[Federal Register Volume 59, Number 84 (Tuesday, May 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10464]


[[Page Unknown]]

[Federal Register: May 3, 1994]


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COMMODITY FUTURES TRADING COMMISSION

 

Chicago Mercantile Exchange: Proposed Amendments Establishing a 
Report-Based Contract Month Cycle for the Live Hog and Frozen Pork 
Bellies Futures Option Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Proposed Contract Market Rule Change.

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SUMMARY: The Chicago Mercantile Exchange (CME) has submitted proposed 
amendments to its live hogs and frozen pork bellies futures option 
contracts. The proposed amendments will establish a ``report-based'' 
contract month trading cycle. Trading in each contract month of the 
cycle will occur only during a two-week period immediately preceding 
the release of the United States Department of Agriculture's (USDA's) 
quarterly ``Hogs and Pigs'' report.
    In accordance with section 5a(a)(12) of the Commodity Exchange Act 
and acting pursuant to the authority delegated by Commission Regulation 
140.96, the Acting Director of the Division of Economic Analysis 
(Division) of the Commodity Futures Trading Commission (Commission) has 
determined, on behalf of the Commission, that publication of the 
proposed amendments is in the public interest. On behalf of the 
Commission, the Division is requesting comment on this proposal.

DATES: Comments must be received on or before June 2, 1994.

ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K 
Street, NW., Washington, DC 20581. Reference should be made to the 
report-based contract month cycle for the live hog and frozen pork 
bellies futures option contracts.

FOR FURTHER INFORMATION CONTACT: Frederick V. Linse, Division of 
Economic Analysis, Commodity Futures Trading Commission, 2033 K Street, 
NW., Washington, DC 20581, telephone (202) 254-7303.

