[Federal Register: December 17, 1998 (Volume 63, Number 242)]
[Page 69616-69617]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Proposed Amendments to the Standards for Deliverable Lumber on
the Chicago Mercantile Exchange Random Lengths Lumber Futures Contract,
Submitted Under Fast Track Review Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposed contract market rule


SUMMARY: The Chicago Mercantile Exchange (CME or Exchange) has proposed
amendments to the random lengths lumber futures contract to change the
standards for deliverable lumber. Specifically, the Exchange proposes
to disallow delivery of lumber produced from Alpine fir, to provide
that lumber produced from hemlock-fir is not deliverable if the lumber
is manufactured in Canada or in specified areas of Washington, Oregon,
and California; to provide that lumber produced from spruce-pine fir is
not deliverable if it is manufactured in those specified areas in
Washington, Oregon, and California, and to clarify that lumber produced
from species under the Engelmann Spruce/Lodgepole Pine designation is
deliverable as a group. The proposals were submitted under the
Commission's 45-day fast track procedures. The Acting Director of the
Division of Economic Analysis (Division) of the Commission, acting
pursuant to the authority delegated by Commission Regulation 140.96,
has determined that the proposals are of major economic significance,
and that publication for comment is in the public interest, will assist
the Commission in considering the views of interested persons, and is
consistent with the purpose of the Commodity Exchange Act.\1\

    \1\ Section 5a(a)(12) of the Act, which requires the Commission
to publish proposed rules of "major economic significance," does
not define the meaning of that term. Moreover, section 5a(a)(12)
provides that the Commission's determination that proposed exchange
rules are of major economic significance under that section is final
and not subject to judicial review. The Commission staff has
interpreted the meaning of "major economic significance" broadly
as proposed rules which may have an effect on the pricing of a
contract, on the value of existing contracts, on a contract's
hedging or price basing utility, or on deliverable supplies. Section
5a(a)(12) does not define rules of "major economic significance"
based upon a specific dollar impact on the economy or other such
measures used in other statutes, such as those used in determining
whether an agency rule is a "major rule" under 5 U.S.C. section

DATES: Comments must be received on or before January 4, 1999.

[[Page 69617]]

ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581. In
addition, comments may be sent by facsimile transmission to facsimile
number (202) 418-5521, or by electronic mail to [email protected].
Reference should be made to CME random lengths lumber futures contract.

Please contact John Forkkio of the Division of Economic Analysis,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581, telephone (202) 418-5281. Facsimile
number: (202) 418-5527. Electronic mail: [email protected].

SUPPLEMENTARY INFORMATION: Under the rules of the random length lumber
futures contract, lumber made from a variety of species is deliverable,
including species grouped under the terms "Spruce-Pine-Fir" (SPF) and
"Hemlock-fir" (HF). The CME noted that SPF number has been the
pricing basis of the futures contract for many years, and that remains
the benchmark for cash lumber prices. The CME further noted that
futures deliveries of HF lumber have increased in recent months, due to
a decline in HF lumber cash prices relative to the prices of SPF
lumber. This has been caused by diminishing export demand for HF lumber
to Asian countries resulting from the recent economic difficulties,
which have adversely affected their construction industries.
    The CME explained that, after receiving complaints about HF lumber
deliveries and following a review of the market, it determined that
many domestic cash market buyers view HF lumber as an undesirable
product. In this regard, the CME stated:

