Public Statements & Remarks

Statement of Commissioner Brian D. Quintenz on ErisX RSBIX NFL Contracts and Certain Event Contracts

Any Given Sunday in the Futures Market

March 25, 2021

In December 2020, ErisX filed a self-certification that their RSBIX NFL futures contracts involving the moneyline, point spread, and total points on NFL football games meet the requirements of the CEA for a contract listed by a registered Designated Contract Market (DCM).  Prior to 2018, sports gaming was limited by a federal law which only allowed it to legally occur in Nevada. After Murphy v. NCAA[1] struck down that law, multiple states have legalized sports gambling and thereby allowed legitimate business activity in that area.  Since the derivative markets’ historical use is the hedging of commodity price risk associated with economic activity, contracts relating to the outcome of sporting events could now have a legitimate economic and hedging purpose for businesses in these states. Such was the intent of ErisX’s contracts.

On December 23, the Commission issued a 90-day stay of the self-certification pursuant to rule 40.11, which subjects any event contract which may involve gaming to a special disapproval process.  During those 90 days, the Commission reviewed ErisX’s contracts to determine if they were prohibited by statute or Commission regulations.  The Commission also requested public feedback on six questions, and received twenty-five responses.  Subsequently, Commission staff proposed an Order that found the ErisX NFL contracts involved gaming, were prohibited by regulation, and were also contrary to the public interest.  This proposed Order (which for simplicity’s sake I will refer to just as the Order) was circulated to the Commission for a vote, utilizing a process where the Order is considered by the most junior Commissioner first then moving to the next Commissioner in seniority.  Just hours before this voting process could conclude, and likely in anticipation of the Order’s approval by the Commission, ErisX decided to withdraw their certification, preventing the Order from being fully and formally considered by the Commission and publicly issued.

Withdrawing the certification had the same functional effect on the ErisX NFL contracts that the Order would have had; the contracts will not be listed.  However, the withdrawal also meant that the Commission’s Order will never be public.  The staff’s analysis and working law that was applied to the ErisX NFL contracts may well be the same that Commission staff will apply in current or future direct discussions with exchanges to similar contracts, and outside of the purview of the Commissioners or the public.  But the legal analysis and interpretations will remain secret until forced into the open by another, bolder exchange’s decision to see a self-certification process through to a conclusion.

Secret agency law is anathema in our democracy, and should only be tolerated where absolutely necessary.[2]  The government can try to hide behind FOIA exemptions,[3] deliberative process, or prohibitions on disclosing “confidential information,” but it shouldn’t be able to take the ball home in the middle of the fourth quarter when leading by a field goal.

I would have dissented from the Order prohibiting the ErisX NFL contracts due to significant concerns around the statute’s constitutionality, the regulation’s validity, and the order’s arbitrariness.  Customarily, my dissent would be made moot by virtue of ErisX’s withdrawal, and my ability to comment on the Order therefore nullified.  But, because of the severity of these concerns and their implication for any future event contract filing, I feel compelled to release this statement to bring transparency to this debate and process. So….are you ready for some football?

*           *           *

“You know, when you get old, in life, things get taken from you.  I mean, that’s…that’s a part of life.  But, you only learn that when you start losing stuff.  You find out life’s this game of inches. So is footballthe margin for error is so small.  I mean, one half a step too late or too early and you don’t quite make it. One half second too slow, to fast, and you don’t quite catch it.”

-Tony D’Amato (as played by Al Pacino) in Any Given Sunday

  1. Introduction

When we think of commodities, we think of tangible things. Oil, corn, gold.  There are intangible commodities too, most of which have a connection to the financial system, like a broad stock index (S&P 500) or a borrowing rate (LIBOR).  But what about an event?  An election?  Whether the Summer Olympics will occur in Japan?  A …. football game?  Those, too, are commodities!

The statutory definition of a commodity includes “…an occurrence, extent of an occurrence, or contingency…that is 1) beyond the control of the relevant parties to the contract…and 2) associated with a financial, commercial, or economic consequence.”[4]  Since practically any event has at least a minimal financial, commercial, or economic consequence, all events are commodities.  Because of this definition, any contract on the outcome of a future event would be considered a commodity futures contract, and, pursuant to the Commodity Exchange Act (CEA), is required to be traded on a registered Designated Contract Market (DCM).

The Dodd Frank Act inserted a new section into the CEA regarding certain event contracts, which said the Commission “may determine that [event] 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.”  If the Commission determines that any such “enumerated” event contracts are contrary to the public interest, the statute then prohibits them from being traded on a registered exchange.

Got that?  All events are commodities, which means all contracts on future events are commodity futures contracts, which means all future event contracts need to be traded on a regulated and registered futures exchange.  But if the Commission deems any event contract that involves one of the enumerated activities to be contrary to the public interest, that contract is banned from trading on any registered futures exchange.  The contract cannot trade anywhere else either since it is still a commodity futures contract and, if traded off of an exchange would be illegal.

Now, we may all say to ourselves that this is a good thing.  Shouldn’t these socalled “event” contracts, that are by nature more “probabilistic” than traditional physical commodity contracts, be more akin to “gaming” or “gambling?”  Certainly, they are, generally speaking, less related to traditional economic goods.  Before we get into the specifics around ErisX’s NFL contracts and the Constitutional and administrative issues with the statute, regulation, and the Commission’s proposed Order, let me take a minute to dispel two notions: that taking an economic position on an event’s outcome is legally equivalent to a gaming/gambling activity, and that there is no fundamental or qualitative difference between gambling and speculating.  Understanding these points may help to better define what our markets are truly meant to do and why participants in them, regardless of their motives, are vital to it.

First, it is not the case that trading an event contract with a binary outcome is automatically considered a bet, wager, or gamble from a regulatory perspective.  The statute’s language proves that.  If the statute assumed that participating in any event contract involved making a wager or gamble, there would have been no need for Congress to individually enumerate “gaming” as a distinct category of event contracts upon which the Commission could make a public interest determination.  (This is an important federal statutory point that conflicts with many state laws, to which we will return at the end).

