[Federal Register: March 13, 2002 (Volume 67, Number 49)]
[Page 11286-11288]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



New York Mercantile Exchange's Proposal To Permit Exchange of
Futures for, or in Connection With, Futures Transactions in Brent Crude
Oil Futures Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for public comment on a proposed exchange rule to
permit Exchange of Futures for Futures (``EFF'') transactions.


SUMMARY: The New York Mercantile Exchange (``NYMEX'' or ``Exchange'')
has requested that the Commission approve proposed new Rule 6.21D to
permit EFF transactions in the Exchange's Brent Crude Oil (``Brent'')
futures contract. The proposed new rule would establish a non-
competitive trading procedure that would operate in a manner that is
analogous in some respects to block trading rules and in other respects
to exchange of futures for physicals (``EFP'') rules currently in
operation at some exchanges. NYMEX intends for the proposal to enable
``eligible contract participants,'' as that term is defined by section
1a(12) of the Commodity Exchange Act, to liquidate open positions in
Exchange-specified substantially equivalent contracts at another
exchange and to establish comparable positions in the Exchange's Brent
contract. The proposed rule essentially provides a mechanism to
transfer Brent futures positions from another exchange to NYMEX. NYMEX
proposes to implement the rule on a one-year pilot program basis.
    Acting pursuant to the authority delegated by Commission Regulation
140.96(b), the Division of Trading and Markets, in concurrence with the
Division of Economic Analysis and the Office of General Counsel, has
determined to publish NYMEX's proposal for public comment. The Division
believes that publication of the proposal is in the public interest and
will assist the Commission in considering the views of interested

DATES: Comments must be received on or before April 12, 2002.

ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581. In
addition, comments may be sent by facsimile transmission to (202) 418-
5521 or by electronic mail to [email protected]. Reference should be
made to the NYMEX proposal to adopt EFF procedures for the Brent Crude
Oil futures contract.

FOR FURTHER INFORMATION, CONTACT: Please contact Jane H. Croessmann,
Staff Attorney, Division of Trading and Markets, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW,
Washington, DC 20581. Telephone: (202) 418-5433. Electronic mail:
[email protected].


I. Background

    NYMEX began trading its Brent futures contract on September 5,
2001. NYMEX represents that a number of market participants have

[[Page 11287]]

interest in the Exchange establishing a mechanism whereby positions in
Brent futures contracts at another exchange could be transferred to
NYMEX. NYMEX represents that it has designed proposed Rule 6.21D to
address those needs.

II. Summary Description of Proposed EFF Procedure

    Under proposed Rule 6.21D, eligible contract participants would be
permitted to execute away from the central marketplace transactions of
50 or more NYMEX Brent futures contracts. As a condition precedent to
the NYMEX transaction, the parties must have liquidated a position in a
substantially equivalent contract at another exchange, although they
would not be required to execute those liquidating transactions against
each other.\1\ Regardless of whether the parties executed a single
liquidating transaction with each other or two separate liquidating
transaction with other parties, the quantities of the liquidating
transactions would have to be substantially equivalent to the quantity
covered by the later NYMEX transaction.

    \1\ Rule 6.21D(3) provides that NYMEX shall determine whether a
contract at another exchange is substantially equivalent. NYMEX has
indicated to the Commission that, at this time, the International
Petroleum Exchange's (``IPE'') Brent futures contract appears to be
the only contract that would meet this standard. The NYMEX EFF
procedure would be implemented without any special arrangement with
IPE or any corresponding IPE rule change.

    NYMEX states that its proposal would provide a means for
sophisticated market participants to liquidate open Brent positions at
another exchange and to individually negotiate transactions that would
essentially result in the transfer of those positions to NYMEX. NYMEX
further states that Rule 6.21D's various restrictions should permit
parties to make those transfers, while avoiding exposure to the
possibility of significant price slippage in a thinly traded market.
NYMEX believes that by facilitating the transfer of positions between
markets, its proposal would serve to increase competition between
markets and, thus, benefit their users.

III. Text of Proposed NYMEX Rule 6.21D

    Below is the text of proposed new NYMEX Rule 6.21D.

