[Federal Register Volume 75, Number 139 (Wednesday, July 21, 2010)]
[Notices]
[Pages 42380-42390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17747]
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COMMODITY FUTURES TRADING COMMISSION
Orders Finding That the SP-15 Financial Day-Ahead LMP Peak
Contract and SP-15 Financial Day-Ahead LMP Off-Peak Contract Offered
for Trading on the IntercontinentalExchange, Inc., 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
[[Page 42381]]
undertake a determination whether the SP-15 \2\ Financial Day-Ahead LMP
Peak (``SPM'') contract and SP-15 Financial Day-Ahead LMP Off-Peak
(``OFP'') 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
SPM and OFP contracts 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 51264 (October 6, 2009).
\2\ The acronym ``SP'' stands for ``South Path.''
\3\ The Federal Register notice also requested comment on the
SP-15 Financial Day-Ahead LMP Peak Daily (``SDP'') contract; SP-15
Financial Day-Ahead LMP Off-Peak Daily (``SQP'') contract; SP-15
Financial Swap Real Time LMP-Peak Daily (``SRP'') contract; NP-15
Financial Day-Ahead LMP Peak Daily (``DPN'') contract and NP-15
Financial Day-Ahead LMP Off-Peak Daily (``UNP'') contract; these
contracts will be addressed in a separate Federal Register release.
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DATES: Effective Date: July 9, 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: [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 No. 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
SPM and OFP 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''),
Electric Power Supply Association (``EPSA''), Financial Institutions
Energy Group (``FIEG''), Working Group of Commercial Energy Firms
(``WGCEF''), ICE, California Public Utilities Commission (``CPUC''),
Edison Electric Institute (``EEI''), Western Power Trading Forum
(``WPTF'') and Public Utility Commission of Texas (``PUCT'').\11\ The
comment letters from
[[Page 42382]]
FERC \12\ and PUCT did not directly address the issue of whether or not
the subject contracts are SPDCs. CPUC stated that the subject contracts
are SPDCs but did not provide reasons for how the contracts meet the
criteria for SPDC determination. The remaining comment letters raised
substantive issues with respect to the applicability of section 2(h)(7)
to the subject contracts and generally expressed the opinion that the
contracts are not SPDCs because they do 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 SP-15 Financial Day-Ahead LMP Peak Daily (``SDP'')
contract; SP-15 Financial Day-Ahead LMP Off-Peak Daily (``SQP'')
contract; SP-15 Financial Swap Real Time LMP-Peak Daily (``SRP'')
contract; NP-15 Financial Day-Ahead LMP Peak Daily (``DPN'')
contract and NP-15 Financial Day-Ahead LMP Off-Peak Daily (``UNP'')
contract. These 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. EPSA describes itself as the ``national
trade association representing competitive power suppliers,
including generators and marketers.'' 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.'' ICE is an ECM, as noted above. CPUC is a
``constitutionally established agency charged with the
responsibility for regulating electric corporations within the State
of California.'' EEI is the ``association of shareholder-owned
electric companies, international affiliates and industry associates
worldwide.'' 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/2009/09-012.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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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 SPM
and OFP 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 SPM
and OFP contracts are discussed separately below.
a. The SP-15 Financial Day-Ahead LMP Peak (SPM) Contract and the SPDC
Indicia
The SPM contract is cash settled based on the arithmetic average of
peak-hour, day-ahead locational marginal prices (``LMPs'') \15\ posted
by the California ISO \16\ (``CAISO'') for the SP-15 Existing Zone
Generation (``EZ Gen'') hub for all peak hours during the contract
month. The LMPs are derived from power trades that result in physical
delivery. The size of the SPM contract is 400 megawatt hours (``MWh''),
and the SPM contract is listed for up to 110 calendar months.
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\15\ An LMP represents the additional cost associated with
producing an incremental amount of electricity. LMPs account for
generation costs, congestion along the transmission lines, and
electricity loss.
\16\ The acronym ``ISO'' signifies ``Independent System
Operator,'' which is an entity that coordinates electricity
generation and transmission, as well as grid reliability, throughout
its service area.
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In general, electricity is bought and sold in an auction setting on
an hourly basis at various point along the electrical grid. An LMP
associated with a specific hour is derived as a volume-weighted average
price of all of the transactions where electricity is to be supplied
and consumed during that hour.
