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CFTC Proposes Reporting Rules for ICE Henry Hub Contract

The Commodity Futures Trading Commission (CFTC) has issued a notice of intent and called for comments on a proposed determination that IntercontinentalExchange's Henry Hub lookalike contract, the Henry Financial LD1 Fixed Price contract, qualifies as a significant price discovery contract (SPDC) in the natural gas market and therefore should be subject to reporting rules and position limits applicable to designated contract markets such as Henry Hub futures contracts offered by the New York Mercantile Exchange (Nymex).

The CFTC, acting on a submission by ICE, noted that the ICE exchange-traded swap appears to fit the criteria of a new rule issued earlier this year calling for closer oversight of contracts with a significant amount of trading that perform a price discovery function. In a first quarter report, ICE said its Henry Hub swap contract averaged 449,010 contracts per business day during the quarter and its open interest as of March 31 was 2,932,798 contracts.

In a previous study of the exempt commercial markets, the CFTC rated the ICE Henry Hub contract as economically equivalent to the Nymex natural gas futures contract physically delivered at the Henry Hub. "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," according to the study.

The study showed that in 2006 ICE's natural gas contract exhibited price leadership on 20% of the contract days, while the Nymex contract led on 63% of the contract days.

An ICE spokesperson said the exchange has been reporting since 2006. Its filing under the new rules will simply codify what it already has been doing. The rules, which went into effect on April 22, were designed to carry out provisions of the CFTC Reauthorization Act of 2008 in which Congress sought to bring some of the derivatives market under government observation.

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