[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38478-38487]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16206]
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COMMODITY FUTURES TRADING COMMISSION
Orders Finding That the Mid-C Financial Peak Daily Contract and
Mid-C Financial Off-Peak Daily Contract, Offered for Trading on the
IntercontinentalExchange, Inc., Do Not Perform a Significant Price
Discovery Function
AGENCY: Commodity Futures Trading Commission.
ACTION: Final orders.
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SUMMARY: On October 6, 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 Mid-C \2\ Financial Peak Daily (``MPD'') contract and Mid-C
Financial Off-Peak Daily (``MXO'') contract,\3\ which are listed 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 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
orders finding that the MPD and MXO 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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\1\ 74 FR 51261 (October 6, 2009).
\2\ The acronym ``Mid-C'' stands for Mid-Columbia.
\3\ The Federal Register notice also requested comment on the
Mid-C Financial Peak (``MDC'') contract and Mid-C Financial Off-Peak
(``OMC'') contract; these contracts will be addressed in a separate
Federal Register release.
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DATES: Effective Date: June 25, 2010.
FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,
Division of Market Oversight, Commodity Futures Trading
[[Page 38479]]
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Telephone: (202) 418-5515. E-mail: [email protected]; or Susan
Nathan, Senior Special Counsel, Division of Market Oversight, same
address. Telephone: (202) 418-5133. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \4\
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.\5\ 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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\4\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008).
\5\ 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.\6\ 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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\6\ 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.\7\ The issuance of such an order also triggers the
obligations, requirements and timetables prescribed in Commission rule
36.3(c)(4).\8\
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\7\ 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).
\8\ 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 6, 2009, the Commission published in the Federal
Register notice of its intent to undertake a determination whether the
MPD and MXO contracts \9\ perform a significant price discovery
function and requested comment from interested parties.\10\ Comments
were received from the Federal Energy Regulatory Commission (``FERC''),
Financial Institutions Energy Group (``FIEG''), Working Group of
Commercial Energy Firms (``WGCEF''), Edison Electric Institute
(``EEI''), ICE, Western Power Trading Forum (``WPTF'') and Public
Utility Commission of Texas (``PUCT'').\11\ The comment letters from
FERC \12\ and PUCT did not directly address the issue of whether or not
the subject contracts are SPDCs. The remaining comment letters raised
substantive issues with respect to the applicability of section 2(h)(7)
to the MPD and MXO contracts and generally expressed the opinion that
the contracts are not SPDCs because they does not meet the material
price reference or material liquidity criteria for SPDC determination.
These comments are more extensively discussed below, as applicable.
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\9\ As noted above, the Federal Register notice also requested
comment on the Mid-C Financial Peak (``MDC'') contract and Mid-C
Financial Off-Peak (``OMC'') contract. The MDC and OMC contracts
will be addressed in a separate Federal Register release.
\10\ 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.
\11\ 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.'' 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.'' EEI is the ``association of
shareholder-owned electric companies, international affiliates and
industry associates worldwide.'' ICE is an ECM, as noted above. WPTF
describes itself as a ``broad-based membership organization
dedicated to encouraging competition in the Western power markets *
* * WTPF strives to reduce the long-run cost of electricity to
consumers throughout the region while maintaining the current high
level of system reliability.'' PUCT is the independent organization
that oversees the Electric Reliability Council of Texas (``ERCOT'')
to ``ensure nondiscriminatory access to the transmission and
distribution systems, to ensure the reliability and adequacy of the
regional electrical network, and to perform other essential market
functions.'' The comment letters are available on the Commission's
Web site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-011.html.
\12\ FERC expressed the opinion that a determination by the
Commission that either of the subject contracts performs a
significant price discovery function ``would not appear to conflict
with FERC's exclusive jurisdiction under the Federal Power Act (FPA)
over the transmission or sale for resale of electric energy in
interstate commerce or with its other regulatory responsibilities
under the FPA'' and further that ``FERC staff will monitor proposed
SPDC determinations and advise the CFTC of any potential conflicts
with FERC's exclusive jurisdiction over RTOs, [(regional
transmission organizations)], ISOs [(independent system operators)]
or other jurisdictional entities.''
