Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26575

COMMODITY FUTURES TRADING

COMMISSION

Chicago Board of Trade Futures

Contracts in Corn and Soybeans;

Order To Designate Contract Markets

and Amendment Order of November 7,

1997, as Applied to Such Contracts

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final order to Chicago Board of

Trade.

SUMMARY: The Commodity Futures

Trading Commission (Commission), by

letter dated December 19, 1996,

commenced a proceeding under section

5a(a)(10) of the Act by issuing to the

Board of Trade of the City of Chicago

(CBT) a notification 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.’’ 61 FR 67998

(December 26, 1996). 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 of the CBT corn and

soybean futures contracts. 62 FR 60831

(November 13, 1998). By letter dated

November 17, 1997, the CBT notified

the Commission that it would submit for

Commission review an alternative to the

contract terms ordered by the

Commission and thereafter submitted

draft applications for contract market

designation for corn and soybeans,

beginning with contract months in the

year 2000.

The Commission on May 7, 1998,

ordered that the applications for

contract market designation in corn and

in soybeans submitted by the CBT on

December 19, 1997, and supplemented

on March 20, 1998, be granted and

amended its Order of November 7, 1997,

as applied to the newly approved

contracts to the extent stated. Under this

Order, the Commission permits the

CBT: (i) to add the southern Illinois

River as delivery locations for soybeans

and to delete the Toledo, Ohio

switching district as a delivery location

for soybeans; (ii) to modify the

premiums for delivery of soybeans and

corn at non-par locations from a

percentage of the freight tariff to a

specified fixed cents per bushel

schedule of premiums; (iii) to modify

the contingency plan to include a

conforming fixed cents-per-bushel

schedule of locational adjustments; and

(iv) to add a minimum net worth

eligibility requirement for issuers of

shipping certificates of $5 million.

Nothing in the Commission’s Order

vacates the designation of the current

corn and soybean futures contracts,

vacates the applicability of the

November 7, 1997 Order to those

contracts, or amends the terms of the

November 7, 1997 Order as applied to

those contracts.

The Commission has determined that

publication of this 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

May 7, 1998.

ADDRESSES: Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW., Washington, DC

20581.

FOR FURTHER INFORMATION CONTACT:

Steven Manaster, Director, or Paul M.

Architzel, Chief Counsel, Division of

Economic Analysis, Commodity Futures

Trading Commission, Three Lafayette

Centre, 1155 21st Street, NW.,

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

* * *.

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

of the CBT corn and soybean futures

contracts. 62 FR 60831 (November 13,

1998). By letter dated November 17,

1997, the CBT notified the Commission

that it would submit for Commission

review an alternative to the contract

terms ordered by the Commission and

thereafter submitted draft applications

for contract market designation for corn

and soybeans, beginning with contract

months in the year 2000. The

Commission, on December 1, 1997,

published in the Federal Register notice

of the CBT’s draft proposal. 62 FR

63529. Subsequently, on December 19,

1997, the CBT submitted its proposal,

and on March 20, 1998, the CBT

amended its proposal. The Commission

on May 7, 1998, designated the CBT as

contract markets in corn and soybeans

and amended the November 7, 1997

Order as applied to the newly approved

contracts to the extent stated. 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: May 7, 1998.

The Commodity Futures Trading

Commission (CFTC or Commission)

hereby orders that the applications for

contract market designation in corn and

in soybeans submitted by the Board of

Trade of the City of Chicago (CBT) on

December 19, 1997 and supplemented

on March 20, 1998, be granted and

hereby amends its Order under section

5a(a)(10), dated November 7, 1997, to

permit the applications for designation

to be granted. Under this Order, the

Commission takes the following actions:

(1) Grants under section 5 of the

Commodity Exchange Act (Act) the

CBT’s application for designation as a

contract market in soybeans and

approves under section 5a(a)(12) of the

Act all of the proposed rules of the

contract market contained in

Attachment 1 to this Order;

(2) Grants under section 5 of the Act

the CBT’s application for designation as

a contract market in corn and approves

under section 5a(a)(12) of the Act all of

the proposed rules of the contract

market contained in Attachment 2 to

this Order;

(3) Amends its Order of November 7,

1997, making all changes necessary to

effect the above actions, as follows:

(i) permits the CBT to add the

southern Illinois River as delivery

locations for soybeans and to delete the

Toledo, Ohio switching district as a

delivery location for soybeans;

(ii) permits the CBT to modify the

premiums for delivery of soybeans and

corn at non-par locations from a

percentage of the freight tariff to a fixed

cents per bushel schedule of premiums;

(iii) permits the CBT to modify the

contingency plan in the Order of

November 7, 1997, to include a

conforming fixed cents-per-bushel

schedule of locational adjustments; and

(iv) permits the CBT to add a

minimum net worth eligibility

requirement for issuers of shipping

certificates of $5 million;

Nothing in this Order precludes the

CBT from listing for trading the soybean

and corn contracts designated under

this Order for contract months prior to

the January 2000 soybean futures
26576 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

1 In this regard, Toledo continues to perform a

vital role in futures markets due to its position as

the primary delivery point for the CBT wheat

futures contract. In this respect, Toledo is located

within one of the few primary production areas for

soft red winter wheat and has provided the bulk of

the deliverable supply for that futures contract for

many years.

2Of course, if the CBT elected simultaneously to

list the current and revised futures contracts for

trading and intends to list options on those futures

contracts, it must submit for prior Commission

approval applications for designation as a contract

market in options on either the revised or current

futures contracts to assure that the CBT is properly

authorized to trade options on both futures

contracts.

contract month and the March 2000

corn futures contract month, the initial

contract months for which the Order of

November 7, 1997, became effective.

Nothing in this Order vacates the

designation of the current corn and

soybean futures contracts, vacates the

applicability of the November 7, 1997

Order to those contracts, or amends the

terms of the November 7, 1997 Order as

applied to those contracts. Both or

either of the currently designated

contracts and the contracts designated

by this Order may be traded.

Nothing in this Order mandates that

Toledo, Ohio, cease operation as a

delivery location in any commodity,

either for futures contracts traded on the

CBT, for futures contracts for which any

other board of trade which might choose

to seek contract market designation, or

for any of Toledo’s substantial cash

market operations.

The Commission, as discussed below,

bases these actions on its findings that

available deliverable supplies of corn

and soybeans under the CBT’s present

revisions are not so inadequate under

section 5a(a)(10) as to require that the

Commission mandate additional

delivery points. However, the adequacy

of corn and soybean supplies cannot be

accurately and fully ascertained until

after there is a history of deliveries

occurring under the terms of the revised

contracts. If in operation the revised

contract terms result in inadequate

deliverable supplies of corn or

soybeans, the Commission will

reconsider the need to require

additional delivery points for the

revised contracts. To that end, the

Commission directs the CBT to report

on the experience with deliveries and

expiration performance in the revised

corn and soybean futures contracts on

an annual basis for a five-year period

after contract expirations begin under

the revised contracts.

