Friday, May 1, 2015
Futures Regulatory Alert #2015 - 5
Pre-Arranged Transactions
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In furtherance of Commodity Futures Trading Commission (CFTC) Core Principles 2, 7 and 9, NFX reminds market participants that all transactions must be conducted in the NFX Trading System and are subject to market exposure, unless such transactions are otherwise exempt. NFX Rules at Chapter III, Section 24(g)(2), set forth below, describes the prohibition related to pre-arranged transactions, as well as, the three types of transactions that lawfully consist of a pre-trade negotiation and or communication between trade participants or agents for the trade participants. NFX Rules at Chapter IV, Sections 10 and 11 contain rules related to acceptable off-exchange transactions. NFX Rules at Chapter V, Section 11 set forth requirements for submitting a Cross Order. NFX provides a competitive, open market for the execution of transactions designed to protect the price discovery process of trading in its centralized market. NFX Rules authorize, for bona fide business. The Exchange also permits a Futures Participant, acting as principal or agent, to enter into or confirm the execution of a Futures Contract if the Contract is reported, recorded, or cleared in accordance with NFX Rules. NFX Rules permit the submission of Block Trades, Exchange for Related Positions and Cross Orders. NFX Rules at Chapter III, Section 24(g), entitled “General Trading Standards and Prohibited Practices,” states: “Futures Participants and Authorized Traders shall not: …..(2) Engage in pre-arranged transactions other than transactions executed in compliance with Chapter IV, Sections 11 (Block Trades) and 12 (Exchange for Related Positions) and Chapter V, Section 11 (Pre- Negotiated Business and Cross Transactions)…” Block Trades are permissible, noncompetitive, privately negotiated transactions at or in excess of a minimum threshold quantity of contracts, which are executed apart and away from the public auction market. The minimum quantity threshold is designated in the contract specifications for each Contract that is eligible for Block Trades. Only Orders of a commodity trading advisor (“CTA”) or foreign Person performing a role or function to a CTA may be aggregated in order to achieve the minimum transaction size, otherwise Orders may not be aggregated. Exchange for Related Positions (“EFRPs) are permissible, noncompetitive, privately negotiated transactions executed apart and away from the public auction market which are permitted by arrangement between only two parties in accordance with Exchange Rule located at Chapter IV, Section 12. The Exchange currently permits the following types of EFRP transactions: Exchange of Futures for Physical (“EFP”) – the simultaneous execution of an Exchange futures contract and a corresponding physical transaction or a forward contract on a physical transaction. Exchange of Futures for Risk (“EFR”) – the simultaneous execution of an Exchange futures contract and a corresponding OTC swap or other OTC derivative transaction. Exchange of Options for Options (“EOO”) – the simultaneous execution of an Exchange option contract and a corresponding transaction in an OTC option or other OTC instrument with similar characteristics. The related position component of an EFRP may not be a futures contract or an options on a futures contract. See Chapter IV, Section 11. Cross Orders are supported for all NFX Products provided they meet the requirements of NFX Rules at Chapter V, Section 11. Participants and Users can submit pre-negotiated, two-sided Cross Orders to the Exchange for execution. However, prior to execution, the Cross Order transaction must interact with any available liquidity in the Order Book prior to any volume being crossed. A Request for Cross (RFC)) must be entered before the Cross Order can be submitted. All Cross Order transactions must follow the following rules and procedures prior to execution:
Cross Order transactions that are submitted by Participants and/or Users that are not properly configured for both the RFC and Cross Order functionality will be rejected.
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