Key Points
- Better Markets supports litigation against the CFTC to block its approval of perpetual US equity derivatives.
- The organization argues that these products are securities-based swaps, lack fixed dates, and require SEC oversight.
- They warn that 6-to-1 leverage and auto-liquidation could quickly wipe out retail investors' portfolios.
The legal battle over the CFTC allowing perpetual derivatives on individual US equities is intensifying, with third parties now weighing in.
Better Markets, an organization that "fights for a financial system that serves society and supports the productive economy," has filed an amicus curiae brief supporting the Capital Markets Association (CMA) in its challenge to the Commodity Futures Trading Commission (CFTC) for approving perpetual derivatives on individual US equities.
In the brief submitted by former SEC acting chair and commissioner Allison Herren Lee and former SEC general counsel and acting director of the Division of Corporation Finance John C. Coates, the organization argues that these perpetual contracts should be classified as securities-based swaps, not futures, because they lack a fixed settlement date.
As securities-based swaps, these products would be subject to SEC oversight under the Dodd-Frank Act and would not be allowed to bypass essential protections, including registration requirements and restrictions that trading be conducted only on regulated national securities exchanges.
Additionally, Better Markets highlighted that approving these swaps would pose significant risks to retail investors due to the combination of high leverage, no expiration date, and auto-liquidation features, thus fostering a speculative ecosystem.
"These 'perpetual futures' are effectively shadow stocks, offering about six-to-one leverage, which means an investor's entire portfolio can be wiped out by just a 16% market move. Such volatility is common in single stocks, so the risk of complete loss is real and may happen frequently, devastating retail investors while platform companies profit," Better Markets cautioned about the risks of opening up these products to retail investors.
"As we've seen in other countries, these products breed environments where investors can be wiped out in just minutes, including overnight if auto-liquidation thresholds are triggered," the organization concluded.
Better Markets' stance aligns with that of the CMA, which noted that the CFTC's recent approval of securities product filings failed to explain why it has long viewed perpetual derivatives as swaps, nor did it address the impact of this new outlook on investors and the broader securities market.
The CMA, representing major industry participants such as Cboe Global Markets, Citadel Securities, and Healthy Markets Association, is seeking to rescind approval of these products and have them acknowledged as securities-based swaps, effectively curtailing the CFTC's ability to approve them while the case is adjudicated.
This case is becoming a major battleground between incumbents and the CFTC, which is also facing challenges from state regulators regarding prediction markets. The SEC has filed an amicus brief supporting the CFTC’s new rule change, countering CMA's claim that the agency is “out of control.”