The revised CBT proposed locational

price differentials for the corn and

soybean futures contracts fall within the

range of commonly observed or

expected commercial price differences,

as required by section 5a(a)(10) of the

Act and Commission policy. However,

in light of the great variability in where

the differential for each river segment

falls within the range of commonly

observed cash price differences, the

Commission directs the CBT as part of

the above reports on delivery and

expiration performance also to report on

the extent to which particular locational

price differentials may discourage or

encourage deliveries to be made from

that location. This report should relate

rates of delivery by river segment to the

applicable differentials, focussing with

particularity on September deliveries

from all locations and on deliveries

from the Peoria-Pekin and HavanaGrafton river segments year-round.

The Commission’s conclusions are

supported by factual analyses made by

the CFTC staff and by 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 Order of November 7, 1997, and

in response to the Commission’s request

for comment in the Federal Register on

the CBT’s recent proposal. The

Commission, in reaching its conclusions

in this Order, considered the record

before it, which includes a substantial

amount of documentary evidence, a

record number of written comments

submitted in response to four requests

for comment, and the transcriptions of

statements presented by the CBT and

interested members of the public during

two open meetings of the Commission

to consider these issues.

The Commission has reached its

conclusions based upon the legal

standards of the Commodity Exchange

Act. Section 5a(a)(10) of the Act requires

that exchanges establish such delivery

points as will tend to prevent or

diminish price manipulation, market

congestion and the abnormal movement

of commodities in interstate commerce.

In carrying out the requirements of

section 5a(a)(10), the Commission is not

free to direct exchanges to add

particular delivery locations if the

Commission finds that the contract

meets the statutorily-required level of

deliverable supplies. Thus, the

Commission’s approval of the delivery

locations selected by the CBT for its

revised corn and soybean futures

contracts is not based upon a finding

that Toledo, Ohio, is in any way an

inappropriate delivery point for these or

any other futures contracts. To the

contrary, Toledo currently is an active

cash market for corn, soybeans and

wheat, with over 120 million bushels of

these commodities being received at

that location in 1997. The available data

indicate that Toledo will continue to be

an active cash market center for these

commodities in the future.1 As the

Commission in its Order of November 7,

1997, Toledo has proven to be an

effective futures delivery point for corn

and soybeans. 62 FR 60854.

Accordingly, nothing precludes the

CBT, it if chooses, from continuing to

list for trading the soybean futures

contract provided under the Order of

November 7, 1997, which includes

Toledo as a delivery point, or precludes

any other exchange from seeking

designation for a contract with Toledo

as a delivery point.

The Commission’s action in

designating contract markets for corn

and soybeans under the terms which the

CBT has recently proposed does not

vacate or negate the existing designated

contracts which are the subject of the

Order of November 7, 1997. That Order

remains in effect as to the current

contracts and, as modified herein,

applies to the revised contracts. Until

the designation for such contracts are

vacated, the CBT may trade both the

current and the revised contracts

simultaneously, if it so chooses.2

Moreover, the CBT may begin trading

the revised contracts for contract

months with expirations prior to year

2000.

I. The Section 5a(a)(10) Proceeding

The Commission, by letter dated

December 19, 1996, commenced a

proceeding under section 5a(a)(10) of

the Act by issuing to the CBT a

notification 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 points or point 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 closure of three of the six existing

Chicago warehouses regular for delivery
Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26577

3The CBT task force spent a year developing

proposed changes to the contract’s specifications.

Those recommendations were modified by the

CBT’s board of directors, and the modified proposal

was then defeated by a vote of the CBT membership

on October 17, 1996.

4A shipping certificate is a negotiable instrument

that represents a commitment by the 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 pursuant to terms

specified by the CBT whenever the holder decides

to surrender the certificate to the issuer.

5A transcript of the meeting has 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; a United

States Representative and a state government

representative from the state of Michigan;

representatives of six commercial users of the

contracts; representatives of three producer

associations; and six persons representing the CBT.

6Subsequently, 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

October 22, 1997.

7Comments 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 violate that

provision of the Act. Others took issue with the

Commission for not proposing additional remedial

changes, particularly for the corn contract.

8A transcript of the hearing and all attendant

written statements and documents have been

included in the public comment file of this

proceeding.

under the futures contracts during the

year prior to the section 5a(a)(10)

notification underscored the need to

address without delay the fundamental

problems with the contract’s delivery

specifications. However, the CBT

membership defeated contract

modifications recommended by its

board of directors in October 1996.3

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, by

finding that the CBT corn and soybean

futures contracts no longer met the

requirements of that section of the Act.

Subsequently, on April 16, 1997, the

CBT submitted its response to the

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

of proposed exchange rule amendments

(1997 proposal). Those proposed rule

amendments would have replaced 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.4 Such shipping certificate

would have provided 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 and

additionally to be delivered in Chicago

by rail or vessel. Delivery at all eligible

locations would have been at par. The

CBT’s 1997 proposal would have

eliminated the current delivery points

on its corn and soybean futures

contracts at Toledo, Ohio and St. Louis,

Missouri and would have restricted

firms eligible to issue shipping

certificates to those meeting a minimum

net worth requirement of $40 million, in

addition to a number of other

requirements.

The Commission previously had

published the substance of the CBT’s

1997 proposed amendments in the

Federal Register for a 15-day comment

period (62 FR 12156 (March 14, 1997),

later extended until June 16, 1997 (62

FR 1997). The Commission received

almost 700 comments, the largest

number of comments ever received by

the Commission on any issue before it.

On June 12 1997, the Commission held

a public meeting at the CBT’s request to

accept oral and written statements by

the CBT and interested members of the

public. 62 F.R. 29107 (May 29, 1997).

The participants represented a crosssection of views, both favoring and

opposing the CBT proposal.5

On September 15, 1997, the

Commission issued a proposed order,

publishing its text in the Federal

Register with a request for public

comment.6 62 FR 49474 (September 22,

1997). The comment period on the

proposed order expired on October 22,

1997. Over 230 commenters submitted

comments to the Commission on the

proposed order.7 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.8 The CBT also filed

exceptions to the proposed order as

provided under the Act.

On November 7, 1997, the

Commission issued a final Order (Order)

to the CBT under section 5a(a)(10) of the

Act. 62 FR 60831 (November 13, 1997).

