CFTC Announces Its Determination that the Henry Financial LD1 Fixed Price Contract Traded on the Intercontinentalexchange, Inc., Performs a Significant Price Discovery Function
The Commodity Futures Trading Commission (CFTC) on Friday, July 24, 2009, exercised a new authority to apply CFTC regulatory and reporting requirements to exempt commercial markets (ECMs) with significant price discovery contracts (SPDCs). Pursuant to the authority in Section 2(h)(7) of the Commodity Exchange Act (Act) and Commission Rule 36.3(c)(3), the CFTC issued an Order finding that the Henry Financial LD1 Fixed Price contract – a natural gas contract traded on the IntercontinentalExchange, Inc. (ICE), an ECM – performs a significant price discovery function. This Order represents the Commission’s first use of its new regulatory authority over ECMs with respect to their SPDCs.
“To protect the American public, it is essential that we bring transparency and accountability to the marketplace,” CFTC chairman Gary Gensler said. “Bringing this natural gas contract under the CFTC’s regulatory authority is a critical step toward ensuring a fair and orderly marketplace. We will continue to use this authority and our other existing authorities, as well as work with Congress to secure additional authorities, to police energy markets for fraud, manipulation and other abuses.”
On June 9, 2009, the Commission announced its intent to undertake a review based upon its initial evaluation that the ICE Henry Financial LD1 Fixed Price natural gas contract appeared to satisfy some of the statutory criteria for a significant price discovery determination. Further analysis of the contract and its characteristics – including the contract’s high average daily trading volume, the contract’s reliance on the settlement price for NYMEX’s physically-delivered natural gas futures contract and trader usage of the contract’s prices – satisfied the Commission that the ICE Henry Financial LD1 Fixed Price contract meets the material liquidity, price linkage and arbitrage criteria for a SPDC. In light of clear indicia in the record that three significant price discovery criteria were satisfied, the Commission did not undertake an analysis with respect to material price reference and accordingly did not reach a conclusion with respect to that criterion.
Issuance of this order triggers the effectiveness of the Commission’s regulatory authorities with respect to ICE in connection with this contract and thus subjects ICE to all provisions of the Act applicable to registered entities. Issuance of this order also triggers the obligations, requirements and timetables prescribed in Commission Rule 36.3(c)(4) relating to compliance with statutory core principles applicable to ECMs with SPDCs. Because the Henry Financial LD1 Fixed Price contract represents ICE’s first SPDC, ICE will have a grace period of 90 days from the date of this order in which to submit to the Commission a written demonstration of compliance with the core principles.
