WINNIPEG – XCAN Grain Pool has agreed to a “no admission, no denial” payment of $250,000 to the Winnipeg Commodity Exchange after questions arose about how the company traded the June 1994 canola futures.
Exchange president Fred Siemens said the company, which was the major long position holder in the contract, was charged with four bylaw offenses. Rather than taking the matter to a full hearing before the exchange’s business conduct committee, XCAN and the committee agreed to the payment.
“XCAN views that payment as a positive gesture toward the commodity exchange and the trade generally, but sees it as a contribution toward the investigative costs … incurred by the commodity exchange in their investigation,” said Ken Matchett, chief executive officer of XCAN.
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Last June, the exchange declared a market emergency and forced early liquidation of the contract when it became clear there was not enough canola available to short position holders to satisfy the demands of XCAN.
The company needed canola for forward-sold cash commitments, and decided it needed to settle its futures contracts through physical delivery rather than trading them out.
Siemens said that while the contract gives participants the option of taking delivery or selling the contract, less than five percent of contracts are resolved through physical delivery.
The exchange determined XCAN broke exchange bylaws that were:
- Likely to lessen confidence in the delivery system.
- Detrimental to interests and welfare of the exchange.
- Contrary to the spirit which should govern the commercial transactions of members of the exchange.
- Prejudicial to the public interest.
“I would say with certainty that our integrity was tested through the June ’94 (contract) primarily because the exchange took the extraordinary action of concluding a contract prematurely,” said Siemens, adding that market participants expect a contract to run its course.
Matchett said XCAN did not intend to cause stress to the exchange. While XCAN generally buys futures contracts to protect itself from price volatility for its future sales commitments, Matchett said XCAN found itself in a situation where the three prairie pools’ country elevators would not have enough canola to meet commitments.
XCAN decided to settle through delivery. “While we don’t start out with the intention of taking delivery on a futures contract, it is an option available to owners of futures contracts,” Matchett said.
The reverse is true for short position holders; while most don’t plan to have to make delivery against a futures contract, the possibility exists.
When the exchange liquidated the contract, Matchett said XCAN ran out of canola to satisfy its sales commitments.
Last summer, the trade buzzed with rumors that XCAN was manipulating the market. However, Siemens said the exchange’s compliance office did not present evidence of this type of activity.
Matchett said he doesn’t think the investigation has hurt the company’s reputation in the eyes of market participants and customers because they understand how the market and contracts work.
The WCE is wrapping up an investigation into the activities of three short position holders in the contract and will make results of the investigation public.
