Citadel Securities asked US regulators yesterday (Wednesday) to keep equity event contracts and perpetuals under securities rules. It told the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) that CFTC self-certification can bypass SEC review.
A CFTC-regulated exchange can self-certify a product and begin trading as soon as the next business day. An SEC-regulated options exchange generally must publish its proposal for comment and obtain an affirmative approval order.
The distinction affects how quickly retail traders could gain access to yes-or-no contracts on corporate results and perpetual derivatives tracking stocks or equity indexes. It also determines which agency’s trading, disclosure and surveillance rules apply.
Citadel’s position adds a regulatory condition to its commercial interest in the sector. FinanceMagnates.com reported in April that President Jim Esposito said the firm could enter prediction markets as a liquidity provider, with a focus on institutional hedging instead of sports betting.
Citadel Draws a Line Around Corporate Events
Citadel said binary contracts tied to a public company’s key performance indicators belong under securities law. Those products pay a fixed amount based on whether an issuer reports revenue, sales, earnings or another metric above or below a preset threshold.
Cboe and MEMX have taken that route. Both exchanges filed proposals with the SEC for company-linked binary options under the existing options framework.
Those filings require public review, surveillance and clearing. FinanceMagnates.com previously covered Cboe’s plan to bring prediction-style contracts into the securities market.
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Citadel argues that the same corporate metrics can influence the underlying stock and give employees or other insiders an advantage in the derivative. Moving that trading to a separate regulatory system could create a “parallel shadow market linked to U.S. equities,” the firm said.
The CFTC also prohibits fraud, manipulation and misuse of confidential information on its registered exchanges. FinanceMagnates.com reported in February that the agency highlighted two Kalshi cases involving traders with advance knowledge of an election campaign and planned YouTube videos.
Self-Certification Becomes the Fault Line
Citadel’s objection centers on the different launch processes. A designated contract market can certify that a product complies with the Commodity Exchange Act and list it the following business day unless the CFTC intervenes.
An options exchange carries the burden of showing the SEC that a proposal complies with securities law. The SEC normally publishes the filing for public comment and must issue a written approval before trading starts.
Citadel said venues should not be able to choose their regulator through their own description of an instrument. The letter says some CFTC-registered markets have already self-certified contracts based on company KPIs and securities indexes, but it does not identify the venues or contracts.
The firm also asked the SEC to review new products more quickly. Its proposal would preserve the securities approval path while addressing the delay that makes CFTC self-certification faster.
Perpetuals Pull the Fight Into Equity Trading
The dispute already extends beyond event contracts. The CFTC approved Kalshi’s BTCPERP, a perpetual contract tied to bitcoin’s spot price, as a futures contract on May 29. CME Group challenged that classification in federal court, arguing that perpetuals are swaps under the Dodd-Frank Act.
Kalshi has since moved toward equities. Its August application for US500 proposes a perpetual future tracking the MerQube US Large Cap Index, a benchmark built from 500 US-listed companies.
FinanceMagnates.com reported that the contract would trade nearly around the clock and use daily funding payments instead of an expiration date.
Citadel said regulators should settle the legal classification before approving equity-index perpetuals. It expects proposals for contracts on individual stocks and pre-IPO companies to follow, although the letter does not identify an applicant or timetable.
Product distributors are already discussing the category. Crypto.com told The Wall Street Journal that it had talked with Robinhood about equity-linked perpetual futures, subject to regulatory approval, as the companies expanded their prediction-market relationship.
This article was written by Damian Chmiel at www.financemagnates.com.
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