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
[[Page 42383]]
quotes offered in advance. Because the power quotes are dependent 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 either too much power or too little
power. A real-time auction is operated to alleviate this problem by
serving 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 as compared to the day-ahead market.
Path 15 is an 84-mile portion of the north-south power transmission
corridor in California, forming part of the Pacific AC Intertie and the
California-Oregon Transmission Project.\17\ Path 15, along with the
Pacific DC Intertie running far to the east, completes an important
transmission interconnection between the hydroelectric plants to the
north and the fossil fuel plants to the south. Path 15 currently
consists of three lines at 500 kilovolts (``kV'') and four lines at 230
kV.\18\ The 500 kV lines connect Los Banos to Gates (two lines) and Los
Banos to Midway (one line); all four 230 kV lines have Gates at one end
with the other ends terminating at the Panoche 1, Panoche
2, Gregg, or McCall substations. ``NP-15'' refers to the
northern half of Path 15; conversely, ``SP-15'' refers to the lower
half of Path 15.
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\17\ The Pacific Intertie comprises three alternating current
(``AC'') lines and one direct current (``DC'') line. Together, these
lines comprise the largest single electricity transmission program
in the United States. The northern end of the DC line is at the
Bonneville Power Administration's Celilo Converter Station, which is
just south of The Dalles Dam about 90 miles east of Portland. The
southern end is 846 miles away at the Sylmar Converter Station on
the northern outskirts of Los Angeles. That station is operated by
utilities including the Los Angeles Department of Water and Power
(``LADWP'') and Southern California Edison. The AC lines follow
generally the same path but terminate in Northern California. Only a
few parties actually own the Intertie, but numerous entities have
contracts to share its transmission capacity. The California-
California border is a dividing line for Intertie ownership and
capacity sharing. Depending on seasonal conditions, the Intertie is
capable of transmitting up to 7,900 MW--4,800 MW of AC power (1,600
MW of this amount is in the California-Oregon Transmission Project,
also known as the ``Third AC Line'') and 3,100 MW of DC power. Over
the past five years, the limit has ranged between about 6,300 MW and
7,900 MW. Most of the power transmitted on the Intertie is surplus
to regional needs, but some firm power also is transmitted. See
http://www.nwcouncil.org/LIBRARY/2001/2001-11.pdf.
\18\ The third 500 kV line was installed between 2003 and 2004
in order to relieve constraints on the existing north-south
transmission lines. This capacity constraint contributed to the
California energy crisis in 2000 and 2001. See http://www.wapa.gov/sn/ops/transmission/path15/factSheet.pdf.
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When the weather is hot in California and the Desert Southwest, it
is comparatively cool in the Pacific Northwest. Conversely, when the
weather is cold in the Pacific Northwest it is comparatively warm in
California and the Desert Southwest. Consumers on the West Coast take
advantage of seasonal weather differences to share large amounts of
power between the Desert Southwest and the Pacific Northwest. In the
spring and summer, when generators (mostly hydroelectric plants)
generally have surplus power in the Northwest and temperatures climb in
the Southwest, power is shipped south to help meet increasing power
demand, particularly for air conditioning. Conversely in the winter,
when generators in the Southwest generally have surplus power and
temperatures drop in the Northwest, power is shipped north to meet
increasing electricity demand, particularly for heating.
CAISO is charged with operating the high-voltage grid in
California. Because CAISO's service area is basically the entire state
of California, it is responsible for serving millions of businesses and
households, particularly in the Los Angeles and San Francisco areas.
CAISO's current mission is to ensure the efficient and reliable
operation of the power grid, provide fair and open transmission access,
promote environmental stewardship, facilitate effective markets,
promote infrastructure development and support the timely and accurate
dissemination of information. CAISO is responsible for operating the
hourly auctions in which the power is traded, and CAISO publishes LMP
data on its Web site.
1. Material Price Reference Criterion
The Commission's October 6, 2009, Federal Register notice
identified the SPM contract as a potential SPDC based on the material
price reference and material liquidity statutory criteria. 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 SPM 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 SPM contract, while not mentioned by name in the ECM Study,
warranted further review.
The Commission explains in its Guidance to the statutory criteria
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.\19\ 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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\19\ 17 CFR 36, Appendix A.
