MARKET REGULATION ADVISORY NOTICE______________________________________________________________________
Exchange

CME, CBOT, NYMEX & COMEX

Subject

Wash Trades Prohibited

Rule References

Rule 534

Advisory Date

September 2, 2020

Advisory Number

CME Group RA2008-5

Effective Date

September 17, 2020

Effective on trade date September 17, 2020, and pending all relevant CFTC regulatory review periods,
this Advisory Notice will supersede CME Group Market Regulation Advisory Notice RA1905-5 from April
11, 2019. It is being issued to amend Q&A 12 to eliminate a reference to a legacy front-end audit trail tag
and its associated number in connection with the migration from iLink2 to iLink 3, a new order entry
protocol for trading futures and options markets on the CME Globex electronic trading platform.
No substantive information in this Advisory Notice has been amended.
Rule 534, set forth below, has not changed, and this Advisory Notice is being issued to provide updated
guidance regarding compliance with Rule 534. Member firms are strongly encouraged to ensure that all
firm employees and customers are fully informed regarding Rule 534 and the guidance in this Advisory
Notice.
Rule 534 (“Wash Trades Prohibited”)
No person shall place or accept buy and sell orders in the same product and expiration
month, and, for a put or call option, the same strike price, where the person knows orreasonably should know that the purpose of the orders is to avoid taking a bona fide market
position exposed to market risk (transactions commonly known or referred to as wash
trades or wash sales). Buy and sell orders for different accounts with common beneficial
ownership that are entered with the intent to negate market risk or price competition shallalso be deemed to violate the prohibition on wash trades. Additionally, no person shallknowingly execute or accommodate the execution of such orders by direct or indirectmeans.

Questions regarding this Advisory Notice may be directed to one of the following individuals in Market
Regulation:
Erin Middleton, Director, Rules & Regulatory Outreach, 312.341.3286
Paige Gawrys, Senior Specialist, Rules & Regulatory Outreach, 312.872.5078
Jennifer Dendrinos, Senior Director, Investigations, 312.341.7812
Natasha Selkov, Manager, Investigations, 312.341.7623
For media inquiries concerning this Advisory Notice, please contact CME Group Corporate Communications at 312.930.3434 or
news@cmegroup.com.

CME Group RA2008-5
September 2, 2020
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Frequently Asked Questions (“FAQ”) Related to Rule 534 (“Wash Trades Prohibited”)
Q1:

What is the definition of a wash trade?

A1:

A wash trade is a form of fictitious trade in which a transaction or a series of transactions give theappearance that bona fide purchases and sales have been made, but where the trades havebeen entered into without the intent to take a bona fide market position or without the intent toexecute bona fide transactions subject to market risk or price competition. Parties who initiate,execute or accommodate transactions which they know, or reasonably should know, will achievea wash result shall be in violation of Rule 534.
A wash trade requires:a) that the transaction or series of transactions produces a wash result - meaning thepurchase and sale of the same instrument at the same price, or a similar price, foraccounts with the same beneficial ownership or for accounts with common beneficial
ownership; andb) that the party(ies) intended to achieve a wash result. Intent may be inferred fromevidence of prearrangement or from evidence that the orders or trade(s) werestructured, entered or executed in a manner that the party(ies) knew, or reasonably
should have known, would produce a wash result.
The prearrangement, execution or structuring of transactions in CME Group markets with theintent of negating market risk, independent of whether such transactions are entered and/or
executed in compliance with other rules which permit prearrangement such as Rule 539.C. (“PreExecution Communications Regarding Globex Trades”) may be deemed to violate Rule 534.

Q2:

What does it mean to have accounts “with the same beneficial ownership” or “withcommon beneficial ownership” in the context of Rule 534’s prohibition on wash trades?

A2:

Accounts with the “same beneficial ownership” include accounts with identical ownership as wellas accounts of different entities that are 100% wholly-owned by the same parent.
“Common beneficial ownership” is more inclusive and includes not only accounts with the same
beneficial ownership, but also accounts with common beneficial ownership that is less than
100%.

