The amicus curiae brief, filed by Better Markets, former SEC Commissioner Allison Herren Lee, and Harvard Law Professor John C. Coates, argues that single-stock perpetual futures constitute swaps—and, consequently, bypass current Dodd-Frank Act protections for retail investors under the CFTC’s new rules.
Key Takeaways
Better Markets Files Brief to Challenge CFTC’s Approval Of Perpetual Derivatives
The legal battle over the CFTC’s decision to allow perpetual derivatives on individual U.S. stocks is heating up, and third-parties are now raising their voices.
Better Markets, an organization that “fights for a financial system that serves society and supports the productive economy,” has filed a friend-of-the-court (amicus curiae) brief to back the Capital Markets Alliance’s (CMA) challenge to the Commodity Futures Trading Commission’s (CFTC) approval of perpetual derivatives on individual U.S. stocks.
In the brief, filed by former SEC Acting Chair and Commissioner Allison Herren Lee and former SEC General Counsel and Acting Director of the Division of Corporate Finance John C. Coates, the organization argues that these perpetuals should be classified as security-based swaps and not futures, as they lack a fixed delivery date.
As a consequence of being classified as security-based swaps, these fall under the SEC’s jurisdiction under the Dodd-Frank Act and must not bypass critical protection measures, including registration and the requirement that trading should only be conducted on regulated national securities exchanges.
Furthermore, Better Markets, which has a history of opposing decentralized initiatives, stresses that approving these swaps brings severe risks to retail investors, as they combine high leverage, no expiration date, and automated liquidation features, enticing the formation of a speculative ecosystem.
“These ‘perpetual futures’ are really shadow stocks that are leveraged roughly six-to-one, meaning an investor’s entire portfolio can be zeroed out with just a 16% movement in the market. That level of volatility is common with single stocks and therefore the risk of total loss is real and likely frequent, ruining retail investors while enriching the platform companies,” said Better Markets, warning about the risks of opening these tools to retail investors.
“As we have seen in other nations where these products proliferate, investors can get wiped out in a matter of minutes, including overnight when automatic liquidation thresholds can be triggered,” the organization concluded.
Better Markets’ opinions coincide with those of the CMA, which stressed that the CFTC’s recent approval of a multitude of filings for securities-based products fails to explain why it has long treated perpetual derivatives as swaps, and disregards the impact that this new vision will have on investors and the wider securities market.
The CMA, representing industry heavyweights like Cboe Global Markets, Citadel Securities, and Healthy Markets Association, asks to vacate the approvals of these products and acknowledge that they constitute security-based swaps, effectively barring the CFTC’s purported ability to approve them while the case is pending.
The case is becoming a major battle facing industry incumbents and the CFTC, which is also facing state regulators over prediction markets. The SEC has already filed an amicus brief supporting the CFTC’s new rule changes, contesting CMA’s allegations that it is “going rogue.”
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WRITTEN BYSergio Goschenko
