11/02/2000
The proposed NEW COMEX Rule 4.36A ("Exchange of Aluminum Futures for, or in Connection with Swap Transactions") requires approval by the Commodity Futures Trading Commission ("CFTC") prior to implementation in the COMEX Aluminum Futures Contract.
The Exchange Membership will be notified when CFTC approval is received and the implementation date of the proposed new rule.
Proposed New COMEX RULE 4.36A
(Pilot Program)
(THE ENTIRE RULE IS NEW)
Rule 4.36A. EXCHANGE OF ALUMINUM FUTURES FOR, OR IN CONNECTION WITH, SWAP TRANSACTIONS
(a) (1) An exchange of Aluminum futures for, or in connection with, a swap (EFS) consists of two discrete, but related, transactions; a swap transaction and a futures transaction. At the time such transaction is effected, the buyer and seller of the futures must be, respectively, the seller and the buyer of the swap.
(2) The pilot program is available only to commercial market participants. For purposes of this rule, a "commercial market participant" shall include a person or entity that transacts business in the normal channels of commerce in the cash commodity or related commodity underlying the EFS posted on the Exchange and also shall include an entity that regularly maintains a book of and acts as a dealer in swap transactions.
(b) The swap component shall involve the commodity underlying the futures contract (or a derivative, by-product or related product of such commodity). The quantity covered by the swap must be approximately equivalent to the quantity covered by the futures contracts. The swap component of an EFS transaction must comply with the requirements of Commission Regulation Part 35 (Exemption of Swap Agreements). The initial term of the pilot program shall be three years from the effective date of this Rule 4.36A.
(c) The report of an Aluminum EFS transaction shall be given on the Floor of the Exchange during the hours of futures trading. (2) Aluminum EFS transactions are permitted until 12:00 p.m. on the day following the last day of trading of an expiring futures contract.
(d) A report of such Aluminum EFS transaction shall be submitted to the Exchange by each Clearing Member representing the buyer and/or seller. Such report shall identify the EFS as made under this Rule and shall contain the following information: a statement that the swap component of the EFS complied with the requirements of Part 35 at the time the EFS was entered into between the buyer and seller, a statement that the EFS has resulted or will result in a change of payments 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 EFS on the Floor of the Exchange.
(e) Each buyer and seller must satisfy the Exchange, at its request, that the transaction is a legitimate Aluminum EFS transaction. Upon the request of the Exchange, all documentary evidence relating to the EFS, including a master swap agreement and any supplements thereto, shall be obtained by the Clearing Members from the buyer or seller and made available by the Clearing Members for examination by the Exchange.
(f) A report of each Aluminum EFS transaction shall be given, and notice thereof shall be posted on the Floor of the Exchange, 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. EFS transactions shall be cleared through the Exchange in accordance with normal procedures, shall be clearly identified and marked in the same manner as EFP transactions, and shall be recorded by the Exchange and by the Clearing Members involved.
(g) All omnibus accounts and foreign brokers shall submit a signed EFS 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 EFS pursuant to this rule, 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 EFS on the Floor of the Exchange. Failure by an omnibus account or foreign broker to submit either the agreement or the particular EFS 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.
Frequently Asked Questions about the Exchange of Futures for Swaps (EFS) for Aluminum
Proposed New COMEX Rule 4.36A
10/23/00
What is an EFS?
The New York Mercantile Exchange has proposed to initiate an Exchange of Futures for Swaps program on COMEX for it’s Aluminum Futures Contract. An EFS is a mechanism that involves the simultaneous purchase or sale of an over-the-counter swap and the offsetting sale or purchase of a COMEX Aluminum futures contract.
Why is it used?
EFS transactions could be used to initiate or liquidate a futures position. Trading futures against swaps obligations gives participants greater flexibility in the management of price risk.
How will it operate?
Like an EFP transaction, two parties will be allowed to negotiate off exchange, the terms and conditions of an integrated over-the-counter swap and related futures transaction. The futures portion of the agreement will be posted with a Futures Commission Merchant during regular trading hours.
