[00:00:00] Speaker 01: Based number 21-1038, Seabow Futures Exchange LLC, Petitioner versus Securities and Exchange Commission. [00:00:08] Speaker 01: Mr. Greenwald for the petitioner, Ms. [00:00:10] Speaker 01: McKenzie for the respondent, Mr. Stansel for the intruder. [00:00:16] Speaker 02: Morning, Council. [00:00:18] Speaker 02: Mr. Greenwald, please proceed when you're ready. [00:00:20] Speaker 06: Thank you, Your Honor. [00:00:21] Speaker 06: May it please the Court, my name is Paul Greenwald, and I represent the petitioner in this appeal, the Seabow Futures Exchange. [00:00:29] Speaker 06: This appeal really boils down to one issue. [00:00:32] Speaker 06: Does the exemptive order standing alone satisfy the APA standard requiring that the commission engage in reason decision-making? [00:00:41] Speaker 06: The answer to that question is no. [00:00:44] Speaker 06: Instead, the exemptive order is arbitrary and capricious for at least three reasons. [00:00:49] Speaker 06: First, the order does not provide a factual basis explaining why the spikes product must be exempt [00:00:57] Speaker 06: from the definition of a security future in order to achieve the Commission's stated goals, which are fostering competition and lowering transaction costs. [00:01:08] Speaker 06: That failure alone is fatal under the Administrative Procedures Act. [00:01:13] Speaker 06: Second, the Commission failed to consider two important aspects of granting exemptive relief. [00:01:21] Speaker 06: The Commission found that the Spikes product is a security future, and this [00:01:26] Speaker 06: The panel knows from our briefs, if something is a security future, the regulators have determined that specialized disclosures must be provided to investors before they can trade that product. [00:01:38] Speaker 06: The commission, however, did not address that issue at all. [00:01:41] Speaker 06: It didn't address whether the effect of granting exemptive relief would mean that investors would not be provided with specialized disclosures that both the [00:01:52] Speaker 06: Securities and Exchange Commission and the CFTC have endorsed and have said must be provided to investors. [00:02:00] Speaker 06: The commission also failed to consider the fact that its order and the fact that it decided to proceed alone and not engage in joint action with the CFTC would lead to regulatory confusion. [00:02:13] Speaker 06: We have a situation here where Securities and Exchange Commission has said the Spikes product is a securities future, full stop. [00:02:21] Speaker 06: And it made that determination despite the fact that MJEX, the exchange where the Spikes product is traded, urged that the product be viewed as a regular future. [00:02:32] Speaker 06: In other words, it did not agree with MJEX on that position. [00:02:36] Speaker 03: Mr. Greenwald, is there, I mean, is it, do you believe that the SEC has the authority to exempt Spikes without working jointly with the CFTC? [00:02:47] Speaker 06: Your honor, I do. [00:02:49] Speaker 06: There is a statutory scheme of joint regulation for security futures, but there's also section 36 of the exchange, which I believe, despite Congress's intent, that security futures would be jointly regulated. [00:03:04] Speaker 06: I do think that allows the Securities and Exchange Commission to go at loan and to exempt products solely for the purposes of exchange. [00:03:12] Speaker 03: And so you think it's consistent [00:03:15] Speaker 03: with the act for both agencies to reach different conclusions about what is a security future? [00:03:21] Speaker 03: And for the SEC to separately exempt, you know, a security future from their rules? [00:03:30] Speaker 06: I do not think it's consistent with the statutory scheme for the agencies to reach different conclusions about how a product should be classified. [00:03:38] Speaker 06: I do think though, again, under section 36, that the SEC does have the authority to exempt [00:03:44] Speaker 06: even a security feature from certain exchange act requirements, if that answers your honor's question. [00:03:53] Speaker 06: So we have a situation here where the SEC has said these products are security features. [00:03:58] Speaker 02: So you started out by saying, I think that you have to look at the order alone. [00:04:04] Speaker 02: Yes, your honor. [00:04:05] Speaker 02: And the question is why? [00:04:06] Speaker 02: So suppose if the order alone gives an indication of what the explanation is, [00:04:13] Speaker 02: And then all you have to do is look at the underlying record materials and it's readily apparent what the only explanation could be as to why the exemptive order was issued. [00:04:24] Speaker 02: Does it make sense just to send it back for what everybody knows is going to happen? [00:04:29] Speaker 02: It might, but I'm just framing the question that way to get your [00:04:33] Speaker 06: answer on why is it that you would never look past the four corners of the order itself well i think you have to they have to at least give some indication of the rationale behind their decision that is required by section 706 of the apa and this court's president so i don't think it's sufficient to go back after the fact as counsel has done in their briefs come up with rationales that aren't discussed in the order and say [00:04:56] Speaker 06: This is what the commission certainly had in mind. [00:05:00] Speaker 02: And what are the rationales that you say aren't discussed in the order at all? [00:05:03] Speaker 06: For example, their briefs talk about tax treatment of this product. [00:05:08] Speaker 06: The exemptive order doesn't mention tax treatment whatsoever. [00:05:11] Speaker 06: And we think there's a real issue as to whether or not the SEC, by granting exemptive relief for the purposes of the Exchange Act, can change the tax treatment of this product. [00:05:23] Speaker 06: In