Federal Register: October 9, 2009 (Volume 74, Number 195)
DOCID: fr09oc09-52 FR Doc E9-24390
COMMODITY FUTURES TRADING COMMISSION
Commodity Futures Trading Commission
NOTICE: NOTICES
DOCID: fr09oc09-52
DOCUMENT ACTION: Notice of action and request for comment.
SUBJECT CATEGORY:
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 PG&E Citygate Financial Basis Contract, Offered for Trading on the IntercontinentalExchange, Inc., Performs a Significant Price Discovery Function
DATES: Comments must be received on or before October 26, 2009.
DOCUMENT SUMMARY:
The Commodity Futures Trading Commission (``CFTC'' or ``Commission'') is undertaking a review to determine whether the PG&E Citygate Financial Basis (``PGE'') 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''), performs 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. In connection with this evaluation, the Commission invites comment from interested parties.
SUMMARY:
Determination Whether the PG and E Citygate Financial Basis Contract Performs a Significant Price Discovery Function
SUPPLEMENTAL 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 selfregulatory 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 informationsubmission 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.
\1\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on April 22, 2009.
In determining whether an ECM's contract is or is not a 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 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
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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.
\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/ pr540307_ecmreport.pdf.
\4\ 7 U.S.C. 2(h)(7)(C).
B. PG&E Citygate Financial Basis Contract
The PGE contract is cash settled based on the difference between the bidweek price index for a particular calendar month at the PG&E Citygate hub, as published by Intelligence Press, Inc. (IPI), in NGI's Bidweek Survey, and the final settlement price of the New York Mercantile Exchange's (NYMEX's) physicallydelivered Henry Hub natural gas futures contract for the same calendar month. The bidweek price is computed from fixedprice, bilateral transactions executed during the last five business days of a given month, where the transactions specify the delivery of natural gas at the PG&E hub during the following calendar month. The price index is computed as the volume weighted average of the applicable natural gas transactions. Bidweek prices are published on the first business day of the month in which the gas flows. The size of the PGE contract is 2,500 mmBtu, and the unit of trading is any multiple of 2,500 mmBtu. The PGE contract is listed for up to 72 calendar months commencing with the next calendar month.
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 PGE contract, the total number of trades was 1,142 in the second quarter of 2009, resulting in a daily average of 17.8 trades. During the same period, the PGE contract had a total trading volume of 99,418 contracts and an average daily trading volume of 1,553.4 contracts. Moreover, the open interest as of June 30, 2009, was 150,299 contracts.
It appears that the PGE contract may satisfy the material liquidity, price linkage, and material price reference factors for SPDC determination. With respect to material liquidity, trading in the ICE PGE contract averaged more than 1,500 contracts on a daily basis, with more than 15 separate transactions each day. In addition, the open interest in the subject contract was substantial. In regard to price linkage, the final settlement price of the PGE contract is based, in part, on the final settlement price of the NYMEX's physicallydelivered natural gas contract, where the NYMEX is registered with the Commission as a designated contract market (``DCM''). In terms of material price reference, the ICE maintains exclusive rights over IPI's bidweek price indices. As a result, no other exchange can offer such a basis contract based on IPI's PG&E bidweek index. While other thirdparty price providers produce natural gas price indices for a variety of trading centers, those indices may not have the same values or quality as IPI's price indices; each company's bidweek indices are based on transactions that are consummated during the last five days of the month prior to delivery and are voluntarily submitted by traders. 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 ``West Gas 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.
\5\ 17 CFR Part 36, Appendix A.
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 ICE's PGE 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 a 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 subject contract.
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 30380060 to this collection of information.
\6\ 44 U.S.C. 3507(d).
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B. CostBenefit 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 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.
\7\ 7 U.S.C. 19(a).
The bulk of the costs imposed by the requirements of Commission Rule 36.3 relate to significant and increased informationsubmission 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 newlymandated 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 5, 2009 by the Commission. David A. Stawick,
Secretary of the Commission.
[FR Doc. E924390 Filed 10809; 8:45 am]
BILLING CODE 635101P
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) 4185515. Email: gprice@cftc.gov; or Susan Nathan, Senior Special Counsel, Division of Market Oversight, same address. Telephone: (202) 4185133. Email: snathan@cftc.gov.