Event Contracts, 48968-49000 [2024-12125]
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Federal Register / Vol. 89, No. 112 / Monday, June 10, 2024 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 40
RIN 3038–AF14
Event Contracts
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (Commission or
CFTC) is proposing amendments to its
rules concerning event contracts in
certain excluded commodities. The
Commission is proposing amendments
to further specify types of event
contracts that fall within the scope of
section 5c(c)(5)(C) of the Commodity
Exchange Act (CEA or the Act) and are
contrary to the public interest, such that
they may not be listed for trading or
accepted for clearing on or through a
CFTC-registered entity. Among other
things, the Commission proposes to
further specify the types of event
contracts that involve ‘‘gaming.’’ The
Commission also proposes to amend
certain language in its event contract
rules to further align with statutory text,
and to make certain technical changes to
its event contract rules in order to
enhance clarity and organization.
DATES: Comments must be received on
or before July 9, 2024.
ADDRESSES: You may submit comments,
identified by ‘‘Event Contracts’’ and RIN
number 3038–AF14, by any of the
following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this release and
follow the instructions on the Public
Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. Submissions
through the CFTC Comments Portal are
encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.cftc.gov. You should submit
only information that you wish to make
available publicly. If you wish the
Commission to consider information
that you believe is exempt from
disclosure under the Freedom of
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SUMMARY:
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Information Act (‘‘FOIA’’), a petition for
confidential treatment of the exempt
information may be submitted according
to the Commission’s procedures
established in 17 CFR 145.9.
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from https://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under FOIA.
FOR FURTHER INFORMATION CONTACT: Grey
Tanzi, Assistant Chief Counsel, (312)
596–0635, gtanzi@cftc.gov, Division of
Market Oversight, Commodity Futures
Trading Commission, 77 West Jackson
Blvd., Suite 800, Chicago, Illinois
60604, Andrew Stein, Assistant Chief
Counsel, (202) 418–6054, astein@
cftc.gov, Lauren Bennett, Assistant Chief
Counsel, (202) 418–5290, lbennett@
cftc.gov, or Nora Flood, Chief Counsel,
(202) 418–6059, nflood@cftc.gov, Three
Lafayette Centre, 1151 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Overview of Proposed Changes to
§ 40.11
B. Commission History With Event
Contracts
C. Statutory Authority and Prior
Commission Action
1. CEA Section 5c(c)(5)(C)
2. Commission Regulation § 40.11
3. Commission Determinations Pursuant to
§ 40.11
II. Proposed Amendments to § 40.11
A. Amendments to Further Align With
Statutory Language
1. Description of Excluded Commodities
(a) Proposed Amendments
(b) Illustrative Examples of Event Contracts
Not Within Scope of CEA Section
5c(c)(5)(C) and § 40.11
2. Contracts That ‘‘Involve’’ an Enumerated
Activity
B. The Enumerated Activities
1. Gaming
(a) Background
(b) Proposed Gaming Definition
(c) Illustrative Examples of Gaming
2. The Other Enumerated Activities
C. Public Interest Considerations
1. Overview of Proposed Amendments
2. Factors Considered by the Commission
in Evaluating Whether a Contract, or
Category of Contracts, Is Contrary to the
Public Interest
3. The Enumerated Activities
(a) Terrorism, Assassination, and War
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(b) Activity That Is Unlawful Under
Federal or State Law
(c) Gaming
D. The Commission’s Authority To Identify
Additional Similar Activities to the
Enumerated Activities
E. Technical Amendments
1. Technical Amendments to § 40.11(a)
2. Technical Amendments to § 40.11(c)
F. Implementation Timeline
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
1. Submission of Updated Rules to the
Commission
2. Request for Comment
C. Consideration of Costs and Benefits
1. Introduction
2. Proposed Amendments
(a) Definition of Gaming—Proposed
§ 40.11(b)
(1) Baseline and Proposed Amendments
(2) Benefits
(3) Costs
(b) Amendments to Further Align With
Statutory Language
3. Section 15(a) Factors
(a) Protection of Market Participants and
the Public
(b) Efficiency, Competitiveness and
Financial Integrity
(c) Price Discovery
(d) Sound Risk Management Practices
(e) Other Public Interest Considerations
D. Antitrust Considerations
I. Background
A. Overview of Proposed Changes to
§ 40.11
On July 27, 2011, the Commission
published in the Federal Register final
rules under part 40 of the Commission’s
regulations, including new § 40.11.1
Commission Regulation 40.11 was
promulgated pursuant to authority
granted under section 5c(c)(5)(C) of the
CEA,2 which was added by section
745(b) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(the ‘‘Dodd-Frank Act’’).3 CEA section
5c(c)(5)(C) authorizes the Commission
to prohibit certain ‘‘event contracts’’
from being listed or made available for
clearing or trading on or through a
1 Provisions Common to Registered Entities, 76 FR
44776 (July 27, 2011). Commission Regulation 40.11
was adopted as part of broader changes made to
part 40 of the Commission’s regulations to
implement section 745 of the Dodd-Frank Act,
which amended section 5c of the CEA. Section 5c(c)
of the CEA, in particular, sets forth requirements
relating to the listing for trading or making available
for clearing of derivative contracts, and the
implementation of rules and rule amendments, by
‘‘registered entities.’’ CEA section 1a(40), 7 U.S.C.
