Comment: CFTC to get futures industry resistance if it tries to set block-trade minimums

By Neil Roland


The US Commodity Futures Trading Commission will meet resistance from the futures industry if it tries to set block-trading minimums in an upcoming rule proposal.

At the same time, however, the commission is likely to win support from the new derivative trading platforms, called swap execution facilities, if it seeks to replace futures exchanges in setting these thresholds

CFTC Chairman Gary Gensler circulated a confidential draft proposal Monday among the three other commissioners, who can weigh in with suggested changes before the plan is issued for public comment.

Futures exchanges, including CME Group and intercontinentalExchange, will be competing for business with new derivative trading platforms, such as Bloomberg, ICAP and Javelin Capital Markets.

Futures industry participants, speaking as a January conference at the CFTC, vigorously opposed the commission playing any role in setting the thresholds.

“We strongly believe that the commission should refrain from trying to fix something that is not broken,” said Jerry Jeske, group chief compliance officer for Mercuria Energy Trading, which ships oil, coal and natural gas. “The CFTC should embrace the success and declare victory”

Thomas Farley, a senior vice president at the IntercontinentalExchange, said: “We as that you leave it in our hands to be able to update (block sizes) periodically from time to time.”


-          ‘Very low’ minimums –

Block minimums are often set by futures exchanges at  low levels that appeal to industry participants.

At the CME, more than a third of its 1,056 energy products had block-trading minimums of between one and five contracts as of Aug. 12, according to its website.

In interviews with MLex, some CFTC officials described these energy thresholds as “very low” while saying it is too early to predict where the commission will come out on this issue.

Block trades are large, privately negotiated contracts in typically illiquid markets. They are executed off a public exchange and reported to that platform.

Minimum thresholds are set to encourage as many contracts as possible to be transacted on exchanges.


-          SEF rules-

In May, the CFTC finalized block rules for swap execution facilities (SEFs), for which the commission sets the minimums.

SEF executives at the January roundtable said that the commission should play the same role with regard to block sizes for both future and derivative trading.

“One trade venue must not be permitted to set its own rule while the other has it set for them,” said James Cawley, Javelin Capital Markets chief executive officer. “ Such a scenario clearly raises the specter of a race to the bottom.”

But in a foreshadowing of the back-and-forth likely to take place, Don Wilson, CEO of DRW Trading, a proprietary futures firm, said the different structures of the future and derivative markets call for different regulatory approaches.

Linked Case File (s)
Dodd-Frank regulation-Swap reporting and block trades
CFTC-Futures block-trade minimums

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