Six Major Firms Support CFTC in Legal Battle Over Single-Stock Perpetual Futures
A coalition including Coinbase and Kalshi has filed a brief supporting the CFTC in ongoing litigation concerning the regulatory authority to permit perpetual futures contracts on individual US stocks.
A coalition of six companies, including Coinbase and Kalshi, petitioned a federal court on Monday to approve their submission of an amicus brief supporting the United States Commodity Futures Trading Commission (CFTC) in ongoing litigation concerning perpetual futures contracts linked to individual US stocks.
Based on a proposed amicus brief disclosed Monday by Coinbase legal representative Molly Abraham, the coalition encompasses Payward, which operates as Kraken's parent entity, trading firms DRW Holdings and Jump Trading, as well as crypto investment firm Paradigm Operations. These companies contend that perpetual futures contracts on stocks are subject to current US futures regulations.
This filing arrives just days following a federal judge's determination that the CFTC likely "exceeded its statutory authority" when it permitted single-stock perpetual contracts to be traded as security futures.
The outcome of this case may establish whether US-based exchanges will have the ability to provide retail investors with contracts that follow individual stock prices without requiring an expiration date.
Why stock perps face scrutiny
On Nov. 3, the CFTC made an announcement that perpetual futures on individual stocks, commonly referred to as stock perps, would be permitted to commence trading on exchanges regulated in the United States for the first time.
The Capital Markets Alliance Association (CMAA), a recently established trade and advocacy organization that represents participants in traditional financial markets and counts Cboe and Citadel Securities among its members, initiated legal action against the CFTC last week, disputing the agency's authority to permit these contracts to be traded.
Stock perps provide traders with the opportunity to engage in speculation on price fluctuations of individual stocks without the requirement to purchase the underlying shares. In contrast to conventional futures contracts, these instruments do not include a predetermined expiration date.
The CMAA's position is that due to the absence of a fixed expiration date in these contracts, they ought to be classified and regulated as security-based swaps, which are a category of derivative instrument connected to stocks or other securities that fall primarily under the regulatory purview of the Securities and Exchange Commission (SEC) and are subject to more stringent limitations regarding retail trading.
The six companies providing support for the CFTC hold a contrary view, maintaining that the presence of a fixed expiration date is not a necessary requirement for a contract to be classified as a security future, a category that is subject to joint regulatory oversight by both the CFTC and SEC.
Judge questions CFTC authority but doesn't halt trading
In response to the complaint filed by the CMAA, US District Judge Valerie Caproni indicated that the plaintiff would likely prevail in its assertion that the CFTC had overstepped its statutory authority when it authorized stock perps to trade under the classification of security futures.
Caproni determined that the contracts seemed to meet the criteria for classification as swaps instead of security futures, thereby raising questions about the agency's interpretation of the applicable law.
Nevertheless, she rejected the CMAA's motion for a temporary restraining order, concluding that the organization had not successfully proven that imminent and irreparable harm would occur. This ruling allowed the CFTC's trading authorizations to remain effective while the legal proceedings continue.
CMAA is expected to submit its response to the CFTC's opposition to a preliminary injunction on Tuesday.