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The SP-15 power market is a major pricing center for electricity on
the West Coast. Traders, including producers, keep abreast of the
electricity prices in the SP-15 power market when conducting cash
deals. These traders look to a competitively determined price as an
indication of expected values of power at the SP-15 hub when entering
into cash market transactions for electricity, especially those trades
providing for physical delivery in the
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future. Traders use the ICE SPM contract, as well as other ICE power
contracts, to hedge cash market positions and transactions--activities
which enhance the SPM contract's price discovery utility. The
substantial volume of trading and open interest in the SPM contract
appears to attest to its use for this purpose. While the SPM contract's
settlement prices may not be the only factor influencing spot and
forward transactions, electricity traders consider the ICE price to be
a critical factor in conducting OTC transactions.\20\ As a result, the
SPM contract satisfies the direct price reference test.
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\20\ In addition to referencing ICE prices, firms participating
in the SP-15 power 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 in entering into power
transactions.
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The fact that ICE's SPM monthly contract is used more widely as a
source of pricing information rather than the daily contract (i.e., the
SDP contract) \21\ bolsters the argument that it serves as a direct
price reference. In this regard, the SPM contract prices power at the
SP-15 hub up to almost five years into the future. Thus, market
participants can use the SPM contract to lock-in electricity prices far
into the future. Traders use monthly power contracts like the SPM
contract to price future electric power commitments, where such
commitments are based on long range forecasts of power supply and
demand. In contrast, the SDP contract is listed for a much shorter
length of time--up to 75 days in the future. As generation and usage
nears, market participants have a better understanding of actual power
supply and needs. As a result, they can modify previously-established
hedges with daily contracts, like the SDP contract.
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\21\ The SDP contract is cash settled based on the arithmetic
average of peak-hour, day-ahead LMPs posted by CAISO for the SP-15
EZ Gen hub for all peak hours on the day prior to generation. The
LMPs are derived from power trades that result in physical delivery.
The size of the SDP contract is 400 MWh, and the SDP contract is
listed for 75 consecutive calendar days.
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The Commission notes that SP-15 is a major trading point for
electricity, and the SPM contract's prices are well regarded in the
industry as indicative of the value of power at the SP-15 hub.
Accordingly, the Commission believes that it is reasonable to conclude
that market participants purchase the data packages that include the
SPM contract's prices in substantial part because the SPM contract's
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 these circumstances, the SPM
contract meets the indirect price reference test.
i. Federal Register Comments:
WGCEF, EPSA, WPTF, FIEG, EEI and ICE stated that no other contract
directly references or settles to the SPM contract's price. Moreover,
the commenters argued that the underlying cash price series against
which the SPM contract is settled (in this case, the average day-ahead
peak-hour SP-15 electricity prices over the contract month, which is
derived from cash market transactions) is the authentic reference price
and not the ICE contract itself. The Commission 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, the SP-15 hub is a major trading center for
electricity in the western United States. Traders, including producers,
keep abreast of the prices of the SPM contract when conducting cash
deals. These traders look to a competitively determined price as an
indication of expected values of electricity at the SP-15 hub when
entering into cash market transaction for power, especially those
trades that provide for physical delivery in the future. Traders use
the ICE SPM contract to hedge cash market positions and transactions,
which enhances the SPM contract's price discovery utility. While the
SPM 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.
In addition, WGCEF and EPSA stated that the publication of price
data for the SPM contract price is weak justification for material
price reference. Market participants generally do not purchase ICE data
sets for one contract's prices, such as those for the SPM contract.
Instead, traders are interested in the settlement prices, so the fact
that ICE sells the SPM prices as part of a broad package is not
conclusive evidence that market participants are buying the ICE data
sets because they find the SPM prices have substantial value to them.
As noted above, the Commission notes that publication of the SPM
contract's prices is indirect evidence of routine dissemination. The
SPM contract's prices, while sold as a package, are of particular
interest to market participants. Thus, the Commission has concluded
that traders likely specifically purchase the ICE data packages for the
SPM contract's prices and consult such prices on a frequent and
recurring basis in pricing cash market transactions.
