Executive Summary:  The Commission should permit a designated contract market (DCM) to list contracts on sporting events that are designed to hedge the risks of commercial activity related to those events, including legalized sports bookmaking.  However, the proposal (withdrawn) by Eris Exchange (ErisX) to list contracts based on the outcome of football games was deficient because: (1) ErisX did not provide sufficient evidence of hedging utility; and (2) ErisX’s proposed exclusion of the general public from trading the contract on the DCM would violate DCM Core Principles and CFTC regulations regarding impartial access (Core Principle 2) and antitrust considerations (Core Principle 19).  A DCM cannot exclude retail participants.  Core Principle 2 prohibits a DCM from imposing discriminatory access criteria on the basis of net worth, as ErisX has proposed.  Core Principle 19 requires a DCM to not impose any material anticompetitive burden on trading.  ErisX’s proposed sporting event contracts are functionally identical to the sports bets offered by bookmakers to the general public, and are designed so that sports bookmakers may use the exchange to hedge the risks arising from selling those contracts to the public.  It would be anticompetitive to allow bookmakers to trade these contracts on the exchange so they can sell them to the public at casinos, racetracks, and other betting establishments, while at the same time prohibiting the public from obtaining those contracts through open, transparent, competitive trading on the exchange.  Although contracts involving gaming should be permitted to be traded on a DCM if they have an economic purpose, which may include hedging by sports bookmakers, gaming contracts without any such economic purpose should not be permitted on a DCM.

1. The ErisX Petition.

On December 15, 2020, the CFTC received a self-certification filed by ErisX under Regulation 40.2 for the listing of three financially settled contracts that it called “RSBIX NFL Futures Contracts” (NFL Contracts).[1]  The ErisX certification included the following assertions:

The contracts are futures contracts.  According to ErisX, “[t]he proposed Contracts will be structured as a futures contract for each sports event outcome.”[2]

The contracts mirror common sports bets.  ErisX’s certification stated that the NFL Contracts “will be listed for individual sporting events, and will include contracts based on the moneyline,[3] the point spread,[4] and the total points for each game.”[5]  ErisX’s description of the NFL Contracts employs the same terminology and indicates that the contracts would function in the same manner as the moneyline, point spread, and total points sports bets offered by sports bookmakers to the general public.[6]

Hedging utility.  According to ErisX, the NFL Contracts would “permit Licensed Sportsbooks to manage commercial risk by hedging their exposure [to imbalances in their books],” and are “tailored to address the unique risks of Licensed Sportsbooks.”[7]  ErisX claimed that contracts with alternative specifications “would create a disparity between the commercial risks faced by Licensed Sportsbooks and the hedge used to mitigate the commercial risk.”[8]  ErisX also asserted that the NFL Contracts could be used by vendors and stadium owners to hedge their commercial risks that depend on attendance at football games because teams that win more games have better attendance and are more likely to make the playoffs and host additional games.

Compliance with DCM Core Principles.  The ErisX Certification included explanations of how it believed the NFL Contracts complied with the relevant DCM core principles and CFTC regulations.

Exclusion of retail customers.  ErisX proposed to limit trading in the NFL Contracts to “eligible contract participants (ECPs) that fall into one of the following categories: (1) commercial market participants seeking to hedge their cash market exposure; or (2) designated market makers.”[9]  These limitations “mean that retail (non-ECP) persons and persons seeking to profit based upon the outcome of particular sporting events will not be eligible to trade the Contracts.”[10]

On December 23, 2020, the CFTC informed ErisX that it had determined that the NFL Contracts “may involve, relate to, or reference . . . gaming” under CFTC Regulation 40.11.  The CFTC requested that ErisX suspend any listing and trading of the contracts during the pendency of a 90-day review period beginning on that date.[11]  The CFTC sought public comments on a number of questions related to the certification, and received 25 comment letters in response.[12]  On March 22, 2021, one day before the expiration of the 90-day review period, ErisX withdrew its certification.

ErisX officials have been quoted as stating that they may re-file another certification.[13]  In light of the public comments received on the initial filing, and the potential for a subsequent filing, I believe that it may be helpful to provide my views on the now-withdrawn ErisX certification and some of the issues it presented.[14]

2. Standard of Review.

As enacted by Congress in the Dodd-Frank Act, CEA Section 5c(C)(5)(C) (the CEA gaming provision) prohibits the listing of agreements, contracts, transactions or swaps in an excluded commodity[15] that involve (i) activity that is unlawful under any federal or state law, (ii) terrorism, (iii) assassination, (iv) war, or (vi) gaming, if the Commission determines such agreements, contracts, or transactions are “contrary to the public interest.”[16]  The CEA gaming provision thus requires a two-part test for the Commission to prohibit a contract that involves gaming.  First, the Commission must find that a contract “involves” gaming.  Second, it must determine that the contract involving gaming is “contrary to the public interest.”

The Commission has interpreted the “public interest” test in the CEA gaming provision as a restoration of the “economic purpose” test that was eliminated in the Commodity Futures Modernization Act of 2000 (CFMA).[17]  The referenced economic purpose test included a requirement that an application for the listing of a contract demonstrate that the contract “reasonably can be expected to be, or has been, used for hedging and/or price basing on more than an occasional basis.”[18]  The Commission also has concluded it has “discretion to consider other factors in addition to the economic purpose test in determining whether an event contract is contrary to the public interest.”[19]

During the Senate’s consideration of the CEA gaming provision, Senator Lincoln, then-Chair of the Senate Committee on Agriculture, Nutrition and Forestry, stated that this provision was intended to enable the CFTC to prohibit the trading of derivative contracts based on sporting events:

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.[20]

In 2011, the Commission promulgated Regulation 40.11 to implement the CEA gaming provision.[21]  Regulation 40.11(a) prohibits the listing of an agreement, contract, or transaction “that involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State of Federal law . . . .”[22]  Regulation 40.11(c) provides for a 90-day review period for any such contract that the Commission determines may involve gaming or any of the other activities referenced in Regulation 40.11(a).

During the 40.11 rulemaking comment period, the Commission was urged to further define the term “gaming” to avoid market uncertainty as to the scope of the prohibition.[23]  In the final rulemaking, the Commission stated it “agrees that the term ‘gaming’ requires further clarification and that the term is not susceptible to easy definition.”[24]  The Commission declined, however, to provide such further definition, stating instead that it would “consider individual product submissions on a case-by-case basis.”[25]  The ErisX certification presented such a product for the Commission’s consideration.

With respect to product certifications submitted under Regulation 40.2 that may involve gaming, the Commission also reviews the certifications under the same standards that apply to all other product certifications submitted under Regulation 40.2.  These include whether the proposed product complies with “applicable provisions of the Act, including core principles, and the Commission’s regulations thereunder.”[26]

3. Review of the NFL Contracts.

1. The NFL Contracts involve gaming.

Football is a game.  Betting on the outcome of games is “gaming.”  The American Gaming Association (AGA) website provides a one-page summary of the business of sports betting.  Under the heading “The Basics of Sports Betting,” this AGA document identifies and explains key sports betting terms and concepts, including descriptions of the moneyline, point spread, and over/under bets.

The NFL Contracts are identified by the same labels and structured to match the basic types of sports bets described by the AGA.  The asserted economic purpose of the NFL Contracts—to enable sports bookmakers to hedge their gaming contracts with the public—does not undermine the conclusion that the NFL Contracts involve gaming.  To the contrary, it supports this conclusion: a contract that is structured identically to gaming contracts, labelled with the same terms as gaming contracts, and designed with a purpose to hedge gaming contracts “involves” gaming.[27]

2. Hedging utility.

The Commission has interpreted the public interest test in the CEA gaming provision to encompass the economic purpose test that the CFMA deleted from the CEA.  Notably, however, the CEA gaming provision does not require the Commission to prohibit contracts involving gaming or to prohibit a contract simply because it involves gaming; it provides the Commission with the discretion to prohibit them.  In my view, the Commission should recognize the significant growth of sports betting as a legalized activity in recent years with significant underlying commercial activity.  The Commission should permit a DCM to list contracts involving sports events where a DCM demonstrates that such contracts have an economic purpose and hedging utility related to such commercial activity.

