FR Doc E9-25183[Federal Register: October 20, 2009 (Volume 74, Number 201)]

[Notices]

[Page 53724-53728]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr20oc09-41]

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COMMODITY FUTURES TRADING COMMISSION

Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of

the Commodity Exchange Act and Commission Rule 36.3(c)(3), To Undertake

a Determination Whether the (1) Phys, BS, LD1 (US/MM), AB-NIT Contract,

et al., Offered for Trading on the Natural Gas Exchange, Inc., Perform

Significant Price Discovery Functions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of action and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (“CFTC” or

“Commission”) is undertaking a review to determine whether the (1)

Phys,1 BS,2

[[Page 53725]]

LD1 3 (US/MM), AB-NIT 4 (“Alberta Basis”); (2) Phys, BS, LD1 (US/

MM), Union-Dawn 5 (“Union-Dawn Basis”); (3) Phys, FP,6 (CA/

GJ),7 AB-NIT (“Alberta Fixed-Price”); (4) Phys, FP, (US/MM), Union-

Dawn (“Union-Dawn Fixed-Price”); and (5) Phys, ID,8 7a 9 (CA/GJ),

AB-NIT (“Alberta Index”) contracts, offered for trading on the

Natural Gas Exchange, Inc. (“NGX”), an exempt commercial market

(“ECM”) under Sections 2(h)(3)-(5) of the Commodity Exchange Act

(“CEA” or the “Act”), perform significant price discovery

functions. Authority for this action is found in section 2(h)(7) of the

CEA and Commission rule 36.3(c) promulgated thereunder. In connection

with this evaluation, the Commission invites comment from interested

parties.

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1 The acronym “Phys” indicates physical delivery of natural

gas.

2 The acronym “BS” indicates that the contract is a cash-

settled basis swap.

3 The acronym “LD1” indicates the final settlement price of

the New York Mercantile Exchange (NYMEX) physically-delivered Henry

Hub Natural Gas futures contract for the corresponding contract

month, which is expressed in US dollars and cents per million

British thermal units (mmBtu).

4 The acronym “AB-NIT” refers to the Alberta, Canada, and

Nova Inventory Transfer hub.

5 “Union-Dawn” refers to the Union Gas, Ltd.’s, Dawn hub,

which is located in Canada across the U.S. border from Detroit,

Michigan.

6 The acronym “FP” refers to fixed-price contracts.

7 The abbreviation CA/GJ refers the Canadian dollars per

gigajoule, which is a unit of measure for energy. One GJ is equal to

0.9478 mmBtu.

8 The acronym “ID” refers to index contracts.

9 The term “7a” refers to a price index that is computed as

a volume-weighted average of transactions that occur on the NGX

trading platform during a particular calendar month. Such

transactions specify the physical delivery of natural gas at the AB-

NIT hub in the following calendar month.

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

ADDRESSES: Comments may be submitted by any of the following methods:

Follow the instructions for submitting comments. Federal

eRulemaking Portal: http://www.regulations.gov.

E-mail: [email protected]. Include Phys, BS, LD1 (US/MM),

AB-NIT (“Alberta Basis”) Contract; Phys, BS, LD1 (US/MM), Union-Dawn

(“Union-Dawn Basis”) Contract; Phys, FP, (CA/GJ), AB-NIT (“Alberta

Fixed-Price”) Contract; Phys, FP, (US/MM), Union-Dawn (“Union-Dawn

Fixed-Price”) Contract; and/or Phys, ID, 7a (CA/GJ), AB-NIT (“Alberta

Index”) Contract in the subject line of the message, depending on the

subject contract(s) to which the comments apply.

Fax: (202) 418-5521

Mail: Send to David A. Stawick, Secretary, Commodity

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,

NW., Washington, DC 20581

Courier: Same as mail above.

All comments received will be posted without change to http://

www.CFTC.gov/.

FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,

Division of Market Oversight, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

Telephone: (202) 418-5515. E-mail: [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

On March 16, 2009, the CFTC promulgated final rules implementing

provisions of the CFTC Reauthorization Act of 2008 (“Reauthorization

Act”) 10 which subjects ECMs with significant price discovery

contracts (“SPDCs”) to self-regulatory and reporting requirements, as

well as certain Commission oversight authorities, with respect to those

contracts. Among other things, these rules and rule amendments revise

the information-submission requirements applicable to ECMs, establish

procedures and standards by which the Commission will determine whether

an ECM contract performs a significant price discovery function, and

provide guidance with respect to compliance with nine statutory core

principles applicable to ECMs with SPDCs. These rules became effective

on April 22, 2009.

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10 74 FR 12178 (Mar. 23, 2009); these rules became effective

on April 22, 2009.

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In determining whether an ECM’s contract is or is not an SPDC, the

Commission will evaluate the contract’s material liquidity, price

linkage to other contracts, potential for arbitrage with other

contracts traded on designated contract markets or derivatives

transaction execution facilities, use of the ECM contract’s prices to

execute or settle other transactions, and other factors.

In order to facilitate the Commission’s identification of possible

SPDCs, Commission rule 36.3(c)(2) requires that an ECM operating in

reliance on section 2(h)(3) promptly notify the Commission and provide

supporting information or data concerning any contract: (i) That

averaged five trades per day or more over the most recent calendar

quarter; and (ii) (A) for which the ECM sells price information

regarding the contract to market participants or industry publications;

or (B) whose daily closing or settlement prices on 95 percent or more

of the days in the most recent quarter were within 2.5 percent of the

contemporaneously determined closing, settlement, or other daily price

of another agreement.

II. Determination of an SPDC

A. The SPDC Determination Process

Commission rule 36.3(c)(3) establishes the procedures by which the

Commission makes and announces its determination on whether a specific

ECM contract serves a significant price discovery function. Under those

procedures, the Commission will publish a notice in the Federal

Register that it intends to undertake a determination as to whether the

specified agreement, contract, or transaction performs a significant

price discovery function and to receive written data, views, and

arguments relevant to its determination from the ECM and other

interested persons.11 After prompt consideration of all relevant

information,12 the Commission will, within a reasonable period of

time after the close of the comment period, issue an order explaining

its determination. Following the issuance of an order by the Commission

that the ECM executes or trades an agreement, contract, or transaction

that performs a significant price discovery function, the ECM must

demonstrate, with respect to that agreement, contract, or transaction,

compliance with the core principles under section 2(h)(7)(C) of the CEA

13 and the applicable provisions of Part 36. If the Commission’s

order represents the first time it has determined that one of the ECM’s

contracts performs a significant price discovery function, the ECM must

submit a written demonstration of its compliance with the core

principles within 90 calendar days of the date of the Commission’s

order. For each subsequent determination by the Commission that the ECM

has an additional SPDC, the

[[Page 53726]]

ECM must submit a written demonstration of its compliance with the core

principles within 30 calendar days of the Commission’s order.

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11 The Commission may commence this process on its own

initiative or on the basis of information provided to it by an ECM

pursuant to the notification provisions of Commission rule

36.3(c)(2).

12 Where appropriate, the Commission may choose to interview

market participants regarding their impressions of a particular

contract. Further, while they may not provide direct evidentiary

support with respect to a particular contract, the Commission may

rely for background and context on resources such as its October

2007 Report on the Oversight of Trading on Regulated Futures

Exchanges and Exempt Commercial Markets (“ECM Study”). http://

www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-

07_ecmreport.pdf.

13 7 U.S.C. 2(h)(7)(C).

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B. Phys, BS, LD1 (US/MM), AB-NIT Contract

The Alberta Basis contract is a monthly contract that calls for

physical delivery of natural gas based on the final settlement price

for NYMEX’s Henry Hub physically-delivered natural gas futures contract

for the specified calendar month, plus or minus the price differential

(basis) between the Alberta delivery point 14 and the Henry Hub.

