c

 subject to a higher level o

It is also important to note that the CFTC hearing, staff interviews, and staff experience in 

surveillance of these markets do not suggest that the OTC bilateral or voice broker e

m

 markets is limited. In addition, the non-standardized form and significant size and 

ersion of these markets would make it extremely costly and difficult to extrapolate bene

ket surveillance information on a routine basis. 

B. Commission’s Legislative Recommendations 

ight of its findings, the Commission recommends the following legislative changes22 in or

etect and prevent manipulation and to ensure the market integrity of ECM contracts that

orm a significant price discovery function for commodities in interstate commerce.23

ormulating these recommendations, the Commission has atte

icient oversight over the trading on ECMs of contracts that serve a significant price discovery

ction for commodities in interstate commerce. The Commission’s recommendations 

resent a careful, measured approach to detect and prevent price manipulation and disruptio

arket integrity, to ensure fair competition among markets, and to continue to promote the 

ificant innovation brought about by ECMs since the CFMA was enacted. 

 Commission’s recommendations are contract specific and do not necessarily affect the 

rety of an ECM’s platform since ECMs host a broad range of products and contracts that may

 serve a significant price discovery function. Furthermore, these recommendations apply

exempt commodities – not just energy – given the concern that any of these exempt products 

 be susceptible to manipulation once they begin to serve a significant price discovery role. 

e a determin

uld be within the Commission’s exclusive jurisdiction. Moreover, by virtue of being within 

 new regulatory status, the contract will benefit from the Commission’s regulatory passport 

 

22 T ovide the Commission with adequate rulemaking 

authority in connection with each of the CEA amendments recommended herein so it has the ability to properly 

imp

23 Fo

rath

Con

matt

he Commission also recommends that Congress should pr

lement the provisions. 

r the purposes of this report, the Commission has set forth its suggested statutory revisions in broad terms, 

er than proposing specific amendatory language. The Commission stresses its willingness to assist Congress and

gressional staff in drafting any CEA revisions implementing these recommendations or regarding any other 

er. 

20
reg

wor

 discovery 

nction and certain self-regulatory responsibilities to ECMs over those contracts: 

arding trading the contract by market participants located in other jurisdictions around the

ld. 

Authorities Requested 

With this in mind, the Commission recommends amendments to the CEA that grant certain 

authorities to the Commission over ECM contracts that serve a significant price

fu

1. Large Trader Position Reporting – An ECM contract that is determined to serve a 

significant price discovery function should be subject to large trader position reporting 

requirements comparable to those that currently apply to all DCM contracts. A large trader 

reporting system would e nce staff to monitor 

positions on a daily basis to detect and deter ossible manipulative schemes. The statutory 

4i 

 currently does for DCM contracts. 

nable the Commission’s market surveilla

p

basis for the Commission regulations that establish a large trader reporting system, Section 

of the CEA, 7 U.S.C. § 6i, should be amended to apply to an ECM contract that serves a 

significant price discovery function. That authority over certain ECM contracts would 

enable the Commission to require position reporting by individual traders and clearing 

members and to issue special calls to these traders and firms, as needed, for related position 

data as the Commission

2. Position Limits and/or Accountability Level Regime – An ECM should be required to 

adopt position limits or accountability levels, as appropriate, for a listed contract that serves 

significant price discov

a 

ery function. For cash-settled ECM contracts, such levels ideally 

would reflect trading activity in the underlying market at the time when the cash settlement 

pric

fina ining 

trad ered 

con ility to 

mo ide to the 

Commission any rules relating to contract terms/conditions and establishing position limits or 

acc e 

any nd 

pro

3. 

e is determined. For any cash-settled ECM contract that is based on a DCM contract’s 

l settlement price, the ECM should establish an agreement with the DCM for obta

ing volume data during the DCM’s final settlement period. For physically-deliv

tracts, such levels must reflect deliverable supply. To ensure the Commission’s ab

nitor compliance with this obligation, the ECM would be required to prov

ountability levels, notify the Commission of any amendments to these rules, and provid

 information requested by the Commission when it evaluates the ECM’s requirements a

cedures. 

