More Tricks from the NYMEX

August 14, 2000

Mr. Daniel Rappaport
Chairman
New York Mercantile Exchange, Inc
One North End Avenue
World Financial Center
New York, NY 10282

Dear Mr. Rappaport;

On August 11, 2000, the New York Mercantile Exchange, Inc. (NYMEX) issued a press release announcing margin increases for your palladium contract. As of the close of business on Aug 18, 2000, margin requirements for customers (non-members) will rise to $135,000 per 100 ounce contract, for the August and September 2000 contract months. Since the September contract closed at $785.50 per ounce on August 11, 2000, the margin required for customers will be 70% greater than the contract's full cash value on the day of the press release. This is preposterous and absurd.

Obviously, the NYMEX has taken such drastic action to eliminate the chance of default in these contract months. There can be no other reason for such an extreme margin increase. But why should longs have to put up more than 100% of the contract's value, if it is impossible for them to default with 100% deposited? You are asking potential cash buyers to put up 70% more than the complete purchase price. That's bizarre. It is the shorts who will default, if anyone defaults. That will be because they don't have the real material to deliver, if called upon to do so by the longs. And having the shorts put up more than 100% of the contract's full cash value will not guarantee against default. Only by mandating that shorts hold exchange-sanctioned warehouse receipts by first notice day, or sooner, will guarantee against default. (This was my message in the article I sent you - The Shorts ARE Different - https://www.gold-eagle.com/gold_digest_00/butler042800.html . Considering the NYMEX's poor record in disorderly market conditions and defaults, I would think you would want to fix the problem, instead of continuing your unfair favoring of the shorts. The absurdity of raising margin requirements beyond 100% for longs is a clear signal to the world that the NYMEX does not want their business. You would rather turn away bona fide business, than demand shorts be able to honor their commitments? Do the shorts run your exchange?

Also on August 11, the Commodity Futures Trading Commission issued its Commitments of Traders Report as of the close of business August 8. That report indicated that 4 or less traders were net short approximately 27,000 contracts in COMEX silver. This is the equivalent of 135 million ounces of silver, or 25% of world production. The circumstance of 4 or less traders being short the equivalent of a quarter of the entire world's annual production is without precedent in the history of commodity futures trading, outside of the COMEX. I wrote to you about this previously. Are these 1, 2, 3 or 4 traders in position to deliver silver if called upon to, or are they naked short?

As of the date of this letter, there are close to 300 million ounces of silver open, held long and short, in your September silver contract, with less than three weeks to go before first notice day. This represents 300% of warehouse stocks, and a shocking 50% of world annual mine production. Half a year's worth of world production, up for delivery in three weeks, and your rules allow it. Sir, like so many other things unique to your exchange, this is without precedent in commodity futures history.

The common denominator in your ongoing problems in platinum and palladium, and your coming problems in silver (and maybe gold), revolves around your refusal to treat the shorts and longs on an equal and fair basis. Making the longs post 100% full cash value guarantees the longs can't possibly default. Demanding more is unfair. All the margin in the world, however, won't guarantee that shorts can deliver. The only thing that will guarantee that the shorts can not possibly default is to require all shorts posses warehouse delivery receipts on, or before first notice day. If you adopt this rule, you will never have another delivery problem. If you don't, you will have nothing but delivery problems and the continuous threat of default.

Your recalcitrance against adopting a rule that is fair to all your members and the public and that will guarantee your exchange to be default-free, is disheartening. In fact, I can think of no legitimate reason to not enacting immediately the rule requiring shorts to hold warehouse delivery receipts on, or before, first notice day, or liquidate or roll-over their position. If we have a problem in your silver contract, as I have warned you before, and the NYMEX or COMEX attempts the same discriminatory and manipulative measures as seen in the current palladium marginatrocity, I intend to hold NYMEX and its officers and directors liable, on a corporate and personal basis, for aiding and abetting the shorts. I also intend to attempt to persuade the authorities to initiate criminal proceedings under the RICO statutes for the ongoing and continuous manipulation in COMEX silver, that has resulted from your refusal to enact rules that would insure fair trade.

As I did the last time I contacted you, I will keep this matter private, if you demonstrate good faith by you telling me that you intend to enact the short-certifying rule change, or offering a legitimate reason why not. In either event, if I don't hear from you by Thursday noon, August 17, 2000, I will make this letter public and begin all efforts to force this rule change on you. The NYMEX and COMEX have favored and coddled the shorts for too long. It's time to level the playing field.

Very truly yours,

Ted Butler

Dear Mr. Butler,

This is in reply to your email. NYMEX has taken, and intends to continue to take, such steps as it deems prudent. Thank you for your comments.

Best regards,

Neal Wolkoff
Executive Vice President