[Federal Register Volume 75, Number 85 (Tuesday, May 4, 2010)]
[Notices]
[Pages 23729-23745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10314]



[[Page 23729]]

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COMMODITY FUTURES TRADING COMMISSION


Orders Finding that the (1) Phys,\1\ BS,\2\ LD1 \3\ (US/MM), AB-
NIT;\4\ (2) Phys, BS, LD1 (US/MM), Union-Dawn; \5\ (3) Phys, FP,\6\ 
(CA/GJ),\7\ AB-NIT; (4) Phys, FP, (US/MM), Union-Dawn; and (5) Phys, 
ID,\8\ 7a \9\ (CA/GJ), AB-NIT Contracts, Offered for Trading on the 
Natural Gas Exchange, Inc., Do Not Perform a Significant Price 
Discovery Function
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    \1\ The acronym ``Phys'' indicates physical delivery of natural 
gas.
    \2\ The acronym ``BS'' indicates that the contract is a cash-
settled basis swap.
    \3\ The acronym ``LD1'' indicates the final settlement price of 
the New York Mercantile Exchange's (``NYMEX's'') physically-
delivered Henry Hub Natural Gas futures contract for the 
corresponding contract month, which is expressed in U.S. dollars and 
cents per million British thermal units (mmBtu).
    \4\ The acronym ``AB-NIT'' refers to the Alberta, Canada, market 
center and Nova Inventory Transfer hub.
    \5\ ``Union-Dawn'' refers to the Union Gas, Ltd.'s, Dawn hub, 
which is located in Canada across the U.S. border from Detroit, 
Michigan.
    \6\ The acronym ``FP'' refers to a fixed-price contract.
    \7\ The abbreviation CA/GJ refers the Canadian dollars per 
gigajoule, which is a unit of measure for energy. One GJ is equal to 
0.9478 mmBtu.
    \8\ The acronym ``ID'' refers to an index contract.
    \9\ The term ``7a'' refers to a price index that is computed as 
a volume-weighted average of transactions that occur on the Natural 
Gas Exchange's trading platform during a particular calendar month. 
Such transactions specify the physical delivery of natural gas at 
the AB-NIT hub in the following calendar month.
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AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

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SUMMARY: On October 20, 2009, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment in the Federal 
Register \10\ a notice of its intent to undertake a determination 
whether the (1) Phys, BS, LD1 (US/MM), AB-NIT (``Alberta Basis''); (2) 
Phys, BS, LD1 (US/MM), Union-Dawn (``Union-Dawn Basis''); (3) Phys, FP, 
(CA/GJ), AB-NIT (``Alberta Fixed-Price''); (4) Phys, FP, (US/MM), 
Union-Dawn (``Union-Dawn Fixed-Price''); and (5) Phys, ID, 7a (CA/GJ), 
AB-NIT (``7a Index'') contracts, which are listed for trading on the 
Natural Gas Exchange, Inc. (``NGX''), an exempt commercial market 
(``ECM'') under sections 2(h)(3)-(5) of the Commodity Exchange Act 
(``CEA'' or the ``Act''), perform 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 NGX as well as other available information. The 
Commission has reviewed the entire record in this matter, including all 
comments received, and has determined to issue orders finding that the 
Alberta Basis, Union-Dawn Basis, Alberta Fixed-Price, Union-Dawn Fixed-
Price and 7a Index contracts do 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.
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    \10\ 74 FR 53724 (October 20, 2009).

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DATES: Effective Date: April 28, 2010.

FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist, 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5515. E-mail: <a href="/cdn-cgi/l/email-protection#e38493918a8086a380859780cd848c95"><span class="__cf_email__" data-cfemail="335443415a505673505547501d545c45">[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#f88b96998c909996b89b9e8c9bd69f978e"><span class="__cf_email__" data-cfemail="15667b74617d747b55767361763b727a63">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \11\ 
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.\12\ The legislation authorizes the 
CFTC to designate an agreement, contract or transaction 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 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).
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    \11\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 
2008).
    \12\ 7 U.S.C. 1a(29).
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    On March 16, 2009, the CFTC promulgated final rules implementing 
the provisions of the Reauthorization Act.\13\ 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 of 
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 for which the exchange sells its price 
information regarding the contract to market participants or industry 
publications, or whose daily closing or settlement prices on 95 percent 
or more of the days in the most recent quarter were within 2.5 percent 
of the contemporaneously determined closing, settlement or other daily 
price of another contract.
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    \13\ 74 FR 12178 (Mar. 23, 2009); these rules became effective 
on April 22, 2009.
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    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 will publish notice in the Federal Register 
that it intends to undertake an evaluation whether the specified 
agreement, contract or transaction performs a significant price 
discovery function and to receive written views, data and arguments 
relevant to its determination from the ECM and other interested 
persons. Upon the close of the comment period, the Commission will 
consider, among other things, all relevant information regarding the 
subject contract and issue an order announcing and explaining its 
determination whether or not the contract is a SPDC. The issuance of an 
affirmative order signals the effectiveness of the Commission's 
regulatory authorities over an ECM with respect to a SPDC; at that time 
such an ECM becomes subject to all provisions of the CEA applicable to 
registered entities.\14\ The issuance of such an order also triggers 
the obligations, requirements and timetables prescribed in Commission 
rule 36.3(c)(4).\15\
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    \14\ 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).
    \15\ For an initial SPDC, 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 SPDCs, ECMs have a grace period of 
30 calendar days to demonstrate core principle compliance.
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II. Notice of Intent To Undertake SPDC Determination

    On October 20, 2009, the Commission published in the Federal 
Register notice of its intent to undertake a determination whether the 
Alberta Basis, Union-Dawn Basis, Alberta Fixed-

[[Page 23730]]

Price, Union-Dawn Fixed Price and 7a Index contracts perform a 
significant price discovery function and requested comment from 
interested parties.\16\ Comments were received from the Federal Energy 
Regulatory Commission (``FERC''), NGX and Working Group of Commercial 
Energy Firms (``WGCEF'').\17\ The comment letter from FERC \18\ did not 
directly address the issue of whether or not the subject contracts are 
SPDCs. NGX stated that the subject contracts lack sufficient liquidity 
to perform a significant price discovery function. WGCEF argued that 
the Alberta Basis and Union-Dawn Basis contracts fail to meet the 
material price reference, price linkage and material liquidity criteria 
for SPDC determination. Similarly, the 7a Index contracts lack 
sufficient liquidity to perform a significant price discovery 
function.\19\ NGX's and the Working Group's comments are more 
extensively discussed below, as applicable.
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    \16\ 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.
    \17\ FERC is an independent Federal regulatory agency that, 
among other things, regulates the interstate transmission of natural 
gas, oil and electricity. NGX is Canada's leading energy exchange 
and North America's largest physical clearing and settlement 
facility; NGX is wholly owned by the TMX Group, Inc. WGCEF describes 
itself as ``a diverse group of commercial firms in the domestic 
energy industry whose primary business activity is the physical 
delivery of one or more energy commodities to customers, including 
industrial, commercial and residential consumers'' and whose 
membership consists of ``energy producers, marketers and 
utilities.'' FIEG describes itself as an association of investment 
and commercial banks who are active participants in various sectors 
of the natural gas markets, ``including acting as marketers, 
lenders, underwriters of debt and equity securities, and proprietary 
investors.'' The comment letters are available on the Commission's 
website: comment letters are available on the Commission's Web site: 
http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-029.html.
    \18\ FERC stated that the subject contracts call for physical 
delivery of natural gas in Canada, and thus do not appear to be 
interstate commerce under the Natural Gas Act (``NGA''). 
Accordingly, FERC expressed the opinion that a determination by the 
Commission that any of the contracts performs a significant price 
discovery function ``would not appear to conflict with FERC's 
exclusive jurisdiction under NGA over certain sales of natural gas 
in interstate commerce for resale or with its other regulatory 
responsibilities under the NGA'' and further that ``FERC staff will 
continue to monitor for any such conflict * * * [and] advise the 
CFTC'' should any such potential conflict arise. CL01.
    \19\ WGCEF did not address whether the Alberta Fixed Price or 
Union-Dawn Fixed Price contracts are SPDCs.
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III. Section 2(h)(7) of the CEA

    The Commission is directed by section 2(h)(7) of the CEA to 
consider the following criteria in determining a contract's 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 or 
consulting, 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 a 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 criteria must be present to support a determination that a 
particular contract performs a significant price discovery function, 
and one or more criteria may be inapplicable to a particular 
contract.\20\ Moreover, the statutory language neither prioritizes the 
criteria nor specifies the degree to which a SPDC must conform to the 
various criteria. In Guidance issued in connection with the Part 36 
rules governing ECMs with SPDCs, the Commission observed that these 
criteria do not lend themselves to a mechanical checklist or formulaic 
analysis. Accordingly, the Commission has indicated that in making its 
determinations it will consider the circumstances under which the 
presence of a particular criterion, or combination of criteria, would 
be sufficient to support a SPDC determination.\21\ 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. 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. In evaluating a contract's price discovery role as 
a price reference, the Commission the extent to which, on a frequent 
and recurring basis, bids, offers or transactions are directly based 
on, or are determined by referencing, the prices established for the 
contract.
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    \20\ In its October 20, 2009, Federal Register release, the 
Commission identified material price reference, price linkage and 
material liquidity as the possible criteria for SPDC determination 
of the Alberta Basis and Union-Dawn Basis contracts (arbitrage was 
not identified as a possible criterion). With respect to the Alberta 
Fixed-Price, Union-Dawn Fixed-Price and 7a Index contracts, the 
Federal Register release identified material price reference and 
material liquidity as the possible criteria for SPDC determination 
(price linkage and arbitrage were not identified as possible 
criteria). The criteria not indentified in the initial release will 
not be discussed further in this document or the associated Orders.
    \21\ 17 CFR part 36, Appendix A.
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IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the 
Alberta Basis, Union-Dawn Basis, Alberta Fixed-Price, Union-Dawn Fixed-
Price and 7a Index contracts are discussed separately below.

a. The Phys, BS, LD1 (US/MM), AB-NIT (Alberta Basis Contract) and the 
SPDC Indicia

    The Alberta Basis contract calls for the physical delivery of 
natural gas based on the final settlement price for New York Mercantile 
Exchange's (``NYMEX's'') Henry Hub physically-delivered Natural Gas 
(``NG'') futures contract for the specified calendar month, plus or 
minus the price differential (basis) between the Alberta delivery point 
and the Henry Hub. There is no standard size for the Alberta Basis 
contract, although a minimum

