[Federal Register Volume 74, Number 201 (Tuesday, October 20, 2009)]
[Notices]
[Pages 53720-53722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-25174]


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COMMODITY FUTURES TRADING COMMISSION


Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of 
the Commodity Exchange Act and Commission Rule 36.3(c)(3), To Undertake 
a Determination Whether the Henry Financial Swing Contract; Henry 
Financial Basis Contract; and Henry Financial Index Contract, Offered 
for Trading on the IntercontinentalExchange, Inc., Perform Significant 
Price Discovery Functions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of action and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is undertaking a review to determine whether the Henry 
Financial Swing (``HHD'') contract; Henry Financial Basis (``HEN'') 
contract; and/or Henry Financial Index (``HIS'') contract, offered for 
trading 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''), perform significant price 
discovery functions. Authority for this action is found in section 
2(h)(7) of the CEA and Commission rule 36.3(c) promulgated thereunder. 
In connection with this evaluation, the Commission invites comment from 
interested parties.

DATES: Comments must be received on or before November 4, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:
    <bullet> Follow the instructions for submitting comments. Federal 
eRulemaking Portal: http://www.regulations.gov.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#b6c5d3d5c4d3c2d7c4cff6d5d0c2d598d1d9c0"><span class="__cf_email__" data-cfemail="ddaeb8beafb8a9bcafa49dbebba9bef3bab2ab">[email protected]</span></a>. Include Henry Financial Swing 
(HHD) contract; Henry Financial Basis (HEN) contract; and/or Henry 
Financial Index (HIS) contract in the subject line of the message, 
depending on the subject contract(s) to which the comments apply.
    <bullet> Fax: (202) 418-5521.
    <bullet> Mail: Send to David A. Stawick, Secretary, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581.
    <bullet> Courier: Same as mail above.
    All comments received will be posted without change to http://www.CFTC.gov/.

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#d3b4a3a1bab0b693b0b5a7b0fdb4bca5"><span class="__cf_email__" data-cfemail="deb9aeacb7bdbb9ebdb8aabdf0b9b1a8">[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#53203d32273b323d13303527307d343c25"><span class="__cf_email__" data-cfemail="b8cbd6d9ccd0d9d6f8dbdeccdb96dfd7ce">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On March 16, 2009, the CFTC promulgated final rules implementing 
provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization 
Act'') \1\ which subjects ECMs with significant price discovery 
contracts (``SPDCs'') to self-regulatory and reporting requirements, as 
well as certain Commission oversight authorities, with respect to those 
contracts. Among other things, these rules and rule amendments revise 
the information-submission requirements applicable to ECMs, establish 
procedures and standards by which the Commission will determine whether 
an ECM contract performs a significant price discovery function, and 
provide guidance with respect to compliance with nine statutory core 
principles applicable to ECMs with SPDCs. These rules became effective 
on April 22, 2009.
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    \1\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on 
April 22, 2009.
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    In determining whether an ECM's contract is or is not a SPDC, the 
Commission will consider the contract's material liquidity, price 
linkage to other contracts, potential for arbitrage with other 
contracts traded on designated contract markets or derivatives 
transaction execution facilities, use of the ECM contract's prices to 
execute or settle other transactions, and other factors.
    In order to facilitate the Commission's identification of possible 
SPDCs,

[[Page 53721]]

Commission rule 36.3(c)(2) requires that an ECM operating in reliance 
on section 2(h)(3) promptly notify the Commission and provide 
supporting information or data concerning any contract: (i) that 
averaged five trades per day or more over the most recent calendar 
quarter; and (ii) (A) for which the ECM sells price information 
regarding the contract to market participants or industry publications; 
or (B) 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 agreement.

II. Determination of a SPDC

A. The SPDC Determination Process

    Commission rule 36.3(c)(3) establishes the procedures by which the 
Commission makes and announces its determination on whether a specific 
ECM contract serves a significant price discovery function. Under those 
procedures, the Commission will publish a notice in the Federal 
Register that it intends to undertake a determination as to whether the 
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.\2\ After prompt consideration of all relevant 
information \3\, the Commission will, within a reasonable period of 
time after the close of the comment period, issue an order explaining 
its determination. Following the issuance of an order by the Commission 
that the ECM executes or trades an agreement, contract, or transaction 
that performs a significant price discovery function, the ECM must 
demonstrate, with respect to that agreement, contract, or transaction, 
compliance with the core principles under section 2(h)(7)(C) of the CEA 
\4\ and the applicable provisions of Part 36. If the Commission's order 
represents the first time it has determined that one of the ECM's 
contracts performs a significant price discovery function, the ECM must 
submit a written demonstration of its compliance with the core 
principles within 90 calendar days of the date of the Commission's 
order. For each subsequent determination by the Commission that the ECM 
has an additional SPDC, the ECM must submit a written demonstration of 
its compliance with the core principles within 30 calendar days of the 
Commission's order.
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    \2\ The Commission may commence this process on its own 
initiative or on the basis of information provided to it by an ECM 
pursuant to the notification provisions of Commission rule 
36.3(c)(2).
    \3\ Where appropriate, the Commission may choose to interview 
market participants regarding their impressions of a particular 
contract. Further, while they may not provide direct evidentiary 
support with respect to a particular contract, the Commission may 
rely for background and context on resources such as its October 
2007 Report on the Oversight of Trading on Regulated Futures 
Exchanges and Exempt Commercial Markets (``ECM Study''). http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf.
    \4\ 7 U.S.C. 2(h)(7)(C).
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B. Henry Financial Swing Contract

