Chicago Board of Trade Futures Contracts in Corn and Soybeans; Order To Designate Contract Markets and Amendment Order of November 7, 1997, as Applied to Such Contracts

COMMODITY FUTURES TRADING COMMISSION

Chicago Board of Trade Futures Contracts in Corn and Soybeans;

Order To Designate Contract Markets and Amendment Order of November 7,

1997, as Applied to Such Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order to Chicago Board of Trade.

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SUMMARY: The Commodity Futures Trading Commission (Commission), by

letter dated December 19, 1996, commenced a proceeding under section

5a(a)(10) of the Act by issuing to the Board of Trade of the City of

Chicago (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.'' 61 FR 67998 (December 26, 1996). 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 of the CBT corn

and soybean futures contracts. 62 FR 60831 (November 13, 1998). By

letter dated November 17, 1997, the CBT notified the Commission that it

would submit for Commission review an alternative to the contract terms

ordered by the Commission and thereafter submitted draft applications

for contract market designation for corn and soybeans, beginning with

contract months in the year 2000.

The Commission on May 7, 1998, ordered that the applications for

contract market designation in corn and in soybeans submitted by the

CBT on December 19, 1997, and supplemented on March 20, 1998, be

granted and amended its Order of November 7, 1997, as applied to the

newly approved contracts to the extent stated. Under this Order, the

Commission permits the CBT: (i) to add the southern Illinois River as

delivery locations for soybeans and to delete the Toledo, Ohio

switching district as a delivery location for soybeans; (ii) to modify

the premiums for delivery of soybeans and corn at non-par locations

from a percentage of the freight tariff to a specified fixed cents per

bushel schedule of premiums; (iii) to modify the contingency plan to

include a conforming fixed cents-per-bushel schedule of locational

adjustments; and (iv) to add a minimum net worth eligibility

requirement for issuers of shipping certificates of $5 million. Nothing

in the Commission's Order vacates the designation of the current corn

and soybean futures contracts, vacates the applicability of the

November 7, 1997 Order to those contracts, or amends the terms of the

November 7, 1997 Order as applied to those contracts.

The Commission has determined that publication of this 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 May 7, 1998.

ADDRESSES: Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street, NW., Washington, DC 20581.

FOR FURTHER INFORMATION CONTACT:

Steven Manaster, Director, or Paul M. Architzel, Chief Counsel,

Division of Economic Analysis, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, NW., 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 * * *.

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 of the CBT corn and soybean futures contracts. 62 FR

60831 (November 13, 1998). By letter dated November 17, 1997, the CBT

notified the Commission that it would submit for Commission review an

alternative to the contract terms ordered by the Commission and

thereafter submitted draft applications for contract market designation

for corn and soybeans, beginning with contract months in the year 2000.

The Commission, on December 1, 1997, published in the Federal Register

notice of the CBT's draft proposal. 62 FR 63529. Subsequently, on

December 19, 1997, the CBT submitted its proposal, and on March 20,

1998, the CBT amended its proposal. The Commission on May 7, 1998,

designated the CBT as contract markets in corn and soybeans and amended

the November 7, 1997 Order as applied to the newly approved contracts

to the extent stated. 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: May 7, 1998.

The Commodity Futures Trading Commission (CFTC or Commission)

hereby orders that the applications for contract market designation in

corn and in soybeans submitted by the Board of Trade of the City of

Chicago (CBT) on December 19, 1997 and supplemented on March 20, 1998,

be granted and hereby amends its Order under section 5a(a)(10), dated

November 7, 1997, to permit the applications for designation to be

granted. Under this Order, the Commission takes the following actions:

(1) Grants under section 5 of the Commodity Exchange Act (Act) the

CBT's application for designation as a contract market in soybeans and

approves under section 5a(a)(12) of the Act all of the proposed rules

of the contract market contained in Attachment 1 to this Order;

(2) Grants under section 5 of the Act the CBT's application for

designation as a contract market in corn and approves under section

5a(a)(12) of the Act all of the proposed rules of the contract market

contained in Attachment 2 to this Order;

(3) Amends its Order of November 7, 1997, making all changes

necessary to effect the above actions, as follows:

(i) permits the CBT to add the southern Illinois River as delivery

locations for soybeans and to delete the Toledo, Ohio switching

district as a delivery location for soybeans;

(ii) permits the CBT to modify the premiums for delivery of

soybeans and corn at non-par locations from a percentage of the freight

tariff to a fixed cents per bushel schedule of premiums;

(iii) permits the CBT to modify the contingency plan in the Order

of November 7, 1997, to include a conforming fixed cents-per-bushel

schedule of locational adjustments; and

(iv) permits the CBT to add a minimum net worth eligibility

requirement for issuers of shipping certificates of $5 million;

Nothing in this Order precludes the CBT from listing for trading

the soybean and corn contracts designated under this Order for contract

months prior to the January 2000 soybean futures

[[Page 26576]]

contract month and the March 2000 corn futures contract month, the

initial contract months for which the Order of November 7, 1997, became

effective.

Nothing in this Order vacates the designation of the current corn

and soybean futures contracts, vacates the applicability of the

November 7, 1997 Order to those contracts, or amends the terms of the

November 7, 1997 Order as applied to those contracts. Both or either of

the currently designated contracts and the contracts designated by this

Order may be traded.

Nothing in this Order mandates that Toledo, Ohio, cease operation

as a delivery location in any commodity, either for futures contracts

traded on the CBT, for futures contracts for which any other board of

trade which might choose to seek contract market designation, or for

any of Toledo's substantial cash market operations.

