[Federal Register: May 5, 2000 (Volume 65, Number 88)]
[Notices]
[Page 26187-26188]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my00-43]

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COMMODITY FUTURES TRADING COMMISSION


New York Cotton Exchange: Proposed Amendments To Convert the U.S.
Dollar Index Futures Contract to Physical Delivery From Cash
Settlement.

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposed amendments to the terms and
conditions of commodity futures contract.

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SUMMARY: The FINEX Division of the New York Cotton Exchange (NYCE or
Exchange) has submitted proposed amendments to convert its U.S. Dollar
Index (USDX or Index) futures contract to physical delivery from its
existing cash settlement provisions. Under the proposal, the NYCE would
no longer cash settle the USDX futures contract based on a survey of
banks conducted by Reuters. Rather, the contract would provide for
physical delivery of U.S. dollars in exchange for a basket of foreign
currencies based on the fixed percentage weights of the Index.
    The Acting Director of the Division of Economic Analysis
(Division), acting pursuant to the authority delegated by Commission
Regulation 140.96, has determined that publication of the proposal 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.

DATES: Comments must be received on or before May 22, 2000.

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 the proposed amendments to the NYCE U.S.
Dollar Index futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact Michael Penick of the
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581,
telephone (202) 418-5279. Facsimile number: (202) 418-5527. Electronic
mail: [email protected].

SUPPLEMENTARY INFORMATION: The USDX is a geometric index of six foreign
currencies with fixed percentage weights. The six currencies and their
percentage weights are as follows: euro (57.6%); Japanese yen (13.6%);
British pound (11.9%); Canadian dollar (9.1%); Swedish krona (4.2%);
and Swiss franc (3.6%). The index formula is:
[GRAPHIC] [TIFF OMITTED] TN05MY00.041

Where Spot Rate<INF>i</INF> = exchange rate of currency i at time t
with all exchange rates expressed in European terms, i.e., units of
foreign currency per U.S. dollar, and II is the mathematical symbol for
the product of a multiplication.

    Under current rules, the USDX futures contract is cash settled at
expiration based on a survey of banks for indicative bids and offers.
The survey is conducted by Reuters USA during the last half hour of
trading on the last trading day. The Exchange stated that ``over time,
there has been a deterioration of the quality of the indications and a
decline in the number of bank contributors.''
    The Exchange proposes replacing the cash settlement procedure with
a physical delivery procedure. Under this procedure, a long position
holder in the subject contract would receive delivery of U.S. dollars
and make payment in a basket of the six foreign currencies that are
components of the USDX. Under the proposal, the contract size would
remain $1,000 times the Index. Thus, at an Index level at delivery time
of 100, the long would receive U.S. $100,000 and pay an amount of
foreign currency valued at $100,000. Similarly, the short position
holder would deliver U.S. $100,000 and receive payment in the basket of
foreign currencies.
    As part of the delivery procedure, the Exchange would determine a
final settlement price. The final settlement price would be based, to
the extent possible, on futures prices of NYCE currency futures
contracts that expire at the same time as the subject USDX futures
contract. If necessary, the rate for any currency that does not have an
NYCE futures contract expiring at the same time as the USDX contract
would be ``determined by the [NYCE's] Settlement Committee taking into
account cash and futures prices of the underlying currency component
and any other information that the Committee may deem appropriate.''
    The final settlement price would be used to determine both the
amount of U.S. dollars that the short delivers and the long receives
and the amount of foreign currency that the long pays and the short
receives. For example, suppose the final USDX settlement price is
100.00 and one euro is worth exactly $1.00. As noted, the weighting of
the euro is 57.6%. In this instance, the short would deliver $100,000
($1,000 times 100.00). The long would pay a basket of foreign currency
worth $100,000. That basket would contain $57,600 (57.6% of $100,000)
worth of euros and $42.400 worth of the other five currencies
distributed according to their respective weights. Since the euro in
this example is worth exactly $1.00, the long would pay 57,600 euros.
The amount that the long would pay of each in the other five foreign
currencies would be calculated similarly, based on their percentage
weights and currency exchange rates.
    Now, suppose the final settlement price is $110.00 and the euro is
valued at 90.00 cents. In this instance, the short would deliver and
the long would receive $110,000 ($1,000 times 110.00). The long would
pay and the short would receive a basket of foreign currency worth
$110,000. That basket would contain $63,360 (57.6% of $110.000) worth
of the euros and $46,640 worth of the other five currencies distributed
according to their respective weights. Since the euro in this example
is worth $0.90, the long would pay 70,400 euros ($63,360 divided by
0.90), compared to the 57,600 euros that the long would pay if the USDX
were 100.00 and the euro were valued at $1.00 under the preceding
example.
    As shown in these examples, under the proposed physical delivery
procedure, neither the number of U.S.

[[Page 26188]]

dollars delivered nor the size of the basket of currencies is fixed.\1\
Rather, both amounts vary in the same direction as the futures price
(or index level) changes. Specifically, if the Index rises, the long
receives more dollars, but is also obligated to pay more foreign
currency units. Conversely, if the Index declines, the long receives
fewer dollars, but is obligated to pay fewer foreign currency units.
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    \1\ For most futures contracts, the amount of the commodity
delivered is fixed (e.g. 5,000 bushels of corn), while only the
number of dollars paid for the commodity varies as the futures price
varies.
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    The Division requests comment on the above-noted delivery
provision. How does this novel delivery provision affect the hedging or
price discovery functions of the futures contract? Also, under this
delivery procedure, can market participant who make or take delivery
realize profits or losses in the contract?
    For most physical delivery futures contracts, it is not possible to
benefit from manipulating the daily settlement price used in delivery
invoices, since any benefit to a futures margin account would be offset
by losses associated with that invoice price at delivery. In the
revised USDX contract, the final settlement price would be used to
determine both the invoice price and the amount of currency delivered.
The Division requests comment regarding whether, given the unusual
terms of the revised USDX futures contract, it is possible to benefit
from manipulating the proposed final settlement price and, if so,
whether the final settlement price is readily susceptible to
manipulation.
    The proposal was submitted to the Commission under the Commission's
45-day Fast Track procedures of Commission Regulation 1.41(b)(2). Under
these procedures, absent Commission action to the contrary, the
proposal would be deemed approved at the close of business on May 30,
2000. In view of the limited review period under the Fast Track
procedures, the Division has determined to publish for public comment
notice of the proposal 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 St., NW, Washington, D.C. 20581.
Copies of the proposed amendments can be obtained through the Office of
the Secretariat by mail at the above address or by phone at (202) 418-
5100.
    Other materials submitted by the NYCE may be available upon request
pursuant to the Freedom of Information Act (5 U.S.C. 552) and the
Commission's regulations thereunder (17 CFR Part 145 (1997)), except to
the extent they are entitled to confidential treatment as set forth in
17 CFR 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 the Secretariat at the Commission's headquarters in
accordance with 17 CFR 145.7 and 145.8.
    Any person interested in submitting written data, views, or
arguments on the proposed amendments, or with respect to other
materials submitted by the NYCE, should send such comments to Jean A.
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st St., NW, Washington, DC 20581 by the specified date.

    Issued in Washington, DC, on May 1, 2000.
Richard A. Shilts,
Acting Director.
[FR Doc. 00-11241 Filed 5-4-00; 8:45 am]
BILLING CODE 6351-01-M

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