The Commission’s Order found that the

CBT’s 1997 proposal failed to meet the

requirements of sections 5a(a)(10),

5a(a)(12), 8a(7), and 15 of the Act

because of (1) an inadequate amount of

deliverable supplies of soybeans; (2) the

failure to include required locational

differentials; (3) the failure to provide

an adequate contingency plan for

alternative deliveries if river

transportation were obstructed; and (4)

the unnecessary limitation on eligibility

for issuing corn and soybean shipping

certificates imposed by the CBT’s

proposed $40 million minimum net

worth requirement.

Based on these findings, the

Commission Order changed and

supplemented the delivery locations for

CBT’s soybean futures contract by

retaining the Toledo, Ohio switching

district and the St. Louis/East St. Louis/

Alton areas as delivery locations, with

Toledo priced at par and the St. Louis/

East St. Louis/Alton area priced 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. The

Commission also required that both

corn and soybeans from shipping

locations on the northern Illinois River

be 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. For both the

CBT corn and soybean futures contracts,

the Commission ordered that the

contingency plan for alternative

delivery procedures when traffic on the

northern Illinois River is obstructed be

changed and supplemented and that the

$40 million minimum net worth

eligibility requirement for issuers of

shipping certificates be eliminated.

The Commission’s Order explicitly

permitted the CBT to seek appropriate

modifications to it, stating that the

Commission had not ‘‘precluded 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.’’ 62 FR 60833. To the

contrary, the Order provided that 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.

Id. at 60834.

By letter dated November 17, 1997,

the CBT notified the Commission that it
26578 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

9By letter to the CBT, dated January 9, 1998, the

Commission’s Division of Economic Analysis

terminated fast-track review of the designation

applications. In light of the outstanding Order

under section 5a(a)(10), the Commission ruled that

these applications are ineligible for fast-track

treatment.

10An additional four comment letters neither

favored nor opposed the specific CBT proposal, but

rather addressed other issues.

11Section 5(6) conditions designation of a board

of trade as a contract market, among other

requirements, on the ‘‘governing board * * *

making effective the orders issued pursuant to the

provisions of section 5a of this Act * * * .’’

Accordingly, the Commission has reviewed the

proposed applications for designation to determine

whether they violate any specific criterion set forth

in, or term of, the Order. Where they violate a

provision of the Order, the Commission has

determined whether amendment of the Order to

remove conflicts between the two would be

appropriate. In addition, the Commission has

reviewed the applications for contract market

designation under all of the statutory and regulatory

requirements generally applicable to contract

market designation.

12The Commission explained in the order that:

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. 62 FR 60838.

13The Commission’s Order at 60839–60850

explains in detail the methodology by which the

Commission determined the potentially available

gross deliverable supplies of corn and soybeans

under the 1997 proposal and the necessary

reductions from those gross supplies.

14The Commission found that deliverable

supplies of corn in September may be further

supplemented by new crop production and that, as

a transition month, the September contract month

would be somewhat less likely to be subject to

manipulation than other months. 62 FR 60850.

would submit for Commission review

an alternative to the contract terms

ordered by the Commission and

thereafter submitted draft applications

for contract market designation for corn

and soybeans, beginning with contract

months in the year 2000. The

Commission, on December 1, 1997,

published in the Federal Register notice

of the CBT’s draft proposal of revised

contract terms. 62 FR 63529. The

Commission requested comment on five

specific issues: (1) whether the

deliverable supplies under the CBT

draft proposal would meet the

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

Act; (2) whether the CBT draft

proposal’s locational price differentials

would reflect cash market practice; (3)

whether the CBT draft proposal’s loadout provision would conform to

commercial practice; (4) whether the

CBT draft proposal’s reimbursement

scheme under the contingency plan

would reflect commercial practices; and

(5) whether the CBT draft proposal’s

minimum net worth requirements

would unduly limit eligibility of firms

to become issuers of shipping

certificates. 62 FR 63532.9

The Commission received twentyseven comment letters in response to

this notice, thirteen of which supported

the CBT alternatives. Of the ten

comments opposing the CBT alternative,

nine questioned the CBT’s proposed

elimination of Toledo as a delivery

point. Three commenters opposed the

draft proposal’s locational price

differentials as not reflective of cash

price differentials, and three opposed as

too high the net worth requirement for

issuers of shipping certificates.10

By submission dated March 20, 1998,

the CBT amended its applications for

designation and provided additional

information (1998 proposal). The March

20, 1998 submission modified the draft

proposal for the soybean contract by

changing the segmentation of delivery

zones within the delivery area as

proposed, modifying the schedule of

locational price differentials applicable

to those zones and making the

equivalent schedule of locational price

adjustments applicable under the

contingency delivery plan; modifying

the performance requirement for

deliverers in the Alton-St. Louis area;

and reducing the proposed eligibility

requirement for issuers of shipping

certificates from a proposed requirement

to register for delivery of a minimum of

30 barges to a $5 million minimum net

worth requirement.

The Commission has reviewed the

CBT’s 1998 proposal to determine

whether it meets the requirements of the

Commission’s Order and of the Act and

regulations thereunder.11 The CBT’s

1998 proposal differs from the

Commission’s Order with respect to: (1)

the delivery locations for the soybean

contract; (2) the locational price

differentials for both the soybean and

corn futures contract; and (3) for both

contracts, the minimum net worth

eligibility requirement for issuers of

shipping certificates. These differences

from the provisions of the Commission’s

Order are analyzed below.

II. Deliverable Supply

A. The Commission’s Order

In determining whether the CBT’s

first proposal met the requirements of

section5a(a)(10) of the Act, the

Commission initially assessed whether

the available deliverable supplies of the

commodity at the delivery points

specified by the CBT for all delivery

months on the contract would be

sufficiently large and available to

market participants so that futures

deliveries, or the credible threat thereof,

could assure an appropriate

convergence of cash and futures prices

and thereby tend to prevent or to

diminish price manipulation, market

congestion, and the abnormal movement

of the commodity in interstate

commerce. 62 FR 60838. The

Commission determined the appropriate

standard for measuring the adequacy of

deliverable supplies under the 1997

proposal by examining the relationship

between the level of deliverable stocks

for corn and soybeans and the presence

of a price premium for the expiring

futures month over the next futures

month (a price inverse).12

Based on an analysis of these

relationships, the Commission used as a

measure of an inadequate level of

deliverable supplies under section

5a(a)(10) deliverable supplies below the

level of 2,400 contracts for soybeans and

below the level of 3,000 contracts for

corn. However, the Commission also

noted that a higher level of deliverable

supplies historically may, in fact, be

necessary to protect against price

manipulation. As the Commission

explained in its Order, to avoid a

repetition of the July 1989 soybean

futures contract expiration, when both

the Commission and the CBT acted on

their belief that a sizable long position

posed a significant threat of

manipulation, deliverable supplies of at

least 4,000 contracts would be

necessary. 62 FR 60839. The

Commission considered both of these

measures, as well as other relevant

information, in its analysis of the

adequacy of deliverable supply.

