In those CME and CBOT futures contracts that result in physical delivery, where delivery takes place against the oldest open long positions, market participants are permitted to liquidate and re-establish the position to move further back in the delivery queue.
This practice is called freshening of position dates.
Parameters related to freshening trades
Trades executed to liquidate and re-establish a position for purposes of freshening the position date must be competitively executed and must be clearly independent transactions subject to market risk.
Purchases and sales to freshen a position date that are prearranged or otherwise executed pursuant to an express or implied agreement will be deemed to violate the prohibition on wash trades
Example
For example, Participants A and B hold open long positions in the same physically deliverable commodity in the delivery month where delivery takes place against the oldest open long position.
To reduce the risk of being stopped for delivery, Participants A and B pre-arrange the execution of transactions that have the effect of offsetting and re-establishing one or both of their long positions, thus freshening the position 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 the same price as the initial transaction.
In this transaction set, the sells had the effect of offsetting the pre-existing long positions and the buys had the effect of re-establishing the long positions with newer position dates.
Due to the way the transactions were orchestrated, Participants A and B negated or strictly limited market risk. This set of transactions constitutes an indirect wash in violation of Rule 534.
Conclusion
Market participants need to be aware of the rules surrounding position freshening to avoid violating the prohibition on wash trades.
This is part of a course on wash trades. For official regulatory guidance on wash trades, reference the applicable Market Regulation Advisory Notice.
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