[Federal Register Volume 75, Number 85 (Tuesday, May 4, 2010)]
[Notices]
[Pages 23686-23690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10311]


-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION


Order Finding That the Carbon Financial Instrument Contract 
Offered for Trading on the Chicago Climate Exchange, Inc. Does Not 
Perform a Significant Price Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

-----------------------------------------------------------------------

SUMMARY: On August 20, 2009, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment in the Federal 
Register \1\ a notice of its intent to undertake a determination 
whether the Carbon Financial Instrument (``CFI'') contract offered for 
trading on the Chicago Climate Exchange, Inc. (``CCX''), an exempt 
commercial market (``ECM'') under Section 2(h)(3)-(5) of the Commodity 
Exchange Act (``CEA'' or the ``Act''), performs a significant price 
discovery function pursuant to section 2(h)(7) of the CEA. The 
Commission undertook this review based upon an initial evaluation of 
information and data provided by CCX. The Commission has reviewed 
public comments and the entire record in this matter and has determined 
to issue an order finding that the CCX CFI contract, at this time, does 
not perform a significant price discovery function. Authority for this 
action is found in section 2(h)(7) of the CEA and Commission rule 
36.3(c) promulgated thereunder.
---------------------------------------------------------------------------

    \1\ 74 FR 42052 (August 20, 2009).

---------------------------------------------------------------------------
DATES: Effective date: April 28, 2010.

FOR FURTHER INFORMATION CONTACT: Irina Leonova, Financial Economist, 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5646. Email: <a href="/cdn-cgi/l/email-protection#076e6b626869687166476461736429606871"><span class="__cf_email__" data-cfemail="325b5e575d5c5d445372515446511c555d44">[email protected]</span></a>, or Gregory K. 
Price, Industry Economist, Division of Market Oversight, same address. 
Telephone: (202) 418-5515. E-mail: <a href="/cdn-cgi/l/email-protection#294e595b404a4c694a4f5d4a074e465f"><span class="__cf_email__" data-cfemail="761106041f1513361510021558111900">[email protected]</span></a>, or Susan Nathan, 
Senior Special Counsel, Division of Market Oversight, same address. 
Telephone: (202) 418-5133. E-mail: <a href="/cdn-cgi/l/email-protection#85f6ebe4f1ede4ebc5e6e3f1e6abe2eaf3"><span class="__cf_email__" data-cfemail="8bf8e5eaffe3eae5cbe8edffe8a5ece4fd">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \2\ 
significantly broadened the CFTC's regulatory authority with respect to 
ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory 
category--ECMs on which significant price discovery contracts 
(``SPDCs'') are traded--and treating ECMs in that category as 
registered entities under the CEA. The legislation authorizes the CFTC 
to designate an agreement, contract or transaction traded on an ECM as 
a SPDC if the Commission determines, under criteria established in 
section 2(h)(7), that it performs a significant price discovery 
function. When the Commission makes such a

[[Page 23687]]

determination, the ECM on which the SPDC is traded must assume, with 
respect to that contract, all the responsibilities and obligations of a 
registered entity under the Act and Commission regulations, and must 
comply with nine core principles established by new section 2(h)(7)(C).
---------------------------------------------------------------------------

    \2\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 
2008).
---------------------------------------------------------------------------

    On March 16, 2009, the CFTC promulgated final rules implementing 
the provisions of the Reauthorization Act.\3\ As relevant here, Rule 
36.3 imposes increased information reporting requirements on ECMs to 
assist the Commission in making prompt assessments whether particular 
ECM contracts may be SPDCs. In addition to filing quarterly reports 
regarding its contracts, an ECM must notify the Commission promptly 
concerning any contract traded in reliance on the exemption in section 
2(h)(3) of the CEA that averaged five trades per day or more over the 
most recent calendar quarter, and that either: (1) had its price 
information sold by the exchange to market participants or industry 
publications or (2) had daily closing or settlement prices which were 
within 2.5% of the contemporaneously determined closing, settlement or 
other daily price of another contract on 95 percent or more of the days 
in the most recent quarter.
---------------------------------------------------------------------------

    \3\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.
---------------------------------------------------------------------------