Applying these measures of adequacy

of deliverable supply to the 1997

proposal,13 the Commission found that

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 * * *.’’ 62 FR

60850. As to the CBT proposal for corn,

the Commission found that ‘‘gross

deliverable supplies throughout the year

appear to be adequate except for

September’’ 14 and that, in light of the

other changes and supplements which

the Commission was making to the

proposal and absent actual trading

experience to the contrary, it did not

find that additional delivery points for

corn were required.

Having found that section 5a(a)(10) of

the Act required that delivery points for

soybeans be added to those proposed by

the CBT in order to increase available

deliverable supplies, the Commission

supplemented the 1997 by proposal by
Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26579

15The CBT’s proposed delivery locations for corn

are the same as in the Commission’s Order.

retaining the existing contract’s delivery

points. With the addition of the retained

delivery locations and other changes

and supplements,

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. 62 FR 60854.

The Commission’s decision to order

that delivery locations be added to the

1997 soybean proposal to increase

deliverable supplies was based solely

upon its finding that available

deliverable supplies would not

otherwise meet the levels required by

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

the Commission’s determination of how

to remedy the shortfall in deliverable

supplies was narrowly focused. Thus,

the Commission did not consider the

merits of other possible, but untried

delivery locations as a means of

increasing deliverable supplies. Instead,

the Commission deferred to the CBT’s

expressed preferences for delivery

locations on the contract. Accordingly,

the Commission ‘‘accept[ed] the

delivery points in the proposal itself as

a starting point.’’ 62 FR 60854. The

Commission next considered delivery

points which previously had been

chosen and used by the CBT. The

Commission found that the existing

delivery points of St. Louis and Toledo,

‘‘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 * * *, are feasible,

workable and acceptable.’’ Id. Finally,

the Commission noted that, ‘‘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 * * *.’’ Id. at n. 39.

B. Adequacy of the 1998 Proposal’s

Delivery Points.

The 1998 proposal for the CBT’s

soybean futures contract would omit

Toledo as a delivery point and would

add the southern Illinois River from

Pekin south to river’s mouth at Grafton

as a delivery point.15 The CBT supports

its proposal on the grounds that the

delivery area ‘‘represent[s] the major

markets along the Illinois Waterway,

including Burns Harbor, IN and in St.

Louis, Missouri.’’ (CBT December 17,

1997, submission at 16.) The CBT

proposal contains a total of 46 potential

shipping stations with a cumulative

daily barge loading capability of 145

barges—about 1,627 contracts

(8,134,000 bushels) of soybeans—

located within the proposed delivery

areas for the soybean futures contract.

(CBT January 23, 1998, submission,

Table 1.) The CBT maintains that based

on the analysis used by the Commission

in its Order, available deliverable

supply levels under its 1998 proposal

‘‘meet the statutory requirements and

benchmarks’’ of the Order for the

critical summer months of July, August

and September. (CBT December 17,

1997, submission at 16.)

The following chart details gross

deliverable soybean supplies

attributable to firms eligible to issue

shipping certificates available from the

1998 proposed delivery areas for the

critical contract months of July, August

and September.

BILLING CODE 6351–01–M
26580 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

BILLING CODE 6351–01–C
Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26581

16The gross deliverable supply estimates were

derived using the same procedures as were used to

calculate the estimates for the Commission’s final

order. Specifically, for the Illinois River and St.

Louis, supplies for each contract month were

estimated by summing barge shipments for that

month and all subsequent months of the crop year

(ending with September), with adjustments being

made to exclude new crop shipments during

September. For Chicago, the estimates were

calculated as the sum of stocks available at the

beginning of the contract month plus receipts

during the month, with adjustments being made to

reflect the recent sharp decline in storage capacity

at Chicago. The gross deliverable supply estimates

for eligible firms were further adjusted to reflect

only barge shipments from the Illinois River and St.

Louis by the eight firms believed to be capable of

meeting the CBT’s proposed $5 minimum net worth

requirement.

The term ‘‘gross deliverable supplies’’ reflects the

fact that these are estimates of the maximum level

of deliverable supplies likely to be available for the

futures contracts before any adjustment is made for

other factors that are likely to reduce deliverable

supplies. These factors, discussed in more detail

below, include the 1998 proposal’s continued

reliance on Chicago as a source of deliverable

supplies, the proposed three-day barge queuing and

priority load-out requirements, and prior

commercial commitments of available supplies. A

detailed description of the estimation procedure is

presented in the Commission’s Order.

17The Commission also estimated gross

deliverable supplies for all firms, including those

which are not expected to be able to meet the CBT’s

proposed minimum net worth eligibility

requirement of $5 million, These estimates reflect

total shipments from the Illinois River and St.

Louis, and were analyzed because it is likely that

at least part of the soybeans shipped by the smaller,

ineligible firms readily could be diverted to eligible

delivery facilities for futures delivery purposes at

economic prices and, thus, should be regarded as

part of the contract’s deliverable supply. The allfirms estimates have not been included in this

Order because they result in levels which are only

marginally greater than those for eligible-firms and

exhibit essentially the same results as do the

eligible-firm estimates when measured against the

Commission’s benchmark standards. However, in a

few years particularly during the month of

September, the addition of minor amounts of

deliverable supplies from ineligible firms results in

estimates which exceed a benchmark level which

did not otherwise do so. Specifically, the all-firms

estimates exceeded the 2,400 threshold when

eligible firm estimates did not in September 1993

and the 4,000 threshold in September 1990, 1994

and 1995.

18Other factors affecting deliverable supplies

identified in the Commission’s Order included

locational price differentials and foreseeable

disruptions in barge shipping on the Illinois River.

However, as discussed below, the 1998 proposal

satisfactorily addresses these factors.

Such estimated gross deliverable

supplies for eligible firms exceeded the

Commission’s benchmark levels of

2,400 contracts in each of the past

eleven years during July and August.16

They reached or exceeded the 4,000

contract benchmark level in ten of

eleven years during July and in seven of

eleven years during August.17

The estimated gross deliverable

soybean supplies for September meet

the level of 2,400 contracts in nine of

the eleven years. However, they meet

the 4,00 contract level in only one of

eleven years. As noted in the Order,

deliverable supply concerns for

September may be mitigated by the

availability of new crop production in

that month and the imminent harvest of

even greater supplies in October. In

particular, as shown in Table 1,

estimated September soybean

production in areas immediately

adjacent to the proposed delivery area

ranged from 1,636 contracts in 1996 to

14,623 contracts in 1994. These

amounts are greater for soybeans than

under the Commission’s Order (compare

62 FR 60847) because the 1998 proposal

expanded delivery locations along the

Illinois River, a major production area.

