[Federal Register: September 22, 1997 (Volume 62, Number 183)]
[Notices]
[Page 49474-49498]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se97-34]
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COMMODITY FUTURES TRADING COMMISSION
Chicago Board of Trade Futures Contracts in Corn and Soybeans;
Proposed Order To Change and To Supplement Proposal
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of, and Request for Public Comment on, Proposed Order to
Chicago Board of Trade to Change and to Supplement Chicago Board of
Trade Proposal on Delivery Specifications.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has
issued a Proposed Order to the Board of Trade of the City of Chicago
(``CBT''), under Section 5a(a)(10) of the Commodity Exchange Act
(``Act''), 7 U.S.C. 7a(a)(10), to Change and to Supplement its Proposal
regarding the delivery terms of the CBT corn and soybean futures
contracts. The CBT proposal was submitted in response to a December 19,
1996, notification to the CBT by the Commission that the CBT corn and
soybean futures contracts no longer accomplish the objectives of that
section of the Act. The Commission in its Proposed Order, proposes to
change and to supplement the CBT proposal for its soybean futures
contract by: i) retaining the Toledo, Ohio, switching district as a
delivery location; ii) retaining St. Louis-East St. Louis-Alton as a
delivery location for shipping stations; and iii) making soybeans from
the Toledo delivery location deliverable at contract price and from all
other locations 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,
Illinois, with Chicago at contract price. The Commission, with respect
to the CBT corn contract, is proposing to make corn from shipping
locations on the northern Illinois River deliverable 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, Illinois, with Chicago at contract price.
With respect to both the CBT corn and soybean futures contracts, the
Commission also proposes to change and to supplement the proposed
contingency plan for alternative delivery procedures when traffic on
the northern Illinois River is obstructed and to eliminate the $40
million minimum net worth eligibility requirement for issuers of
shipping certificates. Finally, the Commission is proposing to
disapprove the proposed terms of the July and December 1999 corn
futures contracts and the July and November 1999 soybean futures
contracts and is proposing to apply the changes and supplements
described above to such contracts under sections 5a(a)(10), 5a(a)(12),
and 8a(7) of the Act.
The Commission has determined that publication of the Proposed
Order for public comment is in the public interest, will assist the
Commission in considering the views of interested persons, and is
consistent with the purposes of the Commodity Exchange Act.
DATES: Comment must be received by October 22, 1997.
ADDRESSES: Comments should be mailed to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581, attention: Office of the Secretariat; transmitted by
facsimile at (202) 418-5521; or transmitted electronically at
[[email protected]]. Reference should
[[Page 49475]]
be made to ``Proposed Order--Corn and Soybean Delivery Points.''
FOR FURTHER INFORMATION CONTACT: John Mielke, Acting Director, or Paul
M. Architzel, Chief Counsel, Division of Economic Analysis, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
N.W., Washington, D.C. 20581, (202) 418-5260, or electronically, Mr.
Architzel at [[email protected]].
SUPPLEMENTARY INFORMATION: Section 5a(a)(10) of the Act provides that
as a condition of contract market designation, boards of trade are
required to:
Permit the delivery of any commodity, on contracts of sale
thereof for future delivery, of such grade or grades, 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. If the Commission after investigation finds that the rules
and regulations adopted by a contract market permitting delivery of
any commodity on contracts of sale thereof for future delivery, do
not accomplish the objectives of this subsection, then the
Commission shall notify the contract market of its finding and
afford the contract market an opportunity to make appropriate
changes in such rules and regulations. If the contact market within
seventy-five days fails to make the changes which in the opinion of
the Commission are necessary to accomplish the objectives of this
subsection, then the Commission after granting the contract market
an opportunity to be heard, may change or supplement such rules and
regulations of the contract market to achieve the above objectives *
* *.
The Commission, on September 15, 1997, issued a Proposed Order
under section 5a(a)(10) of the Act to change and to supplement the
proposal of the CBT relating to the delivery specifications of the corn
and soybean futures contracts. That proposal was submitted in response
to prior Commission notification to the CBT that its futures contracts
for corn and soybeans no longer were in compliance with the
requirements of section 5a(a)(10) of the Act. The text of the Proposed
Order is set forth below.
In the Matter of the Section 5a(a)(10) Notification to the Board
of Trade of the City of Chicago, Dated December 19, 1996, Regarding
Delivery Point Specifications of the Corn and Soybean Futures
Contracts.
Dated: September 15, 1997.
Proposed Order of the Commodity Futures Trading Commission to
Change and to Supplement Proposed Rules of the Board of Trade of the
City of Chicago, Submitted for Commission Approval in Response to a
Section 5a(a)(10) Notice Relating to Futures Contracts in Corn and
Soybeans.
The Commodity Futures Trading Commission (CFTC or Commission)
hereby:
(1) proposes under section 5a(a)(10) of the Commodity Exchange Act
(Act) to change and to supplement the proposed delivery specifications
of the Board of Trade of the City of Chicago (CBT) soybean futures
contract by making all changes to such rules and regulations as
required to effect the following:
i. retaining the Toledo, Ohio, switching district as a delivery
location;
ii. retaining St. Louis-East St. Louis-Alton as a delivery location
for shipping stations; and
iii. making soybeans from the Toledo delivery location deliverable
at contract price and making soybeans from shipping locations within
the St. Louis-East St. Louis-Alton and the northern Illinois River
delivery locations deliverable 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, Illinois, with Chicago at contract price;
(2) proposes under section 5a(a)(10) of the Act to change and to
supplement the proposed delivery specifications of the CBT corn futures
contract by making all changes to such rules and regulations as
required to make corn from shipping locations on the northern Illinois
River deliverable 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,
Illinois, with Chicago at contract price;
(3) proposes under section 5a(a)(10) of the Act to change and to
supplement the proposed CBT contingency plan for alternative delivery
when river traffic is obstructed by reducing the continuous period of
lock closure which triggers application of the plan's special
procedures from the 45 days proposed to 15 days, by eliminating the
condition which triggers the contingency plan that notice of the lock
closure must have been given six-months prior to such closure, by
making the contingency plan applicable whenever a majority of shipping
stations within the northern Illinois River delivery area are affected
by closure of any lock or locks and by changing the differential from
100 percent of the Waterways Freight Bureau Tariff No. 7 rate as
proposed to 150 percent.
(4) proposes under sections 5a(a)(10) and 15 of the Act to change
and to supplement the proposed CBT corn and soybean futures contracts
by eliminating the $40 million minimum net worth eligibility
requirement for issuers of shipping certificates; and
(5) proposes to disapprove under sections 5a(a)(10), 5a(a)(12), and
15 of the Act and Commission rule 1.41(b) the terms of the July and
December 1999 corn futures contracts and the July and November 1999
soybean futures contracts and proposes to apply the changes and
supplements described above to such contracts under sections 5a(a)(10),
5a(a)(12), and 8a(7).
The complete text of the revisions proposed by the Commission to
the proposed CBT rules appears in attachment 1 of this Order.
The Commission, as detailed below, bases these proposed actions on
its finding that the response of the CBT to the section 5a(a)(10)
notification relating to its corn and soybean futures contracts does
not meet the requirements, or accomplish the statutory objectives, of
that section and also violates section 15 of the Act. The Commission's
determination is based upon: (1) the inadequate amount of deliverable
supplies of soybeans available under the proposed contract terms in the
delivery area as proposed; (2) the failure of the proposed corn and
soybean contracts to include necessary locational differentials; (3)
the failure of the proposed corn and soybean contracts to provide an
adequate rule for alternative deliveries if river transportation is
obstructed; and (4) the substantial impediment to eligibility for
issuing corn and soybean shipping certificates imposed by the $40
million net worth requirement.
Specifically, under the CBT proposal, the amount of deliverable
supplies of soybeans during the critical summer delivery months of
July, August, and September fails to meet the minimum level that, in
the opinion of the Commission, is necessary to tend to prevent or
diminish price manipulation, market congestion, or the abnormal
movement of soybeans in interstate commerce. The gross amount of
potentially deliverable supplies historically has failed to reach the
minimum level on a significant number of occasions during the past 11
years the Commission has examined. Moreover, on those occasions when
the gross amount of potentially deliverable supplies did exceed that
minimum level, it frequently did so only because of supplies available
at the Chicago/Burns Harbor (Chicago) delivery point, the continuing
decline of which precipitated the section 5a(a)(10) notification in the
first instance. This inadequacy is further heightened when appropriate
downward adjustments are made to reflect only that portion of the
[[Page 49476]]
gross deliverable supply which would likely be available for futures
deliveries. Thus, gross deliverable supplies would be diminished by the
effects of the proposed three-day barge queuing rule, prior commercial
commitments of available stocks, the lack of locational price
differentials, and the unjustifiably high financial eligibility
requirements. The frequent interruptions in barge transportation on the
northern Illinois River due to lock closings and weather conditions
also create foreseeable disruptions to deliverable supplies under the
CBT proposal. 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.
The Commission does 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. However, the adequacy of corn
supplies cannot be accurately and fully ascertained until after there
is a history of deliveries occurring under the proposal. To the extent
that in operation the proposal results in inadequate deliverable
supplies of corn, the Commission will reconsider the need to require
additional delivery points for the corn contract. To that end, the
Commission directs 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.
Neither the CBT proposal for soybeans nor its proposal for corn
provides for locational price differentials among spatially separated
delivery points, as section 5a(a)(10) of the Act requires. In addition
to tending to reduce deliverable supplies, the lack of locational price
differentials reflecting the differentials in the underlying cash
markets for corn and soybeans would render the futures contracts
susceptible to price manipulation, market congestion, and the abnormal
movement of the commodities in interstate commerce.<SUP>1</SUP>
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\1\ The lack of locational price differentials not only violates
section 5a(a)(10) of the Act, but also is contrary to Commission
Guideline No. 1 and the Commission's policy on differentials. See,
CFTC Guideline No. 1, 17 CFR part 5, appendix A; and Memorandum from
Mark Powers, Chief Economist to the Commission, dated March 22,
1977, (1977), adopted by the Commission at its meeting of May 3,
1977.
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In addition, the proposed contingency plan providing for
alternative delivery procedures when river traffic is obstructed
violates the provisions of section 5a(a)(10). By requiring lengthy
advance notice of a river obstruction before the contingency plan
applies, by limiting the contingency plan only to instances of river
obstructions south of the delivery area, and by specifying a
differential that does not conform to the differential proposed by the
Commission, the proposed plan fails to diminish the potential for price
manipulation, market congestion, or the abnormal movement of the
commodities in interstate commerce.
Finally, in addition to its likely detrimental effect on the amount
of available deliverable supplies on the contracts, the proposed $40
million net worth eligibility requirement for issuers of shipping
certificates poses a significant, unnecessary, and unjustified barrier
to entry to those wishing to participate as issuers of shipping
certificates on the contracts in violation of section 15 of the Act.
This proposed $40 million net worth requirement is in addition to other
minimum financial requirements that shipping certificate issuers must
meet, including minimum working capital of $2 million, a bond or other
financial guarantee equal to the full market value of all outstanding
shipping certificates, and a limitation on the value of outstanding
certificates an issuer may issue to 25 percent of the issuer's net
worth. These requirements are fully adequate to ensure the financial
ability of issuers to perform their responsibilities under the
contracts. The burden imposed by the additional $40 million net worth
requirement on those otherwise eligible to participate in the contract
as shipping certificate issuers would not only be unnecessary, but
would act as a significant barrier to participation as an issuer and
would preserve a high level of concentration among issuers.
Accordingly, as provided under section 5a(a)(10) of the Act, the
Commission hereby notifies the CBT that it will have an opportunity to
be heard on this proposed Order by the Commission. To that end, the
Commission will convene a public hearing at its Washington, D.C.,
office, on October 15, 1997, beginning at 1:00 p.m. (or at an earlier
date if the CBT requests), in order to provide the CBT with an
opportunity to appear before the Commission to make an oral
presentation regarding the matters raised in this proposed Order. The
Commission will also accept written comments from the CBT on the
proposed Order on or before the date of the hearing.
