[Federal Register Volume 63, Number 215 (Friday, November 6, 1998)]
[Notices]
[Pages 59930-59936]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29724]
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Notices
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains documents other than rules
or proposed rules that are applicable to the public. Notices of hearings
and investigations, committee meetings, agency decisions and rulings,
delegations of authority, filing of petitions and applications and agency
statements of organization and functions are examples of documents
appearing in this section.
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Federal Register / Vol. 63, No. 215 / Friday, November 6, 1998 /
Notices
[[Page 59930]]
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DEPARTMENT OF AGRICULTURE
Risk Management Agency
RIN 0563-AB61
Dairy Options Pilot Program
AGENCY: Risk Management Agency, USDA.
ACTION: Notice of Availability.
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SUMMARY: This notice announces the availability of a new Dairy Options
Pilot Program (DOPP) to be administered by the Risk Management Agency
(RMA) in conjunction with the private sector. The objective of DOPP is
to provide education, training and assistance to producers to ascertain
whether put options can provide producers with reasonable protection
from the price risk.
EFFECTIVE DATE: December 14, 1998.
FOR FURTHER INFORMATION CONTACT: For further information and a copy of
the cost-benefit analysis to the DOPP, contact Joe Connor, Financial
Analyst, Reinsurance Services Division, Risk Management Agency, United
States Department of Agriculture, 1400 Independence Avenue, S.W., Stop
0804, Room 6739-S, Washingon, DC., 20250-0804.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
The Office of Management and Budget (OMB) has determined this rule
to be significant for the purposes of Executive Order 12866 and,
therefore, has been reviewed by OMB.
Cost-Benefit Analysis
The program is designed to increase the level of understanding of
options contracts as risk management tools among dairy producers and to
explore their specific applicability to the dairy industry. The costs
to the Government of options premium under the program are estimated to
be about $10 million annually. If successful, the program will help
create liquid markets in basic formula price (BFP) futures and options
contracts which would be sustained, in part, by the on-going hedging of
output price risk by dairy producers who have benefited from the
educational aspect of the program. Under that scenario, the benefits of
the program would include furnishing producers with a viable price risk
management alternative, exerting a stabilizing influence on the dairy
industry, and contributing to the Department's goals of supporting
market oriented reforms in the agricultural sector.
Paperwork Reduction Act of 1995
Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. chapter
35), the collections of information for this notice have been approved
by the Office of Management and Budget (OMB) under control number 0563-
0054 through February 28, 2001.
Unfunded Mandates Reform Act of 1995
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.
L. 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments and the private sector. This notice contains no Federal
mandates (under the regulatory provisions of title II of UMRA) for
State, local, and tribal governments or the private sector. Therefore,
this notice is not subject to the requirements of sections 202 and 205
of UMRA.
Executive Order 12612
It has been determined under section 6(a) of Executive Order 12612,
Federalism, that this notice does not have sufficient federalism
implications to warrant the preparation of a Federalism Assessment. The
provisions contained in this notice will not have a substantial direct
effect on States or their political subdivisions, or on the
distribution of power and responsibilities among the various levels of
government.
Regulatory Flexibility Act
This notice will not have a significant impact on a substantial
number of small entities. The provisions included in this notice will
not impact small entities to a greater extent than large entities. The
amount of work required of brokers will only increase slightly because
the information to determine the eligibility of producers and trading
activities is already collected by brokers specializing in hedge
positions and the only additional burden is the electronic transmittal
of this information. Therefore, this action is determined to be exempt
from the provisions of the Regulatory Flexibility Act (5 U.S.C. 605)
and no Regulatory Flexibility Analysis was prepared.
Federal Assistance Program
This program is listed in the Catalog of Federal Domestic
Assistance under No.10.450.
Executive Order 12372
This program is not subject to the provisions of Executive Order
12372 which require intergovernmental consultation with State and local
officials. See the Notice related to 7 CFR part 3015, subpart V,
published at 48 FR 29115, June 24, 1983.
Executive Order 12988
This notice has been reviewed in accordance with Executive Order
12988 on civil justice reform. The provisions of this notice will not
have a retroactive effect. The provisions of this notice will preempt
State and local laws to the extent such State and local laws are
inconsistent herewith. The administrative appeal provisions published
at 7 CFR part 11 must be exhausted before any action for judicial
review of any determination made by RMA may be brought.
Environmental Evaluation
This action is not expected to have any significant impact on the
quality of the human environment, health, and safety. Therefore,
neither an Environmental Assessment nor an Environmental Impact
Statement is needed.