    Commission Rule 36.3(c)(3) established the procedures by which the 
Commission makes and announces its determination whether a particular 
ECM contract serves a significant price discovery function. Under those 
procedures, the Commission publishes notice in the Federal Register 
that it intends to undertake a determination whether the specified 
agreement, contract or transaction performs a significant price 
discovery function and receives written views, data and arguments 
relevant to its determination from the ECM and other interested 
persons. The Commission, within a reasonable period of time after the 
close of the comment period, considers all relevant information and 
issues an order announcing and explaining its determination. The 
issuance of an affirmative order subjects an ECM with a SPDC to the 
full application of the Commission's regulatory authorities; at that 
time, such an ECM becomes subject to all provisions of the CEA 
applicable to registered entities.\4\ The issuance of such an order 
also triggers the obligations, requirements and timetables prescribed 
in Commission Rule 36.3(c)(4).\5\
---------------------------------------------------------------------------

    \4\ Public Law 110-246 at 13203; Joint Explanatory Statement of 
the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d 
Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888, 
75894 (Dec. 12, 2008).
    \5\ For an initial SPDC determination, ECMs have a grace period 
of 90 calendar days from the issuance of a SPDC determination order 
to submit a written demonstration of compliance with the applicable 
core principles. For subsequent SPDC determinations, ECMs have a 
grace period of 30 calendar days to demonstrate core principle 
compliance.
---------------------------------------------------------------------------

II. Notice of Intent To Undertake SPDC Determination

    On August 20, 2009, the Commission published in the Federal 
Register a notice of its intent to undertake a determination whether 
the CCX's CFI contract performs a significant price discovery function, 
and requested comment from interested parties.\6\ Comments were 
received from the IntercontinentalExchange, Inc. (``ICE''); Jeremy D. 
Weinstein, Esq. (``Weinstein''); the California Forestry Association 
(``CFA''); and Scott DeMonte (``DeMonte'').\7\ The comments are more 
extensively discussed below in the Analysis Section.
---------------------------------------------------------------------------

    \6\ The Commission's Part 36 Rules establish, among other 
things, procedures by which the Commission makes and announces its 
determination whether a specific ECM contract serves a significant 
price discovery function. Under those procedures, the Commission 
publishes a notice in the Federal Register that it intends to 
undertake a determination whether a specified agreement, contract or 
transaction performs a significant price discovery function and to 
receive written data, views and arguments relevant to its 
determination from the ECM and other interested persons.
    \7\ The comment letters are available on the Commission's Web 
site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-010.html.
---------------------------------------------------------------------------

III. Section 2(h)(7) of the CEA

    The Commission is directed by section 2(h)(7) of the CEA to 
consider, as appropriate, the following factors in determining whether 
a contract performs a significant price discovery function:
    <bullet> Price Linkage--the extent to which the agreement, contract 
or transaction uses or otherwise relies on a daily or final settlement 
price, or other major price parameter, of a contract or contracts 
listed for trading on or subject to the rules of a designated contract 
market (``DCM'') or derivatives transaction execution facility 
(``DTEF''), or a SPDC traded on an electronic trading facility, to 
value a position, transfer or convert a position, cash or financially 
settle a position, or close out a position.
    <bullet> Arbitrage--the extent to which the price for the 
agreement, contract or transaction is sufficiently related to the price 
of a contract or contracts listed for trading on or subject to the 
rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of 
an electronic trading facility, so as to permit market participants to 
effectively arbitrage between the markets by simultaneously maintaining 
positions or executing trades in the contracts on a frequent and 
recurring basis.
    <bullet> Material price reference--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 agreements, contracts or transactions being traded 
or executed on the electronic trading facility.
    <bullet> Material liquidity--the extent to which the volume of 
agreements, contracts or transactions in the commodity being traded on 
the electronic trading facility is sufficient to have a material effect 
on other agreements, contracts or transactions listed for trading on or 
subject to the rules of a DCM, DTEF or electronic trading facility 
operating in reliance on the exemption in section 2(h)(3).
    Not all factors must be present to support a determination that a 
particular contract performs a significant price discovery function. 
Moreover, the statutory language neither prioritizes the factors nor 
specifies the degrees to which a SPDC must conform to the various 
factors. In Guidance issued in connection with the Part 36 rules 
governing ECMs with SPDCs, the Commission observed that these factors 
do not lend themselves to a mechanical checklist or formulaic 
analysis.\8\
---------------------------------------------------------------------------

    \8\ Appendix A to Part 36, 17 CFR part 36 (2009).
---------------------------------------------------------------------------

