The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) recently requested comment on potential rule changes regarding the classification of swap instruments and regulatory jurisdiction that could reshape product classification and introduce a new model of "alternative compliance" for instruments that are subject to overlapping regulatory regimes of the two agencies.

The jurisdictional line separating swaps regulated by the CFTC from security-based swaps regulated by the SEC has never been entirely intuitive. New products, including event contracts, perpetual contracts, tokenized instruments, and other crypto-linked structures, are making that line harder to administer. In June 2026, the agencies responded with a joint request for comment seeking input on both the governing product definitions and a potentially consequential concept the agencies call "alternative compliance."

The initiative does not change existing law. It is neither a proposed rule nor a product-specific classification decision. Instead, it asks whether the agencies should refine the analytical framework established under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act and whether coordinated compliance mechanisms could reduce duplicative obligations without weakening market oversight. One practical implication could be that both agencies ease the compliance burdens for companies and entities while also clarifying the regulatory scope, policy objectives, and enforcement scope.

The request has prompted significant public input.

The equity-linked instrument classification problem

Dodd-Frank divided regulatory authority over derivatives between the CFTC and the SEC. The CFTC generally regulates swaps, or agreements between two parties to exchange cash flows associated with changes in the value of assets held by each party. The SEC regulates security-based swaps, or generally speaking, swaps based on a single security, a narrow-based security index, or certain events relating to a single issuer or issuers in a narrow-based index because of their potential to influence the market for the underlying security or index. With the proliferation of emerging financial instruments, market developments are testing the boundaries of those swap classifications.

The SEC’s proposed rules on swap definitions focus on products whose form, reference asset, settlement mechanics, or economic function may point in different regulatory directions. The questions are particularly relevant to event contracts and prediction markets, perpetual contracts, structured notes, index-linked products, and digital or tokenized instruments. For these products, labels and trading venues alone do not necessarily determine regulatory jurisdiction; the analysis may turn on the instrument’s specific terms and economic characteristics.

The consequential proposal of alternative compliance

The most forward-looking feature of the joint request for comment may be its discussion of methods of alternative compliance for market participants facing dual regulatory requirements on related products or activities. The SEC and CFTC are considering whether compliance with one agency’s framework could satisfy the corresponding requirements of the other where they are substantially similar in nature.

The agencies' attempts to simplify dual compliance obligations are an outcome-oriented effort that could ease the burden of compliance while adequately addressing the regulatory scope, policy objectives, supervisory programs, enforcement authority, and investor protections of both the SEC and CFTC. The relevant question would not necessarily be whether two rules are identical, but whether they achieve sufficiently comparable regulatory outcomes.

Potential alternative-compliance mechanisms include coordinated notice registration, joint procedural frameworks, streamlined trade reporting, and deemed filing arrangements. Each could lessen duplicative registration, reporting, examination, and compliance burdens for firms operating across the jurisdictional divide. However, Dodd-Frank’s limits on the authority of both the SEC and the CFTC to exempt specific products will require carefully coordinated rulemaking, examination, and enforcement.

Citadel Securities urges a firm SEC boundary for equity-linked products

The SEC has received significant public comment on the proposed rules addressing financial innovation, market integrity, and investor protection. One notable submission is a September 9, 2026, letter from Citadel Securities, a leading market maker in the United States. The letter offers a market-structure perspective on the joint SEC/CFTC proposal. Citadel identifies equity-linked event contracts and perpetual derivatives as two recent developments that underscore the importance of properly classifying innovative products that could directly affect an underlying security or index. According to Citadel, products with a direct securities nexus to U.S. public companies, their securities, equity indexes, or issuer-specific events are functionally securities or security-based swaps and should remain within the SEC’s regulatory framework.

The letter gives particular attention to binary contracts that settle based solely on whether a public company achieves a key performance indicator. Citadel contends that such a contract may be a securities option because its payoff is "based on the value of" the issuer’s securities. Alternatively, if the instrument is treated as a swap, Citadel argues that it should be classified as a security-based swap when the referenced event directly affects the issuer’s financial statements, financial condition, or obligations. Under either route, the letter concludes, the product falls within the SEC’s jurisdiction over securities.

Citadel’s policy case rests largely on integrated market surveillance across traditional equity markets and emerging trading platforms. Equity-linked event contracts can create opportunities for trading on material nonpublic information or for coordinated manipulation across the derivative and underlying equity markets. Citadel argues that SEC oversight, together with securities self-regulatory organizations, permits surveillance across equities, options, and related instruments. Moving issuer-linked contracts into a separate CFTC-regulated market, in its view, risks creating a fragmented "shadow market" without equivalent integration.

The procedural differences between the agencies' product-review systems are central to Citadel’s concern. CFTC-regulated venues, such as designated contract markets like Kalshi and Polymarket, may generally self-certify new products and begin trading on an accelerated timetable, whereas SEC-regulated exchanges typically must obtain affirmative approval following the administrative public notice and comment process. Citadel warns that firms could use those differences to select a regulator by characterization, self-certifying a public-company KPI contract through the CFTC while a securities exchange seeks SEC approval for a substantially similar product. In Citadel’s view, classification disputes should be resolved by the agencies through the statutory interagency process, not by a trading venue’s self-assigned label.

Citadel accordingly supports alternative compliance only as a mechanism for coordinating genuinely overlapping requirements after the product has been correctly classified. It should not allow CFTC compliance to substitute for SEC oversight where Congress assigned the product to the securities regulator, nor should self-certification become a de facto alternative-compliance regime. Any accommodation, the letter suggests, should preserve substantively equivalent surveillance, transparency, investor protection, and enforcement safeguards.