The Commission's conclusions, as discussed in greater detail below,
are supported by factual analyses made by the CFTC staff and by a large
number of well-informed written comments submitted to the Commission by
commercial users of the corn and soybean futures contracts and by other
interested persons. The Commission also analyzed the documentary
evidence submitted by the CBT and other commenters in support of the
CBT proposal. In addition, the CBT and other interested members of the
public presented oral and written comments to the Commission during an
open meeting of the Commission. Written and oral comments received were
reviewed by the Commission and were considered by the Commission in
arriving at its conclusions.
I. The Section 5a(a)(10) Proceeding
The Commission, by letter dated December 19, 1996, commenced this
proceeding by issuing to the CBT a notification under section 5a(a)(10)
of the Act finding that the delivery specifications of its corn and
soybean futures contracts no longer accomplish the statutory objectives
of ``permit[ting] 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.''
Letter of December 19, 1996, to Patrick Arbor from the Commission, 61
FR 67998 (December 26, 1996) (section 5a(a)(10) notification). The
section 5a(a)(10) notification detailed long-term trends in the
storage, transportation and processing of corn and soybeans, related
those trends to changes in cash market conditions at the CBT delivery
locations, and analyzed the lack of consistency between the cash market
for these commodities and the delivery provisions of these contracts.
Id., 68000-68004.
The section 5a(a)(10) notification also recounted the CBT's failure
over the last 25 years adequately to address these structural problems
with the contracts. As noted in the section 5a(a)(10) notification,
section 5a(a)(10) was itself expressly added to the Act in 1974 after a
number of apparent manipulations and problem liquidations involving the
CBT grain contracts. Id. 68005. In July 1989 an emergency action was
required relating to CBT's soybean contract because of a commercial
trader's holding of futures positions which exceeded the total amount
of soybeans that could be delivered at the contract's delivery points.
By 1991 several major
[[Page 49477]]
studies had been completed demonstrating the inadequacy of the CBT's
delivery points. Nevertheless, the CBT's response to these problems was
limited. Id. 68006. As the Commission noted in the section 5a(a)(10)
notification, when in 1992 it approved certain changes proposed by the
CBT to address these problems, the Commission cautioned that the CBT's
response was merely a short-term palliative, and the Commission urged
the CBT to consider actively more significant contract changes. Id.
68007.
Only three years later, three of the existing six Chicago
warehouses regular for delivery ceased operations, a symptom of the
serious, fundamental problems with the contracts' delivery
specifications. At the urging of the Commission, the CBT formed a
special task force to address the delivery problems. That task force
took a year developing proposed changes to the contracts'
specifications which were modified by the CBT's board of directors. The
modified proposal was then defeated by a vote of the CBT membership on
October 17, 1996.
Subsequently, on December 19, 1996, after an additional Chicago
delivery warehouse stopped accepting soybeans and corn in late October
1996, the Commission formally commenced this proceeding under section
5a(a)(10) of the Act. The section 5a(a)(10) notification found that the
CBT corn and soybean futures contracts no longer met the requirements
of that section of the Act and notified the CBT that it had until March
4, 1997, the statutory period of 75 days, to submit for Commission
approval proposed amendments to the contracts' delivery specifications
to bring them into compliance with the Act. Neither the CBT nor the
nearly 700 comments filed with the Commission regarding the CBT
proposal have challenged the factual basis for the December
notification, and indeed, both the CBT and many commenters have
acknowledged the correctness of that Commission action.
The CBT, on April 16, 1997, submitted its response to the section
5a(a)(10) notification in the form of proposed exchange rule
amendments.<SUP>2</SUP> Previously, the Commission had published the
substance of the proposed amendments in the Federal Register for a 15-
day comment period.<SUP>3</SUP> 62 FR 12156 (March 14, 1997). In
response to requests for additional time to comment on the proposal,
the Commission on April 24, 1997, extended the comment period until
June 16, 1997. 62 FR 1992.<SUP>4</SUP>
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\2\ While the CBT labeled its submission of the proposed rule
amendments as having been made pursuant to section 5a(a)(12), as
well as section 5a(a)(10), of the Act, the Commission is applying
its specific authority and procedures set forth in section 5a(a)(10)
with regard to its consideration of the CBT's submission.
Section 5a(a)(12) of the Act provides that ``the Commission
shall disapprove after appropriate notice and opportunity for
hearing any such rule which the Commission determines at any time to
be in violation of the provisions of this Act or the regulations of
the Commission.'' In addition, section 8a(7) of the Act empowers the
Commission to alter or to supplement exchange rules as necessary or
appropriate ``to insure fair dealing in commodities traded for
future delivery on such contract market.'' Such changes or
alterations may address contract terms or conditions, among other
matters.
The Commission is exercising its authority under section
5a(a)(10) of the Act to change and to supplement the CBT proposals.
Nevertheless, the Commission, for the reasons detailed below,
necessarily also finds that the CBT proposal must be disapproved
under section 5a(a)(12) of the Act as being inconsistent with the
requirements of sections 5a(a)(10), 8a(7) and 15 of the Act and must
be altered and supplemented under section 8a(7) of the Act.
\3\ On March 4, 1997, the CBT had notified the Commission that
its Board had authorized the submission of the proposed amendments
to the CBT membership for a formal vote. On April 15, 1997, the CBT
membership voted in favor of the proposed amendments, and the CBT
formally submitted them for Commission review the next day.
\4\ Also on April 24, 1997, the CBT informed the Commission by
letter that it would the next day list, or relist, for trading the
July and December 1999 corn futures contract months and the July and
November 1999 soybean futures contract months. By letter dated May
2, 1997, the Commission notified the CBT that the listing or
relisting of these contract months ``is not legally authorized at
the present time,'' that the Commission ``reserves all of its
authority under sections 5a(a)(10), 5a(a)(12) and 8a(7) of the Act
to approve, disapprove, supplement, or modify the proposed delivery
specifications of the CBT corn and soybeans futures contract and to
apply that determination to the[se] * * * trading months,'' and that
the CBT ``must notify all market participants that the Commission
has not approved the listing of these contract months.''
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The CBT requested the opportunity to appear before the Commission
``to address issues that have been generated during the comment
period.'' <SUP>5</SUP> The Commission granted the CBT's request (62 FR
29107 (May 29, 1997)), holding a public meeting on June 12, 1997, to
accept oral and written statements by the CBT and interested members of
the public. The participants represented a cross-section of views, both
favoring and opposing the CBT proposal.<SUP>6</SUP>
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\5\ The Commission received close to 700 comments on the CBT's
proposal, the largest number of comments ever received by the
Commission on any issue before it. The vast majority of the comments
were opposed to the CBT proposal for a variety of reasons. Many of
the comments were well reasoned and contained valuable factual
information and data which were important supplements to the
information provided by the CBT in its submission.
\6\ Both written and oral statements in connection with the
meeting were submitted to the Commission for inclusion in the record
and, along with a transcription of the meeting, have been entered
into the Commission's comment file. Participants included a United
States Senator from the State of Ohio (transcript at 69-75) and
United States Representatives from the States of Michigan
(transcript at 9-14) and Ohio (transcript at 14-26); representatives
of six commercial users of the contracts (transcript at 116-168);
and representatives of three producer associations (transcript at
169-183). The CBT presented its views through the statements of six
persons (transcript at 27-29, 36-69).
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II. The CBT Proposal Responding to the Section 5a(a)(10)
Notification
In correspondence dated April 16, 1997, the CBT responded to the
section 5a(a)(10) notification by submitting proposed amendments to the
terms and conditions of its corn and soybean futures contracts for
Commission review. The data submitted by the CBT to justify its
proposal were inadequate to permit a determination of whether the
proposal met the requirements of section 5a(a)(10) of the Act and
contained certain flaws.<SUP>7</SUP> Therefore, the Commission was
required independently to collect and to analyze the data necessary for
a proper analysis of the CBT's proposal. The CBT supplemented its
original submission on more than one occasion--most recently on August
25, 1997.
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\7\ In this regard, the Act, Guideline No. 1, and Commission
rule 1.41 provide that the Exchange must demonstrate that its
proposed rule amendments meet the requirements of the law. When
exchange submissions fail to provide sufficient information to
permit the Commission to make a determination, the Commission can
refuse to consider a proposed amendment and can remit the proposed
rule for further justification. See, 17 CFR 1.41(b). However, in
this case the Commission chose to supplement the CBT submission with
its own research and to act on the CBT proposal.
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The CBT's proposal would replace the existing delivery system
involving delivery of warehouse receipts representing stocks of grain
in store at terminal elevators in Chicago, Toledo, and St. Louis with
delivery of shipping certificates.<SUP>8</SUP> The shipping
certificates would provide for corn or soybeans to be loaded into a
barge at a shipping station located along a 153-mile segment of the
Illinois River from Chicago (including Burns Harbor, Indiana) to Pekin,
Illinois. Delivery in Chicago would also be permitted by rail or
vessel. Delivery at all eligible locations would be at par. (See map
below.)
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\8\ A shipping certificate is a negotiable instrument that
represents a commitment by the issuer to deliver (i.e., load into a
barge) corn or soybeans to the certificate holder, pursuant to terms
specified by the CBT, whenever the holder decides to surrender the
certificate to the issuer. Unlike an issuer of a corn or soybean
warehouse receipt, which must have the product in storage to back
the receipt, an issuer of a shipping certificate would be able to
honor its delivery obligation not only from inventories, but also
from anticipated receipts or purchases of corn or soybeans after the
holder surrenders the certificate.
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In addition to being located along the defined segment of the
Illinois River
[[Page 49478]]
and capable of loading barges, firms eligible to issue shipping
certificates would be required to meet a minimum net worth standard of
$40 million. This minimum net worth standard is not applicable to the
CBT's other agricultural futures contracts and would be in addition to
the CBT's existing requirement of $2 million working capital required
of firms regular for delivery of all agricultural products. The
proposal also would require the issuer to have a letter of credit or
other guaranteed credit instrument collateralizing the full market
value of the issued certificates and would establish limits on the
amount of outstanding shipping certificates by firm.<SUP>9</SUP> In
addition, the proposal would impose requirements regarding an issuer's
rate of loading barges.<SUP>10</SUP> Once a shipping certificate has
been surrendered to the issuer, the issuer would have to begin loading
product within three business days of surrender and receipt of loading
orders or one business day after placement of the certificate holder's
barge, whichever is later. This loading would be required to take
precedence over all other barge loadings for eight hours per day at the
issuer's loading facility.
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\9\ These limitations are: (a) for northern Illinois River
locations, 30 times the registered daily barge loading rate; (b) a
value no greater than 25% of the operator's net worth; and (c) for
Chicago and Burns Harbor locations only, the registered storage
capacity of the facility.
\10\ The issuer's registered daily rate of loading shall be not
less than (a) for northern Illinois River locations, one barge per
day per shipping station and (b) for Chicago and Burns Harbor
locations only, three barges per day per shipping station.
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Shipping certificate holders would be required to pay shipping
certificate issuers a daily premium charge until the certificate is
surrendered.<SUP>11</SUP> The last trading day for expiring corn and
soybean futures months would be the business day preceding the 15th
calendar day of the delivery month, with all deliveries of shipping
certificates required to be completed by the second business day
following the last trading day. Currently, the last trading day is the
eighth-to-last business day of the delivery month, with futures
delivery of warehouse receipts continuing through the end of the month.
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\11\ This charge is \12/100\ of one cent per bushel for Chicago
and \10/100\ of one cent per bushel for issuers along the northern
Illinois River.
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The CBT's proposal would eliminate the current delivery points on
its corn and soybean futures contracts at Toledo, Ohio, and St. Louis,
Missouri.
