[Federal Register Volume 62, Number 183 (Monday, September 22, 1997)]
[Notices]
[Pages 49474-49498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24948]


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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 
[<a href="/cdn-cgi/l/email-protection#94e7f1f7e6f1e0f5e6edd4f7f2e0f7baf3fbe2"><span class="__cf_email__" data-cfemail="7506101607100114070c35161301165b121a03">[email protected]</span></a>]. 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 [PA<a href="/cdn-cgi/l/email-protection#4a382922233e302f260a292c3e29642d253c"><span class="__cf_email__" data-cfemail="97e5f4fffee3edf2fbd7f4f1e3f4b9f0f8e1">[email protected]</span></a>].

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>
---------------------------------------------------------------------------

    \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.

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[[Page 49483]]

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[[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.

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[[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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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>
---------------------------------------------------------------------------

    \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>
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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>
---------------------------------------------------------------------------

    \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>
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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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