    Accordingly, the Commission has indicated that in making its 
determination it will consider the circumstances under which the 
presence of a particular factor, or combination of factors, would be 
sufficient to support a SPDC determination.\9\ For example, for 
contracts that are linked to other contracts or that may be arbitraged 
with other contracts, the Commission will consider whether the price of 
the potential SPDC moves in such harmony with the other contract that 
the two markets essentially become interchangeable.\10\ This co-
movement of prices would be an indication that activity in the contract 
had reached a level sufficient for the contract to perform a 
significant price discovery function.
---------------------------------------------------------------------------

    \9\ 17 CFR part 36, appendix A.
    \10\ Appendix A to Part 36, 17 CFR 36 (2009).
---------------------------------------------------------------------------

IV. The CCX CFI Contract

    CCX, launched in 2003, operates the only North American voluntary, 
legally

[[Page 23688]]

binding integrated trading system to reduce emissions of six major 
greenhouse gases, with offset projects worldwide. CCX offers a cap and 
trade system whose members \11\ make a legally binding emission 
reduction commitment. Members are allocated annual emission allowances 
in accordance with their emissions baseline and the CCX emission 
reduction schedule. Members who reduce beyond their targets have 
surplus allowances to sell or bank; those who do not meet the targets 
must comply by purchasing CCX CFIs. The CCX CFI contract is a cash 
market instrument and not a derivatives contract. The Chicago Climate 
Futures Exchange (CCFE), a subsidiary of CCX that operates as a DCM, 
lists derivatives (futures and option contracts) on CCX CFIs.
---------------------------------------------------------------------------

    \11\ CCX membership categories:
     Members: Entities with direct greenhouse gas (GHG) emissions. 
Members make a legally binding commitment to the CCX Emission 
Reduction Schedule and are subject to annual emissions verification 
by FINRA. Indirect emissions are an opt-in.
    Registry Participant Members: Entities with direct GHG emissions 
that establish a CCX Registry account of their emissions and undergo 
data verification. Standardized independent third-party data 
verification is provided by FINRA on an annual or multi-annual 
basis.
    Associate Members: Office-based businesses or institutions with 
negligible direct GHG emissions. Associate Members commit to report 
and fully offset 100 percent of indirect emissions associated with 
energy purchases and business travel from year of entry through 2010 
and emissions data are verified by FINRA.
    Offset Providers: Owners of title to qualifying offset projects 
that sequester, destroy or reduce GHG emissions. Offset Providers 
register and sell offsets directly on the CCX.
    Offset Aggregators: Entities that serve as the administrative 
representative, on behalf of offset project owners, of multiple 
offset-generating projects. Offset projects involving less than 
10,000 metric tons of carbon dioxide equivalent per year should be 
registered and sold through an Offset Aggregator.
    Liquidity Providers: Entities or individuals who trade on CCX 
for purposes other than complying with the CCX Emission Reduction 
Schedule, such as market makers and proprietary trading groups.
    Exchange Participants: Entities or individuals who purchase CFI 
contracts and retire them to offset emissions associated with 
special events or other specified activities.
---------------------------------------------------------------------------

    The size of the CCX CFI contract is 100 metric tons (MT) of 
CO<INF>2</INF>-equivalent emissions. A CCX CFI contract involves the 
immediate delivery of, and payment for, vintage specific CCX carbon 
dioxide (CO<INF>2</INF>) emission allowances called CFIs. Earlier dated 
vintages may be delivered against later vintage trades. Transactions 
(with exception of bilateral agreements) are cleared on trade day. Full 
contract value settlement occurs on the next business day. CCX 
substitutes as a counterparty to all transactions and guarantees 
performance until settlement is completed.
    Based upon a required quarterly notification filed on October 15, 
2009, (mandatory under Rule 36.3(c)(2)), the CCX reported that, with 
respect to its CFI contract, an average of 8 trades per day occurred in 
the third quarter of 2009. During the same period, the CFI had an 
average daily trading volume of 1,141 contracts. In the second quarter 
of 2009, market participants traded the CFI contract on average 15 
times per day with an average daily trading volume of 1,235 contracts. 
Because the CCX CFI is a cash market instrument, open interest figures 
are not applicable.

