Proposed Amendments to the Standards for Deliverable Lumber on the Chicago Mercantile Exchange Random Lengths Lumber Futures Contract, Submitted Under Fast Track Review Procedures

COMMODITY FUTURES TRADING COMMISSION

Proposed Amendments to the Standards for Deliverable Lumber on

the Chicago Mercantile Exchange Random Lengths Lumber Futures Contract,

Submitted Under Fast Track Review Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposed contract market rule

amendments.

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

amendments to the random lengths lumber futures contract to change the

standards for deliverable lumber. Specifically, the Exchange proposes

to disallow delivery of lumber produced from Alpine fir, to provide

that lumber produced from hemlock-fir is not deliverable if the lumber

is manufactured in Canada or in specified areas of Washington, Oregon,

and California; to provide that lumber produced from spruce-pine fir is

not deliverable if it is manufactured in those specified areas in

Washington, Oregon, and California, and to clarify that lumber produced

from species under the Engelmann Spruce/Lodgepole Pine designation is

deliverable as a group. The proposals were submitted under the

Commission's 45-day fast track procedures. The Acting Director of the

Division of Economic Analysis (Division) of the Commission, acting

pursuant to the authority delegated by Commission Regulation 140.96,

has determined that the proposals are of major economic significance,

and that publication for comment is in the public interest, will assist

the Commission in considering the views of interested persons, and is

consistent with the purpose of the Commodity Exchange Act.\1\

\1\ Section 5a(a)(12) of the Act, which requires the Commission

to publish proposed rules of ``major economic significance,'' does

not define the meaning of that term. Moreover, section 5a(a)(12)

provides that the Commission's determination that proposed exchange

rules are of major economic significance under that section is final

and not subject to judicial review. The Commission staff has

interpreted the meaning of ``major economic significance'' broadly

as proposed rules which may have an effect on the pricing of a

contract, on the value of existing contracts, on a contract's

hedging or price basing utility, or on deliverable supplies. Section

5a(a)(12) does not define rules of ``major economic significance''

based upon a specific dollar impact on the economy or other such

measures used in other statutes, such as those used in determining

whether an agency rule is a ``major rule'' under 5 U.S.C. section

804(2).

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DATES: Comments must be received on or before January 4, 1999.

[[Page 69617]]

ADDRESSES: Interested persons should submit their views and comments to

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

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

addition, comments may be sent by facsimile transmission to facsimile

number (202) 418-5521, or by electronic mail to [email protected].

Reference should be made to CME random lengths lumber futures contract.

FOR FURTHER INFORMATION CONTACT:

Please contact John Forkkio of the Division of Economic Analysis,

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street NW, Washington, DC 20581, telephone (202) 418-5281. Facsimile

number: (202) 418-5527. Electronic mail: [email protected].

SUPPLEMENTARY INFORMATION: Under the rules of the random length lumber

futures contract, lumber made from a variety of species is deliverable,

including species grouped under the terms ``Spruce-Pine-Fir'' (SPF) and

``Hemlock-fir'' (HF). The CME noted that SPF number has been the

pricing basis of the futures contract for many years, and that remains

the benchmark for cash lumber prices. The CME further noted that

futures deliveries of HF lumber have increased in recent months, due to

a decline in HF lumber cash prices relative to the prices of SPF

lumber. This has been caused by diminishing export demand for HF lumber

to Asian countries resulting from the recent economic difficulties,

which have adversely affected their construction industries.

The CME explained that, after receiving complaints about HF lumber

deliveries and following a review of the market, it determined that

many domestic cash market buyers view HF lumber as an undesirable

product. In this regard, the CME stated:

* * * The Hemlock species is the source of this dissatisfaction,

as it is said to produce lumber with working qualities that are

inferior to SPF lumber even if the grade level is the same. Although

Hemlock cannot be entirely separated from HF lumber, certain areas

produce HF lumber that contains more Hemlock than other areas.

Similarly, SPF lumber made from Alpine fir or Sitka Spruce (SS),

predominantly U.S. coastal species, is seen as inferior. Most

production of SPF lumber containing these species can be

geographically separated from other areas of production.

