[Federal Register: April 5, 2000 (Volume 65, Number 66)]
[Page 17859-17860]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



New York Cotton Exchange: Proposed Amendment to the Cotton No. 2
Futures Contract Prohibiting Cotton Stocks Under Commodity Credit
Corporation Loan From Simultaneously Being Exchange-Certified for
Delivery on the Futures Contract

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposed amendment to contract terms
and condition.


SUMMARY: The New York Cotton Exchange (NYCE or Exchange) has proposed
an amendment to the Exchange's cotton No. 2 futures contract. The
proposed amendment would prohibit cotton stocks from simultaneously
being included in both Exchange-certified stocks and under Commodity
Credit Corporation (CCC) loan. The Acting Director of the Division,
acting pursuant to the authority delegated by Commission Regulation
140.96, has determined that the proposed amendment is of major economic
significance, within the meaning of section 5a(a)(12) of the Commodity
Exchange Act (Act), and that its publication is in the public interest
and will assist the Commission in considering the views of interested

DATES: Comments must be received on or before May 5, 2000.

ADDRESSES: Interested person should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In
addition, comments may be sent by facsimile transmission to facsimile
number (202) 418-5521, or by electronic mail to secretary@cftc.gov.
Reference should be made to the proposed amendment to the New York
Cotton Exchange cotton No. 2 futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact John Bird of the
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581,
telephone (202) 418-5274. Facsimile number: (202) 418-5527. Electronic
Mail: jbird@cftc.gov.

SUPPLEMENTARY INFORMATION: The cotton No. 2 futures contract requires
that cotton intended for delivery be inspected for conformity with the
contract's quality specifications. Cotton that is found to meet the
contract's quality specifications is certified by the Exchange as
deliverable on the futures contract.
    The proposal will specify that no bale of cotton may simultaneously
be included in both certified stocks and Commodity Credit Corporation
(CCC) loan stocks. The Exchange intends to make the proposed amendment
effective within 30 days following Commission approval, if granted,
with respect to the first contract month with no open interest on such
effective date and for all contract months listed thereafter.
    In support of the proposal, the Exchange stated that:

    From the perspective of the cotton futures market, the
significant change to the cotton loan program which took effect in
1986 was the provision that the CCC would waive interest charges and
pay some or all of the storage charges that accrued during the loan
period as necessary to make the loan repayable at the lower of the
loan rate plus storage and interest, or the AWP [Adjusted World
Price for cotton]. In the event of forfeiture to the CCC, no
interest is charged, and the CCC assumes responsibility for the
warehouse storage charges that accrued during the period that the
cotton was under loan.
    Therefore, it is clear that, particularly at times when the AWP
is below the loan rate, cotton under loan is subject to non-
commercial forces. This is in contrast to ``free'' cotton stocks,
which are subject to commercial market forces, particularly to the
intertemporal relationships in the cotton No. 2 futures market. For
producers and cooperatives, the loan program effectively provides a
free put option at an exercise (the

[[Page 17860]]

loan rate) which may be significantly above the prevailing market
    While the impact of the loan program on the cash market is not
within the Exchange's jurisdiction, the rules relating to
certification of stocks for futures delivery are, and the Exchange
is concerned that the interplay between the loan program and the
stocks certification process does not adversely affect the economic
performance of the futures market.
    The level of certified stocks is an important influence in the
day-today behavior of the futures market. It is, after all, (and is
designed to be), the most relevant measure of available deliverable
supply. Furthermore, * * * the level of certified stocks is the
primary determinant of inter-temporal price relationships in the
cotton No. 2 futures market, which in turn underpin the role of the
futures market in guiding commercial inventory management activity.
    Hence, the Exchange's concern that, if certified stocks include
cotton which is under loan, it is not responsive to commercial
market forces and is eligible to be forfeited to the CCC on non-
commercial terms, the future market will not be properly informed as
to commercially available deliverable supply and its role in guiding
commercial inventory management will be impaired.

    In support of its view that the level of certified cotton stocks is
the primary determinant of inter-temporal cotton futures price
relationships, the Exchange provided an econometric analysis comparing
the relationship between the December/March cotton futures price spread
and the level of stocks certified for futures delivery with the
relationships between the same cotton futures price spread and total
cotton stocks in public warehouses and total U.S. stocks. Based on this
analysis, the Exchange concluded that ``[t]he results confirm the
critical role of certified stocks in determining price spread behavior
and demonstrate the markedly superior explanatory power of certified
stocks in this regard over that of other publicly available stocks
    The Exchange also said that, since 1993, it has monitored and
included in its weekly stocks report data on certified stocks which are
under CCC loan. The Exchange indicated that, during this period,
certified stocks under CCC loan have never been more than several
hundred bales and that, since 1995, there have been no certified stocks
under loan.
    The Division is requesting comments on the proposed amendment. The
Division is particularly interested in comments in regard to whether:
(1) the continuation of the practice of allowing certified cotton
stocks to remain under CCC loan represents a threat to orderly trading
and delivery in the futures market; (2) the proposal will reduce
deliverable supplies to levels that would make the futures market
susceptible to price manipulation or distortion; and (3) the proposal,
by precluding the use of a method of financing that is commonly used in
the cash market, is consistent with the requirements of section 15 of
the Commodity Exchange Act.\1\

    \1\ Section 15 stipulates that, in requiring or approving any
bylaw, rule, or regulation of a contract market, the Commission must
take into consideration the public interest to be protected by the
antitrust laws and endeavor to take the least anticompetitive means
of achieving the objectives of the Act, as well as the policies and
purposes of the Act.

    The proposed amendment was submitted under the Commission's Fast
Track procedure for the review of rule changes which provides that,
absent and contrary action by the Commission, the proposed amendment
may be deemed approved 45 days after the Commission received the
proposal. However, in view the complex issues posed by the proposal and
to provide an adequate period for interested parties to comment, the
Fast Track review period has been extended by an additional 30 days to
May 31, 2000, pursuant to the provisions of Commission Regulation
    Copies of the proposed amendment will be available for inspection
at the Office of the Secretariat, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
Copies of the proposed amendment can be obtained through the Office of
the Secretariat by mail at the above address, by phone at (202) 418-
5100, or via the Internet at secretary@cftc.gov.
    Other materials submitted by the Exchange in support of the
proposal may be available upon request pursuant to the Freedom of
Information Act (5 U.S.C. 552) and the Commission's regulations
thereunder (17 CFR part 145 (1997)), except to the extent they are
entitled to confidential treatment as set forth in 17 CFR 145.5 and
145.9. Request for copies of such materials should be made to the FOI,
Privacy and Sunshine Act Compliance Staff of the Office of Secretariat
at the Commission's headquarters in accordance with 17 CFR 145.7 and
    Any person interested in submitting written data, views, or
arguments on the proposed amendment, or with respect to other materials
submitted by the Exchange, should send such comments to Jean A. Webb,
Secretary, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581 by the specified

    Issued in Washington, DC, on March 31, 2000.
Richard Shilts,
Acting Director.
[FR Doc. 00-8354 Filed 4-4-00; 8:45 am]

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