Lastly, EEI argued that the ECM Study did not specifically identify
the SPM 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:
The Commission finds that the ICE SPM contract meets the material
price reference criterion because cash market transactions are priced
either explicitly or implicitly on a frequent and recurring basis at a
differential to the SPM contract's price (direct evidence). Moreover,
the SPM contract's price data are sold to market participants, and
those individuals likely purchase the ICE data packages specifically
for the SPM contract's prices and 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 the SPM contract as a potential SPDC based on
the material price reference and material liquidity criteria. 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 SPM contract was 3,235 in the second quarter of 2009,
resulting in a daily average of 50.5 trades. During the same period,
the SPM contract had a
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total trading volume of 143,717 contracts and an average daily trading
volume of 2,245.6 contracts. Moreover, open interest as of June 30,
2009, was 460,583 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.\22\
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\22\ 74 FR 51264 (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 311,819
contracts (or 4,797.2 contracts on a daily basis). In terms of number
of transactions, 6,199 trades occurred in the fourth quarter of 2009
(95.4 trades per day). As of December 31, 2009, open interest in the
SPM contract was 622,503 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 was substantial between the second and
fourth quarters of 2009. In addition, trading activity in the SPM
contract, as characterized by total quarterly volume, indicates that
the SPM contract experiences trading activity that is greater than that
of thinly-traded futures markets.\23\ Thus, it is reasonable to infer
that the SPM contract could have a material effect on other ECM
contracts or on DCM contracts.
---------------------------------------------------------------------------
\23\ 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 SPM contract potentially could have
on another ECM contract staff performed a statistical analysis \24\
using daily settlement prices (between July 1, 2008 and December 31,
2009) for the ICE SPM and OFP contracts. The simulation suggest that,
on average over the sample period, a one percent rise in the SPM
contract's price elicited a 0.7 percent increase in ICE OFP contract's
price.
---------------------------------------------------------------------------
\24\ Specifically, Commission staff econometrically estimated a
cointegrated vector autoregression (CVAR) model using daily
settlement prices. CVAR methods permit a dichotomization of the data
relationships into long run equilibrium components (called the
cointegration space or cointegrating relationships) and a short run
component. A CVAR model was chosen over the more traditional vector
autoregression model in levels because the statistical properties of
the data (lack of stationarity and ergodicity) precluded the more
traditional modeling treatment. Moreover, the statistical properties
of the data necessitated the modeling of the contracts' prices as a
CVAR model containing both first differences (to handle
stationarity) and an error-correction term to capture long run
equilibrium relationships. The prices were treated as a single
reduced-form model in order to test hypothesis that power prices in
the same market affect each other. The prices of ICE's SPM and OFP
contracts are positively related to each other in a cointegrating
relationship and display a high level of statistical strength. On
average, during the sample period, each percentage rise in SPM
contract's price elicited a 0.7 percent rise in OFP contract's
price.
---------------------------------------------------------------------------
i. Federal Register Comments:
ICE and WGCEF stated that the SPM contract lacks a sufficient
number of trades to meet the material liquidity criterion. These two
commenters, along with WPTF, EPSA, FIEG and EEI argued that the SPM
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 SPM 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 SPM contract's price. Instead, the DCM contracts and the
SPM contract are both cash settled based on physical transactions,
which neither the ECM or the DCM contracts can influence. The
Commission's statistical analysis shows that changes in the ICE SPM
contract's price significantly influences the prices of other ECM
contracts (namely, the OFP contract).
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 SPM 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.'' \25\
---------------------------------------------------------------------------
\25\ 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'' \26\ 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.
---------------------------------------------------------------------------
\26\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------
ICE argued 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.'' \27\ It is the Commission's opinion that liquidity,
as it pertains to the SPM contract, is typically a function of trading
activity in particular lead months and, given sufficient liquidity in
such months, the ICE SPM contract itself would be considered liquid.
ICE's analysis of its own trade data confirms this to be the case for
the SPM contract, and thus, the Commission believes that it applied the
statistical data cited above in an appropriate manner for gauging
material liquidity.
---------------------------------------------------------------------------
\27\ 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 66 percent of all
transactions in the SPM contract (as of the 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.
---------------------------------------------------------------------------
ii. Conclusion Regarding Material Liquidity:
For the reasons discussed above, the Commission finds that the SPM
satisfies the material liquidity criterion. Specifically, there is
sufficient trading activity in the SPM 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[hellip]or an electronic trading facility operating in reliance
on the exemption in section 2(h)(3) of the Act.''
[[Page 42386]]
3. Overall Conclusion Regarding the SPM Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE SPM
contract performs a significant price discovery function under two of
the four criteria established in section 2(h)(7) of the CEA.
