[Federal Register Volume 62, Number 219 (Thursday, November 13, 1997)]
[Notices]
[Pages 60831-60860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29895]


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COMMODITY FUTURES TRADING COMMISSION


Chicago Board of Trade Futures Contracts in Corn and Soybeans; 
Order To Change and To Supplement Delivery Specifications

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order to Chicago Board of Trade to change and to 
supplement delivery specifications.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
issuing an Order to the Board of Trade of the City of Chicago (CBT), 
under Section 5a(a)(10) of the Commodity Exchange Act (Act), 7 U.S.C. 
7a(a)(10), to change and to supplement the delivery terms of the CBT 
corn and soybean futures contracts. The CBT submitted proposed changes 
to the delivery specifications of its corn and soybean futures 
contracts in response to a December 19, 1996, notification to the CBT 
by the Commission that the CBT corn and soybean futures contracts no 
longer accomplish the objectives of that section of the Act. The 
Commission in

[[Page 60832]]

its Order changes and supplements the CBT proposal for its soybean 
futures contract by making all changes to such CBT rules as required to 
effect the following: (i) retaining the Toledo, Ohio switching district 
as a delivery location; (ii) retaining St. Louis-East St. Louis-Alton 
as a delivery location for shipping stations; and (iii) making soybeans 
from the Toledo delivery location deliverable at contract price and 
from all other locations at a premium over contract price of 150 
percent of the difference between the Waterways Freight Bureau Tariff 
No. 7 rate applicable to that location and the rate applicable to 
Chicago, Illinois, with Chicago at contract price.
    The Commission changes and supplements the CBT proposal for its 
corn futures contracts by making corn from shipping locations on the 
northern Illinois River deliverable at a premium over contract price of 
150 percent of the difference between the Waterways Freight Bureau 
Tariff No. 7 rate applicable to that location and the rate applicable 
to Chicago, Illinois, with Chicago at contract price. With respect to 
both the CBT corn and soybean futures contracts, the Commission also is 
ordering that the proposed CBT contingency plan for alternative 
delivery procedures when traffic on the northern Illinois River is 
obstructed be changed and supplemented and is ordering that the $40 
million minimum net worth eligibility requirement for issuers of 
shipping certificates be eliminated. Finally, the Commission is 
disapproving the proposed terms for the March, July and December 1999 
corn futures contracts and the January, July and November 1999 soybean 
futures contracts. Such contract months and any other 1999 contract 
months are hereby authorized to trade under the existing contract 
terms. The terms of the corn and soybean futures contracts proposed by 
the CBT as changed and supplemented herein will apply beginning with 
the January 2000 soybean futures contract and the March 2000 corn 
futures contract.
    The Commission has determined that publication of the Order is in 
the public interest, will provide the public with notice of its action, 
and is consistent with the purposes of the Commodity Exchange Act.

DATES: This Order became effective on November 7, 1997.

ADDRESSES: Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, N.W., Washington, D.C. 20581.

FOR FURTHER INFORMATION CONTACT: John Mielke, Acting Director, or Paul 
M. Architzel, Chief Counsel, Division of Economic Analysis, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
N.W., Washington, D.C. 20581, (202) 418-5260, or electronically, Mr. 
Architzel at [PA[email protected]].

SUPPLEMENTARY INFORMATION: Section 5a(a)(10) of the Act provides that, 
as a condition of contract market designation, boards of trade are 
required to:

    Permit the delivery of any commodity, on contracts of sale 
thereof for future delivery, of such grade or grades, at such point 
or points and at such quality and locational price differentials as 
will tend to prevent or diminish price manipulation, market 
congestion, or the abnormal movement of such commodity in interstate 
commerce. If the Commission after investigation finds that the rules 
and regulations adopted by a contract market permitting delivery of 
any commodity on contracts of sale thereof for future delivery, do 
not accomplish the objectives of this subsection, then the 
Commission shall notify the contract market of its finding and 
afford the contract market an opportunity to make appropriate 
changes in such rules and regulations. If the contact market within 
seventy-five days fails to make the changes which in the opinion of 
the Commission are necessary to accomplish the objectives of this 
subsection, then the Commission after granting the contract market 
an opportunity to be heard, may change or supplement such rules and 
regulations of the contract market to achieve the above objectives * 
* *.

    The Commission, on November 7, 1997, issued an Order under section 
5a(a)(10) of the Act to change and to supplement the delivery 
specifications proposed by the CBT for its corn and soybean futures 
contracts. That proposal was submitted in response to prior Commission 
notification to the CBT that its futures contracts for corn and 
soybeans no longer were in compliance with the requirements of section 
5a(a)(10) of the Act. The text of the Order is set forth below.

    In the Matter of the Section 5a(a)(10) Notification to the Board 
of Trade of the City of Chicago Dated December 19, 1996, Regarding 
Delivery Point Specifications of the Corn and Soybean Futures 
Contracts

    Dated: November 7, 1997.

    Order of the Commodity Futures Trading Commission to Change and 
to Supplement Proposed Rules of the Board of Trade of the City of 
Chicago Submitted for Commission Approval in Response to a Section 
5a(a)(10) Notice Relating to Futures Contracts in Corn and Soybeans.

    The Commodity Futures Trading Commission (CFTC or Commission) 
hereby orders changes and supplements to the Board of Trade of the City 
of Chicago (CBT) proposed rules relating to its futures contracts in 
corn and soybeans as shown in attachment 1 to this Order. Under this 
Order, the Commission takes the following actions:
    (1) changes and supplements under section 5a(a)(10) of the 
Commodity Exchange Act (Act) the proposed delivery specifications of 
the CBT's soybean futures contract by making all changes to such rules 
as required to effect the following:
    i. retaining the Toledo, Ohio switching district as a delivery 
location;
    ii. retaining St. Louis-East St. Louis-Alton as a delivery location 
for shipping stations; and
    iii. making soybeans from the Toledo delivery location deliverable 
at contract price and making soybeans from shipping locations within 
the St. Louis-East St. Louis-Alton and the northern Illinois River 
delivery locations deliverable at a premium over contract price of 150 
percent of the difference between the Waterways Freight Bureau Tariff 
No. 7 rate applicable to that location and the rate applicable to 
Chicago, Illinois, with Chicago at contract price;
    (2) changes and supplements under section 5a(a)(10) of the Act the 
proposed delivery specifications of CBT's corn futures contract by 
making all changes to such rules as required to make corn from shipping 
locations on the northern Illinois River deliverable at a premium over 
contract price of 150 percent of the difference between the Waterways 
Freight Bureau Tariff No. 7 rate applicable to that location and the 
rate applicable to Chicago, Illinois, with Chicago at contract price;
    (3) changes and supplements under section 5a(a)(10) of the Act the 
proposed CBT contingency plan for alternative delivery when river 
traffic is obstructed by reducing the continuous period of such an 
obstruction which triggers application of the plan's special procedures 
from the 45 days proposed to 15 days, by eliminating the condition 
which triggers the contingency plan that notice of the obstruction must 
have been given six-months prior to such an obstruction, by making the 
contingency plan applicable whenever a majority of shipping stations 
within the northern Illinois River delivery area is affected by an 
obstruction and by changing the differential from 100 percent of the 
Waterways Freight Bureau Tariff No. 7 rate as proposed to 150 percent;
    (4) changes and supplements under sections 5a(a)(10) and 15 of the 
Act the proposed CBT corn and soybean futures contracts by eliminating 
the $40 million minimum net worth eligibility requirement for issuers 
of shipping certificates;

[[Page 60833]]

    (5) disapproves under sections 5a(a)(10), 5a(a)(12), and 15 of the 
Act and Commission rule 1.41(b) CBT's proposed terms for the March, 
July, and December 1999 corn futures contracts and the January, July, 
and November 1999 soybean futures contracts. Such contract months and 
any other 1999 contract months are hereby authorized to trade under the 
existing contract terms or, if the CBT so elects, under the contract 
terms proposed by the CBT as changed and supplemented by this Order;
    (6) orders that the terms of the corn and soybean futures contracts 
proposed by the CBT as changed and supplemented by this Order shall 
apply to contract months beginning with and subsequent to the January 
2000 soybean futures contract month and the March 2000 corn futures 
contract month, whenever such contract months are listed for trading.
    Nothing in this Order precludes the CBT from submitting for 
Commission review and approval under sections 5a(a)(10) and 5a(a)(12) 
of the Act any alternative proposed delivery specifications for its 
corn or soybean futures contracts.
    The Commission, as discussed below, bases these actions on its 
finding that the CBT proposal in response to the Commission's section 
5a(a)(10) notification relating to the CBT's corn and soybean futures 
contracts does not meet the requirements, or accomplish the statutory 
objectives, of that section and also violates sections 8a(7) and 15 of 
the Act. The Commission's determination is based upon: (1) the 
inadequate amount of deliverable supplies of soybeans available under 
the proposed contract terms in the delivery area as proposed by the 
CBT; (2) the failure of the CBT's proposed corn and soybean contracts 
to include required locational differentials; (3) the failure of the 
CBT's proposed corn and soybean contracts to provide an adequate rule 
for alternative deliveries if river transportation is obstructed; and 
(4) the substantial impediment to eligibility for issuing corn and 
soybean shipping certificates imposed by the CBT's proposed $40 million 
net worth requirement.
    Specifically, under the CBT proposal, the amount of deliverable 
supplies of soybeans during the critical summer delivery months of 
July, August, and September fails to meet the level that, in the 
opinion of the Commission, is necessary to tend to prevent or diminish 
price manipulation, market congestion, or the abnormal movement of 
soybeans in interstate commerce. The gross amount of potentially 
deliverable supplies historically has failed to reach an adequate level 
on a significant number of occasions during the past 11 years which the 
Commission has examined. Moreover, on those occasions when the gross 
amount of potentially deliverable supplies did reach that level, it 
frequently did so only because of supplies available at the Chicago/
Burns Harbor (Chicago) delivery point, the continuing decline of which 
precipitated the section 5a(a)(10) notification in the first instance. 
This inadequacy is further demonstrated when required downward 
adjustments are made to reflect only that portion of gross deliverable 
supplies which would likely be available for futures deliveries. Thus, 
gross deliverable supplies would be diminished by the effects of the 
proposed three-day barge queuing rule, prior commercial commitments of 
available stocks, the lack of locational price differentials, and the 
unjustifiably high financial eligibility requirements. The frequent 
interruptions in barge transportation on the northern Illinois River 
due to lock closings and weather conditions also create foreseeable 
disruptions to deliverable supplies under the CBT proposal. The 
inadequacy of deliverable supplies of soybeans under the CBT proposal 
requires the retention of the CBT's current delivery points at Toledo 
and St. Louis, where additional deliverable supplies would be 
available.
    The Commission does not find that available deliverable supplies of 
corn under the CBT's proposal are so inadequate under section 5a(a)(10) 
as to require additional delivery points. However, changes and 
supplements to other aspects of the CBT's proposal as to its corn 
contracts are required to meet the objectives of section 5a(a)(10), as 
discussed below. Moreover, the adequacy of corn supplies cannot be 
accurately and fully ascertained until after there is a history of 
deliveries occurring under the CBT's proposal, as changed and 
supplemented by this Order. If in operation the proposal results in 
inadequate deliverable supplies of corn, the Commission will reconsider 
the need to require additional delivery points for the corn contract. 
To that end, the Commission directs the CBT to report on the experience 
with deliveries and expiration performance in the corn futures contract 
on an annual basis for a five-year period after contract expirations 
begin under the revised contract terms.
    Neither the CBT proposal for soybeans nor its proposal for corn 
provides for locational price differentials among spatially separated 
delivery points, as section 5a(a)(10) of the Act requires. In addition 
to tending to reduce deliverable supplies, the lack of locational price 
differentials reflecting the differentials in the underlying cash 
markets for corn and soybeans would render the futures contracts 
susceptible to price manipulation, market congestion, and the abnormal 
movement of the commodities in interstate commerce.1
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    \1\ The lack of locational price differentials not only violates 
section 5a(a)(10) of the Act, but also is contrary to Commission 
Guideline No. 1 and the Commission's policy on differentials. See, 
CFTC Guideline No. 1, 17 CFR part 5, appendix A; and Memorandum from 
Mark Powers, Chief Economist to the Commission, dated March 22, 
1977, adopted by the Commission at its meeting of May 3, 1977 
(Powers Memorandum).
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    In addition, the proposed contingency plan providing for 
alternative delivery procedures when river traffic is obstructed does 
not meet the objectives of section 5a(a)(10). By requiring lengthy 
advance notice of a river traffic obstruction before the contingency 
plan applies, by limiting the contingency plan only to instances of 
river traffic obstructions south of the delivery area, by limiting the 
relevant river traffic obstructions to lock closures, by requiring 
unduly lengthy obstructions, and by specifying a differential that does 
not conform to the locational differentials found to be appropriate by 
the Commission, the CBT's proposed plan fails to diminish the potential 
for price manipulation, market congestion, or the abnormal movement of 
the commodities in interstate commerce arising from foreseeable river 
traffic obstructions.
    Finally, in addition to its likely detrimental effect on the amount 
of available deliverable supplies on the contracts, the proposed $40 
million net worth eligibility requirement for issuers of shipping 
certificates poses a significant, unnecessary, and unjustified barrier 
to entry to those wishing to participate as issuers of shipping 
certificates on the contracts in violation of section 15 of the Act. 
This proposed $40 million net worth requirement is in addition to other 
minimum financial requirements that shipping certificate issuers must 
meet, including minimum working capital of $2 million, a bond or other 
financial guarantee equal to the full market value of all outstanding 
shipping certificates, and a limitation on the value of outstanding 
certificates an issuer may issue to 25 percent of the issuer's net 
worth. These requirements are fully adequate to ensure the financial 
ability of issuers to perform their responsibilities under the 
contracts. The burden imposed by the

[[Page 60834]]

additional $40 million net worth requirement on those otherwise 
eligible to participate in the contract as shipping certificate issuers 
would not only be unnecessary, but would act as a significant barrier 
to participation as an issuer and would create and tend to preserve a 
high level of concentration among issuers.
    The Commission's conclusions, as discussed in greater detail below, 
are supported by factual analyses made by the CFTC staff and by a large 
number of well-informed written comments submitted to the Commission by 
commercial users of the corn and soybean futures contracts and by other 
interested persons both prior to and in response to the Commission's 
issuance of the proposed order. The Commission also analyzed the 
documentary evidence submitted by the CBT and other commenters in 
support of the CBT proposal. In addition, the CBT and other interested 
members of the public presented oral and written comments to the 
Commission during an open meeting of the Commission prior to its 
issuance of the proposed order. The CBT was also heard by the 
Commission at a public hearing convened subsequent to issuance of the 
proposed order. The written and oral comments of the CBT received in 
connection with that hearing, along with comments filed by the public 
on the proposed order and written exceptions filed by the CBT, were 
reviewed by the Commission and were considered by it in arriving at its 
conclusions and in adopting this final Order.
    The CBT and a number of commenters raised objections to the 
Commission's proposed order. In response to some of these points, the 
Commission has made a number of changes from the order as proposed in 
adopting this Order as final. These changes include revisions to the 
calculation of some of the data in the Order. These revisions were made 
in response to suggestions and questions raised by the CBT at its 
hearing and in its various filings and in informal discussions with the 
CBT staff. They reflect corrections of calculations and of the 
formatting of certain data submitted to the Commission by the CBT. In 
addition, at the suggestion of the CBT in its oral and written 
statements filed at the hearing and in its written exceptions filed 
thereafter, the Commission has modified its estimate of September corn 
and soybean production.
    The final Order clarifies two provisions in attachment 1 by 
deleting several references to ``warehouse receipts'' which appeared in 
attachment 1 to the proposed order because they are surplusage.
    In addition, as explained in greater detail below, the Commission 
has determined to authorize for trading the 1999 contract months in the 
CBT's corn and soybean futures contracts under the current terms of 
those contracts, while disapproving the CBT's proposed terms for those 
contracts. In doing so, the Commission is responding to many commenters 
who requested that the Commission authorize the listing of these 
trading months in order to permit trading without delays or 
interruption. The Commission recognizes the urgent need to have 
certainty with respect to the terms of those contracts and the legality 
of their listing.
    This action by the Commission permits the continuation of trading 
in the corn and soybean contracts under the current terms, which are 
familiar to the CBT, its members, and the agricultural users of these 
contracts, until contract months for the year 2000, which would be 
governed by the new terms of the contracts as contained in this Order. 
In the interim the CBT will continue to be free to propose revisions of 
the new terms to the Commission for its consideration under sections 
5a(a)(10) and 5a(a)(12) or to submit a petition to the Commission to 
reconsider or to amend this Order. If the CBT believes that an 
alternative to the new terms and to its original proposal would better 
serve its business interests and would also meet the statutory 
requirements, the CBT should submit such a proposed rule revision or 
petition.