The Commission, as discussed below, bases these actions on its

findings that available deliverable supplies of corn and soybeans under

the CBT's present revisions are not so inadequate under section

5a(a)(10) as to require that the Commission mandate additional delivery

points. However, the adequacy of corn and soybean supplies cannot be

accurately and fully ascertained until after there is a history of

deliveries occurring under the terms of the revised contracts. If in

operation the revised contract terms result in inadequate deliverable

supplies of corn or soybeans, the Commission will reconsider the need

to require additional delivery points for the revised contracts. To

that end, the Commission directs the CBT to report on the experience

with deliveries and expiration performance in the revised corn and

soybean futures contracts on an annual basis for a five-year period

after contract expirations begin under the revised contracts.

The revised CBT proposed locational price differentials for the

corn and soybean futures contracts fall within the range of commonly

observed or expected commercial price differences, as required by

section 5a(a)(10) of the Act and Commission policy. However, in light

of the great variability in where the differential for each river

segment falls within the range of commonly observed cash price

differences, the Commission directs the CBT as part of the above

reports on delivery and expiration performance also to report on the

extent to which particular locational price differentials may

discourage or encourage deliveries to be made from that location. This

report should relate rates of delivery by river segment to the

applicable differentials, focussing with particularity on September

deliveries from all locations and on deliveries from the Peoria-Pekin

and Havana-Grafton river segments year-round.

The Commission's conclusions are supported by factual analyses made

by the CFTC staff and by 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 Order of November 7, 1997, and in response

to the Commission's request for comment in the Federal Register on the

CBT's recent proposal. The Commission, in reaching its conclusions in

this Order, considered the record before it, which includes a

substantial amount of documentary evidence, a record number of written

comments submitted in response to four requests for comment, and the

transcriptions of statements presented by the CBT and interested

members of the public during two open meetings of the Commission to

consider these issues.

The Commission has reached its conclusions based upon the legal

standards of the Commodity Exchange Act. Section 5a(a)(10) of the Act

requires that exchanges establish such delivery points as will tend to

prevent or diminish price manipulation, market congestion and the

abnormal movement of commodities in interstate commerce. In carrying

out the requirements of section 5a(a)(10), the Commission is not free

to direct exchanges to add particular delivery locations if the

Commission finds that the contract meets the statutorily-required level

of deliverable supplies. Thus, the Commission's approval of the

delivery locations selected by the CBT for its revised corn and soybean

futures contracts is not based upon a finding that Toledo, Ohio, is in

any way an inappropriate delivery point for these or any other futures

contracts. To the contrary, Toledo currently is an active cash market

for corn, soybeans and wheat, with over 120 million bushels of these

commodities being received at that location in 1997. The available data

indicate that Toledo will continue to be an active cash market center

for these commodities in the future.\1\ As the Commission in its Order

of November 7, 1997, Toledo has proven to be an effective futures

delivery point for corn and soybeans. 62 FR 60854. Accordingly, nothing

precludes the CBT, it if chooses, from continuing to list for trading

the soybean futures contract provided under the Order of November 7,

1997, which includes Toledo as a delivery point, or precludes any other

exchange from seeking designation for a contract with Toledo as a

delivery point.

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\1\ In this regard, Toledo continues to perform a vital role in

futures markets due to its position as the primary delivery point

for the CBT wheat futures contract. In this respect, Toledo is

located within one of the few primary production areas for soft red

winter wheat and has provided the bulk of the deliverable supply for

that futures contract for many years.

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The Commission's action in designating contract markets for corn

and soybeans under the terms which the CBT has recently proposed does

not vacate or negate the existing designated contracts which are the

subject of the Order of November 7, 1997. That Order remains in effect

as to the current contracts and, as modified herein, applies to the

revised contracts. Until the designation for such contracts are

vacated, the CBT may trade both the current and the revised contracts

simultaneously, if it so chooses.\2\ Moreover, the CBT may begin

trading the revised contracts for contract months with expirations

prior to year 2000.

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\2\ Of course, if the CBT elected simultaneously to list the

current and revised futures contracts for trading and intends to

list options on those futures contracts, it must submit for prior

Commission approval applications for designation as a contract

market in options on either the revised or current futures contracts

to assure that the CBT is properly authorized to trade options on

both futures contracts.

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I. The Section 5a(a)(10) Proceeding

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 points or

point 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 closure of three of the six existing Chicago warehouses regular

for delivery

[[Page 26577]]

under the futures contracts during the year prior to the section

5a(a)(10) notification underscored the need to address without delay

the fundamental problems with the contract's delivery specifications.

However, the CBT membership defeated contract modifications recommended

by its board of directors in October 1996.\3\ 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, by finding that the

CBT corn and soybean futures contracts no longer met the requirements

of that section of the Act.

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\3\ The CBT task force spent a year developing proposed changes

to the contract's specifications. Those recommendations were

modified by the CBT's board of directors, and the modified proposal

was then defeated by a vote of the CBT membership on October 17,

1996.

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Subsequently, on April 16, 1997, the CBT submitted its response to

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

rule amendments (1997 proposal). 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.\4\ Such 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 1997 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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\4\ 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 pursuant to terms specified

by the CBT whenever the holder decides to surrender the certificate

to the issuer.

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The Commission previously had published the substance of the CBT's

1997 proposed amendments in the Federal Register for a 15-day comment

period (62 FR 12156 (March 14, 1997), later extended until June 16,

1997 (62 FR 1997). The Commission received almost 700 comments, the

largest number of comments ever received by the Commission on any issue

before it. On June 12 1997, the Commission held a public meeting at the

CBT's request to accept oral and written statements by the CBT and

interested members of the public. 62 F.R. 29107 (May 29, 1997). The

participants represented a cross-section of views, both favoring and

opposing the CBT proposal.\5\

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\5\ A transcript of the meeting has 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; a United States

Representative and a state government representative from the state

of Michigan; representatives of six commercial users of the

contracts; representatives of three producer associations; and six

persons representing the CBT.

