Citadel Securities is pressing U.S. regulators to keep event contracts tied to public companies and their securities within the Securities and Exchange Commission’s regulatory reach. The market maker argues that trading venues should not be able to determine which regulator oversees an equity linked product simply by how the product is characterized.
In a Sept. 9 letter responding to a joint SEC and Commodity Futures Trading Commission consultation, Citadel focused on contracts linked to corporate performance metrics. It warned that allowing such products to enter the market through the CFTC’s self certification process could sidestep securities oversight and create market integrity concerns, particularly around insider information.
Key Takeaways
- Citadel Securities wants the SEC to remain the primary regulator for event contracts tied to U.S. public companies and their securities.
- The firm says certain key performance indicator contracts and binary options may qualify as securities or security based swaps.
- Citadel argues that the CFTC’s self certification process should not become a route for avoiding SEC review of equity linked products.
- The market maker also raised insider trading concerns involving corporate information that may not yet be public.
- The SEC and CFTC have not made a final determination and are reviewing comments on the regulatory boundary between swaps and security-based swaps.
Citadel Challenges Regulatory Routing of Equity Linked Products
Citadel’s argument centers on how regulators classify event contracts connected to publicly traded companies. Event contracts generally pay based on whether a specified outcome occurs. Citadel highlighted contracts tied to corporate key performance indicators, where the outcome can depend on whether a company reaches a particular business or financial target.
Stephen John Berger, Citadel’s global head of government and regulatory policy, argued that the substance of the product should determine its regulator.
“A trading venue should not be able to effectively choose its regulator for an equity-linked product based on its own unilateral characterization of such product.”
Citadel said some CFTC registered designated contract markets have self certified KPI linked products under the CFTC framework.
The firm’s position does not call for all event contracts to be placed under SEC supervision. Its argument is narrower, focusing on products sufficiently connected to individual public companies, their securities or company specific financial events.
CFTC Self-Certification Comes Under Scrutiny
A major part of Citadel’s concern involves differences between the CFTC and SEC processes for bringing new financial products to market. According to Citadel, CFTC-registered venues can self certify certain products and begin trading as soon as the next business day without first going through a public comment process.
The SEC framework generally involves a more extensive review. Venues may have to demonstrate compliance with securities rules, undergo public comment and receive affirmative SEC approval before a product begins trading. Citadel argues that these differences create the possibility of regulatory arbitrage if an equity linked instrument that would otherwise face SEC scrutiny can instead be introduced as a CFTC regulated event contract.
Berger said new financial products should compete based on their characteristics rather than regulatory differences.
“New products should succeed on their individual merits, rather than by taking advantage of distinctions between the SEC and CFTC regulatory frameworks.”
Corporate Event Contracts Raise Insider Trading Concerns
Citadel also raised concerns about material nonpublic information when event contracts depend on company specific metrics. Employees, executives or other insiders could potentially possess information about whether a particular KPI has been achieved before that information becomes publicly available. They could also have advance knowledge of when and how the company intends to report the result.
Citadel said this connection strengthens the argument for securities oversight.
“The fact that these instruments pose novel risks relating to insider trading, including not only whether specific metrics will be met, but also whether and how they will be reported by the issuer, reinforces the case for SEC oversight.”
The firm argued that certain KPI-linked binary options should be treated as securities under federal law.
It also said an event contract could qualify as a security based swap when linked to an event involving a single issuer that directly affects the company’s financial statements, financial condition or financial obligations.
SEC and CFTC Face Broader Classification Question
Citadel submitted its comments as the SEC and CFTC consider how federal rules should distinguish swaps from security based swaps. The agencies have been examining definitions that can determine whether a derivative falls primarily under CFTC or SEC jurisdiction, an increasingly important issue as exchanges develop new event based and perpetual products.
Citadel asked the SEC to provide timely reviews of new product filings and clearer classification decisions for equity linked event contracts and perpetual derivatives. The submission itself does not change how these products are regulated. The SEC and CFTC must now consider Citadel’s position alongside other comments before determining whether changes or additional guidance are necessary.
Conclusion
Citadel Securities’ proposal highlights a growing jurisdictional question as event contracts expand into areas traditionally associated with securities markets. Rather than seeking SEC control over prediction markets broadly, Citadel is arguing that products tied closely to individual public companies should face securities oversight when their economic characteristics meet securities or security-based swap definitions.
How the SEC and CFTC ultimately draw that line could determine whether future equity linked event contracts can reach U.S. markets through CFTC self-certification or must undergo the more extensive SEC review process.
