(Adds CME statement in paragraph 9)
By Julie Ingwersen
CHICAGO, July 2 (Reuters) - During the first three months in which the CME Group allowed privately negotiated "block trades" in agricultural futures and options, 75 percent of those trades occurred in highly liquid nearby contracts, the U.S. Commodity Futures Trading Commission said in a report on Monday.
That trend runs contrary to grain industry expectations for block trades, which the CME Group Inc, parent of the Chicago Board of Trade and the Chicago Mercantile Exchange, began allowing in markets such as corn and wheat in January.
The CME has said it expanded block trading in agricultural products to boost trade in thinly traded markets, including contracts for deferred delivery.
Yet the CFTC found the bulk of block trades were executed in front contract months, which are typically the most actively traded agricultural futures and options.
"The use of block trades in liquid contracts appears to conflict with the expectations set by the CME," the CFTC's report said.
"The industry concern is that block trades are pulling volume from liquid contracts," the report said.
However, the CFTC found no rule violation in nearby block trades, and said after reviewing CME grain and livestock trading data from Jan. 8 to March 31 that block trades complied with CME rules requiring trades to be executed at a "fair and reasonable" price.
The CFTC said it would continue to monitor block trades for examples of lost liquidity in nearby contracts, and for block prices falling outside the normal trade range.
"We are continuing to review the CFTC's report," a CME Group spokesman said in an emailed statement. "We believe ag block trades are beneficial to our markets and the participants who rely on them to manage their risk."
CME executives discussed block trades in a meeting with U.S. Agriculture Secretary Sonny Perdue last week during which they said they were holding periodic talks on the topic with the National Grain and Feed Association, a trade group that represents commercial grain handlers.
Block trades are struck away from the exchange, sometimes outside of regular trading hours, but still cleared by the exchange. Proponents say the transactions help them execute large orders without disrupting prices in thinly traded markets.
Some brokers oppose block trades, saying they unfairly allow big players to trade in secret, bypassing the open market.
"This is the exchange catering to the big managed money accounts, and the traditional players are not relevant to them," said Scott Hedin, an independent grain trader.
Block trades represent an extremely small portion of CME's overall trading volume in agricultural products, the CFTC said, although its analysis showed volume can be "somewhat more significant on specific dates and for certain contract months." (Reporting by Julie Ingwersen; Editing by Lisa Shumaker and Joseph Radford)