Chicago Mercantile Exchange: Proposed Amendments Relating to the Delivery Procedures, Quality Standards and Quality Price Differentials, and Speculative Position Limit Specifications for the Live Cattle Futures Contract

COMMODITY FUTURES TRADING COMMISSION

Chicago Mercantile Exchange: Proposed Amendments Relating to the

Delivery Procedures, Quality Standards and Quality Price Differentials,

and Speculative Position Limit Specifications for the Live Cattle

Futures Contract

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed contract market rule change.

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SUMMARY: The Chicago Mercantile Exchange (CME) has submitted proposed

amendments to its live cattle futures contract. The primary proposed

amendments will: (1) Modify the par yield grade and weight range

specifications and the sources and calculation methods for establishing

price differentials for non-par quality grades, yield grades, and

carcass-weights; (2) extend the delivery period for live-graded

deliveries by five business days; (3) change the last trading day of

expiring contract months; and (4) increase to 600 from 300 contracts

the spot month speculative position limit applicable on those days

preceding the last five trading days, with the existing limit of 300

contracts being retained during the last five trading days of the

contract month.

In accordance with section 5a(a)(12) of the Commodity Exchange Act

and acting pursuant to the authority delegated by Commission Regulation

140.96, the Acting Director of the Division of Economic Analysis

(Division) of the Commodity Futures Trading Commission (Commission) has

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

are of major economic significance. On behalf of the Commission, the

Division is requesting comment on this proposal.

DATES: Comments must be received on or before February 18, 1997.

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ADDRESSES: Interested persons should submit their views and comments to

Jean A. Webb, Secretary, Commodity Futures Trading Commission, 1155

21st Street, NW, Washington, DC 20581. In addition, comments may be

sent by facsimile transmission to (202) 418-5521, or by electronic mail

to [email protected]. Reference should be made to the proposed changes

in quality standards, delivery procedures, and the speculative position

limits for the CME live cattle futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact Fred Linse of the

Division of Economic Analysis, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st St., NW, Washington, DC 20581,

telephone 202-418-5273, or electronic mail: [email protected].

SUPPLEMENTARY INFORMATION: Under the current terms of the live cattle

futures contract, a par delivery unit consists of 40,000 pounds of

steers. At the buyer's option, steers may be delivered either to a CME-

approved livestock yard, for grading by United States Department of

Agriculture (USDA) personnel on a live basis, or to a CME-approved

slaughter plant, for grading by USDA personnel on a carcass basis. The

par delivery lot is composed of 55% USDA Choice, and 45% USDA Select

quality grade steers or carcasses, with a yield grade of 1, 2, 3, or 4.

No more than one yield grade 4 steer or carcass is permitted in a par

delivery unit.

For live-graded delivery, the average weight of the live steers in

a par delivery unit must fall between 1,050 and 1,250 pounds, with no

individual steer weighing more than 100 pounds above or below the

average weight of the delivery unit. For carcass-graded delivery, no

individual carcass may weigh less than 600 pounds nor more than 900

pounds. The hot yield of a par delivery unit is 63 percent.

The futures contract's existing terms also provide for the delivery

at specified price differentials for delivery units of live steers or

steer carcasses that deviate from the above-specified par delivery

standards. In particular, each additional Choice grade steer or carcass

above the 55 percent minimum level in a delivery unit is deliverable at

a price differential calculated by subtracting the ``Select 1-3 Boxed

Beef Cut-Out Value'' from the ``Choice 1-3 Boxed Beef Cut-Out Value,''

which are published on the delivery day by the USDA Market News Service

on the National Carlot Meat Report, and multiplying this difference by

63 percent. Similarly, each additional Select grade steer or carcass in

excess of the 45 percent maximum level in a delivery unit is

deliverable at a price differential calculated by subtracting the

``Choice 1-3 Boxed Beef Cut-Out Value'' from the ``Select 1-3 Boxed

Beef Cut-Out Value,'' that are published by the USDA Market News

Service on the delivery day, and multiplying this difference by 63

percent. In addition, any carcass grading below USDA Select is

deliverable at a discount of 25% of the settlement price using the

average live weight of the steers included in the delivery unit.