fact, [00:05:24] Speaker 06: The section of the revenue code that the commission cites in its brief, section 1234B, essentially says, and this is 1234B subsection C, something is a security future if it meets the Exchange Act definition of a security future. [00:05:39] Speaker 06: The commission has said it does meet the Exchange Act definition of a security future. [00:05:44] Speaker 06: The next provision, D, says if something is a security future, it's taxed as a security future, not as a regulatory future. [00:05:52] Speaker 06: So that's an example of where we believe that a council on appeal has created a rationale that is completely missing from the executive. [00:06:00] Speaker 02: Well, suppose the SEC said that in its order. [00:06:02] Speaker 02: Suppose it said it did reference promoting competition. [00:06:06] Speaker 02: And then the next layer is, well, why does it promote competition? [00:06:09] Speaker 02: And it could be, well, it promotes competition because it creates a more equivalent tax treatment. [00:06:14] Speaker 02: And then there'd be a subsequent question that you're pointing out, which is, does it actually create a more equivalent tax treatment because maybe the IRS thinks that [00:06:21] Speaker 02: Actually, it's not, you can't do this. [00:06:24] Speaker 02: It doesn't result in the same tax treatment because you've already denominated a securities future. [00:06:28] Speaker 02: That's a separate question. [00:06:29] Speaker 02: But suppose the SEC in its order did do the second part, which is to say, promote competition, it did say that. [00:06:36] Speaker 02: Why does it promote competition to equalize tax treatment? [00:06:39] Speaker 02: And it explains, we think it will equalize tax treatment because even though we denominated a securities future, we think really the fact that we're doing the exemptive part of it kicks it back and makes it roughly equivalent to VIX. [00:06:51] Speaker 02: And then there'll be a separate question later if that's correct or not. [00:06:54] Speaker 02: I get that. [00:06:55] Speaker 02: But if they had done that second part, would that be enough to survive arbitrary and capricious review for this part of your challenge? [00:07:02] Speaker 06: I don't believe it would. [00:07:04] Speaker 06: I think the case law is clear, including the Susquehanna case, which we believe is squarely on point. [00:07:08] Speaker 06: It's not, it's not sufficient for us to speculate about what the agency might have done. [00:07:14] Speaker 02: No, but they didn't. [00:07:15] Speaker 02: They didn't. [00:07:17] Speaker 02: I'm giving you a hypothetical where we're not speculating anymore, at least as to the rationale for thinking that it's promoting competition is that they've been equalized tax treatment. [00:07:26] Speaker 02: I'm hypothesizing an order in which the order actually says the reason [00:07:31] Speaker 02: that we think competition would be promoted is that tax treatment would then be equalized. [00:07:37] Speaker 02: So that part of the explanation is actually in the order by hypothesis. [00:07:40] Speaker 02: I know it's not in there now. [00:07:41] Speaker 02: By hypothesis, it's in there. [00:07:43] Speaker 02: So why wouldn't that be enough? [00:07:44] Speaker 06: I think they would have to explain why, under Your Honor's hypothetical, that it would equalize tax treatment, and they would have to deal with the very statutory provisions that I just dealt with. [00:07:53] Speaker 06: or this explains the court that, and they would have to explain why they think they have the authority to alter the tax treatment under the revenue code. [00:08:00] Speaker 06: We don't think they have that. [00:08:02] Speaker 03: Is there anything in the record that suggests that, that, you know, even if they, that the SEC could do this or that by creating this exemption, it affects the tax treatment of the spice futures? [00:08:14] Speaker 06: Is there anything in the record? [00:08:15] Speaker 06: There are statements by MJEC referring to tax street and the need to equalize it, but there's nothing in the exemptive [00:08:22] Speaker 06: And they are just inclusory statements, even at MJAX's submissions. [00:08:27] Speaker 06: So there's no analysis there of the tax code or the commission's authority to alter the tax code. [00:08:35] Speaker 06: And again, by finding that these products, the spikes product is a security future, we think that locks in the tax treatment under section 1234B. [00:08:44] Speaker 02: Right, you think that, but then just get back to my hypothetical. [00:08:48] Speaker 02: So suppose they say, I just want to get to some point at which it would be enough, because there has to be some explanation that would be enough as to the tax treatment. [00:08:56] Speaker 02: Even if it turns out, and maybe you disagree with this, even if it turns out that it's legally wrong, if they believe that it will equalize the tax treatment, or if they think it's likely to equalize the tax treatment, they be in the SEC obviously. [00:09:09] Speaker 02: They create an order that says, [00:09:11] Speaker 02: I'd like to promote competition. [00:09:13] Speaker 02: The way to promote competition is to equalize things as much as possible. [00:09:16] Speaker 02: One of the key criteria is tax treatment because there's a disequilibrium unless there's a couple of tax treatment. [00:09:23] Speaker 02: We think it would equalize tax treatment. [00:09:25] Speaker 02: Here's how we analyze the provisions. [00:09:26] Speaker 02: It would actually equalize tax treatment in our view. [00:09:30] Speaker 02: That may turn out to be wrong, but that's our view. [00:09:32] Speaker 02: If they spell that out, then would that be enough as to this part of it? [00:09:36] Speaker 06: I think it would be enough as this part, as if the appeal would be different than we would contend, we would be arguing that