MFA Urges SEC, CFTC to Strengthen Oversight of Novel Contracts
The Managed Funds Association is urging federal regulators to establish stronger investor protections and clearer oversight for event contracts, perpetual contracts and other emerging financial products.
In a comment letter submitted Monday, MFA asked the Securities and Exchange Commission and Commodity Futures Trading Commission to coordinate their treatment of products that cross jurisdictional boundaries. The association said effective oversight could build institutional investor confidence and support broader market participation.
“The most successful financial innovations are the ones investors trust,” MFA President and CEO Bryan Corbett said. “Confidence in how new markets are overseen is essential to broader participation by institutional investors.”
Event contracts generally provide payouts based on the outcome of a particular occurrence. MFA warned that contracts tied to corporate developments could allow individuals possessing material nonpublic information to profit from that information.
Perpetual contracts are derivatives without expiration dates. They generally use periodic funding payments to keep their prices aligned with referenced assets. Although widely traded in offshore cryptocurrency markets, the contracts can present concerns involving leverage, pricing, liquidity and customer protection.
The CFTC has acknowledged that perpetual contracts raise complex market-structure and investor-protection questions. It has encouraged exchanges to seek voluntary agency approval before listing perpetual products tied to asset classes beyond certain digital commodities.
MFA recommended that securities-linked products remain within the SEC’s surveillance framework to help regulators identify potential insider trading and manipulation. Products implicating both agencies should receive affirmative approval before trading begins, the group said, rather than entering the market through self-certification.
The association also asked regulators to classify cross-currency equity swaps, commonly called “compo” swaps, as security-based swaps. Those instruments reference stocks denominated in foreign currencies but are currently treated as mixed swaps subject to both agencies’ requirements.
MFA said placing them under the same framework as economically similar equity swaps would eliminate duplicative regulation without weakening investor protections.
The recommendations come as the SEC and CFTC consider how existing securities and derivatives laws should apply to rapidly developing products while allowing financial innovation to continue in regulated U.S. markets.