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

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COMMODITY FUTURES TRADING COMMISSION

Chicago Mercantile Exchange: Proposed Amendments Converting the

Live Hogs Futures Contract From a Physical Delivery Contract to a Cash

Settlement System

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed contract market rule changes.

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SUMMARY: The Chicago Mercantile Exchange (``CME'') has submitted

proposed amendments to its Live Hogs futures contract that would

convert the delivery provisions of that futures contract from a

physical delivery contract to a cash settlement system. In accordance

with Section 5a(a)(12) of the Commodity Exchange Act, and acting

pursuant to the authority delegated by Commission Regulation 140.96,

the Acting Director of the Division of Economic Analysis (``Division'')

of the Commodity Futures Trading Commission (``Commission'') has

determined, on behalf of the Commission, that the proposed amendments

are of major economic significance and that publication of the proposed

amendments would be in the public interest. On behalf of the

Commission, the Division is requesting comment on this proposal.

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

ADDRESSES: Interested persons should submit their views and comments to

Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K

Street NW, Washington, D.C. 20581. Reference should be made to the

proposed amendments converting the live hogs futures contract to cash

settlement.

FOR FURTHER INFORMATION CONTACT: Frederick V. Linse, Division of

Economic Analysis, Commodity Futures Trading Commission, 2033 K Street

NW., Washington, D.C. 20581, telephone (202) 254-7303.

SUPPLEMENTARY INFORMATION: The existing terms of the live hogs futures

contract provides for physical delivery of 40,000 pounds of live hogs

meeting specified quality and weight requirements at CME-approved

public livestock yards at seven delivery points located in six

different states. The contract currently specifies a maximum daily

price fluctuation limit of 1.5 cents per pound, which is applicable

through the last trading day of each expiring contract month. The

contract's existing terms also specify that trading ends on the

business day immediately preceding the last five business days of the

contract month. In addition, the contract's current terms provide for

speculative position limits of 900 contracts in any one month and 450

contracts in the expiring month.

The proposed amendments would delete all physical delivery

provisions of the futures contract. These provisions would be replaced

by terms specifying cash settlement of all open positions at the

expiration of trading in a contract month. The cash settlement price

would reflect the value of hogs on a carcass weight basis during the

last two trading days of expiring contract months. Specifically, the

proposed cash settlement price would equal the two-day weighted average

of U.S. Department of Agriculture (USDA) Lean Value Direct Hog Prices

for packer base weight hog carcasses, 51-52 percent lean/.80-.99 inches

of backfat at the last rib or equivalent as reported by the USDA for

the Western Corn Belt, the Eastern Corn Belt and the Mid-South. Under

the proposals, the cash settlement price would be calculated by summing

the above-noted USDA-reported average prices for each region and each

of the two days weighted by the ratio of the total number of lean hogs

sold directly to packers in that region on that day relative to the

total number of lean hogs sold directly to packers in all three regions

combined during the specified two-day period.

The proposed amendments also will specify that the contract's

trading unit will be 40,000 pounds of lean hog carcasses. In addition,

the proposed amendments will provide that the contract's existing 1.5-

cent-per-pound maximum daily price fluctuation will not be applicable

during the last two trading days of an expiring contract month.

Speculative position limits would be 3,000 contracts in any individual

non-spot contract month and 450 contracts in expiring contract months

as of the close of business on the fifth business day of the spot

month. Trading in expiring contract months would end on the tenth

business day of the spot month for both the futures and option

contracts.

In addition to the substantive amendments, the proposed amendments

would make certain conforming changes to other rules governing the live

hog futures and option contracts. Also, the proposed amendments would

rename the contracts as the ``lean hogs'' futures and options

contracts.

According to the CME, physical delivery through public livestock

yards no longer reflects dominant cash market practice. The CME notes

that less than 10% of hogs meeting the requirements for delivery on the

futures contract are currently sold through such yards, and that the

percentage of hogs sold through such yards is expected to continue to

decline. The CME further indicates that, as a result of the decline in

importance of sales through public livestock yards, the usefulness of

the live hogs futures contract as a price discovery and risk management

tool has been adversely affected. The CME indicates, in this respect,

that the limited cash market activity at most public terminal markets

raises valid questions regarding whether the prices paid at the

terminal markets accurately reflect prices paid in the rest of the

industry.

According to the CME, the decline in importance of the terminal

markets has been accompanied by an increase in the importance of direct

sales to packers at packing plants and country buying stations, and an

increase in carcass-basis pricing. The CME said that, according to the

USDA, 90% of the hogs sold in the U.S. during 1990 (the latest year for

which statistics are available) were sold through non-public markets,

mainly packing plants and country buying stations. The CME also said

that approximately 75% of market hogs sold in 1993 were sold on a

carcass grade and yield basis.

The CME believes that cash settlement using carcass-based pricing

is necessary to ensure the long-term viability of the contract for the

reasons noted above. The CME also believes that increasing the

speculative limits to 3,000 contracts in individual non-spot months and

to 450 contracts in the expiring month will accommodate new business

from certain commercial entities and increase the liquidity of the

market.

The CME proposes to make the amendments effective only for all

newly listed contracts, following Commission approval. No currently

open contract month or position would be affected by the proposed

amendments.

On behalf of the Commission, the Division is requesting comment on

the proposed amendments. In particular, the Division is seeking comment

on regarding the extent to which the proposed cash settlement price

will reflect the underlying cash market and the susceptibility of the

proposed cash settlement price to manipulation or distortion.

Copies of the proposed amendments will be available for inspection

at the Office of the Secretariat, Commodity Futures Trading Commission,

2033 K Street NW, Washington, D.C. 20581. Copies of the amended terms

and conditions can be obtained through the [[Page 27725]] Office of the

Secretariat by mail at the above address or by telephone at (202) 254-

6314.

The materials submitted by the CME in support of the proposed

amendments may be available upon request pursuant to the Freedom of

Information Act (5 U.S.C. 552) and the Commission's regulations

thereunder (17 CFR part 145 (1987)). Requests for copies of such

materials should be made to the FOI, Privacy and Sunshine Act

Compliance Staff of the Office of the Secretariat at the Commission's

headquarters in accordance with CFR 145.7 and 145.8.

Any person interested in submitting written data, views or

arguments on the proposed amendments should send such comments to Jean

A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K Street

NW., Washington, D.C. 20581 by the specified date.

Issued in Washington, D.C. on May 18, 1995.

Blake Imel,

Acting Director.

[FR Doc. 95-12875 Filed 5-24-95; 8:45 am]

BILLING CODE 6351-01-P