On December 17, the CME Group Exchanges (CME Group) issued Market Regulation Advisory Notice RA1411-5 to provide updated guidance on wash trades. The Advisory Notice revises portions of the frequently asked questions section of the Advisory Notice.
Under the revised answer to Question 8 in the Advisory Notice, CME Group will eliminate the existing prohibition on intra-day freshening of positions for physical delivery futures contracts, as it applied to live cattle futures. This change does not affect the Advisory Notice’s general requirements for freshening position dates under the wash trade rule. Specifically, offsetting trades designed to freshen positions must be competitively executed in the marketplace and represent independent transactions exposed to market risk.
CME Group also modified the answer to Question 9 to clarify the circumstances in which block trades may be effected between accounts with the same or common beneficial ownership. Under the revised Advisory Notice, block trades between accounts with the “same beneficial ownership” are strictly prohibited as wash trades in violation of Rule 534. By contrast, block trades between accounts with “common beneficial ownership” are permitted, provided that: (i) the block trade is executed at a fair and reasonable price, (ii) each party to the transaction has a legal and independent bona fide business purpose for engaging in the trade and (iii) each party’s decision to enter into the transaction is made by an independent decision-maker. While intending to clarify when block trades between related entities are permitted, the revision to the answer in Question 9 may conflict with earlier guidance on CME Group block trades. Specifically, the updated wash trade Advisory Notice appears to categorically prohibit accounts with identical (“same”) ownership from relying on standards applicable to “affiliated” accounts, while Advisory Notices RA1408-3 (CME and CBOT) and RA1413-4 (NYMEX and COMEX) permit block trades between accounts of affiliated parties as long as the three requirements set forth above are met.
Finally, CME Group updated the answer to Question 11 to reflect upcoming enhancements to the CME Group’s optional Self-Match Prevention (SMP) functionality on Globex. The SMP functionality enhancement will allow market participants to dictate whether the resting or aggressing order is canceled in a self-match scenario. Additionally, for markets using a first in, first out (FIFO) matching algorithm, orders will only be canceled when an actual self-match occurs. CME will fully phase in these SMP functionality enhancements by January 11. The answer to Question 11 continues to provide that it is a violation of Rule 534 for an individual to enter an order on the electronic platform that the individual knows or reasonably should know would trade against the individual’s own order resting on the opposite side of the market.
The revisions to Q&As 8, 9 and 11 become effective January 2. The Advisory Notice is available here.