ASA: Derivatives Tied to American Public Companies Belong Under Securities Law

WASHINGTON – The American Securities Association (ASA) today submitted a comment letter to the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) urging both agencies to reaffirm that instruments based on a single security, a narrow-based security index, or an event directly affecting a public company's financial condition are securities subject to SEC jurisdiction, regardless of how a trading venue labels them.

ASA's letter comes as venues seek approval for perpetual futures tied to individual U.S. stocks that would trade around the clock with significant leverage. Under the current self-certification regime, a venue can unilaterally characterize a security-based swap or equity option as a "swap," file it with the CFTC, and begin listing the next business day without public comment or affirmative approval.

“A trading venue should not get to pick its own regulator by skirting investor protection laws and relabeling its product offerings,” said ASA President and CEO Chris Iacovella. “Congress drew a deliberate line in Title VII between the CFTC and the SEC to protect markets and investors, and that jurisdictional divide was not accidental. A derivative linked to a public company’s security can be used to move the price of that security, and material nonpublic information can be simultaneously exploited in the cash and derivatives markets. The SEC's surveillance framework spans both the derivatives and the equity markets in which the underlying security trades, and that integration is what makes insider trading and manipulation detectable.”

The letter expressly supports the introduction of key performance indicator (KPI) products, noting they provide useful information about issuer performance and give investors new tools to hedge issuer-specific risk.

ASA outlined its objection to the process by which venues choose to avoid securities regulation, and it urged both Commission to reject (1) around-the-clock trading, (2) leverage of 20 to 100 times, and (3) using privately held companies as reference entities. These modest prohibitions would preserve the benefits of innovative products while protecting investors and maintaining the integrity of our public equity markets.

ASA noted that allowing instruments to reference privately held companies would create public price discovery and liquidity for those companies without the disclosure obligations that come with being public, giving them a reason to stay private longer and cutting directly against Chairman Atkins's goal of encouraging companies to go public and stay public.

If the Commissions nonetheless approve such products, ASA recommended conditioning approval on three requirements: that they trade only during regulated equity exchange market hours, that customer margin be no less protective than Regulation T's 2:1 limit, and that they reference only publicly traded U.S. companies.

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The American Securities Association (ASA) represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership of almost one hundred members that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States.