I. The Section 5a(a)(10) Proceeding

    The Commission, by letter dated December 19, 1996, commenced this 
proceeding by issuing to the CBT a notification under section 5a(a)(10) 
of the Act finding that the delivery specifications of its corn and 
soybean futures contracts no longer accomplish the statutory objectives 
of ``permit[ting] the delivery of any commodity * * * at such point or 
points and at such quality and locational price differentials as will 
tend to prevent or diminish price manipulation, market congestion, or 
the abnormal movement of such commodity in interstate commerce.'' 
Letter of December 19, 1996, to Patrick Arbor from the Commission, 61 
FR 67998 (December 26, 1996) (section 5a(a)(10) notification). The 
section 5a(a)(10) notification detailed long-term trends in the 
storage, transportation and processing of corn and soybeans, related 
those trends to changes in cash market conditions at the CBT delivery 
locations, and analyzed the lack of consistency between the cash market 
for these commodities and the delivery provisions of the contracts. Id. 
at 68000-68004.
    The section 5a(a)(10) notification also recounted the CBT's failure 
over the last 25 years adequately to address these structural problems 
with the contracts. As noted in the section 5a(a)(10) notification, 
section 5a(a)(10) was itself expressly added to the Act in 1974 after a 
number of apparent manipulations and problem liquidations involving the 
CBT grain contracts. Id. at 68005. In July 1989 an emergency action was 
required relating to CBT's soybean contract because of a commercial 
trader's holding of futures positions which substantially exceeded the 
total amount of soybeans that could be delivered at the contract's 
delivery points. By 1991 several major studies had been completed 
demonstrating the inadequacy of the CBT's delivery points. 
Nevertheless, the CBT's response to these problems was limited. Id. at 
68006. As the Commission noted in the section 5a(a)(10) notification, 
when the Commission approved certain changes proposed by the CBT to 
address these problems in 1992, it cautioned that the CBT's response 
was merely a short-term palliative and urged the CBT actively to 
consider more significant contract changes. Id. at 68007.
    Only three years later, three of the existing six Chicago 
warehouses regular for delivery under the futures contracts ceased 
operations, a symptom of the serious, fundamental problems with the 
contracts' delivery specifications. At the urging of the Commission, 
the CBT formed a special task force to address the delivery problems. 
That task force spent a year developing proposed changes to the 
contracts' specifications which were modified by the CBT's board of 
directors. The modified proposal was then defeated by a vote of the CBT 
membership on October 17, 1996.
    Subsequently, after an additional Chicago delivery warehouse 
stopped accepting soybeans and corn in late October 1996, the 
Commission formally commenced this proceeding under section 5a(a)(10) 
of the Act on December 19, 1996. The section 5a(a)(10) notification 
found that the CBT corn and soybean futures contracts no longer met the 
requirements of that section of the Act and notified the CBT that it 
had until March 4, 1997, the statutory period of 75 days, to submit for 
Commission approval proposed amendments to the contracts' delivery 
specifications to bring them into compliance with the Act.

[[Page 60835]]

    The CBT, on April 16, 1997, submitted its response to the section 
5a(a)(10) notification in the form of proposed exchange rule 
amendments.2 Previously, the Commission had published the 
substance of the CBT's proposed amendments in the Federal Register for 
a 15-day comment period.3 62 FR 12156 (March 14, 1997). In 
response to requests for additional time to comment on the proposal, 
the Commission on April 24, 1997, extended the comment period until 
June 16, 1997. 62 FR 1992. 4
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    \2\ While the CBT labeled its submission of the proposed rule 
amendments as having been made pursuant to section 5a(a)(12) of the 
Act as well as section 5a(a)(10), the Commission is applying its 
authority and procedures set forth in section 5a(a)(10) with regard 
to its consideration of the CBT's submission.
    Section 5a(a)(12) of the Act provides that ``the Commission 
shall disapprove after appropriate notice and opportunity for 
hearing any such [exchange] rule which the Commission determines at 
any time to be in violation of the provisions of this Act or the 
regulations of the Commission.'' In addition, section 8a(7) of the 
Act empowers the Commission to alter or to supplement exchange rules 
as necessary or appropriate ``to insure fair dealing in commodities 
traded for future delivery on such contract market.'' Such changes 
or alterations may address contract terms or conditions, among other 
matters.
    The Commission is exercising its authority under section 
5a(a)(10) of the Act to change and to supplement the CBT proposal. 
Nevertheless, the Commission, for the reasons discussed in this 
Order, necessarily also finds that the CBT proposal must be 
disapproved under section 5a(a)(12) of the Act as being inconsistent 
with the requirements of sections 5a(a)(10), 8a(7) and 15 of the Act 
and must be altered and supplemented under section 8a(7) of the Act.
    \3\ On March 4, 1997, the CBT notified the Commission that its 
Board had authorized the submission of the proposed amendments to 
the CBT membership for a formal vote. On April 15, 1997, the CBT 
membership voted in favor of the proposed amendments, and the CBT 
formally submitted them for Commission review the next day.
    \4\ Also on April 24, 1997, the CBT informed the Commission by 
letter that it would the next day list, or relist, for trading the 
July and December 1999 corn futures contract months and the July and 
November 1999 soybean futures contract months. By letter dated May 
2, 1997, the Commission notified the CBT that the listing or 
relisting of these contract months ``is not legally authorized at 
the present time,'' that the Commission ``reserves all of its 
authority under sections 5a(a)(10), 5a(a)(12) and 8a(7) of the Act 
to approve, disapprove, supplement, or modify the proposed delivery 
specifications of the CBT corn and soybeans futures contract and to 
apply that determination to the[se] . . . trading months,'' and that 
the CBT ``must notify all market participants that the Commission 
has not approved the listing of these contract months.''
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    The CBT requested the opportunity to appear before the Commission 
``to address issues that have been generated during the comment 
period.'' 5 The Commission granted the CBT's request (62 
F.R. 29107 (May 29, 1997)), holding a public meeting on June 12, 1997, 
to accept oral and written statements by the CBT and interested members 
of the public. The participants represented a cross-section of views, 
both favoring and opposing the CBT proposal. 6
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    \5\ The Commission received almost 700 comments on the CBT's 
proposal, the largest number of comments ever received by the 
Commission on any issue before it. The vast majority of the comments 
were opposed to the CBT proposal for a variety of reasons. Many of 
the comments were well reasoned and contained valuable factual 
information and data which were important supplements to the 
information provided by the CBT in its submission.
    \6\ Written statements in connection with the meeting were 
submitted to the Commission for inclusion in the record and, along 
with a transcript of the meeting, have been entered into the 
Commission's comment file. Participants included a United States 
Senator, a United States Representative and a state government 
representative from the state of Ohio, (transcript at 69-75, 29-35, 
19-26); a United States Representative and a state government 
representative from the state of Michigan, (transcript at 9-14, 14-
19); representatives of six commercial users of the contracts 
(transcript at 116-168); and representatives of three producer 
associations (transcript at 169-183). The CBT presented its views 
through the statements of six persons (transcript at 27-29, 36-69).
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    On September 15, 1997, the Commission issued a proposed order, 
publishing its text in the Federal Register with a request for public 
comment. 7 62 FR 49474 (September 22, 1997). It should be 
noted that problems under the current corn and soybean contracts have 
continued to the present. For example, the September 1997 soybean 
contract experienced significant price distortions during September 
apparently due in part to shortness of available deliverable supplies.
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    \7\ Subsequently, the Commission also published for public 
comment notice that it was proposing to disapprove application of 
the terms proposed by the CBT to the January 1999 soybean futures 
contract and the March 1999 corn futures contract. 62 FR 5108 
(September 30, 1997). The CBT purportedly listed those futures 
contracts for trading after issuance of the September 15, 1997, 
proposed order. The comment period on that notice also ended on 
October 22, 1997.
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    The comment period on the proposed order expired on October 22, 
1997. Over 230 commenters submitted comments to the Commission on the 
proposed order. 8 In addition, the Commission held a public 
hearing on October 15, 1997, at which the CBT was afforded the 
opportunity mandated under section 5a(a)(10) of the Act to appear 
before the Commission and to be heard. In addition to its oral 
presentations, the CBT submitted written statements and documentary 
evidence. A transcript of the hearing and all attendant written 
statements and documents have been included in the public comment file 
of this proceeding. 9 The CBT was also provided with an 
opportunity to file exceptions to the proposed order by October 22, 
1997, and the CBT did so.
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    \8\ Comments were received by the Commission offering a wide 
range of opinion. Many took issue with the philosophy underlying the 
section 5a(a)(10) statutory authority which permits the Commission 
to order an exchange to change or to supplement contract terms that 
in its opinion do not accomplish the objectives of providing for 
delivery at such point or points and at such price differentials as 
will tend to prevent or to diminish price manipulation, market 
congestion, or the abnormal movement of such commodity in interstate 
commerce. Others took issue with the Commission's proposed order for 
not going far enough, particularly with respect to its failure to 
order the retention of Toledo and St. Louis as delivery points for 
the CBT corn contract. As discussed above, the Commission has 
considered carefully all of the comments submitted and has made 
several changes or modifications to the final Order in response to 
them.
    \9\ Testimony given by CBT spokespersons during the October 15, 
1997, public hearing, as reflected in the hearing transcript, is 
cited hereinafter by using the abbreviation ``tr.'' followed by the 
relevant page number(s). Citations to the CBT letter of exceptions 
dated October 22, 1997, use the abbreviation ``October 22, 1997 
exceptions'' followed by the relevant page number(s).
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II. The CBT Proposal Responding to the Section 5a(a)(10) 
Notification

    In correspondence dated April 16, 1997, the CBT responded to the 
section 5a(a)(10) notification by submitting proposed amendments to the 
terms and conditions of its corn and soybean futures contracts for 
Commission review. The data submitted by the CBT to justify its 
proposal were inadequate to permit a determination of whether the 
proposal met the requirements of section 5a(a)(10) of the Act and 
contained certain flaws.10 Therefore, the Commission was 
required independently to collect and to analyze the data necessary for 
a proper analysis of the CBT's proposal. The CBT supplemented its 
original submission on more than one occasion--most recently on August 
25, 1997. It also modified and supplemented its analysis supporting its 
proposal during the meeting of June 12, 1997, during the hearing of 
October 15, 1997, and in its various written submissions and comments.
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    \10\ In this regard, the Act, Guideline No. 1, and Commission 
rule 1.41 provide that an exchange must demonstrate that its 
proposed rule amendments meet the requirements of the law. When 
exchange submissions fail to provide sufficient information to 
permit the Commission to make a determination, the Commission can 
refuse to consider a proposed amendment and can remit the proposed 
rule for further justification. See, 17 CFR 1.41(b). However, in 
this case the Commission chose to supplement the CBT submission with 
its own research and to act on the CBT proposal.
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    The CBT's proposal would replace the existing delivery system 
involving delivery of warehouse receipts representing stocks of grain 
stored at terminal elevators in Chicago, Toledo, and St. Louis with 
delivery of shipping certificates. 11 A shipping certificate

[[Page 60836]]

would provide for corn or soybeans to be loaded into a barge at one of 
the shipping stations located along a 153-mile segment of the Illinois 
River from Chicago (including Burns Harbor, Indiana) to Pekin, 
Illinois. (See map below.) Delivery in Chicago would also be permitted 
by rail or vessel. Delivery at all eligible locations would be at par. 
The CBT's proposal would eliminate the current delivery points on its 
corn and soybean futures contracts at Toledo, Ohio, and St. Louis, 
Missouri.
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    \11\ A shipping certificate is a negotiable instrument that 
represents a commitment by the issuer to deliver (e.g., load into a 
barge) corn or soybeans to the certificate holder, pursuant to terms 
specified by the CBT, whenever the holder decides to surrender the 
certificate to the issuer. Unlike an issuer of a corn or soybean 
warehouse receipt, which must have the product in storage to back 
the receipt, an issuer of a shipping certificate would be able to 
honor its delivery obligation not only from inventories, but also 
from anticipated receipts or purchases of corn or soybeans after the 
holder surrenders the certificate.
---------------------------------------------------------------------------

    In addition to having a shipping station located along the 
specified segment of the Illinois River capable of loading barges, 
firms eligible to issue shipping certificates would be required to meet 
a minimum net worth standard of $40 million. This minimum net worth 
standard is not applicable to the CBT's other agricultural futures 
contracts and would be in addition to the CBT's existing requirement of 
$2 million working capital required of firms regular for delivery under 
all of its futures contracts for agricultural products. The CBT 
proposal also would require the issuer to have a letter of credit or 
other guaranteed credit instrument collateralizing the full market 
value of the issued certificates and would establish limits on the 
amount of outstanding shipping certificates issued by an issuer. These 
limitations would be: (a) for northern Illinois River locations, 30 
times the registered daily barge loading rate of each shipping station; 
(b) a value no greater than 25% of the issuer's net worth; and (c) for 
Chicago locations only, the registered storage capacity of the 
facility.
    In addition, the proposal would impose requirements regarding an 
issuer's rate of loading barges. 12 Once a shipping 
certificate was surrendered to the issuer, the issuer would have to 
begin loading product within three business days of surrender and 
receipt of loading orders or one business day after placement of the 
certificate holder's barge, whichever were later. This loading would be 
required to take precedence over all other barge loadings for eight 
hours per day at the issuer's loading facility.
---------------------------------------------------------------------------

    \12\ The issuer's registered daily rate of loading would be not 
less than (a) for northern Illinois River locations, one barge per 
day per shipping station and (b) for Chicago locations, three barges 
per day per shipping station.
---------------------------------------------------------------------------

    Shipping certificate holders would be required to pay shipping 
certificate issuers a daily premium charge until the certificate were 
surrendered. 13 The last trading day for expiring corn and 
soybean futures months would be the business day preceding the 15th 
calendar day of the delivery month, with all deliveries of shipping 
certificates required to be completed by the second business day 
following the last trading day. (Currently, the last trading day is the 
eighth-to-last business day of the delivery month, with futures 
delivery of warehouse receipts continuing through the end of the 
month.)