Secondly, speaking in broad policy terms and putting aside the voluminous technical and legal nuances, there are qualitative and logical distinctions between speculation and betting.  Whereas bettors participate in games of pure chance, whose sole purpose is to completely reward the winner and punish the loser for an outcome that would otherwise provide no economic utility (think roulette), speculators in the derivatives market participate in non-chance driven outcomes that have price forming impacts upon which legitimate businesses can hedge their activities and cash flows.

There are plenty of events that have a discernable and legitimate economic impact and whose probabilistic outcomes can be estimated through an analysis of relevant factors.  That could now be just as true for sporting events as it is for oil, corn, or gold production.  Try telling a professional sports team’s general manager (or even die-hard fantasy footballers) that their outcomes are purely chance driven.  Post Moneyball, GMs analyze statistics until they are redeyed to try to get an edge, just like professional investors.  Hedge funds put infrared cameras on natural gas processing facilities to know the minutes they are operating or shutdown so they have an edge on estimating production figures.  Some investment firms have micro climate weather experts so as to more accurately predict localized rain fall and draught conditions to get a get a better estimate on crop yields.  Those same firms’ market positions then also provide a strong economic benefit.  If the firms are confident enough in their predictions, they will move the equilibrium price and provide a market signal to any business involved (from production to processing to distribution), of the economic value that can be hedged based off of an event’s perceived outcome.  From that aspect, estimating potential sporting event outcomes could be little different than estimating oil, corn, or gold fundamentals.  The other factor which makes speculation different than pure-chance gambling is the price forming impact it has on markets which allow businesses to hedge their risk.  Post Murphy, it is at least logically possible that sport books would qualify for that economic justification.

If you are unconvinced, think more broadly about how a market probability of other potential events could provide an economic good and is different than betting on a true game of chance.  How valuable would it have been to restaurants across California and New York during the pandemic lockdowns to have had an event contract in place for hedging that asked in March 2020 whether indoor dinning would be allowed within one year? From a probabilistic perspective, if you think that the outcome is purely a political decision, you would be right.  But if you think that there are no discernable, influential, or acute facts that would go into predicting any decision on that outcome, you are wrong.  From an economic perspective, the value of that market derived probability could have provided crucial hedging utility for small businesses, many of which are now gone.  Unfortunately, such contacts have yet to come to market. Perhaps the Commission’s interpretations in the proposed Order is why.

  1. The Statute, the Regulation, and the Order on ErisX’s RSBIX NFL Futures Contracts
  1. The Statute

The proposed Order that would have prohibited the ErisX NFL contracts under CEA section 5c(c)(5)(C).  As described above, that section provides, among other things, a “special rule” for the disapproval of certain enumerated event contracts, specifically those that “involve” activity that is: unlawful under any Federal or State law, terrorism, assassination, war, gaming, or other similar activity that is determined by the Commission by rule or regulation to be contrary to the public interest.  As above, these will be referenced throughout as the “enumerated event contracts.”

The presumption of the statute’s special rule for these enumerated event contracts, perhaps surprisingly, is not that they are prohibited.  To the contrary, the default under this statutory section is that these contracts, even those involving terrorism and assassination, are permitted.  An enumerated event contract is only prohibited if the contract is determined by the Commission to be contrary to the public interest.  Whatever enumerated event contracts that have not been found to be contrary to the public interest are unequivocally allowed, even those that, on their face, could be blatantly immoral or inciteful of violence, so long as the Commission has not made a direct determination that that particular contract or group of contracts are contrary to the public interest.

Interestingly, the statute also does not require the Commission to make any determinations on these contracts at all.  It is completely up to the Commission to decide whether and when to review an enumerated event contract or set of contracts for a public interest determination.  If the Commission made no public interest determinations pursuant to this statutory section, it would nonetheless be following the law.

  1. The Regulation

In 2012, the Commission promulgated Regulation 40.11 implementing this section of the statute.  This regulation states that, “pursuant to” CEA section 5c(c)(5)(C), the Commission is prohibiting all event contracts that involve the enumerated activities above.  The regulation also allows for a 90-day review period of contracts to allow the Commission to determine whether the contract is an enumerated event contract. If the contract is found to be an enumerated event contract, then it is subject to the per se prohibition in the regulation.

  1. The ErisX RSBIX NFL Futures Contracts and the Order

For clarity below, I refer to the Order as if it was issued.  However, it was not, in fact, finalized by the Commission and publicly issued.

The Order that would have been issued by the Commission on March 23rd would have prohibited ErisX’s NFL contracts under both the statute and the regulation.  The Order first found that the ErisX NFL contracts are enumerated event contracts because they involve gaming.  The Order used ‘legislative history” to reinstitute ““the economic purpose test that the Commission used to determine whether a contract was contrary to public interest” prior to that test’s removal from the CEA by the Commodity Futures Modernization Act of 2000 (CFMA).”  The Order stated that this test involves evaluating the contracts’ utility for both hedging and pricing basis purposes.  The Order concluded that the “record in this matter does not establish that the ErisX NFL event contracts have a hedging utility,” and the contracts “do not form the basis for the pricing of a commercial transaction involving a physical commodity, financial asset or service.”  In addition to the economic purpose test, the Order asserted that the Commission can also consider other factors in determining that the contracts are contrary to the public interest.  The Order listed one such factor, that “the ErisX NFL event contracts could potentially promote sports gambling,” which, the order found, also makes the contracts contrary to the public interest.

*           *           *

You might have noticed there is a conflict between the statutory framework and regulatory framework.  As I discuss in length below, the statute’s default is to allow the enumerated event contracts unless there is a determination by the Commission that an enumerated event contract is contrary to the public interest.  The regulation simply announces a blanket prohibition on all enumerated event contracts in accordance with its interpretation of the statute’s intent.