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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.\6\ 62 FR 49474 (September 22, 1997). The comment period on the

proposed order expired on October 22, 1997. Over 230 commenters

submitted comments to the Commission on the proposed order.\7\ 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.\8\ The CBT also filed exceptions

to the proposed order as provided under the Act.

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\6\ 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 October

22, 1997.

\7\ 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

violate that provision of the Act. Others took issue with the

Commission for not proposing additional remedial changes,

particularly for the corn contract.

\8\ A transcript of the hearing and all attendant written

statements and documents have been included in the public comment

file of this proceeding.

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

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

1997). The Commission's Order found that the CBT's 1997 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 contingency plan

for alternative deliveries if river transportation were obstructed; and

(4) the unnecessary limitation on 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 Order 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. For 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's Order explicitly permitted the CBT to seek

appropriate modifications to it, stating that the Commission had not

``precluded 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 notified the Commission

that it

[[Page 26578]]

would submit for Commission review an alternative to the contract terms

ordered by the Commission and thereafter submitted draft applications

for contract market designation for corn and soybeans, beginning with

contract months in the year 2000. The Commission, on December 1, 1997,

published in the Federal Register notice of the CBT's draft proposal of

revised contract terms. 62 FR 63529. The Commission requested comment

on five specific issues: (1) whether the deliverable supplies under the

CBT draft proposal would meet the requirements of section 5a(a)(10) of

the Act; (2) whether the CBT draft proposal's locational price

differentials would reflect cash market practice; (3) whether the CBT

draft proposal's load-out provision would conform to commercial

practice; (4) whether the CBT draft proposal's reimbursement scheme

under the contingency plan would reflect commercial practices; and (5)

whether the CBT draft proposal's minimum net worth requirements would

unduly limit eligibility of firms to become issuers of shipping

certificates. 62 FR 63532.\9\

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\9\ By letter to the CBT, dated January 9, 1998, the

Commission's Division of Economic Analysis terminated fast-track

review of the designation applications. In light of the outstanding

Order under section 5a(a)(10), the Commission ruled that these

applications are ineligible for fast-track treatment.

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The Commission received twenty-seven comment letters in response to

this notice, thirteen of which supported the CBT alternatives. Of the

ten comments opposing the CBT alternative, nine questioned the CBT's

proposed elimination of Toledo as a delivery point. Three commenters

opposed the draft proposal's locational price differentials as not

reflective of cash price differentials, and three opposed as too high

the net worth requirement for issuers of shipping certificates.\10\

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\10\ An additional four comment letters neither favored nor

opposed the specific CBT proposal, but rather addressed other

issues.

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By submission dated March 20, 1998, the CBT amended its

applications for designation and provided additional information (1998

proposal). The March 20, 1998 submission modified the draft proposal

for the soybean contract by changing the segmentation of delivery zones

within the delivery area as proposed, modifying the schedule of

locational price differentials applicable to those zones and making the

equivalent schedule of locational price adjustments applicable under

the contingency delivery plan; modifying the performance requirement

for deliverers in the Alton-St. Louis area; and reducing the proposed

eligibility requirement for issuers of shipping certificates from a

proposed requirement to register for delivery of a minimum of 30 barges

to a $5 million minimum net worth requirement.

The Commission has reviewed the CBT's 1998 proposal to determine

whether it meets the requirements of the Commission's Order and of the

Act and regulations thereunder.\11\ The CBT's 1998 proposal differs

from the Commission's Order with respect to: (1) the delivery locations

for the soybean contract; (2) the locational price differentials for

both the soybean and corn futures contract; and (3) for both contracts,

the minimum net worth eligibility requirement for issuers of shipping

certificates. These differences from the provisions of the Commission's

Order are analyzed below.

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\11\ Section 5(6) conditions designation of a board of trade as

a contract market, among other requirements, on the ``governing

board * * * making effective the orders issued pursuant to the

provisions of section 5a of this Act * * * .'' Accordingly, the

Commission has reviewed the proposed applications for designation to

determine whether they violate any specific criterion set forth in,

or term of, the Order. Where they violate a provision of the Order,

the Commission has determined whether amendment of the Order to

remove conflicts between the two would be appropriate. In addition,

the Commission has reviewed the applications for contract market

designation under all of the statutory and regulatory requirements

generally applicable to contract market designation.

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II. Deliverable Supply

A. The Commission's Order

In determining whether the CBT's first proposal met the

requirements of section5a(a)(10) of the Act, the Commission initially

assessed whether the available deliverable supplies of the commodity at

the delivery points specified by the CBT for all delivery months on the

contract would be sufficiently large and available to market

participants so that futures deliveries, or the credible threat

thereof, could assure an appropriate convergence of cash and futures

prices and thereby tend to prevent or to diminish price manipulation,

market congestion, and the abnormal movement of the commodity in

interstate commerce. 62 FR 60838. The Commission determined the

appropriate standard for measuring the adequacy of deliverable supplies

under the 1997 proposal by examining the relationship between the level

of deliverable stocks for corn and soybeans and the presence of a price

premium for the expiring futures month over the next futures month (a

price inverse).\12\

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\12\ The Commission explained in the order that:

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. 62 FR

60838.

