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[Federal Register: January 17, 1997 (Volume 62, Number 12)]
[Notices]
[Page 2657-2659]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

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COMMODITY FUTURES TRADING COMMISSION


Chicago Mercantile Exchange: Proposed Amendments Relating to the
Delivery Procedures, Quality Standards and Quality Price Differentials,
and Speculative Position Limit Specifications for the Live Cattle
Futures Contract

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed contract market rule change.

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SUMMARY: The Chicago Mercantile Exchange (CME) has submitted proposed
amendments to its live cattle futures contract. The primary proposed
amendments will: (1) Modify the par yield grade and weight range
specifications and the sources and calculation methods for establishing
price differentials for non-par quality grades, yield grades, and
carcass-weights; (2) extend the delivery period for live-graded
deliveries by five business days; (3) change the last trading day of
expiring contract months; and (4) increase to 600 from 300 contracts
the spot month speculative position limit applicable on those days
preceding the last five trading days, with the existing limit of 300
contracts being retained during the last five trading days of the
contract month.
    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. On behalf of the Commission, the
Division is requesting comment on this proposal.

DATES: Comments must be received on or before February 18, 1997.


[[Page 2658]]


ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 1155
21st Street, NW, Washington, DC 20581. In addition, comments may be
sent by facsimile transmission to (202) 418-5521, or by electronic mail
to [email protected]. Reference should be made to the proposed changes
in quality standards, delivery procedures, and the speculative position
limits for the CME live cattle futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact Fred Linse of the
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st St., NW, Washington, DC 20581,
telephone 202-418-5273, or electronic mail: [email protected].

SUPPLEMENTARY INFORMATION: Under the current terms of the live cattle
futures contract, a par delivery unit consists of 40,000 pounds of
steers. At the buyer's option, steers may be delivered either to a CME-
approved livestock yard, for grading by United States Department of
Agriculture (USDA) personnel on a live basis, or to a CME-approved
slaughter plant, for grading by USDA personnel on a carcass basis. The
par delivery lot is composed of 55% USDA Choice, and 45% USDA Select
quality grade steers or carcasses, with a yield grade of 1, 2, 3, or 4.
No more than one yield grade 4 steer or carcass is permitted in a par
delivery unit.
    For live-graded delivery, the average weight of the live steers in
a par delivery unit must fall between 1,050 and 1,250 pounds, with no
individual steer weighing more than 100 pounds above or below the
average weight of the delivery unit. For carcass-graded delivery, no
individual carcass may weigh less than 600 pounds nor more than 900
pounds. The hot yield of a par delivery unit is 63 percent.
    The futures contract's existing terms also provide for the delivery
at specified price differentials for delivery units of live steers or
steer carcasses that deviate from the above-specified par delivery
standards. In particular, each additional Choice grade steer or carcass
above the 55 percent minimum level in a delivery unit is deliverable at
a price differential calculated by subtracting the ``Select 1-3 Boxed
Beef Cut-Out Value'' from the ``Choice 1-3 Boxed Beef Cut-Out Value,''
which are published on the delivery day by the USDA Market News Service
on the National Carlot Meat Report, and multiplying this difference by
63 percent. Similarly, each additional Select grade steer or carcass in
excess of the 45 percent maximum level in a delivery unit is
deliverable at a price differential calculated by subtracting the
``Choice 1-3 Boxed Beef Cut-Out Value'' from the ``Select 1-3 Boxed
Beef Cut-Out Value,'' that are published by the USDA Market News
Service on the delivery day, and multiplying this difference by 63
percent. In addition, any carcass grading below USDA Select is
deliverable at a discount of 25% of the settlement price using the
average live weight of the steers included in the delivery unit.
Carcasses grading USDA Prime are considered to be USDA Choice for
purposes of calculating the value of delivery units. Each additional
yield grade 4 carcass above the par allowable number of one is
deliverable at a discount of $20 per hundredweight, or 25% of the
settlement price, whichever is greater, on a live weight basis. Any
carcass with a yield grade of 5 is deliverable at a discount of $30 per
hundredweight, or 40 percent of the settlement price, whichever is
greater, on a live weight basis.
    Live steers that weigh 100 to 200 pounds above or below the
delivery unit's average weight are deliverable at a discount of three
cents per pound. Individual steers that weigh more than 200 pounds over
or under the delivery unit's average weight, or that weigh less than
1,000 pounds or greater than 1,300 pounds, are not deliverable on the
futures contract. Steer carcasses that weigh less than 600 pounds or
more than 900 pounds are deliverable at a discount of 20 percent of the
settlement price.
    Delivery may be made on any business day of the contract month
beginning with the seventh business day following the first Friday of
the contract month, plus the first two business days in the succeeding
calendar month.
    The primary proposed amendments will:
    (1) Change the par yield grade specification to USDA yield grade 3
steers or carcasses, from the existing par specification of USDA yield
grade 1, 2, 3, or 4 steers or carcasses;
    (2) Change the weight requirement for live-graded delivery units
deliverable at par by specifying an average steer weight range of 1,100
pounds to 1,300 pounds (from the existing 1,050 pounds to 1,250 pounds
range), and an individual steer weight range of 1,050 pounds to 1,350
pounds (from the existing 1,000 pounds to 1,300 pounds range);
    (3) Remove the existing limitation on the number of yield grade 4
steers permitted in live-graded delivery units and allow the delivery
of yield grade 5 steers in such units;
    (4) Modify the sources and calculation procedures for determining
price differentials for quality grade, yield grade, and carcass weight
as described in proposed rule 1504.A below:
* * * * *
    A. Sources and Calculation of Adjustment Factors Quality grade
adjustments for all delivery units will make use of the live weight
equivalent of the Choice-Select boxed beef spread calculated from
information reported by USDA (in $/cwt.) for the day of tender in the
National Carlot Meat Report. This is referred to hereafter as the Live-
Equivalent Choice-Select Spread (LECSS) and is computed by subtracting
the ``Select 1-3 Boxed Beef Cut-Out Value'' from the ``Choice 1-3 Boxed
Beef Cut-Out Value'' and multiplying that result by 0.0063. Boxed Beef
Cut-Out Values from the 550/700 pound category are used for live-graded
delivery units with an average live weight less than 1,111 pounds and
for carcass-graded delivery units with an average carcass weight less
than 700 pounds. Boxed Beef Cut-Out Values from the 700/850 pound
category are used for live-graded delivery units with an average live
weight greater than or equal to 1,111 pounds and for carcass-graded
delivery units with an average carcass weight greater than or equal to
700 pounds.
    The National Carlot Meat Report for the day of tender shall also
serve as the source of information for calculating the condemned liver
factor used in carcass-graded deliveries. The condemned liver factor
shall equal the reported liver value (in $/cwt.) from the ``By-Product
Value Calculation'' multiplied by -0.01.
    In addition, quality grade, yield grade and carcass weight
adjustments will make use of factors calculated from values reported by
USDA (in $/cwt.) in the National Carcass Premiums and Discounts for
Slaughter Steers and Heifers report. The Prime, Standard, Yield Grade
1, Yield Grade 2, Yield Grade 4, Yield Grade 5, and 900-950 lbs.
factors are calculated by multiplying the reported simple average for
the corresponding category by 0.0063. If a quality grade or yield grade
is broken into subcategories on this report, then the factor for that
quality or yield grade shall be the simple average of all reported
averages for the subcategories in that category multiplied by 0.0063.
The most recently issued report with respect to the day a Certificate
is tendered shall be used to calculate the factors for that delivery
unit. When a Certificate is tendered on the same day that a new report
is issued,

