[Federal Register Volume 63, Number 92 (Wednesday, May 13, 1998)]
[Notices]
[Pages 26575-26585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12664]



[[Page 26575]]

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COMMODITY FUTURES TRADING COMMISSION


Chicago Board of Trade Futures Contracts in Corn and Soybeans; 
Order To Designate Contract Markets and Amendment Order of November 7, 
1997, as Applied to Such Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order to Chicago Board of Trade.

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SUMMARY: The Commodity Futures Trading Commission (Commission), by 
letter dated December 19, 1996, commenced a proceeding under section 
5a(a)(10) of the Act by issuing to the Board of Trade of the City of 
Chicago (CBT) a notification 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.'' 61 FR 67998 (December 26, 1996). 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 of the CBT corn 
and soybean futures contracts. 62 FR 60831 (November 13, 1998). By 
letter dated November 17, 1997, the CBT notified the Commission that it 
would submit for Commission review an alternative to the contract terms 
ordered by the Commission and thereafter submitted draft applications 
for contract market designation for corn and soybeans, beginning with 
contract months in the year 2000.
    The Commission on May 7, 1998, ordered that the applications for 
contract market designation in corn and in soybeans submitted by the 
CBT on December 19, 1997, and supplemented on March 20, 1998, be 
granted and amended its Order of November 7, 1997, as applied to the 
newly approved contracts to the extent stated. Under this Order, the 
Commission permits the CBT: (i) to add the southern Illinois River as 
delivery locations for soybeans and to delete the Toledo, Ohio 
switching district as a delivery location for soybeans; (ii) to modify 
the premiums for delivery of soybeans and corn at non-par locations 
from a percentage of the freight tariff to a specified fixed cents per 
bushel schedule of premiums; (iii) to modify the contingency plan to 
include a conforming fixed cents-per-bushel schedule of locational 
adjustments; and (iv) to add a minimum net worth eligibility 
requirement for issuers of shipping certificates of $5 million. Nothing 
in the Commission's Order vacates the designation of the current corn 
and soybean futures contracts, vacates the applicability of the 
November 7, 1997 Order to those contracts, or amends the terms of the 
November 7, 1997 Order as applied to those contracts.
    The Commission has determined that publication of this 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 May 7, 1998.

ADDRESSES: Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

FOR FURTHER INFORMATION CONTACT:
Steven Manaster, Director, or Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., 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 * * *.

    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 of the CBT corn and soybean futures contracts. 62 FR 
60831 (November 13, 1998). By letter dated November 17, 1997, the CBT 
notified the Commission that it would submit for Commission review an 
alternative to the contract terms ordered by the Commission and 
thereafter submitted draft applications for contract market designation 
for corn and soybeans, beginning with contract months in the year 2000. 
The Commission, on December 1, 1997, published in the Federal Register 
notice of the CBT's draft proposal. 62 FR 63529. Subsequently, on 
December 19, 1997, the CBT submitted its proposal, and on March 20, 
1998, the CBT amended its proposal. The Commission on May 7, 1998, 
designated the CBT as contract markets in corn and soybeans and amended 
the November 7, 1997 Order as applied to the newly approved contracts 
to the extent stated. 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: May 7, 1998.

    The Commodity Futures Trading Commission (CFTC or Commission) 
hereby orders that the applications for contract market designation in 
corn and in soybeans submitted by the Board of Trade of the City of 
Chicago (CBT) on December 19, 1997 and supplemented on March 20, 1998, 
be granted and hereby amends its Order under section 5a(a)(10), dated 
November 7, 1997, to permit the applications for designation to be 
granted. Under this Order, the Commission takes the following actions:
    (1) Grants under section 5 of the Commodity Exchange Act (Act) the 
CBT's application for designation as a contract market in soybeans and 
approves under section 5a(a)(12) of the Act all of the proposed rules 
of the contract market contained in Attachment 1 to this Order;
    (2) Grants under section 5 of the Act the CBT's application for 
designation as a contract market in corn and approves under section 
5a(a)(12) of the Act all of the proposed rules of the contract market 
contained in Attachment 2 to this Order;
    (3) Amends its Order of November 7, 1997, making all changes 
necessary to effect the above actions, as follows:
    (i) permits the CBT to add the southern Illinois River as delivery 
locations for soybeans and to delete the Toledo, Ohio switching 
district as a delivery location for soybeans;
    (ii) permits the CBT to modify the premiums for delivery of 
soybeans and corn at non-par locations from a percentage of the freight 
tariff to a fixed cents per bushel schedule of premiums;
    (iii) permits the CBT to modify the contingency plan in the Order 
of November 7, 1997, to include a conforming fixed cents-per-bushel 
schedule of locational adjustments; and
    (iv) permits the CBT to add a minimum net worth eligibility 
requirement for issuers of shipping certificates of $5 million;
    Nothing in this Order precludes the CBT from listing for trading 
the soybean and corn contracts designated under this Order for contract 
months prior to the January 2000 soybean futures

[[Page 26576]]

