- Citadel Securities urged the SEC and CFTC to reaffirm SEC oversight of products tied to U.S. public companies and their securities.
- The market maker argued that trading venues should not be able to use CFTC self-certification to bypass SEC review of equity-linked products.
- Citadel said KPI-linked binary options could qualify as securities or security-based swaps and raise additional insider trading concerns.
Citadel Securities is calling on U.S. regulators to clarify which agency should oversee event contracts and other products linked to publicly traded companies.
In a Sept. 9 letter responding to a joint SEC and CFTC request for comment, the market maker argued that trading venues should not be able to determine their regulator simply by how they classify an equity-linked product.
Citadel specifically raised concerns about the CFTC’s self-certification process, which can allow registered venues to launch new products as soon as the next business day without first seeking public comment.
The SEC process generally requires venues to demonstrate compliance, allow public feedback and receive affirmative approval before trading begins.
Citadel Warns Against Regulatory Arbitrage
Citadel Global Head of Government and Regulatory Policy Stephen John Berger said venues should not effectively be able to choose which regulator oversees a product.
“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,” Berger wrote.
Citadel pointed to key performance indicator contracts tied to individual public companies as one example.
According to Berger, some CFTC-registered designated contract markets have used self-certification to offer these products under CFTC jurisdiction.
Event Contracts Could Create Insider Trading Risks
Citadel argued that KPI-linked contracts raise novel concerns surrounding insider trading.
People with access to nonpublic corporate information could potentially know whether a specific metric will be achieved or how and when that information will be reported by the company.
Berger said these risks strengthen the case for SEC oversight.
Citadel also argued that KPI-linked binary options should be considered securities under federal law.
Certain contracts could additionally qualify as security-based swaps when they are tied to an event involving a single company that directly affects its financial statements, financial condition or financial obligations.
Citadel Calls for Clearer Product Rules
While pushing for SEC oversight, Citadel also asked the agency to provide timely reviews of new product filings.
The firm wants regulators to resolve classification questions involving both equity-linked event contracts and perpetual derivatives.
The goal, according to Citadel, should be to prevent products from gaining an advantage simply because of differences between SEC and CFTC regulatory processes.
“New products should succeed on their individual merits,” Berger wrote, “rather than by taking advantage of distinctions between the SEC and CFTC regulatory frameworks.”