Self Regulatory Oversight – An ECM should be required to monitor trading of a lis

tract that serves a significant price discovery function to detect and prevent manipulation, 

ted 

con

price distortion, and disruptions of the delivery or cash-settlement process. As part of this 

monitoring, an ECM should collect market data and trading information and provide such 

information, upon request, to the Commission. 

4. Emergency Authority – The CEA should be amended to require an ECM to adopt rules 

to provide for the exercise of emergency authority to alter or supplement contract rules, 

liquidate open positions, and to suspend or curtail trading in any listed contract that serves a 

significant price discovery function. The Commission should be granted similar emergency 

authority relative to these price discovery contracts (authority the Commission has relative to 

21
DCMs). These authorities for an ECM and the Commission would be essential tools to 

prevent manipulation and disruptions of the delivery or cash-settlement process. 

It is the Commission’s belief that, for ECM contracts that serve a significant price discove

function, these additional authorities and responsibilities are measured and appro

ry 

priate and will 

nsure fairness by conferring responsibilities on ECMs consistent with those applicable to DCMs 

n. 

A determination of whether an ECM contract serves as a significant source of price discovery 

should: (1) include measures that are quantifiable and verifiable to ensure decision making is 

simplified and transparent; (2) seek to minimize the costs of administration imposed on the 

Commission and the costs of compliance imposed upon the ECMs; and (3) recognize that startup ECMs and new contracts will generally not have sufficient liquidity to serve as a significant 

source of price discovery. 

Consistent with these general principles, the Commission believes Congress should instruct the 

Commission to use the following factors in determining whether a contract serves a significant 

price discovery function: 

Material Liquidity: The volume of trading of the relevant contract must be high enough 

to be able to impact other regulated contracts or to become an independent price 

reference or benchmark that is regularly utilized by the public. In this context, 

consideration should be given to the size of the relative market of the underlying 

commodity and the susceptibility of these markets to manipulation; and 

Linkage/Material Price Referencing: The linkage of ECM pricing to the settlement 

terms of a regulated contract on a DCM is an indication of significant price discovery 

since this allows for easier substitution of products between the linked markets. Material 

price referencing of ECM contracts also can indicate that significant price discovery is 

occurring when prices of ECM contracts are referenced in setting the price in other 

transactions in commodities in interstate commerce on a frequent and recurring basis.24 

C. Other Recommendations 

In addition to the legislative amendments recommended above, the Commission intends to 

undertake two initiatives to promote greater understanding of trading in energy futures products. 

 

e

in Core Principles 3, 4, 5, and 12. See 7 U.S.C. §§ 7(d)(3), (4), (5), and (12). 

In light of the legislative changes proposed, the Commission must also revisit its rulemaking that

requires the reporting of a product’s volume and prices if it serves a significant price discovery 

function so that the rulemaking can reflect the legislative changes recommended herei

Significant Price Discovery Standard 

24 Although not a factor directly relating to price discovery, clearing of products may indicate that a product is more 

standardized and mature, and more likely to be linked or serve as a material price reference for transactions in 

commodities in interstate commerce. 

22
23

The Commission plans to establish an Energy Markets Advisory Committee to conduct public 

meetings on issues affecting energy producers, distributors, market users and consumers, as well 

as others interested in or affected by energy futures markets. The Commission believes that an 

Energy Markets Advisory Committee will facilitate regular communications between the 

Commission and the diverse energy-related interests affected by these markets. 

The Commission proposes to work closely with the Federal Energy Regulatory Commission 

(FERC) to educate and develop best practices for utilities and others who use NYMEX 

settlement prices as benchmarks in pricing their energy products. These efforts would focus on 

ensuring that these organizations fully understand the mechanics of the settlement processes at 

NYMEX and on working with these organizations and NYMEX to develop different 

benchmarking approaches if appropriate. The CFTC and FERC should also help educate these 

end users of energy on how to utilize the futures and other derivatives markets in managing price 

risk and volatility.