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[Federal Register: November 13, 1997 (Volume 62, Number 219)]
[Notices]
[Page 60831-60860]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13no97-43]

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COMMODITY FUTURES TRADING COMMISSION


Chicago Board of Trade Futures Contracts in Corn and Soybeans;
Order To Change and To Supplement Delivery Specifications

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order to Chicago Board of Trade to change and to
supplement delivery specifications.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is
issuing an Order to the Board of Trade of the City of Chicago (CBT),
under Section 5a(a)(10) of the Commodity Exchange Act (Act), 7 U.S.C.
7a(a)(10), to change and to supplement the delivery terms of the CBT
corn and soybean futures contracts. The CBT submitted proposed changes
to the delivery specifications of its corn and soybean futures
contracts in response to a December 19, 1996, notification to the CBT
by the Commission that the CBT corn and soybean futures contracts no
longer accomplish the objectives of that section of the Act. The
Commission in

[[Page 60832]]

its Order changes and supplements the CBT proposal for its soybean
futures contract by making all changes to such CBT rules as required to
effect the following: (i) retaining the Toledo, Ohio switching district
as a delivery location; (ii) retaining St. Louis-East St. Louis-Alton
as a delivery location for shipping stations; and (iii) making soybeans
from the Toledo delivery location deliverable at contract price and
from all other locations at a premium over contract price of 150
percent of the difference between the Waterways Freight Bureau Tariff
No. 7 rate applicable to that location and the rate applicable to
Chicago, Illinois, with Chicago at contract price.
    The Commission changes and supplements the CBT proposal for its
corn futures contracts by making corn from shipping locations on the
northern Illinois River deliverable at a premium over contract price of
150 percent of the difference between the Waterways Freight Bureau
Tariff No. 7 rate applicable to that location and the rate applicable
to Chicago, Illinois, with Chicago at contract price. With respect to
both the CBT corn and soybean futures contracts, the Commission also is
ordering that the proposed CBT contingency plan for alternative
delivery procedures when traffic on the northern Illinois River is
obstructed be changed and supplemented and is ordering that the $40
million minimum net worth eligibility requirement for issuers of
shipping certificates be eliminated. Finally, the Commission is
disapproving the proposed terms for the March, July and December 1999
corn futures contracts and the January, July and November 1999 soybean
futures contracts. Such contract months and any other 1999 contract
months are hereby authorized to trade under the existing contract
terms. The terms of the corn and soybean futures contracts proposed by
the CBT as changed and supplemented herein will apply beginning with
the January 2000 soybean futures contract and the March 2000 corn
futures contract.
    The Commission has determined that publication of the Order is in
the public interest, will provide the public with notice of its action,
and is consistent with the purposes of the Commodity Exchange Act.

DATES: This Order became effective on November 7, 1997.

ADDRESSES: Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, N.W., Washington, D.C. 20581.

FOR FURTHER INFORMATION CONTACT: John Mielke, Acting Director, or Paul
M. Architzel, Chief Counsel, Division of Economic Analysis, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
N.W., Washington, D.C. 20581, (202) 418-5260, or electronically, Mr.
Architzel at [[email protected]].

SUPPLEMENTARY INFORMATION: Section 5a(a)(10) of the Act provides that,
as a condition of contract market designation, boards of trade are
required to:

    Permit the delivery of any commodity, on contracts of sale
thereof for future delivery, of such grade or grades, at such point
or points and at such quality and locational price differentials as
will tend to prevent or diminish price manipulation, market
congestion, or the abnormal movement of such commodity in interstate
commerce. If the Commission after investigation finds that the rules
and regulations adopted by a contract market permitting delivery of
any commodity on contracts of sale thereof for future delivery, do
not accomplish the objectives of this subsection, then the
Commission shall notify the contract market of its finding and
afford the contract market an opportunity to make appropriate
changes in such rules and regulations. If the contact market within
seventy-five days fails to make the changes which in the opinion of
the Commission are necessary to accomplish the objectives of this
subsection, then the Commission after granting the contract market
an opportunity to be heard, may change or supplement such rules and
regulations of the contract market to achieve the above objectives *
* *.

    The Commission, on November 7, 1997, issued an Order under section
5a(a)(10) of the Act to change and to supplement the delivery
specifications proposed by the CBT for its corn and soybean futures
contracts. That proposal was submitted in response to prior Commission
notification to the CBT that its futures contracts for corn and
soybeans no longer were in compliance with the requirements of section
5a(a)(10) of the Act. The text of the Order is set forth below.

    In the Matter of the Section 5a(a)(10) Notification to the Board
of Trade of the City of Chicago Dated December 19, 1996, Regarding
Delivery Point Specifications of the Corn and Soybean Futures
Contracts

    Dated: November 7, 1997.

    Order of the Commodity Futures Trading Commission to Change and
to Supplement Proposed Rules of the Board of Trade of the City of
Chicago Submitted for Commission Approval in Response to a Section
5a(a)(10) Notice Relating to Futures Contracts in Corn and Soybeans.

    The Commodity Futures Trading Commission (CFTC or Commission)
hereby orders changes and supplements to the Board of Trade of the City
of Chicago (CBT) proposed rules relating to its futures contracts in
corn and soybeans as shown in attachment 1 to this Order. Under this
Order, the Commission takes the following actions:
    (1) changes and supplements under section 5a(a)(10) of the
Commodity Exchange Act (Act) the proposed delivery specifications of
the CBT's soybean futures contract by making all changes to such rules
as required to effect the following:
    i. retaining the Toledo, Ohio switching district as a delivery
location;
    ii. retaining St. Louis-East St. Louis-Alton as a delivery location
for shipping stations; and
    iii. making soybeans from the Toledo delivery location deliverable
at contract price and making soybeans from shipping locations within
the St. Louis-East St. Louis-Alton and the northern Illinois River
delivery locations deliverable at a premium over contract price of 150
percent of the difference between the Waterways Freight Bureau Tariff
No. 7 rate applicable to that location and the rate applicable to
Chicago, Illinois, with Chicago at contract price;
    (2) changes and supplements under section 5a(a)(10) of the Act the
proposed delivery specifications of CBT's corn futures contract by
making all changes to such rules as required to make corn from shipping
locations on the northern Illinois River deliverable at a premium over
contract price of 150 percent of the difference between the Waterways
Freight Bureau Tariff No. 7 rate applicable to that location and the
rate applicable to Chicago, Illinois, with Chicago at contract price;
    (3) changes and supplements under section 5a(a)(10) of the Act the
proposed CBT contingency plan for alternative delivery when river
traffic is obstructed by reducing the continuous period of such an
obstruction which triggers application of the plan's special procedures
from the 45 days proposed to 15 days, by eliminating the condition
which triggers the contingency plan that notice of the obstruction must
have been given six-months prior to such an obstruction, by making the
contingency plan applicable whenever a majority of shipping stations
within the northern Illinois River delivery area is affected by an
obstruction and by changing the differential from 100 percent of the
Waterways Freight Bureau Tariff No. 7 rate as proposed to 150 percent;
    (4) changes and supplements under sections 5a(a)(10) and 15 of the
Act the proposed CBT corn and soybean futures contracts by eliminating
the $40 million minimum net worth eligibility requirement for issuers
of shipping certificates;

[[Page 60833]]

    (5) disapproves under sections 5a(a)(10), 5a(a)(12), and 15 of the
Act and Commission rule 1.41(b) CBT's proposed terms for the March,
July, and December 1999 corn futures contracts and the January, July,
and November 1999 soybean futures contracts. Such contract months and
any other 1999 contract months are hereby authorized to trade under the
existing contract terms or, if the CBT so elects, under the contract
terms proposed by the CBT as changed and supplemented by this Order;
    (6) orders that the terms of the corn and soybean futures contracts
proposed by the CBT as changed and supplemented by this Order shall
apply to contract months beginning with and subsequent to the January
2000 soybean futures contract month and the March 2000 corn futures
contract month, whenever such contract months are listed for trading.
    Nothing in this Order precludes the CBT from submitting for
Commission review and approval under sections 5a(a)(10) and 5a(a)(12)
of the Act any alternative proposed delivery specifications for its
corn or soybean futures contracts.
    The Commission, as discussed below, bases these actions on its
finding that the CBT proposal in response to the Commission's section
5a(a)(10) notification relating to the CBT's corn and soybean futures
contracts does not meet the requirements, or accomplish the statutory
objectives, of that section and also violates sections 8a(7) and 15 of
the Act. The Commission's determination is based upon: (1) the
inadequate amount of deliverable supplies of soybeans available under
the proposed contract terms in the delivery area as proposed by the
CBT; (2) the failure of the CBT's proposed corn and soybean contracts
to include required locational differentials; (3) the failure of the
CBT's proposed corn and soybean contracts to provide an adequate rule
for alternative deliveries if river transportation is obstructed; and
(4) the substantial impediment to eligibility for issuing corn and
soybean shipping certificates imposed by the CBT's proposed $40 million
net worth requirement.
    Specifically, under the CBT proposal, the amount of deliverable
supplies of soybeans during the critical summer delivery months of
July, August, and September fails to meet the level that, in the
opinion of the Commission, is necessary to tend to prevent or diminish
price manipulation, market congestion, or the abnormal movement of
soybeans in interstate commerce. The gross amount of potentially
deliverable supplies historically has failed to reach an adequate level
on a significant number of occasions during the past 11 years which the
Commission has examined. Moreover, on those occasions when the gross
amount of potentially deliverable supplies did reach that level, it
frequently did so only because of supplies available at the Chicago/
Burns Harbor (Chicago) delivery point, the continuing decline of which
precipitated the section 5a(a)(10) notification in the first instance.
This inadequacy is further demonstrated when required downward
adjustments are made to reflect only that portion of gross deliverable
supplies which would likely be available for futures deliveries. Thus,
gross deliverable supplies would be diminished by the effects of the
proposed three-day barge queuing rule, prior commercial commitments of
available stocks, the lack of locational price differentials, and the
unjustifiably high financial eligibility requirements. The frequent
interruptions in barge transportation on the northern Illinois River
due to lock closings and weather conditions also create foreseeable
disruptions to deliverable supplies under the CBT proposal. The
inadequacy of deliverable supplies of soybeans under the CBT proposal
requires the retention of the CBT's current delivery points at Toledo
and St. Louis, where additional deliverable supplies would be
available.
    The Commission does not find that available deliverable supplies of
corn under the CBT's proposal are so inadequate under section 5a(a)(10)
as to require additional delivery points. However, changes and
supplements to other aspects of the CBT's proposal as to its corn
contracts are required to meet the objectives of section 5a(a)(10), as
discussed below. Moreover, the adequacy of corn supplies cannot be
accurately and fully ascertained until after there is a history of
deliveries occurring under the CBT's proposal, as changed and
supplemented by this Order. If in operation the proposal results in
inadequate deliverable supplies of corn, the Commission will reconsider
the need to require additional delivery points for the corn contract.
To that end, the Commission directs the CBT to report on the experience
with deliveries and expiration performance in the corn futures contract
on an annual basis for a five-year period after contract expirations
begin under the revised contract terms.
    Neither the CBT proposal for soybeans nor its proposal for corn
provides for locational price differentials among spatially separated
delivery points, as section 5a(a)(10) of the Act requires. In addition
to tending to reduce deliverable supplies, the lack of locational price
differentials reflecting the differentials in the underlying cash
markets for corn and soybeans would render the futures contracts
susceptible to price manipulation, market congestion, and the abnormal
movement of the commodities in interstate commerce.<SUP>1</SUP>
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    \1\ The lack of locational price differentials not only violates
section 5a(a)(10) of the Act, but also is contrary to Commission
Guideline No. 1 and the Commission's policy on differentials. See,
CFTC Guideline No. 1, 17 CFR part 5, appendix A; and Memorandum from
Mark Powers, Chief Economist to the Commission, dated March 22,
1977, adopted by the Commission at its meeting of May 3, 1977
(Powers Memorandum).
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    In addition, the proposed contingency plan providing for
alternative delivery procedures when river traffic is obstructed does
not meet the objectives of section 5a(a)(10). By requiring lengthy
advance notice of a river traffic obstruction before the contingency
plan applies, by limiting the contingency plan only to instances of
river traffic obstructions south of the delivery area, by limiting the
relevant river traffic obstructions to lock closures, by requiring
unduly lengthy obstructions, and by specifying a differential that does
not conform to the locational differentials found to be appropriate by
the Commission, the CBT's proposed plan fails to diminish the potential
for price manipulation, market congestion, or the abnormal movement of
the commodities in interstate commerce arising from foreseeable river
traffic obstructions.
    Finally, in addition to its likely detrimental effect on the amount
of available deliverable supplies on the contracts, the proposed $40
million net worth eligibility requirement for issuers of shipping
certificates poses a significant, unnecessary, and unjustified barrier
to entry to those wishing to participate as issuers of shipping
certificates on the contracts in violation of section 15 of the Act.
This proposed $40 million net worth requirement is in addition to other
minimum financial requirements that shipping certificate issuers must
meet, including minimum working capital of $2 million, a bond or other
financial guarantee equal to the full market value of all outstanding
shipping certificates, and a limitation on the value of outstanding
certificates an issuer may issue to 25 percent of the issuer's net
worth. These requirements are fully adequate to ensure the financial
ability of issuers to perform their responsibilities under the
contracts. The burden imposed by the

[[Page 60834]]

additional $40 million net worth requirement on those otherwise
eligible to participate in the contract as shipping certificate issuers
would not only be unnecessary, but would act as a significant barrier
to participation as an issuer and would create and tend to preserve a
high level of concentration among issuers.
    The Commission's conclusions, as discussed in greater detail below,
are supported by factual analyses made by the CFTC staff and by a large
number of well-informed written comments submitted to the Commission by
commercial users of the corn and soybean futures contracts and by other
interested persons both prior to and in response to the Commission's
issuance of the proposed order. The Commission also analyzed the
documentary evidence submitted by the CBT and other commenters in
support of the CBT proposal. In addition, the CBT and other interested
members of the public presented oral and written comments to the
Commission during an open meeting of the Commission prior to its
issuance of the proposed order. The CBT was also heard by the
Commission at a public hearing convened subsequent to issuance of the
proposed order. The written and oral comments of the CBT received in
connection with that hearing, along with comments filed by the public
on the proposed order and written exceptions filed by the CBT, were
reviewed by the Commission and were considered by it in arriving at its
conclusions and in adopting this final Order.
    The CBT and a number of commenters raised objections to the
Commission's proposed order. In response to some of these points, the
Commission has made a number of changes from the order as proposed in
adopting this Order as final. These changes include revisions to the
calculation of some of the data in the Order. These revisions were made
in response to suggestions and questions raised by the CBT at its
hearing and in its various filings and in informal discussions with the
CBT staff. They reflect corrections of calculations and of the
formatting of certain data submitted to the Commission by the CBT. In
addition, at the suggestion of the CBT in its oral and written
statements filed at the hearing and in its written exceptions filed
thereafter, the Commission has modified its estimate of September corn
and soybean production.
    The final Order clarifies two provisions in attachment 1 by
deleting several references to ``warehouse receipts'' which appeared in
attachment 1 to the proposed order because they are surplusage.
    In addition, as explained in greater detail below, the Commission
has determined to authorize for trading the 1999 contract months in the
CBT's corn and soybean futures contracts under the current terms of
those contracts, while disapproving the CBT's proposed terms for those
contracts. In doing so, the Commission is responding to many commenters
who requested that the Commission authorize the listing of these
trading months in order to permit trading without delays or
interruption. The Commission recognizes the urgent need to have
certainty with respect to the terms of those contracts and the legality
of their listing.
    This action by the Commission permits the continuation of trading
in the corn and soybean contracts under the current terms, which are
familiar to the CBT, its members, and the agricultural users of these
contracts, until contract months for the year 2000, which would be
governed by the new terms of the contracts as contained in this Order.
In the interim the CBT will continue to be free to propose revisions of
the new terms to the Commission for its consideration under sections
5a(a)(10) and 5a(a)(12) or to submit a petition to the Commission to
reconsider or to amend this Order. If the CBT believes that an
alternative to the new terms and to its original proposal would better
serve its business interests and would also meet the statutory
requirements, the CBT should submit such a proposed rule revision or
petition.

