Key facts
- TD Cowen believes CME Group has a stronger legal case against the CFTC regarding crypto perpetual futures.
- CME argues that perpetual futures, which do not expire, should be regulated as swaps, not futures contracts.
- The lawsuit challenges the CFTC's recent approval of perpetual futures for Kalshi and Coinbase.
- TD Cowen expects CME to seek a preliminary injunction to block perpetual futures during the litigation.
- The CFTC and SEC have jointly requested public feedback on derivatives rules, including perpetual futures.
CME Group has the stronger legal position in its lawsuit challenging the U.S. Commodity Futures Trading Commission's approval of crypto perpetual futures, according to TD Cowen. The derivatives exchange argues that perpetual futures, which do not expire, should be regulated as swaps due to their lack of a delivery date, contrasting with traditional futures contracts that require delivery at a set future time.
TD Cowen's Jaret Seiberg noted that CME's case is bolstered by both procedural and substantive arguments. He highlighted that the CFTC previously treated perpetual contracts as swaps and sought public comment on the issue, yet approved Kalshi's bitcoin perpetual futures in a single day without issuing a formal regulation. This, Seiberg suggested, may violate the Administrative Procedure Act by not adequately explaining the classification decision.
The distinction between futures and swaps is significant due to differing regulatory and tax rules. Swap dealers face stricter margin requirements and lack certain tax advantages available to futures. CME is seeking to have the CFTC's approval vacated and for perpetual contracts to be regulated as swaps.
A CFTC spokesperson criticized CME's action as "lawfare" against the agency and the current administration's agenda, expressing confidence in dismissing the lawsuit. Kalshi reportedly views the suit as a response to fear of competition, while Coinbase has backed the CFTC's approach, citing benefits of competition and innovation. Following the lawsuit, the CFTC and SEC jointly issued a request for public feedback on updating derivatives rules, including the treatment of perpetual futures.