CME Group proposed amendments to its rule regarding pre-execution communications to add a new procedure to effectuate lawful cross trades following such communications (click here to access CME Rule 539C). The new mechanism is termed a “committed cross” and, absent objection by the Commodity Futures Trading Commission, will be required for all Chicago Mercantile Exchange and Chicago Board of Trade interest rate, equity and foreign exchange options contracts traded on Globex beginning trade date April 11, 2016. Other contracts will be subject to existing cross trade protocols. Unlike now, no request for a quote (RFQ) must be issued prior to a request for a cross (RFC) for a C-Cross transaction. In a C-Cross transaction, following a pre-execution communication, the submitter must “definitively” submit the proposed cross order to the Globex marketplace through a request for quote, which will tell market participants that a cross will occur after a certain time has passed (typically five seconds for options) unless it is earlier matched against existing liquidity. At the time it implements C-Cross functionality, CME Group will also introduce for interest rate and FX options only (but not equity options) a “Better Price Match Allocation” protocol to ensure that, where a cross trade request represents a new best bid or offer at the time of order placement, and during the time of pendency no better price for the buy or sell is entered, at least a certain percentage of the order will be crossed. Initially this percentage will be 20 percent.
Compliance Weeds: In general, for approved contracts, CME Group permits pre-execution communications to facilitate trading subject to strict requirements. Among these requirements are that the party on whose behalf a communication is being made previously must have consented to such communication and that no person involved in pre-trade communications may take advantage of information conveyed except to facilitate the relevant trade. Unfortunately, CME Group rules regarding cross trades vary by product and by futures and options. Even the mechanical steps for executing a cross trade following a conversation varies. There are Globex Crosses, Agency Crosses, and RFQ and RFC Crosses – and now Committed Crosses too. However, despite the complexity, the consequences of getting it wrong can be severe, resulting in not only potential CME Group sanctions, but possible sanctions by the Commodity Futures Trading Commission too. (Click here to access the article “CFTC Fines FirstRand Bank for Unlawful Pre-Execution Discussions Related to Soybean Futures Trades” in the September 1, 2014 edition of Bridging the Week.) Most simply, all non-competitive trades are strictly prohibited under CFTC rules, and any violation of a CME Group rule regarding pre-execution communications, could also be deemed a violation of this CFTC requirement. Pre-execution communication rules of other designated contract markets are similar but contain important differences from CME Group requirements (click here to access the “Pre-Execution Communication FAQ” of ICE Futures U.S. (dated January 2015) and here to access guidance with respect to executing cross orders on Nasdaq Futures, Inc.). The CME Group advisory notice that was issued in connection with its revised rule contains a very helpful matrix that sets forth the different types of cross-trade protocols that must be followed for futures and options and different products (click here to access).