Treatment of Funds Held in Connection with the Clearing of Over-the-Counter Products by The New York Mercantile Exchange

UNITED STATES OF AMERICA
Before The
COMMODITY FUTURES TRADING COMMISSION

Treatment of Funds Held in Connection with )
the Clearing of Over-the-Counter Products ��)
by The New York Mercantile Exchange ��)

ORDER

The New York Mercantile Exchange (“NYMEX”), a registered derivatives clearing organization (“DCO”), has filed rules that would implement an initiative to provide clearing services for specified energy contracts executed in the over-the-counter (“OTC”) markets. NYMEX has certified that the rules comply with the Commodity Exchange Act (“Act”) and the Commission’s regulations pursuant to Section 5c(c) of the Act and Commission Regulation 40.6.

These contracts will be entered into OTC and transferred to the NYMEX Clearing House through exchange of futures for swaps (“EFS”) or exchange of futures for physicals (“EFPs”). The contracts will not be listed for trading on NYMEX as a designated contract market (“DCM”).

Section 4d(a) of the Act provides:

It shall be unlawful for any person to engage as a futures commission merchant or introducing broker in soliciting orders or accepting orders for the purchase or sale of any commodity for future delivery, or involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market or derivatives transaction execution facility unless—
. . .

(2) such person shall, if a futures commission merchant, . . . treat and deal with all money, securities, and property received by such person to margin, guarantee, or secure the trades or contracts of any customer of such person, or accruing to such customer as the result of such trades or contracts, as belonging to such customer. Such money, securities, and property shall be separately accounted for and shall not be commingled with the funds of such commission merchant or be used to margin or guarantee the trades or contracts, or to secure or extend the credit, of any customer or person other than the one for whom the same are held.

Section 4d(b) of the Act provides:

It shall be unlawful for any person, including but not limited to any clearing agency of a contract market or derivatives transaction execution facility and any depository, that has received any money, securities’ or property for deposit in a separate account as provided in paragraph (2) of this section, to hold, dispose of, or use any such money, securities, or property as belonging to the depositing futures commission merchant or any person other than the customers of such futures commission merchant.

Notwithstanding the previously cited provisions, however, Section 4d provides further that:

in accordance with such terms and conditions as the Commission may prescribe by rule, regulation, or order, such money, securities, and property of the customers of such [FCM] may be commingled and deposited as provided in this section with any other money, securities, and property received by such [FCM] and required by the Commission to be separately accounted for and treated and dealt with as belonging to customers of such [FCM].

Upon consideration, the Commission has determined to issue an Order pursuant to this provision of Section 4d in connection with the NYMEX proposal. Subject to the following 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. The terms and conditions are as follows:

This Order will apply only to the following contracts (“eligible products”) as described in the NYMEX submission dated May 24, 2002 (“May 24 submission”):

Palo Verde Electricity;
PJM Electricity;
Mid-Columbia Electricity;
Light Louisiana Sweet Crude Oil;
West Texas Intermediate Midland Crude Oil;
Mars Blend Oil;
West Texas Sour Crude Oil;
Henry Hub Swap;
Henry Hub Basis Swap (Platts IFERC);
West Texas Intermediate Crude Oil Calendar Swap;
Dubai Crude Oil Calendar Swap;
US Gulf Coast Unleaded 87 Octane Gasoline Crack Spread Calendar Swap (Platts);
US Gulf Coast No. 2 Heating Oil Crack Spread Calendar Swap (Platts);
Unleaded 87 Octane Gasoline Up-Down Spread Calendar Swap (Platts);
No.2 Heating Oil Up-Down Spread Calendar Swap (Platts);
NYMEX AECO/NIT Basis Swap (Alberta Natural Gas);
Chicago Basis Swap (NGI);
Houston Ship Channel Basis Swap (Platts IFERC);
San Juan Basis Swap (Platts IFERC);
SoCal Basis Swap (NGI);
Transco Zone 6 Basis Swap (Platts IFERC);
New York Harbor Unleaded Gasoline Crack Calendar Swap;
New York Harbor No. 2 Heating Oil Crack Calendar Swap;
Northwest Pipeline Rockies Basis Swap (Platts IFERC); and
Panhandle Basis Swap (Platts IFERC)

Before acceptance for clearing, NYMEX will require eligible products to be subjected to a risk management filter as described in the May 24 submission.
NYMEX will mark-to-market each eligible product on a daily basis as described in the May 24 submission.
NYMEX will make available open interest and settlement price information for eligible products on a daily basis in the same manner as for contracts listed for trading on NYMEX.
NYMEX will apply the SPAN margining system and calculate margin rates for each eligible product as follows:

(a) With respect to the Mid-Columbia Electricity, PJM Electricity, and Palo Verde Electricity contracts, NYMEX will set customer margin rates that are consistent with a 99% level of confidence that such margin rates would reflect the risk of price movement over a four-day period.

(b) With respect to the WTI Calendar Swap, the Henry Hub Swap and the Henry Hub Basis Swap contracts, NYMEX will apply its standard risk analysis and margin procedures, which provide a 99% level of confidence that the customer margin rate would reflect the risk of price movement over a two-day period.

(c) With respect to all other contracts to be listed only for clearing, NYMEX will set margin rates applicable to customers that are 20% above the margin rate generated as a result of the NYMEX’s standard risk analysis and margin procedures.

NYMEX will submit a report to the Commission reviewing its experiences with the special margin provisions provided in paragraphs 5(a) and 5(c) above, and discussing any proposed changes to such special margin provision. This report will address a review period consisting of at least the first 90 days after the commencement of clearing under this order. Such special margin provisions shall remain in effect during the Commission’s review of this report.
NYMEX will establish final settlement prices for each eligible product as described in the May 24 submission.
NYMEX will apply position limit, position accountability, and reporting requirements to eligible products as described in the May 24 submission.
NYMEX will conduct financial surveillance and oversight of eligible products as described in the May 24 submission.
All money, securities, and property received by a participating FCM to margin, guarantee, or secure eligible products, shall be deemed to have been received by the participating FCM and shall be accounted for and treated and dealt with as belonging to the customers of the participating FCM consistently with Section 4d of the Act.
Subject to the terms and conditions of this Order, notwithstanding any provision to the contrary in the Commission’s rules (including, but not limited to, Rules 1.20(a), 1.22 and 1.24), the money, securities, and property described in the preceding paragraph of this Order may be commingled with money, securities, and property received by a participating FCM to margin, guarantee, or secure trades or positions in commodity futures or commodity option contracts executed on a DCM or DTF, or accruing as a result of such trades or contracts, and otherwise required by the Commission to be segregated under the Act.
This Order does not provide an exemption from any provision of the Act or rules thereunder not specified herein.

This Order is issued pursuant to Section 4d of the Commodity Exchange Act based upon the representations made and supporting material provided to the Commission by the 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, D.C., this 30^th day of May, 2002.

By the Commission,

Jean A. Webb
Secretary of the Commission