2024-12125
[Federal Register Volume 89, Number 112 (Monday, June 10, 2024)]
[Proposed Rules]
[Pages 48968-49000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-12125]
[[Page 48967]]
Vol. 89
Monday,
No. 112
June 10, 2024
Part II
Commodity Futures Trading Commission
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17 CFR Part 40
Event Contracts; Proposed Rule
Federal Register / Vol. 89, No. 112 / Monday, June 10, 2024 /
Proposed Rules
[[Page 48968]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 40
RIN 3038-AF14
Event Contracts
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to its rules concerning event contracts in
certain excluded commodities. The Commission is proposing amendments to
further specify types of event contracts that fall within the scope of
section 5c(c)(5)(C) of the Commodity Exchange Act (CEA or the Act) and
are contrary to the public interest, such that they may not be listed
for trading or accepted for clearing on or through a CFTC-registered
entity. Among other things, the Commission proposes to further specify
the types of event contracts that involve ``gaming.'' The Commission
also proposes to amend certain language in its event contract rules to
further align with statutory text, and to make certain technical
changes to its event contract rules in order to enhance clarity and
organization.
DATES: Comments must be received on or before July 9, 2024.
ADDRESSES: You may submit comments, identified by ``Event Contracts''
and RIN number 3038-AF14, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this release and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
Commission's procedures established in 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
FOIA.
FOR FURTHER INFORMATION CONTACT: Grey Tanzi, Assistant Chief Counsel,
(312) 596-0635, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800,
Chicago, Illinois 60604, Andrew Stein, Assistant Chief Counsel, (202)
418-6054, [email protected], Lauren Bennett, Assistant Chief Counsel,
(202) 418-5290, [email protected], or Nora Flood, Chief Counsel, (202)
418-6059, [email protected], Three Lafayette Centre, 1151 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Overview of Proposed Changes to Sec. 40.11
B. Commission History With Event Contracts
C. Statutory Authority and Prior Commission Action
1. CEA Section 5c(c)(5)(C)
2. Commission Regulation Sec. 40.11
3. Commission Determinations Pursuant to Sec. 40.11
II. Proposed Amendments to Sec. 40.11
A. Amendments to Further Align With Statutory Language
1. Description of Excluded Commodities
(a) Proposed Amendments
(b) Illustrative Examples of Event Contracts Not Within Scope of
CEA Section 5c(c)(5)(C) and Sec. 40.11
2. Contracts That ``Involve'' an Enumerated Activity
B. The Enumerated Activities
1. Gaming
(a) Background
(b) Proposed Gaming Definition
(c) Illustrative Examples of Gaming
2. The Other Enumerated Activities
C. Public Interest Considerations
1. Overview of Proposed Amendments
2. Factors Considered by the Commission in Evaluating Whether a
Contract, or Category of Contracts, Is Contrary to the Public
Interest
3. The Enumerated Activities
(a) Terrorism, Assassination, and War
(b) Activity That Is Unlawful Under Federal or State Law
(c) Gaming
D. The Commission's Authority To Identify Additional Similar
Activities to the Enumerated Activities
E. Technical Amendments
1. Technical Amendments to Sec. 40.11(a)
2. Technical Amendments to Sec. 40.11(c)
F. Implementation Timeline
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
1. Submission of Updated Rules to the Commission
2. Request for Comment
C. Consideration of Costs and Benefits
1. Introduction
2. Proposed Amendments
(a) Definition of Gaming--Proposed Sec. 40.11(b)
(1) Baseline and Proposed Amendments
(2) Benefits
(3) Costs
(b) Amendments to Further Align With Statutory Language
3. Section 15(a) Factors
(a) Protection of Market Participants and the Public
(b) Efficiency, Competitiveness and Financial Integrity
(c) Price Discovery
(d) Sound Risk Management Practices
(e) Other Public Interest Considerations
D. Antitrust Considerations
I. Background
A. Overview of Proposed Changes to Sec. 40.11
On July 27, 2011, the Commission published in the Federal Register
final rules under part 40 of the Commission's regulations, including
new Sec. 40.11.\1\ Commission Regulation 40.11 was promulgated
pursuant to authority granted under section 5c(c)(5)(C) of the CEA,\2\
which was added by section 745(b) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the ``Dodd-Frank Act'').\3\ CEA section
5c(c)(5)(C) authorizes the Commission to prohibit certain ``event
contracts'' from being listed or made available for clearing or trading
on or through a
[[Page 48969]]
registered entity,\4\ if such contracts involve an activity that is
enumerated in CEA section 5c(c)(5)(C) or ``other similar activity'' as
determined by the Commission by rule or regulation, and the Commission
determines that such contracts are contrary to the public interest.
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\1\ Provisions Common to Registered Entities, 76 FR 44776 (July
27, 2011). Commission Regulation 40.11 was adopted as part of
broader changes made to part 40 of the Commission's regulations to
implement section 745 of the Dodd-Frank Act, which amended section
5c of the CEA. Section 5c(c) of the CEA, in particular, sets forth
requirements relating to the listing for trading or making available
for clearing of derivative contracts, and the implementation of
rules and rule amendments, by ``registered entities.'' CEA section
1a(40), 7 U.S.C. 1a(40), defines the term ``registered entity'' to
include any board of trade designated by the Commission as a
contract market (``DCM''), and any derivatives clearing organization
(``DCO''), swap execution facility (``SEF''), or swap data
repository (``SDR'') registered by the Commission.
\2\ 7 U.S.C. 7a-2(c)(5)(C).
\3\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\4\ See note 2, supra. CEA section 1a(40), 7 U.S.C. 1a(40),
defines the term ``registered entity'' to include any DCM, and any
DCO, SEF, or SDR registered by the Commission.
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While the term ``event contract'' is not defined in the CEA or the
CFTC's regulations, event contracts are generally understood to be a
type of derivative contract, typically with a binary payoff structure,
based on the outcome of an underlying occurrence or event.\5\ A
registered entity that seeks to list event contracts for trading, or
make event contracts available for clearing, must comply with the
substantive and procedural requirements that apply, more generally, to
the listing for trading, or making available for clearing, of
derivative contracts. For example, CFTC-registered exchanges--namely,
DCMs and SEFs--are subject to statutory requirements to only list or
permit trading in derivative contracts that are not readily susceptible
to manipulation; \6\ to enforce compliance with contract terms and
conditions; \7\ and to monitor trading on the exchange in order to
prevent manipulation, price distortion, and disruption of the
settlement process through market surveillance, compliance, and
enforcement practices and procedures.\8\ In addition to the more
generally applicable requirements to which registered entities are
subject when listing derivative contracts for trading or making such
contracts available for clearing, CEA section 5c(c)(5)(C) grants the
Commission the authority to prohibit registered entities from listing
for trading or making available for clearing particular types of event
contracts, if the Commission determines that such contracts are
contrary to the public interest.
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\5\ Most event contracts that have traded or are currently
trading on CFTC-registered exchanges are structured as binary
options, which are generally understood as a type of option whose
payout is either a fixed amount or zero.
\6\ See Core Principle 3 for DCMs, CEA section 5(d)(3), 7 U.S.C.
7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3), 7
U.S.C. 7b-3(f)(3).
\7\ See Core Principle 2 for DCMs, CEA section 5(d)(2), 7 U.S.C.
7(d)(2), and Core Principle 2 for SEFs, CEA section 5h(f)(2), 7
U.S.C. 7b-3(f)(2).
\8\ See Core Principle 4 for DCMs, CEA section 5(d)(4), 7 U.S.C.
7(d)(4), and Core Principle 4 for SEFs, CEA section 5h(f)(4), 7
U.S.C. 7b-3(f)(4).
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Since 2021, the Commission has observed a significant increase in
the number of event contracts listed for trading by CFTC-registered
exchanges, as well as in the diversity of occurrences and events
underlying such contracts.\9\ The Commission has also observed recent
applications for exchange registration, and expressions of interest
regarding exchange registration, from entities that have indicated that
they are interested primarily, or exclusively, in listing event
contracts for trading.\10\
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\9\ From 2006-2020, DCMs listed for trading an average of
approximately five event contracts per year. In 2021, this number
increased to 131, and the number of newly-listed event contracts per
year has remained at a similar level in subsequent years. Since
2021, DCMs also have listed for trading a substantial number of
event contracts not associated with traditional commodities,
financial indices, or economic indicators. These have included event
contracts based on the occurrence or non-occurrence of international
events, natural disasters in specific U.S. cities, heating/cooling
degree days and cumulative average temperature in specific cities,
the timing of video game and album releases, Oscar award winners,
COVID-19 case levels and restrictions, the outcome of cases pending
before the Supreme Court of the United States, the passage of
specific laws by the U.S. Congress, U.S. Presidential approval
ratings, confirmation of U.S. executive branch officials, National
Football League (``NFL'') television ratings, the discovery of
exoplanets, and the occurrence of a National Aeronautics and Space
Administration moon landing before a certain date.
\10\ As of February 12, 2024, Commission staff were reviewing
several pending applications for contract market designation from
entities with a stated interest in offering event contracts for
trading. Commission staff have received multiple additional
inquiries from other entities indicating an interest in applying for
exchange registration in order to offer event contracts for trading.
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In light of these developments, the Commission proposes to amend
Sec. 40.11 to further specify types of event contracts that fall
within the scope of CEA section 5c(c)(5)(C) and are contrary to the
public interest. The Commission believes that these amendments would
support efforts by registered entities to ensure compliance with the
CEA by more clearly identifying the types of event contracts that may
not be listed for trading or accepted for clearing. The Commission
believes that these amendments would, correspondingly, assist
registered entities, as well as applicants for registration, in making
informed business decisions with respect to product design, which would
help to support responsible market innovation.
The Commission believes that amending Sec. 40.11 to further
specify types of event contracts that may not be listed for trading or
accepted for clearing would also benefit the Commission and its staff,
by reducing the need to undertake individualized, resource-intensive
contract reviews. As further discussed below, under Sec. 40.11(c), the
Commission may initiate a 90-day review to evaluate whether a
particular event contract is of a type that may not be listed for
trading or accepted for clearing. Further specifying, in Sec. 40.11,
the types of event contracts that may not be listed for trading or
accepted for clearing should provide registered entities with a better
understanding regarding appropriate event contract parameters and
should, in turn, reduce the likelihood that contract filings that raise
potential public interest concerns are submitted to the Commission.
From a resource allocation perspective, this will be of significant
benefit to the Commission and its staff, since, in the Commission's
experience, a single Sec. 40.11(c) review is resource-intensive and
consumes hundreds of hours of staff time.
Finally, the Commission proposes to make certain amendments to
Sec. 40.11 to further align the language of the regulation with the
statutory text of CEA section 5c(c)(5)(C), and also proposes to make
certain technical amendments to the regulation in order to enhance
clarity and organization.
B. Commission History With Event Contracts
CFTC-registered exchanges have listed a variety of event contracts
for trading for several decades.\11\ On February 18, 2004, the
Commission designated the first contract market dedicated to trading
event contracts.\12\ In 2008, the Commission published a concept
release (the ``2008 Concept Release''), requesting input from
interested persons, and those with expertise, on the appropriate
regulatory treatment of event contract markets.\13\ The 2008 Concept
Release was prompted by the Commission's receipt of a substantial
number of requests for guidance related to application of the CEA to
event contract markets.\14\ The Commission sought both general input
and responses to 24 enumerated questions. The Commission received 31
comments in response to the 2008
[[Page 48970]]
Concept Release,\15\ but ultimately did not take further action at that
time. In 2010, Congress addressed the Commission's regulatory authority
with respect to certain event contracts in section 745(b) of the Dodd-
Frank Act, which added section 5c(c)(5)(C) to the CEA. Thereafter, in
2011, the Commission adopted Sec. 40.11, which implements CEA section
5c(c)(5)(C).
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\11\ Since 1992, CFTC-registered exchanges have listed for
trading event contracts involving interests such as regional insured
property losses, the count of bankruptcies, temperature
volatilities, corporate mergers, and corporate credit events. See
Concept Release on Appropriate Regulatory Treatment of Event
Contracts, 73 FR 25669, 25671 (May 7, 2008).
\12\ See CFTC Order of Designation for HedgeStreet, Inc.
(``HedgeStreet'') (Feb. 20, 2004), available at https://www.cftc.gov/sites/default/files/opa/press04/opa4894-04.htm (last
visited Mar. 7, 2024). HedgeStreet listed daily and weekly event
contracts on various corporate mergers, weather events, and economic
indicators. Effective June 21, 2009, HedgeStreet changed its name to
North American Derivatives Exchange, Inc., or ``Nadex.'' Nadex
continues to list event contracts on foreign exchange, equity
indices, commodity prices, and digital assets.
\13\ 73 FR 25669.
\14\ Id.
\15\ See Comment File for Federal Register Release 73 FR 25669,
CFTC, https://www.cftc.gov/LawRegulation/PublicComments/08-004.html
(last visited Mar. 7, 2024).
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As discussed above, in recent years, the Commission has observed
applications for exchange registration, and expressions of interest
regarding exchange registration, from entities that appear to be
interested primarily, or exclusively, in listing event contracts for
trading.\16\ The Commission also has observed a significant increase in
the number of event contracts listed for trading by registered
entities, and in the diversity of occurrences and events underlying
such contracts.
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\16\ The Commission's Division of Market Oversight (``DMO'')
also has issued staff no-action positions to two academic
institutions which provide that, subject to specified terms, DMO
will not recommend to the Commission enforcement action against the
academic institutions for operating, without registration as a DCM,
SEF, or foreign board of trade (``FBOT''), small-scale, not-for-
profit markets that offer trading in political and economic
indicator event contracts for academic purposes. See CFTC Staff
Letter No. 93-66 issued to the University of Iowa (June 18, 1993),
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf. This no-action
position superseded the operative terms of a more limited no-action
position issued in 1992. See also CFTC Staff Letter No. 14-130
issued to Victoria University of Wellington, New Zealand (Oct. 29,
2014), available at https://www.cftc.gov/csl/14-130/download. The
terms of these staff no-action positions contemplate that each event
market will be operated by the relevant academic institution for
academic purposes and without compensation. The terms of the no-
action positions also contemplate limitations on, among other
things, the number of market participants and the number of
contracts that each market participant may hold. In issuing each of
the no-action positions, DMO explicitly noted that it was not
rendering an opinion on the legality of the academic institutions'
activities under state law.
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C. Statutory Authority and Prior Commission Action
1. CEA Section 5c(c)(5)(C)
As discussed above, a registered entity that seeks to list event
contracts for trading, or accept such contracts for clearing, must
comply with the substantive and procedural requirements that apply,
more generally, to the listing for trading or acceptance for clearing
of derivative contracts.\17\ Notably, for example, a DCM or SEF is
required to ensure that the derivative contracts that it lists or
permits for trading are not readily susceptible to manipulation; to
ensure enforcement of the terms and conditions of those contracts; and
to monitor trading in those contracts in order to prevent manipulation,
price distortion, and disruption of the settlement process.\18\ CEA
section 5c(c)(5)(C) further grants the Commission the authority to
prohibit registered entities from listing or making available for
clearing or trading certain event contracts that involve particular
activities, if the Commission determines that such contracts are
contrary to the public interest.
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\17\ Registered entities seeking to list event contracts for
trading, or accept such contracts for clearing, must abide by the
CEA and Commission regulations, including applicable statutory core
principles. See, e.g., CEA section 5(d), 7 U.S.C. 7(d) (Core
Principles for DCMs); CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2)
(Core Principles for DCOs); CEA section 5h(f), 7 U.S.C. 7b-3(f)
(Core Principles for SEFs). In addition, registered entities seeking
to list event contracts for trading, or accept such contracts for
clearing, must comply with the submission requirements set forth in
CEA section 5c(c), 7 U.S.C. 7a-2(c)(1), and part 40 of the
Commission's regulations.
\18\ See Core Principle 3 for DCMs, CEA section 5(d)(3), 7
U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3),
7 U.S.C. 7b-3(f)(3); Core Principle 2 for DCMs, CEA section 5(d)(2),
7 U.S.C. 7(d)(2), and Core Principle 2 for SEFs, CEA section
5h(f)(2), 7 U.S.C. 7-b3(f)(2); and Core Principle 4 for DCMs, CEA
section 5(d)(4), 7 U.S.C. 7(d)(4), and Core Principle 4 for SEFs,
CEA section 5h(f)(4), 7 U.S.C. 7b-3(f)(4). For the avoidance of
doubt, regardless of whether or not a particular event contract
falls within the scope of CEA section 5c(c)(5)(C) and Sec. 40.11,
the DCM or SEF seeking to list the event contract for trading has a
statutory obligation to ensure that the event contract is not
readily susceptible to manipulation.
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Section 5c(c)(5)(C) was added to the CEA by section 745(b) of the
Dodd-Frank Act, which amended, more generally, the contract and rule
submission requirements set forth in CEA section 5c(c). In a short
colloquy with the late Senator Diane Feinstein on the Senate floor
regarding the proposed Dodd-Frank Act provision that ultimately was
enacted as CEA section 5c(c)(5)(C) (the ``2010 Colloquy''), Senator
Blanche Lincoln, then-Chair of the Senate Committee on Agriculture,
Nutrition, and Forestry--who is identified in the 2010 Colloquy as one
of the authors of CEA section 5c(c)(5)(C)--stated that the provision
was intended to assure that the Commission ``has the power to prevent
the creation of futures and swaps markets that would allow citizens to
profit from devastating events and also prevent gambling through
futures markets.'' \19\
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\19\ 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln),
available at https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf (last visited Mar. 7, 2024).
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CEA section 5c(c)(5)(C)(i) provides that in connection with the
listing of agreements, contracts, transactions, or swaps in excluded
commodities \20\ that are based upon the occurrence, extent of an
occurrence, or contingency (other than a change in the price, rate,
value, or levels of a commodity described in section la(2)(i) of this
title),\21\ by a designated contract market or swap execution facility,
the Commission may determine that such agreements, contracts, or
transactions are contrary to the public interest if the agreements,
contracts, or transactions involve--(I) activity that is unlawful under
any Federal or State law; (II) terrorism; (III) assassination; (IV)
war; (V) gaming; or (VI) other similar activity determined by the
Commission, by rule or regulation, to be contrary to the public
interest.\22\
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\20\ The term ``excluded commodity'' is defined in CEA section
1a(19), 7 U.S.C. 1a(19), as: (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.
\21\ There is no ``section 1a(2)(i)'' in the CEA. As discussed
in section II.A.1.a, infra, the Commission believes that the
reference in CEA section 5c(c)(5)(C)(i) to ``section 1a(2)(i)'' is a
typographical or drafting error.
\22\ CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
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CEA section 5c(c)(5)(C)(ii) provides that no agreement, contract or
transaction \23\ determined by the Commission to be contrary to the
public interest under section 5c(c)(5)(C)(i) may be listed or made
available for clearing or trading on or through a registered
entity.\24\
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\23\ CEA section 5c(c)(5)(C)(i) applies in connection with the
listing of agreements, contracts, transactions, or swaps by a DCM or
SEF. 7 U.S.C. 7a-2(c)(5)(C)(i). The Commission notes that similar
phrases both later in CEA section 5c(c)(5)(C)(i) and in CEA section
5c(c)(5)(C)(ii) refer only to ``agreements, contracts, or
transactions . . . .'' The Commission interprets either phrase to
encompass derivative contracts listed for trading on or through DCMs
or SEFs, and for simplicity refers to ``agreements, contracts,
transactions or swaps'' as ``contracts'' herein.
\24\ CEA section 5c(c)(5)(C)(ii); 7 U.S.C. 7a-2(c)(5)(C)(ii).
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The Commission interprets CEA section 5c(c)(5)(C) to contemplate
that the Commission engage in a two-step
[[Page 48971]]
inquiry. First, the Commission must assess whether a contract in a
specified excluded commodity ``involve[s]'' an activity enumerated in
CEA section 5c(c)(5)(C)(i)(I)-(V) (each, an ``Enumerated Activity'') or
other similar activity as determined by the Commission by rule or
regulation (``prescribed similar activity''). If the Commission
determines that the contract involves such activity, the Commission
must assess whether the contract is contrary to the public interest.
The Commission interprets CEA section 5c(c)(5)(C) to provide that the
contract may not be listed or made available for clearing or trading by
a registered entity if the Commission finds both that (i) the contract
involves an Enumerated Activity or prescribed similar activity, and
(ii) the contract is contrary to the public interest.
2. Commission Regulation 40.11
In 2011, the Commission adopted Sec. 40.11 to implement CEA
section 5c(c)(5)(C) as part of broader changes to the Commission's part
40 regulations.\25\ Commission Regulation 40.11(a)(1) provides that a
registered entity shall not list for trading or accept for clearing on
or through the registered entity an agreement, contract, transaction,
or swap based upon an excluded commodity, as defined in Section
1a(19)(iv) of the Act, that involves, relates to, or references
terrorism, assassination, war, gaming, or an activity that is unlawful
under any State or Federal law.\26\ Although they are not listed in
precisely the same order, the activities enumerated in Sec.
40.11(a)(1) are the same as the activities enumerated in CEA sections
5c(c)(5)(C)(i)(I)-(V) and are similarly referred to herein as the
Enumerated Activities.
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\25\ Part 40 of the Commission's regulations, more generally,
implements the contract and rule submission requirements for
registered entities set forth in CEA section 5c(c). For example,
Sec. 40.2 sets forth the general process by which a DCM or SEF may
list a new derivative contract for trading by providing the
Commission with a written certification--a ``self-certification''--
that the contract complies with the CEA, including the CFTC's
regulations thereunder. See also CEA section 5c(c)(1), 7 U.S.C. 7a-
2(c)(1). The Commission must receive the DCM's or SEF's self-
certified submission at least one business day before the contract's
listing. 17 CFR 40.2(a)(2). Commission Regulation 40.3 sets forth
the general process by which a DCM or SEF may elect voluntarily to
seek prior Commission approval of a derivative contract that the DCM
or SEF seeks to list for trading. See also CEA sections 5c(c)(4)-
(5), 7 U.S.C. 7a-2(c)(4)-(5). Amendments to an existing derivative
contract also must be submitted to the Commission either by way of
self-certification or for prior Commission approval. 17 CFR 40.5,
40.6.
\26\ 17 CFR 40.11(a)(1).
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Consistent with CEA section 5c(c)(5)(C)(i)(VI), Sec. 40.11(a)(2)
provides that a registered entity shall not list for trading or accept
for clearing on or through the registered entity an agreement,
contract, transaction, or swap based upon an excluded commodity, as
defined in Section 1a(19)(iv) of the Act, that involves, relates to, or
references an activity that is similar to an activity enumerated in
Sec. 40.11(a)(1), and that the Commission determines, by rule or
regulation, to be contrary to the public interest.\27\ To date, the
Commission has not made any such determinations.
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\27\ 17 CFR 40.11(a)(2). CEA section 5c(c)(5)(C) applies with
respect to agreements, contracts, transactions, or swaps in excluded
commodities that are based upon the occurrence, extent of an
occurrence, or contingency (other than a change in the price, rate,
value, or levels of a commodity described in section 1a(2)(i)).
There is no ``section 1a(2)(i)'' in the CEA, and the Commission
believes the reference to this provision in CEA section 5c(c)(5)(C)
is a typographical or drafting error. In adopting Sec. Sec.
40.11(a)(1) and (2), as well as Sec. 40.11(c), the Commission
interpreted CEA section 5c(c)(5)(C) to apply with respect to the
excluded commodities defined in CEA section 1a(19)(iv). See
discussion in section II.A.1.a, infra.
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Pursuant to Sec. 40.11(c), when a contract submitted to the
Commission by a registered entity, pursuant to Sec. 40.2 or Sec.
40.3, may involve, relate to, or reference an activity enumerated in
Sec. Sec. 40.11(a)(1) or (2), the Commission is authorized to commence
a 90-day review of the contract.\28\ The Commission must issue an order
approving or disapproving the contract by the end of the 90-day review
period or, if applicable, at the conclusion of any extended period
agreed to or requested by the registered entity.\29\ Commission
Regulation 40.11(c)(1) requires the Commission to request that the
registered entity suspend the listing or trading of the contract during
the 90-day review period.\30\ The Commission also must post on its
website a notification of the intent to carry out a 90-day review.\31\
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\28\ 17 CFR 40.11(c). Commission Regulation 40.11(c) states that
the 90-day review period shall commence from the date the Commission
notifies the registered entity of a potential violation of Sec.
40.11(a).
\29\ 17 CFR 40.11(c)(2).
\30\ 17 CFR 40.11(c)(1).
\31\ Id.
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The Commission did not, in Sec. 40.11 or in the 2011 adopting
release for the rule, define any of the Enumerated Activities. The
Commission acknowledged, in the adopting release, a comment on the rule
proposal that stated that the term ``gaming,'' in particular, should be
further defined in order to enhance clarity regarding the scope of the
prohibition set forth in Sec. 40.11(a)(1).\32\ The Commission
expressed agreement with the interest to further define ``gaming'' for
purposes of the prohibition,\33\ and stated that the Commission might
issue a future event contracts rulemaking that, among other things,
addressed the appropriate treatment of event contracts involving
gaming.\34\ The Commission stated that, in the meantime, it had
determined to adopt the prohibition set forth in Sec. 40.11(a)(1) with
respect to the Enumerated Activities, ``and to consider individual
product submissions on a case-by-case basis under Sec. 40.2 or Sec.
40.3.'' \35\
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\32\ Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
\33\ Id.
\34\ Id.
\35\ Id. The Commission noted that a registered entity could
receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a particular
contract for Commission approval under Sec. 40.3: if the submitted
contract was approved by the Commission, the registered entity would
have assurance that the Commission had reviewed and did not object
to the submission based on the prohibitions in Sec. 40.11(a). Id.
at 44785-86. The Commission noted that, alternatively, a registered
entity could self-certify a contract under Sec. 40.2 and, if the
Commission determined during its review of the contract ``that the
submission may violate the prohibitions in Sec. 40.11(a)(1)-(2),
the Commission may request that the registered entity suspend the
trading or clearing of the contract pending the completion of a 90-
day . . . review.'' Id. at 44786. The Commission stated that, upon
completion of that review, the Commission would be required to issue
an order finding either that the contract violated, or did not
violate, the prohibitions in Sec. 40.11(a)(1)-(2). Id.
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3. Commission Determinations Pursuant to Sec. 40.11
To date, the Commission has issued two final determinations
pursuant to Sec. 40.11. On January 3, 2012, the Commission commenced a
90-day review, under Sec. 40.11(c), of certain event contracts on
election outcomes that had been self-certified by Nadex.\36\ On April
2, 2012, the Commission issued an order (the ``Nadex Order'')
prohibiting the contracts from being listed or made available for
clearing or trading, finding that the contracts involved the Enumerated
Activity of
[[Page 48972]]
gaming and were contrary to the public interest.\37\
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\36\ See https://www.cftc.gov/PressRoom/PressReleases/6163-12.
Nadex self-certified cash-settled, binary contracts on whether there
would be a Democratic majority in the U.S. House of Representatives
(``House''); whether there would be a Republican majority in the
House; whether there would be a Democratic majority in the U.S.
Senate (``Senate''); and whether there would be a Republican
majority in the Senate. The contracts settled based on whether the
named party held the majority of seats in the identified chamber of
Congress on the expiration date. Nadex also self-certified ten cash-
settled, binary contracts on the upcoming Presidential election.
Each contract was based on one of the leading candidates for
President and paid according to whether that candidate won the
Presidency.
\37\ See CFTC Release No. 6224-12 CFTC Issues Order Prohibiting
North American Derivatives Exchange's Political Event Derivatives
Contracts (Apr. 2, 2012), available at https://www.cftc.gov/PressRoom/PressReleases/6224-12.
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On June 23, 2023, the Commission commenced a 90-day review, under
Sec. 40.11(c), of certain event contracts self-certified by KalshiEX
LLC (``Kalshi'') that were based on which political party controlled
each chamber of Congress.\38\ On September 22, 2023, the Commission
issued an order (the ``Kalshi Order'') prohibiting the contracts from
being listed or made available for clearing or trading, finding that
the contracts involved the Enumerated Activities of gaming and activity
that is unlawful under State law, and that the contracts were contrary
to the public interest.\39\ The Kalshi Order is currently under
judicial review in the U.S. District Court for the District of
Columbia.\40\
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\38\ See CFTC Release No. 8728-23, CFTC Announces Review of
Kalshi Congressional Control Contracts and Public Comment Period
(June 23, 2023), available at https://www.cftc.gov/PressRoom/PressReleases/8728-23. The Kalshi contracts were cash-settled,
binary contracts that settled based on the party affiliation of the
leader of the identified chamber of Congress on the expiration date.
The Kalshi contracts differed from the Nadex contracts that the
Commission had previously disapproved, in that the Nadex contracts
settled based on the number of seats in the House or Senate held by
a given political party, while the Kalshi contracts settled based on
the party affiliation of the leader of the House (the Speaker) or
the leader of the Senate (the President Pro Tempore).
