Release: 4051-97

For Release: September 15, 1997

CFTC Notifies the Chicago Board of Trade That Its Proposal to Change Its Corn and Soybean Futures Contracts Does Not Satisfy the Terms of the Statute and Proposes to Change and to Supplement the CBT Proposal

Washington, D.C. The Commodity Futures Trading Commission today notified the Chicago Board of  Trade ("CBT") that the CBT's proposal to change its corn and soybean futures contracts does not satisfy the requirements of section 5a(a)(10) of the Commodity Exchange Act (the Act). The Commission also is invoking its statutory authority to propose to change and to supplement the delivery specifications of the CBT corn and soybean contracts. The Commission's proposed Order would change and supplement the CBT proposal in the following ways:

1. for the soybean contract, require that the CBT retain Toledo, Ohio and St. Louis, Missouri, as delivery points, in addition to Chicago, Illinois and the northern Illinois River, as the CBT proposed;

2. for both the soybean and corn contracts, require locational price differentials;

3. for both the corn and soybean futures contracts, require that the contingency plan which applies if the river traffic on the northern Illinois River is obstructed be changed and supplemented;

4. for both the corn and soybean futures contracts, eliminate as an unnecessary barrier to entry the CBT proposed $40 million net worth requirement for eligibility to become a shipping certificate issuer.

Finally, the Commission is proposing to disapprove the terms of the July and December 1999 corn futures contracts and the July and November 1999 soybean futures contracts, which are currently trading without the Commission's authorization, and to apply the changes described above to those contract months. However, the Commission also informed the CBT that, if the CBT proposes to list those contract months incorporating the Commission's proposed changes and supplements, the Commission would approve such listing immediately.

Background

In December 1996, the Commission notified the CBT that its corn and soybean futures contracts no longer met the requirements of the Commodity Exchange Act. The Commission found that the CBT corn and soybean futures contracts violate the requirement of section 5a(a)(10) of the Act that futures contracts "permit the delivery of any commodity . . . at such point or points and at such quality and locational price differentials as will tend to prevent or diminish price manipulation, market congestion, or the abnormal movement of such commodity in interstate commerce." That notification described the long-term changes in the marketing, storage, transportation and processing of corn and soybeans which the futures contracts failed to reflect.

CBT Proposal

In response to the Commission's notification, the CBT proposed to replace the contracts' existing warehouse receipt delivery system with shipping certificates deliverable from facilities in Chicago and along the northern Illinois River --defined as the area from Chicago to Pekin, Illinois. Under the CBT proposal delivery at all eligible locations would be at par, firms eligible to issue shipping certificates would be required to meet a minimum net worth standard of $40 million, and the current delivery points of Toledo, Ohio, and St. Louis, Missouri would be eliminated.

Commission Determination

After review of the documentary record, including a record number of nearly 700 comment letters submitted to the Commission by interested members of the public, the CBT submissions and extensive factual analyses of the Commission's Division of Economic Analysis, the Commission determined that the CBT proposal does not meet the requirements, or accomplish the statutory objectives, of section 5a(a)(10) of the Act and also violates section 15 of the Act. The Commission, therefore, proposes to change and to supplement the proposal pursuant to its statutory authority under the Act.

Specifically, the Commission found that, under the CBT proposal, the amount of deliverable supplies of soybeans during the critical summer months of July, August, and September fails to meet the minimum level necessary to tend to prevent or diminish price manipulation, market congestion, or the abnormal movement of soybeans in interstate commerce. In the Commission's opinion, the inadequacy of deliverable supplies of soybeans under the CBT proposal requires the retention of the CBT's current delivery points at Toledo and St. Louis, where additional deliverable supplies would be available. Accordingly, the Commission proposes to order the CBT to retain the Toledo and St. Louis delivery points on the soybeans contract.

The Commission did not find that available deliverable supplies of corn under the CBT's proposal are inadequate under section 5a(a)(10) so as to require additional delivery points. Rather, the Commission proposes to direct the CBT to report on the experience with deliveries and expiration performance in the corn futures contract on an annual basis for a five-year period after contract expirations begin under the revised contract terms.

The Commission also found that the lack of price differentials at all river-based delivery point locations for both the corn and soybean futures contracts failed to reflect the differentials in the underlying cash markets for corn and soybeans as required by section 5a(a)(10) of the Act. The Commission found that, in addition to reducing deliverable supplies, the lack of locational price differentials would render the futures contracts susceptible to price manipulation, market congestion, and the abnormal movement of the commodities in interstate commerce. Accordingly, the Commission proposes to add differentials to both the corn and soybeans contracts. For soybeans, Chicago and Toledo would be at contract price with other delivery points at a premium over contract price of 150 percent of the difference between the Waterways Freight Bureau Tariff No. 7 rate applicable to that location and the rate applicable to Chicago. For corn, Chicago would be at contract price with all other points at a premium over contract price of 150 percent of the difference between the Waterways Freight Bureau Tariff No. 7 rate applicable to that location and the rate applicable to Chicago.

The Commission also found that the CBT proposal's reliance chiefly on a single mode of transportation to effect delivery renders the contract susceptible to significant disruptions in transportation on the Illinois River, increasing the possibility of price manipulation, market congestion, or the abnormal movement of corn and soybeans in interstate commerce. Although the CBT submitted a contingency plan to address such disruptions, the Commission found that it did not sufficiently provide for alternative delivery procedures when river traffic is obstructed. Accordingly, the Commission proposes to change the CBT contingency plan by reducing the time period for which locks must be closed before the contingency plan becomes applicable from 45 days to 15 days, by making the contingency plan applicable to the closure of any lock or locks which affects shipments from a majority of shipping stations within the northern Illinois River delivery area, by making the rule applicable to all announced closures with no minimum notification period specified and by changing the differential from 100 percent of the Waterways Freight Bureau Tariff No. 7 rate as proposed to 150 percent.

Finally, the Commission found that a provision in the CBT proposal requiring shipping certificate issuers to have $40 million net worth poses a significant and unnecessary barrier to entry to those wishing to participate as issuers of shipping certificates on the contracts. The proposed $40 million net worth requirement is in addition to other financial requirements in the proposal that shipping certificate issuers must meet. The Commission found that the other financial requirements are fully adequate to ensure the financial ability of issuers to perform their responsibilities under the contracts. For these reasons, the Commission proposes to eliminate the $40 million net worth requirement.

The CBT will have an opportunity to be heard by the Commission on the Commission's proposed Order pursuant to section 5a(a)(10) of the Act. To that end, the Commission intends to convene a public hearing at its Washington, D.C., office at 1:00 p.m. on October 15, 1997 (or at an earlier date if requested by the CBT). The Commission also intends to publish its proposed Order in the Federal Register and to accept public comments on the proposed Order for 30 days following the date of publication in the Federal Register.

Copies of the Commission's proposed Order are available from the Commission's Office of Public Affairs, Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC 20581, (202) 418-5080.