Q3:

May a market participant place, accept or execute simultaneous buy and sell orders foraccounts with common beneficial ownership in the same product and expiration month, or
option series?

A3:

Any market participant who places or accepts buy and sell orders for simultaneous execution thatare for accounts with common beneficial ownership, and any market participant who executes
such orders, will be in violation of Rule 534 if the execution of the orders yields a wash result andthe party knew, or reasonably should have known, that the trades were entered into without theintent to execute bona fide transactions subject to market risk or price competition.

Q4:

When receiving simultaneous buy and sell orders placed by another party, does themarket participant receiving the orders have any independent obligation to determine
whether the orders are bona fide?

A4:

Yes. The CFTC has held (see, for example, In the Matter of Three Eight Corporation) that market
participants, including account executives and floor brokers, who accept simultaneous buy andCME Group RA2008-5
September 2, 2020
Page 3 of 8sell orders for execution have an independent “duty to inquire” about the propriety of such orders.
In the absence of such inquiry, the market participant accepting the orders may be found to haveengaged in wash trades if the execution of the orders produces a wash result.
Market participants receiving simultaneous buy and sell orders for execution must make inquiry
sufficient to ascertain whether the orders are for accounts with common beneficial ownership. If
the buy and sell orders are for an omnibus account, the market participant has a duty to inquireas to whether the orders are for different account owners within the omnibus account.
If a market participant cannot assure himself that buy and sell orders received for simultaneous
execution are for accounts that do not have common beneficial ownership, the market participant
may refuse to accept the orders. Accepting or executing simultaneous buy and sell orders
without such assurance creates potential regulatory exposure if the execution of the orders yields
a wash result.
Q5:

In the event buy and sell orders for accounts with common beneficial ownership are
simultaneously entered for a legitimate purpose, how should such orders be executed tocomply with Rule 534?

A5:

In the electronic venue, one of the orders should be entered on the electronic trading platformand executed in full prior to the entry of the second order. This will ensure that the orders are notexecuted opposite each other and will provide a clear audit trail with respect to the entry andexecution of the orders. In this circumstance, a written and timestamped record must be made of
any order that is not entered on the electronic platform immediately upon receipt.
In the open outcry venue, the buy and sell orders should be timestamped immediately uponreceipt. One of the orders should be entered into the pit, executed and timestamped out prior to
submitting the second order to the pit for execution. The second order should be timestamped
again when it is submitted to the pit. This methodology will ensure that the orders are notexecuted opposite each other and the accurate timestamping will provide evidence that theorders were not entered for simultaneous execution.
In either the electronic or open outcry venue, simply ensuring that there is a delay between theentry of the buy and sell orders may not, depending on the terms of the orders, preclude theorders from trading in whole or in part against each other. To the extent that the orders trade
opposite each other either directly or indirectly through a common third party, the trade may bedeemed an illegal wash trade notwithstanding the fact that the orders were entered at different
times.
Additionally, in certain circumstances, simultaneous buy and sell orders for accounts with
common beneficial ownership that are contemporaneously executed at nearly the same price,
rather than at precisely the same price, may violate the prohibition on wash trades if it isdemonstrated that the orders were structured to negate market risk, for example, by requiring thatthe price difference between the two orders be strictly limited.

Q6:

Is it acceptable to contemporaneously enter buy and sell orders for accounts with
common beneficial ownership if the buy and sell orders are given to different FCMs or todifferent floor brokers for execution?

A6:

The potential for regulatory exposure in this situation is significant. If the orders trade against
each other in whole or in part, or if both orders are executed opposite the same third party, an
inference may be drawn that orders were structured with the intent to execute a prohibited wash
trade. The fact that the orders were competitively executed without prearrangement may notprotect the party entering the orders from liability if the execution of the orders produces a wash
result.

CME Group RA2008-5
September 2, 2020
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Q7:

Is it acceptable to enter simultaneous buy and the sell orders for accounts with common
beneficial ownership for execution on a discretionary (“DRT”) basis?

