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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 LD1 Fixed Price Contract Traded on the IntercontinentalExchange, Inc., Performs a Significant Price Discovery Function

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Commodity Futures Trading Commission.

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Notice of action and request for comment.


The Commodity Futures Trading Commission (“CFTC” or “Commission”) is undertaking a review to determine whether the Henry Financial LD1 Fixed Price contract traded 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”), performs a significant price discovery function. The Commission is undertaking this review based upon its evaluation of information provided by the ICE, as well as a Commission report on ECMs. 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.


Comments must be received on or before July 13, 2009.


Comments may be submitted by any of the following methods:

  • Follow the instructions for submitting comments. Federal eRulemaking Portal:
  • E-mail: Include ICE Henry Financial LD1 Fixed Price Contract in the subject line of the message.
  • 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​.

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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:; or Susan Nathan, Senior Special Counsel, Division of Market Oversight, same address. Telephone: (202) 418-5133. E-mail:

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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.

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, 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, 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 [3] 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.

B. ICE's Henry Financial LD1 Fixed Price Contract

The ICE Henry Financial LD1 Fixed Price contract is cash settled based on the final settlement price of the New York Mercantile Exchange's (NYMEX's) physically-delivered Henry Hub-based Natural Gas futures contract for the corresponding contract month. [4] The trading unit of the ICE Henry Financial LD1 Fixed Price contract is 2,500 mmBtu multiplied by the number of calendar days in the contract month. For example, if a contract month has 30 days, the trading unit is 75,000 mmBtu, which is referred to as 30 lots.

Based upon a required quarterly notification filed on April 30, 2009 (mandatory under Rule 36.3(c)(2)), the subject contract realized more than an average of five trades per day during the first quarter of 2009. In addition, the average volume of natural gas traded each business day over that period was 449,010 contracts, and the open interest in the contract as of March 31, 2009, was 2,932,798 contracts.Start Printed Page 28030

It appears that the ICE Henry Financial LD1 Fixed Price contract may satisfy the material liquidity, price linkage, and arbitrage criteria for SPDC determination. With regard to material liquidity, the high average daily trading volume indicates that the subject contract is relatively liquid. With respect to the price linkage and arbitrage tests, it is noted above that the ICE Henry Financial LD1 Fixed Price contract and the NYMEX's physically-delivered Natural Gas futures contract have the same final settlement prices. Moreover, ICE uses the NYMEX's forward settlement curve when conducting its mark-to-market accounting procedures to settle the subject contract on daily basis. An October 2007 CFTC publication entitled Report on the Oversight of Trading on Regulated Futures Exchanges and Exempt Commercial Markets (“ECM Study”) stated that traders and voice brokers view the subject ICE contract as economically equivalent to the NYMEX physically-delivered Natural Gas futures contract. [5] The ICE and NYMEX contracts essentially comprise a single market for natural gas derivatives trading, and traders look to both the ICE and to the NYMEX when determining where to execute a trade at the best price. The ECM Study also stated that the ICE natural gas contract acts as price discovery market. To this end, the ECM Study referenced an analysis [6] of whether the NYMEX, ICE, or both facilities exhibit price leadership with respect to their natural gas contracts. If a particular exchange's prices lead those on another exchange, then the former exchange's contract is thought of as a price discovery market. In 2006, the ICE's natural gas contract exhibited price leadership on 20 percent of the contract days; the NYMEX's physically-delivered natural gas contract, on the other hand, exhibited price leadership on 63 percent of the contract days. Based on these factors, the ECM Study concluded that the ICE and the NYMEX contracts are both price discovery venues for natural gas trading.

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, the Commission, in making SPDC determinations, will apply and weigh each factor, as appropriate, to the specific contract and circumstances under consideration. In addition, as part of its evaluation, the Commission will consider the written data, views, and arguments from the ECM that lists the potential SPDC and from any other interested parties.

The Commission requests comment on whether the ICE's Henry Financial LD1 Fixed Price contract performs a significant price discovery function. Commenters' attention is directed particularly to Appendix A of the Commission's part 36 rules for a detailed discussion of the factors relevant to SPDC determination. The Commission notes that comments which analyze the contract 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 Henry Financial LD1 Fixed Price contract.

IV. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) [7] 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.

B. Cost-Benefit Analysis

Section 15(a) of the CEA [8] 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.

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.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) [9] requires that agencies consider the impact of their rules on small businesses. The requirements of part 36 affect exempt commercial markets. The Commission previously has determined that exempt commercial markets are not small entities for purposes of the RFA.[10] Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that this Order, taken in connection with the part 36 rules, will not have a significant economic impact on a substantial number of small entities.

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Issued in Washington, DC on June 9, 2009 by the Commission.

David A. Stawick,

Secretary of the Commission.

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1.  74 FR 12178 (Mar. 23, 2009); these rules became effective on April 22, 2009.

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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).

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4.  The NYMEX is a designated contract market that offers futures and option contracts on a wide range of energy products, including crude oil, refined petroleum products, and natural gas.

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6.  ECM Study at 11.

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8.  7 U.S.C.19(a).

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10.  66 FR 42256, 42268 (Aug. 10, 2001).

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[FR Doc. E9-13871 Filed 6-11-09; 8:45 am]