e8-9981

[Federal Register: May 7, 2008 (Volume 73, Number 89)]

[Notices]

[Page 25669-25674]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr07my08-57]

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COMMODITY FUTURES TRADING COMMISSION

Concept Release on the Appropriate Regulatory Treatment of Event Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for Public Comment.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

is soliciting comment on the appropriate regulatory treatment of

financial agreements offered by markets commonly referred to as event,

prediction, or information markets.\1\ For ease of reference and to

avoid classification issues, these financial agreements are referred to

herein as event contracts. In general, event contracts are neither

dependent on, nor do they necessarily relate to, market prices or

broad-based measures of economic or commercial activity.\2\ Rather,

event contracts may be based on eventualities and measures as varied as

the world's population in the year 2050, the results of political

elections, or the outcome of particular entertainment events.\3\ The

Commission's staff has received a substantial number of requests for

guidance on the propriety of trading various event contracts under the

regulatory rubric of the Commodity Exchange Act (CEA or Act). Given the

substantive and practical concerns that may arise from applying federal

regulation to event contracts and markets, the Commission believes that

it is appropriate to solicit and consider the public's comments in

advance of issuing any definitive guidance.

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\1\ See Michael Gorham, Event Markets Campaign for Respect,

Futures Industry Magazine (Jan./Feb. 2004); Justin Wolfers and Eric

W. Zitzewitz, Prediction Markets, 18 J. Econ. Persp. 107 (Spring

2004); Robert W. Hahn and Paul C. Tetlock, Using Information Markets

to Improve Public Decision Making, AEI-Brookings Joint Center for

Regulatory Studies Working Paper 04-18 (March 2005); Hal R. Varian,

Can Markets Be Used to Help People Make Nonmarket Decisions?, The

New York Times (May 8, 2003).

\2\ The term event contract is not intended to encompass

contracts that generate trading prices that predictably correlate

with market prices or broad-based measures of economic or commercial

activity, or contracts which substantially replicate other commodity

derivatives contracts, such as binary options on exchange rates or

the price of crude oil. The aforementioned contracts are

unambiguously subject to CFTC regulation.

\3\ See, e.g., Retired claims list at the Foresight Exchange,

available at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.ideosphere.com/fx-bin/ListClaims.

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DATES: Comments must be received by July 7, 2008.

ADDRESSES: Comments should be sent to the Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,

DC 20581, Attention: Office of the Secretariat. Comments may be sent by

facsimile to 202.418.5521, or by e-mail to [email protected]

Reference should be made to the ``Concept Release on the Appropriate

Regulatory Treatment of Event Contracts.'' Comments may also be

submitted through the Federal eRulemaking Portal at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Bruce Fekrat, Special Counsel, Office

of the Director (telephone 202.418.5578, e-mail [email protected]),

Division of

[[Page 25670]]

Market Oversight, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Purpose of the Release

Since 2005, the Commission's staff has received a substantial

number of requests for guidance on the propriety of offering and

trading financial agreements that may primarily function as information

aggregation vehicles. These event contracts generally take the form of

financial agreements linked to eventualities or measures that neither

derive from, nor correlate with, market prices or broad economic or

commercial measures. Event contracts have been based on a wide variety

of interests including the results of presidential elections, the

accomplishment of certain scientific advances, world population levels,

the adoption of particular pieces of legislation, the outcome of

corporate product sales, the declaration of war and the length of

celebrity marriages. In response to the various requests for guidance,

and to promote regulatory certainty, the Commission has commenced a

comprehensive review of the Act's applicability to event contracts and

markets. To further its review, the Commission is issuing this release

to solicit the expertise of interested persons, including CFTC-

registered markets, exempt markets, over-the-counter derivatives

dealers, capital market participants, legal practitioners, state and

federal regulatory authorities, academicians and research institutions

with respect to the practical and regulatory issues relevant to

regulating event contracts and markets.

Broadly speaking, the Commission must determine:

1. Whether event contracts are within the Commission's jurisdiction

and if so, why (or why not)?

2. If event contracts are within the Commission's jurisdiction,

should there be exemptions or exclusions applied to them and if so, why

(or why not)?

3. How should the Commission address the potential gaming aspects

of some event contracts and the possible pre-emption of state gaming

laws?

