55 East 52nd Street

New York, NY 10055

BY ELECTRONIC TRANSMISSION

Submission No. 16-84

July 22, 2016

Mr. Christopher J. Kirkpatrick

Secretary of the Commission

Office of the Secretariat

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

Re: Amendments to Rules 10.04 and 10.22 - Discount for Low-Strength Bales

Delivered Against the Cotton No. Futures Contract - Submission Pursuant to

Section 5c(c)(1) of the Act and Regulations 40.4 and 40.5(a)--EXPEDITED

APPROVAL REQUESTED

Dear Mr. Kirkpatrick:

Pursuant to Commodity Futures Trading Commission (“CFTC”) Regulation 40.4 and

40.5(a), ICE Futures U.S., Inc. (“IFUS” or “Exchange”) hereby submit for review and expedited

approval, the amendments to Rules 10.04 and 10.22 set forth in Exhibit A, which create a

discount for delivery of low strength bales against the Cotton No. 2 futures contract. Cotton No.

2 Futures Rules currently allow for delivery of bales with a strength reading of 25.0 grams per

tex or higher, with no provisions for premiums or discounts for delivery based on strength. In

order to bring the futures contract terms more in line with commercial market practice, the

Exchange is amending Rules 10.04 and 10.22 to create a discount for delivery of low strength

bales, that is, those which have a strength reading of 25.0 to 25.9 grams per tex.

The new discount will be based on daily spot market data derived from the same spot

markets currently used to determine premiums and discounts for grade and staple differences1.

1 The existing premiums and discounts for grade and staple are calculated by the USDA using data collected by

them from regional spot markets as provided by USDA regulations; for a given delivery day, the relevant

differences are those observed by the USDA on the 6th business day prior to the delivery day. The new strength
The amendments do not change the minimum strength quality allowed to be delivered (which

will remain at 25.0 grams per tex). The amendments also provide that the impact of the new

discount on a delivery invoice shall be handled in the same manner that the existing premiums

and discounts for grade and staple are handled.

The amendments, which were suggested by the American Cotton Shippers Association

and which received unanimous support from the Exchange’s Cotton Committee, bring the No. 2

futures contract terms more in line with the commercial market practice to discount such bales.

For example, the CCC loan program already applies USDA-determined discounts to low strength

bales. As such, the failure to incorporate a discount could create an unwanted incentive to

deliver low strength bales against the contract.

Furthermore, in considering when the proposed amendments should be implemented, the

both the Cotton Committee and the Exchange’s Board of Directors determined that the

amendments do not materially affect the amount of money to be paid or the quality of the

merchandise to be delivered under the Cotton No. 2 futures contract, and therefore, can be made

effective to contract months in which there is open interest. In reaching this recommendation, it

was noted that over the past five crop years the share of total US production that fell into the

relevant strength range has been quite small; USDA Annual Cotton Quality Reports for the past

four full seasons (2011/12 to 2014/15) shows the share of production with a strength reading

from 25.0 to 25.9 grams per tex at 0.9%, 0.8%, 0.4% and 0.5% respectively. In addition, the

Exchange’s weekly report detailing the distribution of certified stocks by strength reading;

showed, as of June 13, 2016, that only 0.4% of certified bales fell into this low strength range.

While the effect on the value of applying the amendments to existing positions cannot be

predicted, since the 2016/17 crop has not yet been harvested and of unknown condition the

impact of the new discount applied to low-strength cotton will be de minimis, based upon the

small volume of such low-strength bales produced over the past four seasons and the seasonaverage commercial market discounts for these bales. The season average USDA-calculated

discount for these bales over the same four past full seasons has been approximately 150

points/1.5 cents per pound. For example, at the current futures price of 72 cents per pound,

delivery of par quality bales (ie, no quality or age differentials) would generate an invoice value

of $36,000 per contract. Using the four-season average share of crop data (rounded up to 1%)

and average discount level referenced above, the invoice impact of the proposed discount would

discount will also be calculated by the USDA using data from the same regional spot markets and following the

same schedule.
be $7.50 per contract2

. As such, any price impact related to the subject amendments would be

small in comparison to the size and supply/demand fundamentals of the 2016/2017 crop year,

which is the principal driver in determining price levels for futures positions in the October 2016

delivery month and subsequent delivery months.

The amendments to Rules 10.04 and 10.22, which the Exchange shall make effective

upon approval by the Commission for the October 2016 delivery month and all delivery months

thereafter, comply with the Commodity Exchange Act, as amended, and the regulations

thereunder. The amendments do not alter the quality or quantity of cotton deliverable against the

Cotton No. 2 contract. Rather, in furtherance of Core Principle 3, the amendments align the

contract with current commercial practice. By adding a discount, the amendments reduce the

incentive to deliver low strength bales against the Cotton No. 2 contract, which will help keep

futures prices aligned with cash market prices. There were no substantive opposing views to the

amendments.

The Exchange certifies that concurrent with this filing a copy of this submission was

posted on the Exchange’s website at (https://www.theice.com/futures-us/regulation#rule-filings).

If you have any questions or need further information, please contact me at 212-748-4021 or at

jason.fusco@theice.com.

