Until this month, only one contract traded on an exempt commercial market was considered by the Commodity Futures Trading Commission (CFTC) to be a significant price discovery contract (SPDC). SPDCs are considered to perform significant price discovery functions, and the CFTC can require that specific position limits and position accountability standards be adopted for them. Seven more natural gas contracts have now joined that category.
In its April 27, 2010 meeting, the CFTC examined 23 natural gas contracts traded on two exempt commercial markets, the Intercontinental Exchange (ICE) and Natural Gas Exchange (NGX). It voted to designate seven ICE natural gas contracts as SPDCs. All of them are financially settled basis contracts that are priced at a differential between the New York Mercantile Exchange (NYMEX) settlement price for Henry Hub natural gas and the value of natural gas at other locations, specifically:
- Southern California (border with Arizona)
- PG&E Citygate (San Francisco area)
- Northwest Rockies (Wyoming, Utah, and Colorado)
- Alberta, Canada
- Chicago, Illinois
- Houston Ship Channel
- Waha (West Texas near New Mexico border)
These seven now join the Henry Hub Financial LD1 Fixed Price contract traded on ICE, which the CFTC designated a SPDC last summer. As background, ICE operates as an exempt commercial market under the Commodity Exchange Act (CEA). Pursuant to amendments to the CEA in 2008, ICE is subject to certain regulatory obligations and CFTC oversight with respect to its markets in contracts that are designated by the CFTC as SPDCs. Thus, for each of these SPDC-designated seven contracts, ICE must adopt spot month position limits if trades in the contract are cleared. ICE also will have to adopt position accountability levels or position limits for the contracts for the non-spot months and all months combined and implement large trader position reporting for the contracts.
The CFTC is in the process of evaluating 16 electricity contracts and one refined petroleum contract to determine if any should be designated as SPDCs. CFTC staff has indicated that it will be presenting analysis and recommendations to the CFTC commissioners in one to two months.
In a separate matter, on April 22, 2010, the CFTC issued an order settling charges against the San Diego Gas & Electric Company (SDG&E) for engaging in wash sales in natural gas futures contracts traded on NYMEX. Wash sales involve transactions with the intention to avoid taking a bona fide market position and are unlawful under CEA §4c(a). The CFTC found that SDG&E engaged in wash sales by placing simultaneous buy and sell orders for NYMEX natural gas contracts between January 26 and February 2, 2006, with instructions that the buy and sell orders be executed at or near the same price, and that the orders were in fact executed at or around the same price and time. SDG&E settled the charges without admitting or denying the CFTC's findings. Under the settlement offer, the CFTC ordered SDG&E to cease and desist from violating CEA §4c(a), pay a civil monetary penalty of $80,000, and implement procedures to ensure that its trading on U.S. futures markets complies with the CEA, CFTC rules, and applicable exchange rules.