Sorry for the delay in getting this back to you.  Give me a call and we can 
discuss in more detail.

Mark

P.S. - have you been watching the Horatio Hornblower movies on A&E?



Christian Yoder

04/13/99 04:30 PM
To: Mark - ECT Legal Taylor/HOU/ECT@ECT
cc:  
Subject: request for primer

Mark,
I am heading into another CFTC related analysis and desparately need another 
quick primer.  I would be very greatful if you could edit the following 
conversation and send it back to me like you did last time.  I kept that copy 
and it has proven to be invaluable.

 Know it All:  Yeah that CFTC stuff is pretty complicated.  You have to 
remember though that it is the option of settling financially that 
distinguishes the futures contract.  If you do a physical contract that has 
the option to settle financially it is an illegal futures contract if it 
isn't done on a regulated exchange  and it is just like giving the other guy 
a free option to termiate for illegality. So the risk in doing these things 
is that your counterparty can get out on the basis of illegality and 
secondly, you might find yourself suddenly regulated by the CFTC.  This risk 
is not to be confused with the other kind of risk which is where you write a 
mandatory financial transaction but wrap it up in physical clothing.  This is 
basically the risk of doing an unauthorized derivitive transaction and again, 
depending on the counterparty, you may have given a free option to terminate 
for lack of authorization. 

Tormented: Okay, okay, I think I've got that part, but what's all this option 
crap that people keep adding into the forumula?  They always say you can 
trade this and that and then they throw in the options.  Are options over the 
counter or under the counter or not on the counter or regulated or what?

Know it All:  Can't you remember this stuff.  I get tired of repeating it.  
Certain kinds of All commodity options are regulated and certain kinds 
aren't. Can't you just get that once and for all?

Tormented:  No.  I've got optionality dislexia.  What kind of option is How 
are options regulated?  I see our traders doing options all the time and we 
just write them up in our confirmation letters.  There's no big deal about 
CFTC or regulation.  What's the problem?

Know it All:  Well its like this:  if it is an option to do a futures 
contract it has to be done on the Exchange.  Any other options are off 
exchange.  It's just that simple.  Off exchange commodity options can only be 
done if the offeree (that's the guy receiving the offer) is a commercial 
user, producer, processor or merchant handling the underlying commodity.

Tormented:  Hmmm.  I'll have to think about that.