Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60831

from the levels of restraint (quotas), and visa

and ELVIS requirements if they are properly

certified, prior to the shipment leaving

Thailand.

Other Provisions:

Merchandise imported for the personal use

of the importer and not for resale, regardless

of value, and properly marked commercial

sample shipments valued at U.S. $250 or less

do not require a visa or ELVIS transmission

for entry and shall not be charged to

agreement levels.

Any shipment which is not accompanied

by a valid and correct visa with an ELVIS

transmission or exempt certification in

accordance with the foregoing provisions

shall be denied entry by the Government of

the United States unless the Government of

Thailand authorizes the entry and any

charges to the agreement levels.

The actions taken concerning the

Government of Thailand with respect to

imports of textiles and textile products in the

foregoing categories have been determined by

the Committee for the Implementation of

Textile Agreements to involve foreign affairs

functions of the United States. Therefore,

these directions to the Commissioner of

Customs, which are necessary for the

implementation of such actions, fall within

the foreign affairs exception to the

rulemaking provisions of 5 U.S.C. 553(a)(1).

This letter will be published in the Federal

Register.

Sincerely,

Troy H. Cribb,

Chairman, Committee for the Implementation

of Textile Agreements.

Annex A

Part Categories (Descriptions below are for

general reference only.)

301–P Chief weight cotton

combed yarn, less than 85

percent cotton: only HTS

numbers 5206.21.0000,

5206.22.0000,

5206.23.0000,

5206.24.0000,

5206.25.0000,

5206.41.0000,

5206.42.0000,

5206.43.0000,

5206.44.0000 and

5206.45.0000.

Annex A—Continued

301–O Chief weight cotton

combed yarn, 85 percent

or more cotton: only HTS

numbers 5205.21.0020,

5205.21.0090,

5205.22.0020,

5205.22.0090,

5205.23.0020,

5205.23.0090,

5205.24.0020,

5205.24.0090,

5205.26.0020,

5205.26.0090,

5205.27.0020,

5205.27.0090,

5205.28.0020,

5205.28.0090,

5205.41.0020,

5205.41.0090,

5205.42.0020,

5205.42.0090,

5205.43.0020,

5205.43.0090,

5205.44.0020,

5205.44.0090,

5205.46.0020,

5205.46.0090,

5205.47.0020,

5205.47.0090,

5205.48.0020 and

5205.48.0090.

359–H Cotton headwear: only

HTS numbers

6505.90.1540 and

6505.90.2060.

359–O Other cotton apparel, not

elsewhere specified: all

HTS numbers except those

in Category 359–H.

369–D Cotton dish towels: only

HTS numbers

6302.60.0010,

6302.91.0005 and

6302.91.0045.

369–S Cotton shop towels: only

HTS number

6307.10.2005.

369–O Other cotton made-ups, not

elsewhere specified: all

HTS numbers except those

in Category 369–D and

Category 369–S.

604–A Piled acrylic spun yarn:

only HTS number

5509.32.0000.

604–O Other staple fiber yarn, 85

percent or more synthetic:

all HTS numbers except

those in Category 604–A.

659–H Man-made fiber headwear:

only HTS numbers

6502.00.9030,

6504.00.9015,

6504.00.9060,

6505.90.5090,

6505.90.6090,

6505.90.7090 and

6505.90.8090.

Annex A—Continued

659–O Other man-made fiber apparel, not elsewhere specified: all HTS numbers except those in Category

659–H.

669–P Man-made fiber bags: only

HTS numbers

6305.32.0010,

6305.32.0020,

6305.33.0010,

6305.33.0020 and

6305.39.0000.

669–O Other man-made fiber

manufactures, NSPF: all

HTS numbers except those

in Category 669–P.

Merged Categories and Subcategories

317/326

331/631

334/634

335/635/835

336/636

338/339

341/641

342/642

347/348/847

351/651

359–H/659–H

613/614/615 (Subcategories 614 and 613/

615)

625/626/627/628/629 (Subcategory 625)

638/639

645/646

647/648

[FR Doc. 97–29780 Filed 11–12–97; 8:45 am]

BILLING CODE 3510–DR–F

COMMODITY FUTURES TRADING

COMMISSION

Chicago Board of Trade Futures

Contracts in Corn and Soybeans;

Order To Change and To Supplement

Delivery Specifications

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final order to Chicago Board of

Trade to change and to supplement

delivery specifications.

SUMMARY: The Commodity Futures

Trading Commission (Commission) is

issuing an 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 the

delivery terms of the CBT corn and

soybean futures contracts. The CBT

submitted proposed changes to the

delivery specifications of its corn and

soybean futures contracts 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
60832 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

its Order changes and supplements the

CBT proposal for its soybean futures

contract by making all changes to such

CBT rules as required to effect the

following: (i) retaining the Toledo, Ohio

switching district as a delivery location;

(ii) retaining St. Louis-East St. LouisAlton 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 changes and

supplements the CBT proposal for its

corn futures contracts by making 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

is ordering that the proposed CBT

contingency plan for alternative

delivery procedures when traffic on the

northern Illinois River is obstructed be

changed and supplemented and is

ordering that the $40 million minimum

net worth eligibility requirement for

issuers of shipping certificates be

eliminated. Finally, the Commission is

disapproving the proposed terms for the

March, July and December 1999 corn

futures contracts and the January, July

and November 1999 soybean futures

contracts. Such contract months and

any other 1999 contract months are

hereby authorized to trade under the

existing contract terms. The terms of the

corn and soybean futures contracts

proposed by the CBT as changed and

supplemented herein will apply

beginning with the January 2000

soybean futures contract and the March

2000 corn futures contract.

The Commission has determined that

publication of the Order is in the public

interest, will provide the public with

notice of its action, and is consistent

with the purposes of the Commodity

Exchange Act.

DATES: This Order became effective on

November 7, 1997.

ADDRESSES: Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581.

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

[PArchitzel@cftc.gov].

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 November 7,

1997, issued an Order under section

5a(a)(10) of the Act to change and to

supplement the delivery specifications

proposed by the CBT for its 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

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: November 7, 1997.

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 orders changes and supplements

to the Board of Trade of the City of

Chicago (CBT) proposed rules relating to

its futures contracts in corn and

soybeans as shown in attachment 1 to

this Order. Under this Order, the

Commission takes the following actions:

(1) changes and supplements under

section 5a(a)(10) of the Commodity

Exchange Act (Act) the proposed

delivery specifications of the CBT’s

soybean futures contract by making all

changes to such rules as required to

effect the following:

i. retaining the Toledo, Ohio

switching district as a delivery location;

ii. retaining St. Louis-East St. LouisAlton 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. LouisEast 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) changes and supplements under

section 5a(a)(10) of the Act the proposed

delivery specifications of CBT’s corn

futures contract by making all changes

to such rules 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) changes and supplements under

section 5a(a)(10) of the Act the proposed

CBT contingency plan for alternative

delivery when river traffic is obstructed

by reducing the continuous period of

such an obstruction 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 obstruction must have been

given six-months prior to such an

obstruction, by making the contingency

plan applicable whenever a majority of

shipping stations within the northern

Illinois River delivery area is affected by

an obstruction and by changing the

differential from 100 percent of the

Waterways Freight Bureau Tariff No. 7

rate as proposed to 150 percent;

(4) changes and supplements under

sections 5a(a)(10) and 15 of the Act the

proposed CBT corn and soybean futures

contracts by eliminating the $40 million

minimum net worth eligibility

requirement for issuers of shipping

certificates;
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60833

1The 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, adopted

by the Commission at its meeting of May 3, 1977

(Powers Memorandum).

(5) disapproves under sections

5a(a)(10), 5a(a)(12), and 15 of the Act

and Commission rule 1.41(b) CBT’s

proposed terms for the March, July, and

December 1999 corn futures contracts

and the January, July, and November

1999 soybean futures contracts. Such

contract months and any other 1999

contract months are hereby authorized

to trade under the existing contract

terms or, if the CBT so elects, under the

contract terms proposed by the CBT as

changed and supplemented by this

Order;

(6) orders that the terms of the corn

and soybean futures contracts proposed

by the CBT as changed and

supplemented by this Order shall apply

to contract months beginning with and

subsequent to the January 2000 soybean

futures contract month and the March

2000 corn futures contract month,

whenever such contract months are

listed for trading.

Nothing in this Order precludes the

CBT from submitting for Commission

review and approval under sections

5a(a)(10) and 5a(a)(12) of the Act any

alternative proposed delivery

specifications for its corn or soybean

futures contracts.

