[Federal Register: February 4, 2003 (Volume 68, Number 23)]
[Notices]
[Page 5621-5625]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04fe03-32]
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COMMODITY FUTURES TRADING COMMISSION
In the Matter of the New York Mercantile Exchange, Inc. Petition
for Interpretation Pursuant to Section 1a(12)(C) of the Commodity
Exchange Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: In response to a petition from the New York Mercantile
Exchange, Inc. (NYMEX or Exchange) the Commodity Futures Trading
Commission (Commission), pursuant to section 1a(12)(C) of the Commodity
Exchange Act (Act), is issuing an order that deems, subject to certain
conditions, Exchange floor brokers and floor traders who are registered
with the Commission, when acting in a proprietary trading capacity, to
be ``eligible contract participants'' as that term is defined in
section 1a(12) of the Act. Accordingly, subject to certain conditions
as set forth in the Commission's order, NYMEX floor brokers and floor
traders (collectively referred to hereafter as floor members), when
acting for their own accounts, are permitted to enter into certain
specified over-the-counter (OTC) transactions in exempt commodities
pursuant to section 2(h)(1) of the Act. In order to participate, the
floor member must have its OTC trades guaranteed by, and cleared at
NYMEX by, an Exchange clearing member that is registered with the
Commission as a futures commission merchant (FCM) and that meets
certain minimum working capital requirements. The order is effective
for a two-year period.
DATES: This order is effective February 4, 2003.
FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Special Counsel,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Center, 1155 21st Street, NW., Washington, DC 20581.
Telephone: 202-418-5492. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Statutory Background
Section 1a(12) of the Act, as amended by the Commodity Futures
Modernization Act of 2000 (CFMA), Pub. L. 106-554, which was signed
into law on December 21, 2000, defines the term ``eligible contract
participant'' (ECP) by listing those entities and individuals
considered to be ECPs.\1\ Under sections 2(d)(1), 2(g), and 2(h)(1) of
the Act, OTC transactions \2\ entered
[[Page 5622]]
into by ECPs in an ``excluded commodity'' or an ``exempt commodity,''
as those terms are defined by the Act,\3\ are exempt from all but
certain requirements of the Act.\4\ Floor brokers and floor traders are
explicitly included in the ECP definition only to the extent that the
floor broker or floor trader acts ``in connection with any transaction
that takes place on or through the facilities of a registered entity or
an exempt board of trade, or any affiliate thereof, on which such
person regularly trades.'' \5\
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\1\ Included generally in Section 1a(12) as ECPs are financial
institutions; insurance companies and investment companies subject
to regulation; commodity pools and employee benefit plans subject to
regulation and asset requirements; other entities subject to asset
requirements or whose obligations are guaranteed by an ECP that
meets a net worth requirement; governmental entities; brokers,
dealers, and futures commission merchants (FCM) subject to
regulation and organized as other than natural persons or
proprietorships; brokers, dealers, and FCMs subject to regulation
and organized as natural persons or proprietorships subject to total
asset requirements or whose obligations are guaranteed by an ECP
that meets a net worth requirement; floor brokers or floor traders
subject to regulation in connection with transactions that take
place on or through the facilities of a registered entity or an
exempt board of trade; individuals subject to total asset
requirements; an investment adviser or commodity trading advisor
acting as an investment manager or fiduciary for another ECP, and
any other person that the Commission deems eligible in light of the
financial or other qualifications of the person.
\2\ OTC transactions are transactions that are not executed on a
trading facility. As defined in Section 1a(33)(A) of the Act, the
term ``trading facility'' generally means ``a person or group of
persons that constitutes, maintains, or provides a physical or
electronic facility or system in which multiple participants have
the ability to execute or trade agreements, contracts, or
transactions by accepting bids and offers made by other participants
that are open to multiple participants in the facility or system.''
\3\ Section 1a(14) defines the term ``exempt commodity'' to mean
a commodity that is not an excluded commodity or an agricultural
commodity. Section 1a(13) defines the term ``excluded commodity'' to
mean, among other things, an interest rate, exchange rate, currency,
credit risk or measure, debt instrument, measure of inflation, or
other macroeconomic index or measure. Although the term
``agricultural commodity'' is not defined in the Act, Section 1a(4)
enumerates a non-exclusive list of several agricultural-based
commodities and products. The broadest types of commodities that
fall into the exempt category are energy and metals products.