    \13\ This charge would be 12/100 of one cent per bushel for 
Chicago and 10/100 of one cent per bushel for issuers along the 
northern Illinois River.
---------------------------------------------------------------------------

BILLING CODE 6351-01-P

[[Page 60837]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.025



BILLING CODE 6351-01-P

[[Page 60838]]

III. Deliverable Supplies of Soybeans Are Inadequate Under Section 
5a(a)(10)

A. The Standard for Measuring Adequacy of Deliverable Supplies

    Pursuant to section 5a(a)(10), the Commission must assess whether 
the CBT proposal meets the standard set by that section to ``permit the 
delivery * * * at such point or points and at such * * * locational 
price differentials as will tend to prevent or diminish price 
manipulation, market congestion, or the abnormal movement of such 
commodity in interstate commerce.''
    One criterion for whether a delivery proposal meets the standards 
of section 5a(a)(10) is whether the available deliverable supplies of 
the commodity at the delivery points specified are adequate to tend to 
prevent or to diminish price manipulation, market congestion, and the 
abnormal movement of the commodity in interstate commerce. As discussed 
below, other aspects of a proposed futures contract may violate section 
5a(a)(10) by tending to cause the prohibited results, but adequate 
deliverable supplies are a sine qua non for any contract under section 
5a(a)(10).
    The Commission believes that, to meet the statutory requirement of 
tending to prevent or to diminish price manipulation, market 
congestion, or the abnormal movement of a commodity in interstate 
commerce, a futures contract should have a deliverable supply that, for 
all delivery months on the contract, is sufficiently large and 
available to market participants that futures deliveries, or the 
credible threat thereof, can assure an appropriate convergence of cash 
and futures prices. To prevent unwarranted distortion of futures prices 
in relation to the cash market, the futures contract's delivery terms 
must reflect a product--in quality, form, location, mode of 
transportation, etc.--that is readily saleable in the cash market.
    Commission Guideline No. 1 (17 CFR part 5, appendix A) provides 
some guidance with respect to the adequacy of the delivery terms of a 
futures contract. Guideline No. 1 requires that exchanges provide 
justification concerning significant contract terms--particularly 
delivery provisions--for new or amended futures contracts. This 
justification should provide evidence that the proposed contract terms 
and conditions are in conformity with practices in the underlying cash 
market, that those terms and conditions will provide for deliverable 
supplies that will not be conducive to price manipulation or 
distortion, and that such supplies reasonably can be expected to be 
available to the short trader and saleable by the long trader at their 
market value in normal cash market channels.14
---------------------------------------------------------------------------

    \14\ This Commission standard addresses concerns over 
manipulation from both the long and short side. Availability of 
adequate deliverable supplies tends to prevent price manipulation by 
the longs on a futures contract by ensuring that the shorts on the 
futures contract can obtain the commodity to make delivery on the 
futures contract without artificial constraints at a price 
reflecting fundamental demand and supply conditions in the cash 
market. The ready saleability in the cash market of the commodity 
received through delivery on the futures contract by contract longs 
tends to prevent price manipulation by the shorts on the futures 
contract. The Commission has considered both short-side and long-
side manipulations in making its determinations in this Order.
    The CBT has attempted to justify its proposal by arguing that 
restricting available deliverable supplies through contract delivery 
terms is an appropriate method of reducing the likelihood of short-
side price manipulation. The Commission disagrees with this 
argument. Such restrictions in supplies render a contract highly 
vulnerable to price manipulation by the longs and are unnecessary if 
the contract is designed so as to permit the saleability of the 
commodity received by the takers of delivery at the normal cash 
market price.
---------------------------------------------------------------------------

    Judging the adequacy of deliverable supply in the context of a 
section 5a(a)(10) proceeding is more important than and significantly 
different from determining adequacy in the routine review of 
applications for new contract market designations. This section 
5a(a)(10) proceeding involves contracts that are known to have very 
large and well-established markets, a history of large trader 
positions, and a decades-long history of surveillance problems. Indeed, 
the Commission has already made an affirmative finding that the 
delivery provisions of the current contracts do not meet the standards 
of section 5a(a)(10) of the Act, and the Commission must decide whether 
the CBT's proposal goes far enough to cure that failure.
    To determine an appropriate standard for measuring the adequacy of 
deliverable supplies under the CBT proposal, the Commission has 
examined separately for corn and soybeans the relationship between the 
level of deliverable stocks and the presence of a price premium for the 
expiring futures month over the next futures month (a price inverse). 
The presence of such a premium is an indication of tight deliverable 
supplies, potentially creating a price distortion. In situations where 
limited supplies lead to such a price inverse, futures contracts are 
significantly vulnerable to price manipulation, market congestion, and 
the abnormal movement of the commodity in interstate commerce under the 
terms of section 5a(a)(10), particularly when traders hold large 
positions.15
---------------------------------------------------------------------------

    \15\ Of course, price inverses in futures contracts can occur as 
a normal result of short supplies in the cash market and can thus 
accurately reflect the cash market. However, when the available 
deliverable supplies under a futures contract have been so limited 
by the contract terms as to create such a shortage artificially, 
then the resultant susceptibility to price manipulation and price 
distortion are exactly the results forbidden by section 5a(a)(10). 
The CBT proposal's contract terms would cause such a limitation in 
available deliverable supplies, as discussed below.
---------------------------------------------------------------------------

    For soybeans, the Commission's staff analysis demonstrated a 
positive relationship between price inverses and deliverable supplies 
of less than 12 million bushels (2,400 contracts). Price inversions 
occurred in 12 of the 17 expirations of the CBT's soybean futures 
contracts when deliverable supplies were less than 12 million bushels 
or 2,400 contracts. Furthermore, such inversions occurred in 10 of the 
11 such expirations when a trader's position exceeded 600 contracts, a 
relatively common occurrence in the soybean futures market. In 
contrast, when deliverable supplies exceeded 2,400 contracts, 
regardless of the size of large traders' positions, there was only a 
single instance of price inversion. The 2,400-contract level of 
deliverable supplies constitutes four times the speculative position 
limit for the contract, a benchmark historically used by the 
Commission's staff in analyzing the adequacy of deliverable supplies 
for new contracts.
    The analysis for the corn market found a comparable relationship 
between price inverses and deliverable supplies at the level of 15 
million bushels or 3,000 contracts. Price inverses occurred in seven of 
the ten corn expirations when deliverable supplies were less than 3,000 
contracts.16 This analysis supports using as a measure of an 
inadequate level of deliverable supplies under section 5a(a)(10) a 
level below 2,400 contracts for soybeans and a level below 3,000 
contracts for corn.
---------------------------------------------------------------------------

    \16\ In all seven expirations the largest long position exceeded 
600 contracts.
---------------------------------------------------------------------------

    However, the history of these contracts demonstrates that a higher 
level of deliverable supplies may, in fact, be necessary to protect 
against price manipulation. Therefore, the Commission also has decided 
to consider an additional measure based on historic experience with 
manipulation and price distortion in these contracts. During the July 
1989 soybean futures contract expiration, the Commission exercised its 
surveillance powers to force the reduction of the long futures position 
of the Ferruzzi group of

[[Page 60839]]

companies, and the CBT declared a market emergency and ordered the 
phased reduction of all positions above a specified size. Both the 
Commission and the CBT believed that the position of the Ferruzzi group 
posed a significant threat of manipulation and acted on that 
belief.17 Just prior to the CBT emergency action, Ferruzzi's 
long position in the July 1989 soybean future was about 20 million 
bushels or 4,000 contracts. To avoid a repetition of such a situation, 
deliverable supplies of at least 4,000 contracts would be necessary.
---------------------------------------------------------------------------

    \17\ Although this incident involved soybean futures, it was 
recognized to have broader implications for the CBT's grain 
contracts and led to a reappraisal of the adequacy of the CBT's 
delivery terms for its wheat, corn, and soybean futures contracts 
and to revisions of all three contracts.
---------------------------------------------------------------------------

    In its analysis of the adequacy of the deliverable supplies under 
the CBT proposal, the Commission has considered both of these measures, 
as well as other relevant information.

B. The CBT Submission Does Not Demonstrate That Its Proposal Meets the 
Statutory Standard of Adequate Deliverable Supplies

    The CBT has failed to provide data that demonstrates the adequacy 
of available deliverable supplies under its proposal. It supports its 
proposal by general statements about production and transactions in the 
cash markets in the vicinity of the delivery area, contending, for 
example, that its proposed delivery area

    * * * is located along more than 150 miles of the northern 
Illinois River, which is one of the world's largest and most active 
cash grain markets, handling over 500 million bushels of corn and 
soybeans per year. It substantially increases the supply of grain 
eligible for delivery on our futures contracts over the current 
delivery system, thereby minimizing the potential for price 
distortions and manipulation.

CBT July 1, 1997, submission, p. 2-2.
    Data concerning total corn and soybean production and handling in 
the areas near the delivery points are not an adequate measure of 
deliverable supplies under the proposed contracts in light of the CBT 
proposal's heavy reliance on barge delivery along the northern Illinois 
River, which involves product primarily destined for the export market. 
Most production and handling of corn and soybeans in the vicinity of 
the proposed delivery points historically have involved product 
destined for the domestic market, and only a portion of that product 
has traditionally been loaded on barges as required in the CBT 
proposal. Therefore, the proper measure of available supplies must be 
based on historical barge shipment data. Such data are the best measure 
of that portion of the stocks in the vicinity of the northern Illinois 
River delivery points which is realistically available for delivery 
onto barges on the river as required by the CBT proposal.18
---------------------------------------------------------------------------

    \18\ At the October 15, 1997 hearing (tr. at pp. 34-35) and in 
its October 22, 1997 exceptions at pp. 29-30, the CBT introduced new 
arguments relating to corn and soybean stocks based upon data 
provided to the CBT by the Commission. Those data consisted of a 
survey of data for one year estimating September stocks within the 
vicinity of the northern Illinois River and extrapolations from that 
data for additional years. The Commission placed little weight on 
these data not only because they rely upon only one year's actual 
observation, but more importantly because they provide no guidance 
in determining the proportion of such stocks which form part of the 
proposed contracts' deliverable supplies.
    The CBT argued that all stocks of soybeans within twenty-five 
miles (or more) of the northern Illinois River should be included in 
deliverable supplies. However, only that relatively small portion of 
the stocks available for barge shipment is properly considered as 
available for delivery under the terms of the contract proposed by 
the CBT. Stocks destined for other uses, such as the larger domestic 
processing market, cannot be considered to be available.
---------------------------------------------------------------------------

    To rely on additional supplies destined for domestic processing and 
other uses would be to assume that the futures contract would divert 
those supplies to the export market which barge delivery largely 
constitutes, thus causing an abnormal movement in interstate commerce 
forbidden by section 5a(a)(10). The CBT has suggested that an 
appropriate measure of deliverable supplies is the amount of commodity 
that would be made available for futures deliveries in response to 
price increases on the futures markets resulting from manipulation 
attempts and other causes--its ``elasticity of supply'' argument. CBT 
October 22, 1997 exceptions at p. 19. However, diversions of a 
commodity from its normal movement and uses in the cash market in 
response to rising prices on futures markets which are not reflective 
of price increases in the cash market are precisely the prohibited 
effects which section 5a(a)(10) seeks to prevent.
    The CBT also argued that deliverable supplies are adequate based on 
the delivery capacity of firms along the river. The CBT states that 
there are seven firms with a cumulative daily barge loading capacity of 
5.5 million bushels of grain and a 30-day loading capacity of 171.8 
million bushels of grain.19 (CBT April 16, 1997, submission, 
attachment 4.) However, the CBT's reliance on the loading capacity of 
firms in the delivery area as an indicator of adequacy of deliverable 
supplies is misplaced. As the unused delivery capacity in Chicago 
clearly demonstrates, delivery capacity bears little relation to the 
amount of deliverable supplies actually available at a particular 
location. The CBT's loading capacity measure, which is based on its 
proposed maximum limits on the shipping station's ability to issue 
shipping certificates (30 times a station's 8-hour loading capacity), 
far exceeds the highest observed level of actual combined monthly corn 
and soybean barge shipments at the delivery points during the 11-year 
period studied, 1986 through 1996.
---------------------------------------------------------------------------

    \19\ According to the CBT, the firms and their percentage share 
of loading capacity are: Archer Daniels Midland Co., 41 percent; 
Continental Grain Company, 23 percent; Cargill, Inc., 12 percent; 
Consolidated Grain and Barge, ten percent; Sours Grain Company, six 
percent; American Milling Company, six percent; and Garvey 
International, two percent. (CBT April 16, 1997, submission, 
attachment 14.)
---------------------------------------------------------------------------

    Moreover, the CBT overstated the loading capacity related to the 
contracts by including the capacity of three firms that would not meet 
the CBT's proposed $40 million minimum net worth requirement to qualify 
as shipping certificate issuers under the contracts. In doing so, the 
CBT also significantly understated the level of concentration of the 
proposed delivery system and ignored the exclusionary effect of its $40 
million net worth requirement.
    The CBT, in its initial submission, also provided inflated data on 
barge shipments. These data significantly overstated the amount of 
barge shipments by including shipments from part of the Illinois River 
outside of the CBT's proposed delivery area of the contracts. The CBT's 
data also included barge shipments by all shippers, including three 
shippers not meeting the eligibility requirements to be issuers of 
certificates under the contracts, and thus overstated the deliverable 
supplies available in that respect as well.

