CME Group shelves update to rules barring wash trades

06/28/2013

By Tom Polansek

CHICAGO, June 28 (Reuters) - CME Group Inc, the world's largest futures exchange operator, on Friday shelved a plan to update its rules prohibiting wash trades after a regulator expressed concerns about oversight and enforcement of the new provisions.

CME, which owns the 165-year-old Chicago Board of Trade and offers trading on assets from oil to interest rates, had planned to implement new guidelines for the trades on July 1 to replace those in place since 2009.

However, CME said in a notice that its old rules will stay in effect until further notice "following dialogue" with the Commodity Futures Trading Commission's Division of Market Oversight.

A CME spokeswoman said she did not have details about the discussions.

Wash trades occur when a trading firm improperly sells a contract to itself without taking any risk in the market. The practice is barred under U.S. regulatory and exchange rules because it can create the appearance of an active market where there is none.

CME's move comes after Bart Chilton, one of five CFTC members, said on Monday that regulators needed to examine CME's plan because of unanswered questions about oversight and enforcement.

The CFTC, concerned about the frequency with which high-speed traders engage in wash trades, has been reviewing the banned self-dealing with an eye toward crafting new rules to prevent it, Chilton told Reuters earlier this year.

The review was prompted by a report from CFTC's surveillance staff that showed a "shocking" level of self-dealing across a range of markets, including financial, energy, agricultural and metals contracts, Chilton said in March.

A CFTC spokesman did not immediately respond to a request for comment on Friday.

The rules shelved by CME drew a clearer line between intentional and unintentional self-trading. The distinction is a key point for high-frequency traders who say that some self-dealing is inevitable given the speed and volume of their transactions.

CME on Monday defended the changes, saying an explanation of the new rules it submitted to the CFTC was "consistent with longstanding rule interpretations" and with "well-established case laws."

CME earlier this month launched an optional feature on its electronic trading platform designed to prevent wash trades by allowing traders to block matching buy and sell orders. The program "is being used by and remains available for interested market participants," a spokeswoman said.



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