\4\ OTC transactions in excluded commodities entered into by
ECPs pursuant to Section 2(d)(1) are generally not subject to any
provision of the Act. OTC transactions in exempt or excluded
commodities that are individually negotiated by ECPs pursuant to
section 2(g) are generally not subject to any provision of the Act.
OTC transactions in exempt commodities entered into by ECPs pursuant
to section 2(h)(1) are generally not subject to any provision of the
Act other than anti-manipulation provisions and anti-fraud
provisions in certain situations.
\5\ Section 1a(12)(A)(x) of the Act.
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The Act, however, gives the Commission discretion to expand the ECP
category as it deems appropriate. Specifically, section 1a(12)(C)
provides that the list of entities defined as ECPs shall include ``any
other person that the Commission determines to be eligible in light of
the financial or other qualifications of the person.''
II. The NYMEX Petition
A. Introduction
By letter dated May 23, 2002, NYMEX submitted a petition for a
Commission interpretation pursuant to section 1a(12)(C) of the Act.\6\
Specifically, NYMEX, acting on behalf of Exchange floor members and
member clearing firms, requested that the Commission make a
determination pursuant to section 1a(12)(C) of the Act that floor
members, when acting in a proprietary capacity, may enter into certain
specified OTC transactions in exempt commodities pursuant to section
2(h)(1) of the Act if such Commission registrants have obtained a
financial guarantee for such transactions from an Exchange clearing
member that is registered with the Commission as an FCM.\7\ NYMEX
suggested that the permissible OTC transactions be limited to trading
in a commodity that either (1) is listed only for clearing at the
Exchange,\8\ or (2) is listed for trading and clearing at the Exchange
and where Exchange rules provide for the exchange of futures for swaps
(EFS) in that contract.\9\ NYMEX further proposed that such
transactions would be subject to additional conditions and restrictions
detailed in the petition and described below.\10\
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\6\ In its petition, NYMEX also requested that the Commission
make a determination pursuant to section 1a(11)(C) of the Act that
floor members, when acting in a proprietary capacity, may also be
considered to be eligible commercial entities (ECE) when they enter
into certain specified transactions. Such a determination would
permit NYMEX floor members to enter into transactions in exempt
commodities on exempt commercial markets (ECM) pursuant to Section
2(h)(3) of the Act. On January 9, 2003, the Commission issued an
order that deems, subject to certain conditions, floor brokers and
floor traders who are registered with the Commission, when acting in
a proprietary trading capacity, to be ECEs as that term is defined
in Section 1a(11) of the Act. That order was published in the
Federal Register on January 16, 2003. 68 FR 2319 (January 16, 2003).
\7\ To qualify for the Section 2(h)(1) exemption, the
transaction must: (1) Be in an exempt commodity, (2) be entered into
by ECPs, and (3) not be entered into on a trading facility.
\8\ By letter dated May 24, 2002, NYMEX filed rule changes that
would implement an initiative to provide clearing services for
specified energy contracts executed in the OTC markets. NYMEX
certified that the rules comply with the Act and the Commission's
regulations. Under the provision, NYMEX initially listed 25
contracts that are entered into OTC and accepted for clearing by
NYMEX, but are not listed for trading on the Exchange. In connection
with the NYMEX initiative, on May 30, 2002, the Commission issued an
order pursuant to section 4d of the Act. The order provides that,
subject to certain terms and conditions, the NYMEX Clearing House
and FCMs clearing through the NYMEX Clearing House may commingle
customer funds used to margin, secure, or guarantee transactions in
futures contracts executed in the OTC markets and cleared by the
NYMEX Clearing House with other funds held in segregated accounts
maintained in accordance with section 4d of the Act and Commission
Regulations thereunder.
\9\ EFS transactions are permitted at the Exchange pursuant to
NYMEX Rule 6.21A, Exchange of Futures for, or in Connection with,
Swap Transactions. The swap component of the transaction must
involve the commodity underlying a related NYMEX futures contract,
or a derivative, by-product, or related product of such a commodity.