C. The CBT Proposal Fails to Provide Adequate Deliverable Supplies For 
Soybeans

1. Methodology
    The Commission staff compiled an extensive amount of data from 
which the Commission could estimate deliverable supplies. These data 
were assembled from information supplied by the United States 
Department of Agriculture (USDA), the U.S. Army Corps of Engineers, the 
Coast Guard, grain merchants, and the CBT.
    The CBT proposal provides for delivery from Chicago by rail, 
vessel, and barge and along the northern Illinois River by barge. The 
contracts are

[[Page 60840]]

essentially designed to reflect the export market price for corn and 
soybeans, since the vast majority of corn and soybeans loaded on 
vessels and barges at Chicago and on barges along the northern Illinois 
River is destined for export markets. While Chicago rail shipments play 
some role in the domestic market, that role has diminished so as to be 
very small.
    The potentially available gross deliverable stocks along the 
northern Illinois River delivery area for each delivery month were 
estimated by summing barge shipments from the CBT's proposed delivery 
points on the northern Illinois River for that month and all subsequent 
months of the same crop year to and including September, which was 
assumed to be the end of the crop year.20 Since the amount 
shipped during a given month and in each succeeding month of the crop 
year must have been in transit or in storage in some location near the 
river at the beginning of the month, this summing procedure provides an 
estimate of the gross corn and soybean supplies potentially available 
for delivery from the proposed delivery points during each delivery 
month.21
---------------------------------------------------------------------------

    \20\ Corn and soybeans are both harvested beginning in mid-
September or October, the start of a new crop year. All deliveries 
of corn and soybeans throughout the year subsequent to harvest are 
made from stored supplies. These supplies are consumed over time, 
reaching their lowest level during the summer, until the next 
harvest replenishes the supply.
    \21\ The amount of barge shipments for September was reduced by 
50% prior to its inclusion in the sum for earlier old crop months. 
This 50% reduction is an amount suggested by trade sources to 
reflect the likelihood that September barge shipments consisted, in 
part, of new crop supplies which were not available for shipment 
during the old crop year. The full amount of September shipments was 
included, however, in determining September supplies. This 
calculation has been adjusted in response to the CBT's suggestions. 
Generally, September new crop production occurs late in the month.
---------------------------------------------------------------------------

    Because these stocks reflect the quantity of soybeans and corn 
actually shipped via the northern Illinois River, they represent a 
reasonable and accurate historical estimate reflecting the quantity of 
these commodities that was potentially available to the proposed 
northern Illinois River delivery points at prevailing cash market 
supply and demand conditions. While other supplies of corn and soybeans 
are in the vicinity, they historically moved to other demand centers 
rather than moving into the flow of product via barge shipment down the 
northern Illinois River primarily destined for the export market. If 
the CBT contracts under the proposed delivery terms were to draw these 
supplies from their usual destinations in the domestic market to 
futures deliveries, an abnormal movement in interstate commerce would 
occur. Therefore, such other supplies should not be considered in 
determining the adequacy of potentially available deliverable supplies.
    For Chicago, potentially available gross deliverable supplies were 
estimated as the sum of stocks available at the beginning of each 
delivery month plus receipts of corn or soybeans during that month. 
Receipts were included because shipping certificates do not require the 
commodity to be in store at the delivery point. Thus, Chicago warehouse 
operators potentially could issue shipping certificates against stocks 
in store at the beginning of a delivery month and against actual and/or 
anticipated receipts of corn or soybeans as well.
    These estimates of potentially available gross deliverable supplies 
were adjusted to reflect the effect of the CBT's proposed minimum net 
worth requirement on the number of firms that would be eligible to make 
delivery and, for Chicago, the proposed limits on the number of 
shipping certificates that could be issued by those firms. The CBT 
proposal restricts eligibility of issuers of shipping certificates to 
firms meeting a $40 million minimum net worth requirement. This 
eligibility

[[Page 60841]]

requirement would eliminate barge shipments made by ineligible firms 
among those firms which currently operate loading facilities along the 
northern Illinois River delivery area and likely would reduce 
deliverable supplies originating from the proposed northern Illinois 
River delivery area by an average of about five percent. However, it is 
possible that some portion of the supplies that normally are shipped by 
the firms not meeting that eligibility requirement--although certainly 
not all those supplies--would become available for futures delivery by 
diversion of the supplies to the four eligible firms. Accordingly, the 
Commission calculated two separate estimates of potentially available 
gross deliverable supplies: one excluding shipments by firms not 
eligible to issue shipping certificates under the CBT's proposal and 
the second including such ineligible firms' shipments.
    Another adjustment was made to reflect current capacity restraints. 
Because of the recent closure of four of the six elevators in Chicago, 
prior years' data for Chicago were adjusted to reflect current maximum 
capacity levels in that area.22
---------------------------------------------------------------------------

    \22\ The procedure to determine the amount of this adjustment 
was to sum the observed stocks and receipts of corn and soybeans in 
Chicago plus stocks of wheat. Whenever such a sum would have 
exceeded current total registered storage capacity, the estimated 
supplies of corn and soybeans were reduced proportionately by share 
of stocks. The result clearly overstates potential gross deliverable 
supplies of corn and soybeans in Chicago because it assumes that the 
facilities eligible for delivery of such commodities would be 
operating at full capacity, while Chicago facilities have 
historically operated at a fraction of capacity and continue to do 
so, as shown on a chart below. The numbers in the final Order are 
adjusted from those in the proposed order to reflect corrections in 
computation and in the CBT data on stocks of grain and soybeans in 
Chicago.
---------------------------------------------------------------------------

    Through this analysis, the Commission arrived at potentially 
available gross deliverable supplies, as discussed below. As is also 
described in more detail below, those gross amounts do not constitute a 
basis for determining whether deliverable supplies under the CBT 
proposal are adequate to meet the requirements of section 5a(a)(10). 
Instead, those amounts are only the beginning point for an analysis of 
deliverable supplies and must be reduced because of various additional 
factors limiting the available deliverable supplies, as discussed 
below.
2. Potentially Available Gross Deliverable Soybean Supplies
    Delivery months under the CBT proposed soybean futures contract 
include July, August, and September, inter alia. These months are at 
the end of the crop year and therefore historically reflect the lowest 
available supplies. As shown in the following charts for soybean 
supplies attributable to the four firms which would be eligible to 
issue shipping certificates, potentially available gross deliverable 
supplies under the CBT proposal for July, August, and September do not 
meet an adequate level considered by the Commission to be required by 
section 5a(a)(10) of the Act. Specifically, for July, the gross 
deliverable supplies of soybeans were less than the 2,400-contract 
level in three of the 11 years covered by the analysis, while the 
4,000-contract level was not reached in eight of the 11 years. For 
August, gross deliverable soybean supplies fell below 2,400 contracts 
in four years, and the 4,000-contract level was not reached in any of 
the 11 years. Gross deliverable supplies in September were less than 
the 2,400-contract level in seven of the 11 years and did not reach the 
4,000-contract level on any occasion.23 As demonstrated in 
the following charts, Chicago supplies played a critically important 
role in almost all instances in which the 2,400-contract level was 
reached or exceeded.

    \23\ As shown in the charts for shipments by all firms, 
including those firms that would be ineligible to issue certificates 
under the CBT proposal, the proposal improved marginally in that 
gross deliverable supplies for all firms were less than 2,400 
contracts in six rather than seven years for September.

BILLING CODE 6351-01-P

[[Page 60842]]

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[[Page 60843]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.027



BILLING CODE 6351-01-C

[[Page 60844]]

3. Potentially Available Gross Deliverable Corn Supplies
    The CBT's proposed corn contract would include the contract months 
of July and September, inter alia.24 In the case of corn, 
the potentially available estimated gross deliverable supplies for July 
attributable to the four eligible firms reached or exceeded the 3,000 
and 4,000 contract levels in all years. However, gross deliverable 
supplies of corn for the four eligible firms in September fell below 
the 3,000-contract level in seven of the 11 years analyzed and were 
less than 4,000 contracts in nine years. The gross deliverable supply 
estimates for all existing firms differed only slightly from the 
results for the four eligible firms.
---------------------------------------------------------------------------

    \24\ Unlike the soybean futures contract, there is no August 
contract month listed for corn.

BILLING CODE 6351-01-P

[[Page 60845]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.028



[[Page 60846]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.029



BILLING CODE 6351-01-C

[[Page 60847]]

4. September New Crop Production
    Neither corn nor soybeans reached adequate levels of potentially 
available gross deliverable supplies for September. However, because 
September is a transition month between the old crop and the new crop, 
deliverable supplies estimates based upon barge shipments data for 
September may understate September potentially available gross 
deliverable supplies. The harvest of the new crops of corn and soybeans 
generally begins sometime in mid to late September, and thus, new crop 
production may be available for delivery on the September contracts. 
Accordingly, the Commission also calculated estimates of new crop 
production of corn and soybeans that may have become available during 
the month of September. Those estimates, however, are less reliable 
than the barge shipment data discussed above.
    The following table shows estimated September new crop production 
within 25 miles (trucking distance) of the proposed delivery points for 
corn and soybeans derived from U.S. Department of Agriculture data 
submitted to the Commission by the CBT.25 Some portion of 
this new crop production might have been available for delivery during 
September. However, the Commission has already assumed that half of the 
September northern Illinois River shipment data shown above constitutes 
new crop supplies, based on discussions with trade sources. 
Furthermore, a substantial portion of the new crop production 
historically has been destined for uses other than barge shipments, 
such as domestic processing.
---------------------------------------------------------------------------

    \25\ The table has been modified to reflect corrections to the 
CBT-supplied data noted by the CBT at the October 15, 1997, hearing.
---------------------------------------------------------------------------

    A significant amount of corn was produced during September and 
possibly might augment to some extent the potentially available gross 
deliverable supplies discussed above. September soybean production has 
generally been considerably smaller than September corn production. 
Moreover, September soybean production does not overcome the inadequate 
potentially available gross deliverable supplies of soybeans in July 
and August.
    The likelihood of price manipulation in September may be somewhat 
less than in July or August because it is a transitional month between 
old and new crop years. The end of the crop year generally is a period 
of low supplies and relatively high prices. However, the harvest of the 
new crop replenishes supplies and frequently leads to lower prices. 
Significant new crop supplies usually become available in areas 
tributary to the northern Illinois River by mid October. The incentive 
to manipulate prices of the September futures contracts by attempting 
to corner the remaining old crop supplies might be reduced by the 
potential losses that a manipulator might incur in reselling the 
shipping certificates or product obtained through September deliveries 
at lower prices after the arrival of new crop supplies.
    Nonetheless, it should be noted that a significant price distortion 
was experienced in connection with the expiration of the September 1997 
soybean futures contract. Under the CBT proposal, the use of shipping 
certificates rather than warehouse receipts to effect delivery might 
permit expanded deliveries of new crop production under the September 
contract. Rather than requiring movement of new crop supplies into a 
warehouse at a terminal market before delivery, as is necessary under 
current warehouse receipt delivery, the CBT proposal would allow the 
issuance of shipping certificates for locations closer to the 
production area and for up to 30 days of loading capacity and thus 
would give issuers more opportunity to deliver some new crop 
production. Issuers might issue some shipping certificates on the basis 
that new crop supplies which were not immediately in hand might be 
available by the time loading was required under the shipping 
certificates.
    The Commission considers the low level of potentially available 
gross deliverable supplies of corn, which is limited to September, to 
be of less regulatory concern than the low levels of such supplies of 
soybeans which extend throughout the three summer months. The shortage 
of corn supplies is apparently of brief duration, and the expectation 
of abundant supplies of new crop production of corn by October reduces 
the likelihood that the corn shortage in September would lead to the 
prohibited effects under section 5a(a)(10).

  Estimated Corn and Soybean Production Located Near Proposed Delivery  
                         Points During September                        
                      [5,000-Bushel Contract Units]                     
------------------------------------------------------------------------
                                                    Estimated September 
                                                       production *     
                    Crop year                    -----------------------
                                                     Corn      Soybeans 
------------------------------------------------------------------------
1986............................................      15,218       3,109
1987............................................      26,784       6,056
1988............................................      12,955       5,749
1989............................................      10,169       6,143
1990............................................       9,305       2,491
1991............................................      41,663       8,729
1992............................................       2,884       3,536
1993............................................       6,513       1,670
1994............................................      13,299      10,417
1995............................................      12,359       5,646
1996............................................       5,271      1,013 
------------------------------------------------------------------------
* The estimated production by September 30 of each year was calculated  
  by multiplying U.S. Department of Agriculture harvesting progress     
  estimates for the Illinois and Indiana crop reporting districts       
  adjacent to the revised delivery points by U.S. Department of         
  Agriculture production data for counties located within about 25 miles
  of the proposed delivery points.                                      

5. The CBT's Objections on Gross Deliverable Supplies
    At the October 15, 1997 hearing and in its October 22, 1997 letter 
of exceptions, the CBT raised various objections to the Commission's 
evaluation of potentially available gross deliverable supplies of 
soybeans. In doing so, the CBT failed to recognize that the estimate of 
such supplies is merely the starting point for the Commission's 
analysis of available deliverable supplies, which can be arrived at 
only after taking into consideration various factors reducing the 
availability of supplies, as is discussed below. Furthermore, the CBT 
focused solely on the 2,400 contract measure for soybeans and virtually 
ignores the other important measure of 4,000 contracts.
    The CBT objected to the Commission's consideration of 1987 and 1993 
river shipment data because floods and lock closings occurred during 
those years. For example, the CBT objected that the gross deliverable 
supplies for 1993 obtained from barge shipment data should be augmented 
because in that year the upper Midwest experienced severe floods. CBT 
October 22, 1997 exceptions at p. 38, tr. at pp. 22-28. The CBT argued 
that the Commission should assume that the CBT would have responded by 
declaring a market emergency and requiring use of alternate delivery 
areas with additional deliverable supplies. However, U.S. Army Corps of 
Engineer data show that barge shipments continued to move down the 
Illinois River throughout this period despite the flooding and the area

[[Page 60848]]

from which the CBT argued it would have required deliveries may have 
experienced even greater flooding than the regular delivery area. 
Whether the CBT would have taken any action under such circumstances 
and, if so, what action it would have taken are in the realm of pure 
speculation. Similarly, the CBT argued that the deliverable supplies 
for 1987 should be augmented because certain locks were closed, which 
arguably would have triggered the CBT's contingency plan.26 
While the CBT's argument does underscore the need for an effective 
contingency plan because of foreseeable periods of river traffic 
obstruction, it does not justify ignoring historical data concerning 
gross deliverable supplies.
---------------------------------------------------------------------------

    \26\ In addition to being speculative, the CBT's approach 
improperly over-counts gross deliverable supplies during this 
period. The CBT apparently uses as a base amount the deliverable 
supplies shown by the Commission's analysis for those months and 
then adds to that base an additional amount based on shipments for 
those same months from areas eligible for delivery under the 
proposed contingency rule. However, the contingency plan would be 
triggered only during such period as shipment on the northern 
Illinois River was obstructed. Hence, even if the Commission were to 
accept the CBT's assumptions, the shipments shown in the 
Commission's analysis should not be included in the CBT's 
calculation.
---------------------------------------------------------------------------

    The CBT also sought to bolster the potentially available gross 
deliverable supplies for the August and September soybean futures 
contracts by relying on new crop production. See, tr. at pp. 17-22 and 
October 22, 1997 exceptions at pp. 29-30. As noted above, the 
Commission has considered the availability of some new crop production 
for the September futures contract. Although the ability to issue 
shipping certificates would give issuers some flexibility to effect 
deliveries from potential new crop production during September, new 
crop production would not realistically be available for delivery on 
the August futures contract, and the CBT has grossly overstated the 
amount of new crop production available for delivery on the September 
futures contract.
    It is not realistic to assume that issuers would issue certificates 
representing their full 30-day capacity and would choose to load out at 
least one barge per day over a six-week period. Shipments on the 
northern Illinois River in the August-September period have never 
approached such a large volume during the eleven years studied. 
Shipments from any one shipping station on the northern Illinois River 
at a rate as high as one barge per day per month have been observed 
only once in July and once in September and only three times in August 
during the entire eleven year period analyzed. Moreover, shipments from 
a shipping station at a daily rate of one barge for one month would 
have exceeded by five times the monthly average number of barges of 
soybeans shipped from individual shipping stations during July, August, 
and September over that period.
    Furthermore, it is extremely unlikely that an issuer would 
undertake the risk involved in the CBT's hypothetical scenario. An 
issuer would have to have a very large amount of old crop supplies 
available to deliver until significant supplies from the harvest became 
available, and the timing of the harvest is extremely variable and 
difficult to predict.
6. Necessary Reductions From Gross Deliverable Supplies
    Additional factors must be considered which necessarily reduce the 
above estimates of potentially available gross deliverable supplies. 
These factors include: (a) the CBT proposal's reliance on Chicago as a 
source of deliverable supplies; (b) the CBT's proposed three-day barge 
queuing and priority load-out requirements; and (c) prior commercial 
commitments of available supplies.
    In addition, further reductions must be made from gross deliverable 
supplies resulting from the CBT proposal's lack of locational price 
differentials and foreseeable disruptions in barge transportation on 
the Illinois River. As discussed above, the CBT's proposed $40 million 
minimum net worth requirement for issuers of shipping certificates also 
reduces gross deliverable supplies. These additional factors are 
analyzed separately in later sections of this Order.
    a. Reliance on Chicago. To the extent that potentially available 
gross deliverable supplies of soybeans in some years have been at or 
above the 2,400 and 4,000 contract levels, they have generally depended 
on Chicago supplies to do so. For July, under the CBT proposal gross 
deliverable supplies of soybeans originating solely from the northern 
Illinois River delivery area reached or exceeded the 2,400-contract 
level in only three of the 11 years. In August and September, under the 
CBT proposal gross deliverable supplies of soybeans originating from 
the northern Illinois River alone did not exceed the 2,400-contract 
level on any occasion. The 4,000-contract level was not exceeded by 
northern Illinois River gross deliverable supplies of soybeans under 
the CBT proposal in any year in the July, August, or September delivery 
months. Thus, to the very limited extent that potentially available 
gross deliverable supplies in the past would have reached an adequate 
level before consideration of necessary reductions, they would have 
done so because of supplies in Chicago.
    Cash market activity in Chicago is likely to continue its 
historical decline. While the estimation procedure for gross 
deliverable supplies used in this analysis tried to correct for the 
precipitous decline of the cash market in Chicago by using 100 percent 
of the current capacity as a constraint on past supplies, that method 
certainly overstates the actual deliverable supplies that may originate 
from Chicago in the future. Chicago elevators for many years have held 
stocks well below their maximum capacity levels, particularly in the 
critical summer months. The following chart demonstrates that 
significant underutilization of the remaining capacity in Chicago is 
continuing despite the dramatic contraction in available capacity and 
is highly likely to continue to do so in the future. Indeed, stocks in 
Chicago in the recent past have been at less than half of capacity. 
Thus, Chicago supplies will most likely be reduced significantly in the 
future and would not be available in significant quantities under the 
CBT proposal.27
---------------------------------------------------------------------------

    \27\ Moreover, there is no reason to believe, as the CBT argued 
in its October 22, 1997 exceptions at p. 39, that any significant 
amount, much less 20%, of the soybeans that previously flowed to 
Chicago would be redirected to flow down the northern Illinois River 
on barges to the Gulf. There has not been a notable increase in 
barge shipments from the shipping stations on the northern Illinois 
River closest to Chicago during the recent closures of elevators in 
Chicago, demonstrating that such a redirection has probably not 
occurred and is not likely in the future.