You also might have noticed from the description of the Order that it made two conflicting official rulings.  On the one hand, the Order found that the ErisX NFL contracts involve gaming and are therefore enumerated event contracts.  Under Regulation 40.11, that means game overthe ErisX NFL contracts are prohibited.  However, the Order also made specific findings that the ErisX NFL contracts are contrary to the public interest, while then claiming that future enumerated event contracts that are not found to be contrary to the public interest will be allowed, directly contradicting the blanket prohibition in Regulation 40.11.

The confusion within the Order is not surprising when you consider the fundamental problems with the statute and the regulation that the Order attempted to incorporate.  As explained below, the statute is unconstitutional, and, arguendo, even if it were constitutional, the regulation would still be invalid.  The Commission faced a hostile statutory and regulatory code environment, akin to playing an away play-off game on the forbidding frozen tundra of Lambeau Field.

I commend the all-pro Commission staff who worked on this Order for their meticulous research into the world of sports betting and state gambling regulations.  The staff are dedicated and talented, and I appreciate and recognize their hard work.  However, in light of the significant problems with the constitutional and administrative bases for the Order, and some of the assumptions that the Order made, I would have felt compelled to vote against it.  As noted, I am issuing this statement to bring clarity to an otherwise fogged-in field.

My disagreement with the Order is also not necessarily with its outcome.  I don’t opine today whether the ErisX NFL contracts should ultimately be allowed or prohibited because I don’t believe the Commission currently has a constitutional or valid process to evaluate them.  The issues here are bigger than ErisX’s contracts; the statute is unconstitutional, the regulation is invalid, and even without those issues, there were flaws in the Order that made it arbitrary and capricious.

  1. Constitutional Concerns

The statute is an impermissible and non-constitutional delegation of legislative power to the agency because 1) it gives the Commission complete discretion on whether to allow or effectively ban any given enumerated contract by arbitrarily undertaking (or abstaining from) a public interest determination process, and 2) that public interest determination is not bounded by any set of guiding principles or limiting circumstances around which the Commission should apply its expertise to any associated fact-finding.

  1. Complete Discretion Over Lawful Behavior Through an Arbitrary Process

Section 5c(c)(5)(C)(i) of the CEA presents an unusual confluence of Congressional abdication and vagueness that creates a significant unconstitutional delegation.  First, and I can’t emphasize this enough, the default position under the statute is that even the enumerated event contracts are allowed.  The statute then permits, but does not require, the Commission to make a determination that any enumerated event contract is contrary to the public interest.  But there is no guidance to the Commission whatsoever regarding when it should undertake the analysis to make such a determination.  In fact, imagine that a contract regarding terrorism or assassinations is certified by an exchange and, if a public interest analysis were to be conducted, the contract would most certainly fail it.  If the Commission remains silentif it doesn’t undertake and make that negative determination - that contract would be perfectly legal and allowed to trade.  Further, if the Commission decides to punt on analyzing a specific contract’s public interest, the Commission has not shirked its statutory duty, because there is no obligation to make any determinations at all.  To undertake a determination process or not is left solely and exclusively to the discretion of the Commission, and completely without guidance from Congress.

While the Supreme Court was divided in the outcome of the recent case of Gundy v. United States,[5] the justices unanimously agreed that a statutory delegation to an agency is generally not constitutional if Congress fails to “lay[] down by legislative act an intelligible principle to which the person or body authorized to [exercise the delegated authority] is directed to conform.”[6]  Congress could have simply withheld listing events as commodities.  Congress could also just as easily have declared that any contract referencing war, terrorism, assassination, or gaming is illegal, and required the Commission to play the role of fact finder to identify which contracts crossed that threshold.  But it did not.  It punted on the policy making, instead giving the Commission the sole ability and with complete and unbounded discretion, to decide when to conduct an analysis to determine if the contracts referencing the certain enumerated activities were “not in the public interest,” and thereby banning them from trading.  In this framework, forget trying to find an intelligible principle;[7] unlike other problematic statutes, here Congress didn’t even give us “gibberish!”[8]  There is nothing to construe or even misconstrue into an intelligible principle.

The delegation in CEA section 5c(c)(5)(C) presents the same issue that was presented almost 100 years ago in Panama Refining Co. v. Ryan,[9] where the Supreme Court held that Congress unconstitutionally delegated its legislative power to the executive branch. Here, like there, the statute provides “no requirement, no definition of circumstances and conditions in which” the Executive Branch should take action.[10]  In this statute, Congress failed to set forth any indication of what it intended the Commission to do, let alone a standard, “sufficiently definite and precise to enable Congress, the courts, and the public to ascertain” whether Congress’s intentions were followed.[11]  If confronted with the statute at issue here, the Court should find an unconstitutional delegation of legislative authority.  This is what the Court did in Panama Refining Co., and would have done in Gundy if the statute there was as clearly devoid of intelligible principles as the one here.

  1. The Standard of “Contrary to the Public Interest” is Unconstitutional

Independent of the problem with the statute completely submitting to the Commission’s discretion of when to make a determination, is the problematic use of the sole phrase “public interest” as to how to make a determination.  In his book Go East, Young Man, Justice Douglas opined, “I also realized that Congress defaulted when it left it up to an agency to do what the ‘public interest’ indicated should be done.  ‘Public interest’ is too vague a standard to be left to free-wheeling administrators.  They should be more closely confined to specific ends or goals.”[12]  At its best, in statutes where context provides clear guidance for interpreting the “public interest” requirement, it is still objectively vague.[13]  At its worst, such as here, the standard itself constitutes an unconstitutional delegation and is unconstitutionally vague.  The “public interest” could be a moral consideration. It could be an interest based on financial stability, the integrity of sporting events, enhancing the regulatory apparatus around sports betting, or even, perhaps, increasing fair access to gaming.  And there can be competing interests amongst the public.  To the public that enjoys sports betting, a contract that makes their interest easier, safer, or cheaper, is in the public interest.  However, that same contract is contrary to the interest of the public that is opposed to sports betting.  And what about the derivative market’s interests?  Could the public interest solely be maintaining some concept of that market’s “integrity”, such as preserving a positive value judgement on the markets’ wholistic propriety?  Could the public interest be ensuring the most appropriate or effective use of the Commission’s limited resources given the size and significance of the traditional derivatives market?  Could it be a political or philosophical goal of preventing blurred lines of gambling versus speculation?  Identifying the interests, and balancing the competing interests, is a job for Congress, not the Commission.  As Justice Gorsuch noted, “Such an ‘evasive standard’ could threaten the separation of powers if it effectively allowed the agency to make the ‘important policy choices’ that belong to Congress while frustrating meaningful judicial review.”[14]

