Economic Requirements

Policy Statement on Price Differentials

The specification of delivery points, deliverable grades and their corresponding price differentials has a direct bearing on the susceptibility of the futures contract to price manipulation and market congestion. Ideally, supplies of the par delivery unit should normally be sufficient to satisfy expected demand for the commodity at expiration, thus ensuring normal convergence of cash and futures prices. When supplies of the par unit prove to be insufficient, distortions in the price of the futures and, perhaps, even in the cash market may occur. The provision of additional delivery points or deliverable grades may serve to limit these price divergences by attracting additional supplies from the non-par grades and/or from the non-par delivery points and allowing natural market forces to balance supply and demand.

In cases where additional delivery points or qualities are desirable to limit a contract’s susceptibility to manipulation or congestion, locational and quality price differentials should reflect normal commercial price differences between delivery points or qualities. When cash market differences are unstable, futures market differentials should be set at levels that fall within the range of values commonly observed or expected to occur in the future, eliminating any unusual or extreme differences.

Nevertheless, this policy is not intended to sanction maintenance of a particular location or quality as the par specification long past the time the cash market has passed it by. In other words, the par unit should normally be sufficient, and non-par delivery points or qualities should not be used to prop up an outmoded par point or par grade. Neither should this method of setting the differential be used as an excuse for adding delivery points or qualities that are not consistent with prevailing cash market practice. Too many points or grades at imprecisely-set price differentials can create a misconception to both speculators and hedgers as to what the contract represents.