The Commodity Futures Trading Commission (CFTC) Friday moved to bring the Henry Financial LD1 Fixed Price contract traded on the IntercontinentalExchange, Inc. (ICE) under its regulatory authority, saying the contract “performs a significant price discovery function.” The ICE contract is a “look-alike” contract to the CME Group’s Nymex Henry Hub contract, which already is under CFTC regulation.
“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.”
ICE followed up with a press statement Monday, saying it would begin submitting enhanced market statistics for its cash-settled Henry Hub natural gas swap market to the CFTC immediately. Clearing firms will begin providing large trader data to the CFTC and ICE’s data will be incorporated in the weekly Commitment of Traders (COT) report. In addition to its inclusion in the COT report, the ICE Henry Hub swap will also be subject to position limits and accountability levels.
The company said it has worked with the CFTC in developing regular over-the-counter (OTC) market reporting, including large trader information, since October 2006.
“We appreciate the CFTC’s use of its broad powers in the OTC markets to provide regulatory certainty and to underscore the integrity of these important contracts,” said ICE Chairman Jeffrey C. Sprecher. “As the most transparent and standardized OTC energy marketplace, ICE demonstrated leadership in bringing visibility into these global markets, and we have worked proactively to ensure that the CFTC has the information it needs to effectively monitor our markets.”
The CFTC action was announced on Monday, one day before fireworks are expected to erupt at the first of the commission’s three hearings to discuss energy position limits and hedge exemptions. The lead-off panel Tuesday features two aggressive congressional proponents of more regulatory control of markets, including Rep. Bart Stupak (D-MI), who sponsored an amendment in the House-passed climate change and energy bill giving the CFTC greater oversight of energy commodity derivatives and credit default swaps. Also facing CFTC Chairman Gary Gensler on the first panel will be Sen. Bernie Sanders, I-VT, who held up Gensler’s Senate confirmation for several months, objecting to the role Gensler played nearly 10 years ago as a former undersecretary of the treasury in supporting deregulation of the derivatives market.
Following up will be a second panel featuring top executives of ICE and the Chicago Mercantile Exchange. Batting clean-up on a third panel will be representatives of the Futures Industry Association and three industrial groups that have been highly critical of the recent volatile energy commodities market.
Friday’s announcement completed CFTC action begun in June to look at the status of the ICE contract. At the time the CFTC said the ICE exchange-traded swap appeared 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 (see Daily GPI, June 16).
In a previous study of exempt commercial markets (ECM), 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 July 24 order regarding the ICE Henry Hub swaps contract represents the commission’s first use of its new regulatory authority over ECMs with respect to their significant price discovery contracts (SPDC).
The CFTC’s analysis of the ICE contract and its characteristics — including its high average daily trading volume, reliance on the settlement price for Nymex’s Henry Hub contract and trader usage of the contract’s prices — showed it met the material liquidity, price linkage and arbitrage criteria for an SPDC.
The order was effective immediately, although since this is 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. A spokesperson said ICE eventually would be posting some aggregate open interest data on its website, but they weren’t sure when that would occur.
It also was not clear what effect, if any, the policing of position limits will have on the natural gas swap contracts traded on ICE.
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