Background
Section 191 of the Federal Agriculture Improvement and Reform Act
of 1996 authorizes the Secretary of Agriculture (Secretary) to conduct
a pilot program for one or more agricultural commodities to determine
the feasibility of the use of futures and options as risk management
tools to protect producers from fluctuations in price, yield and
income. Accordingly, the Secretary directed RMA to develop DOPP.
[[Page 59931]]
The purpose of this notice is to announce the implementation of
DOPP. DOPP will not be published as a proposed or final rule unless the
program is authorized to be and is offered on a wider basis. DOPP will
be in effect when applications and contracts are made available by RMA
and producers in selected counties are provided actual notice through
the mail of the program's availability.
DOPP is intended to offer an educational experience to dairy
producers whose need for risk management tools has risen sharply as a
result of unprecedented price volatility, the elimination of price
supports, and the current unavailability of production insurance. DOPP
will be offered on a pilot basis to determine the usefulness of
commodity futures and options markets to manage risk in the dairy
industry.
The program represents a joint initiative between RMA and the
private sector. DOPP procedures were first proposed to RMA by the
Coffee, Sugar & Cocoa Exchange (CSCE). During the development of this
program, the Chicago Mercantile Exchange (CME) provided additional
recommendations. If successful, the educational benefits of DOPP will
prepare producers to manage their price risk independently through the
milk futures and options markets.
The program will be available in the following States and counties:
Stanislaus, Merced, Tulare, San Bernadino, San Joaquin, and Kings
counties, California; Stearns, Otter Tail, Todd, Morrison, Winona, and
Goodhue counties, Minnesota; St. Lawrence, Oneida, Steuben, Chautaugua,
Jefferson, and Lewis counties, New York; Lancaster, Bradford, Franklin,
Crawford, Berks, and Chester counties, Pennsylvania; Hopkins, Wood, Van
Zandt, Erath, Johnson, and Comanche counties, Texas; Marathon, Clark,
Grant, Vernon, and Chippewa counties, Wisconsin; and Franklin, Addison,
Orleans, Orange, Rutland, and Caledonia counties, Vermont. At the
discretion of the Secretary, States and counties are subject to change
throughout the duration of this pilot program.
The participation limit per county is set at 100 producers, subject
to adjustments as described below. Counties with a higher number of
participants signing-up will have participants selected through a
lottery. Applicants who miss the opportunity to participate in the
first round of the program will obtain preference in the next round
offered in their county. When a county has fewer than the maximum
number of participants, the excess program vacancies will be pooled and
distributed among counties where more than the maximum number has
signed up. Producers wishing to participate in the program must fill
out and sign an application (Form CCC-320) and a release of information
from their broker to RMA (CCC-321).
The program will last a maximum of 8 months for each participating
producer commencing at the date of training through the close-out of
DOPP options positions. After registration and training, producers will
have up to 2 months to purchase DOPP options and all DOPP options must
expire within 6 months from the date of purchase. Producers are
required to buy ``put options'' at least two months in the future in
order to allow time for the educational benefits of the program to be
realized. For the same reason, producers will be required to hold their
options until the four week period immediately prior to the expiration
date.
In order to introduce the new trading volume onto the markets
slowly, each round of participants will commence trading at different
times by state.
The two exchanges where the BFP futures and put options are
currently available are CSCE and CME. The contracts on the two
exchanges differ with regard to quantity. Under the program, a
participating producer will be permitted to purchase contracts to hedge
between 100,000 and 600,000 pounds of milk over a six-month period.
Producers will be required to submit documentation supporting their
farm's production of at least 100,000 pounds of milk over a six-month
period.
Discussion of Comments and Changes to the Program
On Friday, January 2, 1998, RMA published an Advance Notice of
Availability and Request for Comments in the Federal Register at 63 FR
51 to seek input from the public on a new DOPP to be administered by
the RMA in conjunction with the private sector. The public was afforded
30 days to submit written comments and opinions.
Approximately one-hundred comments were received from dairy
producers, cooperatives, industry associations, milk processors,
members of Congress, commodities exchanges, academics, state
representatives, and the general public. Over 95 percent of the
comments were in favor of the concept of the program, though many
suggested ways to improve the program's design features.
Comments received generally revolve around 4 major issues: (1) what
states and counties would be first implemented; (2) what exchange or
exchanges would be used to trade DOPP options; (3) whether cooperatives
should be able to participate as eligible producers; and (4) various
modifications to the constraints on trading behavior placed on DOPP
participants. The comments received and RMA's responses are as
follows:.