In 2010, at the time the CEA gaming provision was enacted as part of the Dodd-Frank Act, sports betting was generally illegal in the United States, including under prohibitions on state-authorized sports betting in the Professional and Amateur Sports Protection Act (PASPA).  Sports betting was permitted only in Nevada casinos and three states hosted sports lotteries or permitted sports pools.[28]  In light of the widespread illegality of sports betting at the time, it is not surprising that sports betting contracts were held out in legislative discussions as a prime example of event contracts that would not have a legitimate economic purpose. [29]

The sports betting landscape today, however, is dramatically different from when Congress enacted the gaming provision and the Commission promulgated Regulation 40.11.  In the three years since the Supreme Court’s 2018 decision invalidating PASPA,[30] sports betting in the U.S. has expanded rapidly, both geographically and in the total dollar amount of betting annually.  Half of the states and the District of Columbia have legalized sports betting, and more are considering whether to do so.[31]  Morningstar projects that in 2024, the aggregate amount of legal sports betting in the U.S. will reach $81 billion.[32]

Because in many states sports betting is now legal under both state and federal law, it would not be “contrary to the public interest” for the Commission to permit the listing of sports event contracts if an exchange can demonstrate that the contracts will be used to hedge commercial risks arising from lawful commercial activity related to sports betting.[33]  In my view, however, ErisX did not provide sufficient evidence that the NFL Contracts would provide an effective and more-than-occasionally-used hedging mechanism for licensed sportsbooks, vendors, or stadium owners.  Among other issues, for example, the AGA, which represents licensed sportsbooks, cast doubt upon the utility of the contracts, stating that the proposed contracts “pose complex legal and policy questions,” and informing the Commission that “some AGA members also believe these proposed contracts will have limited utility for their individual operations.”[34]  Further, ErisX provided no evidence to support its claim that the NFL Contracts could be used to hedge the non-gaming economic consequences arising from the outcomes of NFL games, such as changes in revenue for in-stadium and other vendors.

If ErisX or any other applicant can demonstrate that sports event contracts such as the NFL Contracts can be used for an economic purpose other than for gaming itself, meaning they reasonably can be expected to be used for hedging and/or price basing on more than an occasional basis, then in my view it would not be contrary to the public interest to permit their listing.  To date, however, there has been no such demonstration.

3. Violations of Core Principles.

Even if a proposed contract passes muster under Regulation 40.11, it also must satisfy all the other requirements of Regulation 40.2, including compliance with the CEA core principles and CFTC regulations.  In my view, contracts that exclude retail participation on a DCM, such as the NFL Contracts, do not satisfy these requirements.

Excluding retail customers from trading the NFL Contracts would violate DCM Core Principle 2 (impartial access) and Core Principle 19 (antitrust considerations).  To the best of my knowledge, no DCM has ever prevented—and the CFTC has never previously permitted a DCM to prevent—retail customers from trading a contract competitively on a DCM.

1. Core Principle 2 (impartial access).

DCM Core Principle 2 requires a DCM to “enforce compliance with the rules of the contract market, including [] access requirements . . . .”[35]   In connection with Core Principle 2, CFTC Regulation 38.151 states:

A designated contract market must provide its members, persons with trading privileges, and independent software vendors with impartial access to its markets and services, including:

(1)  Access criteria that are impartial, transparent, and applied in a non-discriminatory manner . . .[36]

In the preamble to the final rule implementing Regulation 38.151, the Commission made clear its interpretation of Core Principle 2 as requiring DCMs to provide impartial, non-discriminatory access.  The Commission concluded that “impartial access rules are necessary in order to prevent the use of discriminatory access requirements as a competitive tool against certain participants.”[37]  The Commission stated that such impartial access “will likely enhance the DCM’s liquidity and the overall transparency of the swaps and futures markets.”[38]  The Commission emphasized that access criteria should be based only “on the financial and operational soundness of a participant, and not on factors that could bar access and result in discriminatory access or act as a barrier to entry.”[39]  In the notice of proposed rulemaking, the Commission specifically rejected as discriminatory any access criteria based on a person’s net worth (e.g., ECP status): “The Commission believes that the requirement to provide impartial access requires DCMs to avoid the creation of exclusive membership standards that focus on high net worth.”[40]

ErisX proposed to limit trading in the NFL Contracts to ECPs that are either (i) licensed sportsbooks, vendors, or stadium owners, or (ii) designated market makers.  Under ErisX rules, a market maker must (a) meet ErisX’s definition of a Professional Trading Firm; and (b) enter into a market making agreement with ErisX.  According to ErisX, “[t]he foregoing limitations on eligible participants mean that retail (non-ECP) persons and persons seeking to profit based on the outcome of particular sporting events will not be eligible to trade the Contracts.”[41]

ErisX’s exclusion of individuals who are not ECPs is the very kind of discrimination based on net worth that the Commission has prohibited.  It is blatantly discriminatory to bar retail customers with less than $10 million in discretionary investments from access to the DCM.   None of ErisX’s proposed access criteria relate to the permissible factors of financial or operational soundness.  Moreover, if ErisX applied its access criteria in a truly non-discriminatory manner, all other persons “seeking to profit based on the outcome of sporting events”—a category that includes licensed sportsbooks, in-stadium and other vendors, and stadium owners—also would not be able to trade the contracts, and there would be nobody left to trade.    

2. Core Principle 19 (antitrust considerations).

Core Principle 19 states:

(19)  Antitrust considerations.—Unless necessary or appropriate to achieve the purposes of this Act, the board of trade shall not—

(A) adopt any rule or taking [sic] any action that results in any unreasonable restraint of trade; or

(B) impose any material anticompetitive burden on trading on the contract market.[42]

In addition to a DCM’s antitrust obligations under Core Principle 19, the CEA imposes an obligation upon the Commission to foster competition.  CEA Section 15 requires that in issuing any order or approving any rule or regulation of a contract market, the Commission must “take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the objectives of the [CEA].”[43]  The Commission therefore has an obligation to ensure that the terms of contracts listed on exchanges do not impermissibly restrict competition.

The sports betting market as envisioned by ErisX would be anticompetitive—it would protect the bookmakers from competition by members of the public and non-market making ECPs.  The market structure that would have resulted from ErisX’s proposal would be one where sports bookmakers could trade amongst themselves to swap their risks and together balance their books, while preserving their exclusive ability to provide sports event contracts to the public.[44]  Members of the public would be prohibited from accessing the DCM to either post or accept bids or offers from other market participants.  The proposed restrictions on participation in the trading of the NFL Contracts thus would protect sports bookmakers from competition from retail traders and non-market making ECPs; retail customers would be required to obtain their sports betting contracts from bookmakers.

