UPDATE 1-CME Group weighs overhaul for daily grain price limits

Fri Jan 24, 2014 4:29pm EST

* Markets would have higher limits when prices are high
    * 2-3 limit-move days a year expected under new mechanism


    By Tom Polansek
    CHICAGO, Jan 24 (Reuters) - CME Group Inc is
considering a proposal to reset daily price limits for U.S.
grain and oilseed futures twice a year based on underlying price
levels in agricultural markets, documents distributed by the
exchange operator show.
    The proposal would allow higher price limits when market
prices are high and lower price limits when market prices are
low, according to a CME fact sheet sent to market participants
and obtained by Reuters. 
    Limits would always be approximately six percent of the
underlying nearby contract price.
    CME is collecting feedback on the proposal and hopes to
complete any necessary submissions to regulators at the U.S.
Commodity Futures Trading Commission by the end of February, a
spokeswoman said on Friday.
    CME, which owns the Chicago Board of Trade, currently has
initial daily price limits for grains and oilseeds that remain
unchanged throughout the year.    
    The move toward variable limits coincides with changing
dynamics in global grain markets, with prices for crops such as
corn and soybeans dropping after large U.S. harvests. Soybean
futures in 2012 reached a record high because production fell
during the Midwest's worst drought in decades.
    "If we are going to have limits in markets, they must be
flexible to reflect the current situation rather than a
situation from the past," said Rich Nelson, chief strategist for
brokerage Allendale.
    Under the proposal, the first reset date for price limits
would be the first trading day in May. The newly calculated
limits would remain in effect until the last trading day in
October.
    A mechanism for variable limits would benefit CME because
"it relieves you from having to go to the CFTC every time you
want to adjust something," said Jack Scoville, senior market
analyst of Price Futures Group.
    The limits would be based on daily settlement prices
collected for the July expirations for each of the CBOT grain
and oilseed futures products over 45 consecutive trading days
before and on the business day before April 16, according to the
fact sheet.
    Average prices for each contract would be calculated based
on the collected settlement prices and then multiplied by six
percent. The resulting numbers would be rounded off for each
contract.
    Markets that would be affected include corn, soybeans, soft
red winter wheat, hard red winter wheat, soybean oil, soybean
meal, oats and rough rice futures.
    "A price limit set at six percent of the underlying futures
price will likely capture daily price moves with approximately
99 percent confidence," CME said in the fact sheet. "Thus, under
normal market conditions, one should still expect two or three
limit-move days per year under this mechanism." 
    If a market settles up or down by the new limit during the
six-month period, the limit would be expanded by 50 percent the
next trading day, and remain at the expanded limit until no
listed contracts settle at the expanded limit.
    The second reset date would be the first trading day in
November. New limits would be calculated in a similar manner to
the May reset.
    CME in 2011 increased the initial daily limit for corn
futures to 40 cents per bushel from 30 cents as tight supplies
caused repeated limit-up moves. Market participants who
supported the increase had also encouraged CME to examine a
system for adjusting limits based on price levels, according to
the fact sheet.
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