I. The Section 5a(a)(10) Proceeding

    The Commission, by letter dated December 19, 1996, commenced this
proceeding by issuing to the CBT a notification under section 5a(a)(10)
of the Act finding that the delivery specifications of its corn and
soybean futures contracts no longer accomplish the statutory objectives
of ``permit[ting] the delivery of any commodity * * * at such point or
points and at such quality and locational price differentials as will
tend to prevent or diminish price manipulation, market congestion, or
the abnormal movement of such commodity in interstate commerce.''
Letter of December 19, 1996, to Patrick Arbor from the Commission, 61
FR 67998 (December 26, 1996) (section 5a(a)(10) notification). The
section 5a(a)(10) notification detailed long-term trends in the
storage, transportation and processing of corn and soybeans, related
those trends to changes in cash market conditions at the CBT delivery
locations, and analyzed the lack of consistency between the cash market
for these commodities and the delivery provisions of the contracts. Id.
at 68000-68004.
    The section 5a(a)(10) notification also recounted the CBT's failure
over the last 25 years adequately to address these structural problems
with the contracts. As noted in the section 5a(a)(10) notification,
section 5a(a)(10) was itself expressly added to the Act in 1974 after a
number of apparent manipulations and problem liquidations involving the
CBT grain contracts. Id. at 68005. In July 1989 an emergency action was
required relating to CBT's soybean contract because of a commercial
trader's holding of futures positions which substantially exceeded the
total amount of soybeans that could be delivered at the contract's
delivery points. By 1991 several major studies had been completed
demonstrating the inadequacy of the CBT's delivery points.
Nevertheless, the CBT's response to these problems was limited. Id. at
68006. As the Commission noted in the section 5a(a)(10) notification,
when the Commission approved certain changes proposed by the CBT to
address these problems in 1992, it cautioned that the CBT's response
was merely a short-term palliative and urged the CBT actively to
consider more significant contract changes. Id. at 68007.
    Only three years later, three of the existing six Chicago
warehouses regular for delivery under the futures contracts ceased
operations, a symptom of the serious, fundamental problems with the
contracts' delivery specifications. At the urging of the Commission,
the CBT formed a special task force to address the delivery problems.
That task force spent a year developing proposed changes to the
contracts' specifications which were modified by the CBT's board of
directors. The modified proposal was then defeated by a vote of the CBT
membership on October 17, 1996.
    Subsequently, after an additional Chicago delivery warehouse
stopped accepting soybeans and corn in late October 1996, the
Commission formally commenced this proceeding under section 5a(a)(10)
of the Act on December 19, 1996. The section 5a(a)(10) notification
found that the CBT corn and soybean futures contracts no longer met the
requirements of that section of the Act and notified the CBT that it
had until March 4, 1997, the statutory period of 75 days, to submit for
Commission approval proposed amendments to the contracts' delivery
specifications to bring them into compliance with the Act.

[[Page 60835]]

    The CBT, on April 16, 1997, submitted its response to the section
5a(a)(10) notification in the form of proposed exchange rule
amendments.<SUP>2</SUP> Previously, the Commission had published the
substance of the CBT's proposed amendments in the Federal Register for
a 15-day comment period.<SUP>3</SUP> 62 FR 12156 (March 14, 1997). In
response to requests for additional time to comment on the proposal,
the Commission on April 24, 1997, extended the comment period until
June 16, 1997. 62 FR 1992. <SUP>4</SUP>
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    \2\ While the CBT labeled its submission of the proposed rule
amendments as having been made pursuant to section 5a(a)(12) of the
Act as well as section 5a(a)(10), the Commission is applying its
authority and procedures set forth in section 5a(a)(10) with regard
to its consideration of the CBT's submission.
    Section 5a(a)(12) of the Act provides that ``the Commission
shall disapprove after appropriate notice and opportunity for
hearing any such [exchange] rule which the Commission determines at
any time to be in violation of the provisions of this Act or the
regulations of the Commission.'' In addition, section 8a(7) of the
Act empowers the Commission to alter or to supplement exchange rules
as necessary or appropriate ``to insure fair dealing in commodities
traded for future delivery on such contract market.'' Such changes
or alterations may address contract terms or conditions, among other
matters.
    The Commission is exercising its authority under section
5a(a)(10) of the Act to change and to supplement the CBT proposal.
Nevertheless, the Commission, for the reasons discussed in this
Order, necessarily also finds that the CBT proposal must be
disapproved under section 5a(a)(12) of the Act as being inconsistent
with the requirements of sections 5a(a)(10), 8a(7) and 15 of the Act
and must be altered and supplemented under section 8a(7) of the Act.
    \3\ On March 4, 1997, the CBT notified the Commission that its
Board had authorized the submission of the proposed amendments to
the CBT membership for a formal vote. On April 15, 1997, the CBT
membership voted in favor of the proposed amendments, and the CBT
formally submitted them for Commission review the next day.
    \4\ Also on April 24, 1997, the CBT informed the Commission by
letter that it would the next day list, or relist, for trading the
July and December 1999 corn futures contract months and the July and
November 1999 soybean futures contract months. By letter dated May
2, 1997, the Commission notified the CBT that the listing or
relisting of these contract months ``is not legally authorized at
the present time,'' that the Commission ``reserves all of its
authority under sections 5a(a)(10), 5a(a)(12) and 8a(7) of the Act
to approve, disapprove, supplement, or modify the proposed delivery
specifications of the CBT corn and soybeans futures contract and to
apply that determination to the[se] . . . trading months,'' and that
the CBT ``must notify all market participants that the Commission
has not approved the listing of these contract months.''
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    The CBT requested the opportunity to appear before the Commission
``to address issues that have been generated during the comment
period.'' <SUP>5</SUP> The Commission granted the CBT's request (62
F.R. 29107 (May 29, 1997)), holding a public meeting on June 12, 1997,
to accept oral and written statements by the CBT and interested members
of the public. The participants represented a cross-section of views,
both favoring and opposing the CBT proposal. <SUP>6</SUP>
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    \5\ The Commission received almost 700 comments on the CBT's
proposal, the largest number of comments ever received by the
Commission on any issue before it. The vast majority of the comments
were opposed to the CBT proposal for a variety of reasons. Many of
the comments were well reasoned and contained valuable factual
information and data which were important supplements to the
information provided by the CBT in its submission.
    \6\ Written statements in connection with the meeting were
submitted to the Commission for inclusion in the record and, along
with a transcript of the meeting, have been entered into the
Commission's comment file. Participants included a United States
Senator, a United States Representative and a state government
representative from the state of Ohio, (transcript at 69-75, 29-35,
19-26); a United States Representative and a state government
representative from the state of Michigan, (transcript at 9-14, 14-
19); representatives of six commercial users of the contracts
(transcript at 116-168); and representatives of three producer
associations (transcript at 169-183). The CBT presented its views
through the statements of six persons (transcript at 27-29, 36-69).
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    On September 15, 1997, the Commission issued a proposed order,
publishing its text in the Federal Register with a request for public
comment. <SUP>7</SUP> 62 FR 49474 (September 22, 1997). It should be
noted that problems under the current corn and soybean contracts have
continued to the present. For example, the September 1997 soybean
contract experienced significant price distortions during September
apparently due in part to shortness of available deliverable supplies.
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    \7\ Subsequently, the Commission also published for public
comment notice that it was proposing to disapprove application of
the terms proposed by the CBT to the January 1999 soybean futures
contract and the March 1999 corn futures contract. 62 FR 5108
(September 30, 1997). The CBT purportedly listed those futures
contracts for trading after issuance of the September 15, 1997,
proposed order. The comment period on that notice also ended on
October 22, 1997.
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    The comment period on the proposed order expired on October 22,
1997. Over 230 commenters submitted comments to the Commission on the
proposed order. <SUP>8</SUP> In addition, the Commission held a public
hearing on October 15, 1997, at which the CBT was afforded the
opportunity mandated under section 5a(a)(10) of the Act to appear
before the Commission and to be heard. In addition to its oral
presentations, the CBT submitted written statements and documentary
evidence. A transcript of the hearing and all attendant written
statements and documents have been included in the public comment file
of this proceeding. <SUP>9</SUP> The CBT was also provided with an
opportunity to file exceptions to the proposed order by October 22,
1997, and the CBT did so.
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    \8\ Comments were received by the Commission offering a wide
range of opinion. Many took issue with the philosophy underlying the
section 5a(a)(10) statutory authority which permits the Commission
to order an exchange to change or to supplement contract terms that
in its opinion do not accomplish the objectives of providing for
delivery at such point or points and at such price differentials as
will tend to prevent or to diminish price manipulation, market
congestion, or the abnormal movement of such commodity in interstate
commerce. Others took issue with the Commission's proposed order for
not going far enough, particularly with respect to its failure to
order the retention of Toledo and St. Louis as delivery points for
the CBT corn contract. As discussed above, the Commission has
considered carefully all of the comments submitted and has made
several changes or modifications to the final Order in response to
them.
    \9\ Testimony given by CBT spokespersons during the October 15,
1997, public hearing, as reflected in the hearing transcript, is
cited hereinafter by using the abbreviation ``tr.'' followed by the
relevant page number(s). Citations to the CBT letter of exceptions
dated October 22, 1997, use the abbreviation ``October 22, 1997
exceptions'' followed by the relevant page number(s).
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II. The CBT Proposal Responding to the Section 5a(a)(10)
Notification

    In correspondence dated April 16, 1997, the CBT responded to the
section 5a(a)(10) notification by submitting proposed amendments to the
terms and conditions of its corn and soybean futures contracts for
Commission review. The data submitted by the CBT to justify its
proposal were inadequate to permit a determination of whether the
proposal met the requirements of section 5a(a)(10) of the Act and
contained certain flaws.<SUP>10</SUP> Therefore, the Commission was
required independently to collect and to analyze the data necessary for
a proper analysis of the CBT's proposal. The CBT supplemented its
original submission on more than one occasion--most recently on August
25, 1997. It also modified and supplemented its analysis supporting its
proposal during the meeting of June 12, 1997, during the hearing of
October 15, 1997, and in its various written submissions and comments.
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    \10\ In this regard, the Act, Guideline No. 1, and Commission
rule 1.41 provide that an exchange must demonstrate that its
proposed rule amendments meet the requirements of the law. When
exchange submissions fail to provide sufficient information to
permit the Commission to make a determination, the Commission can
refuse to consider a proposed amendment and can remit the proposed
rule for further justification. See, 17 CFR 1.41(b). However, in
this case the Commission chose to supplement the CBT submission with
its own research and to act on the CBT proposal.
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    The CBT's proposal would replace the existing delivery system
involving delivery of warehouse receipts representing stocks of grain
stored at terminal elevators in Chicago, Toledo, and St. Louis with
delivery of shipping certificates. <SUP>11</SUP> A shipping certificate

[[Page 60836]]

would provide for corn or soybeans to be loaded into a barge at one of
the shipping stations located along a 153-mile segment of the Illinois
River from Chicago (including Burns Harbor, Indiana) to Pekin,
Illinois. (See map below.) Delivery in Chicago would also be permitted
by rail or vessel. Delivery at all eligible locations would be at par.
The CBT's proposal would eliminate the current delivery points on its
corn and soybean futures contracts at Toledo, Ohio, and St. Louis,
Missouri.
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    \11\ A 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 decides to surrender the
certificate to the issuer. Unlike an issuer of a corn or soybean
warehouse receipt, which must have the product in storage to back
the receipt, an issuer of a shipping certificate would be able to
honor its delivery obligation not only from inventories, but also
from anticipated receipts or purchases of corn or soybeans after the
holder surrenders the certificate.
---------------------------------------------------------------------------

    In addition to having a shipping station located along the
specified segment of the Illinois River capable of loading barges,
firms eligible to issue shipping certificates would be required to meet
a minimum net worth standard of $40 million. This minimum net worth
standard is not applicable to the CBT's other agricultural futures
contracts and would be in addition to the CBT's existing requirement of
$2 million working capital required of firms regular for delivery under
all of its futures contracts for agricultural products. The CBT
proposal also would require the issuer to have a letter of credit or
other guaranteed credit instrument collateralizing the full market
value of the issued certificates and would establish limits on the
amount of outstanding shipping certificates issued by an issuer. These
limitations would be: (a) for northern Illinois River locations, 30
times the registered daily barge loading rate of each shipping station;
(b) a value no greater than 25% of the issuer's net worth; and (c) for
Chicago locations only, the registered storage capacity of the
facility.
    In addition, the proposal would impose requirements regarding an
issuer's rate of loading barges. <SUP>12</SUP> Once a shipping
certificate was surrendered to the issuer, the issuer would have to
begin loading product within three business days of surrender and
receipt of loading orders or one business day after placement of the
certificate holder's barge, whichever were later. This loading would be
required to take precedence over all other barge loadings for eight
hours per day at the issuer's loading facility.
---------------------------------------------------------------------------

    \12\ The issuer's registered daily rate of loading would be not
less than (a) for northern Illinois River locations, one barge per
day per shipping station and (b) for Chicago locations, three barges
per day per shipping station.
---------------------------------------------------------------------------

    Shipping certificate holders would be required to pay shipping
certificate issuers a daily premium charge until the certificate were
surrendered. <SUP>13</SUP> The last trading day for expiring corn and
soybean futures months would be the business day preceding the 15th
calendar day of the delivery month, with all deliveries of shipping
certificates required to be completed by the second business day
following the last trading day. (Currently, the last trading day is the
eighth-to-last business day of the delivery month, with futures
delivery of warehouse receipts continuing through the end of the
month.)