Prohibiting retail customers from accessing sports bet contracts offered on a DCM would harm the public.  On a DCM, retail participants would benefit from exchange-based prices that would more accurately reflect the market’s assessment of the probability of an event, rather than the odds dictated to the customer by a bookmaker.[45]  On the DCM, members of the public could make or take bids or offers placed by other market participants—including the bookmakers, market-makers, and other members of the public—rather than be consigned to take-it-or-leave-it odds offered by bookmakers.  The price discovery process on the exchange would be transparent, in contrast to the opaque price-setting process of a bookmaker or casino.  The bid/ask spread on the exchange likely would be smaller than the commission or “vig” charged by the bookmakers.[46]  The two-tier market structure that ErisX’s proposal would create—a non-public exchange designed to solely support the business of the dealers who would then have the exclusive ability to offer the same contracts at a mark-up to the public off-exchange—has been rejected in CFTC-regulated swaps markets[47] and is contrary to the public interest.[48]

The economic purpose test in the CEA gaming provision does not require that all market participants have an economic purpose in trading the contract—just that the contract “can be expected to be, or has been, used for hedging and/or price basing on more than an occasional basis.”  CFTC markets are composed of both hedgers and speculators.  Once hedgers are permitted in a market, speculators must be permitted as well.  Speculators have a variety of motivations, and neither the exchanges nor the CFTC has ever sought to limit speculation in DCM contracts based upon the net worth of a speculator, or to probe into the motives of speculators—other than to prohibit fraud or manipulation.[49]

The contracts proposed by ErisX would be a no-lose situation for the bookmakers, and a no-win situation for the public.[50]  ErisX’s proposed restrictions are both anticompetitive and harmful to retail market participants.[51]

4. Contracts involving gaming without an economic purpose should not be permitted on a DCM.

As described above, if sports event contracts involving gaming are found to have an economic purpose, they should be permitted to be listed on a DCM and retail customers cannot be prohibited from trading those contracts.  In my view, however, based upon the gaming provision and the general purposes of the CEA, it would be contrary to the public interest to permit the listing of contracts involving gaming that do not have an economic purpose.

In Section 3(a) of the CEA, Congress finds 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 financially secure trading facilities.”[52]  In Section 3(b) Congress declares that the purpose of the Act is to further these interests “through a system of effective self-regulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission.”[53]  The CFTC describes its mission as to “promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.”[54]

Contracts or transactions involving gaming that do not have any of the purposes described in CEA Section 3(a)—managing price risks or price-basing—are not the types of contracts contemplated by Congress to be within the public interests served by the CEA or the functions of the facilities regulated by the CFTC.[55]  It would be contrary to the public interests identified in the CEA to permit the use of CFTC-licensed facilities solely for non-economic purposes.

5. Conclusion.

If sporting event contracts with an economic purpose, such as hedging, are allowed to be traded on a DCM, the general public must be able to access and trade those contracts on the exchange.  The public cannot be barred from trading a contract listed on a DCM.  However, gaming contracts without any economic purpose should not be permitted on a DCM.

The collapse of Archegos Capital Management[1] and the billions of dollars in losses to investors and other market participants is a vivid demonstration of the havoc that errant large investment vehicles called “family offices” can wreak on our financial markets.[2]  Family offices can be active in both securities and commodities markets.  Unfortunately, in the last two years the CFTC has loosened its oversight of family offices.  In 2019, and again in 2020, the Commodity Futures Trading Commission (CFTC) approved rules that exempted family offices from some of our most basic requirements.  I objected to these exemptions at the time, warning in 2019 that “[t]he approval of [these rules] without any checks and balances on exempt family office CPOs [commodity pool operators] will increase risks to our markets and market participants.”[3]  The Archegos failure highlights the importance of strengthening the CFTC’s oversight of these large funds and preventing bad actors from trading in our markets. 

A “family office” has nothing to do with ordinary families.  Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes, and plan their estates.[4]  According to a 2019 report, the average wealth of family offices surveyed in North America was $1.3 billion, with $852 million in assets under management.[5]  As we have just seen, the failure of a large family office can cause significant harm to our financial markets.

Because family offices do not solicit investments from the public, they are generally exempt from certain CFTC regulations that relate to investor protection.  But the CFTC strayed far beyond this rationale when it also exempted multimillionaire and billionaire family offices from basic requirements related to market protection and integrity.

In November 2019, the Commission exempted family offices operating in CFTC regulated markets from providing notice that they are exempt from CFTC registration requirements.[6]  All other entities claiming similar exemptions must provide notice.  The information required would fit on a post-it note, and the CFTC estimated the annual cost of the filing to be merely $28.50.  There is no rational justification for exempting large family offices with billions of dollars under management from minimal notice requirements with relatively trivial costs.  Without a notice filing, the Commission remains generally unaware of the very existence of these large commodity pools, is hampered in its ability to oversee their activities, and does not even know whom to contact should issues arise.

In July 2020, the Commission exempted persons in family offices from a new CFTC rule designed to foreclose bad actors from acting as CPOs if they are subject to statutory disqualification.  In other words, even if a family office operator or one of its principals has been barred from CFTC markets, committed a felony involving commodity or securities laws, or has been found to have violated specified statutes involving embezzlement, theft, extortion, forgery, and fraud, they can remain exempt from CFTC registration.[7]  Thus, convicted felons, market manipulators, and other financial market miscreants can operate freely within the confines of a family office, unbeknownst to the CFTC.  In my view, there is no reasonable justification for such a policy.

As I previously stated, disqualification should mean disqualification.  In response to the 2020 rulemaking I stated: 

[U]nder this set of new rules completed today, CPOs of family offices are exempt from registration, exempt from providing notice that they are using an exemption, and exempt from the statutory disqualifications that generally apply to all other CPOs.  This triad of exemptions for CPOs of family offices leaves the Commission uniquely unaware of the activities and integrity of these entities.

To protect the integrity of the commodity markets, the Commission must be aware of and able to monitor the activities of large family offices.  In order to do this the Commission should have basic information about family offices that are operating commodity pools.  The qualifications of persons operating family offices should be no less than for persons operating other exempt and non-exempt pools.  I urge the Commission to revisit these issues soon.

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 football—the 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 so—called “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 red—eyed 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.

2. 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.

2. 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.

3. 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 over—the 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.

3. 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 silent—if 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.

2. 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.

3. 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]

4. 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.

2. 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.

5. 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 statute—that 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.

2. 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 process—the 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 28th—plenty 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?

3. 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.”

4. 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.

6. 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.”

I concur in the Commission’s findings that Coinbase, Inc., the owner and operator of an online digital asset exchange,[1] violated anti-manipulation provisions of the Commodity Exchange Act (CEA) and the CFTC’s rules based on:  1) reporting false, misleading, or inaccurate transaction information; and 2) secondary, principal-agent liability for wash sales by a former “Employee A.”  I write separately, though, to ensure the public is not misled to believe that the CFTC regulates exchanges such as Coinbase.  It does not.  This fact leads me to express my serious concerns about the Commission’s dedication of resources to this matter involving an exchange for cash transactions in digital assets (e.g., Bitcoin, Litecoin), given that— 

• Coinbase has not offered any futures contract, option, or swap (collectively, derivatives products) regulated by the CFTC;
• As a result, Coinbase is not required to register with, and is not regulated by, the CFTC;
• Coinbase’s activities concerning the digital assets at issue did not affect the trading of any listed derivatives product regulated by the CFTC because there were no listed derivatives products on digital assets traded at that time; and
• The settled charges are based largely on conduct that is several years old, has not been repeated, and in the case of the charge of secondary liability, is based on conduct by an employee who left Coinbase years ago and who is not being charged.

In short, the CFTC must:  1) maintain its focus on its primary area of responsibility - the derivatives markets; and 2) be clear with the public that the CFTC does not regulate cash digital asset exchanges like Coinbase.  I fear that today’s settlement falls short on both objectives.

The CFTC Does Not Regulate Cash Digital Asset Exchanges Like Coinbase

The CFTC does not regulate Coinbase (or any other exchange for cash digital asset transactions).  That important point bears repeating, because it is not made anywhere in the Commission’s settlement Order:  The CFTC does not regulate Coinbase.