A7:

The entry of simultaneous buy and sell orders for accounts with common beneficial ownershipthat are entered with instructions giving the executing party discretion over the price and/or timeof execution may be viewed, depending on the circumstances, as an implicit request to the
executing party to negate market risk. Should the execution of the orders produce a wash result,the parties placing, accepting and executing the orders may be liable for having engaged in an
illegal wash trade.

Q8:

Are market participants permitted to “freshen” position dates (i.e. liquidating and reestablishing a position) without violating the prohibition on wash trades?

A8:

In those products settled via physical delivery against the oldest open long position, CME and
CBOT Rule 807 (“Open Long Positions During the Delivery Month”) allow for the intraday
freshening of position dates. However, trades executed to liquidate and re-establish a position inorder to freshen the position’s date must be competitively executed and must be clearly
independent transactions subject to market risk. Purchases and sales to freshen a position datethat are prearranged or otherwise executed pursuant to an express or implied agreement will bedeemed to violate the prohibition on wash trades.

Q9:

Do block trades between different accounts with common beneficial ownership violate thewash trading prohibition?

A9:

Block trades between different accounts with common beneficial ownership are prohibited
unless:a) each party’s decision to enter into the block trade is made by an independent
decision-maker;b) each party has a legal and independent bona fide business purpose for engaging in
the block trade; andc) the block trade is executed at a fair and reasonable price.
In the absence of satisfying all of the aforementioned requirements, the transaction may
constitute an illegal wash trade prohibited by Rule 534.

Q10:

If buy and sell orders for accounts with common beneficial ownership are independently
initiated by independent decision makers and coincidentally cross in the market, will thetrade violate the wash trade prohibition?

A10:

Buy and sell orders for accounts with common beneficial ownership that are independently
initiated for legitimate and separate business purposes by independent decision makers andwhich coincidentally cross with each other in the competitive market are not considered wash
trades provided that the trade was not prearranged and neither party had knowledge of theother’s order or otherwise intended for their order to trade against the other’s order. Market
participants should be aware, however, that trades between accounts with common beneficial
ownership may draw additional regulatory scrutiny and should be prepared to demonstrate thatsuch trades are bona fide. (See also Q12, Q13 and Q14.)

CME Group RA2008-5
September 2, 2020
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Q11:

Under what circumstances does trading opposite one’s own order on the electronic
platform violate Rule 534?

A11:

It is a violation of Rule 534 for an individual to enter an order on the electronic platform that theindividual knew or reasonably should have known would trade against his own order resting on
the opposite side of the market. The unintentional and incidental matching of buy and sell orders
entered by an individual trader on the electronic platform generally will not be considered aviolation of Rule 534. However, if such self-matching occurs on more than an incidental basis in
the context of the trader’s activity or in the context of the particular market’s activity, such trades
may be deemed to violate the prohibition on wash trades.
It is recommended that individual traders who frequently enter orders on opposing sides of themarket that have a tendency to self-match on more than an incidental basis employ functionalitythat will minimize the potential for their buy and sell orders to match with each other. Whenemployed, CME Group’s optional self-match prevention (“SMP”) functionality automatically blocks
the matching of buy and sell orders for commonly owned accounts that are submitted to Globex
with the same SMP ID. Should you have any questions on the registration or operation of
CME Group’s SMP functionality, please contact CME Global Account Management in the U.S. at(312) 634-8700, in Europe at 44 203 379 3754, or in Asia at 65 6593 5574.

Q12:

Is it a violation of Rule 534 if independently initiated orders originating from different
proprietary traders within the same firm match against each other?