The Commission urges interested persons to provide detailed and

comprehensive comments that will assist the Commission in conducting

its review and analysis of the Commission's regulatory purview over

event contracts, the interests that may appropriately underlie

Commission-regulated transactions, and the appropriate regulatory

treatment of markets that may offer event contracts.

B. CFTC Experience With Event Contracts

The Iowa Electronic Markets (IEM), an electronic trading facility

that functions as an experimental and academic program, is one of the

better known and oft discussed real-money event markets currently in

operation.\4\ The IEM operates in part pursuant to a 1993 no-action

letter issued by Commission staff which, without asserting jurisdiction

or describing the potential parameters of the Commission's regulatory

purview over the market, allows the IEM to list various event contracts

subject to certain conditions and limitations for covered contracts.\5\

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\4\ The IEM is run by the University of Iowa Departments of

Accounting and Economics and the University's College of Business

Administration.

\5\ CFTC Staff Letter No. 93-66 [1992-1994 Transfer Binder]

Comm. Fut. L. Rep. (CCH) ] 25,785 (June 18, 1993). This no-action

letter superseded the operative terms of a more limited letter

issued to the IEM in 1992. The 1993 letter's relief extends to IEM

contracts based on political elections, economic indicators, and

certain currency exchange rates. The letter requires that the IEM

limit access to any one submarket to between 1,000 and 2,000

traders. The letter also sets the maximum amount that any single

participant can risk in any one submarket at five hundred dollars.

The letter makes clear that relief is premised on, among other

factors, the IEM's representations concerning the market's specific

manner of operation and academic purpose, and the assurance that the

IEM will not receive any profit or other form of compensation from

its activities.

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The IEM continues to be most recognized for its presidential

election contracts. The IEM offers a vote share contract and a winner-

take-all contract for the 2008 U.S. presidential election cycle. Its

vote share contract is ultimately associated with the candidates that

will be nominated by each party. Each vote share contract has a maximum

value of $1 and a contract payout that is directly based on the

percentage of the popular vote received by each of the two major party

candidates. For instance, a contract for a candidate who receives 40%

of the popular votes cast for both candidates will be worth $.40 at

settlement.

In contrast, the IEM's 2008 presidential election winner-take-all

contract will have a value of either $1 or $0 at settlement. The IEM's

winner-take-all-contract is also associated with a specific candidate,

but instead of having a payout that is tied to a particular percentage

of the popular vote received by each candidate, the contract will

distribute a fixed payout of $1 to its holder if and only if the

candidate referenced by the contract receives a greater percentage of

the popular vote cast. Although the IEM's presidential election

contracts are imperfect vehicles for the discovery of information,

there is some consensus on the question of whether the IEM's contracts

can function capably as predictive tools.\6\ Indeed, trading data

generated by some IEM presidential election contracts arguably have

produced better predictive indicators than data obtained from

professional polling organizations.\7\

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\6\ See, e.g., Michael Abramowicz, Information Markets,

Administrative Decision Making, and Predictive Cost-Benefit

Analysis, 71 U. Chi. L. Rev. 933, 950 (2004).

\7\ See Cass R. Sunstein, Group Judgments: Statistical Means,

Deliberation, and Information Markets, 80 N.Y.U. L. Rev. 962, 1029-

31 (June 2005).

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II. Commodity Options and Futures and the Attributes of Event Contracts

The Commission, with some exceptions, has exclusive jurisdiction

over two relevant types of derivative instruments--commodity options

and commodity futures contracts. Section 4c(b) of the Act gives the

Commission plenary jurisdiction over commodity options, and provides

that ``[n]o person shall * * * enter into * * * any transaction

involving any commodity regulated under this Act which is of the

character of, or is commonly known to the trade as, an option * * *

contrary to any rule, regulation or order of the Commission[.]''

Section 2(a)(1)(A) of the Act provides that the Commission shall have

exclusive jurisdiction with respect to accounts, agreements, and

transactions (including options) involving contracts of sale of a

commodity for future delivery. Event contracts, depending on their

underlying interests, can be designed to exhibit the attributes of

either options or futures contracts.