The CFTC’s regulatory authority derives from the CEA, which provides it with exclusive jurisdiction to regulate certain derivatives products:  futures contracts, certain types of options, and swaps.[2]  The CEA does not provide the CFTC with jurisdiction to regulate exchanges or other markets involving cash commodity transactions—be they for corn, oil, or digital assets.  Coinbase is a cash market that has never offered any derivatives products, and thus falls outside the scope of the CFTC’s regulatory authority under the CEA.

If Coinbase offered derivatives products, the CEA would require Coinbase to register with the CFTC.[3]  In order to register, it would have to demonstrate to the CFTC that it is in compliance with a host of core principles set out in the CEA, as well as the CFTC’s implementing regulations.  And in order to maintain its registration, it would have to demonstrate to the CFTC its ongoing compliance with those core principles and regulations.[4] 

As a trading platform for cash transactions in digital assets, however, Coinbase is not subject to any of the regulatory requirements of the CEA or the CFTC’s rules.  As a result, the trading public that participates on Coinbase’s trading platform cannot rely upon the protections afforded by those regulatory requirements. 

The Commission should be very clear about that whenever it acts in the digital asset space so as not to confuse the trading public regarding the CFTC’s role as a regulator of futures, options, and swaps and the exchanges on which they trade—and the lack of corresponding regulatory protections under the CEA for those who trade on cash digital asset exchanges like Coinbase.  It is unfortunate that today’s settlement Order fails to do so. 

The CFTC Cannot be a Full-Time “Cop on the Beat” for Cash Digital Asset Exchanges

The CEA has always provided the CFTC with certain limited enforcement authorities with respect to cash commodity markets,[5] and those authorities were expanded to some degree by the Dodd-Frank Act.[6]  The public should be aware that where cash commodity markets are concerned, this limited authority (anti-fraud/manipulation/false reporting, as opposed to day-to-day regulatory oversight) is bestowed upon the CFTC as a tool to assist in its primary function of regulating derivatives products, such as futures.  Futures contracts serve a price discovery function.  Well-functioning futures (and other derivatives products) rely upon a sound underlying cash market and may reference cash market indexes in their pricing.  Therefore, cash market transactions can potentially be part of a scheme to manipulate prices of derivatives products that are regulated by the CFTC.  Congress has recognized these relationships between prices of cash transactions and derivatives products, and thus the CEA provides the CFTC with limited enforcement authorities with respect to cash transactions.  This is the hook that today’s settlement Order uses with respect to Coinbase.

Let me be very clear:  I do not condone the conduct that the Commission finds Coinbase and its former Employee A to have engaged in.  My point in writing is not to defend Coinbase.  Rather, it is to voice my concern about the implications of today’s action for the trading public, the American taxpayer, and the Commission’s priorities.

Public Perceptions

Although data is difficult to come by, a conservative estimate is that there are, at a minimum, dozens of cash digital asset exchanges in operation today.  I am concerned that today’s exercise of the CFTC’s cash market enforcement authority against Coinbase misleadingly suggests that the CFTC is a full-time “cop on the beat” for all manipulation, false reporting, and fraud involving this multitude of exchanges.  It is easy to see how the public might get such an impression, especially in light of separate statements on the CFTC’s website that “the CFTC maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.”[7]  While such statements may be intended to be educational in nature, when read in conjunction with today’s enforcement action against Coinbase, they are likely to create unrealistic public expectations for an agency primarily tasked with regulating derivatives markets, not cash markets.

Allocation of Resources

Further, the allocation of the Commission’s resources is inherently zero-sum in nature.  Every tax dollar and every staff hour spent investigating or prosecuting conduct involving a cash digital asset exchange is a tax dollar or staff hour that is not spent investigating or prosecuting conduct in the derivatives markets that American taxpayers have every reason to expect will be at the center of the CFTC’s attention under the CEA.  Further, these resources are diverted away from such activities as examining the derivatives exchanges and clearinghouses that do fall within the CFTC’s direct oversight.  Expending resources on the universe of cash digital asset exchanges outside the CFTC’s regulatory oversight risks leaving unaddressed misconduct and compliance deficiencies in the derivatives markets and exchanges that are the CFTC’s primary responsibility—or, if addressed, not addressed as promptly.[8] 

Setting Priorities

Let me again be very clear:  I fully endorse a robust enforcement program at the CFTC.  Holding wrongdoers to account and deterring future misconduct is an essential part of the CFTC’s mission, and the Commission and its Division of Enforcement do it well.

For the reasons discussed above, however, it is incumbent upon us to carefully consider where cash digital asset exchanges fit when setting our enforcement priorities.  And although I expect the CFTC press release announcing today’s settlement will contain the customary patting-ourselves-on-the-back for the $6.5 million civil monetary penalty imposed on Coinbase, nevertheless, I believe that this case reflects poorly on the Commission’s enforcement priorities.

Most importantly, at the time of the conduct at issue, there were no futures contracts, option contracts, or swaps on Bitcoin or other digital assets traded on a DCM or SEF regulated by the CFTC.  The false reporting by Coinbase stopped by July 2017, yet the first listed Bitcoin derivatives products did not trade until a few months later.

Throughout its history, the Commission has rightly been judicious, and cautious, about exercising the CEA’s enforcement authority in cash markets for commodities for which there is no listed derivatives product traded subject to the CFTC’s regulatory authority under the CEA.  I see no reason why the Commission should alter that approach for cases involving cash digital asset transactions, simply because they are the latest high-profile headline.  The Commission should reserve its enforcement efforts with respect to cash digital asset exchanges like Coinbase for situations in which there is a listed derivatives product traded subject to the regulation of the CFTC with respect to the digital asset in question.

Beyond that, the charges against Coinbase being brought and settled by the Commission are based largely on conduct that is several years old.  Indeed, were it not for tolling agreements between Coinbase and the Division of Enforcement, most of the falsely reported transactions would fall outside the applicable statute of limitations.  The remaining false reporting by Coinbase came to an end in mid-2017, independent of any action by the Commission, and has not been repeated since then.[9]

Once again, this is not to minimize the misconduct of Coinbase (or its Employee A) in any way.  If Coinbase were a DCM or SEF required to register with the CFTC and the conduct involved derivatives products regulated by the CFTC, enforcement would unquestionably be appropriate.  But that is not the case.  And in light of the circumstances described above, in my view, prioritizing this case reflects a misallocation of the Commission’s resources.

Conclusion

The phenomenal growth of digital assets and the proliferation of exchanges for cash digital asset transactions, like many other past market innovations, present unique challenges for various regulators around the globe.  It is, therefore, incumbent upon the entire community of regulators, including the CFTC, to clearly convey the scope—and the limitations—of our role in ensuring such new innovations can be brought to the public with integrity.

It is thus the responsibility of the Commission to:

• Clearly and frequently communicate to the trading public that the CFTC does not regulate cash digital asset exchanges such as Coinbase;
• Clearly and frequently communicate to the trading public that the CFTC cannot be the “cop on the beat” with respect to all misconduct that may transpire involving cash digital asset exchanges;
• Focus the expenditure of its limited human and financial resources on the derivatives markets, which is the CFTC’s primary responsibility under the CEA; and
• Carefully consider the priority it attaches to unregulated cash digital asset exchanges in its enforcement efforts, especially when there is no listed derivatives product traded subject to CFTC regulation based on the relevant digital asset.

While I concur in the findings and terms of the settlement Order before us today, I question whether the Commission has fulfilled the foregoing responsibilities in this case.