In furtherance of its effort to permit OTC clearing at the Exchange,
NYMEX amended the rule to include as eligible EFS transactions ``any
contract executed off the Exchange that the Exchange has designated
as eligible for clearing at the Exchange.''
\10\ NYMEX also suggested a further limitation on floor members'
permissible transactions by not permitting, initially, any
transactions in electricity commodities.
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The NYMEX petition was published in the Federal Register for public
comment on June 19, 2002. \11\ The Commission received comments from
NYMEX and from the Intercontinental Exchange, an ECM. In its comment
letter of July 17, 2002, NYMEX reaffirmed its strong interest in the
determination requested in the petition and its strong belief that such
a determination would have numerous pro-competitive results.\12\
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\11\ 67 FR 41698 (June 19, 2002). In that same Federal Register
release, the Commission also requested comments with respect to
NYMEX's request that the Commission make a determination pursuant to
section 1a(11)(C) of the Act that floor members, when acting in a
proprietary capacity, may also be considered to be ECEs when they
enter into certain specified transactions, as well as a petition
filed by the Intercontinental Exchange, Inc., requesting that the
Commission issue an order pursuant to section 1a(11) that would
expand the ECE category to include floor brokers and floor traders
registered as such in the U.S. or with the U.K. Financial Services
Authority. As previously noted, on January 9, 2003, the Commission
issued an order that deems, subject to certain conditions, floor
brokers and floor traders who are registered with the Commission,
when acting in a proprietary trading capacity, to be ECEs as that
term is defined in section 1a(11) of the Act.
\12\ The Commission also received a comment letter, dated
September 27, 2002, from the Managing Member of Hudson Capital
Group, L.L.C., an options trading group. The commenter strongly
supported the petition to allow NYMEX members to trade OTC energy
products.
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B. Public Interest Considerations
In its petition, NYMEX stated that the requested determination is
best considered against the overall context of the connection between
the OTC and exchange markets, and that it is good public policy for the
Commission to permit the strengthening of these ties when it is
possible to do so. The petition stated that NYMEX has concluded that
the ability of its floor members to trade OTC transactions pursuant to
an FCM guarantee, particularly OTC swaps involving NYMEX or NYMEX
``look-alike'' products, is a pivotal component, for the four reasons
described below, of the Exchange's business strategy to better serve
its customers.
First, NYMEX stated that permitting its floor members to enter into
OTC swaps would enhance their ability to provide liquidity to the
Exchange's markets. Second, NYMEX stated that access to OTC markets
would enhance floor members' ability to make tight markets in new
Exchange products that would compete against the standardized look-
alike contracts traded in the OTC markets.\13\ Third, NYMEX stated that
permitting its floor members to enter into EFS transactions with OTC
counterparties would expand the pool of potential counterparties for
OTC market participants and facilitate liquidity in the OTC
marketplace. Finally, with respect to the clearing of OTC transactions,
the Exchange intends that the open positions in futures
[[Page 5623]]
contracts created by the exchange of an OTC swap for a NYMEX future
would be offset by an opposite transaction in the OTC market, thus
providing a larger pool of market participants who would enter into a
transaction initiating or liquidating a position on the Exchange.
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\13\ In this regard, the petition states that 80 to 90 percent
of energy swaps transactions involve standardized economic terms.
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With respect to the economic impact on OTC markets, the petition
stated that permitting floor members to trade OTC transactions would
increase competition and efficiency, enhance price discovery, and
reduce the liquidity risk and the resultant increased market risk that
arises from artificial barriers to entry in the markets. NYMEX stated
that floor members participating in the OTC markets would perform the
same functions they perform in the Exchange market including, among
others, enhancing price discovery through the speed and efficiency of
market adjustment to new fundamentals and facilitating adjustment of
the market price to new information.