There is no standard size for the Alberta Basis contract, although a

minimum volume of 100 mmBtu is required in increments of 100 units per

day. The Alberta Basis contract is listed for 60 consecutive calendar

months.

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14 NOVA Gas Transmission, Ltd., owns the natural gas

transmission infrastructure known as the Alberta System. The Alberta

System is a network comprising 14,100 miles of pipeline that gathers

natural gas for use both in Alberta and for delivery to provincial

border points for export to North American markets. The Alberta

System is one of the largest natural gas transmission systems in

North America and gathers 66 percent of natural gas produced in

Western Canada.

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Based upon a required quarterly notification filed on August 25,

2009 (mandatory under Rule 36.3(c)(2)), the NGX reported that, with

respect to its Alberta Basis contract, the average number of trades

each day for the nearby contract month was 23.2 in the second quarter

of 2009. During the same period, the Alberta Basis nearby contract had

an average daily trading volume of 5,869,800 million British thermal

units (mmBtu).15 Moreover, the net open interest as of June 30, 2009,

for the nearby contract month was 150,213,600 mmBtu. For delivery two

months out, the open interest was 10,112,200 mmBtu.

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15 For comparative purposes, the size of the NYMEX’s

physically-delivered Henry Hub natural gas futures contract is

10,000 mmBtu.

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It appears that the Alberta Basis contract may satisfy the material

liquidity, price linkage, and material price reference factors for SPDC

determination. With respect to material liquidity, trading in the

Alberta Basis contract was nearly 6,000,000 mmBtu on a daily basis,

with more than 20 separate transactions each day. In addition, the open

interest in the subject contract was substantial. In regard to price

linkage, the final settlement of the Alberta Basis contract is based,

in part, on the final settlement price of the NYMEX’s physically-

delivered natural gas futures contract, where the NYMEX is registered

with the Commission as a designated contract market (“DCM”).

With respect to material price reference, the NGX forged an

alliance with the IntercontinentalExchange, Inc., (ICE) to use the

ICE’s matching engine to complete transactions in physical gas

contracts traded on NGX. In return, the NGX agreed to provide the

clearing services for such transactions. As part of the agreement, NGX

provides the ICE with transaction data, which are then made available

to market participants on a paid basis. The ICE offers the NGX data in

several packages, which vary in terms of the amount of available

historical data. For example, the ICE offers the “OTC Gas End of Day”

data packages with access to all historical data, or the option of

accessing 12, 24, 36, and 48 months of past data only.

C. Phys, BS, LD1 (US/MM), Union-Dawn Contract

The Union-Dawn Basis contract is a monthly contract that calls for

physical delivery of natural gas based on the final settlement price

for NYMEX’s Henry Hub physically-delivered natural gas futures contract

for the specified calendar month, plus or minus the price differential

(basis) between the Dawn delivery point 16 and the Henry Hub. There

is no standard size for the Union-Dawn Basis contract, although a

minimum volume of 100 mmBtu is required in increments of 100 units per

day. The Union-Dawn Basis contract is listed for 60 consecutive

calendar months.

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16 Union Gas, Ltd., is a major Canadian natural gas storage,

transmission, and distribution company based in Ontario, Canada.

Union Gas offers premium storage and transportation services to

customers at the Dawn hub, which the largest underground storage

facility in Canada and one of the largest in North America. The Dawn

hub offers customers an important link for natural gas moving from

Western Canadian and U.S. supply basins to markets in central Canada

and the northeast United States.

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Based upon a required quarterly notification filed on August 25,

2009 (mandatory under Rule 36.3(c)(2)), the NGX reported that, with

respect to its Union-Dawn Basis contract, the average number of trades

each day for the nearby contract month was 8.3 in the second quarter of

2009. During the same period, the Union-Dawn Basis nearby contract had

an average daily trading volume of 1,332,400 mmBtu. Moreover, the net

open interest as of June 30, 2009, for the nearby contract month was

28,203,800 mmBtu. For delivery two months out, the open interest was

12,908,400 mmBtu.