It reasonably can be expected that some

portion of this September soybean

production would potentially be

deliverable on the September futures

contract within normal commercial

marketing channels. As a result, it is

likely that the level of gross deliverable

supplies available in September would

be somewhat higher than the above

estimates.

TABLE 1.—ESTIMATED SOYBEAN PRODUCTION LOCATED NEAR PROPOSED

DELIVERY POINTS AS OF SEPTEMBER

30

[In 5,000 bushel contract units]

Crop year Soybeans

1986 .......................................... 5,608

1987 .......................................... 10,622

1988 .......................................... 8,527

1989 .......................................... 8,606

1990 .......................................... 3,416

1991 .......................................... 12,972

1992 .......................................... 5,721

1993 .......................................... 2,263

1994 .......................................... 14,623

1995 .......................................... 7,258

1996 .......................................... 1,636

* The production as of September 30 of

each year was estimated by multiplying U.S.

Department of Agriculture harvesting progress

estimates for the Illinois and Indiana crop reporting districts adjacent to the proposed delivery points by U.S.D.A. production data for

counties located within about 25 miles of the

proposed delivery points.

The potentially available gross

deliverable supplies must be reduced,

however, by the following factors

identified in the Order and which

remain applicable here: (1) Continuing

reliance, impart, on Chicago as a source

of deliverable supplies; (2) a threebusiness-day barge queuing and priority

load-out requirement; and (3) prior

commercial commitments of available

supplies.18

a. Reliance on Chicago

To the extent that potentially

available gross deliverable supplies of

soybeans have reached or exceeded the

2,400 and 4,000 contract levels, they

have frequently depended on Chicago

supplies to do so. During July,

deliverable supplies from locations

other than Chicago reached or exceeded

the 2,400 level in ten, and reached or

exceeded the 4,000 level in six, of the

eleven years analyzed. During August,

deliverable supplies from locations

other than Chicago reached or exceed

the 2,400 contract level in seven, and

the 4,000 contract level in one, of the

years analyzed. For September,

deliverable supplies from locations

other than Chicago reached or exceeded

the 2,400 contract level in four of the

eleven years and never reached the

4,000 contract level during this period.

The 1998 proposal’s reliance on

Chicago deliverable supplies to meet the

Commission’s benchmark levels may

result in future shortfalls. As the

Commission’s Order stated:

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

form Chicago in the future. Chicago elevators

fro many years have held stocks well below

their maximum capacity levels, particularly

in the critical summer months. * * *

Chicago supplies will most likely be reduced

significantly in the future and would not be

available insignificant quantities under the

CBT proposal.

62 FR 60850.

b. The Three-Day Barge Queuing and

Priority Load-Out Requirements

The 1998 proposal retains the

provisions of the 1997 proposal

requiring a shipping certificate issuer to

begin loading onto the certificate

holder’s barges within three business

days after receiving instructions and the

holder’s barges are at the delivery

facility ready to load. As the

commenters to the 1997 proposal made

clear, requiring the shipping certificate

issuer to give preference to shipping

certificate holders over customers and

proprietary business for eight hours of

load-out capacity per day is contrary to

cash market practice. The Order

questioned the merits of the CBT’s

justification of this provision, which

merely assumes that issuers would be

willing and able to meet this

requirement and accommodate their

cash business simply by extending their
26582 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

19This is consistent with the Commission’s

direction to the CBT in the Order to report on the

delivery experience in corn. That requirement was

grounded in the Commission’s finding that

deliverable supplies of corn under the CBT’s 1997

proposal were not so inadequate to require

additional delivery points under section 5a(a)(10).

Inasmuch as the 1997 and 1998 proposals for

delivery points for corn are the same, that finding

and the Commission’s direction to file annual

reports for five years has not been modified by this

order.

20Chicago and Toledo were ordered to be valued

at par.

Percent of tariff is a common means of quoting

freight prices and is used extensively in cash

market trading. The Waterways Freight Bureau

Tariff No. 7 specifies the cost per ton of shipping

commodities via barge to New Orleans from

specified river segments (barge tariff zones) on the

Illinois, Mississippi and Ohio Rivers. This tariff

schedule was issued by the Interstate Commerce

Commission in 1976 as part of its regulatory

program for barge freight rates. Although this tariff

schedule no longer serves a regulatory purpose, the

barge industry routinely quotes barge freight rates

as a percentage of the tariff schedule.

hours of operation. The Commission

finds here, as it did in its prior Order,

that:

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.

62 FR 60850.

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. As

the Order reasoned, ‘‘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.’’ 62 FR

60850. When such committed stocks are

removed from total shipments, ‘‘it is

likely that the actual available

deliverable supplies for the futures

contracts would be significantly less

than indicated by the above gross

estimates.’’

d. Conclusion

In summary, under the 1998 proposal

gross deliverable supplies for soybeans

during the months of July and August

reach or exceed the 2,400 contract

benchmark in every year, and the 4,000

contract benchmark in most years.

Although the estimates for gross

deliverable supplies during September

failed to reach the 2,400 contract

benchmark level in two of the past

eleven years and failed to reach the

4,000 contract level in all years but one,

those estimates may be supplemented

by new crop production in September.

Overall, the number of contract months

for which estimated gross deliverable

supplies of soybeans under the 1998

proposal would have reached or

exceeded benchmark levels compares

favorably with the number of contract

months reaching or exceeding the

benchmark levels under the

Commission’s Order for soybeans (and

for corn). On this basis, the Commission

does not find soybean deliverable

supplies to be so inadequate as to

require delivery points additional to, or

different from, those proposed by the

CBT.

However, in light of the reductions

from gross deliverable supplies that may

result from prior commercial

commitments and the contract’s threebusiness-day load requirement, the

extent to which available deliverable

supplies actually would meet or exceed

the Commission’s deliverable supply

standards is uncertain. Equally

uncertain is whether future available

deliverable supplies would meet or

exceed the Commission’s deliverable

supply standards. This will depend in

part upon the degree to which Chicago

remains a viable source of deliverable

supplies of soybeans or upon growth in

the other delivery areas sufficient to

compensate for declining activity in

Chicago. Because only actual trading

experience will reveal whether the level

of available deliverable supplies meets

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

the Act, 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 soybean contract.19 These

reports will allow the Commission to

revisit the issue of adequacy of available

deliverable supplies in the future if

actual experience with the contract

suggests that such supplies are not

adequate.

III. Differentials

A. The Commission’s Order

The Commission’s Order found that,

in light of the significant locational

price differences in the cash market

among the proposed delivery locations,

section 5a(a)(10) required setting

differentials for the delivery locations

on the corn and soybean futures

contracts. Specifically, the Order found

that:

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.

