Market Regulation Advisory Notices
To Members, Member Firms and Market Users
From Market Regulation Department
Subject Pre-Execution Communications in CME Products on CME Globex
Notice Date 2008-04-15
Notice Number CME - RA0802-2
Effective Date 2008-05-11
This Advisory supersedes CME Market Regulation Advisory Notice RA0801-2 and applies only to CME products traded on CME Globex. Pre-execution communications involving CBOT products are prohibited as detailed in CBOT Market Regulation Advisory Notice RA0802-1.
 
Pre-execution communications are permitted in CME products traded on CME Globex pursuant to the requirements of Rule 539.C. (“Pre-Execution Communications Regarding Globex Trades”). CME Rule 539 expressly prohibits pre-execution communications in connection with pit transactions executed on the trading floor.  
 
Effective May 11, for trade date May 12 , 2008, CME will adopt revisions to Rule 539.C. related to pre-execution communications in connection with electronic trading of all CME options products. The revisions require pre-execution communications involving CME options products (including options spreads and combinations and options/futures spreads) to be preceded by the entry of a Request for Quote (“RFQ”). Subsequent to the entry of the RFQ, any trade intended for execution pursuant to a pre-execution communication requires the entry of an additional RFQ followed by the entry of a Request for Cross (“RFC”) order, an order which contains both the buy and sell orders.
 
With the exception of CME equity options, the RFC order must be entered no less than 15 seconds and no more than 30 seconds after the entry of the additional RFQ. In CME equity options, the RFC order must be entered no less than 5 seconds and no more than 30 seconds after the entry of the additional RFQ. The RFQs and the RFC must be entered within the same trading session and failure to enter the RFC order within the time parameters set forth above requires a new RFQ to be entered prior to the entry of the RFC order. In all cases, the entry of the RFC order must comply with the time parameters set forth in Rule 539.C.4.
 
The revised rules ensure that all liquidity providers are afforded the opportunity to respond to RFQs in a timely manner, assuring transparent price discovery for market participants. The requirements with respect to engaging in pre-execution communications in CME futures and options contracts trading on CME Globex are described on pages 2 and 3 of this Advisory. The text of revised Rule 539 appears on page 6 of this Advisory. For additional information on the changes to the CME algorithm rules being implemented in connection with the revisions to Rule 539.C., please see today’s release of Special Executive Report S-4703.
Pre-execution communications may occur only when the party for whose benefit the trade is being made has previously consented to such communications.  Additionally, p arties who have been involved in a pre-execution communication may not disclose the details of that communication to other parties, nor may a party place any order to take advantage of the information conveyed in such communications except to facilitate the trade in accordance with the rule.
 
 
Requirements for Pre-Execution Communications in CME Options Products
 
1.       Prior to engaging in pre-execution communications involving CME options products or any spread or combination involving options, the market participant must submit a Request for Quote (“RFQ”).
2.       Subsequent to submitting the RFQ and engaging in pre-execution communications, a trade to be executed pursuant to such communications requires the market participant to issue an additional RFQ.
3.       In all CME options other than Equity options, no less than 15 seconds and no more than 30 seconds after issuing the additional RFQ, a trade to be executed pursuant to pre-execution communications must be initiated by the entry of an RFC order, a submission which includes both the buy and sell orders. In CME Equity options, the RFC order must be entered no less than 5 seconds and no more than 30 seconds after issuing the additional RFQ. The revised RFC matching algorithm is summarized below.
4.       If an RFC order is not entered within 30 seconds after the additional RFQ, any subsequent trade to be executed pursuant to pre-execution communications must be preceded by the entry of a new RFQ and, thereafter, the RFC order must be entered in accordance with the time parameters set forth in #3 above. 
Revised RFC Matching Algorithm for CME Options Products
The RFC price improves both the best bid and best offer in the order book or there is no bid/offer in the order book.
If the RFC price improves both the best bid and best offer in the order book or if there is no bid/offer in the order book, 100% of the RFC quantity will match at the RFC price immediately upon submission of the RFC.
 
The RFC price matches or is outside the best bid or best offer in the order book.
  •        If the RFC price matches or is outside the best bid or offer in the market, the applicable side of the RFC order will immediately match against the orders in the market at a price better than or equal to the RFC price;
 
All Options Other than Equity Options
  •      Immediately thereafter, 60% of the smaller quantity remaining on one side of the RFC will match against the order on the opposite side of the RFC at the RFC price;
  •        Any remaining unmatched portion on the RFC will then be available for matching against other incoming orders for five (5) seconds;
  •      Any match-eligible quantity remaining on the RFC will then match at the RFC price;
  •    Any unmatched balance on one side of the RFC will either be cancelled or remain in the order book depending on the instructions submitted with the RFC.
 
 
 
Equity Options
  •      Immediately thereafter, 100% of the smaller quantity remaining on one side of the RFC will match against the order on the opposite side of the RFC at the RFC price;
  •       Any unmatched balanced on one side of the RFC will either be cancelled or remain in the order book depending on the instructions submitted with the RFC.       
 
Requirements for Pre-Execution Communications in CME Futures Products
 
1.       For transactions in CME futures products which involve pre-execution communications, the order of the party who initiated the pre-execution communication must be the first order entered into CME Globex. No RFQ or RFC is required.
2.       At least 5 seconds must elapse after the entry of the first order before the opposing order can be entered.