\39\ See CFTC Release No. 8780-23, CFTC Disapproves KalshiEX
LLC's Congressional Control Contracts (Sept. 22, 2023), available at
https://www.cftc.gov/PressRoom/PressReleases/8780-23.
\40\ KalshiEx LLC v. Commodity Futures Trading Commission, 1:23-
cv-03257 (filed Nov. 1, 2023) (D.D.C.).
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The Commission has exercised its authority to commence a 90-day
review of event contracts, pursuant to Sec. 40.11(c), on two
additional occasions.\41\ On December 23, 2020, the Commission
commenced a 90-day review of certain event contracts that had been
self-certified by Eris Exchange, LLC (``ErisX''), that were based on
the moneyline, the point spread, and the total points for individual
NFL games.\42\ On August 26, 2022, the Commission commenced a 90-day
review of certain Congressional control event contracts submitted for
Commission approval by Kalshi.\43\ In both of these instances, the
submitting parties withdrew their respective contracts from
consideration before the Commission issued a final determination
pursuant to Sec. 40.11.
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\41\ In so doing, the Commission found, pursuant to Sec.
40.11(c), that the subject contracts ``may'' involve an Enumerated
Activity. 17 CFR 40.11(c).
\42\ See CFTC Release No. 8345-20, CFTC Announces Review of
RSBIX NFL Futures Contracts Proposed by Eris Exchange, LLC (Dec. 23,
2020), available at https://www.cftc.gov/PressRoom/PressReleases/8345-20.
\43\ See CFTC Release No. 8578-22, CFTC Announces Review and
Public Comment Period of KalshiEx Proposed Congressional Control
Contracts Under CFTC Regulation 40.11, available at https://www.cftc.gov/PressRoom/PressReleases/8578-22.
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II. Proposed Amendments to Sec. 40.11
In light of (i) the significant increase that the Commission has
observed in the number and diversity of event contracts listed for
trading by Commission-registered exchanges, and (ii) the increased
interest that the Commission has observed, among applicants and
prospective applicants for exchange registration, in operating
exchanges that would primarily or exclusively offer event contracts for
trading, the Commission is proposing to amend Sec. 40.11 to, among
other things, further specify types of event contracts that fall within
the scope of CEA section 5c(c)(5)(C) and are contrary to the public
interest, such that they may not be listed for trading or accepted for
clearing on or through a registered entity. As discussed above, the
Commission believes that these proposed amendments would support
efforts by registered entities to ensure compliance with the CEA, and
would, correspondingly, assist registered entities, as well as
applicants for registration, in making informed business decisions with
respect to product design, thereby helping to support responsible
market innovation. The Commission further believes that, by helping to
delineate appropriate event contract parameters, the proposed
amendments would reduce the frequency of event contract submissions to
the Commission that raise potential public interest concerns, which
would allow for more efficient use of Commission and staff resources by
reducing the need to conduct individualized event contract reviews
pursuant to Sec. 40.11(c). It may also yield efficiencies for
registered entities by helping to avoid situations where they expend
resources to develop and submit a contract that the Commission
subsequently determines, following a Sec. 40.11(c) review, may not be
listed for trading or accepted for clearing.
In addition, the Commission is proposing to make certain amendments
to Sec. 40.11 to further align the language of the regulation with the
statutory text of CEA section 5c(c)(5)(C), and also is proposing to
make certain technical amendments to the regulation to enhance clarity
and organization.
A. Amendments to Further Align With Statutory Language
1. Description of Excluded Commodities
(a) Proposed Amendments
CEA section 5c(c)(5)(C) applies with respect to agreements,
contracts, transactions, or swaps in excluded commodities that are
based upon the occurrence, extent of an occurrence, or contingency
(other than a change in the price, rate, value, or levels of a
commodity described in section 1a(2)(i)).\44\ There is no ``section
1a(2)(i)'' in the CEA, and the Commission believes the reference to
this provision in CEA section 5c(c)(5)(C) is a typographical or
drafting error.\45\ In adopting Sec. 40.11, the Commission interpreted
the ``excluded commodities'' falling within the scope of CEA section
5c(c)(5)(C) to be those set forth in CEA section 1a(19)(iv), and
accordingly referenced CEA section 1a(19)(iv) in Sec. Sec.
40.11(a)(1)-(2) and Sec. 40.11(c).\46\
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\44\ CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
\45\ CEA section 1a(2), 7 U.S.C. 1a(2), defines an ``appropriate
Federal banking agency,'' which is not relevant to the excluded
commodity definition.
\46\ While the adopting release did not discuss the basis for
this interpretation, it is likely that the Commission assumed that
Congress intended to incorporate the statutory language of the
``excluded commodity'' definition set forth in CEA section
1a(19)(iv), since CEA section 5c(c)(5)(C) tracks the language of CEA
section 1a(19)(iv) to a large extent. The ``excluded commodity''
definition set forth in CEA section 1a(19)(iv) is as follows: 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. ``[C]lause (i)'' refers to CEA section 1a(19)(i).
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With the aim of adhering as closely as possible to the statutory
text--while, by necessity, having to account for the errant reference
in CEA section 5c(c)(5)(C) to ``section 1a(2)(i),'' which is not a
provision in the statute--the Commission is proposing to amend
Sec. Sec. 40.11(a)(1)-(2) and Sec. 40.11(c) to refer to agreements,
contracts, transactions, or swaps in excluded commodities based on the
occurrence, extent of an occurrence, or contingency (other than a
change in the price, rate, value, or levels of a commodity described in
section 1a(19)(i) of the Act). These proposed amendments would achieve
two purposes. First, the proposed amendments would remove from the
relevant rules the current reference to CEA section 1a(19)(iv) and
would more precisely track the text of CEA section 5c(c)(5)(C). Second,
the proposed amendments would clarify the Commission's interpretation
that the
[[Page 48973]]
reference to ``section 1a(2)(i)'' in CEA section 5c(c)(5)(C) was
intended by Congress to refer to the excluded commodities described in
CEA section 1a(19)(i), namely, 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. This interpretation carves out from the
scope of CEA section 5c(c)(5)(C) event contracts based on a change in
the price, rate, value, or levels of these measures, indices, and
instruments.
The measures, indices, and instruments described in CEA section
1a(19)(i) served as underlyings for a range of derivative contracts
that were broadly traded on CFTC-registered exchanges at the time of
enactment of CEA section 5c(c)(5)(C).\47\ As such, the Commission
believes that it is unlikely that Congress intended the heightened
authority granted to the Commission in CEA section 5c(c)(5)(C) to apply
with respect to event contracts based on changes in the price, rate,
value or levels of these measures, indices, and instruments.\48\ The
Commission notes that it has not historically recognized these types of
event contracts as falling within the scope of CEA section 5c(c)(5)(C)
and, by extension, Sec. 40.11.
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\47\ These included derivative contracts based on changes in the
Consumer Price Index (``CPI''), home price indices for various U.S.
cities, U.S. Initial Jobless Claims, and Gross Domestic Product
(``GDP'').
\48\ Consistent with the Commission's view that the reference to
``section 1a(2)(i)'' in CEA section 5c(c)(5)(C) was intended by
Congress to refer to the excluded commodities described in CEA
section 1a(19)(i), section 201(b) of the CFTC Reauthorization Act of
2019 included, as a technical correction to the CEA, the replacement
of the reference to ``section la(2)(i)'' with a reference to
``section 1a(19)(i).'' CFTC Reauthorization Act of 2019, H.R. 6197,
116th Cong. (2d. Sess. 2020).
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(b) Illustrative Examples of Event Contracts Not Within the Scope of
CEA Section 5c(c)(5)(C) and Sec. 40.11
The Commission believes that registered entities and market
participants would benefit from the Commission providing examples of
the types of event contracts that, in the Commission's view, fall
outside of the scope of CEA section 5c(c)(5)(C) and, by extension,
Sec. 40.11.\49\ The Commission believes that, among other things, this
will assist registered entities, as well as applicants for
registration, in making informed business decisions with respect to
product design, thereby supporting responsible innovation. The
Commission believes that this also will support the more efficient use
of CFTC staff resources in connection with the review of event contract
submissions.
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\49\ For the avoidance of doubt, with respect to these types of
event contracts, a registered entity still must comply with the
substantive and procedural requirements that apply, more generally,
to the listing for trading or acceptance for clearing of derivative
contracts, including, for DCMs and SEFs, the statutory requirement
to ensure that such contracts are not readily susceptible to
manipulation.
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While the Commission cannot anticipate every contract design, the
Commission believes that event contracts based on a change in the
price, rate, value, or levels of the following would generally fall
outside of the scope of CEA section 5c(c)(5)(C) and Sec. 40.11:
Economic indicators, including the CPI and other price
indices; the U.S. trade deficit with another country; measures related
to GDP, jobless claims, or the unemployment rate; and U.S. new home
sales;
Financial indicators, including the federal funds rate;
total U.S. credit card debt; fixed-rate mortgage averages (e.g., the
30-year fixed-rate mortgage interest rate); and end of day, week, or
month values for broad-based stock indexes; and
Foreign exchange rates or currencies.
Request for Comment
The Commission requests comment on all aspects of its proposal to
amend the language of Sec. Sec. 40.11(a)(1)-(2) and 40.11(c) to more
precisely track, in the description of ``excluded commodities,'' the
text of CEA section 5c(c)(5)(C). In particular, the Commission requests
comment on its interpretation that the reference to ``section
1a(2)(i)'' in the parenthetical in CEA section 5c(c)(5)(C)(i) is a
typographical or drafting error, and that the intention was to refer to
the excluded commodities described in CEA section 1a(19)(i).
The Commission further requests comment on the examples provided of
event contracts that the Commission believes would generally fall
outside of the scope of CEA section 5c(c)(5)(C) and Sec. 40.11. In
particular, the Commission requests comment on the following questions:
Are there additional types of event contracts that should
be explicitly identified by the Commission in the non-exclusive list of
contract types that would generally fall outside of the scope of CEA
section 5c(c)(5)(C) and Sec. 40.11?
What indices or measures are ``other macroeconomic
index[es] or measure[s]'' for purposes of CEA section 1a(19)(i)? Are
tax rates (e.g., corporate and capital gains tax rates) among such
macroeconomic measures?
2. Contracts That ``Involve'' an Enumerated Activity
CEA section 5c(c)(5)(C) applies with respect to event contracts in
certain excluded commodities that ``involve'' one of the Enumerated
Activities or a prescribed similar activity. In adopting Sec. 40.11,
the Commission described the types of event contracts that may not be
listed for trading or accepted for clearing as contracts that involve,
relate to, or reference one of the Enumerated Activities or a
prescribed similar activity.\50\ Commission Regulation 40.11(c) further
provides that the Commission may engage in a 90-day review of an event
contract if the contract may involve, relate to, or reference an
Enumerated Activity or a prescribed similar activity.\51\
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\50\ 17 CFR 40.11(a)(1) and (2). While there are no prescribed
similar activities at this juncture, the Commission retains its
authority under CEA section 5c(c)(5)(C)(i)(VI) and Sec. 40.11(a)(2)
to prescribe similar activities in future rules or regulations.
\51\ 17 CFR 40.11(c).
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In order to further align the language of the regulation with the
statutory text of CEA section 5c(c)(5)(C), the Commission proposes to
amend Sec. 40.11 to remove the terms ``relate to'' and ``reference''
wherever they appear and to simply refer to event contracts that
``involve'' an Enumerated Activity or prescribed similar activity. The
proposed amendments would reaffirm the scope of the Commission's
prohibition authority and the standard of review that applies with
respect to an event contract pursuant to Sec. 40.11. The proposed
amendments would also be consistent with the determinations made by the
Commission in the Nadex Order and the Kalshi Order, both of which
focused on whether the event contracts in question ``involved'' an
Enumerated Activity.\52\ The proposed amendments are not intended to
alter the scope of the Commission's prohibition authority or the nature
of the Commission's analysis to determine whether a particular event
contract falls within the ambit of CEA section 5c(c)(5)(C) and Sec.
40.11.
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\52\ See Kalshi Order at 5-7; Nadex Order at 2.
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The term ``involve'' is not defined in the CEA, so the Commission
gives the term its ordinary meaning.\53\ Definitions of ``involve''
include ``to relate to or affect,'' ``to relate closely,'' to
``entail,'' or to ``have as an essential feature or consequence.'' \54\
In this regard, the
[[Page 48974]]
Commission reiterates that a contract may ``involve'' an Enumerated
Activity, or prescribed similar activity, in circumstances where such
activity is not, itself, the contract's underlying.\55\ By its plain
meaning, a contract ``involves'' its underlying, but it also involves
other characteristics. Further, where the CEA specifies a contract's
underlying, it uses the word ``underlying,'' \56\ or, as syntax
requires, it refers to what the contract is ``based on'' \57\ or
``based upon.'' \58\
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\53\ See Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 187, 115
S.Ct. 788 (1995); see also Morrisette v. United States, 342 U.S.
246, 263, 72 S.Ct. 240 (1952) (holding that undefined statutory
words that are not terms of art are given their ordinary meanings,
frequently derived from the dictionary).
\54\ See ``involve'' definition, Merriam-Webster.com, available
at https://www.merriam-webster.com/dictionary/involve (last visited
Mar. 7, 2024); Random House College Dictionary 703 (Revised ed.
1979); Riverside University Dictionary 645 (1983) 645; see also
Roget's International Thesaurus 1040 (7th ed. 2010) (giving as
synonyms ``entail'' and ``relate to'').
\55\ See Kalshi Order at 5-7; Nadex Order at 2.
\56\ E.g., 7 U.S.C. 6c(d)(2)(A)(i), 20(e), 25(a)(1)(D)(ii).
\57\ E.g., 7 U.S.C. 2(a)(1)(C)(i)(I), 2(a)(1)(C)(iv), 6b(e).
\58\ E.g., 7 U.S.C. 2(a)(1)(C)(ii).
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Beyond the plain meaning of ``involve,'' the full text of CEA
section 5c(c)(5)(C)(i) demonstrates that a contract ``involve[s]'' more
than just its underlying: the provision uses the terms ``based upon''
and ``involve'' in the same sentence and differentiates between the
two. First, CEA section 5c(c)(5)(C)(i) states that the provision
applies with respect to agreements, contracts, transactions, or swaps
in excluded commodities that are based upon the occurrence, extent of
an occurrence, or contingency.\59\ In other words, the contract's
underlying must be an event. Then, just a few words later, CEA section
5c(c)(5)(C)(i) states that ``such agreements, contracts, or
transactions'' must ``involve'' an Enumerated Activity or prescribed
similar activity. In context, ``based upon'' and ``involve'' must have
different meanings, with ``based upon'' referring to the underlying,
and requiring only that it be an event, and ``involve'' retaining its
broader ordinary meaning and referring not just to the underlying, but
to ``such agreements, contracts, or transactions'' as a whole.
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\59\ 7 U.S.C. 7a-2(c)(5)(C).
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In effect, Congress's choice of the broader term ``involve'' means
that CEA section 5c(c)(5)(C) encompasses both event contracts whose
underlying is an Enumerated Activity or prescribed similar activity,
and event contracts with a different connection to an Enumerated
Activity or prescribed similar activity, because, for example, they
``relate closely'' to, ``entail,'' or ``have as an essential feature or
consequence'' such activity.
The legislative history of CEA section 5c(c)(5)(C) supports the
plain meaning of the statutory text in this regard. During the 2010
Colloquy, Senator Lincoln stated that, among other things, CEA section
5c(c)(5)(C) was intended to ``prevent gambling through futures
markets'' and to restrict derivatives exchanges from ``construct[ing]
an `event contract' around sporting events such as the Super Bowl, the
Kentucky Derby, and Masters Golf Tournament.'' \60\ None of the Super
Bowl, the Kentucky Derby, or the Masters Golf Tournament are, of
themselves, ``gaming.'' \61\ Rather, the statement of Senator Lincoln--
who, as noted above, is identified in the 2010 Colloquy as one of the
authors of CEA section 5c(c)(5)(C)--focuses on the overall
characteristics of the contract. As noted in the Nadex Order and the
Kalshi Order, this legislative history supports the plain meaning of
the term ``involve,'' and indicates that the question for the
Commission in evaluating whether a contract ``involves'' an Enumerated
Activity or prescribed similar activity is whether the contract,
considered as a whole, involves one of those activities.\62\
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\60\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln).
\61\ As noted in the Kalshi Order, it is difficult to conceive
of a contract whose underlying event, itself, is ``gaming.'' If
``involve'' were to refer only to a contract's underlying, contracts
based on sporting events such as horse races and football games
would not qualify, because sports typically are not understood to be
``gaming''--they are understood to be ``games.'' In effect, if
``involve'' were to refer only to a contract's underlying, the scope
of certain prongs of CEA section 5c(c)(5)(C) could effectively be
limited to a null set of event contracts, which could not have been
Congress's intent. Kalshi Order at 7, note 18.
\62\ Nadex Order at 2; Kalshi Order at 7. For example, giving
the term its ordinary meaning, a contract ``involves'' an Enumerated
Activity or prescribed similar activity if trading in the contract
amounts to such activity. Id. at 7, note 19.
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Request for Comment
The Commission requests comment on all aspects of its proposal to
amend Sec. 40.11 to remove the terms ``relate to'' and ``reference''
wherever they appear, and to refer in the regulation only to event
contracts that ``involve'' an Enumerated Activity or prescribed similar
activity.
B. The Enumerated Activities
1. Gaming
(a) Background
Neither the CEA nor current Sec. 40.11 define ``gaming'' or any of
the other Enumerated Activities. While acknowledging, in the adopting
release for Sec. 40.11, the interest expressed by certain commenters
to further define the term ``gaming'' for purposes of the regulation,
the Commission deferred at the time from doing so, indicating that it
would instead ``consider individual product submissions on a case-by-
case basis under Sec. 40.2 or Sec. 40.3.'' \63\
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\63\ Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
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Since the adoption of Sec. 40.11 in 2011, as part of the agency's
standard product review process, CFTC staff have evaluated whether
event contracts in certain excluded commodities may implicate CEA
section 5c(c)(5)(C) and Sec. 40.11, and in four instances the
Commission has commenced a review pursuant to Sec. 40.11(c) to
evaluate whether event contracts implicated one of the Enumerated
Activities. In each of these four instances, a Sec. 40.11(c) review
was commenced, in part, to evaluate whether the event contracts in
question implicated gaming.\64\
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\64\ See https://www.cftc.gov/PressRoom/PressReleases/6163-12
(2011 Nadex contracts); https://www.cftc.gov/PressRoom/PressReleases/8345-20 (2020 ErisX contracts); https://www.cftc.gov/PressRoom/PressReleases/8578-22 (2022 Kalshi contracts); https://www.cftc.gov/PressRoom/PressReleases/8728-23 (2023 Kalshi
contracts).
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Based upon its experience administering CEA section 5c(c)(5)(C)
pursuant to Sec. 40.11, the Commission believes that defining the term
``gaming'' within Sec. 40.11 will assist in establishing a common
understanding and more uniform application of the term. It will thereby
assist registered entities, and applicants for registration, in their
product design efforts, and benefit market participants and the public
by helping to ensure that event contracts listed for trading and
accepted for clearing by registered entities are consistent with the
requirements of the CEA and Sec. 40.11. The Commission notes that
there may continue to be instances where contract-specific reviews are
commenced pursuant to Sec. 40.11(c) in order to evaluate whether a
contract involves ``gaming,'' as proposed to be defined. However, the
Commission expects that establishing a definition, and thereby a common
understanding of the term, will help to reduce the frequency of these
reviews.
(b) Proposed Gaming Definition
The Commission proposes to define ``gaming'' in new Sec.
40.11(b)(1) as the staking or risking by any person of something of
value upon: (i) the outcome of a contest of others; (ii) the outcome of
a game involving skill or chance; (iii) the performance of one or more
competitors in one or more contests or games; or (iv) any other
occurrence or non-occurrence in connection with one or more contests or
games.\65\ This proposed definition is
[[Page 48975]]
consistent with the Commission's interpretation of the term ``gaming''
in the Nadex Order and the Kalshi Order,\66\ and draws upon the
ordinary meaning of the term \67\ and relevant state and federal
statutory definitions, as discussed below. The Commission wishes to
make it clear that its proposed definition of ``gaming'' would not have
applicability beyond the CFTC's administration of CEA section
5c(c)(5)(C) and Sec. 40.11.
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\65\ The Commission considers the term ``contest'' to have its
ordinary meaning, and to encompass a ``competition.'' See, e.g.,
MERRIAM-WEBSTER.COM, available at https://www.merriam-webster.com/dictionary/contest (last visited Mar. 7, 2024) (defining the noun
``contest'' as: ``1) a struggle for superiority or victory:
competition; 2) a competition in which each contestant performs
without direct contact with or interference from competitors'').
\66\ See Nadex Order at 2-3; Kalshi Order at 8-10.
\67\ See note 70, infra.
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The proposed definition recognizes--as the Commission did in the
Nadex Order and the Kalshi Order \68\--that the terms ``gaming'' and
``gambling'' are used interchangeably in common usage and dictionary
definitions.\69\ The proposed definition further recognizes that, under
a number of state statutes, ``gambling,'' ``betting,'' or ``wagering''
is recognized to include a person staking or risking something of value
upon a game or contest, or the performance of competitors in a game or
contest.\70\ Further, a federal statute, the Unlawful internet Gambling
Enforcement Act (``UIGEA''), defines the term ``bet or wager'' as the
staking or risking by any person of something of value on the outcome
of a contest of others, a sporting event, or a game subject to chance,
upon an agreement or understanding that the person or another person
will receive something of value in the event of a certain outcome.\71\
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\68\ Nadex Order at 2-3; Kalshi Order at 8-9.
\69\ For example, Dictionary.com defines ``gaming'' as, e.g.,
``gambling.'' See ``gaming'' definition, Dictionary.com, https://www.dictionary.com/browse/gaming (last visited Feb. 2, 2024).
Black's Law Dictionary also refers to ``gambling'' as ``gaming'' and
cross-refers the definition of gaming to gambling. See ``GAMING
Definition & Legal Meaning,'' Black's Law Dictionary, 2nd Ed.,
available at https://thelawdictionary.org/gaming/ (last visited Mar.
22, 2024). Further, many state agencies that regulate gambling are
known as ``gaming'' commissions. See, e.g., Nevada Gaming Commission
and Nevada Gaming Control Board, https://gaming.nv.gov/ (last
visited Mar. 7, 2024); New York State Gaming Commission, https://www.gaming.ny.gov/ (last visited Mar. 1, 2024); Illinois Gaming
Board, https://www.igb.illinois.gov/ (last visited Mar. 7, 2024).
\70\ See, e.g., Ga. Code Ann. section 16-12-21(a)(1) (West 2020)
(A person commits the offense of gambling when he makes a bet upon
the partial or final result of any game or contest or upon the
performance of any participant in such game or contest.); Tex. Penal
Code Ann. section 47.02(a) (West 2019) (A person commits an offense
of gambling if he: (1) makes a bet on the partial or final result of
a game or contest or on the performance of a participant in a game
or contest''). See also note 75, infra.
\71\ 31 U.S.C. 5362(1)(A). The UIGEA, 31 U.S.C. 5361-5367
(2006), prohibits gambling businesses from knowingly accepting
payments in connection with the participation of another person in a
bet or wager that involves the use of the internet and that is
unlawful under any federal or state law. Unlike the Wire Act, 28
U.S.C. 1084 (1961), the UIGEA defines a ``bet'', but it criminalizes
it only if it is connected with unlawful internet gambling that
violates any federal or state law. See 31 U.S.C. 5362. The UIGEA
does not alter the definitions in other federal and state laws and
expressly excludes any transaction conducted on or subject to the
rules of a registered entity or exempt board of trade under the CEA
from the definition of ``bet or wager.'' See id. at section
5362(1)(E).
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Accordingly, the Commission believes that it is appropriate, for
purposes of defining ``gaming'' within Sec. 40.11, to focus on the
staking or risking of something of value upon a contest of others or a
game, including the outcome of such contest or game, the performance of
competitors in such contest or game,\72\ or other occurrences or non-
occurrences in connection with such contest or game. As noted above,
this proposed approach draws upon the approach taken in relevant state
and federal statutes to defining the terms ``gambling,'' ``betting,''
and ``wagering.'' In this regard, the proposed approach is consistent
with indications of the intent of the drafters of CEA section
5c(c)(5)(C). In the 2010 Colloquy, Senator Lincoln stated that the
provision was intended, in part, to assure that the Commission had the
authority to ``prevent gambling through futures markets.'' \73\
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\72\ This would include the performance of one or more athletes
in one or more games, as well as the performance of one or more
competitors in one or more auto, drone, boat, horse, or similar
competitions. In addition, this would include performance in any
``fantasy'' or simulated contest or league in which participants own
or manage an imaginary or theoretical team and compete against other
participants based on the performance of such teams or team members.
\73\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statement of Sen. Blanche Lincoln).
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The Commission acknowledges that several state statutes recognize
``gambling,'' ``betting,'' or ``wagering,'' to encompass, more broadly,
a person staking or risking something of value upon the outcome of any
contingent event not in the person's influence or control--and not just
a game or a contest of others.\74\ The Commission is not proposing to
define ``gaming'' in this manner. The Commission recognizes that this
broader definition could encompass event contracts that were not
intended by Congress to be subject to the Commission's heightened
authority pursuant to CEA section 5c(c)(5)(C), including the types of
event contracts described in section II.A.1.b, supra. To avoid going
beyond what Congress may have intended with respect to the ``gaming''
category, the Commission is proposing to use the narrower definition
discussed herein. The Commission is, however, proposing to define
``gaming'' to include the staking or risking of something of value on a
contingent event in connection with a game or contest, which the
Commission believes would be as much of a wager or bet on the game or
contest as staking or risking something of value on the outcome of the
game or contest would be.
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\74\ See, e.g., N.Y. Penal Law section 225.00(2) (McKinney 2015)
(A person engages in gambling when he stakes or risks something of
value upon the outcome of a contest of chance or a future contingent
event not under his control or influence, upon an agreement or
understanding that he will receive something of value in the event
of a certain outcome.); Mich. Comp. Laws section 750.301 (2023) (Any
person or his or her agent or employee who, directly or indirectly,
takes, receives, or accepts from any person any money or valuable
thing with the agreement, understanding or allegation that any money
or valuable thing will be paid or delivered to any person where the
payment or delivery is alleged to be or will be contingent upon the
result of any race, contest, or game or upon the happening of any
event not known by the parties to be certain.); Va. Code Ann.
section 18.2-325(1) (West 2022) (Illegal gambling means the making,
placing, or receipt of any bet or wager of money or other
consideration or thing of value, made in exchange for a chance to
win a prize, stake, or other consideration or thing of value,
dependent upon the result of any game, contest, or any other event
the outcome of which is uncertain or a matter of chance.).
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(c) Illustrative Examples of Gaming
In order to provide additional guidance to registered entities and
market participants, the Commission proposes to set forth in new Sec.
40.11(b)(2) a non-exclusive list of examples of activities that
constitute ``gaming,'' as proposed to be defined. Proposed Sec.
40.11(b)(2) states that ``gaming'' includes, but is not limited to, the
staking or risking by any person of something of value upon: (i) the
outcome of a political contest, including an election or elections;
(ii) the outcome of an awards contest; (iii) the outcome of a game in
which one or more athletes compete; or (iv) an occurrence or non-
occurrence in connection with such a contest or game, regardless of
whether it directly affects the outcome. The Commission emphasizes that
the list of examples provided in proposed Sec. 40.11(b)(2) is non-
exclusive. To the extent that other activity falls within the
definition of ``gaming'' set forth at proposed Sec. 40.11(b)(1), such
activity would also constitute ``gaming.''
The first three examples in the non-exclusive list reflect types of
games or contests which, when something of value is staked or risked
upon their outcome, have been recognized as
[[Page 48976]]
gambling, betting, or wagering under relevant state and federal
statutes, and would constitute ``gaming'' under the proposed definition
in Sec. 40.11(b)(1).\75\ The first example reflects the Commission's
prior determinations that ``gaming'' includes the staking of something
of value upon the outcome of a political contest, including an
election.\76\ The Commission's prior determinations reflect, in turn,
that several state statutes, on their face, link the terms ``gaming''
or ``gambling'' to betting or wagering on elections.\77\
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\75\ See section II.B.1.b, supra.
\76\ In the Nadex Order, which addressed certain event contracts
on election outcomes, the Commission found that state gambling
definitions of ``wager'' and ``bet'' were analogous to the act of
taking a position in the subject contracts. Additionally, the
Commission cited to the UIGEA definition of the term ``bet or
wager,'' and found that taking a position in the subject contracts
``fit[] the plain meaning'' of a person staking something of value
upon a contest of others, since the contracts were all premised--
either directly or indirectly--on the outcome of a contest between
electoral candidates. As in the Nadex Order, in the Kalshi Order,
the Commission looked to definitions of the terms ``gaming,''
``gambling,'' and ``bet or wager,'' including state and federal
statutory definitions, and found that the subject contracts involved
gaming, since taking a position in the contracts would be staking
something of value upon the outcome of a contest of others: the
contracts were premised on the outcome of Congressional election
contests. As discussed, infra, the Commission further found in the
Kalshi Order that the subject contracts involved ``activity that is
unlawful under . . . State law'' pursuant to CEA section
5c(c)(5)(C)(i)(I) and Sec. 40.11(a)(1).