contract month and the March 2000 corn futures contract month, the 
initial contract months for which the Order of November 7, 1997, became 
effective.
    Nothing in this Order vacates the designation of the current corn 
and soybean futures contracts, vacates the applicability of the 
November 7, 1997 Order to those contracts, or amends the terms of the 
November 7, 1997 Order as applied to those contracts. Both or either of 
the currently designated contracts and the contracts designated by this 
Order may be traded.
    Nothing in this Order mandates that Toledo, Ohio, cease operation 
as a delivery location in any commodity, either for futures contracts 
traded on the CBT, for futures contracts for which any other board of 
trade which might choose to seek contract market designation, or for 
any of Toledo's substantial cash market operations.
    The Commission, as discussed below, bases these actions on its 
findings that available deliverable supplies of corn and soybeans under 
the CBT's present revisions are not so inadequate under section 
5a(a)(10) as to require that the Commission mandate additional delivery 
points. However, the adequacy of corn and soybean supplies cannot be 
accurately and fully ascertained until after there is a history of 
deliveries occurring under the terms of the revised contracts. If in 
operation the revised contract terms result in inadequate deliverable 
supplies of corn or soybeans, the Commission will reconsider the need 
to require additional delivery points for the revised contracts. To 
that end, the Commission directs the CBT to report on the experience 
with deliveries and expiration performance in the revised corn and 
soybean futures contracts on an annual basis for a five-year period 
after contract expirations begin under the revised contracts.
    The revised CBT proposed locational price differentials for the 
corn and soybean futures contracts fall within the range of commonly 
observed or expected commercial price differences, as required by 
section 5a(a)(10) of the Act and Commission policy. However, in light 
of the great variability in where the differential for each river 
segment falls within the range of commonly observed cash price 
differences, the Commission directs the CBT as part of the above 
reports on delivery and expiration performance also to report on the 
extent to which particular locational price differentials may 
discourage or encourage deliveries to be made from that location. This 
report should relate rates of delivery by river segment to the 
applicable differentials, focussing with particularity on September 
deliveries from all locations and on deliveries from the Peoria-Pekin 
and Havana-Grafton river segments year-round.
    The Commission's conclusions are supported by factual analyses made 
by the CFTC staff and by 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 Order of November 7, 1997, and in response 
to the Commission's request for comment in the Federal Register on the 
CBT's recent proposal. The Commission, in reaching its conclusions in 
this Order, considered the record before it, which includes a 
substantial amount of documentary evidence, a record number of written 
comments submitted in response to four requests for comment, and the 
transcriptions of statements presented by the CBT and interested 
members of the public during two open meetings of the Commission to 
consider these issues.
    The Commission has reached its conclusions based upon the legal 
standards of the Commodity Exchange Act. Section 5a(a)(10) of the Act 
requires that exchanges establish such delivery points as will tend to 
prevent or diminish price manipulation, market congestion and the 
abnormal movement of commodities in interstate commerce. In carrying 
out the requirements of section 5a(a)(10), the Commission is not free 
to direct exchanges to add particular delivery locations if the 
Commission finds that the contract meets the statutorily-required level 
of deliverable supplies. Thus, the Commission's approval of the 
delivery locations selected by the CBT for its revised corn and soybean 
futures contracts is not based upon a finding that Toledo, Ohio, is in 
any way an inappropriate delivery point for these or any other futures 
contracts. To the contrary, Toledo currently is an active cash market 
for corn, soybeans and wheat, with over 120 million bushels of these 
commodities being received at that location in 1997. The available data 
indicate that Toledo will continue to be an active cash market center 
for these commodities in the future.\1\ As the Commission in its Order 
of November 7, 1997, Toledo has proven to be an effective futures 
delivery point for corn and soybeans. 62 FR 60854. Accordingly, nothing 
precludes the CBT, it if chooses, from continuing to list for trading 
the soybean futures contract provided under the Order of November 7, 
1997, which includes Toledo as a delivery point, or precludes any other 
exchange from seeking designation for a contract with Toledo as a 
delivery point.
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    \1\ In this regard, Toledo continues to perform a vital role in 
futures markets due to its position as the primary delivery point 
for the CBT wheat futures contract. In this respect, Toledo is 
located within one of the few primary production areas for soft red 
winter wheat and has provided the bulk of the deliverable supply for 
that futures contract for many years.
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    The Commission's action in designating contract markets for corn 
and soybeans under the terms which the CBT has recently proposed does 
not vacate or negate the existing designated contracts which are the 
subject of the Order of November 7, 1997. That Order remains in effect 
as to the current contracts and, as modified herein, applies to the 
revised contracts. Until the designation for such contracts are 
vacated, the CBT may trade both the current and the revised contracts 
simultaneously, if it so chooses.\2\ Moreover, the CBT may begin 
trading the revised contracts for contract months with expirations 
prior to year 2000.
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    \2\ Of course, if the CBT elected simultaneously to list the 
current and revised futures contracts for trading and intends to 
list options on those futures contracts, it must submit for prior 
Commission approval applications for designation as a contract 
market in options on either the revised or current futures contracts 
to assure that the CBT is properly authorized to trade options on 
both futures contracts.
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I. The Section 5a(a)(10) Proceeding

    The Commission, by letter dated December 19, 1996, commenced a 
proceeding under section 5a(a)(10) of the Act by issuing to the CBT a 
notification 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 points or 
point 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 closure of three of the six existing Chicago warehouses regular 
for delivery

[[Page 26577]]

