SEC Backs CFTC as US Stock Perpetuals Head to Court
By @sharedot · · 6 pages
- Crypto
- Regulation
- Cftc
- SEC
- Perpetual Futures
The SEC filed a brief defending the CFTC in the legal fight over US stock perpetuals, even as a judge found the plaintiffs likely to win on the law.
What happened: SEC steps into the perpetuals brawl
The SEC filed a court brief in Manhattan backing the Commodity Futures Trading Commission against the Capital Markets Alliance, a group whose members include Cboe and Citadel Securities, which sued on November 3 to overturn the CFTC's approval of perpetual futures on individual US stocks.
The alliance argues the contracts are security-based swaps only the SEC can approve. The SEC disputed the alliance's portrayal of "a CFTC gone rogue, and an SEC gone missing," saying exchanges' rules remain subject to its review, while notably not stating whether the contracts are futures or swaps.
The platforms involved — Coinbase Derivatives, Kalshi and Payward's Bitnomial — applied in September for more than 100 such contracts between them.
Why it's surprising: a judge already sided with the challengers
The surprise is that the SEC's intervention comes despite an early courtroom loss for its position.
According to Finance Magnates, Judge Valerie Caproni found the alliance likely to show the CFTC lacked authority, writing that perpetual contracts never provide for delivery of a stock at a future date, which makes them look like swaps under the SEC's remit, and that the CFTC's actions "seem to represent a major disruption to the equities market."
Yet she refused a temporary restraining order, saying declarations from Cboe, Citadel Securities and Healthy Markets described possible rather than likely harm.
The case has since moved to Judge Lorna Schofield, who will schedule oral argument on a preliminary injunction, with briefing on that motion closing Tuesday.
The evidence: trading is live and briefs split along business lines
Per CoinGape, Coinbase, Kalshi and Payward's equity perpetual applications were deemed approved on November 2, and Finance Magnates reports Kalshi began offering contracts on about 50 US stocks and ETFs on November 5.
Per Finance Magnates, Cboe told the court it counted about $375 million in 24-hour notional volume on the second day.
Friend-of-the-court filings divide along business lines: Coinbase, Kalshi and Payward filed jointly with DRW, Jump Trading and Paradigm, while Better Markets — with former SEC acting chair Allison Herren Lee and former general counsel John Coates — said the CFTC was trying to "gut 90 years of investor protections" and that roughly 6-to-1 leverage means a 16% market fall can wipe out a portfolio.
The CFTC argues the alliance is a vehicle created for the case with no standing to sue.
Stakes and what comes next: who regulates leveraged stock exposure
The case will decide where US retail traders get leveraged exposure to single stocks: on CFTC-regulated venues or on SEC-supervised exchanges.
Per Finance Magnates, Ledger Insights reported the SEC has until December 31 to decide whether to overturn the exchanges' rules — a gap Citadel Securities asked regulators to close in September, arguing a venue should not be able to choose its regulator by how it describes a product.
The American Securities Association backs the alliance, CME Group, which has sued the CFTC since June over a bitcoin perpetual, and five securities law scholars have asked to file briefs, and Plus500 began offering Kalshi's perpetual futures to institutional clients in October.