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CME Assures Customers Ahead of Swap Dealer Rule Enactment

Looking to allay concerns from customers that some of its new product offerings will force a change in how they trade, CME Group issued an open letter last week that more fully explains how the exchange will operate once Dodd-Frank Wall Street Reform Act regulations on swap dealer registrations going into effect Oct. 12. The exchange also explained in more depth the previously announced rollout of a broad suite of new natural gas and power contracts that will be listed as futures on CME Globex, the New York Mercantile Exchange (Nymex) trading floor and CME ClearPort, and will be available for trading on CME Direct, a platform offering side-by-side trading and straight-through processing and clearing of exchange-listed and over the counter (OTC) energy markets.

The Commodity Futures Trading Commission's (CFTC) swap dealer registration regulations will require entities that have entered into more than the de minimis level of swap transactions after that date to register by no later than two months after the end of the month in which they exceeded the de minimis level. By way of example, if an entity reaches $8 billion in swap dealing the day after Oct. 12, then the entity would have to register as a swap dealer within two months after the end of October, or by Dec. 31 (see NGI, Sept. 17a).

In its letter last week, signed by Chairman Terry Duffy and CEO Gill Phupinder, CME said that a number of its ClearPort energy customers have asked whether they can continue to use CME ClearPort after Oct. 12, in the customary manner.

"First, it is important to note that energy transactions submitted to CME ClearPort are exempt from any new compliance obligations through Dec. 31, 2012, under final CFTC regulations, including the Effective Date Order voted on by the CFTC this summer and published in the Federal Register on July 13, 2012," CME said in the letter. "This means, among other things, customers can continue conducting business on ClearPort following the Oct. 12 effective date of the product definition rulemaking exactly as they do today without their trades being counted towards their de minimis swap dealing threshold."

The exchange said it wants to make clear that it has heard its customers' concerns and is taking action to ensure that CME ClearPort will continue to offer customers flexibility in the way they do business, and that any changes it is required to make to its service are made with a focus on minimum impact on its customers.

"With flexibility and minimal customer impact as our guiding principles, we will continue to offer the full suite of services available today, including the use of the ClearPort EFS, while providing new alternatives for customers who prefer the certainty of futures regulatory treatment throughout the contract lifecycle."

The clock continues to wind down on the deadlines to comply with the Dodd-Frank Wall Street reform act as rules continue to come online following the legislation's enactment in 2010. The exchange-tweaking moves in recent weeks by CME and IntercontinentalExchange (ICE) would appear to be a way for the exchanges to minimize the impacts or work around the new rules (see NGI, Sept. 17b).

CME's rollout of new energy contracts as futures follows rival ICE's announcement in late July that all cleared OTC products listed on its OTC energy market will be transitioned to futures products. Cleared North American natural gas, electric power, environmental products and natural gas liquids swaps will be listed as futures on the energy division of ICE Futures U.S. Cleared oil products, freight and iron ore swaps will be listed as futures on ICE Futures Europe. Earlier this month ICE announced that it was moving up the roll-out date for its OTC-to-futures conversion from January 2013 (see NGI, Aug. 6) to Oct. 15, 2012, due to "the strong preference of our customer base to trade futures as soon as practical."

In addition to continuing to transact using the ClearPort EFS, CME added that all CME ClearPort transactions are available on the trading floor today and will continue to be. "Many of our more liquid markets are available as futures on CME Globex today," the exchange said. "In both our floor and CME Globex markets, customers will have the ability to transact through private negotiation pursuant to new block trade rules."

In the coming days, and subject to regulatory review, CME said it is taking several additional actions to maximize customers' choice in execution in the energy markets, including: making additional CME ClearPort contracts available on CME Globex, expanding the product suite available for open auction or cross trading on the CME Globex platform. Several dozen will be listed by Oct. 12 with the majority of the slate to follow; establishing new block thresholds to allow customers to achieve futures treatment for privately negotiated transactions in 80-plus contracts, with block thresholds available on hundreds of additional products in the near future; and submitting a rule filing for 9(B)(iii) Trades (named for the applicable CEA section) which will allow customers in certain markets where there is little or no liquidity in the centralized market to transact privately negotiated futures contracts without a minimum size requirement.

In addition to CME Direct, a platform for side-by-side online trading of Exchange listed and OTC markets, the exchange reiterated Monday that it has created other new tools to support ease of access to CME markets. The exchange mentioned CME SDR for managing swaps reporting needs and CME Direct Messenger, an instant messaging platform integrated with CME Direct.

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