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Based on an analysis of these relationships, the Commission used as

a measure of an inadequate level of deliverable supplies under section

5a(a)(10) deliverable supplies below the level of 2,400 contracts for

soybeans and below the level of 3,000 contracts for corn. However, the

Commission also noted that a higher level of deliverable supplies

historically may, in fact, be necessary to protect against price

manipulation. As the Commission explained in its Order, to avoid a

repetition of the July 1989 soybean futures contract expiration, when

both the Commission and the CBT acted on their belief that a sizable

long position posed a significant threat of manipulation, deliverable

supplies of at least 4,000 contracts would be necessary. 62 FR 60839.

The Commission considered both of these measures, as well as other

relevant information, in its analysis of the adequacy of deliverable

supply.

Applying these measures of adequacy of deliverable supply to the

1997 proposal,\13\ the Commission found that 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 * * *.'' 62 FR 60850. As

to the CBT proposal for corn, the Commission found that ``gross

deliverable supplies throughout the year appear to be adequate except

for September'' \14\ and that, in light of the other changes and

supplements which the Commission was making to the proposal and absent

actual trading experience to the contrary, it did not find that

additional delivery points for corn were required.

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\13\ The Commission's Order at 60839-60850 explains in detail

the methodology by which the Commission determined the potentially

available gross deliverable supplies of corn and soybeans under the

1997 proposal and the necessary reductions from those gross

supplies.

\14\ The Commission found that deliverable supplies of corn in

September may be further supplemented by new crop production and

that, as a transition month, the September contract month would be

somewhat less likely to be subject to manipulation than other

months. 62 FR 60850.

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Having found that section 5a(a)(10) of the Act required that

delivery points for soybeans be added to those proposed by the CBT in

order to increase available deliverable supplies, the Commission

supplemented the 1997 by proposal by

[[Page 26579]]

retaining the existing contract's delivery points. With the addition of

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the retained delivery locations and other changes and supplements,

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. 62

FR 60854.

The Commission's decision to order that delivery locations be added

to the 1997 soybean proposal to increase deliverable supplies was based

solely upon its finding that available deliverable supplies would not

otherwise meet the levels required by section 5a(a)(10) of the Act.

Moreover, the Commission's determination of how to remedy the shortfall

in deliverable supplies was narrowly focused. Thus, the Commission did

not consider the merits of other possible, but untried delivery

locations as a means of increasing deliverable supplies. Instead, the

Commission deferred to the CBT's expressed preferences for delivery

locations on the contract. Accordingly, the Commission ``accept[ed] the

delivery points in the proposal itself as a starting point.'' 62 FR

60854. The Commission next considered delivery points which previously

had been chosen and used by the CBT. The Commission found that the

existing delivery points of St. Louis and Toledo, ``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 * * *, are feasible, workable and acceptable.'' Id. Finally, the

Commission noted that, ``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 * * *.'' Id. at n. 39.

B. Adequacy of the 1998 Proposal's Delivery Points.

The 1998 proposal for the CBT's soybean futures contract would omit

Toledo as a delivery point and would add the southern Illinois River

from Pekin south to river's mouth at Grafton as a delivery point.\15\

The CBT supports its proposal on the grounds that the delivery area

``represent[s] the major markets along the Illinois Waterway, including

Burns Harbor, IN and in St. Louis, Missouri.'' (CBT December 17, 1997,

submission at 16.) The CBT proposal contains a total of 46 potential

shipping stations with a cumulative daily barge loading capability of

145 barges--about 1,627 contracts (8,134,000 bushels) of soybeans--

located within the proposed delivery areas for the soybean futures

contract. (CBT January 23, 1998, submission, Table 1.) The CBT

maintains that based on the analysis used by the Commission in its

Order, available deliverable supply levels under its 1998 proposal

``meet the statutory requirements and benchmarks'' of the Order for the

critical summer months of July, August and September. (CBT December 17,

1997, submission at 16.)

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\15\ The CBT's proposed delivery locations for corn are the same

as in the Commission's Order.

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The following chart details gross deliverable soybean supplies

attributable to firms eligible to issue shipping certificates available

from the 1998 proposed delivery areas for the critical contract months

of July, August and September.

BILLING CODE 6351-01-M

[[Page 26580]]

[GRAPHIC] [TIFF OMITTED] TN13MY98.018

BILLING CODE 6351-01-C

[[Page 26581]]

Such estimated gross deliverable supplies for eligible firms

exceeded the Commission's benchmark levels of 2,400 contracts in each

of the past eleven years during July and August.\16\ They reached or

exceeded the 4,000 contract benchmark level in ten of eleven years

during July and in seven of eleven years during August.\17\

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\16\ The gross deliverable supply estimates were derived using

the same procedures as were used to calculate the estimates for the

Commission's final order. Specifically, for the Illinois River and

St. Louis, supplies for each contract month were estimated by

summing barge shipments for that month and all subsequent months of

the crop year (ending with September), with adjustments being made

to exclude new crop shipments during September. For Chicago, the

estimates were calculated as the sum of stocks available at the

beginning of the contract month plus receipts during the month, with

adjustments being made to reflect the recent sharp decline in

storage capacity at Chicago. The gross deliverable supply estimates

for eligible firms were further adjusted to reflect only barge

shipments from the Illinois River and St. Louis by the eight firms

believed to be capable of meeting the CBT's proposed $5 minimum net

worth requirement.

The term ``gross deliverable supplies'' reflects the fact that

these are estimates of the maximum level of deliverable supplies

likely to be available for the futures contracts before any

adjustment is made for other factors that are likely to reduce

deliverable supplies. These factors, discussed in more detail below,

include the 1998 proposal's continued reliance on Chicago as a

source of deliverable supplies, the proposed three-day barge queuing

and priority load-out requirements, and prior commercial commitments

of available supplies. A detailed description of the estimation

procedure is presented in the Commission's Order.