under the futures contracts during the year prior to the section 
5a(a)(10) notification underscored the need to address without delay 
the fundamental problems with the contract's delivery specifications. 
However, the CBT membership defeated contract modifications recommended 
by its board of directors in October 1996.\3\ 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, by finding that the 
CBT corn and soybean futures contracts no longer met the requirements 
of that section of the Act.
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    \3\ The CBT task force spent a year developing proposed changes 
to the contract's specifications. Those recommendations were 
modified by the CBT's board of directors, and the modified proposal 
was then defeated by a vote of the CBT membership on October 17, 
1996.
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    Subsequently, on April 16, 1997, the CBT submitted its response to 
the section 5a(a)(10) notification in the form of proposed exchange 
rule amendments (1997 proposal). Those proposed rule amendments would 
have replaced 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.\4\ Such shipping certificate would have provided 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 and additionally 
to be delivered in Chicago by rail or vessel. Delivery at all eligible 
locations would have been at par. The CBT's 1997 proposal would have 
eliminated the current delivery points on its corn and soybean futures 
contracts at Toledo, Ohio and St. Louis, Missouri and would have 
restricted firms eligible to issue shipping certificates to those 
meeting a minimum net worth requirement of $40 million, in addition to 
a number of other requirements.
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    \4\ 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 pursuant to terms specified 
by the CBT whenever the holder decides to surrender the certificate 
to the issuer.
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    The Commission previously had published the substance of the CBT's 
1997 proposed amendments in the Federal Register for a 15-day comment 
period (62 FR 12156 (March 14, 1997), later extended until June 16, 
1997 (62 FR 1997). The Commission received almost 700 comments, the 
largest number of comments ever received by the Commission on any issue 
before it. On June 12 1997, the Commission held a public meeting at the 
CBT's request to accept oral and written statements by the CBT and 
interested members of the public. 62 F.R. 29107 (May 29, 1997). The 
participants represented a cross-section of views, both favoring and 
opposing the CBT proposal.\5\
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    \5\ A transcript of the meeting has 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; a United States 
Representative and a state government representative from the state 
of Michigan; representatives of six commercial users of the 
contracts; representatives of three producer associations; and six 
persons representing the CBT.
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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.\6\ 62 FR 49474 (September 22, 1997). The comment period on the 
proposed order expired on October 22, 1997. Over 230 commenters 
submitted comments to the Commission on the proposed order.\7\ 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.\8\ The CBT also filed exceptions 
to the proposed order as provided under the Act.
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    \6\ 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 October 
22, 1997.
    \7\ 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 
violate that provision of the Act. Others took issue with the 
Commission for not proposing additional remedial changes, 
particularly for the corn contract.
    \8\ A transcript of the hearing and all attendant written 
statements and documents have been included in the public comment 
file of this proceeding.
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    On November 7, 1997, the Commission issued a final Order (Order) to 
the CBT under section 5a(a)(10) of the Act. 62 FR 60831 (November 13, 
1997). The Commission's Order found that the CBT's 1997 proposal failed 
to meet the requirements of sections 5a(a)(10), 5a(a)(12), 8a(7), and 
15 of the Act because of (1) an inadequate amount of deliverable 
supplies of soybeans; (2) the failure to include required locational 
differentials; (3) the failure to provide an adequate contingency plan 
for alternative deliveries if river transportation were obstructed; and 
(4) the unnecessary limitation on eligibility for issuing corn and 
soybean shipping certificates imposed by the CBT's proposed $40 million 
minimum net worth requirement.
    Based on these findings, the Commission Order changed and 
supplemented the delivery locations for CBT's soybean futures contract 
by retaining the Toledo, Ohio switching district and the St. Louis/East 
St. Louis/Alton areas as delivery locations, with Toledo priced at par 
and the St. Louis/East St. Louis/Alton area priced 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. The Commission also required that 
both corn and soybeans from shipping locations on the northern Illinois 
River be 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. For both the CBT corn and 
soybean futures contracts, the Commission ordered that the contingency 
plan for alternative delivery procedures when traffic on the northern 
Illinois River is obstructed be changed and supplemented and that the 
$40 million minimum net worth eligibility requirement for issuers of 
shipping certificates be eliminated.
    The Commission's Order explicitly permitted the CBT to seek 
appropriate modifications to it, stating that the Commission had not 
``precluded 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.'' 62 FR 60833. To the contrary, the Order provided that 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.

Id. at 60834.
    By letter dated November 17, 1997, the CBT notified the Commission 
that it

[[Page 26578]]

would submit for Commission review an alternative to the contract terms 
ordered by the Commission and thereafter submitted draft applications 
for contract market designation for corn and soybeans, beginning with 
contract months in the year 2000. The Commission, on December 1, 1997, 
published in the Federal Register notice of the CBT's draft proposal of 
revised contract terms. 62 FR 63529. The Commission requested comment 
on five specific issues: (1) whether the deliverable supplies under the 
CBT draft proposal would meet the requirements of section 5a(a)(10) of 
the Act; (2) whether the CBT draft proposal's locational price 
differentials would reflect cash market practice; (3) whether the CBT 
draft proposal's load-out provision would conform to commercial 
practice; (4) whether the CBT draft proposal's reimbursement scheme 
under the contingency plan would reflect commercial practices; and (5) 
whether the CBT draft proposal's minimum net worth requirements would 
unduly limit eligibility of firms to become issuers of shipping 
certificates. 62 FR 63532.\9\
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    \9\ By letter to the CBT, dated January 9, 1998, the 
Commission's Division of Economic Analysis terminated fast-track 
review of the designation applications. In light of the outstanding 
Order under section 5a(a)(10), the Commission ruled that these 
applications are ineligible for fast-track treatment.
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    The Commission received twenty-seven comment letters in response to 
this notice, thirteen of which supported the CBT alternatives. Of the 
ten comments opposing the CBT alternative, nine questioned the CBT's 
proposed elimination of Toledo as a delivery point. Three commenters 
opposed the draft proposal's locational price differentials as not 
reflective of cash price differentials, and three opposed as too high 
the net worth requirement for issuers of shipping certificates.\10\
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    \10\ An additional four comment letters neither favored nor 
opposed the specific CBT proposal, but rather addressed other 
issues.
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    By submission dated March 20, 1998, the CBT amended its 
applications for designation and provided additional information (1998 
proposal). The March 20, 1998 submission modified the draft proposal 
for the soybean contract by changing the segmentation of delivery zones 
within the delivery area as proposed, modifying the schedule of 
locational price differentials applicable to those zones and making the 
equivalent schedule of locational price adjustments applicable under 
the contingency delivery plan; modifying the performance requirement 
for deliverers in the Alton-St. Louis area; and reducing the proposed 
eligibility requirement for issuers of shipping certificates from a 
proposed requirement to register for delivery of a minimum of 30 barges 
to a $5 million minimum net worth requirement.
    The Commission has reviewed the CBT's 1998 proposal to determine 
whether it meets the requirements of the Commission's Order and of the 
Act and regulations thereunder.\11\ The CBT's 1998 proposal differs 
from the Commission's Order with respect to: (1) the delivery locations 
for the soybean contract; (2) the locational price differentials for 
both the soybean and corn futures contract; and (3) for both contracts, 
the minimum net worth eligibility requirement for issuers of shipping 
certificates. These differences from the provisions of the Commission's 
Order are analyzed below.
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    \11\ Section 5(6) conditions designation of a board of trade as 
a contract market, among other requirements, on the ``governing 
board * * * making effective the orders issued pursuant to the 
provisions of section 5a of this Act * * * .'' Accordingly, the 
Commission has reviewed the proposed applications for designation to 
determine whether they violate any specific criterion set forth in, 
or term of, the Order. Where they violate a provision of the Order, 
the Commission has determined whether amendment of the Order to 
remove conflicts between the two would be appropriate. In addition, 
the Commission has reviewed the applications for contract market 
designation under all of the statutory and regulatory requirements 
generally applicable to contract market designation.
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II. Deliverable Supply