And what about Congress’s estimation of the public interest?  Did Congress have an idea in mind of what the public interest is?  We don’t know, because in adopting such a vague standard, Congress took a knee.  In this statute, did Congress provide us a standard we should use that is “sufficiently definite and precise to enable Congress, the courts, and the public to ascertain” whether Congress’s intentions were followed?  Absolutely not.  There are literally no requirements, guidance, criteria, tests, or parameters listed in the statute to consider in making such a determination.  Here, we are not “filling in the details.”[15]  Such a statute “at once presents a delegation problem and provides impermissibly vague guidance to affected citizens.”[16]

There are, of courses, cases where a statutory “public interest” standard was upheld. The Court has opined that the standard is a “criterion which is as concrete as the complicated factors for judgment in such a field of delegated authority permit . . . [that] is not to be interpreted as setting up a standard so indefinite as to confer an unlimited power”[17] and is to be interpreted “by reference to the purpose of the relevant Act, the requirements it imposes, and the context.”[18]  However, those tools which make the standard survive in those cases are not available here.  The Order itself referenced none. It simply stated that the “the legislative history of CEA Section 5c(c)(5)(C) indicates Congress’s intent to restore, for the purposes of that provision, the economic purpose test that the Commission used to determine whether a contract was contrary to the public interest pursuant to CEA Section 5(g) prior to the deletion of CEA Section 5(g) by the Commodity Futures Modernization Act of 2000.”  Consistent with its conclusory approach, the Order did not inform the public what this “legislative history” is. I have my suspicions, but before we get to that, consider that the only indication of what the wholly important and singularly determining “public interest” standard is comes from an opinion on “legislative history.”  There was no reference in the Order to the purpose of the relevant Act, the requirements it imposes, and the context that the phrase is used in, only a reference to purported “legislative history.”  And does the meager justification provide truly robust guidance into what Congress intended?  That answer is likely best displayed by the Order’s own hedge.  Unwilling to rely on its legislative history inference, the Order noted that the standard in the statute can actually mean other factors.  Clearly, then, the inference from legislative history is weak, and certainly in no way strong enough to give the standard the definition and boundaries it needs to be constitutional.

As to the “legislative history” interpretation on which the Order so heavily relied, I suspect that the reference is to a simple colloquy between Senator Lincoln and Senator Feinstein, which stated that 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.”[19]  I assume that this conversation between two senators was the basis from which the Order drew out the inference that the economic purpose test has been restored by statute.  I assume this from indications from the staff who drafted the Order, but also because there is nothing else that comes close, which should be a disqualification of the interpretation in and of itself.  Relying on legislative history, let alone a single colloquy, to support a view of a mandated narrow decision-making framework is a Hail Mary.  As Justice Gorsuch wrote, “Hopes and dreams are not law.”[20]  Neither is a colloquy.

  1. The Commission is not Congress

The risks concomitant with an unconstitutional delegation, and the reason why we should care about Congress giving the job of legislative policymaking to an executive agency, are brightly illuminated by the Order.  As Justice Kennedy famously observed, “Abdication of responsibility is not part of the constitutional design.”[21]  When left to its own devices, the Commission is not a good substitute for Congress. It is a phenomenal body for ensuring the safety, security, and functioning of the markets it regulates. It possesses vast knowledge and expertise in financial regulation relevant to its mandate. The Commission enjoys the benefit of a talented and dedicated staff that includes some of the foremost experts in their fields. But the Commission is not a moral arbiter. It is not expert in determining what the is in the public’s interest, and it is certainly not equipped to tell the public what its interest should be. The Commission simply cannot afford these policy issues the kind of deliberative care the framers designed a representative legislature to ensure.[22]

The Commission is also not a transparent arbitrator of debate.  Consider the very convenient example of the Order.  ErisX submitted its contracts, and the agency got into a huddle.  There were inside discussions, meetings, draft Orders and revisions to those draft, none of which were presented in a public forum as would a Congressional Committee hearing or floor vote with amendments and debate.  While the Commission eventually determined to open a comment period to allow the public to give input that ostensibly would assist the Commission in its public interest analysis, you wouldn’t even know that comments were submitted because the Order discussed none.  Certainly, one would be left to wonder why the Order arrived at its conclusions.  It contained no reasoned explanation and no analysis, and that is just in regard to the views of the staff who developed the Order (this will be discussed at length later under criticism of the Order and due process).  Any Commissioner who would have voted to approve the Order is under no compulsion to explain why they would have, upon what legal basis they reached their conclusion, of what fact set they were most convinced, or with what public interest standard they agreed.[23]  There is not even a normal public disclosure of which specific Commissioners voted for an Order, and which against.  Should the lack of the NFL contracts have massive negative ramifications for legitimate businesses, no one would know whom to blame or for what reasoning.