The Commission, as discussed below,

bases these actions on its finding that

the CBT proposal in response to the

Commission’s section 5a(a)(10)

notification relating to the CBT’s corn

and soybean futures contracts does not

meet the requirements, or accomplish

the statutory objectives, of that section

and also violates sections 8a(7) and 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 by the CBT; (2) the

failure of the CBT’s proposed corn and

soybean contracts to include required

locational differentials; (3) the failure of

the CBT’s 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 CBT’s

proposed $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 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

an adequate level on a significant

number of occasions during the past 11

years which the Commission has

examined. Moreover, on those occasions

when the gross amount of potentially

deliverable supplies did reach that

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 demonstrated

when required downward adjustments

are made to reflect only that portion of

gross deliverable supplies 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 so

inadequate under section 5a(a)(10) as to

require additional delivery points.

However, changes and supplements to

other aspects of the CBT’s proposal as

to its corn contracts are required to meet

the objectives of section 5a(a)(10), as

discussed below. Moreover, the

adequacy of corn supplies cannot be

accurately and fully ascertained until

after there is a history of deliveries

occurring under the CBT’s proposal, as

changed and supplemented by this

Order. If 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.1

In addition, the proposed contingency

plan providing for alternative delivery

procedures when river traffic is

obstructed does not meet the objectives

of section 5a(a)(10). By requiring

lengthy advance notice of a river traffic

obstruction before the contingency plan

applies, by limiting the contingency

plan only to instances of river traffic

obstructions south of the delivery area,

by limiting the relevant river traffic

obstructions to lock closures, by

requiring unduly lengthy obstructions,

and by specifying a differential that

does not conform to the locational

differentials found to be appropriate by

the Commission, the CBT’s proposed

plan fails to diminish the potential for

price manipulation, market congestion,

or the abnormal movement of the

commodities in interstate commerce

arising from foreseeable river traffic

obstructions.

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
60834 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

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 create and tend to

preserve a high level of concentration

among issuers.

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 both prior to and in

response to the Commission’s issuance

of the proposed order. 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 prior to its issuance

of the proposed order. The CBT was also

heard by the Commission at a public

hearing convened subsequent to

issuance of the proposed order. The

written and oral comments of the CBT

received in connection with that

hearing, along with comments filed by

the public on the proposed order and

written exceptions filed by the CBT,

were reviewed by the Commission and

were considered by it in arriving at its

conclusions and in adopting this final

Order.

The CBT and a number of

commenters raised objections to the

Commission’s proposed order. In

response to some of these points, the

Commission has made a number of

changes from the order as proposed in

adopting this Order as final. These

changes include revisions to the

calculation of some of the data in the

Order. These revisions were made in

response to suggestions and questions

raised by the CBT at its hearing and in

its various filings and in informal

discussions with the CBT staff. They

reflect corrections of calculations and of

the formatting of certain data submitted

to the Commission by the CBT. In

addition, at the suggestion of the CBT in

its oral and written statements filed at

the hearing and in its written exceptions

filed thereafter, the Commission has

modified its estimate of September corn

and soybean production.

The final Order clarifies two

provisions in attachment 1 by deleting

several references to ‘‘warehouse

receipts’’ which appeared in attachment

1 to the proposed order because they are

surplusage.

In addition, as explained in greater

detail below, the Commission has

determined to authorize for trading the

1999 contract months in the CBT’s corn

and soybean futures contracts under the

current terms of those contracts, while

disapproving the CBT’s proposed terms

for those contracts. In doing so, the

Commission is responding to many

commenters who requested that the

Commission authorize the listing of

these trading months in order to permit

trading without delays or interruption.

The Commission recognizes the urgent

need to have certainty with respect to

the terms of those contracts and the

legality of their listing.

This action by the Commission

permits the continuation of trading in

the corn and soybean contracts under

the current terms, which are familiar to

the CBT, its members, and the

agricultural users of these contracts,

until contract months for the year 2000,

which would be governed by the new

terms of the contracts as contained in

this Order. In the interim the CBT will

continue to be free to propose revisions

of the new terms to the Commission for

its consideration under sections

5a(a)(10) and 5a(a)(12) or to submit a

petition to the Commission to

reconsider or to amend this Order. If the

CBT believes that an alternative to the

new terms and to its original proposal

would better serve its business interests

and would also meet the statutory

requirements, the CBT should submit

such a proposed rule revision or

petition.

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 the contracts. Id. at 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. at 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

substantially exceeded the total amount

of soybeans that could be delivered at

the contract’s delivery points. By 1991

several major studies had been

completed demonstrating the

inadequacy of the CBT’s delivery points.

Nevertheless, the CBT’s response to

these problems was limited. Id. at

68006. As the Commission noted in the

section 5a(a)(10) notification, when the

Commission approved certain changes

proposed by the CBT to address these

problems in 1992, it cautioned that the

CBT’s response was merely a short-term

palliative and urged the CBT actively to

consider more significant contract

changes. Id. at 68007.

Only three years later, three of the

existing six Chicago warehouses regular

for delivery under the futures contracts

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

spent 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, 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 on December

19, 1996. 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.
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60835

2While the CBT labeled its submission of the

proposed rule amendments as having been made

pursuant to section 5a(a)(12) of the Act as well as

section 5a(a)(10), the Commission is applying its

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

[exchange] 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 proposal. Nevertheless, the

Commission, for the reasons discussed in this

Order, 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.

3On March 4, 1997, the CBT 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.

4Also 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.’’

5The Commission received almost 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.

6Written statements in connection with the

meeting were submitted to the Commission for

inclusion in the record and, along with a transcript

of the meeting, have been entered into the

Commission’s comment file. Participants included

a United States Senator, a United States

Representative and a state government

representative from the state of Ohio, (transcript at

69–75, 29–35, 19–26); a United States

Representative and a state government

representative from the state of Michigan,

(transcript at 9–14, 14–19); 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).

7Subsequently, the Commission also published

for public comment notice that it was proposing to

disapprove application of the terms proposed by the

CBT to the January 1999 soybean futures contract

and the March 1999 corn futures contract. 62 FR

5108 (September 30, 1997). The CBT purportedly

listed those futures contracts for trading after

issuance of the September 15, 1997, proposed order.

The comment period on that notice also ended on

October 22, 1997.

8Comments were received by the Commission

offering a wide range of opinion. Many took issue

with the philosophy underlying the section

5a(a)(10) statutory authority which permits the

Commission to order an exchange to change or to

supplement contract terms that in its opinion do

not accomplish the objectives of providing for

delivery at such point or points and at such price

differentials as will tend to prevent or to diminish

price manipulation, market congestion, or the

abnormal movement of such commodity in

interstate commerce. Others took issue with the

Commission’s proposed order for not going far

enough, particularly with respect to its failure to

order the retention of Toledo and St. Louis as

delivery points for the CBT corn contract. As

discussed above, the Commission has considered

carefully all of the comments submitted and has

made several changes or modifications to the final

Order in response to them.

9Testimony given by CBT spokespersons during

the October 15, 1997, public hearing, as reflected

in the hearing transcript, is cited hereinafter by

using the abbreviation ‘‘tr.’’ followed by the

relevant page number(s). Citations to the CBT letter

of exceptions dated October 22, 1997, use the

abbreviation ‘‘October 22, 1997 exceptions’’

followed by the relevant page number(s).

10 In this regard, the Act, Guideline No. 1, and

Commission rule 1.41 provide that an 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.

11A shipping certificate is a negotiable

instrument that represents a commitment by the

Continued

The CBT, on April 16, 1997,

submitted its response to the section

5a(a)(10) notification in the form of

proposed exchange rule amendments.2

Previously, the Commission had

published the substance of the CBT’s

proposed amendments in the Federal

Register for a 15-day comment period.3

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. 4

The CBT requested the opportunity to

appear before the Commission ‘‘to

address issues that have been generated

during the comment period.’’ 5 The

Commission granted the CBT’s request

(62 F.R. 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. 6

On September 15, 1997, the

Commission issued a proposed order,

publishing its text in the Federal

Register with a request for public

comment. 7 62 FR 49474 (September 22,

1997). It should be noted that problems

under the current corn and soybean

contracts have continued to the present.

For example, the September 1997

soybean contract experienced

significant price distortions during

September apparently due in part to

shortness of available deliverable

supplies.

The comment period on the proposed

order expired on October 22, 1997. Over

230 commenters submitted comments to

the Commission on the proposed

order. 8 In addition, the Commission

held a public hearing on October 15,

1997, at which the CBT was afforded the

opportunity mandated under section

5a(a)(10) of the Act to appear before the

Commission and to be heard. In

addition to its oral presentations, the

CBT submitted written statements and

documentary evidence. A transcript of

the hearing and all attendant written

statements and documents have been

included in the public comment file of

this proceeding. 9 The CBT was also

provided with an opportunity to file

exceptions to the proposed order by

October 22, 1997, and the CBT did so.

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.10 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. It also

modified and supplemented its analysis

supporting its proposal during the

meeting of June 12, 1997, during the

hearing of October 15, 1997, and in its

various written submissions and

comments.