[[Page 23731]]

volume of 100 million British thermal units (``mmBtu'') is required in 
increments of 100 units per day. The Alberta Basis contract is listed 
for 60 consecutive calendar months.
    The Henry Hub,\22\ which is located in Erath, Louisiana, is the 
primary cash market trading and distribution center for natural gas in 
the United States. It also is the delivery point and pricing basis for 
the NYMEX's actively traded, physically-delivered natural gas futures 
contract, which is the most important pricing reference for natural gas 
in the United States. The Henry Hub, which is operated by Sabine Pipe 
Line, LLC, serves as a juncture for 13 different pipelines. These 
pipelines bring in natural gas from fields in the Gulf Coast region and 
ship it to major consumption centers along the East Coast and Midwest. 
The throughput shipping capacity of the Henry Hub is 1.8 trillion mmBtu 
per day.
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    \22\ The term ``hub'' refers to a juncture where two or more 
natural gas pipelines are connected. Hubs also serve as pricing 
points for natural gas at the particular locations.
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    In addition to the Henry Hub, there are a number of other locations 
where natural gas is traded. In 2008, there were 33 natural gas market 
centers in North America.\23\ Some of the major trading centers include 
Alberta, Northwest Rockies, Southern California border and the Houston 
Ship Channel. For locations that are directly connected to the Henry 
Hub by one or more pipelines and where there typically is adequate 
shipping capacity, the price at the other locations usually directly 
tracks the price at the Henry Hub, adjusted for transportation costs. 
However, at other locations that are not directly connected to the 
Henry Hub or where shipping capacity is limited, the prices at those 
locations often diverge from the Henry Hub price. Furthermore, one 
local price may be significantly different than the price at another 
location even though the two markets' respective distances from the 
Henry Hub are the same. The reason for such pricing disparities is that 
a given location may experience supply and demand factors that are 
specific to that region, such as differences in pipeline shipping 
capacity, unusually high or low demand for heating or cooling or supply 
disruptions caused by severe weather. As a consequence, local natural 
gas prices can differ from the Henry Hub price by more than the cost of 
shipping and such price differences can vary in an unpredictable 
manner.
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    \23\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
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    The Alberta hub is far removed from the Henry Hub and is not 
directly connected to the Henry Hub by an existing pipeline. Located in 
the Canadian province of Alberta, the Alberta natural gas market is a 
major connection point for long-distance transmission systems that ship 
natural gas to points throughout Canada and the United States. The 
Alberta province is Canada's dominant natural gas producing region; six 
of the nine Canadian market centers are located in the Alberta 
province. The throughput capacity at the AECO-C hub is ten billion 
cubic feet per day. Moreover, the number of pipeline interconnections 
at that hub was four in 2008. Lastly, the AECO-C hub's capacity is 20.4 
billion cubic feet per day.\24\
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    \24\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf
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    The local price at the Alberta hub typically differs from the price 
at the Henry Hub. Thus, the price of the Henry Hub physically-delivered 
futures contract is an imperfect proxy for the Alberta price. Moreover, 
exogenous factors, such as adverse weather, can cause the Alberta gas 
price to differ from the Henry Hub price by an amount that is more or 
less than the cost of shipping, making the NYMEX Henry Hub futures 
contract even less precise as a hedging tool than desired by market 
participants. Basis contracts \25\ allow traders to more accurately 
discover prices at alternative locations and hedge price risk that is 
associated with natural gas at such locations. In this regard, a 
position at a local price for an alternative location can be 
established by adding the appropriate basis swap position to a position 
taken in the NYMEX physically-delivered Henry Hub contract (or in the 
NYMEX or ICE Henry Hub look-alike contract, which cash settle based on 
the NYMEX physically-delivered NG contract's final settlement price).
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    \25\ Basis contracts denote the difference in the price of 
natural gas at a specified location minus the price of natural gas 
at the Henry Hub. The differential can be either a positive or 
negative value.
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    In its October 20, 2009, Federal Register notice, the Commission 
identified material price reference, price linkage and material 
liquidity as the potential SPDC criteria applicable to the Alberta 
Basis contract.\26\ Each of these criteria is discussed below.
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    \26\ As noted above, the Commission did not find an indication 
of arbitrage in connection with this contract; accordingly, that 
criterion is not discussed in reference to the Alberta Basis 
contract.
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1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to the Alberta Basis contract. The 
Commission noted that NGX forged an alliance with the 
IntercontinentalExchange, Inc., (``ICE'') to use the ICE's matching 
engine to complete transactions in physical natural gas contracts 
traded on NGX. In return, NGX agreed to provide clearing services for 
such transactions. As part of the agreement, NGX provides ICE with 
transaction data, which are then made available to market participants 
on a paid basis. ICE offers NGX's price data in several packages, which 
vary in terms of the amount of available historical data. For example, 
the ICE offers the ``OTC Gas End of Day'' data package with access to 
all price data, or just current prices plus a selected number of months 
(i.e., 12, 24, 36, or 48 months) of historical data.
    The Commission will rely on one of two sources of evidence--direct 
or indirect--to determine that the price of a contract was being used 
as a material price reference and therefore, serving a significant 
price discovery function.\27\ With respect to direct evidence, the 
Commission will consider the extent to which, on a frequent and 
recurring basis, cash market bids, offers or transactions are directly 
based on or quoted at a differential to, the prices generated on the 
ECM in question. Direct evidence may be established when cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract in question. Cash 
market prices are set explicitly at a differential to the section 
2(h)(3) contract when, for instance, they are quoted in dollars and 
cents above or below the reference contract's price. Cash market prices 
are set implicitly at a differential to a section 2(h)(3) contract 
when, for instance, they are arrived at after adding to, or subtracting 
from the section 2(h)(3) contract, but then quoted or reported at a 
flat price. With respect to indirect evidence, the Commission will 
consider the extent to which the price of the contract in question is 
being routinely disseminated in widely distributed industry 
publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry

[[Page 23732]]

participants in pricing cash market transactions.
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    \27\ 17 CFR part 36, Appendix A.
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    The Alberta hub is a major trading center for natural gas in North 
America. Traders, including producers, keep abreast of the prices of 
the Alberta market center when conducting cash deals. However, ICE's 
cash-settled AECO Financial Basis contract is used more widely as a 
price reference than the NGX Alberta Basis contract. Traders look to 
ICE contract's competitively determined price as an indication of 
expected values of natural gas at the Alberta hub when entering into 
cash market transactions for natural gas, especially those trades 
providing for physical delivery in the future. Moreover, traders use 
ICE's AECO Financial Basis contract, as well as other basis contracts, 
to hedge cash market positions and transactions. The substantial volume 
of trading and open interest in the ICE contract attests to its use for 
this purpose.\28\ In contrast, trading volume in the NGX Alberta Basis 
contract is much smaller than in ICE's cash-settled version of the 
contract. In this regard, total trading volume in the NGX Alberta Basis 
contract in the third quarter of 2009 was equivalent to 52,158 NYMEX 
physically-delivered natural gas contracts, which has a size of 10,000 
mmBtu.
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    \28\ In the third quarter of 2009, 6,320 separate trades 
occurred on ICE's electronic platform in its AECO Financial Basis 
contract, resulting in a daily average of 95.8 trades. During the 
same period, the ICE contract had a total trading volume on its 
electronic platform of 736,412 contracts (which was an average of 
11,158 contracts per day). As of September 30, 2009, open interest 
in the ICE AECO Financial Basis contract was 483,561 contracts.
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    Accordingly, although the Alberta Hub is a major trading center for 
natural gas and, as noted, NGX provides price information for the 
Alberta Basis contract to ICE which sells it, the Commission has found 
upon further evaluation that the Alberta Basis contract is not 
routinely consulted by industry participants in pricing cash market 
transactions and thus does not meet the Commission's Guidance for the 
material price reference criterion. In this regard, the ICE AECO 
natural gas futures contract is routinely consulted by industry 
participants in pricing cash market transactions at this location. 
Because both the NGX and the ICE contracts basically price the same 
commodity at the same location and time and the ICE contract has 
significantly higher trading volume and open interest, it is not 
necessary for market participants to independently refer to the NGX 
Alberta Basis contract for pricing natural gas at this location. Thus, 
the Alberta Basis contract does not satisfy the direct price reference 
test for existence of material price reference. Furthermore, the 
Commission notes that publication of the Alberta Basis contract's 
prices is not indirect evidence of material price reference. The 
Alberta Basis contract's prices are published with those of numerous 
other contracts, including ICE's AECO Financial Basis contract, which 
are of more interest to market participants. Thus, the Commission has 
concluded that traders likely do not specifically purchase ICE data 
packages for the NGX Alberta Basis contract's prices and do not consult 
such prices on a frequent and recurring basis in pricing cash market 
transactions.
i. Federal Register Comments
    NGX states its opinion that the Alberta Basis contract does not 
satisfy the material price reference criteria because the contract 
lacks sufficient liquidity, and ``the consideration of liquidity is 
implicitly understood to be a relevant, if not fundamental factor, 
where material price reference is being considered.'' \29\ Furthermore, 
NGX opined that the Commission purported ``to adopt a threshold as low 
as 5, 10 or 20 trades per day as sufficiently material to attract a 
SPDC designation.'' \30\ In this regard, the Commission adopted a five 
trades-per-day threshold as a reporting requirement to enable it to 
``independently be aware of ECM contracts that may develop into SPDCs'' 
\31\ rather than solely relying upon an ECM on its own to identify any 
such potential SPDCs to the Commission. Thus, any contract that meets 
this threshold may be subject to scrutiny as a potential SPDC. However, 
this does not mean that the contract will be found to be a SPDC merely 
because it met the reporting threshold. WGCEF states that there is no 
direct evidence that any contracts on any market settle to or reference 
the NGX Alberta Basis price. Moreover, WGCEF ``does not believe the 
fact that ICE publishes the settlement prices of NGX physical 
transactions constitutes sufficient evidence of a Material Price 
Reference necessary to satisfy the requirements of CEA Section 
2(h)(7)(B)(iii).'' It notes that the publication of NGX price data by 
ICE is the result of a unique arrangement between ICE and NGX, whereby 
ICE serves as the exclusive trading platform for NGX contracts and NGX 
does not publish any trade data on its own website. ``Given this unique 
arrangement,'' WGCEF asserts, ``it is only logical that ICE publishes 
transaction data regarding the NGX physical deals in its ``OTC Gas End 
of Day'' publication.'' As noted above, the Commission believes that 
publication of the Alberta Basis contract's prices is not indirect 
evidence of material price reference. The Alberta Basis contract's 
prices are published with those of numerous other contracts, including 
ICE's AECO Financial Basis contract, which are of more interest to 
market participants. As a result, the Commission has concluded that 
traders likely do not specifically purchase ICE data packages for the 
NGX Alberta Basis contract's prices and do not consult such prices on a 
frequent and recurring basis in pricing cash market transactions.
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    \29\ CL 02.
    \30\ Id.
    \31\ 73 FR 75892 (December 12, 2008)
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ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the NGX Alberta Basis 
contract does not meet the material price reference criterion because 
cash market transactions are not priced either explicitly or implicitly 
on a frequent and recurring basis at a differential to the Alberta 
Basis contract's price (direct evidence). Moreover, while the Alberta 
Basis contract's price data is sold to market participants, market 
participants likely do not specifically purchase the ICE data packages 
for the Alberta contract's prices and do not consult such prices on a 
frequent and recurring basis in pricing cash market transactions 
(indirect evidence).
2. Price Linkage Criterion
    In its October 20, 2009, Federal Register notice, the Commission 
identified price linkage as a potential basis for a SPDC determination 
with respect to the Alberta Basis contract. In this regard, the final 
settlement of the Alberta Basis contract is based, in part, on the 
final settlement price of NYMEX's Henry Hub physically delivered NG 
futures contract, where NYMEX is registered with the Commission as a 
DCM.
    The Commission's Guidance on Significant Price Discovery Contracts 
notes that a ``price-linked contract is a contract that relies on a 
contract traded on another trading facility to settle, value or 
otherwise offset the price-linked contract.'' \32\ Furthermore, the 
Guidance notes that ``[f]or a linked contract, the mere fact that a 
contract is linked to another contract will not be sufficient to 
support a determination that a contract performs a significant

[[Page 23733]]

price discovery function. To assess whether such a determination is 
warranted, the Commission will examine the relationship between 
transaction prices of the linked contract and the prices of the 
referenced contract. The Commission believes that where material 
liquidity exists, prices for the linked contract would be observed to 
be substantially the same as, or move substantially in conjunction 
with, the prices of the referenced contract.'' The Guidance proposes a 
threshold price relationship such that prices of the ECM linked 
contract will fall within a 2.5 percent price range for 95 percent of 
contemporaneously determined closing, settlement or other daily prices 
over the most recent quarter. Finally, the Commission also stated in 
the Guidance that it would consider a linked contract that has a 
trading volume equivalent to 5 percent of the volume of trading in the 
contract to which it is linked to have sufficient volume potentially to 
be deemed SPDC (``minimum threshold'').
---------------------------------------------------------------------------

    \32\ Appendix A to the Part 36 rules.
---------------------------------------------------------------------------