Specifically, the Commission has determined that the SPM contract meets
the material price reference and material liquidity criteria at this
time. Accordingly, the Commission is issuing the attached Order
declaring that the SPM 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 SPM contract,\28\ and triggers the obligations,
requirements--both procedural and substantive--and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs.
---------------------------------------------------------------------------
\28\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
b. The SP-15 Financial Day-Ahead LMP Off-Peak (OFP) Contract and the
SPDC Indicia
The OFP contract is cash settled based on the arithmetic average of
off-peak hour, day-ahead LMPs posted by CAISO for the SP-15 EZ Gen hub
for all peak hours during the contract month. The LMPs are derived from
power trades that result in physical delivery. The size of the OFP
contract is 25 MWh, and the SPM contract is listed for up to 86
calendar months.
In general, electricity is bought and sold in an auction setting on
an hourly basis at various points along the electrical grid. An LMP
associated with a specific hour is derived as a volume-weighted average
price of all of the transactions where electricity is to be supplied
and consumed during that hour.
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 power quotes are
dependent on estimates of supply and demand, electricity needs usually
are not perfectly satisfied in the day-ahead market. Consequently, on
the day the electricity is transmitted and used, auction participants
typically realize that they bought or sold either too much power or too
little power. A real-time auction is operated to alleviate this problem
by serving 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 as compared to the day-ahead market.
Path 15 is an 84-mile portion of the north-south power transmission
corridor in California, forming part of the Pacific AC Intertie and the
California-Oregon Transmission Project.\29\ Path 15, along with the
Pacific DC Intertie running far to the east, completes an important
transmission interconnection between the hydroelectric plants to the
north and the fossil fuel plants to the south. Path 15 currently
consists of three lines at 500 kilovolts (``kV'') and four lines at 230
kV.\30\ The 500 kV lines connect Los Banos to Gates (two lines) and Los
Banos to Midway (one line); all four 230 kV lines have Gates at one end
with the other ends terminating at the Panoche 1, Panoche
2, Gregg, or McCall substations. ``NP-15'' refers to the
northern half of Path 15; conversely, ``SP-15'' refers to the lower
half of Path 15.
---------------------------------------------------------------------------
\29\ The Pacific Intertie comprises three alternating current AC
lines and one direct current DC line. Together, these lines comprise
the largest single electricity transmission program in the United
States. The northern end of the DC line is at the Bonneville Power
Administration's Celilo Converter Station, which is just south of
The Dalles Dam about 90 miles east of Portland. The southern end is
846 miles away at the Sylmar Converter Station on the northern
outskirts of Los Angeles. That station is operated by utilities
including LADWP and Southern California Edison. The AC lines follow
generally the same path but terminate in Northern California. Only a
few parties actually own the Intertie, but numerous entities have
contracts to share its transmission capacity. The California-Oregon
border is a dividing line for Intertie ownership and capacity
sharing. Depending on seasonal conditions, the Intertie is capable
of transmitting up to 7,900 MW-4,800 MW of AC power (1,600 MW of
this amount is in the California-Oregon Transmission Project, also
known as the Third AC Line) and 3,100 MW of DC power. Over the past
five years, the limit has ranged between about 6,300 MW and 7,900
MW. Most of the power transmitted on the Intertie is surplus to
regional needs, but some firm power also is transmitted. See http://www.nwcouncil.org/LIBRARY/2001/2001-11.pdf.
\30\ The third 500 kV line was installed between 2003 and 2004
in order to relieve constraints on the existing north-south
transmission lines. This capacity constraint contributed to the
California energy crisis in 2000 and 2001. See http://www.wapa.gov/sn/ops/transmission/path15/factSheet.pdf.
---------------------------------------------------------------------------
When the weather is hot in California and the Desert Southwest, it
is comparatively cool in the Pacific Northwest. Conversely, when the
weather is cold in the Pacific Northwest it is comparatively warm in
California and the Desert Southwest. Consumers on the West Coast take
advantage of seasonal weather differences to share large amounts of
power between the Desert Southwest and the Pacific Northwest. In the
spring and summer, when generators (mostly hydroelectric plants)
generally have surplus power in the Northwest and temperatures climb in
the Southwest, power is shipped south to help meet increasing power
demand, particularly for air conditioning. Conversely in the winter,
when generators in the Southwest generally have surplus power and
temperatures drop in the Northwest, power is shipped north to meet
increasing electricity demand, particularly for heating.
