ICE proposes ending bulk cocoa discount for London contract

* ICE makes three major changes to bulk cocoa rules

* Rules for different cocoa origins simplified (Adds detail, background)

By Nigel Hunt

LONDON, May 12 (Reuters) - ICE Futures Europe has proposed several changes to its London cocoa contract, including the removal of the discount for bulk supplies, it said on Tuesday.

The exchange said that change is intended to reflect the fact that a discount for bulk cocoa did not exist in the physical market. Traders say at times in the past this has caused a divergence between futures and physical prices.

Changes will also apply to ICE's euro cocoa contract.

Ben Jackson, President and chief operating officer of ICE Futures U.S. had told Reuters in an interview in late March the exchange was finalising changes to its contract after consulting with the market on a variety of issues, including certificate length.

Traders have said that major cocoa processors now hold a lot of their cocoa in non-bagged bulk format, but it had sometimes proved challenging to grade based on existing rules.

This can lead to a divergence of physical and futures prices with backwardations in the futures market (when the spot contract is at a premium to forward contracts) even when overall supplies are ample.

A rival euro cocoa contract launched by CME Group (Kuala Lumpur: 7018.KL - news) earlier this year is priced against bulk cocoa.

ICE said the proposed changes "aim to ensure that our cocoa market continues to reflect the commercial realities in the physical market."

Two other changes will be applied to bulk cocoa including extending the certificate length and the addition of a test for free fatty acids (FFAs).

The FFA content of dry cocoa beans tends to increase with storage time and lowers the value of the product.

ICE also simplified its origin grouping system with all African origins tenderable with no discount while for all other origins there will be a discount of 50 pounds.

The exchange said the updated system "better reflects the primary demand in the European market for good fermented African cocoa."

ICE also operates a U.S.-based dollar cocoa market. (Reporting by Nigel Hunt; Editing by David Goodman and David Evans)