[Federal Register Volume 75, Number 86 (Wednesday, May 5, 2010)]
[Notices]
[Pages 24633-24640]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10344]


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COMMODITY FUTURES TRADING COMMISSION


Order Finding That the ICE Chicago Financial Basis Contract 
Traded on the IntercontinentalExchange, Inc., Performs a Significant 
Price Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Order.

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SUMMARY: On October 9, 2009, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment in the Federal 
Register \1\ a notice of its intent to undertake a determination 
whether the Chicago Financial Basis (``DGD'') contract, traded on the 
IntercontinentalExchange, Inc. (``ICE''), an exempt commercial market 
(``ECM'') under sections 2(h)(3)-(5) of the Commodity Exchange Act 
(``CEA'' or the ``Act''), performs a significant price discovery 
function pursuant to section 2(h)(7) of the CEA. The Commission 
undertook this review based upon an initial evaluation of information 
and data provided by ICE 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 an order finding that 
the DGD contract performs 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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    \1\ 74 FR 52198 (October 9, 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#1176616378727451727765723f767e67"><span class="__cf_email__" data-cfemail="583f282a313b3d183b3e2c3b763f372e">[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#37445956435f5659775451435419505841"><span class="__cf_email__" data-cfemail="98ebf6f9ecf0f9f6d8fbfeecfbb6fff7ee">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \2\ 
significantly broadened the CFTC's regulatory authority with respect to 
ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory 
category--ECMs on which significant price discovery contracts 
(``SPDCs'') are traded--and treating ECMs in that category as 
registered entities under the CEA.\3\ 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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    \2\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 
2008).
    \3\ 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.\4\ 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 
prices of another contract.
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    \4\ 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.\5\ The issuance of such an order also triggers the 
obligations, requirements and timetables prescribed in Commission rule 
36.3(c)(4).\6\
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    \5\ 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).
    \6\ 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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[[Page 24634]]

II. Notice of Intent To Undertake SPDC Determination

    On October 9, 2009, the Commission published in the Federal 
Register notice of its intent to undertake a determination whether the 
DGD contract performs a significant price discovery function, and 
requested comment from interested parties.\7\ Comments were received 
from the Industrial Energy Consumers of America (``IECA''), Working 
Group of Commercial Energy Firms (``WGCEF''), ICE, Economists 
Incorporated (``EI''), Natural Gas Supply Association (``NGSA''), 
Federal Energy Regulatory Commission (``FERC''), and Financial 
Institutions Energy Group (``FIEG'').\8\ The comment letter from FERC 
\9\ did not directly address the issue of whether or not the DGD 
contract is a SPDC; IECA concluded that the DGD contract is a SPDC, but 
did not provide a basis for its conclusion.\10\ The other parties' 
comments raised substantive issues with respect to the applicability of 
section 2(h)(7) to the DGD contract, generally asserting that the DGD 
contract is not a SPDC as it does not meet the material liquidity, 
material price reference and price linkage criteria for SPDC 
determination. Those comments are more extensively discussed below, as 
applicable.
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    \7\ 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.
    \8\ IECA describes itself as an ``association of leading 
manufacturing companies'' whose membership ``represents a diverse 
set of industries including: plastics, cement, paper, food 
processing, brick, chemicals, fertilizer, insulation, steel, glass, 
industrial gases, pharmaceutical, aluminum and brewing.'' 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.'' ICE is an ECM, as noted above. EI is an economic 
consulting firm with offices located in Washington, DC, and San 
Francisco, CA. NGSA is an industry association comprised of natural 
gas producers and marketers. FERC is an independent federal 
regulatory agency that, among other things, regulates the interstate 
transmission of natural gas, oil and electricity. 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: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-017.html.
    \9\ FERC stated that the DGD contract is cash settled and does 
not contemplate actual physical delivery of natural gas. 
Accordingly, FERC expressed the opinion that a determination by the 
Commission that a contract performs a significant price discovery 
function ``would not appear to conflict with FERC's exclusive 
jurisdiction under the Natural Gas Act (NGA) over certain sales of 
natural gas in interstate commerce for resale or with its other 
regulatory responsibilities under the NGA'' and further that, ``the 
FERC staff will continue to monitor for any such conflict * * * 
[and] advise the CFTC'' should any such potential conflict arise. CL 
06.
    \10\ IECA stated that the subject ICE contract should ``be 
required to come into compliance with core principles mandated by 
Section 2(h)(7) of the Act and with other statutory provisions 
applicable to registered entities. [This contract] should be subject 
to the Commission's position limit authority, emergency authority 
and large trader reporting requirements, among others.'' CL 01.
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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.\11\ 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.\12\ 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 will consider 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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    \11\ In its October 9, 2009, Federal Register release, the 
Commission identified material price reference, price linkage and 
material liquidity as the possible criteria for SPDC determination 
of the DGD contract. Arbitrage was not identified as a possible 
criterion and will not be discussed further in this document or the 
associated Order.
    \12\ 17 CFR part 36, Appendix A.
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IV. Findings and Conclusions

a. The Chicago (DGD) Financial Basis Contract and the SPDC Indicia

    The DGD contract is cash settled based on the difference between 
the bidweek price index for the price of natural gas at the Chicago hub 
for the month of delivery, as published in