CAISO is charged with operating the high-voltage grid in
California. Because CAISO's service area is basically the entire state
of California, it is responsible for serving millions of businesses and
households, particularly in the Los Angeles and San Francisco areas.
CAISO's current mission is to ensure the efficient and reliable
operation of the power grid, provide fair and open transmission access,
promote environmental stewardship, facilitate effective markets,
promote infrastructure development and support the timely and accurate
dissemination of information. CAISO is also responsible for operating
the hourly auctions in which the power is traded and publishing the LMP
data on its Web site.
1. Material Price Reference Criterion
The Commission's October 6, 2009, Federal Register notice
identified the OFP contract as a potential SPDC based on the material
price reference and material liquidity criteria. 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 OFP 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 OFP contract, while not mentioned by name in the
ECM Study, warranted further review.
[[Page 42387]]
The Commission explains in its Guidance to the statutory criteria
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.\31\ 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.
---------------------------------------------------------------------------
\31\ 17 CFR 36, Appendix A.
---------------------------------------------------------------------------
The SP-15 power market is a major pricing center for electricity on
the West Coast. Traders, including producers, keep abreast of the
electricity prices in the SP-15 power market when conducting cash
deals. These traders look to a competitively determined price as an
indication of expected values of power at the SP-15 hub when entering
into cash market transaction for electricity, especially those trades
providing for physical delivery in the future. Traders use the OFP
contract, as well as other ICE power contracts, to hedge cash market
positions and transactions--activities which enhance the OFP contract's
price discovery utility. The substantial volume of trading and open
interest in the OFP contract appear to attest to its use for this
purpose. While the OFP contract's settlement prices may not be the only
factor influencing spot and forward transactions, electricity traders
consider the ICE price to be a critical factor in conducting OTC
transactions.\32\ In these circumastances, the OFP contract satisfies
the direct price reference test.
---------------------------------------------------------------------------
\32\ In addition to referencing ICE prices, firms participating
in the SP-15 power 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 in entering into power
transactions.
---------------------------------------------------------------------------
The fact that ICE's OFP monthly contract is used more widely as a
source of pricing information rather than the daily contract (i.e., the
SQP contract) \33\ is further evidence of direct price reference. In
this regard, OFP contract prices power at the SP-15 hub up to six years
into the future. Thus, market participants can use the OFP contract to
lock-in electricity prices far into the future. Traders use monthly
power contracts like the OFP contract to price future power electricity
commitments, where such commitments are based on long range forecasts
of power supply and demand. In contrast, the SQP contract is listed for
a much shorter length of time--up to 38 days in the future. As
generation and usage nears, market participants have a better
understanding of actual power supply and needs. As a result, they can
modify previously-established hedges with daily contracts, like the SQP
contract.
---------------------------------------------------------------------------
\33\ The SDP contract is cash settled based on the arithmetic
average of peak-hour, day-ahead LMPs posted by CAISO for the SP-15
EZ Gen hub for all peak hours on the day prior to generation. The
LMPs are derived from power trades that result in physical delivery.
The size of the SDP contract is 400 MWh, and the SDP contract is
listed for 75 consecutive calendar days.
---------------------------------------------------------------------------
The Commission notes that SP-15 is a major trading point for
electricity, and the OFP contract's prices are well regarded in the
industry as indicative of the value of power at the SP-15 hub.
Accordingly, the Commission believes that it is reasonable to conclude
that market participants purchase the data packages that include the
OFP contract's prices in substantial part because the SPM contract's
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 OFP
contract satisfies the indirect price reference test.
i. Federal Register Comments:
WGCEF, EPSA, WPTF, FIEG, EEI and ICE stated that no other contract
directly references or settles to the OFP contract's price. Moreover,
the commenters argued that the underlying cash price series against
which the SPM contract is settled (in this case, the average day-ahead
peak-hour SP-15 electricity prices over the contract month, which is
derived from cash market transactions) is the authentic reference price
and not the ICE contract itself. The Commission 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, the SP-15 hub is a major trading center for
electricity in the western United States. Traders, including producers,
keep abreast of the prices of the OFP contract when conducting cash
deals. These traders look to a competitively determined price as an
indication of expected values of electricity at the SP-15 hub when
entering into cash market transactions for power, especially those
trades that provide for physical delivery in the future. Traders use
the ICE OFP contract to hedge cash market positions and transactions,
which enhances the OFP contract's price discovery utility. While the
OFP 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.
