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FollowingCitadel Securities urges the SEC and CFTC to maintain regulation of event contracts and perpetual derivatives for linked listed companies
Citadel Securities calls on the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to continue to include event contracts and perpetual derivatives for listed companies within the SEC's regulatory scope. The company pointed out that some trading platforms are taking advantage of the CFTC's faster approval process to circumvent securities regulations.
On September 9, the market maker submitted a comment letter to two regulators in response to a joint request for comment on the incident contract. The letter made it clear that products linked to U.S. listed companies should be within the SEC's regulatory and monitoring system. The letter was written by Stephen John Berger, Citadel's global head of government and regulatory policy, and was posted on the SEC's website as part of a commentary document.
Differences in regulatory approval processes cause controversy
Citadel's core concern is the gap in the approval processes between the two regulators. According to CFTC regulations, registered trading platforms can self-certify new products, declare that they meet compliance requirements, and may start trading on the next trading day without going through a public solicitation process. In contrast, platforms regulated by the SEC typically have to prove compliance before trading begins, go through a public consultation process, and obtain explicit approval from the SEC.
The letter notes that trading platforms may use this self-certification path to circumvent the SEC's jurisdiction over equity-related products. "A trading platform should not be able to effectively select the regulator for its equity-related products based solely on its unilateral characterization of the product." Berger wrote in the letter.
Key performance indicator contracts are suspected of "regulatory arbitrage"
Berger used key performance indicator (KPI) contracts as an example to explain. The payouts (amounts paid) for such contracts depend on whether the company meets certain targets. According to the letter, some designated contract markets registered with the CFTC have self-certified these contracts to allow them to be traded under the jurisdiction of the CFTC. Citadel believes these products are "security-based swaps" and therefore should fall under the jurisdiction of the SEC.
In addition, the letter pointed out that such tools pose new types of insider trading risks. This involves not only the question of whether indicators are up to standard, but also how issuers report these data.
Potential risks of perpetual derivatives
For perpetual derivatives-similar futures contracts that have no expiration date and are commonly found in the cryptocurrency market-Citadel said that the version of the linked equity could cause trading activity to deviate from the SEC's existing surveillance and investor protection framework.
To this end, Citadel asked the two regulators to reaffirm the SEC's jurisdiction over equity-related products, prevent self-certification from being used as a means of circumventing regulation, clarify the handling of incident contracts and perpetual derivatives as soon as possible, and commit to filing new products. Conduct timely review.
"The success of new products should be based on their own merits, rather than taking advantage of differences between the SEC and CFTC regulatory frameworks to profit." The letter also added.
As of now, neither regulatory agency has publicly responded to this letter, and the joint comment process has not determined a specific decision date.