A significant number of event contracts are structured as all-or-

nothing binary transactions commonly described as binary options.\8\

Binary event contracts typically pay out a fixed amount when an outcome

either occurs or does not occur. The trading of such contracts can

facilitate the discovery of information by assigning probabilities,

through market-derived prices, to discrete eventualities. For example,

a binary contract based on whether a particular person will run for the

presidency in 2012, can pay a fixed $100 to its buyer if and only if

that individual runs for the presidency in 2012. If the contract's

traders believe that the likelihood of the individual's candidacy in

2012 is around 17 percent, the price of the contract will be around

[[Page 25671]]

$17, and will approximate the market's consensus expectation of the

individual's candidacy.

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\8\ See, e.g., Intrade Prediction Markets, Current Events

Contracts at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.intrade.com/jsp/intrade/contractSearch/.

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In addition to binary event transactions, the term event contract

has also been used to identify transactions, based on interests other

than market prices, which resemble futures contracts. For instance,

these types of event contracts can price consensus estimates of moving

values, such as the number of hours the average U.S. resident spends in

traffic or the share of votes that a particular candidate for political

office may receive. Unlike binary transactions, and similar to any

commodity futures contract, this type of contract creates continuous

and ongoing obligations that are linked to moving measures or levels,

as opposed to being dependent on the outcome of a single discrete

occurrence.

III. The Commission's Regulatory Purview

As discussed above, with some limited exceptions, the regulatory

purview of the Act extends to and includes transactions that are either

structured as options or futures when such transactions involve

interests that constitute commodities under the Act. Section 1a(4) of

the Act defines commodity in two distinct ways. First, Section 1a(4)

specifically enumerates certain articles or goods as commodities.\9\

Second, Section 1a(4) defines the term commodity as including those

articles or goods, and services, rights or interests, ``in which

contracts for future delivery are presently or in the future dealt

in.'' Therefore, an underlying interest that is not enumerated in

Section 1a(4) may be a statutory commodity under the Act if it

reasonably can underlie a futures contract on a forward looking

basis.\10\

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\9\ 7 U.S.C. 1a(4). Section 1a(4) of the Act enumerates the

following commodities: wheat, cotton, rice, corn, oats, barley, rye,

flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum

tuberosum (Irish potatoes), wool, wool tops, fats and oils

(including lard, tallow, cottonseed oil, peanut oil, soybean oil,

and all other fats and oils), cottonseed meal, cottonseed, peanuts,

soybeans, soybean meal, livestock, livestock products, and frozen

concentrated orange juice.

\10\ See United States v. Valencia, No. H-03-024, 2003 WL

23174749 at *8 (S.D. Tex Aug. 25, 2003) (noting that the

determination of whether West Coast natural gas is ``a commodity in

which contracts for future delivery are presently or in the future

dealt in,'' is a fact question, and that ``there is no evidence that

West Coast gas could not in the future be traded on a futures

exchange.'').

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In addition to Section 1a(4), Section 1a(13) of the Act identifies

certain interests as excluded commodities and thereby gives further

shape to the statutory definition of commodity.\11\ The Section 1a(13)

definition of excluded commodity is composed of four subsections. The

third subsection defines the term to include any economic or commercial

index that is based on prices, rates, values, or levels not within the

control of any party to the relevant contract. The fourth subsection of

Section 1a(13) provides that an excluded commodity includes an

occurrence, extent of an occurrence, or contingency associated with a

financial or economic consequence that is not within the control of the

parties to the relevant transaction.

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\11\ 7 U.S.C. 1a(13). Section 1a(13) of the Act provides that:

The term ``excluded commodity'' means--

(i) an interest rate, exchange rate, currency, security,

security index, credit risk or measure, debt or equity instrument,

index or measure of inflation, or other macroeconomic index or

measure;

(ii) any other rate, differential, index, or measure of economic

or commercial risk, return, or value that is--

(I) not based in substantial part on the value of a narrow group

of commodities not described in clause (i); or

(II) based solely on one or more commodities that have no cash

market;

(iii) any economic or commercial index based on prices, rates,

values, or levels that are not within the control of any party to

the relevant contract, agreement, or transaction; or

(iv) an occurrence, extent of an occurrence, or contingency

(other than a change in the price, rate, value, or level of a

commodity not described in clause (i)) that is--

(I) beyond the control of the parties to the relevant contract,

agreement, or transaction; and

(II) associated with a financial, commercial, or economic

consequence.