    To assess whether the Alberta Basis contract meets the price 
linkage criterion, Commission staff obtained price data from NGX and 
performed the statistical tests cited above. Staff found that, while 
the Alberta Basis contract price is determined, in part, by the final 
settlement price of the NYMEX physically delivered natural gas futures 
contract (a DCM contract), the imputed Alberta price (derived by adding 
the NYMEX Henry Hub Natural Gas price to the Alberta Basis price) is 
not within 2.5 percent of the settlement price of the corresponding 
NYMEX Henry Hub natural gas futures contract on 95 percent or more of 
the days. Specifically, during the third quarter of 2009, none of the 
Alberta Basis natural gas prices derived from the NGX basis values were 
within 2.5 percent of the daily settlement price of the NYMEX Henry Hub 
futures contract. In addition, staff found that the Alberta Basis 
contract fails to meet the volume threshold requirement. In particular, 
the total trading volume in the NYMEX NG contract during the third 
quarter of 2009 was 14,022,963 contracts, with 5 percent of that number 
being 701,148 contracts. Trades on the NGX centralized market in the 
Alberta Basis contract during the same period was 52,168 NYMEX-
equivalent contracts. Thus, centralized-market trades in the Alberta 
Basis contract amounted to less than the minimum threshold.
i. Federal Register Comments
    NGX states its belief that the Alberta Basis contract does not meet 
the price linkage factor because there is insufficient trading activity 
in this contract.
    WGCEF acknowledges that the Alberta Basis contract is technically 
linked to the NYMEX Henry Hub NG contract. However, WGCEF contends that 
a comparison of the Alberta Basis contract price with NYMEX NG 
settlement prices from July 21, 2009 through November 2, 2009 clearly 
establishes that prices for these contracts are not substantially the 
same and do not move substantially in conjunction with one another.
ii. Conclusion Regarding the Price Linkage Criterion
    The Commission finds that the NGX Alberta Basis contract does not 
meet the price linkage criterion because it fails the price 
relationship and volume test provided for in the Commission's Guidance.
3. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity, price linkage and 
material price reference as potential criteria for SPDC determination 
of the AB contract. To assess whether a contract meets the material 
liquidity criterion, the Commission first examines trading activity as 
a general measurement of the contract's size and potential importance. 
If the Commission finds that the contract in question meets a threshold 
of trading activity that would render it of potential importance, the 
Commission will then perform a statistical analysis to measure the 
effect that changes to the subject-contract's prices potentially may 
have on prices for other contracts listed on an ECM or a DCM.
    With respect to the material liquidity criterion, the Commission 
noted that the average number of transactions in the Alberta Basis 
nearby month contract was 23.2 trades per day in the second quarter of 
2009. During the same period, the Alberta Basis contract had an average 
daily trading volume of 5,869,000 mmBtu (or 587 NYMEX-equivalent 
contracts of 10,000 mmBtu size). Moreover, open interest as of June 30, 
2009, was 150,213,600 mmBtu in the nearby month (15,021 NYMEX 
equivalents) and 10,112,200 mmBtu (1,011 NYMEX equivalents) for 
delivery two months out.\33\
---------------------------------------------------------------------------

    \33\ Second quarter 2009 data was submitted to the Commission in 
a different format than in later filings. In this regard total 
trading volume and total number of trades per quarter were not 
identified.
---------------------------------------------------------------------------

    In a subsequent filing, NGX reported that in the third quarter of 
2009 the total number of transactions was 2,640 trades (an average of 
40 trades per day). Trading volume in the third quarter of 2009 was 
521,580,000 mmBtu (52,158 NYMEX-equivalent contracts) or an average of 
7,900,000 mmBtu (790 NYMEX-equivalent contracts) on a daily basis. As 
of September 30, 2009, open interest in the Alberta Basis contract was 
6,440,000 mmBtu (644 NYMEX-equivalent contracts).
    The number of trades per day remained relatively low from the 
second to third quarters of 2009, and averaged only slightly more than 
the reporting level of five trades per day. Moreover, trading activity 
in the Alberta Basis contract, as characterized by total quarterly 
volume, indicates that the Alberta Basis contract experiences trading 
activity that is similar to that of minor futures markets.\34\ Thus, 
the Alberta Basis contract does not meet a threshold of trading 
activity that would render it of potential importance and no additional 
statistical analysis is warranted.\35\
---------------------------------------------------------------------------

    \34\ Based on the Commission's experience, a minor futures 
contract is, generally, one that has a quarterly trading volume of 
100,000 contracts or less.
    \35\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is an SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the Union-Dawn Basis contract does not 
meet either the price linkage or material price reference criterion. 
In light of this finding and the Commission's Guidance cited above, 
there is no need to evaluate further the material liquidity criteria 
since it cannot be used alone as a basis for an SPDC determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX stated in its comment letter that the Alberta Basis contract 
does not meet the material liquidity criterion for SPDC determination 
for a number of reasons.
    First, NGX opined that the Commission ``seems to have applied a 
threshold for `material liquidity' that is extremely low, and in 
general insufficient to support a determination that these contracts 
are no longer emerging markets but in fact serve a significant price 
discovery function.'' NGX also noted that the Commission's Guidance 
states that material liquidity was intended to be a ``broad concept 
that captures the ability to transact immediately with little or no 
price concession.'' The Guidance also states that where ``material 
liquidity exists, a more or less continuous stream of prices can be 
observed and the prices should be similar,'' such as ``where trades 
occur multiple times per minute.'' NGX then opined that ``[t]he levels 
of liquidity

[[Page 23734]]

outlined above for the Proposed Contracts cannot be what Congress 
intended in establishing the dividing line between contracts ripe for 
regulation and those still emerging and in need of further 
incubation.''
    WGCEF used arguments similar to those of NGX in opining that the 
Alberta Basis contract does not meet the material liquidity criterion. 
For example, WGCEF stated that the Alberta Basis contract does not have 
an effect on other contracts that are listed for trading, particularly 
the NYMEX NG contract. WGCEF pointed out the Commission's Guidance 
which states that a ``continuous stream of prices'' should be observed 
in markets with material liquidity. In addition, WGCEF indicated that 
in liquid markets observed prices should be similar to each other and 
that transactions should occur multiple times per minute; ``the trade 
frequency of the Alberta Basis Contract in terms of multiple trades per 
minute is very low.'' In this regard, the Commission notes that it 
adopted a five trades-per-day threshold as a reporting requirement to 
enable it to ``independently be aware of ECM contracts that may develop 
into SPDCs'' \36\ rather than solely relying upon an ECM on its own to 
identify any such potential SPDCs to the Commission. Thus, any contract 
that meets this threshold may be subject to scrutiny as a potential 
SPDC but this does not mean that the contract will be found to be a 
SPDC merely because it met the reporting threshold. Furthermore, the 
Commission observes that a continuous stream of prices would indeed be 
an indication of liquidity for certain markets but the Guidance also 
notes that ``quantifying the levels of immediacy and price concession 
that would define material liquidity may differ from one market or 
commodity to another.''
---------------------------------------------------------------------------

    \36\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds that the 
Alberta Basis contract does not meet the material liquidity criterion.
4. Overall Conclusion Regarding the Alberta Basis Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the NGX Alberta 
Basis contract does not perform a significant price discovery function 
under the criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the NGX Alberta Basis 
contract does not meet the material price reference, price linkage, or 
material liquidity criteria at this time. Accordingly, the Commission 
is issuing the attached Order declaring that the Alberta Basis contract 
is not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard NGX as a registered entity in connection with its 
Alberta Basis contract.\37\ Accordingly, with respect to its Alberta 
Basis contract, NGX is not required to comply with the obligations, 
requirements and timetables prescribed in Commission rule 36.3(c)(4) 
for ECMs with SPDCs. However, NGX must continue to comply with the 
applicable reporting requirements for ECMs.
---------------------------------------------------------------------------

    \37\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

b. The Phys, BS, LD1 (US/MM), Union-Dawn (Union-Dawn Basis) Contract 
and the SPDC Indicia

    The NGX Union-Dawn Basis contract is a monthly contract that calls 
for physical delivery of natural gas based on the final settlement 
price for NYMEX's Henry Hub physically-delivered natural gas futures 
contract for the specified calendar month, plus or minus the price 
differential (basis) between the Dawn delivery point and the Henry Hub. 
There is no standard size for the Union-Dawn Basis contract, although a 
minimum volume of 100 mmBtu is required in increments of 100 units per 
day. The Union-Dawn Basis contract is listed for 60 consecutive 
calendar months.
    The Henry Hub,\38\ which is located in Erath, Louisiana, is the 
primary cash market trading and distribution center for natural gas in 
the United States. It also is the delivery point and pricing basis for 
the NYMEX's actively traded, physically-delivered natural gas futures 
contract, which is the most important pricing reference for natural gas 
in the United States. The Henry Hub, which is operated by Sabine Pipe 
Line, LLC, serves as a juncture for 13 different pipelines. These 
pipelines bring in natural gas from fields in the Gulf Coast region and 
ship it to major consumption centers along the East Coast and Midwest. 
The throughput shipping capacity of the Henry Hub is 1.8 trillion mmBtu 
per day.
---------------------------------------------------------------------------

    \38\ The term ``hub'' refers to a juncture where two or more 
natural gas pipelines are connected. Hubs also serve as pricing 
points for natural gas at the particular locations.
---------------------------------------------------------------------------

    In addition to the Henry Hub, there are a number of other locations 
where natural gas is traded. In 2008, there were 33 natural gas market 
centers in North America.\39\ Some of the major trading centers include 
Alberta, Northwest Rockies, Southern California border and the Houston 
Ship Channel. For locations that are directly connected to the Henry 
Hub by one or more pipelines and where there typically is adequate 
shipping capacity, the price at the other locations usually directly 
tracks the price at the Henry Hub, adjusted for transportation costs. 
However, at other locations that are not directly connected to the 
Henry Hub or where shipping capacity is limited, the prices at those 
locations often diverge from the Henry Hub price. Furthermore, one 
local price may be significantly different than the price at another 
location even though the two markets' respective distances from the 
Henry Hub are the same. The reason for such pricing disparities is that 
a given location may experience supply and demand factors that are 
specific to that region, such as differences in pipeline shipping 
capacity, unusually high or low demand for heating or cooling or supply 
disruptions caused by severe weather. As a consequence, local natural 
gas prices can differ from the Henry Hub price by more than the cost of 
shipping and such price differences can vary in an unpredictable 
manner.
---------------------------------------------------------------------------

    \39\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------

    Union Gas, Ltd., is a major Canadian natural gas storage, 
transmission, and distribution company based in Ontario, Canada. Union 
Gas offers premium storage and transportation services to customers at 
the Dawn hub, which is the largest underground storage facility in 
Canada and one of the largest in North America. The Dawn hub offers 
customers an important link for natural gas moving from Western 
Canadian and U.S. supply basins to markets in central Canada and the 
northeast United States. The throughput capacity at the Dawn hub is 9.3 
billion cubic feet per day. Moreover, the number of pipeline 
interconnections at that hub was ten in 2008. Lastly, the Dawn hub's 
capacity is 12.8 billion cubic feet per day.\40\
---------------------------------------------------------------------------

    \40\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------

    The local price at the Dawn hub typically differs from the price at 
the Henry Hub. Thus, the price of the Henry Hub physically-delivered 
futures contract is an imperfect proxy for the Dawn price. Moreover, 
exogenous factors, such as adverse weather, can cause the Dawn gas 
price to differ from the Henry Hub price by an amount that is more or 
less than the cost of shipping, making the NYMEX Henry Hub futures

[[Page 23735]]

contract even less precise as a hedging tool than desired by market 
participants. Basis contracts \41\ allow traders to more accurately 
discover prices at alternative locations and hedge price risk that is 
associated with natural gas at such locations. In this regard, a 
position at a local price for an alternative location can be 
established by adding the appropriate basis swap position to a position 
taken in the NYMEX physically-delivered Henry Hub contract (or in the 
NYMEX or ICE Henry Hub look-alike contract, which cash settle based on 
the NYMEX physically-delivered natural gas contract's final settlement 
price).
---------------------------------------------------------------------------

    \41\ Basis contracts denote the difference in the price of 
natural gas at a specified location minus the price of natural gas 
at the Henry Hub. The differential can be either a positive or 
negative value.
---------------------------------------------------------------------------