Carcasses grading USDA Prime are considered to be USDA Choice for

purposes of calculating the value of delivery units. Each additional

yield grade 4 carcass above the par allowable number of one is

deliverable at a discount of $20 per hundredweight, or 25% of the

settlement price, whichever is greater, on a live weight basis. Any

carcass with a yield grade of 5 is deliverable at a discount of $30 per

hundredweight, or 40 percent of the settlement price, whichever is

greater, on a live weight basis.

Live steers that weigh 100 to 200 pounds above or below the

delivery unit's average weight are deliverable at a discount of three

cents per pound. Individual steers that weigh more than 200 pounds over

or under the delivery unit's average weight, or that weigh less than

1,000 pounds or greater than 1,300 pounds, are not deliverable on the

futures contract. Steer carcasses that weigh less than 600 pounds or

more than 900 pounds are deliverable at a discount of 20 percent of the

settlement price.

Delivery may be made on any business day of the contract month

beginning with the seventh business day following the first Friday of

the contract month, plus the first two business days in the succeeding

calendar month.

The primary proposed amendments will:

(1) Change the par yield grade specification to USDA yield grade 3

steers or carcasses, from the existing par specification of USDA yield

grade 1, 2, 3, or 4 steers or carcasses;

(2) Change the weight requirement for live-graded delivery units

deliverable at par by specifying an average steer weight range of 1,100

pounds to 1,300 pounds (from the existing 1,050 pounds to 1,250 pounds

range), and an individual steer weight range of 1,050 pounds to 1,350

pounds (from the existing 1,000 pounds to 1,300 pounds range);

(3) Remove the existing limitation on the number of yield grade 4

steers permitted in live-graded delivery units and allow the delivery

of yield grade 5 steers in such units;

(4) Modify the sources and calculation procedures for determining

price differentials for quality grade, yield grade, and carcass weight

as described in proposed rule 1504.A below:

* * * * *

A. Sources and Calculation of Adjustment Factors Quality grade

adjustments for all delivery units will make use of the live weight

equivalent of the Choice-Select boxed beef spread calculated from

information reported by USDA (in $/cwt.) for the day of tender in the

National Carlot Meat Report. This is referred to hereafter as the Live-

Equivalent Choice-Select Spread (LECSS) and is computed by subtracting

the ``Select 1-3 Boxed Beef Cut-Out Value'' from the ``Choice 1-3 Boxed

Beef Cut-Out Value'' and multiplying that result by 0.0063. Boxed Beef

Cut-Out Values from the 550/700 pound category are used for live-graded

delivery units with an average live weight less than 1,111 pounds and

for carcass-graded delivery units with an average carcass weight less

than 700 pounds. Boxed Beef Cut-Out Values from the 700/850 pound

category are used for live-graded delivery units with an average live

weight greater than or equal to 1,111 pounds and for carcass-graded

delivery units with an average carcass weight greater than or equal to

700 pounds.

The National Carlot Meat Report for the day of tender shall also

serve as the source of information for calculating the condemned liver

factor used in carcass-graded deliveries. The condemned liver factor

shall equal the reported liver value (in $/cwt.) from the ``By-Product

Value Calculation'' multiplied by -0.01.

In addition, quality grade, yield grade and carcass weight

adjustments will make use of factors calculated from values reported by

USDA (in $/cwt.) in the National Carcass Premiums and Discounts for

Slaughter Steers and Heifers report. The Prime, Standard, Yield Grade

1, Yield Grade 2, Yield Grade 4, Yield Grade 5, and 900-950 lbs.

factors are calculated by multiplying the reported simple average for

the corresponding category by 0.0063. If a quality grade or yield grade

is broken into subcategories on this report, then the factor for that

quality or yield grade shall be the simple average of all reported

averages for the subcategories in that category multiplied by 0.0063.

