CFTC Orders Exchanges To Address State Access Limits

The Commodity Futures Trading Commission gave designated contract markets 30 days from Nov. 5 to end domestic trading restrictions based on where a participant lives, or explain in writing why compliance is not feasible. The deadline expires Dec. 5.

The instruction applies to Regulation 38.151(b), which requires designated contract markets, or DCMs, to provide impartial access under transparent and nondiscriminatory criteria. The CFTC’s interpretation states that federal law generally does not allow a DCM to deny access to an otherwise eligible trader because the trader lives in a particular state.

The commission also told DCMs to take reasonable steps to ensure that futures commission merchants and introducing brokers do not impose geographic restrictions that violate the impartial-access requirement. These intermediaries often connect retail customers with DCMs.

A venue that cannot remove a restriction must submit a written explanation to the CFTC’s Division of Market Oversight. The agency will review the facts of each case in considering possible enforcement action. The interpretation does not provide a safe harbor or specify how quickly the division will respond.

In a statement accompanying the interpretation, Chairman Michael S. Selig described geographic restrictions as inconsistent with the Commodity Exchange Act’s impartial-access requirements. The commission’s interpretation is an agency view of existing law, not a new legislative rule. It does not automatically override state laws or court orders, and it does not name the exchanges or markets affected.

The CFTC cited risks to traders and market operations. A trader who opens a position in a permitted state and then travels to a restricted state may be unable to manage the position or meet a margin call. That could lead to a forced liquidation. The agency also linked state-by-state restrictions to lower liquidity, wider bid-ask spreads and less effective hedging.

The interpretation identifies sports contracts, statewide election markets, weather contracts and energy contracts as products that may be affected. The commission said restrictions can exclude traders with local knowledge of a state or region.

The CFTC filed suit against Utah on Oct. 27, alleging that the state had brought enforcement actions against CFTC-regulated markets. The agency also initiated proceedings involving nine other states and filed briefs in four federal appeals courts and one state supreme court. The commission’s Utah case concerns state efforts to restrict prediction markets.

The CFTC’s interpretation does not immediately open markets to traders in excluded states. Exchanges and intermediaries may continue to apply customer-identification checks, eligibility standards and risk controls. Any access change would require amendments to an exchange’s rules and compliance by the intermediaries serving its customers.

The CFTC announced a Dec. 15 roundtable on 24-hour trading, overnight sessions, tokenization and market operations on Oct. 28. It issued a statement on equity perpetual futures on Nov. 3 and a no-action letter on Nov. 5 concerning trust companies used by clearing organizations for daily settlements.

The Nov. 5 interpretation was published with a note that technical corrections may be made before publication. It also contains a placeholder for its Federal Register effective date. The CFTC has not published a list of affected venues, markets or traders.

Reviewed and fact-checked by Alex Panasenko on November 6.