The CME Group made it clear at a July 19 meeting that the exchange would go ahead with plans to raise the daily trading limits on corn futures despite strong opposition from many grain-handling companies.
The CME’s request to raise the trading limit to 40 cents from the current 30 cents is under review by the Commodity Futures Trading Commission (CFTC) until Aug. 8.
The CME said it was accepting comments until Aug. 8.
Following a spirited discussion at the Chicago Board Of Trade (CBOT), David Lehman, a CME managing director, said “from strictly an economic standpoint, the daily price limits should be based on a per cent of price, but that won’t happen now.”
The current daily trading limit for corn futures is 30 cents per bushel, expandable to 45 cents, then again to 70 cents. And CME, the world’s largest derivatives exchange, has proposed to the Commodity Futures Trading Commission that the corn limits expand to 40 cents and then to 60 cents.
CME held a feedback session in the historic CBOT building visitors’ gallery July 19.
Charles Carey, a CME vice-chairman, told Reuters that trading limits are necessary to avoid panic and to avoid driving away business.
“Corn limits are too low now compared with wheat and soybeans. The market can handle a 40-cent limit,” Carey said.
CBOT corn prices are roughly at $7 per bushel with a 30-cent limit, soybeans nearly $14 and a 70-cent limit while wheat prices at about $7 have a 60-cent-per-bushel limit.
CME Group said the increase in corn limits is a preventive measure to guard against expected volatility now and in the future and was proposed by the CME management and board of directors.
Industry complaints about the proposed limit increase centred about concern of potential escalating margin requirements and lack of capital to do business with the expanded limits.
“Margin requirements reflect the volatility in the market, not necessarily the price limits,” said Amy McCormick of the CME risk management division countering the complaint.
Chicago Cash merchandiser Glenn Hollander expressed concern that commercials and end-users might be driven away by the expanding daily trading limits.
CME officials acknowledged that most of the feedback letters that have been sent to the CFTC largely opposed the increased price limits.
But “the industry will have to increase capitalization to do business,” Lehman said.
Country elevators and others that buy grain hedge their price risk by selling futures. When prices rally as short hedgers face higher margin calls. For large positions, the extra capital demands can run into the millions of dollars.