\77\ See, e.g., 720 Ill. Comp. Stat. Ann. section 5/28-1 (West
2011) (A person commits gambling when he makes a wager upon the
result of any game, contest, or any political nomination,
appointment or election''); Neb. Rev. Stat. section 28-1101(4)
(2011) (A person engages in gambling if he or she bets something of
value . . . upon the outcome of a game, contest, or election.); N.M.
Stat. Ann. section 44-5-10 (1978) (Bets and wagers authorized by the
constitution and laws of the United States, or by the laws of this
state, are gaming within the meaning of this chapter.); N.D. Cent.
Code. Ann. section 12.1-28-01 (West 2011) (Gambling means risking
any money upon the happening or outcome of an event, including an
election . . . over which the person taking the risk has no
control.). See also Ga. Code. Ann. section 16-12-21(a)(2) (West
2011) (A person commits the offense of gambling when he makes a bet
upon the result of any political nomination, appointment, or
election.); Miss. Code Ann. section 97-33-1 (West 2011) (If any
person shall wager or bet upon the result of any election he shall
be fined in a sum not more than Five Hundred Dollars.); S.C. Code
Ann. section 16-19-90 (2012) (Any person who shall make any bet or
wager of money upon any election in this State shall be guilty of a
misdemeanor.); Tex. Penal Code Ann. section 47.02(a)(2) (West 2011)
(A person commits an offense if he makes a bet on the result of any
political nomination, appointment, or election.).
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For purposes of proposed Sec. 40.11(b), the Commission would
consider a political contest to include, but not to be limited to, a
federal, state, or municipal election or primary contest for any
political office, as well as any political contest in a foreign
jurisdiction, including any political subdivision thereof, or in a
supranational organization. For the avoidance of doubt, the Commission
would consider an event contract to ``involve'' gaming if the contract
is premised on the outcome of one or more political contests, or would
otherwise amount to the staking or risking of something of value upon
the outcome of one or more political contests.\78\
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\78\ Consistent with its determination in the Kalshi Order,
where taking a position in a contract would be staking or risking
something of value upon the outcome of a political contest,
including an election or elections, the Commission would consider
the contract also to involve activity that is unlawful under state
law, pursuant to CEA section 5c(c)(5)(C)(i)(I) and Sec.
40.11(a)(1). See Kalshi Order at 12-14.
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The inclusion of the staking or risking of something of value upon
the outcome of a political contest as an example of ``gaming'' in
proposed Sec. 40.11(b)(2) highlights that the Commission's proposed
definition is not limited to sporting events or other games. This
reflects the similar approach taken in numerous state gambling statutes
\79\ as well as in the UIGEA, which defines a ``bet or wager'' to mean,
in relevant part, the staking or risking by any person of something of
value on the outcome of a contest of others, a sporting event, or a
game subject to chance.\80\ The separate ``contest of others'' category
in the UIGEA definition demonstrates that ``betting or wagering'' (and,
by extension, gaming) is recognized within a federal statutory
framework as extending beyond sporting events and games of chance.
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\79\ See, e.g., notes 71, 75, and 78, supra.
\80\ 31 U.S.C. 5362(1)(a).
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In this regard, in its non-exclusive list of examples of ``gaming''
at proposed Sec. 40.11(b)(2), the Commission includes the staking or
risking of something of value upon the outcome of an awards contest.
This would encompass, among other things, the staking or risking of
something of value upon the outcome of entertainment award contests
such as the Emmys, the Oscars, or the Grammys; athletics award contests
such as the Heisman Trophy; or achievement award contests such as the
Nobel Prize or the Pulitzer Prize. The Commission further includes as
an example of ``gaming'' in proposed Sec. 40.11(b)(2) the staking or
risking of something of value upon the outcome of a game in which one
or more athletes participate. This would encompass, among other things,
the staking or risking of something of value upon the outcome of a
professional or amateur (including scholastic) sports game.
Finally, the Commission includes as an example of ``gaming'' in
proposed Sec. 40.11(b)(2) the staking or risking of something of value
upon an occurrence or non-occurrence in connection with any of the
previously described examples of contests or games--regardless of
whether such occurrence or non-occurrence directly affects the outcome
of such contest or game. As discussed above, the Commission is
proposing to define ``gaming'' to mean--in addition to the staking or
risking of something of value upon the outcome of a contest of others
or a game of skill or chance, or the performance of one or more
competitors in such contest or game--the staking or risking of
something of value upon any other occurrence or non-occurrence in
connection with a contest or game. The Commission makes clear, in
proposed Sec. 40.11(b)(2), that it is of no import whether or not such
occurrence or non-occurrence directly affects the outcome of a contest
or game. Such an occurrence or non-occurrence would encompass, for
example: (i) whether a particular candidate enters or withdraws from a
political contest, or polls above or below a certain threshold; (ii)
whether a particular individual is nominated for an award or attends an
award ceremony; and (iii) in the context of an athletic game, the score
or individual player or team statistics at given intervals during the
game, whether a particular player will participate in a game, and
whether a particular individual will attend a game.
The Commission notes that a number of states prohibit betting or
wagering on a variety of occurrences or non-occurrences associated with
athletic games,\81\ as well as non-sporting events.\82\ This highlights
that in some
[[Page 48977]]
instances, event contracts that involve ``gaming,'' as proposed to be
defined, may also involve a second Enumerated Activity--``activity that
is unlawful under . . . State law.'' For example, as discussed in
section I.C.3, supra, the Commission found in the Kalshi Order that the
subject contracts involved both gaming and activity that is unlawful
under state law.\83\ While the Commission does not provide a complete
catalogue herein of the types of betting or wagering that is prohibited
under state law, it warrants recognition that in certain instances,
event contracts that involve ``gaming,'' as proposed to be defined, may
also involve activity that is unlawful under state law.\84\
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\81\ See, e.g. Va. Code Ann. section 58.1-4039 (A)(2) (West) (No
person shall place or accept a proposition bet on college sports.).
Ohio and Maryland have recently followed suit and banned player-
specific proposition bets on college sports. See https://casinocontrol.ohio.gov/static/NCAA%20Request%20&%20Commission's%20Response/
Response%20to%20the%20NCAA%20Regarding%20Proposition%20Wagers%20on%20
Student%20Athletes%202022%2002%2023.pdf (Feb. 23, 2024 letter from
the Ohio Casino Control Commission approving a request from the
National Collegiate Athletic Association (``NCAA'') to prohibit
player-specific proposition bets on intercollegiate athletics
competitions); https://sbcamericas.com/2024/03/04/maryland-bans-college-athlete-props/ (describing a directive by the Maryland
Lottery and Gaming Control Agency to all sportsbook operators in
Maryland to remove college player proposition wagers from their
platforms as of Mar. 1, 2024). See also Massachusetts Gaming
Commission Says No Super Bowl Prop Bets This Year, NewBostonPost
(Feb. 9, 2024), available at https://newbostonpost.com/2024/02/09/massachusetts-gaming-commission-says-no-super-bowl-prop-bets-this-year/.
\82\ For example, in Nevada, a sports book may not accept wagers
on a non-sporting event unless specifically approved by the Gaming
Commission; to date, the Nevada Gaming Commission has not approved
wagers on awards shows or other non-athletic or certain ``Esports''
related events or contests. See Nev. Gaming Comm'n Reg. section
22.120, Permitted wagers (Rev. 2023)
\83\ Kalshi Order at 11-12.
\84\ See note 88, infra. While the Commission has exclusive
jurisdiction over futures and swaps contracts traded on a CFTC-
registered exchange, preempting the application of state law with
respect to such transactions--and meaning that transacting in such
contracts on a CFTC-registered exchange cannot, of itself,
constitute unlawful activity for state law purposes--this does not
preclude a contract from involving ``activity that is unlawful under
. . . State law'' for purposes of CEA section 5c(c)(5)(C).
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As discussed above, the Commission recognizes that there may
continue to be instances where contract-specific reviews will need to
be commenced pursuant to Sec. 40.11(c) in order to evaluate whether a
particular contract involves ``gaming,'' as proposed to be defined.
However, it is anticipated that the proposed definition and non-
exclusive list of examples will assist in demarcating for registered
entities and market participants the types of event contracts that
involve ``gaming'' for purposes of Sec. 40.11(a)(l), and thereby
reduce the frequency with which such reviews must be commenced.
Request for Comment
The Commission requests comment on all aspects of its proposed
definition of the term ``gaming.'' In particular, the Commission
requests comment on the following questions:
Are there examples of activities that would constitute
``gaming'' that may fall outside of the proposed definition?
Are there other types of votes or elections that the
Commission should specifically identify, for clarity, in the
illustrative examples in proposed Sec. 40.11(b)(2)? What types of
other votes or elections should be identified, and why?
Should the availability at gaming venues of bets or wagers
on a particular contingency, occurrence, or event be a relevant factor
in the Commission's consideration of whether an event contract
involving that contingency, occurrence, or event involves ``gaming''
for purposes of Sec. 40.11?
If, on judicial review, it is determined that staking
something of value on the outcome of a political contest does not
involve ``gaming,'' the Commission may consider whether that activity
is ``similar to'' gaming. Is staking something of value on the outcome
of a political contest similar to gaming?
The Commission may also consider whether it should
enumerate contracts involving political contests or some subset thereof
as contracts involving a ``similar activity'' to any one or more of
``war,'' ``terrorism,'' ``assassination,'' or ``activity that is
unlawful under any Federal or State law'' under CEA section
5c(c)(5)(C)(i)(VI) and determine that contracts involving this newly
enumerated activity of political contests are contrary to the public
interest. Are contracts involving political contests contracts
involving a similar activity to any one or more of ``war,''
``terrorism,'' ``assassination,'' or ``activity that is unlawful under
any Federal or State law''? If so, should the Commission determine such
contracts are contrary to the public interest?
2. The Other Enumerated Activities
The Commission does not believe that it is necessary to define
``terrorism,'' ``assassination,'' or ``war'' at this time.\85\ With
respect to ``activity that is unlawful under any Federal or State
law,'' the Commission notes that the Sec. 40.11(c) review that it
conducted in connection with its determination in the Kalshi Order
evaluated whether the subject Congressional control contracts involved
this Enumerated Activity. In the Kalshi Order, the Commission found
that, in many states, betting or wagering on elections is prohibited by
statute or common law, and the Commission cited to the statutory
provisions and caselaw prohibiting such activity that it had identified
through a survey of relevant state law.\86\ The Commission found that,
because taking a position in the subject contracts would be staking
something of value upon the outcome of contests between electoral
candidates--in effect, betting or wagering on the outcome of
elections--and because in many states such conduct is illegal, the
subject contracts involved activity that was unlawful under state
law.\87\
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\85\ The Commission clarifies, however, that it believes that
cyberattacks and other acts of cyberterrorism constitute terrorism,
and in some cases war, and are also likely to constitute activity
that is unlawful under state or federal law.
\86\ Kalshi Order at 11-12.
\87\ CEA section 2(a)(1) grants the Commission ``exclusive
jurisdiction'' over futures and swap contracts traded on a CFTC-
registered exchange, 7 U.S.C. 2(a)(1). This ``preempts the
application of state law,'' Leist v. Simplot, 638 F.2d 283, 322 (2d
Cir. 1980), so transacting these contracts on a CFTC-registered
exchange cannot, in and of itself, be an ``activity that is unlawful
under any . . . State law.'' However, such contracts may still
``involve . . . activity'' that is unlawful under a state law, in
the sense, for example, that transactions in the contracts may
``relate closely'' to, ``entail,'' or ``have as an essential feature
or consequence'' an activity that violates state law. For example,
in the Kalshi Order, the Commission found that state laws (which are
not preempted by the CEA) prohibit wagering on elections. The
Commission found that taking a position in the subject Congressional
control contracts would be staking something of value on the outcome
of contests between electoral candidates, such that wagering on
elections was ``an essential feature or consequence'' of the
contracts. Accordingly, the Commission found that while transactions
in the contracts on a CFTC-registered exchange would not violate,
for example, state bucket-shop laws, they nevertheless involved an
activity that is unlawful in a number of states--wagering on
elections. The Commission found that to permit such transactions on
a CFTC-registered exchange would undermine important state interests
expressed in statutes separate and apart from those applicable to
trading on a CFTC-registered exchange. Id. at 13, note 28.
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The Commission anticipates that that the agency would in the future
follow a similar approach--including a survey of relevant law--in
circumstances where there is a question regarding whether an event
contract submitted to the Commission involves activity that is unlawful
under any state, or federal, law for purposes of Sec. 40.11(a)(1). The
Commission acknowledges that many state codes include laws prohibiting
certain activity that, while not repealed, are generally considered
archaic and are not enforced. The Commission believes that it is
unlikely that a registered entity would seek to list for trading or
accept for clearing an event contract involving such a law. To the
extent that a registered entity does make a submission to the
Commission regarding a contract that may involve such a law, the
Commission believes that it may be appropriate to commence a review of
the contract pursuant to Sec. 40.11(c) to evaluate whether, in light
of the relevant facts and circumstances, it is appropriate to recognize
the contract as involving ``activity that is unlawful under any . . .
State law'' for purposes of Sec. 40.11(a)(1).
The Commission notes further that a registered entity may receive a
definitive resolution of any questions concerning the applicability of
Sec. 40.11(a)(1) by submitting a contract for Commission approval
under Sec. 40.3. CFTC staff also may, at its discretion and upon a
request from a registered entity, review a draft contract
[[Page 48978]]
submission or proposal and provide guidance concerning the contract's
compliance with the CEA and CFTC regulations, including Sec.
40.11(a)(1).\88\
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\88\ The Commission notes, however, that staff's guidance
concerning drafts and proposals is preliminary and non-binding. CFTC
staff formally reviews contracts only at such time as a compliant
submission is provided to the Commission pursuant to Sec. 40.2 or
Sec. 40.3.
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Request for Comment
The Commission requests comment as to whether commenters agree with
the Commission's view that a registered entity is unlikely to seek to
list for trading or accept for clearing a contract that involves a
state law prohibiting certain activity that, while not repealed, is
generally considered archaic and is not enforced.
C. Public Interest Considerations
1. Overview of Proposed Amendments
As discussed above, CEA section 5c(c)(5)(C) provides that a
registered entity may not list, or make available for clearing or
trading, contracts in certain excluded commodities that involve an
Enumerated Activity or prescribed similar activity, and that have been
determined by the Commission to be contrary to the public interest.\89\
The Commission interprets CEA section 5c(c)(5)(C) to provide that a
contract may not be listed or made available for clearing or trading if
the Commission finds both that: (i) the contract involves an Enumerated
Activity or prescribed similar activity, and (ii) the contract is
contrary to the public interest.
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\89\ 7 U.S.C. 7a-2(c)(5)(C).
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While CEA section 5c(c)(5)(C) requires the Commission to determine
that a contract that involves an Enumerated Activity or prescribed
similar activity is contrary to the public interest, in order for the
contract to be prohibited from being listed or made available for
clearing or trading, the statute does not require this public interest
determination to be made on a contract-specific basis. The Commission
interprets CEA section 5c(c)(5)(C) to authorize categorical public
interest determinations if the Commission determines that contracts
involving an Enumerated Activity or prescribed similar activity are, as
a category, contrary to the public interest.\90\ The Commission
proposes to amend Sec. 40.11(a)(1) to include a determination that
event contracts involving each of the Enumerated Activities--including
``gaming,'' as proposed to be defined--are, as a category, contrary to
the public interest and therefore may not be listed for trading or
accepted for clearing on or through a registered entity. The Commission
notes that, to date, it has conducted a contract-specific public
interest analysis in connection with each of the contract reviews that
it has commenced pursuant to Sec. 40.11(c).\91\ If, as proposed, Sec.
40.11(a)(1) is amended to include a categorical public interest
determination with respect to contracts involving each of the
Enumerated Activities, the Commission would not, going forward,
undertake a contract-specific public interest analysis as part of a
review commenced pursuant to Sec. 40.11(c). Rather, the focus of any
such review would be to evaluate whether the contract involves an
Enumerated Activity, in which case, it may not be listed for trading or
accepted for clearing on or through a registered entity. The Commission
believes this would be appropriate to ensure the consistent treatment
of categories of contracts that have been determined by the Commission
to be contrary to the public interest. The Commission notes its
expectation, as discussed above, that defining the term ``gaming'' for
purposes of Sec. 40.11(a)(1) will further assist registered entities
in their product design and compliance efforts, and will reduce the
instances in which contract-specific reviews need to be commenced
pursuant to Sec. 40.11(c).
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\90\ Further, the Commission's general rulemaking authority
under CEA section 8(a)(5) provides the Commission with the authority
to enact prophylactic regulations that, as proposed herein and for
the reasons discussed below, the Commission has determined are
reasonably necessary to prevent the listing for trading or
acceptance for clearing of event contracts that will always violate
the public interest, and to diminish the harms (such as inefficiency
for market participants) caused by regular use of post hoc
evaluations of contracts that exchanges have already expended
resources to develop. CEA section 8(a)(5), 7 U.S.C. 12(a)(5)
(authorizing the Commission ``to make and promulgate such rules and
regulations as, in the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to accomplish any
of the purposes of [the CEA]'').
\91\ In the Nadex Order and the Kalshi Order, the Commission
first determined that the subject contracts involved an Enumerated
Activity (or Enumerated Activities), and then separately determined
that the contracts were contrary to the public interest and
therefore prohibited from being listed or made available for
clearing or trading. See Nadex Order at 3-4; Kalshi Order at 13-23.
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2. Factors Considered by the Commission in Evaluating Whether a
Contract, or Category of Contracts, Is Contrary to the Public Interest
The term ``public interest'' is not defined in CEA section
5c(c)(5)(C). As discussed more fully below, historically, the
Commission has evaluated whether a contract is contrary to the public
interest with reference to the contract's commercial hedging or price-
basing utility. The Commission has also, however, regularly stated that
other public interest factors may be considered.\92\ In that historical
context, the Commission observes that the event contract categories
listed in CEA 5c(c)(5)(C)--for example, terrorism, war, assassination,
and activity that is unlawful under any federal or state law--are
indicative of additional public interest concerns for Congress, beyond
a contract's hedging and price-basing utility, in establishing the
heightened authority set forth in that provision.
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\92\ See note 103, infra.
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The Commission reviewed the legislative history available to
establish its own determination of what factors are relevant in a
public interest evaluation under CEA section 5c(c)(5)(C). The
legislative history of the provision is limited, but it does suggest an
intent on the part of the drafters for the hedging and price-basing
utility of a contract to be relevant factors for consideration in a
public interest evaluation.\93\ In the 2010 Colloquy, Senator Feinstein
and Senator Lincoln discussed the Commission's authority, prior to the
enactment of the Commodity Futures Modernization Act of 2000
(``CFMA''), to prevent trading that is contrary to the public
interest.\94\ Before its repeal by the CFMA, CEA section 5(g) made it a
condition of initial and continuing contract market designation that
transactions for future delivery not be contrary to the public
interest.\95\ The Commission interpreted this statutory public interest
standard to include the concept of an ``economic purpose'' test. Pre-
CFMA guidelines articulated the economic purpose test as an evaluation
of whether a contract reasonably can be expected to be, or has been,
used for hedging and/or pricing basing on more than an occasional
basis.\96\
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\93\ The Commission has recognized price basing to occur when
producers, processors, merchants, or consumers of a commodity
establish commercial transaction prices based on the futures price
for that or a related commodity. See, e.g., Kalshi Order at 18.
\94\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln).
\95\ CEA section 5(g), 7 U.S.C. 7(g) (repealed).
\96\ The Commission adopted ``Guideline No. 1'' to assist DCMs
in preparing applications for product approval. See Guideline on
Economic and Public Interest Requirements for Contract Market
Designation, 40 FR 25849 (June 19, 1975). Guideline No. 1 stated
that DCMs should make an affirmative showing that a proposed futures
contract was ``reasonably expected to serve, on more than occasional
basis,'' as a price discovery or hedging tool for commercial users
of the underlying commodity. Subsequently, the Commission revised
Guideline No. 1, publishing it as appendix A to part 5 of chapter 17
of the Code of Federal Regulations. See 47 FR 49832 (Nov. 3, 1982).
As revised in 1982, Guideline No. 1 was updated to address proposed
innovations in the trading of futures contracts, including futures
contracts on financial instruments and on various indexes and cash-
settled futures contracts. Guideline No. 1 was again revised in
1992. 57 FR 3518 (Jan. 30, 1992). The 1992 revisions eliminated
redundant materials by stating that an application for designation
as a contract market for a particular futures contract should
include a cash-market description only when the proposed contract
differed from a currently designated contract and that a DCM need
justify only individual contract terms that were different from
terms which previously had been approved by the Commission. 57 FR at
3521. In addition, the 1992 revisions eliminated the guideline that
a DCM provide a further, separate justification that the proposed
contract would be quoted and disseminated for price basing, or used
as a means of hedging against possible loss through price
fluctuation on more than an occasional basis, noting that ``the
economic purpose of a contract is often implicit, or encapsulated,
in the exchange's demonstration that the terms and conditions of the
proposed contract meet the criteria of the Guideline [No. 1].'' 57
FR at 3521-22, note 9. Former CEA section 5(g) was deleted by the
CFMA, and Guideline No. 1 was accordingly also withdrawn by the
Commission.
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[[Page 48979]]
In the 2010 Colloquy, Senator Feinstein and Senator Lincoln
articulated the approach to evaluating a contract's hedging and price-
basing utility differently from how the economic purpose test was
applied under former CEA section 5(g). Senator Feinstein asked Senator
Lincoln whether, with respect to CEA section 5c(c)(5)(C), the intent
was to ``define `public interest' broadly so that the CFTC may consider
the extent to which a proposed derivative contract would be used
predominantly by speculators or participants not having a commercial or
hedging interest.'' \97\ Senator Feinstein further asked whether the
Commission would ``have the power to determine that a contract is a
gaming contract if the predominant use of the contract is speculative
as opposed to a hedging or economic use.'' \98\ Senator Lincoln
replied, ``That is our intent.'' \99\ Thus, while pre-CFMA Commission
guidelines articulated the economic purpose test as an evaluation of
``whether [a] contract reasonably can be expected to be, or has been,
used for hedging and/or price basing on more than an occasional
basis,'' Senator Lincoln and Senator Feinstein referred instead to
whether a contract is used predominantly by speculators or market
participants not having a commercial or hedging interest.
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\97\ 156 Cong. Rec. S5906 (daily ed. July 15, 2010) (statements
of Sen. Diane Feinstein and Sen. Blanche Lincoln).
\98\ Id.
\99\ Id.
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While the articulation of the approach to evaluating hedging and
pricing-basing utility differs from the pre-CFMA articulation, the 2010
Colloquy does suggest an intent on the part of the drafters of CEA
section 5c(c)(5)(C) for the hedging and price-basing utility of a
contract to be relevant considerations in a public interest review
under that provision. As noted, this is not inconsistent with the
approach taken in assessing whether a futures contract was contrary to
the public interest under former CEA section 5(g), which contemplated
application of the economic purpose test.
In this regard, the Commission notes further that the general
``Findings and Purpose'' provision of the CEA, at CEA section 3(a),
states that the transactions subject to [the CEA] . . . are affected
with a national public interest by providing a means for managing and
assuming price risks, discovering prices, or disseminating pricing
information through trading in liquid, fair, and secure financial
facilities.\100\ Accordingly, the CEA recognizes hedging as a public
interest, which certain transactions subject to the CEA--transactions
providing a means for managing and assuming price risk--are intended to
serve.
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\100\ 7 U.S.C. 5(a).
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As such, the Commission recognizes the utility of a contract, or
category contracts, for purposes of hedging and price-basing to be
relevant factors for consideration in evaluating whether the contract,
or category of contracts, is contrary to the public interest pursuant
to CEA section 5c(c)(5)(C).\101\ While the articulation of the approach
to evaluating hedging and price-basing utility differs in the 2010
Colloquy and under the pre-CFMA economic purpose test, the Commission
anticipates that a contract, or category of contracts, that does not
satisfy one such articulation also would likely not satisfy the other.
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\101\ The Commission considered hedging and price-basing utility
in its previous orders under CEA section 5c(c)(5)(C) and Sec.
40.11. See Kalshi Order at 13-15; Nadex Order at 3. In the Kalshi
Order the Commission found, among other things, that the event
underlying the subject contracts--control of a chamber of Congress--
did not, in and of itself, have ``sufficiently direct, predictable,
or quantifiable economic consequences'' for the contracts to serve
an effective hedging function. The Commission found that, since the
economic effects of control of a chamber of Congress are ``diffuse
and unpredictable,'' the price of the subject contracts was not
directly correlated to the price of any commodity, and so the price
of the contracts could not predictably be used to establish
commercial transaction prices. The Commission found that, even if
some level of political risk may be embedded in the price of many
commercial transactions, that did not, in itself, support a finding
that the subject contracts served a price-basing function. Kalshi
Order at 16-17. Similarly, in the Nadex Order the Commission found
that ``the unpredictability of the specific economic consequences of
an election means that the [subject contracts] cannot reasonably be
expected to be used for hedging purposes . . .'' Nadex Order at 3.
The Commission found that there was no situation in which the
subject contracts' prices could form the basis for the pricing of a
commercial transaction, financial asset, or service, which
demonstrated that the contracts did not have price-basing utility.
Id.
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In this regard, the Commission reiterates that it has the
discretion to consider other factors, in addition to hedging and price-
basing utility, in its evaluation of whether a contract, or category of
contracts, is contrary to the public interest for purposes of CEA
section 5c(c)(5)(C).\102\ This is consistent with the discretion of the
Commission when evaluating whether a futures contract was contrary to
the public interest under CEA section 5(g), prior to its repeal by the
CFMA.\103\ Accordingly, for the reasons discussed herein, and giving
due consideration to the intentions reflected in the 2010 Colloquy, the
Commission has determined that there are circumstances where other
public interest considerations support prohibiting a contract, or
category of contracts, from being listed for trading or accepted for
clearing on or through a registered entity, even where such contract,
or category of contracts, may have certain hedging or price-basing
utility.\104\
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\102\ For example, in both the Nadex Order and the Kalshi Order,
the Commission highlighted the public interest concerns that would
be raised if registered entities were permitted to offer trading in
event contracts involving the outcome of political elections. Nadex
Order at 4; Kalshi Order at 19-20.
\103\ In the Senate conference report for the Commodity Futures
Trading Commission Act of 1974, the conferees adopted an amendment
that required a board of trade to demonstrate that transactions on
it would not be contrary to the public interest, and ``note[d] that
the broader language of the Senate provision would include the
concept of the `economic purpose' test provided in the House bill
subject to the final test of the `public interest.' '' S. Rep. 1194,
93rd Cong. 2d Sess. 36 (1974). See also Economic and Public Interest
Requirements for Contract Market Designation, 47 FR 49832, 49836
(Nov. 3, 1982) (``Congress made clear when it adopted the public
interest test of Section 5(g) of the Act, that the public interest
test is broader than, and includes, an economic purpose test''
(citing the above-referenced Senate conference report). This public
interest standard was not modified by the 1992 revisions to
Guideline 1. See generally 57 FR 3518 (Jan. 30, 1992).
\104\ In the 2010 Colloquy, Senator Feinstein asked Senator
Lincoln whether she agreed that CEA section 5c(c)(5)(c) would
``empower the Commission to prevent trading in contracts that may
serve a limited commercial function but threaten the public good by
allowing some to profit from events that threaten our national
security.'' Senator Lincoln confirmed that she agreed, stating that
while national security threats ``pose a real commercial risk to
many businesses in America,'' contracts that permitted people to
hedge that risk ``would also involve betting on the likelihood of
events that threaten our national security. That would be contrary
to the public interest.'' 156 Cong. Rec. S5906-07 (daily ed. July
15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche
Lincoln).
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With respect to other factors to be considered in a public interest
review, the legislative history of CEA section 5c(c)(5)(C) supports
consideration of whether the contract, or category of
[[Page 48980]]
contracts, may threaten the public good. In the 2010 Colloquy, Senator
Feinstein recognized contracts that would ``allow[] some to profit from
events that threaten our national security'' as a threat to the public
good.\105\ Senator Lincoln similarly recognized that event contracts
that allowed for the hedging of the commercial risks of terrorist
attacks, war, and hijacking would also ``involve betting on the
likelihood of events that threaten our national security. That would be
contrary to the public interest.'' \106\ The Commission believes this
is plainly so given the terrible potential consequences of these
activities. The Commission accordingly agrees with, and adopts, the
view expressed in the 2010 Colloquy that national security and, more
broadly, the public good, are relevant factors for consideration in an
evaluation of whether a contract, or category of contracts, is contrary
to the public interest for purposes of CEA section 5c(c)(5)(C).