The CBT’s proposal would replace the

existing delivery system involving

delivery of warehouse receipts

representing stocks of grain stored at

terminal elevators in Chicago, Toledo,

and St. Louis with delivery of shipping

certificates. 11 A shipping certificate
60836 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

issuer to deliver (e.g., 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.

12The issuer’s registered daily rate of loading

would be not less than (a) for northern Illinois River

locations, one barge per day per shipping station

and (b) for Chicago locations, three barges per day

per shipping station.

13This charge would be 12/100 of one cent per

bushel for Chicago and 10/100 of one cent per

bushel for issuers along the northern Illinois River.

would provide for corn or soybeans to

be loaded into a barge at one of the

shipping stations located along a 153-

mile segment of the Illinois River from

Chicago (including Burns Harbor,

Indiana) to Pekin, Illinois. (See map

below.) Delivery in Chicago would also

be permitted by rail or vessel. Delivery

at all eligible locations would be at par.

The CBT’s proposal would eliminate the

current delivery points on its corn and

soybean futures contracts at Toledo,

Ohio, and St. Louis, Missouri.

In addition to having a shipping

station located along the specified

segment of the Illinois River 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 under all of its futures

contracts for agricultural products. The

CBT 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 issued

by an issuer. These limitations would

be: (a) for northern Illinois River

locations, 30 times the registered daily

barge loading rate of each shipping

station; (b) a value no greater than 25%

of the issuer’s net worth; and (c) for

Chicago locations only, the registered

storage capacity of the facility.

In addition, the proposal would

impose requirements regarding an

issuer’s rate of loading barges. 12 Once a

shipping certificate was 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 were 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.

Shipping certificate holders would be

required to pay shipping certificate

issuers a daily premium charge until the

certificate were surrendered. 13 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.)

BILLING CODE 6351–01–P
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60837

BILLING CODE 6351–01–P
60838 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

14This Commission standard addresses concerns

over manipulation from both the long and short

side. Availability of adequate deliverable supplies

tends to prevent price manipulation by the longs on

a futures contract by ensuring that the shorts on the

futures contract can obtain the commodity to make

delivery on the futures contract without artificial

constraints at a price reflecting fundamental

demand and supply conditions in the cash market.

The ready saleability in the cash market of the

commodity received through delivery on the futures

contract by contract longs tends to prevent price

manipulation by the shorts on the futures contract.

The Commission has considered both short-side

and long-side manipulations in making its

determinations in this Order.

The CBT has attempted to justify its proposal by

arguing that restricting available deliverable

supplies through contract delivery terms is an

appropriate method of reducing the likelihood of

short-side price manipulation. The Commission

disagrees with this argument. Such restrictions in

supplies render a contract highly vulnerable to

price manipulation by the longs and are

unnecessary if the contract is designed so as to

permit the saleability of the commodity received by

the takers of delivery at the normal cash market

price.

15Of course, price inverses in futures contracts

can occur as a normal result of short supplies in the

cash market and can thus accurately reflect the cash

market. However, when the available deliverable

supplies under a futures contract have been so

limited by the contract terms as to create such a

shortage artificially, then the resultant

susceptibility to price manipulation and price

distortion are exactly the results forbidden by

section 5a(a)(10). The CBT proposal’s contract terms

would cause such a limitation in available

deliverable supplies, as discussed below.

16 In all seven expirations the largest long position

exceeded 600 contracts.

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 tend to prevent or to

diminish price 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 or to diminish price

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 deliverable supplies that

will not be conducive to price

manipulation or distortion, and that

such supplies reasonably can be

expected to be available to the short

trader and saleable by the long trader at

their market value in normal cash

market channels.14

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 decadeslong history of surveillance problems.

Indeed, the Commission has already

made an affirmative finding that the

delivery provisions of the current

contracts do not meet the standards of

section 5a(a)(10) of the Act, and the

Commission must decide whether the

CBT’s proposal goes far enough to cure

that failure.

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 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),

particularly when traders hold large

positions.15

For soybeans, the Commission’s staff

analysis demonstrated a positive

relationship between price inverses and

deliverable supplies of less than 12

million bushels (2,400 contracts). Price

inversions occurred in 12 of the 17

expirations of the CBT’s soybean futures

contracts when deliverable supplies

were less than 12 million bushels or

2,400 contracts. Furthermore, such

inversions occurred in 10 of the 11 such

expirations when a trader’s position

exceeded 600 contracts, a relatively

common occurrence in the soybean

futures market. In contrast, when

deliverable supplies exceeded 2,400

contracts, regardless of the size of large

traders’ positions, there was only a

single instance of price inversion. The

2,400-contract level of deliverable

supplies constitutes four times the

speculative position limit for the

contract, a benchmark historically used

by the Commission’s staff in analyzing

the adequacy of deliverable supplies for

new contracts.

The analysis for the corn market

found a comparable relationship

between price inverses and deliverable

supplies at the level of 15 million

bushels or 3,000 contracts. Price

inverses occurred in seven of the ten

corn expirations when deliverable

supplies were less than 3,000

contracts.16 This analysis supports using

as a measure of an inadequate level of

deliverable supplies under section

5a(a)(10) a level below 2,400 contracts

for soybeans and a level below 3,000

contracts for corn.

However, the history of these

contracts demonstrates that a higher

level of deliverable supplies may, in

fact, be necessary to protect against

price manipulation. Therefore, the

Commission also has decided to

consider an additional measure based

on historic experience with

manipulation and price distortion in

these contracts. During the July 1989

soybean futures contract expiration, the

Commission exercised its surveillance

powers to force the reduction of the long

futures position of the Ferruzzi group of
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60839

17Although this incident involved soybean

futures, it was recognized to have broader

implications for the CBT’s grain contracts and led

to a reappraisal of the adequacy of the CBT’s

delivery terms for its wheat, corn, and soybean

futures contracts and to revisions of all three

contracts.

18At the October 15, 1997 hearing (tr. at pp. 34–

35) and in its October 22, 1997 exceptions at pp.

29–30, the CBT introduced new arguments relating

to corn and soybean stocks based upon data

provided to the CBT by the Commission. Those data

consisted of a survey of data for one year estimating

September stocks within the vicinity of the

northern Illinois River and extrapolations from that

data for additional years. The Commission placed

little weight on these data not only because they

rely upon only one year’s actual observation, but

more importantly because they provide no guidance

in determining the proportion of such stocks which

form part of the proposed contracts’ deliverable

supplies.

The CBT argued that all stocks of soybeans within

twenty-five miles (or more) of the northern Illinois

River should be included in deliverable supplies.

However, only that relatively small portion of the

stocks available for barge shipment is properly

considered as available for delivery under the terms

of the contract proposed by the CBT. Stocks

destined for other uses, such as the larger domestic

processing market, cannot be considered to be

available.

19According 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.)

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.17 Just prior to the CBT emergency

action, Ferruzzi’s long position in the

July 1989 soybean future was about 20

million bushels or 4,000 contracts. To

avoid a repetition of such a situation,

deliverable supplies of at least 4,000

contracts would be necessary.

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 under its

proposal. 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

* * * 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 total corn and

soybean production and handling in the

areas near the delivery points are not an

adequate measure of deliverable

supplies under the proposed 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 proposed 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

required in the CBT proposal. Therefore,

the proper measure of available supplies

must be based on historical barge

shipment data. Such data are the best

measure of that portion of the stocks in

the vicinity of the northern Illinois

River delivery points which is

realistically available for delivery onto

barges on the river as required by the

CBT proposal.18

To rely on additional supplies

destined for domestic processing and

other uses would be to assume that the

futures contract would divert those

supplies to the export market which

barge delivery largely constitutes, thus

causing an abnormal movement in

interstate commerce forbidden by

section 5a(a)(10). The CBT has

suggested that an appropriate measure

of deliverable supplies is the amount of

commodity that would be made

available for futures deliveries in

response to price increases on the

futures markets resulting from

manipulation attempts and other

causes—its ‘‘elasticity of supply’’

argument. CBT October 22, 1997

exceptions at p. 19. However, diversions

of a commodity from its normal

movement and uses in the cash market

in response to rising prices on futures

markets which are not reflective of price

increases in the cash market are

precisely the prohibited effects which

section 5a(a)(10) seeks to prevent.

The CBT also argued that deliverable

supplies are adequate based on 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.19 (CBT April 16, 1997,

submission, attachment 4.) However,

the CBT’s reliance on the loading

capacity of firms in the delivery area as

an indicator of adequacy of deliverable

supplies 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

loading 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 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 the CBT’s proposed

$40 million minimum net worth

requirement to qualify as shipping

certificate issuers under the contracts. In

doing so, the CBT 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 initial submission,

also provided inflated data on barge

shipments. These data significantly

overstated the amount of barge

shipments by including shipments from

part of the Illinois River outside of the

CBT’s proposed delivery area of the

contracts. The CBT’s data also included

barge shipments by all shippers,

including three shippers not meeting

the eligibility requirements to be issuers

of certificates under the contracts, and

thus overstated the deliverable supplies

available in that respect as well.

