[Federal Register: June 19, 2002 (Volume 67, Number 118)]
[Notices]
[Page 41698-41702]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19jn02-39]

-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION


In the Matter of the New York Mercantile Exchange, Inc. Petition
for Treatment of Floor Brokers and Floor Traders as Eligible Commercial
Entities and Eligible Contract Participants Pursuant to Sections
1a(11)(C) and 1a(12)(C) of the Commodity Exchange Act and the
Intercontinental Exchange, Inc. Petition for Treatment of Floor Brokers
and Floor Traders as Eligible Commercial Entities Pursuant to Section
1a(11)(C)

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
requesting comment regarding a New York Mercantile Exchange, Inc.
(``NYMEX'' or ``Exchange'') petition requesting a Commission
determination that Exchange members who are registered with the
Commission as either floor brokers or floor traders fall within the
definitions of ``eligible contract participant'' as that term is
defined in Section 1a(12) of the Commodity Exchange Act (``Act'') and
``eligible commercial entity'' as that term is defined in Section
1a(11) of the Act. Subject to trading restrictions and Exchange
oversight as set forth in the petition, NYMEX asks that its floor
brokers and floor traders (collectively referred to hereafter as
``floor members''), when they act for their own accounts and are
guaranteed by an Exchange clearing member that is registered as a
futures commission merchant (``FCM''), be permitted to: (1) Act as an
eligible contract participant and enter into certain specified over-
the-counter (``OTC'') transactions in exempt commodities, and (2) act
as an eligible commercial entity and enter into certain specified
transactions in exempt commodities on exempt commercial markets. The
Commission is also requesting comment with respect to an
Intercontinental Exchange, Inc. (``Intercontinental Exchange'')
petition that requests that, subject to certain restrictions, the
category of eligible commercial entity be expanded to include floor
brokers and floor traders registered with the Commission or with the
U.K. Financial Services Authority trading on an exempt commercial
market. The Commission particularly asks for comments with respect to
whether any response to the petitions should be tailored specifically
to NYMEX and the Intercontinental

[[Page 41699]]

Exchange and to the narrow circumstances presented in the petitions or
whether a response should be more broadly based and, thus, also
applicable to other entities.

DATES: Comments must be received by July 5, 2002.

ADDRESS: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to 202-418-5521 or, by e-mail to
secretary@cftc.gov. Reference should be made to ``ECP/ECE Petitions.''

FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Center, 1155 21st Street, NW., Washington, DC 20581.
Telephone: 202-418-5492. E-mail: dandresen@cftc.gov.

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. ECPs that enter into OTC transactions \1\ in an
``excluded commodity'' or an ``exempt commodity,'' as those terms are
defined by the Act,\2\ are not subject to various requirements of the
Act.\3\ The ECP definition directly includes floor brokers and floor
traders 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.'' \4\
---------------------------------------------------------------------------

    \1\ 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.''
    \2\ 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 that 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 macroelectronic index or measure. Although the
term ``agricultural commodity'' is not defined in the Act, section
1a(4) enumerates several agricultural-based commodities and
products. The broadest types of commodities that fall into the
exempt category are energy and metals products.
    \3\ Under Section 2(d)(1) of the Act, ECPs that enter into OTC
transactions in excluded commodities are generally not subject to
any provisions of the Act. Under Section 2(g) of the Act, ECPs that
individually negotiate OTC transactions in exempt or excluded
commodities are generally not subject to any provision of the Act.
Under Section 2(h)(1) of the Act, ECPs that enter into OTC
transactions in exempt commodities are generally not subject to any
provisions of the Act other than certain anti-fraud and anti-
manipulation provisions.
    \4\ Section 1a(12)(A)(x) of the Act.
---------------------------------------------------------------------------

