After nearly two years of deliberation, the Commodity FuturesTrading Commission conditionally approved a new rule permitting theNew York Mercantile Exchange to hold a three-year pilot duringwhich futures contracts can be exchanged for positions in swaptransactions (EFS transactions). Rule 6.21A is designed to providea closer link between the on-exchange futures market andoff-exchange swaps markets, giving off-exchange participantsgreater ability to manage the risks associated with swap positions.

EFS transactions will be similar to exchange of futures forphysical delivery transactions, or EFP transactions. Two partieswill be allowed to privately negotiate the execution of integratedover-the-counter swaps and related futures transactions on agreedupon pricing terms. The transaction must involve nearly equal butopposite side-of-the-market quantities of futures and swapexposures in the same or related commodities. The swap component ofthe transaction must involve the commodity underlying the futurescontract (or a derivative), and the quantity covered by the swapmust be approximately equivalent to the quantity covered by thefutures contract. EFS transactions will be permitted to initiate,transfer and liquidate futures market positions between the twoparties involved. The transactions will be recognized in all Nymexdivision markets.

The pilot is scheduled to begin Feb. 1. However, Nymex wouldhave preferred to offer the option without a pilot. The pilot wasimposed by the CFTC, along with special cumulative reportingrequirements for all EFS transactions during the pilot.

CFTC Commissioner Barbara Pedersen Holum concurred in part anddissented in part on the commission’s decision. She objected toholding a pilot and what she called “duplicative reportingrequirements,” saying they would “impede the competitive ability ofNymex without any offsetting regulatory purpose.” She said therestrictions would “discourage participation and detract from theunderlying economic utility of the EFS proposal.”

She also objected to the CFTC’s two-year delay in issuing itsdecision on the matter. “Efforts by commission staff to ‘fine-tune’oversight mechanisms, as has apparently occurred here, do notjustify the substantial delay in acting on this exchangeinitiative,” she said.

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

Rocco Canonica

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