hand, the Commission set up to regulate exchange actions (as distinguished from trader actions) consists of three heads of administrative departments, all of whom have many other administrative duties, and two of whom have little, if any, direct continuing interest in what is happening currently on commodity exchanges except as they are called upon to sit as members of the commission acting in particular proceedings.

It is suggested that, insofar as experience has indicated that the terms of the law provide not only an insufficient basis, but also somewhat inefficient administrative machinery, for accomplishing the law's intent, it would seem that the Congress may wish to give consideration to possible amendment to provide more effective functioning of regulation and larger exercise by public authority of preventive rather than punitive nature respecting the policies and actions of exchange managements if and when they deviate from sound and equitable practices.

THE UNITED STATES WAREHOUSE ACT

"The Secretary of Agriculture or his designated representative" administers the United States Warehouse Act. The Act deals mainly with two of several aspects of warehousing of interest in futures trading, namely, with the validity of warehouse receipts and preventing discriminations by warehousemen against persons using warehouse services. The basis for control is licensing, but only upon application of the warehouseman. Charging "unreasonable or exorbitant" rates for services may cause suspension or revocation of licenses.

The Warehouse Act does not touch at all upon numerous aspects of warehousing important in futures trading, and since licensing is voluntary on the part of warehousemen, its regulation in respect to those upon which it does touch is incomplete. In Minneapolis, for instance, no elevator regular for futures delivery is federally licensed, while in Chicago the proportion of regular houses federally licensed was about 86.8 percent in 1945. Neither does the Commodity Exchange Act relate the administration of the Warehouse Act to exchange operations except to make receipts, of federally licensed warehouses tenderable on futures contracts provided such receipts are for the kind, quality and quantity specified in futures contracts, and the warehouse itself meets the physical requirements as to location, accessibility, and suitability for warehousing and delivery set up by the exchange for regular warehouses.

It would seem that the nature and scope of both the United States Warehouse Act and the Commodity Exchange Act should be so amplified and coordinated, or even combined, as to make effective the type and scope of regulation over futures trading contemplated by the Congress in enacting the Commodity Exchange Act. This suggestion applies particularly with respect to warehouses regular for delivery of commodities on futures contracts covered by the Commodities Exchange Act.

OTHER MEASURES

Today, after many years of legislative and regulative effort directed along lines of punitive action against traders rather than constructive policy and practice regulation at the exchange management level, some progress has been made, but there appears to be much yet to be accomplished. In Chicago, great speculative corners have become rare, but there has been little change in concentrated control of warehousing facilities or in the use of such facilities by merchandiser-operators to further their own purposes in both grain merchandising and futures trading. Contrary to a statement, based on misinformation, made in an earlier memorandum for the Committee, the principal elevators regular for delivery in Chicago still are

owned by railroads and leased to private grain-merchant operators. In futures trading, merchandising interests, speculative interests, commission house interests, hedgers, and small floor traders sometimes oppose, and sometimes cooperate, as their business interests dictate. In Chicago, with the exception of three "nonmember" directors, the policy forming and policy directing board of 21 officers and directors are drawn from among these various interests. Realistic approach requires recognition that they would have to be something more than human if they left all considerations of personal or company interests outside the boardroom door when they meet to formulate policies and adopt rules and regulations for the operation of the exchange. Much the same situation exists in other exchanges.

At the same time partial regulation has not reached the heart of the problem which, after all, is the spirit of policy formation and application in exchange management. For instance, something more than lip service to the principles of validity of futures contracts and responsibility of traders is needed to ensure equitable management of exchange operations. Experience continues to point to the conclusion that the correction of conditions that periodically become explosive cannot be left altogether to an exchange membership and management individually and collectively bound by written agreement to observe and act in accordance with the charter, rules, and regulations of the association as provided by the Chicago Board's Rule 107, the Minneapolis Chamber's Rule 702 and the Kansas City Board's Preamble Agreement of Members.

Viewed in its entirety, therefore, it would appear that, in addition to strengthening and coordinating the Commodity Exchange Act and the United States Warehouse Act in ways suggested above, the Congress may wish to give consideration to embodying in Federal Law each of the following recommendations previously made by the Federal Trade Commission in 1937:

1. That all deliveries of grain on futures contracts shall be made from public warehouses:

(a) Licensed by Federal authority.

(b) Subject to Federal regulation.

(c) Not owned, operated, or controlled, directly or indirectly, by any person, firm, or any other organization directly or indirectly dealing in grain.

2. That all deliveries of grain on any futures contracts shall be subject to:

(a) Federal grading and inspection.

(b) Federal regulation of the delivery of grain on such contracts.

3. That the storage charges for grain in public warehouses from which grain is deliverable on futures contracts as aforesaid shall be regulated by the Federal authority.

4. That every futures contract for grain on any futures market may be satisfied by the delivery of grain from any public warehouse operating in accordance with the provisions of paragraphs 1, 2 and 3 of these recommendations in not less than one market in addition to the market on which such contract is made, such outside market or markets to be determined in the discretion of the Federal authority.

5. That it shall be unlawful for brokers, commission men, officers, and large stockholders of companies doing a brokerage or commission business in futures for customers to speculate in grain futures for their own account.

6. That exchange rules for delivery in cars and for settlement of defaulted futures contracts shall be interpreted and applied under Federal supervision.