C. The CBT Proposal Fails to Provide

Adequate Deliverable Supplies 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 U.S. 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
60840 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

20Corn and soybeans are both harvested

beginning in mid-September or October, the start 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 during the

summer, until the next harvest replenishes the

supply.

21The amount of barge shipments for September

was reduced by 50% prior to its inclusion in the

sum for earlier old crop months. This 50%

reduction is an amount suggested by trade sources

to reflect the likelihood that September barge

shipments consisted, in part, of new crop supplies

which were not available for shipment during the

old crop year. The full amount of September

shipments was included, however, in determining

September supplies. This calculation has been

adjusted in response to the CBT’s suggestions.

Generally, September new crop production occurs

late in the month.

essentially designed to reflect the export

market price 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 is destined for

export markets. While Chicago rail

shipments play some role in the

domestic market, that role has

diminished so as to be very small.

The potentially available gross

deliverable stocks along the northern

Illinois River delivery area for each

delivery month were estimated by

summing barge shipments from the

CBT’s proposed delivery 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.20 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 near the river at the

beginning of the month, this summing

procedure provides an estimate of the

gross corn and soybean supplies

potentially available for delivery from

the proposed delivery points during

each delivery month.21

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 reflecting the

quantity of these commodities that was

potentially available to the proposed

northern Illinois River delivery points at

prevailing cash market supply and

demand conditions. While other

supplies of corn and soybeans are in the

vicinity, they historically moved to

other demand centers rather than

moving into the flow of product via

barge shipment down the northern

Illinois River primarily destined for the

export market. 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.

For Chicago, potentially available

gross 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 estimates of potentially

available gross deliverable supplies

were adjusted to reflect the effect of the

CBT’s proposed minimum net worth

requirement 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 CBT

proposal restricts eligibility of issuers of

shipping certificates to firms meeting a

$40 million minimum net worth

requirement. This eligibility
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60841

22The procedure to determine the amount of this

adjustment was to sum the observed stocks and

receipts of corn and soybeans in Chicago plus

stocks of wheat. Whenever such a sum would have

exceeded current total registered storage capacity,

the estimated supplies of corn and soybeans were

reduced proportionately by share of stocks. The

result clearly overstates potential gross deliverable

supplies of corn and soybeans in Chicago because

it assumes that the facilities eligible for delivery of

such commodities would be operating at full

capacity, while Chicago facilities have historically

operated at a fraction of capacity and continue to

do so, as shown on a chart below. The numbers in

the final Order are adjusted from those in the

proposed order to reflect corrections in

computation and in the CBT data on stocks of grain

and soybeans in Chicago.

23As 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 six rather than seven years for

September.

requirement would eliminate barge

shipments made by ineligible firms

among those firms which currently

operate loading facilities along the

northern Illinois River delivery area 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 some

portion of the supplies that normally are

shipped by the firms not meeting that

eligibility requirement—although

certainly not all those supplies—would

become available for futures delivery by

diversion of the supplies to the four

eligible firms. Accordingly, the

Commission calculated two separate

estimates of potentially available gross

deliverable supplies: one excluding

shipments by firms not eligible to issue

shipping certificates under the CBT’s

proposal 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.22

Through this analysis, the

Commission arrived at potentially

available gross deliverable supplies, as

discussed below. As is also described in

more detail below, those gross amounts

do not constitute a basis for determining

whether deliverable supplies under the

CBT proposal are adequate to meet the

requirements of section 5a(a)(10).

Instead, those amounts are only the

beginning point for an analysis of

deliverable supplies and must be

reduced because of various additional

factors limiting the available deliverable

supplies, as discussed below.

2. Potentially Available Gross

Deliverable Soybean Supplies

Delivery months under the CBT

proposed soybean futures contract

include July, August, and September,

inter alia. These months are at the end

of the crop year and therefore

historically reflect the lowest available

supplies. As shown in the following

charts for soybean supplies attributable

to the four firms which would be

eligible to issue shipping certificates,

potentially available gross deliverable

supplies under the CBT proposal for

July, August, and September do not

meet an adequate level considered by

the Commission to be required by

section 5a(a)(10) of the Act. Specifically,

for July, the gross deliverable supplies

of soybeans were less than the 2,400-

contract level in three of the 11 years

covered by the analysis, while the

4,000-contract level was not reached in

eight of the 11 years. For August, gross

deliverable soybean supplies fell below

2,400 contracts in four years, and the

4,000-contract level was not reached in

any of the 11 years. Gross deliverable

supplies 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.23 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.

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24Unlike the soybean futures contract, there is no

August contract month listed for corn.

3. Potentially Available Gross

Deliverable Corn Supplies

The CBT’s proposed corn contract

would include the contract months of

July and September, inter alia.24 In the

case of corn, the potentially available

estimated gross deliverable supplies for

July attributable to the four eligible

firms reached or exceeded the 3,000 and

4,000 contract levels in all years.

However, gross deliverable supplies of

corn for the four eligible firms in

September fell below the 3,000-contract

level in seven of the 11 years 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.

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25The table has been modified to reflect

corrections to the CBT-supplied data noted by the

CBT at the October 15, 1997, hearing.

4. September New Crop Production

Neither corn nor soybeans reached

adequate levels of potentially available

gross deliverable supplies for

September. However, because

September is a transition month

between the old crop and the new crop,

deliverable supplies estimates based

upon barge shipments data for

September may understate September

potentially available gross deliverable

supplies. The harvest of the new crops

of corn and soybeans generally begins

sometime in mid to late 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. Those estimates,

however, are less reliable than the barge

shipment data discussed above.

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 U.S. Department

of Agriculture data submitted to the

Commission by the CBT.25 Some portion

of this new crop production might have

been available for delivery during

September. However, the Commission

has already assumed that half of the

September northern Illinois River

shipment data shown above constitutes

new crop supplies, based on discussions

with trade sources. Furthermore, a

substantial portion of the new crop

production historically has been

destined for uses other than barge

shipments, such as domestic processing.

A significant amount of corn was

produced during September and

possibly might augment to some extent

the potentially available gross

deliverable supplies discussed above.

September soybean production has

generally been considerably smaller

than September corn production.

Moreover, September soybean

production does not overcome the

inadequate potentially available gross

deliverable supplies of soybeans in July

and August.

The likelihood of price manipulation

in September may be somewhat less

than in July or August 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, the

harvest of the new crop replenishes

supplies and 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 remaining old crop supplies might

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.

Nonetheless, it should be noted that a

significant price distortion was

experienced in connection with the

expiration of the September 1997

soybean futures contract. Under the CBT

proposal, the use of shipping certificates

rather than warehouse receipts to effect

delivery might 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 would allow

the issuance of shipping certificates for

locations closer to the production area

and for up to 30 days of loading

capacity and thus would give issuers

more opportunity to deliver some new

crop production. Issuers might issue

some shipping certificates on the basis

that new crop supplies which were not

immediately in hand might be available

by the time loading was required under

the shipping certificates.

The Commission considers the low

level of potentially available gross

deliverable supplies of corn, which is

limited to September, to be of less

regulatory concern than the low levels

of such supplies of soybeans which

extend throughout the three summer

months. The shortage of corn supplies is

apparently of brief duration, and the

expectation of abundant supplies of new

crop production of corn by October

reduces the likelihood that the corn

shortage in September 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]

Crop year

Estimated September

production *

Corn Soybeans

1986 ...................... 15,218 3,109

1987 ...................... 26,784 6,056

1988 ...................... 12,955 5,749

1989 ...................... 10,169 6,143

ESTIMATED CORN AND SOYBEAN PRODUCTION LOCATED NEAR PROPOSED

DELIVERY POINTS DURING SEPTEMBER—Continued

[5,000-Bushel Contract Units]

Crop year

Estimated September

production *

Corn Soybeans

1990 ...................... 9,305 2,491

1991 ...................... 41,663 8,729

1992 ...................... 2,884 3,536

1993 ...................... 6,513 1,670

1994 ...................... 13,299 10,417

1995 ...................... 12,359 5,646

1996 ...................... 5,271 1,013

* The estimated production by September 30

of each year was calculated by multiplying

U.S. Department of Agriculture harvesting

progress estimates for the Illinois and Indiana

crop reporting districts adjacent to the revised

delivery points by U.S. Department of Agriculture production data for counties located

within about 25 miles of the proposed delivery

points.