\17\ The Commission also estimated gross deliverable supplies

for all firms, including those which are not expected to be able to

meet the CBT's proposed minimum net worth eligibility requirement of

$5 million, These estimates reflect total shipments from the

Illinois River and St. Louis, and were analyzed because it is likely

that at least part of the soybeans shipped by the smaller,

ineligible firms readily could be diverted to eligible delivery

facilities for futures delivery purposes at economic prices and,

thus, should be regarded as part of the contract's deliverable

supply. The all-firms estimates have not been included in this Order

because they result in levels which are only marginally greater than

those for eligible-firms and exhibit essentially the same results as

do the eligible-firm estimates when measured against the

Commission's benchmark standards. However, in a few years

particularly during the month of September, the addition of minor

amounts of deliverable supplies from ineligible firms results in

estimates which exceed a benchmark level which did not otherwise do

so. Specifically, the all-firms estimates exceeded the 2,400

threshold when eligible firm estimates did not in September 1993 and

the 4,000 threshold in September 1990, 1994 and 1995.

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The estimated gross deliverable soybean supplies for September meet

the level of 2,400 contracts in nine of the eleven years. However, they

meet the 4,00 contract level in only one of eleven years. As noted in

the Order, deliverable supply concerns for September may be mitigated

by the availability of new crop production in that month and the

imminent harvest of even greater supplies in October. In particular, as

shown in Table 1, estimated September soybean production in areas

immediately adjacent to the proposed delivery area ranged from 1,636

contracts in 1996 to 14,623 contracts in 1994. These amounts are

greater for soybeans than under the Commission's Order (compare 62 FR

60847) because the 1998 proposal expanded delivery locations along the

Illinois River, a major production area. It reasonably can be expected

that some portion of this September soybean production would

potentially be deliverable on the September futures contract within

normal commercial marketing channels. As a result, it is likely that

the level of gross deliverable supplies available in September would be

somewhat higher than the above estimates.

Table 1.--Estimated Soybean Production Located Near Proposed Delivery

Points as of September 30

[In 5,000 bushel contract units]

------------------------------------------------------------------------

Crop year Soybeans

------------------------------------------------------------------------

1986....................................................... 5,608

1987....................................................... 10,622

1988....................................................... 8,527

1989....................................................... 8,606

1990....................................................... 3,416

1991....................................................... 12,972

1992....................................................... 5,721

1993....................................................... 2,263

1994....................................................... 14,623

1995....................................................... 7,258

1996....................................................... 1,636

------------------------------------------------------------------------

* The production as of September 30 of each year was estimated by

multiplying U.S. Department of Agriculture harvesting progress

estimates for the Illinois and Indiana crop reporting districts

adjacent to the proposed delivery points by U.S.D.A. production data

for counties located within about 25 miles of the proposed delivery

points.

The potentially available gross deliverable supplies must be

reduced, however, by the following factors identified in the Order and

which remain applicable here: (1) Continuing reliance, impart, on

Chicago as a source of deliverable supplies; (2) a three-business-day

barge queuing and priority load-out requirement; and (3) prior

commercial commitments of available supplies.\18\

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\18\ Other factors affecting deliverable supplies identified in

the Commission's Order included locational price differentials and

foreseeable disruptions in barge shipping on the Illinois River.

However, as discussed below, the 1998 proposal satisfactorily

addresses these factors.

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a. Reliance on Chicago

To the extent that potentially available gross deliverable supplies

of soybeans have reached or exceeded the 2,400 and 4,000 contract

levels, they have frequently depended on Chicago supplies to do so.

During July, deliverable supplies from locations other than Chicago

reached or exceeded the 2,400 level in ten, and reached or exceeded the

4,000 level in six, of the eleven years analyzed. During August,

deliverable supplies from locations other than Chicago reached or

exceed the 2,400 contract level in seven, and the 4,000 contract level

in one, of the years analyzed. For September, deliverable supplies from

locations other than Chicago reached or exceeded the 2,400 contract

level in four of the eleven years and never reached the 4,000 contract

level during this period.

The 1998 proposal's reliance on Chicago deliverable supplies to

meet the Commission's benchmark levels may result in future shortfalls.

As the Commission's Order stated:

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 form Chicago in the future. Chicago elevators fro many

years have held stocks well below their maximum capacity levels,

particularly in the critical summer months. * * * Chicago supplies

will most likely be reduced significantly in the future and would

not be available insignificant quantities under the CBT proposal.

62 FR 60850.

b. The Three-Day Barge Queuing and Priority Load-Out Requirements

The 1998 proposal retains the provisions of the 1997 proposal

requiring a shipping certificate issuer to begin loading onto the

certificate holder's barges within three business days after receiving

instructions and the holder's barges are at the delivery facility ready

to load. As the commenters to the 1997 proposal made clear, requiring

the shipping certificate issuer to give preference to shipping

certificate holders over customers and proprietary business for eight

hours of load-out capacity per day is contrary to cash market practice.

The Order questioned the merits of the CBT's justification of this

provision, which merely assumes that issuers would be willing and able

to meet this requirement and accommodate their cash business simply by

extending their

[[Page 26582]]

hours of operation. The Commission finds here, as it did in its prior

Order, that:

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.

62 FR 60850.

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.

