Citadel Securities Flags Insider-Trading Risk on Corporate KPI Contracts

Citadel Securities told the Securities and Exchange Commission and the Commodity Futures Trading Commission that betting contracts tied to whether a public company hits a business metric create insider-trading risks only the SEC’s framework can police, and asked both agencies to keep such products under SEC oversight.

The argument sits in a Sept. 9 comment letter filed by Stephen John Berger, Citadel Securities’ global head of government and regulatory policy, in response to a joint request for comment from the two agencies on event contracts and perpetual derivatives.

Berger wrote that certain venues registered with the CFTC have already self-certified so-called KPI contracts tied to public companies for trading under CFTC jurisdiction. Payouts on those contracts depend on whether a company meets a specific metric, which he said opens a second front of abuse beyond trading on nonpublic results. “The fact that these instruments pose novel risks relating to insider trading, including not only whether specific metrics will be met, but also whether and how they will be reported by the issuer, reinforces the case for SEC oversight,” he wrote in the letter.

That concern is an argument from the market maker, not a finding by either regulator. Neither agency has responded to the letter.

Citadel Securities’ case rests on classification. The letter argues that contracts tied to a single issuer’s financial results or condition qualify as security-based swaps, and in binary-option form as securities, placing them under the SEC’s regulatory and surveillance system. Berger added that such contracts can qualify as security-based swaps when tied to an event involving a single issuer that directly affects its financial statements, financial condition or financial obligations.

The timing matters because venues operating under CFTC rules can self-certify new products and potentially begin trading the next business day without public comment, while SEC-regulated venues generally must demonstrate compliance, take public comment and obtain affirmative approval first. The letter warns that this gap lets a venue, in effect, pick its own regulator by how it labels an equity-linked product.

Citadel Securities asked the SEC and the CFTC to reaffirm SEC jurisdiction over equity-linked event contracts, block self-certification from being used to circumvent it, and promptly clarify the treatment of event contracts and perpetual derivatives. No dates for a decision or the next step in the joint comment process have been announced.