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\105\ Id.
\106\ Id.
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The Commission will consider all relevant factors in evaluating
whether a contract, or category of contracts, is contrary to the public
interest, and there is no one factor that will be determinative in the
Commission's evaluation. In addition to hedging utility, price-basing
utility, and threats to national security or other threats to the
public good, some of the factors that may be relevant when the
Commission is evaluating whether a contract, or category of contracts,
is contrary to the public interest include: (i) the extent to which the
contract, or category of contracts, would draw the Commission into
areas outside of its primary regulatory remit; \107\ (ii) whether
characteristics of the contract, or category of contacts, may increase
the risk of manipulative activity relating to the trading or pricing of
the contract; \108\ and (iii) whether the contract, or category of
contracts, could result in market participants profiting from harm to
any person or group of persons.\109\
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\107\ See, e.g., Kalshi Order at 22-23.
\108\ See, e.g., id. at 21-22. The Commission notes that DCMs
and SEFs have a statutory obligation to ensure that the contracts
that they list for trading are not readily susceptible to
manipulation. See Core Principle 3 for DCMs, CEA section 5(d), 7
U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3),
7 U.S.C. 7b-3(f)(3). The Commission distinguishes the type of review
that would be undertaken to evaluate whether a contract submission
to the Commission, pursuant to Sec. 40.2 or Sec. 40.3,
demonstrates compliance with this statutory obligation, from the
type of review that would be undertaken to evaluate whether
increased risk of manipulative activity may raise public interest
concerns regarding a contract, or category of contracts, for
purposes of CEA section 5c(c)(5)(C). The Commission notes that a
review for purposes of CEA section 5c(c)(5)(C) would be to determine
whether a contract, or category of contracts, should be per se
prohibited from being listed for trading or accepted for clearing on
or through a registered entity because it is contrary to the public
interest.
\109\ In the 2010 Colloquy, Senator Lincoln stated that CEA
section 5c(c)(5)(C) was intended, in part, to ensure that the
Commission had the power ``to prevent the creation of futures and
swaps markets that would allow citizens to profit from devastating
events.'' See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln).
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The Commission notes that the factors that inform a public interest
determination, and the weight given to each such factor, are likely to
vary depending on the particular characteristics of the contract, or
category of contracts, that are being evaluated.
Request for Comment
The Commission requests comment on all aspects of its discussion of
the factors to be considered in evaluating whether a contract, or
category of contracts, is contrary to the public interest for purposes
of CEA section 5c(c)(5)(C). In particular, the Commission requests
comment on the following questions:
Should hedging and price-basing utility be considered as
factors when evaluating whether a contract, or category of contracts,
is contrary to the public interest? Why or why not?
If hedging and price-basing utility should be considered
as factors when evaluating whether a contract, or category of
contracts, is contrary to the public interest, how should such utility
be assessed?
Are there factors, in addition to those described herein,
that may be relevant when evaluating whether a contract, or category of
contracts, is contrary to the public interest? Are there any factors
the Commission should specifically not consider? Why or why not?
3. The Enumerated Activities
The Commission proposes to amend Sec. 40.11(a)(1) to include a
determination that any event contract that involves an Enumerated
Activity--including ``gaming,'' as proposed to be defined--is contrary
to the public interest and therefore may not be listed for trading or
accepted for clearing on or through a registered entity.
(a) Terrorism, Assassination, and War
The Commission recognizes the Enumerated Activities of terrorism,
assassination, and war as activities that pose a threat to national and
international security and entail violence and human suffering. The
Commission believes that it would be contrary to the public interest to
allow event contracts involving such activities to trade on CFTC-
regulated markets. The Commission believes that allowing such contracts
to trade would raise a real risk that the contracts, and markets for
the contracts, could be used to ``profit from devastating events.''
\110\ Allowing trading in contracts involving terrorism, assassination,
or war could incentivize certain market participants to take a
speculative position on whether these devastating events will occur, or
how wide-reaching their impact will be--a type of speculation that the
Commission believes, at a base level, is offensive and has no place in
CFTC-regulated markets. Allowing trading in such contracts might even
increase the risk of a terrorist attack, assassination, or act of war
by creating financial incentives for a potential perpetrator to take a
position in such a contract and then profit by carrying out the heinous
act that the contract involves. The national and international security
concerns and threat to the public good raised by terrorism,
assassination, and war are so significant that the Commission must
consider very seriously even the slightest risk that CFTC-regulated
markets could create a means or motive to profit from such
activity.\111\ Accordingly, in circumstances where an event contract
involves terrorism, assassination, or war, the Commission believes that
the public interest concerns that would be raised by allowing the
contract to be traded as a financial instrument on CFTC-regulated
markets, as described above, would
[[Page 48981]]
supersede any potential price-basing or hedging utility of the
contract.
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\110\ Id.
\111\ Similar concerns led to the shutdown in 2003 of the
Futures Markets Applied to Prediction (``FutureMAP'') program
proposed by the Defense Advanced Research Projects Agency
(``DARPA''), an office within the United States Department of
Defense. The FutureMAP program would have permitted traders to take
positions on questions such as whether a particular political leader
would be assassinated or whether a bioterror attack would occur.
Senators raised concerns that the market would permit the
perpetrator of a terrorist attack to profit from that attack.
Senator Tom Daschle raised concerns that the market could actually
incentivize terrorist attacks (``How long would it be before you saw
traders investing in a way that would bring about the desired
result''), and Senators Byron Dorgan and Ron Wyden characterized the
project as ``morally repugnant,'' ``offensive,'' and ``grotesque.''
See ``Threats and Responses and Criticisms; Pentagon Prepares a
Futures Market on Terror Attacks,'' The New York Times, July 29,
2003, available at https://www.nytimes.com/2003/07/29/us/threats-responses-plans-criticisms-pentagon-prepares-futures-market-terror.html; ``Pentagon Kills `Terror Futures Market,' '' NBC News,
July 29, 2003, available at https://www.nbcnews.com/id/wbna3072985;
149 Cong. Rec. S10082-83 (daily ed. July 29, 2003), available at
https://www.congress.gov/congressional-record/volume-149/issue-114/senate-section/article/S10082-1.
---------------------------------------------------------------------------
The Commission therefore proposes to amend Sec. 40.11(a)(1) to
include determinations that any event contract that involves terrorism,
assassination, or war is contrary to the public interest and may not be
listed for trading or accepted for clearing on or through a registered
entity.
Request for Comment
The Commission requests comment on all aspects of its proposed
public interest determinations with respect to contracts involving
terrorism, assassination, and war. In particular, the Commission
requests comment on whether there are contracts that may involve
terrorism, assassination, or war that do not raise the above-described
public interest concerns. Why, or why not?
(b) Activity That is Unlawful Under Federal or State Law
The Commission similarly proposes to amend Sec. 40.11(a)(1) to
include a determination that any event contract that involves activity
that is unlawful under federal or state law is contrary to the public
interest and may not be listed for trading or accepted for clearing on
or through a registered entity. As an independent agency of the federal
government, the Commission exercises the authorities granted to it by
Congress under the CEA to help ensure that U.S. derivatives markets
operate with integrity. The Commission believes that it is contrary to
the public interest to permit trading, in the financial markets that
the Commission is mandated by Congress to oversee, in any event
contract that involves activity that Congress has determined to be
illegal.
The Commission further believes that it is contrary to the public
interest to permit trading in any event contract that involves activity
that is illegal under state law. Legislative bodies are intended to
serve the public good, and such bodies generally bar or prohibit
activity that they recognize as causing, or posing, public harm. Judges
and judicial bodies, applying statutes and developing common law, also
establish the illegality of activity that is recognized as causing, or
posing, public harm.\112\ The Commission thus believes that permitting
trading, on CFTC-regulated markets, in contracts that involve activity
that is unlawful under state law--and potentially in some circumstances
creating opportunities to profit from illegal activity--would undermine
important state interests, expressed in state statutes and common law,
in protecting the public good.\113\ This is also a matter of comity
with states.
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\112\ The Commission noted such common law prohibitions, and
related policy concerns, with respect to wagering on elections in
the Kalshi Order. Kalshi Order at 11-12, note 27.
\113\ While the Commission has exclusive jurisdiction over
futures and swaps contracts traded on a CFTC-registered exchange,
preempting the application of state law with respect to such
transactions--and meaning that transacting in such contracts on a
CFTC-registered exchange cannot, of itself, constitute unlawful
activity for state law purposes--this does not preclude a contract
from involving ``activity that is unlawful under . . . State law''
for purposes of CEA section 5c(c)(5)(C).
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The Commission notes that there are variations across state law in
the specific activities that are recognized as unlawful. The Commission
believes that a determination that an event contract that involves
activity that is unlawful under state law is contrary to the public
interest--which turns the focus of the analysis to the questions of
whether the activity, itself, is recognized as unlawful, and, if so,
whether the contract ``involves'' such unlawful activity--eliminates
the possibility that the Commission would have to serve, in its public
interest analysis of a particular contract involving particular
activity, as arbiter of a state's own public interest determination, as
expressed in statute and/or common law, in recognizing specific
activity as causing, or posing, public harm.
Request for Comment
The Commission requests comment on all aspects of its proposed
public interest determination with respect to contracts involving
activity that is unlawful under federal or state law. In particular,
the Commission requests comment on whether there are contracts that may
involve such activity that do not raise the above-described public
interest concerns. Why, or why not?
(c) Gaming
As discussed above, the Commission is proposing to define the term
``gaming,'' for purposes of Sec. 40.11, as the staking or risking by
any person of something of value upon: (i) the outcome of a contest of
others; (ii) the outcome of a game involving skill or chance; (iii) the
performance of one or more competitors in one or more contests or
games; or (iv) any other occurrence or non-occurrence in connection
with one or more contests or games. The proposed definition draws upon
the approach taken, in relevant state and federal statutory
definitions, to defining the terms ``gambling,'' ``betting,'' or
``wagering,'' which, as discussed above, are generally used
interchangeably with the term ``gaming.'' The Commission proposes to
amend Sec. 40.11(a)(1) to include a determination that any contract
that involves ``gaming,'' as proposed to be defined, is contrary to the
public interest. Both economic utility and other public interest
factors inform the Commission's preliminarily determination that event
contracts involving gaming should not be permitted to trade on CFTC-
regulated markets.
The Commission believes that by defining ``gaming'' in a manner
that draws upon the approach taken, in relevant state and federal
statutory definitions, to defining the terms ``gambling,'' ``betting,''
or ``wagering,'' the Commission is in turn identifying, for purposes of
Sec. 40.11, contracts that ``exist predominantly to enable gambling.''
\114\ The Commission believes that the economic impact of an occurrence
(or non-occurrence) in connection with a contest of others, or a game
of skill or chance--including the outcome of such contest or game--
generally is too diffuse and unpredictable to correlate to direct and
quantifiable changes in the price of commodities or other financial
assets or instruments, limiting the hedging and price-basing utility of
an event contract involving such an occurrence. Generally speaking, the
Commission believes that something of value is staked or risked upon an
occurrence (or non-occurrence) in connection with a contest of others,
[[Page 48982]]
or a game involving skill or chance, for entertainment purposes--in
order wager on the occurrence. As such, the Commission believes that
contracts involving such occurrences are likely to be traded
predominantly ``to enable gambling'' \115\ and ``used predominantly by
speculators or participants not having a commercial or hedging
interest,'' and cannot reasonably expected to be ``used for hedging
and/or price basing on more than an occasional basis.'' \116\
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\114\ In the 2010 Colloquy, when discussing the Dodd-Frank Act
provision that was ultimately enacted as CEA section 5c(c)(5)(C),
Senator Lincoln stated that ``[t]he Commission needs the power to,
and should, prevent derivatives contracts that are contrary to the
public interest because they exist predominantly to enable gambling
through supposed ``event contracts.'' See 156 Cong. Rec. S5906-07
(daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and
Sen. Blanche Lincoln). The Commission is aware that the legal
landscape with respect to certain forms of gambling has changed
since CEA section 5(c)(c)(5)(C) was adopted in 2010, and Sec. 40.11
was adopted in 2011. Specifically, in 2018, the Supreme Court in
Murphy v. N.C.A.A., 584 U.S. 453, 138 S.Ct. 1461, struck down The
Professional and Amateur Sports Protection Act (``PAPSA''). PAPSA
had prohibited states from authorizing state-sponsored gambling on
sporting events or permitting other persons to operate and promote
such sports gambling schemes. Following this decision, many states
have legalized various forms of sports gambling. The Commission
highlights, however, the determination of Congress to identify
``gaming'' as an Enumerated Activity, separate and apart from
activity that is unlawful under federal or state law. This indicates
Congressional intent--supported by the 2010 Colloquy--to empower the
Commission to prohibit event contracts that would effectively serve
as a wagering vehicle, subject to a Commission determination that
such contracts are contrary to the public interest. To this point,
the Commission notes that there were forms of legalized gambling in
the United States when CEA section 5c(c)(5)(C) was adopted (e.g.,
casino sportsbooks in states such as Nevada and New Jersey).
\115\ Id.
\116\ See section II.C.2, supra.
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While there may be individuals or entities for whom a particular
occurrence in connection with a contest or game have more direct and
more predictable economic consequences, the Commission believes that
any such segment of individuals or entities is likely to be narrow as
compared to the broader universe of market participants, including
retail market participants, who may be able to trade in an event
contract listed on a CFTC-registered exchange--and who, the Commission
believes, are most likely to trade such contract for entertainment
purposes only.
Moreover, the Commission believes that an individual or entity for
whom a particular occurrence in connection with a contest or game may
have more direct and more predictable economic consequences may also be
more likely to have access to information and/or influence that could
be used to engage in activity that could artificially move the market
in an event contract involving such occurrence, potentially raising
heightened manipulation concerns. For example, a professional athlete
or coach may be economically impacted by their team's wins or losses,
but may also have access to information--for example, about a team
member's health or a potential injury--that could be used to trade
ahead of the market in an event contract involving the team's
performance. Further, the athlete or coach would potentially have a
platform--for example, access to media, combined with public perception
as an authoritative source of information regarding the team--that
could be used to disseminate misinformation that could artificially
impact the market in the contract for additional financial gain.\117\
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\117\ In this regard, the Commission notes that, in order to
address concerns about the potential to undermine the integrity of a
sporting event or wagering thereon, a number of states have
established prohibitions on sports wagers for certain categories of
individuals when they are involved in a particular sporting event,
including athletes, coaches, referees, and staff of participants in
the event. See, e.g., N.Y. Rac. Pari-Mut. Wag. & Breed. Law Sec.
1367 (McKinney). In the context of an event contract traded on CFTC-
regulated markets, involving an occurrence (or non-occurrence) in
connection with a contest of others or a game of skill or chance,
the Commission notes that, even if individuals, or groups of
individuals, who may influence the outcome of the occurrence are
prohibited by the contract's terms from trading in the contract,
this would not prevent such individual, or group of individuals,
from engaging in other activity--for example, the spread of
misinformation--that could artificially move the market in the event
contract.
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The Commission additionally notes that, in many instances, a
particular individual or group of individuals may be able to influence
an occurrence in connection with a contest or game.\118\ If an event
contract involving such an occurrence is permitted to trade on CFTC-
registered markets, then even if the individual, or group of
individuals, that can influence the outcome of the occurrence are
prohibited, by the contract's terms, from trading in the contract, such
individual or group of individuals may be vulnerable to pressure or
persuasion by others who have taken a position in the contract and seek
a particular outcome.\119\
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\118\ This may particularly be the case for occurrences that do
not directly affect the final outcome of a contest or game. The
Commission believes that event contracts involving such occurrences
would be akin to ``novelty,'' ``proposition,'' or ``prop'' bets.
Many states that have legalized sports gambling prohibit various
types of novelty or proposition bets due, in part, to manipulation
concerns. See, e.g., Massachusetts Gaming Commission Says No Super
Bowl Prop Bets This Year, NewBostonPost (Feb. 9, 2024), available at
https://newbostonpost.com/2024/02/09/massachusetts-gaming-commission-says-no-super-bowl-prop-bets-this-year/. See also
Suspicious betting leads to questions about Super Bowl Gatorade
color odds, New York Post (Feb. 13, 2024), available at https://nypost.com/2024/02/13/sports/suspicious-betting-raises-questions-about-super-bowl-gatorade-color-odds/.
\119\ Relevant to this concern, certain state gaming regulators
have prohibited, or are seeking to prohibit, collegiate sports
proposition bets due to concerns related to ``bad actors [who] have
engaged in unacceptable behavior by making threats against student-
athletes[.]'' Could Ohio ban college sports prop bets? Mike DeWine,
NCAA president Charlie Baker support, The Columbus Dispatch (Feb. 2,
2024), available at https://www.dispatch.com/story/sports/college/big-10/2024/02/02/mike-dewine-ohio-college-sports-betting-ban-ncaa/72453967007/; see also Va. Code Ann. section 58.1-4039 (A)(2) (West)
(No person shall place or accept a proposition bet on college
sports.).
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The Commission further notes that most contracts falling within the
proposed definition of ``gaming'' would have no underlying cash market
with bona fide economic transactions to provide directly correlated
price forming information. Rather, price forming information is either
nonexistent, or driven by informational sources that are unregulated,
have opaque underlying processes and procedures, and may not follow
scientifically reliable methodologies.\120\ This differs from the
informational sources used for pricing the vast majority of commodities
underlying Commission-regulated derivatives contracts (e.g., government
issued crop forecasts, weather forecasts, federal government economic
data, market-derived supply and demand metrics for commodities, market-
based interest rate curves). The lack of price forming information for
contracts involving ``gaming,'' or the availability of only opaque and
unregulated sources of price forming information, may increase the risk
of manipulative activity relating to the trading and pricing of such
contracts, while decreasing the ability of the offering exchange, or
the Commission, to detect such activity.
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\120\ Notably, the most useful source of price-forming
information with respect to contracts involving ``gaming,'' as
proposed to be defined, would likely be prices of similar wagers in
gambling and sport-betting facilities. The Commission believes that
this fact further supports the Commission's view that trading in
such ``gaming'' contracts would effectively amount to betting or
wagering.
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Other public interest considerations also weigh against permitting
the trading, on CFTC-regulated markets, of event contracts involving
gaming, as proposed to be defined. The Commission believes that
permitting such contracts to trade as financial instruments on
financial markets could raise broad investor protection concerns by
conflating gambling and financial instruments in a manner that could
particularly create confusion and risk for retail market participants.
Among other things, it could improperly signal to certain retail
investors that these contracts are instruments to be used for
investment purposes--and it could signal to others that derivative
markets are appropriate venues for retail market participants to trade
for entertainment purposes, which could minimize, for those investors,
unique characteristics and risks of trading, more generally, in
derivative markets.
Moreover, the Commission notes that in the United States, gambling
is overseen by state regulators with particular expertise, and governed
by state gaming laws aimed at addressing particular risks and concerns
associated with gambling.\121\ The Commission is
[[Page 48983]]
not a gaming regulator. The CEA and Commission regulations are focused
on regulating financial instruments and markets, and do not include
provisions aimed at protecting against gambling-specific risks and
concerns, including customer protection concerns inherent to
gambling.\122\ Permitting event contracts involving gaming, as proposed
to be defined, to trade on CFTC-regulated markets would in effect
permit instruments commonly understood as bets or wagers on contests or
games to avoid these legal regimes and protections. Gambling is a
rapidly evolving field, and the Commission does not believe that it has
the statutory mandate nor specialized experience appropriate to oversee
it, or that Congress intended for the Commission to exercise its
jurisdiction or expend its resources in this manner.\123\
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\121\ See, e.g., N.Y. Rac. Pari-Mut. Wag. & Breed. Law section
1367 (McKinney) (requiring casinos and mobile sports wagering
licensees to promptly report to the New York State Gaming Commission
information relating to, among other things, unusual wagering
activity or patterns that may indicate concern with the integrity of
a sporting event, any potential breach of the relevant sports
governing body's internal rules and codes of conduct pertaining to
sports wagering (as they have been provided by the sports governing
body to the casino or mobile sports wagering operator), and
suspicious or illegal wagering activities, including using agents to
place wagers, using confidential non-public information, or using
false identification); Colo. Rev. Stat. Ann. section 44-30-1506
(West) (requiring a sports betting operator promptly to report to
the Colorado Division of Gaming any abnormal betting activity or
discernible patterns that may indicate a concern about the integrity
of a sports event or events; any other conduct with the potential to
corrupt a betting outcome of a sports event for purposes of
financial gain, including match fixing or the use of material,
nonpublic information to place bets or facilitate another person's
sports betting activity; and suspicious or illegal wagering
activities).
\122\ For example, a number of states have developed self-
exclusion programs for individuals who experience problem gambling,
which enable such individuals to self-report to be excluded from in-
person and/or online gambling sites for a set amount of years (or,
in some cases, indefinitely). See, e.g., Del. Code Ann. tit. 29,
Sec. 4834 (West); La. Stat. Ann. section 27:27.1; Ariz. Rev. Stat.
Ann. section 5-1320; Iowa Gaming Association, Responsible Gaming,
available at https://www.iowagaming.org/responsible-gaming/. A
number of states mandate the on-site posting of problem gambling
assistance notices, and some states also mandate employee training
to identify individuals who may be struggling with problem gambling.
See, e.g., 4 Pa. Stat. and Cons. Stat. Ann. section 3706 (West); 230
Ill. Comp. Stat. Ann. 10/13.1; Ohio Rev. Code Ann. section 3772.18
(West). In addition, a number of states require gambling
advertisements to include customer protection disclosures, such as
resources for problem gambling assistance. See, e.g., N.Y. Rac.
Pari-Mut. Wag. & Breed. Law sections 1362, 1363 (McKinney); Tenn.
Code Ann. section 4-49-205 (West); Ark. Code Ann. section 20-27-2601
(West); Conn. Gen. Stat. Ann. section 12-863 (West).
\123\ See note 82, supra, for examples of certain evolving risks
related to certain bets or wagers on contests or games.
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The Commission notes that the non-exclusive list of examples of
``gaming'' set forth in proposed Sec. 40.11(b)(2) includes staking or
risking something of value upon the outcome of a political contest,
including an election or elections, or upon an occurrence or non-
occurrence in connection with such a contest. Consistent with its
determinations in the Nadex Order and the Kalshi Order, the Commission
believes that permitting trading, on CFTC-regulated markets, in this
particular sub-set of gaming contracts would raise unique additional
public interest concerns relating to election integrity and the
perception of election integrity, and the appropriate role of the
Commission in this area.\124\ For example, permitting trading in these
types of contracts could create monetary incentives to vote for
particular candidates even when such votes may be contrary to a voter's
(or organized groups of voters') political views. It would also raise
concerns that conduct designed to artificially affect the electoral
process could be used to manipulate the markets in such contracts, or
conversely, that the markets in such contracts could be manipulated to
influence elections or electoral perceptions. For example, false
reporting or other misinformation--such as inaccurate polling or voter
surveys or false news reporting--could be used to distort the
information underlying price formation in such contracts.\125\
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\124\ The Commission believes that permitting trading in
contracts involving political contests in a foreign jurisdiction, or
concerning a supranational organization, also would raise these
public interest concerns, just as permitting trading in contracts
involving political contest in the United States would.
\125\ Certain commenters on the contracts subject to the Kalshi
Order asserted that event contracts involving occurrences in
connection with political election contests could serve as a check
on misinformation and inaccurate polling, stating that market-based
alternatives tend to be more accurate than polling or other methods
of predicting election outcomes. See Kalshi Order at 22. The
Commission notes that there is also research suggesting that
election markets may incentivize the creation of ``fake'' or
unreliable information in the interest of moving the market; a
number of commenters on the contracts subject to the Kalshi Order
also raised this concern. Id. See also Yeargain, Tyler, ``Fake
Polls, Real Consequences: The Rise of Fake Polls and the Case for
Criminal Liability,'' Missouri Law Review, Volume 85, Issue 1
(Winter 2020) citing Enten, Harry, ``Fake Polls are a Real
Problem,'' FiveThirtyEight (Aug. 22, 2017), available at https://fivethirtyeight.com/features/fake-polls-are-a-real-problem/ (noting
how a seemingly false or unreliable poll caused significant movement
on an event contract market and suggesting that such poll could have
been, or at least could be, created to cause such market movement;
further arguing that such false polls can have a real and
detrimental effect on elections). The Commission notes, further,
that there is no underlying cash market for political event
contracts, with bona fide economic transactions to provide directly
correlated price forming information. Rather, price forming
information is driven in large measure by polling and other
informational sources that are unregulated, frequently have opaque
underlying processes and procedures, and may not follow
scientifically reliable methodologies. The opaque and unregulated
sources of price forming information for such contracts may increase
the risk of manipulative activity relating to the trading and
pricing of the contracts, while decreasing the ability of the
listing registered entity and the Commission to detect such
activity.
---------------------------------------------------------------------------
The Commission notes, further, that it is not tasked with the
protection of election integrity or enforcement of campaign finance
laws. However, if trading was permitted on CFTC-registered exchanges in
event contracts that involve the staking or risking of something of
value on a political contest, then the Commission could find itself
investigating the outcome of an election itself.\126\ Again, the
Commission does not have the specialized experience appropriate for
this role, and believes that it is unlikely that Congress intended for
the Commission to exercise its jurisdiction or expend its resources
this way.
---------------------------------------------------------------------------
\126\ While certain commodities outside the Commission's direct
remit do underlie derivatives without giving rise to significant
problems, due to the special role of elections in our society, the
Commission believes that the oversight function in this area is best
reserved for other expert bodies. Of course, governmental bodies are
tasked with that function, but the Commission has both the authority
and responsibility to address fraud, false reporting, and
manipulation in markets for derivatives that trade on CFTC-
registered exchanges. See, e.g., CEA section 6(c), 7 U.S.C. 9(c); 17
CFR 180. As such, if trading were permitted in event contracts that
involve the staking or risking of something of value on the outcome
of a political contest, or upon an occurrence or non-occurrence in
connection with such a contest, the Commission would have a
statutory responsibility to exercise its surveillance,
investigation, and enforcement authority to ensure the integrity of
the markets in such contracts. Conversely, attempts at manipulation
of such markets could have broader electoral implications, similarly
drawing the Commission into investigations of election-related
activities. Indeed, accusations of fraud have been leveled at
government bodies tasked with administering elections. Such
scenarios underscore for the Commission that it has no appropriate
role in this area.
---------------------------------------------------------------------------
The unique additional public interest concerns that would be raised
by permitting the trading, on a CFTC- registered exchange, of an event
contract that involves the staking or risking of something of value on
the outcome of a political contest, or upon an occurrence or non-
occurrence in connection with such a contest, inform the Commission's
proposal to amend Sec. 40.11(a)(1) to include a determination that any
such contract is contrary to the public interest.\127\
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\127\ Many state courts have also found that wagering on
elections is contrary to sound public policy. E.g., Alabama, White
v. Yarbrough, 16 Ala. 109, 110 (1849) (``A wager on an election is
void as against public policy''); Arkansas, Williams v. Kagy, 3 SW2d
332, 333-34, 176 Ark. 484, 3 (1928) (``Even before the passage of
the statute quoted, this court ruled . . . that wagers upon
elections then pending are calculated to endanger the peace and
harmony of society and have a corrupting influence upon the morals
and are contrary to sound policy''); Colorado, Maher v. Van Horn, 60
P. 949, 17-18 (Colo. 1900) (``[W]ager contracts on the result of
elections are contrary to public policy and void and will not be
enforced by the courts''); Georgia, McLennan v. Whidon, 48 SE 201,
202-03, 120 Ga. 666 (1904), quoting Leverett v. Stegal, 23 Ga. 259
(1857) (finding that all gambling contracts are illegal but noting
that ``If there be any class of gambling contracts which should be
frowned upon more than another it is bets on elections. They strike
at the foundations of popular institutions, corrupt the ballot box,
or, what is tantamount to it, interfere with the freedom and purity
of elections''); Indiana, Worthington v. Black, 13 Ind. 344, 344-345
(1859) (``It has been often decided that wagers upon the result of
an election are against the principles of sound policy, and
consequently illegal . . .''); Iowa, David v. Ransom, 1 Greene 383,
383-85 (1848) (``A wager or bet made between parties on the result
of an election is void. If the wager is made before an election,
illegal votes are often secured, and others induced, contrary to the
better judgment of the voter; or if made after an election, the
parties interested might be led to exert a corrupt influence upon
the canvassing, and returns of the votes''); Kansas, Reynolds v.