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For the purpose of discussion and analysis, the types of event

contracts that Commission staff has reviewed can be categorized, albeit

imperfectly, as contracts that are based on narrow commercial measures

and events, contracts based on certain environmental measures and

events, and contracts based upon general measures and events. Narrow

commercial measures quantify and reflect the rate, value, or level of

particularized commercial activity, such as a specific farmer's crop

yield. Narrow commercial events, on the other hand, are events that

might, in and of themselves, have commercial implications, such as

changes in corporate officers or corporate asset purchases.

Environmental measures can be characterized as quantifications of

weather phenomena, such as the volatility of precipitation or

temperature levels, that do not predictably correlate to commodity

market prices or other measures of broad economic or commercial

activity. By comparison, environmental events can include the formation

of a specific type of storm, within an identifiable geographic region,

the likelihood of which will not predictably correlate to commodity

market prices or measures of broad economic or commercial activity.

General measures can be described as measures that are not

commercial or environmental measures. As such, general measures do not

quantify the rate, value, or level of any commercial or environmental

activity and can, for example, include the number of hours that U.S.

residents spend in traffic annually or the vote-share of a particular

presidential candidate. Similarly, general events, such as whether a

Constitutional amendment will be adopted or whether two celebrities

will decide to marry, can be described as events that do not reflect

the occurrence of any commercial or environmental event. The category

of general measures and events can be further divided into a multitude

of subcategories, such as political or entertainment measures or

events.

Since 1992, Commission-regulated exchanges have listed for trading

a variety of commodity futures and options contracts with payout terms

based on interests other than price-based interests. These contracts

involve interests as diverse as regional insured property losses, the

count of bankruptcies, temperature volatilities, corporate mergers, and

corporate credit events.\12\ While not strictly price-based, the

interests underlying these contracts have been viewed by Commission

staff as having generally-accepted and predictable financial,

commercial or economic consequences. In other words, unlike the

interests that event contracts cover, these underlying interests have

been viewed as measures and occurrences that reasonably could be

expected to correlate to market prices or other broad-based commercial

or economic measures or activities.

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\12\ For example, the Chicago Board of Trade's catastrophe

single event insurance option contracts (which are no longer listed)

paid out a fixed amount if and only if insured property damage

exceeded $10 billion for a specific region during a specified

interval of time.

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IV. Further Statutory Background

Federal regulations were initially applied to commodity derivatives

trading in 1921.\13\ At that time, Congress

[[Page 25672]]

acknowledged that commodity futures markets could benefit commerce by

facilitating the hedging of commercial risks and the discovery of

reliable commodity prices.\14\ The Grain Futures Act of 1922, the

forerunner to the CEA, consequently was enacted to promote the

financial vitality of futures trading by limiting price manipulations

and other disturbances that were prevalent at the time and widely

perceived to result from excessive speculation.\15\

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\13\ See, e.g., Hearing on Futures Trading Before the House

Committee on Agriculture, 66th Cong., 3rd Sess. 1043 (1921);

Hearings on H.R. 5676 Before the Senate Committee on Agriculture and

Forestry, 67th Cong., 1st Sess. 452 (1921); Hearings on Futures

Trading Before the House Committee on Agriculture, 67th Cong. 1st

Sess. 7-9 (1921); 61 Cong. Rec. 4761 (1921) (remarks of Senator

Capper, the sponsor of the Senate bill which became the Futures

Trading Act of 1921 (later restyled as the Grain Futures Act of 1922

when found to be unconstitutional for its use of taxation to

penalize off-exchange futures trading)).

\14\ See S. Rep. No. 871 (August 23, 1922). The Congressional

record is replete with discussion of the commercial importance of

commodity futures trading. The record suggests that commercial

interests must be able to look to properly functioning commodity

futures markets for market information and products that facilitate

the making of marketing, financing, and distribution decisions. S.

Rep. No. 93-1131, at 12 (1974). The Congressional record also

indicates that an initial purpose behind regulating commodity

futures trading was to secure fair and orderly markets for producers

and other commercial participants who used the markets for price

basing and hedging. Hearings on S. 2485, S. 2578, S. 2837 and H.R.

1311 before the Senate Committee on Agriculture and Forestry, 93d

Cong., 2d Sess. at 234 (1974); see also 80 Cong. Rec. 10739 (April

11, 1974).

\15\ E.g., 61 Cong. Rec. 4761-4763 (1921) (remarks of Senator

Capper); 61 Cong. Rec. 1379 (1921) (remarks of Rep. Bland); 61 Cong.