Can you define what constitutes a swap agreement?
In general, a swap agreement is an exchange of a series of cash flows measured by different parameters with payment calculated by a reference to a principal base or benchmark. Two parties must be in agreement on all components of the swap agreement.
An exchange of Aluminum futures for, or in connection with, a swap (EFS) consists of two discrete, but related, transactions: a swap transaction and a futures transaction. The swap component shall involve the commodity underlying the futures contract or a derivative, by-product or related product of such commodity. At the time such transaction is effected, the buyer and seller of the futures must be, respectively, the seller and the buyer of the swap.
The attached copy of CFTC Regulation 35.1 paragraph (1) section I-III "Swap agreement" will expand the above definition to particular financial instruments that may constitute a swap agreement.
Who will trade EFS?
There are two sets of conditions that must be met in order to trade an EFS. First, the EFS program is limited to "eligible swap participants," as defined in the CFTC’s regulations. The attached copy of CFTC Regulation 35.1 paragraph (2) definition of "Eligible swap participant" details the eligibility criteria for persons or entities who which to enter into swap transactions.
Second, the pilot program is further limited to commercial market participants. For purposes of this rule, a commercial market participant shall include a person or entity that transacts business in the normal channels of commerce in the cash commodity or related commodity underlying the EFS posted on the Exchange and also shall include an entity that regularly maintains a book of and acts as a dealer in swap transactions.
Will EFS trades be counted in the regular trading volume data?
Yes. The total trading volume accurately reflects trades executed by open outcry, NYMEX ACCESSSM, and EFPs. The volume on EFS will also be recorded in these totals.
Are there product restrictions on EFS transactions?
An exchange of futures for swaps consists of two discrete but related transactions: a cash transaction and a futures transaction. At the time such transaction is effected, the buyer and seller of the futures must be the seller and buyer of a quantity of the over-the-counter swap. The quantity covered by the swap must be approximately equivalent to the quantity covered by the futures contracts. The swap component of an EFS transaction must comply with the requirements of Commission Regulation Part 35 (Exemption of Swap Agreements).
Can EFS trades be posted on NYMEX ACCESSSM?
Posting on NYMEX ACCESSSM will not be possible in the near term.
What is the length of time for the EFS pilot program?
Under the present terms of proposed new COMEX Rule 4.36A, the term of the pilot program for COMEX Aluminum EFS transactions would be three years from the date of its launch. Exchange staff will be working with CFTC staff during the rule approval process in an effort to make this rule approved as a permanent regulation, rather than as a pilot program.
As a floor broker, what is required of me when I post the futures portion of the trade?
A report of each Aluminum EFS transaction shall be given, and notice thereof shall be posted on the Floor of the Exchange, 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. EFS transactions shall be cleared through the Exchange in accordance with normal procedures, shall be clearly identified and marked in the same manner as EFP transactions, and shall be recorded by the Exchange and by the Clearing Members involved.
Aluminum EFS transactions will be permitted until 12:00 p.m. on the day following the last day of trading of an expiring futures contract. The posting procedures are contained in the proposed new rule.
As an FCM, what must be reported to the Exchange when processing an EFS transaction?
A report of such Aluminum EFS transaction shall be submitted to the Exchange by each Clearing Member representing the buyer and/or seller. Such report shall identify the EFS as made under this Rule and shall contain the following information:
a statement that the swap component of the EFS complied with the requirements of Part 35 (see attachment) at the time the EFS was entered into between the buyer and seller;
a statement that the EFS has resulted or will result in a change of payments or other such change, the kind and quantity of the futures ; the price at which the futures transaction is to be cleared ; and
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 EFS on the Floor of the Exchange.
All omnibus accounts and foreign brokers shall submit a signed EFS 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 EFS pursuant to this rule, 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 EFS on the Floor of the Exchange.