[[Page 24635]]

Intelligence Press Inc.'s (``IPI's'') Natural Gas Bidweek Survey, and 
the final settlement price of the New York Mercantile Exchange's 
(``NYMEX's'') physically-delivered Henry Hub natural gas futures 
contract for the same calendar month. The IPI bidweek price, which is 
published monthly, is based on a survey of cash market traders who 
voluntarily report to IPI data on fixed-price transactions for physical 
delivery of natural gas at the Chicago hub conducted during the last 
five business days of the month; such bidweek transactions specify the 
delivery of natural gas on a uniform basis throughout the following 
calendar month at the agreed-upon rate. The IPI bidweek index is 
published on the first business day of the calendar month in which the 
natural gas is to be delivered. The size of the DGD contract is 2,500 
million British thermal units (``mmBtu''), and the unit of trading is 
any multiple of 2,500 mmBtu. The DGD contract is listed for up to 72 
calendar months commencing with the next calendar month.
    The Henry Hub,\13\ 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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    \13\ 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.\14\ 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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    \14\ See http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngmarketcenter/ngmarketcenter.pdf.
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    The Chicago hub, operated by Nicor, Inc., serves as an 
interconnection point for eight interstate pipelines. The firms that 
service the Chicago area are ANR Pipeline Company, Natural Gas Pipeline 
Company of America, Northern Border Pipe Line, Northern Natural Gas 
Company, Midwestern Gas Transmission Company, Alliance Pipeline, 
Panhandle Eastern Pipeline Company, and Horizon Pipeline.\15\ The 
Chicago Market Center, which includes the Chicago hub, had an estimated 
throughput capacity of 100 million cubic feet per day in 2008. 
Moreover, the number of pipeline interconnections at the Chicago Market 
Center was eight in 2008, up from seven in 2003. Lastly, the pipeline 
interconnection capacity of the Chicago Market Center in 2008 was 2.4 
billion cubic feet per day, which constituted a 9 percent increase over 
the pipeline interconnection capacity in 2003.\16\ The Chicago hub is 
far removed from the Henry Hub but is not directly connected to the 
Henry Hub by an existing pipeline.
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    \15\ See http://www.nicor.com/en_us/commercial/gas_xchange/chicago_hub.htm.
    \16\ 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 Chicago 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 Chicago price. Moreover, 
exogenous factors, such as adverse weather, can cause the Chicago 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 \17\ 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).
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    \17\ 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 9, 2009, Federal Register notice, the Commission 
identified material price reference, price linkage and material 
liquidity as the potential SPDC criteria applicable to the DGD 
contract. Each of these criteria is discussed below.\18\
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    \18\ As noted above, the Commission did not find an indication 
of arbitrage in connection with this contract; accordingly, that 
criterion was not discussed in reference to the DGD contract.
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1. Material Price Reference Criterion.
    The Commission's October 9, 2009, Federal Register notice 
identified material price reference as a potential basis for a SPDC 
determination with respect to this contract. The Commission considered 
the fact that ICE maintains exclusive rights over IPI's bidweek price 
indices. As a result, no other exchange can offer such a basis contract 
based on IPI's Chicago bidweek index. While other third-party price 
providers produce natural gas price indices for this and other trading 
centers, market participants indicate that the IPI Chicago bidweek 
index is highly regarded for this particular location and should market 
participants wish to establish a hedged position based on this index, 
they would need to do so by taking a position in the ICE DGD swap since 
ICE has the right to the IPI index for cash settlement purposes. In 
addition, ICE sells its price data to market participants in a number 
of different packages which vary in terms of the hubs covered, time 
periods, and whether the data are daily only or historical. For 
example, ICE offers the ``Midcontinent Gas End of Day'' and ``OTC Gas 
End of Day'' \19\ 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

