A recent appeals court decision has overturned a 2020 order by the U.S. Securities and Exchange Commission (SEC) that exempted the SPIKES Volatility Index from being classified as a security future. The ruling deemed the SEC’s actions as “arbitrary and capricious,” creating potential implications for other pending cases between crypto firms and regulators.
On July 28th, a three-judge panel on the U.S. Court of Appeals for the D.C. Circuit invalidated the SEC order, with Chief Judge Sri Srinivasan writing that the Commission failed to adequately explain its rationale and did not properly consider the confusion its decision could cause.
The SEC’s 2020 order had spared the SPIKES Index, a measure of expected 30-day volatility on the S&P 500 created by T3 Index, from being classified as a security future. This freed SPIKES from the regulatory burdens placed on security futures like high taxes.
According to the SEC, the move was meant to encourage competition among volatility indexes. However, the recent ruling found the regulator’s justification lacking. Under the court’s decision, SPIKES Index futures will now be categorized as security futures rather than regular futures, as reported by Cointelegraph.
Implications for Crypto Regulation
The “arbitrary and capricious” finding also raises questions around other SEC actions related to cryptocurrencies. Two of the three appellate judges are overseeing a separate case filed by Grayscale Investments concerning the SEC’s rejection of a Bitcoin ETF application.
Grayscale has argued that the SEC exceeded its authority and that denying the ETF was unlawful. Legal experts believe the appeals court’s willingness to overturn the SPIKES decision as unjustified shows a skepticism toward SEC reasoning that could work in Grayscale’s favor.
More broadly, the ruling provides further evidence that the SEC does not have full discretion when it comes to crypto oversight. Other companies like Ripple have also taken the agency to court over what they consider capricious rulings, indicating growing pushback against SEC crypto policy.
SPIKES Now Considered Security Future
By classifying SPIKES as a security future rather than a regular future, the index becomes subject to regulation by the Commodity Futures Trading Commission (CFTC) rather than the Commodity Exchange Act (CEA).
Security futures face stricter rules around trading, taxes, and margin requirements. As a result, market participants using SPIKES Index futures will now need to transition their holdings within three months.
Exchanges that offered SPIKES products may also face adjustments to comply with the new designation. However, major platform Cboe argued that “nothing has changed” in regards to its ability to list SPIKES options for trading.
Volatility Indexes: An Overview
While less well-known than benchmarks like the S&P 500, volatility indexes play an important role in finance. They aim to quantify market instability using options pricing models.
The most prominent volatility measure is the VIX Index, referred to as the “fear gauge” of the stock market. It represents the 30-day expected volatility of the S&P 500 calculated by the Cboe.
Other major volatility benchmarks include the Cboe VELES Index and the Nasdaq Volatility Index. More specialized versions also exist, like the Cboe Crude Oil ETF Volatility Index for oil price swings.
By providing a numeric representation of market turmoil, volatility indexes help investors evaluate risk and hedge against volatility. Numerous tradable products have emerged to gain exposure to short and long-term volatility.
Conclusion
The D.C. Circuit’s reversal of the SEC’s SPIKES decision shows that regulators do not have free rein when it comes to overseeing nascent markets like crypto. It also indicates that courts are willing to question the reasoning behind SEC rulings.
With other major crypto cases currently making their way through the courts, the ruling may be a positive sign for firms pushing back against what they see as unjustified SEC actions. However, the uncertainty around crypto’s regulatory fate is likely to persist for some time.