5. The CBT’s Objections on Gross

Deliverable Supplies

At the October 15, 1997 hearing and

in its October 22, 1997 letter of

exceptions, the CBT raised various

objections to the Commission’s

evaluation of potentially available gross

deliverable supplies of soybeans. In

doing so, the CBT failed to recognize

that the estimate of such supplies is

merely the starting point for the

Commission’s analysis of available

deliverable supplies, which can be

arrived at only after taking into

consideration various factors reducing

the availability of supplies, as is

discussed below. Furthermore, the CBT

focused solely on the 2,400 contract

measure for soybeans and virtually

ignores the other important measure of

4,000 contracts.

The CBT objected to the

Commission’s consideration of 1987 and

1993 river shipment data because floods

and lock closings occurred during those

years. For example, the CBT objected

that the gross deliverable supplies for

1993 obtained from barge shipment data

should be augmented because in that

year the upper Midwest experienced

severe floods. CBT October 22, 1997

exceptions at p. 38, tr. at pp. 22–28. The

CBT argued that the Commission should

assume that the CBT would have

responded by declaring a market

emergency and requiring use of

alternate delivery areas with additional

deliverable supplies. However, U.S.

Army Corps of Engineer data show that

barge shipments continued to move

down the Illinois River throughout this

period despite the flooding and the area
60848 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

26 In addition to being speculative, the CBT’s

approach improperly over-counts gross deliverable

supplies during this period. The CBT apparently

uses as a base amount the deliverable supplies

shown by the Commission’s analysis for those

months and then adds to that base an additional

amount based on shipments for those same months

from areas eligible for delivery under the proposed

contingency rule. However, the contingency plan

would be triggered only during such period as

shipment on the northern Illinois River was

obstructed. Hence, even if the Commission were to

accept the CBT’s assumptions, the shipments

shown in the Commission’s analysis should not be

included in the CBT’s calculation.

27Moreover, there is no reason to believe, as the

CBT argued in its October 22, 1997 exceptions at

p. 39, that any significant amount, much less 20%,

of the soybeans that previously flowed to Chicago

would be redirected to flow down the northern

Illinois River on barges to the Gulf. There has not

been a notable increase in barge shipments from the

shipping stations on the northern Illinois River

closest to Chicago during the recent closures of

elevators in Chicago, demonstrating that such a

redirection has probably not occurred and is not

likely in the future.

from which the CBT argued it would

have required deliveries may have

experienced even greater flooding than

the regular delivery area. Whether the

CBT would have taken any action under

such circumstances and, if so, what

action it would have taken are in the

realm of pure speculation. Similarly, the

CBT argued that the deliverable

supplies for 1987 should be augmented

because certain locks were closed,

which arguably would have triggered

the CBT’s contingency plan.26 While the

CBT’s argument does underscore the

need for an effective contingency plan

because of foreseeable periods of river

traffic obstruction, it does not justify

ignoring historical data concerning gross

deliverable supplies.

The CBT also sought to bolster the

potentially available gross deliverable

supplies for the August and September

soybean futures contracts by relying on

new crop production. See, tr. at pp. 17–

22 and October 22, 1997 exceptions at

pp. 29–30. As noted above, the

Commission has considered the

availability of some new crop

production for the September futures

contract. Although the ability to issue

shipping certificates would give issuers

some flexibility to effect deliveries from

potential new crop production during

September, new crop production would

not realistically be available for delivery

on the August futures contract, and the

CBT has grossly overstated the amount

of new crop production available for

delivery on the September futures

contract.

It is not realistic to assume that

issuers would issue certificates

representing their full 30-day capacity

and would choose to load out at least

one barge per day over a six-week

period. Shipments on the northern

Illinois River in the August-September

period have never approached such a

large volume during the eleven years

studied. Shipments from any one

shipping station on the northern Illinois

River at a rate as high as one barge per

day per month have been observed only

once in July and once in September and

only three times in August during the

entire eleven year period analyzed.

Moreover, shipments from a shipping

station at a daily rate of one barge for

one month would have exceeded by five

times the monthly average number of

barges of soybeans shipped from

individual shipping stations during

July, August, and September over that

period.

Furthermore, it is extremely unlikely

that an issuer would undertake the risk

involved in the CBT’s hypothetical

scenario. An issuer would have to have

a very large amount of old crop supplies

available to deliver until significant

supplies from the harvest became

available, and the timing of the harvest

is extremely variable and difficult to

predict.

6. Necessary Reductions From Gross

Deliverable Supplies

Additional factors must be considered

which necessarily reduce the above

estimates of potentially available gross

deliverable supplies. These factors

include: (a) the CBT proposal’s reliance

on Chicago as a source of deliverable

supplies; (b) the CBT’s proposed threeday barge queuing and priority load-out

requirements; 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 and

foreseeable disruptions in barge

transportation on the Illinois River. As

discussed above, the CBT’s proposed

$40 million minimum net worth

requirement for issuers of shipping

certificates also reduces gross

deliverable supplies. These additional

factors are analyzed separately in later

sections of this Order.

a. Reliance on Chicago. To the extent

that potentially available 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, under the

CBT proposal gross 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, under the CBT

proposal gross deliverable supplies of

soybeans 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

gross deliverable supplies of soybeans

under the CBT proposal in any year in

the July, August, or September delivery

months. Thus, to the very limited extent

that potentially available gross

deliverable supplies in the past would

have reached an adequate level before

consideration of necessary reductions,

they would have done so because of

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 the cash market

in 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

Chicago in the future. Chicago elevators

for many years have held stocks well

below their maximum capacity levels,

particularly in the critical summer

months. The following chart

demonstrates that significant

underutilization of the remaining

capacity in Chicago is continuing

despite the dramatic contraction in

available capacity and is highly likely to

continue to do so in the future. Indeed,

stocks in Chicago in the recent past have

been at less than half of capacity. Thus,

Chicago supplies will most likely be

reduced significantly in the future and

would not be available in significant

quantities under the CBT proposal.27

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b. The Three-Day Barge Queuing and

Priority Load-Out Requirements. The

CBT proposal includes a provision

requiring a shipping certificate issuer to

begin loading onto the certificate

holder’s barges within three business

days after it receives loading

instructions and the holder’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 and 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 customers

are generally accommodated on a firstcome, 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

issuers would be able and willing to

obtain labor for a 24-hour day, to

procure additional transportation and

supplies quickly, and to move the

supplies to the waiting barges

efficiently.

While the effect of the proposed

loading requirements on the willingness

of issuers to issue shipping certificates

for futures delivery is difficult to

measure in advance, it represents a

significant departure from cash market

practice and most likely would reduce

the amount of gross deliverable

supplies.

c. Prior Commercial Commitments of

Stocks for Shipment. An additional

factor which would reduce the above

estimates of gross deliverable supplies is

prior commitment of stocks for

shipment. 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 northern Illinois River is not

irrevocably committed at the time of the

shipment’s origination, the ability of

firms economically to obtain supplies to

meet existing commitments for

shipment from alternative sources

would certainly 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, a result that section 5a(a)(10) is

intended to prevent. 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.

7. Conclusion

In summary, the proposed delivery

provisions of the soybean contract

clearly fail to meet the statutory

requirement for adequate 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

adjustments required by such 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 the 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. Gross deliverable supplies

for September as estimated by the

Commission may be further

supplemented to some extent by new

crop production in September, and the

September corn contract would be

somewhat 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. The Commission’s action in

changing and supplementing the CBT’s

proposed corn contract to add locational

differentials, to eliminate the $40

million minimum 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. In light of those

changes and supplements, the

Commission does not find that the

available deliverable supplies of corn

under the revised CBT proposal are so

inadequate under section 5a(a)(10) 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 based on section

5a(a)(10) requirements. As discussed

above, Guideline No. 1 requires that

futures contract terms and conditions

provide for deliverable supplies that

will not be conducive to price

manipulation or distortion and that

such supplies reasonably can be

expected to be available to the short

trader and saleable by the long trader at

their market value in normal cash

market channels. 17 CFR Part 5,

Appendix A(a)(2)(i). 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 represented by cash price

differences * * *’’ Powers

Memorandum, supra note 1, at p.15.

When cash market price differences are

unstable or where the product flow in

the cash market is not relevant to the

futures delivery points, the

Commission’s policy requires that

differentials must be set at levels which

fall within the range of values that 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
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28The 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 (barge, rail car, vessel, etc.) at a

designated location.

29CIF 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 the

products 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.

30The CBT implicitly recognized these cash

market value relationships and the importance of

barge-freight differences in valuing the commodities

in its proposed contingency plan to allow deliveries

at alternative delivery locations during

transportation disruptions on the Illinois River. As

described below, that proposal provides that

deliveries at alternative locations must be priced

CIF New Orleans with the delivery taker

reimbursing the issuer for the cost of freight to New

Orleans from the original delivery location.

policy on locational price differentials.

