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Notice No. 06-544

October 13, 2006

TO: All Exchange Members, Member Firms and Clearing Members

FROM: James E. Newsome, President

RE: Compliance Interpretive Notice 01-06 - Trading Activity in Physically-
Delivered NYMEX Energy Contracts in Relation to NYMEX Cash-Settled
Contracts

It is the responsibility of market users to conduct trading on an orderly basis in
compliance with NYMEX rules. The NYMEX Compliance Staff, which monitors the markets to
ensure that trading is orderly, focuses among other things on whether market users trading in the
closing range of physical delivery (“physical”) contracts while holding open positions in cash
contracts that are settled at the same settlement price, are trading in an orderly and commercially
reasonable manner.

The Compliance Department will closely review trading in the closing range of the
physical contracts with special attention to any open cash-settled contracts. Where it appears
that a market user is attempting, either through its own trading or in coordination with, or with
the assistance of others, to effect market movement in the physical contracts to benefit an open
cash-settled contract position, an investigation will commence.

To the extent that such activity is deemed by Compliance Staff to have been undertaken
by a person or firm subject to the disciplinary jurisdiction of NYMEX, the Compliance
Department will seek action through the existing disciplinary channels. Such actions may
constitute violations of NYMEX rules that are major offenses, including but not limited to, Rule
8.55(A)(3) (dishonest conduct), Rule 8.55(A)(8) (manipulation or attempted manipulation), and
Rule 8.55(A)(18) (conduct substantially detrimental to the interest of the Exchange).

Should such activity be deemed by Compliance Staff to have been conducted by a
party(s) who is outside the direct jurisdiction of NYMEX, if deemed appropriate, the matter will
be referred to the Commodity Futures Trading Commission or other regulatory agencies, and
could additionally result in referrals to various law enforcement authorities as well.

Questions regarding this notice should be directed to Thomas LaSala, Senior Vice
President, Compliance and Risk Management, at (212) 299-2897, Nancy Minett, Vice President,
Compliance, at (212) 299-2940, or Adam Wernow, Compliance Counsel, at (212) 299-2851.


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October 13, 2006
Via E-Mail

Office of the Acting Secretary

Commodity Futures Trading Commission

Three Lafayette Centre = >
1155 21st Street, N.W. Z
Washington, D.C. 20581

Re: Rule Certification. NYMEX Submission 06.121: Notification of New NYMEX-
Rules 9.27A, Expiration Position Accountability Levels, and 9.29A, Exemptions
from Position Limits for Exposure Associated with NYMEX Physical versus Cash-
Settled Arbitrage Transactions; Compliance Interpretive Notice 01-06 4nd
Amendments to Chapter 9, Appendix A : ~TM

Dear Ms. Eileen Donovan:

The New York Mercantile Exchange ("NYMEX" or the "Exchange") is notifying the
Commodity Futures Trading Commission (‘“tCFTC” or “Commission”) of New NYMEX Rules
9.27A, Expiration Position Accountability Levels, and 9.29A, Exemptions from Position Limits
for Exposure Associated with NYMEX Physical versus Cash-Settled Arbitrage Transactions;
Compliance Interpretive Notice 01-06; and Amendments to Chapter 9, Appendix A.

Effective Monday, October 16, 2006, the Exchange will implement a number of changes
regarding position limits in its energy contracts. The changes include the following:

* Disaggregation from the underlying physically-delivered contracts of specified cash-
settled penultimate and last-day cash-settled futures contracts, as well as associated
miNYs and European Options. Specified penultimate and last day cash-settled futures
and options will be aggregated and subject to accountability handling. Please see
attached MATRIX for specific contract information, as well as Chapter 9, Appendix A.

+ Establishment of new Rule 9.27A, “Expiration Position Accountability Levels.” This
rule will define handling of the specified penultimate cash-settled futures/options, as well
as the last day cash-settled futures contracts on an accountability basis.

+ New Rule 9.29A, “Exemptions from Position Limits for Exposure Associated with
NYMEX Physical versus Cash-Settled Arbitrage Transactions.” This rule will define and
provide structure to allow for an exemptive capability in the underlying physically
delivered contracts where an arbitrage exists versus the associated penultimate and last
day cash-settled futures and options contracts. Note: Formal filing/review and approval
will be required.


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PEMETIULCS



New NYMEX Rule 9.29A - Exemptions from Position Limits for Exposure Associated with
NYMEX Physical versus Cash Settled Arbitrage Transactions

(A) A person may apply to the Exchange for an exemption from the position limits set forth in
Rule 9.27 related to contracts CL, NG, HO, HU and RB, where such exemption is in connection
with open arbitrage positions in the associated Penultimate Cash-Settled Contracts (WS, HP, NP,
BH, RT), miNY Contracts (QM, QG, QH, QU), Last Day Cash-Settled Contracts (HH, NN) and
Cash-Settled Penultimate Options (LC, LN, LB, LG).