they got it wrong, essentially. [00:09:43] Speaker 06: But here we have a different case. [00:09:45] Speaker 06: There's the absence of any analysis. [00:09:48] Speaker 06: So if they engage in the analysis and get it wrong, I agree, Your Honor, that is a different. [00:09:52] Speaker 03: And in Judge Srinivasan's hypothetical, would that be then a contrary to law challenge that you would bring? [00:09:58] Speaker 06: I think it would be contrary. [00:10:02] Speaker 06: I see I'm out of time. [00:10:05] Speaker 06: Unless you have other questions, I'll sit down and reserve my time for rebuttal. [00:10:08] Speaker 06: Thank you. [00:10:08] Speaker 06: Thank you. [00:10:11] Speaker 02: This is Mackenzie. [00:10:14] Speaker 04: Good morning, Your Honors. [00:10:14] Speaker 04: May it please the court, Rachel Mackenzie, for the SEC? [00:10:18] Speaker 04: There's no dispute in this case that the classification of these products and how they trade, whether as a security future or as a future, carries competitive consequences. [00:10:28] Speaker 04: 20 years ago, CBO sought and obtained relief so that its own product, VIX Futures, would trade as a regular feature rather than as a security feature. [00:10:37] Speaker 04: And the commission set it up in this order for this court to discern that it granted conditional and exempted relief to MJECs to level the competitive playing field so that SPICES Futures... Can you maybe just give me some background here? [00:10:52] Speaker 03: Why did the SEC and CFTC not coordinate as they did with the VIX Futures? [00:10:58] Speaker 03: I mean, there's a very strong directive from Congress for security futures to be coordinated between the CFTC and the SEC. [00:11:06] Speaker 03: And that's in fact what happened with Vic's futures. [00:11:09] Speaker 03: So why did the SEC go to loan here? [00:11:14] Speaker 04: The agencies disagree on whether or not under the statutory terms this product is a future or a security future. [00:11:20] Speaker 04: They reached different conclusions about that as not permitted to do under the statute. [00:11:24] Speaker 04: The statute grants concurrent jurisdiction. [00:11:26] Speaker 04: It requires the agencies to coordinate in certain particular ways. [00:11:30] Speaker 04: For example, as in the mixed order, if they're going to exclude an index from the definition of a narrow-based security. [00:11:37] Speaker 03: The fact that Congress gave the same exact definition in both acts and strongly, in a number of provisions, required coordination. [00:11:46] Speaker 03: I mean, is it actually consistent with the act for the agencies to reach two different conclusions about whether the same product is a security feature? [00:11:54] Speaker 03: I mean, how does that [00:11:55] Speaker 04: help you know how does that help you know people who are buying this product or people who are running this product i mean how does that work i think it is your honor because the congress gave the agencies concurrent jurisdiction it certainly didn't give the cfdc unilateral authority to decide whether something is a security or not nor did it give the commission unilateral authority and essentially what happened here is the agencies proceeded consecutively rather than concurrently but at the end of the day they reached roughly the same conclusion right the commission [00:12:25] Speaker 04: disagrees with the CFTC. [00:12:26] Speaker 04: It does think that this product meets the statutory definition of a security future, but it also recognized that practically speaking, there are reasons why it is appropriate to treat this product the same way that you would treat fixed futures, and that is that it trades fundamentally as a future rather than as a security future. [00:12:45] Speaker 04: I don't think the commission in this case created regulatory confusion. [00:12:48] Speaker 04: I think it eliminated it. [00:12:50] Speaker 04: CFTC went through its process. [00:12:52] Speaker 04: It determined that this should trade as a future. [00:12:54] Speaker 04: Um, the commission hadn't spoken at all. [00:12:58] Speaker 04: And then when it weighed in said, we actually think this is a security feature, but at the end of the day, we also think that you trade as a future and as a security. [00:13:05] Speaker 02: So apart from the regulatory confusion part of it, although if you have a follow-up, I don't want, um, there's, to me, there's a threshold question, which is that the order links the public interest to fostering competition in the words of the order. [00:13:23] Speaker 02: But then it doesn't say anything about how competition is fostered. [00:13:27] Speaker 02: It just doesn't. [00:13:28] Speaker 02: There's nothing in here to explain how competition is fostered. [00:13:33] Speaker 02: And I take it from the briefs, the argument is essentially, what's self-evident? [00:13:38] Speaker 02: Of course, competition is important, and that we can probably take as a given. [00:13:44] Speaker 02: But how does this foster competition? [00:13:46] Speaker 02: And the briefs have an explanation about margins and taxes. [00:13:50] Speaker 02: And we'll focus on taxes, because at least taxes are in the record. [00:13:53] Speaker 02: But there's not the link in the order to any of that. [00:13:58] Speaker 02: That just seems like a problem, because it leaves somebody wondering what the agency's explanation is as to why the public interest is being served, and it's incumbent upon the agency to explain. [00:14:13] Speaker 02: And it might be easy for the agency to do, but the order just doesn't contain that explanation. [00:14:19] Speaker 04: A couple of reactions to that, Your Honor. [00:14:21] Speaker 04: First of all, I disagree with the premise that the order doesn't say anything that suggests that these classifications matter for competition. [00:14:29] Speaker 04: Specifically about the margin