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[[Page 38480]]
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:
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.
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.
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.
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.\13\ 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.\14\ 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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\13\ In its October 6, 2009, Federal Register release, the
Commission identified material price reference and material
liquidity as the possible criteria for SPDC determination of the MPD
and MXO contracts. Arbitrage and price linkage were not identified
as possible criteria. As a result, arbitrage and price linkage will
not be discussed further in this document and the associated Orders.
\14\ 17 CFR 36, Appendix A.
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IV. Findings and Conclusions
The Commission's findings and conclusions with respect to the MPD
and MXO contracts are discussed separately below:
a. The Mid-C Financial Peak Daily (MPD) Contract and the SPDC Indicia
The MPD contract is cash settled based on the peak, day-ahead price
index for the specified day, as published by ICE in its ``ICE Day Ahead
Power Price Report,'' which is available on the ECM's Web site. The
daily peak-hour electricity price index is a volume-weighted average of
qualifying, day-ahead, peak-hour power transactions at the Mid-Columbia
hub that are traded on the ICE platform from 6 a.m. to 11 a.m. CST on
the publication date. The ICE transactions on which the price index is
based specify the physical delivery of power. The size of the MPD
contract is 400 megawatt hours (``MWh''), and the MPD contract is
listed for 38 consecutive days.
As the Columbia River flows through Washington State, it encounters
two federal and nine privately-owned hydroelectric dams generating a
total of close to 20,000 MW of power in the Northwest.\15\ With another
three dams in British Columbia, Canada, and many more on its various
tributaries, the Columbia River is the largest power-producing river in
North America. A major goal of the participants in the Mid-C
electricity market is to maximize the Columbia River's potential, along
with protecting and enhancing the non-power uses of the river. The
reliability of the electricity grid in the Northwest is coordinated by
the Northwest PowerPool (``NWPP''), which is a voluntary organization
comprised of major generating utilities serving the Northwestern United
States, as well as British Columbia and Alberta, Canada.
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\15\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
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One stretch of the Columbia River between the Grand Coulee Dam and
Priests Rapids Dam is governed by the Mid-Columbia Hourly Coordination
Agreement (``MCHCA''). The MCHCA covers seven dams \16\ and nearly
13,000 MW of generation. Specifically, the agreement defines how the
Chelan, Douglas and Grant PUDs coordinate operations with the
Bonneville Power Administration to maximize power generation while
reducing fluctuations in the river's flow. A number of other utilities
that buy power from the PUDs have also signed onto the agreement. This
agreement was signed into effect in 1972 and renewed for 20 years in
1997.\17\
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\16\ The federal dams are Grand Coulee and Chief Joseph. The
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest
Rapids (operated by the Grant PUD). The term ``PUD'' stands for
publically-owned utility, which provides essential services within a
specified area.
\17\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
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In general, electricity is bought and sold in an auction setting on
an hourly basis at various points along the electrical grid. The price
of electricity at a particular point on the grid is called the
locational marginal price (``LMP''), which includes the costs of
producing the electricity, as well as congestion and line losses. Thus,
an LMP reflects generation costs as well as the actual cost of
supplying and delivering electricity to a specific point on the grid.
Electricity is traded in a day-ahead market as well as a real-time
market. Typically, the bulk of energy transactions occur in the day-
ahead market. The day-ahead market establishes prices for electricity
that is to be delivered during the specified hour on the following day.
Day-ahead prices are determined based on generation and energy
transaction quotes offered in advance. Because day-
[[Page 38481]]
ahead quotes for power are based on estimates of supply and demand,
electricity needs usually are not perfectly satisfied in the day-ahead
market. In this regard, on the day the electricity is transmitted and
used, auction participants typically realize that they bought or sold
too much power or too little power. A real-time auction is operated to
alleviate this problem by servicing as a balancing mechanism.
Specifically, electricity traders use the real-time market to sell
excess electricity and buy additional power to meet demand. Only a
relatively small amount of electricity is traded in the real-time
market compared with the day-ahead market.