A. The Commission's Order

    In determining whether the CBT's first proposal met the 
requirements of section5a(a)(10) of the Act, the Commission initially 
assessed whether the available deliverable supplies of the commodity at 
the delivery points specified by the CBT for all delivery months on the 
contract would be sufficiently large and available to market 
participants so that futures deliveries, or the credible threat 
thereof, could assure an appropriate convergence of cash and futures 
prices and thereby tend to prevent or to diminish price manipulation, 
market congestion, and the abnormal movement of the commodity in 
interstate commerce. 62 FR 60838. The Commission determined the 
appropriate standard for measuring the adequacy of deliverable supplies 
under the 1997 proposal by examining the relationship between the level 
of deliverable stocks for corn and soybeans and the presence of a price 
premium for the expiring futures month over the next futures month (a 
price inverse).\12\
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    \12\ The Commission explained in the order that:
    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. 62 FR 
60838.
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    Based on an analysis of these relationships, the Commission used as 
a measure of an inadequate level of deliverable supplies under section 
5a(a)(10) deliverable supplies below the level of 2,400 contracts for 
soybeans and below the level of 3,000 contracts for corn. However, the 
Commission also noted that a higher level of deliverable supplies 
historically may, in fact, be necessary to protect against price 
manipulation. As the Commission explained in its Order, to avoid a 
repetition of the July 1989 soybean futures contract expiration, when 
both the Commission and the CBT acted on their belief that a sizable 
long position posed a significant threat of manipulation, deliverable 
supplies of at least 4,000 contracts would be necessary. 62 FR 60839. 
The Commission considered both of these measures, as well as other 
relevant information, in its analysis of the adequacy of deliverable 
supply.
    Applying these measures of adequacy of deliverable supply to the 
1997 proposal,\13\ the Commission found that 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 * * *.'' 62 FR 60850. As 
to the CBT proposal for corn, the Commission found that ``gross 
deliverable supplies throughout the year appear to be adequate except 
for September'' \14\ and that, in light of the other changes and 
supplements which the Commission was making to the proposal and absent 
actual trading experience to the contrary, it did not find that 
additional delivery points for corn were required.
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    \13\ The Commission's Order at 60839-60850 explains in detail 
the methodology by which the Commission determined the potentially 
available gross deliverable supplies of corn and soybeans under the 
1997 proposal and the necessary reductions from those gross 
supplies.
    \14\ The Commission found that deliverable supplies of corn in 
September may be further supplemented by new crop production and 
that, as a transition month, the September contract month would be 
somewhat less likely to be subject to manipulation than other 
months. 62 FR 60850.
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    Having found that section 5a(a)(10) of the Act required that 
delivery points for soybeans be added to those proposed by the CBT in 
order to increase available deliverable supplies, the Commission 
supplemented the 1997 by proposal by

[[Page 26579]]

retaining the existing contract's delivery points. With the addition of 
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the retained delivery locations and other changes and supplements,

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. 62 
FR 60854.

    The Commission's decision to order that delivery locations be added 
to the 1997 soybean proposal to increase deliverable supplies was based 
solely upon its finding that available deliverable supplies would not 
otherwise meet the levels required by section 5a(a)(10) of the Act. 
Moreover, the Commission's determination of how to remedy the shortfall 
in deliverable supplies was narrowly focused. Thus, the Commission did 
not consider the merits of other possible, but untried delivery 
locations as a means of increasing deliverable supplies. Instead, the 
Commission deferred to the CBT's expressed preferences for delivery 
locations on the contract. Accordingly, the Commission ``accept[ed] the 
delivery points in the proposal itself as a starting point.'' 62 FR 
60854. The Commission next considered delivery points which previously 
had been chosen and used by the CBT. The Commission found that the 
existing delivery points of St. Louis and Toledo, ``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 * * *, are feasible, workable and acceptable.'' Id. Finally, the 
Commission noted that, ``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 * * *.'' Id. at n. 39.

B. Adequacy of the 1998 Proposal's Delivery Points.

    The 1998 proposal for the CBT's soybean futures contract would omit 
Toledo as a delivery point and would add the southern Illinois River 
from Pekin south to river's mouth at Grafton as a delivery point.\15\ 
The CBT supports its proposal on the grounds that the delivery area 
``represent[s] the major markets along the Illinois Waterway, including 
Burns Harbor, IN and in St. Louis, Missouri.'' (CBT December 17, 1997, 
submission at 16.) The CBT proposal contains a total of 46 potential 
shipping stations with a cumulative daily barge loading capability of 
145 barges--about 1,627 contracts (8,134,000 bushels) of soybeans--
located within the proposed delivery areas for the soybean futures 
contract. (CBT January 23, 1998, submission, Table 1.) The CBT 
maintains that based on the analysis used by the Commission in its 
Order, available deliverable supply levels under its 1998 proposal 
``meet the statutory requirements and benchmarks'' of the Order for the 
critical summer months of July, August and September. (CBT December 17, 
1997, submission at 16.)
---------------------------------------------------------------------------

    \15\ The CBT's proposed delivery locations for corn are the same 
as in the Commission's Order.
---------------------------------------------------------------------------

    The following chart details gross deliverable soybean supplies 
attributable to firms eligible to issue shipping certificates available 
from the 1998 proposed delivery areas for the critical contract months 
of July, August and September.