62 FR 60851.

The Commission’s Order found that

cash market differences in the value of

corn and soybeans for various delivery

points on the northern Illinois River are

based primarily upon the cost of barge

freight to the Gulf of Mexico. Based on

Commission policy requiring that

locational price differentials on futures

contracts be set within the range of

commonly observed or expected

commercial price differences, the Order

found that 150 percent of the Waterways

Freight Bureau Tariff No. 7 rate

‘‘provides an appropriate basis for the

differential.’’20 The percentage of tariff

specified by the Order (150%) was

based on analysis of barge freight rates

for Illinois River shipments for the

period 1990 through 1996. The Order

found that 150% 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 shipments,’’

particularly during the critical summer

months. 62 FR 60856.

The Order also changes and

supplemented the differential provided

under a proposed contingency plan to

take effect during times when river

traffic is obstructed to make it consistent

with the differentials in effect at other

times. The Commission’s Order found

that obstructions of river traffic caused

by adverse weather conditions or

announced lock repair and maintenance

were commonplace and that ‘‘it is not

an appropriate use of exchange

emergency authority to address such

foreseeable disruptions to the operation

of contract terms.’’ 62 FR 60853.

Accordingly, the Commission found

further that, because ‘‘prolonged

obstruction of transportation on the

river would increase the susceptibility

of the futures contract to manipulation

by issuers,’’ section 5a(a)(10) required a

‘‘contingency plan’’ rule for the

proposed contract. Id.

The Order found that the contingency

plan proposed by the CBT fell short of

achieving the statutory objectives in a

number of ways, including its

computation of the reimbursement in

transportation costs for deliveries at
Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26583

21This result is due to the substantial increases

in barge freight rates that are commonly observed

beginning in September caused by the increasing

demand for shipping as the harvest season begins.

The Commission considers the lower frequency

with which the future contract’s differentials will

be at or above cash price freight differentials to be

of less regulatory concern in September than at

other times of the year. The seasonal movement of

abundant supplies for shipment in commercial

channels from all delivery locations reduces the

likelihood that the proposed differentials would

lead to the prohibited effects under section

5a(a)(10).

22As noted above, the barge industry routinely

quotes freight rates as a percentage of the tariff

schedule. As a consequence of this pricing

convention, the relative cost of shipping among

various river locations at any one time is stable.

However, barge freight rates (quoted as a percent of

the tariff schedule) fluctuate over time in response

to increases or decreases in supply and demand for

barge shipping. The proposed CBT differentials

which are specified in cents-per-bushel at half-cent

intervals do not translate precisely to a uniform

percentage of tariff. Accordingly, as barge freight

rates rise and fall in relation to the futures

contracts’ fixed locational differentials, the

frequency with which deliveries would be made

would vary somewhat from one location to another.

alternative locations when the

contingency plan was in effect based

upon 100 percent of the Waterways

Freight Bureau Tariff No. 7 barge freight

rate schedule. This rate would have

been different from the rate found by the

Commission to be appropriate at all

other times. The Commission found

that, ‘‘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.’’ 62 FR 60852.

B. Adequacy of the 1998 Proposal’s

Differentials

The 1998 proposal differs from the

Order in the amount of the locational

price differentials specified for the corn

and soybean futures contracts. The CBT

proposes to substitute the following

locational differentials for those ordered

by the Commission:

TABLE 2.—THE PROPOSED LOCATIONAL PRICE DIFFERENTIALS FOR THE SOYBEAN AND CORN FUTURES CONTRACTS IN

CENTS PER BUSHEL

Location Soybean differential Corn differential

Chicago ............................................................................................................................................ par ............................. par.

Lockport to Seneca .......................................................................................................................... +2 cents .................... +2 cents.

Ottawa to Chillicothe ........................................................................................................................ +2.5 cents ................. +2.5 cents.

Peoria to Pekin ................................................................................................................................. +3 cents .................... +3 cents.

Havana to Grafton ............................................................................................................................ +3.5 cents ................. Not applicable.

St. Louis/East St. Louis/Alton .......................................................................................................... +6 cents .................... Not applicable.

In support of its proposal, the CBT

states that, ‘‘Statistics using barge freight

rate differentials and F.O.B. shipping

station minus F.O.B. Chicago

differentials during the period from

1990–1996 show that the proposed

locational differentials are also within

the range of commonly observed

commercial barge and price

differences.’’ (CBT January 23, 1998,

submission at 2.)

To determine whether the CBT’s

proposed differentials fall within the

range of commonly observed or

expected commercial price differences,

the Commission analyzed the frequency

of opportunities for economic delivery

from each delivery location at the

specified differential. Deliveries from a

location would most likely be made

when the relative difference in the cost

of barge freight between Chicago and the

delivery point to New Orleans is equal

to or less than the differential specified

in the futures contract for that location.

The Commission estimated the cost of

barge freight using data on weekly offers

for freight for the period of January 1990

through October 1997.

Significantly, during the critical

summer months of July and August (but

not September),21 the 1998 proposed

differentials for most delivery locations

clearly fall at or above the mid-point of

estimated cash price differences.

Accordingly, the 1998 proposed

differentials based on the estimated cost

of freight would result in relatively

frequent opportunities for economic

delivery—generally exceeding 50

percent of the observations—during July

and August for most locations. The

opportunities for economic delivery at

some locations would be less frequent,

however, at times of the year other than

during the summer months, but overall

deliverable supplies are greater at those

times. For the period January 1990

through October 1997, the relative

estimated frequency with which

economic delivery likely would be

feasible from the majority of locations

generally exceeded 30 percent.22

Accordingly, the CBT’s proposed

differentials reasonably can be expected

to fall within the range of commonly

observed or expected commercial price

differences and thus tend to prevent or

diminish price manipulation, market

congestion, or the abnormal movement

of the commodities in interstate

commerce.

However, the delivery locations of

Peoria-Pekin for corn and soybeans, and

Havana-Grafton for soybeans, appear to

fall at the low end of the range of

estimated barge freight differences. In

light of the variation among river

segments in the estimated frequency of

opportunities for economic deliveries

from the various locations, the

Commission directs the CBT to report

annually for a period of five years on the

extent to which particular locational

price differentials may discourage or

encourage deliveries to be made from

that location. This report should

compare rates of delivery by river

segment to the applicable differentials,

focusing with particularlity on

September deliveries from all locations

and on deliveries from the Peoria-Pekin

and Havana-Grafton river segments

year-round. Such reporting will allow

the Commission to revisit the issue of

adequacy of locational differentials if

actual experience with the contracts

suggests that the differentials are not

adequate.

