SEC backs CFTC in dispute over single-stock perpetual futures

What happened

The Securities and Exchange Commission has entered a legal fight over perpetual futures linked to individual U.S. stocks, filing a court brief that supports the Commodity Futures Trading Commission, according to The Block's Nov. 11 report, as cited by Unchained. Unchained said it had not reviewed the filing. The dispute concerns applications from Coinbase, Kalshi and Bitnomial, which is owned by Kraken parent Payward, to offer single-stock perpetual futures.

Those applications were deemed approved by the CFTC on Nov. 2 after its review window lapsed. The Capital Markets Alliance, a trade group whose members include Cboe and Citadel Securities, then sued the CFTC in the U.S. District Court for the Southern District of New York. It argued the contracts are security-based swaps overseen by the SEC rather than futures under the CFTC.

Coinbase, Kalshi and Payward, joined by DRW Holdings, Jump Trading and Paradigm, filed their own brief backing the CFTC. The SEC's brief reportedly rejects the alliance's portrayal of the CFTC as acting on its own. According to The Block, the SEC pointed to its review of CFTC rule changes and to cooperation between the two agencies on single-stock perps, calling the idea of a rogue CFTC and an absent SEC mistaken.

Why it matters

The case puts the two main federal market regulators on opposite sides of a question that could shape how single-stock perpetuals are treated: as futures or as securities-based swaps. It also exposes divisions beyond the agencies. Crypto exchanges and trading firms are supporting the CFTC, while investor advocacy group Better Markets and two former senior SEC officials are backing the Capital Markets Alliance's request for a preliminary injunction.

The SEC opposed the injunction but did not take a position on whether the contracts are futures or swaps, Ledger Insights reported. That leaves the immediate court fight focused on procedure and oversight rather than a final classification, even as the agency faces a separate deadline on the exchanges' rules.

What the data shows

Better Markets put the leverage on the products at about six times and said 'an investor's entire portfolio can be zeroed out with just a 16% movement in the market,' according to Unchained's account. The report also said the SEC has a Dec. 31 deadline to decide whether to overturn the exchanges' rules and gave no hint of how it will rule. The applications had been deemed approved after the CFTC's review window lapsed on Nov. 2.

Background

Perpetual futures, or perps, are leveraged derivatives with no expiry date. The Capital Markets Alliance challenged the CFTC's approvals under the Administrative Procedure Act, arguing the agency failed to follow required procedures and asking the court to vacate the approvals, CoinGape reported. The SEC's brief noted that the CFTC's changes to its regulations are still pending, according to CoinGape.

On Nov. 10, Better Markets asked the court to accept a friend-of-the-court brief supporting the alliance's request for a preliminary injunction. Allison Herren Lee, a former acting SEC chair and commissioner, and John C. Coates, a Harvard Law School professor and former SEC general counsel, signed on. Dominick Freda, Better Markets' legal director, said the CFTC was 'attempting to gut 90 years of investor protections on behalf of Kalshi, Coinbase and others.' He described the products as 'shadow stocks' and argued that, despite the futures label, they are securities swaps that belong under SEC rules.

What is still unclear

It is not clear from the reports how the court will weigh the SEC's brief, which opposed the injunction without resolving the futures-versus-swaps question. The reports also do not say when the court will rule on the preliminary injunction request or how the SEC will use its Dec. 31 deadline.

What to watch

The next steps are the court's handling of the preliminary injunction request and the SEC's Dec. 31 deadline on the exchanges' rules. The case also remains one to watch for how the SEC and CFTC divide oversight of products that combine crypto-style perpetuals with exposure to U.S. equities.

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