C. NYMEX's Analysis of the ECP Definition
In its petition, NYMEX contended that section 1a(12) of the Act
supports its requested treatment of floor members as ECPs for a number
of reasons. First, NYMEX stated that the treatment of floor members
under the section 1a(12) ECP definition appears to be inconsistent in
that it treats floor members differently based upon how they organize
their businesses. Specifically, floor members who operate as natural
persons are only considered ECPs if they satisfy a total asset
standard.\14\ By comparison, floor members that are organized as
partnerships or proprietorships are considered ECPs if they are
guaranteed by a specified entity and are not required to meet any total
asset requirement.\15\ The Exchange represented that floor trader
registrations are generally made in the name of the individual and that
exchange membership or seat ownership historically has been held in the
name of one individual.\16\
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\14\ Section 1a(12)(A)(xi) provides that an individual who meets
either of two total asset tests is an ECP. An individual must either
have total assets in an amount in excess of $10,000,000, or of
$5,000,000 and enter ``into the agreement, contract, or transaction
in order to manage the risk associated with an asset owned or
liability incurred, or reasonably likely to be owned or incurred, by
the individual.''
\15\ Section 1a(12)(A)(v) provides that a corporation,
partnership, proprietorship, organization, trust, or other entity
that meets one of three tests is an ECP. The entity must either (1)
have total assets exceeding $10,000,000; (2) have its obligations
guaranteed or otherwise supported by (subject to total assets or
other requirements) a financial institution, insurance company,
investment company, commodity pool, or governmental entity; or (3)
have a net worth exceeding $1,000,000 and enter ``into an agreement,
contract, or transaction in connection with the conduct of the
entity's business or to manage the risk associated with an asset
owned or liability incurred or reasonably likely to be owned or
incurred by the entity in the conduct of the entity's business.''
\16\ NYMEX's argument on this point is premised on the
assumption that floor brokers and floor traders may alternatively
qualify as ECPs under provisions of the ECP definition that
specifically refer to ``a corporation, partnership, proprietorship,
organization, trust, or other entity'' (section 1a(12)(A)(v)) and to
``an individual'' (section 1a(12)(A)(xi)). At present, the
Commission is neither accepting nor rejecting the Exchange's
interpretation of the ECP definition, but is exercising the
authority granted under section 1a(12)(C). As previously noted, the
only provision of the ECP definition that specifically refers to
floor brokers or floor traders is section 1a(12)(A)(x), which
includes within the definition of ECP a floor broker or floor trader
to the extent that the floor broker or floor trader acts in
connection with any transaction that takes place on or through the
facilities of a registered entity or an exempt board of trade, or
any affiliate thereof, on which such person regularly trades.
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Second, the petition stated that the treatment of floor members
under Section 1a(12) is inconsistent with the treatment of brokers or
dealers or foreign persons (performing similar roles or functions
subject to foreign regulation) who are natural persons or
proprietorships. Under section 1a(12)(viii), these persons may be
considered to be ECPs by meeting either the total assets test of
section 1a(12)(xi) or satisfying one of the provisions of 1a(12)(v).
Thus, under section 1a(12)(v) a broker or dealer or foreign person
operating as a natural person, but not a floor member similarly
operating, is permitted to trade OTC products with a guarantee from one
of the specified entities and without meeting any total asset
requirements.
Third, NYMEX contended that floor members with FCM guarantees
should be considered ECPs because the Act permits other entities to use
guarantees as a substitute for meeting a total assets requirement.
Specifically, NYMEX stated that section 1a(12)(v) of the Act permits a
corporation, partnership, proprietorship, organization, trust, or other
entity to obtain a guarantee or support via a letter of credit from a
financial institution, insurance company, investment company, commodity
pool, or governmental entity.
Finally, NYMEX argued that it is reasonable for floor members to
rely on FCMs as guarantors.\17\ Under section 1a(12)(A)(v), ``a
corporation, partnership, proprietorship, organization, trust, or other
entity'' may be considered an ECP if it is guaranteed by a commodity
pool with more than $5 million in total assets. NYMEX pointed out that
commodity pools generally are not in the business of conducting risk
management for or providing guarantees in connection with trading in
the OTC markets. NYMEX stated that if commodity pools are allowed to
provide guarantees, then FCMs, who are in the business of monitoring
trading by the Exchange members that they guarantee, should be
permitted to provide such guarantees for floor members. NYMEX stated
that its rules provide that each Exchange clearing member registered as
an FCM must maintain minimum working capital of at least $5
million.\18\
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\17\ The Commission believes that the FCM guaranteeing the OTC
transactions should also have the obligation to clear the
transactions at NYMEX.