    \13\ This charge would be 12/100 of one cent per bushel for
Chicago and 10/100 of one cent per bushel for issuers along the
northern Illinois River.
---------------------------------------------------------------------------

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[[Page 60837]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.025



BILLING CODE 6351-01-P

[[Page 60838]]

III. Deliverable Supplies of Soybeans Are Inadequate Under Section
5a(a)(10)

A. The Standard for Measuring Adequacy of Deliverable Supplies

    Pursuant to section 5a(a)(10), the Commission must assess whether
the CBT proposal meets the standard set by that section to ``permit the
delivery * * * at such point or points and at such * * * locational
price differentials as will tend to prevent or diminish price
manipulation, market congestion, or the abnormal movement of such
commodity in interstate commerce.''
    One criterion for whether a delivery proposal meets the standards
of section 5a(a)(10) is whether the available deliverable supplies of
the commodity at the delivery points specified are adequate to tend to
prevent or to diminish price manipulation, market congestion, and the
abnormal movement of the commodity in interstate commerce. As discussed
below, other aspects of a proposed futures contract may violate section
5a(a)(10) by tending to cause the prohibited results, but adequate
deliverable supplies are a sine qua non for any contract under section
5a(a)(10).
    The Commission believes that, to meet the statutory requirement of
tending to prevent or to diminish price manipulation, market
congestion, or the abnormal movement of a commodity in interstate
commerce, a futures contract should have a deliverable supply that, for
all delivery months on the contract, is sufficiently large and
available to market participants that futures deliveries, or the
credible threat thereof, can assure an appropriate convergence of cash
and futures prices. To prevent unwarranted distortion of futures prices
in relation to the cash market, the futures contract's delivery terms
must reflect a product--in quality, form, location, mode of
transportation, etc.--that is readily saleable in the cash market.
    Commission Guideline No. 1 (17 CFR part 5, appendix A) provides
some guidance with respect to the adequacy of the delivery terms of a
futures contract. Guideline No. 1 requires that exchanges provide
justification concerning significant contract terms--particularly
delivery provisions--for new or amended futures contracts. This
justification should provide evidence that the proposed contract terms
and conditions are in conformity with practices in the underlying cash
market, that those terms and conditions will provide for deliverable
supplies that will not be conducive to price manipulation or
distortion, and that such supplies reasonably can be expected to be
available to the short trader and saleable by the long trader at their
market value in normal cash market channels.<SUP>14</SUP>
---------------------------------------------------------------------------

    \14\ This Commission standard addresses concerns over
manipulation from both the long and short side. Availability of
adequate deliverable supplies tends to prevent price manipulation by
the longs on a futures contract by ensuring that the shorts on the
futures contract can obtain the commodity to make delivery on the
futures contract without artificial constraints at a price
reflecting fundamental demand and supply conditions in the cash
market. The ready saleability in the cash market of the commodity
received through delivery on the futures contract by contract longs
tends to prevent price manipulation by the shorts on the futures
contract. The Commission has considered both short-side and long-
side manipulations in making its determinations in this Order.
    The CBT has attempted to justify its proposal by arguing that
restricting available deliverable supplies through contract delivery
terms is an appropriate method of reducing the likelihood of short-
side price manipulation. The Commission disagrees with this
argument. Such restrictions in supplies render a contract highly
vulnerable to price manipulation by the longs and are unnecessary if
the contract is designed so as to permit the saleability of the
commodity received by the takers of delivery at the normal cash
market price.
---------------------------------------------------------------------------

    Judging the adequacy of deliverable supply in the context of a
section 5a(a)(10) proceeding is more important than and significantly
different from determining adequacy in the routine review of
applications for new contract market designations. This section
5a(a)(10) proceeding involves contracts that are known to have very
large and well-established markets, a history of large trader
positions, and a decades-long history of surveillance problems. Indeed,
the Commission has already made an affirmative finding that the
delivery provisions of the current contracts do not meet the standards
of section 5a(a)(10) of the Act, and the Commission must decide whether
the CBT's proposal goes far enough to cure that failure.
    To determine an appropriate standard for measuring the adequacy of
deliverable supplies under the CBT proposal, the Commission has
examined separately for corn and soybeans the relationship between the
level of deliverable stocks and the presence of a price premium for the
expiring futures month over the next futures month (a price inverse).
The presence of such a premium is an indication of tight deliverable
supplies, potentially creating a price distortion. In situations where
limited supplies lead to such a price inverse, futures contracts are
significantly vulnerable to price manipulation, market congestion, and
the abnormal movement of the commodity in interstate commerce under the
terms of section 5a(a)(10), particularly when traders hold large
positions.<SUP>15</SUP>
---------------------------------------------------------------------------

    \15\ Of course, price inverses in futures contracts can occur as
a normal result of short supplies in the cash market and can thus
accurately reflect the cash market. However, when the available
deliverable supplies under a futures contract have been so limited
by the contract terms as to create such a shortage artificially,
then the resultant susceptibility to price manipulation and price
distortion are exactly the results forbidden by section 5a(a)(10).
The CBT proposal's contract terms would cause such a limitation in
available deliverable supplies, as discussed below.
---------------------------------------------------------------------------

    For soybeans, the Commission's staff analysis demonstrated a
positive relationship between price inverses and deliverable supplies
of less than 12 million bushels (2,400 contracts). Price inversions
occurred in 12 of the 17 expirations of the CBT's soybean futures
contracts when deliverable supplies were less than 12 million bushels
or 2,400 contracts. Furthermore, such inversions occurred in 10 of the
11 such expirations when a trader's position exceeded 600 contracts, a
relatively common occurrence in the soybean futures market. In
contrast, when deliverable supplies exceeded 2,400 contracts,
regardless of the size of large traders' positions, there was only a
single instance of price inversion. The 2,400-contract level of
deliverable supplies constitutes four times the speculative position
limit for the contract, a benchmark historically used by the
Commission's staff in analyzing the adequacy of deliverable supplies
for new contracts.
    The analysis for the corn market found a comparable relationship
between price inverses and deliverable supplies at the level of 15
million bushels or 3,000 contracts. Price inverses occurred in seven of
the ten corn expirations when deliverable supplies were less than 3,000
contracts.<SUP>16</SUP> This analysis supports using as a measure of an
inadequate level of deliverable supplies under section 5a(a)(10) a
level below 2,400 contracts for soybeans and a level below 3,000
contracts for corn.
---------------------------------------------------------------------------

    \16\ In all seven expirations the largest long position exceeded
600 contracts.
---------------------------------------------------------------------------

    However, the history of these contracts demonstrates that a higher
level of deliverable supplies may, in fact, be necessary to protect
against price manipulation. Therefore, the Commission also has decided
to consider an additional measure based on historic experience with
manipulation and price distortion in these contracts. During the July
1989 soybean futures contract expiration, the Commission exercised its
surveillance powers to force the reduction of the long futures position
of the Ferruzzi group of

[[Page 60839]]

companies, and the CBT declared a market emergency and ordered the
phased reduction of all positions above a specified size. Both the
Commission and the CBT believed that the position of the Ferruzzi group
posed a significant threat of manipulation and acted on that
belief.<SUP>17</SUP> Just prior to the CBT emergency action, Ferruzzi's
long position in the July 1989 soybean future was about 20 million
bushels or 4,000 contracts. To avoid a repetition of such a situation,
deliverable supplies of at least 4,000 contracts would be necessary.
---------------------------------------------------------------------------

    \17\ Although this incident involved soybean futures, it was
recognized to have broader implications for the CBT's grain
contracts and led to a reappraisal of the adequacy of the CBT's
delivery terms for its wheat, corn, and soybean futures contracts
and to revisions of all three contracts.
---------------------------------------------------------------------------

    In its analysis of the adequacy of the deliverable supplies under
the CBT proposal, the Commission has considered both of these measures,
as well as other relevant information.

B. The CBT Submission Does Not Demonstrate That Its Proposal Meets the
Statutory Standard of Adequate Deliverable Supplies

    The CBT has failed to provide data that demonstrates the adequacy
of available deliverable supplies under its proposal. It supports its
proposal by general statements about production and transactions in the
cash markets in the vicinity of the delivery area, contending, for
example, that its proposed delivery area

    * * * is located along more than 150 miles of the northern
Illinois River, which is one of the world's largest and most active
cash grain markets, handling over 500 million bushels of corn and
soybeans per year. It substantially increases the supply of grain
eligible for delivery on our futures contracts over the current
delivery system, thereby minimizing the potential for price
distortions and manipulation.

CBT July 1, 1997, submission, p. 2-2.
    Data concerning total corn and soybean production and handling in
the areas near the delivery points are not an adequate measure of
deliverable supplies under the proposed contracts in light of the CBT
proposal's heavy reliance on barge delivery along the northern Illinois
River, which involves product primarily destined for the export market.
Most production and handling of corn and soybeans in the vicinity of
the proposed delivery points historically have involved product
destined for the domestic market, and only a portion of that product
has traditionally been loaded on barges as required in the CBT
proposal. Therefore, the proper measure of available supplies must be
based on historical barge shipment data. Such data are the best measure
of that portion of the stocks in the vicinity of the northern Illinois
River delivery points which is realistically available for delivery
onto barges on the river as required by the CBT proposal.<SUP>18</SUP>
---------------------------------------------------------------------------

    \18\ At the October 15, 1997 hearing (tr. at pp. 34-35) and in
its October 22, 1997 exceptions at pp. 29-30, the CBT introduced new
arguments relating to corn and soybean stocks based upon data
provided to the CBT by the Commission. Those data consisted of a
survey of data for one year estimating September stocks within the
vicinity of the northern Illinois River and extrapolations from that
data for additional years. The Commission placed little weight on
these data not only because they rely upon only one year's actual
observation, but more importantly because they provide no guidance
in determining the proportion of such stocks which form part of the
proposed contracts' deliverable supplies.
    The CBT argued that all stocks of soybeans within twenty-five
miles (or more) of the northern Illinois River should be included in
deliverable supplies. However, only that relatively small portion of
the stocks available for barge shipment is properly considered as
available for delivery under the terms of the contract proposed by
the CBT. Stocks destined for other uses, such as the larger domestic
processing market, cannot be considered to be available.
---------------------------------------------------------------------------

    To rely on additional supplies destined for domestic processing and
other uses would be to assume that the futures contract would divert
those supplies to the export market which barge delivery largely
constitutes, thus causing an abnormal movement in interstate commerce
forbidden by section 5a(a)(10). The CBT has suggested that an
appropriate measure of deliverable supplies is the amount of commodity
that would be made available for futures deliveries in response to
price increases on the futures markets resulting from manipulation
attempts and other causes--its ``elasticity of supply'' argument. CBT
October 22, 1997 exceptions at p. 19. However, diversions of a
commodity from its normal movement and uses in the cash market in
response to rising prices on futures markets which are not reflective
of price increases in the cash market are precisely the prohibited
effects which section 5a(a)(10) seeks to prevent.
    The CBT also argued that deliverable supplies are adequate based on
the delivery capacity of firms along the river. The CBT states that
there are seven firms with a cumulative daily barge loading capacity of
5.5 million bushels of grain and a 30-day loading capacity of 171.8
million bushels of grain.<SUP>19</SUP> (CBT April 16, 1997, submission,
attachment 4.) However, the CBT's reliance on the loading capacity of
firms in the delivery area as an indicator of adequacy of deliverable
supplies is misplaced. As the unused delivery capacity in Chicago
clearly demonstrates, delivery capacity bears little relation to the
amount of deliverable supplies actually available at a particular
location. The CBT's loading capacity measure, which is based on its
proposed maximum limits on the shipping station's ability to issue
shipping certificates (30 times a station's 8-hour loading capacity),
far exceeds the highest observed level of actual combined monthly corn
and soybean barge shipments at the delivery points during the 11-year
period studied, 1986 through 1996.
---------------------------------------------------------------------------

    \19\ According to the CBT, the firms and their percentage share
of loading capacity are: Archer Daniels Midland Co., 41 percent;
Continental Grain Company, 23 percent; Cargill, Inc., 12 percent;
Consolidated Grain and Barge, ten percent; Sours Grain Company, six
percent; American Milling Company, six percent; and Garvey
International, two percent. (CBT April 16, 1997, submission,
attachment 14.)
---------------------------------------------------------------------------

    Moreover, the CBT overstated the loading capacity related to the
contracts by including the capacity of three firms that would not meet
the CBT's proposed $40 million minimum net worth requirement to qualify
as shipping certificate issuers under the contracts. In doing so, the
CBT also significantly understated the level of concentration of the
proposed delivery system and ignored the exclusionary effect of its $40
million net worth requirement.
    The CBT, in its initial submission, also provided inflated data on
barge shipments. These data significantly overstated the amount of
barge shipments by including shipments from part of the Illinois River
outside of the CBT's proposed delivery area of the contracts. The CBT's
data also included barge shipments by all shippers, including three
shippers not meeting the eligibility requirements to be issuers of
certificates under the contracts, and thus overstated the deliverable
supplies available in that respect as well.