McKinney, 4 Kan. 94, 101 (1866) (``[A bet] involving an inquiry into
the validity of the election of a public officer. . . . was
therefore, illegal and void on principles of public policy'');
Massachusetts, Ball v. Gilbert, 53 Mass. 397, 400-02 (1847) (a wager
upon the event of an election to a public office--at the federal,
state, or local level--is illegal and void on numerous public policy
grounds); Missouri, Hickerson v. Benson, 8 Mo. 8 (1843) (wagers on
the result of public elections and collateral matters are
``clearly'' against public policy and ``sound morality'' and
consequently illegal and void at common law); Nebraska, Specht v.
Beindorf, 56 Neb. 553, 76 NW 1059 (1898) (promissory note premised
on the election of a public official is a wager on the result of an
election and void on grounds of public policy); North Carolina,
Bettis v. Reynolds, 34 N.C. 344, 345-48 (1851) (``the practice of
betting on elections has a direct tendency to cause undue
influence[,]'' and even where neither party was a voter, a wager on
the result of a Presidential election void as against public
policy); Oregon, Willis v. Hoover, 9 Or. 418, 419-20 (1881) (wagers
on the result of public elections are illegal and void upon grounds
of public policy); Rhode Island, Stoddard v. Martin, 1 R.I. 1, 1
(1828) (all wagers on elections and judicial decisions ``are of
immoral tendency, against sound policy,'' and therefore void);
Texas, Thompson v. Harrison, 1842 WL 3625, at *1 (1842) (wagers on
the result of public elections are ``contrary to good morals'' and
void on grounds of public policy); Wisconsin, Murdock v. Kilbourn, 6
Wis. 468, 470-71 (1857) (wager upon the event of a public election
is contrary to public policy, illegal, and void).
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[[Page 48984]]
Request for Comment
The Commission requests comment on all aspects of its proposed
public interest determination with respect to contracts involving
gaming. In particular, the Commission requests comment on whether there
are contracts that may involve gaming that do not raise the above-
described public interest concerns. Why, or why not?
D. The Commission's Authority To Identify Additional Similar Activities
to the Enumerated Activities
CEA section 5c(c)(5)(C)(i)(VI) provides that the Commission may
determine, by rule or regulation, that event contracts in certain
excluded commodities are contrary to the public interest if the
contracts involve ``other similar activity'' to the Enumerated
Activities.\128\ CEA section 5c(c)(5)(C)(ii), in turn, provides that
such contracts shall not be listed or made available for clearing or
trading on or through a registered entity. These statutory provisions
are implemented through Sec. 40.11(a)(2), which provides that a
registered entity shall not list for trading or accept for clearing an
event contract ``which involves, relates to, or references an activity
that is similar to an activity enumerated in Sec. 40.11(a)(1) of this
part''--namely, an Enumerated Activity--and that the Commission
determines, by rule or regulation, to be contrary to the public
interest.\129\ CEA sections 5c(c)(5)(C)(i)-(ii), as implemented through
Sec. 40.11(a)(2), thus empower the Commission to identify, by rule or
regulation, additional, similar activities to the Enumerated
Activities, and to prohibit registered entities from listing for
trading or accepting for clearing event contracts involving those
activities where the Commission finds that such contracts are contrary
to the public interest. To date, the Commission has not exercised this
authority.
---------------------------------------------------------------------------
\128\ 7 U.S.C. 7a-2(c)(5)(C)(i)(VI).
\129\ 17 CFR 40.11(a)(2).
---------------------------------------------------------------------------
While the Commission is not proposing to exercise this authority at
this juncture, the Commission reiterates that it retains the authority
under CEA section 5c(c)(5)(C)(VI) to determine, in the future, that
other activities are similar to the Enumerated Activities, and that
event contracts involving such similar activities are contrary to the
public interest and may not be listed for trading or accepted for
clearing on or through a registered entity. This authority will
continue to be reflected in the regulatory text of Sec. 40.11(a)(2).
As part of any final rule resulting from this Notice of Proposed
Rulemaking, the Commission intends to include an Appendix E to Part 40
containing guidance in the form of factors the Commission may consider,
in addition to other factors the Commission deems appropriate in light
of individual facts and circumstances, when making a determination
under Sec. 40.11(a)(2) that such event contracts are contrary to the
public interest, consistent with the public interest analysis set forth
above.
E. Technical Amendments
The Commission proposes to make certain technical amendments to
Sec. 40.11. These proposed amendments are intended to clarify and more
logically organize the regulation, and are not intended to change the
regulation's substantive meaning or effect. As a threshold matter, the
Commission proposes to remove the words ``Review of'' from the title of
Sec. 40.11, because the regulation does not only address contract
reviews. The Commission believes that the regulation would be more
clearly and accurately titled ``Event contracts based upon certain
excluded commodities.''
1. Technical Amendments to Sec. 40.11(a)
The Commission proposes to make certain technical amendments to
Sec. 40.11(a). First, the Commission proposes to list the Enumerated
Activities, as currently set forth in Sec. 40.11(a)(1), in separate
sub-paragraphs and to reorder the list of the Enumerated Activities to
match the order in which they appear in CEA section 5c(c)(5)(C)(i). The
Enumerated Activities would be listed in new sub-paragraphs (i) through
(v) of Sec. 40.11(a)(1).
The Commission further proposes to replace ``which'' with ``that''
in Sec. 40.11(a)(2). This is not intended to change the meaning of the
current language. Rather, the Commission proposes this change to make
the language of Sec. 40.11(a)(2) consistent with the language of Sec.
40.11(a)(1).
The Commission additionally proposes to state in Sec. 40.11(a)(2)
that a contract may not be listed for trading or accepted for clearing
if the contract involves activity that is similar to an activity
enumerated in proposed sub-paragraphs (i) through (v) of Sec.
40.11(a)(1)--in effect, if the contract involves activity that is
similar to one of the statutory Enumerated Activities. This would be
substantively consistent with existing Sec. 40.11(a)(2) and would
reflect the statutory text of CEA section 5c(c)(5)(C)(i)(VI), which
states that the Commission may make a public interest determination
with respect to contracts involving other activity that is similar to
the Enumerated Activities set forth in CEA sections 5c(c)(5)(C)(i)(I)-
(V). The Commission contemplates that, in the event that it identifies
activities that are similar to the Enumerated Activities in a future
rule or regulation pursuant to its authority under CEA section
5c(c)(5)(C)(i)(VI) and Sec. 40.11(a)(2), such activities would be
numbered sequentially after proposed sub-paragraphs (i) through (v) of
Sec. 40.11(a)(1).
2. Technical Amendments to Sec. 40.11(c)
The Commission proposes to make certain technical amendments to
Sec. 40.11(c). These proposed amendments are not intended to alter the
regulation's substantive meaning or its practical implementation,
including the timing or procedural requirements of the Sec. 40.11(c)
review process. The proposed technical amendments are simply intended
to clarify Sec. 40.11(c) and improve its organization.
[[Page 48985]]
First, the Commission proposes removing the phrase ``and approval
of certain event contracts'' from the title of Sec. 40.11(c), because
the paragraph does not only address contract approval. The Commission
believes the paragraph would be more clearly and accurately titled
``90-day review.''
Next, the Commission proposes to number the introductory paragraph
to Sec. 40.11(c) as Sec. 40.11(c)(1), and to reorganize existing
Sec. Sec. 40.11(c)(1) and (2) into three new paragraphs, numbered
Sec. Sec. 40.11(c)(2) through Sec. 40.11(c)(4). In renumbered Sec.
40.11(c)(1), the Commission proposes adding the modifying phrase ``made
by a registered entity'' to clarify that submissions pursuant to
Sec. Sec. 40.2 and 40.3 are made by registered entities. The
Commission further proposes replacing the word ``which'' with ``that''
in order to make the language consistent throughout Sec. 40.11, and
proposes replacing the word ``be'' with ``is'' simply for grammatical
structure.\130\
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\130\ As discussed above, the Commission also is proposing to
remove from Sec. 40.11(c)(1), as proposed to be renumbered, the
words ``relate to, or reference'', and to refer only to contracts
that ``may involve'' an activity enumerated in Sec. 40.11(a)(1) or
Sec. 40.11(a)(2), in order to more closely align with the statutory
language of CEA section 5c(c)(5)(C).
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The proposed reorganization of existing Sec. Sec. 40.11(c)(1) and
(2) into three new paragraphs, numbered Sec. Sec. 40.11(c)(2) through
Sec. 40.11(c)(4), and the proposed language changes to those
provisions, are intended to improve the clarity of Sec. 40.11(c) by,
among other things, grouping related information together. As amended,
Sec. 40.11(c)(2) would address the commencement of a 90-day review
period, including notification of such commencement. As amended, Sec.
40.11(c)(2) would include language explicitly stating that a registered
entity must be notified of the commencement of a 90-day review, and
would group this language together with a clarified version of existing
language providing that notice of the commencement of a 90-day review
will be posted on the Commission's website. To further enhance clarity,
proposed Sec. 40.11(c)(2) would provide that the 90-day review period
commences ``on the date the Commission notifies the registered entity
of its determination to conduct a 90-day review,'' amending the current
language, which states that the 90-day review period commences from the
date the Commission notifies a registered entity of a potential
violation of Sec. 40.11(a). The Commission proposes to clarify the
current language to avoid potential uncertainty as to the specific
start date of the 90-day review period.
Proposed new Sec. 40.11(c)(3) would address the existing
requirement that the Commission request that a registered entity
suspend the listing or trading of a contract during the pendency of the
90-day review period. To enhance clarity, minor technical changes would
be made to the existing regulatory language, including removal of
excess wording describing the types of contracts that may be subject to
a 90-day review.
With the exception of a sub-heading the Commission proposes to
remove for consistency, proposed new Sec. 40.11(c)(4) would include
existing regulatory language addressing Commission action at the end of
the 90-day review period.
Request for Comment
The Commission requests comment on all aspects of its proposed
technical amendments to Sec. 40.11.
F. Implementation Timeline
The Commission proposes making the final rule amendments effective
30 days after publication in the Federal Register. The Commission
believes that this 30-day period should provide registered entities
with sufficient time to account for the rule amendments in their
product design and compliance procedures. However, the Commission also
proposes an implementation period that would run for an additional 30
days after the effective date of the final rule amendments--for a total
of 60 days from the date of publication of the final rule amendments in
the Federal Register--solely for event contracts that are listed for
trading as of the date of publication of the final rule amendments, and
that are impacted by the amendments.
The Commission believes that a 60-day implementation period for
these contracts will minimize any market disruption that might be
caused by the rule amendments. In this regard, the Commission notes
that event contracts are generally based upon a discrete occurrence or
event, and Commission staff's anecdotal experience indicates that many
event contracts settle within relatively short time horizons. This,
coupled with the fact that, as discussed further in section III.C,
infra, contracts that involve ``gaming,'' as proposed to be defined,
currently comprise a small portion of the overall event contracts
market, suggests that few event contracts impacted by the proposed rule
amendments, if finalized, would need to be wound down before their
existing settlement dates.\131\ To the extent that a particular event
contract that is impacted by the rule amendments has a settlement date
that extends beyond the implementation period, the Commission believes
that 60 days would provide sufficient time for the registered entity to
ensure the orderly cessation of trading in the contract.
---------------------------------------------------------------------------
\131\ See also note 171, infra.
---------------------------------------------------------------------------
For the avoidance of doubt, the proposed extended 60-day
implementation period would apply only to contracts that are listed and
available for trading as of the date of publication of the final rule
amendments in the Federal Register. The extended implementation period
would not apply to contracts that have been self-certified under Sec.
40.2, or approved by the Commission under Sec. 40.3, but are not
listed and available for trading as of the date of publication of the
final rule amendments in the Federal Register. The interest in
minimizing market disruption that informs the proposed extended
implementation period does not apply to such contracts.
All registered entities are expected to make good-faith efforts
that will result in conformance with the final rule amendments by no
later than the effective date of the final amendments (or the 60-day
implementation period, as applicable). These good-faith efforts should
take the final rule amendments into account in all compliance, contract
design, and listing, trading, or clearing decisions, as well as in
decisions leading to the orderly and timely winddown of any contracts
with settlement dates beyond the 60-day implementation period.
Request for Comment
The Commission requests comment on all aspects of the proposed
implementation timeline. In particular, the Commission requests comment
on the following questions:
Would an effective date that is 30 days after publication
of the final rule amendments in the Federal Register provide registered
entities with sufficient opportunity to comply with the amendments?
Would the proposed 60-day implementation period provide
sufficient time for the expiration of, or orderly cessation of trading
in, listed event contracts that are impacted by the proposed rule
amendments?
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires federal agencies
to consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
to provide a regulatory
[[Page 48986]]
flexibility analysis respecting the impact.\132\ Whenever an agency
publishes a general notice of proposed rulemaking for any rule,
pursuant to the notice-and-comment provisions of the Administrative
Procedure Act,\133\ a regulatory flexibility analysis or certification
is typically required.\134\
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\132\ 5 U.S.C. 601 et seq.
\133\ 5 U.S.C. 553.
\134\ See 5 U.S.C. 601(2), 603, 604, and 605.
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The rule amendments proposed herein will affect DCMs, SEFs, and
DCOs. The Commission has previously established certain definitions of
``small entities'' to be used by the Commission in evaluating the
impact of its rules on small entities in accordance with the RFA.\135\
The Commission previously determined that DCMs are not small entities
for purposes of the RFA.\136\ Similarly, the Commission previously
determined that SEFs \137\ and DCOs \138\ are not small entities for
purposes of the RFA.\139\
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\135\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982).
\136\ Id. at 18618-19.
\137\ See Core Principles and Other Requirements for SEFs, 78 FR
33476, 33548 (June 4, 2013).
\138\ See New Regulatory Framework for Clearing Organizations,
66 FR 45604, 45609 (Aug. 29, 2001).
\139\ The determination about impact on small entities in this
section is limited to the RFA analysis. Additional analysis on the
impact of the regulation is set out in the analysis of cost-benefit
considerations in section III.C.
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. Sec. 605(b) that the proposed
amendments will not have a significant economic impact on a substantial
number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \140\ imposes certain
requirements on federal agencies, including the Commission, in
connection with conducting or sponsoring any ``collection of
information,'' as defined by the PRA. Under the PRA, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number
from the Office of Management and Budget (``OMB'').\141\ The PRA is
intended, in part, to minimize the paperwork burden created for
individuals, businesses, and other persons as a result of the
collection of information by federal agencies, and to ensure the
greatest possible benefit and utility of information created,
collected, maintained, used, shared, and disseminated by or for the
federal government.\142\ The PRA applies to all information, regardless
of form or format, whenever the federal government is obtaining,
causing to be obtained, or soliciting information, and includes
required disclosure to third parties or the public, of facts or
opinions, when the information collection calls for answers to
identical questions posed to, or identical reporting or recordkeeping
requirements imposed on, ten or more persons.\143\
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\140\ 5 U.S.C. 601, et seq.
\141\ See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
\142\ See 44 U.S.C. 3501.
\143\ See 44 U.S.C. 3502(3).
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The rule amendments proposed herein, if adopted, would result in a
collection of information within the meaning of the PRA, as discussed
below. The Commission therefore is submitting this proposal to the OMB
for its review in accordance with the PRA.\144\ Responses to this
collection of information would be mandatory. The Commission will
protect any proprietary information according to the Freedom of
Information Act and part 145 of the Commission's regulations.\145\ In
addition, section 8(a)(1) of the CEA strictly prohibits the Commission,
unless specifically authorized by the CEA, from making public any
``data and information that would separately disclose the business
transactions or market positions of any person and trade secrets or
names of customers.'' \146\ Finally, the Commission is also required to
protect certain information contained in a government system of records
according to the Privacy Act of 1974.\147\
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\144\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
\145\ See 5 U.S.C. 552; see also 17 CFR part 145 (Commission
Records and Information).
\146\ 7 U.S.C. 12(a)(1).
\147\ 5 U.S.C. 552a.
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1. Submission of Updated Rules to the Commission
This proposed rulemaking affects a collection of information for
which the Commission has previously received a control number from OMB.
The title for this collection of information is OMB Control No. 3038-
0093, Part 40, Provisions Common to Registered Entities (``OMB
Collection 3038-0093'').
Section 40.6 of the Commission's regulations \148\ requires
registered entities to make rule submissions to the Commission when
they adopt a new or revised rule or rule amendments, including changes
to product terms and conditions. The Commission anticipates that, if
the rule amendments proposed herein are adopted, registered entities
whose product offerings include contracts involving ``gaming,'' as
proposed to be defined, will take certain steps with respect to those
contracts in order to comply with the rules. The Commission anticipates
that, for certain exchanges, one step will be filing Sec. 40.6 self-
certification submissions to permanently delist the contracts and
remove reference to them from their exchange rules.\149\ These Sec.
40.6 filings are additional burdens under the PRA and would increase
the reporting burden associated with OMB Collection 3038-0093.\150\
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\148\ 17 CFR 40.6.
\149\ In this context, ``delisting'' refers to the process of
submitting rule amendments to the Commission in order to withdraw
self-certified or approved contracts (meaning they can no longer be
listed for trading on the exchange), regardless of whether such
contracts are currently available to market participants for
trading.
\150\ Additional costs associated with delisting are laid out in
the analysis of cost-benefit considerations, but are not PRA burdens
because they do not require a registered entity to submit reports or
create records for the Commission beyond the registered entity's
existing obligations.
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The Commission estimates that approximately 30 Sec. 40.6 filings
would need to be submitted for contracts to be delisted if the proposed
rule amendments are adopted, taking an average of two hours per
submission. Currently, there are six DCMs that list event contracts for
trading.\151\ As an average, the new burden would be an estimated 5
additional Sec. 40.6 filings per DCM. Accordingly, the Commission
estimates the additional PRA burden as follows:
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\151\ As discussed below in section III.C.2(a)(3), note 175,
only one DCM currently offers the types of event contracts that
would be prohibited and require Sec. 40.6 filings as a result of
the proposed rule amendments, if adopted. However, for the purposes
of the PRA, the Commission is estimating the potential burden for
all six DCMs that currently offer event contracts.
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Sec. 40.6 submissions related to delisting contracts
Estimated Number of Respondents: 6.
One-Time Responses by each Respondent: 5.
Estimated Hours per Response: 2.
Estimated Total Hours: 60.
As discussed in the analysis of cost benefit considerations in
section III.C, infra, registered entities may incur other costs to
review and implement the new definition of ``gaming,'' if the proposed
rules are adopted. This may include costs to update any product design
and compliance procedures that a registered entity maintains in the
regular course of business. These activities do not constitute
``information collections,'' however, because the PRA excludes the
maintenance of records required to be kept in the usual and customary
order of business from the definition of a ``collection of
information.'' \152\
[[Page 48987]]
Moreover, updates to these types of business records would not require
registered entities to provide responses to a series of identical
questions.\153\ The Commission expects that the content and nature of
any revisions to update product design or compliance procedures would
vary considerably among registered entities and registered entities
retain flexibility in deciding how to structure those procedures and
what content to include.
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\152\ 5 CFR 1320.3(b)(3). The following OMB collections address
the general reporting and recordkeeping compliance obligations for
DCMs, SEFs, and DCOs, for compliance with relevant CEA core
principles and Commission regulations: OMB Control No. 3038-0052,
Core Principles and Other Requirements for DCMs (``OMB Collection
3038-0052''); OMB Control No. 3038-0074, Core Principles and Other
Requirements for Swap Execution Facilities (``OMB Collection 3038-
0074''); and OMB Control No. 3038-0076, Requirements for Derivative
Clearing Organizations (``OMB Collection 3038-0076''). The
Commission does not anticipate that the proposed rule amendments
will affect the information collection burden associated with these
collections.
\153\ 44 U.S.C. 3502(3)(A) (providing that a ``collection of
information'' occurs when ten or more persons are asked to report,
provide, disclose, or record information in response to ``identical
questions'').
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There are no additional capital and start-up or operations and
maintenance costs associated with this collection.
2. Request for Comment
The Commission invites the public and other federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. The Commission will consider public
comments on this proposed collection of information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC
20581, (202) 418-5174 or from http://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that all comments can be summarized and addressed in the final
rulemaking, and please refer to the ADDRESSES section of this rule
proposal for instructions on submitting comments to the Commission. OMB
is required to make a decision concerning the proposed information
collection requirements between 30 and 60 days after publication of
this release in the Federal Register. Therefore, a comment to OMB is
best assured of receiving full consideration if OMB receives it within
30 calendar days of publication of this release. Nothing in the
foregoing affects the deadline enumerated above for public comment to
the Commission on the proposed rule amendments.
C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\154\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (i) protection of market
participants and the public; (ii) efficiency, competitiveness, and
financial integrity of futures markets; (iii) price discovery; (iv)
sound risk management practices; and (v) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
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\154\ 7 U.S.C. 19(a).
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While, as discussed previously and further below, the Commission
believes the amendments proposed herein--measured relative to the
baseline of status quo conditions--would create meaningful benefits for
market participants and the public, it also recognizes that they likely
would result in some incremental costs. The Commission has endeavored
to enumerate material costs and benefits and, when reasonably feasible,
assign a quantitative value to them. Where it is not reasonably
feasible to quantify costs and benefits of the proposed amendments,
those costs and benefits are discussed qualitatively.\155\
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\155\ The Commission notes that this cost benefit consideration
is based on its understanding that the derivatives market regulated
by the Commission functions internationally with: (1) transactions
that involve U.S. persons occurring across different international
jurisdictions; (2) some persons organized outside of the United
States that are registered with the Commission; and (3) some persons
that typically operate both within and outside the United States and
that follow substantially similar business practices wherever
located. Where the Commission does not specifically refer to matters
of location, the discussion of costs and benefits below refers to
the effects of the proposed rule amendments on all relevant
derivatives activity, whether based on their actual occurrence in
the United States or on their connection with activities in, or
effect on, U.S. commerce.
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The Commission identifies and considers the benefits and costs of
the proposed amendments relative to a baseline standard of those
generated by the current statutory and regulatory framework applicable
to event contracts, i.e., the status quo. This framework includes the
provisions involving event contracts in CEA section 5c(c)(5)(C) and
current Sec. 40.11 and Commission orders that have been issued
pursuant to Sec. 40.11(c)(2), which address relevant terms such as
``gaming.'' The specific elements of the baseline that would be
impacted by the proposed amendments are discussed in more detail below.
2. Proposed Amendments
(a) Definition of Gaming--Proposed Sec. 40.11(b)
(1) Baseline and Proposed Amendments
Pursuant to current Sec. 40.11(a)(1), a registered entity shall
not list for trading or accept for clearing on or through the
registered entity an event contract in certain excluded commodities
that ``involves, relates to, or references'' gaming. The term
``gaming'' is not defined in the CEA or Commission regulations. The
Commission has issued two orders pursuant to Sec. 40.11(c)(2)--the
Nadex Order \156\ and the Kalshi Order \157\--both of which have
included discussions of the term. The orders have provided some insight
regarding the Commission's understanding of what ``gaming'' means for
purposes of CEA section 5c(c)(5)(C) and Sec. 40.11. For example, the
orders set forth the Commission's recognition that: (i) relevant state
and federal statutes define the terms ``gambling,'' ``betting,'' and
``wagering''--which are generally used
[[Page 48988]]
interchangeably with the term ``gaming''--to include staking something
of value upon a game or contest of others; \158\ (ii) the event
contracts subject to each respective order involved ``gaming,'' because
they involved staking something of value upon the outcome of a contest
of others; \159\ and (iii) an event contract can involve ``gaming,''
for purposes of CEA section 5c(c)(5)(C) and Sec. 40.11, in
circumstances where the contract's underlying, itself, is gaming, and
in circumstances where the contract has a different connection to
gaming, for example because the contract ``relates closely'' to,
``entails,'' or ``has as an essential feature or consequence''
gaming.\160\
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\156\ See https://www.cftc.gov/PressRoom/PressReleases/6224-12.
\157\ See https://www.cftc.gov/PressRoom/PressReleases/8780-23.
\158\ Kalshi Order at 8-9.
\159\ Nadex Order at 3; Kalshi Order at 10.
\160\ Kalshi Order at 7. See also Nadex Order at 2 (``[T]he
legislative history of CEA Section 5c(c)(5)(C) indicates that the
relevant question for the Commission in determining whether a
contract involves one of the activities enumerated in CEA Section
5c(c)(5)(C)(i) is whether the contract, considered as a whole,
involves one of those activities.'')
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The Commission's understanding of the term ``gaming,'' as set forth
in the orders that it has issued pursuant to Sec. 40.11(c)(2), is
reflected in its proposed definition of the term--and, more generally,
in the other amendments proposed herein. However, the Commission
recognizes that in the absence, to date, of a formal statutory or
regulatory definition, registered entities may have taken somewhat
different approaches to interpreting the scope of the term, and in some
respects may have interpreted the scope to be narrower than the
definition of ``gaming'' that the Commission is now proposing.
Conversely, certain registered entities may have interpreted the term
more broadly than the Commission's proposed definition.
The Commission is proposing to define ``gaming,'' in new Sec.
40.11(b)(1), to mean the staking or risking by any person of something
of value upon: (i) the outcome of a contest of others; (ii) the outcome
of a game involving skill or chance; (iii) the performance of one or
more competitors in one or more contests or games; or (iv) any other
occurrence or non-occurrence in connection with one or more contests or
games. The Commission is proposing to provide in new Sec. 40.11(b)(2)
that ``gaming'' includes, but is not limited to, the staking or risking
of something of value upon the outcome of a political contest,
including an election or elections, an awards contest, or a game in
which one or more athletes compete; or an occurrence or non-occurrence
in connection with such a contest or game, regardless of whether it
directly affects the outcome. In establishing the proposed ``gaming''
definition, the Commission, as noted above, considered its discussion
of ``gaming'' in the Nadex Order and Kalshi Order, and drew upon the
ordinary meaning of the term, as well as relevant state and federal
statutory definitions.\161\
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\161\ See note 54, supra (discussing that undefined statutory
terms are given their ordinary meaning).
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(2) Benefits
By providing additional specificity to determine whether a
particular event contract falls within the scope of CEA section
5c(c)(5)(C) and is contrary to the public interest because it involves
``gaming,'' the Commission believes its proposed definition would
reduce the likelihood that a registered entity would list for trading
an event contract that is contrary to the public interest.
The Commission believes that, by establishing a common
understanding and more uniform application of the term ``gaming,'' the
proposed definition also should assist registered entities in their
product design and compliance efforts and help avoid situations in
which registered entities expend resources to develop and submit a
contract that the Commission subsequently determines may not be listed
for trading or made available for clearing, pursuant to CEA section
5c(c)(5)(C) and Sec. 40.11(a)(1). As discussed above, the Commission
has observed a significant increase in the overall number and diversity
of event contracts being listed for trading.\162\ While the Commission
does not have access to data or any other information to enable it to
predict the specific types or quantities of event contracts that may be
listed for trading in the future, the observed event contract trend
causes the Commission to anticipate that going forward, absent these
proposed rule amendments, the number of submitted contracts involving
``gaming'' could increase. Accordingly, by better delineating the types
of prohibited event contracts that involve ``gaming,'' the proposed
definition should enhance registered entities' confidence with respect
to product design and compliance, potentially yielding cost- and
resource-saving benefits for them in the process. In addition, the
proposed definition may help guard against market disruption that might
otherwise be caused if an event contract is listed for trading and the
Commission later determines, following an individualized review
pursuant to (c), that the contract is prohibited because it involves
gaming and is contrary to the public interest.
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\162\ See section I.A., supra.
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The proposed definition also would support the Commission and its
staff in the effective oversight of derivative markets--including by
supporting the efficient and effective administration of the contract
submission and review process, by helping to reduce the likelihood that
contracts are submitted to the Commission that raise public interest
concerns. In this regard, among other things, the proposed definition
would promote the Commission's responsible stewardship and efficient
use of the tax dollars appropriated to it by reducing the need for
individualized contract reviews pursuant to Sec. 40.11(c). In the
Commission's experience, a review pursuant to Sec. 40.11(c) is
resource-intensive and consumes hundreds of hours of staff time. Based
on prior experience, the Commission estimates that each review
conducted pursuant to Sec. 40.11(c) takes, on average, approximately
625 hours of Commission staff time, at a cost of approximately
$220,012.\163\
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\163\ This figure is rounded to the nearest dollar and based on
the annual mean wages for U.S. Bureau of Labor Statistics (``BLS'')
categories 19-3011, ``Economists'' and 23-1011, ``Lawyers.'' BLS,
Occupational Employment and Wages, May 2023 (hereinafter ``BLS
Data''), available at https://www.bls.gov/oes/current/oes_nat.htm.
This estimate assumes that, of the approximately 625 hours expended
for each review conducted pursuant to Sec. 40.11(c), approximately
25% (or 156 hours) is expended by economists, and approximately 75%
(or 469 hours) is expended by lawyers. The ``Economist'' category
consists of professionals who ``[c]onduct research, prepare reports,
or formulate plans to address economic problems related to the
production and distribution of goods and services or monetary and
fiscal policy.'' BLS, Occupational Employment and Wages, May 2023:
19-3011, Economists, available at https://www.bls.gov/oes/current/oes193011.htm. According to BLS, the mean salary for this category
in the context of Federal, State, and Local Government is $138,360.
