ICE Futures U.S. proposed amending its Frequently Asked Questions regarding pre-hedging futures block trades less than two weeks after its latest guidance became effective on November 1. IFUS’s current block trade FAQ permits certain pre- or anticipatory hedging by a counterparty to a potential block trade prior to the block transaction being formally executed. However, this ability does not exist for “an intermediary that takes the opposite side of its own Customer order.” In addition, it is currently prohibited under the IFUS guidance for a person to engage in front running of a block trade when acting on material nonpublic information regarding an impending transaction by another person “obtained through a confidential employee/employer relationship, broker/customer relationship or in breach of a fiduciary responsibility.” As proposed to be amended, the phrase “fiduciary responsibility” would be replaced by the phrase “pre-existing duty.” It appears that the new phrase is broader than the prior phrase, although it is not clear what is contemplated by the new phrase or that it has any applicability in connection with principal transactions. Absent objection by the Commodity Futures Trading Commission, IFUS’s new FAQ should be effective November 28. ICE Futures U.S. initially proposed its revised block trade FAQ during June 2016; amended its proposal in October 2016 (which is the version currently in effect); and now has proposed a third version.
My View: Currently, there are three very similar but slightly different variations of block trade guidances outstanding that address what is permissible pre-hedging of block trades by principals to a transaction: what ICE Futures U.S. has just proposed; what CME Group has adopted based on IFUS language currently in place; and what NASDAQ Futures has adopted (Click here for details in the article, “Pre-Hedging by Principals Authorized in Block Trade Clarification Implemented by IFUS and Adopted by CME Group” in the October 30, 2016 edition of Bridging the Week and here for the article, “NASDAQ Futures Adopts Block Pre-Hedge Guidance Similar to CME Group and IFUS” in the November 6, 2016 edition of Bridging the Week.) The three exchanges should, as soon as possible, provide clarification regarding the meaning of their guidances and the significance of any subtle differences in language. My expectation is that this will happen in some form shortly.