1. Material Price Reference Criterion
The Commission's October 6, 2009, Federal Register notice
identified material price reference and material liquidity as the
potential basis for a SPDC determination with respect to the MPD
contract. The Commission considered the fact that 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 ``West Power
of Day'' 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. This package includes price data for the MPD contract.
The Commission also noted that its October 2007 Report on the
Oversight of Trading on Regulated Futures Exchanges and Exempt
Commercial Markets (``ECM Study'') found that in general, market
participants view ICE as a price discovery market for certain
electricity contracts. The study did not specify which markets
performed this function; nevertheless, the Commission determined that
the MPD contract, while not mentioned by name in the ECM Study, might
warrant further review.
The Commission explains in its Guidance to the Part 36 rules that
in evaluating a contract under the material price reference criterion,
it 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.\18\ 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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\18\ 17 CFR 36, Appendix A.
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The Mid-C power market is a major pricing center for electricity on
the West Coast. Traders, including producers, keep abreast of the
electricity prices in the Mid-C power market when conducting cash
deals. However, ICE's Mid-C Financial Peak (``MDC'') contract, which is
a monthly contract, is used more widely as a source of pricing
information for electricity than the daily, peak-hour contract (i.e.,
the MPD contract). Specifically, the MDC contract prices power at the
Mid-C trading point based on the simple average of the daily peak-hour
prices over the entire month, as reported by ICE. Moreover, the MDC
contract is listed for up to 86 calendar months. Thus, market
participants can use the MDC contract to lock-in electricity prices far
into the future. In contrast, the MPD contract is listed for a much
shorter length of time--up to 38 days in the future. With such a
limited timeframe, the forward pricing capability of the MPD contract
is much more constrained than that of the MDC contract. Traders use
monthly power contracts like the MDC contract to price electricity
commitments in the future, where such commitments are based on long
range forecasts of power supply and demand. As actual generation and
usage nears, market participants have a better understanding of actual
power supply and needs. As a result, traders can modify previously-
established hedges with the daily power contracts, like the MPD
contract.
The Commission explained in its Guidance that a contract meeting
the material price reference criterion would routinely be consulted by
industry participants in pricing cash market transactions. Although the
Mid-C is a major trading center for electricity and, as noted, ICE
sells price information for the MPD contract, the MPD contract is not
consulted in this manner and does not satisfy the material price
reference criterion. Thus, the MPD contract does not satisfy the direct
price reference test for existence of material price reference.
Furthermore, the Commission notes that publication of the MPD
contract's prices is not indirect evidence of material price reference.
The MPD contract's prices are published with those of numerous other
contracts, including ICE's monthly electricity contracts, which are of
more interest to market participants. In these circumstances, the
Commission has concluded that traders likely do not specifically
purchase ICE data packages for the MPD contract's prices and do not
consult such prices on a frequent and recurring basis in pricing cash
market transactions.
i. Federal Register Comments:
WGCEF, WPTF, EEI and ICE stated that no other contract directly
references or settles to the MPD contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the MPD contract is settled (in this case, the peak Mid-C electricity
price on a particular day, which is derived from cash market
transactions) is the authentic reference price and not the ICE contract
itself. Commission staff believes that this interpretation of price
reference is too narrow and believes that a cash-settled derivatives
contract could meet the price reference criterion 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, while the Mid-C is a major power market, traders do not
consider the daily peak-hour Mid-C price to be as important as the
electricity price associated with the monthly contract.
In addition, WGCEF stated that the publication of price data for
the MPD contract price is weak justification for material price
reference. This commenter argued that market participants generally do
not purchase ICE data sets for one contract's prices, such as those for
the MPD contract. Instead, traders are interested in the settlement
prices, so the fact that ICE sells the MPD prices as part of a broad
package is not conclusive evidence that market participants are buying
the ICE
[[Page 38482]]
data sets because they find the MPD prices have substantial value to
them. As noted above, the Commission notes that publication of the MPD
contract's prices is not indirect evidence of routine dissemination.