Comments: Seventy comments were solicitations by producers,
agricultural extension agents, brokers, futures exchanges, association
of dairy cooperatives, state and Federal government representatives,
and legislators to implement DOPP in their states and counties or
congressional districts. One cooperative suggested that the county
selection criteria should be: (1) the majority of farms (but not all)
should be family operations; (2) states should be representative of the
industry as a whole; (3) states should not be selected if they are
dominated by just one or two cooperatives; and (4) favor should be
given to states with strong pre-existing support structures such as
active university extension, marketing clubs, etc. An extension agent
suggested selecting states and counties from the several regions of
milk production, and makes a point of selecting one state from the west
and from the southeast.
Response: Selection of the counties where the DOPP is to be
implemented first was based on the concentration of production and the
geographical proximity of selected counties to one another. The former
criterion is relatively objective and was based on 1992 agricultural
census data. The latter criterion is more subjective but is necessary
to enable RMA to increase operational efficiency with regard to
training and compliance. The selected counties contain a diverse
mixture of family farms and corporate farms of all sizes, as well as
regions where many cooperatives are active, not just one or two
dominant cooperatives. Extension support and marketing clubs are also
found in many of these areas.
Comments: Fifty-one comments from cooperatives, futures exchanges,
legislators, association of dairy cooperatives, brokers and industry
associations suggested the use of a single exchange or a single
contract in the program. They can be summarized as follows:
(A) DOPP options should be traded solely on the Coffee Sugar &
Cocoa Exchange (CSC) because: (1) Trading on two exchanges diffuses
liquidity the program could be expected to build; (2) it makes the
program less confusing to the new trader; (3) it makes data collection
and analysis easier; (4) it recognizes CSC's longer commitment to
[[Page 59932]]
the project and innovative contribution to the program's design; and
(5) CSC has an excellent track record on aggressive efforts to present
educational seminars.
(B) DOPP options should be traded using any single contract and
exchange but not more than one of either to make the program less
complicated.
(C) DOPP options should be traded on any eligible exchange as
established by the language of the statute and the Advance Notice of
Availability and let the market decide where DOPP options should be
traded and inform the producers of the different contracts available on
the market.
Response: Dairy producers should be able to choose the options
product that best fits their needs both in terms of contract size and
in the exchange used. The market alone should dictate where options are
traded and it would be inappropriate for RMA to intervene in that
process. Further, the complexity of these markets is not something the
producer should be sheltered from under the program. Rather, the
program is intended to be an educational opportunity for the producer
to become familiar with this complexity.
Comments: Two cooperatives and one association suggested DOPP
should allow cooperatives to be DOPP participants, thus making the
program less time consuming to the producer and bringing their key
partner, the cooperative, up to speed on futures and options as well as
indirectly encouraging cooperatives to expand their forward contracting
programs.
Response: Based on the language in section 191 of the Federal
Agriculture Improvement and Reform Act of 1996 (1996 Act), there is no
authority to allow other than those producers who are eligible for a
production flexibility contract, a marketing assistance loan, or other
assistance under title I of the 1996 Act. Cooperatives are not eligible
for any of the programs listed. Therefore, no change has been made.
Comment: One exchange suggested that RMA should clarify
restrictions on the timing of purchases.
Response: RMA has clarified the provisions regarding the date by
which all purchases must be complete. RMA has also added a provision to
clarify for what months the options can be purchased.
Comment: One broker and one crop insurance company suggested that
RMA should remove the 600,000 pound maximum production that can be
hedged under the program.
Response: This program is experimental and intended to determine
the feasibility of such a risk management tool. The 600,000 pound
maximum is intended to allow sufficient use of the market while
protecting taxpayers from larger outlays than necessary to achieve the
educational objective of the program. Therefore, no change has been
made.
Comment: One association and one broker commented that RMA should
change the maximum strike price of 25 cents out-of-the-money to the
first strike price that is ``at'' or ``in'' the money.
Response: This change would also be too expensive to implement and,
potentially, less relevant educationally because producers wishing to
hedge production might be less inclined to choose an expensive ``in''
the money option. However, the 25 cent requirement has been reduced to
10 cents.
Comment: One legislator and one producer suggested that DOPP should
be implemented in the statutorily allowed 100 counties.
Response: As RMA's first options pilot program, it has been
determined that a smaller scale of operation will allow greater
opportunity to observe and make adjustments to the program before
expanding it. Further, implementing the program at its full capacity
would increase the likelihood that a proposed and final rule be
published prior to implementation, instead of a Notice of Availability.
This would eliminate RMA's ability to modify the program expeditiously
in its early stages. Therefore, no change has been made.
Comment: One broker suggested that the separate billing scheme
would detract from the realism of the producer's experience.