C. The CBT Proposal Fails to Provide Adequate Deliverable Supplies For
Soybeans

1. Methodology
    The Commission staff compiled an extensive amount of data from
which the Commission could estimate deliverable supplies. These data
were assembled from information supplied by the United States
Department of Agriculture (USDA), the U.S. Army Corps of Engineers, the
Coast Guard, grain merchants, and the CBT.
    The CBT proposal provides for delivery from Chicago by rail,
vessel, and barge and along the northern Illinois River by barge. The
contracts are

[[Page 60840]]

essentially designed to reflect the export market price for corn and
soybeans, since the vast majority of corn and soybeans loaded on
vessels and barges at Chicago and on barges along the northern Illinois
River is destined for export markets. While Chicago rail shipments play
some role in the domestic market, that role has diminished so as to be
very small.
    The potentially available gross deliverable stocks along the
northern Illinois River delivery area for each delivery month were
estimated by summing barge shipments from the CBT's proposed delivery
points on the northern Illinois River for that month and all subsequent
months of the same crop year to and including September, which was
assumed to be the end of the crop year.<SUP>20</SUP> Since the amount
shipped during a given month and in each succeeding month of the crop
year must have been in transit or in storage in some location near the
river at the beginning of the month, this summing procedure provides an
estimate of the gross corn and soybean supplies potentially available
for delivery from the proposed delivery points during each delivery
month.<SUP>21</SUP>
---------------------------------------------------------------------------

    \20\ Corn and soybeans are both harvested beginning in mid-
September or October, the start of a new crop year. All deliveries
of corn and soybeans throughout the year subsequent to harvest are
made from stored supplies. These supplies are consumed over time,
reaching their lowest level during the summer, until the next
harvest replenishes the supply.
    \21\ The amount of barge shipments for September was reduced by
50% prior to its inclusion in the sum for earlier old crop months.
This 50% reduction is an amount suggested by trade sources to
reflect the likelihood that September barge shipments consisted, in
part, of new crop supplies which were not available for shipment
during the old crop year. The full amount of September shipments was
included, however, in determining September supplies. This
calculation has been adjusted in response to the CBT's suggestions.
Generally, September new crop production occurs late in the month.
---------------------------------------------------------------------------

    Because these stocks reflect the quantity of soybeans and corn
actually shipped via the northern Illinois River, they represent a
reasonable and accurate historical estimate reflecting the quantity of
these commodities that was potentially available to the proposed
northern Illinois River delivery points at prevailing cash market
supply and demand conditions. While other supplies of corn and soybeans
are in the vicinity, they historically moved to other demand centers
rather than moving into the flow of product via barge shipment down the
northern Illinois River primarily destined for the export market. If
the CBT contracts under the proposed delivery terms were to draw these
supplies from their usual destinations in the domestic market to
futures deliveries, an abnormal movement in interstate commerce would
occur. Therefore, such other supplies should not be considered in
determining the adequacy of potentially available deliverable supplies.
    For Chicago, potentially available gross deliverable supplies were
estimated as the sum of stocks available at the beginning of each
delivery month plus receipts of corn or soybeans during that month.
Receipts were included because shipping certificates do not require the
commodity to be in store at the delivery point. Thus, Chicago warehouse
operators potentially could issue shipping certificates against stocks
in store at the beginning of a delivery month and against actual and/or
anticipated receipts of corn or soybeans as well.
    These estimates of potentially available gross deliverable supplies
were adjusted to reflect the effect of the CBT's proposed minimum net
worth requirement on the number of firms that would be eligible to make
delivery and, for Chicago, the proposed limits on the number of
shipping certificates that could be issued by those firms. The CBT
proposal restricts eligibility of issuers of shipping certificates to
firms meeting a $40 million minimum net worth requirement. This
eligibility

[[Page 60841]]

requirement would eliminate barge shipments made by ineligible firms
among those firms which currently operate loading facilities along the
northern Illinois River delivery area and likely would reduce
deliverable supplies originating from the proposed northern Illinois
River delivery area by an average of about five percent. However, it is
possible that some portion of the supplies that normally are shipped by
the firms not meeting that eligibility requirement--although certainly
not all those supplies--would become available for futures delivery by
diversion of the supplies to the four eligible firms. Accordingly, the
Commission calculated two separate estimates of potentially available
gross deliverable supplies: one excluding shipments by firms not
eligible to issue shipping certificates under the CBT's proposal and
the second including such ineligible firms' shipments.
    Another adjustment was made to reflect current capacity restraints.
Because of the recent closure of four of the six elevators in Chicago,
prior years' data for Chicago were adjusted to reflect current maximum
capacity levels in that area.<SUP>22</SUP>
---------------------------------------------------------------------------

    \22\ The procedure to determine the amount of this adjustment
was to sum the observed stocks and receipts of corn and soybeans in
Chicago plus stocks of wheat. Whenever such a sum would have
exceeded current total registered storage capacity, the estimated
supplies of corn and soybeans were reduced proportionately by share
of stocks. The result clearly overstates potential gross deliverable
supplies of corn and soybeans in Chicago because it assumes that the
facilities eligible for delivery of such commodities would be
operating at full capacity, while Chicago facilities have
historically operated at a fraction of capacity and continue to do
so, as shown on a chart below. The numbers in the final Order are
adjusted from those in the proposed order to reflect corrections in
computation and in the CBT data on stocks of grain and soybeans in
Chicago.
---------------------------------------------------------------------------

    Through this analysis, the Commission arrived at potentially
available gross deliverable supplies, as discussed below. As is also
described in more detail below, those gross amounts do not constitute a
basis for determining whether deliverable supplies under the CBT
proposal are adequate to meet the requirements of section 5a(a)(10).
Instead, those amounts are only the beginning point for an analysis of
deliverable supplies and must be reduced because of various additional
factors limiting the available deliverable supplies, as discussed
below.
2. Potentially Available Gross Deliverable Soybean Supplies
    Delivery months under the CBT proposed soybean futures contract
include July, August, and September, inter alia. These months are at
the end of the crop year and therefore historically reflect the lowest
available supplies. As shown in the following charts for soybean
supplies attributable to the four firms which would be eligible to
issue shipping certificates, potentially available gross deliverable
supplies under the CBT proposal for July, August, and September do not
meet an adequate level considered by the Commission to be required by
section 5a(a)(10) of the Act. Specifically, for July, the gross
deliverable supplies of soybeans were less than the 2,400-contract
level in three of the 11 years covered by the analysis, while the
4,000-contract level was not reached in eight of the 11 years. For
August, gross deliverable soybean supplies fell below 2,400 contracts
in four years, and the 4,000-contract level was not reached in any of
the 11 years. Gross deliverable supplies in September were less than
the 2,400-contract level in seven of the 11 years and did not reach the
4,000-contract level on any occasion.<SUP>23</SUP> As demonstrated in
the following charts, Chicago supplies played a critically important
role in almost all instances in which the 2,400-contract level was
reached or exceeded.

    \23\ As shown in the charts for shipments by all firms,
including those firms that would be ineligible to issue certificates
under the CBT proposal, the proposal improved marginally in that
gross deliverable supplies for all firms were less than 2,400
contracts in six rather than seven years for September.

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[[Page 60842]]

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[[Page 60843]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.027



BILLING CODE 6351-01-C

[[Page 60844]]

3. Potentially Available Gross Deliverable Corn Supplies
    The CBT's proposed corn contract would include the contract months
of July and September, inter alia.<SUP>24</SUP> In the case of corn,
the potentially available estimated gross deliverable supplies for July
attributable to the four eligible firms reached or exceeded the 3,000
and 4,000 contract levels in all years. However, gross deliverable
supplies of corn for the four eligible firms in September fell below
the 3,000-contract level in seven of the 11 years analyzed and were
less than 4,000 contracts in nine years. The gross deliverable supply
estimates for all existing firms differed only slightly from the
results for the four eligible firms.
---------------------------------------------------------------------------

    \24\ Unlike the soybean futures contract, there is no August
contract month listed for corn.

BILLING CODE 6351-01-P

[[Page 60845]]

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[[Page 60846]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.029



BILLING CODE 6351-01-C

[[Page 60847]]

4. September New Crop Production
    Neither corn nor soybeans reached adequate levels of potentially
available gross deliverable supplies for September. However, because
September is a transition month between the old crop and the new crop,
deliverable supplies estimates based upon barge shipments data for
September may understate September potentially available gross
deliverable supplies. The harvest of the new crops of corn and soybeans
generally begins sometime in mid to late September, and thus, new crop
production may be available for delivery on the September contracts.
Accordingly, the Commission also calculated estimates of new crop
production of corn and soybeans that may have become available during
the month of September. Those estimates, however, are less reliable
than the barge shipment data discussed above.
    The following table shows estimated September new crop production
within 25 miles (trucking distance) of the proposed delivery points for
corn and soybeans derived from U.S. Department of Agriculture data
submitted to the Commission by the CBT.<SUP>25</SUP> Some portion of
this new crop production might have been available for delivery during
September. However, the Commission has already assumed that half of the
September northern Illinois River shipment data shown above constitutes
new crop supplies, based on discussions with trade sources.
Furthermore, a substantial portion of the new crop production
historically has been destined for uses other than barge shipments,
such as domestic processing.
---------------------------------------------------------------------------

    \25\ The table has been modified to reflect corrections to the
CBT-supplied data noted by the CBT at the October 15, 1997, hearing.
---------------------------------------------------------------------------

    A significant amount of corn was produced during September and
possibly might augment to some extent the potentially available gross
deliverable supplies discussed above. September soybean production has
generally been considerably smaller than September corn production.
Moreover, September soybean production does not overcome the inadequate
potentially available gross deliverable supplies of soybeans in July
and August.
    The likelihood of price manipulation in September may be somewhat
less than in July or August because it is a transitional month between
old and new crop years. The end of the crop year generally is a period
of low supplies and relatively high prices. However, the harvest of the
new crop replenishes supplies and frequently leads to lower prices.
Significant new crop supplies usually become available in areas
tributary to the northern Illinois River by mid October. The incentive
to manipulate prices of the September futures contracts by attempting
to corner the remaining old crop supplies might be reduced by the
potential losses that a manipulator might incur in reselling the
shipping certificates or product obtained through September deliveries
at lower prices after the arrival of new crop supplies.
    Nonetheless, it should be noted that a significant price distortion
was experienced in connection with the expiration of the September 1997
soybean futures contract. Under the CBT proposal, the use of shipping
certificates rather than warehouse receipts to effect delivery might
permit expanded deliveries of new crop production under the September
contract. Rather than requiring movement of new crop supplies into a
warehouse at a terminal market before delivery, as is necessary under
current warehouse receipt delivery, the CBT proposal would allow the
issuance of shipping certificates for locations closer to the
production area and for up to 30 days of loading capacity and thus
would give issuers more opportunity to deliver some new crop
production. Issuers might issue some shipping certificates on the basis
that new crop supplies which were not immediately in hand might be
available by the time loading was required under the shipping
certificates.
    The Commission considers the low level of potentially available
gross deliverable supplies of corn, which is limited to September, to
be of less regulatory concern than the low levels of such supplies of
soybeans which extend throughout the three summer months. The shortage
of corn supplies is apparently of brief duration, and the expectation
of abundant supplies of new crop production of corn by October reduces
the likelihood that the corn shortage in September would lead to the
prohibited effects under section 5a(a)(10).

  Estimated Corn and Soybean Production Located Near Proposed Delivery
                         Points During September
                      [5,000-Bushel Contract Units]
------------------------------------------------------------------------
                                                    Estimated September
                                                       production *
                    Crop year                    -----------------------
                                                     Corn      Soybeans
------------------------------------------------------------------------
1986............................................      15,218       3,109
1987............................................      26,784       6,056
1988............................................      12,955       5,749
1989............................................      10,169       6,143
1990............................................       9,305       2,491
1991............................................      41,663       8,729
1992............................................       2,884       3,536
1993............................................       6,513       1,670
1994............................................      13,299      10,417
1995............................................      12,359       5,646
1996............................................       5,271      1,013
------------------------------------------------------------------------
* The estimated production by September 30 of each year was calculated
  by multiplying U.S. Department of Agriculture harvesting progress
  estimates for the Illinois and Indiana crop reporting districts
  adjacent to the revised delivery points by U.S. Department of
  Agriculture production data for counties located within about 25 miles
  of the proposed delivery points.

5. The CBT's Objections on Gross Deliverable Supplies
    At the October 15, 1997 hearing and in its October 22, 1997 letter
of exceptions, the CBT raised various objections to the Commission's
evaluation of potentially available gross deliverable supplies of
soybeans. In doing so, the CBT failed to recognize that the estimate of
such supplies is merely the starting point for the Commission's
analysis of available deliverable supplies, which can be arrived at
only after taking into consideration various factors reducing the
availability of supplies, as is discussed below. Furthermore, the CBT
focused solely on the 2,400 contract measure for soybeans and virtually
ignores the other important measure of 4,000 contracts.
    The CBT objected to the Commission's consideration of 1987 and 1993
river shipment data because floods and lock closings occurred during
those years. For example, the CBT objected that the gross deliverable
supplies for 1993 obtained from barge shipment data should be augmented
because in that year the upper Midwest experienced severe floods. CBT
October 22, 1997 exceptions at p. 38, tr. at pp. 22-28. The CBT argued
that the Commission should assume that the CBT would have responded by
declaring a market emergency and requiring use of alternate delivery
areas with additional deliverable supplies. However, U.S. Army Corps of
Engineer data show that barge shipments continued to move down the
Illinois River throughout this period despite the flooding and the area

[[Page 60848]]

from which the CBT argued it would have required deliveries may have
experienced even greater flooding than the regular delivery area.
Whether the CBT would have taken any action under such circumstances
and, if so, what action it would have taken are in the realm of pure
speculation. Similarly, the CBT argued that the deliverable supplies
for 1987 should be augmented because certain locks were closed, which
arguably would have triggered the CBT's contingency plan.<SUP>26</SUP>
While the CBT's argument does underscore the need for an effective
contingency plan because of foreseeable periods of river traffic
obstruction, it does not justify ignoring historical data concerning
gross deliverable supplies.
---------------------------------------------------------------------------

    \26\ In addition to being speculative, the CBT's approach
improperly over-counts gross deliverable supplies during this
period. The CBT apparently uses as a base amount the deliverable
supplies shown by the Commission's analysis for those months and
then adds to that base an additional amount based on shipments for
those same months from areas eligible for delivery under the
proposed contingency rule. However, the contingency plan would be
triggered only during such period as shipment on the northern
Illinois River was obstructed. Hence, even if the Commission were to
accept the CBT's assumptions, the shipments shown in the
Commission's analysis should not be included in the CBT's
calculation.
---------------------------------------------------------------------------

    The CBT also sought to bolster the potentially available gross
deliverable supplies for the August and September soybean futures
contracts by relying on new crop production. See, tr. at pp. 17-22 and
October 22, 1997 exceptions at pp. 29-30. As noted above, the
Commission has considered the availability of some new crop production
for the September futures contract. Although the ability to issue
shipping certificates would give issuers some flexibility to effect
deliveries from potential new crop production during September, new
crop production would not realistically be available for delivery on
the August futures contract, and the CBT has grossly overstated the
amount of new crop production available for delivery on the September
futures contract.
    It is not realistic to assume that issuers would issue certificates
representing their full 30-day capacity and would choose to load out at
least one barge per day over a six-week period. Shipments on the
northern Illinois River in the August-September period have never
approached such a large volume during the eleven years studied.
Shipments from any one shipping station on the northern Illinois River
at a rate as high as one barge per day per month have been observed
only once in July and once in September and only three times in August
during the entire eleven year period analyzed. Moreover, shipments from
a shipping station at a daily rate of one barge for one month would
have exceeded by five times the monthly average number of barges of
soybeans shipped from individual shipping stations during July, August,
and September over that period.
    Furthermore, it is extremely unlikely that an issuer would
undertake the risk involved in the CBT's hypothetical scenario. An
issuer would have to have a very large amount of old crop supplies
available to deliver until significant supplies from the harvest became
available, and the timing of the harvest is extremely variable and
difficult to predict.
6. Necessary Reductions From Gross Deliverable Supplies
    Additional factors must be considered which necessarily reduce the
above estimates of potentially available gross deliverable supplies.
These factors include: (a) the CBT proposal's reliance on Chicago as a
source of deliverable supplies; (b) the CBT's proposed three-day barge
queuing and priority load-out requirements; and (c) prior commercial
commitments of available supplies.
    In addition, further reductions must be made from gross deliverable
supplies resulting from the CBT proposal's lack of locational price
differentials and foreseeable disruptions in barge transportation on
the Illinois River. As discussed above, the CBT's proposed $40 million
minimum net worth requirement for issuers of shipping certificates also
reduces gross deliverable supplies. These additional factors are
analyzed separately in later sections of this Order.
    a. Reliance on Chicago. To the extent that potentially available
gross deliverable supplies of soybeans in some years have been at or
above the 2,400 and 4,000 contract levels, they have generally depended
on Chicago supplies to do so. For July, under the CBT proposal gross
deliverable supplies of soybeans originating solely from the northern
Illinois River delivery area reached or exceeded the 2,400-contract
level in only three of the 11 years. In August and September, under the
CBT proposal gross deliverable supplies of soybeans originating from
the northern Illinois River alone did not exceed the 2,400-contract
level on any occasion. The 4,000-contract level was not exceeded by
northern Illinois River gross deliverable supplies of soybeans under
the CBT proposal in any year in the July, August, or September delivery
months. Thus, to the very limited extent that potentially available
gross deliverable supplies in the past would have reached an adequate
level before consideration of necessary reductions, they would have
done so because of supplies in Chicago.
    Cash market activity in Chicago is likely to continue its
historical decline. While the estimation procedure for gross
deliverable supplies used in this analysis tried to correct for the
precipitous decline of the cash market in Chicago by using 100 percent
of the current capacity as a constraint on past supplies, that method
certainly overstates the actual deliverable supplies that may originate
from Chicago in the future. Chicago elevators for many years have held
stocks well below their maximum capacity levels, particularly in the
critical summer months. The following chart demonstrates that
significant underutilization of the remaining capacity in Chicago is
continuing despite the dramatic contraction in available capacity and
is highly likely to continue to do so in the future. Indeed, stocks in
Chicago in the recent past have been at less than half of capacity.
Thus, Chicago supplies will most likely be reduced significantly in the
future and would not be available in significant quantities under the
CBT proposal.<SUP>27</SUP>
---------------------------------------------------------------------------