BILLING CODE 6351-01-P
[[Page 49479]]
[GRAPHIC] [TIFF OMITTED] TN22SE97.000
BILLING CODE 6351-01-C
[[Page 49480]]
III. Deliverable Supplies of Soybeans Are Inadequate Under Section
5a(a)(10)
A. The Standard for Measuring Adequacy of Deliverable Supplies
Pursuant to section 5a(a)(10), the Commission must assess whether
the CBT proposal meets the standard set by that section to ``permit the
delivery * * * at such point or points and at such * * * locational
price differentials as will tend to prevent or diminish price
manipulation, market congestion, or the abnormal movement of such
commodity in interstate commerce.''
One criterion for whether a delivery proposal meets the standards
of section 5a(a)(10) is whether the available deliverable supplies of
the commodity at the delivery points specified are adequate to prevent
manipulation, market congestion, and the abnormal movement of the
commodity in interstate commerce. As discussed below, other aspects of
a proposed futures contract may violate section 5a(a)(10) by tending to
cause the prohibited results, but adequate deliverable supplies are a
sine qua non for any contract under section 5a(a)(10).
The Commission believes that, to meet the statutory requirement of
tending to prevent manipulation, market congestion, or the abnormal
movement of a commodity in interstate commerce, a futures contract
should have a deliverable supply that, for all delivery months on the
contract, is sufficiently large and available to market participants
that futures deliveries, or the credible threat thereof, can assure an
appropriate convergence of cash and futures prices. To prevent
unwarranted distortion of futures prices in relation to the cash
market, the futures contract's delivery terms must reflect a product--
in quality, form, location, mode of transportation, etc.--that is
readily saleable in the cash market.
Commission Guideline No. 1 (17 CFR part 5, appendix A) provides
some guidance with respect to the adequacy of the delivery terms of a
futures contract. Guideline No. 1 requires that exchanges provide
justification concerning significant contract terms--particularly
delivery provisions--for new or amended futures contracts. This
justification should provide evidence that the proposed contract terms
and conditions are in conformity with practices in the underlying cash
market, that those terms and conditions will provide for a deliverable
supply that will not be conducive to price manipulation or distortion,
and that such a supply reasonably can be expected to be available to
the short trader and saleable by the long trader at its market value in
normal cash market channels.
Judging the adequacy of deliverable supply in the context of a
section 5a(a)(10) proceeding is more important than and significantly
different from determining adequacy in the routine review of
applications for new contract market designations. This section
5a(a)(10) proceeding involves contracts that are known to have very
large and well-established markets, a history of large trader
positions, and a decades-long history of surveillance problems. Indeed,
the Commission has already made an affirmative and unchallenged finding
that the delivery provisions of the current contracts violate the terms
of section 5a(a)(10) of the Act, and the issue before it is whether the
CBT's proposal goes far enough to cure the illegality of the contracts.
To determine an appropriate standard for measuring the adequacy of
deliverable supplies under the CBT proposal, the Commission has
examined separately for corn and soybeans the relationship between the
level of deliverable stocks and the presence of a price premium for the
expiring futures month over the next futures month (a price inverse).
The presence of such a premium is an indication of tight deliverable
supplies, potentially creating a price distortion. In situations where
limited deliverable supplies lead to such a price inverse, futures
contracts are significantly vulnerable to price manipulation, market
congestion, and the abnormal movement of the commodity in interstate
commerce under the terms of section 5a(a)(10).
For soybeans, the Commission's staff analysis demonstrated a
consistent positive relationship between price inverses and deliverable
stocks of less than 12 million bushels (2,400 contracts). Price
inversions occurred in ten of the 15 expirations when deliverable
stocks were less than 12 million bushels. This level of deliverable
stocks constitutes four times the speculative position limit for the
contract (2,400 contracts), a benchmark historically used by the
Commission's staff in analyzing deliverable supplies for new
contracts.<SUP>12</SUP>
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\12\ The size of the largest long position in an expiring
futures contract was also found to be associated with price inverses
when deliverable stocks were less than 2,400 contracts. Of the five
expirations in which the largest long position was 600 contracts or
less, price inverses occurred only once. However, for the ten
expirations in which the largest long position exceeded 600
contracts, inversions occurred nine times. At higher stock levels--
that is, above the 2,400-contract level for soybeans--that
relationship between position size and price inverses was not
observed.
---------------------------------------------------------------------------
The analysis for the corn market found a comparable relationship
between price inverses and deliverable supplies at the stock level of
15 million bushels (3,000 contracts). Price inverses occurred in seven
of the ten corn expirations when deliverable stocks were less than
3,000 contracts.<SUP>13</SUP> This analysis supports using as a measure
of an inadequate level of deliverable supplies under section 5a(a)(10)
a level below 12 million bushels (2,400 contracts) for soybeans and
below 15 million bushels (3,000 contracts) for corn.
---------------------------------------------------------------------------
\13\ In all seven expirations the largest long position exceeded
600 contracts.
---------------------------------------------------------------------------
However, the history of these contracts may demonstrate that a
higher level of supplies is, in fact, necessary to protect against
manipulation. In particular, an additional measure would be based on
historic experience with manipulation and price distortion in these
contracts. During the July 1989 soybean expiration, the Commission
exercised its surveillance powers to force the reduction of the long
futures position of the Ferruzzi group of companies, and the CBT
declared a market emergency and ordered the phased reduction of all
positions above a specified size. Both the Commission and the CBT
believed that the position of the Ferruzzi group posed a significant
threat of manipulation and acted on that belief.<SUP>14</SUP> Just
prior to the CBT emergency action, Ferruzzi's long position in the July
1989 soybean future was about 20 million bushels (4,000 contracts). To
avoid a repetition of such a situation, deliverable supplies of at
least 4,000 contracts would be necessary.
---------------------------------------------------------------------------
\14\ Although this incident involved soybean futures, it was
recognized to have broader implications for CBT's grain contracts
and led to an appraisal of the adequacy of the CBT's delivery terms
generally for its wheat, corn, and soybean futures and to revisions
to all three contracts.
---------------------------------------------------------------------------
In its analysis of the adequacy of the deliverable supplies under
the CBT proposal, the Commission has considered both of these measures,
as well as other relevant information.
B. The CBT Submission Does Not Demonstrate That Its Proposal Meets the
Statutory Standard of Adequate Deliverable Supplies
The CBT has failed to provide data that demonstrates the adequacy
of available deliverable supplies. It supports its proposal by general
statements about production and transactions in the cash markets in the
vicinity of the delivery area, contending, for example, that its
proposed delivery area
[[Page 49481]]
* * * is located along more than 150 miles of the northern Illinois
River, which is one of the world's largest and most active cash
grain markets, handling over 500 million bushels of corn and
soybeans per year. It substantially increases the supply of grain
eligible for delivery on our futures contracts over the current
delivery system, thereby minimizing the potential for price
distortions and manipulation.
CBT July 1, 1997, submission, p. 2-2.
Data concerning corn and soybean production and handling in the
areas near the delivery points are not an adequate measure of
deliverable supplies under the contracts in light of the CBT proposal's
heavy reliance on barge delivery along the northern Illinois River
which involves product primarily destined for the export market. Most
production and handling of corn and soybeans in the vicinity of the
delivery points historically have involved product destined for the
domestic market, and only a portion of that product has traditionally
been loaded on barges as provided in the CBT proposal. Therefore, the
proper measure of available supplies must be based on barge shipment
data. To rely on additional supplies currently destined for the
domestic market would be to assume that the futures contract would
divert those supplies to the export market, thus causing an abnormal
movement in interstate commerce forbidden by section 5a(a)(10).
The CBT argues that the supplies available for delivery along the
northern Illinois River are adequate by citing the delivery capacity of
firms along the river. The CBT states that there are seven firms with a
cumulative daily barge loading capacity of 5.5 million bushels of grain
and a 30-day loading capacity of 171.8 million bushels of
grain.<SUP>15</SUP> (CBT April 16, 1997, submission at attachment 4.)
---------------------------------------------------------------------------
\15\ According to the CBT, the firms and their percentage share
of loading capacity are: Archer Daniels Midland Co., 41 percent;
Continental Grain Company, 23 percent; Cargill, Inc., 12 percent;
Consolidated Grain and Barge, ten percent; Sours Grain Company, six
percent; American Milling Company, six percent; and Garvey
International, two percent. (CBT April 16, 1997, submission,
attachment 14.)
---------------------------------------------------------------------------
The CBT's reliance on the loading capacity of firms in the delivery
area as an indicator of adequacy of deliverable supply is misplaced. As
the unused delivery capacity in Chicago clearly demonstrates, delivery
capacity bears little relation to the amount of deliverable supplies
actually available at a particular location. The CBT's capacity
measure, which is based on its proposed maximum limits on the shipping
station's ability to issue shipping certificates (30 times a station's
daily (8-hour) loading capacity), far exceeds the highest observed
level of actual combined monthly corn and soybean barge shipments at
the delivery points during the 11-year period studied, 1986 through
1996.
Moreover, the CBT overstated the loading capacity related to the
contracts by including the capacity of three firms that would not meet
contract requirements, particularly the $40 million net worth
requirement, to qualify as shipping certificate issuers under the
contracts. In doing so, it also significantly understated the level of
concentration of the proposed delivery system and ignored the
exclusionary effect of its $40 million net worth requirement.
The CBT, in its submission, also provided inflated data on barge
shipments. These data significantly overstated the amount of barge
shipments by including shipments from a certain part of the Illinois
River outside of the defined delivery area of the contracts. CBT's data
also included barge shipments by all shippers, including those not
meeting the eligibility requirements to be issuers of certificates
under the contracts and thus overstated the deliverable amounts
available in that respect as well.
C. The CBT Proposal Fails to Meet the Minimum Threshold for Deliverable
Supply for Soybeans
1. Methodology. The Commission staff compiled an extensive amount
of data from which the Commission could estimate deliverable supplies.
These data were assembled from information supplied by the United
States Department of Agriculture (USDA), the Army Corps of Engineers,
the Coast Guard, grain merchants, and the CBT.
The CBT proposal provides for delivery from Chicago by rail,
vessel, and barge and along the northern Illinois River by barge. The
contracts are essentially reflections of the export market for corn and
soybeans, since the vast majority of corn and soybeans loaded on
vessels and barges at Chicago and on barges along the northern Illinois
River are destined for export markets. While Chicago rail shipments may
play some role in the domestic market, that role has diminished so as
to be very small.
The northern Illinois River's potentially available deliverable
stocks for each delivery month were estimated by summing barge
shipments from relevant points on the northern Illinois River for that
month and all subsequent months of the same crop year to and including
September, which was assumed to be the end of the crop
year.<SUP>16</SUP> Since the amount shipped during a given month and in
each succeeding month of the crop year must have been in transit or in
storage in some location tributary to the river at the beginning of the
month, this summing procedure provides an estimate of the corn and
soybean stocks available to the proposed delivery points at the
beginning of each delivery month.<SUP>17</SUP>
---------------------------------------------------------------------------
\16\ Corn and soybeans are both harvested beginning in September
or October, the beginning of a new crop year. All deliveries of corn
and soybeans throughout the year subsequent to harvest are made from
stored supplies. These supplies are consumed over time, reaching
their lowest level over the summer until the next harvest
replenishes the supply.
\17\ To account for the fact that a portion of the corn and
soybeans shipped during September may include some new crop supplies
that are not available earlier in the crop year, the estimated
northern Illinois River deliverable stocks for delivery months
preceding September were reduced in certain years to reflect the
likelihood that part of the September shipments consisted of new
crop supplies. The indicated reductions were made only in years
where available USDA data on harvesting progress for crop-reporting
districts in northern/central Illinois and Illinois production data
by county indicated that significant quantities of corn and soybeans
had been harvested in September. Deliverable supplies for all months
of a given crop year prior to September were reduced by an amount
equal to 50 percent of the September shipments (an amount suggested
by trade sources) whenever the quantity of new crop supplies
available in September in those counties within 25 miles of the
proposed northern Illinois River and Chicago delivery area exceeded
the quantity shipped during the month. The use of new crop supplies
from counties within 25 miles of the revised delivery points was
based on the assumption that most new crop supplies available early
in the harvest period are likely to be moved to the delivery points
by trucks moving relatively short distances from farms to avoid
creating unnecessary delays in harvesting. In addition, trade
sources indicated that most supplies that move to the proposed
northern Illinois River delivery points are trucked from locations
within 25 miles of these points.
