CME Group Issues Advisory Concerning Wash Trades

The CME Group issued an Advisory effective November 19, 2013 concerning Rule 534, which prohibits wash trades on the CME, CBOT, NYMEX, COMEX and KCBT.  Rule 534 prohibits a person from placing buy and sell orders for accounts held by the same beneficial owner where the person "knows or reasonably should know that the purpose of the orders is to avoid taking a bona fide market position exposed to market risk," or for different accounts with common beneficial ownership that are "entered with the intent to negate market risk or price competition."

The Advisory sets forth two primary elements for a wash trade.  First, orders must actually result in a wash meaning that orders for accounts with the same beneficial owner(s) or common beneficial ownership  produce a purchase and sale of the same instrument at the same or similar price.  Second, the party intended to achieve a wash result.  Notably, the party does not need to intend to violate Rule 534 or even know that what they were doing was prohibited by exchange rules.  Rather, simply the intent to produce a wash result can be sufficient to create liability under the Advisory.  The Advisory also provides 17 FAQs primarily dealing with intent in different situations addressing individuals trading, proprietary trading groups and algorithms.  Generally, if a trader knew, or should have known that the trade would or could result in a wash, or did not take reasonable steps to prevent a wash trade, the Advisory provides that the trader will most likely be liable for a Rule 534 violation.

CFTC Issues Final Rule Adopting International Standards for Certain DCOs

The CFTC has adopted additional rules governing systematically important derivative clearing organizations (SIDCOs) in order to meet certain international banking capital standards set by the Basel Committee for Banking Supervision.  Specifically, the new rules set forth additional standards of compliance with a DCO's core principles  and are intended to meet the Principles for Financial Market Infrastructures (PFMIs) provided by the Committee on Payment and Settlement Systems and the Board of the International Organization of Securities Commissions (CPSS - IOSCO).  Compliance with these new standards will ensure that the SIDCO can continue to act as a Qualifying Central Counterparty.

Under international banking capital standards, banks are encouraged to use Qualifying Central Counterparties for clearing derivative transactions through the use of incentives such as lower capital charges on such transactions. The additional rules provide a procedure for DCOs to opt in to this regulatory regime and also provide substantive rules concerning governance, financial resources, system safeguards, special default rules and procedures for uncovered losses or shortfalls, risk management, additional disclosure requirements, efficiency, and recovery and wind-down procedures.  Most of these rules may be found in Part 39 of the CFTC rules.