CHICAGO Oct 8 CME Group Inc, the
largest U.S. futures market operator, said on Tuesday that it
will step up surveillance of its lean hog futures next week to
prevent price manipulation under a pricing formula the exchange
adopted to cope with the shut down of the U.S. government.
The closer look from the exchange-operator's market
regulation department will guard against potential price
manipulation during an adjusted settlement procedure for the
contracts, said Dave Lehman, CME's managing director of
commodity research and product development.
If the government's shutdown extends to Oct. 15-the day
after the CME October lean hog contract expires-the exchange
operator will base the final settlement on a "volume weighted
average" of trades made the previous two trading days-Friday,
Oct. 11 and Monday, Oct. 14. Data from the U.S. Department of
Agriculture, normally used to calculate final settlement, would
not be available.
CME had no choice but to revamp its settlement calculation
after the USDA pulled the plug on its daily, weekly and monthly
reports, including those containing livestock and meat prices.
The reports are the industry's benchmarks and have been the
basis of U.S. cash contracts between hog processors and
Using a volume weighted average of futures prices over two
trading days is the best way to reflect USDA data in the absence
of the government reports, Lehman told Reuters. Spreading the
calculation period over two days reduces the risk of
manipulation, he said.
"There's extra scrutiny being put on this expiration,"
Lehman said. "Our market regulation department can see who's in
the market, who holds positions, who's trading, and they can
monitor that and take action if they need to, if it looks like
prices are being distorted."
Some traders worry that CME's revised methodology could
create an opportunity for potential manipulation because more
volume at a specific price on those days will have a greater
influence in calculating the final settlement price. Any trader
holding an open position at expiration will be paid or charged
based on the final settlement figure.
"I fail to see how CME's solution ties to cash prices when I
know there is little or no authoritative cash price information
available right now," R.J. O'Brien hog futures trader Tom
Cawthorne said. "It brings up more questions than answers."
"The plan by CME is confusing and opens the door to the
possibility that a group of individuals could manipulate the
market by taking it higher or lower, depending on their
positions," Cawthorne added.
EXPIRATION CLOCK TICKING
With a few days left until expiration, 18,566 October hog
futures contracts remained open as of the start of trading on
Tuesday. That equates to some 3.7 million pigs.
University of Missouri livestock economist Ron Plain said
the exchange's alternative settlement will be a step down from
its traditional practice, but may be the best option available
given the circumstances.
"CME's got this dilemma. The contract expires early next
week and they've got to have some sort of mechanism for
settling," Plain said.
The country's leading meat packers, including Smithfield
Foods, Tyson Foods and Cargill Inc
also had to adopt new methods when the USDA data they used for
purchase contracts with hog producers became unavailable. They
came up with alternative pricing formulas to get them through
until the government resumes its daily market reports.
Steve Meyer, president of Iowa-based Paragon Economics and
consultant to the National Pork Board, said it is not easy to
gauge how the various revamped pricing strategies will affect
"You're pricing hogs with something that is estimating the
price of hogs and nobody knows the price of hogs," he said. "I'm
not sure whether there is a better alternative right now."
"You'd like to know where the CME lean hog index is before
you bet on where it might be," he added.