New York 

Mercantile Exchange 

Ms. Eileen Donovan 

Acting Secretary 

Received CFTC 

Recor~' Section 

7jdr/p7 

July 23, 2007 

., 

" ' , '· . 

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Commodity Futures Trading Commission 

Three Lafayette Centre 

COMMENT 

11552151 St. N.W. 

Washington, D.C. 20581 

Re: Regulation 18.05 

Dear Ms. Donovan: 

The New York Mercantile Exchange, Inc. (NYMEX or Exchange) appreciates the 

opportunity to comment on the Commodity Futures Trading Commission's (CFTC) 

Federal Register Release (Release) dated June 22, 2007. The CFTC requested 

comment on proposed amendments to CFTC Rule 18.05 (Maintenance of Books and 

Records). NYMEX is a for-profit corporation organized under the laws of the State of 

Delaware and is fully regulated by the CFTC as a designated contract market and as a 

registered derivatives clearing organization. It is the chief operating subsidiary of 

NYMEX Holdings, Inc. (NYMEX Holdings). NYMEX is the largest exchange in the world 

for trading futures and options contracts on energy and metals commodities. 

The CFTC is proposing to amend Rule 18.05 to provide that every trader holding 

or controlling a reportable futures or option position will be required to keep books and 

records concerning all positions and transactions in the same commodity on all reporting 

markets, exempt commercial markets, exempt boards of trade, foreign boards of trade 

as well as on over-the-counter transactions undertaken pursuant to the exclusions or 

exemptions set forth in Sections 2(d), 2(g) or 2(h)(1 )-(2) of the Commodity Exchange Act 

or under Part 35 of the CFTC's rules. The CFTC is also proposing to amend this rule to 

clarify that every reportable trader must keep books and records for "commercial 

activities" that the trader hedges with the reportable futures and options positions. 

As an overview, while this proposed rulemaking is well-intentioned, by its terms, 

it is only triggered by reportable levels on a regulated exchange. Consequently, if 

implemented, this proposal would tip an already un-level playing field in the direction of 

unregulated trading venues by creating an additional incentive for market participants 

either to do all of their trading in unregulated venues or to trade at a level below the 

reportable level on the regulated exchange. Thus, it is quite clear that the proposal 

would not only impose serious costs on regulated exchanges but also raise public policy 

concerns by shifting more trading activity away from transparent and regulated venues. 

On the other hand, this proposal is limited in its effectiveness because of the 

New York Mercantile Exchange, Inc. 

World Financial Center 

One North End Avenue 

New York, NY 10282-1101 

(212) 299-2000 

The New York Memmtile Exchange, Inc., is composed of two divisiom. 

The NYMEX Division offers trading in crude oil, heating oil, unleaded gasoline, 

natural gas, electricity, coal, propane, platinum, and palladium. The COMEX Division 

offers trading in gold, silver, copper, and alumitJum. 
2 

acknowledged infrequent use by the CFTC of the special call procedure. In view of the 

substantial costs and limited utility of this proposal, NYMEX recommends that the 

Commission defer this proposed rule-making in favor of a more comprehensive 

legislative approach. 

Turning to the rulemaking proposal in the Release, in support of the proposed 

amendments, the CFTC notes that "[t]here is a close relationship among transactions 

conducted on reporting markets and non-reporting transactions." (72 Fed. Reg. 34413, 

34414 (2007) (to be codified at 17 C.F.R. Part 18) (proposed June 22, 2007). Indeed, in 

recent legislative testimony, the CFTC has confirmed its view that certain reporting and 

non-reporting trading venues are essentially linked. The Commission additionally 

observed in the Release that it was crucial for the CFTC to assess a reportable trader's 

overall position in the same commodity in non-reporting transactions: 

" ... in order to see the complete picture of the reportable trader's positions in the 

commodity. This is particularly important in light of the growing volume of trading 

on, and participation in, the non-reporting markets, the close relationship among 

the various products and markets, the increasing globalization of the futures 

markets, and the growth of trading on electronic exchanges and on foreign 

boards of trade." (ibid.) 

As examples of the close relationships among the various products, the CFTC 

relied upon two examples focusing upon non-reporting products related to NYMEX 

products: (1) the "virtually identical" natural gas contracts listed on the Intercontinental 

Exchange (ICE); and the West Texas Intermediate crude oil futures contract that is listed 

for trading on ICE Futures, a foreign board of trade. 

NYMEX is very supportive of the principal intention underlying these proposed 

amendments, which is to enhance the Commission's ability to deter and to prevent price 

manipulation or any other disruptions to the integrity of the regulated futures markets~ 

We also note that the CFTC characterized this proposed rule-making as "making 

explicit" the scope of the CFTC's current authority to obtain this information. 

Nonetheless, the cost-benefit analysis section of the Release did not give any 

consideration or analysis to the cost impact of this rule-making on regulated exchanges 

with reportable position requirements. As discussed below, the costs associated with 

this proposed rulemaking to the regulated exchanges vastly outweighs the benefits. We 

find this to be a major flaw in the proposal, which necessitates a different course of 

action. 

NYMEX's own recent experiences with a compliance advisory issued earlier this 

year confirm that traders are hesitant for purely commercial reasons for anyone, 

including but not limited to regulatory staff, to have access to their complete book of 

proprietary trading positions. However, the expansive scope of the information that can 

be obtained (from a trader with a reportable position) would not be triggered by Rule 

18.05 if the trader either stayed below the reportable position level on the regulated 

exchange or conducted all of its trading in non-reportable transactions. 
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Thus, Rule 18.05 as amended would simply add yet another incentive for mC!rket 

participants to shift their trading activity from regulated and transparent venues to 

unregulated and non-transparent venues. While this would be an unintended 

consequence of the proposed rule-making, it would nonetheless impose a very real cost 

on regulated exchanges and also would have adverse public policy consequences. Our 

review of the cost-benefit analysis section also raises an issue as to the extent of the 

benefits to be obtained from these amendments in light of the CFTC's own 

acknowledgement that special calls for information on non-reporting transactions "would 

continue to be made on an infrequent basis." (72 Fed. Reg. 34413, 34416 (2007) (to be 

codified at 17 C.F.R. Part 18) (proposed June 22, 2007) The avoidance of these 

reporting requirements by those who would choose instead to leave the regulated 

exchanges contradicts the intent and purpose of the proposed rule and can be remedied 

only by imposing identical requirements on linked trading facilities meeting specified 

criteria. 

In our view, the logic of the CFTC's analysis of the evolution of the markets leads 

in the direction of legislative change resulting in the implementation of reportable 

requirements on organized trading facilities that have triggered specified criteria. We 

strongly believe that such a comprehensive approach will provide a more effective 

solution than the enactment of a stop-gap rule change with seemingly limited 

effectiveness and with real costs that exceed the anticipated benefits. Consequently, 

NYMEX respectfully suggests that the Commission defer this proposed rule-making in 

favor of legislative change. We believe that the flight to non-transparent, unregulated 

trading facilities to avoid reporting of OTC positions will be swift and will have dire 

consequences for the regulated exchanges. 

Should you require any additional information or have any comments or 

questions regarding this comment letter, please do not hesitate to contact me at any 

time. 

cc: Walt Lukken, Acting Chairman 

Michael Dunn, Commissioner 

Very truly yours, 

~A_v--f~h' James E. Newsome 

President and Chief Executive Officers