[[Page 24636]]

historical data. These two packages include price data for the DGD 
contract.
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    \19\ The OTC Gas End of Day dataset includes daily settlement 
prices for natural gas contracts listed for all points in North 
America.
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    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.\20\ 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.
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    \20\ 17 CFR part 36, Appendix A.
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    The Chicago hub is a particularly important trading center and 
pricing point for natural gas in the United States. It is one of only 
two market centers (the other is ANR's Joliet Hub) located in the 
Midwest region. The Chicago Hub is strategically located at a point 
where eight major interstate pipelines transporting natural gas from 
Canada, the Southwest, and the Gulf of Mexico converge. In particular, 
it is linked with three pipelines that also transport gas from the 
Henry Hub in Louisiana. As a result, Chicago prices are often compared 
with those at the Henry Hub in analyzing bias differences between the 
two points during heavy demand periods.\21\
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    \21\ http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2003/market_hubs/mkthubsweb.html
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    Traders, including producers, keep abreast of the prices of the DGD 
contract when conducting cash deals. These traders look to a 
competitively determined price as an indication of expected values of 
natural gas at the Chicago hub when entering into cash market 
transaction for natural gas, especially those trades providing for 
physical delivery in the future. Traders use the ICE DGD contract, as 
well as other ICE basis swap contracts, to hedge cash market positions 
and transactions--activities which enhance the DGD contract's price 
discovery utility. The substantial volume of trading and open interest 
in the DGD contract appears to attest to its use for this purpose. 
While the DGD contract's settlement prices may not be the only factor 
influencing spot and forward transactions, natural gas traders consider 
the ICE price to be a critical factor in conducting OTC 
transactions.\22\ As a result, the DGD contract satisfies the direct 
price reference test.
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    \22\ In addition to referencing ICE prices, natural gas market 
firms participating in the Chicago market may rely on other cash 
market quotes as well as industry publications and price indices 
that are published by third-party price reporting firms when 
entering into natural gas transactions.
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    In terms of indirect price reference, ICE sells the DGD contract's 
prices as part of a broad package. The Commission notes that the 
Chicago hub is a major natural gas trading point, and the DGD 
contract's prices are well regarded in the industry as indicative of 
the value of natural gas at the Chicago hub. Accordingly, the 
Commission believes that it is reasonable to conclude that market 
participants are purchasing the data packages that include the DGD 
contract's prices in substantial part because the DGD contract prices 
have particular value to them. Moreover, such prices are consulted on a 
frequent and recurring basis by industry participants in pricing cash 
market transactions. In light of the above, the DGD contract meets the 
indirect price reference test.
    NYMEX lists a futures contract that is comparable to the ICE DGD 
contract on its ClearPort platform. However, unlike the ICE contract, 
none of the trades in the NYMEX, Chicago Basis Swap (Platts IFERC) 
futures contract are executed in NYMEX's centralized marketplace. 
Instead, all of the transactions originate as bilateral swaps that are 
submitted to NYMEX for clearing. The daily settlement prices of the 
NYMEX Chicago Basis Swap futures contract are influenced, in part, by 
the daily settlement prices of the ICE DGD contract. This is because 
NYMEX determines the daily settlement prices for its natural gas basis 
swap contracts through a survey of cash market voice brokers. Voice 
brokers, in turn, refer to the ICE DGD price, among other information, 
as an important indicator as to where the market is trading. Therefore, 
the ICE DGD price influences the settlement price for the NYMEX Chicago 
Basis Swap futures contract. This is supported by an analysis of the 
daily settlement prices for the NYMEX and ICE Chicago contracts. In 
this regard, 97 percent of the daily settlement prices for the NYMEX 
Chicago Basis Swap futures contract are within one standard deviation 
of the DGD contract's price settlement prices.
    Lastly, the fact that the DGD contract does not meet the price 
linkage criterion (discussed below) bolsters the argument for material 
price reference. As noted above, the Henry Hub is the pricing reference 
for natural gas in the United States. However, regional market 
conditions may cause the price of natural gas in another area of the 
country to diverge by more than the cost of transportation, thus making 
the Henry Hub price an imperfect proxy for the local gas price. The 
more variable the local natural gas price is, the more traders need to 
accurately hedge their price risk. Basis swap contracts provide a means 
of more accurately pricing natural gas at a location other than the 
Henry Hub. An analysis of Chicago natural gas prices showed that 47 
percent of the observations were more than 2.5 percent different than 
the contemporaneous Henry Hub prices. The average Chicago basis value 
between January 2008 and September 2009 was -$0.06 per mmBtu with a 
variance of $0.04 per mmBtu.
i. Federal Register Comments
    ICE stated in its comment letter that the DGD contract does not 
meet the material price reference criterion for SPDC determination. ICE 
argued that the Commission appeared to base the case that the DGD 
contract is potentially a SPDC on two disputable assertions. First, in 
issuing its notice of intent to determine whether the DGD contract is a 
SPDC, the CFTC cited a general conclusion in its ECM study ``that 
certain market participants referred to ICE as a price discovery market 
for certain natural gas contracts.'' \23\ ICE states that CFTC's 
conclusion is ``hard to quantify as the ECM report does not mention'' 
this contract as a potential SPDC. ``It is unknown which market 
participants made this statement in 2007 or the contracts that were 
referenced.'' \24\ In response to the above comment, the Commission 
notes that it cited the ECM study's general finding

