Countdown to V.S.R. in K.C. wheat futures begins

by Jay Sjerven
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Kansas City hard red winter wheat futures
The C.M.E. Group on Dec. 19 will take the initial step toward implementing a variable storage rate for its Kansas City hard red winter wheat futures contract.
 

CHICAGO — The C.M.E. Group on Dec. 19 will take the initial step toward implementing a variable storage rate (V.S.R.) for its Kansas City hard red winter wheat futures contract. That date will mark the beginning of an initial observation period that will conclude on Feb. 23, 2018, during which an evaluation will be made of the 2018 March-May hard red winter wheat calendar spread relative to financial full carry. On the basis of that evaluation, under the V.S.R., the maximum storage rate, which will hold at 19.7/100s of one cent per bu per day during the observation period, will be raised, lowered or left unchanged beginning March 18, 2018.

The C.M.E. explained the V.S.R. mechanism examines nearby calendar spreads to determine adjustments to the maximum storage charges that regular warehouses may charge holders of its outstanding warehouse receipts. The V.S.R. provides a formula for triggering higher maximum allowable storage charges when futures spreads are at or near financial full carry, and lower maximum allowable storage charges when futures spreads are narrow or inverted. (The C.M.E. defines financial full carry as the cost to take delivery of a wheat shipping certificate to the next delivery period and redeliver that certificate during the next delivery period. Financial full carry considers the number of days from the first delivery day in the nearby contract to the first delivery day in the contract following the nearby contract, the settlement price for the nearby futures contract and the current daily storage charge, plus interest.) After an initial adjustment to harmonize base storage rate increments with the exchange’s soft red winter wheat futures contracts, where the V.S.R. was introduced in 2010, the mechanics of the V.S.R. mechanism for the K.C. contracts and the soft red winter wheat futures contracts will be identical.

The aim of the V.S.R. is to improve cash-futures convergence at futures contract expiration.

The C.M.E. said it would release the results of the observation period via a special executive report in advance of the March 18 effective date. The results of the observation period will be determined by the following standards:

  1. A V.S.R. result of 50% of financial full carry or less will result in the contracts’ maximum storage charge being lowered from 19.7/100s to 16.5/100s of one cent per bu per day on March 18, 2018.
  2. A V.S.R. result between 50% and 80% of financial full carry will result in the contracts’ maximum storage charge remaining unchanged at 19.7/100s of one cent per bu per day on March 18, 2018.
  3. A V.S.R. result of 80% of financial full carry or more will result in the contracts’ maximum storage charge being raised from 19.7/100s to 26.5/100s of one cent per bu per day on March 18, 2018.

If the maximum storage charge of 19.7/100s of one cent per bu per day remains unchanged on March 18, 2018, it will remain in place until a subsequent observation period where the V.S.R. mechanism triggers that rate down to 16.5/100s or up to 26.5/100s of one cent per bu. per day. The C.M.E. said this will harmonize the storage rate increment of the contracts with the exchange’s soft red winter wheat futures contracts.

The C.M.E. said once triggered to either 16.5/100s or 26.5/100s, the V.S.R. mechanism for all subsequent observation periods will be consistent with exchange’s soft red winter wheat futures as follows:

  1. A V.S.R. result of 50% of financial full carry or less will result in the contracts’ maximum storage charge decreasing by 10/100s of one cent per bu per day on the 18th calendar day of the nearby contract month.
  2. A V.S.R. result between 50% and 80% of financial full carry will result in the contracts’ maximum storage charge remaining unchanged on the 18th calendar day of the nearby contract month.
  3. A V.S.R. result of 80% of financial full carry or more will result in the contracts’ maximum storage charge increasing by 10/100s of one cent per bu per day on the 18th calendar day of the nearby contract month. The maximum storage rate will not be reduced below 16.5/100s of one cent per bu per day.

The V.S.R. will continually expand financial full carry until calendar spreads fall below 80% of financial full carry. MBN

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