ICE Futures U.S. proposed an amendment to its block trade frequently asked questions to clarify when pre-hedging or anticipatory hedging of a block trade is permitted. (Click here to access the current IFUS block trade FAQs.) Under IFUS’s proposed guidance, the principal parties to a block trade may engage in pre- or anticipatory hedging of the position they believe in “good faith” will result from the “consummation” of a block trade. However, this ability will not exist for “an intermediary that takes the opposite side of its own Customer order.” As proposed, an intermediary will be permitted to enter into transactions to offset the position that will result from the block trade only after the block trade has been consummated, including the period of time before the block trade is publicly reported by the exchange. Under IFUS’s recommended guidance, no person may front run a block trade by another person if it received non-public information regarding such transaction “through a confidential employee/employer relationship, broker/customer relationship or in breach of a fiduciary responsibility.” ICE Futures Europe also proposed non-substantive amendments to its separate block trade guidance related to specific contracts.
Compliance Weeds: In the United States, block trades are an exception to the Commodity Futures Trading Commission requirement that all futures contracts be executed on a derivatives contract market. Block trades may be executed off the marketplace by eligible contract participants subject to CFTC-approved DCM rules. These rules typically state which DCM products are subject to block trades (and sometimes, during which times); minimum thresholds; and reporting requirements. The rules also typically address the use of nonpublic information regarding block trades. Currently, CME Group prohibits pre-hedging or anticipatory hedging of any portion of a block trade in the same or related product by all parties to an impending block trade. However, parties to a block trade may hedge or offset the risk associated with a block trade following its consummation before the transaction is reported publicly by the exchange. Under IFUS’s proposed interpretation, this strict restriction will only exist for intermediaries that participate in block trades, not principals that deal directly with each other. Third parties on both exchanges will not be able to trade on insider information related to block trades under any circumstance until after a public report of the relevant transaction. It is also important not to assume that IFUS’s and ICE Futures Europe’s requirements on block trades are identical. Among other things, the parties that may participate in block trades and the prohibitions regarding use of impending information regarding block trades may be different between the ICE exchanges located on the opposite sides of the Atlantic Ocean.