    * * * The Hemlock species is the source of this dissatisfaction,
as it is said to produce lumber with working qualities that are
inferior to SPF lumber even if the grade level is the same. Although
Hemlock cannot be entirely separated from HF lumber, certain areas
produce HF lumber that contains more Hemlock than other areas.
Similarly, SPF lumber made from Alpine fir or Sitka Spruce (SS),
predominantly U.S. coastal species, is seen as inferior. Most
production of SPF lumber containing these species can be
geographically separated from other areas of production.
    To eliminate the areas where the proportion of Hemlock produced
is greatest, the Exchange proposes that HF lumber produced in Canada
and the Pacific coastal areas of the United States be eliminated
from delivery. In addition, SPF lumber produced in the U.S. Pacific
coastal area will be eliminated. Lastly, it is proposed that the
species grouped under the term "Engelmann Spruce/Lodgepole Pine
(ES/LP)" be made eligible for delivery as it is an acceptable
substitute for SPF lumber. The separate species are already
deliverable and the addition of this grouping will clarify the
delivery species.
    The [proposed] restricted areas [for ineligible SPF and HF
lumber] * * * roughly correspond to those bounded by the Pacific
Ocean and the summit of the Cascade Mountain range. The boundaries
for Washington and Oregon are those defined by the Western Wood
Products Association, a number of grading agency used by most
western mills. The restricted areas are those that contain the
highest proportion of lumber made from Hemlock, Alpine Fir and Sitka
Spruce. The boundaries in California and Canada also delineate
similar areas of production, as noted by industry representatives.*
* *

    The Exchange asserted that the proposed amendments would not raise
concerns about potential manipulation of the futures contract, even
though deliverable supplies would be somewhat diminished. This is due
to the ready availability of lumber meeting the revised quality
standards and the spot month speculative limit of 600 contracts which
represents only 4.8% of monthly production, according to the Exchange.
Finally, the CME notes that:

    * * * fairly recent and rapid change has manifested itself in
futures deliveries and caused uncertainty as to which species of
lumber is being priced in the futures market. It is not yet clear
what the longer term relationship will be between SPF and HF lumber
prices. What is clear is that the uncertainty has resulted in a
disruption of both long and short hedgers' basis relationships. This
disruption has caused numerous participants to state that they will
decrease their hedging activity. Long hedgers find themselves at
risk of receiving delivery of product that was assumed to be SPF
lumber but may actually be HF lumber with a lower cash value that
the SPF lumber that they used as the basis for their futures
contract purchase. In other words, they will get less than they paid
for. Short hedgers who product SPF lumber are reluctant to sell
futures contracts that may be priced at the lower prices that
reflect HF lumber values. As SPF is the dominant lumber species, the
loss of this hedging activity will severely affect the level of
trading activity and reduce the usefulness of the futures contract
for the lumber industry.

    The CME proposes to implement the amendments for application to
newly listed contracts only.
    The Division requests comments on the proposed changes to the
random length lumber futures contract. Specifically, the Division
requests comment on the input of the proposals on deliverable supplies
for the futures contract. Also, commenters are requested to comment on
the extent to which the proposed charges would improve the hedging and
pricing utility of the contract.
    The proposed amendments were submitted pursuant to the Commission's
fast track procedures for streamlining the review of futures contract
rule amendments and new contract approvals (62 FR 10434). Under those
procedures, the proposals, absent any contract action by the
Commission, may be deemed approved at the close of business on January
19, 1999, 45 days after receipt of the proposals. In view of the
limited review period provided under the fast track procedures, the
Commission has determined to publish for public comment notice of the
availability of the terms and conditions for 15 days, rather than 30
days as provided for proposals submitted under the regular review
    Copies of the proposed amendments will be available for inspection
at the Office of the Secretariat, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
Copies can be obtained through the Office of the Secretariat by mail at
the above address, by phone at (202) 418-5100, or via the internet on
the CFTC website at www.cftc.gov under "What's New & Pending".
    Other materials submitted by the CME is support of the proposals
may be available upon request pursuant to the Freedom of Information
Act (5 U.S.C. 552) and the Commission's regulations thereunder (17
C.F.R. Part 145 (1997)), except to the extent they are entitled to
confidential treatment as set forth in 17 C.F.R. 145.5 and 145.9.
Requests for copies of such materials should be made to the FOI,
Privacy and Sunshine Act Compliance Staff of the Office of Secretariat
at the Commission's headquarters in accordance with 17 C.F.R. 145.7 and
    Any person interested in submitting written data, views, or
arguments on the proposals, or with respect to other materials
submitted by the CME, should send such comments to Jean A. Webb,
Secretary, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581 by the specified

    Issued in Washington, DC, on December 11, 1998.
John R. Mielke,
Acting Director.
[FR Doc. 98-33356 Filed 12-16-98; 8:45 am]

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