[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2657-2659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1241]


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COMMODITY FUTURES TRADING COMMISSION


Chicago Mercantile Exchange: Proposed Amendments Relating to the 
Delivery Procedures, Quality Standards and Quality Price Differentials, 
and Speculative Position Limit Specifications for the Live Cattle 
Futures Contract

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 cattle futures contract. The primary proposed 
amendments will: (1) Modify the par yield grade and weight range 
specifications and the sources and calculation methods for establishing 
price differentials for non-par quality grades, yield grades, and 
carcass-weights; (2) extend the delivery period for live-graded 
deliveries by five business days; (3) change the last trading day of 
expiring contract months; and (4) increase to 600 from 300 contracts 
the spot month speculative position limit applicable on those days 
preceding the last five trading days, with the existing limit of 300 
contracts being retained during the last five trading days of the 
contract month.
    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. On behalf of the Commission, the 
Division is requesting comment on this proposal.

DATES: Comments must be received on or before February 18, 1997.


[[Page 2658]]


ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 1155 
21st Street, NW, Washington, DC 20581. In addition, comments may be 
sent by facsimile transmission to (202) 418-5521, or by electronic mail 
to [email protected]. Reference should be made to the proposed changes 
in quality standards, delivery procedures, and the speculative position 
limits for the CME live cattle futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact Fred Linse of the 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st St., NW, Washington, DC 20581, 
telephone 202-418-5273, or electronic mail: [email protected].

SUPPLEMENTARY INFORMATION: Under the current terms of the live cattle 
futures contract, a par delivery unit consists of 40,000 pounds of 
steers. At the buyer's option, steers may be delivered either to a CME-
approved livestock yard, for grading by United States Department of 
Agriculture (USDA) personnel on a live basis, or to a CME-approved 
slaughter plant, for grading by USDA personnel on a carcass basis. The 
par delivery lot is composed of 55% USDA Choice, and 45% USDA Select 
quality grade steers or carcasses, with a yield grade of 1, 2, 3, or 4. 
No more than one yield grade 4 steer or carcass is permitted in a par 
delivery unit.
    For live-graded delivery, the average weight of the live steers in 
a par delivery unit must fall between 1,050 and 1,250 pounds, with no 
individual steer weighing more than 100 pounds above or below the 
average weight of the delivery unit. For carcass-graded delivery, no 
individual carcass may weigh less than 600 pounds nor more than 900 
pounds. The hot yield of a par delivery unit is 63 percent.
    The futures contract's existing terms also provide for the delivery 
at specified price differentials for delivery units of live steers or 
steer carcasses that deviate from the above-specified par delivery 
standards. In particular, each additional Choice grade steer or carcass 
above the 55 percent minimum level in a delivery unit is deliverable at 
a price differential calculated by subtracting the ``Select 1-3 Boxed 
Beef Cut-Out Value'' from the ``Choice 1-3 Boxed Beef Cut-Out Value,'' 
which are published on the delivery day by the USDA Market News Service 
on the National Carlot Meat Report, and multiplying this difference by 
63 percent. Similarly, each additional Select grade steer or carcass in 
excess of the 45 percent maximum level in a delivery unit is 
deliverable at a price differential calculated by subtracting the 
``Choice 1-3 Boxed Beef Cut-Out Value'' from the ``Select 1-3 Boxed 
Beef Cut-Out Value,'' that are published by the USDA Market News 
Service on the delivery day, and multiplying this difference by 63 
percent. In addition, any carcass grading below USDA Select is 
deliverable at a discount of 25% of the settlement price using the 
average live weight of the steers included in the delivery unit. 
Carcasses grading USDA Prime are considered to be USDA Choice for 
purposes of calculating the value of delivery units. Each additional 
yield grade 4 carcass above the par allowable number of one is 
deliverable at a discount of $20 per hundredweight, or 25% of the 
settlement price, whichever is greater, on a live weight basis. Any 
carcass with a yield grade of 5 is deliverable at a discount of $30 per 
hundredweight, or 40 percent of the settlement price, whichever is 
greater, on a live weight basis.
    Live steers that weigh 100 to 200 pounds above or below the 
delivery unit's average weight are deliverable at a discount of three 
cents per pound. Individual steers that weigh more than 200 pounds over 
or under the delivery unit's average weight, or that weigh less than 
1,000 pounds or greater than 1,300 pounds, are not deliverable on the 
futures contract. Steer carcasses that weigh less than 600 pounds or 
more than 900 pounds are deliverable at a discount of 20 percent of the 
settlement price.
    Delivery may be made on any business day of the contract month 
beginning with the seventh business day following the first Friday of 
the contract month, plus the first two business days in the succeeding 
calendar month.
    The primary proposed amendments will:
    (1) Change the par yield grade specification to USDA yield grade 3 
steers or carcasses, from the existing par specification of USDA yield 
grade 1, 2, 3, or 4 steers or carcasses;
    (2) Change the weight requirement for live-graded delivery units 
deliverable at par by specifying an average steer weight range of 1,100 
pounds to 1,300 pounds (from the existing 1,050 pounds to 1,250 pounds 
range), and an individual steer weight range of 1,050 pounds to 1,350 
pounds (from the existing 1,000 pounds to 1,300 pounds range);
    (3) Remove the existing limitation on the number of yield grade 4 
steers permitted in live-graded delivery units and allow the delivery 
of yield grade 5 steers in such units;
    (4) Modify the sources and calculation procedures for determining 
price differentials for quality grade, yield grade, and carcass weight 
as described in proposed rule 1504.A below:
* * * * *
    A. Sources and Calculation of Adjustment Factors Quality grade 
adjustments for all delivery units will make use of the live weight 
equivalent of the Choice-Select boxed beef spread calculated from 
information reported by USDA (in $/cwt.) for the day of tender in the 
National Carlot Meat Report. This is referred to hereafter as the Live-
Equivalent Choice-Select Spread (LECSS) and is computed by subtracting 
the ``Select 1-3 Boxed Beef Cut-Out Value'' from the ``Choice 1-3 Boxed 
Beef Cut-Out Value'' and multiplying that result by 0.0063. Boxed Beef 
Cut-Out Values from the 550/700 pound category are used for live-graded 
delivery units with an average live weight less than 1,111 pounds and 
for carcass-graded delivery units with an average carcass weight less 
than 700 pounds. Boxed Beef Cut-Out Values from the 700/850 pound 
category are used for live-graded delivery units with an average live 
weight greater than or equal to 1,111 pounds and for carcass-graded 
delivery units with an average carcass weight greater than or equal to 
700 pounds.
    The National Carlot Meat Report for the day of tender shall also 
serve as the source of information for calculating the condemned liver 
factor used in carcass-graded deliveries. The condemned liver factor 
shall equal the reported liver value (in $/cwt.) from the ``By-Product 
Value Calculation'' multiplied by -0.01.
    In addition, quality grade, yield grade and carcass weight 
adjustments will make use of factors calculated from values reported by 
USDA (in $/cwt.) in the National Carcass Premiums and Discounts for 
Slaughter Steers and Heifers report. The Prime, Standard, Yield Grade 
1, Yield Grade 2, Yield Grade 4, Yield Grade 5, and 900-950 lbs. 
factors are calculated by multiplying the reported simple average for 
the corresponding category by 0.0063. If a quality grade or yield grade 
is broken into subcategories on this report, then the factor for that 
quality or yield grade shall be the simple average of all reported 
averages for the subcategories in that category multiplied by 0.0063. 
The most recently issued report with respect to the day a Certificate 
is tendered shall be used to calculate the factors for that delivery 
unit. When a Certificate is tendered on the same day that a new report 
is issued,

