Nov 26, 2024 CME Group (“CME”) regularly publishes Market Regulation Advisory Notices to clarify exchange expectations for market participant behavior. On July 2, 2024, CME issued a notice updating Rule 526, which has since prompted increased inquiries from CME regarding cross-exchange futures switch activity, as observed by Turnkey Trading Partners (“Turnkey”). A futures switch occurs when a market participant transfers a position on one exchange to a similar position on another. These orders are typically executed as negotiated block futures trades, allowing brokers to achieve even or better position transfer pricing. These types of transactions can occur for any commodity, but perhaps are most common within the energy complex. Customers of introducing brokers often pursue switches to capture minor pricing advantages or manage book risk. These transactions are generally quoted as a single price, reflecting the overall cost of the switch. However, a switch is not a single order. At a minimum, it involves two distinct transactions: Purchasing a product on one exchange, and Selling a product on another exchange. Because a switch spans multiple exchanges, it cannot typically be priced or quoted on electronic execution platforms. Negotiating a switch is often complex, involving multiple parties and several executed orders. Only after these orders are average-priced together can the quoted switch price be obtained. CME Rule 526 and Independent Pricing The updated Rule 526, outlined in the most recent Market Regulation Advisory Notice, includes a Frequently Asked Questions section. In Item 3, CME clarifies that block trades must not be executed at prices below the minimum price increment. However, there is an exception: If two or more block trades are independently negotiated and executed, they may meet the minimum price increment individually but achieve an average price below the increment. The key to understanding CME’s expectations lies in the word “independent.” Implications for Cross-Exchange Switches Based on Turnkey’s observations, firms facilitating cross-exchange switches that include a CME leg may face scrutiny under the updated guidance. CME may no longer consider such trades as independently negotiated when quoted or priced as a single transaction. This raises compliance concerns: Quoting switches as a singular transaction and averaging the price below the minimum increment risks violating CME’s rules. Moving forward, CME expects each leg of a switch to be quoted and priced independently as separate trades. Recommendations Turnkey advises that voice and chat brokers offering cross-exchange switches adopt policies to comply with these updated expectations. Each leg of a switch should be quoted and priced as an independent trade to meet CME’s minimum price increment requirements. Failing to do so could lead to regulatory violations in the future. Establishing clear policies now will help firms align with CME’s standards and mitigate compliance risks. For more information on cross-exchange switches, please contact your Turnkey representative or email us at operations@turnkeytradingpartners.com.