SEC Backs CFTC in Court Fight Over Perpetual Futures on US Stocks

The top US securities regulator has sided with the Commodity Futures Trading Commission (CFTC) in a court fight over perpetual futures on US stocks. In a brief filed on Monday, the Securities and Exchange Commission (SEC) urged a judge not to block them.

The challenge comes from the Capital Markets Alliance Association, whose members include Cboe and Citadel Securities. It sued in Manhattan on November 3, the day the CFTC allowed the contracts to list as security futures.

The alliance argues they are security-based swaps that only the SEC can approve. The case will decide where US retail traders get leveraged exposure to single stocks: on CFTC-regulated venues or on SEC-supervised exchanges.

Coinbase Derivatives, Kalshi and Payward's Bitnomial applied in September for more than 100 such contracts between them.

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Trading is already under way. Kalshi began offering contracts on about 50 US stocks and ETFs on November 5, according to the company. Cboe told the court it counted about $375 million in 24-hour notional volume on the second day.

Judge Found the Contracts Look Like Swaps

The SEC joined a case in which the alliance has already won an early argument on the law. Judge Valerie Caproni, who handled the emergency request on November 3, found the alliance likely to show that the CFTC lacked authority.

Perpetual contracts never provide for delivery of a stock at a future date, the order said, which makes them look like swaps under the SEC's remit. Caproni wrote that the CFTC's actions "seem to represent a major disruption to the equities market."

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The judge still refused a temporary restraining order. Declarations from Cboe, Citadel Securities and Healthy Markets described possible harm rather than harm that was likely, the order said.

The case has since moved to Judge Lorna Schofield, who will schedule oral argument on a preliminary injunction. Briefing on that motion closed on Tuesday.

The CFTC argues in its opposition that the alliance has no standing to sue, describing it as a vehicle created for the case rather than a true membership organization.

SEC Leaves the Swap Question Open

The SEC brief takes aim at the alliance's portrayal "of a CFTC gone rogue, and an SEC gone missing," which it calls mistaken, The Block reported. The agency said the exchanges' rules for the products remain subject to its review and that it works closely with the CFTC.

The two regulators pledged closer coordination in a memorandum of understanding signed in March, a pact that FM Intelligence examined as a step toward integrated supervision.

The brief does not say whether the contracts are futures or swaps. The alliance's reply, filed on Tuesday, cites it as showing the SEC has not yet decided. Ledger Insights reported the SEC has until December 31 to decide whether to overturn the exchanges' rules.

That gap is what Citadel Securities asked regulators to close in September, before any equity perpetual was approved. It argued that a venue should not be able to choose its regulator by how it describes a product.

Briefs Split Exchanges From Trading Firms

The other friend-of-the-court filings divide the market along business lines. Coinbase, Kalshi and Payward filed jointly with trading firms DRW, Jump Trading and Paradigm. The court accepted their brief on Tuesday but refused Coinbase's request to join oral argument.

The contracts' opponents have their own briefs. Better Markets filed with former SEC acting chair Allison Herren Lee and former SEC general counsel John Coates. Dominick Freda, its legal director, said the CFTC was trying to "gut 90 years of investor protections."

Better Markets said leverage of about 6-to-1 means a 16% fall in the market can wipe out a portfolio. The American Securities Association, which represents regional brokerages, also backs the alliance.

CME Group, suing the CFTC since June over a bitcoin perpetual, and five securities law scholars have also asked to file. By FinanceMagnates.com's count, the court has accepted two briefs, both for the CFTC, and four await leave, at least two backing the alliance.

Brokers are already in the chain. Plus500 began offering Kalshi's perpetual futures to institutional clients and partner brokers in October. The CFTC's answer to the complaint is due on November 25.