To eliminate the areas where the proportion of Hemlock produced

is greatest, the Exchange proposes that HF lumber produced in Canada

and the Pacific coastal areas of the United States be eliminated

from delivery. In addition, SPF lumber produced in the U.S. Pacific

coastal area will be eliminated. Lastly, it is proposed that the

species grouped under the term ``Engelmann Spruce/Lodgepole Pine

(ES/LP)'' be made eligible for delivery as it is an acceptable

substitute for SPF lumber. The separate species are already

deliverable and the addition of this grouping will clarify the

delivery species.

The [proposed] restricted areas [for ineligible SPF and HF

lumber] * * * roughly correspond to those bounded by the Pacific

Ocean and the summit of the Cascade Mountain range. The boundaries

for Washington and Oregon are those defined by the Western Wood

Products Association, a number of grading agency used by most

western mills. The restricted areas are those that contain the

highest proportion of lumber made from Hemlock, Alpine Fir and Sitka

Spruce. The boundaries in California and Canada also delineate

similar areas of production, as noted by industry representatives.*

* *

The Exchange asserted that the proposed amendments would not raise

concerns about potential manipulation of the futures contract, even

though deliverable supplies would be somewhat diminished. This is due

to the ready availability of lumber meeting the revised quality

standards and the spot month speculative limit of 600 contracts which

represents only 4.8% of monthly production, according to the Exchange.

Finally, the CME notes that:

* * * fairly recent and rapid change has manifested itself in

futures deliveries and caused uncertainty as to which species of

lumber is being priced in the futures market. It is not yet clear

what the longer term relationship will be between SPF and HF lumber

prices. What is clear is that the uncertainty has resulted in a

disruption of both long and short hedgers' basis relationships. This

disruption has caused numerous participants to state that they will

decrease their hedging activity. Long hedgers find themselves at

risk of receiving delivery of product that was assumed to be SPF

lumber but may actually be HF lumber with a lower cash value that

the SPF lumber that they used as the basis for their futures

contract purchase. In other words, they will get less than they paid

for. Short hedgers who product SPF lumber are reluctant to sell

futures contracts that may be priced at the lower prices that

reflect HF lumber values. As SPF is the dominant lumber species, the

loss of this hedging activity will severely affect the level of

trading activity and reduce the usefulness of the futures contract

for the lumber industry.

The CME proposes to implement the amendments for application to

newly listed contracts only.

The Division requests comments on the proposed changes to the

random length lumber futures contract. Specifically, the Division

requests comment on the input of the proposals on deliverable supplies

for the futures contract. Also, commenters are requested to comment on

the extent to which the proposed charges would improve the hedging and

pricing utility of the contract.

The proposed amendments were submitted pursuant to the Commission's

fast track procedures for streamlining the review of futures contract

rule amendments and new contract approvals (62 FR 10434). Under those

procedures, the proposals, absent any contract action by the

Commission, may be deemed approved at the close of business on January

19, 1999, 45 days after receipt of the proposals. In view of the

limited review period provided under the fast track procedures, the

Commission has determined to publish for public comment notice of the

availability of the terms and conditions for 15 days, rather than 30

days as provided for proposals submitted under the regular review

procedures.

Copies of the proposed amendments will be available for inspection

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

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

Copies can be obtained through the Office of the Secretariat by mail at

the above address, by phone at (202) 418-5100, or via the internet on

the CFTC website at www.cftc.gov under ``What's New & Pending''.

Other materials submitted by the CME is support of the proposals

may be available upon request pursuant to the Freedom of Information

Act (5 U.S.C. 552) and the Commission's regulations thereunder (17

C.F.R. Part 145 (1997)), except to the extent they are entitled to

confidential treatment as set forth in 17 C.F.R. 145.5 and 145.9.

Requests for copies of such materials should be made to the FOI,

Privacy and Sunshine Act Compliance Staff of the Office of Secretariat

at the Commission's headquarters in accordance with 17 C.F.R. 145.7 and

145.8.

Any person interested in submitting written data, views, or

arguments on the proposals, or with respect to other materials

submitted by the CME, should send such comments to Jean A. Webb,

Secretary, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street NW, Washington, DC 20581 by the specified

date.

Issued in Washington, DC, on December 11, 1998.

John R. Mielke,

Acting Director.

[FR Doc. 98-33356 Filed 12-16-98; 8:45 am]

BILLING CODE 6351-01-M