The Commission’s Order would have been akin to the referees overruling a game winning touchdown upon further review, but without allowing anyone else to see the replay.  And who would have enforced the prohibition?  You got it, the Commission. And let’s just suppose that ErisX is not the only one interested in listing similar event contracts.  Who will decide whether to review those other contracts, or to just play spectator, do nothing, and allow them?  Once again, the Commission.  In this case, the Commission is playing all three phases of the game: (i) special teams, by deciding without constraint or requirement whether to conduct an analysis of the contracts under terms of the special rule, (ii) offense, making the policy judgment in such determinations about whether any enumerated event contracts are contrary to the public interest, and (iii) defense, enforcing one prohibition more broadly against any others seeking to list different enumerated contracts by threatening them with similar orders and without any clear guidance. This does not make for a fair game.  Or, as this idea is perhaps more succinctly expressed in The Federalist, “[t]he accumulation of all powers legislative, executive and judiciary in the same hands, whether of one, a few or many, and whether hereditary, self appointed, or elective, may justly be pronounced the very definition of tyranny.”[24]

  1. Regulation 40.11 is Invalid

The statute that provides the special rule for event contracts has a default position, that contracts referencing the enumerated events are allowed.  The only event contracts that are prohibited are any contracts which are specifically “determined by the Commission to be contrary to the public interest.”[25]  The statute’s meaning is plain and obvious; event contracts, even those that are enumerated in the statute, are allowed unless the Commission makes a determination that the contract is contrary to the public interest.  Regulation 40.11 somehow missed this, and violates the APA both for being contrary to the statute and for fumbling the “reasoned decision making” test.

  1. Contrary to the Statute

In the recent Supreme Court case involving a delegation of decision making and the validity of a regulation, Justice Kagan preferred to address the regulation’s validity under the Chevron standard.[26]  The regulation at issue in that case survived, according to Justice Kagan, because the statute was ambiguous.  There is no such ambiguity in the statute here. Congress unambiguously provided a default rule that all event contracts, including the enumerated ones, are allowed.  Further, Congress affirmatively indicated that contracts involving the enumerated events are not per se contrary to the public interest, which at the very least implies the possibility that an enumerated event contract could actually be in the public interest. Indeed, the default under the statute presumes as much.

The regulation is so unrelated to the statute, it cannot even be called its opposite.  The regulation simply ignores the default rule and the requirement for the Commission to make a determination that an enumerated event contract is contrary to the public interest. Instead, the regulation adopts a per se rule that all enumerated event contracts are prohibited regardless of their utility or benefit.  The regulation does not even offer any potential for an enumerated event contract to be allowed, regardless of any contrarian or even unanimous outside view as to their public utility or propriety.  This is not only out of bounds from what the statute authorized, it is completely contrary to the statute’s rule that even enumerated event contracts are by default allowed.

  1. Failing the Reasoned Decision Making Test

In her concurrence in Little Sisters, Justice Kagan notes that although the regulation at issue there was within the scope of the statute’s meaning, the regulation may nonetheless fail if it is not the result of “reasoned decision making.”[27]  A regulation is not the result of reasoned decision making when the agency “has not given “a satisfactory explanation for its action”—when it has failed to draw a “rational connection” between the problem it has identified and the solution it has chosen, or when its thought process reveals “a clear error of judgment.”[28]  This is a very apt description of section 40.11.

The only explanation given in the adopting release for prohibiting all enumerated event contracts is, “Pursuant to Section 745(b) of the Dodd-Frank Act, the Commission proposed § 40.11(a)(1) to prohibit the listing of certain contracts involving terrorism, assassination, war, gaming, or activities that are unlawful under any State or Federal law.”[29]  The proposing release is not much more helpful, although it differs from the final release, and its selected quotation of the statute is very telling. The proposed release states the following:

Section 745(b) of the Dodd-Frank Act authorizes the Commission to prohibit the listing, trading, or clearing of agreements, contracts, transactions or swaps that are based upon an occurrence, extent of a concurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in Section 1a(19)(i) of the Act) that is beyond the control of the parties to the relevant contract, agreement, or transaction and associated with financial, commercial, or economic consequence, as defined in Section 1a(19)(iv) of the Act, if the contract involves terrorism, assassination, war, gaming, an activity that is unlawful under any Federal or State law, or any similar activity that the Commission determines, by rule or regulation, to be contrary to the public interest.

Pursuant to this authority, the Commission proposes new § 40.11(a)(1) to prohibit the listing, trading, or clearing of any above mentioned agreements, contracts, transactions or swaps.  In addition, the Commission proposes new § 40.11(a)(2) to prohibit the listing, trading, or clearing of any agreements, contracts, transactions or swaps involving activities similar to those enumerated in § 40.11(a)(1) and that the Commission determines, by rule or regulation, to be contrary to the public interest.[30]

While the trail that leads from the proposed rule to the final rule manages to be both meager and nonetheless confused, there are a few clear points that emerge.  First, the regulation is not itself a determination that a contract, or even class of contracts, is contrary to the public interest.  Occasionally, language may be contorted and mangled into an ex post facto reinterpretation of a regulation, but that is not an option with Regulation 40.11.  Second, the proposing release blatantly misquotes the statute.  The proposing release labors under the assumption that the statute “authorizes the Commission to prohibit the listing, trading, or clearing . . ..”  That is not so. The statute only authorizes the Commission to make a determination that an enumerated or similar event contract is contrary to the public interest. Once that determination is made, the statute itself, in CEA section 5c(c)(5)(C)(ii) prohibits the listing, clearing, or trading of those contracts.  The prohibition, which the Commission declares in Regulation 40.11, is not the Commission’s to make.  In a likely related misapprehension, the regulation completely ignores the fact that the statute actually allows all enumerated event contracts except for those where the Commission made a determination that the contract is contrary to the public interest.

The regulation clearly did not make a public interest determination, it made a prohibition through misstating a statutory declaration.  Because of this misinterpretation, there is a complete absence of reasoning in Regulation 40.11 to support its declared prohibition.  Why did the Commission propose and adopt a blanket rule?  We don’t know, because the regulation fails to say. In the absence of any explanation in the regulation, we can only guess, but it seems likely that the regulation is completely predicated on a basic misreading of the statute.  Accordingly, not only is the regulation contrary to the statute, it miserably fails the “reasoned decision making” test.

