Notice No. 08-606
November 25, 2008

Amendments to Various NYMEX Rules and New NYMEX Rules in Connection with the Integration and Harmonization with CME and CBOT Rules

The New York Mercantile Exchange, Inc. ("NYMEX" or "Exchange") recently self-certified rule changes in connection with the substantial harmonization of NYMEX and COMEX clearing, disciplinary, arbitration and electronic trading rules with CME and CBOT rules. This notice provides summary information concerning the changes to Exchange rules that are being implemented on December 4.

A link to the actual rule amendments and new rule chapters is also included below. With regard to that link, it should be noted that NYMEX has postponed until January 2, 2009, the adoption of new Rules 6.01 and 104.03 concerning record retention requirements with regard to all forms of trading floor records including mandatory recordation and retention of phone lines, instant messages and emails. Based on this postponement, new Rule 450 will remain in effect until Rules 6.01 and 104.03 become effective, at which time Rule 450 will be deleted.

Disciplinary Rules

New NYMEX Chapter 4 (Enforcement of Rules) adopts the majority of the language in existing CME and CBOT Chapter 4 based on NYMEX's adoption of existing CME and CBOT disciplinary practices and procedures. The marked modifications in NYMEX Chapter 4 show how the NYMEX rules will differ from their CME and CBOT counterparts. They are, in large part, based on differences between the Chicago and New York exchanges which have not yet been harmonized. For example, NYMEX has maintained its existing rules with respect to summary proceedings for violations of decorum, attire and pit etiquette and for violations of position limits. Further harmonization is expected to occur in connection with the adoption of harmonized trade practice rules. Rules 446-450 at the end of NYMEX Chapter 4 are NYMEX-only rules which have no counterpart in CME or CBOT Chapter 4. NYMEX's adoption of new Chapter 4 has resulted in the complete elimination of existing NYMEX Chapter 8 (Disciplinary Rules).

We have modified the Chief Regulatory Officers' ability to deny any party access to any or all CME Group markets, electronic trading and clearing platforms and to deny members access to the CME Group trading floors in circumstances where the Chief Regulatory Officer determines such immediate action is necessary to protect the best interests of the exchanges.

With respect to hearings before a hearing panel of the Board of Directors, we have added a provision giving the Chairman of the Board, in his sole discretion, the authority to determine whether sufficient grounds exist to hold a hearing in circumstances where no right to a hearing is otherwise set forth in the rules (Rule 410).

We have added new Rule 433 ("Strict Liability for the Acts of Agents"), which is based on a comparable provision in the Commodity Exchange Act. The rule allows a disciplinary committee to find, if warranted, that a Member is strictly liable for the acts, omissions or failures of any official, agent or other person acting for the Member within the scope of his employment or office. This provision is in addition to the existing requirement that Members diligently supervise their employees and agents pursuant to Rule 432.W. We have added new Rule 444 ("Sanctions and Restitution Orders") which clarifies that, subject to a determination by the sanctioning entity, Members may be liable for the payment of unpaid disciplinary fines and unpaid restitution orders levied against their employees.

Arbitration Rules

NYMEX and COMEX are adopting with very minor modifications the existing CME and CBOT arbitration rules. Two changes of note for NYMEX will be to harmonize to CME and CBOT practices such that 1) failure to file an answer to a claim within the required time period will constitute an admission of the facts alleged in the claim (currently at NYMEX a failure to answer is deemed a denial) and 2) NYMEX arbitration panel size will be increased from three to five members.

Delivery Rules

NYMEX delivery rules are currently set forth in each of the product chapters for those contracts which are physically delivered. New NYMEX Chapter 7B (Delivery Facilities and Procedures) adopts two rules formerly set forth in NYMEX Chapter 9 which were determined to be necessary for retention.

Clearing Rules

NYMEX will be adopting new Chapters 8 (Clearing House and Performance Bonds) and 9 (Clearing Members) substantially harmonized with existing language in CBOT Chapters 8 and 9. Material differences will remain due to different operational and technical requirements for NYMEX/COMEX. These differences are explained in more detail below. The harmonization has resulted in the complete elimination of current NYMEX Chapters 4 (Margins) and 9 (Clearing Rules).