requirements that actually is in the order, a joint appendix for the commission specifically exempts MJAX requirements for listing standards, including with respect to margin, because given that the order is going to allow it to trade as a future rather than as a security future, it would be improper to hold them to the same listing standards. [00:14:48] Speaker 04: for security features. [00:14:49] Speaker 04: So the margin piece is actually in there. [00:14:52] Speaker 04: Secondly, the order also at footnote 35 notes that the statute itself recognizes that these regulatory classifications matter for competitive purposes because the statutory definition of a narrow-based security index in Exchange Act Section 3855 includes a three-month grace period when an index is going to transition from broad to narrow-based, i.e. [00:15:14] Speaker 04: when a product is going to transition from being a future to a security [00:15:18] Speaker 04: There's no dispute that this classification matters deeply to market participants, and that matters in a way that affects how customers. [00:15:25] Speaker 02: There's no doubt about that, but let's just focus on taxes because that's been a big part of this. [00:15:30] Speaker 02: Is there anything about taxes? [00:15:32] Speaker 04: Not in your order. [00:15:33] Speaker 04: It is in the record. [00:15:34] Speaker 02: It's in the record, right? [00:15:35] Speaker 02: So you have to, and particularly it's in, I don't know, [00:15:38] Speaker 02: I already said VIX when apparently I was supposed to say VIX, so I don't know how I display. [00:15:44] Speaker 02: But the intervener, it's in the intervener's materials when they made the application to the commission. [00:15:51] Speaker 02: you can't look at the order and know that it has anything to do, that competition is fostered because it equalizes tax treatment in the view of the commission. [00:15:59] Speaker 04: I agree with that, your honor. [00:16:00] Speaker 04: I don't think that particular piece is necessary to be in the order for this order to survive arbitrary and viciousness review for this reason. [00:16:07] Speaker 04: The commission focus on the ways in which these classifications are different and matter. [00:16:13] Speaker 04: And that is consistent with the commission's expertise and what it particularly has control over. [00:16:18] Speaker 04: So that's the listing standard and marginal. [00:16:21] Speaker 04: As your honor's colloquy with Mr. Greenwald indicated, ultimately the question of tax treatment is for the IRS. [00:16:28] Speaker 04: The commission statement that they should trade as a future and not as a security future is a necessary condition for MDX to get the tax treatment it would like. [00:16:36] Speaker 04: It may not be sufficient, but that doesn't undermine the fact that it is necessary. [00:16:40] Speaker 02: You have a lot of stuff in your brief about tax treatment, and I think, right? [00:16:46] Speaker 02: And now it's sounding to me like none of that matters. [00:16:49] Speaker 04: It matters, Your Honor. [00:16:50] Speaker 04: It matters that it's in the record. [00:16:52] Speaker 04: The order says enough for this court to discern the commission's path, that it reached this conclusion because these regulatory classifications carry competitive significance. [00:17:01] Speaker 04: The order highlights one reason why that's true, that's the list of requirements, and this court can turn to the record in judging the reasonableness of the commission's decision and see another reason why that's true, and that's the tech. [00:17:12] Speaker 03: Ms. [00:17:12] Speaker 03: McKenzie, how do the listing requirements relate to competitiveness? [00:17:16] Speaker 03: It seems like the real [00:17:18] Speaker 03: gist of making them competitive is the tax treatment. [00:17:21] Speaker 03: I mean, listing requirements don't necessarily affect the competitiveness for consumers. [00:17:29] Speaker 03: So I'm not sure how that gets you to, you know, how does that get the SEC to supporting its claim that this is necessary for competition? [00:17:38] Speaker 04: I see my red light on. [00:17:39] Speaker 04: Can I answer your honor's question? [00:17:42] Speaker 04: The listing requirements as to margin do matter to customers because what margin essentially means is the higher the margin requirement, the more a customer has to pay upfront to take a position. [00:17:53] Speaker 03: But the main competitive difference is the tax treatment. [00:17:57] Speaker 04: That's a significant competitive difference. [00:17:59] Speaker 03: Do you have a sense, how is the IRS treating, what sort of tax treatment has been given to these futures over the past, I guess, a year and a half, two years? [00:18:07] Speaker 04: I actually do not know that. [00:18:08] Speaker 04: My colleague who is going to be speaking for NJUX next might have a better sense of that because it's NJUX with customers that would be costing that treatment. [00:18:17] Speaker 03: But you agree that the SEC cannot exempt securities futures for the purposes of the tax code. [00:18:25] Speaker 04: can't reach a determination about their taxes. [00:18:28] Speaker 04: What the commission did in this case is what it's authorized to do, which is exempt for most purposes, this product from the definition of the security future and state that it is the commission's intention that this trade predominantly is not. [00:18:40] Speaker 03: But that also means that the commission believes that this is a security future and for some purposes regulates it as a security future. [00:18:49] Speaker 03: For some limited purpose. [00:18:50] Speaker 03: And you agree that the SEC cannot exempt [00:18:54] Speaker 03: these from the tax code, because presumably the SEC doesn't have any exemptive authority over the tax code. [00:19:00] Speaker 04: Certainly agree with that, Your Honor. [00:19:01] Speaker 