    \27\ Moreover, there is no reason to believe, as the CBT argued
in its October 22, 1997 exceptions at p. 39, that any significant
amount, much less 20%, of the soybeans that previously flowed to
Chicago would be redirected to flow down the northern Illinois River
on barges to the Gulf. There has not been a notable increase in
barge shipments from the shipping stations on the northern Illinois
River closest to Chicago during the recent closures of elevators in
Chicago, demonstrating that such a redirection has probably not
occurred and is not likely in the future.

BILLING CODE 6351-01-P

[[Page 60849]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.030



BILLING CODE 6351-01-C

[[Page 60850]]

    b. The Three-Day Barge Queuing and Priority Load-Out Requirements.
The CBT proposal includes a provision requiring a shipping certificate
issuer to begin loading onto the certificate holder's barges within
three business days after it receives loading instructions and the
holder's barges are at the delivery facility ready to load. Most
significantly, the issuer would be required to give preference to
shipping certificate holders relative to any other customer and
proprietary business for eight hours of load-out capacity per day. This
requirement is contrary to the current contracts' delivery terms and to
cash market practice, where customers are generally accommodated on a
first-come, first-served basis. Concerns have been expressed by some
commenters that, by requiring issuers to cease loading corn and
soybeans in barges for their cash market business in order to meet the
requirements of the shipping certificates and by requiring that only
limited advance notice would have to be given to issuers, the CBT
proposal would discourage potential issuers from issuing shipping
certificates for futures delivery.
    The CBT, on the other hand, has argued that the impact of the
proposed preferential load-out requirement for futures deliveries on an
issuer's willingness to issue shipping certificates would be limited
because the rules would require the issuer to load out only eight hours
per day, leaving the remaining 16 hours of each day to load other
barges. CBT's position assumes, without providing supporting data, that
issuers would be able and willing to obtain labor for a 24-hour day, to
procure additional transportation and supplies quickly, and to move the
supplies to the waiting barges efficiently.
    While the effect of the proposed loading requirements on the
willingness of issuers to issue shipping certificates for futures
delivery is difficult to measure in advance, it represents a
significant departure from cash market practice and most likely would
reduce the amount of gross deliverable supplies.
    c. Prior Commercial Commitments of Stocks for Shipment. An
additional factor which would reduce the above estimates of gross
deliverable supplies is prior commitment of stocks for shipment.
Determining deliverable supplies on the basis of shipment information
does not make necessary deductions for that amount of the shipments
which would be unavailable for futures delivery because they were
otherwise committed and because no substitution was possible at an
equivalent market price. While a number of commenters indicated that
much of the corn and soybeans shipped on the northern Illinois River is
not irrevocably committed at the time of the shipment's origination,
the ability of firms economically to obtain supplies to meet existing
commitments for shipment from alternative sources would certainly be
limited at times. This situation would be more likely to occur in those
periods when supplies are limited, such as during the critical summer
months of July, August, and September. The commitment of supplies of
corn and soybeans under forward contracts or other marketing
arrangements would at times make them unavailable to the futures
delivery process until futures prices were significantly distorted
relative to cash prices, a result that section 5a(a)(10) is intended to
prevent. Thus, it is likely that the actual available deliverable
supplies for the futures contracts would be significantly less than
indicated by the above gross estimates.
7. Conclusion
    In summary, the proposed delivery provisions of the soybean
contract clearly fail to meet the statutory requirement for adequate
levels of deliverable supplies throughout the summer months of July,
August, and September even before the above reductions (plus those
discussed below) have been made, and the additional adjustments
required by such factors would further reduce the available deliverable
supplies. For these reasons, price distortions and manipulation, market
congestion, and abnormal movements of soybeans in interstate commerce
would be likely to occur. Additional delivery points to increase the
available deliverable supplies of soybeans, as well as other
adjustments to the CBT's proposal discussed below, are necessary to
achieve the objectives of section 5a(a)(10).
    As to the CBT proposal for corn, gross deliverable supplies
throughout the year appear to be adequate except for September. Gross
deliverable supplies for September as estimated by the Commission may
be further supplemented to some extent by new crop production in
September, and the September corn contract would be somewhat less
likely to be subject to manipulation than other months with similar low
levels because of the expectation of abundant supplies of new crop
production in the immediate future. The Commission's action in changing
and supplementing the CBT's proposed corn contract to add locational
differentials, to eliminate the $40 million minimum net worth
eligibility requirement, and to broaden the contingency plan for river
disruptions, discussed below, will have the effect of alleviating some
limitations on deliverable supplies of corn under CBT's proposal. In
light of those changes and supplements, the Commission does not find
that the available deliverable supplies of corn under the revised CBT
proposal are so inadequate under section 5a(a)(10) that additional
delivery points are necessary. Actual trading experience will reveal
whether the level of deliverable supplies meets the requirements of
section 5a(a)(10). Accordingly, the Commission directs the CBT to
report on the actual delivery and contract expiration experience on an
annual basis for the first five years after contract expirations begin
under the revised contract terms.

IV. The Lack of Locational Price Differentials Violates Section
5a(a)(10)

    Section 5a(a)(10) requires that, where more than one delivery point
or commodity grade is specified, a futures contract must specify
quality and locational price differentials to the extent necessary to
prevent price manipulation, market congestion, or the abnormal movement
of the commodity in interstate commerce. Guideline No. 1 and the
Commission's policy on price differentials are based on section
5a(a)(10) requirements. As discussed above, Guideline No. 1 requires
that futures contract terms and conditions provide for deliverable
supplies that will not be conducive to price manipulation or distortion
and that such supplies reasonably can be expected to be available to
the short trader and saleable by the long trader at their market value
in normal cash market channels. 17 CFR Part 5, Appendix A(a)(2)(i). In
addition, the Commission's policy on price differentials requires that,
where cash market locational or quality differentials are stable, the
futures contract should reflect ``normal commercial price differences
as represented by cash price differences * * *'' Powers Memorandum,
supra note 1, at p.15. When cash market price differences are unstable
or where the product flow in the cash market is not relevant to the
futures delivery points, the Commission's policy requires that
differentials must be set at levels which fall within the range of
values that are commonly observed.
    The CBT's failure to specify locational price differentials
violates section 5a(a)(10) as well as the requirements of Guideline No.
1 and the Commission's

[[Page 60851]]

policy on locational price differentials. The cash market on the
northern Illinois River clearly reflects a unidirectional flow of corn
and soybeans and exhibits significant locational price differences at
the proposed delivery points which have a stable relationship with one
another. The failure of the CBT proposal to provide for locational
price differentials reflecting the cash market not only would reduce
available deliverable supplies on the contracts, but would result in
price distortions and susceptibility to price manipulation, market
congestion, and the abnormal movement of corn and soybeans.
    Although the CBT describes its delivery system as a simple single
delivery area, in fact it is a multiple delivery point system without
differentials. This multiple delivery point system is comprised of
spatially-separated points along the northern Illinois River, which are
affected by a unidirectional demand from the Gulf market across five
different barge freight zones, including Chicago. Chicago may also be
affected, at times, by a number of competing cash market demand pulls.
    The value of corn and soybeans loaded into barges generally is
greater at barge-loading facilities located down river relative to the
value of grain loaded in barges at upriver locations, including
Chicago. As indicated above, the CBT proposal essentially would price
corn and soybeans when they are loaded on barges along the northern
Illinois River destined for the export market centered in New Orleans.
The futures contracts would be priced FOB barge at the loading
facilities.<SUP>28</SUP> Currently, the cash market for such products
prices them at the CIF New Orleans price, which is uniform and widely
known.<SUP>29</SUP> The cost of barge freight to New Orleans included
in that price varies based on established barge freight costs that are
higher at Chicago and lower as one descends the northern Illinois River
and thus is closer to New Orleans. Those freight rates are transparent
and widely reported publicly. While they vary to some extent, they are
expressed as a varying percentage of the fixed amounts found in the
Waterways Freight Bureau Tariff No. 7. By backing out the freight
amounts from the CIF price, one can calculate the differences in the
value of the commodities FOB various Illinois River points.
---------------------------------------------------------------------------

    \28\ The acronym FOB, free on board, means that, under the terms
of the sale of a commodity, the price agreed between the buyer and
seller includes the cost of loading the product into transportation
equipment (barge, rail car, vessel, etc.) at a designated location.
    \29\ CIF New Orleans means that, under the terms of the sale,
the price agreed upon between the buyer and the seller includes the
freight and insurance to transport the products to New Orleans and
to deliver them there. This market, which calls for the products to
be shipped at the cost of the seller to export points in New
Orleans, is very liquid, with corn and soybeans being actively
traded throughout the year.
---------------------------------------------------------------------------

    During the critical summer months the price differential based on
the freight rate between Chicago (the most northerly Illinois River
delivery point) and Pekin (the most southerly Illinois River delivery
point) has ranged in recent years between 4.1 and 5.3 cents per bushel
of corn and between 4.4 and 5.7 cents per bushel of soybeans. These
differences are very significant and are sufficient to distort prices,
to limit deliverable supplies, and to divert supplies from one delivery
point to another.<SUP>30</SUP>
---------------------------------------------------------------------------

    \30\ The CBT implicitly recognized these cash market value
relationships and the importance of barge-freight differences in
valuing the commodities in its proposed contingency plan to allow
deliveries at alternative delivery locations during transportation
disruptions on the Illinois River. As described below, that proposal
provides that deliveries at alternative locations must be priced CIF
New Orleans with the delivery taker reimbursing the issuer for the
cost of freight to New Orleans from the original delivery location.
---------------------------------------------------------------------------

    Where as here, futures contracts provide for multiple delivery
points and significant normal commercial price differences exist in the
cash market between those locations, section 5a(a)(10) requires that
the terms of the futures contracts include locational price
differentials. The failure to set locational price differentials
reflecting normal cash market price differences has the economic effect
of excluding the disadvantaged delivery point from being used for
delivery. Such an exclusion may result in abnormal movement of the
commodity away from the disadvantaged delivery point and to the
advantaged delivery point. In order for a disadvantaged delivery point
to function, the futures price has to increase above the commodity's
underlying cash market value at the disadvantaged delivery point to
overcome this built-in penalty. This opens the door to price distortion
and price manipulation in the amount of the ``differential penalty.''
Alternatively, market congestion at the advantaged delivery point may
result. These are precisely the types of market abuse that section
5a(a)(10) sought to avoid by requiring exchanges to ``permit delivery *
* * at such * * * locational price differentials as will tend to
prevent or diminish price manipulation, market congestion, or the
abnormal movement of such commodity in interstate commerce.'' For these
reasons, the Commission finds that the lack of locational price
differentials violates section 5a(a)(10).
    The CBT argued that section 5a(a)(10) is not violated by its
proposal's lack of differentials because ``locational differentials for
corn and soybeans at par fall well within the expected values of cash
market differentials between the delivery points.'' CBT June 16, 1997
submission, at 40. However, this is not the appropriate standard
because the relative value of these commodities among the northern
Illinois River delivery points is constant, quite transparent and based
on established barge freight differences, as discussed above.
Furthermore, even if it were the appropriate standard, we find that a
lack of price differentials is not commonly observed in the cash
market, for the reasons discussed above.
    The CBT's argument erroneously relies on bid prices to farmers at
various delivery points rather than prices FOB barge, the prices that
the CBT's proposed contracts are designed to reflect. The CBT also
relies on information that suggests that the cash market value of corn
and soybeans loaded onto vessels and rail cars at Chicago may at times
equal or exceed the value of corn or soybeans loaded onto barges at
locations on the northern Illinois River delivery area. However, with
the precipitous decline in the available deliverable supplies in
Chicago, such occasional variances from the prices loaded on barges at
Chicago and along the northern Illinois River play a small role in the
cash market and should not be a significant factor in setting
locational differentials under the CBT's proposal. The prices for
barges loaded on the northern Illinois River at Chicago and at delivery
points south of Chicago reflect the differences in freight costs on
which the Commission bases it price differentials for those delivery
points.

V. The Failure Adequately To Address Foreseeable Interruptions to
Deliveries Violates Section 5a(a)(10)

    An additional concern regarding the operation of the CBT proposal
applicable to both the corn and soybean contracts is its reliance
chiefly upon a single mode of transportation to effect delivery--
Illinois River barge transportation. A large number of commenters
questioned the reliability of barge transportation on the Illinois
River from the standpoint of assuring that takers of futures delivery
would be able to receive and to transport their grain promptly in the
event of a disruption of barge transportation on the river due to
weather or lock maintenance.

