SEC backs CFTC in perpetual stock contracts dispute, affirms coordination between agencies

Key Facts

The U.S. Securities and Exchange Commission filed a brief supporting the Commodity Futures Trading Commission’s legal position in a dispute over which agency has authority to regulate perpetual contracts linked to individual stocks, according to a report published by The Block on November 11. The SEC responded to the Capital Markets Alliance’s allegation that the commission acted alone and without coordinating with it. The agency said changes to the commission’s rules are also subject to its review and that cooperation between the two agencies is ongoing. It said the amicus brief addresses what it described as a false portrayal of the commission as acting without oversight and the SEC as absent from the process. The brief therefore does not align the SEC with the alliance’s lawsuit seeking to overturn the approvals; instead, it defends the existence of regulatory coordination between the two agencies.

The lawsuit centers on how single-stock perpetual contracts are classified and which agency has authority to oversee them. The Capital Markets Alliance says the CFTC violated the Administrative Procedure Act when it authorized trading in these products because, according to the alliance, the contracts should fall under the SEC’s jurisdiction. The alliance also accuses the commission of failing to explain its decision and seeks to have the approvals overturned. The alliance includes members such as Cboe exchange and Citadel Securities, placing a dispute between securities-industry participants and the agency that authorized the products at the heart of the case. The commission says the contracts can be listed on exchanges registered with it, while the dispute continues over whether their legal classification is futures contracts or securities swaps.

In its brief, the SEC said its review of CFTC rule changes is part of the regulatory framework and that cooperation between the agencies is important to overseeing the contracts. The commission’s regulatory rationale rests on the registration of trading platforms with it, as well as their registration with the SEC as securities platforms for trading security futures products. CFTC Chairman Michael Selig said single-stock perpetual contracts could begin trading for the first time on futures markets registered with the commission and also registered with the SEC. Selig described expanding access to these instruments for traditional securities as enabling U.S. participants to use them for risk management and price discovery, within the law. He added that the products are grounded in the Commodity Futures Modernization Act of 2000 and the memorandum of understanding between the agencies, which are committed to providing regulatory clarity and a path for innovation.

Applications by Coinbase, Kalshi and Payward to list perpetual contracts linked to U.S. stocks were deemed approved on November 2, according to The Block. On November 3, the U.S. District Court for the Southern District of New York rejected the alliance’s request for a temporary restraining order to halt CFTC approvals of applications by KalshiEX, Bitnomial Exchange and Coinbase Derivatives. But in its order, the court indicated that the alliance was likely to succeed in its claim that the commission exceeded its statutory authority by approving the trading of perpetual derivatives on individual stocks as security futures contracts. The court found that the alliance had not demonstrated imminent irreparable harm, a requirement for a temporary restraining order. It also said the commission’s actions appeared to represent a major disruption to the stock market, and that the public interest favored preventing such disruption before it occurred.

The SEC brief was not the only court filing in the case. Coinbase, Payward, Kalshi, DRW Holdings, Paradigm and Jump Trading filed a joint brief opposing the alliance’s lawsuit. Better Markets and former SEC Commissioner Allison Herren Lee also filed supporting briefs, arguing that the new contracts should be regulated by the SEC. Better Markets described the products as securities swaps, despite their designation as perpetual futures contracts, and said they should be subject to the investor protections provided by the agency’s rules. The multiple briefs reflect a dispute over the nature of the product and regulatory jurisdiction, as well as the SEC’s response to the alliance’s portrayal of the relationship between the agencies.

The court’s order set November 6 as the deadline for the CFTC to file its opposition to the preliminary injunction request and November 10 for the alliance’s reply, subject to change by order of the assigned judge. The SEC filed its brief on November 11, after the two deadlines specified in the order. The rejection of the request to halt the approvals had left the trading path open at that stage, while the challenge to the legality of the approvals and the limits of the commission’s authority continued. The CFTC chairman said coordinating the agencies’ regulatory frameworks is intended to protect market integrity, investors and customers. The case remains focused on legal jurisdiction and the classification of the contracts as court proceedings continue.