Chicago Board of Trade Futures Contracts in Corn and Soybeans; Draft Proposed Revisions to Delivery Specifications

COMMODITY FUTURES TRADING COMMISSION

Chicago Board of Trade Futures Contracts in Corn and Soybeans;

Draft Proposed Revisions to Delivery Specifications

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of, and Request for Public Comment on, Draft Proposed

Revisions by the Chicago Board of Trade to Delivery Specifications on

Corn and Soybean Futures Contracts.

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SUMMARY: The Commodity Futures Trading Commission (Commission) on

November 7, 1997, issued an Order changing and supplementing under

section 5a(a)(10) of the Commodity Exchange Act (Act), 7 U.S.C.

7a(a)(10), the delivery terms of the corn and soybean futures contracts

of the Board of Trade of the City of Chicago (CBT). The CBT previously

had 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 its November 7 Order changed and

supplemented the CBT proposal for its soybean futures contract by

making changes relating to the delivery locations proposed by the CBT

and for both its soybean and corn futures contracts by making changes

relating to the locational price differentials proposed by the CBT, to

a contingency rule proposed by the CBT and to a minimum net worth

requirement for eligibility to issue shipping certificates proposed by

the CBT. The November 7 Order also provided that the CBT was not

precluded ``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 CBT on November 18, 1997, provided to the Commission draft

proposed revisions to the corn and soybean futures contracts which,

although approved by the CBT Board of Directors, have not yet been

presented to the CBT membership for its approval. Those draft proposed

revisions contain delivery specifications different from those

contained in the Commission's November 7 Order.

The Commission is providing notice of the CBT's draft proposed

revisions in order to provide the public with an opportunity to comment

to the Commission on them. The Commission has determined that

publication of the CBT's draft proposed revisions for public comment is

in the public interest, will assist the Commission in considering the

views of interested persons, and is consistent with the purposes of the

Commodity Exchange Act.

DATES: Comments must be received by January 15, 1998.

ADDRESSES: Comments should be mailed to the Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,

D.C. 20581, attention: Office of the Secretariat; transmitted by

facsimile at (202) 418-5521; or transmitted electronically at

[[email protected]]. Reference should be made to ``Corn and Soybean

Delivery Points; Draft Proposed Revisions.''

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:

I. Background

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

[[Page 63530]]

an opportunity to make appropriate changes in such rules and

regulations. If the contract market within seventy-five days of such

notification 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, by letter dated December 19, 1996, commenced a

proceeding under section 5a(a)(10) of the Act by issuing to the CBT a

notification 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 CBT, on April 16, 1997, submitted its response to the section

5a(a)(10) notification in the form of proposed exchange rule

amendments. Those proposed rule amendments would have replaced 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.1 A shipping certificate would have provided

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 and

additionally to be delivered in Chicago by rail or vessel. Delivery at

all eligible locations would have been at par. The CBT's proposal would

have eliminated the current delivery points on its corn and soybean

futures contracts at Toledo, Ohio and St. Louis, Missouri and would

have restricted firms eligible to issue shipping certificates to those

meeting a minimum net worth requirement of $40 million, in addition to

a number of other requirements.

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\1\ 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.

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The Commission published the substance of the CBT's proposed

amendments in the Federal Register for public comment, receiving almost

700 comments, the largest number of comments ever received by the

Commission on any issue before it. In addition, at the request of the

CBT, the Commission held a public meeting on June 12, 1997, to accept

oral and written statements by the CBT and interested members of the

public. 62 FR 29107 (May 29, 1997).

On September 15, 1997, the Commission issued a proposed order,

publishing its text in the Federal Register with a request for public

comment. 62 FR 49474 (September 22, 1997). Over 230 commenters

submitted comments to the Commission on the proposed order. In

addition, the Commission held a public meeting on October 15, 1997, at

which the CBT was afforded an opportunity to appear before the

Commission and to be heard. Subsequently, the CBT filed written

exceptions to the proposed order.

On November 7, 1997, the Commission issued a final Order to the CBT

under section 5a(a)(10) of the Act. 62 FR 60831 (November 13, 1997)

(November 7 Order or Order). The Commission's Order found that the

CBT's proposal failed to meet the requirements of sections 5a(a)(10),

5a(a)(12), 8a(7), and 15 of the Act because of (1) an inadequate amount

of deliverable supplies of soybeans; (2) the failure to include

required locational differentials; (3) the failure to provide an

adequate rule for alternative deliveries if river transportation were

obstructed; and (4) the substantial impediment to eligibility for

issuing corn and soybean shipping certificates imposed by the CBT's

proposed $40 million minimum net worth requirement.

