On August 28, 2014, the Chicago Mercantile Exchange Inc., the Board of Trade of the City of Chicago, the New York Mercantile Exchange, Inc., and the Commodity Exchange, Inc. (collectively, the “CME”) submitted a notice of a rule adoption to the Commodity Futures Trading Commission (the “CFTC”) regarding new Rule 575, titled “Disruptive Practices Prohibited.” Rule 575 became effective September 15, 2014. The CME also issued Market Regulation Advisory Notice RA1405-5 (“CME MRAN”) which, with new Rule 575, provides regulatory guidance on various types of prohibited disruptive order entry and trading practices. On September 11, 2014, the Futures Industry Association (“FIA”) hosted a webinar with staff from the CME to discuss new Rule 575 and the CME MRAN. This Clients & Friends Memo updates our previous memo on this topic based on FIA’s webinar. In addition, on September 15, 2014, CME issued an updated MRAN with “minor modifications” based on CME’s discussions with the CFTC. The updated MRAN did not change the September 15, 2014 effective date.
The prohibited disruptive trading practices specified in new Rule 575 will supplement existing CME exchange rules including Rules 432.B.2, 432.Q, and 432.T.1 During FIA’s webinar, the CME emphasized that Rule 575 is a codification of CME’s existing rules and is designed to provide guidance as opposed to establishing new substantive obligations. Therefore, it is possible, but we believe unlikely, that the CME may pursue “disruptive” conduct that predates September 15, 2014 under Rule 432. Although the CME reminded market participants that new Rule 575 is not an exhaustive list of trading practices that could violate exchanges rules and that market participants still could face liability under the more general requirements in CME Rule 432, CME said that it “did their best” to incorporate disruptive trading practices in Rule 575. Rules 432 and 575 do not completely overlap, so market participants should remember that they still need to comply with Rule 432.The CME MRAN notes that Rule 575 prohibits certain of the disruptive trading practices prohibited under Section 4c(a) of the Commodity Exchange Act (“CEA Prohibited Trading Practices”). The CEA Prohibited Trading Practices are:
- violating bids or offers;
- demonstrating intentional or reckless disregard for the orderly execution of transactions during the closing period; and
- conduct that is commonly known to the trade as “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution).
The CFTC previously issued interpretive guidance concerning the CEA Prohibited Trading Practices.2 Set forth below is a table that summarizes the most significant aspects of the new CME Rule 575, additional guidance from the CME MRAN, and comments on the practical impact of the provisions of the new CME Rule.
Click here to view the table.