ICE Futures U.S. slightly revised a proposed guidance regarding block trades that it previously submitted to the Commodity Futures Trading Commission in June 2016 that would permit certain pre- or anticipatory hedging by a counterparty prior to a block transaction being formally executed. Under IFUS’s proposed guidance, the principal parties to a proposed block trade may engage in pre- or anticipatory hedging of the position they believe in “good faith” would result from the “consummation” of a block trade. However, this ability would not exist for “an intermediary that takes the opposite side of its own Customer order.” As proposed, an intermediary would be permitted to enter into transactions to offset the position that will result from the block trade only after the block trade has been finalized. IFUS’s proposed amendments to its initial CFTC submission seemed to constitute mostly non-substantive wordsmithing; however, the exchange expressly clarified that its proposed guidance would not affect any requirement under applicable law or regulation of the Commodity Futures Trading Commission. IFUS submitted its proposed revised guidance to the CFTC for its approval on October 4.
Compliance Weeds: Block trades are an exception to the CFTC’s requirement that all futures contracts be executed on a designated contract market. Block trades may be executed off the marketplace by eligible contract participants subject to CFTC-approved DCM rules. These rules typically state which DCM products are subject to block trades (and during which times); minimum thresholds; and reporting requirements. The rules also typically address the use of nonpublic information regarding block trades. Currently, all DCMs prohibit pre-hedging or anticipatory hedging of any portion of a block trade in the same or related product by all parties to an impending block trade. However, typically, parties to a block trade may hedge or offset the risk associated with a block trade following its execution, but prior to when the transaction is reported publicly by the exchange. Under IFUS’s proposed interpretation, parties to a block trade – but not intermediaries acting for customers – would also be permitted to hedge or offset the risk associated with a block trade prior to execution that they believed would result from consummation of the block trade. Third parties on both exchanges are prohibited from trading on insider information related to block trades under any circumstance until after a public report of a relevant transaction.