The cash market on the northern Illinois

River clearly reflects a unidirectional

flow of corn and soybeans and exhibits

significant locational price differences

at the proposed delivery points which

have a stable relationship with one

another. 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 spatiallyseparated 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 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 FOB

barge at the loading facilities.28

Currently, the cash market for such

products prices them at the CIF New

Orleans price, which is uniform and

widely known.29 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

publicly. While they vary to some

extent, they are expressed 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 commodities FOB various Illinois

River points.

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

supplies from one delivery point to

another.30

Where as here, futures contracts

provide for multiple delivery points 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 contracts 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).

The CBT argued 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.’’ CBT June 16, 1997

submission, at 40. However, this is not

the appropriate 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, as discussed

above. Furthermore, even if it were the

appropriate standard, we find that a lack

of price differentials is not commonly

observed in the cash market, for the

reasons discussed above.

The CBT’s argument erroneously

relies on bid prices to farmers at various

delivery points rather than prices FOB

barge, the prices that the CBT’s

proposed contracts are designed to

reflect. The CBT also relies on

information that suggests that the cash

market value of corn and soybeans

loaded onto vessels and rail cars at

Chicago may at times equal or exceed

the value of corn or soybeans loaded

onto 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

play a small role in the cash market and

should not be a significant factor in

setting locational differentials under the

CBT’s proposal. The prices for barges

loaded on the northern Illinois River at

Chicago and at delivery points south of

Chicago reflect the differences in freight

costs on which the Commission bases it

price differentials for those delivery

points.

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.
60852 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

31Specifically, 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. The CBT, in its October 22, 1997

exceptions at p. 38, agrees that these disruptions

have in the past (in 1987, for example) been severe

and prolonged enough to curtail the ability to take

delivery within the northern Illinois River delivery

area. See also, tr. at 22–24.

32 In addition to weather 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.

33The 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 delivery 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 and

market congestion arising from delayed delivery in

such circumstances, a different and more effective

contingency plan is required under section

5a(a)(10).

There has been a 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 U.S. 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 way south to New Orleans.31

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 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 south of the delivery area from

early June through the middle of August

in 1993.32

The CBT proposal’s heavy reliance on

barge delivery would disadvantage

delivery takers during those periods

when barge traffic is negatively

impacted by weather conditions or lock

maintenance and repair. Prolonged

obstruction of transportation on 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

foreseeable disruptions to the operation

of contract terms.33 In response to

repeated requests by the Commission

staff, the CBT, by submission dated

August 22, 1997, sought to cure this

defect in its proposal 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 lock allowing river

movement) is scheduled, with sixmonths 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

taker at a point between the lowest

closed lock and St. Louis or on the midMississippi 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.

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, similar

problems could be caused 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

lock at a time, having the potential to

increase the impact of the disruption

within the delivery area from such

projects. Thus, although the same

foreseeable situation rendering the

contracts vulnerable to price

manipulation and 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 that situation. Furthermore,

obstructions and disruptions to river

traffic other than lock closures—such as

those caused by flooding—are

foreseeable, would render the proposed

contracts vulnerable to price

manipulation and market congestion

and should be addressed in the

contingency plan.

Secondly, when a sustained river

traffic obstruction of less than 45 days

is announced, vulnerability to price

manipulation and market congestion is

foreseeable. This is also true when there

has been less than the six-month

advance 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

traffic obstruction 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 was

obstructed and that, once the

obstruction to river movement was

ended, the issuer could only be required

to deliver on the certificates over an

entire-month period.

In this connection, it should be noted

that closures for lock repairs generally

are scheduled for the summer months,

the time when deliverable supplies are

lowest and futures contracts are most

susceptible to manipulation. (Indeed, a

prolonged closure extending to the

arrival of the new crop could allow

futures deliverers to depress the price of

an old crop futures month to levels

reflecting new crop values at a time

when the broader cash market was

reflecting the usual old crop/new crop

price differences based on 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 to be applicable by the
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60853

34Even if such differing differentials would not

have such adverse results, it would be nonetheless

‘‘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.

35British American Commodity Options Corp. v.

Bagley, [1975–1977 Transfer Binder] Comm. Fut. L.

Rep. (CCH) ¶ 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).

36The HHI is calculated by summing the squares

of the individual market share of each of a market’s

participants. The 3,300 figure is 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) which, 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 (and indeed less than

under the current delivery system).

37Concerns about concentration among those

firms eligible to issue shipping certificates under

the CBT’s proposal are compounded by the sizeable

ownership interests some of the firms have in barge

fleets operating on the northern Illinois River and

in Gulf export and processing facilities. Several

commenters expressed concern that this vertical

integration increases their opportunity for price

manipulation.

Commission, as discussed below. The

application of different 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.34

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

futures contracts, the CBT has proposed

to require that firms eligible to issue

shipping certificates under its soybean

and corn contracts must also meet a

minimum net worth standard of $40

million. As discussed above, this

requirement has the effect of reducing

the amount of deliverable supplies by

making ineligible for delivery certain

existing loading facilities in the delivery

areas owned by otherwise eligible firms.

In addition, the requirement 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

issuing 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.35 Therefore, the

CBT proposal’s possible anticompetitive

effects must be evaluated against its

potential effectiveness in achieving the

policies and purposes of the Act.

All existing futures contracts that

provide for delivery using 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 minimum 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

minimum net worth requirement would

be to limit issuance of shipping

certificates to four large grain firms

among the seven firms with shipping

stations along the northern Illinois River

delivery area. At least three firms which

currently operate shipping stations on

the designated segment of the northern

Illinois River and have participated in

the cash market by loading barges of

corn and soybeans would be excluded

from issuing shipping certificates for

delivery on the CBT’s proposed futures

contracts. The Commission does not

believe that 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 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 would be

approximately 3,300.36 This increase in

concentration as compared with the

current delivery system—530 points in

the HHI—would likely create or

enhance market power or facilitate its

exercise in an already highly

concentrated market.

The CBT has failed to demonstrate a

need for this particular requirement.

Accordingly, the Commission finds that

the $40 million minimum net worth

requirement would be an unjustified

barrier to entry into a highly

concentrated market and its approval by

the Commission would be contrary to

section 15 of the Act.37

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 the 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 under

the CBT’s proposal should be increased

through the retention of those delivery

points under the CBT’s current contracts

which the CBT has proposed to

eliminate and that appropriate

locational differentials should be
60854 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

38Some 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.

39The CBT argues that the Commission should

not determine to order the CBT to retain Toledo and

St. Louis as delivery points because their retention

would permit multiple delivery locations on the

soybean futures contracts and because selection of

delivery points is the responsibility of the contract

market alone. However, the current contract has

included Toledo and St. Louis as delivery points for

many years with no apparent ill effects. Moreover,

section 5a(a)(10) directs the Commission to act

when the contract market’s proposed contract terms

fail to accomplish the objectives of that section of

the Act, and additional delivery points are

necessary to assure adequate deliverable supplies

under section 5a(a)(10) in this instance. By

beginning its analysis with the CBT’s proposed

delivery specifications and next considering

delivery points already chosen and used by the

exchange as existing delivery points, the

Commission has sought to achieve the most

conservative means of reaching the required levels

of deliverable supplies. Of course, the CBT

continues to be free to indicate by proposed rule or

petition that its business preference for delivery

locations is otherwise, and the Commission would

consider such a new proposal under the standards

for review provided under the Act.

applied to such delivery points. In

addition, the Commission has

determined for both the corn and

soybean contracts to revise the CBT’s

proposal to impose appropriate

locational differentials for northern

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 minimum

net worth requirement of $40 million,

which is an unnecessary barrier to

entry. The Commission also has

determined to revise the river traffic

obstruction contingency rule by

reducing the continuous period of

obstruction 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

obstruction of river traffic, by making it

applicable to all announced

obstructions 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.

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 advantage of

having transportation ties to both the

export market 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 an important delivery point

under the current contract, it likely

would become one under the contract’s

revised shipping certificate format.38

These two delivery points have the

strong advantage of having been chosen

by the CBT as appropriate delivery

points for its soybean contract and

having been used as delivery points for

the contract for a number of 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.39

The retention of Toledo and St. Louis

as delivery points provides a substantial

increase in the available deliverable

supplies of soybeans and in the number

of potential shipping certificate issuers

on the contract. When Toledo and St.

Louis are included as delivery points on

the soybean futures contract, the

number of entities eligible as issuers

increases by three, significantly

reducing the degree of concentration

among potential shipping certificate

issuers. 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 and from the

elimination of the $40 million minimum

net worth requirement for eligibility as

shipping certificate issuers, as discussed

in section D, below. Pursuant to these

changes ordered by the Commission,

potentially available gross deliverable

supplies of soybeans are at or above the

2,400-contract level in both July and

August during each of the past 11 years

and in September during all but one of

the 11 years. Indeed, the gross

deliverable supplies are also at or above

the 4,000-contract level for 25 of the 33

months examined.