[[Page 2659]]

that new report shall be used in factor calculation regardless of the
time of day that the report is released.
    The sub-Standard factor shall equal -25% of the tender-day
settlement price.
    Should the USDA determine that an error exists in any of the
reports used to calculate adjustment factors and subsequently issues a
corrected report, that corrected report shall be used in place of the
original.
* * * * *
    All live steers or steer carcasses in a delivery unit shall receive
a quality grade adjustment computed from the Live-Equivalent Choice-
Select Spread (LECSS) factors and other factors described in proposed
Rule 1504.A. Per pound quality grade adjustments shall be as follows:

USDA Prime: +0.45  x  LECSS + Prime factor
USDA Choice: +0.45  x  LECSS
USDA Select: -0.55  x  LECSS
USDA Standard: +0.45  x  LECSS + Standard factor
Below USDA Standard: +0.45  x  LECSS + Standard factor + sub-Standard
factor

    The per animal quality grade adjustment shall be calculated by
multiplying the per pound quality grade adjustment by the average live
weight of the delivery unit. Carcasses deemed ungradeable with respect
to quality grade by the USDA shall receive a per pound quality grade
discount equal to 25% of the settlement price. In addition, carcasses
weighing between 900 and 950 pounds will be deliverable at a price
differential that is based on the adjustment factors described in
proposed Rule 1504.A (rather than at the existing discount equal to 20%
of the settlement price);
    (5) Expand the delivery period to include the first seven business
days of the calendar month following the delivery month (from the first
two business days of such months);
    (6) Change the last trading day of expiring contract months to the
last business day of such months (from the last business day
immediately preceding the last five business days of the contract
month); and
    (7) Increase to 600 from 300 contracts the speculative position
limit applicable during that part of the spot month which begins on the
first business day following the first Friday of the contract month and
ends on the business preceding the last five trading days of the
expiring contract month. The existing spot-month speculative position
limit of 300 contracts would remain applicable during the last five
trading days of the expiring contract month.
    The CME intends to apply the proposed amendments to all newly
listed contract months following receipt of Commission approval.
    In support of the proposed amendments, the Exchange states that
``[t]hese changes are in the best interests of both the Live Cattle
contract and the cattle feeding industry as a whole, particularly as
the cash market continues to move toward increased usage of value-based
marketing methods.'' In addition, the Exchange believes the proposal
will increase deliverable supplies by permitting wider variations from
the par quality specifications at market-based price differentials. The
Exchange believes the proposed increase in the spot month speculative
position limit preceding the last five trading days is supported by the
increased deliverable supplies associated with the proposed amendments
as well as other contract changes that were implemented in 1995.
    The Commission is requesting comments specifically with respect to
(1) the extent to which the proposed amendments reflect prevailing cash
market practices; (2) the extent to which the proposed price
differentials for the delivery of differing qualities of live steers or
steer carcasses reflect commercial price differences; and (3) the
impact of the proposed amendments on the level of economically
deliverable supplies at the contract's delivery points during the
delivery months traded under the futures contract.
    Copies of the proposed amendments will be available for inspection
at the Office of the Secretariat, Commodity Futures Trading Commission,
at the above address. Copies of the amended terms and conditions can be
obtained through the Office of the Secretariat by mail at the same
address or by telephone at (202) 418-5105.
    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 above address
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, at the above
address by the specified date.

    Issued in Washington, DC, on January 8, 1997.
Blake Imel,
Acting Director, Division of Economic Analysis.
[FR Doc. 97-1241 Filed 1-16-97; 8:45 am]
BILLING CODE 6351-01-P
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