BILLING CODE 6351-01-M

[[Page 26580]]

[GRAPHIC] [TIFF OMITTED] TN13MY98.018



BILLING CODE 6351-01-C

[[Page 26581]]

    Such estimated gross deliverable supplies for eligible firms 
exceeded the Commission's benchmark levels of 2,400 contracts in each 
of the past eleven years during July and August.\16\ They reached or 
exceeded the 4,000 contract benchmark level in ten of eleven years 
during July and in seven of eleven years during August.\17\
---------------------------------------------------------------------------

    \16\ The gross deliverable supply estimates were derived using 
the same procedures as were used to calculate the estimates for the 
Commission's final order. Specifically, for the Illinois River and 
St. Louis, supplies for each contract month were estimated by 
summing barge shipments for that month and all subsequent months of 
the crop year (ending with September), with adjustments being made 
to exclude new crop shipments during September. For Chicago, the 
estimates were calculated as the sum of stocks available at the 
beginning of the contract month plus receipts during the month, with 
adjustments being made to reflect the recent sharp decline in 
storage capacity at Chicago. The gross deliverable supply estimates 
for eligible firms were further adjusted to reflect only barge 
shipments from the Illinois River and St. Louis by the eight firms 
believed to be capable of meeting the CBT's proposed $5 minimum net 
worth requirement.
    The term ``gross deliverable supplies'' reflects the fact that 
these are estimates of the maximum level of deliverable supplies 
likely to be available for the futures contracts before any 
adjustment is made for other factors that are likely to reduce 
deliverable supplies. These factors, discussed in more detail below, 
include the 1998 proposal's continued reliance on Chicago as a 
source of deliverable supplies, the proposed three-day barge queuing 
and priority load-out requirements, and prior commercial commitments 
of available supplies. A detailed description of the estimation 
procedure is presented in the Commission's Order.
    \17\ The Commission also estimated gross deliverable supplies 
for all firms, including those which are not expected to be able to 
meet the CBT's proposed minimum net worth eligibility requirement of 
$5 million, These estimates reflect total shipments from the 
Illinois River and St. Louis, and were analyzed because it is likely 
that at least part of the soybeans shipped by the smaller, 
ineligible firms readily could be diverted to eligible delivery 
facilities for futures delivery purposes at economic prices and, 
thus, should be regarded as part of the contract's deliverable 
supply. The all-firms estimates have not been included in this Order 
because they result in levels which are only marginally greater than 
those for eligible-firms and exhibit essentially the same results as 
do the eligible-firm estimates when measured against the 
Commission's benchmark standards. However, in a few years 
particularly during the month of September, the addition of minor 
amounts of deliverable supplies from ineligible firms results in 
estimates which exceed a benchmark level which did not otherwise do 
so. Specifically, the all-firms estimates exceeded the 2,400 
threshold when eligible firm estimates did not in September 1993 and 
the 4,000 threshold in September 1990, 1994 and 1995.
---------------------------------------------------------------------------

    The estimated gross deliverable soybean supplies for September meet 
the level of 2,400 contracts in nine of the eleven years. However, they 
meet the 4,00 contract level in only one of eleven years. As noted in 
the Order, deliverable supply concerns for September may be mitigated 
by the availability of new crop production in that month and the 
imminent harvest of even greater supplies in October. In particular, as 
shown in Table 1, estimated September soybean production in areas 
immediately adjacent to the proposed delivery area ranged from 1,636 
contracts in 1996 to 14,623 contracts in 1994. These amounts are 
greater for soybeans than under the Commission's Order (compare 62 FR 
60847) because the 1998 proposal expanded delivery locations along the 
Illinois River, a major production area. It reasonably can be expected 
that some portion of this September soybean production would 
potentially be deliverable on the September futures contract within 
normal commercial marketing channels. As a result, it is likely that 
the level of gross deliverable supplies available in September would be 
somewhat higher than the above estimates.

  Table 1.--Estimated Soybean Production Located Near Proposed Delivery 
                        Points as of September 30                       
                    [In 5,000 bushel contract units]                    
------------------------------------------------------------------------
                         Crop year                             Soybeans 
------------------------------------------------------------------------
1986.......................................................        5,608
1987.......................................................       10,622
1988.......................................................        8,527
1989.......................................................        8,606
1990.......................................................        3,416
1991.......................................................       12,972
1992.......................................................        5,721
1993.......................................................        2,263
1994.......................................................       14,623
1995.......................................................        7,258
1996.......................................................        1,636
------------------------------------------------------------------------
* The production as of September 30 of each year was estimated by       
  multiplying U.S. Department of Agriculture harvesting progress        
  estimates for the Illinois and Indiana crop reporting districts       
  adjacent to the proposed delivery points by U.S.D.A. production data  
  for counties located within about 25 miles of the proposed delivery   
  points.                                                               

    The potentially available gross deliverable supplies must be 
reduced, however, by the following factors identified in the Order and 
which remain applicable here: (1) Continuing reliance, impart, on 
Chicago as a source of deliverable supplies; (2) a three-business-day 
barge queuing and priority load-out requirement; and (3) prior 
commercial commitments of available supplies.\18\
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    \18\ Other factors affecting deliverable supplies identified in 
the Commission's Order included locational price differentials and 
foreseeable disruptions in barge shipping on the Illinois River. 
However, as discussed below, the 1998 proposal satisfactorily 
addresses these factors.
---------------------------------------------------------------------------

a. Reliance on Chicago
    To the extent that potentially available gross deliverable supplies 
of soybeans have reached or exceeded the 2,400 and 4,000 contract 
levels, they have frequently depended on Chicago supplies to do so. 
During July, deliverable supplies from locations other than Chicago 
reached or exceeded the 2,400 level in ten, and reached or exceeded the 
4,000 level in six, of the eleven years analyzed. During August, 
deliverable supplies from locations other than Chicago reached or 
exceed the 2,400 contract level in seven, and the 4,000 contract level 
in one, of the years analyzed. For September, deliverable supplies from 
locations other than Chicago reached or exceeded the 2,400 contract 
level in four of the eleven years and never reached the 4,000 contract 
level during this period.
    The 1998 proposal's reliance on Chicago deliverable supplies to 
meet the Commission's benchmark levels may result in future shortfalls. 
As the Commission's Order stated:

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 form Chicago in the future. Chicago elevators fro many 
years have held stocks well below their maximum capacity levels, 
particularly in the critical summer months. * * * Chicago supplies 
will most likely be reduced significantly in the future and would 
not be available insignificant quantities under the CBT proposal.

62 FR 60850.
b. The Three-Day Barge Queuing and Priority Load-Out Requirements
    The 1998 proposal retains the provisions of the 1997 proposal 
requiring a shipping certificate issuer to begin loading onto the 
certificate holder's barges within three business days after receiving 
instructions and the holder's barges are at the delivery facility ready 
to load. As the commenters to the 1997 proposal made clear, requiring 
the shipping certificate issuer to give preference to shipping 
certificate holders over customers and proprietary business for eight 
hours of load-out capacity per day is contrary to cash market practice. 
The Order questioned the merits of the CBT's justification of this 
provision, which merely assumes that issuers would be willing and able 
to meet this requirement and accommodate their cash business simply by 
extending their

[[Page 26582]]

hours of operation. The Commission finds here, as it did in its prior 
Order, that:

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.