---------------------------------------------------------------------------
Because these stocks reflect the quantity of soybeans and corn
actually shipped via the northern Illinois River, they represent a
reasonable and accurate historical estimate of the quantity of these
commodities that were economically available to the proposed northern
Illinois River delivery points at prevailing cash market price
relationships. While other supplies of corn and soybeans are in the
vicinity, they historically moved to other demand centers rather than
for delivery into the export market by barge shipments. If the CBT
contracts under the proposed delivery terms were to draw these supplies
from their usual destinations in the domestic market to futures
deliveries, an abnormal movement in interstate commerce would occur.
Therefore, such other supplies should not be considered in determining
the adequacy of potentially available deliverable supplies.
[[Page 49482]]
For Chicago, potentially available deliverable supplies were
estimated as the sum of stocks available at the beginning of each
delivery month plus receipts of corn or soybeans during that month.
Receipts were included because shipping certificates do not require the
commodity to be in store at the delivery point. Thus, Chicago warehouse
operators potentially could issue shipping certificates against stocks
in store at the beginning of a delivery month and against actual and/or
anticipated receipts of corn or soybeans as well.
These potentially available deliverable supply estimates were
adjusted to reflect the effect of the proposed financial requirements
on the number of firms that would be eligible to make delivery and, for
Chicago, the proposed limits on the number of shipping certificates
that could be issued by those firms. The proposal restricts eligibility
of issuers of shipping certificates to firms meeting a $40 million net
worth requirement. This eligibility requirement would eliminate barge
shipments made by ineligible firms and likely would reduce deliverable
supplies originating from the proposed northern Illinois River delivery
area by an average of about five percent. However, it is possible that
a portion of the supplies that normally are shipped by the three firms
not meeting that eligibility requirement--although by no means all
those supplies--would be made available for futures delivery by
diversion of the supplies to the four eligible firms. Accordingly, the
Commission calculated two separate estimates of potentially available
deliverable supplies: one excluding shipments made by firms not
eligible to issue shipping certificates on the contract and the second
including such ineligible firms' shipments.
Another adjustment was made to reflect current capacity restraints.
Because of the recent closure of four of the six elevators in Chicago,
prior years' data for Chicago were adjusted to reflect current maximum
capacity levels in that area.
Through this analysis, the Commission arrived at potentially
available gross deliverable supplies, discussed below. As is also
described in more detail below, those amounts must be reduced because
of various additional factors limiting the available deliverable
supplies.
2. Gross Deliverable Soybean Supplies. Delivery months under the
CBT proposed soybean futures contract include July, August, and
September, months which are at the end of the crop year and which
therefore historically reflect the lowest available supplies. As shown
in the following charts for soybeans attributable to the four firms
which would be eligible to issue shipping certificates, gross
deliverable supplies under the CBT proposal (Chicago supplies plus
northern Illinois River supplies) for July, August, and September do
not meet the minimum level considered by the Commission to be required
by section 5a(a)(10) of the Act. Specifically, for July, the total
deliverable supply of soybeans was less than the 2,400-contract level
in four of the 11 years covered by the analysis, while the 4,000-
contract level was not reached in six of the 11 years. For August,
gross deliverable soybean supplies for the four eligible firms fell
below 2,400 contracts in five years, and the 4,000-contract level was
not reached in any of the 11 years. Soybean deliverable supplies for
the four eligible firms in September were less than the 2,400-contract
level in seven of the 11 years and did not reach the 4,000-contract
level on any occasion.<SUP>18</SUP> As demonstrated in the following
charts, Chicago supplies played a critically important role in almost
all instances in which the 2,400-contract level was reached or
exceeded.
---------------------------------------------------------------------------
\18\ As shown in the charts for shipments by all firms,
including those firms that would be ineligible to issue certificates
under the CBT proposal, the proposal improved marginally in that
gross deliverable supplies for all firms were less than 2,400
contracts in two rather than four years for July.
BILLING CODE 6351-01-P
[[Page 49483]]
[GRAPHIC] [TIFF OMITTED] TN22SE97.001
[[Page 49484]]
[GRAPHIC] [TIFF OMITTED] TN22SE97.002
BILLING CODE 6351-01-C
[[Page 49485]]
3. Gross Deliverable Corn Supplies. The CBT proposed corn contract
would include the contract months of July and September, inter
alia.<SUP>19</SUP> In the case of corn, the estimated gross deliverable
supplies for July attributable to the four eligible firms reached or
exceeded the 3,000-contract levels in all years and the 4,000-contract
level in all years but one. However, gross deliverable supplies of corn
for the four eligible firms in September fell below the 3,000-contract
level in eight of the 11 years in the period analyzed and were less
than 4,000 contracts in nine years. The gross deliverable supply
estimates for all existing firms differed only slightly from the
results for the four eligible firms.
\19\ Unlike the soybean futures contract, there is no August
contract month listed for corn.
[GRAPHIC] [TIFF OMITTED] TN22SE97.003
[[Page 49486]]
[GRAPHIC] [TIFF OMITTED] TN22SE97.004
BILLING CODE 6351-01-C
[[Page 49487]]
4. September New Crop Production. Although neither corn nor
soybeans reached adequate minimum levels of potentially available gross
deliverable supplies for September, because September is a transition
month between old and new crop, deliverable supply estimates based upon
barge shipments data for September may understate actual September
deliverable supplies. The harvest of the new crops in corn and soybeans
begins in September, and thus, new crop production may be available for
delivery on the September contracts. Accordingly, the Commission also
calculated estimates of new crop production of corn and soybeans that
may have become available during the month of September.
The following table shows estimated September new crop production
within 25 miles (trucking distance) of the proposed delivery points for
corn and soybeans derived from USDA data. While these stocks might have
been available for delivery during September, the extent to which this
new crop production has already been included in the September Illinois
River shipment data shown above or was already committed to other uses,
particularly processing, cannot be ascertained.
A significant amount of corn was produced during September in most
years and potentially might augment to some extent the gross
deliverable supplies discussed above. However, there were very low
levels of September soybean production during at least five of the 11
years analyzed, and even taking September production into account,
September soybean supplies fall below a minimum adequate level.
Further, September soybean production does not in any way supplement
the inadequate gross deliverable supplies of soybeans in July and
August.
The likelihood of price manipulation in September may be somewhat
lessened because it is a transitional month between old and new crop
years. The end of the crop year generally is a period of low supplies
and relatively high prices. However, at harvest supplies are
replenished, and the arrival of these new crop supplies frequently
leads to lower prices. Significant new crop supplies usually become
available in areas tributary to the northern Illinois River by mid
October. The incentive to manipulate prices of the September futures
contracts by attempting to corner the low remaining old crop supplies
would be reduced by the potential losses that a manipulator might incur
in reselling the shipping certificates or product obtained through
September deliveries at lower prices after the arrival of new crop
supplies.
Under the CBT proposal, the use of Illinois River shipping
certificates rather than Chicago or Toledo warehouse receipts to effect
delivery might also permit expanded deliveries of new crop production
under the September contract. Rather than requiring movement of new
crop supplies into a warehouse at a terminal market before delivery, as
is necessary under current warehouse receipt delivery, the CBT proposal
allows the issuance of shipping certificates for locations much closer
to the production area and for up to 30 days of loading capacity and
thus would give issuers more opportunity to deliver new crop
production. They may issue shipping certificates on the basis that new
crop supplies which are not immediately in hand will be available by
the time loading is required under the shipping certificate.
The Commission considers the low levels of gross deliverable
supplies of corn in September to be of less regulatory concern than the
low levels of soybeans, which extend throughout the three summer
months. Not only is the shortage of corn supplies of brief duration,
but the fact that abundant supplies of new crop production are expected
soon lessens the likelihood that corn shortage in that month would lead
to the prohibited effects under section 5a(a)(10).
Estimated Corn and Soybean Production Located Near Proposed Delivery
Points During September
[5,000-Bushel Contract Units]
------------------------------------------------------------------------
Estimated September
production
Year -------------------------
Corn Soybeans
------------------------------------------------------------------------
1986.......................................... 15,219 3,109
1987.......................................... 26,78 36,056
1988.......................................... 6,354 2,046
1989.......................................... 2,013 583
1990.......................................... 2,686 782
1991.......................................... 41,663 8,729
1992.......................................... 1,284 1,356
1993.......................................... 644 29
1994.......................................... 2,800 6,471
1995.......................................... 2,574 487
1996.......................................... 1,926 46
------------------------------------------------------------------------
* The estimated production by September 30 of each year was calculated
by multiplying USDA harvesting progress estimates for the Illinois and
Indiana crop reporting districts that are adjacent to the revised
delivery points by USDA production data for counties located within
about 25 miles of the proposed delivery points.
5. Reductions From the Gross Deliverable Supplies. Additional
factors must be considered which necessarily reduce the above estimates
of gross deliverable supplies. These factors include: (a) the reliance
on Chicago as a source of deliverable supplies; (b) the three-day barge
queuing and priority load-out requirement; and (c) prior commercial
commitments of available supplies. In addition, further reductions must
be made from gross deliverable supplies resulting from the CBT
proposal's lack of locational price differentials, the $40 million net
worth requirement for issuers of shipping certificates, and foreseeable
disruptions in barge transportation on the Illinois River; these
additional factors are analyzed separately in later sections of this
proposed Order.
a. Reliance on Chicago. To the extent that gross deliverable
supplies of soybeans in some years have been at or above the 2,400- and
4,000-contract levels, they have generally depended on Chicago supplies
to do so. For July, deliverable supplies of soybeans originating solely
from the northern Illinois River delivery area reached or exceeded the
2,400-contract level in only three of the 11 years. In August and
September, soybean deliverable supplies originating from the northern
Illinois River alone did not exceed the 2,400-contract level on any
occasion. The 4,000-contract level was not exceeded by northern
Illinois River deliverable supplies of soybeans in any year in the
July, August, or September delivery months. Thus, to the very limited
extent that gross deliverable supplies in the past would have reached a
minimum level, they would have done so because of the supplies in
Chicago.
Cash market activity in Chicago is likely to continue its
historical decline. While the estimation procedure for gross
deliverable supplies used in this analysis tried to correct for the
precipitous decline of Chicago by using 100 percent of the current
capacity as a constraint on past supplies, that method certainly
overstates the actual deliverable supplies that may originate from that
location in the future. Chicago for many years has held stocks well
below their maximum capacity levels, particularly in the critical
summer months. The following chart demonstrates that underutilization
of the remaining capacity in Chicago is continuing, despite the
dramatic contraction in available capacity, and is most likely to
continue to do so in the future. The likely result is that Chicago
supplies will be reduced significantly in the future and would not be
available in significant quantities under the CBT proposal.
BILLING CODE 6351-01-P
[[Page 49488]]
[GRAPHIC] [TIFF OMITTED] TN22SE97.005
BILLING CODE 6351-01-C
[[Page 49489]]
b. The Three-Day Barge Loading Requirement. The CBT proposal
includes a provision requiring a shipping certificate issuer to begin
loading grain into the receiver's barges within three business days
after it receives loading instructions and the receiver's barges are at
the delivery facility ready to load. Most significantly, the issuer
would be required to give preference to shipping certificate holders
relative to any other customer or proprietary business for eight hours
of load-out capacity per day. This requirement is contrary to the
current contracts' delivery terms and to cash market practice, where
new shippers are accommodated on a first-come, first-served basis.
