CFTC Lacks Jurisdiction Over TRS On ETFs And Custom Baskets

In Short

The Situation: The civil action of the Commodity Futures Trading Commission ("CFTC") against Archegos Capital Management LP and its CFO is but one of many civil and criminal matters arising out of Archegos's catastrophic failure in early 2021.

The Result: The U.S. District Court for the Southern District of New York recently dismissed this action with prejudice on the basis that the CFTC does not have jurisdiction over total return swaps ("TRS") on exchange-traded funds ("ETFs") and certain "custom baskets," which the court determined to be security-based swaps under the exclusive jurisdiction of the Securities and Exchange Commission ("SEC").

Looking Ahead: Although not necessarily surprising, the decision is one of first impression and provides important guidance to market participants seeking certainty of jurisdiction and rule-set compliance requirements. The decision also shines a light on the somewhat jagged border-line between "swaps" and