The MPD contract's prices are published with those of numerous other
contracts, which are of more interest to market participants. Due to
the lack of importance of daily power contracts relative to monthly
contracts, the Commission has concluded that traders likely do not
specifically purchase the ICE data packages for the MPD contract's
prices and do not consult such prices on a frequent and recurring basis
in pricing cash market transactions.
Lastly, EEI criticized that the ECM Study did not specifically
identify the MPD contract as a contract that is referred to by market
participants on a frequent and recurring basis. In response, the
Commission notes that it cited the ECM Study's general finding that
some ICE electricity contracts appear to be regarded as price discovery
markets merely as indication 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.
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the ICE MPD 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 MPD contract's
price (direct evidence). Moreover, while the MPD contract's price data
is sold to market participants, those individuals likely do not
purchase the ICE data packages specifically for the MPD 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 6, 2009, Federal Register notice,
the Commission identified material price reference and material
liquidity as potential criteria for SPDC determination of the MPD
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 total number of transactions executed on ICE's electronic
platform in the MPD contract was 1,294 in the second quarter of 2009,
resulting in a daily average of 20.2 trades. During the same period,
the MPD contract had a total trading volume of 18,862 contracts and an
average daily trading volume of 294.7 contracts. Moreover, open
interest as of June 30, 2009, was 826 contracts, which included 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. In this regard, ICE does not differentiate between
open interest created by a transaction executed on its trading platform
and that created by a transaction executed off its trading
platform.\19\
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\19\ 74 FR 51261 (October 6, 2009).
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In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 19,574 contracts
(or 301 contracts on a daily basis). In terms of number of
transactions, 1,108 trades occurred in the fourth quarter of 2009 (17
trades per day). As of December 31, 2009, open interest in the MPD
contract was 550 contracts, which included 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.
The number of trades per day remained relatively low between the
second and fourth quarters of 2009 and averaged only slightly more than
the reporting level of five trades per day. Moreover, trading activity
in the MPD contract, as characterized by total quarterly volume,
indicates that the MPD contract experiences trading activity that is
similar to that of minor futures markets.\20\ Thus, the MPD contract
does not meet a threshold of trading activity that would render it of
potential importance and no additional statistical analysis is
warranted.\21\
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\20\ 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.
\21\ 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].'' [17 CFR 36, Appendix A]. For the
reasons discussed above, the Commission has found that the MPD
contract does not meet the 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 the Commission believes it is not useful as the sole basis for
a SPDC determination.
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i. Federal Register Comments
ICE and WGCEF stated that the MPD contract lacks a sufficient
number of trades to meet the material liquidity criterion. These two
commenters, along with WPTF, FEIG and EEI argued that the MPD contract
cannot have a material effect on other contracts, such as those listed
for trading by the New York Mercantile Exchange (``NYMEX''), a DCM. The
commenters pointed out that it is not possible for the MPD contract to
affect a DCM contract because price linkage and the potential for
arbitrage do not exist. The DCM contracts do not cash settle to the MPD
contract's price. Instead, the DCM contracts and the MPD contract are
both cash settled based on physical transactions, which neither the ECM
or the DCM contracts can influence.
WGCEF and ICE noted that the Commission's Guidance had posited
concepts of liquidity that generally assumed a fairly constant stream
of prices throughout the trading day and noted that the relatively low
number of trades per day in the MPD contract did not meet this standard
of liquidity. 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.'' \22\
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\22\ Guidance, supra.
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ICE opined that the Commission ``seems to have adopted a five trade
per day test for material liquidity.'' To the contrary, 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'' \23\ 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, the contract will not be found to be a
[[Page 38483]]
SPDC merely because it met the reporting threshold.
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\23\ 73 FR 75892 (December 12, 2008).
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ICE proposed 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 months'' as well as in strips of
contract months. ICE suggested that a more appropriate method of
determining liquidity is to examine the activity in a single traded
month of a given contract.'' \24\ It is the Commission's opinion that
liquidity, as it pertains to the MPD contract, is typically a function
of trading activity in particular lead days and, given sufficient
liquidity in such days, the ICE MPD contract itself would be considered
liquid. In any event, in light of the fact that the Commission has
found that the MPD contract does not meet the material price reference
criterion, according to the Commission's Guidance, it would be
unnecessary to evaluate whether the MPD contract meets the material
liquidity criterion since it cannot be used alone for SPDC
determination.