    The HHD contract is a daily contract that is cash settled based on 
the spot index price for natural gas at the Henry Hub, as published by 
Platts in the ``Daily Price Survey'' table of Gas Daily. The Platts 
index price is based on fixed-price cash market transactions that are 
voluntarily reported by traders. The size of the HHD contract is 2,500 
million British thermal units (``mmBtu''), and the unit of trading is 
any multiple of 2,500 mmBtu. The HHD contract is listed for 65 
consecutive calendar days.
    Based upon a required quarterly notification filed on July 27, 2009 
(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect 
to its HHD contract, 5,246 separate trades occurred in the second 
quarter of 2009, resulting in a daily average of 82.0 trades. During 
the same period, the HHD contract had a total trading volume of 242,968 
contracts (which was an average of 3,796.4 contracts per day). As of 
June 30, 2009, open interest in the HHD contract was 20,173 contracts.
    It appears that the HHD contract may satisfy the material 
liquidity, arbitrage, and material price reference factors for SPDC 
determination. With respect to material liquidity, trading in the HHD 
contract averaged over 3,500 contracts on a daily basis with more than 
80 separate transactions each day. Moreover, the open interest at the 
end of the second quarter in 2009 was significant. Because the HHD 
contract specifies the Henry Hub, the contract's prices series may be 
highly correlated with that of the New York Mercantile Exchange's 
physically-delivered Natural Gas contract and/or the ICE's Henry 
Financial LD1 Financial Fixed Price contract, thus increasing the 
opportunity for arbitrage. In regard to material price reference, while 
it did not specifically address the natural gas contracts under review, 
the ECM Study stated that, in general, market participants view the ICE 
as a price discovery market for certain natural gas contracts. Natural 
gas contracts based on actively-traded hubs are transacted on the ICE's 
electronic trading platform, with the remainder being completed over-
the-counter and potentially submitted for clearing by voice brokers. In 
addition, the 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, the ICE offers ``Henry Hub End of Day'' and ``OTC Gas End of 
Day'' data packages with access to all price data or just 12, 24, 36, 
or 48 months of historical data.

C. Henry Financial Basis Contract

    The HEN contract is a monthly contract that is cash settled based 
on the difference between the bidweek price index for a particular 
calendar month at the Henry Hub, as published by Platts in its Inside 
FERC's Gas Market Report, and the final settlement price of the New 
NYMEX's physically-delivered Henry Hub natural gas futures contract for 
the same calendar month. The Platts bidweek price is based on fixed-
price cash market transactions that are conducted during the last five 
business days of the month and are voluntarily reported by traders; 
bidweek transactions specify the delivery of natural gas during the 
following calendar month. The size of the HEN contract is 2,500 mmBtu, 
and the unit of trading is any multiple of 2,500 mmBtu. The HEN 
contract is listed for up to 72 calendar months.
    Based upon a required quarterly notification filed on July 27, 2009 
(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect 
to its HEN contract, 538 separate trades occurred in the second quarter 
of 2009, resulting in a daily average of 8.4 trades. During the same 
period, the HEN contract had a total trading volume of 78,870 (which 
was an average of 1,232.3 contracts per day). As of June 30, 2009, open 
interest in the HEN contract was 128,504 contracts.
    It appears that the HEN contract may satisfy the material 
liquidity, price linkage, and material price reference factors for SPDC 
determination. With respect to material liquidity, trading in the HEN 
contract averaged more than 1,000 contracts on a daily basis, with 
nearly 10 separate transactions each day. In addition, the open 
interest in the subject contract was substantial. In regard to price 
linkage, the final settlement of the HEN contract is based, in part, on 
the final settlement price of the NYMEX's physically-delivered natural 
gas contract, where the NYMEX is registered with the Commission as a 
designated contract market (``DCM''). In regard to material price 
reference, while it did not specifically address the

[[Page 53722]]

natural gas contracts under review, the ECM Study stated that, in 
general, market participants view the ICE as a price discovery market 
for certain natural gas contracts. Natural gas contracts based on 
actively-traded hubs are transacted on the ICE's electronic trading 
platform, with the remainder being completed over-the-counter and 
potentially submitted for clearing by voice brokers. In addition, the 
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, the ICE offers ``Henry Hub End of Day'' and ``OTC Gas End of 
Day'' data packages with access to all price data or just 12, 24, 36, 
or 48 months of historical data.