[[Page 60852]]

    There has been a history of repeated, significant interruptions in
transportation along the northern Illinois River. In three of the last
13 years, one or more of the locks on this portion of the river have
been closed for repair by the U.S. Army Corps of Engineers for 60 or
more consecutive days during the critical summer months, with the
result that no barge traffic could pass through that point on the river
on its way south to New Orleans.<SUP>31</SUP> In addition, traffic on
the Illinois River is frequently impacted by weather conditions,
including wind, high water during the spring and summer, and icing
during the winter. The Coast Guard, an agency of the U.S. Department of
Transportation, is responsible for maintaining safe passage along the
nation's waterways and, when conditions warrant, issues compulsory
safety zones restricting transportation on certain segments of the
river. Between January 1991 and June 1997 the Coast Guard issued
compulsory safety zones on segments of the northern Illinois River on
21 separate occasions. The delivery area on the northern Illinois River
was affected by such a safety zone for substantial portions of the
river south of the delivery area from early June through the middle of
August in 1993.<SUP>32</SUP>
---------------------------------------------------------------------------

    \31\ Specifically, in 1984 the Lockport and Brandon Road locks
were closed for 60 days in July, August, and September; in 1987 the
Peoria lock was closed for 60 days in July, August, and September;
and in 1995 the Lockport, Brandon Road, Dresden Island, and
Marseilles locks each were closed for between 64 days and 77 days in
July, August, and September. The CBT, in its October 22, 1997
exceptions at p. 38, agrees that these disruptions have in the past
(in 1987, for example) been severe and prolonged enough to curtail
the ability to take delivery within the northern Illinois River
delivery area. See also, tr. at 22-24.
    \32\ In addition to weather actions taken by the Coast Guard,
the U.S. Army Corps of Engineers, which has operational control over
river locks, may close a lock when it determines that icing
conditions so require.
---------------------------------------------------------------------------

    The CBT proposal's heavy reliance on barge delivery would
disadvantage delivery takers during those periods when barge traffic is
negatively impacted by weather conditions or lock maintenance and
repair. Prolonged obstruction of transportation on the river would
increase the susceptibility of the futures contract to manipulation by
issuers, who could issue large numbers of certificates during periods
when those taking delivery would be unable to transport and to sell the
product at an economic value in relation to the CIF New Orleans market.
    The Commission is of the view that it is not an appropriate use of
exchange emergency authority to address such foreseeable disruptions to
the operation of contract terms.<SUP>33</SUP> In response to repeated
requests by the Commission staff, the CBT, by submission dated August
22, 1997, sought to cure this defect in its proposal by proposing a
plan to be followed in the case of transportation disruptions. This
proposed contingency plan provides that, in the event that either the
Peoria or LaGrange lock on the Illinois River (the two most southerly
locks without an auxiliary lock allowing river movement) is scheduled,
with six-months prior notice, to be closed for a period of 45 days or
more, then the delivery maker and taker may mutually agree to
alternative terms or, failing such agreement, the deliverer is
obligated to provide loaded barges to the taker at a point between the
lowest closed lock and St. Louis or on the mid-Mississippi River
between St. Louis and Dubuque, inclusive. The loaded barges would be
valued CIF New Orleans, with the delivery taker responsible for paying
to the delivery maker the transportation cost between the original
shipping station and New Orleans. The reimbursement in transportation
cost would be computed based upon 100 percent of the Waterways Freight
Bureau Tariff No. 7 barge freight rate.
---------------------------------------------------------------------------

    \33\ The CBT proposed a separate rule, regulation
1081.01(12)(G)(8), to address possible disruptions to shipping
traffic within the delivery area. That proposed rule provides that,
if it becomes impossible to load at a designated shipping station
``because of an Act of God, fire, * * * an act of government, labor
difficulties, or unavoidable mechanical breakdown, the shipper will
arrange for water conveyance to be loaded at another regular
shipping station * * *'' and will compensate the taker for resulting
transportation costs, if any. It further provides, however, that if
the impossibility of delivery exists at a majority of shipping
stations within the delivery area, then delivery may be delayed.
Although this proposed rule addresses conditions impeding delivery
at one or some locations within the delivery area, it does not offer
an acceptable solution to the contingency that all or most
deliveries may be rendered impossible due to disruptions of river
traffic south of the delivery area or at points affecting a majority
of shipping stations within the delivery area. Because of the
increased likelihood of price manipulation and market congestion
arising from delayed delivery in such circumstances, a different and
more effective contingency plan is required under section 5a(a)(10).
---------------------------------------------------------------------------

    This proposal falls short of achieving its apparent objective of
addressing the susceptibility of the corn and soybean futures contracts
to price manipulation, market congestion, or the abnormal movement of
the commodity in interstate commerce resulting from disruptions to
river traffic. First, the proposed rule only addresses sustained
blockages due to lock closures south of the delivery area. However,
similar problems could be caused by closure of one or a number of locks
within the delivery area sufficient to disrupt traffic at a majority of
shipping stations. Repairs are often made to more than one lock at a
time, having the potential to increase the impact of the disruption
within the delivery area from such projects. Thus, although the same
foreseeable situation rendering the contracts vulnerable to price
manipulation and market congestion exists when the disruption is within
the delivery area as when it is south of the delivery area, the
contingency plan fails to address that situation. Furthermore,
obstructions and disruptions to river traffic other than lock
closures--such as those caused by flooding--are foreseeable, would
render the proposed contracts vulnerable to price manipulation and
market congestion and should be addressed in the contingency plan.
    Secondly, when a sustained river traffic obstruction of less than
45 days is announced, vulnerability to price manipulation and market
congestion is foreseeable. This is also true when there has been less
than the six-month advance notice which the CBT has proposed as a
condition for triggering the contingency procedures. This vulnerability
arises from the ability of shipping certificate issuers under the CBT
proposal to issue certificates representing up to 30 days of their
capacity. Thus, an announced river traffic obstruction of between 30
and 45 days, for example, would enable eligible issuers to deliver into
the market the maximum number of shipping certificates permitted,
secure in the knowledge that the holders of those certificates could
not accept delivery of the corn or soybeans while the river was
obstructed and that, once the obstruction to river movement was ended,
the issuer could only be required to deliver on the certificates over
an entire-month period.
    In this connection, it should be noted that closures for lock
repairs generally are scheduled for the summer months, the time when
deliverable supplies are lowest and futures contracts are most
susceptible to manipulation. (Indeed, a prolonged closure extending to
the arrival of the new crop could allow futures deliverers to depress
the price of an old crop futures month to levels reflecting new crop
values at a time when the broader cash market was reflecting the usual
old crop/new crop price differences based on supply and demand
conditions.)
    In addition, the proposal to value alternate delivery locations
using 100 percent of the Waterways Freight Bureau Tariff No. 7 rate is
inconsistent with the locational price differential found to be
applicable by the

[[Page 60853]]

Commission, as discussed below. The application of different
differentials to the contracts, depending upon whether deliveries were
subject to the contingency rule or to normal delivery procedures, could
also contribute to price manipulation, market congestion, or the
abnormal movement of commodities in interstate commerce.<SUP>34</SUP>
---------------------------------------------------------------------------

    \34\ Even if such differing differentials would not have such
adverse results, it would be nonetheless ``necessary or appropriate
* * * to insure fair dealing * * *'' in such futures contracts to
apply the same differential in both instances under section 8a(7) of
the Act.
---------------------------------------------------------------------------

VI. The Minimum Net Worth Eligibility Requirement for Issuers Violates
Section 15

    In addition to the CBT's existing requirement of $2 million working
capital required of firms regular for delivery under all its
agricultural futures contracts, the CBT has proposed to require that
firms eligible to issue shipping certificates under its soybean and
corn contracts must also meet a minimum net worth standard of $40
million. As discussed above, this requirement has the effect of
reducing the amount of deliverable supplies by making ineligible for
delivery certain existing loading facilities in the delivery areas
owned by otherwise eligible firms. In addition, the requirement
constitutes a barrier to entry of firms wishing to establish facilities
and to become eligible to issue shipping certificates. The Commission
has analyzed this requirement under the provisions of section 15 of the
Act and finds that it constitutes an unjustifiable barrier to entry and
leads to undue market concentration when considered in the context of
the other requirements issuing firms must meet.
    Section 15 of the Act requires the Commission, when considering
exchange rule proposals or amendments, to consider the public interest
to be protected by the antitrust laws and to endeavor to take the least
anticompetitive means of achieving the objectives of the
Act.<SUP>35</SUP> Therefore, the CBT proposal's possible
anticompetitive effects must be evaluated against its potential
effectiveness in achieving the policies and purposes of the Act.
---------------------------------------------------------------------------

    \35\ British American Commodity Options Corp. v. Bagley, [1975-
1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,245 at
21,334 (S.D.N.Y. 1976) aff'd in part and rev'd in part on other
grounds, 552 F. 2d. 282 (2d. Cir. 1977, cert. denied, 98 S. Ct. 427
(1977).
---------------------------------------------------------------------------

    All existing futures contracts that provide for delivery using
shipping certificate delivery specify certain financial requirements
for certificate issuers. Consistent with this approach, the CBT
proposal requires that issuers of certificates have through-loading
facilities on the northern Illinois River, obtain an irrevocable letter
of credit in an amount equal to the value of their delivery
commitments, and maintain a minimum of two million dollars in working
capital. These requirements are comparable to those imposed on shipping
certificate issuers in other futures markets, including the CBT's own
soybean meal, diammonium phosphate and anhydrous ammonia futures
contracts, the New York Cotton Exchange's frozen concentrated orange
juice futures contract and the Minneapolis Grain Exchange's white wheat
futures contract. Moreover, issuers of a shipping certificate under the
CBT proposal would also be limited to issuing certificates of a value
no greater than 25 percent of the issuer's net worth. However, in
addition to all these requirements, the CBT's proposed corn and soybean
contracts would require shipping certificate issuers to have a minimum
net worth of $40 million, a requirement that is not imposed in any
other futures contract involving shipping certificates.
    The effect of the proposed $40 million minimum net worth
requirement would be to limit issuance of shipping certificates to four
large grain firms among the seven firms with shipping stations along
the northern Illinois River delivery area. At least three firms which
currently operate shipping stations on the designated segment of the
northern Illinois River and have participated in the cash market by
loading barges of corn and soybeans would be excluded from issuing
shipping certificates for delivery on the CBT's proposed futures
contracts. The Commission does not believe that the CBT has presented a
reasonable justification for this requirement.
    Although the CBT's objective of protecting the financial integrity
of the delivery process is reasonable, it is adequately achieved
through the working capital and letter of credit requirements, as it
has been for all other shipping certificate contracts, and through the
limit on the value of certificates issued to 25 percent of an issuer's
net worth. Forty million dollars is a high level of net worth that
excludes three of the seven existing firms with loading facilities
along the northern Illinois River and would act as a barrier to new
entrants. The resulting extremely high level of concentration of the
market restricted to four issuers is demonstrated by the fact that the
Herfindahl-Hirschman Index (HHI) for the proposed market would be
approximately 3,300.<SUP>36</SUP> This increase in concentration as
compared with the current delivery system--530 points in the HHI--would
likely create or enhance market power or facilitate its exercise in an
already highly concentrated market.
---------------------------------------------------------------------------

    \36\ The HHI is calculated by summing the squares of the
individual market share of each of a market's participants. The
3,300 figure is obtained using rated delivery capacity of the four
firms currently meeting the proposed capital requirements to measure
market share. Those firms and their respective market shares are
Archer Daniels Midland Co. (49 percent), Continental Grain Company
(22 percent), Cargill, Incorporated (19 percent), and Consolidated
Grain and Barge (10 percent). Adding in the three firms (American
Milling Company, Garvey International, and Sours Grain Company)
which, absent the proposal's $40 million net worth requirement, also
would be eligible to issue delivery certificates in the proposed
markets would lower the HHI to 2,511, still a high level of
concentration but substantially less than that under the CBT
proposal (and indeed less than under the current delivery system).
---------------------------------------------------------------------------

    The CBT has failed to demonstrate a need for this particular
requirement. Accordingly, the Commission finds that the $40 million
minimum net worth requirement would be an unjustified barrier to entry
into a highly concentrated market and its approval by the Commission
would be contrary to section 15 of the Act.<SUP>37</SUP>
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    \37\ Concerns about concentration among those firms eligible to
issue shipping certificates under the CBT's proposal are compounded
by the sizeable ownership interests some of the firms have in barge
fleets operating on the northern Illinois River and in Gulf export
and processing facilities. Several commenters expressed concern that
this vertical integration increases their opportunity for price
manipulation.
---------------------------------------------------------------------------

VII. Proposed Changes and Supplements to Comply With Sections 5a(a)(10)
and 15

    Under the provisions of section 5a(a)(10) of the Act, the
Commission, having found that the response of the CBT to the
notification relating to its corn and soybean futures contracts does
not accomplish the statutory objectives of that section and ``after
granting the contract market an opportunity to be heard, may change or
supplement such rules and regulations of the contract market to achieve
the above objectives * * *.'' The Commission has determined that the
following changes and supplements to the CBT's proposal are necessary
to achieve the objectives of section 5a(a)(10) and compliance with
section 15 of the Act.
    The Commission has determined that deliverable supplies of soybeans
under the CBT's proposal should be increased through the retention of
those delivery points under the CBT's current contracts which the CBT
has proposed to eliminate and that appropriate locational differentials
should be

[[Page 60854]]

applied to such delivery points. In addition, the Commission has
determined for both the corn and soybean contracts to revise the CBT's
proposal to impose appropriate locational differentials for northern
Illinois River delivery points. The Commission has determined to revise
the proposed eligibility requirements for issuers of corn and soybean
shipping certificates by eliminating the minimum net worth requirement
of $40 million, which is an unnecessary barrier to entry. The
Commission also has determined to revise the river traffic obstruction
contingency rule by reducing the continuous period of obstruction from
45 days as proposed to 15 days, by making it applicable whenever a
majority of shipping stations within the northern Illinois River
delivery area are affected by obstruction of river traffic, by making
it applicable to all announced obstructions with no minimum
notification period specified and by changing the differential from 100
percent of the Waterways Freight Bureau Tariff No. 7 rate as proposed
to 150 percent.