04: What we have the authority to do is exempt this product from a definition. [00:19:06] Speaker 04: And as my colleague for the tax code depends on how this product is defined. [00:19:14] Speaker 03: Well, but you've already said the CFTC can have its own definition. [00:19:16] Speaker 03: So presumably the IRS can have its own, you know, understanding of what a security future is. [00:19:21] Speaker 03: And I actually think the way the SEC has structured it is that the SEC believes it is a security future and then creates exemptions, but you've defined it as a security future. [00:19:31] Speaker 03: So it's hard to imagine then why it would also be exempted, why it would get the type of favorable tax treatment [00:19:38] Speaker 03: you're assuming that it will get in order to promote competition. [00:19:40] Speaker 04: Because the commission stated clearly in its order that the intent is for this product to trade as a feature and not a security feature. [00:19:47] Speaker 04: I do just want to, if I may, briefly roll back to the issue of the CFTC and its determination. [00:19:52] Speaker 04: I think deciding that the commission couldn't come to a different conclusion creates some issues here, because essentially because the CFTC went first, the situation that arises is that if the commission disagrees with the CFTC, as far as [00:20:08] Speaker 04: Sibo's argument goes that it only has two choices. [00:20:10] Speaker 04: It can either say, we agree with you that this is a future and cede all of its jurisdiction. [00:20:16] Speaker 04: Or it can say, we don't agree with you. [00:20:18] Speaker 04: This is the future. [00:20:18] Speaker 04: We think it's the security future, but then we can't grant any exemptive relief to allow these things to practically work. [00:20:24] Speaker 03: Of course, it's a big problem with independent agencies, right? [00:20:26] Speaker 03: Because if these agencies were under the control of the White House, then there would be some uniformity. [00:20:31] Speaker 03: It's not clear how to [00:20:34] Speaker 03: Historically, independent agencies are supposed to coordinate for the benefit of consumers and the public in a way that Congress has directed them to do. [00:20:43] Speaker 04: I do want to emphasize that the agencies do coordinate substantially. [00:20:46] Speaker 04: We did have discussions about this particular issue. [00:20:48] Speaker 04: In this particular case, we were not able to reach an agreement as to whether or not this was a future security feature, but we worked it out. [00:20:55] Speaker 04: This is exactly the way government agencies should behave. [00:20:58] Speaker 04: We have a disagreement about what this statutory language means, but we came to the same, we came to a practical solution that's mutually agreeable to both the CFTC, SEC, and MJIC. [00:21:08] Speaker 04: I realize CBO challenges that, but I think the practical result here is exactly what you would want to see. [00:21:15] Speaker 02: When you came together with VIX way back in the day, I guess, right? [00:21:18] Speaker 04: That's correct. [00:21:19] Speaker 02: More so than here, even though I take the point that the ultimate conclusion here in your view is more alignment than in disalignment. [00:21:26] Speaker 02: So on the tax part of it, [00:21:29] Speaker 02: If the SEC seems like you agree, the SEC can't dictate tax treatment by virtue of its classification, but it can predict tax treatment. [00:21:39] Speaker 02: That's essentially what's going on. [00:21:40] Speaker 02: It thinks that even if it classifies it as a securities future because of the exemptive part of it and because the goal is to treat it as a future, the assumption on the part of the SEC is that then it will gain futures tax treatment by virtue of how the IRS chooses to [00:21:57] Speaker 02: Treat it. [00:21:57] Speaker 02: That's what's going on. [00:21:58] Speaker 04: That's right. [00:21:59] Speaker 04: I think it's a reasonable expectation that it will get this tax treatment. [00:22:02] Speaker 04: It's a necessary precondition to it getting to that tax treatment, whether or not it actually happens. [00:22:06] Speaker 04: We don't know, but we're not required to be able to perfectly. [00:22:09] Speaker 02: So is that the type of thing? [00:22:10] Speaker 02: It's not in the order. [00:22:12] Speaker 02: Are you is your view that the SEC would have been irresponsible for the SEC to put that in the order because it doesn't have [00:22:19] Speaker 02: authority? [00:22:20] Speaker 04: No, your honor, don't think it would have been irresponsible for this. [00:22:22] Speaker 04: It could have. [00:22:24] Speaker 04: There's a practically limitless detail that the commission could have put in this order. [00:22:28] Speaker 04: The question is what it's fired. [00:22:30] Speaker 02: And so it could have done that. [00:22:32] Speaker 02: And it just didn't. [00:22:33] Speaker 02: There's not a word about tax. [00:22:35] Speaker 02: That is correct. [00:22:36] Speaker 02: Okay. [00:22:37] Speaker 02: Um, can I ask you? [00:22:38] Speaker 02: So the order does say in linking the [00:22:46] Speaker 02: statutory goal of public interest to the explanation for the exemption. [00:22:52] Speaker 02: It does say what it's going to do is foster competition. [00:22:55] Speaker 02: That's the way in which the public interest is furthered, I assume. [00:22:59] Speaker 02: So what if the order didn't say that either? [00:23:03] Speaker 02: It talks about the public interest, but it doesn't say anything about facilitating greater competition or foster competition. [00:23:10] Speaker 02: Would that be okay? [00:23:12] Speaker 02: Because someone could say, well, all you have to everybody understands. [00:23:15] Speaker 02: Of course, this is a competitive landscape. [00:23:17] Speaker 02: Just look at the history. [00:23:19] Speaker 02: Look at