Comment Text:
RE: Response to CFTC Request for Comment on the Trading and Clearing of "Perpetual" Style Derivatives
April 22, 2025
I am writing in response to the Commodity Futures Trading Commission (CFTC)'s April 21, 2025 Request for Comment pertaining to the trading and clearing of “perpetual” style derivatives contracts, herein referred to as “perpetual derivatives”, although as the Commissions notes the precise definition of these contracts has yet to be ascertained. I am a current 3L Juris Doctor student at the Georgetown University Law Center in Washington, D.C., where I have taken courses on the regulation of commodities and derivatives markets, emerging issues in U.S. financial services regulation, financial restructuring and bankruptcy, banking regulation, securities regulation, and international financial regulation.
Below I’ve outlined some concerns I might have, given my academic exposure to these issues, as to Question 16 posed in the Commission's Request for Comment: “Do Perpetual Derivatives raise unique issues in the event of a futures commission merchant or derivatives clearing organization insolvency under part 190 of the Commission’s regulations or the U.S. Bankruptcy Code?” While my knowledge and experience within this area is limited, I would like to contribute comments to underscore the significance of Part 190 and the regulations contained therein, and to raise and reiterate some concerns that some commentators have raised with respect to crypto derivatives contracts recorded and traded through decentralized means. I hope these comments will be useful to furthering the Commission’s mission to protect market users and the public and ensure financially sound commodity futures, options and swaps markets.
Perpetual derivatives, especially in crypto markets, present novel challenges for U.S. insolvency frameworks like CFTC Part 190 and the Bankruptcy Code.
Perpetual derivatives (also sometimes referred to as "perpetual swaps") are a type of derivative contract that, unlike traditional futures, do not have an end or close-out date. More common in crypto markets, these contracts are structured to mimic margin-based spot market exposure through recurring funding payments between long and short positions. Perpetual derivatives can trade on centralized or decentralized platforms, and may or may not be cleared through a CFTC-registered derivatives clearing organization (DCO). While I look forward to the Commission's efforts to develop a more precise definition to incorporate into pre-existing regulations and provide certaining to market participants, I will be limiting myself to the above characteristics to guide a discussion pertaining to perpetual derivatives and bankruptcy below:
I. Perpetuals derivatives lack a maturity date
In comparison to conventional futures contracts wherein benchmarking between the derivative and underlying spot instrument occurs at or around the expiration of the contract, allowing for the valuation and close-out of positions between parties, perpetual derivatives never mature. Therefore, it is less clear how and when to liquidate or novate a perpetual derivative in an insolvency scenario under CFTC Part 190 or the Bankruptcy Code §§ 761 – 767 pertaining to commodity broker liquidation. Perpetual derivatives are meant to trade across an indefinite time horizon, as their name suggests, under normal market conditions – when markets are volatile or pricing data becomes fragmented, perpetual contracts might become more difficult to resolve through the bankruptcy process as an FCM winds down.
II. Perpetuals have complex valuation mechanics that obscure customer entitlements
Perpetual derivatives have a continuous funding mechanism, which adds complexity to calculating the "net equity" of a customer in the event of FCM failure. Ascertaining unwind value attributable to each FCM customer might come into dispute, and there appears to be less legal precedent on the issue. While the CFTC can promulgate regulations under Part 190 to delineate customers’ distributions from a bankrupt FCM, the Commission’s latitude to do so has been scrutinized, see In re Griffin Trading Co., 245 B.R. 291, Comm. Fut. L. Rep. (CCH) P 28040 (Bankr. N.D. Ill. 2000) (invalidating 190.08(a)(1)(ii)(J) as exceeding the scope of CFTC’s statutory authority to define “customer property”). Although Griffin Trading Co. was vacated, see 270 B.R. 882 (N.D. Ill. 2001), and therefore has no precedential value, the Supreme Court’s more recent decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024) could expose a similar Part 190 provision to similar legal challenges.
III. Perpetual derivatives traded on foreign venues present unique custody issues
In cases where a perpetual derivative is linked to a crypto asset or a synthetic instrument traded on non-U.S. venues, customer protection under CFTC Regulation Part 190 becomes increasingly murky. Part 190 is designed to protect customer assets held by a failed FCM or DCO through requiring segregation and clear tracing of customer property. However, when a perpetual derivative has underlying exposure is to a decentralized synthetic instrument (in a seemingly common use case, a perpetual ETH/USD swap) or an offshore exchange, an FCM or DCO might not have clear, enforceable custodial arrangements that meet U.S. standards of segregation that would be workable under the existing Part 190 regulations. With respect to crypto, these assets might not be held in delineated and traceable accounts unless required under applicable foreign law. Foreign legal frameworks (or lack thereof) can forestall recovery or prioritization of customer claims when an FCM goes under.
IV. Perpetual derivatives can be less portable than more conventional derivative contracts
Part 190 envisions porting (i.e., transferring) customer positions from an insolvent FCM to a solvent FCM during bankruptcy, preserving continuity, mitigating losses to customers, and minimizing disruption to markets. Perpetual swaps written under non-standard contractual terms (e.g., bespoke contracts, or perpetual derivatives governed under decentralized “smart contracts”) might not be as portable from one entity to another. In an event wherein certain FCM market segments exposed to particular asset classes, such as crypto, become insolvent, remaining DCOs or FCMs could encounter difficulties in accepting unconventional contracts. Non-deliverable, illiquid, or hard-to-value exposures could introduce risks across market segments, and smart contracts might not be interoperable between certain FCMs. Moreover, many decentralized finance lack centralized clearing, which could frustrate porting during an insolvency event.