It is no wonder then, that the Order hedged its reliance on Regulation 40.11 to prohibit these contracts.  The wonder is, with the regulation being so flawed on its face, that the Order chose to incorporate it at all.

  1. The Order was Arbitrary and Capricious

As I noted above, Commission staff found themselves facing a fourth-and-long, down by six, on their own 1-yard line.  The governing statute is unconstitutional.  The regulation misinterprets the statute that it is intended to implement and is invalid.  However, even if, for arguments sake, the statute was constitutional, and the regulation valid, the Order was so incorrect it still lost yardage.  The Order incorrectly placed the burden on ErisX to show that the contracts are in the public interest, failed to give ErisX its due process, arbitrarily defined gaming, and used insufficiently justified and arbitrarily selected tests to support its findings.  As such, even without the deficiencies in the statute and Regulation 40.11, the Order was arbitrary and capricious.

  1. The Order Incorrectly Placed the Burden on ErisX to Affirmatively Show that the NFL Contracts Have Hedging Utility

The Order prohibited the ErisX NFL contracts in part because it found that the “record in this matter does not establish that the ErisX NFL event contracts have a hedging utility.”  This portion of the Order was a very deliberately and carefully worded hedge.  The Order did not say that the ErisX NFL contracts do not have a hedging utility.  Instead, it equivocated in the worst way; by shifting the burden, and the blame, to ErisX.  This flips where the plain meaning of the statute places that burden.

To see why, let’s take a brief look at the history of product certification.  Prior to its deletion in 2000 by the CFMA, CEA Section 5(g) provided that the Commission could not designate a board of trade as a contract market unless the board of trade affirmatively and pro-actively demonstrated that transactions in their contracts ‘‘will not be contrary to the public interest.’’[31]  The Commission interpreted the words “public interest” to include an economic purpose test,[32] which required that exchanges affirmatively demonstrate to the Commission that a proposed contract could be used for hedging or price basing.[33]  In 2000, the CFMA repealed Section 5(g) of the CEA in its entirety.  Exchanges no longer had to affirmatively demonstrate a public interest for their contracts by meeting an economic purpose test for their contracts’ hedging utility. In 2010, Congress passed the Dodd Frank Act, which added the new special rule in CEA section 5c(c)(5)(C) for the Commission to disapprove the enumerated event contracts.  This section left untouched the CFMA’s revised structure for contract certification.  It did not add back any requirement for an exchange to affirmatively demonstrate that a contract has price hedging utility or any other burden to show that a contract was not contrary to the public interest.  However, the Order ignored this completely by incorrectly putting the burden on ErisX to affirmatively demonstrate that the NFL contracts have hedging utility to pass the economic purpose test.

The Order ignored the obvious history of the statute’s removal of the prior exchange-led demonstration by presuming the same burden of proof under the added section for enumerated event contract disapproval.  Section 5c(c)(5)(C) of the CEA is clear and unambiguous; unless the Commission makes a determination that the contract is contrary to the public interest, all of the enumerated event contracts are allowed.  It is the Commission’s burden to overcome the default presumption of statutethat all event contracts including the enumerated ones are in the public interest.  Even if the economic purpose test (through a hedging utility analysis) was a constitutional method by which the Commission could determine that a contract was contrary to the public interest, that demonstration and the fact finding to support it is still the Commission’s burden to make in the affirmative.  It is not the private sector’s burden to prove in the negative.  Yet, that is exactly what the Commission did in the Order: the Order contained no determination that the ErisX NFL contracts do not have a hedging utility, only a “finding” that ErisX hasn’t successfully proved it.  Yet, the Commission itself failed to meet any burden of proof in Regulation 40.11, and, instead of providing that proof here in the Order, the Commission shifted the burden to the exchange to disprove the Commission’s previously unsubstantiated declaration.  This is hardly the process or burden that is appropriate or condoned in the statute.

  1. The Order Failed to Properly Consider the Public Comments and Denied ErisX Due Process

Even if the burden was upon the private petitioner to prove a contract was affirmatively in the public interest, and even if the economic purpose test was a Congressionally directed principle to determine the public interest, the Order’s finding that “the record in this matter does not establish that the ErisX NFL event contracts have a hedging utility” is hard to reconcile with the only truly valid part of this processthe comment file.  The Commission requested public comments and received twenty-five comment letters.  At least thirteen of these commented that the NFL contracts have hedging utility, and many described how.[34]  ErisX’s own submission substantively discussed this very point.  If the Order actually declared that the contracts lack hedging utility, at least the Commission would have shown, cursorily, that it gave the comments enough consideration to disagree with them.  However, the Order’s hedge to blame the “record” for failing to establish a hedging utility ignored the comments completely.  If the Commission truly did consider the comments, the Order gave no indication why they were summarily dismissed as insufficient to meet an unknown and undisclosed threshold of proof.

Similarly, and confusingly, the Order suggested that future submissions may “include new data” (data that ErisX or commenters assumingly failed to include) which could alter the Commission’s view of enumerated event contracts.  If this phrase was to be read seriously, then the Commission acknowledged that some type or kind of future data may prove that these contracts can be used for hedging purposes.  Given the comment file’s demonstration of this fact already, the Commission must have some standard of proof in mind, which it did not disclose, perhaps because it would be unattainable.  If the Commission knew what kind of information or data could have changed its view, it should have more thoroughly sought such information through this process or it should have at least described what information could have been more persuasive.  Otherwise, we are left with an arbitrary dismissal of current facts viewed as insufficient to an unknown provision of future facts.