Rec. 1313-1314 (remarks of Rep. Tincher, the sponsor of the House

bill which became the 1921 Act); 61 Cong. Rec. 1376 (1921) (remarks

of Rep. Gensman).

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In identifying the national public interests that render federal

regulation necessary, the Act focuses on the commercial benefits that

well-functioning derivatives markets can provide by broadly expressing

their critical functions. Customarily, hedging and price basing have

been identified as two critical functions of the commodity derivatives

markets.\16\ For instance, Section 3 of the Act, as amended by the

Commodity Futures Modernization Act of 2000 (CFMA),\17\ finds that

transactions subject to the CEA are affected with the national public

interest because they provide a means for ``managing and assuming price

risks.'' Section 3 of the Act also identifies price discovery and price

dissemination as separate public interests warranting Federal

regulation.\18\

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\16\ Hedging occurs when positions acquired are economically

appropriate to the reduction of risks in the conduct and management

of a commercial enterprise. See, e.g., 17 CFR 1.3(z) (definition of

bona fide hedging). Price basing, a function of price discovery and

dissemination, can occur when commercial entities enter into

transactions in a particular commodity based upon commodity futures

prices for that or a related commodity, oftentimes at a

differential.

\17\ Appendix E, section 108, Pub. L. 106-554, 114 Stat. 2763.

\18\ The hedging and price basing purposes of commodity futures

trading are emphasized in other provisions of the Act as well. See,

e.g., 7 U.S.C. 6a, 6b, and 6c. As a matter of background, the

provision in the Grain Futures Act that was the forerunner of

current CEA Section 3 provided that:

Transactions in grain involving the sale thereof for future

delivery as commonly conducted on boards of trade and known as

``futures'' are affected with a national public interest; that such

transactions are carried on in large volume by the public generally

and by persons engaged in the business of buying and selling grain

and the products and by-products thereof in interstate commerce;

that the prices involved in such transactions are generally quoted

and disseminated throughout the United States and in foreign

countries as a basis for determining the prices to the producer and

the consumer of grain and the products and by-products thereof and

to facilitate the movements thereof in interstate commerce; that

such transactions are utilized by shippers, dealers, millers, and

others engaged in handling grain and the products and by-products

thereof in interstate commerce as a means of hedging themselves

against possible loss through fluctuations in price; that the

transactions and prices of grain on such boards of trade are

susceptible to speculation, manipulation, or control, which are

detrimental to the producer or the consumer and the persons handling

grain and products and by-products thereof in interstate commerce,

and that such fluctuations in prices are an obstruction to and a

burden upon interstate commerce in grain and the products and by-

products thereof and render regulation imperative for the protection

of such commerce and the national public interest therein.

Grain Futures Act, ch. 369, 42 Stat. 998 (Sept. 21, 1922). In

1936, Congress restyled the Grain Futures Act as the Commodity

Exchange Act and amended this provision to substitute the word

``commodity'' for ``grain.'' Pub. L. 74-675, section 2, 49 Stat.

1491 (June 15, 1936).

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Although repealed by the CFMA, former Section 5(g) \19\ of the Act

may be relevant to analyzing the findings and purposes discussed in

Section 3 of the Act. Former Section 5(g) provided that the Commission

could not designate a board of trade as a contract market unless the

board of trade demonstrated that transactions for future delivery in

the commodity for which designation as a contract market was sought

``will not be contrary to the public interest.'' \20\ The public

interest test of Section 5(g) included an ``economic purpose'' test,

subject to a final test of the public interest.\21\ The economic

purpose test applied under former Section 5(g) was used to prohibit the

trading of certain contracts. Notably, the economic purpose test

regarding contracts appropriate for trading on a futures exchange was

not necessarily congruent with the scope of the Commission's

jurisdiction. Accordingly, while futures contracts that failed the

economic purpose test were prohibited from trading on futures exchanges

and thus illegal because of the on-exchange trading requirement, they

(and any instrument with identical terms) remained futures contracts,

fully subject to the Commission's jurisdiction.

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\19\ 7 U.S.C. 7(g), as amended by the Commodity Futures Trading

Commission Act of 1974, Pub. L. 93-463, 88 Stat. 1389 (1974). In

1992, Section 5(g) was redesignated Section 5(7) of the Act. See

Futures Trading Practices Act of 1992, Pub. L. 102-546, 106 Stat.

