CME Group (CME) is suing its own regulator over a product that could threaten parts of its futures empire. But Bank of America (BAC) thinks the fight could do surprisingly well for derivatives exchanges, even if CME loses.
The dispute centers on perpetual futures, or perps. Perpetual contracts don’t expire, making them easy for traders to leverage exposure without rolling into new contracts.
The product has already launched internationally. Bank of America believes crypto perpetual trading will reach over $93 trillion in 2025, almost five times the size of the underlying crypto spot market.
Now, the Commodity Futures Trading Commission (CFTC) accepted KalshiEX’s bitcoin perpetual contract as a futures contract on May 29. The regulator also noted that it should evaluate perpetual products linked to other asset classes on a case-by-case basis.
Less than three weeks later, CME filed suit. Bank of America said CME might do well winning, losing, or just slowing down the regulatory process.
CME lawsuit creates an unusual win-win setup
CME sued the CFTC on June 18 to classify perpetual contracts as swaps, not futures.
This distinction is of considerable commercial importance. If CME wins, perps could be subject to swap-dealer registration, extra reporting requirements, business-conduct rules, and stricter margin standards, according to Bank of America. Such burdens could make it harder to offer the contracts and less attractive to traders.
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But losing might give Bank of America another edge, the bank says. CME has exclusive futures license agreements for key stock indexes such as the S&P 500, Nasdaq-100, and Russell 2000. If perps still count as futures, rivals may find it hard to create contracts directly linked to such indices.
Competitors may create their own benchmarks to rival them, but it will not necessarily be simple to lure liquidity away from existing indexes. Regulators might also be forced to reexamine their approval procedure by a procedural court order, holding up new products without firmly deciding whether perps are futures or swaps.
That’s why Bank of America says the setup is advantageous for CME in a few situations.
The bank doesn’t like the stock overall. This report rates CME Underperform with a $230 price target, compared to its Sept. 10 $274.70 share price. Instead of expecting perps to destroy CME’s business, its caution reflects valuation and slower expected earnings growth.
A $93 trillion market explains why exchanges are worried