Response: In any subsidized program, the producer will not receive
a perfectly realistic free-market experience. By using a billing scheme
that bills RMA for the subsidized portion of the transaction, RMA has
enhanced the speed and efficiency of the payment system. A 72 hour turn
around time is required by brokers under their industry regulations.
Other alternatives such as asking producers to put up the money and be
reimbursed later, or advancing funds to the producer to conduct DOPP
trades were considered. However, the former alternative was rejected on
the grounds that it would negatively impact participation due to the
limited working capital of many small dairy producers. The latter was
deemed to subject the program to increased risk of misuse of funds
while significantly complicating the compliance audit process. Further,
timeliness of trading and compliance information will play a critical
role as RMA evaluates the program for program expansion and relocation.
Therefore, no change has been made.
Comment: One cooperative suggested that 6 months is too short a
period for the program to last for each participant and stated that 12
months is better.
Response: The program can actually last as long as 8 months from
the date of the producer's attendance at the required training class.
RMA determined that an 8 month time period encompasses enough of the
dairy marketing cycle to enable the producer to implement and complete
a useful price risk hedge and allow the producer to decide whether to
continue utilizing this risk management strategy. Therefore, no change
has been made.
Comment: One state government employee commented that RMA should
clarify that producers cannot buy options on more milk than they
produce over six months.
Response: RMA has added a provision that specifies that producers
cannot purchase put options for more production than the producer has
documents to prove was produced during the 6 month period.
Comment: Two brokers suggested that RMA should clarify the flow of
funds.
Response: RMA has clarified that RMA and the producer will make
their respective required payments directly to the broker.
Comment: One broker suggested that funds should be committed to
subsidize additional floor brokers (market makers) to ensure continued
viability of the program.
Response: New floor brokers should naturally gravitate toward the
BFP contracts in response to the new volume the program will provide.
Therefore, no change has been made.
Comment: One association of dairy cooperatives suggested that DOPP
should be funded for three years to allow a diverse group of producers
to participate.
Response: RMA has received funding approval to operate the program
for three years.
Comment: One association suggested that the requirement that
producers cannot exercise or sell an option until the four weeks prior
to expiration should be eliminated or modified.
Response: Previous options pilot programs administered by USDA were
criticized for failing to educate producers by permitting them to sell
their options the same day they obtained them. In order to maximize the
educational experience in hedging strategies, the producer should hold
a position until the month they are actually hedging. To allow the sale
of the option before that time may re-expose the producer to price risk
for the rest of time before the expiration date.
[[Page 59933]]
RMA will take this into consideration as it conducts its ongoing
evaluation of the program and make such changes as are necessary.
Therefore, no change has been made.
Comment: One association suggested that RMA should clarify the
reporting requirement for participation.
Response: The only reporting requirements for eligibility is that
producers must report their milk production history for 6 months to
establish that they meet the 100,000 pounds of production during a
consecutive 6 month period within the previous 12 month period and
maintaining the record of each transaction to ensure that the maximum
amount of production for which options may be purchased under the
program is not exceeded. These requirements are clearly stated.
Therefore, no change has been made.
Comment: One producer perceived the program as Federally sponsored
gambling and suggested the program be abolished prior to
implementation.
Response: Futures and options contracts are widely recognized risk
management tools. The intent of DOPP is simply to educate producers on
the use of these tools. While there is some risk involved, the value of
these risk management tools, which after DOPP expires is at no cost to
the taxpayers, outweighs the risks. Therefore, no change has been made.
In addition to the changes described above, and minor reformatting
and word changes for clarity, RMA has made the following changes to
DOPP:
1. In section 1 of the producer contract, RMA added definitions of
``hedge,'' ``round turn,'' ``Secretary,'' ``strike month,'' and
``USDA'' for clarification.
2. In section 2(a)(4) of the producer contract, RMA reduced the
minimum production in a consecutive 6 month period to be eligible for
the program from 200,000 pounds to 100,000. This change will ensure
that smaller producers are not excluded from the program.
3. In section 2 of the producer contract, RMA added a provision
that requires the producer to execute the DOPP contract and comply with
all its terms and conditions in order to permit enforcement of program
requirements.
4. In section 3(a)(2) of the producer contract and broker
agreement, RMA reduced the amount of milk upon which producers must
purchase put options from 200,000 pounds to 100,000 to allow smaller
producers to participate. RMA also added a provision that specifically
states that options on no more than 600,000 pounds of milk production
can be purchased by any producer. This requirement is intended to limit
the potential costs of the program until such a time that its viability
can be assessed.