[[Page 24637]]

that some ICE natural gas contracts appear to be regarded as price 
discovery markets merely as an indicia that an investigation of certain 
ICE contracts may be warranted. The ECM Study was not intended to serve 
as the sole basis for determining whether or not a particular contract 
meets the material price reference criterion.
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    \23\ CL 03.
    \24\ CL 03.
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    Second, ICE argued that the Commission should not base a 
determination that the DGD contract is a SPDC on the fact that this 
contract has the exclusive right to base its settlement on the IPI 
Chicago Index price. While the Commission acknowledges that there are 
other firms that produce price indices for the Chicago market, as it 
notes above, market participants indicate that the IPI Index is very 
highly regarded and should they wish to establish a hedged position 
based on this index, they would need to do so by taking a position in 
the ICE DGD swap since ICE has the exclusive right to use the IPI 
index.\25\
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    \25\ Futures and swaps based on other Chicago indices have not 
met with the same market acceptance as the DGD contract. For 
example, NYMEX lists a basis swap contract that is comparable to the 
DGD contract with the exception that it uses a different price index 
for cash settlement. Open interest as of September 30, 2009, was 
approximately 19,000 contracts in the NYMEX Chicago Basis Swap 
contract versus about 134,000 contracts in ICE's DGD contract. 
Moreover, there has been no centralized-market trading in the NYMEX 
Chicago Basis Swap contract, so that contract does not serve as a 
source of price discovery for cash market traders with natural gas 
at that location.
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    WGCEF, NGSA, EI and FIEG all stated that the DGD contract does not 
satisfy the material price reference criterion. The commenters argued 
that other contracts (physical or financial) are not indexed basis the 
ICE DGD contract price, but rather are indexed based on the underlying 
cash price series against which the ICE DGD contract is settled. Thus, 
they contend that the underlying cash price series is the authentic 
reference price and not the ICE contract itself. The Commission 
believes that this interpretation of price reference is too limiting in 
that it only considers the final index value on which the contract is 
cash settled after trading ceases. Instead, the Commission believes 
that a cash-settled derivatives contract could meet the price reference 
criteria if market participants ``consult on a frequent and recurring 
basis'' the derivatives contract when pricing forward, fixed-price 
commitments or other cash-settled derivatives that seek to ``lock in'' 
a fixed price for some future point in time to hedge against adverse 
price movements.
    As noted above, the Chicago market is a major trading center for 
natural gas in North America. Traders, including producers, keep 
abreast of the prices of the DGD contract when conducting cash deals. 
These traders look to a competitively determined price as an indication 
of expected values of natural gas at Chicago when entering into cash 
market transaction for natural gas, especially those trades that 
provide for physical delivery in the future. Traders use the ICE DGD 
contract to hedge cash market positions and transactions, which 
enhances the DGD contract's price discovery utility. While the DGD 
contract's settlement prices may not be the only factor influencing 
spot and forward transactions, natural gas traders consider the ICE 
price to be a crucial factor in conducting OTC transactions.
    Both EI and WGCEF stated that publication of price data in a 
package format is a weak justification for material price reference. 
These commenters argue that market participants generally do not 
purchase ICE data sets for one contract's prices, such as those for the 
DGD contract. Instead, traders are interested in the settlement prices, 
so the fact that ICE sells the DGD prices as part of a broad package is 
not conclusive evidence that market participants are buying the ICE 
data sets because they find the DGD prices have substantial value to 
them. The Commission notes that the Chicago hub is a major natural gas 
trading point, and the DGD contract's prices are well regarded in the 
industry as indicative of the value of natural gas at Chicago. 
Accordingly, the Commission believes that it is reasonable to conclude 
that market participants are purchasing the data packages that include 
the DGD contract's prices in substantial part because the DGD contract 
prices have particular value to them.
ii. Conclusion Regarding Material Price Reference
    Based on the above, the Commission finds that the DGD contract 
meets the material price reference criterion because cash market 
transactions are being priced on a frequent and recurring basis at a 
differential to the DGD contract's price (direct evidence). Moreover, 
the ECM (i.e., ICE) sells the DGD contract's price data to market 
participants and it is reasonable to conclude that market participants 
are purchasing the data packages that include the DGD contract's prices 
in substantial part because the DGD contract prices have particular 
value to them. Furthermore, such prices are consulted on a frequent and 
reoccurring basis by industry participants in pricing cash market 
transactions (indirect evidence).
2. Price Linkage Criterion.
    In its October 9, 2009, Federal Register notice, the Commission 
identified price linkage as a potential basis for a SPDC determination 
with respect to the DGD contract. In this regard, the final settlement 
of the DGD contract is based, in part, on the final settlement price of 
NYMEX's physically-delivered natural gas futures contract, where NYMEX 
is registered with the Commission as a DCM.
    The Commission's Guidance on Significant Price Discovery Contracts 
\26\ 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.'' 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.'' Furthermore, 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'').
---------------------------------------------------------------------------

