Staff in the Commodity Futures Trading Commission (“CFTC”) Divisions of Data, of Market Oversight, and of Clearing and Risk issued a no-action letter for a designated contract market’s binary options cleared by a registered derivatives clearing organization. The designated contract market (KalshiEX LLC) and derivatives clearing organization (LedgerX, LLC) had requested that the CFTC staff not recommend enforcement action for failures to report binary options to a swap data repository. Reminding the CFTC staff that similar relief had been granted for other market participants regarding binary options – in no-action letters 17-31 and 17-32, where Nadex, which is both a designated contract market and derivatives clearing organization, and Cantor Futures Exchange, L.P. and Cantor Clearinghouse, L.P., a designated contract market and the derivatives clearing organization that cleared binary options for that designated contract market – the designated contract market and derivatives clearing organization represented that the binary options will be fully collateralized, and the designated contract market will itself publish time and sales data for all of the binary options promptly after trades are executed. The designated contract market and derivatives clearing organization further represented that the designated contract market will comply with Part 16 of the CFTC’s regulations, including providing information to the Division of Market Oversight. During the course of requesting relief, the designated contract market and the derivatives clearing organization stated that those reports will provide the CFTC and public with information “similar, but not identical, to that currently required to be provided to [a swap data repository] under” the CFTC’s regulations.
The CFTC staff granted no-action relief as long as the binary options are fully collateralized in accordance with the CFTC’s definition – which means that the derivatives clearing organization holds, at all times, “funds in the form of the required payment sufficient to cover the maximum possible loss that a party or counterparty could incur upon liquidation or expiration of the contract” – and all cleared through the derivatives clearing organization. Even market participants entering into those binary options must only clear them at the derivatives clearing organization seeking this no-action relief with the designated contract market. Further, the designated contract market must publish the trade timestamp, contract, quantity, and price for each binary option, and provide the CFTC with all trade and supporting data. Too, the designated contract market and the derivatives clearing organization must comply with reporting and recordkeeping requirements other than those for which no-action relief is granted in this letter. Further, the designated contract market and the derivatives clearing organization must be ready to give copies of those records and access to them to the CFTC, Department of Justice, Securities and Exchange Commission, or any prudential regulator.
This no-action relief from the CFTC staff has implications for market participants abroad, as KalshiEX, LLC and LedgerX, LLC remain on the European Securities and Markets Authority’s list of markets considered equivalent to European Union regulated markets for over-the-counter derivatives.