CME Group takes heat over large, private grain trades

OVERLAND PARK, Kan. (Reuters) - Global grain merchant Bunge Ltd and U.S. farmer-owned cooperatives hit exchange-operator CME Group Inc with complaints at a regulatory advisory committee meeting on Thursday over private transactions which critics say reduce transparency in agricultural markets.

FILE PHOTO: Men enter the CME Group offices in New York, U.S., October 18, 2017. REUTERS/Brendan McDermid/File Photo

CME, which owns the Chicago Board of Trade and the Chicago Mercantile Exchange, began allowing the privately negotiated deals - called block trades - in markets such as corn and wheat in January. Proponents say the transactions help them execute large orders without disrupting prices in thinly traded markets.

But small grain dealers, whose transactions do not meet size requirements for block trades, are frustrated that their orders do not get filled in the central market while block trades are being executed privately, said Joe Barker, a director for broker CHS Hedging.

Concerns about the deals surfaced as the U.S. Commodity Futures Trading Commission (CFTC), which regulates the CME Group’s exchanges, held a meeting of its agricultural advisory committee in the farm state of Kansas.

“The feeling in the country is that there is one set of rules for people that do five lots and another set of rules for people that do 500 lots,” said Barker, who represents an association of farm cooperatives on the CFTC committee. “You’ve created two different markets.”

Struck away from the broader market, block trades are meant to facilitate dealings in thinly traded contracts, such as deferred months, and help traders execute large-lot orders at a “fair and reasonable” single price, according to CME. The trades must exceed exchange-set size limits, be cleared by CME and reported publicly after completion.

Some agricultural traders said, however, that the trades have reduced transparency and fairness by removing business in the central order book, where most transactions are executed, including in actively traded contracts

The heaviest use of block trades in agricultural markets so far has been in corn, where the transactions accounted for 0.28 percent of total volume from Jan. 8 to March 23, according to CME. In agricultural markets overall, block trades represented 0.15 percent of total volume for that time period, CME said.

The CFTC is analyzing whether or not block trading at CME is withdrawing liquidity from agricultural markets, Commissioner Brian Quintenz told Reuters.

“The bottom line is the markets have to work for everybody,” he said.

Pushback against block trades comes after CME told the CFTC in December that an overwhelming number of market participants were in favor of them. The trades were previously permitted in other markets, including Black Sea wheat and Eurodollars.

CME wants its central order book to remain the primary venue for price discovery and risk management, said Tim Andriesen, managing director of agricultural products at CME Group.

Block trades encourage transparency, he said at the meeting, since unlike over-the-counter transactions, they must be reported to the broader market soon after they are struck.

“We see a market developing,” Andriesen said about block trades. “We’re looking at them closely.”

CME’s size requirements for block trades concern some grain handlers, said Stephen Strong, who represents an association of crop exporters on the CFTC committee and works for Bunge’s North American arm.

He also questioned CME’s volume data at the meeting, asking whether block trades represent a bigger slice of overall business on days when traders are executing them actively.

“For some, really the jury is still out for us as to whether blocks are a good thing or not,” he said.

(This story has been refiled to correct Barker’s employer to CHS Hedging, not Country Hedging in paragraph 3)

Reporting by Tom Polansek, editing by G Crosse