\18\ Pursuant to NYMEX Rule 9.21(B), each clearing member
registered with the Commission as an FCM must have and maintain
minimum working capital equal to or in excess of the greater of $5
million or the amount prescribed in Commission Regulation 1.17. As
an additional safeguard for the clearing system, the Commission
believes that a higher capitalization standard would be appropriate
where the clearing member FCM is guaranteeing the OTC transactions
of a floor member.
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D. Trading Restrictions and Exchange Oversight
In its petition, NYMEX represented that it would have appropriate
compliance systems in place to monitor OTC trading by Exchange floor
members. Because all the permissible OTC trading subsequently would be
cleared at the Exchange, NYMEX would be able to obtain information
concerning the OTC transactions as part of a review of the exchange of
futures for physicals (EFP) or the EFS transaction bringing the
transaction to the Exchange for clearing. Failure to comply with a
request to provide such information pursuant to the Exchange's EFP or
EFS rules would result in a referral to the Exchange's Business Conduct
Committee for further action.
NYMEX also suggested that, consistent with the standards which
already apply to floor members with respect to their trading on the
Exchange, the Commission should provide that floor members'
transactions in the permissible contracts that are not executed on a
trading facility be executed only pursuant to the section 2(h)(1)
exemption. As indicated above, all section 2(h)(1) transactions would
be subject to the Commission's anti-manipulation provisions and, in
certain situations, anti-fraud provisions.\19\ Finally, the Exchange
represented that it would agree, as a condition for its members
participating in the OTC markets, to limit OTC trading by floor members
such that the counterparties to their trades must not be floor members
[[Page 5624]]
for contracts that are listed for trading on the Exchange. Thus, for
example, floor members could not be counterparties in connection with
an OTC natural gas swap to be exchanged for a futures position in the
NYMEX Natural Gas futures contract. NYMEX floor members could be
counterparties in connection with a Chicago Basis swap that is
subsequently cleared at NYMEX through EFS procedures because that
contract is listed only for clearing at the Exchange.
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\19\ See supra note 4.
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IV. Conclusion
After consideration of the NYMEX petition and review of the
comments, the Commission has determined that NYMEX floor members,
subject to certain conditions and for a two-year period commencing on
the date of publication of the order in the Federal Register, are
eligible to be ECPs as that term is defined in section 1a(12) of the
Act.\20\ The floor members meet the financial qualifications of an ECP
by having a financial guarantee for the OTC transactions from a NYMEX
clearing member that is registered as an FCM and must satisfy certain
minimum working capital requirements.
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\20\ A NYMEX floor member who is determined to be an ECP based
upon compliance with the provisions set forth in the Commission's
order is an ECP only for the purpose of entering into transactions
executed pursuant to Section 2(h)(1) of the Act and as described in
the order.
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The Commission is aware that the execution and clearing of such
transactions has financial implications for the clearing system.\21\
Thus, the Commission is adding the following safeguards to limit the
possibility of a trader entering into OTC transactions that could
create financial difficulty for the guarantor FCM, the clearing entity
or other clearing firms. First, the guarantor FCM must clear, at NYMEX,
every OTC transaction for which it provides such a guarantee. Second,
in order to assure that the guarantor FCM is adequately capitalized,
the guarantor FCM must have and maintain at all times minimum working
capital of at least $20 million; provided that, however, during the
first 18 months following publication of the order a clearing member
must have and maintain minimum working capital of at least:
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\21\ The Commission notes that the guarantor FCM could restrict
or otherwise condition the trading for which the guarantee is
provided. The guarantor could, for instance, limit trading to
certain commodities, place financial limits on overall or daily
positions, or restrict trading by number or size of acceptable
transactions.
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(a) $5 million during the first twelve months of the two-year
period; and
(b) $10 million during the thirteenth through eighteenth months of
the two-year period.
If, during the 18-month period, a clearing member does not maintain
working capital of at least $20 million, it must further reduce its
working capital, to determine if it is in compliance with paragraphs
(a) or (b) above, by 100 percent of the NYMEX margin requirements for
the OTC contracts, agreements or transactions of floor brokers and
floor traders that it is guaranteeing pursuant to the order. A clearing
member must compute its working capital in accordance with exchange
rules and generally accepted accounting principles consistently
applied.\22\
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\22\ The Commission believes that the guarantor FCM should
ultimately have and maintain minimum working capital of $20 million,
but is providing less-capitalized FCMs that wish to guarantee OTC
transactions with the opportunity to do so during the 18-month
transition period in which they increase their working capital. The
Commission notes that the $20 million requirement is somewhat
analogous to the eligible trader requirements for trading on a
registered derivatives transaction execution facility (DTEF).