Based on these findings, the Commission changed and supplemented

the delivery locations for CBT's soybean futures contract by retaining

the Toledo, Ohio switching district and the St. Louis/East St. Louis/

Alton areas as delivery locations, with Toledo priced at par and the

St. Louis/East St. Louis/Alton area priced 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. The Commission also required that both

corn and soybeans from shipping locations on the northern Illinois

River be 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 ordered that the

contingency plan for alternative delivery procedures when traffic on

the northern Illinois River is obstructed be changed and supplemented

and that the $40 million minimum net worth eligibility requirement for

issuers of shipping certificates be eliminated. The Commission ordered

that the contract terms as changed and supplemented would apply

beginning with contract months in the year 2000 and that the

preexisting contract terms would apply to contract months in the year

1999.

The Commission's Order did not ``preclude( ) 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.'' 62 FR

60833. To the contrary, the Order provided that 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.

Id. at 60834.

By letter dated November 17, 1997, the CBT on November 18, 1997,

notified the Commission that it would be submitting for Commission

review such an alternative for contract months in the year 2000 and

thereafter. Proposed revisions of the CBT corn and soybean futures

contracts will be submitted to the CBT membership for its approval in

mid-December 1997, and the CBT expects to submit the proposed revisions

for Commission review and action upon membership approval. However, the

CBT has requested that the Commission seek public comment at this time

on the draft proposed revisions in anticipation of the CBT's receiving

the requisite approval of its membership in order to expedite the

Commission's consideration and review of them. The Commission has

determined that publication of the draft proposed revisions at this

time is in the public interest and will assist the Commission in its

consideration of these issues.

II. CBT's Draft Proposed Revisions

CBT's draft proposed revisions for contract months in the year 2000

and thereafter would have the following terms. The soybean futures

contract would call for shipping certificate

[[Page 63531]]

delivery from shipping stations located along the entire Illinois River

(extending from Chicago and including Burns Harbor, Indiana, to

Grafton, Illinois at the river's mouth) and that portion of the upper

Mississippi River from the mouth of the Illinois River to St. Louis.

Delivery at Chicago/Burns Harbor would be at par, and delivery at other

locations would be at the following premiums: shipping stations located

along the Illinois River from river mile 304 at the junction of the

Calumet Sag Channel and the Chicago Sanitary & Ship Canal to river mile

170 between Chillicothe and Peoria would be priced at a premium of 2

cents per bushel; shipping stations located from river mile 170 to the

mouth of the Illinois River at Grafton would be priced at a premium of

3 cents per bushel; and shipping stations located at the St. Louis/East

St. Louis/Alton delivery area would be priced at a premium of 5 cents

per bushel.

The corn futures contract would retain the delivery locations

contained in the Commission's November 7 Order: shipping stations

located along that portion of the northern Illinois River from Chicago

(including Burns Harbor, Indiana) to Pekin, Illinois. Delivery at

Chicago/Burns Harbor would be at par; delivery from shipping stations

located along the Illinois River from river mile 304 at the junction of

the Calumet Sag Channel and the Chicago Sanitary & Ship Canal to river

mile 170 between Chillicothe and Peoria would be priced at a premium of

2 cents per bushel; and delivery from river mile 170 to river mile 151

at Pekin would be at a premium of 3 cents per bushel.

To qualify for regularity, a shipping certificate issuer would have

to register to load a minimum of 3 barges per day at Chicago/Burns

Harbor and at St. Louis/East St. Louis/Alton (for soybeans) and one

barge per day at all other locations. In addition, a regular issuer

would have to be capable of registering a minimum number of

certificates equivalent to 30 barges (1,650,000 bushels) of corn or

soybeans. A shipper would also have to have a net worth equivalent to

four times the value of the certificates issued and could not issue

certificates for an amount greater than 30 times its registered daily

barge-loading capacity or, in the case of Chicago, its registered

storage capacity. The contracts would also provide a contingency plan

in case of obstructions to river traffic that would require a shipper

to make the product available in a loaded barge with freight pre-paid

to New Orleans at an Illinois or Mississippi River location below the

obstruction. The receiver would be obligated to reimburse the shipper

at a flat specified rate (detailed below) intended to cover the cost of

shipping from the original shipping station to New Orleans.

The quality specifications, unit of trading, delivery months, last

trading day, price basis, price fluctuation limits, and speculative

position limits for the corn and soybean futures contracts would be the

same as those for the respective existing futures contracts.

The terms of CBT's draft proposed revisions differ in a number of

ways from the contract terms contained in the Commission's November 7

Order. In particular, for soybeans the draft proposed revisions would

delete Toledo, Ohio as a delivery point, but add shipping stations on

the Illinois River from Pekin to the river's mouth. In addition, for

both corn and soybeans the draft proposed revisions would establish a

fixed cents per bushel price differentials for all non-par locations

within a specified ``region,'' in contrast to the Commission's Order

which established separate price differentials for each non-par

location based on the difference between 150% of tariff rate applicable

to that shipping station and 150% of tariff rate applicable to Chicago.