    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.''
    Similarly, Section 1a(11) of the Act defines the term ``eligible
commercial entity'' (``ECE'') by listing those ECPs that are qualified
to be ECEs. Floor brokers and floor traders, even if determined to fall
within the definition of ECP, do not qualify as ECEs, under the ECE
definition, for the purpose of engaging in OTC transactions. The Act,
however, gives the Commission discretion to expand the ECE category.
Specifically, Section 1a(11)(C) provides that the list of entities
defined as ECEs shall include ``such other persons as the Commission
shall determine appropriate and shall designate by rule, regulation, or
order.'' A determination under this provision that floor brokers and
floor traders are considered ECEs would permit the floor brokers and
floor traders to enter into transactions in exempt commodities on
exempt commercial markets (``ECM'') pursuant to Section 2(h)(3) of the
Act.\5\
---------------------------------------------------------------------------

    \5\ Under Section 2(h)(3), ECMs are markets that limit
themselves to transactions: (1) in exempt commodities, (2) entered
into on a principal-to-principal basis by ECEs, and (3) executed or
traded on an electronic trading facility. An ECM is not a registered
entity, but is required to notify the Commission of its intention to
operate an electronic facility in reliance on the exemption set
forth in Section 2(h)(3). The notification of operation as an ECM
must include several certifications and, pursuant to Commission
Regulation 36.3(c)(3), a representation that it will require each
participant to comply with all applicable law and that it has a
reasonable basis for believing that authorized participants are
ECEs. ECM transactions are subject to certain of the Act's anti-
fraud and anti-manipulation provisions.
---------------------------------------------------------------------------

II. Eligible Contract Participants

1. The NYMEX Petition

    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 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. NYMEX suggested that the permissible OTC transactions be
limited to trading in a commodity that either (1) is listed only for
clearing on the Exchange,\7\ 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.\8\ NYMEX further proposed
that such transactions would be subject to additional conditions and
restrictions detailed in the petition and described below.
---------------------------------------------------------------------------

    \6\ As discussed below, NYMEX also requested a Commission
interpretation pursuant to Section 1a(11)(C) of the Act. By letter
dated June 3, 2002, NYMEX supplemented its petition.
    \7\ 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 Commission
Regulation 40.6. Under the initiative, NYNEX will list 25 contracts
that will be entered into OTC and accepted for clearing by NYMEX,
but will 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.
    In its petition, NYMEX suggested a further limitation on floor
members' permissible OTC transactions by not permitting, at this
time, any OTC transactions on the three electricity commodities
contracts included among the 25 identified contracts.
    \8\ 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 on the Exchange that the Exchange has designated
as eligible for clearing at the Exchange.'' Currently, NYMEX permits
EFS transactions in the following commodities: Natural Gas, NYMEX
Brent Crude Oil, and Aluminum.
---------------------------------------------------------------------------

A. Public Interest Considerations
    In its petition, the Exchange states that the requested
determination is best considered against the overall context of the
connection between the OTC and

[[Page 41700]]

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 Exchange includes the requested determination among a number of
initiatives intended to better serve the OTC community as part of the
Exchange's goal of becoming the ``one-stop shop for the entire energy
industry.'' The petition states 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 states that the ability of its floor members to enter
into OTC swaps would enhance their function in providing liquidity to
the Exchange's markets. Floor members would increase their access to
trading information in the ``upstairs'' or OTC markets, and this
increased informational flow would assist floor members in maintaining
tight bid-ask spreads with respect to Exchange-traded products that
compete or have strong price relationships with OTC products. Second,
NYMEX states that the ability of its floor members to make tight
markets in new Exchange products that would compete against the
standardized look-alike contracts traded in the OTC markets would be
enhanced. In this regard, the petition states that 80 to 90 percent of
energy swap transactions involve standardized economic terms.
    Third, NYMEX states that its floor members would be able to enter
into EFS transactions with OTC counterparties, thereby expanding the
pool of potential counterparties for OTC market participants and
facilitating liquidity in the OTC marketplace. Finally, with respect to
the clearing of OTC transactions, the Exchange intends that the open
positions in futures 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.
    With respect to the economic impact on OTC markets, the petition
states 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 states
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.
B. NYMEX's Analysis of the ECP Definition
    In its petition, NYMEX contends that Section 1a(12) of the Act
supports its requested treatment of floor members as ECPs for a number
of reasons. First, NYMEX states that the treatment of floor brokers and
floor traders under the Section 1a(12) ECP definition appears to be
inconsistent in that it treats floor brokers and floor traders
differently based upon how they organize their businesses.
Specifically, floor brokers and floor traders who operate as natural
persons are only considered ECPs if they satisfy a total asset
standard.\9\ 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.\10\ The Exchange represents 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.\11\
---------------------------------------------------------------------------