3590 (1992). The CFMA repealed all of former Section 5 of the Act,

including Section 5(g) (redesignated as Section 5(7)), and replaced

it with current Section 5. Section 5 was radically restructured by

the CFMA to provide for designation criteria and core principles

with which a DCM must comply. Appendix E of Pub. L. 106-554, 114

Stat. 2763 (2000).

\20\ The House Committee on Agriculture stressed that contracts

that could be expected to be used almost entirely for speculation

would be against the public interest. H.R. Rep. No. 975, 93 Cong.,

2d Sess. 29 (1974).

\21\ See H.R. Rep. No. 1383, 93d Cong., 2d Sess. 36 (1974).

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By enacting the CFMA, Congress sought ``to promote innovation for

futures and derivatives and to reduce systemic risk by enhancing legal

certainty in the markets for certain futures and derivatives

transactions[.]'' \22\ As demonstrated by the IEM, innovative event

markets have the capacity to facilitate the discovery of information,

and thereby provide potential benefits to the public. Subject to

certain exceptions, Section 4(c)(1) of the Act gives the Commission the

authority to ``promote responsible economic or financial innovation and

fair competition'' by exempting any transaction or class of

transactions from any of the provisions of the Act, including the

requirement that they trade on Commission-regulated markets, where the

Commission determines that such action would be consistent with the

public interest. Pursuant to Section 4(c), Congress gave to ``the

Commission a means of providing certainty and stability to existing and

emerging markets so that financial innovation and market development

can proceed in an effective and competitive manner.'' \23\ Under

Section 4(c), the Commission has the discretion to grant an exemption

to certain classes of transactions without having to make a

determination that such transactions are subject to the Act in the

first instance.\24\ Notably, the Commission can use its Section 4(c)

[[Page 25673]]

exemptive authority not only on a case-by-case, or product-by-product

basis, but may also use the authority to establish a set of regulatory

provisions applicable to a defined class of products.

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\22\ House Report No. 106-711(III) September 6, 2000.

\23\ House Conference Report 102-978, 1992 U.S.C.C.A.N. 3179,

3213.

\24\ With respect to the exercise of this discretion, the House-

Senate Conference Committee responsible for the review of Section

4(c) stated that:

The Conferees do not intend that the exercise of exemptive

authority by the Commission would require any determination

beforehand that the agreement, instrument, or transaction for which

an exemption is sought is subject to the Act. Rather, this provision

provides flexibility for the Commission to provide legal certainty

to novel instruments where the determination as to jurisdiction is

not straightforward. Rather than making a finding as to whether a

product is or is not a futures contract, the Commission in

appropriate cases may proceed directly to issuing an exemption.

Conf. Report at 3214-3215. Although Section 4(c) only speaks to

futures contracts, Section 4c(b) of the Act, the Commission's

plenary authority to regulate transactions that involve commodity

options, provides the Commission with comparable exemptive authority

for options.

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V. Issues for Comment

A. Request for Comment

The following questions consider the Commission's regulatory

purview over event contracts, the interests that may appropriately

underlie Commission-regulated transactions, and the appropriate

regulatory treatment of event contracts. The Commission encourages

comments on the specific questions posed, as well as the broad range of

issues raised in this concept release. In providing comments, please

describe your relevant experience and discuss in detail the facts and

legal provisions that support your conclusions. Furthermore, please

consider the Commission's mandate to protect commodity futures and

options markets and customers, and ensure the integrity of the

commodity derivatives marketplace, as well as the expected effects of

any Commission action on competition, efficiency, innovation and the

financial integrity of transactions. Any recommendation with respect to

the regulatory treatment of event contracts and markets should be

consistent with and supported by the Act, practical, and amenable to

effective and efficient implementation.

B. Public Interest

1. What public interests are served by event contracts that are

designed and will principally be traded for information aggregation

purposes and not for commercial risk management or pricing purposes?

2. How are these interests consistent with the public interest

goals embodied in the Act?

3. What calculations, analyses, variables, and factors could be

used to objectively determine the social value of information to the

general public that may be discovered through trading in event

contracts? Should this be a factor in determining whether the

Commission plays a role in regulating these markets?

C. Jurisdictional Determinations

4. What characteristics or traits are common to or should be used

to identify event contracts and event markets?

