Chicago Board of Trade Futures Contracts in Corn and Soybeans; Order To Change and To Supplement Delivery Specifications

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 [PA[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.1

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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.2 Previously, the Commission had published the

substance of the CBT's proposed amendments in the Federal Register for

a 15-day comment period.3 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. 4

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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.'' 5 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. 6

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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. 7 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. 8 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. 9 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.10 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. 11 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.

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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. 12 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.

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\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. 13 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.14

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\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.

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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.15

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\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.

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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.16 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.

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\16\ In all seven expirations the largest long position exceeded

600 contracts.

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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.17 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.18

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\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.19 (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.

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\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.)

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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.20 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.21

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\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.22

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\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.

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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.23 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.

BILLING CODE 6351-01-P

[[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.24 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.

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\24\ Unlike the soybean futures contract, there is no August

contract month listed for corn.

BILLING CODE 6351-01-P

[[Page 60845]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.028

[[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.25 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.

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\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.26

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.

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\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.

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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.27

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\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.28 Currently, the cash market for such products

prices them at the CIF New Orleans price, which is uniform and widely

known.29 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.

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\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.

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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.30

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\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.

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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.31 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 1993.32

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\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.

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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.33 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.

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\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).

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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.34

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\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.

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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.35 Therefore, the CBT proposal's possible

anticompetitive effects must be evaluated against its potential

effectiveness in achieving the policies and purposes of the Act.

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\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).

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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 3,300.36 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.

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\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).

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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.37

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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.

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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.38

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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.

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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.39

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\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.

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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.40

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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.

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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.41

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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.

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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.42 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.

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\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.

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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:

43

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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.

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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