    In its October 20, 2009, Federal Register notice, the Commission 
identified material price reference, price linkage and material 
liquidity as the potential SPDC criteria applicable to the Union-Dawn 
Basis contract. Each of these criteria is discussed below.\42\
---------------------------------------------------------------------------

    \42\ As noted above, the Commission did not find an indication 
of arbitrage in connection with this contract; accordingly, that 
criterion is not discussed in reference to the Union-Dawn Basis 
contract.
---------------------------------------------------------------------------

1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission noted that 
NGX forged an alliance with ICE to use ICE's matching engine to 
complete transactions in physical natural gas contracts traded on NGX. 
In return, NGX agreed to provide the clearing services for such 
transactions. As part of the agreement, NGX provides ICE with 
transaction data, which are then made available to market participants 
on a paid basis. ICE offers the NGX data in several packages, which 
vary in terms of the amount of available historical data. For example, 
the ICE offers the ``OTC Gas End of Day'' data packages with access to 
all price data, or just current prices plus a selected number of months 
(i.e., 12, 24, 36, or 48 months) of historical data.
    The Commission will rely on one of two sources of evidence--direct 
or indirect--to determine that the price of a contract was being used 
as a material price reference and therefore, serving a significant 
price discovery function.\43\ With respect to direct evidence, the 
Commission will consider the extent to which, on a frequent and 
recurring basis, cash market bids, offers or transactions are directly 
based on or quoted at a differential to, the prices generated on the 
ECM in question. Direct evidence may be established when cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract in question. Cash 
market prices are set explicitly at a differential to the section 
2(h)(3) contract when, for instance, they are quoted in dollars and 
cents above or below the reference contract's price. Cash market prices 
are set implicitly at a differential to a section 2(h)(3) contract 
when, for instance, they are arrived at after adding to, or subtracting 
from the section 2(h)(3) contract, but then quoted or reported at a 
flat price. With respect to indirect evidence, the Commission will 
consider the extent to which the price of the contract in question is 
being routinely disseminated in widely distributed industry 
publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry participants in pricing cash market transactions.
---------------------------------------------------------------------------

    \43\ 17 CFR part 36, Appendix A.
---------------------------------------------------------------------------

    The Union-Dawn hub is a relatively important trading center for 
natural gas in North America. Traders use the NGX Union-Dawn Basis 
contract to hedge cash market positions and transactions. Nevertheless, 
the relatively small volume of trading and open interest \44\ in the 
Union-Dawn Basis contract does not support a finding that the contract 
is consulted on a frequent and recurring basis in establishing cash 
market transaction prices. Thus, the Union-Dawn Basis contract does not 
satisfy the direct price reference test for existence of material price 
reference. Furthermore, the Commission notes that publication of the 
Union-Dawn Basis contract's prices is not indirect evidence of material 
price reference. The Union-Dawn Basis contract's prices are published 
with those of numerous other contracts, including ICE's AECO Financial 
Basis contract, which are of more interest to market participants. 
Thus, the Commission has concluded that traders likely do not 
specifically purchase ICE data packages for the NGX Union-Dawn Basis 
contract's prices and do not consult such prices on a frequent and 
recurring basis in pricing cash market transactions.
---------------------------------------------------------------------------

    \44\ In the third quarter of 2009, the Union-Dawn Basis contract 
had a total trading volume that was equivalent to 28,090 NYMEX 
physically-delivered NG futures contracts (the size of one NYMEX NG 
contract is 10,000 mmBtu); the Union-Dawn contract also had an open 
interest equivalent to 2,948 NYMEX NG futures contracts.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX expressed the opinion that the Union Dawn Basis contract does 
not meet the material price reference criterion because there is 
insufficient trading activity in this contract.
    WGCEF stated that there is no evidence that the Union-Dawn Basis 
contract does not directly affect the ``settlement of the NYMEX NG 
Contract nor does it influence physical pricing at the Henry Hub.'' 
\45\ Moreover, there is no evidence that a contract in any market is 
tied directly or indirectly to the settlement price of the Union-Dawn 
Basis contract. With respect to indirect evidence, WGCEF believes that 
ICE's publication of the NGX contract's settlement prices does not 
``constitute sufficient evidence'' of material price reference, and is 
simply an extension of the ``unique [business] arrangement'' between 
ICE and NGX.
---------------------------------------------------------------------------

    \45\ CL 03.
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the NGX Union-Dawn 
Basis contract does not meet the material price reference criterion 
because cash market transactions are not priced either explicitly or 
implicitly on a frequent and recurring basis at a differential to the 
Union-Dawn Basis contract's price (direct evidence). Moreover, while 
the Union-Dawn Basis contract's price data is sold to market 
participants, individuals likely do not specifically purchase the ICE 
data packages for the Union-Dawn Basis contract's prices and do not 
consult such prices on a frequent and recurring basis in pricing cash 
market transactions (indirect evidence).
2. Price Linkage Criterion
    In its October 20, 2009, Federal Register notice, the Commission 
identified price linkage as a potential basis for a SPDC determination 
with respect to the Union-Dawn Basis contract. In this regard, the 
final settlement of the Union-Dawn Basis contract is based, in part, on 
the final settlement price of the NYMEX's Henry Hub physically-
delivered natural gas futures contract, where the NYMEX is registered 
with the Commission as a DCM.
    The Commission's Guidance on Significant Price Discovery Contracts 
notes that a ``price-linked contract is a contract that relies on a 
contract traded on another trading facility to settle, value or 
otherwise offset the price-

[[Page 23736]]

linked contract.'' \46\ Furthermore, the Guidance notes that ``[f]or a 
linked contract, the mere fact that a contract is linked to another 
contract will not be sufficient to support a determination that a 
contract performs a significant price discovery function. To assess 
whether such a determination is warranted, the Commission will examine 
the relationship between transaction prices of the linked contract and 
the prices of the referenced contract. The Commission believes that 
where material liquidity exists, prices for the linked contract would 
be observed to be substantially the same as, or move substantially in 
conjunction with, the prices of the referenced contract.'' The Guidance 
proposes a threshold price relationship such that prices of the ECM 
linked contract will fall within a 2.5 percent price range for 95 
percent of contemporaneously determined closing, settlement or other 
daily prices over the most recent quarter. Finally, the Commission also 
stated in the Guidance that it would consider a linked contract that 
has a trading volume equivalent to 5 percent of the volume of trading 
in the contract to which it is linked to have sufficient volume 
potentially to be deemed a SPDC (``minimum threshold'').
---------------------------------------------------------------------------

    \46\ Appendix A to the Part 36 rules.
---------------------------------------------------------------------------

    To assess whether the Union-Dawn contract meets the price linkage 
criterion, Commission staff obtained price data from NGX and performed 
the statistical tests cited above. Staff found that, while the Union-
Dawn Basis contract price is determined, in part, by the final 
settlement price of the NYMEX physically-delivered natural gas futures 
contract (a DCM contract), the imputed Union-Dawn price (derived by 
adding the NYMEX Henry Hub Natural Gas price to the Union-Dawn Basis 
price) is not within 2.5 percent of the settlement price of the 
corresponding NYMEX Henry Hub natural gas futures contract on 95 
percent or more of the days. Specifically, during the third quarter of 
2009, 27.4 percent of the Union-Dawn Basis natural gas prices derived 
from the NGX basis values were within 2.5 percent of the daily 
settlement price of the NYMEX Henry Hub futures contract. In addition, 
staff found that the Union-Dawn Basis contract fails to meet the volume 
threshold requirement. In particular, the total trading volume in the 
NYMEX NG contract during the third quarter of 2009 was 14,022,963 
contracts, with 5 percent of that number being 701,148 contracts. 
Trades on the NGX centralized market in the Union-Dawn Basis contract 
during the same period was 28,090 NYMEX-equivalent contracts. Thus, 
centralized-market trades in the Union-Dawn Basis contract amounted to 
less than the minimum threshold.
i. Federal Register Comments
    NGX states its belief that the Union Dawn Basis contract does not 
meet the price linkage factor because there is insufficient trading 
activity in this contract. WGCEF acknowledges that the Union-Dawn Basis 
is technically linked to the NYMEX physically-delivered NG futures 
contract. The Working Group notes that a comparison of the Union-Dawn 
Basis with NYMEX NG settlement prices from July 21, 2009, through 
November 2, 2009, clearly establishes that these contracts are not 
substantially the same and do not move substantially in conjunction 
with one another.
ii. Conclusion Regarding the Price Linkage Criterion
    The Commission finds that the Union-Dawn Basis contract does not 
meet the price linkage criterion because it fails the price 
relationship and volume tests provided for in the Commission's 
Guidance.
3. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity, price linkage and 
material price reference as potential criteria for SPDC determination 
of the Union-Dawn Basis contract. To assess whether a contract meets 
the material liquidity criterion, the Commission first examines trading 
activity as a general measurement of the contract's size and potential 
importance. If the Commission finds that the contract in question meets 
a threshold of trading activity that would render it of potential 
importance, the Commission will then perform a statistical analysis to 
measure the effect that changes to the subject-contract's prices 
potentially may have on prices for other contracts listed on an ECM or 
a DCM.
    In its October 20, 2009, Federal Register release, the Commission 
noted that the total number of transactions executed on NGX's 
electronic platform in the nearby month of the Union-Dawn Basis 
contract was 8.3 trades per day in the second quarter of 2009. During 
the same period, the Union-Dawn Basis contract had an average daily 
trading volume of 1,332,400 mmBtu (or 133 NYMEX-equivalent contracts 
per day). Moreover, open interest as of June 30, 2009, was 28,203,800 
mmBtu (2,820 NYMEX-equivalent contracts) in the nearby contract month 
and 12,908,400 mmBtu (1,291 NYMEX-equivalent contracts) for delivery 
two months out.\47\
---------------------------------------------------------------------------

    \47\ Second quarter 2009 data was submitted to the Commission is 
a different format than in later filings. In this regard total 
trading volume and total number of trades per quarter were not 
identified.
---------------------------------------------------------------------------

    In a subsequent filing, NGX reported that total trading volume in 
the third quarter of 2009 was 28,090 contracts (or 425 contracts on a 
daily basis). In term of number of transactions, 1,831 trades occurred 
in the third quarter of 2009 (28 trades per day). As of September 30, 
2009, open interest in the Union-Dawn Basis contract was 23,289 NYMEX-
equivalent contracts.
    As indicated above, the average number of trades per day in the 
second and third quarters of 2009 was only slightly above the minimum 
reporting level (5 trades per day). Moreover, trading activity in the 
Union-Dawn Basis contract, as characterized by total quarterly volume, 
indicates that the Union-Dawn Basis contract experiences trading 
activity similar to that of minor futures markets.\48\ Thus, the Union-
Dawn Basis contract does not meets a threshold of trading activity that 
would render it of potential importance and no additional statistical 
analysis is warranted.\49\
---------------------------------------------------------------------------

    \48\ Based on the Commission's experience, a minor futures 
contract is, generally, one that has a quarterly trading volume of 
100,000 contracts or less.
    \49\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the Union-Dawn Basis contract does not 
meet either the price linkage or material price reference criterion. 
In light of this finding and the Commission's Guidance cited above, 
there is no need to evaluate further the material liquidity criteria 
since it cannot be used alone as a basis for a SPDC determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX stated in its comment letter that the Union-Dawn Basis contract 
does not meet the material liquidity criterion for SPDC determination 
for a number of reasons.
    First, NGX opined that the Commission ``seems to have applied a 
threshold for `material liquidity' that is extremely low, and in 
general insufficient to support a determination that these contracts 
are no longer emerging markets but in fact serve a significant price 
discovery function''. NGX also noted that the Commission's Guidance 
states that material liquidity was intended to be a ``broad concept 
that captures the ability to transact immediately with little or no 
price