BILLING CODE 6351-01-P

[[Page 60849]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.030



BILLING CODE 6351-01-C

[[Page 60850]]

    b. The Three-Day Barge Queuing and Priority Load-Out Requirements. 
The CBT proposal includes a provision requiring a shipping certificate 
issuer to begin loading onto the certificate holder's barges within 
three business days after it receives loading instructions and the 
holder's barges are at the delivery facility ready to load. Most 
significantly, the issuer would be required to give preference to 
shipping certificate holders relative to any other customer and 
proprietary business for eight hours of load-out capacity per day. This 
requirement is contrary to the current contracts' delivery terms and to 
cash market practice, where customers are generally accommodated on a 
first-come, first-served basis. Concerns have been expressed by some 
commenters that, by requiring issuers to cease loading corn and 
soybeans in barges for their cash market business in order to meet the 
requirements of the shipping certificates and by requiring that only 
limited advance notice would have to be given to issuers, the CBT 
proposal would discourage potential issuers from issuing shipping 
certificates for futures delivery.
    The CBT, on the other hand, has argued that the impact of the 
proposed preferential load-out requirement for futures deliveries on an 
issuer's willingness to issue shipping certificates would be limited 
because the rules would require the issuer to load out only eight hours 
per day, leaving the remaining 16 hours of each day to load other 
barges. CBT's position assumes, without providing supporting data, that 
issuers would be able and willing to obtain labor for a 24-hour day, to 
procure additional transportation and supplies quickly, and to move the 
supplies to the waiting barges efficiently.
    While the effect of the proposed loading requirements on the 
willingness of issuers to issue shipping certificates for futures 
delivery is difficult to measure in advance, it represents a 
significant departure from cash market practice and most likely would 
reduce the amount of gross deliverable supplies.
    c. Prior Commercial Commitments of Stocks for Shipment. An 
additional factor which would reduce the above estimates of gross 
deliverable supplies is prior commitment of stocks for shipment. 
Determining deliverable supplies on the basis of shipment information 
does not make necessary deductions for that amount of the shipments 
which would be unavailable for futures delivery because they were 
otherwise committed and because no substitution was possible at an 
equivalent market price. While a number of commenters indicated that 
much of the corn and soybeans shipped on the northern Illinois River is 
not irrevocably committed at the time of the shipment's origination, 
the ability of firms economically to obtain supplies to meet existing 
commitments for shipment from alternative sources would certainly be 
limited at times. This situation would be more likely to occur in those 
periods when supplies are limited, such as during the critical summer 
months of July, August, and September. The commitment of supplies of 
corn and soybeans under forward contracts or other marketing 
arrangements would at times make them unavailable to the futures 
delivery process until futures prices were significantly distorted 
relative to cash prices, a result that section 5a(a)(10) is intended to 
prevent. Thus, it is likely that the actual available deliverable 
supplies for the futures contracts would be significantly less than 
indicated by the above gross estimates.
7. Conclusion
    In summary, the proposed delivery provisions of the soybean 
contract clearly fail to meet the statutory requirement for adequate 
levels of deliverable supplies throughout the summer months of July, 
August, and September even before the above reductions (plus those 
discussed below) have been made, and the additional adjustments 
required by such factors would further reduce the available deliverable 
supplies. For these reasons, price distortions and manipulation, market 
congestion, and abnormal movements of soybeans in interstate commerce 
would be likely to occur. Additional delivery points to increase the 
available deliverable supplies of soybeans, as well as other 
adjustments to the CBT's proposal discussed below, are necessary to 
achieve the objectives of section 5a(a)(10).
    As to the CBT proposal for corn, gross deliverable supplies 
throughout the year appear to be adequate except for September. Gross 
deliverable supplies for September as estimated by the Commission may 
be further supplemented to some extent by new crop production in 
September, and the September corn contract would be somewhat less 
likely to be subject to manipulation than other months with similar low 
levels because of the expectation of abundant supplies of new crop 
production in the immediate future. The Commission's action in changing 
and supplementing the CBT's proposed corn contract to add locational 
differentials, to eliminate the $40 million minimum net worth 
eligibility requirement, and to broaden the contingency plan for river 
disruptions, discussed below, will have the effect of alleviating some 
limitations on deliverable supplies of corn under CBT's proposal. In 
light of those changes and supplements, the Commission does not find 
that the available deliverable supplies of corn under the revised CBT 
proposal are so inadequate under section 5a(a)(10) that additional 
delivery points are necessary. Actual trading experience will reveal 
whether the level of deliverable supplies meets the requirements of 
section 5a(a)(10). Accordingly, the Commission directs the CBT to 
report on the actual delivery and contract expiration experience on an 
annual basis for the first five years after contract expirations begin 
under the revised contract terms.

IV. The Lack of Locational Price Differentials Violates Section 
5a(a)(10)

    Section 5a(a)(10) requires that, where more than one delivery point 
or commodity grade is specified, a futures contract must specify 
quality and locational price differentials to the extent necessary to 
prevent price manipulation, market congestion, or the abnormal movement 
of the commodity in interstate commerce. Guideline No. 1 and the 
Commission's policy on price differentials are based on section 
5a(a)(10) requirements. As discussed above, Guideline No. 1 requires 
that futures contract terms and conditions provide for deliverable 
supplies that will not be conducive to price manipulation or distortion 
and that such supplies reasonably can be expected to be available to 
the short trader and saleable by the long trader at their market value 
in normal cash market channels. 17 CFR Part 5, Appendix A(a)(2)(i). In 
addition, the Commission's policy on price differentials requires that, 
where cash market locational or quality differentials are stable, the 
futures contract should reflect ``normal commercial price differences 
as represented by cash price differences * * *'' Powers Memorandum, 
supra note 1, at p.15. When cash market price differences are unstable 
or where the product flow in the cash market is not relevant to the 
futures delivery points, the Commission's policy requires that 
differentials must be set at levels which fall within the range of 
values that are commonly observed.
    The CBT's failure to specify locational price differentials 
violates section 5a(a)(10) as well as the requirements of Guideline No. 
1 and the Commission's

[[Page 60851]]

policy on locational price differentials. The cash market on the 
northern Illinois River clearly reflects a unidirectional flow of corn 
and soybeans and exhibits significant locational price differences at 
the proposed delivery points which have a stable relationship with one 
another. The failure of the CBT proposal to provide for locational 
price differentials reflecting the cash market not only would reduce 
available deliverable supplies on the contracts, but would result in 
price distortions and susceptibility to price manipulation, market 
congestion, and the abnormal movement of corn and soybeans.
    Although the CBT describes its delivery system as a simple single 
delivery area, in fact it is a multiple delivery point system without 
differentials. This multiple delivery point system is comprised of 
spatially-separated points along the northern Illinois River, which are 
affected by a unidirectional demand from the Gulf market across five 
different barge freight zones, including Chicago. Chicago may also be 
affected, at times, by a number of competing cash market demand pulls.
    The value of corn and soybeans loaded into barges generally is 
greater at barge-loading facilities located down river relative to the 
value of grain loaded in barges at upriver locations, including 
Chicago. As indicated above, the CBT proposal essentially would price 
corn and soybeans when they are loaded on barges along the northern 
Illinois River destined for the export market centered in New Orleans. 
The futures contracts would be priced FOB barge at the loading 
facilities.28 Currently, the cash market for such products 
prices them at the CIF New Orleans price, which is uniform and widely 
known.29 The cost of barge freight to New Orleans included 
in that price varies based on established barge freight costs that are 
higher at Chicago and lower as one descends the northern Illinois River 
and thus is closer to New Orleans. Those freight rates are transparent 
and widely reported publicly. While they vary to some extent, they are 
expressed as a varying percentage of the fixed amounts found in the 
Waterways Freight Bureau Tariff No. 7. By backing out the freight 
amounts from the CIF price, one can calculate the differences in the 
value of the commodities FOB various Illinois River points.
---------------------------------------------------------------------------

    \28\ The acronym FOB, free on board, means that, under the terms 
of the sale of a commodity, the price agreed between the buyer and 
seller includes the cost of loading the product into transportation 
equipment (barge, rail car, vessel, etc.) at a designated location.
    \29\ CIF New Orleans means that, under the terms of the sale, 
the price agreed upon between the buyer and the seller includes the 
freight and insurance to transport the products to New Orleans and 
to deliver them there. This market, which calls for the products to 
be shipped at the cost of the seller to export points in New 
Orleans, is very liquid, with corn and soybeans being actively 
traded throughout the year.
---------------------------------------------------------------------------

    During the critical summer months the price differential based on 
the freight rate between Chicago (the most northerly Illinois River 
delivery point) and Pekin (the most southerly Illinois River delivery 
point) has ranged in recent years between 4.1 and 5.3 cents per bushel 
of corn and between 4.4 and 5.7 cents per bushel of soybeans. These 
differences are very significant and are sufficient to distort prices, 
to limit deliverable supplies, and to divert supplies from one delivery 
point to another.30
---------------------------------------------------------------------------

    \30\ The CBT implicitly recognized these cash market value 
relationships and the importance of barge-freight differences in 
valuing the commodities in its proposed contingency plan to allow 
deliveries at alternative delivery locations during transportation 
disruptions on the Illinois River. As described below, that proposal 
provides that deliveries at alternative locations must be priced CIF 
New Orleans with the delivery taker reimbursing the issuer for the 
cost of freight to New Orleans from the original delivery location.
---------------------------------------------------------------------------

    Where as here, futures contracts provide for multiple delivery 
points and significant normal commercial price differences exist in the 
cash market between those locations, section 5a(a)(10) requires that 
the terms of the futures contracts include locational price 
differentials. The failure to set locational price differentials 
reflecting normal cash market price differences has the economic effect 
of excluding the disadvantaged delivery point from being used for 
delivery. Such an exclusion may result in abnormal movement of the 
commodity away from the disadvantaged delivery point and to the 
advantaged delivery point. In order for a disadvantaged delivery point 
to function, the futures price has to increase above the commodity's 
underlying cash market value at the disadvantaged delivery point to 
overcome this built-in penalty. This opens the door to price distortion 
and price manipulation in the amount of the ``differential penalty.'' 
Alternatively, market congestion at the advantaged delivery point may 
result. These are precisely the types of market abuse that section 
5a(a)(10) sought to avoid by requiring exchanges to ``permit delivery * 
* * at such * * * locational price differentials as will tend to 
prevent or diminish price manipulation, market congestion, or the 
abnormal movement of such commodity in interstate commerce.'' For these 
reasons, the Commission finds that the lack of locational price 
differentials violates section 5a(a)(10).
    The CBT argued that section 5a(a)(10) is not violated by its 
proposal's lack of differentials because ``locational differentials for 
corn and soybeans at par fall well within the expected values of cash 
market differentials between the delivery points.'' CBT June 16, 1997 
submission, at 40. However, this is not the appropriate standard 
because the relative value of these commodities among the northern 
Illinois River delivery points is constant, quite transparent and based 
on established barge freight differences, as discussed above. 
Furthermore, even if it were the appropriate standard, we find that a 
lack of price differentials is not commonly observed in the cash 
market, for the reasons discussed above.
    The CBT's argument erroneously relies on bid prices to farmers at 
various delivery points rather than prices FOB barge, the prices that 
the CBT's proposed contracts are designed to reflect. The CBT also 
relies on information that suggests that the cash market value of corn 
and soybeans loaded onto vessels and rail cars at Chicago may at times 
equal or exceed the value of corn or soybeans loaded onto barges at 
locations on the northern Illinois River delivery area. However, with 
the precipitous decline in the available deliverable supplies in 
Chicago, such occasional variances from the prices loaded on barges at 
Chicago and along the northern Illinois River play a small role in the 
cash market and should not be a significant factor in setting 
locational differentials under the CBT's proposal. The prices for 
barges loaded on the northern Illinois River at Chicago and at delivery 
points south of Chicago reflect the differences in freight costs on 
which the Commission bases it price differentials for those delivery 
points.

V. The Failure Adequately To Address Foreseeable Interruptions to 
Deliveries Violates Section 5a(a)(10)

    An additional concern regarding the operation of the CBT proposal 
applicable to both the corn and soybean contracts is its reliance 
chiefly upon a single mode of transportation to effect delivery--
Illinois River barge transportation. A large number of commenters 
questioned the reliability of barge transportation on the Illinois 
River from the standpoint of assuring that takers of futures delivery 
would be able to receive and to transport their grain promptly in the 
event of a disruption of barge transportation on the river due to 
weather or lock maintenance.