    \9\ 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.''
    \10\ 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, or 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.''
    \11\ As indicated above, the only provision of the ECP
definition that specifically refers to floor brokers or floor
traders is Section 1a(12)(A)(x). 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)). In
publishing the request for comment on NYMEX's petition, the
Commission is neither accepting nor rejecting the Exchange's
interpretation of the ECP definition.
---------------------------------------------------------------------------

    Second, the petition states that the treatment of floor brokers and
floor traders 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. The latter entities 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, Section 1a(12)
permits a broker or dealer or foreign person operating as a natural
person, but not a floor broker or floor trader similarly operating, to
trade OTC products pursuant to Section 1a(12)(v) with a guarantee from
one of the specified entities without meeting any total asset
requirements.
    Third, NYMEX contends that floor members with FCM guarantees should
be considered ECPs because the Act permits other entities to use
guarantees as a substitute for a total assets requirement in meeting
the ECP definition. Specifically, NYMEX states that 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 argues that it is
reasonable for floor brokers and floor traders to rely on FCMs as
guarantors. 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 points 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 states 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 states that its rules provide
that each Exchange clearing member registered as an FCM must maintain
minimum working capital of at least $5 million.\12\
---------------------------------------------------------------------------

    \12\ 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.

---------------------------------------------------------------------------

[[Page 41701]]

C. Trading Restrictions and Exchange Oversight
    In its petition, NYMEX represents 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 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 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.\13\ As indicated above, all Section 2(h)(1) transactions
would be subject to the Commission's anti-fraud and anti-manipulation
prohibitions.\14\ Finally, the Exchange represented that it would
agree, as a condition for participating in the OTC markets, to limit
OTC trading by floor brokers and floor traders such that the
counterparties to their trades must not be floor brokers or floor
traders for contracts that are listed for trading on the Exchange, such
as in connection with an OTC natural gas swap to be exchanged for a
futures position in the NYMEX Natural Gas futures contract.
---------------------------------------------------------------------------

    \13\ 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.
    \14\ See supra note 3.
---------------------------------------------------------------------------

III. Eligible Commercial Entities

1. The NYMEX Petition

    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 ECEs when they enter into certain specified transactions. Such a
determination would permit NYMEX floor members to enter into
transactions in exempt commodities on ECMs pursuant to Section 2(h)(3)
of the Act.\15\ NYMEX stated that floor members permitted to enter into
transactions as ECEs would be subject to the same previously-described
conditions and restrictions applicable to floor members permitted to
enter OTC transactions as ECPs, except that NYMEX did not propose that
floor brokers and floor traders acting as ECEs be subject to the
counterparty limitation. NYMEX states that it does not intend to limit
floor brokers and floor traders acting as ECEs and trading on ECMs to
counterparties other than floor brokers and floor traders because ECMs
may permit transactions to be conducted anonymously between
counterparties and the Exchange would have no effective means to ensure
compliance with a counterparty restriction.\16\
---------------------------------------------------------------------------

