CFTC grants passive software providers regulatory leeway

The US Commodity Futures Trading Commission (CFTC) is giving providers of passive trading software greater certainty about their legal position. The Market Participants Division is publishing Staff Letter 26-25, under which the exemption previously granted specifically to the crypto wallet Phantom is now broadly available to all eligible providers of passive software, including outside the crypto sector.

In brief:

• The CFTC is extending an existing no-action exemption to all passive software providers that meet certain conditions.
• Under this exemption, providers do not have to register as an introducing broker.
• The software may not route orders, manage assets or generate buy or sell signals.

What the no-action position entails

A no-action position means that the regulator indicates it will not recommend enforcement action, provided that certain conditions are met. In this case, the CFTC says that providers of passive software do not need to register as an introducing broker or as an associated person thereof.

According to the official CFTC announcement, the exemption applies exclusively to the offering and marketing of software that enables users to trade through registered futures commission merchants, introducing brokers and designated contract markets.

Strict conditions attached to the software

The exemption applies only when the software functions purely as an interface. This means that users can submit orders directly for CFTC-regulated derivatives, including event contracts and perpetual contracts, as are also offered on various crypto exchanges.

In addition, the software may not manage user funds, generate explicit buy or sell signals, or make its own decisions about the execution or routing of orders. As soon as software actively intervenes on any of these points, the exemption lapses.

Broader application than the earlier exemption

The new letter builds on Staff Letter 26-09, which was previously issued specifically for Phantom. With the publication of Staff Letter 26-25, the CFTC makes clear that the arrangement is not limited to one party or to the crypto sector, but applies to a broader group of software providers that meet the stated conditions.

The measure gives providers of trading software in particular more clarity about when they fall outside the regular registration requirement for brokers. This is relevant now that the boundary between technical service provision and financial intermediation cannot always be sharply drawn in practice.