This number is divided by 1,800 work hours in a year to account for
sick leave and vacations and multiplied by 4 to account for
retirement, health, and other benefits or compensation, as well as
for office space, computer equipment support, and human resources
support. This number is further multiplied by 1.0272 to account for
the 2.72% change in the CPI for Urban Wage-Earners and Clerical
Workers between May 2023 and March 2024 (298.382 to 306.502). BLS,
CPI for Urban Wage Earners and Clerical Workers (CPI-W), U.S. City
Average, All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of
$316. ``The ``Lawyer'' category consists of professionals who
``[r]epresent clients in criminal and civil litigation and other
legal proceedings, draw up legal documents, or manage or advise
clients on legal transactions.'' BLS, Occupational Employment and
Wages, May 2023: 23-1011, Lawyers, available at https://www.bls.gov/oes/current/oes231011.htm. According to BLS, the mean salary for
this category in the context of Federal, State, and Local Government
is $159,280. This number is divided by 1,800 work hours in a year to
account for sick leave and vacations and multiplied by 4 to account
for retirement, health, and other benefits or compensation, as well
as for office space, computer equipment support, and human resources
support. This number is further multiplied by 1.0272 to account for
the 2.72% change in the CPI for Urban Wage-Earners and Clerical
Workers between May 2023 and March 2024 (298.382 to 306.502). BLS,
CPI for Urban Wage Earners and Clerical Workers (CPI-W), U.S. City
Average, All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of
$364. The rounding and modifications applied with respect to the
estimated average burden hour cost for this occupational category
have been applied with respect to each occupational category
discussed as part of this analysis.
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[[Page 48989]]
(3) Costs
The Commission expects that some registered entities may incur a
one-time compliance cost to understand and implement the proposed
``gaming'' definition.\164\ This may include costs to account for the
definition in the registered entity's product design and compliance
procedures. Costs associated with understanding and implementing the
proposed ``gaming'' definition may vary depending on the size of the
registered entity, available resources, and existing products,
practices and policies. Nonetheless, the Commission preliminarily
estimates that a registered entity typically would spend approximately
10 hours, or $2,660 (based on an hourly rate of $266),\165\ to update
its product design and compliance procedures to implement the proposed
``gaming'' definition. The Commission estimates that this would result
in an overall burden of 90 hours and an aggregated cost of $23,940
(nine registered entities \166\ x $2,660).
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\164\ Currently, there are six CFTC-registered exchanges that
offer event contracts for trading, and there are three CFTC-
registered DCOs that accept event contracts for clearing. However,
the Commission acknowledges that additional entities have sought, or
may seek in the future, to register with the Commission in order to
list or clear event contracts.
\165\ This figure is rounded to the nearest dollar and based on
the annual mean wage for BLS category 13-2061, ``Financial
Examiners.'' BLS Data, available at https://www.bls.gov/oes/current/oes_nat.htm. This category consists of professionals who ``[e]nforce
or ensure compliance with laws and regulations governing financial
and securities institutions and financial and real estate
transactions.'' BLS, Occupational Employment and Wages, May 2023:
13-2061 Financial Examiners, available at https://www.bls.gov/oes/current/oes132061.htm. According to BLS, the mean salary for this
category in the context of Securities, Commodity Contracts, and
Other Financial Investments and Related Activities is $116,520. This
number is divided by 1,800 work hours in a year to account for sick
leave and vacations and multiplied by 4 to account for retirement,
health, and other benefits or compensation, as well as for office
space, computer equipment support, and human resources support. This
number is further multiplied by 1.0272 to account for the 2.72%
change in the CPI for Urban Wage-Earners and Clerical Workers
between May 2023 and March 2024 (298.382 to 306.502). BLS, CPI for
Urban Wage Earners and Clerical Workers (CPI-W), U.S. City Average,
All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of $266.
The rounding and modifications applied with respect to the estimated
average burden hour cost for this occupational category have been
applied with respect to each occupational category discussed as part
of this analysis.
\166\ See note 165, supra.
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As discussed more fully below, if the proposed rule amendments are
adopted, the Commission anticipates that exchanges whose product
offerings include contracts that involve ``gaming,'' as proposed to be
defined, will, in order to ensure compliance with the rules, file Sec.
40.6 self-certification submissions to permanently delist the contracts
and remove reference to the contracts in their exchange rules.\167\
Exchanges may also need to take steps to effectuate the orderly wind-
down of contracts involving ``gaming'' that are listed and available
for trading as of the date of publication of final rule amendments in
the Federal Register, and that have settlement dates beyond the 60-day
implementation period proposed by the Commission.
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\167\ In this context, ``delisting'' refers to the process of
submitting rule amendments to the Commission in order to withdraw
self-certified or approved contracts (meaning they can no longer be
listed for trading on the exchange), regardless of whether such
contracts are currently available to market participants for
trading.
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The Commission preliminarily estimates that approximately 30 \168\
Sec. 40.6 delisting submissions would be filed for contracts involving
``gaming,'' as proposed to be defined, taking approximately two hours
per submission. This would result in an estimated burden of 60 hours
and an estimated aggregated cost of $15,960 (based on an hourly rate of
$266).\169\
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\168\ This estimate is based on Commission staff analysis of
product submissions and trading data regarding event contracts
submitted to the Commission by CFTC-registered exchanges. The
estimate contemplates that self-certified or approved contracts
involving ``gaming,'' as proposed to be defined, would need to be
delisted regardless of whether such contracts are available to
market participants for trading at the time that final rule
amendments are published in the Federal Register, or whether their
settlement dates fall within the 60-day implementation period
proposed by the Commission.
\169\ See note 166, supra.
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As discussed above, to the extent the proposed rule amendments are
finalized as proposed, and contracts that involve ``gaming'' are listed
and available for trading as of the date of publication of final rule
amendments in the Federal Register and have settlement dates beyond the
60-day implementation period, there may be costs to the listing
exchanges, and market participants, associated with the wind-down of
those contracts. The Commission notes that event contracts are
generally based upon a discrete occurrence or event, and Commission
staff's anecdotal experience indicates that many event contracts settle
within relatively short time horizons. This, coupled with the fact
that, as discussed below, event contracts that involve ``gaming,'' as
proposed to be defined, currently comprise a small portion of the
overall event contracts market, suggests that few event contracts
involving ``gaming'' would likely need to be wound down before their
existing settlement dates.\170\
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\170\ The terms and conditions of event contracts listed for
trading as of the issuance of these proposed rule amendments that
the Commission believes would be impacted by such amendments, if
finalized, generally establish that the subject contract will settle
either on a date that is expected to be soon after the contract's
underlying occurrence or event, or, as a backstop, on a date that is
further in the future (typically the end of the calendar year).
Based on CFTC staff's experience in connection with administering
the agency's product review process, the Commission believes,
notwithstanding backstop expiration dates, most event contracts
settle close in time to the underlying occurrence or event.
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With respect to the limited number of contracts that the Commission
anticipates would have settlement dates beyond the proposed 60-day
implementation period, the Commission expects that the costs to
exchanges associated with orderly wind-down would include operational,
compliance and technological costs. As further noted below, the costs
to exchanges associated with the wind-down of these contracts may also
include the inability to realize the full anticipated return on
investment in the contracts. The Commission notes that the precise
costs attributable to contract wind-down would be proprietary
information of the listing exchange, to which the Commission does not
have access. However, given the limited number of contracts that the
Commission anticipates would need to be wound down before their
existing settlement dates, the Commission believes that these costs to
the exchange should be relatively modest.
The Commission further anticipates that certain market participants
may incur losses depending on the nature of their positions in the
contracts at, and leading up to, wind-down. Conversely, certain market
participants may profit based on the nature of their positions at, and
leading up to, wind-down.\171\ The Commission notes that the future
market losses or gains to a market participant are not predictable with
any data and therefore, the Commission
[[Page 48990]]
believes that it is not feasible to further quantify these costs
associated with potential contract wind-downs.
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\171\ The Commission notes that the types of event contracts
that would be impacted by this proposed rulemaking, if finalized,
tend to be fully collateralized, which would have a bearing on the
market risk to which market participants would be exposed in the
event of the early wind-down of such a contract.
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The Commission recognizes that a further consequence, for certain
registered entities, and applicants for registration, of establishing a
common understanding and more uniform application of the term
``gaming'' may be to modify such registered entities', and applicants',
understanding of the types of event contracts that they may seek to
list for trading or accept for clearing in the future. This may entail
certain modifications to a registered entity's, or applicant's,
business model and projected revenue streams, and may impact a
registered entity's, or applicant's, ability to realize the full
anticipated return on investment with respect to certain aspects of its
business model. For example, a registered entity or applicant for
registration may have invested resources into various aspects of
strategic planning (e.g., market research, technological
implementation, and marketing) that are premised, at least in part, on
event contracts that may be implicated by the proposed ``gaming''
definition.\172\ Relatedly, establishing a common understanding and
more uniform application of the term ``gaming'' may modify, in certain
respects, the types of event contracts that are available to market
participants for trading and clearing.
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\172\ The Commission notes that the value of any such lost
return would be proprietary information of the listing registered
entity to which the Commission does not have access, and therefore,
the Commission believes that it is not feasible to further quantify
this cost associated with the proposed ``gaming'' definition.
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In this regard, the Commission notes that contracts that involve
``gaming,'' as proposed to be defined, comprise a small portion of the
overall event contracts market, suggesting that the above-described
consequences of the proposed ``gaming'' definition would be relatively
modest. Specifically, the Commission estimates that contracts involving
``gaming,'' as proposed to be defined, comprised less than 1% of the
total trading volume in event contracts in 2023.\173\
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\173\ To make this estimate, Commission staff reviewed
aggregated event contracts trading data that was reported to the
Commission by CFTC-registered exchanges for the period of January 1,
2023 through December 31, 2023. Based on this review, the Commission
further estimates that event contracts that involve ``gaming,'' as
proposed to be defined, comprised approximately 6% of the total
number of event contracts listed for trading in 2023. These event
contracts were primarily comprised of contracts based on the outcome
of various entertainment awards contests. In 2012, in the Nadex
Order, the Commission recognized certain event contracts to involve
``gaming'' where taking a position in the contracts would be staking
``something of value upon a contest of others.'' Nadex Order at 3.
As previously discussed, the Commission notes that it has
observed a significant increase in the number and diversity of event
contracts listed for trading by CFTC-registered exchanges, as well
as increased interest among applicants and prospective applicants
for exchange registration in operating exchanges that would
primarily or exclusively offer event contracts for trading. This
upward trend--if it continues, as the Commission anticipates is
possible (if not probable)--potentially could extend, absent the
proposed rule amendments, to include additional event contracts
involving ``gaming,'' as proposed to be defined. An extension of
this type would mean that a registered entity or applicant for
registration currently may have plans to seek to list for trading or
accept for clearing, and may have invested in, event contracts that
involve ``gaming,'' as proposed to be defined. Beyond this general
observation that registered entities or applicants for registration
potentially could have plans to list in the future, and could have
invested in event contracts involving ``gaming,'' as proposed to be
defined, the Commission lacks access to the entity-specific
proprietary data necessary to quantify what, if any, additional
costs should be attributed to such yet-to-be-listed, planned-for
contracts.
To the extent that registered entities or applicants for
registration currently could have plans to list in the future event
contracts involving ``gaming,'' as proposed to be defined, in the
Commission's view this also supports the benefits, as discussed
infra, that defining the term would provide. Among other things, the
definition would enhance confidence regarding product compliance
that can inform product design efforts, and would help to ensure
that contracts that are contrary to the public interest are not
traded on CFTC-regulated markets.
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Based on historical trading data, the Commission recognizes that
the above-described anticipated costs of the proposed ``gaming''
definition may have more of an impact for some registered entities--and
consequently for their customers--than others.\174\ The Commission
expects, however, that a significant proportion of these registered
entities' offerings would not be impacted by the proposed gaming
definition, suggesting that the overall impact to these registered
entities of the proposed definition would be relatively modest.\175\
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\174\ In 2023, only one CFTC-registered exchange listed event
contracts that involved ``gaming,'' as proposed to be defined. In
2023, only one CFTC-registered DCO cleared event contracts that
involved ``gaming,'' as proposed to be defined.
\175\ For example, the Commission estimates that, in 2023, event
contracts involving ``gaming,'' as proposed to be defined, comprised
approximately 1% of the trading volume of the CFTC-registered
exchange that offered such contracts for trading. The Commission
further estimates that event contracts that involve ``gaming,'' as
proposed to be defined, comprised approximately 9% of the total
number of event contracts listed by this exchange in 2023. To make
these estimates, Commission staff reviewed aggregated event
contracts trading data that was reported to the Commission by CFTC-
registered exchanges for the period of January 1, 2023 through
December 31, 2023.
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Further, the Commission believes that providing specificity to
determine whether a particular event contract involves ``gaming'' will
support the ability of these and other registered entities to develop
and list new products with enhanced confidence regarding such products'
compliance with the CEA and CFTC regulations. The Commission believes
that this should assist registered entities, as well as applicants for
registration, in making informed business decisions with respect to
product design, which should have long-term business benefits. As
discussed above, it may also yield business efficiencies for registered
entities by helping to avoid situations where they expend resources to
develop and submit a contract that the Commission subsequently
determines, following a Sec. 40.11(c) review, may not be listed for
trading or accepted for clearing. To that end, the Commission believes
that defining the term ``gaming'' will have broader public benefits by
helping to ensure that contracts that are contrary to the public
interest--namely, certain contracts that ``exist predominantly to
enable gambling''--are not traded, including by retail market
participants, as financial instruments on CFTC-regulated markets.
(b) Amendments To Further Align With Statutory Language
The proposed rule amendments include certain changes to improve
regulatory and statutory textual alignment that are not expected to
render material costs or benefits.\176\ First, when describing the
contracts to which Sec. 40.11 applies, the Commission is proposing to
remove the terms ``relate to'' and ``reference'' wherever they appear,
and to refer only to contracts that ``involve'' (or, as applicable,
that ``may'' involve) an Enumerated Activity or prescribed similar
activity,\177\ in order to further align with the statutory text of CEA
section 5c(c)(5)(C)(i). The Commission also is proposing to remove from
Sec. 40.11 the reference to CEA section 1a(19)(iv), and to more
precisely track the statutory language of CEA section 5c(c)(5)(C)(i)
when describing the contracts to which Sec. 40.11 applies--while
accounting for the errant reference to ``section 1a(2)(i),'' which is
not a provision in the statute--by stating that the regulation applies
with respect to contracts ``in excluded commodities based on the
occurrence, extent of an
[[Page 48991]]
occurrence, or contingency (other than a change in the price, rate,
value, or levels of a commodity described in section 1a(19)(i) of the
Act)[.]''
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\176\ By further aligning the regulatory text of Sec. 40.11
with the statutory text of CEA section 5c(c)(5)(C), the proposed
amendments may be of some limited benefit to the extent any
registered entity would unnecessarily expend resources to resolve
confusion attributable to the existing textual variation.
\177\ While there are no prescribed similar activities at this
juncture, the Commission retains its authority under CEA section
5c(c)(5)(C)(i)(VI) and Sec. 40.11(a)(2) to prescribe similar
activities in future rules or regulations.
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3. Section 15(a) Factors
The Commission has evaluated the costs and benefits of the proposed
amendments to Sec. 40.11 in light of the following five broad areas of
market and public concern identified in section 15(a) of the CEA:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of the markets; price
discovery; sound risk management practices; and other public interest
considerations.
(a) Protection of Market Participants and the Public
The Commission believes that the proposed amendments to Sec. 40.11
will help to protect the public by preventing the listing for trading
or acceptance for clearing by registered entities of certain event
contracts that are contrary to the public interest. The Commission
further believes that permitting trading of contracts involving
``gaming,'' as proposed to be defined, would conflate gambling and
financial instruments in a manner that could particularly create
confusion and risk for retail market participants, and that the
proposed amendments would, accordingly, enhance protection of market
participants.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission acknowledges that a consequence, for certain
registered entities and applicants for registration, of the proposed
amendments may be to modify such registered entities' and applicants'
understanding of the types of event contracts that they may seek to
list for trading or accept for clearing in the future. This may entail
certain modifications to a registered entity's business model and
projected revenue streams, and may impact a registered entity's, or
applicant's, ability to realize the full anticipated return on certain
aspects of its business model. Based on the types of event contracts
that different registered entities currently list for trading or accept
for clearing, the Commission anticipates that this consequence of the
proposed amendments may impact some registered entities--and
consequently their customers--more than others. However, for those
registered entities that currently list for trading or accept for
clearing contracts that involve ``gaming,'' as proposed to be defined,
the Commission estimates that a significant proportion of their
offerings would not be impacted by the proposed amendments, suggesting
that the overall impact of the rule amendments should be relatively
modest.\178\
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\178\ See note 176, supra.
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Moreover, the Commission believes that, by further specifying types
of event contracts that are contrary to the public interest and
therefore may not be listed for trading or accepted for clearing, the
proposed amendments also will support these and other registered
entities' ability to develop and list new products with enhanced
confidence regarding such products' compliance with the CEA and CFTC
regulations. The Commission believes that this should assist registered
entities, as well as applicants for registration, in making informed
business decisions with respect to product design, which may enhance
competitiveness and efficiency.
(c) Price Discovery
While the proposed amendments are not likely to have an impact on
price discovery in CFTC-regulated markets, the Commission acknowledges
that certain event contracts could have limited informational value in
other contexts outside the scope of CFTC-regulated markets that may be
lost if the proposed amendments are adopted.
(d) Sound Risk Management Practices
The Commission has not identified any effect of the proposed
amendments on sound risk management practices.
(e) Other Public Interest Considerations
As discussed in detail above, the primary purpose of Sec. 40.11 is
to implement the Commission's statutory authority to determine that
certain event contracts are contrary to the public interest and
therefore may not be listed or made available for clearing or trading
on or through a registered entity. The proposed amendments seek to
support this objective by further specifying the types of event
contracts that are contrary to the public interest and therefore may
not be listed for trading or accepted for clearing.
Request for Comment
The Commission generally requests comments on all aspects of its
consideration of costs and benefits, including the identification and
assessment of any costs and benefits not discussed herein; data and any
other information to assist or otherwise inform the Commission's
ability to quantify or qualitatively describe the costs and benefits of
the proposed amendments; and substantiating data, statistics, and any
other information to support positions posited by commenters with
respect to the Commission's discussion. The Commission welcomes comment
on such costs and benefits, particularly from registered entities that
can provide quantitative cost and benefit data based on their
respective experiences. The Commission also welcomes comments on
alternatives to the proposed amendments that may be preferable on cost-
benefit grounds, and why.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to ``take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving'' the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market established pursuant to section 17 of the CEA.\179\
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\179\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether this proposed rulemaking implicates any
other specific public interest to be protected by the antitrust laws.
The Commission has considered the Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether the Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that the
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting this
proposed rulemaking.
List of Subjects in 17 CFR Part 40
Commodity futures, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission hereby proposes to amend 17 CFR chapter I as
follows:
[[Page 48992]]
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
0
1. The authority citation for part 40 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and 12, as amended by
Titles VII and VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Pub. L. 111-203, 124 Stat. 1376
(2010).
0
2. Revise Sec. 40.11 to read as follows:
Sec. 40.11 Event contracts based upon certain excluded commodities.
(a) Prohibition. Agreements, contracts, transactions, or swaps
described in paragraphs (a)(1) and (2) of this section are contrary to
the public interest and shall not be listed for trading or accepted for
clearing on or through a registered entity:
(1) Agreements, contracts, transactions, or swaps in excluded
commodities based upon the occurrence, extent of an occurrence, or
contingency (other than a change in the price, rate, value, or levels
of a commodity described in section 1a(19)(i) of the Act) that involve:
(i) Activity that is unlawful under any Federal or State law;
(ii) Terrorism;
(iii) Assassination;
(iv) War; or
(v) Gaming.
(2) Agreements, contracts, transactions, or swaps in excluded
commodities based upon the occurrence, extent of an occurrence, or
contingency (other than a change in the price, rate, value, or levels
of a commodity described in section 1a(19)(i) of the Act) that involve
other activity that is similar to an activity enumerated in paragraphs
(a)(1)(i) through (v) of this section, and that the Commission
determines, by rule or regulation, to be contrary to the public
interest.
(b) Gaming. (1) For purposes of paragraph (a)(1)(v) of this
section, ``gaming'' means the staking or risking by any person of
something of value upon:
(i) The outcome of a contest of others;
(ii) The outcome of a game involving skill or chance;
(iii) The performance of one or more competitors in one or more
contests or games; or
(iv) Any other occurrence or non-occurrence in connection with one
or more contests or games.
(2) For purposes of paragraph (a)(1)(v) of this section, ``gaming''
includes, but is not limited to, the staking or risking by any person
of something of value upon the outcome of a political contest,
including an election or elections, an awards contest, or a game in
which one or more athletes compete, or an occurrence or non-occurrence
in connection with such a contest or game, regardless of whether it
directly affects the outcome.
(c) 90-day review. (1) The Commission may determine, based upon a
review of the terms or conditions of a submission made by a registered
entity under Sec. 40.2 or Sec. 40.3, that an agreement, contract,
transaction, or swap as described in paragraph (a) of this section may
involve-an activity enumerated in paragraphs (a)(1) or (2) of this
section, and is subject to a 90-day review.
(2) The Commission shall notify the registered entity of its
determination to conduct a 90-day review and post notice of the
determination on its website. The 90-day review period shall commence
on the date the Commission notifies the registered entity of its
determination to conduct a 90-day review.
(3) The Commission shall request that the registered entity suspend
the listing or trading of the agreement, contract, transaction, or swap
subject to the 90-day review during the pendency of the review period.
(4) The Commission shall issue an order approving or disapproving
an agreement, contract, transaction, or swap that is subject to a 90-
day review under this paragraph (c) not later than 90 days subsequent
to the date that the Commission commences review, or if applicable, at
the conclusion of such extended period agreed to or requested by the
registered entity.
Issued in Washington, DC, on May 29, 2024, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Event Contracts--Voting Summary and Chairman's and
Commissioners' Statements
Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson, and
Goldsmith Romero, voted in the affirmative. Commissioners Mersinger
and Pham voted in the negative.
Appendix 2--Statement of Chairman Rostin Behnam
I support the proposed amendments to the Commission's rules
concerning event contracts. Before further discussion, I would like
to acknowledge the tremendous work by many CFTC colleagues. I
particularly would like to thank Vince McGonagle, Nora Flood, and
Grey Tanzi for all of their thorough and thoughtful work on the
proposal.
Starting in 2021, there has been a significant uptick in the
number of event contracts listed for trading by CFTC-registered
exchanges. To put that increase into perspective, more event
contracts were listed for trading in 2021 than had been listed in
the prior 15 years combined. And that has continued to be true each
year since.
Given this exponential increase, the Commission today proposes
to further specify the types of event contracts that fall within the
scope of CEA section 5c(c)(5)(C) and are contrary to the public
interest. The amendments will support efforts by registered entities
to comply with the CEA by more clearly identifying the types of
event contracts that may not be listed for trading or accepted for
clearing. These changes will support responsible and efficient
market innovation, by helping registered entities and new applicants
to make informed decisions with respect to product design.
Specifically, the Commission is proposing to amend Commission
Regulation 40.11 to, among other things, further specify types of
event contracts that fall within the scope of CEA section
5c(c)(5)(C) and are contrary to the public interest, such that they
may not be listed for trading or accepted for clearing on or through
a registered entity. The proposal defines ``gaming'' and provides
illustrative examples of gaming, including the outcome of a
political contest, the outcome of an awards contest, the outcome of
a game in which one or more athletes compete, or an occurrence or
non-occurrence in connection with such a contest or game.
The proposal includes a determination that event contracts
involving each of the Enumerated Activities in CEA section
5c(c)(5)(C) (gaming, war, terrorism, assassination, and activity
that is unlawful under state law) are, as a category, contrary to
the public interest and therefore may not be listed for trading or
accepted for clearing through a registered entity. The illustrative
examples of gaming that I just mentioned are therefore contrary to
the public interest and cannot be listed for trading.
To be clear, that means that even contracts on the outcome of a
political contest such as an election could not be listed for
trading or accepted for clearing under the proposed rule. Such
contracts not only fail to serve the economic purpose of the futures
markets--they are illegal in several states and could potentially
and impermissibly preempt State responsibilities for overseeing
federal elections. This is not a new phenomenon for the CFTC. Over
the course of the last 20 years, the CFTC has remained steadfast--
through many administrations--that election or political contracts
should not be allowed on the US futures and options markets.
Contracts involving political events ultimately commoditize and
degrade the integrity of the uniquely American experience of
participating in the democratic electoral process. Allowing these
contracts would push the CFTC, a financial market regulator, into a
position far beyond its Congressional mandate and expertise. To be
blunt, such contracts would put the CFTC in the role of an election
cop.
The CFTC's jurisdiction as mandated by Congress and solidified
in our statute, the Commodity Exchange Act, recognizes our expertise
in markets for goods, services,
[[Page 48993]]
rights, and interests--which can include events associated with
financial, commercial, or economic consequences. We are tasked with
upholding the public interest by ensuring that America's derivatives
markets provide a means for managing and assuming price risks and
providing for price discovery through liquid, fair, open,
transparent, and financially secure trading facilities. Market
integrity is featured so prominently within that mandate that the
CFTC has civil enforcement authority when it comes to the potential
for fraud, manipulation, and other abuses such as the dissemination
of false information in the underlying or commodity cash markets.
Political control contracts on CFTC-regulated exchanges would push
the CFTC far beyond this historical expertise and jurisdiction, and
potentially place the CFTC in the position of monitoring such
markets for fraud and manipulation in elections themselves.
I thank the staff for their hard work in producing this
important proposal.
Appendix 3--Statement of Commissioner Summer K. Mersinger
I support the Commission \180\ undertaking a rulemaking on event
contracts, which is long overdue. During my tenure on the
Commission, I have consistently called for a rulemaking process to
establish a framework for the Commission to exercise the
discretionary authority with respect to event contracts that
Congress granted to the agency in our governing statute, the
Commodity Exchange Act (``CEA'').\181\
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\180\ This Statement will refer to the agency as the
``Commission'' or ``CFTC.'' All web pages cited herein were last
visited on May 9, 2024.
\181\ See Dissenting Statement of Commissioner Summer K.
Mersinger Regarding Order on Certified Derivatives Contracts with
Respect to Political Control of the U.S. Senate and House of
Representatives (September 22, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement092223
(``Kalshi Dissenting Statement''); and Dissenting Statement of
Commissioner Summer K. Mersinger Regarding Commencement of 90-Day
Review Regarding Certified Derivatives Contracts with Respect to
Political Control of the U.S. Senate and House of Representatives
(June 23, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement062323.
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Unfortunately, though, I cannot support this particular proposed
rulemaking (the ``Proposal''). At first blush, it appears to be
``much ado about nothing,'' \182\ as it seems to do little more than
rubber-stamp what the Commission has already said and done. Upon
closer inspection, though, it is a ``wolf in sheep's clothing''
\183\ because where the Proposal departs from our past practice, it
lays the foundation to prohibit entire categories of potential
exchange-traded event contracts whose terms and conditions the
Commission has never even seen.
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\182\ Shakespeare, William, 1564-1616, Much Ado about Nothing,
London, New York (Penguin, 2005).
\183\ Aesop's Fables, The Wolf in Sheep's Clothing (1867).
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In planting the seeds of future bans of countless event
contracts, sight unseen, the Proposal--
Exceeds the legal authority that Congress granted the
Commission in the CEA;
Relies heavily on a brief snippet of legislative
history consisting of a colloquy between two Senators--cherry-
picking parts of the colloquy it likes, while ignoring other parts
of the same colloquy;
Resurrects an ``economic purpose test'' for evaluating
the public interest that was based on a provision of the CEA that
was repealed by Congress nearly a quarter-century ago;
Fails to do the hard work of analyzing the unique
nature of event contracts, which are different in kind from
traditional derivatives contracts more familiar to the agency;
Relies on unsupported conjecture, treats similar
circumstances differently, and raises more questions than it
answers; and
Flies in the face of the CFTC's mandate to promote
responsible innovation as Congress directed in the CEA.
My dissent should not be taken as an indication that I am a fan
of all event contracts. But it is hard not to conclude from the
multitude of defects in this Proposal that its significant overreach
is motivated more by a seemingly visceral antipathy to event
contracts than by reasoned analysis.
It does not matter whether we think event contracts are a good
idea or a bad idea; the Commission must exercise its authority with
respect to event contracts within the scope of the CFTC's legal
authority, and must appropriately implement the authority that
Congress has provided us. This Proposal fails both tests.
