WINNIPEG (Staff) – Continental Grain warned the Winnipeg Commodity Exchange in the spring of 1994 that the June canola futures contract wasn’t going to work.
Robert McNab, vice-president of Continental Canada, would not comment on the end of the WCE’s investigation into his company’s trading activities in the troubled trading month.
But McNab faxed a two-paragraph letter explaining the company’s response. Here’s what happened with short position holders, based on information from the WCE, president Fred Siemens, and Continental’s statement.
When the WCE realized the June contract wasn’t mirroring cash prices, it met with grain companies. Some sellers wanted to deliver canola against short positions, and some buyers wanted to take physical delivery.
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However, the WCE determined there wasn’t enough space in exchange-licensed elevators to handle the amount of canola involved in the contracts.
Continental and Canagrain International asked the WCE to use canola in non-licensed facilities. But the board of governors believed it would be a significant change to an existing contract, and could throw futures prices into even more of a spin.
When the WCE closed the contract June 6, 1994, there were 14 sellers with open contracts. They were ordered to liquidate their positions.
By June 14, only Continental and Canagrain still held short positions. They were liquidated in the WCE’s clearinghouse at $518 per tonne, the settlement price of the day, along with remaining long positions held by XCAN Grain Pool Ltd.
The WCE found that Canagrain achieved “substantial compliance” and “acted in good faith” with the order. On June 5, it held 1,073 positions, but through trades, deliveries and cash transactions, the company was left with only 100 contracts (2,000 tonnes).
“You could see that they were genuinely attempting to do whatever is possible,” Siemens said.
However, Continental was able to liquidate only 229 of 340 contracts remaining. “They didn’t go far enough,” Siemens said. “Accepting their extenuating circumstances, nonetheless there was an order to get their position down.”
Money contributed
The WCE sent a letter of reprimand to the company, and the company agreed to contribute $25,000 to the investigation. Siemens explained the company did not break WCE bylaws. The WCE examined the company’s actions throughout the June contract, but took exception only to how it operated in the liquidation period.
Continental made this statement about the liquidation period:
“Continental Grain co-operated with the exchange on a daily basis during the liquidation of the June 1994 canola futures contract under severely congested market conditions that perpetuated the market distortions affecting the June 1994 canola futures contract, and acted in good faith throughout the liquidation period.”
Continental said it welcomed the WCE’s review and is pleased that it changed the canola contract.
