Wash Trades Prohibited

This Advisory Notice regarding Rule 534 (“Wash Trades Prohibited”) supersedes CME Group Market Regulation Advisory Notice RA1308-5 issued on November 19, 2013. 

This Advisory Notice is being reissued based on revisions to the answers to Questions 8, 9 and 11 in the FAQ Section of this Advisory Notice. 

The answer to Question 8 contains regulatory guidance on the need to ensure that any freshening of long position dates in certain futures contracts which are settled via physical delivery against the oldest open long position is not done in violation of Rule 534.  Effective on January 2, 2015, CME will eliminate its existing prohibition on freshening in Live Cattle futures, and, as a result, the answer to Question 8 requires modification.

The answer to Question 9 addresses the circumstances under which a block trade between accounts with common beneficial ownership may constitute an unlawful wash trade prohibited by Rule 534.  The revision to Q&A 9 clarifies that block trades between accounts with the same beneficial ownership are strictly prohibited and that block trades between accounts with common beneficial ownership are permitted only in circumstances where the trade meets the three requirements set forth in the answer to Q9.

The answer to Question 11 has been updated based on upcoming Self-Match Prevention (“SMP”) enhancements that will become effective on December 21, 2014, and January 11, 2015.

On November 14, 2013, RA1308-5 was deemed approved by the Commodity Futures Trading Commission (“CFTC”) pursuant to the provisions of CFTC Regulation 40.5.  Other than revised Q&As 8, 9 and 11, no information in this Advisory Notice has been changed.  Accordingly, with the exception of revised Q&As 8, 9 and 11, the remainder of this Advisory Notice remains deemed approved by the CFTC.  Revised Q&As 8, 9 and 11 will become effective on January 2, 2015, pending all relevant regulatory review periods.

Rule 534, presented below, has not changed, and this Advisory Notice is being issued to provide updated guidance regarding compliance with the rule as well as information related to the recent introduction of new Self-Match Prevention functionality on CME Globex.

Member firms are strongly encouraged to ensure that all firm employees and customers are fully informed regarding Rule 534 and the guidance in this Advisory Notice.

Rule 534 (“Wash Trades Prohibited”)

No person shall place or accept buy and sell orders in the same product and expiration month, and, for a put or call option, the same strike price, where the person knows or reasonably should know that the purpose of the orders is to avoid taking a bona fide market position exposed to market risk (transactions commonly known or referred to as wash trades or wash sales).  Buy and sell orders for different accounts with common beneficial ownership that are entered with the intent to negate market risk or price competition shall also be deemed to violate the prohibition on wash trades.  Additionally, no person shall knowingly execute or accommodate the execution of such orders by direct or indirect means.

Questions regarding this Advisory Notice may be directed to the following individuals in Market Regulation:

        Erin Coffey, Senior Rules & Regulatory Outreach Specialist, 312.341.3286

        Jon Farrimond, Lead Rules & Regulatory Outreach Specialist, 44.20.3379.3966

        Robert Sniegowski, Senior Director, Rules & Regulatory Outreach, 312.341.5991

For media inquiries concerning this Advisory Notice, please contact CME Group Corporate Communications at 312.930.3434 or news@cmegroup.com.