BILLING CODE 6351–01–P
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60855

BILLING CODE 6351–01–C
60856 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

40Should actual trading experience reveal that

September supplies must be supplemented, one

means of accomplishing that objective would be to

expand the delivery area to include a greater

segment of the northern Illinois River. With the

specification of appropriate locational differentials,

such a change could probably be made at a later

time with little disruption to the contract.

Accordingly, the retention of Toledo

and St. Louis as delivery points is

appropriate to provide adequate levels

of gross deliverable supplies of soybeans

for the July and August futures

contracts. Although the retention of

Toledo and St. Louis does not yield

gross deliverable supplies which meet

the 2,400-contract level in one 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 if September gross deliverable

supplies might on rare 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 significant

amounts of 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. If

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.40

Accordingly, the Commission finds

that retention of Toledo and St. Louis is

appropriate to provide an adequate level

of available deliverable supplies as

required by section 5a(a)(10).

B. Differentials

Section 5a(a)(10) requires that, where

more than one delivery point is

specified in a futures contract, the

contract terms must provide for

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 price differentials in the cash

market among the proposed delivery

locations, the CBT’s par delivery

proposal for all proposed corn and

soybean delivery locations would

reduce the level of economically

available deliverable supplies 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 provides an appropriate basis

for the differential. The difference

between that rate as applicable to the

delivery location and that rate as

applicable to Chicago, Illinois,

constitutes an appropriate differential

reflecting cash market price differences.

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

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. 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 for

St. Louis on 150 percent of the freight

tariff as well. Most commenters agreed

that this approach is the appropriate

measure of such cash market price

differences.

The differential applicable to Toledo,

which is also 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 locational

differentials provides that such

differentials must fall within the range

of commonly observed cash market

price 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 delivery 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. For

corn, Chicago should be at contract

price with all other delivery 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.

C. Disruptions to River Traffic

The CBT proposal’s heavy reliance on

a single mode of transportation to effect

delivery renders the contract susceptible

to significant 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 for alternate delivery

procedures to address 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 or

other river traffic obstructions 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 also

exists when an obstruction to river
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60857

41 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.

42The CBT in the October 15, 1997, hearing and

in its October 22, 1997 letter of exceptions argued

that these trading months were approved for listing

subject to previously approved listing procedures.

The Commission rejects these arguments. The four

contract months cited in the proposed Order were

listed initially (December and July 1999 corn

futures contracts)—or relisted after having been

previously delisted (July and November 1999

soybean futures contracts)—at a time and in a

manner other than specified in a previously

approved rule, thus requiring the prior approval of

the Commission, which was never granted.

Moreover, all of the futures contract months at

issue, including the January 1999 soybean futures

contract and the March 1999 corn futures, were not

eligible for automatic listing procedures. A

condition in such automatic listing procedures is

that the contract terms or their listing not violate

legal requirements. See, e.g., 1.41(l). The

Commission’s finding in the December section

5a(a)(10) notification that the corn and soybean

futures contracts are not in compliance with section

Continued

traffic has occurred with less than sixmonths notice. Accordingly, 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 all

obstructions to movement on the river

arising either inside or outside of the

delivery area.

In determining the length of an

announced obstruction which should

give rise to a contingency plan, the

Commission analyzed information on

past lock closures by the U.S. 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 obstructions 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 plan.

In addition, as discussed above, the

application of different differentials to

the futures contracts depending upon

whether the delivery is subject to the

contingency rule might also contribute

to price manipulation or 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

deliveries made on the contracts at nonpar locations.

Accordingly, the Commission under

section 5a(a)(10) of the Act changes and

supplements the provisions of this part

of the CBT proposal by reducing the

continuous period of river traffic

obstruction from 45 days as proposed to

15 days, by making the rule applicable

to any obstruction which affects

shipments from a majority of shipping

stations within the northern Illinois

River delivery area, by making the rule

applicable to all announced

obstructions 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

The $40 million minimum net worth

requirement for eligibility of shipping

certificate issuers restricts deliverable

supplies of corn and soybeans by

eliminating several firms and

potentially barring new entrants. 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 the CBT’s

proposed 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 minimum 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 eliminates the requirement

under sections 5a(a)(10) and 15 of the

Act.

E. 1999 Contract Months

The Commission’s section 5a(a)(10)

notification advised the CBT that the

terms of its corn and soybean futures

contracts did not meet the objectives of

that provision of the Act. In light of that

determination, the Commission advised

the CBT that ‘‘the CBT should refrain

from listing additional months of

trading in those contracts during the

pendency of these proceedings.’’ 61 FR

at 67999. Nevertheless, 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.41

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.’’ On September 15, 1997,

the Commission issued its proposed

Order which, in part, proposed to

disapprove the application of the CBT’s

proposed delivery terms to the July 1999

and November 1999 soybean contracts

and the July 1999 and December 1999

corn contracts. Four days later, the CBT

notified its members of its intent to list

for trading the January 1999 soybean

futures contract and the December 1999

corn futures contract under the same

proposed terms as the Commission had

proposed to disapprove. The

Commission then notified the CBT that

it proposed to disapprove the listing for

trading of these two contract months

and to disapprove, to change and to

supplement the terms proposed by the

CBT for these two trading months on the

same basis and for the same reasons as

it previously determined in its proposed

order to disapprove, to change and to

supplement the terms of the July 1999

and November 1999 soybean contracts

and the July 1999 and December 1999

corn contracts. 62 FR 51087 (Sept. 30,

1997).

A number of commenters on the

proposed order requested that the

Commission authorize the listing of

these trading months. They suggested

that having these trading months

available to them without delay or

interruption was important for their

ability to use the markets for hedging

purposes. Other commenters suggested

that authorizing the trading of these

contract months under the current

contract terms rather than the CBT’s

proposed contract terms would provide

the CBT with a period of time in which

to propose alternative amendments to

the delivery specifications of the corn

and soybean futures contracts terms.

The Commission, in response to these

comments, hereby authorizes the listing

of the January, July and November 1999

soybean futures contract and the March,

July and December 1999 corn futures

contracts under their current terms,

while disapproving the application of

the terms contained in the CBT’s

proposal to these contract months.42 The
60858 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

5a(a)(10) of the Act rendered further automatic

listings unavailable, as did the Commission’s

explicit direction to the CBT to refrain from any

such further listings.

43Bold-face type denotes the Commission’s

proposed changes or supplements to the CBT

proposal. Underlinings denote changes proposed by

the CBT. Deletions to proposed CBT language are

not shown.

Commission also authorizes the listing

of other 1999 corn and soybean futures

contracts under their current terms.

However, the CBT may propose to list

the 1999 corn and soybean contracts

incorporating the changes and

supplements contained in this Order,

and the Commission would approve

such listing.

In approving the 1999 contract

months for trading under their current

terms, the Commission is responding to

the views of numerous agricultural

interests that there is a need for

certainty and clarity about the legality

and terms of these contracts and for

their immediate availability for trading

for hedging purposes. It also responds to

arguments of the CBT urging that the

Commission allow listing of the 1999

contract months pursuant to the current

contract terms in the event that the

Commission disapproves the CBT’s

proposal, as it has done in this Order.

The Commission’s action in this regard

obviates the need to address a difficult

legal issue of the interpretation of

section 5a(a)(10) as to contracts which

have been illegally listed by an

exchange but have nonetheless been

trading. Finally, the Commission’s

action permits all 1999 contract months

to trade on identical terms and

establishes a clear point at which the

new terms ordered by the Commission

will be applicable.

For the reasons discussed herein, the

Commission in this Order is changing

and supplementing the amendments to

the CBT corn and soybean futures

contracts which the CBT has proposed

and is directing that they be made

effective for all contract months,

whenever listed for trading, beginning

with and subsequent to the January

2000 soybean futures contract and the

March 2000 corn futures contract. In so

ordering, the Commission finds that the

amendments proposed by the CBT to its

corn and soybean futures contract are

not consistent with section 5a(a)(10) and

that their approval by the Commission

would violate section 15 of the Act.

Accordingly, the Commission under

sections 5a(a)(10), 5a(a)(12), 8a(7), and

15 of the Act is disapproving

application of those proposed terms to

the CBT’s corn and soybean contracts,

including the 1999 contracts.

Dated: November 7, 1997.

By the Commission (Chairperson Born,

Commissioner Dial, Commissioner Spears;

Commissioners Tull and Holum Concurring

in Part and Dissenting in Part with Opinion)

Edward W. Colbert,

Deputy Secretary of the Commission.

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, Opinion of Commissioner

John E. Tull, Jr., Concurring in Part and

Dissenting in Part, Joined by Commissioner

Barbara Pedersen Holum.