(B) Applicants for an exemption under this Rule shall apply to the President or his authorized
representative (referred to as the "President"), on forms provided by the Exchange, not more than
two (2) days after assuming a position in excess of position limits under this Rule.

The Application shall include: a list of the contracts for which exemption is requested; an
agreement to comply with the limits imposed with respect to the proposed transactions; an
agreement to comply with the By-Laws and Rules of the Exchange; agreement to initiate and
liquidate positions in accordance with sound commercial practices and in an orderly manner; and
such other information, and representations as may be required by the Exchange.

(C) Any person who receives approval to own or control positions pursuant to this Rule shall
provide to the Exchange, upon the request of the Board, the Control Committee, or the President,
any information or documentation requested relating to the exemption.

(D) The President shall, on the basis of the application and supplemental information which the
Exchange may request, determine whether an exemption from speculative position limits shall be
granted. The President may deny, condition or impose limitations upon an exemption request
based upon the applicant's business needs, financial status and integrity, the bona fides of the
underlying swap transactions, on the liquidity, depth and volume of the market for which the
exemption is sought, and on such factors as the President deems appropriate. The President may
review at any time exemptions granted under this Rule, and may modify, revoke or place
limitations on the exemption.

(E) Nothing in this Rule shall in any way limit: (i) the authority of the Exchange to take
emergency action; or (ii) the authority of the President to review at any time the position owned
or controlled by any person and to direct that a position be reduced to the level provided for by
Rule 9.27.

(F) Any person who has received from the President written authorization to exceed position
limits imposed under Rule 9.27 must file with the Exchange an updated application annually, no
later than the anniversary date of the initial authorization, or waive the exemption.


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New NYMEX Rule 9.27A - Expiration Position Accountability Levels

(A) Any person who owns or controls positions in excess of the levels cited in Chapter 9,
Appendix (A) below, under heading 9.27A Expiration Position Accountability Levels, shall be
subject to the following provisions pursuant to position accountability levels:

(1) promptly supply to the Exchange such information as the Exchange may request pertaining to
the nature and size of the position, the trading strategy employed with respect to the position, and
the hedging requirements (if any), provided, however, that if the principal or controller fails to
supply such information as and when requested, the President or his designee may order the
reduction of such position;

(2) agrees, upon request by the President or his designee, not to increase the position owned or
controlled as of the time the request was received;

(3) agrees to comply with any limit prescribed by the President or his designee, and to decrease
any open position if directed upon review of the information cited in item 1 above.

(4) The Expiration Position Accountability Levels for designated energy contracts are effective
on the open of trading of the last three (3) trading days of the related physically delivered futures
contracts. The expiration position limits shall be calculated on a net futures-equivalent basis and
will aggregate appropriate contracts as identified in Chapter 9, Appendix A.

(5) Trading in the underlying physically delivered contract that is the basis for the settlement
prices for all contracts subject to this rule shall additionally be subject to NYMEX Interpretive
Notice 01-06.


Issuance of Compliance Interpretive Notice 01-06, “Trading Activity in Physically-
Delivered NYMEX Energy Contracts in Relation to NYMEX Cash-Settled Contracts.”
This Notice seeks to raise awareness and make clear that attempts to effect market
movement in the physical contracts to benefit open cash-settled positions may constitute
an investigation and potential violation of substantive Exchange rules.

Amendment to Chapter 9, Appendix A. Amendments include an increase in the
Expiration Position Limit defined in Rule 9.27 for the Light Sweet Crude Oil Futures
Contract to 3,000 net long or short (previously 2,000). Additionally, all applicable cash-
settled penultimate futures and options, as well as last day cash-settled futures are
highlighted to reflect the introduction of the previously cited new Rule 9.27A,
“Expiration Position Accountability Levels.”

Pursuant to Section 5c(c) of the Commodity Exchange Act (“Act”) and CFTC Rule 40.6,

the Exchange hereby certifies that the attached new rules comply with the Act, including
regulations under the Act.

Should you have any questions regarding the above, please contact Anthony V.

Densieski, Senior Director, Market Surveillance, at (212) 299-2881, and Bonnie H. Yurga,
Director, Market Surveillance, at (212) 299-2879, or myself at (212) 299-2897.

Very truly yours,

Thomas F. LaSala
Senior Vice President
Compliance and Risk Management

Brian Regan
Nancy Minett


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