In addition, WGCEF and EPSA stated that the publication of price
data for the OFP contract price is weak justification for material
price reference. Market participants generally do not purchase ICE data
sets for one contract's prices, such as those for the OFP contract.
Instead, traders are interested in the settlement prices, so the fact
that ICE sells the OFP prices as part of a broad package is not
conclusive evidence that market participants are buying the ICE data
sets because they find the OFP prices have substantial value to them.
As noted above, the Commission notes that publication of the OFP
contract's prices is indirect evidence of routine dissemination. The
OFP contract's prices, while sold as a package, are of particular
interest to market participants. Thus, the Commission has concluded
that traders likely purchase the ICE data packages specifically for the
OFP contract's prices and consult such prices on a frequent and
recurring basis in pricing cash market transactions.
Lastly, EEI argued that the ECM Study did not specifically identify
the OFP contract as a contract that is referred to by market
participants on a frequent and recurring basis. The Commission notes
[[Page 42388]]
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:
The Commission finds that the ICE OFP contract meets the material
price reference criterion because cash market transactions are priced
either explicitly or implicitly on a frequent and recurring basis at a
differential to the OFP contract's price (direct evidence). Moreover,
the OFP contract's price data are sold to market participants, and
those individuals likely purchase the ICE data packages specifically
for the OFP contract's prices and 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 the OFP contract as a potential SPDC based on
the material price reference and material liquidity criteria. 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 OFP contract was 187 in the second quarter of 2009,
resulting in a daily average of 2.9 trades. During the same period, the
OFP contract had a total trading volume of 116,559 contracts and an
average daily trading volume of 1,793.2 contracts. Moreover, open
interest as of June 30, 2009, was 1,408,870 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.\34\
---------------------------------------------------------------------------
\34\ 74 FR 51264 (October 6, 2009).
---------------------------------------------------------------------------
In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 406,418
contracts (or 6,252.6 contracts on a daily basis). In terms of number
of transactions, 329 trades occurred in the fourth quarter of 2009 (5.1
trades per day). As of December 31, 2009, open interest in the OFP
contract was 2,009,556 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 during the period between the second
and fourth quarters of 2009 was not substantial. However, trading
activity in the OFP contract, as characterized by total quarterly
volume, indicates that the OFP contract experiences trading activity
that is greater than that of thinly-traded futures markets.\35\ Thus,
it is reasonable to infer that the OFP contract could have a material
effect on other ECM contracts or on DCM contracts.
---------------------------------------------------------------------------
\35\ 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 SPM contract potentially could have
on another ECM contract staff performed a statistical analysis \36\
using daily settlement prices (between July 1, 2008 and December 31,
2009) for the ICE SPM and OFP contracts. The simulation suggest that,
on average over the sample period, a one percent rise in the OFP
contract's price elicited a 1.4 percent increase in ICE SPM contract's
price.
---------------------------------------------------------------------------
\36\ Specifically, Commission staff econometrically estimated a
cointegrated vector autoregression (CVAR) model using daily
settlement prices. CVAR methods permit a dichotomization of the data
relationships into long run equilibrium components (called the
cointegration space or cointegrating relationships) and a short run
component. A CVAR model was chosen over the more traditional vector
autoregression model in levels because the statistical properties of
the data (lack of stationarity and ergodicity) precluded the more
traditional modeling treatment. Moreover, the statistical properties
of the data necessitated the modeling of the contracts' prices as a
CVAR model containing both first differences (to handle
stationarity) and an error-correction term to capture long run
equilibrium relationships. The prices were treated as a single
reduced-form model in order to test the hypothesis that power prices
in the same market affect each other. The prices of ICE's SPM and
OFP contracts are positively related to each other in a
cointegrating relationship and display a high level of statistical
strength. On average during the sample period, each percentage rise
in OFP contract's price elicited a 1.4 percent rise in SPM
contract's price.
