FR Doc E9-25174[Federal Register: October 20, 2009 (Volume 74, Number 201)]

[Notices]

[Page 53720-53722]

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

[DOCID:fr20oc09-39]

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COMMODITY FUTURES TRADING COMMISSION

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

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

a Determination Whether the Henry Financial Swing Contract; Henry

Financial Basis Contract; and Henry Financial Index Contract, Offered

for Trading on the IntercontinentalExchange, Inc., Perform Significant

Price Discovery Functions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of action and request for comment.

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

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

Financial Swing (“HHD”) contract; Henry Financial Basis (“HEN”)

contract; and/or Henry Financial Index (“HIS”) contract, offered for

trading on the IntercontinentalExchange, Inc. (“ICE”), an exempt

commercial market (“ECM”) under Sections 2(h)(3)-(5) of the Commodity

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

discovery functions. Authority for this action is found in section

2(h)(7) of the CEA and Commission rule 36.3(c) promulgated thereunder.

In connection with this evaluation, the Commission invites comment from

interested parties.

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

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

Follow the instructions for submitting comments. Federal

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

E-mail: [email protected]. Include Henry Financial Swing

(HHD) contract; Henry Financial Basis (HEN) contract; and/or Henry

Financial Index (HIS) contract in the subject line of the message,

depending on the subject contract(s) to which the comments apply.

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”) 1 which subjects ECMs with significant price discovery

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

well as certain Commission oversight authorities, with respect to those

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

the information-submission requirements applicable to ECMs, establish

procedures and standards by which the Commission will determine whether

an ECM contract performs a significant price discovery function, and

provide guidance with respect to compliance with nine statutory core

principles applicable to ECMs with SPDCs. These rules became effective

on April 22, 2009.

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1 74 FR 12178 (Mar. 23, 2009); these rules became effective on

April 22, 2009.

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

Commission will consider the contract’s material liquidity, price

linkage to other contracts, potential for arbitrage with other

contracts traded on designated contract markets or derivatives

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

execute or settle other transactions, and other factors.

In order to facilitate the Commission’s identification of possible

SPDCs,

[[Page 53721]]

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

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

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

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

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

regarding the contract to market participants or industry publications;

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

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

contemporaneously determined closing, settlement, or other daily price

of another agreement.

II. Determination of a SPDC

A. The SPDC Determination Process

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

Commission makes and announces its determination on whether a specific

ECM contract serves a significant price discovery function. Under those

procedures, the Commission will publish a notice in the Federal

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

specified agreement, contract, or transaction performs a significant

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

arguments relevant to its determination from the ECM and other

interested persons.2 After prompt consideration of all relevant

information 3, the Commission will, within a reasonable period of

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

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

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

that performs a significant price discovery function, the ECM must

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

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

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

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

contracts performs a significant price discovery function, the ECM must

submit a written demonstration of its compliance with the core

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

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

has an additional SPDC, the ECM must submit a written demonstration of

its compliance with the core principles within 30 calendar days of the

Commission’s order.

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2 The Commission may commence this process on its own

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

pursuant to the notification provisions of Commission rule

36.3(c)(2).

3 Where appropriate, the Commission may choose to interview

market participants regarding their impressions of a particular

contract. Further, while they may not provide direct evidentiary

support with respect to a particular contract, the Commission may

rely for background and context on resources such as its October

2007 Report on the Oversight of Trading on Regulated Futures

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

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

07_ecmreport.pdf.

4 7 U.S.C. 2(h)(7)(C).

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B. Henry Financial Swing Contract

The HHD contract is a daily contract that is cash settled based on

the spot index price for natural gas at the Henry Hub, as published by

Platts in the “Daily Price Survey” table of Gas Daily. The Platts

index price is based on fixed-price cash market transactions that are

voluntarily reported by traders. The size of the HHD contract is 2,500

million British thermal units (“mmBtu”), and the unit of trading is

any multiple of 2,500 mmBtu. The HHD contract is listed for 65

consecutive calendar days.

Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

to its HHD contract, 5,246 separate trades occurred in the second

quarter of 2009, resulting in a daily average of 82.0 trades. During

the same period, the HHD contract had a total trading volume of 242,968

contracts (which was an average of 3,796.4 contracts per day). As of

June 30, 2009, open interest in the HHD contract was 20,173 contracts.

It appears that the HHD contract may satisfy the material

liquidity, arbitrage, and material price reference factors for SPDC

determination. With respect to material liquidity, trading in the HHD

contract averaged over 3,500 contracts on a daily basis with more than

80 separate transactions each day. Moreover, the open interest at the

end of the second quarter in 2009 was significant. Because the HHD

contract specifies the Henry Hub, the contract’s prices series may be

highly correlated with that of the New York Mercantile Exchange’s

physically-delivered Natural Gas contract and/or the ICE’s Henry

Financial LD1 Financial Fixed Price contract, thus increasing the

opportunity for arbitrage. In regard to material price reference, while

it did not specifically address the natural gas contracts under review,

the ECM Study stated that, in general, market participants view the ICE

as a price discovery market for certain natural gas contracts. Natural

gas contracts based on actively-traded hubs are transacted on the ICE’s

electronic trading platform, with the remainder being completed over-

the-counter and potentially submitted for clearing by voice brokers. In

addition, the ICE sells its price data to market participants in a

number of different packages which vary in terms of the hubs covered,

time periods, and whether the data are daily only or historical. For

example, the ICE offers “Henry Hub End of Day” and “OTC Gas End of

Day” data packages with access to all price data or just 12, 24, 36,

or 48 months of historical data.

C. Henry Financial Basis Contract

The HEN contract is a monthly contract that is cash settled based

on the difference between the bidweek price index for a particular

calendar month at the Henry Hub, as published by Platts in its Inside

FERC’s Gas Market Report, and the final settlement price of the New

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

the same calendar month. The Platts bidweek price is based on fixed-

price cash market transactions that are conducted during the last five

business days of the month and are voluntarily reported by traders;

bidweek transactions specify the delivery of natural gas during the

following calendar month. The size of the HEN contract is 2,500 mmBtu,

and the unit of trading is any multiple of 2,500 mmBtu. The HEN

contract is listed for up to 72 calendar months.

Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

to its HEN contract, 538 separate trades occurred in the second quarter

of 2009, resulting in a daily average of 8.4 trades. During the same

period, the HEN contract had a total trading volume of 78,870 (which

was an average of 1,232.3 contracts per day). As of June 30, 2009, open

interest in the HEN contract was 128,504 contracts.

It appears that the HEN contract may satisfy the material

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

determination. With respect to material liquidity, trading in the HEN

contract averaged more than 1,000 contracts on a daily basis, with

nearly 10 separate transactions each day. In addition, the open

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

linkage, the final settlement of the HEN contract is based, in part, on

the final settlement price of the NYMEX’s physically-delivered natural

gas contract, where the NYMEX is registered with the Commission as a

designated contract market (“DCM”). In regard to material price

reference, while it did not specifically address the

[[Page 53722]]

natural gas contracts under review, the ECM Study stated that, in

general, market participants view the ICE as a price discovery market

for certain natural gas contracts. Natural gas contracts based on

actively-traded hubs are transacted on the ICE’s electronic trading

platform, with the remainder being completed over-the-counter and

potentially submitted for clearing by voice brokers. In addition, the

ICE sells its price data to market participants in a number of

different packages which vary in terms of the hubs covered, time

periods, and whether the data are daily only or historical. For

example, the ICE offers “Henry Hub End of Day” and “OTC Gas End of

Day” data packages with access to all price data or just 12, 24, 36,

or 48 months of historical data.