    \26\ Appendix A to the Part 36 rules.
---------------------------------------------------------------------------

    To assess whether the DGD contract meets the price linkage 
criterion, Commission staff obtained price data from ICE and performed 
the statistical tests cited above. Staff found that while the Chicago 
price is determined, in part, by the final settlement price of the 
NYMEX physically-delivered natural gas futures contract (a DCM 
contract), the Chicago price is not within 2.5 percent of the 
settlement price of the corresponding NYMEX Henry Hub natural gas 
futures contract on 95 percent of the days. Specifically, during the 
third quarter of 2009, 53 percent of

[[Page 24638]]

the Chicago natural gas prices derived from the ICE basis values were 
within 2.5 percent of the daily settlement price of the NYMEX Henry Hub 
futures contract. In addition, staff finds that the DGD contract fails 
to meet the volume threshold requirement. In particular, the total 
trading volume in the NYMEX Natural Gas contract during the third 
quarter of 2009 was 14,022,963 contracts, with 5 percent of that number 
being 701,148 contracts. The number of trades on the ICE centralized 
market in the DGD contract during the same period was 63,499 contracts 
(equivalent to 15,875 NYMEX contracts, given the size difference).\27\ 
Thus, centralized-market trades in the DGD contract amounted to less 
than the minimum threshold.
---------------------------------------------------------------------------

    \27\ The DGD contract is one-quarter the size of the NYMEX Henry 
Hub physically-delivered futures contract.
---------------------------------------------------------------------------

    Due to the specific criteria that a given ECM contract must meet to 
fulfill the price linkage criterion, the requirements, for all intents 
and purposes, exclude ECM contracts that are not near facsimiles of DCM 
contracts. That is, even though an ECM contract may specifically use a 
DCM contract's settlement price to value a position, which is the case 
of the DGD contract, a substantive difference between the two price 
series would rule out the presence of price linkage. In this regard, an 
ECM contract that is priced and traded as if it is a functional 
equivalent of a DCM contract likely will have a price series that 
mirrors that of the corresponding DCM contract. In contrast, for 
contracts that are not look-alikes of DCM contracts, it is reasonable 
to expect that the two price series would be divergent. The Chicago hub 
and the Henry Hub are located in two different areas of the United 
States. The Henry Hub primarily is a supply center while Chicago 
primarily is a demand center. These differences contribute to the 
divergence between the two price series and, as discussed below, 
increase the likelihood that the ``basis'' contract is used for 
material price reference.
i. Federal Register Comments
    NGSA \28\ stated that the DGD contract does not meet the price 
linkage criterion because basis contracts, including the DGD contract, 
are not equivalent to the NYMEX physically-delivered Henry Hub 
contract. EI \29\ also noted that the DGD and NYMEX natural gas 
contracts are not economically equivalent and that the DGD contract's 
volume is too low to affect the NYMEX natural gas futures contract. 
WGCEF \30\ stated that the Chicago price is determined, in part, by the 
final settlement price of the NYMEX Henry Hub futures contract. 
However, WGCEF goes on to state that the DGD contract ``(a) is not 
substantially the same as the NYMEX [natural gas futures contract] * * 
* nor (b) does it move substantially in conjunction'' with the NYMEX 
natural gas futures contract. ICE \31\ opined that the DGD contract's 
trading volume is too low to affect the price discovery process for the 
NYMEX natural gas futures contract. In addition, ICE states that the 
DGD contract simply reflects a price differential between Chicago hub 
and the Henry Hub; ``there is no price linkage as contemplated by 
Congress or the CFTC in its rulemaking.'' FIEG \32\ acknowledged that 
the DGD contract is a locational spread that is based in part on the 
NYMEX natural gas futures price, but also questioned the significance 
of this fact relative to the price linkage criterion since the key 
component of the spread is the price at the Chicago hub and not the 
NYMEX physically-delivered natural gas futures price.
---------------------------------------------------------------------------