[[Page 23737]]

concession.'' The Guidance also states that where ``material liquidity 
exists, a more or less continuous stream of prices can be observed and 
the prices should be similar'', such as ``where trades occur multiple 
times per minute.'' NGX then opined that ``[t]he levels of liquidity 
outlined above for the Proposed Contracts cannot be what Congress 
intended in establishing the dividing line between contracts ripe for 
regulation and those still emerging and in need of further incubation.
    The WGCEF used arguments similar to those of NGX in opining that 
the Union-Dawn Basis contract does not meet the material liquidity 
criterion. In addition, WGCEF noted that to be materially liquid, a 
contract must have ``a material effect of other contracts'' and have 
``sufficient liquidity to perform a significant price discovery 
function.'' WGCEF stated that the Union-Dawn Basis contract lacks both 
of those features.
    In this regard, the Commission notes that it adopted a five trades-
per-day threshold as a reporting requirement to enable it to 
``independently be aware of ECM contracts that may develop into SPDCs'' 
\50\ rather than solely relying upon an ECM on its own to identify any 
such potential SPDCs to the Commission. Thus, any contract that meets 
this threshold may be subject to scrutiny as a potential SPDC but this 
does not mean that the contract will be found to be a SPDC merely 
because it met the reporting threshold. Furthermore, the Commission 
observes that a continuous stream of prices would indeed be an 
indication of liquidity for certain markets but the Guidance also notes 
that ``quantifying the levels of immediacy and price concession that 
would define material liquidity may differ from one market or commodity 
to another.''
---------------------------------------------------------------------------

    \50\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds that the 
Union-Dawn Basis contract does not meet the material liquidity 
criterion.
4. Overall Conclusion Regarding the Union-Dawn Basis Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the Union-Dawn 
Basis contract does not perform a significant price discovery function 
under the criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the Union-Dawn Basis 
contract does not meet the material price reference, price linkage, or 
material liquidity criteria at this time. Accordingly, the Commission 
is issuing the attached Order declaring that the Union-Dawn Basis 
contract is not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard NGX as a registered entity in connection with its 
Union-Dawn Basis contract.\51\ Accordingly, with respect to its Union-
Dawn Basis contract, NGX is not required to comply with the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply 
with the applicable reporting requirements for ECMs.
---------------------------------------------------------------------------

    \51\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

c. The Phys, FP, (CA/GJ), AB-NIT (Alberta Fixed Price) Contract and the 
SPDC Indicia

    The Alberta Fixed-Price contract calls for physical delivery of 
natural gas at the Alberta hub over a number of different time periods. 
This contract allows delivery of natural gas during the following day, 
Friday plus two or three days, Saturday plus three or four days, Sunday 
plus two days, the remainder of the month, throughout the nearby 
calendar month, and during a specific future calendar month. Each 
delivery period is considered to be a separate contract, and market 
participants value each delivery period separately. However, 
overlapping delivery days are considered fungible, and, thus, may be 
offset by traders. There is no standard size for the Alberta Fixed-
Priced contract, although a minimum volume of 94.78 mmBtu is required 
in increments of 100 units per day. The NGX lists the Alberta Fixed-
Price contract for 60 calendar months.
    As noted above, the primary pricing point for natural gas in North 
America is the Henry Hub, which is located in Erath, Louisiana. In 
addition to the Henry Hub, there are a number of other locations where 
natural gas is traded. In 2008, there were 33 natural gas market 
centers in North America.\52\ Some of the major trading centers include 
Alberta, Northwest Rockies, Southern California border and the Houston 
Ship Channel. For locations that are directly connected to the Henry 
Hub by one or more pipelines and where there typically is adequate 
shipping capacity, the price at the other locations usually directly 
tracks the price at the Henry Hub, adjusted for transportation costs. 
However, at other locations that are not directly connected to the 
Henry Hub or where shipping capacity is limited, the prices at those 
locations often diverge from the Henry Hub price. Furthermore, one 
local price may be significantly different than the price at another 
location even though the two markets' respective distances from the 
Henry Hub are the same. The reason for such pricing disparities is that 
a given location may experience supply and demand factors that are 
specific to that region, such as differences in pipeline shipping 
capacity, unusually high or low demand for heating or cooling or supply 
disruptions caused by severe weather. As a consequence, local natural 
gas prices can differ from the Henry Hub price by more than the cost of 
shipping and such price differences can vary in an unpredictable 
manner.
---------------------------------------------------------------------------

    \52\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------

    The Alberta hub is far removed from the Henry Hub and is not 
directly connected to the Henry Hub by an existing pipeline. Located in 
the Canadian province of Alberta, the Alberta natural gas market is a 
major connection point for long-distance transmission systems that ship 
natural gas to points throughout Canada and the United States. The 
Alberta province is Canada's dominant natural gas producing region; six 
of the nine Canadian market centers are located in the Alberta 
province. The throughput capacity at the AECO-C hub is ten billion 
cubic feet per day. Moreover, the number of pipeline interconnections 
at that hub was four in 2008. Lastly, the AECO-C hub's capacity is 20.4 
billion cubic feet per day.\53\
---------------------------------------------------------------------------

    \53\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf
---------------------------------------------------------------------------

    The local price at the Alberta hub typically differs from the price 
at the Henry Hub. Thus, the price of the Henry Hub physically-delivered 
futures contract is an imperfect proxy for the Alberta price. Moreover, 
exogenous factors, such as adverse weather, can cause the Alberta gas 
price to differ from the Henry Hub price by an amount that is more or 
less than the cost of shipping, making the NYMEX Henry Hub futures 
contract even less precise as a hedging tool than desired by market 
participants.
    In its October 20, 2009, Federal Register notice, the Commission 
identified material liquidity and material price reference as the 
potential SPDC criteria applicable to the Alberta Fixed-Price contract. 
Each of these factors is discussed below.\54\
---------------------------------------------------------------------------

    \54\ As noted above, the Commission did not find an indication 
of arbitrage and price linkage in connection with this contract; 
accordingly, those criteria are not discussed in reference to the 
Alberta Fixed-Price contract.

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

[[Page 23738]]

1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission noted that 
the NGX forged an alliance with ICE to use the ICE's matching engine to 
complete transactions in physical gas contracts traded on NGX. In 
return, the NGX agreed to provide the clearing services for such 
transactions. As part of the agreement, NGX provides the ICE with 
transaction data, which are then made available to market participants 
on a paid basis. The ICE offers the NGX data in several packages, which 
vary in terms of the amount of available historical data. For example, 
the ICE offers the ``OTC Gas End of Day'' data package with access to 
all price data, or just current prices plus a selected number of months 
(i.e., 12, 24, 36, or 48 months) of historical data.
    The Commission will rely on one of two sources of evidence--direct 
or indirect--to determine that the price of a contract was being used 
as a material price reference and therefore, serving a significant 
price discovery function.\55\ With respect to direct evidence, the 
Commission will consider the extent to which, on a frequent and 
recurring basis, cash market bids, offers or transactions are directly 
based on or quoted at a differential to, the prices generated on the 
ECM in question. Direct evidence may be established when cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract in question. Cash 
market prices are set explicitly at a differential to the section 
2(h)(3) contract when, for instance, they are quoted in dollars and 
cents above or below the reference contract's price. Cash market prices 
are set implicitly at a differential to a section 2(h)(3) contract 
when, for instance, they are arrived at after adding to, or subtracting 
from the section 2(h)(3) contract, but then quoted or reported at a 
flat price. With respect to indirect evidence, the Commission will 
consider the extent to which the price of the contract in question is 
being routinely disseminated in widely distributed industry 
publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry participants in pricing cash market transactions.
---------------------------------------------------------------------------

    \55\ 17 CFR part 36, Appendix A.
---------------------------------------------------------------------------

    The Alberta hub is a major trading center for natural gas in North 
America. Traders, including producers, keep abreast of the prices of 
the Alberta market center when conducting cash deals. However, ICE's 
cash-settled AECO Financial Basis contract is used more widely as a 
price reference than the NGX Alberta Fixed-Price contract. Traders look 
to the ICE contract's competitively determined price as an indication 
of expected values of natural gas at the Alberta hub when entering into 
cash market transactions for natural gas, especially those trades 
providing for physical delivery in the future. Traders use ICE's AECO 
Financial Basis contract, as well as other basis contracts, to hedge 
cash market positions and transactions. The substantial volume of 
trading and open interest in the ICE contract attests to its use for 
this purpose.\56\ In contrast, trading volume in the NGX Alberta Fixed-
Price contract is much smaller than in ICE's AECO Financial Basis 
contract. In this regard, total trading volume in the NGX Alberta Fixed 
Price contract in the third quarter of 2009 was equivalent to 50,313 
NYMEX physically-delivered NG contracts, which has a size of 10,000 
mmBtu.\57\
---------------------------------------------------------------------------

    \56\ In the third quarter of 2009, 6,320 separate trades 
occurred on ICE's electronic platform, resulting in a daily average 
of 95.8 trades. During the same period, the ICE contract had a total 
trading volume on its electronic platform of 736,412 contracts 
(which was an average of 11,158 contracts per day). Open interest in 
ICE's AECO Financial Basis Contract was 483,561 contracts as of 
September 30, 2009.
    \57\ Trading volume in the ICE AECO Financial Basis contract 
during the third quarter of 2009 was equivalent to 184,103 NYMEX NG 
contracts.
---------------------------------------------------------------------------

    Accordingly, although the Alberta Hub is a major trading center for 
natural gas and, as noted, NGX provides price information for the 
Alberta Fixed Price contract to ICE which sells it, the Commission has 
found upon further evaluation that the Alberta Fixed Price contract is 
not routinely consulted by industry participants in pricing cash market 
transactions and thus does not meet the Commission's Guidance for the 
material price reference criterion. In this regard, the ICE AECO 
Financial Basis contract is routinely consulted by industry 
participants in pricing cash market transactions at this location. 
Because both the NGX and the ICE contracts basically price the same 
commodity at the same location and time \58\ and the ICE contract has 
significantly higher trading volume and open interest, it is not 
necessary for market participants to independently refer to the NGX 
Alberta Fixed-Price contract for pricing natural gas at this location. 
Thus, the Alberta Fixed-Price contract does not satisfy the direct 
price reference test for existence of material price reference. 
Furthermore, the Commission notes that publication of the NGX Alberta 
Fixed-Price contract's prices is not indirect evidence of material 
price reference. The NGX Alberta Fixed-Price contract's prices are 
published with those of numerous other contracts, which are of more 
interest to market participants. Thus, the Commission has concluded 
that traders likely do not specifically purchase the ICE data packages 
for the NGX Alberta Fixed-Price contract's prices and do not consult 
such prices on a frequent and recurring basis in pricing cash market 
transactions.
---------------------------------------------------------------------------

    \58\ The Alberta natural gas price can be derived using the 
Alberta Basis contract and the NYMEX Henry Hub NG contract. In this 
regard, the imputed price is the Henry Hub price plus or minus the 
basis at Alberta, as indicated by the NGX Alberta Basis contract.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX states its belief that the Alberta Fixed Price contract does 
not meet the material price reference factor because there is 
insufficient trading activity in this contract.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the NGX Alberta 
Fixed-Price contract does not meet the material price reference 
criterion because cash market transactions are not priced either 
explicitly or implicitly on a frequent and recurring basis at a 
differential to the Alberta Fixed Price contract's price (direct 
evidence). Moreover, while the Alberta Fixed-Price contract's price 
data is sold to market participants, market participants likely do not 
specifically purchase the ICE data packages for the Alberta Fixed-Price 
contract's prices and do not consult such prices on a frequent and 
recurring basis in pricing cash market transactions (indirect 
evidence).
2. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity and material price 
reference as potential criteria for SPDC determination of the Alberta 
Fixed-Price contract. With respect to the material liquidity criterion, 
the Commission noted that the total number of transactions executed in 
the contract on NGX's electronic platform during the second quarter of 
2009 was 122.1, 36.0,

[[Page 23739]]