    \15\ NYMEX represents that all of the permissible trading on
ECMs would subsequently be cleared at the Exchange.
    \16\ ECMs that do not provide for the clearing of transactions,
however, may require traders to pre-approve those counterparties
against whom they will accept bids or offers. Thus, it may be
possible for floor brokers or floor traders to specify the potential
entities that are acceptable counterparties.
---------------------------------------------------------------------------

    As additional support for its request for a determination that
floor members be able to trade as ECEs on ECMs, NYMEX states that floor
members, if determined to be ECPs, would meet the requirements of
Section 1a(11)(A) of the Act in that the floor members provide risk
management and market-making activities in energy and metals
derivatives products. NYMEX further stated that allowing floor members
with an FCM guarantee to execute transactions as ECEs on ECMs would
simply be an extension of the services that floor members currently
provide to users of NYMEX's markets.

2. The Intercontinental Exchange Petition

    By letter dated June 3, 2002, the Intercontinental Exchange \17\
requested that the Commission issue an Order pursuant to Section 1a(11)
of the Act that would expand the ECE category to include floor brokers
and floor traders registered in the U.S. as such or with the U.K.
Financial Services Authority (``FSA''). Intercontinental Exchange
stated that including floor brokers and floor traders as ECEs would be
consistent with the CFMA and would recognize their value as both
liquidity providers and dealers and market makers.
---------------------------------------------------------------------------

    \17\ The Intercontinental Exchange operates an OTC commodities
trading platform for energy and metals and is itself an ECM.
Intercontinental Exchange submitted its notice of operation as an
ECM to the Commission on December 27, 2001. Intercontinental
Exchange also owns the International Petroleum Exchange (``IPE''), a
U.K. futures exchange for the trading of energy futures products.
---------------------------------------------------------------------------

    In its petition, Intercontinental Exchange commented that the
Commission has previously included floor brokers and floor traders in
the definition of ECE as it relates to trading on a Derivatives
Transaction Execution Facility (``DTEF''). Specifically, Commission
Regulation 37.1(b) states that, for the purpose of DTEF trading, ``the
term `eligible commercial entity' means, and shall include, in addition
to a party or entity so defined in Section 1a(11) of the Act, a
registered floor trader or floor broker trading for its own account,
whose trading obligations are guaranteed by a registered futures
commission merchant.'' The petition states that there is no meaningful
distinction between allowing floor brokers and floor traders to trade
as ECEs on a DTEF and allowing them to trade as ECEs on an ECM.\18\
---------------------------------------------------------------------------

    \18\ DTEFs are registered with the Commission and generally must
meet various standards of operation set forth in Section 5a of the
Act and Part 37 of the Commission's Regulations and are subject to
the Commission's regulatory oversight. By comparison, ECMs are
exempt from Commission regulatory oversight. While ECMs must submit
to the Commission a notice of operation that satisfies the filing
requirements of Section 2(h)(5) of the Act and Commission Regulation
36.3, EMCs are not ``registered with, or designated, recognized,
licensed or approved by the Commission.'' See Section 2(h)(5) of the
Act.
---------------------------------------------------------------------------

    The petition states that, in addition to U.S. registered floor
brokers and floor traders, the ECE definition should include local
member floor traders who are authorized persons under the U.K.''s
Financial Services and Markets Act of 2000 (``FSMA''). As described in
the petition, local members can be individuals or corporations. To
become authorized persons they must, among other things, meet fitness
and proper standards, have competent and prudent management, and
conduct their affairs with due skill, care, and diligence. An
authorized person is subject to FSA rules, including capital and
conduct of business requirements. Intercontinental Exchange states that
the IPE monitors the activities of local members and has the authority
to sanction them in the event of improper conduct. In addition,
Intercontinental Exchange represents that the IPE would cooperate with
the Intercontinental Exchange and with any other exchange on which its
local members may trade or on which its products or similar products
may be traded. Such cooperation would include intermarket surveillance.
    In the petition, Intercontinental Exchange proposed that the
following be included in a definition of ECE for trading on ECMs:
    (1) U.S. registered floor brokers or floor traders or a U.K.
authorized local member floor trader (the floor broker or floor trader
is not required to have any connection or experience trading in the
underlying commodity);

