---------------------- Forwarded by Rahil Jafry/HOU/ECT on 12/26/2000 03:01 
PM ---------------------------
CFTC Rules, Legislation Aim to Clear Up Regulation of Over-the-Counter
Contracts.(US Commodity Futures Trading Commission)(Brief Article)

12/08/2000
The Oil Daily
ITEM00343007
Copyright 2000 Gale Group. All rights reserved. COPYRIGHT 2000 Energy
Intelligence Group

  CFTC Rules, Legislation Aim to Clear Up Regulation of Over-the-Counter
Contracts

  A long process designed to clarify rules for over-the- counter (OTC)
markets may be drawing to a close after the  US Commodity Futures
Trading Commission (CFTC) - the main  regulatory agency - issued its
final framework for a new regime.


  The rules are designed to clear up the legal status of OTC  products
such as swaps, while providing more flexible  oversight of futures
markets and promoting the  establishment of independent clearinghouses.

  Unveiled late last month, the CFTC reforms are due to be  published in
the Federal Register next week, and would take  effect 60 days later -
in mid-February. In the meantime, a  new president should take office
Jan. 20. CFTC experts seem  confident that the reforms will survive the
changeover, saying it is hard for an incoming administration to pull
back final regulations.

  There are also signs of progress on a parallel bill  supporting the
reforms, the Commodity Futures Modernization  Act.

  This was passed by the House in late October, but got  bogged down in
the Senate, partly due to objections by Sen.  Phil Gramm (R-Texas), who
heads the Senate Banking  Committee.

  A compromise was hammered out early this week, sources say,  and the
law could still get through this year - most likely  as an attachment to
an appropriations bill. Legislation  would give the CFTC measures a
stronger legal footing, but  could require them to be tweaked into line.

  The CFTC reforms respond to the explosion of both  derivatives markets
and electronic trading, from equities  to natural gas. Currently,
electronic exchanges targeting  derivatives markets - such as the Big
Oil-backed IntercontinentalExchange - operate in a regulatory gray
area.

  The new reforms define futures exchanges more flexibly,  replacing a
"one-size-fits-all" approach with core  principles, and establishing
three tiers of regulation:

  The top tier - of "recognized futures exchanges" (RFEs) -  matches the
current futures markets, such as Nymex, and is  the most tightly
regulated

  The second rank, of "derivatives transaction facilities"  (DTFs),
comprises institutions requiring looser regulation,  if, for example,
participation is restricted to big  companies.

  The third tier, of "exempt multilateral transaction  execution
facilities" (Exempt MTEFs), escapes most  regulation.

  In parallel, the CFTC has clarified an old ruling removing  swaps from
regulation - the so-called Part 35 exemption.  This ends previous
restrictions, so that OTC products  traded between two parties can now
be "fungible, standardized, and cleared." This is part of a drive to
turn  derivatives into legally recognized products, making it  hard for
one side to renege on an unfavorable contract.

  Finally, the CFTC has moved to encourage the establishment  of
independent clearinghouses by separating the rules for  exchange and
clearing functions. Two start-ups, EnergyClear  and NexClear, have
already declared their intention to  offer such services, starting with
US gas and power.

  Amid concerns about price manipulation, the energy industry  has been
treated as a special case throughout the new  framework and does not
qualify for the least-regulated  Exempt MTEF category of exchange.

  The CFTC reforms also remain fuzzy in certain areas. In  particular,
the new Part 35 exemption for derivatives  covers bilateral
transactions, with multilateral activity  still in something of a gray
area.

  Basically, an exchange handling multilateral trades of  energy
derivatives can apply to the CFTC for official  status as a "commercial
DTF" if it thinks this will bring  credibility and legal standing.
However, a derivatives exchange that does not register with the CFTC
will not be  pursued. The new framework offers "legal certainty for
those who want recognition; it is not ruling on the status  of those who
don't," one expert said.

  In practice, outfits such as EnronOnline - the web system  for direct
transactions with Enron - are in the clear as  bilateral platforms
dealing in contracts outside CFTC  jurisdiction. Intercontinental, as a
multilateral exchange  dealing in standardized swaps, could probably
remain  unregulated, but could also register as a DTF to clarify  its
status.

  Nymex, in its current form, would be an RFE because it  entertains
noninstitutional traders. But the exchange could  apply for its planned
electronic arm enymex (or its  traditional floor) to become a DTF, by
limiting activity to  institutional users.

  David Pike, Manimoli Dinesh

  For more on this story, see the next issue of Oil Daily  sister
publication energy network.



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