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CFTC to examine Chicago Climate Exchange's carbon instrument

The US Commodity Futures Trading Commission will examine whether a carbon financial instrument which trades on the Chicago Climate Exchange performs a significant price discovery function, the CFTC said on Aug. 17.

This will be the second time the commission uses authority it received on April 22 to determine if a specific transaction, contract, or agreement traded on an exempt commercial market performs a significant price discovery function, CFTC Chairman Gary G. Gensler said. If its investigation finds that a financial instrument fits that description, the ECM must comply with position limits, reporting requirements and other rules under the Commodity Exchange Act with respect to the transaction, contract, or agreement.

It ruled on July 24 that the InterContinental Exchange’s Henry Hub natural gas contract performed a significant price discovery function based on its its high average daily trading volume, its reliance on the New York Mercantile Exchange’s physically-delivered gas futures contract, and trader usage of the ICE contract’s prices. ICE declared itself a registered CFTC entity three days later and announced that it would begin submitting enhanced market statistics for its cash-settled Henry Hub gas swap market to the commission immediately.

The Chicago Climate Exchange operates North America’s only cap-and-trade system for six greenhouse gases, according to information at its website, www.chicagoclimatex.com. Members voluntarily agree to meet annual GHG reduction targets. Those who come in below those targets can sell or bank surplus allowances, while those who come in above the targets can buy CCF carbon financial instrument contracts, it said.

The CFTC said that it is conducting the review after initially evaluating information which CCX provided indicating that the carbon financial instrument several statutory criteria for a significant price discovery determination. It will accept public comments for 15 days following its Aug. 14 publication in the Federal Register of a notice of intent about the examination.

Contact Nick Snow at nicks@pennwell.com


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