A12:

It is recognized that many firms have proprietary trading operations in which multiple traders
making fully independent trading decisions enter orders for a commonly owned account (thefirm’s proprietary account) that may unintentionally and coincidentally match with each other on
the electronic platform. Provided that the respective orders of each independent trader are
entered in good faith for the purpose of executing bona fide transactions, are entered without
prearrangement, and are entered without the knowledge of the other trader’s order, then suchtrades shall not be considered to violate the prohibition on wash trades.
Similarly, orders generated by algorithms operated and controlled by fully independent traders in
different trading groups that unintentionally and coincidentally match with each other will not be
considered to be wash trades provided that the orders are initiated in good faith for the purpose of
executing bona fide transactions, that the algorithms operate independently of one another, andthat the respective trading groups do not have knowledge of one another’s orders.
Firms have an obligation to supervise the trading by their employees and algorithms, must beable to demonstrate the independence of the traders/trading groups/algorithms, and should haveand enforce policies and procedures that preclude the traders from having access to or
knowledge of one another’s orders.
Additionally, the operator ID that is tied to the individual or team of individuals (ATS Team)
responsible for the entry of the orders must be uniquely identified in accordance with Rule 576(“Identification of Globex Terminal Operators”) and associated Market Regulation Advisory
Notices.

Q13:

Is it a violation of Rule 534 if orders initiated by one or more automated trading systems
that are operated and/or controlled by the same individual or the same trading groupmatch against each other?

A13:

If a particular algorithm generates buy and sell orders that would potentially match against eachother and such trades occur on more than an incidental basis in the context of the algorithm’s
activity or in the context of the particular market’s activity, the trades may be deemed to violate
the prohibition on wash trades. It is recommended in this circumstance that the party(ies)CME Group RA2008-5
September 2, 2020
Page 6 of 8
responsible for the operation of the algorithm employ functionality that will minimize the potential
for the algorithm’s buy and sell orders to match with each other.
If otherwise independent algorithms are operated and/or controlled by the same individual orteam of individuals and the algorithms trade against one another on more than an incidental basis
in the context of the algorithms’ activity or the particular market’s activity, then the trading
between the algorithms may be deemed to violate the prohibition on wash trades. Where multiple
algorithms operated or controlled by the same individual or team of individuals may generate selfmatch events on more than an incidental basis, it is recommended that the individual or team
employ functionality to minimize or eliminate such occurrences.
Q14:

Are there unique considerations with respect to Rule 534 in the context of exchangesponsored volume incentive programs?

A14:

Market participants who participate in exchange-sponsored programs with incentives tied inwhole or in part to meeting specific volume thresholds should take proactive steps to prevent
transactions between accounts with common beneficial ownership. These trades will draw
additional regulatory scrutiny and it is recommended that participants in these types of incentive
programs employ functionality to mitigate the potential for such trades to occur.

Q15:

In circumstances where “more than incidental” self-matching may be deemed to violate
the prohibition on wash trades, is there a prescribed threshold?

A15:

In these circumstances, market participants are responsible for monitoring their trading, whether
that trading is manual or automated, and are responsible for minimizing the potential for, and theoccurrence of, self-match events.
The incidence of self-matching in these circumstances will be evaluated in the context of theactivity of the trader, trading group, or algorithm(s), and relative to the trades and volume in the
instrument traded. More than de minimis self-matching in this context will result in additional
regulatory scrutiny and may be deemed to violate the prohibition on wash trades; if there is thepotential for more than de minimis self-match events, market participants are expected to either
adjust their trading strategies or employ functionality to mitigate the occurrence of self-match
events.

Q16:

Is the use of CME Group’s Self-Match Prevention functionality mandatory?

A16:

Use of CME Group’s SMP functionality is optional. Each firm has the flexibility to tailor its
application of the functionality and its use of SMP IDs in ways that are suitable for its particularbusiness model and trading strategies. Contact CME Global Account Management for more
information regarding SMP ID configuration. CME Group SMP frequently asked questions andanswers can be found here: http://www.cmegroup.com/globex/trade-on-cme-globex/self-matchfaq.html
Market participants are reminded, however, that the rules of all CME Group Exchanges, as wellas the Commodity Exchange Act, prohibit illegal wash trades. Firms and market participants
should carefully review their operations and the guidance in this Advisory Notice, and, whereappropriate, take steps necessary to minimize the potential for such trades either through the useof SMP functionality or by alternative means.