V. Analysis

A. The Statutory Criteria

    In its notice of intent to undertake a determination whether the 
CCX CFI contract performs a significant price discovery function, the 
Commission indicated that the CCX CFI contract might satisfy the 
material price reference and material liquidity criteria for SPDC 
determination.\12\ Further analysis reveals that the CCX CFI contract 
does not meet either criterion.
---------------------------------------------------------------------------

    \12\ 74 FR 42054 (Aug. 20, 2009).The Commission did not identify 
either price linkage or arbitrage as the possible criteria for the 
CCX CFI contact to be a SPDC. Accordingly, those criteria will not 
be discussed further in this Order.
---------------------------------------------------------------------------

Material Price Reference Criterion
    The Commission has concluded that the CCX CFI contract does not 
meet the material price reference criterion for SPDC determination. As 
noted in the original Federal Register notice, the CFI market is solely 
a CCX-created entity.\13\ The CCX designed all of the parameters of 
this carbon emission reduction program, and it established the rules 
for membership in the ECM, allowance trading, and the creation of 
offsets. Based on these attributes, staff considered whether traders 
look to the CCX as a source of price information and price discovery 
for the CFI or the U.S. carbon market in general that would either be a 
direct or an indirect source of evidence of the material price 
reference. Staff concluded that it appears that CCX CFI prices are not 
used as a price reference to the U.S. carbon market due to the 
relatively small market share of the CCX CFI program in the overall 
U.S. carbon market, the limited potential for the CFI program to be 
folded into a national carbon reduction program, and significant price 
volatility of the CCX CFI instrument. As part of its material price 
reference analysis, Commission staff considered comments filed pursuant 
to the request for comment and all other relevant information.\14\
---------------------------------------------------------------------------

    \13\ 74 FR 42054 (Aug. 20, 2009).
    \14\ The Commission will rely on one of two sources of 
evidence--direct or indirect--to determine a SPDC. Direct evidence 
can be cash market transactions that are frequently based on or 
quoted as a differential to the potential SPDC. Indirect evidence 
includes contracts whose price series are routinely disseminated in 
industry publications or are sold to market participants by the ECM.
---------------------------------------------------------------------------

Material Liquidity Criterion
    The Commission's decision to undertake a review to determine 
whether the CCX CFI contract performs a significant price discovery 
function was based on CCX's required initial quarterly notification 
filed on July 1, 2009. At that time, CCX reported that, with respect to 
all CFI trades combined (aggregate of vintages 2003-2010), an average 
of 15 separate trades per day occurred in the second quarter of 2009. 
Subsequent to the publication of the Commission's Federal Register 
notice announcing its intent to undertake a SPDC review, however, CCX 
amended its filing to show the number of trades per day for each 
vintage, and clarified that the exchange lists and trades CFI contract 
vintages individually and provides a vintage-specific closing price for 
each CFI vintage contract. In these circumstances, the Commission 
recognizes that the CCX CFI vintage-specific contracts should not be 
aggregated, but rather should be treated individually for the purpose 
of a SPDC analysis. Accordingly, the Commission has analyzed each 
individual vintage of the CCX CFIs to determine whether any of them are 
SPDCs.\15\
---------------------------------------------------------------------------

    \15\ Because this shift in focus did not alter either the 
analysis or conclusion or otherwise suggest the need for further 
comment, the Commission did not republish its original notice of 
intent to make a SPDC determination with respect to the CCX CFI 
contract.
---------------------------------------------------------------------------

    The Commission's evaluation of the supplemental data indicates that 
the CCX CFI vintage specific contracts (2003-2010 vintages) do not meet 
the material liquidity criterion for a SPDC; the average number of 
trades per day per vintage was only one contract, well below the five 
trades per day reporting threshold established by the Commission.

B. Comments Received

    The Commission received four responses to its request for comments. 
Two of the comment letters addressed issues beyond the scope of the 
instant matter;\16\ two raised substantive issues

[[Page 23689]]

with respect to the applicability of section 2(h)(7) to the CFI 
contract.\17\
---------------------------------------------------------------------------

    \16\ See supra note 7. Specifically, the California Forestry 
Association offered the opinion that all the over-the-counter 
voluntary carbon trading occurring now serves a significant price 
discovery function. CL 02. Scott DeMonte advises the Commission to 
``fix the manipulation'' in [its] exchanges'' and requests that 
firms be required to have collateral in excess of two times their 
average end of daily trade value in order to participate in this 
market. CL 01.
    \17\ See supra note 7. The commenters who raised substantive 
issues with respect to the applicability of section 2(h)(7) to the 
CFI contract are Jeremy D. Weinstein, Esq., owner of the law offices 
of Jeremy D. Weinstein, a professional corporation located in Walnut 
Creek, California and IntercontinentalExchange, Inc., operator of 
regulated exchanges, trading platforms and clearing houses serving 
the global markets for agricultural, credit, currency, emissions, 
energy and equity index markets headquartered in Atlanta, Georgia, 
U.S.
---------------------------------------------------------------------------

