Alert June 26, 2012

CFTC Proposes Rule Prohibiting Aggregation of Orders to Satisfy Minimum Block Sizes

The CFTC issued a proposed rule that would prohibit the aggregation of orders for different trading accounts in order to satisfy minimum block size or cap size requirements.  Trades that qualify as “block trades” are subject to special rules, including time delays to permit the trading parties time to hedge the trade before it is publicly reported.  Similarly, cap sizes are trading amounts above which the exact value of a publicly reportable swap transaction need not be specified; aggregating accounts over the cap size, therefore, would allow traders to mask the exact amounts of the swap.  The proposed rule’s prohibition on aggregation of orders would not apply to orders aggregated by certain commodity trading advisors (“CTAs”), investment advisers and foreign persons that have more than $25 million in total assets under management.  The proposal would also require parties to a block trade to qualify as eligible contract participants (“ECPs”), except where a designated contract market allows certain CTAs, investment advisers and foreign persons, in each case with more than $25 million in total assets under management, to engage in block trades on behalf of customers who are not ECPs.  Finally, the proposal would require that persons engaging in block trades on behalf of customers receive prior written consent to do so.

The proposal stems originally from a rule proposal issued in December 2010, entitled “Real-Time Public Reporting of Swap Transaction Data.” In January 2012, the CFTC issued a final rule that included certain items from the December 2010 proposal.  Several elements from the proposal pertaining to block trading were intentionally omitted from the final rule to permit the CFTC to perform additional analysis it deemed necessary prior to finalizing those provisions.  On March 15, 2012, the CFTC re-proposed some of the rules omitted from the January 2012 final rule.  Unfortunately, the CFTC later determined that some items were inadvertently omitted from the March 2012 re-proposal.  The proposed rule re-proposes the omitted items.

Comments are due 30 days from the proposal’s forthcoming publication in the Federal Register.