The Commodity Futures Trading Commission (CFTC) voted unanimously April 27 to designate seven natural gas contracts traded on the Intercontinental Exchange Inc. (ICE) as “significant price discovery contracts,” or SPDCs. These actions represent the U.S. Government’s first significant foray into the regulation of over-the-counter (OTC) derivatives transactions, which are currently the subject of Congress’s attention in Washington. In addition, these actions may evidence the CFTC’s interest in pursuing increased enforcement efforts and a greater presence in the energy sector. The CFTC has yet to act on 16 electricity contracts and one refined petroleum contract that have been identified in the Federal Register as potential SPDCs. The CFTC specifically designated as SPDCs the following natural gas contracts:
- NWP Rockies Financial Basis Contract,
- HSC Financial Basis Contract,
- PG&E Citygate Financial Basis Contract,
- Waha Financial Basis Contract,
- Chicago Financial Basis Contract,
- Socal Financial Basis Contract, and
- Alberta Financial Basis Contract.
These contracts, which were previously unregulated, will now be subject to heightened regulatory and reporting requirements by the CFTC, including position limits, large trader reporting requirements, and enhanced self-regulatory oversight by ICE. Alongside the April 27 designations, the CFTC voted unanimously not to regulate 17 contracts traded on ICE, Natural Gas Exchange, and the CCX carbon contract on the Chicago Climate Exchange.
As part of the CFTC’s rulemaking processes (initiated in October 2009), ICE and several industry groups filed comments unilaterally opposing the proposed SPDC designations, receycling familiar complaints that additional regulation would invite “unnecessary government interventions and could unintentionally result in inefficiencies and increased costs in the market.” In addition, industry commenters contended that the contracts at issue do not satisfy the “material price reference” criterion because their price is determined as a “floating” basis differential between two contracts—i.e., their value is derivative of other instruments, and not subject to independent valuation. These “basis” contracts, the argued, do not have a material effect on other agreements, contracts, or transactions listed for trading on a designated contract market, as required by the CFTC’s rules.
In both the orders approving the SPDC designations and the orders rejecting SPDC designations, the CFTC provided very limited analysis of the comments from industry groups. In response to opposition based on the “material price reference” criterion, the CFTC states that the opponents’ interpretation is “too limiting” because it “only considers the final index value on which the contract is cash settled after trading ceases.” Further, the CFTC stated that cash-settled derivatives contracts “could meet the prices reference criterion if market participants ‘consult on a frequent and recurring basis’ . . . when pricing forward.”
However, the designation of the seven contracts seems to be in keeping with a more aggressive regulatory role for the Commission. One day after designating the seven new SPDC contracts, CFTC Chairman Gensler pointed to the SPDC designations as indicative of the oversight and regulatory activities for which the Commission is seeking additional funding and a 25 percent staff increase, including a nearly 50 percent increase in enforcement staff over2008 staffing levels.