5. How do these characteristics and traits differ from those of

commodity futures and options contracts that customarily have been

regulated by the Commission? How are they similar?

6. Are there criteria based on the provisions of the Act that could

be used to make jurisdictional determinations with respect to event

contracts and markets?

7. Given the purposes and history of the Act, would it be

appropriate for the Commission to apply a test premised on commercial

risk management or pricing functions to demarcate the Commission's

jurisdiction over particular contracts? If so, what factors could be

used to make such a determination?

8. Given the purposes and history of the Act, would it be

appropriate for the Commission to apply any test premised on the

economic purpose of certain types of transactions to demarcate the

Commission's jurisdiction over particular contracts? If so, what

factors could be used to make such a determination?

9. What calculations, analyses, variables and factors would be

appropriate in determining whether the impact of an occurrence or

contingency will result in a financial, commercial or economic

consequence that is identified in Section 1a(13) of the Act?

10. What calculations, analyses, variables, and factors would be

appropriate in determining whether an economic or commercial index that

is based on prices, rates, values, or levels should or should not

qualify as an excluded commodity under Section 1a(13) of the Act?

11. What identifiable factors, statutorily based or otherwise,

limit the events and measures that may underlie event contracts when

such contracts are treated as Commission-regulated transactions?

12. What objective and readily identifiable factors, statutorily

based or otherwise, could be used to distinguish event contracts that

could appropriately be traded under Commission oversight from

transactions that may be viewed as the functional equivalent of

gambling?

13. The Commission notes that Section 12(e) of the Act generally

provides that the CEA supersedes and preempts other laws, including

state and local gaming and bucket shop laws, with respect to

transactions executed on or subject to the rules of a Commission-

regulated market, or with respect to transactions exempted from the Act

pursuant to the Commission's exemptive authority under Section 4(c) of

the Act. What are the implications of possibly preempting state gaming

laws with respect to event contracts and markets that are treated as

Commission-regulated or exempted transactions?

14. Should certain underlying events or measures--such as those

based on assassinations or terrorist activities--be prohibited

altogether due to the social perception and impact of such events? What

statutory or other legal basis would support this treatment?

15. Are there event contracts, such as political event contracts,

that should be prohibited from trading under the Act, or that deserve

separate treatment or consideration, due to the nature and importance

of their outcomes? What statutory or other legal basis would support

this treatment?

D. Legal Implementation

16. Is it appropriate for the Commission to direct certain or all

event contracts onto markets that are regulated differently from and

perhaps less stringently than DCMs? For example, it may be warranted or

necessary to treat event markets that aggregate information solely for

academic or research purposes, event markets set-up for internal

corporate purposes, or event markets that offer exceedingly low

notional value contracts to traders differently than markets that

possess the attributes of traditional DCMs.

17. Is it appropriate for the Commission to use the Section 4(c)

exemptive authority of the Act for implementing a regulatory scheme for

event contracts and markets? In this regard, the Commission notes that

it has the discretion to grant an exemption under Section 4(c) to

certain classes of transactions without having to make a determination

as to whether such transactions are subject to the Act in the first

instance.

18. Is the issuance of staff no-action relief, such as the relief

issued to the IEM, an appropriate or preferable means for establishing

regulatory certainty for event contracts and markets? Is a policy

statement appropriate or preferable?

19. What are the benefits and drawbacks of permitting certain event

markets to operate pursuant to Commission established conditions that

are similar to the conditions under which the IEM operates?

E. Market Participants

20. Would it be appropriate to allow market participants, and in

particular, retail customers, to trade on Commission-regulated event

markets with the knowledge that the Commission may not be able to

effectively monitor the measures or events that underlie certain event

contracts?

21. What unique protections and prophylactic measures are

appropriate or necessary for the protection of retail users of event

contracts and markets?

22. What are the implications of permitting the intermediation of

event

[[Page 25674]]

contracts, including intermediation on behalf of retail market

participants, both with respect to trade execution and clearing?

23. Are there any types of trader or intermediary conduct, peculiar

to event contracts and markets, that should be prohibited or monitored

closely by regulators?

24. What other factors could impact the Commission's ability, given

its limited resources, to properly oversee or monitor trading in event

contracts?

Issued in Washington, DC, on May 1, 2008 by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E8-9981 Filed 5-6-08; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: May 7, 2008