5. In section 3 of the producer contract and broker agreement, RMA
clarified when put options may be sold or exercised and has included an
example.
6. In section 3(b) of the producer contract, RMA added a provision
requiring the producer to submit the application to RMA within 30 days
after receiving notification and application materials from RMA through
the mail so that RMA can timely select producers to participate in the
program and reallocate any unfilled slots.
7. In section 5(a) of the producer contract, RMA reduced the number
of producers allowed to participate in each county from 150 to 100.
This change was based on information indicating that it is unlikely
that any county will have more than 100 producers interested in
participating. A reduction in the number of participants per county
will also allow RMA to increase the number of states participating from
6 to 7, which will allow for a greater geographic representation of
milk producers in the program without increasing budget outlays.
8. In section 5(d) of the producer contract and broker agreement,
RMA deleted the requirement that no put option could be purchased at a
premium that was more than 160 percent of the previous day's settlement
premium because such limits could routinely be exceeded under normal
trading situations.
9. In section 6(d) of the producer contract, RMA added a new
provision that authorized the Chicago Mercantile Exchange and Coffee,
Sugar, and Cocoa Exchange to replace BFP options contracts with options
contracts based on a milk price index other than the BFP in order to
provide greater flexibility into the program. This change is necessary
because USDA may stop publishing the BFP at some point in the future.
10. In section 1 of the broker agreement, RMA added definitions of
``hedge,'' ``Secretary,'' ``strike month,'' and ``USDA'' for
clarification.
11. In section 2 of the broker agreement, RMA added provisions that
require the broker to attend at least one DOPP training session and
have specified hardware and software to electronically receive and
transmit data to RMA to be eligible to participate.
12. In section 3 of the broker agreement, RMA added provisions
specifying that brokers cannot allow producers to purchase a DOPP
option that expires during a month that is more than 6 months after the
month of purchase for that option in order to protect the integrity of
the program.
13. In section 3 of the broker agreement, RMA also added a
provision specifying the applicable sanctions if the broker fails to
comply with the terms and conditions of the broker agreement.
14. In section 3 of the broker agreement, RMA deleted the provision
mandating that brokers cannot accept an application unless the
producer's marketing receipts show the requisite production since RMA
will be accepting the applications.
RMA will enter into contracts with producers and brokers who elect
to participate in DOPP.
Notice: The terms and provisions for the DOPP Producer Contract are
as follows:
United States Department of Agriculture
Risk Management Agency
Dairy Options Pilot Program Contract
Participation in the Dairy Options Pilot Program is voluntary.
Neither the United States, the Commodity Credit Corporation, the
Risk Management Agency, the Department of Agriculture, nor any other
Federal agency is authorized to guarantee that participants in this
pilot program will be better or worse off financially as a result of
participation in the pilot program than the producer would have been
if the producer had not participated in the pilot program.
1. Definitions.
Application. Form CCC-320 that is required to be completed and
signed by the producer before the producer is eligible to
participate in this program.
Basic formula price (BFP). The price established by USDA, and
provided to the USDA marketing order administrators to be used to
set regional minimum prices.
Broker. A broker or brokerage firm registered under the
Commodities Exchange Act that has entered into an agreement with RMA
to participate in the program.
CME. Chicago Mercantile Exchange.
CSCE. Coffee, Sugar, and Cocoa Exchange.
DOPP. Dairy Options Pilot Program.
Eligible markets. Commodity futures and options markets
designated as contract markets under the Commodity Exchange Act (7
U.S.C. 1 et seq.).
Exercise. The action taken by the holders of a put option on a
futures contract if they wish to sell the underlying futures
contract.
Expiration date. The last date on which the put option may be
exercised.
Futures contract. A contract to buy or sell a commodity on an
eligible market at some point in the future.
Hedge. To take compensatory measures to counter a possible loss.
Open outcry. Method of public auction required to make bids and
offers in the trading pits, or rings, of commodity exchanges.
[[Page 59934]]
Out-of-the-money. Put option whose strike price is less than the
underlying futures contract price.
Premium. The price of a put option determined by open outcry.
The premium does not include related brokerage commission fees.
Producer. An individual, entity, or joint operation, which as
owner, operator, landlord, tenant, or sharecropper, is entitled to
share in the production available for marketing from the farm, or
share in the proceeds thereof.
Program. The Dairy Options Pilot Program.
Put option. A contract traded on eligible markets that gives the
buyer the right to sell the underlying futures contract at the
strike price on or before the expiration date.
RMA. Risk Management Agency, an agency of the United States
Department of Agriculture.