The most recently issued report with respect to the day a Certificate

is tendered shall be used to calculate the factors for that delivery

unit. When a Certificate is tendered on the same day that a new report

is issued,

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that new report shall be used in factor calculation regardless of the

time of day that the report is released.

The sub-Standard factor shall equal -25% of the tender-day

settlement price.

Should the USDA determine that an error exists in any of the

reports used to calculate adjustment factors and subsequently issues a

corrected report, that corrected report shall be used in place of the

original.

* * * * *

All live steers or steer carcasses in a delivery unit shall receive

a quality grade adjustment computed from the Live-Equivalent Choice-

Select Spread (LECSS) factors and other factors described in proposed

Rule 1504.A. Per pound quality grade adjustments shall be as follows:

USDA Prime: +0.45 x LECSS + Prime factor

USDA Choice: +0.45 x LECSS

USDA Select: -0.55 x LECSS

USDA Standard: +0.45 x LECSS + Standard factor

Below USDA Standard: +0.45 x LECSS + Standard factor + sub-Standard

factor

The per animal quality grade adjustment shall be calculated by

multiplying the per pound quality grade adjustment by the average live

weight of the delivery unit. Carcasses deemed ungradeable with respect

to quality grade by the USDA shall receive a per pound quality grade

discount equal to 25% of the settlement price. In addition, carcasses

weighing between 900 and 950 pounds will be deliverable at a price

differential that is based on the adjustment factors described in

proposed Rule 1504.A (rather than at the existing discount equal to 20%

of the settlement price);

(5) Expand the delivery period to include the first seven business

days of the calendar month following the delivery month (from the first

two business days of such months);

(6) Change the last trading day of expiring contract months to the

last business day of such months (from the last business day

immediately preceding the last five business days of the contract

month); and

(7) Increase to 600 from 300 contracts the speculative position

limit applicable during that part of the spot month which begins on the

first business day following the first Friday of the contract month and

ends on the business preceding the last five trading days of the

expiring contract month. The existing spot-month speculative position

limit of 300 contracts would remain applicable during the last five

trading days of the expiring contract month.

The CME intends to apply the proposed amendments to all newly

listed contract months following receipt of Commission approval.

In support of the proposed amendments, the Exchange states that

``[t]hese changes are in the best interests of both the Live Cattle

contract and the cattle feeding industry as a whole, particularly as

the cash market continues to move toward increased usage of value-based

marketing methods.'' In addition, the Exchange believes the proposal

will increase deliverable supplies by permitting wider variations from

the par quality specifications at market-based price differentials. The

Exchange believes the proposed increase in the spot month speculative

position limit preceding the last five trading days is supported by the

increased deliverable supplies associated with the proposed amendments

as well as other contract changes that were implemented in 1995.

The Commission is requesting comments specifically with respect to

(1) the extent to which the proposed amendments reflect prevailing cash

market practices; (2) the extent to which the proposed price

differentials for the delivery of differing qualities of live steers or

steer carcasses reflect commercial price differences; and (3) the

impact of the proposed amendments on the level of economically

deliverable supplies at the contract's delivery points during the

delivery months traded under the futures contract.

Copies of the proposed amendments will be available for inspection

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

at the above address. Copies of the amended terms and conditions can be

obtained through the Office of the Secretariat by mail at the same

address or by telephone at (202) 418-5105.

The materials submitted by the CME in support of the proposed

amendments may be available upon request pursuant to the Freedom of

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

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

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

Compliance Staff of the Office of the Secretariat at the above address

in accordance with CFR 145.7 and 145.8.

Any person interested in submitting written data, views, or

arguments on the proposed amendments should send such comments to Jean

A. Webb, Secretary, Commodity Futures Trading Commission, at the above

address by the specified date.

Issued in Washington, DC, on January 8, 1997.

Blake Imel,

Acting Director, Division of Economic Analysis.

[FR Doc. 97-1241 Filed 1-16-97; 8:45 am]

BILLING CODE 6351-01-P