7.0, 30.1, 7.4, 68.6 and 12.8 trades for the following delivery 
periods--following day, Friday plus two days, Friday plus three days, 
Saturday plus three days, Saturday plus four days, Sunday plus two 
days, remainder of the month, nearby calendar month, and any single 
future calendar month, respectively. During the same period, the 
Alberta Fixed-Price contract had a total trading volume of 1,209,505 
mmBtu; 821,565 mmBtu; 223,874 mmBtu; 754,175 mmBtu; 672,568 mmBtu; 
6,634,030 mmBtu; and 1,233,958 mmBtu for the following delivery 
periods--next day, Friday plus two days, Friday plus three days, 
Saturday plus three days, Saturday plus four days, Sunday plus two 
days, remainder of the month, nearby calendar month, and any single 
future calendar month, respectively. Moreover, the net open interest as 
of June 30, 2009, was 96,003,450 mmBtu for next-month delivery. For 
delivery two months out, the open interest was 54,456,997 mmBtu.\59\
---------------------------------------------------------------------------

    \59\ Second quarter 2009 data was submitted to the Commission is 
a different format than in later filings. In this regard total 
trading volume and total number of trades per quarter were not 
identified.
---------------------------------------------------------------------------

    In a subsequent filing NGX reported that total trading volume in 
the third quarter of 2009 was 50,313 contracts (or 762 contracts on a 
daily basis). In term of number of transactions, 4,694 trades occurred 
in the third quarter of 2009 (73 trades per day), for those Alberta 
Fixed-Price contracts that specify delivery in the spot month. As of 
September 30, 2009, open interest in the Alberta Fixed-Price contract 
was 23,961 NYMEX-equivalent contracts.
    The average number of trades per day in the second and third 
quarters of 2009 was only moderately above the minimum reporting level 
(5 trades per day). Moreover, trading activity in the Alberta Fixed-
Price contract, as characterized by total quarterly volume, indicates 
that the Alberta Fixed-Price contract experiences trading activity 
similar to that of minor futures markets.\60\ Thus, the Alberta Fixed-
Price contract does not meets a threshold of trading activity that 
would render it of potential importance and no additional statistical 
analysis is warranted.\61\
---------------------------------------------------------------------------

    \60\ Based on the Commission's experience, a minor futures 
contract is, generally, one that has a quarterly trading volume of 
100,000 contracts or less.
    \61\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the Alberta Fixed-Price contract does not 
meet either the price linkage or material price reference criterion. 
In light of this finding and the Commission's Guidance cited above, 
there is no need to evaluate further the material liquidity criteria 
since it cannot be used alone as a basis for a SPDC determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX stated in its comment letter that the Alberta Fixed-Price 
contract does not meet the material liquidity criterion for SPDC 
determination for a number of reasons.
    First, NGX opined that the Commission ``seems to have applied a 
threshold for ``material liquidity'' that is extremely low, and in 
general insufficient to support a determination that these contracts 
are no longer emerging markets but in fact serve a significant price 
discovery function.'' NGX also noted that the Commission's Guidance 
states that material liquidity was intended to be a ``broad concept 
that captures the ability to transact immediately with little or no 
price concession''. The Guidance also states that where ``material 
liquidity exists, a more or less continuous stream of prices can be 
observed and the prices should be similar'', such as ``where trades 
occur multiple times per minutes. NGX then opined that ``[t]he levels 
of liquidity outlined above for the Proposed Contracts cannot be what 
Congress intended in establishing the dividing line between contracts 
ripe for regulation and those still emerging and in need of further 
incubation.
    In this regard, the Commission notes that it adopted a five trades-
per-day threshold as a reporting requirement to enable it to 
``independently be aware of ECM contracts that may develop into SPDCs'' 
\62\ rather than solely relying upon an ECM on its own to identify any 
such potential SPDCs to the Commission. Thus, any contract that meets 
this threshold may be subject to scrutiny as a potential SPDC but this 
does not mean that the contract will be found to be a SPDC merely 
because it met the reporting threshold. Furthermore, the Commission 
observes that a continuous stream of prices would indeed be an 
indication of liquidity for certain markets but the Guidance also notes 
that ``quantifying the levels of immediacy and price concession that 
would define material liquidity may differ from one market or commodity 
to another.''
---------------------------------------------------------------------------

    \62\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds that the 
Alberta Fixed-Price contract does not meet the material liquidity 
criterion.
3. Overall Conclusion Regarding the Alberta Fixed-Price Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the Alberta 
Fixed-Price contract does not perform a significant price discovery 
function under the criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the Alberta Fixed-
Price contract does not meet the material price reference or material 
liquidity criteria at this time. Accordingly, the Commission is issuing 
the attached Order declaring that the Alberta Fixed-Price contract is 
not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard NGX as a registered entity in connection with its 
Alberta Fixed-Price contract.\63\ Accordingly, with respect to its 
Alberta Fixed-Price contract, NGX is not required to comply with the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply 
with the applicable reporting requirements.
---------------------------------------------------------------------------

    \63\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

d. The Phys, FP, (US/MM), Union-Dawn (Union-Dawn Fixed-Price) Contract 
and the SPDC Indicia

    The Union-Dawn Fixed-Price contract calls for physical delivery of 
natural gas at the Dawn hub over two different time periods: The 
following day and Saturday plus three days. Each delivery period is 
considered to be a separate contract, and the market participants value 
each delivery period separately. However, overlapping delivery days are 
considered fungible, and, thus, may be offset by traders. There is no 
standard size for the Union-Dawn Fixed-Priced contract, although a 
minimum volume of 100 mmBtu required in increments of 100 units per 
day. The NGX lists the Union-Dawn Fixed-Price contract for 60 calendar 
months.
    Union Gas, Ltd., is a major Canadian natural gas storage, 
transmission, and distribution company based in Ontario, Canada. Union 
Gas offers premium storage and transportation services to customers at 
the Dawn hub, which the largest underground storage facility in Canada 
and one of the largest in North America. The Dawn hub offers customers 
an important link for natural gas moving from Western Canadian and U.S. 
supply basins to markets in central

[[Page 23740]]

Canada and the northeast United States. The throughput capacity at the 
Dawn hub is 9.3 billion cubic feet per day. Moreover, the number of 
pipeline interconnections at that hub was ten in 2008. Lastly, the Dawn 
hub's capacity is 12.8 billion cubic feet per day.\64\
---------------------------------------------------------------------------

    \64\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
---------------------------------------------------------------------------

    In its October 20, 2009, Federal Register notice, the Commission 
identified material liquidity and material price reference as the 
potential SPDC criteria applicable to the Union-Dawn Fixed-Price 
contract. Each of these factors is discussed below.\65\
---------------------------------------------------------------------------

    \65\ As noted above, the Commission did not find an indication 
of arbitrage and price linkage in connection with this contract; 
accordingly, those criteria are not discussed in reference to the 
Union-Dawn Fixed-Price contract.
---------------------------------------------------------------------------

1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission noted that 
NGX forged an alliance with ICE to use the ICE's matching engine to 
complete transactions in physical gas contracts traded on NGX. In 
return, the NGX agreed to provide the clearing services for such 
transactions. As part of the agreement, NGX provides the ICE with 
transaction data, which are then made available to market participants 
on a paid basis. The ICE offers the NGX data in several packages, which 
vary in terms of the amount of available historical data. For example, 
the ICE offers the ``OTC Gas End of Day'' data packages with access to 
all price data, or just current prices plus a selected number of months 
(i.e., 12, 24, 36, or 48 months) of historical data.
    The Commission will rely on one of two sources of evidence--direct 
or indirect--to determine that the price of a contract was being used 
as a material price reference and therefore, serving a significant 
price discovery function.\66\ With respect to direct evidence, the 
Commission will consider the extent to which, on a frequent and 
recurring basis, cash market bids, offers or transactions are directly 
based on or quoted at a differential to, the prices generated on the 
ECM in question. Direct evidence may be established when cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract in question. Cash 
market prices are set explicitly at a differential to the section 
2(h)(3) contract when, for instance, they are quoted in dollars and 
cents above or below the reference contract's price. Cash market prices 
are set implicitly at a differential to a section 2(h)(3) contract 
when, for instance, they are arrived at after adding to, or subtracting 
from the section 2(h)(3) contract, but then quoted or reported at a 
flat price. With respect to indirect evidence, the Commission will 
consider the extent to which the price of the contract in question is 
being routinely disseminated in widely distributed industry 
publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry participants in pricing cash market transactions.
---------------------------------------------------------------------------

    \66\ 17 CFR part 36, Appendix A.
---------------------------------------------------------------------------

    The Dawn hub is a major trading center for natural gas in the 
United States. Traders use the NGX Union-Dawn Fixed-Price contract to 
hedge cash market positions and transactions. Nevertheless, the 
relatively small volume of trading and open interest \67\ in the Union-
Dawn Fixed-Price contract does not support a finding that the contract 
is consulted on a frequent and recurring basis in establishing cash 
market transaction prices. Thus, the Union-Dawn Fixed-Price contract 
does not satisfy the direct price reference test for existence of 
material price reference. Furthermore, the Commission notes that 
publication of the Union-Dawn Fixed-Price contract's prices is not 
indirect evidence of material price reference. The Union-Dawn Fixed-
Price contract's prices are published with those of numerous other 
contracts, which are of more interest to market participants. Thus, the 
Commission has concluded that traders likely do not specifically 
purchase ICE data packages for the NGX Union-Dawn Fixed-Price 
contract's prices and do not consult such prices on a frequent and 
recurring basis in pricing cash market transactions.
---------------------------------------------------------------------------

    \67\ In the third quarter of 2009, the Union-Dawn Fixed-Price 
contract had a total trading volume that was equivalent to 145 NYMEX 
physically-delivered NG futures contracts (the size of one NYMEX NG 
contract is 10,000 mmBtu); the Union-Dawn contract also had an open 
interest equivalent to 1,738 NYMEX NG futures contracts.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX states its belief that the Union Dawn Fixed Price contract does 
not meet the material price reference factor because there is 
insufficient trading activity in this contract.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the NGX Union-Dawn 
Fixed-Price contract does not meet the material price reference 
criterion because cash market transactions are not priced either 
explicitly or implicitly on a frequent and recurring basis at a 
differential to the Union-Dawn Fixed-Price contract's price (direct 
evidence). Moreover, while the Union-Dawn Fixed-Price contract's price 
data is sold to market participants, traders likely do not specifically 
purchase the ICE data packages for the NGX Union-Dawn Fixed-Price 
contract's prices and do not consult such prices on a frequent and 
recurring basis in pricing cash market transactions (indirect 
evidence).
2. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity and material price 
reference as potential criteria for SPDC determination of the Union-
Dawn Fixed-Price contract. With respect to the material liquidity 
criterion, the Commission noted that the total number of transactions 
executed on NGX's electronic platform in the Union-Dawn Fixed-Price 
contract during the second quarter of 2009 was 114.1 trades and 23.9 
trades for next-day delivery and delivery Saturday plus the next three 
days, respectively. During the same period, the Union-Dawn Fixed-Price 
contract had an average daily trading volume of 812,800 mmBtu and 
458,000 mmBtu for the delivery periods next day and Saturday plus three 
days, respectively. Moreover, the net open interest as of June 30, 
2009, was 2,241,600 mmBtu for next-day delivery (equivalent to 224 
NYMEX NG contracts).\68\
---------------------------------------------------------------------------

    \68\ Second quarter 2009 data was submitted to the Commission is 
a different format than in later filings. In this regard total 
trading volume and total number of trades per quarter were not 
identified.
---------------------------------------------------------------------------

    In a subsequent filing, NGX reported that total trading volume in 
the third quarter of 2009 was the equivalent of 8,333 NYMEX NG 
contracts (or 130 contracts on a daily basis).\69\ In term of number of 
transactions, 7,899 trades occurred over the entire third quarter, 
which equates to 123 trades per day.\70\ As of September 30, 2009, open 
interest

[[Page 23741]]

in the Union-Dawn Fixed-Price contract was 1,738 NYMEX NG contracts.
---------------------------------------------------------------------------

    \69\ Approximately 96 percent of the contracted natural gas 
volume was specified for delivery on either the next day or on the 
weekend. The remaining volume was to be delivered over the specified 
month or during the remainder of the current month.
    \70\ Nearly all (more than 99 percent) of the trades were in 
contracts that specified next-day or weekend delivery of natural 
gas.
---------------------------------------------------------------------------