Round turn. The broker's service in transacting a single put
option consisting of consultation services and the purchase and
liquidation (sale or exercise) of a put option, including the
subsequent sale of the underlying futures position if the put option
is exercised.
Sale. Transfer of title through the selling of the value of the
put option.
Secretary. The Secretary of Agriculture.
Settlement price. The price of a specific put option as
published by the exchange on which that contract trades at the end
of each day's trading.
Strike month. The month preceding the month in which a DOPP
options contract expires, e.g., the strike month for a DOPP option
contract that expires in March would be February.
Strike price. The price at which the holder of a put option may
sell the underlying futures contract.
USDA. The United States Department of Agriculture.
2. Eligibility.
(a) To be eligible for any benefits under this contract, a
producer must:
(1) Be eligible for a production flexibility contract, a
marketing assistance loan or any other assistance under title I of
the Federal Agriculture Improvement and Reform Act of 1996;
(2) Volunteer to participate in this program;
(3) Operate a farm located in a county selected for the pilot
program; and
(4) Have documented production history of at least 100,000
pounds of production over any consecutive six month period during
the most recent 12 months.
(b) This program is available to producers in states and
counties designated.
(c) Execute this contract and comply with its terms and
conditions.
3. Responsibilities.
(a) Producers who elect to participate in the program agree:
(1) To attend not less than one training session conducted by
RMA to educate the producer on the use of put options and the
program's operations;
(2) To buy all put options on a minimum of 100,000, and a
maximum of 600,000, pounds of milk on an eligible market, through an
eligible broker, within 2 months after the date the producer attends
the required training session;
(3) That put options on no more than 200,000 pounds of milk will
be purchased for any one strike month under this program;
(4) That put options on no more than the producer's total
average production over the 6-month period used to establish the
producer's eligibility shall be purchased under this program (For
example, if a producer has provided copies of marketing receipts for
245,000 pounds of milk production eligible for the program, only
200,000 pounds can be hedged under the program because there are no
45,000 pound contracts or less currently available on the market);
(5) That the producer shall not purchase a DOPP option that
expires on a date that is less than 2 months after the date the DOPP
option was purchased (For example, assume the producer wants to
hedge August 1998 production with BFP put options. The last date on
which he or she shall be able to purchase an August option is
Friday, July 3, because the August options expire exactly two months
later, September 3. On July 4, the earliest option the producer
could purchase is the September contract);
(6) That the put options will be purchased at a strike price
that is at least 10 cents out of the money;
(7) That no put options will be sold or exercised before four
weeks prior to the expiration date (For example, the BFP is
announced by the USDA on the fifth of the month following the strike
month, which is not on a weekend or Federal holiday. The September
BFP will be announced by USDA on Monday, October 5, 1998. The
September BFP option expires on the last day of trading of the
September BFP futures contract, which is the day before the date of
the BFP's announcement, or in this case, October 2, 1998 (October 4
is a Sunday). For purposes of DOPP, the four week period leading up
to October 2, 1998, will begin on September 4, 1998. Therefore, a
DOPP participant holding a September BFP put option would be free to
sell or exercise that option at his or her discretion between
September 4, 1998, and the expiration date. If the producer
exercises the put option and holds the futures contract, the
producer assumes the risk of any loss); and
(8) That all options purchased shall expire during the month
that is not more than 6 months after the month of purchase. For
example, assume a producer is trained on June 4, 1998, and makes all
purchases in the months of June and July. The latest option contract
the producer is permitted to buy is the December 1998 contract,
which expires in January, 1999.
(b) The producer must open an account with an eligible broker in
order to participate in the program and must do so before making any
purchases.
(c) The producer must submit a properly completed and executed
application and a copy of the marketing receipts for 6 consecutive
months in the previous 12 months showing production in excess of
100,000 pounds to RMA within 14 days after receiving notification
and application materials from RMA through the mail.
4. Costs.
(a) The producer will pay 20 percent of the premium of each put
option to the broker.
(b) RMA shall pay transactions costs not to exceed $30 per round
turn and 80 percent of the premium to the broker on behalf of the
producer. The producer is free to deal with brokers who charge more
than $30 per round turn, but the producer will be responsible for
any amount that exceeds $30.
5. Restrictions and limitations.
(a) Except as stated herein, total program participation will be
limited to 100 producers per county. If more participants are
enrolled than the county limit, a lottery will be held by RMA to
determine participants within a county. If fewer than 100
participants are enrolled in a county, the number of unfilled
participation slots will be pooled and redistributed over counties
where enrollment exceeds 100.
(b) The producer will be able to order put options from a broker
after the broker has obtained verification from RMA of the
producer's selection as a program participant and the date the
producer received training. Verification will take place
electronically after the producer selects an eligible broker.