Sincerely,

Jason V. Fusco

Assistant General Counsel

Market Regulation

Enc.

cc: Division of Market Oversight

2

Calculated as follows: 1% of 50,000 pounds = 500 pounds subject to the discount; 500 pounds X $0.0150 per

pound = $7.50.
Exhibit A

(In the text below, additions are underscored.)

Rule 10.04. Contract for Future Delivery

* * *

(b) All contracts for the future delivery of Cotton No. 2 shall be in the following form:

ICE FUTURES U.S.®, INC.

Cotton No. 2® Contract

NEW YORK_______________________ 20____

A. B. of the County and State of _________ have this day Sold/Bought and agreed to Deliver to/Receive

from C. D. of the same place fifty thousand (50,000) pounds in about one hundred (100) square

bales of cotton, growth of the United States, at the price of ____________________ cents per

pound for Strict Low Middling one and one-sixteenth inches with additions or deductions for

other grades in accordance with the provisions of the United States Cotton Futures Act,

subsection (f)(3) and with additions for staple premiums or deductions for staple and for strength

and micronaire discounts, deliverable from licensed warehouse at a permissible point of delivery

as provided in the By-Laws and Rules, between the First and Last Delivery Day of

___________________ inclusive, the delivery within such time to be at seller's option in one (1)

warehouse, upon notice to buyer, as provided by the By-Laws and Rules of ICE Futures U.S. Inc.

(the “Exchange”). The cotton dealt with herein or delivered hereunder shall be of, or within, the

grades for which standards are established by the Secretary of Agriculture, except cotton

prohibited from being delivered on a contract by the United States Cotton Futures Act, subsection

(f)(1)(E), and shall be of no other grade or grades, and shall be subject to Exchange inspection.

* * *

(Balance of the Rule unchanged.)

Rule 10.22. Invoicing and Grade, Strength and Staple Differences

(a) In the case of cotton being tendered against the Cotton No. 2 Futures Contract, it shall be invoiced

by calculating in bale units the average value on or off color grade of strict low middling white (41), leaf

grade 4, staple length 1-1/16 inch (34), micronaire 3.5 to 4.7, Grams Per Tex of twenty-[five]six (2[5]6.0)

or higher and adding or deducting such average premium or discount to or from the notice price and

figuring the net weight of the total quantity being invoiced (deliverable weight less weight allowance) by

the price ascertained in the manner outlined.

(b) Premiums and discounts will be the USDA premiums and discounts adjusted in accordance with

paragraphs (d) and (e) below for the specified Notice Day.
(c) Grade, staple and micronaire differences for deliveries on the Cotton No. 2 Futures Contract shall

be based on commercial differences determined in accordance with the United States Cotton Futures Act

and the regulations thereunder, as from time to time amended, as provided in paragraphs (d) and (e) of

this Rule.

(d)(i) The notice price shall be the invoice price for all cotton with a color grade of Strict Low

Middling White (41), leaf grade 4, staple length of 1-1/16 inch (34), Micronaire 3.5 to 4.7, and Grams Per

Tex of twenty-five (25.0) or higher. Additions and deductions for other deliverable grades shall be made

at the average of the differences quoted on the sixth (6th) Business Day prior to the Date of Delivery for

corresponding grades in the spot markets designated by the Secretary of Agriculture for the purpose of

quoting grade differences in accordance with the United States Cotton Futures Act and the regulations

issued thereunder.

(ii) If delivery is made pursuant to delayed certification class, all premiums, discounts and weight

allowances shall be based on the last regular delivery day not the date of physical delivery of the

documents.

(e)(i) An addition shall also be made for each bale having a staple of one and three thirty-seconds of

an inch, which shall be equal to the full average premium for like staple over one and one-sixteenth of an

inch staple quoted on the sixth (6th) Business Day prior to the Date of Delivery, (except in delayed

certification) in such of the spot markets above referred to as do quote staple differences. An addition

shall also be made for each bale having a staple of one and four thirty-seconds of an inch or longer, which

shall be equal to the full average premium for like staple over one and one-sixteenth of an inch staple

quoted on the sixth (6th) Business Day prior to the Date of Delivery, (except in delayed certification) in

such of the spot markets above referred to as do quote staple differences. A deduction shall also be made

for each bale having a staple of one and one thirty-second of an inch, which shall be equal to two hundred

percent (200%) of the full average discount for like staple under one and one-sixteenth of an inch quoted

as aforesaid.

(ii) A deduction shall also be made for each bale having a micronaire reading of 4.8 to 4.9, which

shall be equal to the average of the differences quoted on the sixth (6th) Business Day prior to the

Date of Delivery for this micronaire range in the spot markets designated by the Secretary of

Agriculture referred to in subparagraph (d)(i) above. If no such differences are available, the

deduction under this provision shall be zero (0).

(iii) A deduction shall also be made for each bale having a strength reading of from 25.0 to 25.9

grams per tex (inclusive), which shall be equal to the average of the differences quoted on the sixth

(6th) Business Day prior to the Date of Delivery for this strength range in the spot markets designated

by the Secretary of Agriculture referred to in subparagraph (d)(i) above. If no such differences are

available, the deduction under this provision shall be zero (0).

(f) The penalties as provided in Rule 10.33 will be arrived at by applying to these weight penalties,

respectively, the grade and staple differences applicable on the day of tender.