Following a unanimous recommendation by the Wheat Pit Committee, the board of directors for the Kansas City Board of Trade (KCBT) unanimously approved changes in the settlement procedures for the KCBT Hard Red Winter wheat futures contract, the board announced Aug. 15. The changes are effective on Tuesday, Sept. 2, 2008, subject to Commodity Futures Trading Commission approval.

 

The exchange Wheat Pit Committee held special meetings in recent months to address the issue of individual contract months settling out of line with spread trade. Current settlement procedures require all contract months to settle based on the weighted average of trade in each contract month. At times, these procedures create disparities between individual contract month settlements and the traded spread differentials between contract months.

 

In an effort to mitigate these disparities, the Wheat Pit Committee and board approved changes that provide for settlements on all but the lead contract month based on spread relationships.

 

The settlement price of the lead contract month (defined as the contract month with the largest open interest) shall be determined by the weighted average method of the trades in the closing period as reflected in the information reported to the pit reporter and committee in accordance with KCBT rules.

 

The remaining contract months shall be settled based on spread price relationships, considering spread trades reported during the close. If individual spreads trade at multiple prices during the close, the committee shall use the weighted average of spread prices in determining the settlement. The lead contract month settlement price shall serve as the initial spread relationship basis point for adjacent contract months, whose settlement can then be used in chronology to determine deferred month settlements.

 

If no spreads involving a particular contract month traded during the close, the committee shall take into consideration other market information available to the committee that is pertinent to such contract month, including but not limited to: spread bids and offers; the latest quoted spread trade; the latest outright trades, bids or offers; and the settlement price differentials that existed on the previous day in order to determine a settlement price that most accurately reflects the relationship between such month and surrounding contract months.

 

It is possible that the settlement prices established as a result of spread price relationships could result in settlement prices that violate either open outright contract month or spread orders. No such orders shall be elected and brokers shall not be held liable on orders violated as a result of such settlement price procedure.