The CBT's draft proposed revisions would also establish a new

regularity requirement on shipping certificate issuers which is not

contained in the Commission's Order. Specifically, issuers would have

to register a minimum number of shipping certificates equivalent to 30

barges (1,650,000 bushels) of corn or soybeans. In addition, the CBT's

draft proposed revisions for soybeans would require issuers at St.

Louis/East St. Louis/Alton to load three barges per day, rather than

one barge per day as provided in the Commission's Order.

Finally, the reimbursement method for makers of delivery under the

draft proposed revisions to the contingency rule would be different

from that established in the Commission's Order. In particular, the

draft proposed revisions would require shippers affected by a river

obstruction to make the product available in a loaded barge with

freight pre-paid to New Orleans at an Illinois or Mississippi river

location below the obstruction. Under the Order, the shipper is merely

required to provide the product at a shipping station below the

obstruction. In addition, under the CBT's draft proposed revisions, the

receiver would be obligated to reimburse the shipper at a fixed rate

intended to cover the full cost of shipping the product from the

original shipping station to New Orleans, set at 20 cents per bushel

for Chicago/Burns Harbor issuers, 16 cents per bushel for northern

Illinois River issuers, 12 cents per bushel for southern Illinois River

issuers, and for soybeans only, 7 cents per bushel for St. Louis/East

St. Louis/Alton issuers. Under the Commission's Order, reimbursement is

made based on the difference in barge freight to New Orleans from the

original shipping station and the alternative shipping station,

calculated at 150% of the tariff rate applicable to the respective

stations, and thus is the same as the method of establishing locational

differentials between delivery locations under normal (non-contingency)

situations.

The complete text of the CBT's draft proposed revisions for the

corn and soybean futures contracts can be accessed through the

Commission's internet web site, at http://www.cftc.gov., ``What's

Pending,'' and is also available by request from the Commission's

Office of the Secretariat at the address noted above.

III. Procedure for Commission Review

The CBT's letter of November 17, 1997, indicated the CBT's

intention to file its proposed revisions as applications for contract

market designations and to request ``fast track'' review ``pursuant to

Section 5a(a)(12) of the Act and CFTC regulation rule 1.41.'' The

Commission finds that upon submission by the CBT the proposed revisions

will be ineligible for fast track consideration under the Commission's

rules for the following reasons. The Commission has issued a final

Order under section 5a(a)(10) of the Act relating to the contract terms

of the CBT's corn and soybean futures contracts. The CBT's proposed

revisions to that Order pose difficult economic and legal issues which

cannot appropriately be addressed under the summary fast track

procedures. Moreover, the Commission recognizes that the broad public

interest in this issue requires that the public be given an adequate

opportunity to comment on the proposed revisions. Therefore, the

Commission will consider the proposed revisions, when submitted by the

CBT, under the provisions of sections 5a(a)(10), 5a(a)(12) and 6 of the

Act (and other provisions of the Act, as applicable) and not under the

fast track procedures.

Even though the Commission finds that the CBT's proposed revisions

will be ineligible for fast track review when submitted, it intends to

act expeditiously on them. Moreover, the Commission believes that

publication of the CBT's draft proposed revisions for a

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comment period of forty-five days will provide sufficient time for

public consideration of these issues and will look with disfavor upon

requests for extension of the comment period.

Accordingly, for the above reasons, the Commission finds that

publication of the CBT's draft proposed revisions is in the public

interest and will assist the Commission in its consideration of these

issues. Commenters are invited to analyze the following issues relating

to the CBT's draft proposed revisions and to submit written data, views

or comments relating to the draft proposed revisions:

1. Would available deliverable supplies of corn and soybeans be

sufficient ``to tend to prevent or diminish price manipulation, market

congestion, or the abnormal movement of such commodity in interstate

commerce,'' as required by the Act?

2. Would the price differentials for delivery at non-par locations

appropriately reflect cash market price differentials for corn or

soybeans at such locations relative to each commodity's value at the

par delivery point of Chicago, Illinois?

3. Would the proposed load-out provisions calling for three barges

per day at Chicago/Burns Harbor and at St. Louis/East St. Louis/Alton

(for soybeans) and one barge per day at all other locations conform to

commercial practices?

4. Under the contingency plan for river obstructions, the maker

would be required to provide the product in loaded barges cif New

Orleans. Would the reimbursement to makers of delivery reflect

commercial practices? How does the reimbursement scheme relate to the

locational price differentials for non-contingency conditions?

5. Would the minimum net worth requirements be necessary to ensure

performance on the corn and soybean futures contracts? Do they unduly

limit eligibility of firms to become issuers of shipping certificates?

Issued in Washington, D.C., this 26th day of November, 1997, by

the Commodity Futures Trading Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97-31534 Filed 11-28-97; 8:45 am]

BILLING CODE 6351-01-P