The board of directors of the New York Mercantile Exchange (Nymex) has approved a series of measures to offer credit intermediation through clearing services and trading tools for the over-the-counter (OTC) natural gas market. The plan will include the introduction of exchange of futures for swap (EFS) transactions and large-order execution to the natural gas futures market within the next few weeks, along with the previously announced electronic trading of cleared natural gas swaps and basis contracts.

“Recent events in the natural gas market have served to reinforce the necessity of counterparty credit risk management and have accelerated the exchange’s plans to introduce a full array of risk management tools under the umbrella of our clearinghouse,” said exchange President J. Robert Collins, Jr. “Combining these trading vehicles with our Henry Hub futures contract will offer market participants the advantages of these instruments in conjunction with one of the most liquid commodity markets in the world, and provide greater stability to the market as a whole.”

Natural gas futures and options volumes on Nymex last year reached the equivalent of 230 Tcf. The notional value of last year’s transactions exchange-wide totaled $3 trillion, or $14 billion per day. One half billion dollars is available to participants on each of the exchange divisions through each guarantee fund and the respective clearing members.

EFS transactions will work similarly to exchange of futures for physical (EFP) transactions, Nymex said. Two parties will be allowed to privately negotiate the execution of an integrated over-the-counter swap and related futures transaction on pricing terms agreed upon by the involved parties. The transaction must involve equal but opposite side-of-market quantities of futures and swap exposures in the same or related commodities, and will be permitted until two hours after trading terminates in the underlying futures contract. EFS transactions will be permitted to liquidate, initiate and transfer futures market positions between the two parties involved in the transaction.

The clearing member representing each party will be responsible for notifying the exchange of the amount and type of futures contracts involved, the price at which the futures transaction should be cleared, and the identity of the parties involved.

The exchange will also begin permitting traders to execute block trades of 250 natural gas futures contracts or more in the first two nearby months at the best bid or offer for that size. These trades will not be permitted during the closing range.

Early next year, the exchange will introduce a cleared Henry Hub natural gas swaps contract, providing the marketplace with direct clearing on the most popular energy swap contract over the last several years. As part of this move, the exchange will clear OTC-executed transactions through its EFS mechanism.

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