62 FR 60850.
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. 
As the Order reasoned, ``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.'' 62 FR 60850. When such 
committed stocks are removed from total shipments, ``it is likely that 
the actual available deliverable supplies for the futures contracts 
would be significantly less than indicated by the above gross 
estimates.''
d. Conclusion
    In summary, under the 1998 proposal gross deliverable supplies for 
soybeans during the months of July and August reach or exceed the 2,400 
contract benchmark in every year, and the 4,000 contract benchmark in 
most years. Although the estimates for gross deliverable supplies 
during September failed to reach the 2,400 contract benchmark level in 
two of the past eleven years and failed to reach the 4,000 contract 
level in all years but one, those estimates may be supplemented by new 
crop production in September. Overall, the number of contract months 
for which estimated gross deliverable supplies of soybeans under the 
1998 proposal would have reached or exceeded benchmark levels compares 
favorably with the number of contract months reaching or exceeding the 
benchmark levels under the Commission's Order for soybeans (and for 
corn). On this basis, the Commission does not find soybean deliverable 
supplies to be so inadequate as to require delivery points additional 
to, or different from, those proposed by the CBT.
    However, in light of the reductions from gross deliverable supplies 
that may result from prior commercial commitments and the contract's 
three-business-day load requirement, the extent to which available 
deliverable supplies actually would meet or exceed the Commission's 
deliverable supply standards is uncertain. Equally uncertain is whether 
future available deliverable supplies would meet or exceed the 
Commission's deliverable supply standards. This will depend in part 
upon the degree to which Chicago remains a viable source of deliverable 
supplies of soybeans or upon growth in the other delivery areas 
sufficient to compensate for declining activity in Chicago. Because 
only actual trading experience will reveal whether the level of 
available deliverable supplies meets the requirements of section 
5a(a)(10) of the Act, 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 soybean contract.\19\ These reports will allow the Commission 
to revisit the issue of adequacy of available deliverable supplies in 
the future if actual experience with the contract suggests that such 
supplies are not adequate.
---------------------------------------------------------------------------

    \19\ This is consistent with the Commission's direction to the 
CBT in the Order to report on the delivery experience in corn. That 
requirement was grounded in the Commission's finding that 
deliverable supplies of corn under the CBT's 1997 proposal were not 
so inadequate to require additional delivery points under section 
5a(a)(10). Inasmuch as the 1997 and 1998 proposals for delivery 
points for corn are the same, that finding and the Commission's 
direction to file annual reports for five years has not been 
modified by this order.
---------------------------------------------------------------------------

III. Differentials

A. The Commission's Order

    The Commission's Order found that, in light of the significant 
locational price differences in the cash market among the proposed 
delivery locations, section 5a(a)(10) required setting differentials 
for the delivery locations on the corn and soybean futures contracts. 
Specifically, the Order found that:

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.

62 FR 60851.
    The Commission's Order found that cash market differences in the 
value of corn and soybeans for various delivery points on the northern 
Illinois River are based primarily upon the cost of barge freight to 
the Gulf of Mexico. Based on Commission policy requiring that 
locational price differentials on futures contracts be set within the 
range of commonly observed or expected commercial price differences, 
the Order found that 150 percent of the Waterways Freight Bureau Tariff 
No. 7 rate ``provides an appropriate basis for the differential.''\20\ 
The percentage of tariff specified by the Order (150%) was based on 
analysis of barge freight rates for Illinois River shipments for the 
period 1990 through 1996. The Order found that 150% 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 shipments,'' particularly during the critical summer 
months. 62 FR 60856.
---------------------------------------------------------------------------

    \20\ Chicago and Toledo were ordered to be valued at par.
    Percent of tariff is a common means of quoting freight prices 
and is used extensively in cash market trading. The Waterways 
Freight Bureau Tariff No. 7 specifies the cost per ton of shipping 
commodities via barge to New Orleans from specified river segments 
(barge tariff zones) on the Illinois, Mississippi and Ohio Rivers. 
This tariff schedule was issued by the Interstate Commerce 
Commission in 1976 as part of its regulatory program for barge 
freight rates. Although this tariff schedule no longer serves a 
regulatory purpose, the barge industry routinely quotes barge 
freight rates as a percentage of the tariff schedule.
---------------------------------------------------------------------------

    The Order also changes and supplemented the differential provided 
under a proposed contingency plan to take effect during times when 
river traffic is obstructed to make it consistent with the 
differentials in effect at other times. The Commission's Order found 
that obstructions of river traffic caused by adverse weather conditions 
or announced lock repair and maintenance were commonplace and that ``it 
is not an appropriate use of exchange emergency authority to address 
such foreseeable disruptions to the operation of contract terms.'' 62 
FR 60853. Accordingly, the Commission found further that, because 
``prolonged obstruction of transportation on the river would increase 
the susceptibility of the futures contract to manipulation by 
issuers,'' section 5a(a)(10) required a ``contingency plan'' rule for 
the proposed contract. Id.
    The Order found that the contingency plan proposed by the CBT fell 
short of achieving the statutory objectives in a number of ways, 
including its computation of the reimbursement in transportation costs 
for deliveries at

[[Page 26583]]

alternative locations when the contingency plan was in effect based 
upon 100 percent of the Waterways Freight Bureau Tariff No. 7 barge 
freight rate schedule. This rate would have been different from the 
rate found by the Commission to be appropriate at all other times. The 
Commission found that, ``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.'' 62 FR 60852.