D. Henry Financial Index Contract

    The HIS contract is a monthly contract that is cash settled based 
on the arithmetic average of the daily natural gas prices at the Henry 
Hub, as quoted in the ``Daily Price Survey'' table of Platts' Gas Daily 
during the specified month, less the Platts bidweek price that is 
reported in the first issue of Inside FERC's Gas Market Report in which 
the natural gas is produced. The Platts prices are based on fixed-price 
cash market transactions that are voluntarily reported by traders. The 
size of the HIS contract is 2,500 mmBtu, and the unit of trading is any 
multiple of 2,500 mmBtu. The HIS contract is listed for 36 calendar 
months.
    Based upon a required quarterly notification filed on July 27, 2009 
(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect 
to its HIS contract, 550 separate trades occurred in the second quarter 
of 2009, resulting in a daily average of 8.6 trades. During the same 
period, the HIS contract had a total trading volume of 79,330 contracts 
(which was an average of 1,239.5 contracts per day). As of June 30, 
2009, open interest in the HIS contract was 127,346 contracts.
    It appears that the HIS contract may satisfy the material 
liquidity, and material price reference factors for SPDC determination. 
With respect to material liquidity, trading in the HIS contract 
averaged over 1,200 contracts on a daily basis with more than 8 
separate transactions each day. In addition, the open interest in the 
subject contract was substantial. In regard to material price 
reference, while it did not specifically address the natural gas 
contracts under review, the ECM Study stated that, in general, market 
participants view the ICE as a price discovery market for certain 
natural gas contracts. Natural gas contracts based on actively-traded 
hubs are transacted on the ICE's electronic trading platform, with the 
remainder being completed over-the-counter and potentially submitted 
for clearing by voice brokers. In addition, the 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, the ICE offers ``Henry Hub 
End of Day'' and ``OTC Gas End of Day'' data packages with access to 
all price data or just 12, 24, 36, or 48 months of historical data.

III. Request for Comment

    In evaluating whether an ECM's agreement, contract, or transaction 
performs a significant price discovery function, section 2(h)(7) of the 
CEA directs the Commission to consider, as appropriate, four specific 
criteria: Price linkage, arbitrage, material price reference, and 
material liquidity. As it explained in Appendix A to the Part 36 
rules,\5\ the Commission, in making SPDC determinations, will apply and 
weigh each factor, as appropriate, to the specific contract and 
circumstances under consideration.
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    \5\ 17 CFR Part 36, Appendix A.
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    As part of its evaluation, the Commission will consider the written 
data, views, and arguments from any ECM that lists the potential SPDC 
and from any other interested parties. Accordingly, the Commission 
requests comment on whether the HHD, HEN, and/or HIS contracts perform 
significant price discovery functions. Commenters' attention is 
directed particularly to Appendix A of the Commission's Part 36 rules 
for a detailed discussion of the factors relevant to an SPDC 
determination. The Commission notes that comments which analyze the 
contracts in terms of these factors will be especially helpful to the 
determination process. In order to determine the relevance of comments 
received, the Commission requests that commenters explain in what 
capacity are they knowledgeable about the subject contracts. Moreover, 
because three contracts are included in this notice, it is important 
that commenters identify to which contract(s) their comments apply.

IV. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \6\ imposes certain 
requirements on federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. Certain provisions of final 
Commission rule 36.3 impose new regulatory and reporting requirements 
on ECMs, resulting in information collection requirements within the 
meaning of the PRA; OMB previously has approved and assigned OMB 
control number 3038-0060 to this collection of information.
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    \6\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA \7\ requires the Commission to consider 
the costs and benefits of its actions before issuing an order under the 
Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs; rather, it requires that the 
Commission ``consider'' the costs and benefits of its action. Section 
15(a) further specifies that the costs and benefits shall be evaluated 
in light of five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations.
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    \7\ 7 U.S.C. 19(a).
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    The bulk of the costs imposed by the requirements of Commission 
Rule 36.3 relate to significant and increased information-submission 
and reporting requirements adopted in response to the Reauthorization 
Act's directive that the Commission take an active role in determining 
whether contracts listed by ECMs qualify as SPDCs. The enhanced 
requirements for ECMs will permit the Commission to acquire the 
information it needs to discharge its newly-mandated responsibilities 
and to ensure that ECMs with SPDCs are identified as entities with the 
elevated status of registered entity under the CEA and are in 
compliance with the statutory terms of the core principles of section 
2(h)(7)(C) of the Act. The primary benefit to the public is to enable 
the Commission to discharge its statutory obligation to monitor for the 
presence of SPDCs and extend its oversight to the trading of SPDCs.

    Issued in Washington, DC, on October 14, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-25174 Filed 10-19-09; 8:45 am]
BILLING CODE 6351-01-P


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