Concerns have been expressed by some commenters that, by requiring
issuers to cease loading corn and soybeans in barges for their cash
market business in order to meet the requirements of the shipping
certificates and by requiring that only limited advance notice would
have to be given to issuers, the CBT proposal would discourage
potential issuers from issuing shipping certificates for futures
delivery.
The CBT, on the other hand, has argued that the impact of the
proposed preferential load-out requirement for futures deliveries on an
issuer's willingness to issue shipping certificates would be limited
because the rules would require the issuer to load out only eight hours
per day, leaving the remaining 16 hours of each day to load other
barges. CBT's position assumes, without providing supporting data, that
labor physically and economically would be available for such a 24-hour
day and that additional transportation and grain supplies could quickly
be procured and coordinated to move the grain to the waiting barges.
While the effect of the proposed loading requirements on the
willingness of issuers to issue shipping certificates for futures
delivery is difficult to measure, it represents a significant departure
from cash market practice and most likely would reduce the amount of
available deliverable supplies.
c. Prior Commercial Commitments of Stocks. An additional factor
which would reduce the above estimates of gross deliverable supplies is
prior commitment of stocks. Determining deliverable supplies on the
basis of shipment information does not make necessary deductions for
that amount of the shipments which would be unavailable for futures
delivery because they were otherwise committed and because no
substitution was possible at an equivalent market price. While a number
of commenters indicated that much of the corn and soybeans shipped on
the Illinois River is not irrevocably committed, at least up to the
point when the grain is loaded into a barge, the ability of firms
economically to obtain supplies to meet existing commitments from
alternative sources would be limited at times. This situation would be
more likely to occur in those periods when supplies are limited, such
as during the critical summer months of July, August, and September.
The commitment of supplies of corn and soybeans under forward contracts
or other marketing arrangements would at times make them unavailable to
the futures delivery process until futures prices were significantly
distorted relative to cash prices. Thus, it is likely that the actual
available deliverable supplies for the futures contracts would be
significantly less than indicated by the above gross estimates.
6. Conclusion. In summary, the proposed delivery provisions of the
soybean contract clearly fail to meet the statutory requirement for
minimum levels of deliverable supplies throughout the summer months of
July, August, and September even before the above reductions (plus
those discussed below) have been made, and the additional reductions
required by these factors would further reduce the available
deliverable supplies. For these reasons, price distortions and
manipulation, market congestion, and abnormal movements of soybeans in
interstate commerce would be likely to occur. Additional delivery
points to increase the available deliverable supplies of soybeans, as
well as other adjustments to CBT's proposal discussed below, are
necessary to achieve the objectives of section 5a(a)(10).
As to the CBT proposal for corn, gross deliverable supplies
throughout the year appear to be adequate except for September. While
gross deliverable supplies for September do not meet the minimum level,
they may be supplemented to some unknown extent by new crop production
in September, and the September corn contract would be less likely to
be subject to manipulation than other months with similar low levels
because of the expectation of abundant supplies of new crop production
in the immediate future. While these gross estimates of deliverable
supply overstate economic deliverable supplies and must be reduced by
the other factors discussed, the degree of reduction cannot be
estimated with any certainty. The Commission's proposed action in
changing and supplementing the proposed corn contract to add locational
differentials, to eliminate the net worth eligibility requirement, and
to broaden the contingency plan for river disruptions, discussed below,
will have the effect of alleviating some limitations on deliverable
supplies of corn under CBT's proposal. Accordingly, based on the record
before it, the Commission does not find that the available deliverable
corn supplies are inadequate under section 5a(a)(10) such that
additional delivery points are necessary. Actual trading experience
will reveal whether the level of deliverable supplies meets the
requirements of section 5a(a)(10). Accordingly, the Commission directs
the CBT to report on the actual delivery and contract expiration
experience on an annual basis for the first five years after contract
expirations begin under the revised contract terms.
IV. The Lack of Locational Price Differentials Violates Section
5a(a)(10)
Section 5a(a)(10) requires that, where more than one delivery point
or commodity grade is specified, a futures contract must specify
quality and locational price differentials to the extent necessary to
prevent price manipulation, market congestion, or the abnormal movement
of the commodity in interstate commerce. Guideline No. 1 and the
Commission's policy on price differentials are predicated upon, and
give further specificity to, section 5a(a)(10)'s requirements. As
discussed above, Guideline No. 1 requires that futures contract terms
and conditions provide for a deliverable supply that will not be
conducive to price manipulation or distortion and that such a supply
reasonably can be expected to be available to the short trader and
saleable by the long trader at its market value in normal cash market
channels. In addition, the Commission's policy on price differentials
requires that, where cash market locational or quality differentials
are stable, the futures contract should reflect ``normal commercial
price differences as they are represented by cash price differences * *
*.'' When cash market price differences are unstable or where the
product flow in the cash market is not relevant to the two futures
market points, the Commission's policy requires that differentials must
be set at levels which fall within the range of values which are
commonly observed.
The CBT's failure to specify locational price differentials
violates section 5a(a)(10) as well as the requirements of Guideline No.
1 and the Commission's policy on locational price differentials. The
cash market on the northern Illinois River clearly reflects a
unidirectional
[[Page 49490]]
flow of corn and soybeans and exhibits significant locational price
differences, which have a stable relationship with one another, at the
proposed delivery points. The failure of the CBT proposal to provide
for locational price differentials reflecting the cash market not only
would reduce available deliverable supplies on the contracts, but would
result in price distortions and susceptibility to price manipulation,
market congestion, and the abnormal movement of corn and soybeans.
Although the CBT describes its delivery system as a simple single
delivery area, in fact it is a multiple delivery point system without
differentials. This multiple delivery point system is comprised of
physically-linked, but spatially-separated points along the northern
Illinois River, which are affected by a unidirectional demand from the
Gulf market across five different barge freight zones, including
Chicago. Chicago may also be affected, at times, by a number of
competing cash market demand pulls.
The CBT argues that section 5a(a)(10) is not violated by its
proposal's lack of differentials because ``locational differentials for
corn and soybeans at par fall well within the expected values of cash
market differentials between the delivery points'' and that ``the
differences in barge freight costs between locations on the NIR are
typically * * * smallest during the summer.'' CBT June 16, 1997
submission, 40. However, this is not the appropriate review standard
because the relative value of these commodities among the northern
Illinois River delivery points is constant, quite transparent and based
on established barge freight differences. Furthermore, even if it were,
we find that a lack of price differentials is not commonly observed in
the cash market.<SUP>20</SUP>
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\20\ Available information suggests that the cash market value
of corn and soybeans loaded into vessels and rail cars at Chicago
may at times equal or exceed the value of corn or soybeans loaded
into barges at locations on the northern Illinois River delivery
area. However, with the precipitous decline in the available
deliverable supplies in Chicago, such occasional variances from the
prices loaded on barges at Chicago and along the northern Illinois
River will likely play a small role in the cash market in the future
and are not considered to be a significant factor in setting
locational differentials under the CBT's proposal.
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Moreover, differences in barge freight costs, while lower during
the late spring and early summer months, begin to increase and are
quite significant during the critical July and August period.
The value of corn and soybeans loaded into barges generally is
greater at barge-loading facilities located down river relative to the
value of grain loaded in barges at upriver locations, including
Chicago. As indicated above, the CBT proposal essentially would price
corn and soybeans when they are loaded on barges along the northern
Illinois River destined for the export market centered in New Orleans.
The futures contracts would be priced free on board (FOB) barge at the
loading facilities.<SUP>21</SUP> Currently, the cash market for such
products prices them at the CIF New Orleans price, which is uniform and
widely known.<SUP>22</SUP> The cost of barge freight to New Orleans
included in that price varies based on established barge freight costs
that are higher at Chicago and lower as one descends the northern
Illinois River and thus is closer to New Orleans. Those freight rates
are transparent and widely reported. While they vary to some extent,
they are expressed and reported publicly as a varying percentage of the
fixed amounts found in the Waterways Freight Bureau Tariff No. 7. By
backing out the freight amounts from the CIF price, one can calculate
the differences in the value of the commodity FOB various Illinois
River points.
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\21\ The acronym FOB, free on board, means that, under the terms
of the sale of a commodity, the price agreed between the buyer and
seller includes the cost of loading the product into transportation
equipment (barges, rail cars, vessel, etc.) at a designated
location.
\22\ CIF New Orleans means that, under the terms of the sale,
the price agreed upon between the buyer and the seller includes the
freight and insurance to transport the products to New Orleans and
to deliver them there. This market, which calls for grain to be
shipped at the cost of the seller to export points in New Orleans,
is very liquid, with corn and soybeans being actively traded
throughout the year.
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During the critical summer months the price differential based on
the freight rate between Chicago (the most northerly Illinois River
delivery point) and Pekin (the most southerly Illinois River delivery
point) has ranged in recent years between 4.1 and 5.3 cents per bushel
of corn and between 4.4 and 5.7 cents per bushel of soybeans. These
differences are very significant and are sufficient to distort prices,
to limit deliverable supplies, and to divert them from one delivery
point to another.<SUP>23</SUP>
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\23\ The CBT implicitly recognized these cash market value
relationships and the importance of barge-freight differences in
valuing the commodities in formulating its proposed plan to price
alternative delivery locations in response to transportation
disruptions on the Illinois River. As described below, that proposal
provides that alternative localities must be priced CIF New Orleans
with the delivery taker reimbursing the maker for the cost of
freight to New Orleans from the original delivery location.
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Where, as here, a contract requires multiple delivery points in
order to yield sufficient deliverable supplies and significant normal
commercial price differences exist in the cash market between those
locations, section 5a(a)(10) requires that the terms of the futures
contract include locational price differentials. The failure to set
locational price differentials reflecting normal cash market price
differences has the economic effect of excluding the disadvantaged
delivery point from being used for delivery. Such an exclusion may
result in abnormal movement of the commodity away from the
disadvantaged delivery point and to the advantaged delivery point. In
order for a disadvantaged delivery point to function, the futures price
has to increase above the commodity's underlying cash market value at
the disadvantaged delivery point to overcome this built-in penalty.
This opens the door to price distortion and price manipulation in the
amount of the ``differential penalty.'' Alternatively, market
congestion at the advantaged delivery point may result. These are
precisely the types of market abuse that section 5a(a)(10) sought to
avoid by requiring exchanges to ``permit delivery * * * at such * * *
locational price differentials as will tend to prevent or diminish
price manipulation, market congestion, or the abnormal movement of such
commodity in interstate commerce.'' For these reasons, the Commission
finds that the lack of locational price differentials violates section
5a(a)(10).
V. The Failure Adequately to Address Foreseeable Interruptions to
Deliveries Violates Section 5a(a)(10)
An additional concern regarding the operation of the CBT proposal
applicable to both the corn and soybean contracts is its reliance
chiefly upon a single mode of transportation to effect delivery--
Illinois River barge transportation. A large number of commenters
questioned the reliability of barge transportation on the Illinois
River from the standpoint of assuring that takers of futures delivery
would be able to receive and to transport their grain promptly in the
event of a disruption of barge transportation on the river due to
weather or lock maintenance.
There has been a long history of repeated, significant
interruptions in transportation along the northern Illinois River. In
three of the last 13 years, one or more of the locks on this portion of
the river have been closed for repair by the Army Corps of Engineers
for 60 or more consecutive days during the critical summer months, with
the result that no barge traffic could pass through that point on the
river on its
[[Page 49491]]
way south to New Orleans.<SUP>24</SUP> In addition, traffic on the
Illinois River is frequently impacted by weather conditions, including
wind, high water during the spring and summer, and icing during the
winter. The Coast Guard, an agency of the U.S. Department of
Transportation, is responsible for maintaining safe passage along the
nation's waterways and, when conditions warrant, issues safety
advisories or compulsory safety zones restricting transportation on
certain segments of the river. Between January 1991 and June 1997 the
Coast Guard issued compulsory safety zones on segments of the northern
Illinois River on 21 separate occasions. The delivery area on the
northern Illinois River was affected by such a safety zone for
substantial portions of the river from early June through the middle of
August in 1993.<SUP>25</SUP>
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\24\ Specifically, in 1984 the Lockport and Brandon Road locks
were closed for 60 days in July, August, and September; in 1987 the
Peoria lock was closed for 60 days in July, August, and September;
and in 1995 the Lockport, Brandon Road, Dresden Island, and
Marseilles locks each were closed for between 64 days and 77 days in
July, August, and September.