B. Adequacy of the 1998 Proposal's Differentials

    The 1998 proposal differs from the Order in the amount of the 
locational price differentials specified for the corn and soybean 
futures contracts. The CBT proposes to substitute the following 
locational differentials for those ordered by the Commission:

  Table 2.--The Proposed Locational Price Differentials for the Soybean and Corn Futures Contracts in Cents per 
                                                     Bushel                                                     
----------------------------------------------------------------------------------------------------------------
               Location                         Soybean differential                  Corn differential         
----------------------------------------------------------------------------------------------------------------
Chicago...............................  par................................  par.                               
Lockport to Seneca....................  +2 cents...........................  +2 cents.                          
Ottawa to Chillicothe.................  +2.5 cents.........................  +2.5 cents.                        
Peoria to Pekin.......................  +3 cents...........................  +3 cents.                          
Havana to Grafton.....................  +3.5 cents.........................  Not applicable.                    
St. Louis/East St. Louis/Alton........  +6 cents...........................  Not applicable.                    
----------------------------------------------------------------------------------------------------------------

    In support of its proposal, the CBT states that, ``Statistics using 
barge freight rate differentials and F.O.B. shipping station minus 
F.O.B. Chicago differentials during the period from 1990-1996 show that 
the proposed locational differentials are also within the range of 
commonly observed commercial barge and price differences.'' (CBT 
January 23, 1998, submission at 2.)
    To determine whether the CBT's proposed differentials fall within 
the range of commonly observed or expected commercial price 
differences, the Commission analyzed the frequency of opportunities for 
economic delivery from each delivery location at the specified 
differential. Deliveries from a location would most likely be made when 
the relative difference in the cost of barge freight between Chicago 
and the delivery point to New Orleans is equal to or less than the 
differential specified in the futures contract for that location. The 
Commission estimated the cost of barge freight using data on weekly 
offers for freight for the period of January 1990 through October 1997.
    Significantly, during the critical summer months of July and August 
(but not September),\21\ the 1998 proposed differentials for most 
delivery locations clearly fall at or above the mid-point of estimated 
cash price differences. Accordingly, the 1998 proposed differentials 
based on the estimated cost of freight would result in relatively 
frequent opportunities for economic delivery--generally exceeding 50 
percent of the observations--during July and August for most locations. 
The opportunities for economic delivery at some locations would be less 
frequent, however, at times of the year other than during the summer 
months, but overall deliverable supplies are greater at those times. 
For the period January 1990 through October 1997, the relative 
estimated frequency with which economic delivery likely would be 
feasible from the majority of locations generally exceeded 30 
percent.\22\ Accordingly, the CBT's proposed differentials reasonably 
can be expected to fall within the range of commonly observed or 
expected commercial price differences and thus tend to prevent or 
diminish price manipulation, market congestion, or the abnormal 
movement of the commodities in interstate commerce.
---------------------------------------------------------------------------

    \21\ This result is due to the substantial increases in barge 
freight rates that are commonly observed beginning in September 
caused by the increasing demand for shipping as the harvest season 
begins. The Commission considers the lower frequency with which the 
future contract's differentials will be at or above cash price 
freight differentials to be of less regulatory concern in September 
than at other times of the year. The seasonal movement of abundant 
supplies for shipment in commercial channels from all delivery 
locations reduces the likelihood that the proposed differentials 
would lead to the prohibited effects under section 5a(a)(10).
    \22\ As noted above, the barge industry routinely quotes freight 
rates as a percentage of the tariff schedule. As a consequence of 
this pricing convention, the relative cost of shipping among various 
river locations at any one time is stable. However, barge freight 
rates (quoted as a percent of the tariff schedule) fluctuate over 
time in response to increases or decreases in supply and demand for 
barge shipping. The proposed CBT differentials which are specified 
in cents-per-bushel at half-cent intervals do not translate 
precisely to a uniform percentage of tariff. Accordingly, as barge 
freight rates rise and fall in relation to the futures contracts' 
fixed locational differentials, the frequency with which deliveries 
would be made would vary somewhat from one location to another.
---------------------------------------------------------------------------

    However, the delivery locations of Peoria-Pekin for corn and 
soybeans, and Havana-Grafton for soybeans, appear to fall at the low 
end of the range of estimated barge freight differences. In light of 
the variation among river segments in the estimated frequency of 
opportunities for economic deliveries from the various locations, the 
Commission directs the CBT to report annually for a period of five 
years on the extent to which particular locational price differentials 
may discourage or encourage deliveries to be made from that location. 
This report should compare rates of delivery by river segment to the 
applicable differentials, focusing with particularlity on September 
deliveries from all locations and on deliveries from the Peoria-Pekin 
and Havana-Grafton river segments year-round. Such reporting will allow 
the Commission to revisit the issue of adequacy of locational 
differentials if actual experience with the contracts suggests that the 
differentials are not adequate.

C. Contingency Plan Differentials

    The 1998 proposal's contingency plan differs from the Commission's 
Order in the method of calculating the appropriate reimbursement for 
the change in transportation cots for deliveries at alternative 
locations when the contingency plan is in effect. The Order specified 
that the contingency plan reimbursement be calculated by reference to 
the same differentials between delivery locations required under the 
Order to be applicable under normal (non-contingency) conditions. The 
1998 proposal modifies the reimbursement calculation and changes the 
amount of the contingency plan differentials to conform them to the 
proposed cents per bushel differentials generally applicable under the 
1998 proposal to the contracts. This change is

[[Page 26584]]

consistent with the Commission's Order in that the relative value of 
locational differentials during normal conditions is maintained during 
times when the contingency plan is in effect.

IV. Minimum Net Worth Requirement

A. The Commission's Order

    The Commission's Order also eliminated a proposed $40 million net 
worth requirement for eligibility of shipping certificate issuers. 
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 lease 
anticompetitive means of achieving the objectives of the Act.\23\ 
Accordingly, as the Commission stated in the Order, ``the CBT 
proposal's possible anticompetitive effects must be evaluated against 
its potential effectiveness in achieving the policies and purposes of 
the Act.'' 62 FR 60853.
---------------------------------------------------------------------------

    \23\ 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, 434 U.S. 938 
(1977).
---------------------------------------------------------------------------

