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Nymex Gives Swap Traders New Options

Nymex Gives Swap Traders New Options

After nearly two years of deliberation, the Commodity Futures Trading Commission conditionally approved a new rule permitting the New York Mercantile Exchange to hold a three-year pilot during which futures contracts can be exchanged for positions in swap transactions (EFS transactions). Rule 6.21A is designed to provide a closer link between the on-exchange futures market and off-exchange swaps markets, giving off-exchange participants greater ability to manage the risks associated with swap positions.

EFS transactions will be similar to exchange of futures for physical delivery transactions, or EFP transactions. Two parties will be allowed to privately negotiate the execution of integrated over-the-counter swaps and related futures transactions on agreed upon pricing terms. The transaction must involve nearly equal but opposite side-of-the-market quantities of futures and swap exposures in the same or related commodities. The swap component of the transaction must involve the commodity underlying the futures contract (or a derivative), and the quantity covered by the swap must be approximately equivalent to the quantity covered by the futures contract. EFS transactions will be permitted to initiate, transfer and liquidate futures market positions between the two parties involved. The transactions will be recognized in all Nymex division markets.

The pilot is scheduled to begin Feb. 1. However, Nymex would have preferred to offer the option without a pilot. The pilot was imposed by the CFTC, along with special cumulative reporting requirements for all EFS transactions during the pilot.

CFTC Commissioner Barbara Pedersen Holum concurred in part and dissented in part on the commission's decision. She objected to holding a pilot and what she called "duplicative reporting requirements," saying they would "impede the competitive ability of Nymex without any offsetting regulatory purpose." She said the restrictions would "discourage participation and detract from the underlying economic utility of the EFS proposal."

She also objected to the CFTC's two-year delay in issuing its decision on the matter. "Efforts by commission staff to 'fine-tune' oversight mechanisms, as has apparently occurred here, do not justify the substantial delay in acting on this exchange initiative," she said.

Nevertheless, Nymex President R. Patrick Thompson said conditional approval was better than no approval at all.

Rocco Canonica

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