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Within hours of the US Commodity Futures Trading Commission (CFTC) clearing perpetual futures on individual US stocks to trade from today, a trade group backed by exchange operator Cboe Global Markets and market maker Citadel Securities went to court to stop them.
The Capital Markets Alliance (CMA), a New York-based trade association of exchanges, market makers, broker-dealers, investors and data providers, filed suit in the US District Court for the Southern District of New York on 3 November. It is asking the court to vacate the CFTC’s approval of perpetual derivatives on individual US stocks. Its members include Cboe, Citadel Securities and investor advocacy group Healthy Markets Association. The CMA wants the court to overturn the approvals, rule that the products are security-based swaps, and stop the CFTC putting the approvals into effect while the case is heard. According to crypto news outlet The Defiant, the complaint targets the single-stock perpetual contracts of Kalshi, Coinbase and Bitnomial.
LIQUIDITYFINDER reported earlier today that the CFTC had given US equity perps the green light. That article traced how the US went from its first bitcoin perpetual in May to single stocks in five months.
What The CFTC Approved
CFTC Chairman Michael S. Selig said the contracts were deemed approved under Commission Regulation 40.3 as security futures products under the Commodity Futures Modernization Act of 2000. That brings them under the Commodity Exchange Act, US federal securities law, and the oversight of both the CFTC and the Securities and Exchange Commission (SEC). They can only list on designated contract markets that are also notice-registered with the SEC as national securities exchanges for security futures.
Selig said the decision lets US investors and traders use perpetual futures inside the CFTC’s regulatory framework instead of turning to offshore, often unregulated, venues. He said the CFTC and SEC were committed to giving new products a clear path to market rather than leaving them stuck in jurisdictional disputes.
Why The CMA Says The Approval Is Unlawful
The alliance argues that the approvals breach the Administrative Procedure Act. It says the CFTC gave no reason for its decision, ignored its own long-standing treatment of perpetual derivatives as swaps, and did not properly weigh the effect on investors and the securities markets. The complaint also says the CFTC bypassed legislation passed by Congress and opened the door to a synthetic US stock market operating outside the SEC’s exclusive jurisdiction.
A CFTC spokesperson called the suit troubling interference in CFTC-regulated markets. The spokesperson said markets should be governed by law, not by litigation aimed at blocking innovation.
Cboe’s Case
Cboe said it had joined the action alongside the other CMA members and is supporting the request for injunctive relief.
“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.”
“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. Whether tied to individual issuers, broad-based security indices, corporate events, or other securities-related outcomes, these securities products belong on registered securities platforms and should be subject to the investor protections, oversight, and safeguards required under U.S. securities laws. Cboe and others, including legislators, have raised concerns with these developments through public comments and industry forums, to no avail.” - Craig Donohue, CEO, Cboe Global Markets
Cboe already runs CFTC-regulated venues. Its digital asset futures trade on Cboe Futures Exchange (CFE) and are cleared through Cboe Clear U.S., a CFTC-regulated derivatives clearing organisation. [see - Cboe Completes Migration Of Its Digital Asset Futures To Cboe Futures Exchange.]
“Cboe is no stranger to competition. For more than 50 years, Cboe has competed successfully in some of the world’s most competitive markets and we welcome new entrants and innovation. If this were simply a commercial issue, Cboe could bring these products to market on CFTC regulated trading and clearing platforms that it operates. We support the mission and purpose of the CFTC to oversee the products that Congress has placed under its authority.”
“This issue, however, is about investor protection for securities trading and the rule of law. Investors deserve the specific protections Congress established for securities markets, and regulators have a responsibility to enforce the framework Congress created. When securities products are permitted to trade outside that framework, it creates regulatory arbitrage, bypasses both federal and state laws, and undermines the integrity of those markets.”
“The CFTC has authorized a multitude of filings for securities-related products that break with decades of precedent and its own prior determinations, without providing a clear public explanation of the legal basis for doing so. Through this action and our request for injunctive relief, we look forward to resolving the uncertainty created by these actions and preserving the laws and principles that have made U.S. capital markets the strongest and most trusted in the world.” - Craig Donohue, CEO, Cboe Global Markets
In a letter on the issue, Cboe also raised a surveillance concern. It said order and trade data in stock perpetuals would sit outside the Consolidated Audit Trail, while related hedges in the securities markets would be reported and monitored. Cboe argued that this gap could let cross-market manipulation go undetected.
Not The First Legal Challenge To CFTC Perps
The CMA is not the first to take the CFTC to court over perpetuals. Derivatives exchange operator CME Group sued the CFTC on 18 June in the US District Court for the District of Columbia over its approval of Kalshi’s bitcoin perpetual, BTCPERP. CME argues that a futures contract needs a fixed settlement date, so perpetuals are swaps. The CFTC has asked the court to dismiss that case, and Judge Colleen Kollar-Kotelly has not yet ruled.
The two cases argue different things. CME’s case concerns a bitcoin contract and says perps are swaps. The CMA says single-stock perps are security-based swaps, which would place them under the SEC rather than the CFTC. The equity contracts were cleared under the separate security futures framework with the SEC involved, not under the bitcoin order CME is challenging.
[Read more - LIQUIDITYFINDER covered the bitcoin launch in Kalshi Becomes First Regulated US Exchange To Launch Perpetual Futures After CFTC Approval. Kalshi’s Head of Institutional, Andy Ross, set out the exchange’s wider plans in Kalshi: The Exchange That Can Price Everything.]
Who Is Waiting To Launch
Three venues filed equity perpetual proposals with the CFTC and SEC on 18 September: prediction market exchange Kalshi, Coinbase’s regulated futures exchange Coinbase Derivatives, and derivatives exchange Bitnomial. Kalshi’s filing covers around 60 stocks and ETFs, including Apple, Tesla, Microsoft, Nvidia, Amazon, SPY and QQQ. Andy Ross told Risk.net on 2 November that Kalshi expected to launch within days. If the court grants the CMA’s request to keep the approvals from taking effect while the case is heard, those launches would be put on hold.
Intermediaries are already preparing. Online trading provider Plus500 became the first industry futures commission merchant (FCM) to make Kalshi perps available to clients [see - Plus500 Becomes First Industry FCM To Make Kalshi Perps Available To Clients]. NYSE parent Intercontinental Exchange (ICE) has also invested in TradeXYZ. Subject to regulatory approval, ICE plans to run a US-regulated market and clearing structure for Hyperliquid-based perpetuals on equities, indices, commodities and currencies, [see - ICE And Trade[XYZ] To Build New Regulated Market And Clearing Structure On Hyperliquid].
The CFTC will take up 24/7 trading and perpetual contracts at an industry roundtable on 15 December. For international and CFD brokers, today’s LIQUIDITYFINDER analysis compares US equity perps with the single-stock CFDs already offered outside the US.
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