Pursuant to section 5a(b)(3) of the Act, to trade on a DTEF, a
person must either be an ECP or trade through an FCM that, among
other things, has net capital of at least $20 million.
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Another qualification of floor members that the Commission finds
significant with respect to the eligibility of floor members to be ECPs
is trading expertise. The Commission believes that the participation of
floor members in the OTC markets under the circumstances described here
potentially could, among other things, increase liquidity on the
Exchange and in the OTC marketplace, increase competition and
efficiency, and expand the pool of counterparties for OTC market
participants.
The Commission has determined to make the order effective for a
two-year period in order to provide the opportunity to evaluate the
impact of the OTC trading on both the OTC market and on NYMEX. Thus,
the Commission is requiring that NYMEX submit a report reviewing its
experiences and the experiences of its floor brokers, floor traders and
clearing members with respect to OTC trading, including the levels of
OTC trading and related clearing activity; the number of floor brokers,
floor traders and clearing members who participated in these
activities; and an evaluation of whether the Commission should extend
this Order and, if so, whether any modifications should be made
thereto. This report would address the first eighteen months of the
two-year period, and must be submitted to the Commission no later than
30 days after the conclusion of eighteen months.
Accordingly, the Commission has determined, consistent with the
NYMEX petition, that it is appropriate to issue an order, pursuant to
section 1a(12)(C) of the Act, that includes, subject to certain
conditions and for a two-year period commencing on the date of
publication of the order in the Federal Register, NYMEX floor brokers
and floor traders within the definition of ECPs who can enter into OTC
transactions pursuant to section 2(h)(1) of the Act. Although this
order applies only to NYMEX and NYMEX members, the Commission would
welcome, in response to a petition so requesting, providing
substantially similar relief to other designated contract markets and
members of designated contract markets.
IV. Cost Benefit Analysis
Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission to consider the costs and benefits of its
action before issuing a new regulation or order under the Act. By its
terms, section 15 does not require the Commission to quantify the costs
and benefits of its action or to determine whether the benefits of the
action outweigh its costs. Rather, section 15 simply requires the
Commission to ``consider the costs and benefits'' of the subject rule
or order.
Section 15(a) further specifies that the costs and benefits of the
proposed rule or order shall be evaluated in light of five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
may, in its discretion, give greater weight to any one of the five
enumerated areas of concern and may, in its discretion, determine that,
notwithstanding its costs, a particular rule or order is necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the Act.
The order is intended to reduce regulatory barriers to permit NYMEX
members registered with the Commission as floor brokers or floor
traders, when acting in a proprietary capacity, to enter into OTC
transactions in exempt commodities pursuant to section 2(h)(1) of the
Act if such floor members have obtained a financial guarantee for such
transactions from an Exchange clearing member that is registered with
the Commission as an FCM. The Commission has considered
[[Page 5625]]
the costs and benefits of the order in light of the specific provisions
of section 15(a) of the Act.
A. Protection of Market Participants and the Public
The order would permit, for a two-year period commencing on the
date of its publication in the Federal Register, a registered floor
broker or floor trader to participate in the OTC markets, subject to a
guarantee from an Exchange clearing member registered as an FCM, as
well as to Exchange oversight and certain trading restrictions.
Accordingly, there should be no effect on the Commission's ability to
protect market participants and the public.
B. Efficiency and Competition
The order is expected to benefit efficiency and competition by,
among other things, increasing the flow of trading information to the
Exchange, enhancing the ability of floor members to make tight markets
in products that compete against standardized look-alike contracts
traded in the OTC markets, and increasing the pool of potential
counterparties for OTC market participants.
C. Financial Integrity of Futures Markets and Price Discovery
The order should have no effect, from the standpoint of imposing
costs or creating benefits, on the financial integrity of the futures
and options markets. The order may have a favorable effect in creating
benefits with respect to the price discovery function of such markets.