\25\ In addition to actions taken by the Coast Guard, the U.S.
Army Corps of Engineers, which has operational control over river
locks, may close a lock when it determines that icing conditions so
require.
---------------------------------------------------------------------------
The CBT proposal's heavy reliance on barge delivery would
disadvantage receivers during those periods when barge traffic is
negatively impacted by weather conditions or lock maintenance and
repair. Prolonged closure of the river would increase the
susceptibility of the futures contract to manipulation by issuers, who
could issue large numbers of certificates during periods when those
taking delivery would be unable to transport and to sell the product at
an economic value in relation to the CIF New Orleans market.
The Commission is of the view that it is not an appropriate use of
exchange emergency authority to address such significant and
foreseeable disruptions to the operation of contract
terms.<SUP>26</SUP> In response to repeated requests by the Commission
staff, the CBT, by submission dated August 22, 1997, sought to cure
this defect by proposing a plan to be followed in the case of
transportation disruptions. This proposed contingency plan provides
that, in the event that either the Peoria or LaGrange lock on the
Illinois River (the two most southerly locks without an auxiliary) is
scheduled, with six-months prior notice, to be closed for a period of
45 days or more, then the delivery maker and taker may mutually agree
to alternative terms, or failing such agreement, the deliverer is
obligated to provide loaded barges to the receiver at a point between
the lowest closed lock and St. Louis or on the mid-Mississippi River
between St. Louis and Dubuque, inclusive. The loaded barges would be
valued CIF New Orleans, with the delivery taker responsible for paying
to the delivery maker the transportation cost between the original
shipping station and New Orleans. The reimbursement in transportation
cost would be computed based upon 100 percent of the Waterways Freight
Bureau Tariff No. 7 barge freight rate.
---------------------------------------------------------------------------
\26\ The CBT proposed a separate rule, regulation
1081.01(12)(G)(8), to address possible disruptions to shipping
traffic within the delivery area. That proposed rule provides that,
if it becomes impossible to load at a designated shipping station
``because of an Act of God, fire, * * * an act of government, labor
difficulties, or unavoidable mechanical breakdown, the shipper will
arrange for water conveyance to be loaded at another regular
shipping station * * *'' and will compensate the taker for resulting
transportation costs, if any. It further provides, however, that if
the impossibility of delivery exists at a majority of shipping
stations within the delivery area, then shipment may be delayed.
Although this proposed rule addresses conditions impeding delivery
at one or some locations within the delivery area, it does not offer
an acceptable solution to the contingency that all or most
deliveries may be rendered impossible due to disruptions of river
traffic south of the delivery area or at points affecting a majority
of shipping stations within the delivery area. Because of the
increased likelihood of price manipulation or market congestion
arising from delayed delivery in such circumstances, a different and
more effective contingency plan is required under section 5a(a)(10).
---------------------------------------------------------------------------
This proposal falls short of achieving its apparent objective of
addressing the susceptibility of the corn and soybean futures contracts
to price manipulation, market congestion, or the abnormal movement of
the commodity in interstate commerce resulting from disruptions to
river traffic. First, the proposed rule only addresses sustained
blockages due to lock closures south of the delivery area. However, a
similar situation could be precipitated by closure of one or a number
of locks within the delivery area sufficient to disrupt traffic at a
majority of shipping stations. Repairs are often made to more than one
set of locks at a time, having the potential to increase the breadth of
the disruption within the delivery area from such projects. Thus,
although the same foreseeable situation rendering the contracts
vulnerable to price manipulation or market congestion exists when the
disruption is within the delivery area as when it is south of the
delivery area, the contingency plan fails to address the former
situation.
Secondly, when a sustained river closure of less than 45 days is
announced, vulnerability to price manipulation is foreseeable. This is
also true when locks are closed on less than the six-months notice,
which the CBT has proposed as a condition for triggering the
contingency procedures. This vulnerability arises from the ability of
shipping certificate issuers under the CBT proposal to issue
certificates representing up to 30 days of their capacity. Thus, an
announced river closure of between 30 and 45 days, for example, would
enable eligible issuers to deliver into the market the maximum number
of shipping certificates permitted, secure in the knowledge that the
holders of those certificates could not accept delivery of the corn or
soybeans while the river is closed and that, once the obstruction to
river movement was ended, the issuer could only be required to deliver
on cancelled certificates over an entire-month period. In this
connection, it should be noted that closings are announced for lock
repairs, which generally are scheduled for the late summer months, the
time when deliverable supplies are lowest and river traffic is
generally at its lowest level. Futures contracts during these months
would be most susceptible to manipulation if a prolonged closure
extending to the arrival of the new crop allows futures deliverers to
depress the price of an old crop futures month to levels reflecting new
crop values, when the broader cash market is reflecting the usual old
crop-new crop supply and demand conditions.
In addition, the proposal to value alternate delivery locations
using 100 percent of the Waterways Freight Bureau Tariff No. 7 rate is
inconsistent with the locational price differential found by the
Commission to be required, as discussed below. The application of
divergent differentials to the contracts, depending upon whether
deliveries were subject to the contingency rule or to normal delivery
procedures, could also contribute to price manipulation, market
congestion, or the abnormal movement of commodities in interstate
commerce. <SUP>27</SUP>
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\27\ Even if such differing tariffs would not have such adverse
results, it would be ``necessary or appropriate * * * to insure fair
dealing * * *'' in such futures contracts to apply the same
differential in both instances under section 8a(7) of the Act.
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VI. The Minimum Net Worth Eligibility Requirement for Issuers Violates
Section 15
In addition to the CBT's existing requirement of $2 million working
capital required of firms regular for delivery under all its
agricultural contracts, the CBT has proposed to require that firms
eligible to issue shipping certificates under its proposed soybean and
corn contracts must also
[[Page 49492]]
meet a minimum net worth standard of $40 million. This requirement has
the effect of reducing the amount of economically deliverable supplies
by making ineligible for delivery certain existing loading facilities
in the delivery areas owned by otherwise eligible firms. In addition,
the requirement also constitutes a barrier to entry of firms wishing to
establish facilities and to become eligible to issue shipping
certificates. The Commission has analyzed this requirement under the
provisions of section 15 of the Act and finds that it constitutes an
unjustifiable barrier to entry and leads to undue market concentration
when considered in the context of the other requirements those firms
must meet.
Section 15 of the Act requires the Commission, when considering
exchange rule proposals or amendments, to consider the public interest
to be protected by the antitrust laws and to endeavor to take the least
anticompetitive means of achieving the objectives of the
Act.<SUP>28</SUP> Therefore, the CBT proposal's possible
anticompetitive effects must be evaluated against its potential
effectiveness in achieving the policies and purposes of the Act.
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\28\ British American Commodity Options Corp. v. Bagley, [1975-
1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,245 at
21,334 (S.D.N.Y. 1976) aff'd in part and rev'd in part on other
grounds, 552 F. 2d. 282 (2d. Cir. 1977, cert. denied, 98 S. Ct. 427
(1977).
---------------------------------------------------------------------------
Because shipping certificates for contract delivery purposes are
unsecured, all existing futures contracts that use shipping certificate
delivery specify certain financial requirements for certificate
issuers. Consistent with this approach, the CBT proposal requires that
issuers of certificates have through-loading facilities on the northern
Illinois River, obtain an irrevocable letter of credit in an amount
equal to the value of their delivery commitments, and maintain a
minimum of two million dollars in working capital. These requirements
are comparable to those imposed on shipping certificate issuers in
other futures markets, including the CBT's own soybean meal, diammonium
phosphate and anhydrous ammonia futures contracts, the New York Cotton
Exchange's frozen concentrated orange juice futures contract and the
Minneapolis Grain Exchange's white wheat futures contract. Moreover,
issuers of a shipping certificate under the CBT proposal would also be
limited to issuing certificates of a value no greater than 25 percent
of the issuer's net worth. However, in addition to all these
requirements, the CBT's proposed corn and soybean contracts would
require shipping certificate issuers to have a net worth of $40
million, a requirement that is not imposed in any other futures
contract involving shipping certificates.
The effect of the proposed $40 million net worth requirement would
be to limit issuance of shipping certificates to four large grain firms
among the seven firms with shipping stations. At least three firms
which currently operate shipping stations on the designated segment of
the northern Illinois River and participate in the cash market by
selling barges of corn and soybeans would be excluded from issuing
shipping certificates for those same commodities on the CBT futures
contracts. The Commission does not believe the CBT has presented a
reasonable justification for this requirement.
Although the CBT's objective of protecting the financial integrity
of the delivery process is reasonable, it is adequately achieved
through the working capital and letter of credit requirements, as it
has been for all other shipping certificate contracts, and through the
limit on the value of certificates issued to 25 percent of an issuer's
net worth. Forty million dollars is a high level of net worth that
excludes three of the seven existing firms with loading facilities
along the northern Illinois River and would act as a barrier to other
new entrants. The resulting extremely high level of concentration of
the market restricted to four issuers is demonstrated by the fact that
the Herfindahl-Hirschman Index (HHI) for the proposed market is
approximately 3,300.<SUP>29</SUP> This increase in concentration as
compared with the current delivery system--530 points in the HHI--is
likely to create or enhance market power or facilitate its exercise in
this already highly concentrated market.
---------------------------------------------------------------------------
\29\ The HHI is calculated by summing the squares of the
individual market share of all of a market's participants. The 3,300
figure was obtained using rated delivery capacity of the four firms
currently meeting the proposed capital requirements to measure
market share. Those firms and their respective market shares are
Archer Daniels Midland Co. (49 percent), Continental Grain Company
(22 percent), Cargill, Incorporated (19 percent), and Consolidated
Grain and Barge (10 percent). Adding in the three firms (American
Milling Company, Garvey International, and Sours Grain Company) who,
absent the proposal's $40 million net worth requirement, also would
be eligible to issue delivery certificates in the proposed markets
would lower the HHI to 2,511, still a high level of concentration
but substantially less than that under the CBT proposal.
---------------------------------------------------------------------------
The CBT has failed to demonstrate a need for this particular
requirement. Accordingly, the Commission finds that the $40 million net
worth requirement is an unjustified barrier to entry into a highly
concentrated market and violates section 15 of the Act.<SUP>30</SUP>
---------------------------------------------------------------------------
\30\ Concerns about this concentration among those firms
eligible to issue shipping certificates are compounded by the
sizeable control some of the firms have over barge ownership, Gulf
exports, and processing facilities. Several commenters expressed
concern that this concentration increases the opportunity for price
manipulation.
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VII. Proposed Changes and Supplements to Comply With Sections 5a(a)(10)
and 15
Under the provisions of section 5a(a)(10) of the Act, the
Commission, having found that the response of the CBT to the
notification relating to its corn and soybean futures contracts does
not accomplish the statutory objectives of that section and ``after
granting the contract market an opportunity to be heard, may change or
supplement such rules and regulations of the contract market to achieve
the above objectives * * *'' The Commission has determined that the
following changes and supplements to CBT's proposal are necessary to
achieve the objectives of section 5a(a)(10) and compliance with section
15 of the Act. The Commission has determined that deliverable supplies
of soybeans should be increased through the retention of the delivery
points under CBT's current contracts that the CBT has proposed to
eliminate and that appropriate locational differentials should be
applied to such delivery points. In addition, the Commission has
determined for both the corn and soybean contracts to revise the
proposed rule to impose appropriate locational differentials for
Illinois River delivery points. The Commission has determined to revise
the proposed eligibility requirements for issuers of corn and soybean
shipping certificates by eliminating the net worth requirement of $40
million, which the Commission believes is an unnecessary barrier to
entry. The Commission also has determined to revise the river closure
contingency rule by reducing the continuous period of lock closure from
45 days as proposed to 15 days, by making it applicable whenever a
majority of shipping stations within the northern Illinois River
delivery area are affected by closure of any lock or locks, by making
it 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.