A. Delivery Points

    In determining how to remedy the inadequacy of deliverable supplies
under the CBT soybean proposal, the Commission accepts the delivery
points in the proposal itself as a starting point and believes that the
most reasonable and feasible way to enhance deliverable supplies is by
adding additional delivery points. To do so, the Commission has decided
to retain the delivery points under which the CBT's existing contract
has been operating for years. Thus, the Commission had determined to
retain Toledo and St. Louis as delivery points for soybeans.
    In this regard, many commenters supported retaining the delivery
point at Toledo, pointing out that Toledo's effectiveness as a delivery
point is proven. They also maintained that Toledo brings with it the
advantage of having transportation ties to both the export market via
vessels on the Great Lakes and the expanding livestock feed demand in
the southeastern U.S. via rail transportation. Although St. Louis has
not been an important delivery point under the current contract, it
likely would become one under the contract's revised shipping
certificate format.<SUP>38</SUP>
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    \38\ Some commenters advocated the addition of new and
completely untried delivery points, such as locations in the
interior of Iowa, or delivery points that have been used for other
contracts, such as Minneapolis, Minnesota. Although those
suggestions may have merit, the Commission has decided that the
experience with the current delivery points is entitled to
significant weight.
---------------------------------------------------------------------------

    These two delivery points have the strong advantage of having been
chosen by the CBT as appropriate delivery points for its soybean
contract and having been used as delivery points for the contract for a
number of years. Toledo has been a delivery point on the CBT soybean
contract since 1979; St. Louis has been a delivery point since 1993.
The resulting experience and familiarity with these delivery points of
the CBT, its members and commercial users of the soybean contract are
strong indicators that the delivery points are feasible, workable and
acceptable.<SUP>39</SUP>
---------------------------------------------------------------------------

    \39\ The CBT argues that the Commission should not determine to
order the CBT to retain Toledo and St. Louis as delivery points
because their retention would permit multiple delivery locations on
the soybean futures contracts and because selection of delivery
points is the responsibility of the contract market alone. However,
the current contract has included Toledo and St. Louis as delivery
points for many years with no apparent ill effects. Moreover,
section 5a(a)(10) directs the Commission to act when the contract
market's proposed contract terms fail to accomplish the objectives
of that section of the Act, and additional delivery points are
necessary to assure adequate deliverable supplies under section
5a(a)(10) in this instance. By beginning its analysis with the CBT's
proposed delivery specifications and next considering delivery
points already chosen and used by the exchange as existing delivery
points, the Commission has sought to achieve the most conservative
means of reaching the required levels of deliverable supplies. Of
course, the CBT continues to be free to indicate by proposed rule or
petition that its business preference for delivery locations is
otherwise, and the Commission would consider such a new proposal
under the standards for review provided under the Act.
---------------------------------------------------------------------------

    The retention of Toledo and St. Louis as delivery points provides a
substantial increase in the available deliverable supplies of soybeans
and in the number of potential shipping certificate issuers on the
contract. When Toledo and St. Louis are included as delivery points on
the soybean futures contract, the number of entities eligible as
issuers increases by three, significantly reducing the degree of
concentration among potential shipping certificate issuers. The
following chart shows the increases in gross deliverable supplies of
soybeans which result from the retention of Toledo and St. Louis as
delivery points and from the elimination of the $40 million minimum net
worth requirement for eligibility as shipping certificate issuers, as
discussed in section D, below. Pursuant to these changes ordered by the
Commission, potentially available gross deliverable supplies of
soybeans are at or above the 2,400-contract level in both July and
August during each of the past 11 years and in September during all but
one of the 11 years. Indeed, the gross deliverable supplies are also at
or above the 4,000-contract level for 25 of the 33 months examined.

BILLING CODE 6351-01-P

[[Page 60855]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.031



BILLING CODE 6351-01-C

[[Page 60856]]

    Accordingly, the retention of Toledo and St. Louis as delivery
points is appropriate to provide adequate levels of gross deliverable
supplies of soybeans for the July and August futures contracts.
Although the retention of Toledo and St. Louis does not yield gross
deliverable supplies which meet the 2,400-contract level in one of the
last 11 years in September, September is a transition month between the
old and new crop year, as discussed above. New crop production is in
the offing. Thus, even if September gross deliverable supplies might on
rare occasion fall below the 2,400-contract level, the incentive to
manipulate prices based on a shortfall of old crop supplies is reduced
because of the likelihood of rapidly falling prices as significant
amounts of new crop supplies become available in the near future. In
light of the reduced threat of price manipulation due to the imminence
of new crop production, the Commission is not ordering that additional
delivery points be added to the contract beyond retention of Toledo and
St. Louis. If September deliverable supplies of soybeans appear to be
inadequate once trading under the revised soybean contract begins, the
Commission would take appropriate steps to provide for additional
delivery locations.<SUP>40</SUP>
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    \40\ Should actual trading experience reveal that September
supplies must be supplemented, one means of accomplishing that
objective would be to expand the delivery area to include a greater
segment of the northern Illinois River. With the specification of
appropriate locational differentials, such a change could probably
be made at a later time with little disruption to the contract.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that retention of Toledo and St.
Louis is appropriate to provide an adequate level of available
deliverable supplies as required by section 5a(a)(10).

B. Differentials

    Section 5a(a)(10) requires that, where more than one delivery point
is specified in a futures contract, the contract terms must provide for
locational differentials to the extent necessary to prevent price
manipulation, market congestion, or the abnormal movement of the
commodity in interstate commerce. As discussed above, in light of the
significant locational price differentials in the cash market among the
proposed delivery locations, the CBT's par delivery proposal for all
proposed corn and soybean delivery locations would reduce the level of
economically available deliverable supplies and would increase the
susceptibility of the contracts to the prohibited effects under section
5a(a)(10). Accordingly, to meet the objectives of section 5a(a)(10),
locational differentials must be set for the delivery locations on the
corn and soybean contracts.
    In setting those differentials, the Commission has been guided by
commonly observed cash market price differences among the delivery
points. The cash market differences in the prices of corn and soybeans
for delivery points on the northern Illinois River are based primarily
upon the cost of barge freight--the price of the product increases as
one goes down the river and the cost of freight to New Orleans
decreases. These differences in freight prices are transparent, readily
available, and commonly accepted as the best measure of cash price
values. An analysis of barge freight rate data indicates that 150
percent of the Waterways Freight Bureau Rate Tariff No. 7 rate provides
an appropriate basis for the differential. The difference between that
rate as applicable to the delivery location and that rate as applicable
to Chicago, Illinois, constitutes an appropriate differential
reflecting cash market price differences.
    Barge freight rate data for the years 1990 through 1996 indicate
that 150 percent of tariff is well within the range of commonly
observed freight rates and closely approximates the average percent of
tariff quoted by barge companies for Illinois River shipment during
this period. These data also indicate that 150 percent of tariff
approximates the average percent of tariff quoted for July, August, and
September, the months when deliverable supply concerns and the need to
maximize available deliverable supplies are the greatest. A majority of
those commenting on the issue agreed that it was appropriate to base
price differentials on barge freight cost differences, and several of
the commenters that suggested a fixed rate recommended 150 percent of
tariff.
    St. Louis is being retained as a delivery point for soybeans. The
relative price of soybeans in the cash market among the various
delivery points on the northern Illinois River and St. Louis is
consistently determined based on the difference in freight costs to New
Orleans, and therefore the Commission has decided to base the
differential for St. Louis on 150 percent of the freight tariff as
well. Most commenters agreed that this approach is the appropriate
measure of such cash market price differences.
    The differential applicable to Toledo, which is also retained as a
delivery point for soybeans, cannot be set based on the differentials
relating to barge freight since Toledo is not located on the Illinois
River and does not tend to deliver soybeans CIF New Orleans. The
Commission's policy on locational differentials provides that such
differentials must fall within the range of commonly observed cash
market price differences. Available data indicate that cash price
differentials between Chicago and Toledo commonly range from Chicago's
being at a premium to its being at a discount to Toledo. Therefore,
establishing Toledo deliveries at par with Chicago is well within the
range of commonly observed cash market price differences and provides
an adequate approximation of the cash market price relationship between
the two delivery points. Most commenters expressing an opinion on this
issue agreed that soybeans should be deliverable in Toledo at par with
Chicago.
    Accordingly, the Commission has determined that for soybeans
Chicago and Toledo should be at contract price with all other delivery
locations at a premium over contract price of 150 percent of the
difference between the Waterways Freight Bureau Tariff No. 7 rate
applicable to that location and the rate applicable to Chicago,
Illinois. For corn, Chicago should be at contract price with all other
delivery locations at a premium over contract price of 150 percent of
the difference between the Waterways Freight Bureau Tariff No. 7 rate
applicable to that location and the rate applicable to Chicago,
Illinois.

C. Disruptions to River Traffic

    The CBT proposal's heavy reliance on a single mode of
transportation to effect delivery renders the contract susceptible to
significant disruption of the delivery process, increasing the
possibility of price manipulation, market congestion, or the abnormal
movement of corn and soybeans in interstate commerce. Although the CBT
submitted a contingency plan for alternate delivery procedures to
address disruptions to river traffic, that plan only addressed long-
term disruption to river traffic resulting from closure of locks south
of the delivery area announced six months in advance. As the Commission
discussed above, however, the threat of manipulation of prices arises
from the possible inability of long position holders to take delivery
from all, or a significant number, of shipping stations due to the
closures of a lock or locks or other river traffic obstructions located
either within or south of the delivery area. The longer the period of
the delay before alternate delivery procedures can be invoked, the
greater the potential for manipulation. Moreover, this threat also
exists when an obstruction to river

[[Page 60857]]

traffic has occurred with less than six-months notice. Accordingly,
section 5a(a)(10) of the Act requires that this threat be diminished by
reducing the period during which delivery may be delayed by eliminating
the six-month notice requirement and by applying the contingency
delivery provision to all obstructions to movement on the river arising
either inside or outside of the delivery area.
    In determining the length of an announced obstruction which should
give rise to a contingency plan, the Commission analyzed information on
past lock closures by the U.S. Army Corps of Engineers and on the
issuance of river advisories or safety zones by the Coast Guard. During
the last 17 years for which this information could be ascertained, it
appears that there have been no unplanned and unannounced river
obstructions of greater than two weeks duration. Accordingly,
obstructions lasting at least 15 days after they are announced are
appropriately addressed by application of the contingency plan.
    In addition, as discussed above, the application of different
differentials to the futures contracts depending upon whether the
delivery is subject to the contingency rule might also contribute to
price manipulation or market congestion. Since the Commission has
determined that a differential based on 150 percent of the Waterways
Freight Bureau Tariff No. 7 rate should be applied to the corn and
soybean futures contracts, the Commission believes that the provision
in the contingency plan should be conformed to that differential, which
will be applicable to all deliveries made on the contracts at non-par
locations.
    Accordingly, the Commission under section 5a(a)(10) of the Act
changes and supplements the provisions of this part of the CBT proposal
by reducing the continuous period of river traffic obstruction from 45
days as proposed to 15 days, by making the rule applicable to any
obstruction which affects shipments from a majority of shipping
stations within the northern Illinois River delivery area, by making
the rule applicable to all announced obstructions with no minimum
notification period specified and by changing the differential from 100
percent of the Waterways Freight Bureau Tariff No. 7 rate as proposed
to 150 percent.

D. Net Worth

    The $40 million minimum net worth requirement for eligibility of
shipping certificate issuers restricts deliverable supplies of corn and
soybeans by eliminating several firms and potentially barring new
entrants. As the Commission found above, although the CBT's objective
of protecting the financial integrity of the delivery process is
reasonable, it would be adequately achieved through the CBT's proposed
requirements on working capital, letters of credit, and the ceiling on
issuance of shipping certificates to 25 percent of net worth. Contrary
to the policies underlying the federal antitrust laws, the $40 million
minimum net worth requirement would operate as a significant bar to
entry for entities that would be eligible in all other respects, and
the resulting market concentration would be very high. The CBT has
failed to demonstrate a regulatory need for the requirement.
Accordingly, the Commission eliminates the requirement under sections
5a(a)(10) and 15 of the Act.

E. 1999 Contract Months

    The Commission's section 5a(a)(10) notification advised the CBT
that the terms of its corn and soybean futures contracts did not meet
the objectives of that provision of the Act. In light of that
determination, the Commission advised the CBT that ``the CBT should
refrain from listing additional months of trading in those contracts
during the pendency of these proceedings.'' 61 FR at 67999.
Nevertheless, by letter dated April 24, 1997, to the Chairperson of the
Commission, the CBT advised the Commission that it had determined to
list or to relist for trading the July 1999 and November 1999 soybean
contracts and the July 1999 and December 1999 corn contracts,
respectively, prior to Commission review and approval of the proposed
changes to the delivery specifications.<SUP>41</SUP>
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    \41\ In doing so, the CBT indicated that it would:
    list the aforementioned contracts with a special indicator * * *
denot[ing] that the Exchange's Board of Directors and Membership
have approved the terms of the listed contracts; however, the terms
are subject to CFTC approval.
---------------------------------------------------------------------------

    By letter dated May 2, 1997, the Commission responded that it
``will consider whether to approve the listing of these contract months
as part of its ongoing proceeding pursuant to section 5a(a)(10) of the
Act * * *.'' The Commission found that the ``listing of these trading
months is not consistent with Commission rule 1.41(l) and that * * *
their listing for trading by the CBT is not legally authorized at the
present time.'' On September 15, 1997, the Commission issued its
proposed Order which, in part, proposed to disapprove the application
of the CBT's proposed delivery terms to the July 1999 and November 1999
soybean contracts and the July 1999 and December 1999 corn contracts.
Four days later, the CBT notified its members of its intent to list for
trading the January 1999 soybean futures contract and the December 1999
corn futures contract under the same proposed terms as the Commission
had proposed to disapprove. The Commission then notified the CBT that
it proposed to disapprove the listing for trading of these two contract
months and to disapprove, to change and to supplement the terms
proposed by the CBT for these two trading months on the same basis and
for the same reasons as it previously determined in its proposed order
to disapprove, to change and to supplement the terms of the July 1999
and November 1999 soybean contracts and the July 1999 and December 1999
corn contracts. 62 FR 51087 (Sept. 30, 1997).
    A number of commenters on the proposed order requested that the
Commission authorize the listing of these trading months. They
suggested that having these trading months available to them without
delay or interruption was important for their ability to use the
markets for hedging purposes. Other commenters suggested that
authorizing the trading of these contract months under the current
contract terms rather than the CBT's proposed contract terms would
provide the CBT with a period of time in which to propose alternative
amendments to the delivery specifications of the corn and soybean
futures contracts terms. The Commission, in response to these comments,
hereby authorizes the listing of the January, July and November 1999
soybean futures contract and the March, July and December 1999 corn
futures contracts under their current terms, while disapproving the
application of the terms contained in the CBT's proposal to these
contract months.<SUP>42</SUP> The

[[Page 60858]]

Commission also authorizes the listing of other 1999 corn and soybean
futures contracts under their current terms. However, the CBT may
propose to list the 1999 corn and soybean contracts incorporating the
changes and supplements contained in this Order, and the Commission
would approve such listing.
---------------------------------------------------------------------------

    \42\ The CBT in the October 15, 1997, hearing and in its October
22, 1997 letter of exceptions argued that these trading months were
approved for listing subject to previously approved listing
procedures. The Commission rejects these arguments. The four
contract months cited in the proposed Order were listed initially
(December and July 1999 corn futures contracts)--or relisted after
having been previously delisted (July and November 1999 soybean
futures contracts)--at a time and in a manner other than specified
in a previously approved rule, thus requiring the prior approval of
the Commission, which was never granted. Moreover, all of the
futures contract months at issue, including the January 1999 soybean
futures contract and the March 1999 corn futures, were not eligible
for automatic listing procedures. A condition in such automatic
listing procedures is that the contract terms or their listing not
violate legal requirements. See, e.g., 1.41(l). The Commission's
finding in the December section 5a(a)(10) notification that the corn
and soybean futures contracts are not in compliance with section
5a(a)(10) of the Act rendered further automatic listings
unavailable, as did the Commission's explicit direction to the CBT
to refrain from any such further listings.
---------------------------------------------------------------------------

    In approving the 1999 contract months for trading under their
current terms, the Commission is responding to the views of numerous
agricultural interests that there is a need for certainty and clarity
about the legality and terms of these contracts and for their immediate
availability for trading for hedging purposes. It also responds to
arguments of the CBT urging that the Commission allow listing of the
1999 contract months pursuant to the current contract terms in the
event that the Commission disapproves the CBT's proposal, as it has
done in this Order. The Commission's action in this regard obviates the
need to address a difficult legal issue of the interpretation of
section 5a(a)(10) as to contracts which have been illegally listed by
an exchange but have nonetheless been trading. Finally, the
Commission's action permits all 1999 contract months to trade on
identical terms and establishes a clear point at which the new terms
ordered by the Commission will be applicable.
    For the reasons discussed herein, the Commission in this Order is
changing and supplementing the amendments to the CBT corn and soybean
futures contracts which the CBT has proposed and is directing that they
be made effective for all contract months, whenever listed for trading,
beginning with and subsequent to the January 2000 soybean futures
contract and the March 2000 corn futures contract. In so ordering, the
Commission finds that the amendments proposed by the CBT to its corn
and soybean futures contract are not consistent with section 5a(a)(10)
and that their approval by the Commission would violate section 15 of
the Act. Accordingly, the Commission under sections 5a(a)(10),
5a(a)(12), 8a(7), and 15 of the Act is disapproving application of
those proposed terms to the CBT's corn and soybean contracts, including
the 1999 contracts.