As the Order reasoned, ``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.'' 62 FR 60850. When such

committed stocks are removed from total shipments, ``it is likely that

the actual available deliverable supplies for the futures contracts

would be significantly less than indicated by the above gross

estimates.''

d. Conclusion

In summary, under the 1998 proposal gross deliverable supplies for

soybeans during the months of July and August reach or exceed the 2,400

contract benchmark in every year, and the 4,000 contract benchmark in

most years. Although the estimates for gross deliverable supplies

during September failed to reach the 2,400 contract benchmark level in

two of the past eleven years and failed to reach the 4,000 contract

level in all years but one, those estimates may be supplemented by new

crop production in September. Overall, the number of contract months

for which estimated gross deliverable supplies of soybeans under the

1998 proposal would have reached or exceeded benchmark levels compares

favorably with the number of contract months reaching or exceeding the

benchmark levels under the Commission's Order for soybeans (and for

corn). On this basis, the Commission does not find soybean deliverable

supplies to be so inadequate as to require delivery points additional

to, or different from, those proposed by the CBT.

However, in light of the reductions from gross deliverable supplies

that may result from prior commercial commitments and the contract's

three-business-day load requirement, the extent to which available

deliverable supplies actually would meet or exceed the Commission's

deliverable supply standards is uncertain. Equally uncertain is whether

future available deliverable supplies would meet or exceed the

Commission's deliverable supply standards. This will depend in part

upon the degree to which Chicago remains a viable source of deliverable

supplies of soybeans or upon growth in the other delivery areas

sufficient to compensate for declining activity in Chicago. Because

only actual trading experience will reveal whether the level of

available deliverable supplies meets the requirements of section

5a(a)(10) of the Act, 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 soybean contract.\19\ These reports will allow the Commission

to revisit the issue of adequacy of available deliverable supplies in

the future if actual experience with the contract suggests that such

supplies are not adequate.

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\19\ This is consistent with the Commission's direction to the

CBT in the Order to report on the delivery experience in corn. That

requirement was grounded in the Commission's finding that

deliverable supplies of corn under the CBT's 1997 proposal were not

so inadequate to require additional delivery points under section

5a(a)(10). Inasmuch as the 1997 and 1998 proposals for delivery

points for corn are the same, that finding and the Commission's

direction to file annual reports for five years has not been

modified by this order.

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III. Differentials

A. The Commission's Order

The Commission's Order found that, in light of the significant

locational price differences in the cash market among the proposed

delivery locations, section 5a(a)(10) required setting differentials

for the delivery locations on the corn and soybean futures contracts.

Specifically, the Order found that:

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.

62 FR 60851.

The Commission's Order found that cash market differences in the

value of corn and soybeans for various delivery points on the northern

Illinois River are based primarily upon the cost of barge freight to

the Gulf of Mexico. Based on Commission policy requiring that

locational price differentials on futures contracts be set within the

range of commonly observed or expected commercial price differences,

the Order found that 150 percent of the Waterways Freight Bureau Tariff

No. 7 rate ``provides an appropriate basis for the differential.''\20\

The percentage of tariff specified by the Order (150%) was based on

analysis of barge freight rates for Illinois River shipments for the

period 1990 through 1996. The Order found that 150% 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 shipments,'' particularly during the critical summer

months. 62 FR 60856.

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\20\ Chicago and Toledo were ordered to be valued at par.

Percent of tariff is a common means of quoting freight prices

and is used extensively in cash market trading. The Waterways

Freight Bureau Tariff No. 7 specifies the cost per ton of shipping

commodities via barge to New Orleans from specified river segments

(barge tariff zones) on the Illinois, Mississippi and Ohio Rivers.

This tariff schedule was issued by the Interstate Commerce

Commission in 1976 as part of its regulatory program for barge

freight rates. Although this tariff schedule no longer serves a

regulatory purpose, the barge industry routinely quotes barge

freight rates as a percentage of the tariff schedule.

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The Order also changes and supplemented the differential provided

under a proposed contingency plan to take effect during times when

river traffic is obstructed to make it consistent with the

differentials in effect at other times. The Commission's Order found

that obstructions of river traffic caused by adverse weather conditions

or announced lock repair and maintenance were commonplace and that ``it

is not an appropriate use of exchange emergency authority to address

such foreseeable disruptions to the operation of contract terms.'' 62

FR 60853. Accordingly, the Commission found further that, because

``prolonged obstruction of transportation on the river would increase

the susceptibility of the futures contract to manipulation by

issuers,'' section 5a(a)(10) required a ``contingency plan'' rule for

the proposed contract. Id.

The Order found that the contingency plan proposed by the CBT fell

short of achieving the statutory objectives in a number of ways,

including its computation of the reimbursement in transportation costs

for deliveries at

[[Page 26583]]

alternative locations when the contingency plan was in effect based

upon 100 percent of the Waterways Freight Bureau Tariff No. 7 barge

freight rate schedule. This rate would have been different from the

rate found by the Commission to be appropriate at all other times. The

Commission found that, ``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.'' 62 FR 60852.

B. Adequacy of the 1998 Proposal's Differentials

The 1998 proposal differs from the Order in the amount of the

locational price differentials specified for the corn and soybean

futures contracts. The CBT proposes to substitute the following

locational differentials for those ordered by the Commission:

Table 2.--The Proposed Locational Price Differentials for the Soybean and Corn Futures Contracts in Cents per

Bushel

----------------------------------------------------------------------------------------------------------------

Location Soybean differential Corn differential

----------------------------------------------------------------------------------------------------------------

Chicago............................... par................................ par.

Lockport to Seneca.................... +2 cents........................... +2 cents.

Ottawa to Chillicothe................. +2.5 cents......................... +2.5 cents.