It appears that the Union-Dawn Basis contract may satisfy the

material liquidity, price linkage, and material price reference factors

for SPDC determination. With respect to material liquidity, trading in

the Union-Dawn Basis contract was more than 1,000,000 mmBtu on a daily

basis, with more than eight separate transactions each day. In

addition, the open interest in the subject contract was substantial. In

regard to price linkage, the final settlement of the Union-Dawn Basis

contract is based, in part, on the final settlement price of the

NYMEX’s physically-delivered natural gas futures contract, where the

NYMEX is registered with the Commission as a designated contract market

(“DCM”).

With respect to material price reference, the NGX forged an

alliance with the IntercontinentalExchange, Inc., (ICE) to use the

ICE’s matching engine to complete transactions in physical gas

contracts traded on NGX. In return, the NGX agreed to provide the

clearing services for such transactions. As part of the agreement, NGX

provides the ICE with transaction data, which are then made available

to market participants on a paid basis. The ICE offers the NGX data in

several packages, which vary in terms of the amount of available

historical data. For example, the ICE offers the “OTC Gas End of Day”

data packages with access to all historical data, or the option of

accessing 12, 24, 36, and 48 months of past data only.

D. Phys, FP, (CA/GJ), AB-NIT Contract

The Alberta Fixed-Price contract calls for physical delivery of

natural gas over a number of different time periods. This contract

allows delivery of natural gas during the following day, Friday plus

two or three days, Saturday plus three or four days, Sunday plus two

days, the remainder of the month, throughout the nearby calendar month,

and during a specific future calendar month. Each delivery period is

considered to be a separate contract, and market participants value

each delivery period separately. However, overlapping delivery days are

considered fungible, and, thus, may be offset by traders. There is no

standard size for the Alberta Fixed-Priced contract, although a minimum

volume of 94.78 mmBtu is required in increments of 100 units per day.

The NGX lists the Alberta Fixed-Price contract for 60 calendar months.

Based upon a required quarterly notification filed on August 25,

2009 (mandatory under Rule 36.3(c)(2)), the NGX reported that, with

respect to its Alberta Fixed-Price contract, the average number of

trades daily for each delivery period was greater than five in the

second quarter of 2009. In this regard, the average number of trades

each day was 122.1, 36.0, 7.0, 30.1, 7.4, 68.6, and 12.8 trades for the

following delivery periods–following day, Friday plus two days, Friday

plus three days, Saturday

[[Page 53727]]

plus three days, Saturday plus four days, Sunday plus two days,

remainder of the month, nearby calendar month, and any single future

calendar month, respectively. During the same period, the Alberta

Fixed-Price contract had an average daily trading volume of 1,209,505

mmBtu; 821,565 mmBtu; 223,874 mmBtu; 754,175 mmBtu; 672,568 mmBtu;

6,634,030 mmBtu; and 1,233,958 mmBtu for the following delivery

periods–next day, Friday plus two days, Friday plus three days,

Saturday plus three days, Saturday plus four days, Sunday plus two

days, remainder of the month, nearby calendar month, and any single

future calendar month, respectively. Moreover, the net open interest as

of June 30, 2009, was 96,003,450 mmBtu for next-month delivery. For

delivery two months out, the open interest was 54,456,997 mmBtu.17

—————————————————————————

17 The open interest for other delivery periods was

significantly smaller than for the nearby and second-nearby

contracts.

—————————————————————————

It appears that the Alberta Fixed-Price contract may satisfy the

material liquidity and material price reference factors for SPDC

determination. With respect to material liquidity, trading in the

nearby month of the Alberta Fixed-Price contract was close to 7,000,000

mmBtu on a daily basis, with nearly 70 separate transactions each day.

In addition, the open interest in the subject contract was substantial.