[[Page 60852]]

    There has been a history of repeated, significant interruptions in 
transportation along the northern Illinois River. In three of the last 
13 years, one or more of the locks on this portion of the river have 
been closed for repair by the U.S. Army Corps of Engineers for 60 or 
more consecutive days during the critical summer months, with the 
result that no barge traffic could pass through that point on the river 
on its way south to New Orleans.31 In addition, traffic on 
the Illinois River is frequently impacted by weather conditions, 
including wind, high water during the spring and summer, and icing 
during the winter. The Coast Guard, an agency of the U.S. Department of 
Transportation, is responsible for maintaining safe passage along the 
nation's waterways and, when conditions warrant, issues compulsory 
safety zones restricting transportation on certain segments of the 
river. Between January 1991 and June 1997 the Coast Guard issued 
compulsory safety zones on segments of the northern Illinois River on 
21 separate occasions. The delivery area on the northern Illinois River 
was affected by such a safety zone for substantial portions of the 
river south of the delivery area from early June through the middle of 
August in 1993.32
---------------------------------------------------------------------------

    \31\ Specifically, in 1984 the Lockport and Brandon Road locks 
were closed for 60 days in July, August, and September; in 1987 the 
Peoria lock was closed for 60 days in July, August, and September; 
and in 1995 the Lockport, Brandon Road, Dresden Island, and 
Marseilles locks each were closed for between 64 days and 77 days in 
July, August, and September. The CBT, in its October 22, 1997 
exceptions at p. 38, agrees that these disruptions have in the past 
(in 1987, for example) been severe and prolonged enough to curtail 
the ability to take delivery within the northern Illinois River 
delivery area. See also, tr. at 22-24.
    \32\ In addition to weather actions taken by the Coast Guard, 
the U.S. Army Corps of Engineers, which has operational control over 
river locks, may close a lock when it determines that icing 
conditions so require.
---------------------------------------------------------------------------

    The CBT proposal's heavy reliance on barge delivery would 
disadvantage delivery takers during those periods when barge traffic is 
negatively impacted by weather conditions or lock maintenance and 
repair. Prolonged obstruction of transportation on the river would 
increase the susceptibility of the futures contract to manipulation by 
issuers, who could issue large numbers of certificates during periods 
when those taking delivery would be unable to transport and to sell the 
product at an economic value in relation to the CIF New Orleans market.
    The Commission is of the view that it is not an appropriate use of 
exchange emergency authority to address such foreseeable disruptions to 
the operation of contract terms.33 In response to repeated 
requests by the Commission staff, the CBT, by submission dated August 
22, 1997, sought to cure this defect in its proposal by proposing a 
plan to be followed in the case of transportation disruptions. This 
proposed contingency plan provides that, in the event that either the 
Peoria or LaGrange lock on the Illinois River (the two most southerly 
locks without an auxiliary lock allowing river movement) is scheduled, 
with six-months prior notice, to be closed for a period of 45 days or 
more, then the delivery maker and taker may mutually agree to 
alternative terms or, failing such agreement, the deliverer is 
obligated to provide loaded barges to the taker at a point between the 
lowest closed lock and St. Louis or on the mid-Mississippi River 
between St. Louis and Dubuque, inclusive. The loaded barges would be 
valued CIF New Orleans, with the delivery taker responsible for paying 
to the delivery maker the transportation cost between the original 
shipping station and New Orleans. The reimbursement in transportation 
cost would be computed based upon 100 percent of the Waterways Freight 
Bureau Tariff No. 7 barge freight rate.
---------------------------------------------------------------------------

    \33\ The CBT proposed a separate rule, regulation 
1081.01(12)(G)(8), to address possible disruptions to shipping 
traffic within the delivery area. That proposed rule provides that, 
if it becomes impossible to load at a designated shipping station 
``because of an Act of God, fire, * * * an act of government, labor 
difficulties, or unavoidable mechanical breakdown, the shipper will 
arrange for water conveyance to be loaded at another regular 
shipping station * * *'' and will compensate the taker for resulting 
transportation costs, if any. It further provides, however, that if 
the impossibility of delivery exists at a majority of shipping 
stations within the delivery area, then delivery may be delayed. 
Although this proposed rule addresses conditions impeding delivery 
at one or some locations within the delivery area, it does not offer 
an acceptable solution to the contingency that all or most 
deliveries may be rendered impossible due to disruptions of river 
traffic south of the delivery area or at points affecting a majority 
of shipping stations within the delivery area. Because of the 
increased likelihood of price manipulation and market congestion 
arising from delayed delivery in such circumstances, a different and 
more effective contingency plan is required under section 5a(a)(10).
---------------------------------------------------------------------------

    This proposal falls short of achieving its apparent objective of 
addressing the susceptibility of the corn and soybean futures contracts 
to price manipulation, market congestion, or the abnormal movement of 
the commodity in interstate commerce resulting from disruptions to 
river traffic. First, the proposed rule only addresses sustained 
blockages due to lock closures south of the delivery area. However, 
similar problems could be caused by closure of one or a number of locks 
within the delivery area sufficient to disrupt traffic at a majority of 
shipping stations. Repairs are often made to more than one lock at a 
time, having the potential to increase the impact of the disruption 
within the delivery area from such projects. Thus, although the same 
foreseeable situation rendering the contracts vulnerable to price 
manipulation and market congestion exists when the disruption is within 
the delivery area as when it is south of the delivery area, the 
contingency plan fails to address that situation. Furthermore, 
obstructions and disruptions to river traffic other than lock 
closures--such as those caused by flooding--are foreseeable, would 
render the proposed contracts vulnerable to price manipulation and 
market congestion and should be addressed in the contingency plan.
    Secondly, when a sustained river traffic obstruction of less than 
45 days is announced, vulnerability to price manipulation and market 
congestion is foreseeable. This is also true when there has been less 
than the six-month advance notice which the CBT has proposed as a 
condition for triggering the contingency procedures. This vulnerability 
arises from the ability of shipping certificate issuers under the CBT 
proposal to issue certificates representing up to 30 days of their 
capacity. Thus, an announced river traffic obstruction of between 30 
and 45 days, for example, would enable eligible issuers to deliver into 
the market the maximum number of shipping certificates permitted, 
secure in the knowledge that the holders of those certificates could 
not accept delivery of the corn or soybeans while the river was 
obstructed and that, once the obstruction to river movement was ended, 
the issuer could only be required to deliver on the certificates over 
an entire-month period.
    In this connection, it should be noted that closures for lock 
repairs generally are scheduled for the summer months, the time when 
deliverable supplies are lowest and futures contracts are most 
susceptible to manipulation. (Indeed, a prolonged closure extending to 
the arrival of the new crop could allow futures deliverers to depress 
the price of an old crop futures month to levels reflecting new crop 
values at a time when the broader cash market was reflecting the usual 
old crop/new crop price differences based on supply and demand 
conditions.)
    In addition, the proposal to value alternate delivery locations 
using 100 percent of the Waterways Freight Bureau Tariff No. 7 rate is 
inconsistent with the locational price differential found to be 
applicable by the

[[Page 60853]]

Commission, as discussed below. The application of different 
differentials to the contracts, depending upon whether deliveries were 
subject to the contingency rule or to normal delivery procedures, could 
also contribute to price manipulation, market congestion, or the 
abnormal movement of commodities in interstate commerce.34
---------------------------------------------------------------------------

    \34\ Even if such differing differentials would not have such 
adverse results, it would be nonetheless ``necessary or appropriate 
* * * to insure fair dealing * * *'' in such futures contracts to 
apply the same differential in both instances under section 8a(7) of 
the Act.
---------------------------------------------------------------------------

VI. The Minimum Net Worth Eligibility Requirement for Issuers Violates 
Section 15

    In addition to the CBT's existing requirement of $2 million working 
capital required of firms regular for delivery under all its 
agricultural futures contracts, the CBT has proposed to require that 
firms eligible to issue shipping certificates under its soybean and 
corn contracts must also meet a minimum net worth standard of $40 
million. As discussed above, this requirement has the effect of 
reducing the amount of deliverable supplies by making ineligible for 
delivery certain existing loading facilities in the delivery areas 
owned by otherwise eligible firms. In addition, the requirement 
constitutes a barrier to entry of firms wishing to establish facilities 
and to become eligible to issue shipping certificates. The Commission 
has analyzed this requirement under the provisions of section 15 of the 
Act and finds that it constitutes an unjustifiable barrier to entry and 
leads to undue market concentration when considered in the context of 
the other requirements issuing firms must meet.
    Section 15 of the Act requires the Commission, when considering 
exchange rule proposals or amendments, to consider the public interest 
to be protected by the antitrust laws and to endeavor to take the least 
anticompetitive means of achieving the objectives of the 
Act.35 Therefore, the CBT proposal's possible 
anticompetitive effects must be evaluated against its potential 
effectiveness in achieving the policies and purposes of the Act.
---------------------------------------------------------------------------

    \35\ British American Commodity Options Corp. v. Bagley, [1975-
1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,245 at 
21,334 (S.D.N.Y. 1976) aff'd in part and rev'd in part on other 
grounds, 552 F. 2d. 282 (2d. Cir. 1977, cert. denied, 98 S. Ct. 427 
(1977).
---------------------------------------------------------------------------

    All existing futures contracts that provide for delivery using 
shipping certificate delivery specify certain financial requirements 
for certificate issuers. Consistent with this approach, the CBT 
proposal requires that issuers of certificates have through-loading 
facilities on the northern Illinois River, obtain an irrevocable letter 
of credit in an amount equal to the value of their delivery 
commitments, and maintain a minimum of two million dollars in working 
capital. These requirements are comparable to those imposed on shipping 
certificate issuers in other futures markets, including the CBT's own 
soybean meal, diammonium phosphate and anhydrous ammonia futures 
contracts, the New York Cotton Exchange's frozen concentrated orange 
juice futures contract and the Minneapolis Grain Exchange's white wheat 
futures contract. Moreover, issuers of a shipping certificate under the 
CBT proposal would also be limited to issuing certificates of a value 
no greater than 25 percent of the issuer's net worth. However, in 
addition to all these requirements, the CBT's proposed corn and soybean 
contracts would require shipping certificate issuers to have a minimum 
net worth of $40 million, a requirement that is not imposed in any 
other futures contract involving shipping certificates.
    The effect of the proposed $40 million minimum net worth 
requirement would be to limit issuance of shipping certificates to four 
large grain firms among the seven firms with shipping stations along 
the northern Illinois River delivery area. At least three firms which 
currently operate shipping stations on the designated segment of the 
northern Illinois River and have participated in the cash market by 
loading barges of corn and soybeans would be excluded from issuing 
shipping certificates for delivery on the CBT's proposed futures 
contracts. The Commission does not believe that the CBT has presented a 
reasonable justification for this requirement.
    Although the CBT's objective of protecting the financial integrity 
of the delivery process is reasonable, it is adequately achieved 
through the working capital and letter of credit requirements, as it 
has been for all other shipping certificate contracts, and through the 
limit on the value of certificates issued to 25 percent of an issuer's 
net worth. Forty million dollars is a high level of net worth that 
excludes three of the seven existing firms with loading facilities 
along the northern Illinois River and would act as a barrier to new 
entrants. The resulting extremely high level of concentration of the 
market restricted to four issuers is demonstrated by the fact that the 
Herfindahl-Hirschman Index (HHI) for the proposed market would be 
approximately 3,300.36 This increase in concentration as 
compared with the current delivery system--530 points in the HHI--would 
likely create or enhance market power or facilitate its exercise in an 
already highly concentrated market.
---------------------------------------------------------------------------

    \36\ The HHI is calculated by summing the squares of the 
individual market share of each of a market's participants. The 
3,300 figure is obtained using rated delivery capacity of the four 
firms currently meeting the proposed capital requirements to measure 
market share. Those firms and their respective market shares are 
Archer Daniels Midland Co. (49 percent), Continental Grain Company 
(22 percent), Cargill, Incorporated (19 percent), and Consolidated 
Grain and Barge (10 percent). Adding in the three firms (American 
Milling Company, Garvey International, and Sours Grain Company) 
which, absent the proposal's $40 million net worth requirement, also 
would be eligible to issue delivery certificates in the proposed 
markets would lower the HHI to 2,511, still a high level of 
concentration but substantially less than that under the CBT 
proposal (and indeed less than under the current delivery system).
---------------------------------------------------------------------------

    The CBT has failed to demonstrate a need for this particular 
requirement. Accordingly, the Commission finds that the $40 million 
minimum net worth requirement would be an unjustified barrier to entry 
into a highly concentrated market and its approval by the Commission 
would be contrary to section 15 of the Act.37
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    \37\ Concerns about concentration among those firms eligible to 
issue shipping certificates under the CBT's proposal are compounded 
by the sizeable ownership interests some of the firms have in barge 
fleets operating on the northern Illinois River and in Gulf export 
and processing facilities. Several commenters expressed concern that 
this vertical integration increases their opportunity for price 
manipulation.
---------------------------------------------------------------------------

VII. Proposed Changes and Supplements to Comply With Sections 5a(a)(10) 
and 15

    Under the provisions of section 5a(a)(10) of the Act, the 
Commission, having found that the response of the CBT to the 
notification relating to its corn and soybean futures contracts does 
not accomplish the statutory objectives of that section and ``after 
granting the contract market an opportunity to be heard, may change or 
supplement such rules and regulations of the contract market to achieve 
the above objectives * * *.'' The Commission has determined that the 
following changes and supplements to the CBT's proposal are necessary 
to achieve the objectives of section 5a(a)(10) and compliance with 
section 15 of the Act.
    The Commission has determined that deliverable supplies of soybeans 
under the CBT's proposal should be increased through the retention of 
those delivery points under the CBT's current contracts which the CBT 
has proposed to eliminate and that appropriate locational differentials 
should be

[[Page 60854]]

applied to such delivery points. In addition, the Commission has 
determined for both the corn and soybean contracts to revise the CBT's 
proposal to impose appropriate locational differentials for northern 
Illinois River delivery points. The Commission has determined to revise 
the proposed eligibility requirements for issuers of corn and soybean 
shipping certificates by eliminating the minimum net worth requirement 
of $40 million, which is an unnecessary barrier to entry. The 
Commission also has determined to revise the river traffic obstruction 
contingency rule by reducing the continuous period of obstruction from 
45 days as proposed to 15 days, by making it applicable whenever a 
majority of shipping stations within the northern Illinois River 
delivery area are affected by obstruction of river traffic, by making 
it applicable to all announced obstructions with no minimum 
notification period specified and by changing the differential from 100 
percent of the Waterways Freight Bureau Tariff No. 7 rate as proposed 
to 150 percent.