---------------------------------------------------------------------------
i. Federal Register Comments:
ICE and WGCEF stated that the OFP contract lacks a sufficient
number of trades to meet the material liquidity criterion. These two
commenters, along with WPTF, EPSA, FIEG and EEI argued that the OFP
contract cannot have a material effect on other contracts, such as
those listed for trading by the NYMEX. The commenters pointed out that
it is not possible for the OFP 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 OFP contract's price. Instead,
the DCM contracts and the OFP contract are both cash settled based on
physical transactions, which neither the ECM or the DCM contracts can
influence. The Commission's statistical analysis shows that changes in
the ICE OFP contract's price significantly influences the prices of
other ECM contracts (namely, the SPM contract).
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 OFP 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.''\37\
---------------------------------------------------------------------------
\37\ 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'' \38\ 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.
---------------------------------------------------------------------------
\38\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------
ICE argued 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
[[Page 42389]]
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.''
\39\ It is the Commission's opinion that liquidity, as it pertains to
the SPM contract, is typically a function of trading activity in
particular lead months and, given sufficient liquidity in such months,
the ICE OFP contract itself would be considered liquid. ICE's analysis
of its own trade data confirms this to be the case for the OFP
contract, and thus, the Commission believes that it applied the
statistical data cited above in an appropriate manner for gauging
material liquidity.
---------------------------------------------------------------------------
\39\ 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 79 percent of all
transactions in the OFP contract (as of the 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.
---------------------------------------------------------------------------
ii. Conclusion Regarding Material Liquidity:
For the reasons discussed above, the Commission finds that the OFP
meets the material liquidity criterion. Specifically, there is
sufficient trading activity in the OFP 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.''
3. Overall Conclusion Regarding the OFP Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE OFP
contract performs a significant price discovery function under the two
of the four criteria established in section 2(h)(7) of the CEA.
Specifically, the Commission has determined that the OFP contract meets
the material price reference and material liquidity criteria at this
time. Accordingly, the Commission is issuing the attached Order
declaring that the OFP 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 OFP contract,\40\ and triggers the obligations,
requirements--both procedural and substantive--and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs.
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\40\ 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'') \41\ 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.
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\41\ 44 U.S.C. 3507(d).
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b. Cost-Benefit Analysis
Section 15(a) of the CEA \42\ 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.
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\42\ 7 U.S.C. 19(a).
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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
authorize the Commission to require reports for SPDCs listed on ECMs.
These increased responsibilities, along with the CFTC's increased
regulatory authority, subject the ECM's risk management practices to
the Commission's supervision and oversight and generally enhance the
financial integrity of the markets.
c. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \43\ 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.\44\ 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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\43\ 5 U.S.C. 601 et seq.
\44\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Orders
a. Order Relating to the SP-15 Financial Day-Ahead LMP Peak 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
[[Page 42390]]
Act, hereby determines that the SP-15 Financial Day-Ahead LMP Peak
contract, traded on the IntercontinentalExchange, Inc., satisfies the
material price preference and material liquidity criteria for
significant price discovery contracts. Consistent with this
determination, and effective immediately, the IntercontinentalExchange,
Inc., must comply with, with respect to the SP-15 Financial Day-Ahead
LMP Peak 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 \45\ with respect to the SP-15
Financial Day-Ahead LMP Peak contract and is subject to all the
provisions of the Commodity Exchange Act applicable to registered
entities.
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\45\ 7 U.S.C. 1a(29).
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Further with respect to the SP-15 Financial Day-Ahead LMP Peak
contract, 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.\46\
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\46\ 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).
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b. Order Relating to the SP-15 Financial Day-Ahead LMP Off-Peak
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 SP-15 Financial Day-Ahead LMP Off-
Peak contract, traded on the IntercontinentalExchange, Inc., satisfies
the statutory material price reference and material liquidity criteria
for significant price discovery contracts. Consistent with this
determination, and effective immediately, the IntercontinentalExchange,
Inc., must comply with, with respect to the SP-15 Financial Day-Ahead
LMP Off-Peak 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 \47\ with respect to the
SP-15 Financial Day-Ahead LMP Off-Peak contract and is subject to all
the provisions of the Commodity Exchange Act applicable to registered
entities.
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\47\ 7 U.S.C. 1a(29).
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Further with respect to the SP-15 Financial Day-Ahead LMP Off-Peak
contract, 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.\48\
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\48\ 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 July 9, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-17747 Filed 7-20-10; 8:45 am]
BILLING CODE 6351-01-P