[Federal Register Volume 68, Number 15 (Thursday, January 23, 2003)]
[Notices]
[Pages 3231-3233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1534]


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COMMODITY FUTURES TRADING COMMISSION


Chicago Mercantile Exchange (CME): Proposed Amendments to the 
Weight Specifications, Speculative Position Limits, Delivery Locations, 
and Delivery Procedures for the Live Cattle Futures Contract

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of terms and conditions of proposed 
amendments to the CME's weight specifications, speculative position 
limits, delivery locations, and delivery

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procedures for the live cattle futures contract.

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SUMMARY: The Chicago Mercantile Exchange (CME or Exchange) has 
requested that the Commission approve the subject proposed amendments 
for the live cattle futures contract. The proposals were submitted 
pursuant to the provisions of Section 5c(c)(2) of the Commodity 
Exchange Act (Act) and Commission Regulation 40.4(a). Under the 
proposals, the Exchange will:
    1. Increase the maximum live cattle average deliverable live weight 
by 25 pounds to 1,350 pounds, and increase the maximum individual 
animal live weight by 25 pounds to 1,400 pounds for cattle graded on a 
live weight basis;
    2. Establish a ``scale down'' spot month speculative position limit 
of 450 contracts which applies during the period beginning with the 
close of business on the first business day following the first Friday 
of the contract month until the close of business on the business day 
preceding the last five business days of the contract month, after 
which period existing 300 contract limit will apply through the last 
day of trading;
    3. Add delivery locations at Guymon and Texhoma, Oklahoma;
    4. Establish penalties to be imposed at the sole discretion of the 
United States Department of Agriculture (USDA) grader, on any seller 
who has not properly presorted cattle for grading, and on any buyer who 
disrupts the delivery process, at a rate of $0.15 per pound of live 
cattle delivered;
    5. Grant the CME the authority to prohibit futures delivery on 
``auction days'' at delivery stockyards;
    6. Provide for the establishment of an annual uniform grading and 
documentation fee per delivery unit;
    7. Eliminate the requirement that live-graded delivery cattle stand 
without water during the time interval between 9 a.m. and the time of 
grading; and
    8. Provide for the application of price differentials to the 
delivery of steer carcasses weighing between 950 and 1,000 pounds.
    The Exchange intends to implement the amendments with respect to 
all newly listed futures contract months beginning with the December 
2003 contract month.
    The Director of the Division of Market Oversight (Division) of the 
Commission, acting pursuant to the authority delegated by Commission 
Regulation 140.96, has determined that publication of the Exchange's 
proposed amendments for comment 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 February 7, 2003.

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 (202) 418-
5521 or by electronic mail to [email protected]. Reference should be 
made to ``CME Live Cattle Amendments.''

FOR FURTHER INFORMATION CONTACT: Please contact Martin G. Murray of the 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, 
(202) 418-5276. Facsimile number: (202) 418-5527. Electronic mail: 
[email protected]

SUPPLEMENTARY INFORMATION:

Background

    The CME's live cattle futures contract calls for delivery at par of 
40,000 pounds of USDA estimated Yield Grade 3, 55% Choice, 45% Select 
quality grade live steers, averaging between 1,100 pounds and 1,300 
pounds with an individual steer weighing more than 100 pounds above or 
below the average weight for the unit. No individual animal weighing 
less than 1,050 pounds or more than 1,350 pounds is deliverable.\1\ The 
weighing and grading of cattle delivered on the futures contract is 
conducted by USDA graders. Delivery of live steers may be made at par 
at CME-approved livestock yards in Syracuse, Kansas; Tulia, Texas; 
Columbus, Nebraska; Dodge City, Kansas; Amarillo, Texas; Norfolk, 
Nebraska; North Platte, Nebraska; Ogallala, Nebraska; Pratt, Kansas; 
and Clovis, New Mexico.\2\ The futures contract's rules currently 
specify an individual contract month speculative position limit of 
3,300 contracts, and a spot month speculative position limit of 300 
contracts that becomes effective at the close of business on the first 
business day following the first Friday of the contract month.\3\
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    \1\ Beginning with deliveries on the June 2003 contract month, 
the average weight range will be between 1,100 pounds and 1,325 
pounds, and no individual animal weighing greater than 1,375 pounds 
will be deliverable.
    \2\ At the buyer's option, cattle may be graded on a live basis 
at the delivery stockyard, or on a carcass basis at a CME-approved 
packing plant located within the originating stockyard's delivery 
region.
    \3\ The last trading day of an expiring contract month is the 
last business day of the contract month. Delivery notices may be 
issued beginning with the first business day following the first 
Friday of the contact month.
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1. Deliverable Live Weight Range