I. Event Contracts in Brief
CEA Section 5c(c)(5)(C), which was added to the CEA in 2010 by
the Dodd-Frank Act,\184\ permits the Commission to prohibit an event
contract from being listed for trading on an exchange \185\ if: (1)
the contract involves one of five enumerated activities (i.e.,
activity that is unlawful under Federal or State law; terrorism;
assassination; war; or gaming); and (2) the Commission determines
that the contract is contrary to the public interest. CEA Section
5c(c)(5)(C) also provides that the Commission may determine, by rule
or regulation, that an event contract involves ``other similar
activity'' to the five enumerated activities, which would subject
event contracts involving that similar activity to the ``contrary to
the public interest'' standard.\186\
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\184\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank Act'').
\185\ CEA Section 5c(c)(5)(C) applies to event contracts listed
for trading by two types of exchanges (designated contract markets
(``DCMs'') and swap execution facilities (``SEFs'')), as well as the
clearing of event contracts by derivatives clearing organizations
(``DCOs''), all of which must register with, and are regulated by,
the CFTC. For convenience, this Statement will refer simply to
``exchange trading'' of event contracts.
\186\ CEA Section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
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Congress in CEA Section 5c(c)(5)(C) did not decree that event
contracts involving enumerated activities are contrary to the public
interest per se. Rather, if an event contract involves an enumerated
activity, the Commission ``may'' determine that it is contrary to
the public interest and prohibited from trading--which necessarily
indicates that the Commission also has the discretion to determine
that it is not.
A year after enactment of the Dodd-Frank Act, the Commission
adopted CFTC Rule 40.11 \187\ to implement the CEA's new event
contract provisions.\188\ It is Rule 40.11 that the Commission is
now proposing to amend.
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\187\ CFTC Rule 40.11, 17 CFR 40.11.
\188\ See Provisions Common to Registered Entities, 76 FR 44776
(July 27, 2011) (``Rule 40.11 Adopting Release'').
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II. The Proposed Definition of ``Gaming'' is Significantly Overbroad
Neither the CEA nor the Commission's rules define the term
``gaming.'' In the Rule 40.11 Adopting Release implementing CEA
Section 5c(c)(5)(C), the Commission acknowledged that ``the term
`gaming' requires further clarification,'' and said that the
Commission may issue a future rulemaking concerning event contracts
that involve ``gaming.'' \189\
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\189\ Id. at 44785.
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I agree that, 13 years later, it is long past time for the
Commission to do so. But, the Proposal's definition of ``gaming'' is
much too broad.
1. The Proposal Sweeps in the Universe of Every ``Occurrence or
Non-Occurrence in Connection With'' a Game
The proposed definition of ``gaming'' includes both the outcome
of a game and the performance of one or more competitors in a game.
So far, so good.
But it then tacks on an additional category of ``any other
occurrence or non-occurrence in connection with'' a game. The all-
encompassing nature of the phrase ``any other occurrence or non-
occurrence'' is self-evident. And that universality is further
reinforced by its attachment to the ``in connection with'' wording.
The motivation for this expansive wording in the Proposal is
likely that, where the phrase ``in connection with'' appears in
various enforcement provisions of the CEA, the Commission interprets
it ``broadly, not technically or restrictively.'' \190\ And the
Proposal gives no indication that it should be interpreted any
differently here. In fact, the Proposal (section II.B.1.b) goes so
far as to say that staking or risking something of value on a
contingent event ``in connection with'' a game ``would be as much of
a wager or a bet on the game . . . as staking or risking something
of value on the outcome of the game . . . would be.''
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\190\ See Prohibition on the Employment, or Attempted
Employment, of Manipulative and Deceptive Devices and Prohibition on
Price Manipulation, 76 FR 41398, 41405 (July 14, 2011) (citing the
U.S. Supreme Court's decision in SEC v. Zandford, 535 U.S. 813
(2002), interpreting the ``in connection with'' language in SEC Rule
10b-5, 17 CFR 240.10b-5, as ``particularly instructive''; in
Zandford, the Supreme Court broadly equated the ``in connection
with'' language with the word ``coincide'' and the phrase ``not
independent events,'' id. at 820-822).
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Under this incredibly far-reaching formulation, there are
countless ``occurrence[s] or non-occurrence[s] in connection with''
a game that the Proposal
[[Page 48994]]
would deem to be ``gaming.'' Obvious examples include event
contracts involving the attendance at a baseball or football game,
or whether a particular nation will be selected to host a soccer
World Cup. These would clearly be ``in connection with'' the
underlying baseball, football, or soccer games--but there is no
reason why staking something of value on those contingent events
should be treated the same as staking something of value on the
outcome of those games.
Indeed, there is no better illustration of the overbreadth of
the ``in connection with'' aspect of the proposed ``gaming''
definition than the Proposal's own example (section II.B.1.c) of
``whether a particular individual will attend a game.'' It is
difficult to fathom why an event contract involving whether Taylor
Swift will attend a Kansas City Chiefs football game should
constitute ``gaming''--and impossible to understand why the Proposal
treats similar things differently, since whether she attends a
Beyonc[eacute] concert would not constitute ``gaming.''
I acknowledge that it might be appropriate to extend the
definition of ``gaming'' to include events that can affect the
outcome of a game or the performance of a competitor in a game.
Event contracts involving, say, whether an injury to Shohei Ohtani
would prevent him from playing in the World Series, or involving the
score of a football game at halftime, might be examples of this. But
to broadly define as ``gaming'' every ``occurrence or non-
occurrences in connection with'' a game--regardless of whether it
has any bearing on the outcome of the game or the performance of a
competitor in the game--is wholly unwarranted.
2. Elections and Awards Are Not ``Gaming''
The Proposal rubber-stamps two prior Commission Orders that
found that event contracts involving political control or elections
are ``gaming,'' \191\ essentially repeating the same discussion from
those Orders--and then throwing awards into its ``gaming''
definition as well. Yet, this definition is inconsistent with the
legislative history of CEA Section 5c(c)(5)(C)--legislative history
on which, for other issues discussed below, the Proposal relies
heavily.
---------------------------------------------------------------------------
\191\ See Order Prohibiting North American Derivatives
Exchange's Political Event Derivatives Contracts (April 2, 2012),
available at https://www.cftc.gov/PressRoom/PressReleases/6224-12;
and Order In the Matter of the Certification by KalshiEX LLC of
Derivatives Contracts with Respect to Political Control of the
United States Senate and United States House of Representatives
(September 22, 2023), available at https://www.cftc.gov/PressRoom/PressReleases/8780-23.
---------------------------------------------------------------------------
That legislative history consists of a colloquy between Senators
Blanche Lincoln and Dianne Feinstein. Senator Lincoln was then the
Chair of the Senate Committee on Agriculture, Nutrition, and
Forestry, which is the CFTC's authorizing committee.
In the colloquy, the Senators talked about ``gaming'' only in
the limited context of sporting events. In responding to Senator
Feinstein's question about the CFTC's authority under Section
5c(c)(5)(C) to determine that a contract is a ``gaming'' contract,
Senator Lincoln said that ``[i]t would be quite easy to construct an
`event contract' around sporting events such as the Super Bowl, the
Kentucky Derby, and Masters Golf Tournament.'' \192\ Thus, Senator
Lincoln clearly associated ``gaming'' with sporting events, i.e.,
games.\193\
---------------------------------------------------------------------------
\192\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Senator Dianne Feinstein and Senator Blanche
Lincoln), available at https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf (``Feinstein-Lincoln colloquy'').
\193\ The Senator's view is consistent with the natural
interpretation of the word ``gaming'' as meaning the staking of
money on the outcome of a game. For example, Cambridge Dictionary
defines ``gaming'' in terms of games: ``The risking of money in
games of chance, especially at a casino; gaming machines/tables.''
See ``gaming'' definition, CAMBRIDGE DICTIONARY, available at
https://dictionary.cambridge.org/us/dictionary/english/gaming.
---------------------------------------------------------------------------
But rather than remain true to the legislative history that
equated ``gaming'' with only sporting events, the Proposal broadly
sweeps all ``contests'' into its definition of ``gaming.'' And it
then concludes that elections and awards are ``contests'' and,
therefore, ``gaming''--even though neither Senator Lincoln nor
Senator Feinstein ever mentioned elections or awards (or
``contests,'' for that matter).
The Proposal attempts to squeeze elections and awards into the
``gaming'' category through the following tortured chain of
reasoning:
Gaming means gambling;
Some State statutes link gambling to betting or
wagering on contests; therefore,
Contests (including elections and awards) constitute
gaming.
Yet, one has to ask: If Congress had intended for elections and
awards to be enumerated activities, is it more likely that Section
5c(c)(5)(C) would have:
Included elections and awards in its list of enumerated
activities; or
Enumerated ``gaming'' and hoped the Commission would--
[cir] Define ``gaming'' to include ``contests;'' and
[cir] Consider ``contests'' to include elections and awards?
Congress easily could have included elections and awards as
enumerated activities, but it did not. Confronted with this
Congressional silence, I do not believe the Commission can simply
decree that elections and awards are enumerated activities. And this
is especially the case when Congress in CEA Section 5c(c)(5)(C)
provided the Commission with a ready-made process for determining,
through a rulemaking proceeding, whether contests, elections, and/or
awards are similar to the enumerated activities, including
``gaming.''
I am baffled at why the Commission is tying itself into knots by
trying to reason its way from ``gaming'' to ``gambling'' to
``contests'' to elections and awards, rather than simply do what
Congress said it could do: consider whether elections and awards are
similar to ``gaming'' (or another enumerated activity). This is not
a matter of form over substance. Approach matters when it comes to
exercising our authority under the CEA, and I cannot support the
Proposal's approach to stretch the statutory term ``gaming'' to
include elections and awards.
III. The Commission Lacks Legal Authority To Determine in Advance That
Entire Categories of Event Contracts Are Contrary to the Public
Interest
The overbreadth of the Proposal's ``gaming'' definition would
suffice for me to dissent. But the Proposal's most brazen overreach
is its determination, in advance, that every event contract that
involves an enumerated activity is automatically contrary to the
public interest--regardless of the terms and conditions of that
contract.
The Proposal would prohibit these contracts--sight unseen--
through the shortcut of declaring entire categories of event
contracts to be contrary to the public interest. But the Commission
lacks legal authority under the CEA to make public interest
determinations by category.
The Proposal's justification for its approach (in section
II.C.1) is that ``the statute does not require this public interest
determination to be made on a contract-specific basis.'' This is
backwards. The CFTC is a creature of statute, and has only the
authorities granted to it by the CEA. There is no provision in CEA
Section 5c(c)(5)(C) for public interest determinations regarding
event contracts involving enumerated activities to be made by
category. Accordingly, the Commission cannot claim that authority
through the ipse dixit of ``Congress didn't say we couldn't.''
This is not a mere question of what procedure to follow. The
Proposal would allow the Commission to make the substantive policy
determination that entire categories of event contracts, regardless
of their terms and conditions, are contrary to the public interest.
And the consequences of such a determination are severe--a complete
prohibition on exchanges' ability to list event contracts, and on
market participants' ability to trade them. If Congress had intended
for the Commission to wield this immense authority, surely it would
have said so.
In fact, in another CEA provision similar to CEA Section
5c(c)(5)(C) that also was added by the Dodd-Frank Act, Congress did
say so. CEA Section 2(h)(2)(A)(i) specifically states that the
Commission shall review ``each swap, or any group, category, type,
or class of swaps to make a determination as to whether the swap or
group, category, type, or class of swaps should be required to be
cleared.'' \194\
---------------------------------------------------------------------------
\194\ CEA Section 2(h)(2)(A)(i), 7 U.S.C. 2(h)(2)(A)(i)
(emphasis added). For convenience, the text will refer only to CEA
Section 2(h)(2)(A)(i), although the Dodd-Frank Act also used this
same wording explicitly authorizing the Commission to make
determinations by category in CEA Sections 2(h)(2)(B)(i), (ii),
(iii)(II), and (E); 2(h)(3)(A), (B), (C)(i), (C)(ii), and (D); and
2(h)(4)(B), (B)(iii), (C)(i), and (C)(ii), 7 U.S.C. 2(h)(2)(B)(i),
(ii), (iii)(II), and (E); 2(h)(3)(A), (B), (C)(i), (C)(ii), and (D);
and 2(h)(4)(B), (B)(iii), (C)(i), and (C)(ii).
Of particular interest is CEA Section 2(h)(4)(B)(iii), 7 U.S.C.
2(h)(4)(B)(iii), which provides that to the extent the Commission
finds that a particular swap or category (or group, type or class)
of swaps would be subject to mandatory clearing but no DCO has
listed the swap or category (or group, type, or class) of swaps for
clearing, the Commission ``shall . . . take such actions as the
Commission determines to be necessary and in the public interest,
which may include requiring the retaining of adequate margin or
capital by parties to the swap, group, category, type, or class of
swaps.'' (Emphasis added) Here, unlike with respect to event
contracts, Congress explicitly told the Commission that it could
make a public interest determination either individually or by
category.
---------------------------------------------------------------------------
[[Page 48995]]
Thus, when it enacted the Dodd-Frank Act, Congress knew how to
tell the Commission that it could make a determination on either an
individual or categorical basis when it wanted to do so.\195\ In
contrast, Congress did not say in CEA Section 5c(c)(5)(C) that the
Commission could make public interest determinations for event
contracts by category.
---------------------------------------------------------------------------
\195\ Similarly, in another CEA provision added by the Dodd-
Frank Act, Congress told the Commission that it could exempt swaps
or other transactions from position limits either individually or by
class. See CEA Section 4a(7), 7 U.S.C. 6a(7) (``The Commission . . .
may exempt . . . any swap or class of swaps . . . or any transaction
or class of transactions from any requirement it may establish . . .
with respect to position limits'').
---------------------------------------------------------------------------
The Proposal's premise is that a grant of authority to make a
determination about one thing necessarily includes authority to make
a determination about a category of such things--unless Congress
says otherwise. But if that were the case, then there was no need
for Congress to tell the Commission in CEA Section 2(h)(2)(A)(i)
that it could make mandatory swap clearing determinations either by
individual swap or by category.\196\ The Proposal's determination
would render statutory text in CEA Section 2(h)(2)(A)(i) mere
surplusage in violation of established canons of statutory
construction.\197\ It also would violate the canon of statutory
construction that provisions enacted as part of the same statute
(here, the Dodd-Frank Act) should be construed in a similar
manner.\198\
---------------------------------------------------------------------------
\196\ Nor can authority to make categorical determinations be
found in the CEA's grant of general rulemaking authority in CEA
Section 8a(5), 7 U.S.C. 12a(5), which provides that the Commission
may adopt such rules as, ``in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of'' the CEA. Again, if that were the
case, then there was no need for Congress to tell the Commission in
CEA Section 2(h)(2)(A)(i) that it could make mandatory swap clearing
determinations either by individual swap or by category, nor was
there any need for Congress to tell the Commission in CEA Section
4a(7) that it could exempt swaps or other transactions from position
limits requirements either by individual transaction or by class.
\197\ See, e.g., Dep't of Agric. Rural Dev. Rural Hous. Serv. v.
Kirtz, 601 U.S. 42, 53 (2024) (stating proper respect for Congress
cautions courts against lightly assuming statutory terms are
superfluous or void of significance); City of Chicago, Illinois v.
Fulton, 592 U.S. 154, 159 (2021) (specifying the canon against
surplusage is strongest when an interpretation would render
superfluous another part of the same statutory scheme).
\198\ See Turkiye Halk Bankasi A.S. v. United States, 598 U.S.
264, 275 (2023) (The Court has a duty to construe statutes and not
isolated provisions, and such construction must occur within the
context of the entire statutory scheme.).
---------------------------------------------------------------------------
In the absence of any statutory text in CEA Section 5c(c)(5)(C)
like that in CEA Section 2(h)(2)(A)(i), I cannot accept that
Congress silently authorized the CFTC to make life easier for itself
through the shortcut of making impactful determinations that entire
categories of event contracts are contrary to the public interest
and thus are prohibited from trading on exchanges.
IV. Even if There Is Legal Authority, the Proposal Fails To Justify
Making Advance Public Interest Determinations by Category--for a Host
of Reasons
Even if the Commission has legal authority to make public
interest determinations for event contracts by category, the
Proposal is wholly unpersuasive in its attempt to justify doing so.
There are a multitude of failings.
1. There is No Basis To Resurrect the Repealed ``Economic Purpose
Test,'' Which Shouldn't be Applied to Event Contracts in Any Event
The Proposal would ban entire categories of event contracts as
being contrary to the public interest based largely on the
proposition that they fail the ``economic purpose test.'' There are
four significant problems with this approach.
Congressional Intent: First, the Proposal relies on a single,
ambiguous, passage in the legislative history to conclude that
Congress intended, for purposes of a public interest review of an
event contract, to resurrect the ``economic purpose test'' that the
Commission once used to determine whether a futures contract was
contrary to the public interest--until Congress repealed that public
interest requirement in 2000.\199\
---------------------------------------------------------------------------
\199\ Before 2000, CEA Section 5(g) required that futures
contracts not be contrary to the public interest. The Commission
interpreted this statutory public interest standard to include the
``economic purpose test.'' See Request for Comments Respecting
Public Interest Test, Guideline on Economic and Public Interest
Requirements for Contract Market Designations, 40 FR 25849 (June 19,
1975) (``Guideline No. 1''). In 2000, Congress repealed Section 5(g)
of the CEA and its public interest requirement in the Commodity
Futures Modernization Act of 2000, Public Law 106-554, 114 Stat.
2763 (2000) (``CFMA''). As a result, the Commission withdrew
Guideline No. 1.
---------------------------------------------------------------------------
The Proposal's resurrection of the ``economic purposes test'' is
based entirely on this one passage in the colloquy between Senator
Dianne Feinstein and Senator Blanche Lincoln:
Mrs. Feinstein: . . . Will the CFTC have the power to determine
that a contract is a gaming contract if the predominant use of the
contract is speculative as opposed to hedging or economic use?
Mrs. Lincoln: That is our intent. The Commission needs the power
to, and should, prevent derivatives contracts that are contrary to
the public interest because they exist predominantly to enable
gambling through supposed event contracts. It would be quite easy to
construct an `event contract' around sporting events such as the
Super Bowl, the Kentucky Derby, and Masters Golf Tournament. These
types of contracts would not serve any real commercial purpose.
Rather, they would be used solely for gambling.\200\
---------------------------------------------------------------------------
\200\ See Feinstein-Lincoln colloquy, n.13, supra.
To be clear, the Dodd-Frank Act did not codify the Commission's
prior ``economic purpose test.'' And I cannot accept the Proposal's
assertion that this isolated colloquy between two Senators
establishes an intent by the whole of Congress that the Commission
conduct its public interest reviews of event contracts based on an
``economic purpose test'' that the Commission had withdrawn as a
result of the repeal (by the whole of Congress) of the statutory
provision it implemented a decade earlier.
After all, neither Senator Feinstein nor Senator Lincoln used
the term ``economic purpose test'' or referred to the Commission's
Guideline No. 1 that set out that test. As someone who spent over a
decade working in Congress, and who was present on the Senate floor
for countless colloquies and even had a hand in preparing talking
points for similar floor discussions, I am confident that if the
Senators believed we should resurrect the ``economic purpose test,''
they would have said just that.
Difference in Kind: Second, the ``economic purpose test'' was
designed for traditional futures contracts that have been listed and
traded on exchanges for decades.\201\ These contracts differ in kind
from event contracts, which typically are structured as binary (yes/
no) options.
---------------------------------------------------------------------------
\201\ The CFTC's Guideline No. 1, including its ``economic
purpose test,'' applied to futures contracts. See Guideline No. 1,
40 FR at 25850 (``The Commission is inviting comment . . . to assist
the Commission in determining whether the futures contracts of
[certain exchanges] meet the public interest requirements for
contract market designation . . .''), and at 25851 (an exchange
``should at this time affirm that futures transactions in the
commodity for which designation is sought are not, or are not
reasonably expected to be, contrary to the public interest'')
(emphases added). And the Feinstein-Lincoln colloquy makes clear
that CEA Section 5c(c)(5)(C) was drafted with futures contracts in
mind. Senator Lincoln cited terrorist attacks, war and hijacking as
examples of events that ``pose a real commercial risk to many
businesses in America,'' but stated that ``a futures contract that
allowed people to hedge that risk [of terrorist attacks, war, and
hijacking] . . . would be contrary to the public interest.''
Feinstein-Lincoln Colloquy, n.13, supra (emphasis added).
---------------------------------------------------------------------------
The two prongs of the ``economic purpose test,'' which the
Proposal adopts as a primary basis for prohibiting entire categories
of event contracts as being contrary to the public interest,
evaluate: (1) the contract's utility for price basing; and (2)
whether the contract can be used for hedging purposes. Yet, the
Commission itself has previously recognized the difference between
event contracts and the traditional futures contracts for which the
``economic purpose test'' was developed. In a Concept Release issued
in 2008, the Commission stated that ``[i]n general, event contracts
are neither dependent on, nor do they necessarily relate to, market
prices or broad-based measures of economic or commercial activity,''
and elaborated as follows:
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
[[Page 48996]]
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.\202\
---------------------------------------------------------------------------
\202\ Concept Release on the Appropriate Regulatory Treatment of
Event Contracts, 73 FR 25669, 25669-25670 (May 7, 2008). More
specifically, the Concept Release noted that: 1) event contracts
based on environmental measures (such as the volatility of
precipitation or temperature levels) or environmental events (such
as a specific type of storm within an identifiable geographic
region) will ``not predictably correlate to commodity market prices
or other measures of broad economic or commercial activity;'' and 2)
event contracts based on general measures (such as the number of
hours that U.S. residents spend in traffic annually or the vote-
share of a particular candidate) ``do not quantify the rate, value,
or level of any commercial or environmental activity,'' and that
contracts on general events (such as whether a Constitutional
amendment will be adopted) ``do not reflect the occurrence of any
commercial or environmental event.'' Id. at 25671.
In other words, the Proposal would ban entire categories of
event contracts largely on the basis of price basing and hedging
requirements that event contracts (described in the Concept Release
as ``information aggregation vehicles'') likely--because of their
very structure--have little chance of satisfying.
This problem is compounded by the fact that under the Proposal,
some event contracts that fail to satisfy the ``economic purpose
test'' would be banned, while other contracts failing the test would
not. For example, the Proposal's statement (in section II.C.3.c)
that ``most contracts falling within the proposed definition of
`gaming' would have no underlying cash market with bona fide
economic transactions to provide directly correlated price forming
information'' is equally true of weather-related event contracts--
but those contracts would not be banned.
Since the weather is not an enumerated activity, event contracts
involving the weather can trade because they are not subject to a
public interest review under CEA Section 5c(c)(5)(C). Thus, the
Proposal's reliance on the ``economic purpose test'' means that
exchanges can list for trading event contracts (such as those
involving weather) that the Commission believes are contrary to the
public interest--which I find untenable.
These are the inevitable results of imposing an ``economic
purpose test'' on event contracts that was not designed for event
contracts. Certainly, a rulemaking proceeding could be appropriate
to fully explore the economic attributes of event contracts, and to
consider how to incorporate such attributes into a public interest
review that is tailored to the nature of event contracts. But, that
is not this Proposal.
Government paternalism: Third, the Proposal asserts (in section
II.C.3.c) that ``the economic impact of an occurrence (or non-
occurrence) in connection with a contest of others, or a game of
skill or chance . . . generally is too diffuse and unpredictable to
correlate to direct and quantifiable changes in the price of
commodities or other financial assets or instruments, limiting the
hedging and price-basing utility of an event contract involving such
an occurrence.''
But to say that there are limits to the hedging utility of an
event contract is simply a statement that the contract may not be a
particularly good hedging vehicle. Market participants should be
permitted to make their own choices about what financial products
meet their hedging needs. It is not the CFTC's role to deny them
that choice altogether because we feel a given product's hedging
value is ``limited.''
The ``Economic Purpose Test'' Was Not Applied to Categories of
Contracts: Fourth, even assuming that the ``economic purpose test''
is an appropriate part of a public interest analysis for event
contracts, it does not support making public interest determinations
for event contracts by category--because the Commission applied its
``economic purpose test'' to the terms and conditions of individual
contracts. The Commission's Guideline No. 1 provided that
``[i]ndividual contract terms and conditions must be justified'' in
order for an exchange to demonstrate that it met the ``economic
purpose test.'' \203\
---------------------------------------------------------------------------
\203\ Guideline No. 1, 40 FR at 25850 (emphasis added). See also
id. at 25851 (``The justification of each contract term or condition
must be supported by appropriate economic data'') (emphasis added).
---------------------------------------------------------------------------
The Commission took no shortcuts in applying its subsequently
withdrawn ``economic purpose test'' to futures contracts. It did not
group contracts into categories (such as all futures contracts on
wheat, corn, gold, or silver) in evaluating the public interest
through its ``economic purpose test.'' Rather, the Commission looked
at each contract's ``individual contract terms and conditions'' to
make that determination. If the Proposal is going to (incorrectly)
adopt that ``economic purpose test'' in determining whether an event
contract is contrary to the public interest, then it should apply
that test the same way.
2. The Proposal's Application of Other Factors Falls Far Short of
Justifying Its Prohibition of Entire Categories of Event Contracts
Aside from the ``economic purpose test,'' the Proposal points to
a hodgepodge of other factors to try to justify prohibiting entire
categories of event contracts, whose terms and conditions the
Commission has never seen, from being traded on exchanges. But its
discussion of these factors is conjectural and without evidentiary
support, calls into question other contracts that are trading on
regulated exchanges, and raises more questions than it answers.
Taken as a whole, the Proposal falls far short of justifying the
shortcut of prohibiting entire categories of event contracts (even
assuming the Commission has the legal authority to do so).
Examples of these defects in the Proposal abound, but I will
focus here on just a few:
Hopelessly Impractical: The category of activities illegal under
State law demonstrates the type of problems inherent in determining
that all event contracts in a category are contrary to the public
interest. Some activities are illegal in some States, but not
others. Yet, the Proposal does not provide any guidance on several
obvious questions: Is an event contract automatically contrary to
the public interest if it involves an activity that is illegal in
only a single State--and if so, why? Or, if not, then how many
States have to declare an activity illegal before the automatic
prohibition on event contracts involving that activity is triggered?
More than half? States comprising a certain percentage of the
country's population? \204\
---------------------------------------------------------------------------
\204\ The Proposal justifies its category-based approach
regarding activity that is illegal under State law (in section
II.C.3.b) on the grounds that it ``eliminates the possibility that
the Commission would have to serve . . . as arbiter of a state's own
public interest determination . . . in recognizing specific activity
as causing, or posing, public harm.'' But unless the activity is
illegal in all 50 States, then in determining that an event contract
involving an activity illegal in some States is automatically
contrary to the public interest, the Commission is inherently
``serv[ing] as arbiter'' of the determination by all the other
States that the activity does not cause, or pose, public harm.
---------------------------------------------------------------------------
The problem is exacerbated by the Proposal's suggestion that the
prohibition of event contracts can hinge on decisions by judges. Is
this reference limited to Supreme Courts of the States? Or would a
ruling by a lower court of a State that a particular activity is
illegal trigger an automatic determination that an event contract
involving that activity is contrary to the public interest? What if
that decision is appealed?
While I have focused here on the category of event contracts
involving activities illegal under State law, these types of
practical questions are a foreseeable and inevitable result of any
determination that an entire category of event contracts is contrary
to the public interest. I recognize that a contract-specific
approach to making public interest determinations regarding event
contracts may be difficult and resource-intensive for the CFTC. But
aside from my view that a contract-specific approach is required by
the CEA, it also is a better approach from a policy perspective
precisely because it would permit the CFTC to consider these
practical questions in the context of the specific circumstances
applicable to a particular event contract. We do not get to override
a requirement under the law because it will be hard or require more
work for us.
Absolutism Based on Conjecture: Another defect in the Proposal
is illustrated by the following (in section II.C.3.c): ``Generally
speaking, the Commission believes that something of value is staked
or risked upon an occurrence (or non-occurrence) in connection with
a contest of others, or a game or [sic] skill or chance, for
entertainment purposes--in order wager [sic] on the occurrence. As
such, the Commission believes that contracts involving such
occurrences are likely to be traded predominantly `to enable
gambling' and `used predominantly by speculators or participants not
having a commercial or hedging interest' . . .'' (Emphasis added;
footnote omitted)
These assertions are entirely conjectural, as the Proposal does
not cite any support for these statements. One can readily envision
an event contract involving whether a particular US city will be
awarded the summer or winter Olympic games in a given year, which
[[Page 48997]]
would be used by hotel and restaurant owners, as well as other
businesses, that would make money if their city gets the Olympics
but not if the Olympics are awarded elsewhere. Such an event
contract would not necessarily be used predominantly for
entertainment or speculative purposes.
Indeed, the quoted text itself uses wording like ``[g]enerally
speaking'' and ``likely,'' which is an acknowledgement that its
conclusions are not universally true. A belief for which no evidence
is cited, and that is acknowledged not to be true across-the-board,
cannot justify an absolutist determination that all event contracts
involving an activity are automatically contrary to the public
interest, nor can it justify a prohibition on trading all event
contracts in that category.