    \28\ CL 05.
    \29\ CL 04.
    \30\ CL 02.
    \31\ CL 03.
    \32\ CL 07.
---------------------------------------------------------------------------

ii. Conclusion Regarding the Price Linkage Criterion
    Based on the above, the Commission finds that the DGD 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.
    To assess whether the DGD contract meets the material liquidity 
criterion, the Commission first examined volume and open interest data 
provided to it by ICE as a general measurement of the DGD market's size 
and potential importance, and second performed a statistical analysis 
to measure the effect that changes to DGD prices potentially may have 
on prices for the NYMEX Henry Hub Natural Gas (a DCM contract), the ICE 
Permian Financial Basis contract (an ECM contract), ICE Waha Financial 
Basis contract (an ECM contract) and ICE NGPL TxOk Financial Basis 
contract (an ECM contract).\33\
---------------------------------------------------------------------------

    \33\ As noted above, the material liquidity criterion speaks to 
the effect that transactions in the potential SPDC may have on 
trading in ``agreements, contracts and transactions listed for 
trading on or subject to the rules of a designated contract market, 
a derivatives transaction execution facility, or an electronic 
trading facility operating in reliance on the exemption in section 
2(h)(3) of the Act.''
---------------------------------------------------------------------------

    The Commission's Guidance (Appendix A to Part 36) notes that 
``[t]raditionally, objective measures of trading such as volume or open 
interest have been used as measures of liquidity.'' In this regard, the 
Commission in its October 9, 2009, Federal Register notice referred to 
second quarter 2009 trading statistics that ICE had submitted for its 
DGD contract. Based upon on a required quarterly filing made by ICE on 
July 27, 2009, the total number of DGD trades executed on ICE's 
electronic trading platform was 1,572 in the second quarter of 2009, 
resulting in a daily average of 24.6 trades. During the same period, 
the DGD contract had a total trading volume on ICE's electronic trading 
platform of 146,193 contracts and an average daily trading volume of 
2,284,3 contracts. Moreover, the open interest as of June 30, 2009, was 
127,744 contracts, which includes trades executed on ICE's electronic 
trading platform, as well as trades executed off of ICE's electronic 
trading platform and then brought to ICE for clearing.\34\
---------------------------------------------------------------------------

    \34\ ICE does not differentiate between open interest created by 
a transaction executed on its trading platform versus that created 
by a transaction executed off its trading platform.
---------------------------------------------------------------------------

    Subsequent to the October 9, 2009, Federal Register notice, ICE 
submitted another quarterly notification filed on November 13, 
2009,\35\ with updated trading statistics. Specifically, with respect 
to its DGD contract, 782 separate trades occurred on its electronic 
platform in the third quarter of 2009, resulting in a daily average of 
11.8 trades. During the same period, the DGD contract had a total 
trading volume on its electronic platform of 63,499 contracts (which 
was an average of 962 contracts per day).\36\ As of September 30, 2009, 
open interest in the DGD contract was 134,031 \37\ contracts. Reported 
open interest included positions resulting from trades that were 
executed on ICE's electronic platform, as well as trades that were 
executed off of ICE's electronic platform and brought to ICE for 
clearing.
---------------------------------------------------------------------------

    \35\ See Commission Rule 36.3(c)(2), 17 CFR 36.3(c)(2).
    \36\ By way of comparison, the number of contracts traded in the 
DGD contract is similar to that exhibited on a liquid futures market 
and is roughly equivalent to the volume of trading for the Chicago 
Board of Trade's Oats contract during this period.
    \37\ By way of comparison, open interest in the DGD contract is 
similar to that exhibited on a liquid futures market and is roughly 
equivalent to that in the Chicago Board of Trade's soybean meal 
futures contract.
---------------------------------------------------------------------------

    In the Guidance, the Commission stated that material liquidity can 
be identified by the impact liquidity exhibits through observed prices. 
Thus, to make a determination whether the DGD contract has such 
material impact, the Commission reviewed the relevant

[[Page 24639]]

trading statistics (noted above). In this regard, the average number 
trades per day in the second and third quarters of 2009 were above the 
minimum reporting level (5 trades per day). Moreover, trading activity 
in the DGD contract, as characterized by total quarterly volume, 
indicates that the DGD contract experiences trading activity similar to 
that of other thinly-traded contracts.\38\ However, the DGD contract 
has substantial open interest. This factor coupled with the importance 
of this trading center as a price reference point, makes it reasonable 
to infer that the DGD contract could have a material effect on other 
ECM contracts or on DCM contracts.
---------------------------------------------------------------------------