C. Contingency Plan Differentials

The 1998 proposal’s contingency plan

differs from the Commission’s Order in

the method of calculating the

appropriate reimbursement for the

change in transportation cots for

deliveries at alternative locations when

the contingency plan is in effect. The

Order specified that the contingency

plan reimbursement be calculated by

reference to the same differentials

between delivery locations required

under the Order to be applicable under

normal (non-contingency) conditions.

The 1998 proposal modifies the

reimbursement calculation and changes

the amount of the contingency plan

differentials to conform them to the

proposed cents per bushel differentials

generally applicable under the 1998

proposal to the contracts. This change is
26584 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

23British 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, 434 U.S. 938

(1977).

24These additional financial integrity provisions

included the requirement that issuers of certificates

obtain an irrevocable letter of credit in an amount

equal to the value of their delivery commitments,

maintain a minimum of two million dollars in

working capital and be limited to issuing

certificates of a value no greater than 25 percent of

the issuer’s net worth.

25As a result of this lower barrier to entry as well

as the other changes, the resulting HHI declined

from 3,300 under the 1997 soybean proposal to

2,918 under the 1998 proposal and for the corn

proposals from 3,300 to 2,762.

26Protecting the integrity of the delivery process

is a fundamental objective of the Act. See, e.g.,

Sections 5a(a), 5a(a)(3), 5a(a)(4), 5a(a)(5), 5a(a)(7),

and 5a(a)(10) of the Act. In particular, section

5a(a)(7) of the Act specifically recognizes that

contract markets may impose reasonable

requirements ‘‘as to location, accessibility and

suitability for warehousing and delivery purposes.

* * * ’’

27The issuer must limit the value of its

outstanding certificates to one-quarter of its net

worth.

consistent with the Commission’s Order

in that the relative value of locational

differentials during normal conditions is

maintained during times when the

contingency plan is in effect.

IV. Minimum Net Worth Requirement

A. The Commission’s Order

The Commission’s Order also

eliminated a proposed $40 million net

worth requirement for eligibility of

shipping certificate issuers. 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 lease anticompetitive means of

achieving the objectives of the Act.23

Accordingly, as the Commission stated

in the Order, ‘‘the CBT proposal’s

possible anticompetitive effects must be

evaluated against its potential

effectiveness in achieving the policies

and purposes of the Act.’’ 62 FR 60853.

The Order found that the $40 million

minimum net worth requirement would

limit issuance of shipping certificates to

four of seven grain firms with shipping

stations in the delivery area, result in an

extremely high level of concentration,

increase the Herfindahl-Hirschman

Index (HHI) to 3,300 (an increase of 530

points over the current delivery system),

and act as a barrier to new entrants. 62

FR 60853. Although protecting the

financial integrity of the delivery

process is a reasonable objective, the

Order concluded that the CBT failed to

provide a reasonable justification for the

$40 million minimum net worth

requirement in light of the 1997

proposal’s other proposed financial

integrity measures.24 62 FR 60857.

Accordingly, the Commission

eliminated the $40 million minimum

net worth eligibility requirement,

finding that it would have resulted in a

high level of concentration and imposed

a substantial and impermissible bar to

entry to otherwise eligible firms without

a demonstrated regulatory need for the

requirement. 62 FR 60857.

B. The 1998 Net Worth Proposal

The 1998 proposal would restore a net

worth eligibility requirement for

shipping certificate issuers in the

amount of $5 million. As under the

1997 proposal, this requirement is in

addition to the other financial

guarantees and conditions relating to

working capital, letters of credit and a

variable net worth requirement related

to the value of outstanding shipping

certificates. The CBT supports the

requirement on the grounds that:

The Exchange is responsible for ensuring the

financial integrity of the delivery process

through the specification of minimum

financial requirements. Currently, the

Exchange requires that firms approved as

regular for delivery in the agricultural

markets have a minimum net worth equal to

$5,000 per contract of regular capacity. Firms

which are regular for delivery on the grain

contracts must also meet minimum working

capital and performance bonding

requirements based on their federally

licensed storage capacity.

In order to ensure the financial, operation,

and administrative integrity of the shipping

certificate delivery process, all market

participants must view all certificates as

equally fungible and be indifferent between

issuers. Certificates issued by low net worth

firms have several distinct disadvantages,

particularly, a higher risk of default and

lower operational efficiencies due to fewer

shipping station locations, and therefore,

potentially higher costs to the taker in

assembling the minimum number of

certificates necessary to load a barge.

Furthermore, the cumulative contribution of

low net worth firms does not substantially

increase deliverable supply.

CBT March 20, 1998, submission at 4.

Section 15 of the Act requires that the

Commission evaluate the 1998

proposal’s anticompetitive effects

against its effectiveness in achieving the

policies and purposes of the Act. The

effect of the proposed $5 million net

worth requirement would be to limit

issuance of shipping certificates to firms

able to meet the requirement. However,

the $5 million net worth requirement

constitutes a far lower barrier to entry

than did the 1997 proposal’s $40

million requirement, which as the Order

found, would have limited participation

to ‘‘four large grain firms.’’ In contrast,

for the corn futures contract, under a $5

million net worth requirement, five of

the seven firms operating barge-loading

facilities on the northern Illinois River

potentially qualify for eligibility as

shipping certificate issuers. For the

soybean futures contract, eight of the

eleven barge-loading firms operating on

the Illinois River and at St. Louis would

meet this eligibility requirement.25 The

proposed $5 million net worth

requirement would constitute a lower

barrier to entry. It also would have a

more modest effect on reducing

deliverable supplies for the futures

contracts. United States Army Corps of

Engineers’ data for the 1995–96 crop

year indicates that eligible firms

shipped about 95 percent of all corn and

soybeans from the proposed delivery

areas.

Balanced against its anticompetitive

effect, the $5 million net worth

requirement may serve the regulatory

purpose of increasing the efficiency of

the contract’s delivery mechanism.26

Delivery takers are expected to attempt

to reduce their costs by assembling the

requisite number of shipping certificates

from a single delivery facility to fill a

barge. (A barge with a 55,000 bushel

capacity will require assembly of 11-

5,000 bushel certificates for delivery.)

However, the smallest firms may not

qualify to issue sufficient certificates for

economically efficient consolidation

and assembly.27 Moreover, the $5

million net worth requirement may

significantly reduce the CBT’s

administrative burden related to

monitoring the financial status of

eligible shipping certificate issuers on

an on-going basis. Small, less financially

secure firms likely would require more

careful monitoring than financially

stronger firms.

For the above reasons, the

Commission finds that the anticompetitive effect of the $5 million

proposed net worth eligibility

requirement is not so great as to

outweigh the regulatory purpose

identified by the CBT and that its

approval by the Commission is not

contrary to section 15 of the Act.

