Are Perpetuals Swaps or Futures? The CME Picks a Fight

**Austin Campbell** (0:00)
So, the CME has sued the CFTC over Perpetuals, which is the incumbent suing its own regulator. So, the CME filed on June 18th the DC District Court to undo the CFTC's approval of US perpetual futures. It's challenging the May 29th order, greenlighting Qureshi's BTC perp, naming the agency and Chairman Mike Selig, who the CME says, quote, circumvented the regulatory regime.
The CFTC had approved Qureshi's Bitcoin perpetual with a policy statement letting exchanges self-certify similar crypto perps as futures without prior review. And the CME says, these perps are swaps, not futures. And approving them as futures was arbitrary and capricious.
Under Dodd-Frank, this is Terry Duffy, under Dodd-Frank, it clearly defines what a swap is and what a future is. And when there's two parties exchanging payments to each other, that is defined as a swap. Now, I have a lot of things to say here, but Chris, I'm going to throw the ball to you first, because I'm sure you have a few thoughts.

**Chris Perkins** (1:13)
So there's a lot of history here, Austin.
Terry Duffy, who I testified in Congress many years ago, I don't know, many three years ago, something like that, he didn't like perpetuals and he doesn't like them now. We tried to set the stage for changes to market structure that would enable them, specifically around not needing an intermediary as much anymore. And he vociferously pushed back and he said some mean things to me at the time. But we can leave that to one side.
But if you go back to the history of Dodd-Frank, I think the policy makers got this whole idea wrong. I'll walk you through the history and then why I think it's messed up. So we had issues and by the way, back in the day banks were innovating all the time. Post Dodd-Frank, we really saw very little innovation across the derivatives front. But now we're seeing it again. We're seeing perpetuals. We're seeing prediction markets. So you're seeing these green shoots of innovation again. And of course the incumbents don't like it. But after the global financial crisis, we had this huge issue with what we call derivatives or swaps. And there was the G20 conference in Pittsburgh in 2009 All the governments were like, guys, your derivatives are out of control. These things we call swaps.
We want you to report them to a central repository so we can see them. We want you to centrally clear them. We're going to put these entities, we're going to put all this capital in there, and we're going to make you face the central entities. And then we're going to want you to electronically execute them so we can see it all. And so their policy response to these issues with derivatives was hypercentralization because we didn't have blockchain back then. And what I think they got wrong was they said, if an instrument is a swap, you have to hold a certain amount of collateral against it. And they were very prescriptive. It was a five-day margin period of risk. And let me explain what this means. If I call it a swap, I have to make sure that the margin withstands five days of stresses and the stresses are calibrated. Now, why would it be five days? Well, because you need to hold that margin, that collateral based on the liquidity, how fast you can liquidate a defaulter. And the fact is we had really slow operations as we still do to this day. If you have a long weekend, that's three days right there. Somebody does a trade on a Friday or even a Thursday, you lose, you know, if it was Juneteenth, Friday, Saturday, Sunday this year, you're three days out. And so, if the product is a little bit less liquid, maybe it is concentrated, you couldn't liquidate it. So, if you call something a swap, it's five days. Futures are one to two days with the lower, what we call confidence intervals, less margin. And I don't want to get too technical, but it's more than two times if you look at the square root of time and the collateralization, but forget that for now.
The problem with this whole idea is that we have some very, very liquid swaps and we have some very illiquid futures. And so, from a principles-based perspective, you should really collateralize something, not by what it's called, but by the properties that it has. But for some reason, we got that wrong. And now, as we move forward with the same thing as we're saying, wait a second, these things, they're not futures, they're swaps. So, you have to hold more collateral against them. The whole idea behind this is to lower leverage. And we say this many times in the show, what do retail like?