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Position Limits Extended to ICE HH Contract

October 26, 2009
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IntercontinentalExchange Inc. (ICE) will be imposing position and accountability limits on its Henry Hub over-the-counter (OTC) swaps contract, starting with the February 2010 contract, to conform with directives from the Commodity Futures Exchange Commission (CFTC) regarding contracts that perform a significant price discovery function (SPDF).

The ICE announcement came as the CFTC added another natural gas contract to the 23 others it is investigating with an eye to categorizing them as SPDF contracts and requiring them also to operate under position limits.

ICE will limit traders to 4,000 front-month Henry Hub swaps contracts, the equivalent of 1,000 New York Mercantile Exchange (Nymex) contracts, in the last three days before expiration and impose accountability levels of 24,000 contracts (6,000 Nymex equivalent) in a single month and 48,000 contracts (12,000 Nymex) in all months, according to Ed Dasso, ICE's market surveillance manager. Dasso told NGI the contract levels represent equal volumes of gas to those imposed by the CME Group's Nymex, although the number of contracts differs because of the difference in contract size on the two exchanges.

He said the advance notice would allow time for traders to apply for an exemption or roll out of their contracts. ICE is posting guidelines for exemptions on its website.

Position limits are fixed, while accountability levels are indicators. Traders may request an exemption from the position limits for bona fide hedging, risk management or spread positions In addition, participants may contact ICE to apply for a conditional limit from the delivery month position limits if they are able to demonstrate that they have no activity or position in the physically-settled CME/Nymex contract (NG) and provide information on OTC positions during the last three trading days leading up to expiration, the exchange said in an advisory.

Traders who do not have an exemption and who exceed the position limits will be required to reduce position size. At its discretion, ICE may require a trader over a position accountability level to justify or reduce its position. Further details can be found in the new ICE OTC Rulebook at https://www.theice.com/markets_otc.jhtml.

ICE notes that the CFTC is undertaking a review of position limits in energy contracts and may release a revision to the current position limit system in the future.

Also last week, the CFTC issued a notice that it is investigating the NWP (Northwest Pipeline) Rockies Financial Basis contract to determine if it is important to price discovery. Over the last month the agency has noticed 23 other natural gas contracts, five on the Canadian Natural Gas Exchange and the rest on ICE, which it is expected to bring those under its wing soon (see NGI, Oct. 12). The contracts involve the most heavily traded natural gas locations in the United States and Canada, including Chicago, New York, the California border, the Houston Ship Channel and the AECO hub in Alberta. In each case the public and industry were given just 15 days to comment on the proposed change in status.

The CFTC also has actions under way to regulate electric power futures contracts.

The ICE action to impose position limits follows a CFTC decision in July to bring the ICE Henry Financial LD1 Fixed Price contract under its regulatory authority, saying the contract "performs a significant price discovery function." The ICE contract is a "look-alike" contract to the Nymex Henry Hub contract, which already is regulated.

ICE already has begun submitting enhanced market statistics for its cash-settled Henry Hub natural gas swap market to the CFTC as part of the regulatory change. Clearing firms will begin providing large-trader data to the CFTC and ICE's data will be incorporated in the weekly Commitment of Traders report (see related story).

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