I.  Introduction

The Commission’s final rules on Position Limits for Derivatives (Position Limits Final Rules) become effective today, March 15, 2021.[1]  In anticipation of this effective date, the New York Mercantile Exchange (NYMEX), a CFTC-registered designated contract market, “self-certified”[2] amended product terms and conditions to raise the speculative position limits for its West Texas Intermediate (WTI) crude oil futures, including in the spot month.[3]  NYMEX and other CME Group contract markets also requested and received Commission approval of new or amended rules relevant to their position limits.   These exchange regulatory filings implementing the Position Limits Final Rules miss an opportunity to remediate a well-known vulnerability in these contract markets’ Trading at Settlement (TAS) rules, namely the absence of any numerical limits on the speculative use of TAS contracts during the spot month of the contract.  Last year, the Commission failed to address this issue in its report on the April 20 collapse of WTI crude oil futures prices,[4] as well as in the Position Limits Final Rules.[5]  Today, the contract markets also do not address this issue. 

TAS contracts have been and can be used to manipulate the price of WTI, and were traded in extraordinary amounts during the historic collapse of WTI futures on April 20, 2020.  NYMEX must not continue to sidestep reforms to TAS, including exchange rules governing the netting of TAS positions against other open positions in the same commodity.  Absent appropriate exchange action, the Commission must address this structural issue in the WTI contract and impose appropriate limits on the netting of TAS by speculators.        

At a meeting of the CFTC’s Energy and Environmental Markets Advisory Committee held shortly after the April 20 WTI price collapse, I called upon the CFTC and the CME to analyze the event and “take whatever measures may be appropriate to ensure that trading in the WTI futures contract is orderly and supports convergence of the futures and physical markets.”[6]   Today I am renewing this call for action.  Fixing TAS is critical to the protection of consumers, end-users, and all market participants. 

II.  The Trading at Settlement Order Type

TAS is an order type that allows market participants to execute orders at any time during the trading day, and to have such orders filled at a differential to the settlement price.[7]  For market participants whose primary concern is exposure to the settlement price, TAS is an efficient means of execution with no obligation to actually be in the market during the close.  TAS also offers market participants the opportunity to net their TAS positions against other long or short positions in the same commodity contract.  Netting of long and short positions in a commodity contract is a normal practice under exchange and federal position limits rules, subject to limitations.  However, as discussed below, netting in the context of TAS presents unique challenges to market integrity.    

Positions established via TAS can be netted without limit against other long or short positions in the same commodity contract to remain under exchange and federal position limits.  This unlimited ability to net TAS positions with outright positions presents opportunities for malfeasance or price distortions because it allows a market participant to establish a large open position, the value of which will not be determined until the contract’s settlement price is determined.  The ability to net TAS and outright positions without limit permits a market participant to establish a large TAS position at the yet-to-be determined settlement price and then trade outright contracts aggressively as an offset to affect the TAS settlement price in the trader’s favor.[8] 

The Commission has brought two enforcement actions arising from the use of TAS to manipulate prices in the WTI crude oil futures contract.[9]  Academic research has also found that TAS may “create opportunities for profitable trade-based manipulation . . . .”[10]  The CME Group contract markets have recognized the potential for market abuse and distortion through the use of TAS, warning market participants that “any trading activity that is intended to disrupt orderly trading or to manipulate or attempt to manipulate a settlement price to benefit a TAS position will subject the member and/or the market participant to disciplinary action.”[11]  Further, “[t]o prevent these abuses . . . the CME/CBOT has limited TAS trading in agricultural commodities to only the most liquid commodities, and only in the most liquid contract months.”[12]   

Although the CFTC and exchanges may bring post-event enforcement or disciplinary actions for trading abuses, speculative position limits are a well-established prophylactic measure that complement other measures to deter or prevent price manipulations and distortions, particularly in the spot month.  “An ounce of prevention is worth a pound of cure.”[13]  The CFTC’s position limits regime both limits the market power or ability of traders to manipulate prices and also reduces the financial incentive to do so by limiting the size of gains that could result from a manipulative scheme.[14]   No satisfactory rationale has been presented why there should not be limits on the netting of TAS with outright WTI contracts for speculative positions during the spot month to prevent market abuse or price distortion.    

III.  The Collapse of WTI Crude Oil Futures on April 20, 2020

On April 20, 2020, the WTI crude oil futures contract fell by $55 dollars per barrel in a single trading session, reaching a closing price of negative $37 per barrel.  It was an unprecedented collapse, during which the price of the May WTI futures contract diverged from the price of crude oil in the physical market.  Divergence between futures and physical prices is the opposite of what happens in a properly functioning futures market, and renders the market unusable as a means of discovering prices or managing price risks for a physical commodity.

The WTI crude oil futures contract is a global benchmark for both energy and financial markets.  It is used by businesses to manage the risks arising from energy prices and by financial market participants to manage inflationary and other risks correlated to energy prices.  The WTI contract may take on even greater importance based on the growth of U.S. oil exports since 2015.[15]   The importance of WTI futures contracts to our energy markets, and of the NYMEX WTI crude oil futures contract in particular, requires urgent steps to ensure that the contract functions properly for all market participants—particularly in times of market stress.     

In November of last year, Commission staff published an “Interim Report on NYMEX WTI Crude Contract Trading on and around April 20, 2020” (Interim Report).[16]  As I stated previously, the Interim Report was incomplete, inadequate, and failed to determine the cause of the unprecedented plunge on April 20 of the price of the WTI futures contract and its resulting divergence from physical markets.[17]  Among other shortcomings, the Interim Report failed to analyze the role and price effect of the very large number of TAS contracts traded on that day.  For example, the Interim Report found that TAS was the single largest source of trading volume on April 20 (almost 21 percent), and that during the April 20 trading session, “the number of outright TAS contracts traded at the maximum limit was more than 70 times higher than in all of 2019.”[18]  However, the materiality of, and any impact from, this TAS trading on the collapse of WTI crude oil futures was left unaddressed and unanswered.      

The Interim Report also did not consider exchange practices around the netting of TAS positions against other long and short positions in the same commodity contract.  I raised this concern and others during the Commission’s open meeting to consider the Position Limits Final Rules in November 2020.  The then-chairman responded that the TAS issue was an “interpretive” or “technical” issue that could be resolved during the implementation of the position limits regime and “wouldn’t necessitate another rulemaking.”[19]  The exchanges’ implementation of the position limits regime is now proceeding without any resolution to this issue.  This is unfortunate to say the least. 

IV.  Conclusion

As the Position Limits Final Rules become effective, contract markets and the Commission should continue to work together to ensure a successful implementation.  I encourage all contract markets that permit TAS to impose limits on the netting of TAS by speculators, while continuing to permit these instruments to be properly used for legitimate hedging purposes.  Historically, the exchanges and the Commission have worked well together to develop and implement meaningful speculative position limits, but the Commission must be prepared to impose such limits unilaterally when an exchange does not act in a timely manner.  We must not ignore the lessons of prior market manipulations and failures and allow known vulnerabilities in the crude oil futures market to fester.

Thank you, Acting Chairman Behnam and Alicia, for holding, what I anticipate, will be a very informative meeting with robust debate around a number of important issues facing not only the markets regulated by the CFTC, but so many topics of interest to the public more generally.

I think we can all agree that the work done through this Committee has raised the bar in bringing together thought leaders and elevated the profile of the CFTC.  I welcome these discussions because they highlight the importance of the work we do and also present an opportunity to engage in a much-needed conversation about the unique focus of our mission.

In the 1974 Senate Agriculture Committee report accompanying the Commodity Futures Trading Commission Act, the Committee made a keen observation about the role of the newly independent CFTC:

“The proper regulatory function of an agency which regulates futures trading is to assure that the market is free of manipulation and other practices which prevent the market from being a true reflection of supply and demand.”[1]

Even as our markets have grown and Congress has at times expanded our jurisdiction, our role as a regulator has not fundamentally changed.  We are here to ensure that the markets we oversee—the derivatives markets—function properly for the purpose of price discovery and risk management.