SUPPLEMENTARY INFORMATION: Under the existing terms of the live hogs 
and pork bellies futures option contracts, the CME lists ``regular 
cycle'' option contract months which are exercisable into each of the 
contract months listed by the CME for the underlying live hogs and pork 
bellies futures contracts.1 Currently, all live hogs option 
contract months expire on the first Friday of the underlying futures 
contract month. All but one of the contract months listed for the pork 
bellies option contract expire on the last Friday that precedes by at 
least three days the first business day of the underlying futures 
contract month.2 The CME presently lists for trading at all times 
the nearest five live hogs option contract months and the nearest four 
pork bellies option contract months.3
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    \1\For the live hogs futures contract, the CME currently lists 
the following annual cycle of contract months: February, April, 
June, July, August, October and December. For the pork bellies 
futures contract, the CME currently lists contracts months in the 
following annual cycle: February, March, May, July and August.
    \2\In the case of pork bellies, there currently are two option 
contract months based on the underlying February futures contract 
month: one contract month that expires on the last Friday that is 
more than three business days prior to the first business day of 
February and a contract month which expires on the third Friday of 
the November which immediately precedes the underlying February 
futures contract month.
    \3\For the pork bellies option contract, the CME lists the 
nearest five option contract months when one of the nearest five 
contract months is the existing option month that is based on the 
February futures contract month but expires during the preceding 
November.
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    The pork bellies option contract's existing terms provide for the 
listing of 11 strike prices in intervals of two cents per pound at the 
commencement of trading in a contract month, including the strike price 
nearest to the previous day's settlement price and the next five strike 
prices above and the next five strike prices below that strike price. 
The pork bellies option contract currently provides for the listing of 
additional strike prices as necessary to maintain the listing of at 
least the next five strike prices above and the next five strike prices 
below the prevailing prices for the underlying futures contract month.
    The live hogs option contract currently provides for the listing at 
the commencement of trading in a contract month of all strike prices in 
intervals of two cents per pound that fall within the range of ten 
cents above and ten cents below the previous day's settlement price for 
the underlying futures contract month. In addition, the live hogs 
option contract currently provides that, when a contract month becomes 
the next-to-expire contract month, all strike prices that fall within a 
range of six cents per pound above or six cents per pound below the 
previous day's settlement price will be listed in intervals of one cent 
per pound. The live hogs option contract's existing terms also provide 
for the listing of additional strike prices as necessary to ensure that 
all strike prices at the specified price intervals are listed within 
the above-noted ranges of ten and, as appropriate, six cents above and 
below the prevailing prices for the underlying futures contract month.
    The proposed amendments would provide for the listing of a 
``report-based'' cycle of contract months for the live hog and frozen 
pork bellies option contracts, in addition to the listing of the 
``regular cycle'' of option contract months currently provided for in 
the contracts' rules.4 Each report-based option will have a 
trading life of two weeks. Specifically, a report-based option contract 
month will be listed on the first business day of the calendar week 
preceding the week in which the USDA releases the quarterly ``Hogs and 
Pigs'' report5 and will expire on the last business day of the 
week in which the report is released.6
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    \4\Under the proposals, the regular cycle option contract months 
for pork bellies will include both of the above-noted existing 
option contract months that are based on the February futures 
contract month.
    \5\These quarterly reports are released late in the months of 
March, June, September and December. The exact dates on which the 
reports will be released during a given year are published by the 
USDA during the last calendar quarter of the preceding year.
    \6\In some cases, the USDA Hogs and Pigs report will be released 
after trading ceases on the last trading day for the proposed 
report-based options. For example, the most recent Hogs and Pigs 
report was released at 2 p.m., Central Time, on Friday, March 25, 
1994 (the USDA releases all Hogs and Pigs reports at 2 p.m., Central 
Time, on the scheduled release day, which typically is either a 
Thursday or Friday). The release time for this report would have 
followed the 1 p.m., Central Time, close of trading for live hogs 
and pork bellies on the last trading day of the report-based options 
for that month if such options had been available for listing during 
March 1994. In such cases, persons who hold report-based option 
positions after trading ends on the last trading day would have the 
right to choose whether to exercise such options into the underlying 
futures contract after the USDA report is released. In this respect, 
the option contracts' current terms permit persons holding option 
positions after trading ceases on the last trading day to submit to 
the CME a notice that they wish to exercise their report-based 
option positions until 7 p.m., Central Time, on the last trading 
day. For persons holding in-the-money report-based options, the 
option contracts' existing rules provide that such options will be 
automatically exercised by the CME unless instructions to the 
contrary are submitted to the CME by the option holder by 7 p.m. on 
the last trading day.
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    For report-based options in live hogs, the underlying futures 
contract will be the second-nearest futures contract to delivery. For 
example, the underlying futures contract for a report-based option that 
is listed in March in connection with the release of the March Hogs and 
Pigs report would be the June futures contract month. Similarly, the 
underlying futures contracts for the other report-based options to be 
listed during the calendar year are: the August futures contract month 
for the option listed during June; the December futures contract month 
for the option listed in September; and the April futures contract 
month for the option listed in December. The CME shall list initially, 
and thereafter maintain, put and call live hogs report-based options 
with strike prices at one-cent intervals in a range of six-cents above 
and below the previous day's settlement price of the underlying futures 
contract, and at two-cent intervals in a range 10 cents above and below 
the previous day's settlement price of the underlying futures contract.
    The underlying futures contract months for pork bellies report-
based options are: the May futures contract month for the option listed 
in March; the August futures contract month for the option listed in 
June; the February futures contract month for the option listed in 
September; and the March futures contract month for the option listed 
in December. The CME shall list initially and maintain pork bellies 
report-based put and call options at eleven strike prices listed in 
two-cent intervals, including the strike price that is nearest the 
previous day's settlement price of the underlying futures contract, and 
the next five higher, and the next five lower strike prices.
    The proposed amendments will continue to specify the listing of the 
``regular cycle'' of option contract months and the listing of strike 
prices for such months in the same manner as provided for in the 
contracts' existing terms.
    In support of the proposed amendments, the CME states the 
following:

    Options on futures allow hedgers to shield themselves from the 
adverse impact of a [``Hogs and Pigs''] report while retaining much 
of the ability to benefit from a favorable market response. However, 
for hedgers using options on the more distant contract months, the 
high cost of buying an option--due to the large time value component 
of the option premium--can outweigh the benefits of protection from 
an unfavorable market reaction. As a result, many potential hedgers 
are effectively priced out of the option market.
    Short-dated options would address this problem. Since these 
options would be traded for such a short time, the time value 
component of the option premium would be negligible, and therefore 
the total premium would be substantially less than for a traditional 
long-dated option, all other things being the same. This would make 
short-dated options an attractive risk-management tool for hedgers 
who require protection around the release of these critical reports, 
and particularly those whose usage of options is currently limited 
due to the cost of the premium.

    Copies of the proposed amendments will be available for inspection 
at the Office of the Secretariat, Commodity Futures Trading Commission, 
at the above address. Copies of the amended terms and conditions can be 
obtained through the Office of the Secretariat by mail at the same 
address or by telephone at (202) 254-6314.
    The materials submitted by the CME in support of the proposed 
amendments 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 (1987)). 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 above address 
in accordance with CFR 145.7 and 145.8.
    Any person interested in submitting written data, views, or 
arguments on the proposed amendments should send such comments to Jean 
A. Webb, Secretary, Commodity Futures Trading Commission, at the above 
address by the specified date.

    Issued in Washington, DC on April 26, 1994.
Blake Imel,
Acting Director, Division of Economic Analysis.
[FR Doc. 94-10464 Filed 5-2-94; 8:45 am]
BILLING CODE 6351-01-P