Finally, the Order concluded with a statement that future submissions similar to ErisX’s NFL contracts, would benefit from “any input from relevant Federal, State, and Tribal authorities.”  During the comment period which the Commission requested on this matter, not a single Federal, State, or Tribal authority responded.  That, in and of itself should provide a view that these authorities did not feel the issue important enough to express their opinions.  If the Commission truly felt it needed input from these other authorities to fully weigh these contracts, what did it do to ensure those views were received?  The comment period closed on January 28thplenty of time for the Commission to know whether or not any of these relevant authorities would be providing feedback.  Once it was apparent that none had, the Commission could have held a public roundtable on the topic and invited the relevant parties (whose views it now, after an absence of comment and no further opportunity for input, decides are critical to its decision making).[35]

Is this providing ErisX due process?

  1. The Order’s Definition of Gaming was Arbitrary

The Order went to great lengths to conclude that the term “gaming” in the list of enumerated activities in the statute includes gambling and specifically sports wagering.  The Order looked to state law definitions of “gambling,” and gave several examples in a footnote.  However, many of those examples, including the two that the Commission cited as specifically referencing sporting events under their definition of gambling, would, under the CEA, also define every event contract as gambling.  Alabama’s definition of “gambling” is, “A person engages in gambling if 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 (emphasis added) . . ..”  Alaska’s definition is identical to Alabama’s.  In Idaho, the definition is “risking any money, credit, deposit or other thing of value for gain contingent in whole or in part upon lot, chance, the operation of a gambling device or the happening or outcome of an event, including a sporting event (emphasis added). . ..”  Wyoming’s definition of gambling is “risking any property for gain contingent in whole or in part upon lot, chance, the operation of a gambling device or the happening or outcome of an event, including a sporting event, over which the person taking a risk has no control emphasis added). . ..”  Four of the six states that were cited in the Order define gambling to include staking an economic stake on the outcome of any event, not just sporting events.  Such definitions directly conflict with the CEA, since the statute has a special section that carves out event contracts involving “gaming” as a subset of event contracts generally.  If the CEA agreed with these states’ definitions, there would be no need to separately enumerate a category of event contract that possibly involve “gaming.”

  1. The Order Utilized Impermissible Tests to Prohibit the ErisX NFL Contracts

As discussed extensively above in the Constitutional Concerns section C, the Order stated that the “legislative history” indicates Congress’s intent to “restore” the economic purpose test that was in use prior to the year 2000.  The Order neglected to even give us a footnote to explain where in the legislative history this indication can be found.  By a process of elimination described above, I assume it is the colloquy between Senator Lincoln and Senator Feinstein.  This is, even by legislative history standards, very slim support.  This lone conversation between two senators is not enough resurrect what Congress as a whole previously removed.

This is not to say that economic purpose test is the wrong test.  In my view, the economic purpose test would be a useful tool for the Commission to employ in analyzing new event contract filings.  However, until Congress indicates that this is the test it required, we cannot say that it is the correct test.

The Order seemed to be aware that its inference from legislative history is rather flimsy and was compelled to look at “other factors” too in its public interest determination.  Unfortunately, the Order’s choice of the “other factors” to consider does not strengthen it but rather weakens it.  After concluding that the contracts fail the economic purpose test, the Order separately concluded that the ErisX NFL contracts are contrary to the public interest because they “could potentially promote sports gambling through the derivatives markets.”  From this conclusion we can infer that the “other factors” that the Order considered was “whether the derivatives markets should promote gambling.”  This factor is even more problematic than using the economic purpose test.  Unlike a well-articulated and statutorily described economic purpose test, the question of whether or not gambling should be promoted has nothing to do with the Commission’s expertise or mandate.  This is a question that should be answered by Congress, not by the Commission.

  1. Conclusion

It is more than understandable from the Commission’s perspective, with its defined expertise and limited resources meant to ensure the integrity of the enormously consequential and very large legacy derivatives market, to not want event contracts trading under its jurisdiction let alone those blurring the lines between hedging activity on economically specific and broadly applicable events versus contracts directly referencing (albeit legal) historical gambling activities.  As a huge advocate of our agency’s regulatory expertise, principle-based ruleset, and the importance of a vibrant and resilient derivatives market generally, I heavily sympathize with the staff’s interests and inclinations here as well as the predicament this contract filing presented to the agency as a whole.

However, from a first principles perspective, if the decision is that important to the use of agency resources, the challenge to the agency’s expertise, and explosive broadening of the agency’s markets, it is also likely the best catalyst for Congress to properly reclaim its legislative power and either ban such contracts outright or provide a detailed framework through which the agency can appropriately fact-find on specific contract cases.  But no such prohibition should ever be made by a flawed and non-transparent administrative order pursuant to an APA-violating regulation based on an unconstitutional statutory delegation.

At my swearing in ceremony, I took a solemn oath to protect and defend the Constitution of the United States.  There was no qualifier. I didn’t swear to do so unless it meant having to take an uncomfortable action, here by expanding the scope of our agency’s traditional jurisdiction into debatably unvirtuous territory.  But the debatability of this territory is precisely the point.  The debate and decision to ban such financial activity and the freedom of private enterprise to engage in it within the financial markets should be conducted within the Halls of Congress, where the debaters and deciders are elected and held accountable to the voters for their judgements and any resulting freedom-limiting laws.

It is telling to me that out of the twenty-five comment letters the agency received on this issue, including some from lawyers, legal scholars and law professors, none mentioned an unconstitutional delegation from Congress.  Maybe, in life, as we’ve gotten older, we’ve gotten used to things being taken away from us.  Inch by inch. We’ve become complacent as freedoms get flipped into presumed regulatory prohibitions.  Executive branch agencies no longer need Congress to tell them what we as citizens can’t do.  They can just declare it and place the burden on us individually to prove that we can be isolated exceptions.  The growth, power, and discretion of the administrative state, the usurpation or delegation of legislative powers from Congress, and lack of accountability to the electorate provided thereby has been a statute-by-statute game of inches that Article 1 has been losing over decades.  We need to call an officials’ time-out, go to the replay booth, reset the clock, and ensure that the game is being played according to the rules of the Constitution.  That would truly be “in the public interest.”