I often worry that as the CFTC’s public profile expanded, our role may be increasingly misunderstood—a concern that is demonstrated by press accounts and social media entries suggesting that the CFTC is promoting such things as bitcoin or carbon emission controls.  The public should understand that the CFTC simply monitors developments in these areas because they are important factors in the proper functioning of the derivatives markets.  We do not regulate them, and we certainly aren’t in the business of promoting these things.  Put a different way, the demand for, and development of, the products we regulate is driven largely by the presence of risk—for example, some may utilize bitcoin futures to hedge inflationary risks, and others will seek to hedge risks stemming from broader public concerns, such as climate change, by utilizing the derivatives markets.

The demand for the products we regulate may be derived from private forces or even government mandates, all of which are beyond the CFTC’s remit and control.  The CFTC’s job under the Commodity Exchange Act is to continue our historical oversight to ensure we preserve the function of consequent risk mitigation tools—just as we do today in the regulation of thousands of physical commodity derivatives, several new cryptocurrency derivatives, and almost 150 climate-related derivatives contracts already subject to our regulatory supervision. 

With that said, thank you again for all of the hard work that went into preparing this meeting, and I look forward to today’s discussion and the opportunity to publicly highlight and clarify the scope of the CFTC’s regulatory interest in a vast array of topics.

[1] U.S. Senate Committee of Agriculture and Forestry, Committee report accompanying the Commodity Futures Trading Commission Act (S. Rept. 93-1131), 1974

Introduction

Good morning and welcome to the first virtual meeting of the CFTC’s Market Risk Advisory Committee (MRAC or Committee) of 2021.  I want to thank Commissioners Quintenz, Stump, and Berkovitz for joining today’s meeting.  I also want to thank and acknowledge the MRAC members, the subcommittee chairs, and the speakers who will participate in today’s panels.

I would like to extend my gratitude to Nadia Zakir, the MRAC Chair for her leadership, Alicia Lewis, the Committee’s Designated Federal Officer, for her commitment to making the MRAC and its subcommittees a success, and David Gillers, the Committee’s Alternate Designated Federal Officer, for his dedicated support of the Climate-Related Market Risk Subcommittee.  I would also like to welcome our new members, Angie Karna, Managing Director at Nomura Securities, and Chris Dickens, Managing Director, Chief Operating Officer, Global Markets, Europe, the Middle East and Africa (EMEA) at HSBC.

Before we begin, I would like to take a moment to comment on recent market dynamics.  With respect to precious metals, I want to reiterate that we are closely monitoring recent activity in markets and on social media.[1]  We are also closely following the tragic loss of life, limited clean water, and power outages in Texas.  We are monitoring irregularities in the Texas energy markets following last week’s freeze, specifically where there is a federal nexus with CFTC regulated markets and listed products.  We remain prepared to do whatever is necessary to protect the integrity of our markets.  And, I also want to extend our thoughts and deepest sympathies to those who have experienced the most tragic of losses.

Flexing Forward

The full Committee last convened in July.  I ended my opening remarks by acknowledging that 2020’s challenges and uncertainties did not present without attendant opportunities.[2]  Throughout these last months, I have been inspired by the MRAC and subcommittee members’ continuous engagement in their various work streams amid the ongoing pandemic, the trickle-down impacts of regulatory and administrative change, and perhaps the most unpredictable of all, shifting policies, practices, and procedures on the individual “home-slash-work” front.

Carving out the time and space to focus on issues like interest rate benchmark reform, clearinghouse risk management, market structure, and the overarching impact of climate change on our financial markets—issues our members have dedicated themselves to for the better part of my 3+ year tenure as the MRAC sponsor—may actually serve as a comfortable respite.  However, adding on the various external stresses and the need to comprehend and incorporate new variables has certainly augmented the experience of addressing market structural concerns as we flex forward into 2021.

Indeed, as we have already witnessed these last few months, with so many inputs, new market entrants, and means of intermediation—or the absence thereof, our markets as a system are fragile in the sense that they are programmatically susceptible to what seem like implausible reactions to increasingly diverse externalities.  With structural concerns across the financial markets making headlines, the Commission has remained ever vigilant in carrying out its mission and mandate, and will absolutely continue to do so under my leadership.

Regarding the most recent events in the precious metals and energy markets, I am personally, along with dedicated staff throughout the agency, communicating with fellow regulators, exchanges, and stakeholders to address any potential threats to the integrity of the derivatives markets, evaluating in real-time structural and transparency concerns.  We at the CFTC continue to employ heightened alertness in surveilling these markets for fraud and manipulation.

Moreover, it can never be repeated too often: derivatives markets play a critical role in the everyday lives of all Americans.  This is especially true when it comes to the production and supply of reliable and low-cost energy.  At a time of many challenges across the country resulting from the Covid-19 pandemic, last week’s extreme weather events in Texas and surrounding states created unimaginable burdens for millions of Americans.  Though perhaps not at the forefront of everyone’s thoughts when nearly half of Texas’ residents remain without drinkable water, and thousands remain without electricity, this Arctic blast highlighted weaknesses in our energy infrastructure that will likely be challenged and stressed more often in the future as a result of more frequent extreme weather events.  As we collectively act to restore normalcy and stability in our lives and to reignite economic and employment productivity and growth, I commit to taking any and all actions to ensure the CFTC contributes to this administration’s efforts by ensuring our markets remain transparent, fair and efficient, and fulfill their core responsibilities of price discovery and risk management to ensure reliable and low-cost energy for all Americans.

Today’s Agenda

Today’s meeting is an ambitious endeavor to hear from all four of the MRAC subcommittees and hold our first ever panel focused on diversity, equity, and inclusion in the derivatives industry and related markets.  First, Tom Wipf, the Chairman of the MRAC’s Interest Rate Benchmark Reform Subcommittee (Benchmark Subcommittee) and also Chairman of the Alternative Reference Rate Committee (ARRC) of the Board of Governors of the Federal Reserve System (Federal Reserve Board) will provide an update on the transition away from LIBOR (London Inter-Bank Offered Rate).  This subcommittee demonstrated exceptional effectiveness through 2020, perhaps most notably for leading the June 2^nd table-top exercise as a prelude to the PAI/discounting switch for LIBOR swaps by the clearing houses.[3]  The robust discussions provided the central counterparties (CCPs) valuable feedback on their proposed approaches, raised awareness among market participants and vendors, and from the CFTC’s perspective, helped highlight critical areas where regulatory relief would mitigate potential risks associated with the event.

Another milestone the market achieved was the successful launch of the International Swaps and Derivatives Association (ISDA) 2020 IBOR Fallbacks Protocol[4] to introduce robust fallback language for interest rate swaps.  The Protocol became effective on January 25, 2021.  The relevant CCPs simultaneously adopted the fallback language in their respective rule books for cleared swaps.[5]  CME is in the process of adopting appropriate fallback language into its rulebook for Eurodollar futures and options, which settle to the 3-month USD LIBOR.[6]  Based on CFTC staff analysis of information from ISDA and data from swap data repositories (SDRs), legal entities that account for close to 95% of gross notional outstanding—cleared + uncleared—in interest rate swaps (IRS) have adhered to the Protocol.  Digging deeper, 69% of notional outstanding of uncleared IRS now have the updated ISDA fallback language.

There is a long tail of end-users with a small footprint in the swaps markets.  Our expectation is that many of them will either close their swap positions or negotiate appropriate fallback language bilaterally with their counterparties.  But not having a plan just because the firm has 1-2 open swaps is not an option.  To the extent there are large, active firms who have not yet adhered to the Protocol, relevant regulators and counterparties will be apt to take notice.