Q17:

Does employing CME Group Self-Match Prevention functionality prevent all potential selfmatch events?

A17:

CME Group’s SMP functionality will not prevent self-matches in markets operating with implied
spread functionality if the trade involves an implied order. Absent evidence to the contrary, self-

CME Group RA2008-5
September 2, 2020
Page 7 of 8match events involving implied orders will be deemed unintentional by the CME Group
Exchanges. Additionally, CME Group’s SMP functionality does not operate during the Globex preopen nor does it prevent self-matches of orders entered during the pre-open state when themarket opens.
Q18:

Is it a violation of Rule 534 if resting orders in the order book entered during the Globex
pre-open match opposite one another once the market opens?

A18:

Please see the CME Group Market Regulation Advisory Notice on order entry during the CME
Globex pre-open period.

Q19:

What is an indirect wash trade?

A19:

One or more purchases (sales) opposite a counterparty followed by a sale (purchase) at thesame or similar price opposite the same or different counterparties may be deemed an “indirect
wash trade” in violation of Rule 534 if the orders are entered with the intent to negate or strictly
limit market risk. Such intent exists if the party knew or should have known that the orders would
negate or strictly limit market risk. Additionally, no person is permitted to accept, execute or
accommodate the execution of such orders with knowledge of their character. For additional
information on indirect wash trades, please see the examples following the answer to FAQ 21 at
the end of this Advisory Notice.

Q20:

Does an indirect wash trade have to be prearranged in order to constitute a violation ofRule 534?

A20:

No. An indirect wash trade does not require prearrangement to constitute a violation of Rule 534
if the person knows or reasonably should know that the purpose of the orders is to avoid taking abona fide market position exposed to market risk.

Q21:

What are serial indirect wash trades and do such trades violate Rule 534?

A21:

A series of trades executed among a group of market participants where order entry and tradeactivity is concentrated in discrete and limited periods of time may be deemed “serial indirect
wash transactions” in violation of Rule 534 to the extent that the parties know or reasonably
should know that the purpose of the trades is to avoid taking a bona fide market position exposed
to market risk.

Examples of Prohibited Indirect Wash Activity•

Participant A and B hold open long positions in the same physically deliverable commodity in thedelivery month where delivery takes place against the oldest open long position. To reduce the risk ofbeing stopped for delivery, Participant A and B pre-arrange the execution of transactions that havethe effect of offsetting and re-establishing one or both of their long positions, thus freshening theposition dates. For example, in an initial transaction, Participants A and B knowingly trade opposite
each other in the market. In a subsequent transaction, typically close in time to the initial transaction,
Participants A and B knowingly execute an offsetting transaction opposite each other at or near thesame price as the initial transaction. In this transaction set, the sells had the effect of offsetting thepre-existing long positions and the buys had the effect of re-establishing the long positions with newer
position dates. Due to the manner in which the transactions were orchestrated, Participants A and B
negated or strictly limited market risk. This set of transactions constitutes an indirect wash in violationof Rule 534.

•

Participants A, B, and C participate in an incentive or rebate program where terms or conditions of the
program require each participant to meet a volume threshold (e.g. average daily volume; monthly

CME Group RA2008-5
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volume; passively traded volume; etc.). With or without pre-arrangement, Participants A, B, and/or C
execute a series of transactions, typically in close time proximity, where they buy and sell similar
quantities at the same or similar prices opposite each other and where, at the conclusion of thetransaction series, the participants had no net change in position. Based on factors including, but notlimited to, prior trading activity, market circumstances, market knowledge, or prearrangement theparticipants know or have reason to know the transactions would not be exposed to price competitionor the positions exposed to market risk. Transactions executed for the purpose of increasing volume,
while knowing or having reason to know the transactions would not be exposed to price competitionor the positions exposed to market risk, are considered indirect wash trades in violation of Rule 534.