    The Commission notes that while trading activity in the Union-Dawn 
Fixed-Price appears to be substantial, it is important to keep in mind 
that the majority of trades involve close to immediate delivery, many 
times on a daily basis. With deliveries occurring each day, it is 
reasonable that more contracts would be traded compared to those 
contracts that specify delivery over an entire month. Moreover, trading 
activity in the Union-Dawn Fixed-Price contract, as characterized by 
total quarterly volume, indicates that the Union-Dawn Fixed-Price 
contract experiences less trading activity than minor futures 
markets.\71\ Thus, the Union-Dawn Fixed-Price contract does not meets a 
threshold of trading activity that would render it of potential 
importance and no additional statistical analysis is warranted.\72\
---------------------------------------------------------------------------

    \71\ Based on the Commission's experience, a minor futures 
contract is, generally, one that has a quarterly trading volume of 
100,000 contracts or less.
    \72\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the Alberta Fixed-Price contract does not 
meet either the price linkage or material price reference criterion. 
In light of this finding and the Commission's Guidance cited above, 
there is no need to evaluate further the material liquidity criteria 
since it cannot be used alone as a basis for a SPDC determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX stated in its comment letter that the Union-Dawn Fixed-Price 
contract does not meet the material liquidity criterion for SPDC 
determination for a number of reasons.
    First, NGX opined that the Commission ``seems to have applied a 
threshold for ``material liquidity'' that is extremely low, and in 
general insufficient to support a determination that these contracts 
are no longer emerging markets but in fact serve a significant price 
discovery function''. NGX also noted that the Commission's Guidance 
states that material liquidity was intended to be a ``broad concept 
that captures the ability to transact immediately with little or no 
price concession''. The Guidance also states that where ``material 
liquidity exists, a more or less continuous stream of prices can be 
observed and the prices should be similar'', such as ``where trades 
occur multiple times per minutes. NGX then opined that ``[t]he levels 
of liquidity outlined above for the Proposed Contracts cannot be what 
Congress intended in establishing the dividing line between contracts 
ripe for regulation and those still emerging and in need of further 
incubation.
    In this regard, the Commission notes that it adopted a five trades-
per-day threshold as a reporting requirement to enable it to 
``independently be aware of ECM contracts that may develop into SPDCs'' 
\73\ rather than solely relying upon an ECM on its own to identify any 
such potential SPDCs to the Commission. Thus, any contract that meets 
this threshold may be subject to scrutiny as a potential SPDC but this 
does not mean that the contract will be found to be a SPDC merely 
because it met the reporting threshold. Furthermore, the Commission 
observes that a continuous stream of prices would indeed be an 
indication of liquidity for certain markets but the Guidance also notes 
that ``quantifying the levels of immediacy and price concession that 
would define material liquidity may differ from one market or commodity 
to another.''
---------------------------------------------------------------------------

    \73\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    Based on the above, the Commission finds that the NGX Union-Dawn 
Fixed-Price contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the Union-Dawn Fixed-Price Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the Union-Dawn 
Fixed-Price contract does not perform a significant price discovery 
function under the criteria established in section 2(h)(7) of the CEA. 
Specifically, the Commission has determined that the NGX Union-Dawn 
Fixed-Price contract does not meet the material price reference or 
material liquidity criteria at this time. Accordingly, the Commission 
is issuing the attached Order declaring that the Union-Dawn Fixed-Price 
contract is not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard NGX as a registered entity in connection with its 
Union-Dawn Fixed-Price contract.\74\ Accordingly, with respect to its 
Union-Dawn Fixed-Price contract, NGX is not required to comply with the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4) for ECMs with SPDCs. However, NGX must continue to comply 
with the applicable reporting requirements for ECMs.
---------------------------------------------------------------------------

    \74\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

e. The Phys, ID, 7a (CA/GJ), AB-NIT (7a Index) Contract and the SPDC 
Indicia

    The NGX 7a Index contract calls for physical delivery of natural 
gas at the Alberta, Canada, trading hub during the specified calendar 
month. When trading this contract, market participants price the 
difference between the anticipated value of natural gas at the time of 
delivery and the average of actual trades on the NGX system. The 
average of transactions on the NGX system is reported as a volume-
weighted average price index in the first publication of the delivery 
month of Canadian Enerdata, Ltd.'s Canadian Gas Price Reporter. At the 
time of delivery, the negotiated price premium or discount is added or 
subtracted to the published index price. There is no standard size for 
the 7a Index contract, although a minimum volume of 94.78 mmBtu is 
required in increments of 100 units per day. The NGX lists the 7a Index 
contract for 60 calendar months.
    Located in the Canadian province of Alberta, the Alberta natural 
gas market is a major connection point for long-distance transmission 
systems that ship natural gas to points throughout Canada and the 
United States. The Alberta province is Canada's dominant natural gas 
producing region; six of the nine Canadian market centers are located 
in the Alberta province. The throughput capacity at the AECO-C hub is 
ten billion cubic feet per day. Moreover, the number of pipeline 
interconnections at that hub was four in 2008. Lastly, the AECO-C hub's 
capacity is 20.4 billion cubic feet per day.\75\
---------------------------------------------------------------------------

    \75\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
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    In its October 20, 2009, Federal Register notice, the Commission 
identified material liquidity and material price reference as the 
potential SPDC criteria applicable to the 7a Index contract. Each of 
these factors is discussed below.\76\
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    \76\ As noted above, the Commission did not find an indication 
of arbitrage and price linkage in connection with this contract; 
accordingly, those criteria are not discussed in reference to the 7a 
Index contract.
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1. Material Price Reference Criterion
    The Commission's October 20, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission noted that 
NGX forged an alliance with ICE to use ICE's matching engine to 
complete transactions in

[[Page 23742]]

physical gas contracts traded on NGX. In return, NGX agreed to provide 
the clearing services for such transactions. As part of the agreement, 
NGX provides ICE with transaction data, which are then made available 
to market participants on a paid basis. ICE offers the NGX data in 
several packages, which vary in terms of the amount of available 
historical data. For example, the ICE offers the ``OTC Gas End of Day'' 
data packages with access to all price data, or just current prices 
plus a selected number of months (i.e., 12, 24, 36, or 48 months) of 
historical data.
    The Commission will rely on one of two sources of evidence--direct 
or indirect--to determine that the price of a contract was being used 
as a material price reference and therefore, serving a significant 
price discovery function.\77\ With respect to direct evidence, the 
Commission will consider the extent to which, on a frequent and 
recurring basis, cash market bids, offers or transactions are directly 
based on or quoted at a differential to, the prices generated on the 
ECM in question. Direct evidence may be established when cash market 
participants are quoting bid or offer prices or entering into 
transactions at prices that are set either explicitly or implicitly at 
a differential to prices established for the contract in question. Cash 
market prices are set explicitly at a differential to the section 
2(h)(3) contract when, for instance, they are quoted in dollars and 
cents above or below the reference contract's price. Cash market prices 
are set implicitly at a differential to a section 2(h)(3) contract 
when, for instance, they are arrived at after adding to, or subtracting 
from the section 2(h)(3) contract, but then quoted or reported at a 
flat price. With respect to indirect evidence, the Commission will 
consider the extent to which the price of the contract in question is 
being routinely disseminated in widely distributed industry 
publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry participants in pricing cash market transactions.
---------------------------------------------------------------------------

    \77\ 17 CFR part 36, Appendix A.
---------------------------------------------------------------------------

    The Alberta hub is a major trading center for natural gas in North 
America. Traders, including producers, keep abreast of the prices of 
the Alberta market center when conducting cash deals. However, ICE's 
cash-settled AECO Financial Basis contract is used more widely as a 
price reference than the NGX 7a Index contract. Traders look to the ICE 
contract's competitively determined price as an indication of expected 
values of natural gas at the Alberta hub when entering into cash market 
transactions for natural gas, especially those trades providing for 
physical delivery in the future. Traders use ICE's Alberta contract, as 
well as other basis contracts, to hedge cash market positions and 
transactions. The substantial volume of trading and open interest in 
the ICE contract attests to its use for this purpose.\78\ In contrast, 
trading volume in the 7a Index contract is much smaller than in ICE's 
cash-settled version of the contract. In this regard, total trading 
volume in the NGX 7a Index contract in the third quarter of 2009 was 
equivalent to 1,946 NYMEX physically-delivered natural gas contracts, 
which has a size of 10,000 mmBtu.
---------------------------------------------------------------------------

    \78\ In the third quarter of 2009, 6,320 separate trades 
occurred on ICE's electronic platform, resulting in a daily average 
of 95.8 trades. During the same period, the ICE contract had a total 
trading volume on its electronic platform of 736,412 contracts 
(which was an average of 11,158 contracts per day). As of September 
30, 2009, open interest in the ICE AECO Financial Basis contract was 
483,561 contracts.
---------------------------------------------------------------------------

    Accordingly, although the Alberta Hub is a major trading center for 
natural gas and, as noted, NGX provides price information for the 7a 
Index contract to ICE which sells it, the Commission has found upon 
further evaluation that the 7a Index contract is not routinely 
consulted by industry participants in pricing cash market transactions 
and thus does not meet the Commission's Guidance for the material price 
reference criterion. In this regard, the ICE AECO Financial Basis 
contract is routinely consulted by industry participants in pricing 
cash market transactions at this location. Because both the NGX and the 
ICE contracts basically price the same commodity at the same location 
and time and the ICE contract has significantly higher trading volume 
and open interest, it is not necessary for market participants to 
independently refer to the 7a Index contract for pricing natural gas at 
this location. Thus, the 7a Index contract does not satisfy the direct 
price reference test for existence of material price reference. 
Furthermore, the Commission notes that publication of the 7a Index 
contract's prices is not indirect evidence of material price reference. 
The 7a Index contract's prices are published with those of numerous 
other contracts, which are of more interest to market participants. 
Thus, the Commission has concluded that traders likely do not 
specifically purchase the ICE data packages for the 7a Index contract's 
prices and do not consult such prices on a frequent and recurring basis 
in pricing cash market transactions.
i. Federal Register Comments
    NGX expressed the opinion that the 7a Index contract does not meet 
the material price reference criteria because it lacks sufficient 
trading activity.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the NGX 7a Index 
contract does not meet the material price reference criterion because 
cash market transactions are not priced either explicitly or implicitly 
on a frequent and recurring basis at a differential to the 7a Index 
contract's price (direct evidence). Moreover, while the 7a Index 
contract's price data is sold to market participants, market 
participants likely do not specifically purchase the ICE data packages 
for the 7a Index contract's prices and do not consult such prices on a 
frequent and recurring basis in pricing cash market transactions 
(indirect evidence).
2. Material Liquidity Criterion
    As noted above, in its October 20, 2009, Federal Register notice, 
the Commission identified material liquidity and material price 
reference as potential criteria for SPDC determination of the 7a Index 
contract. To assess whether a contract meets the material liquidity 
criterion, the Commission first examines trading activity as a general 
measurement of the contract's size and potential importance. If the 
Commission finds that the contract in question meets a threshold of 
trading activity that would render it of potential importance, the 
Commission will then perform a statistical analysis to measure the 
effect that changes to the subject-contract's prices potentially may 
have on prices for other contracts listed on an ECM or a DCM.
    The Commission noted that the average number of transactions in the 
7a Index contract was 10.9 in the second quarter of 2009. During the 
same period, the 7a Index contract had an average daily trading volume 
of 2,438,627 mmBtu (244 NYMEX-equivalent contracts of 10,000 mmBtu 
size). Moreover, the net open interest as of June 30, 2009, was 
6,287,794 mmBtu (629 NYMEX-equivalent contracts of 10,000 mmBtu size) 
for delivery in the following month.\79\
---------------------------------------------------------------------------

    \79\ Second quarter 2009 data was submitted to the Commission is 
a different format than in later filings. In this regard total 
trading volume and total number of trades per quarter were not 
identified.

