[Federal Register Volume 65, Number 88 (Friday, May 5, 2000)]
[Notices]
[Pages 26187-26188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11241]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION


New York Cotton Exchange: Proposed Amendments To Convert the U.S. 
Dollar Index Futures Contract to Physical Delivery From Cash 
Settlement.

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposed amendments to the terms and 
conditions of commodity futures contract.

-----------------------------------------------------------------------

SUMMARY: The FINEX Division of the New York Cotton Exchange (NYCE or 
Exchange) has submitted proposed amendments to convert its U.S. Dollar 
Index (USDX or Index) futures contract to physical delivery from its 
existing cash settlement provisions. Under the proposal, the NYCE would 
no longer cash settle the USDX futures contract based on a survey of 
banks conducted by Reuters. Rather, the contract would provide for 
physical delivery of U.S. dollars in exchange for a basket of foreign 
currencies based on the fixed percentage weights of the Index.
    The Acting Director of the Division of Economic Analysis 
(Division), acting pursuant to the authority delegated by Commission 
Regulation 140.96, has determined that publication of the proposal for 
comment is in the public interest, will assist the Commission in 
considering the views of interested persons, and is consistent with the 
purpose of the Commodity Exchange Act.

DATES: Comments must be received on or before May 22, 2000.

ADDRESSES: Interested persons 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 amendments to the NYCE U.S. 
Dollar Index futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact Michael Penick of the 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581, 
telephone (202) 418-5279. Facsimile number: (202) 418-5527. Electronic 
mail: [email protected].

SUPPLEMENTARY INFORMATION: The USDX is a geometric index of six foreign 
currencies with fixed percentage weights. The six currencies and their 
percentage weights are as follows: euro (57.6%); Japanese yen (13.6%); 
British pound (11.9%); Canadian dollar (9.1%); Swedish krona (4.2%); 
and Swiss franc (3.6%). The index formula is:
[GRAPHIC] [TIFF OMITTED] TN05MY00.041

Where Spot Ratei = exchange rate of currency i at time t 
with all exchange rates expressed in European terms, i.e., units of 
foreign currency per U.S. dollar, and II is the mathematical symbol for 
the product of a multiplication.

    Under current rules, the USDX futures contract is cash settled at 
expiration based on a survey of banks for indicative bids and offers. 
The survey is conducted by Reuters USA during the last half hour of 
trading on the last trading day. The Exchange stated that ``over time, 
there has been a deterioration of the quality of the indications and a 
decline in the number of bank contributors.''
    The Exchange proposes replacing the cash settlement procedure with 
a physical delivery procedure. Under this procedure, a long position 
holder in the subject contract would receive delivery of U.S. dollars 
and make payment in a basket of the six foreign currencies that are 
components of the USDX. Under the proposal, the contract size would 
remain $1,000 times the Index. Thus, at an Index level at delivery time 
of 100, the long would receive U.S. $100,000 and pay an amount of 
foreign currency valued at $100,000. Similarly, the short position 
holder would deliver U.S. $100,000 and receive payment in the basket of 
foreign currencies.
    As part of the delivery procedure, the Exchange would determine a 
final settlement price. The final settlement price would be based, to 
the extent possible, on futures prices of NYCE currency futures 
contracts that expire at the same time as the subject USDX futures 
contract. If necessary, the rate for any currency that does not have an 
NYCE futures contract expiring at the same time as the USDX contract 
would be ``determined by the [NYCE's] Settlement Committee taking into 
account cash and futures prices of the underlying currency component 
and any other information that the Committee may deem appropriate.''
    The final settlement price would be used to determine both the 
amount of U.S. dollars that the short delivers and the long receives 
and the amount of foreign currency that the long pays and the short 
receives. For example, suppose the final USDX settlement price is 
100.00 and one euro is worth exactly $1.00. As noted, the weighting of 
the euro is 57.6%. In this instance, the short would deliver $100,000 
($1,000 times 100.00). The long would pay a basket of foreign currency 
worth $100,000. That basket would contain $57,600 (57.6% of $100,000) 
worth of euros and $42.400 worth of the other five currencies 
distributed according to their respective weights. Since the euro in 
this example is worth exactly $1.00, the long would pay 57,600 euros. 
The amount that the long would pay of each in the other five foreign 
currencies would be calculated similarly, based on their percentage 
weights and currency exchange rates.
    Now, suppose the final settlement price is $110.00 and the euro is 
valued at 90.00 cents. In this instance, the short would deliver and 
the long would receive $110,000 ($1,000 times 110.00). The long would 
pay and the short would receive a basket of foreign currency worth 
$110,000. That basket would contain $63,360 (57.6% of $110.000) worth 
of the euros and $46,640 worth of the other five currencies distributed 
according to their respective weights. Since the euro in this example 
is worth $0.90, the long would pay 70,400 euros ($63,360 divided by 
0.90), compared to the 57,600 euros that the long would pay if the USDX 
were 100.00 and the euro were valued at $1.00 under the preceding 
example.
    As shown in these examples, under the proposed physical delivery 
procedure, neither the number of U.S.