(c) No producer may participate in the program more than once.
(d) If a producer who has participated in the program is not in
compliance with the provisions of this contract, the producer will
be required to repay any premiums and broker fees paid by RMA on
behalf of the producer.
(e) This agreement is not effective until the producer executes
and returns forms CCC-320, with supporting documentation of milk
marketing, and CCC-321, and the producer receives written notice
from RMA that the producer has been accepted into the program.
6. Other.
(a) The National Futures Association, on behalf of the Commodity
Futures Trading Commission, maintains a current listing of brokers
and brokerage firms who are licensed to conduct futures-related
business. However, only those brokers who have entered into an
agreement with RMA will be eligible to trade put options under this
program.
(b) To assist in the evaluation of the program, producers
participating in the program may be asked to complete entry and exit
surveys by RMA. While completion of these surveys is voluntary,
producers are encouraged to do so in order that an accurate
assessment may be made of this program's overall effectiveness.
(c) There may be tax consequences with respect to participation
in this program. Producers interested in participating in the
program who have questions regarding the tax issues associated with
this program should seek the advice of a tax advisor.
(d) The CME or the CSCE could replace BFP options contracts with
options contracts on another milk price index. The program will
permit the trading of options contracts on another milk price index
selected by the CME or the CSCE.
Notice: The terms and conditions for the DOPP broker agreement
are as follows:
[[Page 59935]]
United States Department of Agriculture
Risk Management Agency
Broker Agreement for the Dairy Options Pilot Program
1. Definitions.
Application. Form CCC-320 that is required to be completed and
signed by the producer before the producer is eligible to
participate in this program.
Basic formula price. The price established by USDA, and provided
to USDA's marketing order administrators to be used to set regional
minimum prices.
Broker. A broker or brokerage firm registered under the
Commodities Exchange Act that has entered into an agreement with RMA
to participate in the program.
CME. Chicago Mercantile Exchange.
CSCE. Coffee, Sugar, and Cocoa Exchange.
DOPP. Dairy Options Pilot Program.
Eligible markets. Commodity futures and options markets
designated as contract markets under the Commodity Exchange Act (7
U.S.C. 1 et seq.).
Exercise. The action taken by the holders of a put option on a
futures contract if they wish to sell the underlying futures
contract.
Expiration date. The last date on which the put option may be
exercised.
Futures contract. A contract to buy or sell a commodity on an
eligible market at some point in the future.
Hedge. To take compensatory measures to counter a possible loss.
Open outcry. Method of public auction required to make bids and
offers in the trading pits, or rings, of commodity exchanges.
Out-of-the-money. Put option whose strike price is less than the
underlying futures contract price.
Premium. The price of a put option determined by open outcry.
The premium does not include related brokerage commission fees.
Producer. An individual, entity, or joint operation, which as
owner, landlord, tenant, or sharecropper, is entitled to share in
the production available for marketing from the dairy farm, or share
in the proceeds thereof.
Program. The Dairy Options Pilot Program.
Put option. A contract traded on eligible markets that gives the
buyer the right to sell the underlying futures contract at the
strike price on or before the expiration date.
RMA. Risk Management Agency, an agency of the United States
Department of Agriculture.
Round turn. The broker's service in transacting a single put
option consisting of consultation services and the purchase and
liquidation (sale or exercise) of a put option, including the
subsequent sale of the underlying futures position if the put option
is exercised.
Sale. Transfer of title through the selling of the value of the
put option.
Secretary. The Secretary of Agriculture.
Settlement price. The price of a specific put option as
published by the exchange on which that contract trades at the end
of each day's trading.
Strike month. The month preceding the month in which a DOPP
options contract expires, e.g., the strike month for a DOPP options
contract that expires in March would be February.
Strike Price. The price at which the holders of a put option may
choose to sell the underlying futures contract.
USDA. The United States Department of Agriculture.
2. Eligibility.
(a) To be eligible to trade options under this agreement a
broker must:
(1) Be properly licensed and in good standing with the National
Futures Association;
(2) Volunteer to participate in this program;
(3) Attend at least one DOPP training session;
(4) Have the following hardware and software and service in
order to operate the DOPP communications software: Internet Service
Provider; Internet E-mail address; a Windows 95 PC; Internet
Browser, either Microsoft Internet Explorer or Netscape; minimum
28.8 modem; minimum 8 meg RAM, (16 meg recommended); and
(5) Execute this agreement and comply with all its terms and
conditions.
