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UPDATE 3-CME to set variable storage rates with July wheat
(Adds market reaction, open interest data)
CHICAGO Nov 11 (Reuters) - The CME Group (CME.O), the world's largest derivatives exchange, said on Wednesday it plans to implement variable storage rates beginning with its July 2010 wheat contract, pending approval of the Commodity Futures Trading Commission.
The move was done to improve convergence of wheat cash and futures prices at futures expiration.
"It's difficult to say what's gone on behind the scenes between the CFTC and the CME," said Rich Feltes, senior vice president of MF Global Research. "But the very fact that they moved it up to July suggests that they are trying to be a little more responsive to industry pressure."
CME's previous plan was to implement variable storage rates with the September 2010 contract. That plan had been submitted to the commission for approval in late September with a CFTC decision expected by Friday.
"July implementation versus September implementation is not materially different because under current rules the seasonal storage rate would take effect on July 18 and the storage rate will go from 5 cents per bushel per month to 8 cents per bushel per month -- that's under current rules," CME economist Fred Seamon said in an interview.
The CME's wheat markets reflected the new rates, traders said. The price difference between July 2010 WN0 and December 2010 WZ0 contracts grew by 3-1/2 cents a bushel on Wednesday. Other deferred spreads, such as July/March widened by 4-1/2 cents.
The National Grain and Feed Association, a big trade group that includes elevators which benefit from higher storage fees, has pushed to get variable storage rates in place earlier than September 2010. But the CME and its floor traders objected, citing disruptions to positions already in the market.
Open interest in the December 2009 contract was at 114,000 contracts as of Wednesday's open. July 2010 open interest stood at nearly 46,000 contracts while September 2010 was only at 11,100.
CME had argued at CFTC hearings that Sept 2010, not July 2010, was the logical delivery to install the variable storage rates. CME says the rates will help bring CME wheat futures prices and cash prices come together at contract expirations, a condition known as "convergence," but many analysts say it will be ineffective.
"This is an effort to help convergence by chasing some of the speculative trade away because of the wider carries. Will it work? Probably not," said Roy Huckabay, grain markets analyst with The Linn Group, a Chicago brokerage.
NGFA and bankers who fund the commercial hedgers in CME wheat have complained for more than two years that the lack of convergence in CME wheat has destroyed the contract's usefulness as a hedging tool.
Variable storage rates will allow the CME to raise or lower grain storage rates at CBOT delivery facilities by roughly 3 cents a bushel per month, depending on the spread between the two front contract months.
Under the new proposal, if the July-September spread averages 80 percent of financial full carry between May 19, 2010, and June 25, 2010, then the maximum storage charge will increase to 8 cents a bushel per month on July 18. Otherwise, the storage rate will remain at 5 cents per bushel per month.
CME's earlier proposal triggered a change at 85 percent of full carry.
The exchange requested the review period be extended two weeks until Nov. 27 to give CFTC time to consider the changes. (Reporting by Christine Stebbins; Editing by Marguerita Choy)
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