[1]   138 S.Ct. 1461 (2018).

[2] See generally N.L.R.B. v. Sears, Roebuck & Co., 421 U.S. 132, 153 (1975). For a compelling viewpoint on the perfidy of secret law and financial regulators, see SEC Commissioner Hester Pierce’s remarks, SECret Garden, available at

[3] For a contemporary view of some of the legal complexities concerning FOIA, see Justice Barret’s opinion in United States Fish & Wildlife Serv. v. Sierra Club, Inc., 141 S. Ct. 777 (2021).

[4] Section 1a(19)(iv) of the CEA.

[5] 139 S.Ct. 2116 (2019).

[6] Id. at 2123 (plurality opinion of Justice Kagan); id. at 2145 (dissenting opinion of Justice Gorsuch). Justice Gorsuch takes the more stringent view on what Congress may delegate. The Justice may find an unconstitutional delegation even if Congress provided “an intelligible principle.” Justice Kagan may adopt a broader view of what Congress is allowed to delegate. Relevant here is that even according to Justice Kagan’s lenient view, and a fortiori under Justice Gorsuch’s strict view, a delegation such as here, where Congress failed to provide “an intelligible principle” is unconstitutional.

[7] See Gundy, 139 S.Ct. at 2141. There, Justice Gorsuch explained that, “To determine whether a statute provides an intelligible principle, we must ask: Does the statute assign to the executive only the responsibility to make factual findings? Does it set forth the facts that the executive must consider and the criteria against which to measure them? And most importantly, did Congress, and not the Executive Branch, make the policy judgments?  Only then can we fairly say that a statute contains the kind of intelligible principle the Constitution demands.”

[8] Gary Lawson, Delegation and Original Meaning, 88 Va. L. Rev. 327, 329 (2002).

[9] 293 U.S. 388 (1935).

[10] Id. at 430. In that case, all the justices agreed that the Congress’s failure to provide the standards that the executive branch would be tasked with carrying out was an unconstitutional delegation.  Even Justice Cordozo dissented only because he read the statute at issue there as “as if coupled with the words that he shall exercise the power whenever satisfied that by doing so he will effectuate the policy of the statute as theretofore declared.”  Id. at 439.  The rationale for such a reading is largely inapplicable here. Even the principle that favors an interpretation that results in a statute’s constitutionality over one that does not would likely not be applicable here.  That principle only comes into play when there are two ways of reading the statute and favors a reading that supports constitutional validity; here, the statute is clear and there are no two ways about it.  There is no requirement for the Commission to ever make a determination that a contract is contrary to the public interest.

[11] Gundy, 139 S.Ct. at 2142.  There, Justice Gorsuch noted that, “It's easy to see, too, how most any challenge to a legislative delegation can be reframed as a vagueness complaint: A statute that does not contain “sufficiently definite and precise” standards “to enable Congress, the courts, and the public to ascertain” whether Congress's guidance has been followed at once presents a delegation problem and provides impermissibly vague guidance to affected citizens.”

[12] W. Douglas, Go East, Young Man 216–217 (1974) cited in Gundy, 139 S. Ct. at 2140 fn 63.

[13] Nat'l Broad. Co. v. United States, 319 U.S. 190, 216 (1943).

[14] Gundy, 139 S. Ct. at 2145 (discussing the similarly vague standard of “feasible,” which “might refer to “technological” feasibility, “economic” feasibility, “administrative” feasibility, or even “political” feasibility.”)

[15] See Gundy, 139. S. Ct. at 2136.

[16] Id. at 2142.

[17] Nat'l Broad. Co., 319 U.S. at 216.

[18] New York Cent. Sec. Corp. v. United States, 287 U.S. 12, 24 (1932).

[19] Congressional Record—Senate, S5906 (July 15, 2010).

[20] Gundy, 139. S. Ct. at 2146.

[21] Clinton v. City of New York, 524 U.S. 417, 452 (1998).

[22] See Gundy, 139 S.Ct. at 2144. Justice Gorsuch noted this deficiency with regard to the Attorney General, and the same deficiency is found with the Commission.

[23] Indeed, only one other Commissioner undertook to release a statement on this matter. Two others, the deciding votes, did not.

[24] The Federalist No. 47, at 324 (J. Cooke ed. 1961) (Madison).

[25] Section 5c(c)(5)(C)(ii) of the CEA.

[26] Little Sisters of the Poor Saints Peter & Paul Home v. Pennsylvania, 140 S. Ct. 2367, 2397 (2020).

[27] Id. at 2398.

[28] Id.

[29] Provisions Common to Registered Entities, 76 FR 44776, 44785 (July 27, 2011).

[30] Provisions Common to Registered Entities, 75 FR 67282, 67288-89 (Nov. 2, 2010).

[31] H.R. Rep. No. 975, 93 Cong., 2d Sess. 29 (1974).

[32] Concept Release on the Appropriate Regulatory Treatment of Event Contracts, 73 FR 25669, 25672 (May 7, 2008).

[33] A Joint Report of the SEC and the CFTC on Harmonization of Regulation

October 16, 2009, page 23 available at

[34] See e.g. Professor Angel’s comment at *3, SIG Susquehanna’s comment at *2, U.S. Integrity’s comment at *3, and GTS Securities comment at **2-3.

[35] The Order also contained a “finding” that promises to continue to review enumerated event contracts. This completely misses its target.  What the Commission intends to do in the future, with contracts other than these ErisX NFL contracts, is completely irrelevant to why this Order is prohibiting these ErisX NFL contracts.  Presumably, the Commission intends to signal to the industry that this Order is not a per se prohibition of all enumerated event contracts.  That is a statement of future intent, not a finding, and it absolutely does not support the Order’s conclusion.