    The Exchange proposes to increase the maximum average deliverable 
live weight to 1,350 pounds, and increase the maximum individual animal 
live weight to 1,400 pounds, for cattle graded on a live weight basis. 
In support of the proposal, the Exchange states, ``The increase is 
recommended due to an evident trend in increased weights for slaughter 
steers and will allow the contract to follow industry standards.''

2. Spot Month Speculative Position Limit

    The Exchange proposes a ``scale-down'' spot month speculative 
position limit of 450 contracts which would apply during the period 
that begins with the close of business on the first business day 
following the first Friday of the contact month and continues until the 
close of business on the business day preceding the last five business 
days of the contract month. The contract's existing 300-contract limit 
would be applicable from the close of trading on the business day 
preceding the last five trading days throughout the last day of 
trading. Currently, there is a signed 300-contract limit applicable 
throughout the spot month beginning with the close of business on the 
first business day following the first Friday of the contract month 
through the last day of trading.
    In support of the proposal, the Exchange notes that a ``scale 
down'' limit of 600 contract during the first part of the spot month 
and a 300-contract limit thereafter had been eliminated in favor of a 
single 300-contract spot month limit for the December 2002 through 
October 2003 contract months as a result of deliverable supply 
concerns. The Exchange believes that its subject proposals to widen the 
range of deliverable live weights, add two new delivery locations, and 
make other changes in the delivery process as discussed below, ``will 
create a more efficient delivery process, attract more people who are 
willing to deliver and increase the deliverable supply,'' thus 
justifying the establishment of the ``scale down'' limit of 450 
contracts during the first part of the spot month.

3. Delivery Locations

    The Exchange proposes to add Guymon and Texhoma, Oklahoma as 
delivery locations. In support of the proposal, the Exchange states 
that these locations would facilitate delivery from the Oklahoma 
panhandle. The Exchange further notes that Guymon had been a

[[Page 3233]]

delivery location until October 2002, when it was removed due to the 
closing of the facility at this location. Recently, a new operator has 
re-opened the Guymon facility and has expressed an interest in being 
reinstated as a Live Cattle delivery point. In addition, the Texhoma 
Livestock Auction in Texhoma, Oklahoma has expressed an interest to the 
Exchange in becoming a Live Cattle delivery point.

4. Penalties for Delivery Obstructions

    The Exchange proposes to penalize any seller who has not properly 
pre-sorted cattle for grading, at a rate of $.015 per pound of live 
cattle delivered per business day until proper delivery is made. In 
addition, the Exchange proposes to penalize any buyer who disrupts the 
delivery process, at a rate of $.015 per pound of live cattle 
delivered. These penalties to the seller and buyer would be imposed at 
the discretion of the USDA grader.
    In support of the proposal, the Exchange indicates that the 
potential imposition of penalties will increase the ``throughput'' of 
the delivery system, by reducing the likelihood of impediments to the 
efficient operation of the grading process resulting from the actions 
of sellers and buyers. In this regard, the Exchange notes that failure 
on the part of a deliverer to do a proper job of sorting the cattle 
prior to delivery reduces the number of deliveries that can be 
completed in a given time period, and takes unfair advantage of those 
delivering shorts who properly sort their cattle. In addition, 
disruptive behavior by receiving longs and/or their agents interferes 
with the delivery process and reduces the number of deliveries that can 
be completed in a given time period. The Exchange further believes that 
the USDA grader is the logical party to determine whether, and to what 
extent, a delivering short or receiving long has disrupted the delivery 
process because it is the only unbiased, independent participant in the 
process, and USDA personnel are present at every delivery. The Exchange 
notes that the USDA has agreed to accept the responsibility for making 
these determinations.