The Commission's 1937 recommendations suggested strengthening commodity exchange regulation along lines similar to those provided in the Securities Exchange Act. Today, conditions in commodity exchange operation continue practically unchanged from what they were in 1937. Therefore, it would seem that the Congress may wish to give consideration to setting up regulatory organization and procedure for commodity exchanges similar to that now provided for securities exchanges insofar as measures now provided for the latter are applicable.

Report of the

FEDERAL TRADE COMMISSION

on

ECONOMIC EFFECTS OF GRAIN EXCHANGE ACTIONS AFFECTING
FUTURES TRADING DURING THE FIRST SIX MONTHS OF 1946

CHAPTER I

CHICAGO BOARD OF TRADE ACTIONS

SECTION 1. CHRONOLOGY AND SUBJECT MATTER OF ACTIONS

Principal actions taken by the Chicago Board of Trade which affected contracts and trading in futures in wheat, corn, oats, barley and rye during the first 6 months of 1946, was as follows:

1. Regulation 1889, - adopted March 4, 1946, fixed the following maximum prices for trading in futures, which maximums were in accord with increases announced by the Secretary of Agriculture and the Office of Price Administration:

6/Regulation 1876-A, Adopted Feb. 20, 1945.

7/Regulation 1882, Adopted July 26, 1945, applied only to July 1946, and later rye

futures.

2. Regulation 1893, - adopted March 26, 1946, declared an emergency to exist because of interference by War Food Order 144 1/ with normal procedure in the marketing of wheat and, therefore, stopped all further trading in futures contracts for delivery of wheat in May, 1946, and, ordered all May, 1946, wheat futures settled as of March 26, at the ceiling price then prevailing, namely; $1.83 1/2 per bushel.

3. Regulation 1894. On May 12, 1946, following announcement on May 8, by the Office of Economic Stabilization, the U. S. Department of Agriculture, and the Office of Price Administration that, effective May 13, 1946, grain price ceilings would be increased by specified amounts, and on recommendation of the three Government

1/War Food Order No. 144, issued Feb. 15, 1946, and effective Feb. 18, 1946, required, among other things, that all merchandisers and country shippers offer to the Commodity Credit Corp. at the end of each week any wheat in excess of the quantity needed to make deliveries (1) on export licenses Approved by the Office of International Trade, U. S. Department of Commerce, and (2) on orders from millers or feed manufacturers who furnished certificates indicating that the purchases would not increase the respective processors' inventories of wheat on hand to more than 45 days supply, as permitted under War Food Order No. 144. Any wheat so offered by a merchandiser, if not accepted by the Commodity Credit Corp. within two days, was to be held as excess wheat applicable on preferred orders, and could not be applied on any other order or contract.

13

agencies named above that all futures contracts open at the close of business on May 11 be settled at the then applicable ceiling prices, and that all cash contracts be handled in a similar manner, the Chicago Board of Trade adopted Regulation 1894. This regulation, after stating that the Board of Trade found itself without authority to make any adjustments respecting cash contracts, declared an emergency to exist respecting futures trading and stopped all trading except for liquidation in all "old" futures outstanding (except rye for delivery in May 1946) as of May 11, 1946, such trading for liquidation to be at or below the old ceiling prices prevailing on Saturday, May 11, 1946. In addition, the Board authorized trading on "new" futures contracts beginning on May 13, 1946, for months and at prices indicated below. The old ceiling prices at which old futures were ordered closed out, and the new ceiling prices at which trading in new contracts was established were as follows:

This action protected short interests against the increases in ceilings effective May 13, and correspondingly injured the interests of longs. Cargill, Inc., immediately filed suit against the Board of Trade and its officers and directors alleging that the regulation requiring trading and final settlement of old contracts at the old ceilings constituted a violation of the Sherman Antitrust Act, and suing for triple damages on its long position which the complaint stated represented hedges against forward sales of grain which Cargill was obligated to buy at the new ceiling prices without the price protection its hedges otherwise would have afforded.

Trading in the old futures for liquidation only continued in a desultory way to the end of May. There was some reduction of open trades, but shorts, and especially short speculators, were largely frozen in their open positions. On May 29, contracts representing substantial quantities of corn, oats, and barley deliverable in May were in default because of refusal, on the one hand, of longs to sell, and, on the other, of shorts to deliver corn, oats and barley then having higher cash values than the old ceiling settlement prices fixed by Regulation 1894. Also, a considerable quantity of May rye contracts, on which there was no ceiling price, remained unsettled. This situation was met by significant actions of the Board of Trade numbered 4, 5 and 6 below.

4. Regulation 1895, adopted May 31, 1946, fixed the price for settlement of defaulted May rye futures contracts at $2.70 per bushel. This was the settlement price for defaults on the last rye contract traded in before the ceiling price of $1.58 1/2 became effective for all other rye contracts dealt in after June 1, 1946. It represents the level to which unrestrained speculation had forced the price of rye which, like wheat, was in short supply.

5. Regulation 1897, adopted May 31, 1946, reversed the Board's action requiring trading in and settlement of May contracts for corn, oats and barley at the old ceilings and provided for the settlement of defaulted May contracts in these grains at the new ceiling prices effective on and after May 13, 1946, of $1.46 1/2 per bushel for corn; 88 cents for oats, and $1.35 1/2 for barley. This reversal of Regulation 1894 was equivalent to assessing a penalty on defaulting shorts amounting to 25 cents per bushel for corn, 5 cents per bushel for oats and 9 cents per bushel on barley. It merely disposed of the defaulted May, 1946, futures in these grains by shifting the loss on defaults from the longs to the shorts.