In an effort to step up the competition with brokers and EnronOnline, which some observers expect to suffer from Enron’s financial woes, the New York Mercantile Exchange (Nymex) started offering exchange of futures for swap (EFS) transactions last week as a first step in its plans to offer clearing services to the over-the-counter (OTC) natural gas market. In the first full day of EFS demand, 11,100 contracts changed hands and the exchange promptly lowered its fee for the deals to $2.50 per side from $10.

“We are gratified that the strong response to the introduction of this trading instrument will allow us to so heavily discount the transaction fee,” said Exchange President J. Robert Collins, Jr.

Tom Saal, a broker with Miami-based Pioneer Futures, said natural gas contract volume on the exchange “could increase tremendously” because of the new EFS services.

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

EFS transactions are permitted to liquidate, initiate, and transfer futures market positions between the two parties involved in the transaction. The clearing member representing each party is responsible to notify the exchange of the amount of futures contracts involved, the price at which the futures transaction should be cleared, and the identity of the parties involved. Year-to-date average daily volume in natural gas futures is 60,000 contracts. Last Thursdays volume, including the EFS transactions, was 73,364 contracts.

Nymex also plans to introduce large order execution in the natural gas futures market — bulk exchange of up to 250 contracts in the first two nearby months at the best bid or offer for that size — and electronic trading of cleared natural gas swaps and basis contracts.

“We are delighted that we were able to expedite the introduction of [EFS] as the current climate in the natural gas market has served to reinforce the necessity of credit intermediation,” said Collins. “The liquidity of our market, combined with a clearinghouse that has half billion dollars available to participants on each of the Exchange divisions through each guarantee fund and the respective clearing members, put us in a unique position to offer these services.

“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,” said Collins.

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.

Nymex natural gas futures and options volume in 2000 reached the equivalent of 230 Tcf of natural gas and the notional value of last year’s transactions Exchange-wide totaled $3 trillion, or $14 billion per day.

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