fix. [00:23:20] Speaker 02: Everybody knows what's going on. [00:23:21] Speaker 02: Look at index application. [00:23:23] Speaker 02: That's obviously what's going on. [00:23:25] Speaker 02: The order didn't have to say that just. [00:23:28] Speaker 02: Assume it to be true, because, of course, that's the backdrop against which the commission. [00:23:32] Speaker 04: I think if your honor's hypothetical is essentially this case, it's just that the commission has just said the same under section 36 has to be in the public interest and investor protection. [00:23:43] Speaker 04: We find that this meets those and so we're granting exempted relief. [00:23:46] Speaker 02: And then we have some conditions and spell out all the conditions. [00:23:50] Speaker 04: I think that would be a lot closer to what this court was dealing with in Dixon and in Butte County in Taurus records. [00:23:56] Speaker 04: It would be a much closer case than this one, but I think in this case, the commission did provide its rationale for why it made that ultimate finding that this was consistent with Section 36. [00:24:06] Speaker 02: And that's the fault of the competition. [00:24:08] Speaker 04: That's that Spike's futures would need to trade clear and settle as a futures contract rather than as a security future to serve as an alternative to the only comparable incumbent volatility product. [00:24:19] Speaker 02: And what if there was no reference to, I mean, you pointed out something about listing and margins. [00:24:24] Speaker 02: If there weren't that, [00:24:26] Speaker 04: That's a good question. [00:24:28] Speaker 04: I'm not sure that the commission is required to go deeper than this is necessary to foster competition. [00:24:33] Speaker 04: These things need to be comparable. [00:24:35] Speaker 04: So they need to have the same regulatory treatment. [00:24:37] Speaker 04: But this order does go that extra step and points out one way in which these different regulators. [00:24:41] Speaker 02: That's the listing point. [00:24:42] Speaker 04: And it also, again, points to the fact that the CFMA itself in the Exchange Act indicates that these classifications matter deeply to market expense. [00:24:54] Speaker 04: If there are no further questions. [00:24:56] Speaker 04: Thank you, Your Honor. [00:24:57] Speaker 02: Thank you, Mr. Stancel. [00:25:18] Speaker 05: May it please the court, Mark Stansel for Intervenor, which we call MJECS. [00:25:23] Speaker 05: I'd like to address two primary points, subject to the court's questions. [00:25:27] Speaker 05: First, I'd like to explore this competition issue in a little more detail and explain why we believe that the commission's order and ultimate conclusion is rock solid, that this product, proving it to trade as a future, was absolutely essential to competition. [00:25:41] Speaker 05: And second, I'd like to spend just a minute on the practical reality of awarding any remedy here, but in particular, the vacancy remedy that Thibaut was seeking. [00:25:49] Speaker 05: So first, Your Honor, let me start by addressing competition. [00:25:52] Speaker 05: And I'd like to start maybe by pressing back on your premise that the order doesn't explain the basis for the competition finding. [00:26:00] Speaker 05: And part of the reason that it doesn't get a lot of discussion in the orders, because not a lot of discussion is required. [00:26:06] Speaker 05: So Thibaut's primary attack in its brief is to try to redefine the market. [00:26:11] Speaker 05: to say, well, the market here is volatility in the S&P 500. [00:26:16] Speaker 05: Well, that's not correct. [00:26:17] Speaker 05: And that's not how the commission defined competition and the relevant market in its order. [00:26:21] Speaker 05: Here's what it said. [00:26:22] Speaker 05: The commission said, first, it defined MJEX's request. [00:26:26] Speaker 05: What do you mean? [00:26:27] Speaker 05: This is day one. [00:26:28] Speaker 05: It's literally the first paragraph of the order. [00:26:33] Speaker 05: It says that NJEX has asked the request to seek permission for listing and trading contracts for sale for future delivery on the spike index. [00:26:42] Speaker 05: And then concludes that the product has the potential to offer competition with the only comparable product, pardon me, only comparable incumbent volatility product on the market. [00:26:53] Speaker 05: So the commission defines the question as, [00:26:57] Speaker 05: S&P volatility futures. [00:26:59] Speaker 05: And I'm going to spend just a second trying to explain the difference between futures and what SIBO suggests would be other potential alternatives. [00:27:06] Speaker 05: It's apples to oranges. [00:27:09] Speaker 05: So SIBO says that actually the question is just S&P index volatility generally and suggests ETFs, ETNs, options, things like that. [00:27:19] Speaker 05: In the financial world, which is a little esoteric, I grant you, that is like, you know, I use the [00:27:26] Speaker 05: this analogy apples to oranges, it's like apples to sell into rutabaga. [00:27:30] Speaker 05: An option has a very different market dynamic. [00:27:34] Speaker 05: It's used by different investors. [00:27:36] Speaker 05: Futures, volatility futures are used by institutional investors and have a totally different risk profile. [00:27:42] Speaker 05: So until a few weeks ago or a few months ago, rather, I'm not sure I would have known the difference, but to people in the industry, this doesn't require explanation. [00:27:50] Speaker 05: And what is undisputed is that there is before the spikes product, one product [00:27:55] Speaker 05: one and only one that picks future in that market. [00:27:59] Speaker 05: And that's because they have an exclusive license from S&P. [00:28:01] Speaker 03: So, Mr. Sansley, even if we assume that competition is a real, you know, of real importance here, that that