[Federal Register Volume 60, Number 101 (Thursday, May 25, 1995)]
[Notices]
[Pages 27723-27725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12875]
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[[Page 27724]]
COMMODITY FUTURES TRADING COMMISSION
Chicago Mercantile Exchange: Proposed Amendments Converting the
Live Hogs Futures Contract From a Physical Delivery Contract to a Cash
Settlement System
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed contract market rule changes.
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SUMMARY: The Chicago Mercantile Exchange (``CME'') has submitted
proposed amendments to its Live Hogs futures contract that would
convert the delivery provisions of that futures contract from a
physical delivery contract to a cash settlement system. 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 the proposed amendments
are of major economic significance and that publication of the proposed
amendments would be 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 26, 1995.
ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K
Street NW, Washington, D.C. 20581. Reference should be made to the
proposed amendments converting the live hogs futures contract to cash
settlement.
FOR FURTHER INFORMATION CONTACT: Frederick V. Linse, Division of
Economic Analysis, Commodity Futures Trading Commission, 2033 K Street
NW., Washington, D.C. 20581, telephone (202) 254-7303.
SUPPLEMENTARY INFORMATION: The existing terms of the live hogs futures
contract provides for physical delivery of 40,000 pounds of live hogs
meeting specified quality and weight requirements at CME-approved
public livestock yards at seven delivery points located in six
different states. The contract currently specifies a maximum daily
price fluctuation limit of 1.5 cents per pound, which is applicable
through the last trading day of each expiring contract month. The
contract's existing terms also specify that trading ends on the
business day immediately preceding the last five business days of the
contract month. In addition, the contract's current terms provide for
speculative position limits of 900 contracts in any one month and 450
contracts in the expiring month.
The proposed amendments would delete all physical delivery
provisions of the futures contract. These provisions would be replaced
by terms specifying cash settlement of all open positions at the
expiration of trading in a contract month. The cash settlement price
would reflect the value of hogs on a carcass weight basis during the
last two trading days of expiring contract months. Specifically, the
proposed cash settlement price would equal the two-day weighted average
of U.S. Department of Agriculture (USDA) Lean Value Direct Hog Prices
for packer base weight hog carcasses, 51-52 percent lean/.80-.99 inches
of backfat at the last rib or equivalent as reported by the USDA for
the Western Corn Belt, the Eastern Corn Belt and the Mid-South. Under
the proposals, the cash settlement price would be calculated by summing
the above-noted USDA-reported average prices for each region and each
of the two days weighted by the ratio of the total number of lean hogs
sold directly to packers in that region on that day relative to the
total number of lean hogs sold directly to packers in all three regions
combined during the specified two-day period.
The proposed amendments also will specify that the contract's
trading unit will be 40,000 pounds of lean hog carcasses. In addition,
the proposed amendments will provide that the contract's existing 1.5-
cent-per-pound maximum daily price fluctuation will not be applicable
during the last two trading days of an expiring contract month.
Speculative position limits would be 3,000 contracts in any individual
non-spot contract month and 450 contracts in expiring contract months
as of the close of business on the fifth business day of the spot
month. Trading in expiring contract months would end on the tenth
business day of the spot month for both the futures and option
contracts.
In addition to the substantive amendments, the proposed amendments
would make certain conforming changes to other rules governing the live
hog futures and option contracts. Also, the proposed amendments would
rename the contracts as the ``lean hogs'' futures and options
contracts.
According to the CME, physical delivery through public livestock
yards no longer reflects dominant cash market practice. The CME notes
that less than 10% of hogs meeting the requirements for delivery on the
futures contract are currently sold through such yards, and that the
percentage of hogs sold through such yards is expected to continue to
decline. The CME further indicates that, as a result of the decline in
importance of sales through public livestock yards, the usefulness of
the live hogs futures contract as a price discovery and risk management
tool has been adversely affected. The CME indicates, in this respect,
that the limited cash market activity at most public terminal markets
raises valid questions regarding whether the prices paid at the
terminal markets accurately reflect prices paid in the rest of the
industry.
According to the CME, the decline in importance of the terminal
markets has been accompanied by an increase in the importance of direct
sales to packers at packing plants and country buying stations, and an
increase in carcass-basis pricing. The CME said that, according to the
USDA, 90% of the hogs sold in the U.S. during 1990 (the latest year for
which statistics are available) were sold through non-public markets,
mainly packing plants and country buying stations. The CME also said
that approximately 75% of market hogs sold in 1993 were sold on a
carcass grade and yield basis.
The CME believes that cash settlement using carcass-based pricing
is necessary to ensure the long-term viability of the contract for the
reasons noted above. The CME also believes that increasing the
speculative limits to 3,000 contracts in individual non-spot months and
to 450 contracts in the expiring month will accommodate new business
from certain commercial entities and increase the liquidity of the
market.
The CME proposes to make the amendments effective only for all
newly listed contracts, following Commission approval. No currently
open contract month or position would be affected by the proposed
amendments.
On behalf of the Commission, the Division is requesting comment on
the proposed amendments. In particular, the Division is seeking comment
on regarding the extent to which the proposed cash settlement price
will reflect the underlying cash market and the susceptibility of the
proposed cash settlement price to manipulation or distortion.
Copies of the proposed amendments will be available for inspection
at the Office of the Secretariat, Commodity Futures Trading Commission,
2033 K Street NW, Washington, D.C. 20581. Copies of the amended terms
and conditions can be obtained through the [[Page 27725]] Office of the
Secretariat by mail at the above 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 Commission's
headquarters 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, 2033 K Street
NW., Washington, D.C. 20581 by the specified date.
Issued in Washington, D.C. on May 18, 1995.
Blake Imel,
Acting Director.
[FR Doc. 95-12875 Filed 5-24-95; 8:45 am]
BILLING CODE 6351-01-P