CFTC Orders the Chicago Board of Trade to Change Delivery Specifications for Its Corn and Soybean Futures Contracts

Release: #4077-97

For Release: November 7, 1997

CFTC ORDERS THE CHICAGO BOARD OF TRADE TO CHANGE DELIVERY SPECIFICATIONS FOR ITS CORN AND SOYBEAN FUTURES CONTRACTS

Washington, D.C.--The Commodity Futures Trading Commission (Commission) today ordered changes to the Chicago Board of Trade's (CBT) proposed delivery specifications for its corn and soybean futures contracts as required by section 5a(a)(10) of the Commodity Exchange Act. Those proposed delivery specifications as changed by the Commission's Order will apply beginning with the contract months for the year 2000. The Commission also authorized the listing for trading of the 1999 futures contract months under the current terms for CBT's corn and soybean futures contracts. The CBT continues to be free to propose different delivery specifications for the Commission's review.

In response to a prior notification to the CBT by the Commission that the delivery specifications of the CBT's corn and soybean futures contracts no longer provide for adequate deliverable supplies as required by section 5a(a)(10) of the Commodity Exchange Act, the CBT proposed to replace the contracts' existing warehouse receipt delivery system with shipping certificates deliverable from facilities in Chicago and along that portion of the northern Illinois River from Chicago to Pekin, Illinois. Under the CBT proposal delivery at all eligible locations would be at par, firms eligible to issue shipping certificates would be required to meet a minimum net worth standard of $40 million, and the current delivery points of Toledo, Ohio, and St. Louis, Missouri would be eliminated.

As ordered by the Commission, the changes to the CBT's proposed delivery specifications for the soybean futures contract will (1) retain the current delivery locations of Toledo and St. Louis in addition to the proposed delivery locations of Chicago and the northern Illinois River and (2) make soybeans at the Chicago and Toledo delivery locations deliverable at par and at the northern Illinois River and St. Louis delivery locations deliverable at a premium over contract price of 150 percent of the difference between the Waterways Freight Bureau Tariff No.�7 rate applicable to that location and the rate applicable to Chicago.

The Commission has not ordered any changes to the CBT's proposed delivery locations for the corn futures contract. However, the Commission has ordered that corn delivered at locations within the northern Illinois River delivery area will be 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.

In addition, for both contracts the Commission ordered changes to the triggering requirements for CBT's proposed contingency plan for alternative delivery when river traffic is obstructed by reducing the continuous period of such obstruction and eliminating the requirement of six months advance notice of the obstruction. The contingency plan will be applicable whenever a majority of shipping stations within the northern Illinois River delivery area are affected by an announced obstruction of river traffic for a period of fifteen days or more. Finally, the Commission has eliminated the proposed $40 million minimum net worth eligibility requirement for issuers of shipping certificates in both contracts as an unnecessary barrier to participation by issuers.

The Commission took this action based upon the Commodity Exchange Act's direction that the Commission take appropriate steps when an exchange's proposed contract terms fail to accomplish the objectives of section 5a(a)(10) of the Act of permitting delivery at such locations 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."

Background

In December 1996, the Commission notified the CBT that its corn and soybean futures contracts no longer met the requirements of section 5a(a)(10) of the Commodity Exchange Act, referred to above. That notification described the long-term changes in the marketing, storage, transportation and processing of corn and soybeans which the futures contracts failed to reflect. In response, the CBT submitted a proposed revision of the delivery terms of its contracts on April 16, 1997.

After review of the documentary record, including a record number of nearly 700 comment letters submitted to the Commission by interested members of the public, the CBT submissions and extensive factual analyses of the Commission's Division of Economic Analysis, the Commission determined that the CBT proposal did not meet the requirements, or accomplish the statutory objectives, of section 5a(a)(10) of the Act and also violates section 15 of the Act. On September 15, 1997, the Commission, therefore, proposed to change and to supplement the CBT proposal pursuant to its statutory authority under the Act. The CBT had an opportunity to be heard by the Commission on the Commission's proposed order on October 15, 1997. The Commission also published its proposed order in the Federal Register and received over 230 comments in response.

Commission Determination

Based upon its review of the several submissions of the Chicago Board of Trade, the large number of oral and written comments submitted to the Commission for its consideration, the oral and written comments presented to the Commission by the CBT, the documentary evidence submitted by the CBT and other commenters and its own analysis, the Commission found that, under the CBT proposal, the amount of deliverable supplies of soybeans during the critical summer months of July, August, and September fails to meet the level necessary to tend to prevent or diminish price manipulation, market congestion, or the abnormal movement of soybeans in interstate commerce. In the Commission's opinion, in light of the inadequacy of deliverable supplies of soybeans under the CBT proposal, the retention of the CBT's current delivery points at Toledo and St. Louis, where additional deliverable supplies would be available, is appropriate.

The Commission did not find that available deliverable supplies of corn under the CBT's proposal are so inadequate under section 5a(a)(10) as to require additional delivery points. Rather, the Commission is directing the CBT to report on the experience with deliveries and expiration performance in the corn futures contract on an annual basis for a five-year period after contract expirations begin under the revised contract terms.

The Commission also found that the lack of price differentials at all river-based delivery locations for both the corn and soybean futures contracts failed to reflect the differentials in the underlying cash markets for corn and soybeans as required by section 5a(a)(10) of the Act. The Commission found that, in addition to reducing deliverable supplies, the lack of locational price differentials would render the futures contract susceptible to price manipulation, market congestion, and the abnormal movement of the commodities in interstate commerce. Accordingly, the Commission is ordering that differentials be added to both the corn and soybean contracts. For soybeans, Chicago and Toledo would be at contract price with other delivery locations at a premium over contract price of 150 percent of the difference between the Waterways Freight Bureau Tariff No. 7 rate applicable to that location and the rate applicable to Chicago. For corn, Chicago would be at contract price with all other locations at a premium over contract price of 150 percent of the difference between the Waterways Freight Bureau Tariff No. 7 rate applicable to that location and the rate applicable to Chicago.

The Commission also found that the CBT proposal's reliance chiefly on a single mode of transportation to effect delivery renders the contract susceptible to significant disruptions in transportation on the Illinois River, increasing the possibility of price manipulation, market congestion, or the abnormal movement of corn and soybeans in interstate commerce. Although the CBT submitted a contingency plan to address such disruptions, the Commission found that it did not sufficiently provide for alternative delivery procedures when river traffic is obstructed. Accordingly, the Commission is changing the CBT contingency plan by reducing the time period for which a river traffic obstruction must continue before the contingency plan becomes applicable from 45 days to 15 days, by making the contingency plan applicable to an obstruction which affects shipments from a majority of shipping stations within the northern Illinois River delivery area, by making the rule applicable to all announced obstructions with no minimum notification period specified and by changing the differential from 100 percent of the Waterways Freight Bureau Tariff No. 7 rate as proposed to 150 percent.

Finally, the Commission found that a provision in the CBT proposal requiring shipping certificate issuers to have $40 million minimum net worth poses a significant and unnecessary barrier to entry to those wishing to participate as issuers of shipping certificates on the contracts. The proposed $40 million minimum net worth requirement is in addition to other financial requirements in the proposal that shipping certificate issuers must meet. The Commission found that these other financial requirements are fully adequate to ensure the financial ability of issuers to perform their responsibilities under the contracts. For these reasons, the Commission is eliminating the $40 million net worth requirement.