    \38\ Staff has advised the Commission that in its experience, a 
thinly-traded contract is, generally, one that has a quarterly 
trading volume of 100,000 contracts or less. In this regard, in the 
third quarter of 2009, physical commodity futures contracts with 
trading volume of 100,000 contracts or fewer constituted less than 
one percent of total trading volume of all physical commodity 
futures contracts.
---------------------------------------------------------------------------

    To measure the effect that the DGD contract potentially could have 
on a DCM contract, or on another ECM contract, Commission staff 
performed a statistical analysis \39\ using daily settlement prices 
(between January 2, 2008, and September 30, 2009) for the DGD contract, 
as well as for the NYMEX Henry Hub natural gas contract (a DCM 
contract) and the ICE Waha Financial Basis, ICE Permian Financial Basis 
and ICE NGPL TxOk Financial Basis contracts (ECM contracts). The 
simulation results suggest that, on average over the sample period, a 
one percent rise in the DGD contract's price elicited a 1 percent 
increase in each of the other contracts' prices.
---------------------------------------------------------------------------

    \39\ Specifically, Commission staff econometrically estimated a 
vector autoregression (VAR) model using daily settlement prices. A 
vector autoregression model is an econometric model used to capture 
the evolution and the interdependencies between multiple time 
series, generalizing the univariate autoregression models. The 
estimated model displays strong diagnostic evidence of statistical 
adequacy. In particular, the model's impulse response function was 
shocked with a one-time rise in DGD contract's price. The simulation 
results suggest that, on average over the sample period, a one 
percent rise in the DGD contract's price elicited a 1percent 
increase in the NYMEX Henry Hub and the ICE NGPL TxOk, Permian and 
Waha prices. These multipliers of response emerge with noticeable 
statistical strength or significance. Based on such long run sample 
patterns, if the DGD contract's price rises by 10 percent, then the 
price of the other contracts each would rise by about 10 percent.
---------------------------------------------------------------------------

i. Federal Register Comments
    As noted above, comments were received from seven individuals and 
organizations, with five comments being directly applicable to the SPDC 
determination of the ICE DGD contract. WGCEF, EI, FIEG, ICE and NGSA 
generally agreed that the DGD contract does not meet the material 
liquidity criterion.
    WGCEF \40\ and NGSA \41\ both stated that the DGD contract does not 
materially affect other contracts that are listed for trading on DCMs 
or ECMs, as well as other over-the-counter contracts. Instead, the DGD 
contract is influenced by the underlying Chicago cash price index and 
the final settlement price of the NYMEX Henry Hub natural gas futures 
contract, not vice versa. FIEG \42\ stated that the DGD contract cannot 
have a material effect on NYMEX contract because the DGD contract 
trades on a differential and represents ``one leg (and not the relevant 
leg) of the locational spread.'' The Commission's statistical analysis 
shows that changes in the ICE DGD contract's price significantly 
influences the prices of other contracts that are traded on DCMs and 
ECMs.
---------------------------------------------------------------------------

    \40\ CL 02.
    \41\ CL 05.
    \42\ CL 07.
---------------------------------------------------------------------------

    First, ICE opined that the Commission ``seems to have adopted a 
five trade-per-day test to determine whether a contract is materially 
liquid. It is worth noting that ICE originally suggested that the CFTC 
use a five trades-per-day threshold as the basis for an ECM to report 
trade data to the CFTC.'' 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'' 
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. As noted 
above, the Commission is basing a finding of material liquidity for the 
ICE DGD contract, in part, on the fact that the Chicago hub is an 
important pricing point and changes in the DGD contract's prices 
significantly affect those of other ECM contracts and DCM contracts. 
The DGD contract also has significant open interest.
    ICE implied that the statistics provided by ICE were misinterpreted 
and misapplied by the Commission. In particular, ICE stated that the 
volume figures used in the Commission's analysis (cited above) 
``include trades made in all [72] months of * * * [the] contract'' as 
well as in strips of contract months, and a ``more appropriate method 
of determining liquidity is to examine the activity in a single traded 
month or strip of a given contract.'' ICE stated that only about 25 to 
40 percent of the trades occurred in the single most liquid, usually 
prompt, month of the contract.
    It is the Commission's opinion that liquidity, as it pertains to 
the DGD contract, is typically a function of trading activity in 
particular lead months and, given sufficient liquidity in such months, 
the DGD contract itself would be considered liquid. ICE's analysis of 
its own trade data confirms this to be the case for the DGD contract, 
and thus, the Commission believes that it applied the statistical data 
cited above in an appropriate manner for gauging material liquidity.
    In addition, EI and ICE stated that the trades-per-day statistics 
that it provided to the Commission in its quarterly filing and which 
are cited above includes 2(h)(1) transactions, which were not completed 
on the electronic trading platform and should not be considered in the 
SPDC determination process. Commission staff asked ICE to review the 
data it sent in its quarterly filings. In response, ICE confirmed that 
the volume data it provided and which the Commission cited in its 
October 9, 2009, Federal Register notice, as well as the additional 
volume information it cites above, includes only transaction data 
executed on ICE's electronic trading platform. The Commission 
acknowledges that the open interest information it cites above includes 
transactions made off the ICE platform.\43\ However, once open interest 
is created, there is no way for ICE to differentiate between ``on-
exchange'' versus ``off-exchange'' created positions, and all such 
positions are fungible with one another and may be offset in any way 
agreeable to the position holder regardless of how the position was 
initially created.
---------------------------------------------------------------------------

