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NGSA to CFTC: ICE Contracts Do Not Perform Significant Price Discovery
The Natural Gas Supply Association (NGSA) on Monday said it believes that 13 financially settled natural gas contracts traded on IntercontinentalExchange (ICE) — which are currently under review by the Commodity Futures Trading Commission (CFTC) — do not perform a significant price-discovery function (SPDF).
Responding to a notice of inquiry released earlier this month by the Commission, the NGSA said the contracts under discussion generally contain a pricing term that consists of the Henry Hub Nymex futures expiry price for the month and the basis differential from an index publisher. The organization, which represents natural gas marketers and producers, noted that the CFTC has already taken steps to secure the Henry Hub basis contract from risk of excessive speculation.
“NGSA appreciates the Commission’s efforts to ensure a robust and competitive marketplace,” Jennifer Fordham, NGSA director of Energy Markets and Government Affairs, said in a letter to the Commission on Monday. “Nevertheless, NGSA is concerned that the contracts in question do not embody an appropriate combination of key characteristics, as defined by the Commission, necessary for final SPDC [significant price-discovery contract] designation. While NGSA acknowledges that the CFTC has discretion in this regard, any unnecessary SPDC designations and associated position limits risk unintended consequences, particularly with regard to liquidity and cost, in an energy commodity market that is already one of the most efficient in the world.”
Having already pulled the Henry Hub look-alike contract traded on ICE under its regulatory oversight authority, the CFTC in early October said it is considering whether 13 other natural gas contracts and 11 power contracts offered by ICE should receive similar treatment (see Daily GPI, Oct. 8).
The CFTC said it would determine whether the named contracts, which are based on some of the most heavily traded market locations, perform SPDF, which would subject them to the Commission’s position limit authority, emergency authority and large trader reporting requirements, among others.
The 13 natural gas financial basis contracts are PG&E citygate; Waha; Malin; HSC (Houston Ship Channel); Dominion-South; AECO; Permian; TCO (Columbia Gas Transmission); San Juan; TETCO-M3; Transco Zone 6-NY; Chicago citygate; and NGPL-TexOk.
While noting that the characteristics of the ICE Henry Hub “look-alike” swap were deemed to have potential influence on the Nymex futures values and the underlying physical contracts traded at the benchmark Henry Hub pipeline confluence in Erath, LA (see Daily GPI, July 28), the proposed contracts now under consideration have characteristics that are “materially different” than the previous designation, NGSA said. It noted that the contracts for which the Commission is proposing SPDF status generally contain a pricing term that consists of the Henry Hub Nymex futures expiry price for the month and basis differential produced by an index publisher.
“Further, as opposed to the Henry Hub futures contract, the basis contracts do not, to NGSA’s knowledge, have a material effect on other agreements, contracts or transactions listed for trading…on a designated contract market, as is required to be designated a SPDC,” Fordham wrote. “The basis contracts are derivative of the Henry Hub futures contract, not the other way around. NGSA is not aware of contracts which are derivative of the basis contracts.”
Bringing these other contracts under tighter CFTC authority would likely be bad for the market, the NGSA said it believes.
“Without careful application of each of the SPDC core principles, premature SPDC designations risk hampering market development and expansion of potentially valuable risk-management tools. As can be seen from the foregoing, the subject contracts do not meet material elements of the SPDC criteria and do not merit SPDC status. Inappropriate SPDC designation would subject the contracts to unnecessary government interventions and could unintentionally result in inefficiencies and increased costs in the market.”
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