assumption of the SEC is correct, I mean, why does MJECS not challenge the SEC's threshold determination that the spikes future is a securities future? [00:28:19] Speaker 05: But we did try to persuade them of that. [00:28:21] Speaker 05: The way, if you recall, what happened was we self-certified with the CFTC that this was just a future. [00:28:26] Speaker 05: The commission objected. [00:28:27] Speaker 05: We pulled the product and spent the better part of a year trying to persuade them. [00:28:31] Speaker 05: But they do have this exemptive authority, and I think my colleague is quite correct. [00:28:36] Speaker 03: The main reason that you cite in your brief for the need for the exemptive authority is the tax treatment. [00:28:42] Speaker 03: So I'm curious, I mean, what has been the tax treatment over the past year plus? [00:28:47] Speaker 05: My understanding is that you're taxed as futures. [00:28:49] Speaker 05: And I think that's consistent with the definition. [00:28:53] Speaker 05: I'm no tax lawyer, but I think it's consistent with the definition of 1256 contracts. [00:28:59] Speaker 05: But I grant you something would have to give, and there's nothing in the statute that says that the commission can't exercise its exemptive authority to preserve its opinion that these ought to be futures, but to trade as futures contracts. [00:29:13] Speaker 05: So when something trades as a futures contract, it goes to a specific kind of exchange regulated by the CFTC in the day to day. [00:29:21] Speaker 05: And so that is my understanding of how these things are, in fact, treated in reality. [00:29:25] Speaker 03: And this exemptive authority has, in the real world, created the tax consequence that your client is seeking? [00:29:34] Speaker 05: Yes, that's my understanding. [00:29:36] Speaker 05: The reason, Your Honor, if I may continue just a moment, the reason that they don't have to go deeper into competition is because we're really at day one of introducing any competition into the futures volatility market. [00:29:49] Speaker 05: doesn't require a lot of explanation to say it is better to have two genuine competitors than one. [00:29:54] Speaker 02: That is why with respect to that part of it may be self evident. [00:29:58] Speaker 02: But then there's the question of why is why does this make them genuine competitors? [00:30:02] Speaker 02: And that's because tax treatment. [00:30:04] Speaker 02: That's the main one. [00:30:07] Speaker 05: Respectfully, your honor, if it's a futures product and trades as a future, then it is a competitor. [00:30:12] Speaker 05: It would also require [00:30:14] Speaker 05: So, if you treat it as a security future, it will not trade on a futures exchange. [00:30:20] Speaker 05: So, they're literally, and CBO cannot point to any, there is no such thing as a security future product for S&P volatility. [00:30:29] Speaker 05: The thing just doesn't exist for this reason. [00:30:33] Speaker 05: The commission have explained, you know, that it has to trade as a future. [00:30:37] Speaker 05: They did it. [00:30:38] Speaker 05: They have to go the next step and say, here are all the consequences of that. [00:30:41] Speaker 05: I don't think so. [00:30:42] Speaker 05: There is an additional point in the word that be helpful. [00:30:45] Speaker 05: It would be helpful, but I think you're under the. [00:30:48] Speaker 05: in the context of an informal adjudication as the commission has explained. [00:30:51] Speaker 05: I don't think they're required. [00:30:52] Speaker 02: No, no, I don't think they have to do everything that's helpful. [00:30:54] Speaker 02: I just want to make sure I understand your argument that it actually would have been helpful to do that. [00:30:58] Speaker 05: Yes, but I would also point your honor to page three of the joint appendix in which the commission also explains that adding second product, this is a [00:31:08] Speaker 05: I don't know if you will look at the first column on the left, eight or nine lines down. [00:31:12] Speaker 05: It says, in addition, the introduction of an additional volatility product in the market should lower transaction costs for market participants. [00:31:19] Speaker 05: That was a big part of the submission. [00:31:21] Speaker 05: May I spend 30 seconds on the remedy issue? [00:31:24] Speaker 05: If it's 30 seconds, yes. [00:31:26] Speaker 05: Thank you. [00:31:27] Speaker 05: I just want to explain how competition works when trying to dislodge a monopolist. [00:31:31] Speaker 05: So having an S&P volatility futures product is one step of a multi-step, multi-year process. [00:31:39] Speaker 05: And it is hard to dislodge an incumbent that's enjoyed an 18-year monopoly. [00:31:44] Speaker 05: So a remand we think is not necessary, but a vacatur would be catastrophic. [00:31:49] Speaker 05: It wouldn't just set us back 30, 60, 90 days. [00:31:52] Speaker 05: It could have set us back years with great injury to competition. [00:31:55] Speaker 05: And if your honors would just put at some point to JA87, which is mishealed appendix. [00:32:01] Speaker 03: The fact that there are real consequences to vacatur doesn't mean we don't just remand without vacatur because it would be difficult. [00:32:10] Speaker 03: I mean, if we found that the order is arbitrary and capricious in some important way, then isn't the ordinary remedy to vacate? [00:32:19] Speaker 05: Ordinarily, yes, Your Honor, but not where doing so would actually undermine the purposes of the act itself and where the authority... That's not our standard, though, for women without vacator. [00:32:29] Speaker 05: Correct, Your Honor. [00:32:30] Speaker 05: I think this is an allied signal, I think. [00:32:32] Speaker 05: I think it would be entirely disruptive to the Marquis. [00:32:34] Speaker 05: There are enormous reliance interests on not only our product, but on regulatory clarification