    \43\ Supplemental data supplied by the ICE confirmed that block 
trades in the third quarter of 2009 were in addition to the trades 
that were conducted on the electronic platform; block trades 
comprised 64 percent of all transactions in the DGD contract.
---------------------------------------------------------------------------

ii. Conclusion Regarding Material Liquidity
    Based on the above, the Commission concludes that the DGD contract 
meets the material liquidity criterion in that there is sufficient 
trading activity in the DGD contract to have a material effect on 
``other agreements, contracts or transactions listed for trading on or 
subject to the rules of a designated contract market * * * or an 
electronic trading facility operating in reliance on the exemption in 
section 2(h)(3) of the Act'' (that is, an ECM).

[[Page 24640]]

4. Overall Conclusion
    After considering the entire record in this matter, including the 
comments received, the Commission has determined that the DGD contract 
performs a significant price discovery function under two of the four 
criteria established in section 2(h)(7) of the CEA. Although the 
Commission has determined that the DGD contract does not meet the price 
linkage criterion at this time, the Commission has concluded that the 
DGD contract does meet both the material liquidity and material price 
reference criteria. Accordingly, the Commission is issuing the attached 
Order declaring that the DGD contract is a SPDC.
    Issuance of this Order signals the immediate effectiveness of the 
Commission's authorities with respect to ICE as a registered entity in 
connection with its DGD contract,\44\ and triggers the obligations, 
requirements--both procedural and substantive--and timetables 
prescribed in Commission rule 36.3(c)(4) for ECMs.
---------------------------------------------------------------------------

    \44\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------

V. Related Matters

a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \45\ 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.
---------------------------------------------------------------------------

    \45\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

b. Cost-Benefit Analysis

    Section 15(a) of the CEA \46\ 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. The Commission has considered the costs and benefits in light 
of the specific provisions of section 15(a) of the Act and has 
concluded that the Order, required by Congress to strengthen federal 
oversight of exempt commercial markets and to prevent market 
manipulation, is necessary and appropriate to accomplish the purposes 
of section 2(h)(7) of the Act.
---------------------------------------------------------------------------

    \46\ 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 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 
authorizes 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.

c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \47\ 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.\48\ Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that this Order, 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.
---------------------------------------------------------------------------

    \47\ 5 U.S.C. 601 et seq.
    \48\ 66 FR 42256, 42268 (Aug. 10, 2001).
---------------------------------------------------------------------------

VI. Order

a. Order Relating to the Chicago Financial Basis 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 Chicago Financial Basis contract, 
traded on the IntercontinentalExchange, Inc., satisfies the statutory 
material liquidity and material price reference criteria for 
significant price discovery contracts. Consistent with this 
determination, and effective immediately, the IntercontinentalExchange, 
Inc., must comply with, with respect to the Chicago Financial Basis 
contract, the nine core principles established by new section 
2(h)(7)(C). Additionally, the IntercontinentalExchange, Inc., shall be 
and is considered a registered entity \49\ with respect to the Chicago 
Financial Basis contract and is subject to all the provisions of the 
Commodity Exchange Act applicable to registered entities.
---------------------------------------------------------------------------

    \49\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------

    Further, the obligations, requirements and timetables prescribed in 
Commission rule 36.3(c)(4) governing core principle compliance by the 
IntercontinentalExchange, Inc., commence with the issuance of this 
Order.\50\
---------------------------------------------------------------------------

    \50\ Because ICE already lists for trading a contract (i.e., the 
Henry Financial LD1 Fixed Price contract) that was previously 
declared by the Commission to be a SPDC, ICE must submit a written 
demonstration of compliance with the Core Principles within 30 
calendar days of the date of this Order. 17 CFR 36.3(c)(4).

    Issued in Washington, DC on April 28, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-10344 Filed 5-4-10; 8:45 am]
BILLING CODE P


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