In May 2008, the Commodity Futures Trading Commission (CFTC) was “reauthorized” by Congress. In the reauthorization, the CFTC’s authority over Exempt Commercial Markets like the IntercontinentalExchange Inc. (ICE), particularly with respect to the trading of Significant Price Discovery Contracts (SPDC), was significantly enhanced. SPDCs are contracts that are linked to existing exchange-traded contracts; are traded on an electronic exchange; and perform a “significant price discovery function.” In March of 2009, the CFTC finalized its rulemaking regarding the definition of SPDCs and its process for designating contracts as SPDCs.
On June 9, 2009, the CFTC proposed to designate the Henry Hub Financial LD1 Fixed Price contract as an SPDC and on July 24 it formalized the designation. The CFTC determined that the high daily trading volume, the contract’s reliance on the settlement price for NYMEX natural gas futures, and the prevalent use of the contract’s prices by traders were all facts that indicated the Henry Hub LD1 contract satisfied some of the statutory criteria to designate an SPDC, including the material liquidity, price linkage and arbitrage criteria of an SPDC.
This exercise of authority will apply the CFTC’s regulatory and reporting requirements over these contracts traded on ICE for the first time. As a result of the CFTC action, Henry Hub LD1 contracts will be subject to enhanced CFTC oversight and futures-like requirements including possible position limits, large trader reporting requirements, and enhanced self-regulatory oversight by ICE. CFTC Chairman Gary Gensler called this action “a critical step toward ensuring a fair and orderly marketplace.”