[Federal Register: May 13, 1998 (Volume 63, Number 92)]
[Notices]
[Page 26575-26585]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13my98-69]
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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
[[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.)
---------------------------------------------------------------------------
\15\ The CBT's proposed delivery locations for corn are the same
as in the Commission's Order.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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
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