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
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.
©Copyright 1999 Intelligence Press, Inc. All rights
reserved. The preceding news report may not be republished or
redistributed in whole or in part without prior written consent of
Intelligence Press, Inc.