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Last week, the CME Group formally sued the Commodity Futures Trading Commission and its chair Michael Selig over the derivatives regulator’s approval of perpetual futures.
This wasn’t a surprise. The CME had signalled that it was unhappy and would file the lawsuit, and its CME CEO Terry Duffy had already told CNBC that he was “up for a good battle” over the issue.
However, Alphaville just took a look at the lawsuit, and it’s even more excoriating about the CFTC (and Selig specifically) than we anticipated:
. . . One day after receiving an application from Kalshi, Chairman Michael S. Selig — acting alone as the sole confirmed Commissioner of the five-member CFTC — approved Kalshi to list, as futures, perpetual contracts based on the value of Bitcoin. The CFTC’s order repeats Kalshi’s reasoning almost verbatim. The order does not acknowledge, much less grapple with, Congress’s directive that instruments with the structural features of Kalshi’s perpetual contracts are swaps and must be regulated as such. Nor does the order acknowledge or explain the CFTC’s departure from its previous and consistent position that perpetuals are swaps.
The CFTC did not stop there. Together with an accompanying policy statement, the order purports to authorize any futures exchange to automatically self-certify, without prior CFTC approval, any similar perpetual contract based on the value of a cryptocurrency.
With one stroke of his pen, the Chairman overrode Congress’s definition of the term “swap” and circumvented the regulatory regime Congress required for that form of derivative. In the short time since, Kalshi has self-certified over a dozen additional cryptocurrency perpetuals in reliance on the Chairman’s order and brought those perpetuals to market, resulting already in more than a billion dollars of trades.
Look, it’s hard to have a lot of sympathy with the CME, which is a near-monopolistic and egregiously profitable exchange that has never been afraid to throw its weight around and curry favour with regulators and politicians for favourable treatment itself.
It’s simply worried about its own business, not the sanctity of the US financial-regulatory regime. As the lawsuit states in arguing for the CME’s standing to sue:
These agency actions allow entry into the market of a product targeting retail investors that is intended to, and will, directly compete with CME’s products aimed at the same customer base . . . These products, . . . are designed to draw away CME’s customers who currently trade true Bitcoin and cryptocurrency futures, including [Micro Bitcoin] and other products . . . The Order enables Kalshi to enter the market for cryptocurrency futures and to compete — on an unfair and unlawful basis — with CME.
However, on Alphaville’s reading the CME isn’t wrong. Far from it. And it could possibly have gone even further.
Congress has said explicitly that derivatives based on an underlying commodity of some kind that never actually deliver said commodity are swaps. The CFTC has always said so itself, under previous regimes from both parties. But futures are regulated and taxed differently, which is why Kalshi etc are keen to call perpetual derivatives contracts on crypto (and potentially other underlying instruments) for futures.
The CFTC told mainFT last week that the CME “has decided to undertake lawfare against the agency and the Trump administration’s pro-innovation agenda”. Selig has said that: “Incumbents are always going to fear the future.”
In reality, the CFTC is acting more like a rogue agency led by a former crypto lawyer who has gutted both staffing, senior management and the work done by all his predessors, while seeming hellbent on bending the knee to . . . certain industries.
Finance industry people used to complain shrilly about Gary Gensler’s maximalist approach, but Selig is proving by far the most disruptive and unconstrained chair in the CFTC’s history. Even the head of the US gambling industry says Selig “quite frankly, is a joke”:
He believes somehow that what he’s doing is Uber, and the rest of the country is the taxicab industry. That’s not the case. He’s not facilitating something that’s a public good. A federal regulator charged with regulating derivatives around agricultural contracts should not be engaged in it.
The CME’s lawsuit doesn’t go into it, but the debasement of the CFTC cannot be seen in isolation from what is happening over at its sister agency, the US Securities and Exchange Commision.
Both agencies are by law supposed to have five commissioners for fixed terms, typically two from each party and one chair nominated by whoever happens to be president. However, the Trump administration has refused to nominate any new commissioners from either party to either body.
Thus, the CFTC is now wholly in Selig’s grip, while the SEC is under the firm control of chair Paul Atkins. Atkins still has two fellow commissioners at the SEC, but both are Republicans, and one — Hester Peirce, who revels in her “crypto mom” moniker — is soon leaving.
As the Democrat SEC commissioner Caroline Crenshaw said soon before having to leave the agency at the start of the year: “The darkest depths of winter still lie ahead for America’s capital markets.” Quite. But hopefully a self-interested fightback from certain corners of the finance industry will be enough to keep the lights on.
Further reading:
— The giant void of nothingness where US financial regulation used to sit (FTAV)
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