5. Prohibit Deliveries at Certain Locations on Auction Days

    The Exchange proposes to give itself the discretion to prohibit 
delivery at particular stockyards on those dates when an auction or 
other activity that may interfere with futures delivery is taking place 
at such stockyards. In support of the proposal, the Exchange notes that 
all of the contract's existing delivery locations hold feeder cattle 
auctions as their primary business, and that live cattle futures 
deliveries compete for many of the same resources, such as scales, 
pens, sorting alleys, etc. Although the Exchange historically has 
relied on the operators of the delivery stockyards to discourage 
deliveries on auction dates, is has proven difficult in practice for 
operators to do so. As a result, deliveries made on auction days have 
resulted in greater failure rates caused by auction-related operational 
bottlenecks that prevent cattle from being presented in a timely manner 
to the USDA grader.
    The Exchange notes that it will determine in advance and ``black 
out'' auction days in its electronic tender system, making it 
impossible for a delivering short to submit a tender for delivery on 
those dates. Further, the Exchange notes that this prohibition on 
auction-day deliveries would apply generally to all locations, with the 
exception of Amarillo and Dodge City, ``where there are multiple scales 
and ample pens and sorting alleys.''

6. Uniform Grading and Documentation Fees

    The Exchange is proposing to establish and set annually a uniform 
grading and documentation fee per delivery unit, which will be charged 
to sellers for each contract unit of cattle delivered on the futures 
contract. The fee will be applicable at all delivery locations. 
Currently, the Exchange passes through to the seller the actual costs 
billed to it by the USDA for grading services. The Exchange notes that 
USDA grading fees vary widely by location, ranging from $42 to $484, 
depending on the travel costs incurred by USDA to service a particular 
location. The Exchange believes that this variability has ``introduced 
a large degree of uncertainty into the delivery process for those 
planning to deliver at locations which require USDA travel.'' The 
Exchange further notes that the USDA is intending to propose a uniform 
flat fee of $100 per delivery unit for CME live graded deliveries.

7. Standing Without Water

    The Exchange proposes to eliminate the requirement that live-graded 
delivery cattle stand without water during the time interval between 9 
a.m. and the time of grading. Cattle will continue to be denied access 
to feed during this period.

8. Price Differentials for Heavy Carcasses

    The Exchange proposes to provide for the application of price 
differentials to the delivery of steer carcasses weighing between 950 
and 1,000 pounds based on price data from USDA's National Weekly Direct 
Slaughter Cattle--Premiums and Discounts report, which is used under 
existing rules for establishing a price differential for cattle 
weighing between 900 and 950 pounds. Currently, cattle weighing between 
950 and 1,000 pounds are discounted at a rate equal to 20% of the final 
settlement price. In support of the proposal, the Exchange states that 
the proposal ``would allow more precise discounting of carcasses in 
this weight bracket.''
    The Division is requesting comment on the proposals. Copies of the 
Exchange's proposed amendments 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 amendments can also 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 CME in support of the request for 
approval may be available upon request pursuant to the Freedom of 
Information Act (5 U.S.C. 552) and the Commission's regulations there 
under (17 CFR Part 145 (2002)), 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 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 pertaining to the proposed amendments or with respect to 
other materials submitted by the CME 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.

    Dated: Issued in Washington, DC on January 17, 2003.
Michael Gorham,
Director.
[FR Doc. 03-1534 Filed 1-22-03; 8:45 am]
BILLING CODE 6351-01-M