---------------------------------------------------------------------------
\24\ In addition, ICE stated that the trades-per-day statistics
that it provided to the Commission in its quarterly filing and which
were cited in the Commission's October 6, 2009, Federal Register
notice includes 2(h)(1) transactions, which were not completed on
the electronic trading platform and should not be considered in the
SPDC determination process. The Commission staff asked ICE to review
the data it sent in its quarterly filings; ICE confirmed that the
volume data it provided and which the Commission cited includes only
transaction data executed on ICE's electronic trading platform. As
noted above, supplemental data supplied by ICE confirmed that block
trades are in addition to the trades that were conducted on the
electronic platform; block trades comprise about 28 percent (fourth
quarter of 2009) of all transactions in the MPD contract. Commission
acknowledges that the open interest information it provided in its
October 6, 2009, Federal Register notice includes transactions made
off the ICE platform. 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.
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ii. Conclusion Regarding Material Liquidity
For the reasons discussed above, the Commission finds that the MPD
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the MPD Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE MPD
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 MPD 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 MPD contract is not a SPDC.
Issuance of this Order indicates that the Commission does not at
this time regard ICE as a registered entity in connection with its MPD
contract.\25\ Accordingly, with respect to its MPD contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
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\25\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
b. The Mid-C Financial Off-Peak Daily (MXO) Contract and the SPDC
Indicia
The MXO contract is cash settled based on the off-peak, day-ahead
price index for the specified day, as published by ICE in its ``ICE Day
Ahead Power Price Report,'' which is available on the ECM's website.
The daily, off-peak hour electricity price index is a volume-weighted
average of qualifying, day-ahead, off-peak hour power transactions at
the Mid-Columbia hub that are traded on the ICE platform from 6 a.m. to
11a.m. CST on the publication date. The ICE transactions on which the
price index is based specify the physical delivery of power. The size
of the MXO contract is 25 MWh, and the MXO contract is listed for 70
consecutive days.
As the Columbia River flows through Washington State, it encounters
two federal and nine privately-owned hydroelectric dams generating
close to 20,000 MW of power for the Northwest.\26\ With another three
dams in British Columbia, Canada, and many more on its various
tributaries, the Columbia River is the largest power-producing river in
North America. A major goal of the participants in the Mid-C
electricity market is to maximize the Columbia River's potential, along
with protecting and enhancing the non-power uses of the river. The
reliability of the electricity grid in the Northwest is coordinated by
the NWPP.
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\26\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------
One stretch of the Columbia River between the Grand Coulee Dam and
Priests Rapids Dam is governed by the MCHCA. The MCHCA covers seven
dams \27\ and nearly 13,000 MW of generation. Specifically, the
agreement defines how the Chelan, Douglas and Grant PUDs coordinate
operations with the Bonneville Power Administration to maximize power
generation while reducing fluctuations in the river's flow. A number of
other utilities that buy power from the PUDs have also signed onto the
agreement. This agreement was signed into effect on 1972 and renewed
for 20 years in 1997.\28\
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\27\ The federal dams are Grand Coulee and Chief Joseph. The
remaining dams are Wells (operated by the Douglas PUD), Rocky Reach
and Rock Island (operated by the Chelan PUD), and Wanapum and Priest
Rapids (operated the Grant PUD).
\28\ http://www.wpuda.org/publications/connections/hydro/River%20Riders.pdf.
---------------------------------------------------------------------------
In general, electricity is bought and sold in an auction setting on
an hourly basis at various point along the electrical grid. The price
of electricity at a particular point on the grid is called the LMP,
which includes the cost of producing the electricity, as well as
congestion and line losses. Thus, and LMP reflects generation costs as
well as the actual cost of supplying and delivering electricity to a
specific point on the grid.
