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

The Securities and Exchange Commission has thrown its support behind the Commodity Futures Trading Commission in a legal battle over perpetual futures contracts tied to US stocks. In a court brief filed on Monday, the SEC urged a judge not to halt trading of these controversial financial instruments, which have already begun generating significant volume on trading platforms.

The legal challenge comes from the Capital Markets Alliance Association, whose members include major financial players Cboe and Citadel Securities. The alliance filed its lawsuit in Manhattan on November 3, the same day the CFTC permitted these contracts to be listed as security futures. The core dispute centers on whether these products should be classified as futures or security-based swaps, which would determine which regulatory body oversees them.

Judge Questions CFTC Authority

The alliance has already secured an early victory in the case. Judge Valerie Caproni, who handled the initial emergency request on November 3, found that the alliance was likely to demonstrate that the CFTC lacked the authority to approve these perpetual contracts. Her ruling noted that perpetual contracts never provide for delivery of a stock at a future date, making them resemble swaps under the SEC's jurisdiction.

Despite this legal setback, Caproni refused to issue a temporary restraining order, stating that the declarations from Cboe, Citadel Securities, and Healthy Markets showed possible harm rather than likely harm. The case has since been transferred to Judge Lorna Schofield, who will schedule oral arguments on a preliminary injunction. Briefing on that motion concluded on Tuesday.

Trading Platforms Already Active

While the legal battle unfolds, trading platforms have already launched these products. Kalshi began offering contracts on approximately 50 US stocks and ETFs on November 5, according to the company. Cboe reported that these contracts generated about $375 million in 24-hour notional volume on their second day of trading. Other platforms like Coinbase Derivatives, Kalshi, and Payward's Bitnomial had collectively applied in September for approval of more than 100 such contracts.

The SEC brief disputed the alliance's portrayal of a "CFTC gone rogue, and an SEC gone missing," calling this characterization mistaken. The agency emphasized that exchanges' rules for these products remain subject to its review and that it works closely with the CFTC. The two regulators had pledged closer coordination in a memorandum of understanding signed in March.

Opposition Mounts

The contracts face significant opposition from various market participants. Better Markets filed a brief with former SEC acting chair Allison Herren Lee and former SEC general counsel John Coates, arguing that the CFTC was trying to "gut 90 years of investor protections." The organization warned that the 6-to-1 leverage offered with these contracts means a 16% market fall could wipe out an entire portfolio.

The American Securities Association, which represents regional brokerages, also backs the alliance. CME Group, which has been suing the CFTC since June over a bitcoin perpetual contract, and five securities law scholars have also requested to file briefs in the case. Brokers are already involved in the market, with Plus500 offering Kalshi's perpetual futures to institutional clients and partner brokers since October.

The CFTC's answer to the complaint is due on November 25, while the SEC has until December 31 to decide whether to overturn the exchanges' rules for these products. The outcome will determine where US retail traders can access leveraged exposure to single stocks—on CFTC-regulated venues or SEC-supervised exchanges.