                                           in CME Options Products Executed on CME Globex

 
 
 
1.
Is a client’s consent to pre-execution communications necessary?
YES
2.
May the parties involved in pre-execution communications disclose the details of those communications to other parties?
NO
3.
If a party has participated in a pre-execution communication where non-public information has been disclosed about an order or a potential order and the party does not agree to take the other side of the trade, may the party subsequently enter an order into the market to take advantage of the non-public information?
NO
4.
Is an RFQ required to be submitted prior to engaging in pre-execution communications?
YES
5.
Is the RFQ referenced in #4 above required if the system is showing current bids and/or offers in the contract(s) that will be the subject of a pre-execution communication?
YES
6.
After the first RFQ is submitted and a pre-execution communication has taken place, is an additional RFQ required to be submitted prior to entering a Request for Cross (“RFC”) in order to proceed with the transaction?
YES
7.
In all options other than equity options, must the RFC be entered no less than 15 seconds and no more than 30 seconds after issuing the additional RFQ?
YES
8.
In equity options, must the RFC be entered no less than 5 seconds and no more than 30 seconds after issuing the additional RFQ?
YES
9.
Are the quantity and price of the orders on the RFC displayed to the marketplace upon submission of the RFC?
NO
10.
Must both RFQs and the RFC be entered within the same trading session?
YES
11.
If the RFC is not entered within the time parameters set forth in #7 or #8 above after issuing the additional RFQ, is a new RFQ required to be issued prior to entering the RFC?
YES
12.
May an RFC ever be entered outside the time parameters set forth in #7 or #8 above after entry of the required RFQ?
NO
13.
If a call is made to solicit the improvement of a market posted on CME Globex, must an RFQ be entered prior to making the call regardless of whether the parties discuss price, quantity or the side of market with respect to any potential trade?
YES
14.
If the call described in #13 results in the parties agreeing to trade opposite one another must the requirements of #6 and, depending on the option product, #7 or #8 be followed in order to proceed with the trade?
YES
 
 
 
 
 
 
Q&A Regarding Pre-Execution Communication Requirements
 
 in CME Futures Products Executed on CME Globex
 
 
1.
Is a client’s consent to pre-execution communications necessary?
YES
2.
May the parties involved in pre-execution communications disclose the details of those communications to other parties?
NO
3.
If a party has participated in a pre-execution communication where non-public information has been disclosed about an order or a potential order and the party does not agree to take the other side of the trade, may the party subsequently enter an order into the market to take advantage of the non-public information?
NO
4.
Is an RFQ required to be issued prior to engaging in pre-execution communications?
NO
5.
If pre-execution communications have occurred, must the order of the initiator of the pre-execution communication be entered prior to the entry of the opposing order?
YES
6.
Must a minimum of 5 seconds elapse after the entry of the first order before the entry of the second order?
YES
7.
Is the entry of an RFC required?
NO
 
 
 


Questions regarding this advisory may be directed to the following individuals in Market Regulation:
 
Kathleen Zaino, Associate Director, 312.930.2341
Jennifer Baum, Associate Director, 312.341.3124
Robert Sniegowski, Associate Director, 312.648.5493


 

CME RULE 539. 
PREARRANGED, PRE-NEGOTIATED AND NONCOMPETITIVE TRADES PROHIBITED
 
 
No person shall prearrange or pre-negotiate any purchase or sale or noncompetitively execute any transaction, except in accordance with Sections B. and C. below.
 
 
The foregoing restriction shall not apply to block trades pursuant to Rule 526 or Exchange of Futures for Related Position transactions pursuant to Rule 538.
 
                   539.C.        Pre-Execution Communications Regarding Globex Trades
 
Parties may engage in pre-execution communications with regard to transactions executed on the Globex platform where one party (the first party) wishes to be assured that a contra party (the second party) will take the opposite side of the order under the following circumstances: 
 
1.   A party may not engage in pre-execution communications with other market participants on behalf of another party unless the party for whose benefit the trade is being made has previously consented to permit such communications. 
2.   Parties to pre-execution communications shall not (i) disclose to a non-party the details of such communications or (ii) enter an order to take advantage of information conveyed during such communications except in accordance with this rule.
3.   In the case of futures orders, the first party’s order must be entered into the Globex platform first and the second party’s order may not be entered into the Globex platform until a period of 5 seconds has elapsed from the time of entry of the first order.   
4.   In the case of options orders, a pre-execution communication must be preceded by the submission of a Request for Quote (“RFQ”).
            Subsequent to such RFQ, a trade intended for execution for which there has been a pre-execution communication requires the entry of an additional RFQ; thereafter, a Request for Cross (“RFC”) order which contains both the buy and the sell orders must be entered no less than fifteen (15) seconds and no more than thirty (30) seconds after the entry of the additional RFQ in order to proceed with the trade, except in equity options where the RFC must be entered no less than five (5) seconds and no more than thirty (30) seconds after the entry of the additional RFQ.  The RFQs and the RFC order must be entered within the same trading session.  Failure to enter the RFC order within 30 seconds after the entry of the additional RFQ will require a new RFQ to be entered prior to the entry of the RFC order, which must be entered in accordance with the time parameters described above in order to proceed with the trade.
 
 
                                     Q&A Regarding Pre-Execution Communication Requirements