    Weinstein opines that the CCX offset project protocols ``do not 
conform to the stringent additionality \18\ and leakage standards \19\ 
that are in the carbon offset contracts * * * accepted by the broader 
market.'' Consequently, Mr. Weinstein asserts that ``the absence from 
the CCX CFI contract of the most essential requirements for commonality 
with other carbon offset contract prevents market participants from 
using the CFI contracts for material price reference, arbitrage, and 
settlement and execution of transactions.'' The environmental 
requirements of the CCX offset protocols are beyond the scope of the 
Commission authority, and this inquiry was limited to an evaluation 
whether the CCX CFI contract might satisfy the material liquidity and 
material price reference statutory criterion for a SPDC determination.
---------------------------------------------------------------------------

    \18\ There are a number of interpretations of the additionality 
concept in application to the environmental offset projects. The 
most popular interpretations are ``environmental additionality'' 
where a project is additional if the emissions from the project are 
lower than the baseline, and ``project additionality'' where the 
project must not have happened without the Clean Development 
Mechanism (CDM).
    \19\ Leakage generally refers to the increase in emissions 
outside the project boundary that occurs as a consequence of the 
project activity's implementation.
---------------------------------------------------------------------------

    ICE expressed an opinion that ``the CFI does not serve a 
significant price discovery function and the Commission may exceed its 
jurisdiction if it determines that the CFI serves as a significant 
price discovery contract.'' ICE observed that the CCX CFI contract 
fails the threshold for material liquidity because ``each [CCX CFI 
contract] vintage may trade less than twice a day.'' Consequently, ICE 
concluded that ``a trade every couple of hours does not equate to the 
``ability to transact immediately'' or ``a more or less continuous 
stream of prices.'' As noted above, after a thorough review of 
supplemental data provided for the CCX CFI contract, Commission staff 
concluded that different CCX CFI vintages should be considered as 
separate CCX contracts. When analyzed in this manner, the CCX CFI 
contracts do not meet the material liquidity criterion for SPDC 
determination.
    When analyzing the material price reference factor for a CCX CFI 
SPDC determination, ICE commented that ``under the Commission's theory, 
any spot contract automatically serves as a material price reference, 
simply because the contract references itself'' (emphasis in original). 
Additionally, ICE expresses an opinion that ``by making this 
determination [the CCX CFI contract is a SPDC], the Commission is 
broadly asserting jurisdiction over the spot market if the spot 
contract is electronically traded.'' In response, the Commission notes 
that Section 2(h)(7), refers to ``any agreement, contract or 
transaction conducted in reliance on the exemption'' in Section 2(h)(3) 
and does not require that the Commission find that a potential SPDC 
contract is a commodity futures or options contract. The determination 
to list particular instruments in reliance on the Section 2(h)(3) 
exemption is made by the ECM, not the Commission, when the ECM files 
notice with the Commission, under Section 2(h)(5), of its reliance on 
such exemption. Section 2(i) of the CEA reinforces the view that 
instruments traded on 2(h)(3) markets may include non-futures products; 
that section states that there is no presumption that an agreement, 
contract or transaction exempted under section 2(h)(3) ``is or would 
otherwise be subject to this chapter.''

VI. Findings and Conclusion

    In consideration of the initial and supplemental information 
provided by CCX, the comments received in connection with the Federal 
Register notice and all other relevant information, the Commission has 
determined that the CCX CFI contract does not, at this time, perform a 
significant price discovery function. Accordingly, as set forth in the 
Commission's Order, CCX is not required to comply with Commission Rule 
36.3(c)(4) applicable to ECMs with SPDCs, or otherwise to assume the 
statutory and regulatory responsibilities of a registered entity with 
respect to the CFI contract. The Reauthorization Act amended the CEA to 
require that the Commission evaluate not less than annually all 
agreements, contracts and transactions conducted on an ECM in reliance 
on the exemption in section 2(h)(3) to determine whether they serve a 
significant price discovery function.\20\ In addition, the Commission 
routinely monitors contracts traded or executed in reliance on section 
2(h)(3) and reviews all ECM submissions on an ongoing basis for the 
presence of SPDCs. Accordingly, like all ECMs, CCX remains responsible 
for compliance with the reporting requirements described in Rule 
36.3(a) and (b).
---------------------------------------------------------------------------