With respect to material price reference, the NGX forged an

alliance with the IntercontinentalExchange, Inc., (ICE) to use the

ICE’s matching engine to complete transactions in physical gas

contracts traded on NGX. In return, the NGX agreed to provide the

clearing services for such transactions. As part of the agreement, NGX

provides the ICE with transaction data, which are then made available

to market participants on a paid basis. The ICE offers the NGX data in

several packages, which vary in terms of the amount of available

historical data. For example, the ICE offers the “OTC Gas End of Day”

data packages with access to all historical data, or the option of

accessing 12, 24, 36, and 48 months of past data only.

E. Phys, FP, (US/MM), Union-Dawn Contract

The Union-Dawn Fixed-Price contract calls for physical delivery of

natural gas over two different time periods: the following day and

Saturday plus three days. Each delivery period is considered to be a

separate contract, and the market participants value each delivery

period separately. However, overlapping delivery days are considered

fungible, and, thus, may be offset by traders. There is no standard

size for the Union-Dawn Fixed-Priced contract, although a minimum

volume of 100 mmBtu required in increments of 100 units per day. The

NGX lists the Union-Dawn Fixed-Price contract for 60 calendar months.

Based upon a required quarterly notification filed on August 25,

2009 (mandatory under Rule 36.3(c)(2)), the NGX reported that, with

respect to its Union-Dawn Fixed-Price contract, the average number of

trades each day was 114.1 trades and 23.9 trades for next-day delivery

and delivery Saturday plus the next three days, respectively. During

the same period, the Union-Dawn Fixed-Price contract had an average

daily trading volume of 812,800 mmBtu and 458,000 mmBtu for the

delivery periods next day and Saturday plus three days, respectively.

Moreover, the net open interest as of June 30, 2009, was 2,241,600

mmBtu for next-day delivery.

It appears that the Union-Dawn Fixed-Price contract may satisfy the

material liquidity and material price reference factors for SPDC

determination. With respect to material liquidity, trading activity in

the next-day Union-Dawn Fixed-Price contract was over 800,000 mmBtu on

a daily basis, with over 100 separate transactions each day. In

addition, the open interest in the subject contract was substantial.

With respect to material price reference, the NGX forged an

alliance with the IntercontinentalExchange, Inc., (ICE) to use the

ICE’s matching engine to complete transactions in physical gas

contracts traded on NGX. In return, the NGX agreed to provide the

clearing services for such transactions. As part of the agreement, NGX

provides the ICE with transaction data, which are then made available

to market participants on a paid basis. The ICE offers the NGX data in

several packages, which vary in terms of the amount of available

historical data. For example, the ICE offers the “OTC Gas End of Day”

data packages with access to all historical data, or the option of

accessing 12, 24, 36, and 48 months of past data only.

F. Phys, ID, 7a (CA/GJ), AB-NIT Contract

The Alberta Index contract calls for physical delivery of natural

gas during the specified calendar month. When trading this contract,

market participants price the difference between the anticipated value

of natural gas at the time of delivery and the average of actual trades

on the NGX system. The average of transactions on the NGX system is

reported as a volume-weighted average price index in the first

publication of the delivery month of Canadian Enerdata, Ltd.’s Canadian

Gas Price Reporter. At the time of delivery, the negotiated price

premium or discount is added or subtracted to the published index

price. There is no standard size for the Alberta Index contract,

although a minimum volume of 94.78 mmBtu is required in increments of

100 units per day. The NGX lists the Alberta Index contract for 60

calendar months.

Based upon a required quarterly notification filed on August 25,

2009 (mandatory under Rule 36.3(c)(2)), the NGX reported that, with

respect to its Alberta Index contract, the average number of trades

each day was 10.9. During the same period, the Alberta Index contract

had an average daily trading volume of 2,438,627 mmBtu. Moreover, the

net open interest as of June 30, 2009, was 6,287,794 mmBtu for delivery

in the following month.

It appears that the Alberta Index contract may satisfy the material

liquidity and material price reference factors for SPDC determination.