Electricity is traded in a day-ahead market as well as a real-time
market. Typically, the bulk of the energy transactions occur in the
day-ahead market. The day-ahead market establishes prices for
electricity that is to be delivered during the specified hour on the
following day. Day-ahead prices are determined based on generation and
energy transaction quotes offered in advance. Because day-ahead price
quotes are based on estimates of supply and demand, electricity needs
usually are not perfectly satisfied in the day-ahead market. On the day
electricity is generated and used, auction participants usually realize
that they bought or sold either too much or too little power. A real-
time auction is operated in the Mid-C market to alleviate this problem.
In this regard, electricity traders use the real-time market to sell
excess electricity and buy additional power to meet demand. Only a
relatively small amount of electricity is traded in the real-time
market compared with the day-ahead market.
1. Material Price Reference Criterion
The Commission's October 6, 2009, Federal Register notice
identified material price reference and material liquidity as the
potential basis for a SPDC determination with respect to the MXO
contract. The Commission considered the fact that 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
[[Page 38484]]
only or historical. For example, ICE offers the ``West Power of Day''
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. This package includes price data for the MXO contract.
The Commission also noted that its October 2007 ECM Study found
that, in general, market participants view ICE as a price discovery
market for certain electricity contracts. The study did not specify
which markets performed this function; nevertheless, the Commission
determined that the MXO contract, while not mentioned by name in the
ECM Study, might warrant further analysis.
The Commission has explained in Guidance that it will rely on one
of two sources of evidence--direct or indirect--to determine that the
price of a contract is being used as a material price reference and
therefore, serving a significant price discovery function.\29\ 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.
---------------------------------------------------------------------------
\29\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------
The Mid-C power market is a major pricing center for electricity on
the West Coast. Traders, including producers, keep abreast of the
electricity prices in the Mid-C power market when conducting cash
deals. However, ICE's Mid-C Financial Off-Peak (``OMC'') contract,
which is a monthly contract, is used more widely as a source of pricing
information for electricity in that market than the daily off-peak hour
contract (i.e., the MXO contract). In this regard, OMC contract prices
power at the Mid-C trading point based on the simple average of the
daily off-peak hour prices over the entire month, as reported by ICE.
Moreover, the OMC contract is listed for up to 86 calendar months.
Market participants can use the OMC contract to lock-in off-peak
electricity prices far into the future. In contrast, the MXO contract
is listed for a much shorter length of time--up to 70 days in the
future. With such a limited timeframe, the forward pricing capability
of the MXO contract is constrained relative to that of the OMC
contract. Traders likely use monthly power contracts like the OMC
contract to price electricity commitments in the future. Such
commitments are based on long range forecasts of power supply and
demand. As the time of generation and consumption nears, market
participants have a better understanding of actual power supply and
needs. As a result, traders can modify previously-established hedges
with the daily power contracts, like the MXO contract.
The Commission explained in its Guidance that a contract meeting
the material price reference criterion would routinely be consulted by
industry participants in pricing cash market transactions. Although the
Mid-C is a major trading center for electricity and, as noted, ICE
sells price information for the MXO contract, the Commission found upon
further evaluation that the MXO contract is not routinely consulted by
industry participants in pricing cash market transactions. Furthermore,
the Commission notes that publication of the MXO contract's prices is
not indirect evidence of material price reference. The MXO contract's
prices are published with those of numerous other contracts, including
ICE's OMC 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 MXO contract's prices
and do not consult such prices on a frequent and recurring basis in
pricing cash market transactions.
i. Federal Register Comments
WGCEF, WPTF, EEI and ICE stated that no other contract directly
references or settles to the MXO contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the MXO contract is settled (in this case, the off-peak Mid-C
electricity price on a particular day, which is derived from cash
market transactions) is the authentic reference price and not the ICE
contract itself. Commission staff believes that this interpretation of
price reference is too limiting and believes that a cash-settled
derivatives contract could meet the price reference criterion 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, while the Mid-C is a major power market, traders do not
consider the daily off-peak hour Mid-C price to be as important as the
electricity price associated with the average monthly off-peak price.
