[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