3. Responsibilities.
(a) Brokers who elect to participate in the program agree to
enforce the following program requirements with respect to any
producer participating in the program who might use the broker's
services:
(1) To buy all put options on a minimum of 100,000 and a maximum
of 600,000, pounds of milk on an eligible market within 2 months
after the date the producer attends the required training session;
(2) That put options on no more than 200,000 pounds of milk will
be purchased for any one strike month under this program;
(3) That put options on no more than the producer's total
production over the 6-month period used to establish the producer's
eligibility of production shall be purchased under this program;
(4) That the producer shall not purchase a DOPP option that
expires on a date that is less 2 months after the date the DOPP
options contract was purchased (For example, assume the producer
wants to hedge August 1998 production. The last date on which he or
she shall be able to purchase an August option is Friday, July 3,
because the August options expire exactly two months later,
September 3. After July 3, the earliest option the producer could
purchase is the September contract);
(5) That the put options will be purchased at a strike price
that is at least 10 cents out of the money;
(6) That no put options will be sold or exercised before four
weeks prior to the expiration date (For example, the BFP is
announced by the USDA on the fifth of the month following the strike
month, which is not on a weekend or Federal holiday. The September
BFP will be announced by USDA on Monday, October 5, 1998. The
September BFP option expires on the last day of trading of the
September BFP futures contract which is the day before the date of
the BFP's announcement, or in this case, October 2, 1998 (October 4
is a Sunday). For purposes of DOPP, the four week period leading up
to October 2, 1998, will begin on September 4, 1998. Therefore, a
DOPP participant holding a September BFP put option would be free to
sell or exercise that option at his or her discretion between
September 4, 1998, and the expiration date. If the producer
exercises the put option and holds the futures contract, the
producer assumes the risk of any loss); and
(7) That all options purchased shall expire during the month
that is not more than 6 months after the month of purchase (For
example, assume a producer is trained on June 4, 1998, and makes all
purchases in the months of June and July. The latest option contract
the producer is permitted to buy is the December 1998 contract,
which expires in January, 1999).
(b) The broker must keep detailed records on each transaction
and transmit that information to RMA through electronic data
transmission. The broker will be provided with communications
software for this purpose by RMA. Records required include:
(1) The purchase date, time, and premium for each put option;
(2) The expiration date and strike month for each put option;
and
(3) Whether the options are sold or exercised and, if sold or
exercised, the date, and price of the futures contract on the date
of sale or exercise and the time of the transaction.
(c) Brokers certify that systems used to transmit data will be
year 2000 compliant, i.e., be able to accurately process date and
time data (including, but not limited to, calculating, comparing,
and sequencing) from, into, and between the years 1999 and 2000 and
leap year calculations, and to properly exchange date and time data
with other information technology. Data transmission requirements
and year 2000 compliance guidelines are available upon request.
(d) The broker cannot permit a producer to purchase a DOPP
option until RMA has electronically notified the broker that the
producer has been accepted into the program, the amount of milk for
which the producer has provided production records, and the date on
which the producer fulfilled the training requirements.
(e) If a broker participating in the program through this
agreement is not in compliance with the provisions of this
agreement, the broker will be required to repay any broker fees and
premiums paid by RMA on options contracts traded by the broker under
the program.
4. Costs.
(a) Up to $30 per round turn in broker fees will be paid by RMA.
Any transactions costs agreed upon between the broker and a producer
in excess of $30 will be the sole responsibility of the producer and
not of RMA.
(b) The broker will charge the producer's account for 20 percent
of the premium per put option. The 20 percent of the transaction for
which the producer is responsible is the sole responsibility of the
producer and not of RMA.
(c) The broker will bill transaction costs not to exceed $30 and
the balance of the premium, 80 percent, to RMA. RMA will pay these
amounts via the automated clearing
[[Page 59936]]
house (ACH) payments process within three banking days after RMA's
acceptance of the transaction. Transactions will be considered
accepted after RMA systems verify that the broker and participant
have been selected for participation in the program, and that the
transaction does not violate the trading limitations of the program
itemized in Section 3 above.
5. Program changes.
(a) The broker acknowledges that, due to the pilot nature of
this program, on-going modifications may be necessary. The broker
agrees to abide by reasonable changes in the program by RMA.
(b) The CME or the CSCE could replace BFP options contracts with
options contracts on another milk price index. The program will
permit the trading of options contracts on a new milk price index
selected by the futures exchanges at that time.
Signed in Washington, D.C., on November 2, 1998.
Kenneth D. Ackerman,
Administrator, Risk Management Agency.
[FR Doc.98-29724 Filed 11-5-98; 8:45 am]
BILLING CODE 3410-08-P
