Safeguards Should be Stronger for Event, Perpetual Contracts

MFA urged the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to establish strong investor protections and oversight for event contracts, perpetual contracts, and other novel products in a comment letter. Appropriate oversight will help these markets mature by strengthening investor confidence and increasing participation.

“The most successful financial innovations are the ones investors trust,” said Bryan Corbett, MFA President and CEO. “Confidence in how new markets are overseen is essential to broader participation by institutional investors. Getting this framework right will ensure U.S. capital markets remain the envy of the world and the destination of choice for investors and innovators.”

Novel products can expand investor choice and create new opportunities for U.S. capital markets. Realizing those benefits requires addressing new risks when products are closely linked to securities markets. Event contracts tied to corporate outcomes can allow someone with material non-public information to profit directly from that information. Perpetual contracts can create different risks by affecting pricing and liquidity in the markets for the assets they reference. Strong surveillance, clear regulatory oversight, and appropriate safeguards are therefore essential to promote market integrity, strengthen investor confidence, and support the responsible growth of these products.

MFA recommends the Commissions:

• Keep securities-related products under appropriate SEC oversight. Products that affect securities markets should sit within the SEC’s surveillance framework to help detect insider trading and manipulation, and protect investors.

• Require affirmative approval for novel products that implicate both agencies. Replacing self-certification with an affirmative review process would allow the SEC and CFTC an opportunity to assess market integrity, investor protection, and surveillance concerns before trading begins.

• Treat cross-currency, or “compo,” equity swaps as security-based swaps. These are equity swaps on stocks denominated in a foreign currency, which the Commissions currently regulate as mixed swaps subject to both agencies’ rules. Aligning their treatment with economically similar equity swaps would eliminate duplicative requirements that raise costs without providing corresponding regulatory benefits.

Read the full letter here.

Source: MFA