    Dated: November 7, 1997.

    By the Commission (Chairperson Born, Commissioner Dial,
Commissioner Spears; Commissioners Tull and Holum Concurring in Part
and Dissenting in Part with Opinion)
Edward W. Colbert,
Deputy Secretary of the Commission.

    Order of the Commodity Futures Trading Commission to Change and
to Supplement Proposed Rules of the Board of Trade of the City of
Chicago Submitted for Commission Approval in Response to a Section
5a(a)(10) Notice Relating to Futures Contracts in Corn and Soybeans,
Opinion of Commissioner John E. Tull, Jr., Concurring in Part and
Dissenting in Part, Joined by Commissioner Barbara Pedersen Holum.
    I concur in that part of the order which provides that the CBOT
may continue to trade the 1999 contracts under the existing contract
terms. I also concur in that part of the order which provides that
the CBOT may submit alternative proposed delivery specifications for
those two contracts.
    I strongly disagree with the majority's decision to issue this
order which changes and supplements the CBOT's proposed amendments
to the delivery specifications to their corn and soybean contracts.
    As I noted in my earlier dissent, Section 5a(a)(10) of the
Commodity Exchange Act requires us to determine whether the delivery
terms proposed by the CBOT ``will tend to prevent or diminish price
manipulation, market congestion, or the abnormal movement of such
commodity in interstate commerce.'' We must also ``take into
consideration the public interest to be protected by the antitrust
laws in requiring or approving any rule of a contract market.''
Based on my review of the data available at the time of the
Commission's proposed order and as supplemented by the CBOT on
October 15, 1997, I remain convinced that the proposed terms for
both contracts as submitted by the CBOT meet these statutory
requirements.
    In conclusion, both of these contracts will have a tremendous
effect on the world marketplace. For both markets, the price
discovery process and the published prices determine the price,
through basis, to every soybean and corn farmer in the United
States; actually every oil seed and corn farmer and end user
throughout the world. While it is my serious hope that the contracts
designed by the Commission will work, I believe we could have had
better contracts and I sincerely hope that the Exchange will take
advantage of the opportunity to resubmit proposed terms for both
contracts and that the majority will approve such resubmission if it
satisfies the requirements of the Act.

Attachment 1

    For the reasons explained in the ``Order of the Commodity
Futures Trading Commission to Change and to Supplement Proposed
Rules of the Board of Trade of the City of Chicago Submitted For
Commission Approval in Response to a Section 5a(a)(10) Notice
Relating to Futures Contracts in Corn and Soybeans,'' the Commission
is changing and supplementing under section 5a(a)(10) of the
Commodity Exchange Act proposed rules of the Board of Trade of the
City of Chicago. The Commission hereby makes the following changes:
<SUP>43</SUP>
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    \43\ Bold-face type denotes the Commission's proposed changes or
supplements to the CBT proposal. Underlinings denote changes
proposed by the CBT. Deletions to proposed CBT language are not
shown.
---------------------------------------------------------------------------

    1. To change and to supplement the paragraph of Rule 1036.00
immediately following the paragraph beginning with the words ``Corn
Differentials,'' to read as follows:
    In accordance with the provisions of Rule 1041.00A, corn for
shipment from regular warehouses or shipping stations located within
the Chicago Switching District or the Burns Harbor, Indiana
Switching District may be delivered in satisfaction of corn futures
contracts at contract price, subject to the differentials for class
and grade outlined above. Corn for shipment from shipping stations
located on the northern Illinois River may be delivered at a premium
over contract price of 150 percent of the difference between the
Waterways Freight Bureau Tariff No. 7 rate* applicable to that
location and the rate applicable to Chicago, Illinois, subject to
the differentials for class and grade outlined above.
    * The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 35.714 bushels per ton.
    2. To change and to supplement the paragraph of Rule 1036.00
immediately following the paragraph beginning with the words
``Soybean Differentials,'' to read as follows:
    In accordance with the provisions of Rule 1041.00D, soybeans for
shipment from regular warehouses or shipping stations located within
the Chicago Switching District, the Burns Harbor, Indiana Switching
District, or the Toledo, Ohio Switching District may be delivered in
satisfaction of soybean futures contracts at contract price, subject
to the differentials for class and grade outlined above.
    In accordance with the provisions of Rule 1041.00D, soybeans for
shipment from shipping stations located on the northern Illinois
River or from shipping stations within the St. Louis-East St. Louis
and Alton Switching Districts (i.e., the upper Mississippi River
between river miles 170 and 205) may be delivered in satisfaction of
soybean futures contracts at a premium over contract price of 150
percent of the difference between the Waterways Freight Bureau
Tariff No. 7 rate* applicable to that location and the rate
applicable to Chicago, Illinois, subject to the differentials for
class and grade outlined above.
    * The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 33.333 bushels per ton.
    3. To change and to supplement Rule 1041.00A to read as follows:
    Corn. Corn for shipment from regular warehouses or shipping
stations located within the Chicago Switching District or the Burns
Harbor, Indiana, Switching District may be delivered in satisfaction
of corn futures contracts at contract price. Corn for shipment from
shipping stations located within the northern Illinois River may be
delivered in satisfaction of corn futures

[[Page 60859]]

contracts at a premium over contract price of 150 percent of the
difference between the Waterways Freight Bureau Tariff No. 7 rate*
applicable to that location and the rate applicable to Chicago,
Illinois, subject to the differentials for class and grade outlined
above.
    * The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 35.714 bushels per ton.
    4. To change and to supplement Rule 1041.00D to read as follows:
    Soybeans. Soybeans for shipment from regular warehouses or
shipping stations located within the Chicago Switching District, the
Burns Harbor, Indiana, Switching District or the Toledo, Ohio,
Switching District may be delivered in satisfaction of soybean
futures contracts at contract price. Soybeans for shipment from
shipping stations located on the northern Illinois River or from
shipping stations within the St. Louis-East St. Louis and Alton
Switching Districts (i.e., the upper Mississippi River between river
miles 170 and 205) may be delivered in satisfaction of soybean
futures contracts at a premium over contract price of 150 percent of
the difference between the Waterways Freight Bureau Tariff No. 7
rate* applicable to that location and the rate applicable to
Chicago, Illinois, subject to the differentials for class and grade
outlined above.
     The factor for converting the tariff rate quoted in tonnage to
a bushel basis shall be 33.333 bushels per ton.
    5. To change and to supplement Regulation 1044.01 following the
list of delivery locations and immediately prior to the issuer's
signature block by adding, as follows:

soybeans only:
____St. Louis, MO, river mile marker-----------------------------------
____Toledo, OH, Switching District

    6. To change and to supplement Regulation 1056.01 by adding
after the last paragraph the following:
    The premium charges on soybeans for delivery from regular
shippers within the Toledo, Ohio, Switching District shall not
exceed 12/100 of one cent per bushel per day.
    The premium charges on soybeans for delivery from regular
shippers within the St. Louis-East St. Louis and Alton Switching
Districts (i.e., the upper Mississippi River between river miles 170
and 205) shall not exceed 10/100 of one cent per bushel per day.
    7. To change and to supplement the second paragraph of
Regulation 1081.01(1) to read as follows:
    (c) and in the case of Chicago, Illinois, Burns Harbor, Indiana,
and Toledo, Ohio, Switching Districts only, his registered storage
capacity.
    8. To change and to supplement the third paragraph of Regulation
1081.01(1)(a) to read as follows:
    (a) one barge per day at each shipping station on the northern
Illinois River and within the St. Louis-East St. Louis and Alton
Switching Districts (i.e., the upper Mississippi River between river
miles 170 and 205); and
    9. To change and to supplement Regulation 1081.01(2) to read as
follows:
    Except for shippers located on the northern Illinois River and
within the St. Louis-East St. Louis and Alton Switching Districts
(i.e., the upper Mississippi River between river miles 170 and 205),
such warehouse shall be connected by railroad tracks with one or
more railway lines.
    10. To change and to supplement the first sentence of Regulation
1081.01(12)A to read as follows:
    A. Load-Out Procedures for Wheat and Oats and Rail and Vessel
Load-Out Procedures for Corn and Soybeans from Chicago, Illinois,
Burns Harbor, Indiana, and Toledo, Ohio, Switching Districts Only *
* *.
    11. To change and to supplement the first sentence of Regulation
1081.01(12)B to read as follows:
    B. Load-Out Rates for Wheat and Oats and Rail and Vessel Load-
Out Rates for Corn and Soybeans from Chicago, Illinois, Burns
Harbor, Indiana, and Toledo, Ohio, Switching Districts Only * * *.
    12. To change and to supplement Regulation 1081.01(12)G(7) to
eliminate the words ``on the Illinois Waterway,'' to read as
follows:
    Any expense for making the grain available for loading will be
borne by the party making delivery, provided that the taker of
delivery presents barge equipment clean and ready to load within ten
calendar days following the scheduled loading date of the barge. If
the taker's barges are not made available within ten calendar days
following the scheduled loading date, the taker shall reimburse the
shipper for any expenses for making the grain available. Taker and
maker of delivery have three days to agree to these expenses.
    13. To change and to supplement the last sentence of Regulation
1081.10(12)(G)(8) to read as follows:
    (8) * * * If the aforementioned condition of impossibility
prevails at a majority of regular shipping stations, then shipment
shall be made under the provisions of rule 1081.(12)(G)(9).
    14. To change and to supplement the first paragraph and
paragraph 9(b)(iii) and add a new paragraph at the end of Regulation
1081.01(12)(G)(9) to read as follows:
    (9). In the event that it has been announced that river traffic
will be obstructed for a period of fifteen days or longer as a
result of one of the conditions of impossibility listed in
regulation 1081.10(12)(G)(8) and in the event that the obstruction
will affect a majority of regular shipping stations located on the
northern Illinois River, then the following barge load-out
procedures for corn and soybeans shall apply:
    (b) * * *
    (iii) The taker of delivery shall pay the maker 150% of the
Waterways Freight Bureau Tariff Number 7 barge benchmark rate from
the original delivery point stated on the Shipping Certificate to
NOLA.
    (c) In the event that the obstruction or condition of
impossibility listed in regulation 1081.10(12)(G)(8) will affect a
majority of regular shipping stations located on the northern
Illinois River, but no announcement of the anticipated period of
obstruction is made, then shipment may be delayed for the number of
days that such impossibility prevails.
    15. To change and to supplement the first paragraph of
Regulation 1081.01(13)A by eliminating the words ``and soybeans'' in
both instances in which they appear.
    16. To change and to supplement Regulation 1081.01(13)D by
retaining it and changing it to read as follows:
    Soybeans. For the delivery of soybeans, regular warehouses or
shipping stations may be located within the Chicago Switching
District, within the Burns Harbor, Indiana, Switching District
(subject to the provisions of paragraph A above), within the Toledo,
Ohio, Switching District, or shipping stations may be located on the
northern Illinois River (subject to the provisions of paragraph A
above), or within the St. Louis-East St. Louis and Alton Switching
Districts (i.e., the upper Mississippi River between river miles 170
and 205).
    Delivery in Toledo must be made at regular warehouses or
shipping stations providing water loading facilities and maintaining
water depth equal to normal seaway draft of 27 feet. However,
deliveries of soybeans may be made in off-water elevators within the
Toledo, Ohio, Switching District PROVIDED that the party making
delivery makes the soybeans available upon call within five calendar
days to load into water equipment at one water location within the
Toledo, Ohio, Switching District. The party making delivery must
declare within one business day after receiving shipping
certificates and loading orders the water location at which soybeans
will be made available. Any additional expense incurred to move
delivery soybeans from an off-water elevator into water facilities
shall be borne by the party making delivery PROVIDED that the party
taking delivery presents water equipment clean and ready to load
within 15 calendar days from the time the soybeans have been made
available. Official weights and official grades as loaded into the
water equipment shall govern for delivery purposes. Delivery in the
greater St. Louis river-loading area must be made at regular
warehouses or shipping stations providing water loading facilities
and maintaining water depth equal to the average draft of the
current barge loadings in this delivery area. Official weights and
official grades as loaded into the water equipment shall govern for
delivery purposes.
    17. To change and to supplement Regulation 1081.01(14)E by
retaining it and changing it to read as follows:

    Soybeans. The warehouseman or shipper is not required to furnish
transit billing on soybeans represented by shipping certificate
delivery in Toledo, Ohio. Delivery shall be flat.

    18. To change and to supplement the first paragraph of the
applicant's declaration contained in Regulation 1085.01 to read as
follows:

    We, the ________________ (hereinafter called the Warehouseman/
Shipper) owner or lessee of the warehouse located at
________________ or shipping station located at mile marker
__________ of the __________ River, having a storage capacity * * *.

    19. To change and to supplement appendix 4E, paragraph 2, by
eliminating the sentence

[[Page 60860]]

which reads, ``The net worth of a firm regular to deliver corn or
soybeans must be greater than or equal to $40,000,000.''

    The Commission has determined that publication of the Order will
provide notice to interested members of the public of its action, is
consistent with the Commodity Exchange Act and is in the public
interest.

    Issued in Washington, D.C., this 7th day of November 1997, by
the Commodity Futures Trading Commission.
Edward W. Colbert,
Deputy Secretary of the Commission.
[FR Doc. 97-29895 Filed 11-12-97; 8:45 am]
BILLING CODE 6351-01-P
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