Calling into Question Traditional Futures Contracts: I agree
that an event contract involving the outcome of a sporting event,
and that allows players or coaches to in trade that contract, would
be contrary to the public interest. But consistent with its
overreach, the Proposal also concludes that even where the terms and
conditions of such a contract prohibit such persons from trading,
the contract is nonetheless contrary to the public interest. The
Proposal's stated rationale (in section II.C.3.c) is that ``the
athlete or coach would potentially have a platform--for example,
access to media, combined with public perception as an authoritative
source of information regarding the team--that could be used to
disseminate misinformation that could artificially impact the market
in the contract for additional financial gain.''
The same can be said of many traditional exchange-traded futures
contracts. For example, oil companies (or companies in the
agricultural or metals sectors, or other energy companies) also have
``access to media, combined with public perception as an
authoritative source of information regarding'' the oil (or other)
industry, ``that could be used to disseminate misinformation that
could artificially impact the market in the contract for additional
financial gain.'' And yet, exchanges are permitted to list oil
futures for trading (in fact, oil companies are permitted to trade
them).
The Proposal offers no explanation for why a possible incentive
to spread misinformation should render all event contracts involving
sporting events (or occurrences or non-occurrences in connection
with sporting events) contrary to the public interest when
traditional futures contracts with the same incentive are not. A
contract-specific public interest analysis, by contrast, could take
into account the terms and conditions of a particular event
contract--such as whether athletes and coaches can trade, or whether
there are guardrails against the spread of misinformation--to
determine whether the threat of misinformation in that contract is
such that it is contrary to the public interest.
Fallacies Concerning the CFTC's Regulatory and Enforcement
Roles: The Proposal raises in alarmist tones the red herring that
sweeping public interest determinations are necessary so that the
CFTC does not get drawn into a regulatory or enforcement role for
which it is not well-equipped. For example, the Proposal says (in
section II.C.2) that one factor that may be relevant in evaluating
whether event contracts are contrary to the public interest is the
extent to which they ``would draw the Commission into areas outside
of its primary regulatory remit.'' \205\ Other examples are: (1) the
statements (in section II.C.3.c) relating to event contracts
involving elections that the Commission ``is not tasked with the
protection of election integrity or enforcement of campaign finance
laws;'' and (2) the statement (in the first sentence of footnote no.
127) that ``the oversight function in this area [regarding
elections] is best reserved for other expert bodies.''
---------------------------------------------------------------------------
\205\ Since the CFTC has a narrow ``regulatory remit''
restricted to regulating derivatives markets, this factor presumably
could support finding that virtually every event contract is
contrary to the public interest.
---------------------------------------------------------------------------
To be clear: The CFTC does not administer, oversee, or regulate
elections, sporting events, gambling, or any other activity or event
discussed in the Proposal--and that will not change with respect to
any event contract that is found not to be contrary to the public
interest. Rather, the CFTC would exercise its exact same authorities
under the CEA that it does with respect to all other derivatives
contracts.
Nor would the CFTC become some type of ``election cop.'' After
all, the CFTC has anti-fraud and anti-manipulation enforcement
authority with respect to futures contracts on broad-based security
indices, but that does not mean the CFTC regulates the securities
markets or that it is tasked with the protection of the integrity of
the securities markets or enforcement of securities laws--the
Securities and Exchange Commission (``SEC'') does all that. The CFTC
similarly has enforcement authority with respect to natural gas and
electricity since there are futures contracts on those commodities,
but that does not mean the CFTC regulates the transmission of
natural gas or electricity or that it is tasked with the protection
of the integrity of physical natural gas or power markets, or
enforcement of the Natural Gas Act or the Federal Power Act--the
Federal Energy Regulatory Commission (``FERC'') does all that.
The same is true with respect to an event contract that is not
contrary to the public interest and thus is permitted to trade on a
regulated exchange. As the Supreme Court has stated: ``This Court's
cases have consistently held that the use of the words `public
interest' in a regulatory statute is not a broad license to promote
the general public welfare. Rather, the words take meaning from the
purposes of the regulatory legislation.'' \206\ If a particular
event contract involving elections were found not to be contrary to
the public interest and thus permitted to trade, the CFTC would have
absolutely no authority to administer, oversee, or regulate the
elections that are the subject of that contract, or to enforce any
campaign finance laws. Its authority would extend only so far as is
the case with respect to all commodities underlying derivatives
contracts within our jurisdiction, as provided by Congress in the
CEA.
---------------------------------------------------------------------------
\206\ NAACP v. Federal Power Commission, 425 U.S. 662, 669
(1976). The Court went on to explain: ``Congress in its earlier
labor legislation unmistakably defined the national interest in free
collective bargaining. Yet it could hardly be supposed that, in
directing the Federal Power Commission to be guided by the `public
interest,' Congress thereby instructed it to take original
jurisdiction over the processing of charges of unfair labor
practices on the part of its regulatees.'' Id. at 671. Similarly, it
could hardly be supposed that, in directing the CFTC to be guided by
the ``public interest'' in evaluating event contracts, Congress
thereby instructed it to take original jurisdiction over the
regulation or enforcement of laws relating to elections, sporting
events, gambling, or any other activity or event.
---------------------------------------------------------------------------
Why This is Important: I can understand why some might ask: You
have been pleading for an event contracts rulemaking for some time
now, and here it is--so what is the problem? The problem is this:
CFTC Rule 40.11(a)(1) already prohibits the listing and trading of
any event contract involving an enumerated activity. As I explained
in my Kalshi Dissenting Statement:
Rule 40.11 contradicts the statute. CEA Section 5c(c)(5)(C)
grants the Commission discretion to determine whether [an
exchange's] event contract that involves an enumerated activity is
contrary to the public interest. CFTC Rule 40.11(a), by contrast,
provides that [an exchange] ``shall not list for trading'' a
contract that involves . . . an enumerated activity (emphasis
added). Read literally, Rule 40.11(a) removes entirely the
flexibility that Congress granted the Commission to evaluate
[exchange] event contracts from a public interest perspective.\207\
---------------------------------------------------------------------------
\207\ See Kalshi Dissenting Statement, n.2, supra.
---------------------------------------------------------------------------
Rather than fix this problem, though, the Proposal doubles down
on it. By making categorical public interest determinations in
advance, the Proposal would impermissibly transform the two-step
analysis that Congress provided for event contracts into a single
step. It would transmogrify the discretion that Congress gave the
Commission to determine that an event contract involving an
enumerated activity is contrary to the public interest into a
mandate that it do so.
The Proposal actually is quite candid in acknowledging that it
would re-write CEA Section 5c(c)(5)(C). It states (in section
II.C.1): ``If, as proposed, [Rule 40.11] is amended to include a
categorical public interest determination with respect to contracts
involving each of the Enumerated Activities, the Commission would
not, going forward, undertake a contract-specific public interest
analysis as part of a review . . . Rather, the focus of any such
review would be to evaluate whether the contract involves an
Enumerated Activity, in which case, it may not be listed for trading
. . .''
If Congress had intended that every event contract involving an
enumerated activity is automatically contrary to the public interest
and prohibited from trading, it could have provided for such a
single-step process in CEA Section 5c(c)(5)(C). But it did not do
that, and instead provided that even if an event contract involves
an enumerated activity, the Commission cannot prohibit the contract
without exercising its discretion in a second step of determining
that the contract is contrary to the public interest. The
[[Page 48998]]
Commission can't short-circuit the process that Congress established
by determining that an event contract is contrary to the public
interest--in advance and without knowing the contract's terms and
conditions--simply because that makes things easier for the agency.
Granted, the Proposal makes categorical public interest
determinations only for the activities enumerated in CEA Section
5c(c)(5)(C). I admit that I am not going to lose sleep over a
determination that all event contracts involving terrorism,
assassination, and war are contrary to the public interest.
But this is where the ``wolf in sheep's clothing'' arrives.
While this Proposal only addresses event contracts involving
enumerated activities, it sets the precedent for how the Commission
can handle event contracts involving other activities that it
determines are similar to enumerated activities, too.
If the Proposal is adopted as final, then at any time in the
future, the Commission could determine that other activities are
similar to enumerated activities--and could then determine that
every event contract involving that activity is automatically
contrary to the public interest (and therefore prohibited from
trading) regardless of its particular terms and conditions. And
given all the deficiencies in this Proposal's categorical public
interest determinations discussed above, that appears to be a low
bar to clear.
V. Portions of the Proposal Are Inaccurate or Extremely Weak, or Make
No Sense
The fact that certain portions of the Proposal are inaccurate,
extremely weak, or simply make no sense suggests that it either was
hastily prepared, or is motivated primarily by the sheer hatred that
the Commission seems to bear towards event contracts. Here are a few
examples:
The Proposal says (in section II.C.2) that ``the public
good'' is a relevant factor for consideration in an evaluation of
whether an event contract is contrary to the public interest. It
makes no sense that the Commission should consider ``the public
good'' in evaluating whether a contract is contrary to ``the public
interest.'' This is tautological--``the public good'' and ``the
public interest'' mean the same thing.
The Proposal's statement (in section II.C.2) that in
the colloquy, Senators Feinstein and Lincoln ``discussed the
Commission's authority, prior to the enactment of the Commodity
Futures Modernization Act of 2000 (`CFMA'), `to prevent trading that
is contrary to the public interest'' is incorrect. Senators
Feinstein and Lincoln did not ``discuss'' the Commission's pre-CFMA
authority. Senator Feinstein referenced it in asking a question, but
Senator Lincoln (the Committee Chair) did not talk about it--in
fact, she did not even mention the CFMA.
Footnote no. 49 cites the CFTC Reauthorization Act of
2019 as support for the Proposal's view that an erroneous reference
to a non-existent CEA Section 1a(2)(i) in CEA Section 5c(c)(5)(C)
was intended by Congress to refer to CEA Section 1a(19)(i) instead,
since the bill included a provision to replace the reference to
Section 1a(2)(i) with a reference to Section 1a(19)(i). But an
amendment in a bill introduced in a subsequent Congress (nine years
later) sheds no light on what was intended by the Congress that
enacted the statutory provision in question--especially when the
referenced bill was not enacted and nothing has happened on it
during the ensuing five years.
VI. Certain Implementation Timeline Provisions in the Proposal Are Ill-
Advised
As discussed above, I do not support the proposal to determine
that all event contracts involving enumerated activities are
contrary to the public interest. But if the Commission decides to do
so, I oppose applying that determination to contracts that are
already listed for trading as of the date of publication of final
rule amendments in the Federal Register.
It is my hope that there would be few such contracts. But for
any contracts that would be impacted, the Proposal is pollyanaish in
its rosy view (in section II.F) that ``a 60-day implementation
period for these contracts will minimize any market disruption that
might be caused by the rule amendments.'' For one thing, given the
Proposal's repeated emphasis (in sections II.B.1.c and section
II.C.3.c) that its examples of activities that constitute ``gaming''
under the proposed definition are non-exclusive, I am dubious that
exchanges and traders necessarily will know exactly which existing
event contracts the Commission believes are now suddenly prohibited.
Beyond that, this aspect of the Proposal is fundamentally
unfair. At any time during the 13 years since its adoption of Rule
40.11, the Commission could have concluded that a given event
contract involving an enumerated activity is contrary to the public
interest. Exchanges and market participants that have listed and
traded an event contract in good faith reliance on the fact that the
Commission had not determined the contract to be contrary to the
public interest should not pay the price (literally) for the
Commission's inaction by having to halt trading in a fixed amount of
time because the Commission has finally gotten around to it.
This would be the antithesis of ``good government.''
Accordingly, I do not believe that any rule amendments finalized as
part of this rulemaking should apply to an event contract that is
listed and available for trading as of the date of their publication
in the Federal Register.
VII. Conclusion
Rather than undertake a rulemaking process to do the hard work
of building a framework for evaluating event contracts pursuant to
CEA Section 5c(c)(5)(C), the Commission squandered the 14 years
since that provision was enacted as part of the Dodd-Frank Act.
While the Commission is now proposing an event contract rulemaking,
that hard work still has yet to be done. Instead, the Commission is
skipping right over building a proper framework--and simply
proposing to prohibit contracts outright.
This result seems preordained, given the hostility that the
Commission has displayed toward event contracts since the enactment
of the Dodd-Frank Act. This Proposal rubber-stamps the Commission's
two prior Orders finding proposed event contracts to be contrary to
the public interest. In addition, it continues the ``tradition'' of
stretching a solitary, cryptic colloquy to form the basis for
evaluating whether event contracts are contrary to the public
interest through the ``economic purpose test'' that: (1) is not
mentioned in the statute; (2) had previously been withdrawn due to
Congress' repeal of the CEA provision it implemented; (3) was not
designed for this type of contract; and (4) many event contracts,
due to their structure, likely will be unable to meet.
And now the Proposal goes even further, adopting an overly broad
definition of ``gaming'' and declaring entire categories of event
contracts to be contrary to the public interest, sight unseen. The
Commission's legal authority to make such determinations by category
is questionable, at best; that it is inappropriate from a policy
perspective cannot reasonably be questioned.
The Proposal flatly contravenes Congress' direction in the CEA
that the CFTC ``promote responsible innovation.'' \208\ The
unmistakable take-away for exchanges is not to expend resources
developing an innovative event contract because the Commission will
go to great lengths to find that it is contrary to the public
interest and prohibit it from trading.\209\
---------------------------------------------------------------------------
\208\ CEA Section 3(b), 7 U.S.C. 5(b). The Proposal claims (in
section I.A, section II, and section II.A.1.b) that it would help to
support responsible market innovation. I do not agree that
prohibiting broad categories of innovative event contracts supports
responsible market innovation.
\209\ In this regard, the Proposal even undermines the CFTC's
commitment to its own stated Core Value of being ``Forward-
Thinking'' (i.e., challenging ourselves to stay ahead of the curve).
CFTC Core Values, Forward-Thinking, available at https://www.cftc.gov/About/AboutTheCommission.
---------------------------------------------------------------------------
I want to be very clear: My dissent should not be taken as an
endorsement of the wisdom of event contracts generally, or of any
event contract in particular. Rather, it reflects my application of
Congress' direction to the Commission in CEA Section 5c(c)(5)(C).
Whatever we may think of event contracts, we cannot re-write the CEA
to claim an authority that Congress did not give us because we have
been derelict in applying the authority that Congress did give us.
Nor should we be prohibiting an event contract without a proper
showing that it involves an enumerated activity and is contrary to
the public interest based on the application of well-defined factors
to the particular terms and conditions of that particular contract.
Because this wolf in sheep's clothing fails on many levels for
the foregoing reasons, I respectfully dissent.
Appendix 4--Statement of Commissioner Caroline D. Pham
I respectfully dissent from the Event Contracts Proposal because
it takes the CFTC's regulation of event contract markets backwards
with its fundamental misunderstanding of how we regulate derivatives
and the States regulate gaming. Instead of thoughtfully considering
how to effectively regulate these markets while
[[Page 48999]]
fostering innovation, the Event Contracts Proposal ties itself in
knots over the bounds of gaming, which Congress has neither asked
nor directed the Commission to regulate. I am simply disappointed in
this wasted opportunity to regulate retail binary options,
sidestepping our responsibility, and concerned about its legal
impact.
The United States is built on a foundation of federalism.
Federalism reflects the Founders' understanding that a one-size-
fits-all approach would not work for this country, and allows for
States to govern in ways that best suit their residents.\1\ The
simple language of the Tenth Amendment to the Constitution (``The
powers not delegated to the United States by the Constitution, nor
prohibited by it to the States, are reserved to the States
respectively, or to the people'') emphasizes that the Federal
government is a government of limited and enumerated powers.\2\ The
Tenth Amendment, importantly, protects the American people from
Federal encroachment.
---------------------------------------------------------------------------
\1\ See Bernard Dobski, Ph.D., America Is a Republic, Not a
Democracy, The Heritage Foundation (June 19, 2020) (examining
whether current egalitarian efforts threaten, among other things,
the diverse interests the Founders sought to protect from
factionalism), https://www.heritage.org/american-founders/report/america-republic-not-democracy. Interestingly, the Event Contracts
Proposal repeatedly claims to be motivated by the increase in volume
and ``diversity of event contracts listed for trading by Commission-
registered exchanges.'' However, the Proposal admits only one CFTC
registered exchange currently offers the types of event contracts
covered by the Proposal, out of the six CFTC registered exchanges
that are authorized to offer event contracts. I question the
motivations of any rulemaking that seeks to quash unique products
offered by one exchange because their products are ``diverse.''
\2\ See Gary Lawson and Robert Schapiro, Common Interpretation:
The Tenth Amendment, National Constitution Center, https://
constitutioncenter.org/the-constitution/amendments/amendment-x/
interpretations/129#:~:text=by%20Gary%20Lawson,-
Phillip%20S.&text=The%20Tenth%20Amendment%20formally%20changed,Tenth%
20Amendment%20is%20unconstitutional%20afterwards.
---------------------------------------------------------------------------
State regulation of gaming, ranging from betting to lotteries,
is long-established in the U.S., and is clearly a power reserved to
the States.\3\ No one understands their local cultures, economies,
and values better than the States,\4\ which leads to State laws that
have been crafted to reflect the needs of their residents. This
approach has allowed some States to embrace gaming and leverage it
as a source of revenue and tourism, while others take a more
conservative approach.\5\
---------------------------------------------------------------------------
\3\ See Tim Lynch, Gambling Regulation Belongs to the States,
Cato Institute (July 23, 1998), https://www.cato.org/commentary/gambling-regulation-belongs-states.
\4\ See America Is a Republic, Not a Democracy.
\5\ See LexisNexis Legal Insights, States Embracing New Form of
Gambling: iGaming (Mar. 3, 2024), https://www.lexisnexis.com/community/insights/legal/capitol-journal/b/state-net/posts/states-embracing-new-form-of-gambling-igaming.
---------------------------------------------------------------------------
When it comes to event contracts related to gaming, I have been
clear that the CFTC should exercise caution, primarily because I
believe the Commission fundamentally misunderstands the law in this
area and Congressional intent.\6\ That fear has proven well-founded
with the Event Contracts Proposal.
---------------------------------------------------------------------------
\6\ Dissenting Statement of Commissioner Caroline D. Pham
Regarding the Review and Stay of KalshiEX LLC's Political Event
Contracts (Aug. 26, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement082622.
---------------------------------------------------------------------------
The CFTC has a role in regulating event contracts as a market
regulator, but it is essential that the CFTC does not encroach upon
the prerogatives of States. An appropriate Event Contracts Proposal
would have struck a balance between Federal oversight and State
autonomy by focusing on the CFTC's core mandate of promoting market
stability and protecting market participants from fraud and abusive
practices.\7\ In doing so, the CFTC could have maintained the
integrity of event contracts without undermining the authority of
State governments.
---------------------------------------------------------------------------
\7\ Commodity Exchange Act (CEA) Section 3(a), 7 U.S.C. 5.
---------------------------------------------------------------------------
Instead, as I will explain below, the Event Contracts Proposal
bigfoots into State regulation of gaming by drawing unintelligible
lines in the sand that will either at best result in confusion for
State gaming authorities, or at worst push event contracts into
illegal, unregulated offshore markets.
The Event Contracts Proposal Ignores the Supreme Court's Preemption
Doctrine
The Constitution's Supremacy Clause provides that ``the Laws of
the United States . . . shall be the Supreme Law of the Land; and
the Judges in every State shall be bound thereby, any Thing in the
Constitution or Laws of any State to the Contrary notwithstanding.''
\8\ This language is the basis for the doctrine of Federal
preemption, according to which Federal law supersedes conflicting
State laws.\9\
---------------------------------------------------------------------------
\8\ U.S. Const. art. VI, cl. 2.
\9\ Congressional Research Service, Federal Preemption: A Legal
Primer, 1 (Jul. 23, 2019) (citing Gade v. Nat'l Solid Wastes Mgmt.
Assn., 505 U.S. 88, 108 (1992)), https://crsreports.congress.gov/product/pdf/R/R45825/1.
---------------------------------------------------------------------------
The Supreme Court has identified two general ways in which
Federal law can preempt State law: expressly, when a Federal statute
or regulation contains explicit preemptive language; and impliedly
when its structure and purpose implicitly reflect Congress's
preemptive intent.\10\ But the Federal government cannot preempt
traditional State powers that are the exclusive domain of States to
regulate, recognizing the right to self-determination by the people.
---------------------------------------------------------------------------
\10\ See id. at 2 (citing Gade, 505 U.S. 88, 98). The Court has
identified two subcategories of implied preemption: ``field
preemption'' and ``conflict preemption.'' Field preemption occurs
when a pervasive scheme of federal regulation implicitly precludes
supplementary state regulation, or when states attempt to regulate a
field where there is clearly a dominant federal interest. Id. In
contrast, conflict preemption occurs when compliance with both
federal and state regulations is a physical impossibility
(impossibility preemption), or when state law poses an ``obstacle''
to the accomplishment of the ``full purposes and objectives'' of
Congress (obstacle preemption). Id. at 2 (citing Fla. Lime & Avocado
Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963) and Hines v.
Davidowitz, 312 U.S. 52, 67 (1941)).
---------------------------------------------------------------------------
The Event Contracts Proposal uniquely ignores the fact that the
limits Congress placed on the Commission's regulation of event
contracts save the Commission from becoming a gaming regulator. In
other words, the Commission could have relied on implied preemption
to regulate event contracts as derivatives in our markets separate
and apart from State gaming regulation. Instead, the Commission
creates preemption concerns by proposing a gaming definition that
incomprehensibly relies so heavily on State law that I don't know
how any exchange could understand where the Commission's rules begin
and end for these contracts.
Together, under CEA Section 5c(c)(5)(C), Rule 40.11, and the
preamble to the final rulemaking for Rule 40.11, whether an event
contract is prohibited by Rule 40.11 depends on the underlying
activity that the contract is based upon. When the Commission
reviewed an exchange's political control contracts, I raised that
the underlying activity was political control, which was neither
terrorism, assassination, war, gaming, nor unlawful under any
Federal or State law.\11\ Therefore, Rule 40.11(a)(1) did not apply.
Yet in disapproving the contracts, the Commission argued that
``taking a position in the Congressional Control Contracts''
(emphasis added) amounted to gaming.\12\
---------------------------------------------------------------------------
\11\ Dissenting Statement of Commissioner Caroline D. Pham
Regarding the Review and Stay of KalshiEX LLC's Political Event
Contracts.
\12\ See CFTC Order, In the Matter of the Certification by
KalshiEX LLC of Derivatives Contracts with Respect to Political
Control of the United States Senate and United States House of
Representatives (Sept. 22, 2023), https://www.cftc.gov/PressRoom/PressReleases/8780-23.
---------------------------------------------------------------------------
When taking a position in a derivatives contract is gaming, the
Commission starts to look like a gaming regulator. Congress may not
compel a State to enact or enforce a regulatory regime,\13\ and
indeed, Congress has not here. Yet in doubling down on its logic in
the Event Contracts Proposal, when the act of entering into a
derivatives contract that meets the Proposal's overbroad definition
of gaming, drawn from dozens of State laws, is now gaming under the
Commission's jurisdiction, we begin encroaching on State gaming
oversight. State-regulated sportsbooks, in trying to comprehend
where the Commission's gaming derivatives begin and traditional bets
end, will be captured in this confusion and question the need to
register with the Commission as exchanges. I certainly don't want
the Commission to be registering Las Vegas sportsbooks and other
betting venues.
---------------------------------------------------------------------------
\13\ See New York v. United States, 505 U.S. 144 (1992).
---------------------------------------------------------------------------
The Commodity Exchange Act Is Clear That the Commission Regulates Event
Contracts
Congress has been clear in its direction for the CFTC.
First, in relevant part, the purpose of the Commodity Exchange
Act is to deter and prevent price manipulation or any other
disruptions to market integrity; to ensure the financial integrity
of all transactions; to
[[Page 49000]]
protect all market participants from fraudulent or other abusive
sales practices and misuses of customer assets; and to promote
responsible innovation and fair competition among boards of trade,
other markets and market participants.\14\
---------------------------------------------------------------------------
\14\ CEA Section 3(a), 7 U.S.C. 5.
---------------------------------------------------------------------------
Second, the Commission is authorized to review event contracts
if the underlying activity that the contract is based upon is
terrorism, assassination, war, gaming, or unlawful under any Federal
or State law.\15\
---------------------------------------------------------------------------
\15\ CEA section 5c(c)(5)(C), 7 U.S.C. 7a-2(c)(5)(C)(i)(I)-(VI).
---------------------------------------------------------------------------
Read together, Congress intended that the Commission regulate
event contracts within the bounds of the section 5(c) prohibitions.
Instead of telling market participants how we will regulate the
innovative contracts and exchanges that have appeared in recent
years, the Commission has decided to ``identif[y] the types of event
contracts that may not be listed for trading or accepted for
clearing'' (emphasis added), seemingly primarily to avoid the work.
If the number of contract reviews has increased, then the Commission
should increase its resources and capacity--not to prohibit public
activity.
As referenced above, the Commission then embarks on a survey of
state gaming definitions to insert the concept into the Commission's
rules. The Commission even notes the approach ``reflects the similar
approach taken in numerous state gambling statutes,'' and mentions
35 States. The word ``state'' appears in the 95 page release 133
times. The Event Contracts Proposal reads as a defense against
becoming a gaming regulator while inserting State gaming into our
rules, which is not only confusing but unnecessary because Congress
has clearly defined our role with respect to the States.
To make matters worse, the Commission then leaps from the
overbroad, vague definition of gaming to provide examples of the
types of event contracts that the Commission believes fall outside
of the scope of CEA section 5c(c)(5)(C) and, by extension,
Regulation 40.11. Given the fact that the Event Contracts Proposal
repeatedly states that the broad range and volume of new contracts
motivated this rulemaking, I find it stunning that the outer bounds
provided are limited to contracts based on: (1) economic indicators,
(2) financial indicators, and (3) foreign exchange rates or
currencies.
Instead of creating a framework, the Commission is creating a
vast gray area for exchanges. Where gaming begins and the scope of
Regulation 40.11 ends is anyone's guess now, and I fear State gaming
authorities will be left to figure it out on their own.
Specific Areas for Public Comment
In addition to my concerns raised above, I highlight the
following specific areas for public comment to aid in review of the
Proposal:
Missing Comment Letters
The Event Contracts Proposal completely omits any discussion of
the comment letters the Commission recently received on the
definition of gaming, as well as Rule 40.11 and event contracts more
broadly. All told, the Commission has received around 200 comments
in response to requests for public comment on an exchange's
political control contracts.\16\ These comments came from exchanges,
academics, former CFTC officials, and other industry participants,
and were directly on point on the issues raised in today's Proposal.
---------------------------------------------------------------------------
\16\ The CFTC maintains the public comment files at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7311, and
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7394.
---------------------------------------------------------------------------
The Commission cannot selectively decide to tell one side of the
story. It strains credulity that the Commission has selective
amnesia and makes no mention of these letters in the Event Contracts
Proposal.
Misplaced Election Integrity Concerns
The Commission gets hung up on the fact that ``it is not tasked
with the protection of election integrity or enforcement of campaign
finance laws'' in justifying prohibiting event contracts based on
political contests. However, the Federal Election Commission polices
campaigns. Congress has never asked, nor suggested, the CFTC should
police elections, much like the Commission has not become the
weather police for weather derivatives. I will highlight a couple
categories of event contracts that have been permitted since 1992:
The Commission is not the crop yield police and hasn't displaced
the role of the USDA. The Commission is not the police for changes
to corporate officers or asset purchases and has not displaced the
role of the SEC. The Commission is not the police for regional
insured property losses, which is the domain of state insurance
regulators. The Commission is not the bankruptcy police, which is
the domain of the courts. The Commission is not the temperature
police, and so on and so forth. I do believe that the 2008 concept
release from which I drew these examples was very thoughtful, and I
wanted to familiarize myself with the full administrative
record.\17\
---------------------------------------------------------------------------
\17\ See Request for Public Comment, Concept Release on the
Appropriate Regulatory Treatment of Event Contracts, 73 FR 25,669
(May 7, 2008), https://www.federalregister.gov/documents/2008/05/07/E8-9981/concept-release-on-the-appropriate-regulatory-treatment-of-event-contracts.
---------------------------------------------------------------------------
Conclusion
I would like to thank Grey Tanzi, Andrew Stein, Lauren Bennett,
Nora Flood, and Vince McGonagle in the Division of Market Oversight
for their work on the Proposal.
The contracts causing so much consternation for the Commission
have not been, and are not, gaming. If the Commission could accept
that and move on, we could have a healthy discussion over how to
effectively regulate these markets as we do any other and protect
against abusive trading in retail binary options contracts. Instead,
we have muddled it and made a mess.
I look forward to the comments.
[FR Doc. 2024-12125 Filed 6-7-24; 8:45 am]
BILLING CODE 6351-01-P