of this area. [00:32:40] Speaker 05: So I think under the ordinary reliance factors, I think it would be incredibly disruptive. [00:32:46] Speaker 05: It would dislodge pricing improvements that have happened in the market. [00:32:49] Speaker 05: There are people who are relying on our product. [00:32:51] Speaker 05: There are products that in turn rely on our product. [00:32:53] Speaker 05: So we would be unscrambling a lot of eggs. [00:32:56] Speaker 05: And I think that is in the core of why the corporate would. [00:32:59] Speaker 02: Can you just practically spell out the reliance? [00:33:01] Speaker 02: I mean, that's because of the nature [00:33:03] Speaker 02: of a future that it's by definition forward, looking so people have made transactions in reliance on the regulatory treatment as although classified as a securities future trading as a future. [00:33:13] Speaker 05: Absolutely. [00:33:15] Speaker 05: And it would undo those expectations. [00:33:18] Speaker 05: Yes. [00:33:18] Speaker 05: And so for example, when this product first came on in 2019 and started to trade required, I think all of somebody's Thanksgiving holiday to try to unwind even the first day of trading. [00:33:29] Speaker 05: And here we're talking about two years of product, but then also [00:33:33] Speaker 05: There are, I believe ETFs that incorporate the spikes volatility future product in that ETF. [00:33:38] Speaker 05: So it's not just our product, it's a product. [00:33:41] Speaker 05: They're derivative of this. [00:33:42] Speaker 05: Yes. [00:33:42] Speaker 05: Derivative of a derivative. [00:33:44] Speaker 05: Yeah. [00:33:45] Speaker 05: If the court has no further questions. [00:33:48] Speaker 05: Thank you, Mr. Stansel. [00:33:57] Speaker 02: Mr. Greenwald, we'll give you two minutes for rebuttal. [00:33:59] Speaker 06: I'd reserve three, but- I think you'd used up some of that already. [00:34:04] Speaker 06: A few points, Judge. [00:34:07] Speaker 06: First, there was mention by Ms. [00:34:09] Speaker 06: McKenzie of agreement between the agencies to disagree. [00:34:13] Speaker 06: There is nothing about an agreement between the agencies for discussions between the SEC and the CFTC in the record in terms of what the CFTC's position is. [00:34:22] Speaker 06: And the CFTC has not stated a position as to whether or not this product is a regular future or a security future. [00:34:30] Speaker 06: There was also a lot of discussion by both Ms. [00:34:33] Speaker 06: Mackenzie and Mr. Stancil about competitive facts and competitive analysis. [00:34:39] Speaker 06: I'd just like to remind the panel again, there is no competitive analysis in the exemptive order itself. [00:34:45] Speaker 06: There's no definition of the competitive market. [00:34:47] Speaker 06: Council and I may disagree about what the competitive market should be defined as, but the reality is the exemptive order says absolutely nothing about the issues. [00:34:57] Speaker 06: And in fact, it doesn't even refer to the VIX futures by name. [00:35:03] Speaker 06: With regard to the tax treatment, Ms. [00:35:05] Speaker 06: McKenzie completed, I think, correctly that the SEC can't determine tax treatment, but their briefs are all about tax treatment. [00:35:13] Speaker 06: And then their argument turns into, well, don't look at the order, you know, look at the record on tax treatment. [00:35:20] Speaker 06: And that argument is directly contrary to the Supreme Court's holding in the state farm case, the Motor Vehicle Association case, where the court said, you can't look beyond what the agency has said to the record and come up with justifications to support the agency's gap. [00:35:37] Speaker 06: And finally, with regard to the vacator versus remand remedy point, again, there is no evidence of a catastrophic market effect that would occur if the exemptive order were vacated. [00:35:53] Speaker 06: In fact, the evidence is directly contrary. [00:35:56] Speaker 06: In 2019, MJEC shut the product down on one day's notice when the SEC presumably [00:36:03] Speaker 06: said what are you doing we think this is a security future why are you trading it as a record so there is no evidence of a catastrophic market but how long had it been happening at that time it had been trading for two weeks but remember these are futures your honor so they trade to expiration contracts continually expire and although it's outside the record as well and i'm leery about going outside the record there is not a significant open interest uh historically in the spikes product it's not something that has have [00:36:34] Speaker 02: So for this part of the inquiry, I think almost by nature, we have to go outside the record to some extent because no one's gonna have created a record that's geared towards the question of vacator, I don't think. [00:36:44] Speaker 02: So what would be the practical consequence of a vacator in your view? [00:36:48] Speaker 02: You think it would be, there would have to be transitions that would have to be unwound, I take it. [00:36:53] Speaker 02: Everybody agrees with that. [00:36:54] Speaker 06: Well, they would have to close their positions out. [00:36:56] Speaker 06: They would not be able to open any new positions and they'd have to close their existing positions out, which is exactly presumably what happened in 2019. [00:37:04] Speaker 06: in one day. [00:37:06] Speaker 06: The record is that the SEC asked MJECs to stop trading on November 28th and they stopped trading on November 29th. [00:37:17] Speaker 06: So again, the idea that this should continue trading pursuant to an exemptive order that is invalid because of some catastrophic market effect, there's just no evidence. [00:37:30] Speaker 02: All right. [00:37:30] Speaker 02: Thank you, counsel. [00:37:31] Speaker 02: Thank you to all counsel. [00:37:33] Speaker 02: We'll take this case under submission.