Accordingly, for the reasons

discussed above, the Commission grants

the CBT applications for designation for

futures contracts in corn and soybeans

submitted on December 17, 1997, as

supplemented on March 19, 1998, and

amends its Order of November 9, 1997,

as applicable to such contracts so as to

be consistent with this action.

It is further ordered that this grant of

designation shall be subject to CBT’s
Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26585

compliance with all sections of the Act

applicable to the CBT as a contract

market under the Act.

Dated: May 7, 1998.

By the Commission.

Jean A. Webb,

Secretary of the Commission.

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, DC, this 7th day of

May 1998, by the Commodity Futures

Trading Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98–12664 Filed 5–12–98; 8:45 am]

BILLING CODE 6351–01–M

CONSUMER PRODUCT SAFETY

COMMISSION

Sunshine Act Meeting

AGENCY: U.S. Consumer Product Safety

Commission, Washington, DC 20207.

‘‘FEDERAL REGISTER’’ CITATION OF

PREVIOUS ANNOUNCEMENT: [Vol. 63, No.

74/Friday, April 17, 1998/19245].

PREVIOUSLY ANNOUNCED TIME AND DATE OF

MEETING: 10:00 a.m., Thursday, May 21,

1998.

CHANGES IN MEETING: The time has

changed from 10:00 a.m. to 2:00 p.m. for

the Commission Agenda and Priorities

public hearing.

For a recorded message containing the

latest agenda information, call (301)

504–0709.

CONTACT PERSON FOR ADDITIONAL

INFORMATION: Sadye E. Dunn, Office of

the Secretary, 4330 East West Highway,

Bethesda, MD 20207 (301) 504–0800.

Dated: May 8, 1998.

Todd A. Stevenson,

Deputy Secretary.

[FR Doc. 98–12794 Filed 5–8–98; 4:33 pm]

BILLING CODE 6355–01–M

DEPARTMENT OF DEFENSE

Office of the Secretary

Defense Intelligence Agency, Joint

Military Intelligence College: Notice of

Closed Meeting

SUMMARY: Pursuant to the provisions of

Subsection (d) of Section 10 of Public

Law 92–463, as amended by Section 5

of Public Law 94–409, notice is hereby

given that a closed meeting of the DIA

Joint Military Intelligence College Board

of Visitors has been scheduled as

follows:

DATES: Monday, 8 June 1998, 0800 to

1800; and Tuesday, 9 June 1998, 0800

to 1200.

ADDRESSES: Joint Military Intelligence

College, Washington, DC 20340–5100.

FOR FURTHER INFORMATION CONTACT:

Mr. A. Denis Clift, President, DIA Joint

Military Intelligence College,

Washington, DC 20340–5100 (202/231–

3344).

SUPPLEMENTARY INFORMATION: The entire

meeting is devoted to the discussion of

classified information as defined in

Section 552b(c)(1), Title 5 of the U.S.

Code and therefore will be closed. The

Board will discuss several current

critical intelligence issues and advise

the Director, DIA, as to the successful

accomplishment of the mission assigned

to the Joint Military Intelligence College.

Dated: May 6, 1998.

L.M. Bynum,

Alternate OSD Federal Register Liaison

Officer, Department of Defense.

[FR Doc. 98–12684 Filed 5–12–98; 8:45 am]

BILLING CODE 5000–04–M

DEPARTMENT OF DEFENSE

Office of the Secretary

Defense Intelligence Agency, Science

and Technology Advisory Board

Closed Panel Meeting

AGENCY: Department of Defense, Defense

Intelligence Agency.

ACTION: Notice.

SUMMARY: Pursuant to the provisions of

Subsection (d) of Section 10 of Public

Law 92–463, as amended by Section 5

of Public Law 94–409, notice is hereby

given that a closed meeting of the DIA

Science and Technology Advisory

Board has been scheduled as follows.

DATES: 20 and 21 May 1998 (800am to

1600pm).

ADDRESSES: The Defense Intelligence

Agency, Bolling AFB, Washington, DC

20340–5100.

FOR FURTHER INFORMATION CONTACT:

Maj Michael W. Lamb, USAF, Executive

Secretary, DIA Science and Technology

Advisory Board, Washington, DC

20340–1328 (202) 231–4930.

SUPPLEMENTARY INFORMATION: The entire

meeting is devoted to the discussion of

classified information as defined in

Section 552b(c)(I), Title 5 of the U.S.

Code and therefore will be closed to the

public. The Board will receive briefings

on and discuss several current critical

intelligence issues and advise the

Director, DIA, on related scientific and

technical matters.

Dated: May 6, 1998.

L.M. Bynum,

Alternate OSD Federal Register Liaison

Officer, Department of Defense.

[FR Doc. 98–12685 Filed 5–12–98; 8:45 am]

BILLING CODE 5000–04–M

DEPARTMENT OF DEFENSE

Office of the Secretary

Defense Intelligence Agency, Science

and Technology Advisory Board

Closed Panel Meeting

AGENCY: Department of Defense, Defense

Intelligence Agency.

ACTION: Notice.

SUMMARY: Pursuant to the provisions of

Subsection (d) of Section 10 of Public

Law 92–463, as amended by Section 5

of Public Law 94–409, notice is hereby

given that a closed meeting of the DIA

Science and Technology Advisory

Board has been scheduled as follows:

DATES: 28 May 1998 (800am to 1600pm).

ADDRESS; The Defense Intelligence

Agency, Bolling AFB, Washington, DC

20340–5100.

FOR FURTHER INFORMATION CONTACT: Maj.

Michael W. Lamb, USAF, Executive

Secretary, DIA Science and Technology

Advisory Board, Washington, D.C.

20340–1328 (202) 231–4930.

SUPPLEMENTARY INFORMATION: The entire

meeting is devoted to the discussion of

classified information as defined in

Section 552b(c)(1), Title 5 of the U.S.

Code and therefore will be closed to the

public. The Board will receive briefings

on and discuss several current critical

intelligence issues and advise the

Director, DIA, on related scientific and

technical matters.

Dated: May 6, 1998.

L.M. Bynum,

Alternate OSD Federal Register Liaison

Officer, Department of Defense.

[FR 98–12686 Filed 5–12–98; 8:45 am]

BILLING CODE 5000–04–M

DEPARTMENT OF DEFENSE

Office of the Secretary; Defense Policy

Board Advisory Committee

AGENCY: Department of Defense.

ACTION: Notice of Advisory Committee

Meeting.

SUMMARY: The Defense Policy Board

Advisory Committee will meet in closed

session from 8 am until 6, pm, 19 June

1998 in the Pentagon, Washington, DC.