D. Sound Risk Management Practices
The order should have no effect, from the standpoint of imposing
costs, on the risk management practices of the futures and options
industry. Clearing member FCMs that would, on a case-by-case basis, be
extending guarantees to floor members for OTC trading have developed
risk management practices in connection with extending similar
guarantees to floor members for trading executed at the Exchange.
Because the scope of permissible trading would be limited to OTC
transactions that subsequently are cleared at the Exchange, clearing
member FCMs could apply existing risk management practices and
procedures. The order would enhance the ability of floor members to
manage the risks associated with the positions they establish in
Exchange contracts.
E. Other Public Interest Considerations
The order is consistent with one of the purposes of the Act as
articulated in Section 3 in that it would promote responsible
innovation and fair competition among boards of trade, other markets
and market participants.
V. Order
Upon due consideration, and pursuant to its authority under section
1a(12)(C) of the Act, the Commission hereby determines that a NYMEX
member who is registered with the Commission as a floor broker or a
floor trader, when acting in a proprietary trading capacity, is deemed
to be an eligible contract participant and may enter into Exchange-
specified OTC contracts, agreements or transactions in an exempt
commodity under the following conditions:
1. This Order is effective for two years commencing on the date of
its publication in the Federal Register.
2. The contracts, agreements or transactions must be executed
pursuant to section 2(h)(1) of the Act.
3. The floor broker or floor trader must have obtained a financial
guarantee for the contracts, agreements or transactions from a NYMEX
clearing member that:
(a) Is registered with the Commission as an FCM; and,
(b) Clears the OTC contracts, agreements or transactions thus
guaranteed.
4. Permissible contracts, agreements or transactions must be
limited to trading in a commodity that either:
(a) Is listed only for clearing at NYMEX or
(b) Is listed for trading and clearing at NYMEX and NYMEX's rules
provide for exchanges of futures for swaps in that contract, and each
OTC contract, agreement or transaction executed pursuant to the order
must be cleared at NYMEX.
5. The floor broker or floor trader may not enter into OTC
contracts, agreements or transactions with another floor broker or
floor trader as the counterparty for contracts that are listed for
trading on the Exchange.
6. NYMEX must have appropriate compliance systems in place to
monitor the OTC contracts, agreements or transactions of its floor
brokers and floor traders.
7. Clearing members that guarantee and clear OTC contracts,
agreements or transactions pursuant to this Order must have and
maintain at all times minimum working capital of at least $20 million;
provided, however, that during the first 18 months following
publication of the order a clearing member must have and maintain
minimum working capital of at least:
(a) $5 million during the first twelve months of the two-year
period; and
(b) $10 million during the thirteenth through eighteenth months of
the two-year period.
If, during the 18-month period, a clearing member does not maintain
working capital of at least $20 million, it must further reduce its
working capital, to determine if it is in compliance with paragraphs
7(a) or 7(b) of the order, by 100 percent of the NYMEX margin
requirements for the OTC contracts, agreements or transactions of floor
brokers and floor traders that it is guaranteeing pursuant to the
order. A clearing member must compute its working capital in accordance
with exchange rules and generally accepted accounting principles
consistently applied.
8. NYMEX will submit a report to the Commission reviewing its
experiences and the experiences of its floor brokers, floor traders and
clearing members under this Order, including the levels of OTC trading
and related clearing activity; the number of floor brokers, floor
traders and clearing members who participated in these activities; and
an evaluation of whether the Commission should extend this Order and,
if so, whether any modifications should be made thereto. This report
will address the first eighteen months of this Order's two-year period,
and must be submitted to the Commission no later than 30 days after the
conclusion of those eighteen months.
This Order is based upon the representations made and supporting
material provided to the Commission by NYMEX. Any material changes or
omissions in the facts and circumstances pursuant to which this Order
is granted might require the Commission to reconsider its finding that
the provisions set forth herein are appropriate. Further, if experience
demonstrates that the continued effectiveness of this Order would be
contrary to the public interest, the Commission may condition, modify,
suspend, terminate or otherwise restrict the provisions of this Order,
as appropriate, on its own motion.
Issued in Washington, DC, on January 29, 2003, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-2507 Filed 2-3-03; 8:45 am]
BILLING CODE 6351-01-P