Citadel urges SEC to assert oversight of event contracts tied to public firms

Citadel Securities urged the Securities and Exchange Commission and Commodity Futures Trading Commission to reaffirm SEC oversight of products tied to U.S. public companies and their securities.

In a Sept. 9 letter responding to a joint request for comment from the agencies, the market maker said trading venues should not be able to use CFTC self-certification to circumvent SEC jurisdiction over equity-linked products.

Under CFTC rules, venues can self-certify new products and begin trading as soon as the next business day without soliciting public comment, Citadel said. The process differs from the SEC framework, where venues generally must demonstrate compliance, allow public comment, and obtain affirmative SEC approval before trading begins.

"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," Stephen John Berger, Citadel's global head of government and regulatory policy, wrote in the letter.

Berger pointed to key performance indicator contracts tied to public companies as an example, saying certain CFTC-registered designated contract markets have self-certified such products for trading under the CFTC’s jurisdiction.

"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," Berger wrote.

He said KPI-linked binary options should be treated as securities under federal laws. He added that such contracts could also qualify as security-based swaps when tied to an event involving a single issuer that directly affects its financial statements, financial condition or financial obligations.

Citadel also asked the SEC to commit to timely review of new product filings and to resolve classification questions on equity-linked event contracts and perpetual derivatives.

“New products should succeed on their individual merits,” Berger wrote, “rather than by taking advantage of distinctions between the SEC and CFTC regulatory frameworks.”