Comment Text:
Response to CFTC Request for Comment on Perpetual Derivatives:
Thank you for the opportunity to provide feedback on perpetual derivatives. In my view, perpetual swaps, in particular, should be considered for prohibition due to several critical issues related to their design and impact on markets.
Lack of Tying to Underlying Assets: Perpetual swaps are fundamentally flawed because they are not tied to any specific, underlying physical commodity or asset. Unlike traditional futures contracts, which have an expiration date and allow for price discovery based on the delivery or settlement of the underlying asset, perpetual swaps lack such a mechanism. This creates a scenario where prices are decoupled from real-world supply and demand factors, leading to artificial price movements that do not reflect the true value of the underlying asset.
Absence of Time-Based Value Creation: One of the defining characteristics of derivatives is that their value is derived from the time-bound relationship between the contract and the underlying asset. Swaps and futures contracts have an expiration date, and this timeframe is critical for price discovery and risk management. Perpetual swaps, however, allow positions to persist indefinitely without any such time-bound incentive, distorting the market and hindering natural price discovery.
Potential for Market Manipulation: Perpetual swaps open the door to manipulation. Since they are not tied to a defined expiration date and can remain open indefinitely, traders can hold these positions as a form of "market leverage" without necessarily having any intention to take delivery of the underlying asset. This creates opportunities for market manipulation, especially in the absence of a clear expiry or need for settlement, which makes it easier for entities to artificially influence asset prices and distort the market.
Impact on the Integrity of Stock Prices: Perhaps most concerning is the potential for perpetual swaps to undermine the price discovery process in equity markets. Retail investors and smaller participants, who rely on the movement of stock prices to gauge market health, may be misled by perpetual swap contracts that prevent stocks from moving in line with true supply and demand. This creates a situation where the stock market is not reflecting the real value of companies, leading to misinformation and unfair market conditions for everyday investors.
Recommendation for Action: Given the issues outlined above, I believe that the CFTC should consider prohibiting perpetual swaps. These contracts do not provide meaningful price discovery, do not facilitate real hedging, and may encourage speculative practices that distort market integrity. Furthermore, the long-term effects of such products could undermine trust in U.S. markets, especially as they affect retail investors who have no control over the distortions caused by perpetual derivatives.
In conclusion, I urge the CFTC to take a critical view of perpetual swaps and assess whether they have a place in the broader derivatives market. Their potential for abuse, lack of ties to underlying assets, and negative impact on market integrity all suggest that they should not be allowed to persist in their current form.