Rule 6.21D. Exchange of Futures for, or in Connection With, Futures

    (A) General Requirements. (1) An exchange of futures for, or in
connection with, futures (EFF) consists of two discrete, but
related, transactions; one initial futures transaction effected on
another regulated futures exchange (Underlying Transaction) and a
subsequent futures transaction in an eligible NYMEX contract that is
reported at the Exchange pursuant to the procedures specified in
this rule (NYMEX Transaction).
    (2) Liquidating Transactions. As a condition precedent to the
NYMEX Transaction, the parties to the NYMEX Transaction must have
engaged in a transaction on the other regulated futures exchange
pursuant to the procedures of such other exchange that resulted in
liquidating an existing position at such other exchange.
    (3) Quantity. The quantity covered by the Underlying Transaction
must be substantially equivalent to the quantity covered by the
NYMEX Transaction. The contract specifications for the futures
contract traded in the Underlying Transaction must be substantially
equivalent, as determined by the Exchange, to the contract
specifications for the eligible futures contract comprising the
NYMEX Transaction. In addition, the minimum transaction size for the
NYMEX Transaction is 50 contracts.
    (4) Report to Clearing Member. For each party to the NYMEX
Transaction, that party, within two hours of its receipt of trade
confirmation on the Underlying Transaction(s) at the other exchange,
must submit to the NYMEX Clearing Member(s) carrying its account the
details of the NYMEX Transaction. Upon receipt of such information,
the NYMEX Clearing Member(s) must prepare a contemporaneous record
of the information that also indicates the time of receipt of such
    (5) Eligible Contracts and Transactions. EFF transactions may be
effected only for transactions in the Exchange's Brent Crude Oil
futures contract.
    (6) Eligible Participants. This trading procedure is available
only to a person or entity qualifying as an ``eligible contract
participant'' as that term is defined by the Commodity Exchange Act
and CFTC rules.
    (7) Floor Reporting Requirements and Deadlines. A report of each
EFF transaction shall be given, and notice thereof shall be posted
on the Floor of the Exchange. The report of an EFF transaction shall
be given on the Floor of the Exchange during the hours of futures
trading on the day that the transaction thereto was made, or if such
agreement was made after the close of trading, then on the next
business day.
    (8) EFF transactions shall be cleared through the Exchange in
accordance with normal procedures, shall be clearly identified and
marked in the manner provided by the Exchange, and shall be recorded
by the Exchange and by the Clearing Members involved.
    (9) EFF transactions are permitted until the close of trading on
the last trading day in the expiring contract month of the
Exchange's NYMEX Brent Crude Oil futures contract.
    (B) Clearing Member Reporting Requirements. A report of such EFF
transaction shall be submitted to the Exchange by each Clearing
Member representing the buyer and/or seller. Such report shall
identify the EFF as made under this Rule and shall contain the
following information: a statement that the EFF has resulted or will
result in a change of positions or other such change, the kind and
quantity of the futures, the price at which the futures transaction
is to be cleared, the names of the Clearing Members and customers
and such other information as the Exchange may require. Such report
(form) shall be submitted to the Compliance Department by 12:00
noon, no later than two (2) Exchange business days after the day of
posting the EFF on the Floor of the Exchange.
    (C) Exchange Request for Information. Each buyer and seller must
satisfy the Exchange, at its request, that the transaction is a
legitimate EFF transaction. Upon the request of the Exchange, all
documentary evidence relating to the EFF, including documentation of
the Underlying Transaction on the other futures exchange, shall be
obtained by the Clearing Members from the buyer or seller and made
available by the Clearing Members for examination by the Exchange.
    (D) Omnibus Accounts and Foreign Brokers. All omnibus accounts
and foreign brokers shall submit a signed EFF reporting agreement in
the form prescribed by the Exchange to the Exchange's Compliance
Department. Such Agreement shall provide that any omnibus account or
foreign broker identified by a Clearing Member (or another omnibus
account or foreign broker) as the buyer or seller of an EFF pursuant
to this Rule 6.21D, shall supply the name of its customer and such
other information as the Exchange may require. Such information
shall be submitted to the Exchange's Compliance Department by 12:00
noon no later than two (2) Exchange business days after the day of
posting the EFF on the Floor of the Exchange. Failure by an omnibus
account or foreign broker to submit either the agreement or the
particular EFF information to the Exchange may result in a hearing
by the Business Conduct Committee to limit, condition or deny access
of such omnibus account or foreign broker to the market.

IV. Request for Comment

    The Commission requests comment from interested persons concerning
any aspect of NYMEX's EFF proposal. The Commission would be
particularly interested in comments responding to the following
    (1) NYMEX contends that its proposal would facilitate the transfer
of positions from one futures market to another and, thus, would
promote competition among markets that ultimately would benefit
participants in both markets. Would such a procedure, in fact increase
competition between the markets?
    (2) Would a non-competitive trading procedure at one exchange
designed to encourage the transfer of positions from another exchange
affect the integrity of price discovery at either or both markets?
    (3) Under NYMEX's proposal, the condition precedent liquidating
transaction(s) at another exchange and the subsequent NYMEX transaction
would not be a single, integrated transaction, as is the case with
EFPs. Would this feature of EFFs create any incentives to engage in
improper practices at either NYMEX or the other exchange?
    (4) NYMEX analogizes its proposal to block trading rules that have
been implemented at other futures exchanges. NYMEX represents that the
proposed EFF minimum transaction

[[Page 11288]]

size of 50 contracts exceeds in size more than 90% of the Brent futures
contract transactions executed in recent months at NYMEX. The
Commission has utilized the 90% minimum threshold test in evaluating
previously approved block trading proposals. In applying this standard,
however, the Commission has traditionally looked at trading activity
not only at the exchange that proposed block trading procedures, but
also at trading in related cash and futures markets. So, for example,
in the case of the Cantor Exchange's proposal to establish minimum
thresholds for block trades in Treasury securities futures, the
Commission evaluated the thresholds based on both the light trading
activity at Cantor and the much heavier activity in Treasury securities
futures at the Chicago Board of Trade, as well as transactions in the
cash market.
    (a) How should the Commission evaluate the minimum threshold for
Brent EFF transactions?
    (b) Should the Commission also consider the size of transactions
executed in Brent futures contract at another exchange?
    (c) How should that information best be obtained if the other
exchange is not subject to the Commission's jurisdiction?
    (d) If volume and liquidity in the NYMEX Brent futures contract
increase, should the minimum threshold be modified?

V. Miscellaneous

    Other materials submitted by the NYMEX in support of the request
for approval may be available upon request pursuant to the Freedom of
Information Act (5 U.S.C. 552) and the Commission's regulations
thereunder (17 CFR part 145 (2001)), except to the extent they are
entitled to confidential treatment as set forth in 17 CFR 145.5 and
145.9. Requests for copies of such materials should be made to the FOI,
Privacy and Sunshine Act Compliance Staff of the Office of Secretariat
at the Commission's headquarters in accordance with 17 CFR 145.7 and

    Issued in Washington, DC on March 7, 2002.
John C. Lawton,
Acting Director.
[FR Doc. 02-6051 Filed 3-12-02; 8:45 am]