I concur in that part of the order which

provides that the CBOT may continue to

trade the 1999 contracts under the existing

contract terms. I also concur in that part of

the order which provides that the CBOT may

submit alternative proposed delivery

specifications for those two contracts.

I strongly disagree with the majority’s

decision to issue this order which changes

and supplements the CBOT’s proposed

amendments to the delivery specifications to

their corn and soybean contracts.

As I noted in my earlier dissent, 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.’’

Based on my review of the data available at

the time of the Commission’s proposed order

and as supplemented by the CBOT on

October 15, 1997, I remain convinced that the

proposed terms for both contracts as

submitted by the CBOT meet these statutory

requirements.

In conclusion, both of these contracts will

have a tremendous effect on the world

marketplace. For both markets, the price

discovery process and the published prices

determine the price, through basis, to every

soybean and corn farmer in the United States;

actually every oil seed and corn farmer and

end user throughout the world. While it is

my serious hope that the contracts designed

by the Commission will work, I believe we

could have had better contracts and I

sincerely hope that the Exchange will take

advantage of the opportunity to resubmit

proposed terms for both contracts and that

the majority will approve such resubmission

if it satisfies the requirements of the Act.

Attachment 1

For the reasons explained in the ‘‘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 changing and

supplementing under section 5a(a)(10) of the

Commodity Exchange Act proposed rules of

the Board of Trade of the City of Chicago.

The Commission hereby makes the following

changes: 43

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.

*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
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60859

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:

llSt. Louis, MO, river mile marker lll

llToledo, 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

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 shipping certificates 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 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 llllllll (hereinafter

called the Warehouseman/Shipper) owner or

lessee of the warehouse located at

llllllll or shipping station located

at mile marker lllll of the lllll

River, having a storage capacity * * *.

19. To change and to supplement appendix

4E, paragraph 2, by eliminating the sentence
60860 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

1The Commission is granting CME an

unconditional exemption from the dual trading

prohibition for its S&P 500 futures contract. An

Order granting such exemption is being submitted

for publication together with this Notice.

2The Commission has previously discussed in

several instances, including its November 28, 1994

Report to Congress on Futures Exchange Audit

Trails, the possible abuses attendant to dual trading.

See also the Commission’s Proposed Regulation

Prohibiting Dual Trading by Floor Brokers, 56 FR

13025 (March 9, 1993).

3Affected contract market means a contract

market with an average daily volume equal to or in

excess of 8,000 contracts for each of four quarters

during the most recent volume year. Commission

Regulation 155.5(a)(9). See Section 4j(a)(4) of the

Act. As noted by the Commission in promulgating

Regulation 155.5, a contract market trading on an

exchange floor will be considered separate from a

contract market in the same commodity trading a

screen-based trading system. The Commission

further stated that, while not excluding electronic

trading from the dual trading prohibition, the

Commission was retaining the flexibility to

consider the matter further. See 58 FR 40335 (July

28, 1993). The Commission is not addressing

screen-based trading in this proposed Order.

Two contract markets included in the original

petition, British Pound futures and options on

Deutsche Mark futures, no longer are affected

contract markets as defined in the Act and

regulations. This proposed Order is not applicable

to those two contract markets. As previously noted,

this proposed Order also is not applicable to the

S&P 500 futures contract market.

4 62 FR 7755 (February 20, 1997). The

Commission did not address the Exchange’s dual

trading exemption petition in 1994 in large part

because of the Exchange’s prior representation that

it intended to automate the entry of trade execution

times by developing a handheld electronic trading

terminal. In June 1994, the Commission was

informed that the proposed handheld terminal

would not be in place by the October 1995 deadline

for compliance with the heightened audit trail

standards set forth in Section 5a(b)(3) of the Act.

Because CME had not sufficiently demonstrated

that its existing audit trail system met current and

future standards, the Commission required the

Exchange to demonstrate its ability to meet the

audit trail requirements using Commissiondesigned tests and, thus, deferred consideration of

the Exchange’s petition. Subsequent to evaluating

the results of the tests, the Commission offered CME

the opportunity to supplement its petition.

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 Order will provide

notice to interested members of the

public of its action, is consistent with

the Commodity Exchange Act and is in

the public interest.

Issued in Washington, D.C., this 7th day of

November 1997, by the Commodity Futures

Trading Commission.

Edward W. Colbert,

Deputy Secretary of the Commission.

[FR Doc. 97–29895 Filed 11–12–97; 8:45 am]

BILLING CODE 6351–01–P

COMMODITY FUTURES TRADING

COMMISSION

Chicago Mercantile Exchange Petition

for Exemptions From the Dual Trading

Prohibition Set Forth in Section 4j(a) of

the Commodity Exchange Act and

Commission Regulation 155.5

AGENCY: Commodity Futures Trading

Commission.

ACTION: Notice of intent to condition

and proposed order granting conditional

exemptions from the prohibition on

dual trading in seven affected contract

markets.

SUMMARY: For the reasons set forth in

the Proposed Order Granting

Conditional Dual Trading Exemptions

(‘‘proposed Order’’), the Commodity

Futures Trading Commission

(‘‘Commission’’) intends to grant,

subject to a stated condition, the

petition of the Chicago Mercantile

Exchange (‘‘CME’’ or ‘‘Exchange’’) for

exemptions from the dual trading

prohibition in Section 4j(a) of the

Commodity Exchange Act (‘‘Act’’) and

Commission Regulation 155.5 for its

Live Cattle, Deutsche Mark, Japanese

Yen, Swiss Franc and Eurodollar futures

contracts and the option contracts on

Eurodollar and S&P 500 futures.1

Pursuant to the Act and Commission

Regulation 155.5(d)(8)(C)(iii), CME may

submit written supplemental data,

views or arguments and will have the

opportunity to make an oral

presentation to the Commission before

the Commission makes its final

determination.

DATES: If CME intends to make an oral

presentation, it must submit its request

in writing no later than ten days after

receipt of this proposed Order. CME

must submit any written supplemental

data, views or arguments within 30 days

of receipt of this proposed Order.

ADDRESSES: CME’s requests for oral

presentation and submission of written

supplements are to be sent to the Office

of the Secretariat, Commodity Futures

Trading Commission, Three Lafayette

Centre, 1155 21st Street, N.W.,

Washington, D.C. 20581.

FOR FURTHER INFORMATION CONTACT:

Duane C. Andresen, Special Counsel, or

Rachel Fanaroff Berdansky, Special

Counsel, Division of Trading and

Markets, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581; telephone: (202) 418–5490.

SUPPLEMENTARY INFORMATION: A floor

broker engages in dual trading when he

or she executes a customer’s order

during the same trading session in

which he or she executes, directly or

indirectly, a trade in the same contract

for his or her own account or an account

in which he or she has an interest. Dual

trading can afford floor brokers the

opportunity to abuse customer orders if

audit trail information and surveillance

are insufficient to permit the detection

of such abuses. Specifically, a dual

trading floor broker can directly commit

abuses of customer orders such as

trading ahead or against those orders

and also has an informational advantage

for his or her personal trading.2 Section

4j(a) of the Act and Regulation 155.5

prohibit dual trading and establish trade

monitoring standards that must be met

in order for contract markets to be

exempted from the prohibition.

The Commission intends to issue the

following proposed Order granting CME

conditional dual trading exemptions

pursuant to Section 4j(a) of the Act and

Commission Regulation 155.5. In

accordance with Regulation 155.5(d)(8),

CME may submit to the Commission in

writing any supplemental data, views or

arguments within 30 days of receipt of

this Notice and proposed Order. In

addition, CME may request, in writing

within ten days of receipt of this Notice

and proposed Order, an opportunity to

make an oral presentation to the

Commission. If CME submits a request

for an oral presentation, the Exchange

will be notified by the Commission of

the date and the terms under which

CME may make such presentation.

Public notice of such an oral

presentation also will be provided in

accordance with the requirements of the

Government in the Sunshine Act, 5

U.S.C. 552b (Supp. I 1995).

Proposed Order Granting Conditional

Dual Trading Exemptions

On October 20, 1993, CME submitted

a Petition for Exemption from the Dual

Trading Prohibition contained in

Section 4j of the Act and Commission

Regulation 155.5 in CME’s Live Cattle,

Deutsche Mark, Japanese Yen, Swiss

Franc, British Pound, Eurodollar and

S&P 500 futures contracts and the

option contracts on the Deutsche Mark,

Eurodollar and S&P 500 futures. The

Exchange corrected that petition on

December 1, 1993. Subsequently, the

Exchange amended its petition on

January 21, 1994. CME updated its

petition on January 21, 1997, with

respect to eight affected contract

markets.3 Notice of the public

availability of the CME’s updated

exemption petition was published in the

Federal Register on February 20, 1997.4

Upon consideration of CME’s petition,

as supplemented, and other data and

analysis, including, but not limited to:

Exchange audit trail test results

reconciling imputed times to