Authorities have been highlighting the lack of robust fallback language in swaps contracts as a financial stability risk factor, for good reason. We want to make sure that robust contractual language is in place in case of a cessation of the reference rate.  There is much anticipation that cessation announcements by ICE Benchmark Administration and the UK Financial Conduct Authority will be made in the near future, and these will definitively put the end-game for USD LIBOR and other IBORs in sight.  For all practical purposes, the markets will most likely be shifting from USD LIBOR to SOFR (Secured Overnight Financing Rate) and other alternate reference rates in the coming months.

I am looking forward to hearing from the Benchmark Subcommitee on how the markets, especially the derivative markets, will shed the USD LIBOR habit.  Thanks to the close collaborative partnership with the ARRC and the MRAC subcommittee, CFTC has been at the forefront in terms of providing appropriate regulatory relief to facilitate this transition. We remain committed to supporting this effort.

Second, Bob Litterman, Chairman of the Climate-Related Market Risk Subcommittee (the Climate Subcommittee) will present on the Subcommittee’s September release of its report on Managing Climate Risk in the U.S. Financial System (the Climate Report).[7]  The Climate Report is receiving widespread recognition as the first-of-its-kind effort from a U.S. government entity to examine and argue for recognition that climate change poses serious emerging risks to the soundness and stability of the U.S. financial system, and that we need to move urgently and decisively to measure, understand, and address these risks.[8]

I gave the Climate Subcommittee a broad mandate: provide an analysis and recommendations regarding the existing and emerging risks and impacts of climate change on the financial markets.  The Climate Report has exceeded all expectations in tackling the challenges of how to safeguard the financial system in the face of the uniquely complex risks presented by climate change and how to facilitate the transition to a low-carbon, climate resilient economy.  Recognizing our unique circumstances in the U.S., which include a multifaceted system of financial regulation—and myriad regulators, the Climate Report will provide a resource to interested policymakers, regulators, and stakeholders as our nation begins the process of taking thoughtful and intentional steps toward building a climate-resilient financial system that prepares us for the decades to come.

In speaking about climate change and financial market risk, and what role policy makers should and could play, I have always highlighted the pioneering efforts of the Bank of England, the Network for Greening the Financial System (NGFS), and the Financial Stability Board, among others.[9]  Their work towards achieving sustainable finance and resilient markets, and publicizing climate-related financial market risks through dialogs among networks of their nations and members paved our way here today.  And consistent with these attributes, at the heart of the Climate Report, is the concept of partnerships.

Turning back to our agenda, the Market Structure Subcommittee, led by Lisa Shemie, Associate General Counsel and Chief Legal Officer for Cboe FX Markets and Cboe SEF, and Stephen Berger, Managing Director and Global Head of Government & Regulatory Policy at Citadel, will present its final recommendations regarding the swap dealer landscape and the “Made Available to Trade” or “MAT” process for further consideration by the MRAC.

The Commission has focused much of its time and resources over the last decade on efforts to effectuate the Congressional mandates aimed at addressing the risks the previously largely unregulated swaps market posed to the financial system.  Throughout my tenure at the CFTC, I have considered whether the swap dealer definition and associated registration threshold calculation encompass too many entities whose activities are not significant enough to warrant full regulation under Title VII of the Dodd-Frank Act, and alternatively, whether they result in an undue amount of dealing activity falling outside of the regulatory framework.  While I remained judicious in my words and stated my legal interpretations and policy positions clearly on the matters as they came before me,[10] I remain neutral when it comes to new data, changing circumstances, and market evolution that may warrant reconsideration.

Similarly, I have had many years to explore the design and functioning of the MAT process.  As I have previously stated, addressing the MAT process could increase liquidity on swap execution facilities (SEFs), and could do so in concert with increased pre-trade transparency, and without dismantling aspects of the SEF rules that work well.[11]  I commend the Market Structure Subcommittee for working on key issues it believes may be impeding liquidity and diversity among liquidity providers trading on SEFs and designated contract markets (DCMs) and look forward to its presentations and submissions.

The Central Counterparty Risk and Governance Subcommittee (CCP Risk) will present the fourth and last briefing by the subcommittees.  Much of the discussion last July focused on the impacts the COVID-19 pandemic was having on market activity, structure, and elements of central counterparty clearing.  CCPs continue to demonstrate resilience through episodes of high volumes and volatility, managing market and operational risks and mitigating credit and liquidity risks.  Most recently, CCPs proved to be a crucial element in the financial market infrastructure in controlling the frenzied trading in GameStop, AMC Entertainment Holdings, and other stocks.[12]

However, despite clear evidence demonstrating the critical importance of central clearing to our financial markets—a key component of the post-crisis derivatives reforms—there remain sufficient and credible concerns that extreme liquidity demands during periods of high market volatility, as we experienced nearly one year ago, create additional stress to financial markets, and potentially financial stability risks.  These important questions and issues are being debated and discussed across the globe, and I remain committed to using the MRAC, and the key stakeholders participating on the Committee and its subcommittees to help inform any requisite, data driven policy making, aimed to reducing such market risk.

Today we will receive reports from CCP Risk Subcommittee Co-Chairs Alicia Crighton, Global Co-Head of Futures and Head of OTC and Prime Clearing Businesses at Goldman Sachs and representing the Futures Industry Association, and Lee Betsill, Managing Director and Chief Risk Officer, CME Group.  The first report sets forth recommendations regarding CCP margin methodologies across six-key elements of a robust margin framework, many of which CCPs are following today. The second report makes recommendations for improving derivatives clearing organizations’ (DCOs) governance arrangements through further enhancements to the effectiveness of CFTC governance standards by ensuring that DCOs’ management and their boards of directors have a formalized process to solicit, consider, and address input from varied clearing members and end-users before making decisions that could materially affect the risk profile of the DCO’s activity.  I am looking forward to receiving these final reports and fully appreciate these tremendous efforts.  To that end, I wish to highlight that the CCP Risk subcommittee is continuing its work on additional work streams addressing stress testing and liquidity, transparency, capital and skin-in-the-game, and default management.  These are all tremendously difficult issues, core issues that strike at the heart of market risk.  And consequently, they require careful deliberation, discussion, and ultimately time.  It is my expectation that as the Subcommittee reaches conclusions and consensus on these issues, they will report back to the full MRAC in future meetings.

We will end today’s meeting with a panel on diversity in the derivatives markets.  It is time to start a more fulsome dialogue on how the failure to incorporate diversity and foster inclusion in our markets may negatively impact our economic future and the competitiveness in our domestic and global markets.  As relayed by Congressman David Scott (GA) in remarks at a May 2019 hearing on the state of CFTC, “[D]iversity is a strength.  It will make your agency stronger not only by the varied viewpoints and backgrounds that women, LGBTQ employees and employees of color bring, but also through the credibility the agency will gain by accurately reflecting the diversity of our great country.”[13]

In April 2019, I issued a letter to our own Office of Minority and Women Inclusion (OMWI) seeking additional information as to how the underrepresentation of minorities and women, especially in management positions, at the CFTC could be addressed and remedied.[14]  I have continued to actively engage internally with our OMWI and with various affinity groups within the Commission organized to foster and support employee engagement, inclusion, and teamwork.  I have also supported legislative fixes necessary to bring our OMWI in line with our fellow federal financial regulators and to establish an internship program for students attending one of the nineteen 1890s Land-Grant Institutions and others, providing students at historically black colleges and universities with the opportunity to serve a semester-long program within varying divisions of the CFTC.[15]  These issues and the necessary legislative fixes remain a top priority and I will continue to advocate for necessary change in my new role as Acting Chair.

