One CME disciplinary notice gives all the basics for block trades - and makes a case for brokered blocks only
Friday, COMEX issued a disciplinary notice (here) that makes a good case for why companies should consider only allowing traders to make brokered block trades. The staff at the disciplined firm:
1. "reported execution time of the block trade was the time the spread leg prices were determined rather than the time of the trade consummation";
2. "failed to report block trades to the Exchange within the required time period following execution"; and
3. "improperly combined separately negotiated and executed trades on one ticket "
The block trade rules specifically state that a block trade is consummated when the spread value is agreed to, regardless of whether the individual legs have been priced and that the reporting time for the trade starts to run at that time. In addition, each individually negotiated block trade has to be reported separately - part of the rationale is to assure each block meets the rules for a valid block trade, including traded volume.
No surprise, the COMEX also found a failure to advise and train staff. The fine was $60,000.
This can be avoided by only executing block trades through a broker. Like is the case in many other circumstances, the broker has responsibility for assuring compliance with exchange rules and lessens the company burden for compliance (and risk of compliance failure). Unless there is a compelling reason for direct block trade execution, consider requiring all blocks to go through a broker.