    \20\ Section 2(h)(7)(D)(ii), 7 U.S.C. 2(h)(7)(D)(ii).
---------------------------------------------------------------------------

VII. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \21\ imposes certain 
requirements on federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. Certain provisions of final 
Commission Rule 36.3 impose new regulatory and reporting requirements 
on ECMs, resulting in information collection requirements within the 
meaning of the PRA; OMB previously has approved and assigned OMB 
control number 3038-0060 to this collection of information.
---------------------------------------------------------------------------

    \21\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

B. Cost-Benefit Analysis

    Section 15(a) of the CEA \22\ requires the Commission to consider 
the costs and benefits of its actions before issuing an order under the 
Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs; rather, it requires that the 
Commission ``consider'' the costs and benefits of its action. Section 
15(a) further specifies that the costs and benefits shall be evaluated 
in light of five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission may in its discretion give 
greater weight to any of the five enumerated areas and could in its 
discretion determine that, notwithstanding its costs, a particular 
order is necessary or appropriate to protect the public interest or to 
effectuate any provisions or accomplish any of the purposes of the Act.
---------------------------------------------------------------------------

    \22\ 7 U.S.C.19(a).
---------------------------------------------------------------------------

    When a futures contract begins to serve a significant price 
discovery function, that contract, and the ECM on which it is traded, 
warrants increased oversight to deter and prevent price manipulation 
and other disruptions to market integrity, both on the ECM itself and 
in any related futures contracts trading on DCMs. An Order finding that 
a particular contract is a SPDC triggers

[[Page 23690]]

this increased oversight and imposes obligations on the ECM calculated 
to accomplish this goal. The increased oversight engendered by the 
issuance of a SPDC Order increases transparency and helps to ensure 
fair competition among ECMs and DCMs trading similar products and 
competing for the same business. Moreover, the ECM on which the SPDC is 
traded must assume, with respect to that contract, all the 
responsibilities and obligations of a registered entity under the CEA 
and Commission regulations. Additionally, the ECM must comply with nine 
core principles established by section 2(h)(7) of the Act--including 
the obligation to establish position limits and/or accountability 
standards for the SPDC. Amendments to section 4(i) of the CEA authorize 
the Commission to require large trader reports for SPDCs listed on 
ECMs. These increased ECM responsibilities, along with the CFTC's 
increased regulatory authority, subject the ECM's risk management 
practices to the Commission's supervision and oversight and generally 
enhance the financial integrity of the markets.
    The Commission has concluded that the Chicago Climate Exchange's 
Carbon Financial Instrument contract that is the subject of the 
attached Order is not a SPDC; accordingly, the Commission's Order 
impose no additional costs and no additional statutorily or regulatory 
mandated responsibilities on the ECM.

VIII. Order

Order Relating to the CCX CFI Contract

    After considering the complete record in this matter, including the 
comment letters received in response to its request for comments, the 
Commission has determined to issue the following:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Chicago Climate Exchange's Carbon 
Financial Instrument contract that was submitted to the Commission by 
the Chicago Climate Exchange for review on July 1, 2009 and October 15, 
2009 does not, at this time, satisfy the statutory or regulatory 
requirements of a significant price discovery contract. Consistent with 
this determination, the Chicago Climate Exchange is not required at 
this time to comply with section 2(h)(7)(C) in connection with the 
Carbon Financial Instrument contract or the Part 36 regulations 
applicable to exempt commercial markets with significant price 
discovery contracts, and is not required to assume the statutory or 
regulatory responsibilities required of registered entities with 
respect to the Carbon Financial Instrument contract.
    This order is based upon the representations made to the Commission 
by the Chicago Climate Exchange in filings dated July 1, 2009 and 
October 15, 2009, and other supporting material. Any material change or 
omissions in the facts and circumstances pursuant to which this order 
is granted might require the Commission to reconsider its current 
determination that the Carbon Financial Instrument contract is not a 
significant price discovery contract.
    The Commission may, based upon information regarding the Carbon 
Financial Instrument contract reviewed under this Order that is 
submitted in required reports and filings, issue another notice of 
intent to undertake a significant price discovery contract 
determination for these contracts. Further, issuance of this Order does 
not affect the Chicago Climate Exchange's continuing obligation to 
comply with all statutory and regulatory requirements applicable to 
2(h)(3) markets, including all reporting requirements found in 
Commission Regulation 36.3.

    Issued in Washington, DC on April 28, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-10311 Filed 5-3-10; 8:45 am]
BILLING CODE P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>