Rule 800.B. ("Dubai Mercantile Exchange Limited") has been added to Rule 800 to clarify that the clearing rules apply equally to DME unless otherwise indicated. Rule 806 ("Offset Process") provides that when a member buys and sells the same commodity for the same delivery month, the purchases and sales are automatically offset one against the other unless contrary instructions are provided. This differs from CME and CBOT's rule where the purchases and sales are not automatically offset one against the other unless position change data is provided to the Clearing House. Rule 808 ("NYMEX ClearPort Clearing; Procedures for Trade Submission") contains separate procedures for trade submissions that must be made for ClearPort Clearing. Specifically, the rule covers the processing of transactions that are not competitively executed on the Exchange and are submitted to the ClearPort Clearing Trade Portal for clearing. Rule 809 ("Trade Data Processing System") is a redacted version of CME and CBOT Rule 809 which adopts only Section C. from the CME and CBOT rule.

Rule 813 ("Settlement Price") - CME's rule provides that daily settlement prices will be determined by the Pit Committee based on several general factors including, but not limited to, trades during the close, volume traded at a price in the closing range and bids and offers made during the close. CME's rule is one paragraph long. The NYMEX/COMEX rules provide that the Settlement Price Committee will determine daily settlement prices.

Rule 850 ("Exchange Service Fees") adopts NYMEX's existing Exchange Service Fee rule into new Rule 850. Rule 851 ("Required Use of ATOM by Clearing Members and Floor Brokers") - NYMEX will convert to the Brokerage Payment System in the first quarter of 2009 as a means of paying floor brokers for their brokerage activity. Until that time, NYMEX requires that its floor brokers and clearing members utilize the ATOM System and that requirement is set forth in this rule. Rule 902 ("Clearing Membership Assignment Requirements") adopts NYMEX's existing rule which requires that a clearing member own or have conferred upon it two memberships in each division in which it desires clearing member privileges. In addition, the rule maintains the concept that 8,000 CME shares must be owned or pledged if the firm is a clearing member only at NYMEX, 12,000 CME shares if the firm is a clearing member at NYMEX and either CME or CBOT and 16,000 CME shares if the firm is a clearing member at all three exchanges. Rule 931 ("Customer Margins for Security Futures Positions Held in Futures Accounts") and Rule 932 ("Acceptable Margin for Security Futures and Treatment of Undermargined Accounts") will not be adopted by NYMEX as NYMEX does not currently list security futures products for trading.

Former Rule 9.25 ("Resolution of the Board of Directors to establish and maintain a permanent Retail Customer Protection Mechanism") was implemented several years ago in relation to a special CFTC clearing order to the Exchange. However, the Exchange has not relied on that order for a number of years and accordingly has determined to delete this rules.

Rule 972 ("Reductions in Capital") incorporates an existing NYMEX rule which requires that whenever the working capital of a non-FCM clearing member drops below the minimum required working capital, such clearing member shall provide immediate written notice to the Audit Department of the Exchange. Rule 984 ("Give-up Trades – Trades Executed by Open Outcry") sets forth the rights and obligations of the parties to a give-up transaction. The rule is designed to apply and assist in the interpretation of various give-up scenarios where the parties to the give-up transaction do not have an executed agreement between them. Rules 990-992 are unique to NYMEX and concern various capital and clearing requirements applicable to clearing members for various OTC transactions. Rule 993 ("Customer Substitution in the Event of Clearing Member Insolvency") restates a provision from Part 190 of the CFTC regulations and CME/CBOT Rule 718 regarding the substitution of a customer for a defaulting clearing member for delivery purposes. The adoption of this rule into NYMEX Chapter 9 allows for the complete elimination of current Chapter 10 (Bankruptcy of a Member) and Chapter 110 (COMEX Division – Bankruptcy of a Member) in the NYMEX/COMEX Rulebook. The rule will be able to be relocated to Chapter 7 later in the harmonization project when the delivery rules are addressed in more detail.

Position Rules

Position rules are currently set forth in NYMEX Chapter 9 which is being eliminated. The position rules have been temporarily relocated to new NYMEX Chapter 9A (Position Rules). CME and CBOT position rules appear in Chapter 5. The rules in NYMEX Chapter 9A will be relocated to Chapter 5 when the trade practice rules are harmonized.

Electronic Trading Rules

Existing NYMEX Chapter 11G concerns Globex specific trading rules. While several existing rules from the Chapter have been maintained, the majority of the rules are being eliminated and replaced with language from the trade practice rules in CME Chapter 5 modified to be specific to Globex. When we complete the harmonization of the trade practice rules next year, Chapter 11G will be eliminated and the necessary provisions will be moved to Chapter 5.

To view amendments, please click below:

• New Chapters being Added to NYMEX Rulebook
  
• Revisions to Existing NYMEX Rulebook