D. Henry Financial Index Contract

The HIS contract is a monthly contract that is cash settled based

on the arithmetic average of the daily natural gas prices at the Henry

Hub, as quoted in the “Daily Price Survey” table of Platts’ Gas Daily

during the specified month, less the Platts bidweek price that is

reported in the first issue of Inside FERC’s Gas Market Report in which

the natural gas is produced. The Platts prices are based on fixed-price

cash market transactions that are voluntarily reported by traders. The

size of the HIS contract is 2,500 mmBtu, and the unit of trading is any

multiple of 2,500 mmBtu. The HIS contract is listed for 36 calendar

months.

Based upon a required quarterly notification filed on July 27, 2009

(mandatory under Rule 36.3(c)(2)), the ICE reported that, with respect

to its HIS contract, 550 separate trades occurred in the second quarter

of 2009, resulting in a daily average of 8.6 trades. During the same

period, the HIS contract had a total trading volume of 79,330 contracts

(which was an average of 1,239.5 contracts per day). As of June 30,

2009, open interest in the HIS contract was 127,346 contracts.

It appears that the HIS contract may satisfy the material

liquidity, and material price reference factors for SPDC determination.

With respect to material liquidity, trading in the HIS contract

averaged over 1,200 contracts on a daily basis with more than 8

separate transactions each day. In addition, the open interest in the

subject contract was substantial. In regard to material price

reference, while it did not specifically address the natural gas

contracts under review, the ECM Study stated that, in general, market

participants view the ICE as a price discovery market for certain

natural gas contracts. Natural gas contracts based on actively-traded

hubs are transacted on the ICE’s electronic trading platform, with the

remainder being completed over-the-counter and potentially submitted

for clearing by voice brokers. In addition, the ICE sells its price

data to market participants in a number of different packages which

vary in terms of the hubs covered, time periods, and whether the data

are daily only or historical. For example, the ICE offers “Henry Hub

End of Day” and “OTC Gas End of Day” data packages with access to

all price data or just 12, 24, 36, or 48 months of historical data.

III. Request for Comment

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

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

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

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

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

rules,5 the Commission, in making SPDC determinations, will apply and

weigh each factor, as appropriate, to the specific contract and

circumstances under consideration.

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5 17 CFR Part 36, Appendix A.

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

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

and from any other interested parties. Accordingly, the Commission

requests comment on whether the HHD, HEN, and/or HIS contracts perform

significant price discovery functions. Commenters’ attention is

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

for a detailed discussion of the factors relevant to an SPDC

determination. The Commission notes that comments which analyze the

contracts in terms of these factors will be especially helpful to the

determination process. In order to determine the relevance of comments

received, the Commission requests that commenters explain in what

capacity are they knowledgeable about the subject contracts. Moreover,

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

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

IV. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) 6 imposes certain

requirements on federal agencies, including the Commission, in

connection with their conducting or sponsoring any collection of

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

Commission rule 36.3 impose new regulatory and reporting requirements

on ECMs, resulting in information collection requirements within the

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

control number 3038-0060 to this collection of information.

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6 44 U.S.C. 3507(d).

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B. Cost-Benefit Analysis

Section 15(a) of the CEA 7 requires the Commission to consider

the costs and benefits of its actions before issuing an order under the

Act. By its terms, section 15(a) does not require the Commission to

quantify the costs and benefits of an order or to determine whether the

benefits of the order outweigh its costs; rather, it requires that the

Commission “consider” the costs and benefits of its action. Section

15(a) further specifies that the costs and benefits shall be evaluated

in light of five broad areas of market and public concern: (1)

Protection of market participants and the public; (2) efficiency,

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations.

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

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The bulk of the costs imposed by the requirements of Commission

Rule 36.3 relate to significant and increased information-submission

and reporting requirements adopted in response to the Reauthorization

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

whether contracts listed by ECMs qualify as SPDCs. The enhanced

requirements for ECMs will permit the Commission to acquire the

information it needs to discharge its newly-mandated responsibilities

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

elevated status of registered entity under the CEA and are in

compliance with the statutory terms of the core principles of section

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

the Commission to discharge its statutory obligation to monitor for the

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

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

David A. Stawick,

Secretary of the Commission.

[FR Doc. E9-25174 Filed 10-19-09; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: October 20, 2009