[Federal Register Volume 65, Number 66 (Wednesday, April 5, 2000)]
[Notices]
[Pages 17859-17860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8354]


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COMMODITY FUTURES TRADING COMMISSION


New York Cotton Exchange: Proposed Amendment to the Cotton No. 2 
Futures Contract Prohibiting Cotton Stocks Under Commodity Credit 
Corporation Loan From Simultaneously Being Exchange-Certified for 
Delivery on the Futures Contract

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposed amendment to contract terms 
and condition.

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SUMMARY: The New York Cotton Exchange (NYCE or Exchange) has proposed 
an amendment to the Exchange's cotton No. 2 futures contract. The 
proposed amendment would prohibit cotton stocks from simultaneously 
being included in both Exchange-certified stocks and under Commodity 
Credit Corporation (CCC) loan. The Acting Director of the Division, 
acting pursuant to the authority delegated by Commission Regulation 
140.96, has determined that the proposed amendment is of major economic 
significance, within the meaning of section 5a(a)(12) of the Commodity 
Exchange Act (Act), and that its publication is in the public interest 
and will assist the Commission in considering the views of interested 
persons.

DATES: Comments must be received on or before May 5, 2000.

ADDRESSES: Interested person should submit their views and comments to 
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In 
addition, comments may be sent by facsimile transmission to facsimile 
number (202) 418-5521, or by electronic mail to [email protected]. 
Reference should be made to the proposed amendment to the New York 
Cotton Exchange cotton No. 2 futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact John Bird of the 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581, 
telephone (202) 418-5274. Facsimile number: (202) 418-5527. Electronic 
Mail: [email protected].

SUPPLEMENTARY INFORMATION: The cotton No. 2 futures contract requires 
that cotton intended for delivery be inspected for conformity with the 
contract's quality specifications. Cotton that is found to meet the 
contract's quality specifications is certified by the Exchange as 
deliverable on the futures contract.
    The proposal will specify that no bale of cotton may simultaneously 
be included in both certified stocks and Commodity Credit Corporation 
(CCC) loan stocks. The Exchange intends to make the proposed amendment 
effective within 30 days following Commission approval, if granted, 
with respect to the first contract month with no open interest on such 
effective date and for all contract months listed thereafter.
    In support of the proposal, the Exchange stated that:

    From the perspective of the cotton futures market, the 
significant change to the cotton loan program which took effect in 
1986 was the provision that the CCC would waive interest charges and 
pay some or all of the storage charges that accrued during the loan 
period as necessary to make the loan repayable at the lower of the 
loan rate plus storage and interest, or the AWP [Adjusted World 
Price for cotton]. In the event of forfeiture to the CCC, no 
interest is charged, and the CCC assumes responsibility for the 
warehouse storage charges that accrued during the period that the 
cotton was under loan.
    Therefore, it is clear that, particularly at times when the AWP 
is below the loan rate, cotton under loan is subject to non-
commercial forces. This is in contrast to ``free'' cotton stocks, 
which are subject to commercial market forces, particularly to the 
intertemporal relationships in the cotton No. 2 futures market. For 
producers and cooperatives, the loan program effectively provides a 
free put option at an exercise (the

[[Page 17860]]

loan rate) which may be significantly above the prevailing market 
price.
    While the impact of the loan program on the cash market is not 
within the Exchange's jurisdiction, the rules relating to 
certification of stocks for futures delivery are, and the Exchange 
is concerned that the interplay between the loan program and the 
stocks certification process does not adversely affect the economic 
performance of the futures market.
    The level of certified stocks is an important influence in the 
day-today behavior of the futures market. It is, after all, (and is 
designed to be), the most relevant measure of available deliverable 
supply. Furthermore, * * * the level of certified stocks is the 
primary determinant of inter-temporal price relationships in the 
cotton No. 2 futures market, which in turn underpin the role of the 
futures market in guiding commercial inventory management activity.
    Hence, the Exchange's concern that, if certified stocks include 
cotton which is under loan, it is not responsive to commercial 
market forces and is eligible to be forfeited to the CCC on non-
commercial terms, the future market will not be properly informed as 
to commercially available deliverable supply and its role in guiding 
commercial inventory management will be impaired.

    In support of its view that the level of certified cotton stocks is 
the primary determinant of inter-temporal cotton futures price 
relationships, the Exchange provided an econometric analysis comparing 
the relationship between the December/March cotton futures price spread 
and the level of stocks certified for futures delivery with the 
relationships between the same cotton futures price spread and total 
cotton stocks in public warehouses and total U.S. stocks. Based on this 
analysis, the Exchange concluded that ``[t]he results confirm the 
critical role of certified stocks in determining price spread behavior 
and demonstrate the markedly superior explanatory power of certified 
stocks in this regard over that of other publicly available stocks 
data.''
    The Exchange also said that, since 1993, it has monitored and 
included in its weekly stocks report data on certified stocks which are 
under CCC loan. The Exchange indicated that, during this period, 
certified stocks under CCC loan have never been more than several 
hundred bales and that, since 1995, there have been no certified stocks 
under loan.
    The Division is requesting comments on the proposed amendment. The 
Division is particularly interested in comments in regard to whether: 
(1) the continuation of the practice of allowing certified cotton 
stocks to remain under CCC loan represents a threat to orderly trading 
and delivery in the futures market; (2) the proposal will reduce 
deliverable supplies to levels that would make the futures market 
susceptible to price manipulation or distortion; and (3) the proposal, 
by precluding the use of a method of financing that is commonly used in 
the cash market, is consistent with the requirements of section 15 of 
the Commodity Exchange Act.\1\
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    \1\ Section 15 stipulates that, in requiring or approving any 
bylaw, rule, or regulation of a contract market, the Commission must 
take into consideration the public interest to be protected by the 
antitrust laws and endeavor to take the least anticompetitive means 
of achieving the objectives of the Act, as well as the policies and 
purposes of the Act.
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    The proposed amendment was submitted under the Commission's Fast 
Track procedure for the review of rule changes which provides that, 
absent and contrary action by the Commission, the proposed amendment 
may be deemed approved 45 days after the Commission received the 
proposal. However, in view the complex issues posed by the proposal and 
to provide an adequate period for interested parties to comment, the 
Fast Track review period has been extended by an additional 30 days to 
May 31, 2000, pursuant to the provisions of Commission Regulation 
1.41(b).
    Copies of the proposed amendment will be available for inspection 
at the Office of the Secretariat, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. 
Copies of the proposed amendment can be obtained through the Office of 
the Secretariat by mail at the above address, by phone at (202) 418-
5100, or via the Internet at [email protected].
    Other materials submitted by the Exchange in support of the 
proposal may be available upon request pursuant to the Freedom of 
Information Act (5 U.S.C. 552) and the Commission's regulations 
thereunder (17 CFR part 145 (1997)), except to the extent they are 
entitled to confidential treatment as set forth in 17 CFR 145.5 and 
145.9. Request for copies of such materials should be made to the FOI, 
Privacy and Sunshine Act Compliance Staff of the Office of Secretariat 
at the Commission's headquarters in accordance with 17 CFR 145.7 and 
145.8.
    Any person interested in submitting written data, views, or 
arguments on the proposed amendment, or with respect to other materials 
submitted by the Exchange, should send such comments to Jean A. Webb, 
Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581 by the specified 
date.

    Issued in Washington, DC, on March 31, 2000.
Richard Shilts,
Acting Director.
[FR Doc. 00-8354 Filed 4-4-00; 8:45 am]
BILLING CODE 6351-01-M