In addition, WGCEF stated that the publication of price data for
the MXO contract price reference is weak justification for material
price reference. This commenter argued that market participants
generally do not purchase ICE data sets for one contract's prices, such
as those for the MXO contract. Instead, traders are interested in the
settlement prices, so the fact that ICE sells the MXO prices as part of
a broad package is not conclusive evidence that market participants are
buying the ICE data sets because they find the MXO prices have
substantial value to them. As mentioned above, the Commission notes
that publication of the MXO contract's prices is not indirect evidence
of routine dissemination. The MXO contract's prices are published with
those of numerous other contracts, which are of more interest to market
participants. Due to the lack of importance of daily power contracts
relative to monthly power contracts, the Commission has concluded that
traders likely do not specifically purchase the ICE data packages for
the MXO contract's prices and do not consult such prices on a frequent
and recurring basis in pricing cash market transactions.
Lastly, EEI observed that the ECM Study did not specifically
identify the MXO contract as a contract that is referred to by market
participants on a frequent and recurring basis. In response, the
Commission notes that it cited the ECM Study's general finding that
some ICE electricity contracts appear to be regarded as price discovery
markets merely as indication 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.
[[Page 38485]]
ii. Conclusion Regarding Material Price Reference:
Based on the above, the Commission finds that the ICE MXO 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 MXO contract's
price (direct evidence). Moreover, while the MXO contract's price data
is sold to market participants, those individuals likely do not
specifically purchase the ICE data packages for the MXO 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 6, 2009, Federal Register notice,
the Commission identified material price reference and material
liquidity as potential criteria for SPDC determination of the MXO
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 total number of transactions executed on ICE's electronic
platform in the MXO contract was 437 in the second quarter of 2009,
resulting in a daily average of 6.8 trades. During the same period, the
MXO contract had a total trading volume of 61,688 contracts and an
average daily trading volume of 963.9 contracts. Moreover, open
interest as of June 30, 2009, was 826 contracts, which included 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. In this regard, ICE does not differentiate between
open interest created by a transaction executed on its trading platform
and that created by a transaction executed off its trading
platform.\30\
---------------------------------------------------------------------------
\30\ 74 FR 51261 (October 6, 2009).
---------------------------------------------------------------------------
In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 19,216 contracts
(or 296 contracts on a daily basis). In terms of number of
transactions, 123 trades occurred in the fourth quarter of 2009 (1.9
trades per day). As of December 31, 2009, open interest in the MXO
contract was 2,528 contracts, which included 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.
The number of trades per day fell below minimum reporting level of
five trades per day in the fourth quarters of 2009. Moreover, trading
activity in the MXO contract, as characterized by total quarterly
volume, indicates that the MXO contract experiences trading activity
that is similar to that of minor futures markets.\31\ Thus, the MXO
contract does not meet a threshold of trading activity that would
render it of potential importance and no additional statistical
analysis is warranted.\32\
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\31\ 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.
\32\ 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 observed 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 MXO contract does not meet the
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 the Commission
believes it is not useful as the sole basis for a SPDC
determination.
---------------------------------------------------------------------------
i. Federal Register Comments
ICE and WGCEF stated that the MXO contract lacks a sufficient
number of trades to meet the material liquidity criterion. These two
commenters, along with WPTF, FEIG and EEI argued that the MXO contract
cannot have a material effect on other contracts, such as those listed
for trading by NYMEX. The commenters pointed out that it is not
possible for the MXO contract to affect a DCM contract because price
linkage and the potential for arbitrage do not exist. The DCM contracts
do not cash settle to the MXO contract's price. Moreover, the DCM
contracts and the MXO contract are both cash settled based on physical
transactions, which the contracts cannot influence.
WGCEF and ICE noted that the Commission's Guidance had posited
concepts of liquidity that generally assumed a fairly constant stream
of prices throughout the trading day and noted that the relatively low
number of trades per day in the MXO contract did not meet this standard
of liquidity. 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.'' \33\
---------------------------------------------------------------------------
\33\ Guidance, supra.
---------------------------------------------------------------------------
ICE opined that the Commission ``seems to have adopted a five trade
per day test for material liquidity.'' To the contrary, 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''\34\ 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, the contract will not be found to be a SPDC merely
because it met the reporting threshold.