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

[[Page 23743]]

    In a subsequent filing dated November 13, 2009, NGX reported that 
total trading volume in the third quarter of 2009 was 1,964 NYMEX-
equivalent contracts. In terms of number of transactions, 1,056 trades 
occurred in the third quarter of 2009 (an average of 17 trades per 
day). As of September 30, 2009, open interest in the 7a Index contract 
was 14,355 NYMEX-equivalent contracts.
    The Commission notes that trading activity in the 7a Index contract 
increased between the second and third quarters of 2009. In any case, 
the number of trades per day was only slightly more than the minimum 
reporting threshold (5 trades per day). Moreover, trading activity in 
the 7a Index contract, as characterized by total quarterly volume, 
indicates that the Index contract experiences trading activity similar 
to that of minor futures markets.\80\ Thus, the 7a Index contract does 
not meets a threshold of trading activity that would render it of 
potential importance and no additional statistical analysis is 
warranted.\81\
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    \80\ Based on the Commission's experience, a minor futures 
contract is, generally, one that has a quarterly trading volume of 
100,000 contracts or less.
    \81\ In establishing guidance to illustrate how it will evaluate 
the various criteria, or combinations of criteria, when determining 
whether a contract is a SPDC, the Commission made clear that 
``material liquidity itself would not be sufficient to make a 
determination that a contract is a [SPDC], * * * but combined with 
other factors it can serve as a guidepost indicating which contracts 
are functioning as [SPDCs].'' For the reasons discussed above, the 
Commission has found that the TCO contract does not meet either the 
price linkage or material price reference criterion. In light of 
this finding and the Commission's Guidance cited above, there is no 
need to evaluate further the material liquidity criteria since it 
cannot be used alone as a basis for a SPDC determination.
---------------------------------------------------------------------------

i. Federal Register Comments
    NGX stated in its comment letter that the 7a Index contract does 
not meet the material liquidity criterion for SPDC determination for a 
number of reasons.
    First NGX opined that the Commission ``seems to have applied a 
threshold for ``material liquidity'' that is extremely low, and in 
general insufficient to support a determination that these contracts 
are no longer emerging markets but in fact serve a significant price 
discovery function''. NGX also noted that the Commission's Guidance 
states that material liquidity was intended to be a ``broad concept 
that captures the ability to transact immediately with little or no 
price concession.'' The Guidance also states that where ``material 
liquidity exists, a more or less continuous stream of prices can be 
observed and the prices should be similar'', such as ``where trades 
occur multiple times per minutes. NGX then opined that ``[t]he levels 
of liquidity outlined above for the Proposed Contracts cannot be what 
Congress intended in establishing the dividing line between contracts 
ripe for regulation and those still emerging and in need of further 
investigation.
    WGCEF also stated that the 7a contract lacks sufficient liquidity 
to perform a significant price discovery function. They cite the data 
in the Notice of Intent as evidence that trade frequency in terms of 
multiple trades per day is extremely low.
    In this regard, the Commission notes that it adopted a five trades-
per-day threshold as a reporting requirement to enable it to 
``independently be aware of ECM contracts that may develop into SPDCs'' 
\82\ rather than solely relying upon an ECM on its own to identify any 
such potential SPDCs to the Commission. Thus, any contract that meets 
this threshold may be subject to scrutiny as a potential SPDC but this 
does not mean that the contract will be found to be a SPDC merely 
because it met the reporting threshold. Furthermore, the Commission 
observes that a continuous stream of prices would indeed be an 
indication of liquidity for certain markets but the Guidance also notes 
that ``quantifying the levels of immediacy and price concession that 
would define material liquidity may differ from one market or commodity 
to another.''
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    \82\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    For the reasons discussed above, the Commission finds that the 7a 
Index contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the 7a Index Contract
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the 7a Index 
contract does not perform a significant price discovery function under 
the criteria established in section 2(h)(7) of the CEA. Specifically, 
the Commission has determined that the 7a Index contract does not meet 
the material price reference or material liquidity criteria at this 
time. Accordingly, the Commission will issue the attached Order 
declaring that the 7a Index contract is not a SPDC.
    Issuance of this Order indicates that the Commission does not at 
this time regard NGX as a registered entity in connection with its 7a 
Index contract.\83\ Accordingly, with respect to its 7a Index contract 
NGX is not required to comply with the obligations, requirements and 
timetables prescribed in Commission rule 36.3(c)(4) for ECMs with 
SPDCs. However, NGX must continue to comply with the applicable 
reporting requirements.
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    \83\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

V. Related Matters

a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \84\ 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 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.
---------------------------------------------------------------------------

    \84\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

b. Cost-Benefit Analysis

    Section 15(a) of the CEA\85\ 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 actions. 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 one 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 of the provisions or accomplish any of the purposes of 
the Act.
---------------------------------------------------------------------------

    \85\ 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 or 
other disruptions to market integrity, both on the ECM itself and in 
any related futures contracts

[[Page 23744]]

trading on DCMs. An Order finding that a particular contract is a SPDC 
triggers this increased oversight and imposes obligations on the ECM 
calculated to accomplish this goal. The increased oversight engendered 
by the issue 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. Section 4(i) of the CEA authorize the 
Commission to require reports for SPDCs listed on ECMs. These increased 
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 NGX's Alberta Basis, Union-Dawn 
Basis, Alberta Fixed-Price, Union-Dawn Fixed-Price and 7a Index 
contracts that are the subject of the attached Orders are not SPDCs; 
accordingly, the Commission's Orders impose no additional costs and no 
additional statutorily or regulatory mandated responsibilities on the 
ECM.

c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \86\ requires that 
agencies consider the impact of their rules on small businesses. The 
requirements of CEA section 2(h)(7) and the Part 36 rules affect ECMs. 
The Commission previously has determined that ECMs are not small 
entities for purposes of the RFA.\87\ Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that these Orders, taken in connection with section 2(h)(7) of the Act 
and the Part 36 rules, will not have a significant impact on a 
substantial number of small entities.
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    \86\ 5 U.S.C. 601 et seq.
    \87\ 66 FR 42256, 42268 (Aug. 10, 2001).
---------------------------------------------------------------------------

VI. Orders

a. Order Relating to the Phys, BS, LD1 (US/MM), AB-NIT 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 Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Phys, BS, LD1 (US/MM), AB-NIT 
contract, traded on the Natural Gas Exchange, Inc., does not at this 
time satisfy the material price preference, price linkage or material 
liquidity criteria for significant price discovery contracts. 
Consistent with this determination, the Natural Gas Exchange, Inc., is 
not considered a registered entity \88\ with respect to the Phys, BS, 
LD1 (US/MM), AB-NIT contract and is not subject to the provisions of 
the Commodity Exchange Act applicable to registered entities. Further, 
the obligations, requirements and timetables prescribed in Commission 
rule 36.3(c)(4) governing core principle compliance by the Natural Gas 
Exchange, Inc., are not applicable to the Phys, BS, LD1 (US/MM), AB/NIT 
contract with the issuance of this Order.
---------------------------------------------------------------------------

    \88\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission 
by the Natural Gas Exchange, Inc., dated August 25, 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 Phys, BS, LD1 (US/MM), AB-NIT contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the Natural Gas Exchange, Inc., must continue to comply with all of the 
applicable requirements of Section 2(h)(3) and Commission Regulation 
36.3.

b. Order Relating to the Phys, BS, LD1 (US/MM), Union-Dawn 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 Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Phys, BS, LD1 (US/MM), Union-Dawn 
contract, traded on the Natural Gas Exchange, Inc., does not at this 
time satisfy the material price reference, price linkage or material 
liquidity criteria for significant price discovery contracts. 
Consistent with this determination, the Natural Gas Exchange, Inc., is 
not considered a registered entity \89\ with respect to the Phys, BS, 
LD1 (US/MM), Union-Dawn contract and is not subject to the provisions 
of the Commodity Exchange Act applicable to registered entities. 
Further, the obligations, requirements and timetables prescribed in 
Commission rule 36.3(c)(4) governing core principle compliance by the 
Natural Gas Exchange, Inc., are not applicable to the Phys, BS, LD1 
(US/MM), Union-Dawn contract with the issuance of this Order.
---------------------------------------------------------------------------

    \89\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission 
by the Natural Gas Exchange, Inc., August 25, 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 Phys, BS, LD1 (US/MM), Union-Dawn contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the Natural Gas Exchange, Inc., must continue to comply with all of the 
applicable requirements of Section 2(h)(3) and Commission Regulation 
36.3.

c. Order Relating to the Phys, FP, (CA/GJ), AB-NIT 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 Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Phys, FP, (CA/GJ), AB-NIT contract, 
traded on the Natural Gas Exchange, Inc., does not at this time satisfy 
the material price reference or material liquidity reference criteria 
for significant price discovery contracts. Consistent with this 
determination, the Natural Gas Exchange, Inc., is not considered a 
registered entity \90\ with respect to the Phys, FP, (CA/GJ), AB-NIT 
contract and is not subject to the provisions of the Commodity Exchange 
Act applicable to registered entities. Further, the obligations, 
requirements and timetables prescribed in Commission rule 36.3(c)(4) 
governing core principle compliance by the Natural Gas Exchange, Inc., 
are not applicable to the Phys, FP, (CA/GJ), AB-NIT contract with the 
issuance of this Order.
---------------------------------------------------------------------------

    \90\ 7 U.S.C. 1a(29).

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

[[Page 23745]]

    This Order is based on the representations made to the Commission 
by the Natural Gas Exchange, Inc., dated August 25, 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 Phys, FP, (CA/GJ), AB-NIT contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the Natural Gas Exchange, Inc., must continue to comply with all of the 
applicable requirements of Section 2(h)(3) and Commission Regulation 
36.3.

d. Order Relating to the Phys, FP, (US/MM), Union-Dawn 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 Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Phys, FP, (US/MM), Union-Dawn 
contract, traded on the Natural Gas Exchange, Inc., does not at this 
time satisfy the material price reference or material liquidity 
criteria for significant price discovery contracts. Consistent with 
this determination, the Natural Gas Exchange, Inc., is not considered a 
registered entity \91\ with respect to the Phys, FP, (US/MM), Union-
Dawn contract and is not subject to the provisions of the Commodity 
Exchange Act applicable to registered entities. Further, the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4) governing core principle compliance by the Natural Gas 
Exchange, Inc., are not applicable to the Phys, FP, (US/MM), Union-Dawn 
contract with the issuance of this Order.
---------------------------------------------------------------------------

    \91\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission 
by the Natural Gas Exchange, Inc., dated August 25, 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 Phys, FP, (US/MM), Union-Dawn contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the Natural Gas Exchange, Inc., must continue to comply with all of the 
applicable requirements of Section 2(h)(3) and Commission Regulation 
36.3.

e. Order Relating to the Phys, ID, 7a (CA/GJ), AB-NIT 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 Order:
    The Commission, pursuant to its authority under section 2(h)(7) of 
the Act, hereby determines that the Phys, ID, 7a (CA/GJ), AB-NIT 
contract, traded on the Natural Gas Exchange, Inc., does not at this 
time satisfy the material price reference or material liquidity 
criteria for significant price discovery contracts. Consistent with 
this determination, the Natural Gas Exchange, Inc., is not considered a 
registered entity \92\ with respect to the Phys, ID, 7a (CA/GJ), AB-NIT 
contract and is not subject to the provisions of the Commodity Exchange 
Act applicable to registered entities. Further, the obligations, 
requirements and timetables prescribed in Commission rule 36.3(c)(4) 
governing core principle compliance by the Natural Gas Exchange, Inc., 
are not applicable to the Phys, ID, 7a (CA/GJ), AB-NIT contract with 
the issuance of this Order.
---------------------------------------------------------------------------

    \92\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission 
by the Natural Gas Exchange, Inc., dated August 25, 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 Phys, ID, 7a (CA/GJ), AB-NIT contract is not a 
significant price discovery contract. Additionally, to the extent that 
it continues to rely upon the exemption in Section 2(h)(3) of the Act, 
the Natural Gas Exchange, Inc., must continue to comply with all of the 
applicable requirements of Section 2(h)(3) and Commission Regulation 
36.3.

    Issued in Washington, DC on April 28, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-10314 Filed 5-3-10; 8:45 am]
BILLING CODE P


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