Peoria to Pekin....................... +3 cents........................... +3 cents.

Havana to Grafton..................... +3.5 cents......................... Not applicable.

St. Louis/East St. Louis/Alton........ +6 cents........................... Not applicable.

----------------------------------------------------------------------------------------------------------------

In support of its proposal, the CBT states that, ``Statistics using

barge freight rate differentials and F.O.B. shipping station minus

F.O.B. Chicago differentials during the period from 1990-1996 show that

the proposed locational differentials are also within the range of

commonly observed commercial barge and price differences.'' (CBT

January 23, 1998, submission at 2.)

To determine whether the CBT's proposed differentials fall within

the range of commonly observed or expected commercial price

differences, the Commission analyzed the frequency of opportunities for

economic delivery from each delivery location at the specified

differential. Deliveries from a location would most likely be made when

the relative difference in the cost of barge freight between Chicago

and the delivery point to New Orleans is equal to or less than the

differential specified in the futures contract for that location. The

Commission estimated the cost of barge freight using data on weekly

offers for freight for the period of January 1990 through October 1997.

Significantly, during the critical summer months of July and August

(but not September),\21\ the 1998 proposed differentials for most

delivery locations clearly fall at or above the mid-point of estimated

cash price differences. Accordingly, the 1998 proposed differentials

based on the estimated cost of freight would result in relatively

frequent opportunities for economic delivery--generally exceeding 50

percent of the observations--during July and August for most locations.

The opportunities for economic delivery at some locations would be less

frequent, however, at times of the year other than during the summer

months, but overall deliverable supplies are greater at those times.

For the period January 1990 through October 1997, the relative

estimated frequency with which economic delivery likely would be

feasible from the majority of locations generally exceeded 30

percent.\22\ Accordingly, the CBT's proposed differentials reasonably

can be expected to fall within the range of commonly observed or

expected commercial price differences and thus tend to prevent or

diminish price manipulation, market congestion, or the abnormal

movement of the commodities in interstate commerce.

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\21\ This result is due to the substantial increases in barge

freight rates that are commonly observed beginning in September

caused by the increasing demand for shipping as the harvest season

begins. The Commission considers the lower frequency with which the

future contract's differentials will be at or above cash price

freight differentials to be of less regulatory concern in September

than at other times of the year. The seasonal movement of abundant

supplies for shipment in commercial channels from all delivery

locations reduces the likelihood that the proposed differentials

would lead to the prohibited effects under section 5a(a)(10).

\22\ As noted above, the barge industry routinely quotes freight

rates as a percentage of the tariff schedule. As a consequence of

this pricing convention, the relative cost of shipping among various

river locations at any one time is stable. However, barge freight

rates (quoted as a percent of the tariff schedule) fluctuate over

time in response to increases or decreases in supply and demand for

barge shipping. The proposed CBT differentials which are specified

in cents-per-bushel at half-cent intervals do not translate

precisely to a uniform percentage of tariff. Accordingly, as barge

freight rates rise and fall in relation to the futures contracts'

fixed locational differentials, the frequency with which deliveries

would be made would vary somewhat from one location to another.

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However, the delivery locations of Peoria-Pekin for corn and

soybeans, and Havana-Grafton for soybeans, appear to fall at the low

end of the range of estimated barge freight differences. In light of

the variation among river segments in the estimated frequency of

opportunities for economic deliveries from the various locations, the

Commission directs the CBT to report annually for a period of five

years on the extent to which particular locational price differentials

may discourage or encourage deliveries to be made from that location.

This report should compare rates of delivery by river segment to the

applicable differentials, focusing with particularlity on September

deliveries from all locations and on deliveries from the Peoria-Pekin

and Havana-Grafton river segments year-round. Such reporting will allow

the Commission to revisit the issue of adequacy of locational

differentials if actual experience with the contracts suggests that the

differentials are not adequate.

C. Contingency Plan Differentials

The 1998 proposal's contingency plan differs from the Commission's

Order in the method of calculating the appropriate reimbursement for

the change in transportation cots for deliveries at alternative

locations when the contingency plan is in effect. The Order specified

that the contingency plan reimbursement be calculated by reference to

the same differentials between delivery locations required under the

Order to be applicable under normal (non-contingency) conditions. The

1998 proposal modifies the reimbursement calculation and changes the

amount of the contingency plan differentials to conform them to the

proposed cents per bushel differentials generally applicable under the

1998 proposal to the contracts. This change is

[[Page 26584]]

consistent with the Commission's Order in that the relative value of

locational differentials during normal conditions is maintained during

times when the contingency plan is in effect.

IV. Minimum Net Worth Requirement

A. The Commission's Order

The Commission's Order also eliminated a proposed $40 million net

worth requirement for eligibility of shipping certificate issuers.

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 lease

anticompetitive means of achieving the objectives of the Act.\23\

Accordingly, as the Commission stated in the Order, ``the CBT

proposal's possible anticompetitive effects must be evaluated against

its potential effectiveness in achieving the policies and purposes of

the Act.'' 62 FR 60853.

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\23\ 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, 434 U.S. 938

(1977).

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The Order found that the $40 million minimum net worth requirement

would limit issuance of shipping certificates to four of seven grain

firms with shipping stations in the delivery area, result in an

extremely high level of concentration, increase the Herfindahl-

Hirschman Index (HHI) to 3,300 (an increase of 530 points over the

current delivery system), and act as a barrier to new entrants. 62 FR

60853. Although protecting the financial integrity of the delivery

process is a reasonable objective, the Order concluded that the CBT

failed to provide a reasonable justification for the $40 million

minimum net worth requirement in light of the 1997 proposal's other

proposed financial integrity measures.\24\ 62 FR 60857. Accordingly,

the Commission eliminated the $40 million minimum net worth eligibility

requirement, finding that it would have resulted in a high level of

concentration and imposed a substantial and impermissible bar to entry

to otherwise eligible firms without a demonstrated regulatory need for

the requirement. 62 FR 60857.