A. Delivery Points

    In determining how to remedy the inadequacy of deliverable supplies 
under the CBT soybean proposal, the Commission accepts the delivery 
points in the proposal itself as a starting point and believes that the 
most reasonable and feasible way to enhance deliverable supplies is by 
adding additional delivery points. To do so, the Commission has decided 
to retain the delivery points under which the CBT's existing contract 
has been operating for years. Thus, the Commission had determined to 
retain Toledo and St. Louis as delivery points for soybeans.
    In this regard, many commenters supported retaining the delivery 
point at Toledo, pointing out that Toledo's effectiveness as a delivery 
point is proven. They also maintained that Toledo brings with it the 
advantage of having transportation ties to both the export market via 
vessels on the Great Lakes and the expanding livestock feed demand in 
the southeastern U.S. via rail transportation. Although St. Louis has 
not been an important delivery point under the current contract, it 
likely would become one under the contract's revised shipping 
certificate format.38
---------------------------------------------------------------------------

    \38\ Some commenters advocated the addition of new and 
completely untried delivery points, such as locations in the 
interior of Iowa, or delivery points that have been used for other 
contracts, such as Minneapolis, Minnesota. Although those 
suggestions may have merit, the Commission has decided that the 
experience with the current delivery points is entitled to 
significant weight.
---------------------------------------------------------------------------

    These two delivery points have the strong advantage of having been 
chosen by the CBT as appropriate delivery points for its soybean 
contract and having been used as delivery points for the contract for a 
number of years. Toledo has been a delivery point on the CBT soybean 
contract since 1979; St. Louis has been a delivery point since 1993. 
The resulting experience and familiarity with these delivery points of 
the CBT, its members and commercial users of the soybean contract are 
strong indicators that the delivery points are feasible, workable and 
acceptable.39
---------------------------------------------------------------------------

    \39\ The CBT argues that the Commission should not determine to 
order the CBT to retain Toledo and St. Louis as delivery points 
because their retention would permit multiple delivery locations on 
the soybean futures contracts and because selection of delivery 
points is the responsibility of the contract market alone. However, 
the current contract has included Toledo and St. Louis as delivery 
points for many years with no apparent ill effects. Moreover, 
section 5a(a)(10) directs the Commission to act when the contract 
market's proposed contract terms fail to accomplish the objectives 
of that section of the Act, and additional delivery points are 
necessary to assure adequate deliverable supplies under section 
5a(a)(10) in this instance. By beginning its analysis with the CBT's 
proposed delivery specifications and next considering delivery 
points already chosen and used by the exchange as existing delivery 
points, the Commission has sought to achieve the most conservative 
means of reaching the required levels of deliverable supplies. Of 
course, the CBT continues to be free to indicate by proposed rule or 
petition that its business preference for delivery locations is 
otherwise, and the Commission would consider such a new proposal 
under the standards for review provided under the Act.
---------------------------------------------------------------------------

    The retention of Toledo and St. Louis as delivery points provides a 
substantial increase in the available deliverable supplies of soybeans 
and in the number of potential shipping certificate issuers on the 
contract. When Toledo and St. Louis are included as delivery points on 
the soybean futures contract, the number of entities eligible as 
issuers increases by three, significantly reducing the degree of 
concentration among potential shipping certificate issuers. The 
following chart shows the increases in gross deliverable supplies of 
soybeans which result from the retention of Toledo and St. Louis as 
delivery points and from the elimination of the $40 million minimum net 
worth requirement for eligibility as shipping certificate issuers, as 
discussed in section D, below. Pursuant to these changes ordered by the 
Commission, potentially available gross deliverable supplies of 
soybeans are at or above the 2,400-contract level in both July and 
August during each of the past 11 years and in September during all but 
one of the 11 years. Indeed, the gross deliverable supplies are also at 
or above the 4,000-contract level for 25 of the 33 months examined.

BILLING CODE 6351-01-P

[[Page 60855]]

[GRAPHIC] [TIFF OMITTED] TN13NO97.031



BILLING CODE 6351-01-C

[[Page 60856]]

    Accordingly, the retention of Toledo and St. Louis as delivery 
points is appropriate to provide adequate levels of gross deliverable 
supplies of soybeans for the July and August futures contracts. 
Although the retention of Toledo and St. Louis does not yield gross 
deliverable supplies which meet the 2,400-contract level in one of the 
last 11 years in September, September is a transition month between the 
old and new crop year, as discussed above. New crop production is in 
the offing. Thus, even if September gross deliverable supplies might on 
rare occasion fall below the 2,400-contract level, the incentive to 
manipulate prices based on a shortfall of old crop supplies is reduced 
because of the likelihood of rapidly falling prices as significant 
amounts of new crop supplies become available in the near future. In 
light of the reduced threat of price manipulation due to the imminence 
of new crop production, the Commission is not ordering that additional 
delivery points be added to the contract beyond retention of Toledo and 
St. Louis. If September deliverable supplies of soybeans appear to be 
inadequate once trading under the revised soybean contract begins, the 
Commission would take appropriate steps to provide for additional 
delivery locations.40
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    \40\ Should actual trading experience reveal that September 
supplies must be supplemented, one means of accomplishing that 
objective would be to expand the delivery area to include a greater 
segment of the northern Illinois River. With the specification of 
appropriate locational differentials, such a change could probably 
be made at a later time with little disruption to the contract.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that retention of Toledo and St. 
Louis is appropriate to provide an adequate level of available 
deliverable supplies as required by section 5a(a)(10).

B. Differentials

    Section 5a(a)(10) requires that, where more than one delivery point 
is specified in a futures contract, the contract terms must provide for 
locational differentials to the extent necessary to prevent price 
manipulation, market congestion, or the abnormal movement of the 
commodity in interstate commerce. As discussed above, in light of the 
significant locational price differentials in the cash market among the 
proposed delivery locations, the CBT's par delivery proposal for all 
proposed corn and soybean delivery locations would reduce the level of 
economically available deliverable supplies and would increase the 
susceptibility of the contracts to the prohibited effects under section 
5a(a)(10). Accordingly, to meet the objectives of section 5a(a)(10), 
locational differentials must be set for the delivery locations on the 
corn and soybean contracts.
    In setting those differentials, the Commission has been guided by 
commonly observed cash market price differences among the delivery 
points. The cash market differences in the prices of corn and soybeans 
for delivery points on the northern Illinois River are based primarily 
upon the cost of barge freight--the price of the product increases as 
one goes down the river and the cost of freight to New Orleans 
decreases. These differences in freight prices are transparent, readily 
available, and commonly accepted as the best measure of cash price 
values. An analysis of barge freight rate data indicates that 150 
percent of the Waterways Freight Bureau Rate Tariff No. 7 rate provides 
an appropriate basis for the differential. The difference between that 
rate as applicable to the delivery location and that rate as applicable 
to Chicago, Illinois, constitutes an appropriate differential 
reflecting cash market price differences.
    Barge freight rate data for the years 1990 through 1996 indicate 
that 150 percent of tariff is well within the range of commonly 
observed freight rates and closely approximates the average percent of 
tariff quoted by barge companies for Illinois River shipment during 
this period. These data also indicate that 150 percent of tariff 
approximates the average percent of tariff quoted for July, August, and 
September, the months when deliverable supply concerns and the need to 
maximize available deliverable supplies are the greatest. A majority of 
those commenting on the issue agreed that it was appropriate to base 
price differentials on barge freight cost differences, and several of 
the commenters that suggested a fixed rate recommended 150 percent of 
tariff.
    St. Louis is being retained as a delivery point for soybeans. The 
relative price of soybeans in the cash market among the various 
delivery points on the northern Illinois River and St. Louis is 
consistently determined based on the difference in freight costs to New 
Orleans, and therefore the Commission has decided to base the 
differential for St. Louis on 150 percent of the freight tariff as 
well. Most commenters agreed that this approach is the appropriate 
measure of such cash market price differences.
    The differential applicable to Toledo, which is also retained as a 
delivery point for soybeans, cannot be set based on the differentials 
relating to barge freight since Toledo is not located on the Illinois 
River and does not tend to deliver soybeans CIF New Orleans. The 
Commission's policy on locational differentials provides that such 
differentials must fall within the range of commonly observed cash 
market price differences. Available data indicate that cash price 
differentials between Chicago and Toledo commonly range from Chicago's 
being at a premium to its being at a discount to Toledo. Therefore, 
establishing Toledo deliveries at par with Chicago is well within the 
range of commonly observed cash market price differences and provides 
an adequate approximation of the cash market price relationship between 
the two delivery points. Most commenters expressing an opinion on this 
issue agreed that soybeans should be deliverable in Toledo at par with 
Chicago.
    Accordingly, the Commission has determined that for soybeans 
Chicago and Toledo should be at contract price with all other delivery 
locations at a premium over contract price of 150 percent of the 
difference between the Waterways Freight Bureau Tariff No. 7 rate 
applicable to that location and the rate applicable to Chicago, 
Illinois. For corn, Chicago should be at contract price with all other 
delivery locations at a premium over contract price of 150 percent of 
the difference between the Waterways Freight Bureau Tariff No. 7 rate 
applicable to that location and the rate applicable to Chicago, 
Illinois.

C. Disruptions to River Traffic

    The CBT proposal's heavy reliance on a single mode of 
transportation to effect delivery renders the contract susceptible to 
significant disruption of the delivery process, increasing the 
possibility of price manipulation, market congestion, or the abnormal 
movement of corn and soybeans in interstate commerce. Although the CBT 
submitted a contingency plan for alternate delivery procedures to 
address disruptions to river traffic, that plan only addressed long-
term disruption to river traffic resulting from closure of locks south 
of the delivery area announced six months in advance. As the Commission 
discussed above, however, the threat of manipulation of prices arises 
from the possible inability of long position holders to take delivery 
from all, or a significant number, of shipping stations due to the 
closures of a lock or locks or other river traffic obstructions located 
either within or south of the delivery area. The longer the period of 
the delay before alternate delivery procedures can be invoked, the 
greater the potential for manipulation. Moreover, this threat also 
exists when an obstruction to river

[[Page 60857]]

traffic has occurred with less than six-months notice. Accordingly, 
section 5a(a)(10) of the Act requires that this threat be diminished by 
reducing the period during which delivery may be delayed by eliminating 
the six-month notice requirement and by applying the contingency 
delivery provision to all obstructions to movement on the river arising 
either inside or outside of the delivery area.
    In determining the length of an announced obstruction which should 
give rise to a contingency plan, the Commission analyzed information on 
past lock closures by the U.S. Army Corps of Engineers and on the 
issuance of river advisories or safety zones by the Coast Guard. During 
the last 17 years for which this information could be ascertained, it 
appears that there have been no unplanned and unannounced river 
obstructions of greater than two weeks duration. Accordingly, 
obstructions lasting at least 15 days after they are announced are 
appropriately addressed by application of the contingency plan.
    In addition, as discussed above, the application of different 
differentials to the futures contracts depending upon whether the 
delivery is subject to the contingency rule might also contribute to 
price manipulation or market congestion. Since the Commission has 
determined that a differential based on 150 percent of the Waterways 
Freight Bureau Tariff No. 7 rate should be applied to the corn and 
soybean futures contracts, the Commission believes that the provision 
in the contingency plan should be conformed to that differential, which 
will be applicable to all deliveries made on the contracts at non-par 
locations.
    Accordingly, the Commission under section 5a(a)(10) of the Act 
changes and supplements the provisions of this part of the CBT proposal 
by reducing the continuous period of river traffic obstruction from 45 
days as proposed to 15 days, by making the rule applicable to any 
obstruction which affects shipments from a majority of shipping 
stations within the northern Illinois River delivery area, by making 
the rule applicable to all announced obstructions with no minimum 
notification period specified and by changing the differential from 100 
percent of the Waterways Freight Bureau Tariff No. 7 rate as proposed 
to 150 percent.

D. Net Worth

    The $40 million minimum net worth requirement for eligibility of 
shipping certificate issuers restricts deliverable supplies of corn and 
soybeans by eliminating several firms and potentially barring new 
entrants. As the Commission found above, although the CBT's objective 
of protecting the financial integrity of the delivery process is 
reasonable, it would be adequately achieved through the CBT's proposed 
requirements on working capital, letters of credit, and the ceiling on 
issuance of shipping certificates to 25 percent of net worth. Contrary 
to the policies underlying the federal antitrust laws, the $40 million 
minimum net worth requirement would operate as a significant bar to 
entry for entities that would be eligible in all other respects, and 
the resulting market concentration would be very high. The CBT has 
failed to demonstrate a regulatory need for the requirement. 
Accordingly, the Commission eliminates the requirement under sections 
5a(a)(10) and 15 of the Act.

E. 1999 Contract Months

    The Commission's section 5a(a)(10) notification advised the CBT 
that the terms of its corn and soybean futures contracts did not meet 
the objectives of that provision of the Act. In light of that 
determination, the Commission advised the CBT that ``the CBT should 
refrain from listing additional months of trading in those contracts 
during the pendency of these proceedings.'' 61 FR at 67999. 
Nevertheless, by letter dated April 24, 1997, to the Chairperson of the 
Commission, the CBT advised the Commission that it had determined to 
list or to relist for trading the July 1999 and November 1999 soybean 
contracts and the July 1999 and December 1999 corn contracts, 
respectively, prior to Commission review and approval of the proposed 
changes to the delivery specifications.41
---------------------------------------------------------------------------

    \41\ In doing so, the CBT indicated that it would:
    list the aforementioned contracts with a special indicator * * * 
denot[ing] that the Exchange's Board of Directors and Membership 
have approved the terms of the listed contracts; however, the terms 
are subject to CFTC approval.
---------------------------------------------------------------------------

    By letter dated May 2, 1997, the Commission responded that it 
``will consider whether to approve the listing of these contract months 
as part of its ongoing proceeding pursuant to section 5a(a)(10) of the 
Act * * *.'' The Commission found that the ``listing of these trading 
months is not consistent with Commission rule 1.41(l) and that * * * 
their listing for trading by the CBT is not legally authorized at the 
present time.'' On September 15, 1997, the Commission issued its 
proposed Order which, in part, proposed to disapprove the application 
of the CBT's proposed delivery terms to the July 1999 and November 1999 
soybean contracts and the July 1999 and December 1999 corn contracts. 
Four days later, the CBT notified its members of its intent to list for 
trading the January 1999 soybean futures contract and the December 1999 
corn futures contract under the same proposed terms as the Commission 
had proposed to disapprove. The Commission then notified the CBT that 
it proposed to disapprove the listing for trading of these two contract 
months and to disapprove, to change and to supplement the terms 
proposed by the CBT for these two trading months on the same basis and 
for the same reasons as it previously determined in its proposed order 
to disapprove, to change and to supplement the terms of the July 1999 
and November 1999 soybean contracts and the July 1999 and December 1999 
corn contracts. 62 FR 51087 (Sept. 30, 1997).
    A number of commenters on the proposed order requested that the 
Commission authorize the listing of these trading months. They 
suggested that having these trading months available to them without 
delay or interruption was important for their ability to use the 
markets for hedging purposes. Other commenters suggested that 
authorizing the trading of these contract months under the current 
contract terms rather than the CBT's proposed contract terms would 
provide the CBT with a period of time in which to propose alternative 
amendments to the delivery specifications of the corn and soybean 
futures contracts terms. The Commission, in response to these comments, 
hereby authorizes the listing of the January, July and November 1999 
soybean futures contract and the March, July and December 1999 corn 
futures contracts under their current terms, while disapproving the 
application of the terms contained in the CBT's proposal to these 
contract months.42 The

[[Page 60858]]

Commission also authorizes the listing of other 1999 corn and soybean 
futures contracts under their current terms. However, the CBT may 
propose to list the 1999 corn and soybean contracts incorporating the 
changes and supplements contained in this Order, and the Commission 
would approve such listing.
---------------------------------------------------------------------------

    \42\ The CBT in the October 15, 1997, hearing and in its October 
22, 1997 letter of exceptions argued that these trading months were 
approved for listing subject to previously approved listing 
procedures. The Commission rejects these arguments. The four 
contract months cited in the proposed Order were listed initially 
(December and July 1999 corn futures contracts)--or relisted after 
having been previously delisted (July and November 1999 soybean 
futures contracts)--at a time and in a manner other than specified 
in a previously approved rule, thus requiring the prior approval of 
the Commission, which was never granted. Moreover, all of the 
futures contract months at issue, including the January 1999 soybean 
futures contract and the March 1999 corn futures, were not eligible 
for automatic listing procedures. A condition in such automatic 
listing procedures is that the contract terms or their listing not 
violate legal requirements. See, e.g., 1.41(l). The Commission's 
finding in the December section 5a(a)(10) notification that the corn 
and soybean futures contracts are not in compliance with section 
5a(a)(10) of the Act rendered further automatic listings 
unavailable, as did the Commission's explicit direction to the CBT 
to refrain from any such further listings.
---------------------------------------------------------------------------

    In approving the 1999 contract months for trading under their 
current terms, the Commission is responding to the views of numerous 
agricultural interests that there is a need for certainty and clarity 
about the legality and terms of these contracts and for their immediate 
availability for trading for hedging purposes. It also responds to 
arguments of the CBT urging that the Commission allow listing of the 
1999 contract months pursuant to the current contract terms in the 
event that the Commission disapproves the CBT's proposal, as it has 
done in this Order. The Commission's action in this regard obviates the 
need to address a difficult legal issue of the interpretation of 
section 5a(a)(10) as to contracts which have been illegally listed by 
an exchange but have nonetheless been trading. Finally, the 
Commission's action permits all 1999 contract months to trade on 
identical terms and establishes a clear point at which the new terms 
ordered by the Commission will be applicable.
    For the reasons discussed herein, the Commission in this Order is 
changing and supplementing the amendments to the CBT corn and soybean 
futures contracts which the CBT has proposed and is directing that they 
be made effective for all contract months, whenever listed for trading, 
beginning with and subsequent to the January 2000 soybean futures 
contract and the March 2000 corn futures contract. In so ordering, the 
Commission finds that the amendments proposed by the CBT to its corn 
and soybean futures contract are not consistent with section 5a(a)(10) 
and that their approval by the Commission would violate section 15 of 
the Act. Accordingly, the Commission under sections 5a(a)(10), 
5a(a)(12), 8a(7), and 15 of the Act is disapproving application of 
those proposed terms to the CBT's corn and soybean contracts, including 
the 1999 contracts.

