Block Forward Financial Trades

Legal has been assessing the risks of doing block forward trades as financial
and for now, subject to future changes that may be required as discussions
with the CAPX legal experts continue, we can state the basic rules as
follows:

It is okay to do up to 50% of our Block Forward business as financial.
It is very important to monitor this 50% level very closely and we should not
exceed it. We should not rely on the PX to tell us what the level is. We
should confirm it ourselves. A skeptical regulator, looking at PX records
should never be able to see that we ever did more than half our block forward
business as financial.
One of the legal rules that we must comply with in this area is that there
must be a bona fide commercial reason for going financial. This
dumbfoundingly simple sounding rule is important. Somehow, when we
communicate our decision to the PX to go from physical to financial, we
should give our reason. I'm not sure whether our decision is expressed by
phone, or electronically, but in either case, the person making the change
with the PX should get in an expression something like this: "we would like
to change these trades to financial because we think the elimination of
physical risk will benefit us commercially." Please be patient with this
self serving requirement and do it.

I have not worked out with any of the other back office groups how this new
practice will be handled. Obviously any changes it will require in
scheduling, settlements and accounting need to be dealt with too. Please call
me with any questions. ----cgy