With respect to material liquidity, trading in the nearby month of the

Alberta Index contract was over 2,000,000 mmBtu on a daily basis, with

over 10 separate transactions each day. In addition, the open interest

in the subject contract was substantial.

With respect to material price reference, the NGX forged an

alliance with the IntercontinentalExchange, Inc., (ICE) to use the

ICE’s matching engine to complete transactions in physical gas

contracts traded on NGX. In return, the NGX agreed to provide the

clearing services for such transactions. As part of the agreement, NGX

provides the ICE with transaction data, which are then made available

to market participants on a paid basis. The ICE offers the NGX data in

several packages, which vary in terms of the amount of available

historical data. For example, the ICE offers the “OTC Gas End of Day”

data packages with access to all historical data, or the option of

accessing 12, 24, 36, and 48 months of past data only.

III. Request for Comment

In evaluating whether an ECM’s agreement, contract, or transaction

performs a significant price discovery function, section 2(h)(7) of the

CEA directs the Commission to consider, as appropriate, four specific

criteria: price linkage, arbitrage, material price reference, and

material liquidity. As it explained in Appendix A to the Part 36

rules,18 the Commission, in making

[[Page 53728]]

SPDC determinations, will apply and weigh each factor, as appropriate,

to the specific contract and circumstances under consideration.

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18 17 CFR Part 36, Appendix A.

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As part of its evaluation, the Commission will consider the written

data, views, and arguments from any ECM that lists the potential SPDC

and from any other interested parties. Accordingly, the Commission

requests comment on whether the subject contracts perform significant

price discovery functions. Commenters’ attention is directed

particularly to Appendix A of the Commission’s Part 36 rules for a

detailed discussion of the factors relevant to a SPDC determination.

The Commission notes that comments which analyze the contracts in terms

of these factors will be especially helpful to the determination

process. In order to determine the relevance of comments received, the

Commission requests that commenters explain in what capacity are they

knowledgeable about one or several of the subject contracts. Moreover,

because five contracts are included in this notice, it is important

that commenters identify to which contract(s) their comments apply.

IV. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) 19 imposes certain

requirements on federal agencies, including the Commission, in

connection with their conducting or sponsoring any collection of

information, as defined by the PRA. Certain provisions of final

Commission rule 36.3 impose new regulatory and reporting requirements

on ECMs, resulting in information collection requirements within the

meaning of the PRA; OMB previously has approved and assigned OMB

control number 3038-0060 to this collection of information.

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19 44 U.S.C. 3507(d).

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B. Cost-Benefit Analysis

Section 15(a) of the CEA 20 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 such an order or to determine

whether the benefits of such an order outweigh its costs; rather, it

requires that the Commission “consider” the costs and benefits of its

action. Section 15(a) further specifies that the costs and benefits

shall be evaluated in light of five broad areas of market and public

concern: (1) Protection of market participants and the public; (2)

efficiency, competitiveness, and financial integrity of futures

markets; (3) price discovery; (4) sound risk management practices; and

(5) other public interest considerations.

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20 7 U.S.C.19(a).

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The bulk of the costs imposed by the requirements of Commission

Rule 36.3 relate to significant and increased information-submission

and reporting requirements adopted in response to the Reauthorization

Act’s directive that the Commission take an active role in determining

whether contracts listed by ECMs qualify as SPDCs. The enhanced

requirements for ECMs will permit the Commission to acquire the

information it needs to discharge its newly-mandated responsibilities

and to ensure that ECMs with SPDCs are identified as entities with the

elevated status of registered entity under the CEA and are in

compliance with the statutory terms of the core principles of section

2(h)(7)(C) of the Act. The primary benefit to the public is to enable

the Commission to discharge its statutory obligation to monitor for the

presence of SPDCs and extend its oversight to the trading of SPDCs.

Issued in Washington, DC, on October 14, 2009 by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-25183 Filed 10-19-09; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: October 20, 2009