- New ICE Futures U.S. Wash Trade FAQ
- April 5, 2016 | Authors: Sohair A. Aguirre; Jonathan H. Flynn; Neal E. Kumar; Paul J. Pantano
- Law Firm: Cadwalader, Wickersham & Taft LLP - Washington Office
- Effective February 23, 2016, ICE Futures U.S., Inc. (“ICE” or “Exchange”) issued a revised Wash Trade Frequently Asked Questions (“ICE FAQ”). This ICE FAQ replaces a 2009 ICE Wash Trade FAQ and provides additional guidance to market participants on trades that may constitute wash trades. The ICE FAQ also highlights intermediary and third party obligations not to accept orders for trades if it knows or should know that they are wash trades.
The scope of the wash trade prohibition applies to any “market participant” which the FAQ defines as “any person initiating or executing a transaction directly or through an intermediary, and any person for whose benefit such a transaction has been initiated or executed. A market participant also includes any individual or firm that is involved with the placement, negotiation, or execution of a transaction such as a floor, firm or voice broker.”1
I. What is a Wash Trade?
According to the ICE FAQ, “a wash trade occurs when there is an act of entering into, or purporting to enter into, transactions with no intent to obtain a bona fide market position or activity that gives the false appearance of an executed transaction(s), but does not subject the Principal to any market risk or change in position or aid in price discovery.”2
The ICE FAQ also specifically defines a wash trade as a transaction, or a series of transactions, involving the same Commodity Contract and delivery month (or option series) at the same, or a similar, price (or premium) for accounts of the same Principal with no intent to obtain a bona fide market position. The FAQ defines the “same Principal” as accounts that are owned by:
- the same person;
- the same entity;
- a parent and its 100% wholly owned subsidiaries;
- subsidiaries that are 100% owned by the same parent; or
- Common beneficial owners that have a common ownership interest of less than 100%.
Although there is an explicit intent element for wash trades, the ICE FAQ explains that any market participant who knows or should know that a transaction they initiate, place, accept, or accommodate will result in a wash trade is in violation of ICE exchange Rule 4.02(c). The ICE FAQ also reiterates that, in accordance to Exchange Rule 4.02(g), it is prohibited to simultaneously enter into both buy and sell orders for the same Commodity Contract in the same delivery month or option series via a Crossing Order unless such orders are for different Principals.
ICE may infer intent to execute a prohibited wash trade if a buy/sell order is entered into with one market participant and the opposite transaction is entered into with a second market participant who’s accounts are owned by the same Principal as the first. The fact that the trade was not prearranged and was executed competitively on the exchange will not necessarily preclude the parties from facing potential liability.
III. Accepting Simultaneous Buy and Sell Orders
The ICE FAQ re-affirms that intermediaries may be liable for executing orders that result in wash trades. Importantly, the ICE FAQ highlights the affirmative obligations imposed on market intermediaries such as futures commission merchants (“FCM”) to take additional steps in some circumstances to ensure that buy and sell orders placed for simultaneous execution do not violate the prohibition on wash trades.3 According to the ICE FAQ, market participants that accept orders (e.g., FCMs) must determine whether simultaneous buy and sell orders are for the benefit of the same Principal.4 To the extent that an intermediary’s customer makes an assertion that the orders are for different Principals, but the assertion raises red flags, the intermediary may need to take additional steps to ensure the orders do not violate the ICE wash trade rules.
According to ICE, when an intermediary receives simultaneous buy and sell orders and determines the orders are for the benefit of the same Principal, or the intermediary cannot determine whether the trades are for the benefit of the same Principal, the intermediary should not accept the orders. If the intermediary nevertheless accepts simultaneous buy and sell orders without knowledge of improper customer intent to engage in a wash trade, the ICE FAQ provides that the intermediary can mitigate regulatory liability for accepting a wash trade by taking steps to ensure that the orders do not execute opposite each other. For example, the intermediary can enter and execute one order prior to the entry and execution of the second order. However, these steps may not represent a practical solution because an intermediary may still be liable if ICE determines the trade was a wash trade. ICE also expects intermediaries who receive simultaneous buy and sell orders for the same Principal to report those instances to ICE’s Market Regulation Department.
The ICE FAQ also highlights recordkeeping obligations for intermediaries that accept simultaneous buy and sell orders for the same principal. Specifically, the intermediary receiving the orders must maintain records of such orders (e.g. paper tickets, emails or IMs), order details, and evidence of the time of receipt of the order by means of automated time-stamp (or other automated timing device).
IV. ICE Wash Trade Prevention Features
The Self Trade Prevention Functionality (“STPF”) is a wash trading prevention function within ICE’s trading platform which prevents self-trading of orders. Algorithmic proprietary traders are required to use STPF to prevent wash trades; other market participants may choose to take advantage of it.
V. Unintentional Wash Trades
ICE recognizes that a market participant’s proprietary trading operation may include separate business units or several individual traders (or teams of traders) who independently place manual orders or independently operate automated trading systems (“ATS”). Although the traders may initiate the orders independently, the orders may coincidentally match for the accounts of the same Principal. ICE also recognizes that a single ATS, or multiple ATSs controlled by the same individual, may submit buy and sell orders that inadvertently match for the accounts of the same Principal. The ICE FAQ addresses the following three scenarios involving unintentional wash trades:
Scenario 1: Separate Business Units. If traders from independent business units submit buy and sell orders that coincidentally match for the accounts of the same Principal, ICE does not consider the resulting trade a wash trade provided:
- the orders were entered without prearrangement and were not otherwise intended to match;
- neither person had knowledge of the other’s order; and
- the market participant can demonstrate independence of trading decisions and that the transaction had a bona fide business purposes for each party to the trade.5
- the orders were entered without prearrangement and were not otherwise intended to match;
- the orders and/or the trade did not cause price or volume aberrations; and
- the market participant can demonstrate independence of trading decisions, including policies to preclude affiliated traders for the same Principal from having knowledge of or access to each other’s orders.
VI. Block Trades and Exchange of Futures for Related Position Transactions
ICE’s wash trade prohibition extends to off-exchange transactions, including but not limited to Block Trades and Exchange For Related Position (“EFRP”) transactions. That said, a block trade or EFRP transaction between accounts of affiliated parties does not violate the ICE wash trade prohibition if the trade is consistent with the ICE requirements set forth below.
A block trade between affiliated accounts does not constitute a wash sale where:
- the block price is fair and reasonable;
- each party has a bona fide business purpose for entering into the trade; and
- each party’s decision to enter into the trade is made by a separate and independent decision-maker.
- independently controlled with different beneficial ownership;
- independently controlled accounts of separate legal entities with the same beneficial ownership; or
- independently controlled accounts within the same legal entity, provided that the account controllers operate separate business units.
1 ICE FAQ Question 1.
2 ICE FAQ Question 2.
3 See In the Matter of Three Eight Corporation, CFTC No. 88-33, Comm. Fut. L. Rep. (CCH) ¶25,749 (June 16, 1993).
4 This obligation to determine whether orders are for the benefit of the same Principal extends to whether orders originating from an omnibus account are for the benefit of the same Principal within the omnibus account.
5 ICE notes that transferring or moving positions amongst accounts is not a bona fide business purpose, unless the transfer is done in accordance with ICE Rule 4.11 regarding transfer transactions.
6 ICE FAQ Question 13.