After nearly two years of deliberation, the Commodity FuturesTrading Commission last week conditionally approved a new rule,permitting the New York Mercantile Exchange to hold a three-yearpilot during which futures contracts can be exchanged for positionsin swap transactions (EFS transactions).

Rule 6.21A is designed to provide a closer link between theon-exchange futures market and off-exchange swaps markets. It willallow market participants to manage the risks associated with theirswap positions more efficiently, according to Nymex.

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 goes into effect Feb. 1. However, Nymex did notrequest a pilot period for the new rule. The pilot was imposed bythe CFTC, along with special cumulative reporting requirements forall EFS transactions during the pilot.

CFTC Commissioner Barbara Pedersen Holum concurred in part anddissented in part on the commission’s decision. She objected to thepilot restriction and what she called “duplicative reportingrequirements.” She said implementing the rule in a pilot would”discourage participation and detract from the underlying economicutility of the EFS proposal.

“Also, imposing special comprehensive reporting appearsill-advised for the EFS proposal, especially since existing Nymexand CFTC rules ensure maintenance and availability of applicabletrade documents on an as-needed basis.. In sum, adopting theproposal on a pilot basis and imposing duplicative reportingrequirements will impede the competitive ability of Nymex withoutany offsetting regulatory purpose.” Holum said the two regulatoryconditions should be eliminated, and the EFS proposal given anunrestricted approval.

She also objected to the two-year delay before a CFTC decisionon 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.

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