[Federal Register Volume 67, Number 49 (Wednesday, March 13, 2002)]
[Notices]
[Pages 11286-11288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6051]


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COMMODITY FUTURES TRADING COMMISSION


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.

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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 
persons.

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].

SUPPLEMENTARY INFORMATION:   

I. Background

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

[[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.
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    \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.
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    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 
Transactions

    (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 
information.
    (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 
questions:
    (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 
145.8.

    Issued in Washington, DC on March 7, 2002.
John C. Lawton,
Acting Director.
[FR Doc. 02-6051 Filed 3-12-02; 8:45 am]
BILLING CODE 6351-01-P