[Federal Register Volume 60, Number 101 (Thursday, May 25, 1995)]
[Notices]
[Pages 27723-27725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12875]



=======================================================================
-----------------------------------------------------------------------
[[Page 27724]]

COMMODITY FUTURES TRADING COMMISSION


Chicago Mercantile Exchange: Proposed Amendments Converting the 
Live Hogs Futures Contract From a Physical Delivery Contract to a Cash 
Settlement System

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed contract market rule changes.

-----------------------------------------------------------------------

SUMMARY: The Chicago Mercantile Exchange (``CME'') has submitted 
proposed amendments to its Live Hogs futures contract that would 
convert the delivery provisions of that futures contract from a 
physical delivery contract to a cash settlement system. In accordance 
with Section 5a(a)(12) of the Commodity Exchange Act, and acting 
pursuant to the authority delegated by Commission Regulation 140.96, 
the Acting Director of the Division of Economic Analysis (``Division'') 
of the Commodity Futures Trading Commission (``Commission'') has 
determined, on behalf of the Commission, that the proposed amendments 
are of major economic significance and that publication of the proposed 
amendments would be in the public interest. On behalf of the 
Commission, the Division is requesting comment on this proposal.

DATES: Comments must be received on or before June 26, 1995.

ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K 
Street NW, Washington, D.C. 20581. Reference should be made to the 
proposed amendments converting the live hogs futures contract to cash 
settlement.

FOR FURTHER INFORMATION CONTACT: Frederick V. Linse, Division of 
Economic Analysis, Commodity Futures Trading Commission, 2033 K Street 
NW., Washington, D.C. 20581, telephone (202) 254-7303.

SUPPLEMENTARY INFORMATION: The existing terms of the live hogs futures 
contract provides for physical delivery of 40,000 pounds of live hogs 
meeting specified quality and weight requirements at CME-approved 
public livestock yards at seven delivery points located in six 
different states. The contract currently specifies a maximum daily 
price fluctuation limit of 1.5 cents per pound, which is applicable 
through the last trading day of each expiring contract month. The 
contract's existing terms also specify that trading ends on the 
business day immediately preceding the last five business days of the 
contract month. In addition, the contract's current terms provide for 
speculative position limits of 900 contracts in any one month and 450 
contracts in the expiring month.
    The proposed amendments would delete all physical delivery 
provisions of the futures contract. These provisions would be replaced 
by terms specifying cash settlement of all open positions at the 
expiration of trading in a contract month. The cash settlement price 
would reflect the value of hogs on a carcass weight basis during the 
last two trading days of expiring contract months. Specifically, the 
proposed cash settlement price would equal the two-day weighted average 
of U.S. Department of Agriculture (USDA) Lean Value Direct Hog Prices 
for packer base weight hog carcasses, 51-52 percent lean/.80-.99 inches 
of backfat at the last rib or equivalent as reported by the USDA for 
the Western Corn Belt, the Eastern Corn Belt and the Mid-South. Under 
the proposals, the cash settlement price would be calculated by summing 
the above-noted USDA-reported average prices for each region and each 
of the two days weighted by the ratio of the total number of lean hogs 
sold directly to packers in that region on that day relative to the 
total number of lean hogs sold directly to packers in all three regions 
combined during the specified two-day period.
    The proposed amendments also will specify that the contract's 
trading unit will be 40,000 pounds of lean hog carcasses. In addition, 
the proposed amendments will provide that the contract's existing 1.5-
cent-per-pound maximum daily price fluctuation will not be applicable 
during the last two trading days of an expiring contract month. 
Speculative position limits would be 3,000 contracts in any individual 
non-spot contract month and 450 contracts in expiring contract months 
as of the close of business on the fifth business day of the spot 
month. Trading in expiring contract months would end on the tenth 
business day of the spot month for both the futures and option 
contracts.
    In addition to the substantive amendments, the proposed amendments 
would make certain conforming changes to other rules governing the live 
hog futures and option contracts. Also, the proposed amendments would 
rename the contracts as the ``lean hogs'' futures and options 
contracts.
    According to the CME, physical delivery through public livestock 
yards no longer reflects dominant cash market practice. The CME notes 
that less than 10% of hogs meeting the requirements for delivery on the 
futures contract are currently sold through such yards, and that the 
percentage of hogs sold through such yards is expected to continue to 
decline. The CME further indicates that, as a result of the decline in 
importance of sales through public livestock yards, the usefulness of 
the live hogs futures contract as a price discovery and risk management 
tool has been adversely affected. The CME indicates, in this respect, 
that the limited cash market activity at most public terminal markets 
raises valid questions regarding whether the prices paid at the 
terminal markets accurately reflect prices paid in the rest of the 
industry.
    According to the CME, the decline in importance of the terminal 
markets has been accompanied by an increase in the importance of direct 
sales to packers at packing plants and country buying stations, and an 
increase in carcass-basis pricing. The CME said that, according to the 
USDA, 90% of the hogs sold in the U.S. during 1990 (the latest year for 
which statistics are available) were sold through non-public markets, 
mainly packing plants and country buying stations. The CME also said 
that approximately 75% of market hogs sold in 1993 were sold on a 
carcass grade and yield basis.
    The CME believes that cash settlement using carcass-based pricing 
is necessary to ensure the long-term viability of the contract for the 
reasons noted above. The CME also believes that increasing the 
speculative limits to 3,000 contracts in individual non-spot months and 
to 450 contracts in the expiring month will accommodate new business 
from certain commercial entities and increase the liquidity of the 
market.
    The CME proposes to make the amendments effective only for all 
newly listed contracts, following Commission approval. No currently 
open contract month or position would be affected by the proposed 
amendments.
    On behalf of the Commission, the Division is requesting comment on 
the proposed amendments. In particular, the Division is seeking comment 
on regarding the extent to which the proposed cash settlement price 
will reflect the underlying cash market and the susceptibility of the 
proposed cash settlement price to manipulation or distortion.
    Copies of the proposed amendments will be available for inspection 
at the Office of the Secretariat, Commodity Futures Trading Commission, 
2033 K Street NW, Washington, D.C. 20581. Copies of the amended terms 
and conditions can be obtained through the [[Page 27725]] Office of the 
Secretariat by mail at the above address or by telephone at (202) 254-
6314.
    The materials submitted by the CME in support of the proposed 
amendments may be available upon request pursuant to the Freedom of 
Information Act (5 U.S.C. 552) and the Commission's regulations 
thereunder (17 CFR part 145 (1987)). Requests for copies of such 
materials should be made to the FOI, Privacy and Sunshine Act 
Compliance Staff of the Office of the Secretariat at the Commission's 
headquarters in accordance with CFR 145.7 and 145.8.
    Any person interested in submitting written data, views or 
arguments on the proposed amendments should send such comments to Jean 
A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K Street 
NW., Washington, D.C. 20581 by the specified date.

    Issued in Washington, D.C. on May 18, 1995.
Blake Imel,
Acting Director.
[FR Doc. 95-12875 Filed 5-24-95; 8:45 am]
BILLING CODE 6351-01-P