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\24\ These additional financial integrity provisions included

the requirement that issuers of certificates obtain an irrevocable

letter of credit in an amount equal to the value of their delivery

commitments, maintain a minimum of two million dollars in working

capital and be limited to issuing certificates of a value no greater

than 25 percent of the issuer's net worth.

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B. The 1998 Net Worth Proposal

The 1998 proposal would restore a net worth eligibility requirement

for shipping certificate issuers in the amount of $5 million. As under

the 1997 proposal, this requirement is in addition to the other

financial guarantees and conditions relating to working capital,

letters of credit and a variable net worth requirement related to the

value of outstanding shipping certificates. The CBT supports the

requirement on the grounds that:

The Exchange is responsible for ensuring the financial integrity of

the delivery process through the specification of minimum financial

requirements. Currently, the Exchange requires that firms approved

as regular for delivery in the agricultural markets have a minimum

net worth equal to $5,000 per contract of regular capacity. Firms

which are regular for delivery on the grain contracts must also meet

minimum working capital and performance bonding requirements based

on their federally licensed storage capacity.

In order to ensure the financial, operation, and administrative

integrity of the shipping certificate delivery process, all market

participants must view all certificates as equally fungible and be

indifferent between issuers. Certificates issued by low net worth

firms have several distinct disadvantages, particularly, a higher

risk of default and lower operational efficiencies due to fewer

shipping station locations, and therefore, potentially higher costs

to the taker in assembling the minimum number of certificates

necessary to load a barge. Furthermore, the cumulative contribution

of low net worth firms does not substantially increase deliverable

supply.

CBT March 20, 1998, submission at 4.

Section 15 of the Act requires that the Commission evaluate the

1998 proposal's anticompetitive effects against its effectiveness in

achieving the policies and purposes of the Act. The effect of the

proposed $5 million net worth requirement would be to limit issuance of

shipping certificates to firms able to meet the requirement. However,

the $5 million net worth requirement constitutes a far lower barrier to

entry than did the 1997 proposal's $40 million requirement, which as

the Order found, would have limited participation to ``four large grain

firms.'' In contrast, for the corn futures contract, under a $5 million

net worth requirement, five of the seven firms operating barge-loading

facilities on the northern Illinois River potentially qualify for

eligibility as shipping certificate issuers. For the soybean futures

contract, eight of the eleven barge-loading firms operating on the

Illinois River and at St. Louis would meet this eligibility

requirement.\25\ The proposed $5 million net worth requirement would

constitute a lower barrier to entry. It also would have a more modest

effect on reducing deliverable supplies for the futures contracts.

United States Army Corps of Engineers' data for the 1995-96 crop year

indicates that eligible firms shipped about 95 percent of all corn and

soybeans from the proposed delivery areas.

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\25\ As a result of this lower barrier to entry as well as the

other changes, the resulting HHI declined from 3,300 under the 1997

soybean proposal to 2,918 under the 1998 proposal and for the corn

proposals from 3,300 to 2,762.

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Balanced against its anticompetitive effect, the $5 million net

worth requirement may serve the regulatory purpose of increasing the

efficiency of the contract's delivery mechanism.\26\ Delivery takers

are expected to attempt to reduce their costs by assembling the

requisite number of shipping certificates from a single delivery

facility to fill a barge. (A barge with a 55,000 bushel capacity will

require assembly of 11-5,000 bushel certificates for delivery.)

However, the smallest firms may not qualify to issue sufficient

certificates for economically efficient consolidation and assembly.\27\

Moreover, the $5 million net worth requirement may significantly reduce

the CBT's administrative burden related to monitoring the financial

status of eligible shipping certificate issuers on an on-going basis.

Small, less financially secure firms likely would require more careful

monitoring than financially stronger firms.

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\26\ Protecting the integrity of the delivery process is a

fundamental objective of the Act. See, e.g., Sections 5a(a),

5a(a)(3), 5a(a)(4), 5a(a)(5), 5a(a)(7), and 5a(a)(10) of the Act. In

particular, section 5a(a)(7) of the Act specifically recognizes that

contract markets may impose reasonable requirements ``as to

location, accessibility and suitability for warehousing and delivery

purposes. * * * ''

\27\ The issuer must limit the value of its outstanding

certificates to one-quarter of its net worth.

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For the above reasons, the Commission finds that the anti-

competitive effect of the $5 million proposed net worth eligibility

requirement is not so great as to outweigh the regulatory purpose

identified by the CBT and that its approval by the Commission is not

contrary to section 15 of the Act.

Accordingly, for the reasons discussed above, the Commission grants

the CBT applications for designation for futures contracts in corn and

soybeans submitted on December 17, 1997, as supplemented on March 19,

1998, and amends its Order of November 9, 1997, as applicable to such

contracts so as to be consistent with this action.

It is further ordered that this grant of designation shall be

subject to CBT's

[[Page 26585]]

compliance with all sections of the Act applicable to the CBT as a

contract market under the Act.

Dated: May 7, 1998.

By the Commission.

Jean A. Webb,

Secretary of the Commission.

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, DC, this 7th day of May 1998, by the

Commodity Futures Trading Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98-12664 Filed 5-12-98; 8:45 am]

BILLING CODE 6351-01-M