On November 23, 2021, the Division of Market Oversight of the Commodity Futures Trading Commission granted "no action" relief to the Korea Exchange authorizing it to offer and sell futures contracts on the Korea Composite 200 Stock Price Index (KOSPI) to persons located in the United States who are qualified institutional buyers beginning December 1.
The issuance of the NAL was necessary for technical reasons because November 30 will mark the last official day of trading of the KOSPI 200 as a security futures contract under the joint oversight of the CFTC and the Securities and Exchange Commission and December 1 will re-inaugurate the beginning of trading of the KOSPI 200 as a futures contract solely under the jurisdiction of the CFTC -- as trading relates to US persons. Not too long ago the journey of KOSPI 200 futures was in the opposite direction -- from a broad-based stock index futures contract under the exclusive jurisdiction of the CFTC (available to US persons as of November 2008) to a security futures contract under the joint oversight of the CFTC and SEC (as of April 2020)!
What does this development and process have to do with crypto? Nothing today, but it should!
Following the establishment of the CFTC in 1974, the SEC, on occasion, took an extensive view of its jurisdiction over futures on securities. Some of these views were litigated in court. Ultimately chairpersons of the SEC and CFTC -- Philip McBride Johnson and John Shad -- worked out a jurisdictional compromise in 1981 that was formally enacted into law in 1983.
Now, four decades later, the law and rules around futures on broad-based indices and security futures on narrow-based indices have been refined and provide a path to classify not only new financial instruments that might meet one definition or the other, but also existing instruments that might morph over time from one category of instrument to another because of changes in an index's component securities or changes in the weighting of one or more existing component securities of an index. The system provides objective, quantifiable measures to classify product type as well as an objective, measurable means for a product that has been classified one category of financial product under the jurisdiction of the CFTC exclusively or the SEC/CFTC jointly to orderly move to another oversight regime. The system is not perfect (hence the need for the November 23 no action letter), but it generally works.
In April 2019, SEC staff described in a formal framework characteristics of when a cryptoasset might be a security, while previously, in June 2018, William Hinman, then Director of the SEC's Division of Corporation Finance, acknowledged that a cryptoasset that once might be a security could today not be a security (e.g. likely ether). However, in neither insightful colloquy did SEC staff provide quantifiable measures that put meat on the bones of the high level guidance. We need more.
As Chairmen Johnson and Shad did in 1981, SEC Chair Gary Gensler and Acting CFTC Chair Rostin Behnam, should hash out quantifiable measures for cryptoassets similar to the type of measures the SEC and CFTC currently apply to futures based on security indices to help the industry determine when a cryptoasset is a security, and when a cryptoasset that is either a security or not a security might change characteristics and how such mutability could be processed without disrupting investors' trading. The agencies did it previously; they can do it again -- and should!
More to come!
"Indexes do not necessarily remain broad or narrow-based permanently – they may transition from narrow-based to broad-based and then back to narrow-based. Pursuant to [CFTC] Regulation 41.14(b), 'an index that is a narrow-based security index that becomes a broad-based security index for more than 45 business days over 3 consecutive calendar months shall continue to be a narrow-based index for the following 3 calendar months,” providing market participants with time to adjust to applicable CFTC regulations.' " -- CFTC DMO NAL (November 23, 2021).