[[Page 49493]]
A. Delivery Points
In determining how to remedy the inadequacy of deliverable supplies
under the CBT soybean proposal, the Commission accepts the delivery
points in the proposal itself as a starting point and believes that the
most reasonable and feasible way to enhance deliverable supplies is by
adding additional delivery points. To do so, the Commission has decided
to retain the delivery points under which the CBT's existing contract
has been operating for years. Thus, the Commission had determined to
retain Toledo and St. Louis as delivery points for soybeans.
In this regard, many commenters supported retaining the delivery
point at Toledo, pointing out that Toledo's effectiveness as a delivery
point is proven. They also maintained that Toledo brings with it the
strength of having transportation ties to both the export markets via
vessels on the Great Lakes and the expanding livestock feed demand in
the southeastern U.S. via rail transportation. Although St. Louis has
not been a significant delivery point under the current contract, it
likely would become one under the contract's revised shipping
certificate format.<SUP>31</SUP>
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\31\ Some commenters advocated the addition of new and
completely untried delivery points, such as locations in the
interior of Iowa, or delivery points that have been used for other
contracts, such as Minneapolis, Minnesota. Although those
suggestions may have merit, the Commission has decided that the
experience with the current delivery points is entitled to
significant weight.
---------------------------------------------------------------------------
These two delivery points have the strong advantage of having been
chosen by CBT as appropriate delivery points for its soybean contract
and having been used as delivery points for the contract for several
years. Toledo has been a delivery point on the CBT soybean contract
since 1979; St. Louis has been a delivery point since 1993. The
resulting experience and familiarity with these delivery points of the
CBT, its members and commercial users of the soybean contract are
strong indicators that the delivery points are feasible, workable and
acceptable.
As discussed below, they also provide a substantial increase in the
available deliverable supplies of soybeans. When Toledo and St. Louis
are retained as delivery points, gross deliverable supplies are at or
above the 2,400-contract level for all observations in both July and
August during the past 11 years and in September for all but four of
the last 11 years. The gross deliverable supplies are at or above the
4,000-contract level for 21 of 33 observations. The following chart
shows the increases in gross deliverable supplies of soybeans which
result from the retention of Toledo and St. Louis as delivery points.
BILLING CODE 6351-01-P
[[Page 49494]]
[GRAPHIC] [TIFF OMITTED] TN22SE97.006
BILLING CODE 6351-01-C
[[Page 49495]]
Accordingly, the retention of Toledo and St. Louis as delivery
points is necessary and appropriate to provide sufficient levels of
gross deliverable supplies of soybeans for July and August. Although
the retention of Toledo and St. Louis does not yield gross deliverable
supplies which meet the 2,400-contract level in four of the last 11
years in September, September is a transition month between the old and
new crop year, as discussed above. New crop production is in the
offing. Thus, even when September supplies on occasion fall below the
2,400-contract level, the incentive to manipulate prices based on a
shortfall of old crop supplies is reduced because of the likelihood of
rapidly falling prices as new crop supplies become available in the
near future. In light of the reduced threat of price manipulation due
to the imminence of new crop production, the Commission is not ordering
that additional delivery points be added to the contract beyond
retention of Toledo and St. Louis. Should September deliverable
supplies of soybeans appear to be inadequate once trading under the
revised soybean contract begins, the Commission would take appropriate
steps to provide for additional delivery locations.<SUP>32</SUP>
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\32\ Should actual trading experience reveal that September
supplies must be supplemented, one means of accomplishing that
objective would be to expand the proposed definition of the northern
Illinois River to include a greater segment of the river's delivery
area. With the specification of appropriate locational
differentials, this change can be made at a later time with little
or no disruption to the contract.
---------------------------------------------------------------------------
Accordingly, the Commission finds that retention of Toledo and St.
Louis is necessary and appropriate to provide the level of economically
available deliverable supplies required by section 5a(a)(10).
B. Differentials
Section 5a(a)(10) specifies that where more than one delivery point
is specified, the contracts must specify locational differentials to
the extent necessary to prevent price manipulation, market congestion,
or the abnormal movement of the commodity in interstate commerce. As
discussed above, in light of the significant locational differentials
in the cash market among the proposed delivery locations, the CBT's par
delivery proposal for all potential corn and soybean delivery locations
would reduce the level of economically available deliverable supply and
would increase the susceptibility of the contracts to the prohibited
effects under section 5a(a)(10). Accordingly, to meet the objectives of
section 5a(a)(10), locational differentials must be set for the
delivery locations on the corn and soybean contracts.
In setting those differentials, the Commission has been guided by
commonly observed cash market price differences among the delivery
points. The cash market differences in the prices of corn and soybeans
for delivery points on the northern Illinois River are based primarily
upon the cost of barge freight--the price of the product increases as
one goes down the river, and the cost of freight to New Orleans
decreases. These differences in freight prices are transparent, readily
available, and commonly accepted as the best measure of cash price
values. An analysis of barge freight rate data indicates that 150
percent of the Waterways Freight Bureau Rate Tariff No. 7 rate relative
to Chicago, Illinois, is an appropriate differential.
Barge freight rate data for the years 1990 through 1996 indicate
that 150 percent of tariff is well within the range of commonly
observed freight rates, and it closely approximates the average percent
of tariff quoted by barge companies for Illinois River shipment during
this period. These data also indicate that 150 percent of tariff
approximates the average percent of tariff quoted for July, August, and
September, the months when deliverable supply concerns and the need to
maximize available deliverable supplies are the greatest. In addition,
a majority of those commenting on the issue agreed that it was
appropriate to base price differentials on barge freight cost
differences, and several of the commenters that suggested a fixed rate
recommended 150 percent of tariff.
St. Louis is being retained as a delivery point for soybeans. The
relative price of soybeans in the cash market among the various
delivery points on the northern Illinois River and St. Louis is
consistently determined based on the difference in freight costs to New
Orleans, and therefore the Commission has decided to base the
differential of St. Louis on 150 percent of freight tariff as well.
Most commenters agreed that this approach is the appropriate measure of
such price differences.
The differential applicable to Toledo, which is retained as a
delivery point for soybeans, cannot be set based on the differentials
relating to barge freight since Toledo is not located on the Illinois
River and does not tend to deliver soybeans CIF New Orleans. The
Commission's policy on differentials provides that such differentials
must fall within the range of commonly observed cash market
differences. Available data indicate that cash price differentials
between Chicago and Toledo commonly range from Chicago's being at a
premium to its being at a discount to Toledo. Therefore, establishing
Toledo deliveries at par with Chicago is well within the range of
commonly observed cash market price differences and provides an
adequate approximation of the cash market price relationship between
the two delivery points. Most commenters expressing an opinion on this
issue agreed that soybeans should be deliverable in Toledo at par with
Chicago.
Accordingly, the Commission has determined that for soybeans
Chicago and Toledo should be at contract price with all other points at
a premium over contract price based on 150 percent of the Waterways
Freight Bureau Tariff No. 7 rate. For corn, Chicago should 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, Illinois.
C. Disruptions to River Traffic
The CBT proposal's reliance chiefly on a single mode of
transportation to effect delivery renders the contract susceptible to
significant possible disruption of the delivery process, 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 to river
traffic, that plan only addressed long-term disruption to river traffic
resulting from closure of locks south of the delivery area announced
six months in advance. As the Commission discussed above, however, the
threat of manipulation of prices arises from the possible inability of
long position holders to take delivery from all, or a significant
number, of shipping stations due to the closures of a lock or locks
located either within or south of the delivery area. The longer the
period of the delay before alternate delivery procedures can be
invoked, the greater the potential for manipulation. Moreover, this
threat exists equally when a lock or locks have been closed with less
than six-months notice. Accordingly, compliance with section 5a(a)(10)
of the Act requires that this threat be diminished by reducing the
period during which delivery may be delayed by eliminating the six-
month notice requirement and by applying the contingency delivery
provision to similar circumstances caused by obstructions to movement
on the river
[[Page 49496]]
arising either inside or outside of the delivery area.
In determining the length of an announced obstruction which should
give rise to a contingency delivery plan, the Commission analyzed
information on past lock closures by the Army Corps of Engineers and on
the issuance of river advisories or safety zones by the Coast Guard.
During the last 17 years for which this information could be
ascertained, it appears that there have been no unplanned and
unannounced river closures of greater than two weeks duration.
Accordingly, obstructions lasting at least 15 days after they are
announced are appropriately addressed by application of the contingency
delivery plan.
In addition, as discussed above, the application of divergent
differentials to the contracts depending upon whether the delivery is
subject to the contingency rule might also contribute to a price
manipulation or to market congestion. Since the Commission has
determined that a differential based on 150 percent of the Waterways
Freight Bureau Tariff No. 7 rate should be applied to the corn and
soybean futures contracts, the Commission believes that the provision
in the contingency plan should be conformed to that differential, which
will be applicable to all other deliveries made on the contracts at
non-par locations.
Accordingly, the Commission is proposing under section 5a(a)(10) of
the Act to change and to supplement the provisions of this part of the
CBT proposal by reducing the continuous period of lock closure from 45
days as proposed to 15 days, by making the rule 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.
D. Net Worth
As the Commission found above, although the CBT's objective of
protecting the financial integrity of the delivery process is
reasonable, it would be adequately achieved through requirements on
working capital, letters of credit, and the ceiling on issuance of
shipping certificates to 25 percent of net worth. Contrary to the
policies underlying the federal antitrust laws, the $40 million net
worth requirement would operate as a significant bar to entry for
entities that would be eligible in all other respects, and the
resulting market concentration would be very high. The CBT has failed
to demonstrate a regulatory need for the requirement. Accordingly, the
Commission is proposing to eliminate it under sections 15 and 5a(a)(10)
of the Act.
E. 1999 Contract Months
By letter dated April 24, 1997, to the Chairperson of the
Commission, the CBT advised the Commission that it had determined to
list or to relist for trading the July 1999 and November 1999 soybean
contracts and the July 1999 and December 1999 corn contracts,
respectively, prior to Commission review and approval of the proposed
changes to the delivery specifications. In doing so, the CBT indicated
that it would
list the aforementioned contracts with a special indicator * * *
denot[ing] that the Exchange's Board of Directors and Membership
have approved the terms of the listed contracts; however, the terms
are subject to CFTC approval.
By letter dated May 2, 1997, the Commission responded that it
``will consider whether to approve the listing of these contract months
as part of its ongoing proceeding pursuant to section 5a(a)(10) of the
Act * * *.'' The Commission found that the ``listing of these trading
months is not consistent with Commission rule 1.41(l) and that * * *
their listing for trading by the CBT is not legally authorized at the
present time.''
The Commission by this proposed Order announces its intention to
change and to supplement the CBT's proposed amendments to those
contracts on the grounds that they violate sections 5a(a)(10) and 15 of
the Act. Accordingly, the Commission proposes to disapprove the terms
of the 1999 corn and soybean contracts and proposes to apply the
changes described above to such contracts under sections 5a(a)(10),
5a(a)(12), 8a(7), and 15 of the Act. The CBT may propose to list the
1999 corn and soybean contracts incorporating the Commission's proposed
changes and supplements, and the Commission would approve such listing.