[[Page 26188]]

dollars delivered nor the size of the basket of currencies is fixed.\1\ 
Rather, both amounts vary in the same direction as the futures price 
(or index level) changes. Specifically, if the Index rises, the long 
receives more dollars, but is also obligated to pay more foreign 
currency units. Conversely, if the Index declines, the long receives 
fewer dollars, but is obligated to pay fewer foreign currency units.
---------------------------------------------------------------------------

    \1\ For most futures contracts, the amount of the commodity 
delivered is fixed (e.g. 5,000 bushels of corn), while only the 
number of dollars paid for the commodity varies as the futures price 
varies.
---------------------------------------------------------------------------

    The Division requests comment on the above-noted delivery 
provision. How does this novel delivery provision affect the hedging or 
price discovery functions of the futures contract? Also, under this 
delivery procedure, can market participant who make or take delivery 
realize profits or losses in the contract?
    For most physical delivery futures contracts, it is not possible to 
benefit from manipulating the daily settlement price used in delivery 
invoices, since any benefit to a futures margin account would be offset 
by losses associated with that invoice price at delivery. In the 
revised USDX contract, the final settlement price would be used to 
determine both the invoice price and the amount of currency delivered. 
The Division requests comment regarding whether, given the unusual 
terms of the revised USDX futures contract, it is possible to benefit 
from manipulating the proposed final settlement price and, if so, 
whether the final settlement price is readily susceptible to 
manipulation.
    The proposal was submitted to the Commission under the Commission's 
45-day Fast Track procedures of Commission Regulation 1.41(b)(2). Under 
these procedures, absent Commission action to the contrary, the 
proposal would be deemed approved at the close of business on May 30, 
2000. In view of the limited review period under the Fast Track 
procedures, the Division has determined to publish for public comment 
notice of the proposal for 15 days, rather than 30 days as provided for 
proposals submitted under the regular review procedures.
    Copies of the proposed amendments will be available for inspection 
at the Office of the Secretariat, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st St., NW, Washington, D.C. 20581. 
Copies of the proposed amendments can be obtained through the Office of 
the Secretariat by mail at the above address or by phone at (202) 418-
5100.
    Other materials submitted by the NYCE 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. Requests for copies of such materials should be 
made to the FOI, Privacy and Sunshine Act Compliance Staff of the 
Office of the Secretariat at the Commission's headquarters in 
accordance with 17 CFR 145.7 and 145.8.
    Any person interested in submitting written data, views, or 
arguments on the proposed amendments, or with respect to other 
materials submitted by the NYCE, should send such comments to Jean A. 
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st St., NW, Washington, DC 20581 by the specified date.

    Issued in Washington, DC, on May 1, 2000.
Richard A. Shilts,
Acting Director.
[FR Doc. 00-11241 Filed 5-4-00; 8:45 am]
BILLING CODE 6351-01-M