MidAmerica Commodity 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

MidAmerica Commodity 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 MidAmerica Commodity Exchange (``MCE'') 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 September 11, 1996.

ADDRESSES: Interested persons should submit their views and comments to

Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, NW, Washington, D.C. 20581.

Reference should be made to the proposed amendments converting the MCE

live hogs futures contract to cash settlement.

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

Economic Analysis, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581,

telephone (202) 418-5273.

SUPPLEMENTARY INFORMATION: The existing terms of the live hogs futures

contract provides for physical delivery of 20,000 pounds of live hogs

meeting specified quality and weight requirements at MCE-approved

public livestock yards at seven delivery points located in six

different states. 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.

The proposed amendments will delete all physical delivery

provisions of the futures contract. These provisions will be replaced

by terms specifying cash settlement of all open positions at the

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

will be based on the cash market value of hogs during the last two

trading days of expiring contract months. Specifically, the proposed

cash settlement price will equal the two-day weighted average of the

mid-point of the price range for U.S. No. 1, No. 2, and No. 3 grade

barrows and gilts in the 220 to 260-pound weight range in the Iowa-

Southern Minnesota region, as reported by the U.S. Department of

Agriculture (USDA) in its Midwest Direct Hog report. The Iowa-Southern

Minnesota region is defined by the USDA as the state of Iowa and the

Southern two tiers of counties in Minnesota. The final cash settlement

price will be determined in four steps. First, the midpoint of the

price range for U.S. 1, 2 and 3 barrows and gilts in the 220 to 260-

pound weight range at country points for each of the last two trading

days will be calculated and rounded to the nearest whole cent. Second,

the volume percentage for each of last two trading days will be

calculated by dividing the volume of hog receipts on each such day by

the total volume of receipts for the two-day period. Third, each day's

calculated midpoint price is then multiplied by that day's calculated

volume percentage to determine the weighted value for that day. Fourth,

the daily weighted values for the two-day period are summed and rounded

to the nearest whole cent to determine the final cash settlement price.

The Exchange's proposal also will change the last trading day to

the tenth business day of the contract month from the sixth to the last

business day of the contract month.

According to the MCE, physical delivery through public livestock

yards no longer reflects dominant cash market practice. The MCE

indicated that the number of hogs sold for slaughter from Midwestern

public stockyards has been steadily declining, and totaled just

1,383,000 sales in 1995, while the number of hogs sold directly to

packers by producers and other market intermediaries from interior

country points in the Iowa-Southern Minnesota region has been steadily

increasing, and equaled 28,424,000 in 1995. The MCE further indicates

that, as a result of the decline in the 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 MCE believes that by changing the pricing basis

for the MCE live hog contract from Midwestern public stockyards to the

Iowa-Southern Minnesota direct hog market will enable the contract to

better reflect the cash market for slaughter hogs in the Midwest. The

Exchange submits that specifying a cash settlement procedure to replace

the physical delivery settlement mechanism will simplify the settlement

procedure for the contract and facilitate greater use of the contract

by hedgers.

The MCE proposes to make the amendments effective, following

Commission approval, with respect to all newly listed contract months

beginning with the February 1997 contract month. No currently listed

contract month or existing 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

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,

Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.

Copies of the amended terms and conditions can be obtained through the

Office of the Secretariat by mail at the above address or by telephone

at (202) 418-5100.

The materials submitted by the MCE 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, Three

Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581 by the

specified date.

Issued in Washington, D.C. on August 6, 1996.

Blake Imel,

Acting Director.

[FR Doc. 96-20446 Filed 8-9-96; 8:45 am]

BILLING CODE 6351-01-P