    Dated: November 7, 1997.

    By the Commission (Chairperson Born, Commissioner Dial, 
Commissioner Spears; Commissioners Tull and Holum Concurring in Part 
and Dissenting in Part with Opinion)
Edward W. Colbert,
Deputy Secretary of the Commission.

    Order of the Commodity Futures Trading Commission to Change and 
to Supplement Proposed Rules of the Board of Trade of the City of 
Chicago Submitted for Commission Approval in Response to a Section 
5a(a)(10) Notice Relating to Futures Contracts in Corn and Soybeans, 
Opinion of Commissioner John E. Tull, Jr., Concurring in Part and 
Dissenting in Part, Joined by Commissioner Barbara Pedersen Holum.
    I concur in that part of the order which provides that the CBOT 
may continue to trade the 1999 contracts under the existing contract 
terms. I also concur in that part of the order which provides that 
the CBOT may submit alternative proposed delivery specifications for 
those two contracts.
    I strongly disagree with the majority's decision to issue this 
order which changes and supplements the CBOT's proposed amendments 
to the delivery specifications to their corn and soybean contracts.
    As I noted in my earlier dissent, Section 5a(a)(10) of the 
Commodity Exchange Act requires us to determine whether the delivery 
terms proposed by the CBOT ``will tend to prevent or diminish price 
manipulation, market congestion, or the abnormal movement of such 
commodity in interstate commerce.'' We must also ``take into 
consideration the public interest to be protected by the antitrust 
laws in requiring or approving any rule of a contract market.'' 
Based on my review of the data available at the time of the 
Commission's proposed order and as supplemented by the CBOT on 
October 15, 1997, I remain convinced that the proposed terms for 
both contracts as submitted by the CBOT meet these statutory 
requirements.
    In conclusion, both of these contracts will have a tremendous 
effect on the world marketplace. For both markets, the price 
discovery process and the published prices determine the price, 
through basis, to every soybean and corn farmer in the United 
States; actually every oil seed and corn farmer and end user 
throughout the world. While it is my serious hope that the contracts 
designed by the Commission will work, I believe we could have had 
better contracts and I sincerely hope that the Exchange will take 
advantage of the opportunity to resubmit proposed terms for both 
contracts and that the majority will approve such resubmission if it 
satisfies the requirements of the Act.

Attachment 1

    For the reasons explained in the ``Order of the Commodity 
Futures Trading Commission to Change and to Supplement Proposed 
Rules of the Board of Trade of the City of Chicago Submitted For 
Commission Approval in Response to a Section 5a(a)(10) Notice 
Relating to Futures Contracts in Corn and Soybeans,'' the Commission 
is changing and supplementing under section 5a(a)(10) of the 
Commodity Exchange Act proposed rules of the Board of Trade of the 
City of Chicago. The Commission hereby makes the following changes: 
43
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    \43\ Bold-face type denotes the Commission's proposed changes or 
supplements to the CBT proposal. Underlinings denote changes 
proposed by the CBT. Deletions to proposed CBT language are not 
shown.
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    1. To change and to supplement the paragraph of Rule 1036.00 
immediately following the paragraph beginning with the words ``Corn 
Differentials,'' to read as follows:
    In accordance with the provisions of Rule 1041.00A, corn for 
shipment from regular warehouses or shipping stations located within 
the Chicago Switching District or the Burns Harbor, Indiana 
Switching District may be delivered in satisfaction of corn futures 
contracts at contract price, subject to the differentials for class 
and grade outlined above. Corn for shipment from shipping stations 
located on the northern Illinois River may be delivered at a premium 
over contract price of 150 percent of the difference between the 
Waterways Freight Bureau Tariff No. 7 rate* applicable to that 
location and the rate applicable to Chicago, Illinois, subject to 
the differentials for class and grade outlined above.
    * The factor for converting the tariff rate quoted in tonnage to 
a bushel basis shall be 35.714 bushels per ton.
    2. To change and to supplement the paragraph of Rule 1036.00 
immediately following the paragraph beginning with the words 
``Soybean Differentials,'' to read as follows:
    In accordance with the provisions of Rule 1041.00D, soybeans for 
shipment from regular warehouses or shipping stations located within 
the Chicago Switching District, the Burns Harbor, Indiana Switching 
District, or the Toledo, Ohio Switching District may be delivered in 
satisfaction of soybean futures contracts at contract price, subject 
to the differentials for class and grade outlined above.
    In accordance with the provisions of Rule 1041.00D, soybeans for 
shipment from shipping stations located on the northern Illinois 
River or from shipping stations within the St. Louis-East St. Louis 
and Alton Switching Districts (i.e., the upper Mississippi River 
between river miles 170 and 205) may be delivered in satisfaction of 
soybean futures contracts at a premium over contract price of 150 
percent of the difference between the Waterways Freight Bureau 
Tariff No. 7 rate* applicable to that location and the rate 
applicable to Chicago, Illinois, subject to the differentials for 
class and grade outlined above.
    * The factor for converting the tariff rate quoted in tonnage to 
a bushel basis shall be 33.333 bushels per ton.
    3. To change and to supplement Rule 1041.00A to read as follows:
    Corn. Corn for shipment from regular warehouses or shipping 
stations located within the Chicago Switching District or the Burns 
Harbor, Indiana, Switching District may be delivered in satisfaction 
of corn futures contracts at contract price. Corn for shipment from 
shipping stations located within the northern Illinois River may be 
delivered in satisfaction of corn futures

[[Page 60859]]

contracts at a premium over contract price of 150 percent of the 
difference between the Waterways Freight Bureau Tariff No. 7 rate* 
applicable to that location and the rate applicable to Chicago, 
Illinois, subject to the differentials for class and grade outlined 
above.
    * The factor for converting the tariff rate quoted in tonnage to 
a bushel basis shall be 35.714 bushels per ton.
    4. To change and to supplement Rule 1041.00D to read as follows:
    Soybeans. Soybeans for shipment from regular warehouses or 
shipping stations located within the Chicago Switching District, the 
Burns Harbor, Indiana, Switching District or the Toledo, Ohio, 
Switching District may be delivered in satisfaction of soybean 
futures contracts at contract price. Soybeans for shipment from 
shipping stations located on the northern Illinois River or from 
shipping stations within the St. Louis-East St. Louis and Alton 
Switching Districts (i.e., the upper Mississippi River between river 
miles 170 and 205) may be delivered in satisfaction of soybean 
futures contracts at a premium over contract price of 150 percent of 
the difference between the Waterways Freight Bureau Tariff No. 7 
rate* applicable to that location and the rate applicable to 
Chicago, Illinois, subject to the differentials for class and grade 
outlined above.
     The factor for converting the tariff rate quoted in tonnage to 
a bushel basis shall be 33.333 bushels per ton.
    5. To change and to supplement Regulation 1044.01 following the 
list of delivery locations and immediately prior to the issuer's 
signature block by adding, as follows:

soybeans only:
____St. Louis, MO, river mile marker-----------------------------------
____Toledo, OH, Switching District

    6. To change and to supplement Regulation 1056.01 by adding 
after the last paragraph the following:
    The premium charges on soybeans for delivery from regular 
shippers within the Toledo, Ohio, Switching District shall not 
exceed 12/100 of one cent per bushel per day.
    The premium charges on soybeans for delivery from regular 
shippers within the St. Louis-East St. Louis and Alton Switching 
Districts (i.e., the upper Mississippi River between river miles 170 
and 205) shall not exceed 10/100 of one cent per bushel per day.
    7. To change and to supplement the second paragraph of 
Regulation 1081.01(1) to read as follows:
    (c) and in the case of Chicago, Illinois, Burns Harbor, Indiana, 
and Toledo, Ohio, Switching Districts only, his registered storage 
capacity.
    8. To change and to supplement the third paragraph of Regulation 
1081.01(1)(a) to read as follows:
    (a) one barge per day at each shipping station on the northern 
Illinois River and within the St. Louis-East St. Louis and Alton 
Switching Districts (i.e., the upper Mississippi River between river 
miles 170 and 205); and
    9. To change and to supplement Regulation 1081.01(2) to read as 
follows:
    Except for shippers located on the northern Illinois River and 
within the St. Louis-East St. Louis and Alton Switching Districts 
(i.e., the upper Mississippi River between river miles 170 and 205), 
such warehouse shall be connected by railroad tracks with one or 
more railway lines.
    10. To change and to supplement the first sentence of Regulation 
1081.01(12)A to read as follows:
    A. Load-Out Procedures for Wheat and Oats and Rail and Vessel 
Load-Out Procedures for Corn and Soybeans from Chicago, Illinois, 
Burns Harbor, Indiana, and Toledo, Ohio, Switching Districts Only * 
* *.
    11. To change and to supplement the first sentence of Regulation 
1081.01(12)B to read as follows:
    B. Load-Out Rates for Wheat and Oats and Rail and Vessel Load-
Out Rates for Corn and Soybeans from Chicago, Illinois, Burns 
Harbor, Indiana, and Toledo, Ohio, Switching Districts Only * * *.
    12. To change and to supplement Regulation 1081.01(12)G(7) to 
eliminate the words ``on the Illinois Waterway,'' to read as 
follows:
    Any expense for making the grain available for loading will be 
borne by the party making delivery, provided that the taker of 
delivery presents barge equipment clean and ready to load within ten 
calendar days following the scheduled loading date of the barge. If 
the taker's barges are not made available within ten calendar days 
following the scheduled loading date, the taker shall reimburse the 
shipper for any expenses for making the grain available. Taker and 
maker of delivery have three days to agree to these expenses.
    13. To change and to supplement the last sentence of Regulation 
1081.10(12)(G)(8) to read as follows:
    (8) * * * If the aforementioned condition of impossibility 
prevails at a majority of regular shipping stations, then shipment 
shall be made under the provisions of rule 1081.(12)(G)(9).
    14. To change and to supplement the first paragraph and 
paragraph 9(b)(iii) and add a new paragraph at the end of Regulation 
1081.01(12)(G)(9) to read as follows:
    (9). In the event that it has been announced that river traffic 
will be obstructed for a period of fifteen days or longer as a 
result of one of the conditions of impossibility listed in 
regulation 1081.10(12)(G)(8) and in the event that the obstruction 
will affect a majority of regular shipping stations located on the 
northern Illinois River, then the following barge load-out 
procedures for corn and soybeans shall apply:
    (b) * * *
    (iii) The taker of delivery shall pay the maker 150% of the 
Waterways Freight Bureau Tariff Number 7 barge benchmark rate from 
the original delivery point stated on the Shipping Certificate to 
NOLA.
    (c) In the event that the obstruction or condition of 
impossibility listed in regulation 1081.10(12)(G)(8) will affect a 
majority of regular shipping stations located on the northern 
Illinois River, but no announcement of the anticipated period of 
obstruction is made, then shipment may be delayed for the number of 
days that such impossibility prevails.
    15. To change and to supplement the first paragraph of 
Regulation 1081.01(13)A by eliminating the words ``and soybeans'' in 
both instances in which they appear.
    16. To change and to supplement Regulation 1081.01(13)D by 
retaining it and changing it to read as follows:
    Soybeans. For the delivery of soybeans, regular warehouses or 
shipping stations may be located within the Chicago Switching 
District, within the Burns Harbor, Indiana, Switching District 
(subject to the provisions of paragraph A above), within the Toledo, 
Ohio, Switching District, or shipping stations may be located on the 
northern Illinois River (subject to the provisions of paragraph A 
above), or within the St. Louis-East St. Louis and Alton Switching 
Districts (i.e., the upper Mississippi River between river miles 170 
and 205).
    Delivery in Toledo must be made at regular warehouses or 
shipping stations providing water loading facilities and maintaining 
water depth equal to normal seaway draft of 27 feet. However, 
deliveries of soybeans may be made in off-water elevators within the 
Toledo, Ohio, Switching District PROVIDED that the party making 
delivery makes the soybeans available upon call within five calendar 
days to load into water equipment at one water location within the 
Toledo, Ohio, Switching District. The party making delivery must 
declare within one business day after receiving shipping 
certificates and loading orders the water location at which soybeans 
will be made available. Any additional expense incurred to move 
delivery soybeans from an off-water elevator into water facilities 
shall be borne by the party making delivery PROVIDED that the party 
taking delivery presents water equipment clean and ready to load 
within 15 calendar days from the time the soybeans have been made 
available. Official weights and official grades as loaded into the 
water equipment shall govern for delivery purposes. Delivery in the 
greater St. Louis river-loading area must be made at regular 
warehouses or shipping stations providing water loading facilities 
and maintaining water depth equal to the average draft of the 
current barge loadings in this delivery area. Official weights and 
official grades as loaded into the water equipment shall govern for 
delivery purposes.
    17. To change and to supplement Regulation 1081.01(14)E by 
retaining it and changing it to read as follows:

    Soybeans. The warehouseman or shipper is not required to furnish 
transit billing on soybeans represented by shipping certificate 
delivery in Toledo, Ohio. Delivery shall be flat.

    18. To change and to supplement the first paragraph of the 
applicant's declaration contained in Regulation 1085.01 to read as 
follows:

    We, the ________________ (hereinafter called the Warehouseman/
Shipper) owner or lessee of the warehouse located at 
________________ or shipping station located at mile marker 
__________ of the __________ River, having a storage capacity * * *.

    19. To change and to supplement appendix 4E, paragraph 2, by 
eliminating the sentence

[[Page 60860]]

which reads, ``The net worth of a firm regular to deliver corn or 
soybeans must be greater than or equal to $40,000,000.''

    The Commission has determined that publication of the Order will 
provide notice to interested members of the public of its action, is 
consistent with the Commodity Exchange Act and is in the public 
interest.

    Issued in Washington, D.C., this 7th day of November 1997, by 
the Commodity Futures Trading Commission.
Edward W. Colbert,
Deputy Secretary of the Commission.
[FR Doc. 97-29895 Filed 11-12-97; 8:45 am]
BILLING CODE 6351-01-P