[[Page 41702]]

    (2) the floor broker or floor trader must be a member of a
designated contract market (``DCM'') or a U.K. futures exchange or
otherwise have trading privileges on a DCM or a U.K. futures exchange;
    (3) the floor broker or floor trader must have as a part of its
business the business of acting as a floor broker or floor trader; and
    (4) the floor broker or floor trader is an ECP or, if the floor
broker or floor trader is not an ECP, its trades must be guaranteed by
a clearing member of a U.S. or U.K. recognized clearing organization.

IV. Request for Comment

    The Commission generally invites public comment on both the NYMEX
and Intercontinental Exchange petitions and on whether the Commission
should determine that floor brokers and floor traders are ECPs and/or
ECEs and, therefore, be permitted to execute transactions in exempt
commodities in certain markets. The Commission also invites public
comment on what, if any, standards and conditions should be applied in
the event of such a determination. The Commission particularly asks for
comments with respect to whether any response to the petitions should
be tailored specifically to NYMEX and the Intercontinental Exchange and
to the narrow circumstances presented in the petitions or whether a
response should be more broadly based and, thus, also applicable to
other entities. Finally, the Commission requests comment on the
following aspects of the NYMEX and Intercontinental Exchange petitions.
    1. As noted above, NYMEX's petition would limit OTC trading by
floor brokers and floor traders acting as ECPs such that the
counterparties to their trades must not be floor brokers or floor
traders. NYMEX stated that it did not intend for this limitation to
apply to floor brokers and floor traders acting as ECEs and trading on
ECMs. In support of this determination, NYMEX stated that the Exchange
could not ensure compliance with the counterparty restriction because
ECMs may permit transactions to be conducted anonymously between
counterparties. The Commission understands, however, that at some ECMs,
traders have the capability of specifying the entities that are
acceptable counterparties. In light of this capability, the Commission
asks whether it would be reasonable and prudent to maintain a
restriction on eligible counterparties, at least with respect to ECMs
that provide for such a counterparty pre-approval mechanism.
    2. The Commission notes that the NYMEX and Intercontinental
Exchange petitions reflect different terms and conditions with respect
to floor brokers and floor traders acting as ECEs. Based upon these
distinctions, the Commission requests comments regarding whether the
transactions that could be entered into by floor brokers and floor
traders as ECEs on ECMs should be limited to any of the following: (a)
Specifically identified contracts; (b) transactions that would be
cleared; (c) commodities in which the floor broker or floor trader had
trading expertise; (d) transactions for which the floor broker or floor
trader was guaranteed by an Exchange clearing member; or (e) in some
other way.
    3. In its petition, Intercontinental Exchange states that there
would be no meaningful distinction between allowing floor brokers and
floor traders to trade as ECEs on a DTEF, as the Commission has already
permitted, as compared to trading as ECEs on an ECM. The Commission
requests comment on this assertion, and particularly on whether there
should be any distinction in the treatment of floor brokers and floor
traders as ECEs based upon the different regulatory regimes applicable
to DTEFs and ECMs.\19\
---------------------------------------------------------------------------

    \19\ See supra note 18.
---------------------------------------------------------------------------

    4. In addition to U.S. registered floor brokers and floor traders,
Intercontinental Exchange's petition requests ECE treatment for U.K.
authorized local member floor traders. Intercontinental Exchange's
petition also broadly describes the qualification requirements that
such floor traders are subject to under the FSMA. The Commission seeks
general comment on whether ECE treatment should be extended to any non-
U.S. registrants and, if so, what standards the Commission should use
to evaluate the qualifications of such persons.

    Issued in Washington, DC on June 13, 2002 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-15372 Filed 6-18-02; 8:45 am]
BILLING CODE 6351-01-P