The CBT should give notice to all traders that the Commission has
proposed to disapprove the CBT's proposed amendments to the 1999
soybean and corn contracts.<SUP>33</SUP>
\33\ The Commission notes that historically there has been very
little or no open interest in delivery months for corn or soybeans
that mature two years or more in the future.
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By the Commission (Chairperson Born, Commissioner Dial,
Commissioner Spears; Commissioner Tull Dissenting With Opinion,
Commissioner Holum Dissenting Without Opinion)
CBOT Proposed Delivery Terms for Corn and Soybeans--Dissenting
Opinion of Commissioner John E. Tull, Jr.
I strongly disagree with the majority's decision regarding the
Chicago Board of Trade's proposed amendments to the delivery
specifications to their corn and soybean contracts and vote to
approve them.
Section 5a(a)(10) of the Commodity Exchange Act requires us to
determine whether the delivery terms proposed by the CBOT ``will
tend to prevent or diminish price manipulation, market congestion,
or the abnormal movement of such commodity in interstate commerce.''
We must also ``take into consideration the public interest to be
protected by the antitrust laws in requiring or approving any rule
of a contract market.'' With all due respect to my colleagues and
our staff, based on my analysis of the data, I am convinced that the
proposed terms for both contracts as submitted meet these statutory
requirements.
I also note that the CBOT convened two task forces of industry
experts who debated the delivery points at length and the proposal
has been approved by the exchange membership. I believe it is the
right of a membership organization such as the CBOT to write the
specifications of its own contract, as long as those specifications
satisfy the statutory requirements.
Attachment 1
For the reasons explained in the ``Proposed Order of the
Commodity Futures Trading Commission to Change and to Supplement
Proposed Rules of the Board of Trade of the City of Chicago,
Submitted For Commission Approval in Response to a Section 5a(a)(10)
Notice Relating to Futures Contracts in Corn and Soybeans,'' the
Commission is proposing under section 5a(a)(10) of the Commodity
Exchange Act to change and to supplement rules and proposed rules of
the Board of Trade of the City of Chicago. As provided under the
Proposed Order, the Commission proposes to make the following
changes:\34\
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\34\ Bracketed type denotes the Commission's proposed changes or
supplements to the CBT proposal. Italics denote changes proposed by
the CBT. Deletions to proposed CBT language are not shown.
---------------------------------------------------------------------------
1. To change and to supplement the paragraph of Rule 1036.00
immediately following the paragraph beginning with the words ``Corn
Differentials,'' to read as follows:
In accordance with the provisions of Rule 1041.00A, corn for
shipment from regular warehouses or shipping stations located within
the Chicago Switching District or the Burns Harbor, Indiana
Switching District may be delivered in satisfaction of corn futures
contracts at contract price, subject to the differentials for class
and grade outlined above. [Corn for shipment from shipping stations
located on the northern Illinois River may be delivered 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, Illinois, subject to
the differentials for class and grade outlined above.
[[Page 49497]]
*The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 35.714 bushels per ton.]
2. To change and to supplement the paragraph of Rule 1036.00
immediately following the paragraph beginning with the words
``Soybean Differentials,'' to read as follows:
In accordance with the provisions of Rule 1041.00D, soybeans for
shipment from regular warehouses or shipping stations located within
the Chicago Switching District, the Burns Harbor, Indiana Switching
District, [or the Toledo, Ohio Switching District] may be delivered
in satisfaction of soybean futures contracts at contract price,
subject to the differentials for class and grade outlined above.
[In accordance with the provisions of Rule 1041.00D, soybeans
for shipment from shipping stations located on the northern Illinois
River or from shipping stations within the St. Louis-East St. Louis
and Alton Switching Districts (i.e., the upper Mississippi River
between river miles 170 and 205) may be delivered in satisfaction of
soybean futures contracts 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, Illinois, subject to the differentials for
class and grade outlined above.
*The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 33.333 bushels per ton.]
3. To change and to supplement Rule 1041.00A to read as follows:
Corn. Corn for shipment from regular warehouses or shipping
stations located within the Chicago Switching District or the Burns
Harbor, Indiana, Switching District may be delivered in satisfaction
of corn futures contracts at contract price. [Corn for shipment from
shipping stations located within the northern Illinois River may be
delivered in satisfaction of corn futures contracts 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, Illinois, subject to
the differentials for class and grade outlined above.
*The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 35.714 bushels per ton.]
4. To change and to supplement Rule 1041.00D to read as follows:
Soybeans. Soybeans for shipment from regular warehouses or
shipping stations located within the Chicago Switching District, the
Burns Harbor, Indiana, Switching District [or the Toledo, Ohio,
Switching District] may be delivered in satisfaction of soybean
futures contracts at contract price. [Soybeans for shipment from
shipping stations located on the northern Illinois River or from
shipping stations within the St. Louis-East St. Louis and Alton
Switching Districts (i.e., the upper Mississippi River between river
miles 170 and 205) may be delivered in satisfaction of soybean
futures contracts 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, Illinois, subject to the differentials for class and grade
outlined above.
*The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 33.333 bushels per ton.]
5. To change and to supplement Regulation 1044.01 following the
list of delivery locations and immediately prior to the issuer's
signature block by adding, as follows:
[soybeans only:
____ St. Louis, MO, river mile marker ______
____ Toledo, OH, Switching District]
6. To change and to supplement Regulation 1056.01 by adding
after the last paragraph the following:
[The premium charges on soybeans for delivery from regular
shippers within the Toledo, Ohio, Switching District shall not
exceed 12/100 of one cent per bushel per day.
The premium charges on soybeans for delivery from regular
shippers within the St. Louis-East St. Louis and Alton Switching
Districts (i.e., the upper Mississippi River between river miles 170
and 205) shall not exceed 10/100 of one cent per bushel per day.]
7. To change and to supplement the second paragraph of
Regulation 1081.01(1) to read as follows:
(c) and in the case of Chicago, Illinois, Burns Harbor, Indiana,
[and Toledo, Ohio,] Switching Districts only, his registered storage
capacity.
8. To change and to supplement the third paragraph of Regulation
1081.01(1)(a) to read as follows:
(a) one barge per day at each shipping station on the northern
Illinois River [and within the St. Louis-East St. Louis and Alton
Switching Districts (i.e., the upper Mississippi River between river
miles 170 and 205);] and
9. To change and to supplement Regulation 1081.01(2) to read as
follows:
Except for shippers located on the northern Illinois River [and
within the St. Louis-East St. Louis and Alton Switching Districts
(i.e., the upper Mississippi River between river miles 170 and
205),] such warehouse shall be connected by railroad tracks with one
or more railway lines.
10. To change and to supplement the first sentence of Regulation
1081.01(12)A to read as follows:
A. Load-Out Procedures for Wheat and Oats and Rail and Vessel
Load-Out Procedures for Corn and Soybeans from Chicago, Illinois,
Burns Harbor, Indiana, [and Toledo, Ohio, Switching Districts] Only
* * *.
11. To change and to supplement the first sentence of Regulation
1081.01(12)B to read as follows:
B. Load-Out Rates for Wheat and Oats and Rail and Vessel Load-
Out Rates for Corn and Soybeans from Chicago, Illinois, Burns
Harbor, Indiana, [and Toledo, Ohio, Switching Districts] Only * *
*.
12. To change and to supplement Regulation 1081.01(12)G(7) to
eliminate the words ``on the Illinois Waterway,'' to read as
follows:
Any expense for making the grain available for loading will be
borne by the party making delivery, provided that the taker of
delivery presents barge equipment clean and ready to load within ten
calendar days following the scheduled loading date of the barge. If
the taker's barges are not made available within ten calendar days
following the scheduled loading date, the taker shall reimburse the
shipper for any expenses for making the grain available. Taker and
maker of delivery have three days to agree to these expenses.
13. To change and to supplement the last sentence of Regulation
1081.10(12)(G)(8) to read as follows:
(8) * * *. If the aforementioned condition of impossibility
prevails at a majority of regular shipping stations, then shipment
[shall be made under the provisions of rule 1081.(12)(G)(9).]
14. To change and to supplement the first paragraph and
paragraph 9(b)(iii) and add a new paragraph at the end of Regulation
1081.01(12)(G)(9) to read as follows:
(9). In the event that [it has been announced that river traffic
will be obstructed for a period of fifteen days or longer as a
result of one of the conditions of impossibility listed in
regulation 1081.10(12)(G)(8) and in the event that the obstruction
will affect a majority of regular shipping stations located on the
northern Illinois River,] then the following barge load-out
procedures for corn and soybeans shall apply:
(b) * * *
(iii) The taker of delivery shall pay the maker 150% of the
Waterways Freight Bureau Tariff Number 7 barge benchmark rate from
the original delivery point stated on the Shipping Certificate to
NOLA.
[(c) In the event that the obstruction or condition of
impossibility listed in regulation 1081.10(12)(G)(8) will affect a
majority of regular shipping stations located on the northern
Illinois River, but no announcement of the anticipated period of
obstruction is made, then shipment may be delayed for the number of
days that such impossibility prevails.]
15. To change and to supplement the first paragraph of
Regulation 1081.01(13)A by eliminating the words ``and soybeans'' in
both instances in which they appear.
16. To change and to supplement Regulation 1081.01(13)D by
retaining it and changing it to read as follows:
[Soybeans. For the delivery of soybeans, regular warehouses or
shipping stations may be located within the Chicago Switching
District, within the Burns Harbor, Indiana, Switching District
(subject to the provisions of paragraph A above), within the Toledo,
Ohio, Switching District, or shipping stations may be located on the
northern Illinois River (subject to the provisions of paragraph A
above), or within the St. Louis-East St. Louis and Alton Switching
Districts (i.e., the upper Mississippi River between river miles 170
and 205).
Delivery in Toledo must be made at regular warehouses or
shipping stations providing water loading facilities and maintaining
water depth equal to normal seaway draft of 27 feet. However,
deliveries of soybeans may be made in off-water elevators within the
Toledo, Ohio, Switching District PROVIDED that the party making
delivery makes the
[[Page 49498]]
soybeans available upon call within five calendar days to load into
water equipment at one water location within the Toledo, Ohio,
Switching District. The party making delivery must declare within
one business day after receiving warehouse receipts and loading
orders the water location at which soybeans will be made available.
Any additional expense incurred to move delivery soybeans from an
off-water elevator into water facilities shall be borne by the party
making delivery PROVIDED that the party taking delivery presents
water equipment clean and ready to load within 15 calendar days from
the time the soybeans have been made available. Official weights and
official grades as loaded into the water equipment shall govern for
delivery purposes. Delivery in the greater St. Louis river-loading
area must be made at regular warehouses or shipping stations
providing water loading facilities and maintaining water depth equal
to the average draft of the current barge loadings in this delivery
area. Official weights and official grades as loaded into the water
equipment shall govern for delivery purposes.]
17. To change and to supplement Regulation 1081.01(14)E by
retaining it and changing it to read as follows:
[Soybeans. The warehouseman or shipper is not required to
furnish transit billing on soybeans represented by warehouse receipt
or shipping certificate delivery in Toledo, Ohio. Delivery shall be
flat.]
18. To change and to supplement the first paragraph of the
applicant's declaration contained in Regulation 1085.01 to read as
follows:
We, the ________ (hereinafter called the Warehouseman/Shipper)
owner or lessee of the warehouse located at ________ or shipping
station located at mile marker ________ [of the ________ River,]
having a storage capacity * * *.
19. To change and to supplement appendix 4E, paragraph 2, by
eliminating the sentence which reads, ``The net worth of a firm
regular to deliver corn or soybeans must be greater than or equal to
$40,000,000.''
The Commission has determined that publication of the Proposed
Order for public comment will assist the Commission in its
consideration of these issues. Accordingly, the Commission is
requesting written comments from interested members of the public.
Issued in Washington, D.C., this 16th day of September, 1997, by
the Commodity Futures Trading Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 97-24948 Filed 9-19-97; 8:45 am]
BILLING CODE 6351-01-P
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