By Townhall Chicago News Staff
Chicago-headquartered Cboe Global Markets joined the Capital Markets Alliance on Tuesday in filing a lawsuit challenging the Commodity Futures Trading Commission’s approval of single-stock perpetual derivatives contracts.
The legal action, filed in the U.S. District Court for the Southern District of New York, pits some of the largest U.S. market participants against the CFTC and could reshape how equity-linked products are traded and regulated.
The alliance includes Cboe, Citadel Securities and the Healthy Markets Association. The suit asks the court to vacate the CFTC’s approvals, declare the products to be security-based swaps under Securities and Exchange Commission jurisdiction, and bar the CFTC from giving the approvals effect while the case is pending, according to a Nov. 3 statement from the alliance.
“Cboe has joined this action alongside some of the largest U.S. market participants and investor advocates because we believe the CFTC’s actions threaten to erode the regulatory framework that has protected investors and governed U.S. securities markets for more than nine decades,” Craig Donohue, CEO of Cboe Global Markets, said in a Nov. 3 press release.
Donohue said single-stock perpetual derivatives are “the latest example of a troubling trend in which securities products are being offered on CFTC platforms — outside the appropriate regulatory framework and customer protection regime established by Congress.”
CFTC Chairman Michael Selig said the same day that the equity perpetual contracts had been deemed approved as security futures products and could begin trading on CFTC-registered exchanges. The contracts have no fixed expiration and use periodic funding payments intended to keep prices near those of the referenced assets.
The alliance argues in its complaint that the approvals violate the Administrative Procedure Act because the products are security-based swaps subject to SEC jurisdiction, the CFTC provided no explanation for its decision and the agency failed to consider the impact on investors and securities markets.
A federal judge in Manhattan denied the alliance’s request for a temporary restraining order in a Nov. 3 ruling but found the challengers are “likely to succeed on the merits” of their claim that the CFTC lacks the statutory authority to allow the products.
“The perpetual contracts in question do not appear to satisfy the definition of a ‘security future,’” U.S. District Judge Valerie E. Caproni wrote in her order. She found that the contracts “appear to satisfy the definition of a swap, which are subject to regulation by the Securities and Exchange Commission, not by CFTC.”
Caproni denied the restraining order because the alliance failed to demonstrate that its members would likely suffer irreparable harm. She found, however, that the balance of equities and the public interest favored the alliance, noting that the CFTC’s actions “seem to represent a major disruption to the equities market.”
The CFTC’s opposition to the alliance’s preliminary injunction motion is due Friday, Nov. 6, with a reply due Nov. 10.
The dispute centers on whether perpetual derivatives tied to individual stocks fall under the CFTC’s authority over futures or the SEC’s authority over securities. Cboe said it could bring such products to market on its own CFTC-regulated platforms but chose instead to challenge the regulatory framework.
“This issue, however, is about investor protection for securities trading and the rule of law,” Donohue said in the release.
Cboe, founded in 1973 as the world’s first listed options exchange, operates derivatives, equities and foreign exchange markets worldwide.