Earlier this month, the Federal Reserve Bank of San Francisco published its Framework for Change outlining its commitment to taking action towards racial and ethnic equity internally and in the communities it serves.[16]  The Framework recognizes that small, uncoordinated actions will not be enough; changes require many tools and a comprehensive strategy to create a sustainable, self-reinforcing cycle.  The Framework for Change will be supported by four pillars subjected to concrete, and measurable actions: evidence, practice, dialogue, and advocacy.  This is just one movement, and one model, but it is a positive sign that strategies are being implemented at the top.

Today’s conversation will focus on best practices for creating a culture of diversity, equity and inclusion (DE&I) in the derivatives industry through its firms.  Our distinguished panel will share strategies and successes in building and working with diverse teams; share approaches to starting dialogues about race in the workplace; and discuss actionable steps needed to become more inclusive and maximize a team’s potential.

Conclusion

Advisory committees like MRAC are vehicles for change, challenge, and perhaps most importantly, debate and consensus.  Transitions in our markets should ideally be market driven.  However, there is a role for the regulator in ensuring that there is transparency, equity, and commitment that leads to results.  Moreover, it is the province of regulators to define and support markets and market participants through comprehensive legislative and regulatory efforts and to provide firm and decisive leadership—especially in times of economic uncertainty and stress.  We as a nation have an abundance of existing law and regulation and a corps of regulators, SROs, advocacy groups, think tanks, and thought leaders to ensure that we utilize our resources and capital to the fullest extent.  As we continue to progress through 2021, it is my intention to support the momentum of the MRAC and its subcommittees towards addressing, exploring, and resolving the issues we will consider today.

Thank you and I look forward to today’s discussion.

[1] See, e.g., Press Release Number 8360-21, CFTC, Statement of Acting Chairman Rostin Behnam on Trading in Silver Markets (Feb. 1, 2021), https://www.cftc.gov/PressRoom/PressReleases/8360-21.

[2] Rostin Behnam, Commissioner, CFTC, Opening Statement of Commissioner Rostin Behnam before the Market Risk Advisory Committee (July 21, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement072120.

[3] See Press Release Number 8171-20, CFTC, CFTC Market Risk Advisory Committee’s Interest Rate Benchmark Reform Subcommittee Holds Table Top Discussion and Revises Membership (June 2, 2020), https://www.cftc.gov/PressRoom/PressReleases/8171-20.

[4] The ISDA 2020 IBOR Fallbacks Protocol is available at http://assets.isda.org/media/3062e7b4/08268161-pdf/.

[5]See Letter from Christopher Bowen, Managing Director & Chief Regulatory Counsel, CME Group to Christopher Kirkpatrick, Office of the Secretariat, CFTC, Re: Regulation 40.5(a) Submission of Rules for Commission Review and Approval – Modifications to Interest Rate Swap Products to Implement ISDA IBOR Fallback Provisions, CME Submission No. 20-517 (Dec. 8, 2020), available at https://www.cftc.gov/sites/default/files/filings/orgrules/20/12/rule120920cmedco001.pdf.  See also Letter from Julian Oliver, Chief Compliance Officer, LCH Limited to Christopher Kirkpatrick, Office of the Secretariat, CFTC LCH Limited Self Certification: SwapClear Pre-cessation Triggers (Dec. 1, 2020), available at
https://www.lch.com/system/files/media_root/LCHLTD%20Self-Cert_pre%20cessation%20triggers%20final%20v1.pdf.

[6] See Letter from Letter from Christopher Bowen, Managing Director & Chief Regulatory Counsel, CME Group to Christopher Kirkpatrick, Office of the Secretariat, CFTC, Re: CFTC Regulation 40.5(a) Request for Approval. Amendments to the Three-Month Eurodollar Futures and Options on Three-Month Eurodollar Futures Contracts to Implement London Inter-bank Offered Rate (“LIBOR”) Fallback Provisions,

CME Submission No. 21-082 (Feb. 9, 2021), available at https://www.cftc.gov/sites/default/files/filings/ptc/21/02/ptc020921cmedcm001.pdf.

[7] Climate Related Market Risk Subcommittee (2020), Managing Climate Risk in the U.S. Financial System, Washington, D.C.: U.S. Commodity Futures Trading Commission, Market Risk Advisory Committee, available at https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf.

[8] See, e.g., Glenn D. Rudebusch, FRBSF Economic Letter 2021-03, Climate Change is a Source of Financial Risk, FRBSF Economic Letter 2021-03 (Feb. 8, 2021), https://www.frbsf.org/economic-research/publications/economic-letter/2021/february/climate-change-is-source-of-financial-risk/; Andrew Ackerman, Climate Change Poses Major Risk to Financial Stability, Study Finds, WSJ (Sept. 9, 2020), https://www.wsj.com/articles/climate-change-poses-major-risk-to-financial-stability-report-finds-11599668612.

[9] See, e.g., Rostin Behnam, Commissioner, CFTC, Remarks of CFTC Commissioner Rostin Behnam at the 56th Crop Insurance and Reinsurance Bureau Annual Meeting, Changing Weather Patterns: Risk Management for Certain Uncertain Change, Bonita Springs, Florida (Feb. 14, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam15.

[10] See, e.g., De Minimis Exception to the Swap Dealer Definition—Swaps Entered Into by Insured Depository Institutions in Connection with Loans to Customers, 84 FR 12450, 12468 (Apr. 1, 2019), https://www.cftc.gov/sites/default/files/2019-04/2019-06109a.pdf; De Minimis Exception to the Swap Dealer Definition, 83 FR 56666, 56691 (Nov. 13, 2018), https://www.cftc.gov/sites/default/files/2018-11/2018-24579a.pdf; De Minimis Exception to the Swap Dealer Definition, 83 FR 27444, 27481 (proposed June 12, 2018), https://www.cftc.gov/sites/default/files/2018-06/2018-12362a.pdf.

[11] See Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946, 62141 (proposed Nov. 30, 2018), https://www.cftc.gov/sites/default/files/2018-11/2018-24642a.pdf.

[12] See, e.g., Philip Stafford and Joe Rennison, GameStop curbs put clearing houses under the spotlight, FT (Jan. 30, 2021), https://www.ft.com/content/29b4cc1f-a970-4cd7-b452-90d982aacfb9; Telis Demos, Why Did Robinhood Ground GameStop? Look at Clearing, WSJ (Jan. 29, 2021), https://www.wsj.com/articles/how-clearing-demands-grounded-the-wallstreetbets-stocks-for-a-day-11611966092?mg=prod/com-wsj.

[13] Press Release, House Agriculture Committee, Chairman David Scott Opening Statement at Hearing on the State of the Commodity Futures Trading Commission (May 1, 2019), https://agriculture.house.gov/news/documentsingle.aspx?DocumentID=787.

[14] See Press Release Number 7920-19, CFTC, CFTC Commissioner Behnam Issues Letter Regarding Diversity & Inclusion at the CFTC (Apr. 30, 2019), https://www.cftc.gov/PressRoom/PressReleases/7920-19.

[15] See CFTC Reauthorization Act of 2019, H.R. 4895, 116^th Cong. § 104 (2019), https://www.congress.gov/116/bills/hr4895/BILLS-116hr4895rh.pdf; To require the Commodity Futures Trading Commission to establish an Office of Minority and Women Inclusion, and for other purposes, H.R. 4257, 116th Cong. (2019), https://www.govtrack.us/congress/bills/116/hr4257/text

[16] Federal Reserve Bank of San Francisco, Confronting Inequity: A Framework for Change, SF Fed Blog (Feb. 4, 2021), https://www.frbsf.org/our-district/about/sf-fed-blog/confronting-inequity-framework-for-change/.