Any alternative-compliance framework would have to preserve each agency’s ability to discharge its statutory responsibilities. The request therefore asks how surveillance, examinations, enforcement coordination, and information sharing should operate when a registrant relies primarily on the other agency’s requirements. Citadel responds to this inquiry by noting the SEC’s experience with surveilling trading in the cash equities market and the heightened need for application of that integrated surveillance infrastructure to equity-linked products.

The agencies identify market manipulation, trading on material nonpublic information, and cross-market misconduct as central concerns. Effective coordination would likely require timely access to compatible data, clear allocation of supervisory responsibility, and procedures for referring potential violations. Regulatory efficiency, in short, cannot come at the expense of market integrity.

Four classification questions to watch

Although the SEC/CFTC request for comment identifies several derivative instruments that may require clarification to assign regulatory jurisdiction properly, four categories present heightened complexity. Recent innovation in the derivatives market has increased the importance of determining whether these instruments warrant SEC regulation to guard against market manipulation or the use of material nonpublic information concerning an issuer to profit in markets beyond the scope of SEC oversight.

1. Event contracts. The SEC/CFTC proposal indicates that market participants are seeking clarity on how an event contract referencing a security or securities index should be treated. For regulatory purposes, it could be considered a standard swap regulated by the CFTC. Alternatively, an event contract may be treated as a security-based swap if it links the contract to the performance of a single stock, a single loan, or a small group of stocks, in which case it would be regulated by the SEC. A third, more complex characterization would treat event contracts and binary options as mixed swaps that incorporate both underlying equity and non-security components, such as an option on a portfolio containing securities and commodities. The proposal also considers excluding these instruments from the swap definition in the Commodity Exchange Act. The answer could determine whether particular prediction-market contracts remain within the CFTC framework or implicate SEC jurisdiction.
    
2. Perpetual contracts. The request for comment also asks whether cash-settled perpetual contracts referencing equity securities may qualify as security futures rather than swaps or security-based swaps. Because perpetual contracts have no scheduled final settlement, their classification presents distinct questions. If considered a security future, a perpetual contract would be subject to the joint SEC/CFTC regulatory framework and would need to provide sufficient information access to support the same market surveillance and trading oversight as the referenced equity security. Classification may affect not only the governing regulatory regime but also the availability of key investor protections, such as execution-quality disclosures and fair-access standards and controls.
    
3. Structured notes. The agencies seek comment on whether market participants need greater clarity on when an instrument is a note, bond, or evidence of indebtedness that is a security and therefore excluded from the statutory swap definition. Relevant considerations may include whether the instrument reflects a genuine lending relationship and whether it is subject to the Trust Indenture Act.
    
4. Narrow-based security indexes. Some derivatives are tied to securities indexes that may fluctuate between narrow-based and broad-based status. A narrow-based security index (NBSI) is concentrated in a relatively small number of securities or heavily weighted toward particular issuers, creating a closer tie to the equities in the index or to the issuing entities. Derivatives referencing an NBSI generally fall within the security-futures or security-based-swap framework, depending on the instrument. A broad-based index is sufficiently diversified that it does not satisfy the statutory definition of an NBSI. Derivatives referencing a broad-based index generally fall within the CFTC’s futures or swaps framework. The agencies’ request for comment asks whether more guidance is needed for contracts that reference potential changes to an NBSI’s composition, as opposed to changes in its price or value. In addition, the agencies seek public comment on whether the existing tolerance and grace-period provisions for NBSIs that temporarily become broad-based remain adequate or whether supplemental transition rules or safe harbors are necessary.

Practical implications for market participants

For firms developing or trading novel financial products, the request reinforces the importance of a product-by-product jurisdictional analysis. An event contract offered on a CFTC-regulated platform, for example, may still raise security-based-swap questions if its payout is sufficiently connected to a single issuer, security, or narrow-based security index. Likewise, tokenization or on-chain settlement does not eliminate the need to analyze the instrument’s underlying economic rights and reference terms.

Market participants should assess how proposed products map onto the statutory definitions; identify obligations that could arise under both regimes; preserve the reasoning supporting classification decisions; and monitor any subsequent rulemaking, interpretive guidance, or coordinated agency action. Firms should also evaluate data and compliance systems with cross-market supervision in mind, particularly where related products trade on multiple venues or under different regulatory classifications.

The request also creates an opportunity to consider where duplicative requirements produce cost without corresponding regulatory benefit. A persuasive case for alternative compliance will likely require more than identifying burden. Stakeholders will need to show that the proposed substitute regime addresses the same risks, produces comparable outcomes, and gives both agencies sufficient visibility and enforcement capability.

Conclusion

The immediate significance of the 2026 request lies less in any single proposed classification rule than in the agencies' willingness to reconsider the factors that contribute to overlapping jurisdiction and to identify the regulatory scheme best suited to these innovative instruments. Clearer definitions would reduce uncertainty at the product-design stage. A workable alternative-compliance framework could go further by replacing duplicative obligations with coordinated reporting requirements, regulatory standards, and market oversight.

Prediction markets, digital-asset platforms, and other firms operating at the boundary of the securities and commodities laws should assess the features of equity-linked products, their economic function, and the cross-market risks that may affect classification. Although some interagency coordination may occur, compliance with SEC and CFTC regulatory requirements remains central to avoiding heightened scrutiny and potential enforcement actions by either agency.

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