Perpetual contracts have grown into one of the most liquid products in global markets despite not having a settled answer to the most basic question about them: what type of derivative are they under U.S. law? Product classification is the key determination from which the product’s entire regulatory treatment follows. While that threshold question remained unsettled, the market for perpetual contracts grew, and thrived, outside the United States.
Federal commodities law sorts derivatives into two primary categories: futures contracts and swaps. Those products can share identical economics, yet face different regimes governing how they reach the market, who may trade them, and what rules apply to the venues and intermediaries involved. When a derivative references a security, the Commodity Exchange Act operates alongside the federal securities laws to divide authority over the product between the CFTC, which oversees derivatives markets, and the SEC, which oversees securities markets. In some cases, the law places the product under the jurisdiction of both agencies.
Sorting novel derivatives between those two categories has never been easy. One federal judge described the exercise as deciding “whether tetrahedrons belong in square or round holes.” Products straddling the CFTC and the SEC's jurisdictional boundary have raised classification questions for decades, including novel options, index participations, Dow Jones index futures, and volatility index futures. Each product bore features that cut across regulatory categories, setting the agencies’ regulatory approaches at odds and ending in disputes that stalled the development of new markets for years.
The perpetual contract is the latest novel product to defy easy classification. A perpetual contract carries the features that courts and regulators have long identified as characteristics of futures contracts, including standardized terms, fungible contracts, futurity (having value that is set in the future), and the ability to exit the contract by taking the opposite position. Its lack of a fixed expiry date, however, has contributed to a mixed enforcement record, with similar contracts classified as swaps in some actions and as futures-like instruments in others, leaving U.S. participants uncertain how to bring these products to market. The presence of a fixed expiry, though, has never been dispositive to the product analysis: expiry exists to pull the contract price toward the asset's price, and a perpetual contract achieves that same convergence continuously through its funding rate.
The CFTC and the SEC have spent the past year building toward an answer to how perpetual contracts should be classified. The CFTC approved the first U.S.-listed perpetual contracts in May, permitting them to trade as futures contracts, and the CFTC's accompanying policy statement identified perpetual contracts on equities as warranting review by both agencies. The two agencies then jointly asked how the swap and security-based swap definitions, and the exclusions from those definitions for futures and security futures, apply to novel products, including whether a cash-settled equity perpetual contract can be treated as a security future.
Today, HPC filed a comment explaining that an equity perpetual contract bearing the traditional characteristics of a futures contract can be listed as a security future. Our comment urges a consistent taxonomy for perpetual contracts that turns on each contract’s characteristics and the manner in which it trades, under which like products are classified alike regardless of whether they reference bitcoin, crude oil, or a single security. The reference asset properly determines which Commission oversees a contract and which product-level safeguards apply, but it has no bearing on the threshold distinction between a futures contract and a swap. Security futures treatment is also consistent with the statutory text and applicable case law, and that classification would serve U.S. markets well by reducing barriers to access and fostering competition among exchanges.
Security futures are a product category that both Commissions oversee and that both SEC- and CFTC-registered exchanges can list. A registrant primarily regulated by one agency can cross over to the other through notice registration, so securities exchanges and futures exchanges may compete in the same product class. The product category has been commercially dormant for many years, though U.S. exchanges returned to it this summer, and its framework will need modernization for new product structures. Without a clear, harmonized taxonomy, disputes over which regulator's registrants may list a product often end up litigated in court, as they have for nearly four decades. A harmonized taxonomy will let exchanges instead compete on execution quality and liquidity.
Our comment asks the Commissions to take four steps:
- Confirm that the security future definition incorporates the established hallmarks of futures contracts, and that a cash-settled equity perpetual contract bearing those hallmarks may be listed as a security future.
- Preserve the flexibility trading venues have today to make product listing determinations.
- Keep classification consistent across both agencies so a perpetual contract receives the same threshold classification regardless of the asset it references.
- Modernize the security futures framework to revitalize the category and accommodate novel product structures.
The Commissions can take each of these steps without formal rulemaking. Interpretive guidance, policy statements, and staff-level action can provide the clarity that market participants need now, and the Commissions can codify and refine the framework as their experience with these products develops. Taking these steps now would help onshore the more than $480 billion in perpetual contract volume that has traded on Hyperliquid’s perpetual contract markets over the past ten months, including markets in oil, metals, currencies, equity indices, and single stocks.
CFTC Chairman Selig has said the question was never whether perpetual contract markets would exist, but whether they would exist under American oversight and American standards, and prompt guidance is an important step to getting there. HPC will continue engaging with both agencies and their staff as these questions move forward.
Read our full comment letter here.