    The Order found that the $40 million minimum net worth requirement 
would limit issuance of shipping certificates to four of seven grain 
firms with shipping stations in the delivery area, result in an 
extremely high level of concentration, increase the Herfindahl-
Hirschman Index (HHI) to 3,300 (an increase of 530 points over the 
current delivery system), and act as a barrier to new entrants. 62 FR 
60853. Although protecting the financial integrity of the delivery 
process is a reasonable objective, the Order concluded that the CBT 
failed to provide a reasonable justification for the $40 million 
minimum net worth requirement in light of the 1997 proposal's other 
proposed financial integrity measures.\24\ 62 FR 60857. Accordingly, 
the Commission eliminated the $40 million minimum net worth eligibility 
requirement, finding that it would have resulted in a high level of 
concentration and imposed a substantial and impermissible bar to entry 
to otherwise eligible firms without a demonstrated regulatory need for 
the requirement. 62 FR 60857.
---------------------------------------------------------------------------

    \24\ These additional financial integrity provisions included 
the requirement that issuers of certificates obtain an irrevocable 
letter of credit in an amount equal to the value of their delivery 
commitments, maintain a minimum of two million dollars in working 
capital and be limited to issuing certificates of a value no greater 
than 25 percent of the issuer's net worth.
---------------------------------------------------------------------------

B. The 1998 Net Worth Proposal

    The 1998 proposal would restore a net worth eligibility requirement 
for shipping certificate issuers in the amount of $5 million. As under 
the 1997 proposal, this requirement is in addition to the other 
financial guarantees and conditions relating to working capital, 
letters of credit and a variable net worth requirement related to the 
value of outstanding shipping certificates. The CBT supports the 
requirement on the grounds that:

The Exchange is responsible for ensuring the financial integrity of 
the delivery process through the specification of minimum financial 
requirements. Currently, the Exchange requires that firms approved 
as regular for delivery in the agricultural markets have a minimum 
net worth equal to $5,000 per contract of regular capacity. Firms 
which are regular for delivery on the grain contracts must also meet 
minimum working capital and performance bonding requirements based 
on their federally licensed storage capacity.

    In order to ensure the financial, operation, and administrative 
integrity of the shipping certificate delivery process, all market 
participants must view all certificates as equally fungible and be 
indifferent between issuers. Certificates issued by low net worth 
firms have several distinct disadvantages, particularly, a higher 
risk of default and lower operational efficiencies due to fewer 
shipping station locations, and therefore, potentially higher costs 
to the taker in assembling the minimum number of certificates 
necessary to load a barge. Furthermore, the cumulative contribution 
of low net worth firms does not substantially increase deliverable 
supply.

CBT March 20, 1998, submission at 4.
    Section 15 of the Act requires that the Commission evaluate the 
1998 proposal's anticompetitive effects against its effectiveness in 
achieving the policies and purposes of the Act. The effect of the 
proposed $5 million net worth requirement would be to limit issuance of 
shipping certificates to firms able to meet the requirement. However, 
the $5 million net worth requirement constitutes a far lower barrier to 
entry than did the 1997 proposal's $40 million requirement, which as 
the Order found, would have limited participation to ``four large grain 
firms.'' In contrast, for the corn futures contract, under a $5 million 
net worth requirement, five of the seven firms operating barge-loading 
facilities on the northern Illinois River potentially qualify for 
eligibility as shipping certificate issuers. For the soybean futures 
contract, eight of the eleven barge-loading firms operating on the 
Illinois River and at St. Louis would meet this eligibility 
requirement.\25\ The proposed $5 million net worth requirement would 
constitute a lower barrier to entry. It also would have a more modest 
effect on reducing deliverable supplies for the futures contracts. 
United States Army Corps of Engineers' data for the 1995-96 crop year 
indicates that eligible firms shipped about 95 percent of all corn and 
soybeans from the proposed delivery areas.
---------------------------------------------------------------------------

    \25\ As a result of this lower barrier to entry as well as the 
other changes, the resulting HHI declined from 3,300 under the 1997 
soybean proposal to 2,918 under the 1998 proposal and for the corn 
proposals from 3,300 to 2,762.
---------------------------------------------------------------------------

    Balanced against its anticompetitive effect, the $5 million net 
worth requirement may serve the regulatory purpose of increasing the 
efficiency of the contract's delivery mechanism.\26\ Delivery takers 
are expected to attempt to reduce their costs by assembling the 
requisite number of shipping certificates from a single delivery 
facility to fill a barge. (A barge with a 55,000 bushel capacity will 
require assembly of 11-5,000 bushel certificates for delivery.) 
However, the smallest firms may not qualify to issue sufficient 
certificates for economically efficient consolidation and assembly.\27\ 
Moreover, the $5 million net worth requirement may significantly reduce 
the CBT's administrative burden related to monitoring the financial 
status of eligible shipping certificate issuers on an on-going basis. 
Small, less financially secure firms likely would require more careful 
monitoring than financially stronger firms.
---------------------------------------------------------------------------

    \26\ Protecting the integrity of the delivery process is a 
fundamental objective of the Act. See, e.g., Sections 5a(a), 
5a(a)(3), 5a(a)(4), 5a(a)(5), 5a(a)(7), and 5a(a)(10) of the Act. In 
particular, section 5a(a)(7) of the Act specifically recognizes that 
contract markets may impose reasonable requirements ``as to 
location, accessibility and suitability for warehousing and delivery 
purposes. * * * ''
    \27\ The issuer must limit the value of its outstanding 
certificates to one-quarter of its net worth.
---------------------------------------------------------------------------

    For the above reasons, the Commission finds that the anti-
competitive effect of the $5 million proposed net worth eligibility 
requirement is not so great as to outweigh the regulatory purpose 
identified by the CBT and that its approval by the Commission is not 
contrary to section 15 of the Act.
    Accordingly, for the reasons discussed above, the Commission grants 
the CBT applications for designation for futures contracts in corn and 
soybeans submitted on December 17, 1997, as supplemented on March 19, 
1998, and amends its Order of November 9, 1997, as applicable to such 
contracts so as to be consistent with this action.
    It is further ordered that this grant of designation shall be 
subject to CBT's

[[Page 26585]]

compliance with all sections of the Act applicable to the CBT as a 
contract market under the Act.

    Dated: May 7, 1998.

    By the Commission.
Jean A. Webb,
Secretary of the Commission.
    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, DC, this 7th day of May 1998, by the 
Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.

[FR Doc. 98-12664 Filed 5-12-98; 8:45 am]
BILLING CODE 6351-01-M