## Facts

- The Commodity Futures Trading Commission (CFTC) regulates futures and options on futures; the Securities and Exchange Commission (SEC) regulates securities and options on securities.
- Congress codified the Shad–Johnson compromise, allocating jurisdiction over options based on the underlying instrument (securities vs. futures).
- Securities exchanges proposed trading a new equity-index product called Index Participations (IPs), designed to track a stock index without buying each component stock.
- The SEC approved listing and trading of IPs on the Philadelphia Stock Exchange and related exchanges, treating IPs as securities under the Securities Exchange Act.
- The Chicago Mercantile Exchange (CME), the Board of Trade of the City of Chicago (CBOT), and the Investment Company Institute (ICI) petitioned for review, arguing IPs were futures (or options on futures) within the CFTC’s exclusive jurisdiction and that the SEC exceeded its authority.

## Issues

1. Whether IPs were properly characterized as securities (or options on securities) within the SEC’s authority rather than futures within the CFTC’s exclusive authority.
2. Whether the SEC’s approval order conflicted with the jurisdictional allocation reflected in the Shad–Johnson statutory scheme.
3. Whether the SEC’s classification and approval of IP trading was arbitrary, capricious, or otherwise contrary to law.

## Decision

- The Seventh Circuit denied the petitions for review and affirmed the SEC’s order.
- The court held the SEC reasonably treated IPs as securities representing interests in a portfolio of stocks tracking an index, not as futures contracts.
- The court concluded the SEC’s action was consistent with the Shad–Johnson allocation and did not intrude on the CFTC’s exclusive jurisdiction.
- The court found the SEC’s reasoning adequate under deferential review and not arbitrary or capricious.

## Legal Principles

- Classification of novel financial instruments may turn on functional characteristics (ownership-like interest in securities versus standardized hedging contract), not only payoff similarity.
- CFTC exclusivity applies when an instrument is properly treated as a futures contract; it does not bar SEC regulation of instruments reasonably classified as securities.
- Where statutory terms and regulatory boundaries are ambiguous in a technical domain, courts generally defer to a reasonable agency interpretation of its governing statute.
- Under the Shad–Johnson framework, jurisdiction over options follows the characterization of the underlying instrument; if the underlying is a security, options on it fall within SEC authority.

## Conclusion

The court upheld the SEC’s approval of index participation shares on securities exchanges, accepting the SEC’s reasonable classification of the product as a security and holding that the order neither violated the CFTC/SEC jurisdictional division nor failed deferential administrative-law review.


Chi. Mercantile Exch. v. SEC, 883 F.2d 537 (7th Cir. 1989)