Each party to a block trade must be an Eligible Contract Participant (ECP), which is a defined term under Section 1a of the U.S. Commodity Exchange Act. Commodity Trading Advisors (CTAs), and other persons performing a similar role, may also participate in block transactions provided they have total assets under management exceeding 25 million U.S. dollars and the block trade is suitable for their customers.
Eligible Contract Participants generally include exchange members and member firms, broker/dealers, government entities, pension funds, commodity pools, corporations, investment companies, insurance companies, depository institutions and high net-worth individuals. The official definition of an ECP can be found in Section 1a of the U.S. Commodity Exchange Act.
A customer order may only be executed by means of a block trade if the customer has specified the order be executed as a block trade. In the case of CTAs, the CTA must give consent to their broker to execute their orders as a block.
Block trades between different accounts with common beneficial ownership are prohibited unless each party's decision to enter the block trade is made by an independent decision-maker, each party has a legal and independent bona fide business purpose for engaging in the block trade and the block trade is executed at a fair and reasonable price.
In the absence of satisfying all the requirements, the transaction may constitute an illegal wash trade prohibited by Rule 534. Common beneficial ownership is defined as not only accounts with the same beneficial ownership, but also accounts with common beneficial ownership that is less than 100%.
This is part of a course on block trades. For official regulatory guidance on block trades, reference the applicable Market Regulation Advisory Notice.