Chicago Mercantile Exchange v. SEC

The Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) occupy distinct regulatory spheres, which should never overlap. The CFTC is tasked with regulating futures, whereas the SEC regulates securities. However, when financial markets periodically devise new and innovative products, federal statutes sometimes leave ambiguity as to which agency has regulatory jurisdiction. In general, the instruments that are subject to SEC jurisdiction, securities, translate to ownership interests in a common business venture. In that sense, the SEC is primarily tasked with regulating capital formation and aggregation. In contrast, the instruments subject to CFTC regulation, futures, translate to price hedging. It could therefore be said that the CFTC is primarily tasked with regulating hedging. Options do not fall neatly into either the category of capital formation or the category of hedging. For years, as a result, the CFTC and the SEC disputed which agency regulated options on securities. The SEC viewed them as sufficiently related to securities to fall under its regulatory jurisdiction, but the CFTC saw options on securities as untied to capital formation and, thus, more appropriately under CFTC jurisdiction. Ultimately, the two agencies reached a pact, known as the Shad-Johnson Agreement or the Johnson-Shad Agreement, depending on which agency describes it. The agreement provided that jurisdiction over options would follow the underlying asset. Therefore, jurisdiction over options on securities would fall to the SEC, and jurisdiction over options on futures would fall to the CFTC. This agreement was later codified by Congress, but the federal legislation did not address the ambiguities that come with continually evolving financial instruments.