---------------------------------------------------------------------------
\34\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------
ICE proposed 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 months'' as well as in strips of
contract months. ICE suggested that a more appropriate method of
determining liquidity is to examine the activity in a single traded
month of a given contract.\35\ It is the Commission's opinion that
liquidity, as it pertains to the MXO contract, is typically a function
of trading activity in particular lead days and, given sufficient
liquidity
[[Page 38486]]
in such days, the ICE MXO contract itself would be considered liquid.
In any event, in light of the fact that the Commission has found that
the MXO contract does not meet the material price reference criterion,
according to the Commission's Guidance, it would be unnecessary to
evaluate whether the MXO contract meets the material liquidity
criterion since it cannot be used alone for SPDC determination.
---------------------------------------------------------------------------
\35\ In addition, ICE stated that the trades-per-day statistics
that it provided to the Commission in its quarterly filing and which
were cited in the Commission's October 6, 2009, Federal Register
notice includes 2(h)(1) transactions, which were not completed on
the electronic trading platform and should not be considered in the
SPDC determination process. The Commission staff asked ICE to review
the data it sent in its quarterly filings; ICE confirmed that the
volume data it provided and which the Commission cited includes only
transaction data executed on ICE's electronic trading platform. As
noted above, supplemental data supplied by ICE confirmed that block
trades are in addition to the trades that were conducted on the
electronic platform; block trades comprise about 61 percent of all
transactions in the MXO contract (fourth quarter of 2009).
Commission acknowledges that the open interest information it
provided in its October 6, 2009, Federal Register notice includes
transactions made off the ICE platform. 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.
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ii. Conclusion Regarding Material Liquidity
For the reasons discussed above, the Commission finds that the MXO
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the MXO Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE MXO
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 MXO 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 MXO contract is not a SPDC.
Issuance of this Order indicates that the Commission does not at
this time regard ICE as a registered entity in connection with its MXO
contract.\36\ Accordingly, with respect to its MXO contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
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\36\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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V. Related Matters
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \37\ 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.
---------------------------------------------------------------------------
\37\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
b. Cost-Benefit Analysis
Section 15(a) of the CEA\38\ 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.
---------------------------------------------------------------------------
\38\ 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.
The Commission has concluded that the MPD and MXO contracts, which
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'') \39\ 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.\40\ 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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\39\ 5 U.S.C. 601 et seq.
\40\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Orders
a. Order Relating to the Mid-C Financial Peak Daily 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 Mid-C Financial Peak Daily
contract, traded on the IntercontinentalExchange, Inc., does not at
this time satisfy the material price preference or material liquidity
criteria for significant price discovery contracts. Consistent with
this determination, the IntercontinentalExchange, Inc., is not
considered a registered entity \41\ with respect to the Mid-C Financial
Peak Daily 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
IntercontinentalExchange, Inc., are not applicable to the Mid-C
Financial Peak Daily contract with the issuance of this Order.
---------------------------------------------------------------------------
\41\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------
This Order is based on the representations made to the
[[Page 38487]]
Commission by the IntercontinentalExchange, Inc., dated July 27, 2009,
and March 24, 2010, 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 Mid-C Financial Peak Daily 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 IntercontinentalExchange, 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 Mid-C Financial Off-Peak Daily 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 Mid-C Financial Off-Peak Daily
contract, traded on the IntercontinentalExchange, 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 IntercontinentalExchange, Inc., is not
considered a registered entity \42\ with respect to the Mid-C Financial
Off-Peak Daily 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
IntercontinentalExchange, Inc., are not applicable to the Mid-C
Financial Off-Peak Daily contract with the issuance of this Order.
---------------------------------------------------------------------------
\42\ 7 U.S.C. 1a(29).
---------------------------------------------------------------------------
This Order is based on the representations made to the Commission
by the IntercontinentalExchange, Inc., July 27, 2009, and March 24,
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 Mid-C Financial Off-Peak Daily 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
IntercontinentalExchange, 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 June 25, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-16206 Filed 7-1-10; 8:45 am]
BILLING CODE 6351-01-P