Failure by an omnibus account or foreign broker to submit either the agreement or the particular EFS 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.
Should you have any questions or require any further information, please contact nymex.com
PART 35 – EXEMPTION OF SWAP AGREEMENTS
Authority:7USC ' ' 2,6,6c, and 12a
Source: 58 F.R. 5587, Jan.22, 1993(& 25,539),
unless otherwise noted, effective Feb.22, 1993.
[& 2771]
' 35.1 Definitions
Scope. The provisions of this Part shall apply to any swap agreement which may be subject to the Act, and which has been entered into on or after October 23, 1974.
Definitions. As used in this Part:
"Swap agreement" means:
An agreement (including terms and conditions incorporated by reference therein) which is a rate swap agreement, basis swap, forward rate agreement, commodity swap, interest rate option, forward foreign exchange agreement, rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option, any other similar agreement (including any option to enter into any of the foregoing); Any combination of the foregoing; or A master agreement for any of the foregoing together with all supplements thereto; "Eligible swap participant" means, and shall be limited to the following persons or classes of persons:
A bank or trust company (acting on its own behalf or on behalf of another eligible swap participant);
A savings association or credit union;
An insurance company;
An investment company subject to regulation under the Investment Company Act of 1940 (15 U.S.C. ' 80a-1 et seq.) or a foreign person performing a similar role or function subject as such to foreign regulations, provided that such investment company or foreign person is not formed solely for the specific purpose of constituting an eligible swap participant; A commodity pool formed and operated by a persons subject to regulation under the Act or a foreign person performing a similar role or function subject as such to foreign regulation, provided that such commodity pool or foreign person is not formed solely for the specific purpose of constituting an eligible swap participant and has total assets exceeding $5,000,000;
A corporation, partnership, proprietorship, organization, trust, or other entity not formed solely for the specific purpose of constituting an eligible swap participant (A) which has total assets exceeding $10,000,000, or (B) the obligations of which under the swap agreement are guaranteed or otherwise supported by a letter of credit or keepwell, support, or other agreement by any such entity referenced in this subsection (vi)(A) or by an entity referred to in paragraph (i),(ii),(iii),(iv),(v),(vi) or (viii) of this section; or (C) which has a net worth of $1,000,000 and enters into the swap agreement in connection with the conduct of its business; or which has a net worth of $1,000,000 and enters into the swap agreement to manage the risk of any asset or liability owned or incurred in the conduct of its business or reasonably likely to be owned or incurred in the conduct of its business;
An employee benefit plan subject to the Employee Retirement Income Security Act of 1974 or a foreign person performing a similar role or function subject as such to foreign regulation with total assets exceeding $5,000,000, or whose investment decisions are made by a bank, trust company, insurance company, investment adviser subject to regulation under the Investment Advisers Act of 1940 (15 U.S.C. ' 80a-1 et seq.), or a commodity trading advisor subject to regulation under the Act;
Any governmental entity (including the United States, any state, or any foreign government) or political subdivision thereof, or any multinational or supranational entity or any instrumentality, agency, or department of any of the foregoing;
A broker-dealer subject to regulation under the Securities Exchange Act of 1934 (15 U.S.C. ' 78a et seq.) or a foreign person performing a similar role or function subject as such to foreign regulation, acting on its own behalf or on behalf of another eligible swap participant: Provided, however, that if such broker-dealer is a natural person or proprietorship, the broker-dealer must also meet the requirements of either subsection (vi) or (xi) of this section;
A futures commission merchant, floor broker, or floor trader subject to regulation under the Act or a foreign person performing a similar role or function subject as such to foreign regulation, acting on its own behalf or on behalf of another eligible swap participant: Provided, however, that if such futures commission merchant, floor broker, or floor trader is a natural person or proprietorship, the futures commission merchant, floor broker, or floor trader must also meet the requirements of subsection (vi) or (xi) of this section; or
Any natural person with total assets exceeding at least $10,000,000.
[& 2772]
' 35.1 & 2771