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 secretary@cftc.gov. 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: mpenick@cftc.gov.

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:

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Where Spot Rate_i = 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. dollars delivered nor the size of the basket of currencies is fixed. 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.

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.