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that new report shall be used in factor calculation regardless of the 
time of day that the report is released.
    The sub-Standard factor shall equal -25% of the tender-day 
settlement price.
    Should the USDA determine that an error exists in any of the 
reports used to calculate adjustment factors and subsequently issues a 
corrected report, that corrected report shall be used in place of the 
original.
* * * * *
    All live steers or steer carcasses in a delivery unit shall receive 
a quality grade adjustment computed from the Live-Equivalent Choice-
Select Spread (LECSS) factors and other factors described in proposed 
Rule 1504.A. Per pound quality grade adjustments shall be as follows:

USDA Prime: +0.45  x  LECSS + Prime factor
USDA Choice: +0.45  x  LECSS
USDA Select: -0.55  x  LECSS
USDA Standard: +0.45  x  LECSS + Standard factor
Below USDA Standard: +0.45  x  LECSS + Standard factor + sub-Standard 
factor

    The per animal quality grade adjustment shall be calculated by 
multiplying the per pound quality grade adjustment by the average live 
weight of the delivery unit. Carcasses deemed ungradeable with respect 
to quality grade by the USDA shall receive a per pound quality grade 
discount equal to 25% of the settlement price. In addition, carcasses 
weighing between 900 and 950 pounds will be deliverable at a price 
differential that is based on the adjustment factors described in 
proposed Rule 1504.A (rather than at the existing discount equal to 20% 
of the settlement price);
    (5) Expand the delivery period to include the first seven business 
days of the calendar month following the delivery month (from the first 
two business days of such months);
    (6) Change the last trading day of expiring contract months to the 
last business day of such months (from the last business day 
immediately preceding the last five business days of the contract 
month); and
    (7) Increase to 600 from 300 contracts the speculative position 
limit applicable during that part of the spot month which begins on the 
first business day following the first Friday of the contract month and 
ends on the business preceding the last five trading days of the 
expiring contract month. The existing spot-month speculative position 
limit of 300 contracts would remain applicable during the last five 
trading days of the expiring contract month.
    The CME intends to apply the proposed amendments to all newly 
listed contract months following receipt of Commission approval.
    In support of the proposed amendments, the Exchange states that 
``[t]hese changes are in the best interests of both the Live Cattle 
contract and the cattle feeding industry as a whole, particularly as 
the cash market continues to move toward increased usage of value-based 
marketing methods.'' In addition, the Exchange believes the proposal 
will increase deliverable supplies by permitting wider variations from 
the par quality specifications at market-based price differentials. The 
Exchange believes the proposed increase in the spot month speculative 
position limit preceding the last five trading days is supported by the 
increased deliverable supplies associated with the proposed amendments 
as well as other contract changes that were implemented in 1995.
    The Commission is requesting comments specifically with respect to 
(1) the extent to which the proposed amendments reflect prevailing cash 
market practices; (2) the extent to which the proposed price 
differentials for the delivery of differing qualities of live steers or 
steer carcasses reflect commercial price differences; and (3) the 
impact of the proposed amendments on the level of economically 
deliverable supplies at the contract's delivery points during the 
delivery months traded under the futures contract.
    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) 418-5105.
    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 January 8, 1997.
Blake Imel,
Acting Director, Division of Economic Analysis.
[FR Doc. 97-1241 Filed 1-16-97; 8:45 am]
BILLING CODE 6351-01-P