CME Group CEO Terrence Duffy said his company plans to sue the Commodity Futures Trading Commission (CFTC) for approving perpetual futures markets earlier in May.
Perpetual futures, known as “perps,” are derivative contracts that allow users to predict the price of an asset without a fixed timeline.
Key Takeaways
- CME argued that perps were swaps, not futures, under the Dodd-Frank Act.
- Duffy accused the CFTC of “misrepresenting” the situation.
- The CFTC said that CME’s lawsuit was “frivolous”
The CFTC approved the indefinite contracts for the first time when it granted Kalshi’s request to offer Bitcoin perps.
Duffy — who will soon step down from the position he has held for a decade — said on CNBC’s “Fast Money” that CME planned to file a lawsuit challenging the ruling on Thursday. Those plans were later confirmed to Reuters by CME directly.
CME’s objection to perps has to do with a piece of legislation known as the Dodd-Frank Act that was approved by President Barack Obama in 2010. This law updated consumer protections, restricted commercial banks from “proprietary trading,” created whistleblower programs, and made many additional changes focused on preventing a financial crisis similar to the one experienced in 2008.
“Under the Dodd-Frank Act, it clearly defines what a swap is and what a future is, and when there's two parties exchanging payments to each other, that's deemed a swap,” Duffy said. “So, if anything, these products that he supposedly approved as futures are not futures, they would be swaps, and if they're swaps, and let's say, as you know, there's different requirements in order to participate in the swap market.”
Duffy added that the rules for perps were not “very clear,” and that he felt the CFTC misrepresented certain facts “to an extent.”
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Disagreement in regulation
Because perpetual futures are contracts without an expiration date, they require maintenance. Platforms offering these contracts require periodic payments exchanged between traders to ensure that their prices don’t stray too far from the market price.
The CFTC has become increasingly committed to creating and defending a robust trading marketplace. The body’s Chair, Michael S. Selig, left no doubt of that when he supported the approval of Kalshi’s perps on “Fast Money” earlier this week.
“It’s time to approve regulated futures contracts that have no expiration date,” Selig said on the program. “We’re going to make sure the product’s available, but it’s well regulated here in the U.S.”
Upon hearing of CME’s threat to file litigation, the CFTC said it was “frivolous.”
Duffy said that CME spent eight months reviewing the approval process and laws surrounding perps before creating the lawsuit. He also said that CME held exclusive licenses on market benchmarks and that certain perpetual futures would need to cross through CME to be in compliance with rules and regulations.
Prediction markets losing momentum?
News of CME’s lawsuit comes during a time of a national push against the CFTC and prediction markets. While Minnesota issued an outright ban on operators, Kentucky and Illinois also approved taxes that would effectively regulate prediction platforms.
The same day that CME announced its lawsuit, a federal judge in Michigan denied Polymarket’s request for a preliminary injunction against state gaming regulators. The judge also said that sports event contracts did not count as swaps and therefore were not under CFTC regulation.
CME was enlisted by FanDuel last August to offer prediction markets through the sports betting giant’s new platform “FanDuel Predicts.”
Although neither company initially confirmed the availability of the controversial sports event contracts, those markets are available in 18 states. Non-sports states have markets in finance, entertainment, cryptocurrency, and other industries.