1a(40), defines the term ‘‘registered entity’’ to
include any board of trade designated by the
Commission as a contract market (‘‘DCM’’), and any
derivatives clearing organization (‘‘DCO’’), swap
execution facility (‘‘SEF’’), or swap data repository
(‘‘SDR’’) registered by the Commission.
2 7 U.S.C. 7a–2(c)(5)(C).
3 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(July 21, 2010).
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registered entity,4 if such contracts
involve an activity that is enumerated in
CEA section 5c(c)(5)(C) or ‘‘other similar
activity’’ as determined by the
Commission by rule or regulation, and
the Commission determines that such
contracts are contrary to the public
interest.
While the term ‘‘event contract’’ is not
defined in the CEA or the CFTC’s
regulations, event contracts are
generally understood to be a type of
derivative contract, typically with a
binary payoff structure, based on the
outcome of an underlying occurrence or
event.5 A registered entity that seeks to
list event contracts for trading, or make
event contracts available for clearing,
must comply with the substantive and
procedural requirements that apply,
more generally, to the listing for trading,
or making available for clearing, of
derivative contracts. For example,
CFTC-registered exchanges—namely,
DCMs and SEFs—are subject to
statutory requirements to only list or
permit trading in derivative contracts
that are not readily susceptible to
manipulation; 6 to enforce compliance
with contract terms and conditions; 7
and to monitor trading on the exchange
in order to prevent manipulation, price
distortion, and disruption of the
settlement process through market
surveillance, compliance, and
enforcement practices and procedures.8
In addition to the more generally
applicable requirements to which
registered entities are subject when
listing derivative contracts for trading or
making such contracts available for
clearing, CEA section 5c(c)(5)(C) grants
the Commission the authority to
prohibit registered entities from listing
for trading or making available for
clearing particular types of event
contracts, if the Commission determines
that such contracts are contrary to the
public interest.
Since 2021, the Commission has
observed a significant increase in the
number of event contracts listed for
trading by CFTC-registered exchanges,
4 See note 2, supra. CEA section 1a(40), 7 U.S.C.
1a(40), defines the term ‘‘registered entity’’ to
include any DCM, and any DCO, SEF, or SDR
registered by the Commission.
5 Most event contracts that have traded or are
currently trading on CFTC-registered exchanges are
structured as binary options, which are generally
understood as a type of option whose payout is
either a fixed amount or zero.
6 See Core Principle 3 for DCMs, CEA section
5(d)(3), 7 U.S.C. 7(d)(3), and Core Principle 3 for
SEFs, CEA section 5h(f)(3), 7 U.S.C. 7b–3(f)(3).
7 See Core Principle 2 for DCMs, CEA section
5(d)(2), 7 U.S.C. 7(d)(2), and Core Principle 2 for
SEFs, CEA section 5h(f)(2), 7 U.S.C. 7b–3(f)(2).
8 See Core Principle 4 for DCMs, CEA section
5(d)(4), 7 U.S.C. 7(d)(4), and Core Principle 4 for
SEFs, CEA section 5h(f)(4), 7 U.S.C. 7b–3(f)(4).
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as well as in the diversity of occurrences
and events underlying such contracts.9
The Commission has also observed
recent applications for exchange
registration, and expressions of interest
regarding exchange registration, from
entities that have indicated that they are
interested primarily, or exclusively, in
listing event contracts for trading.10
In light of these developments, the
Commission proposes to amend § 40.11
to further specify types of event
contracts that fall within the scope of
CEA section 5c(c)(5)(C) and are contrary
to the public interest. The Commission
believes that these amendments would
support efforts by registered entities to
ensure compliance with the CEA by
more clearly identifying the types of
event contracts that may not be listed
for trading or accepted for clearing. The
Commission believes that these
amendments would, correspondingly,
assist registered entities, as well as
applicants for registration, in making
informed business decisions with
respect to product design, which would
help to support responsible market
innovation.
The Commission believes that
amending § 40.11 to further specify
types of event contracts that may not be
listed for trading or accepted for
clearing would also benefit the
Commission and its staff, by reducing
the need to undertake individualized,
resource-intensive contract reviews. As
further discussed below, under
§ 40.11(c), the Commission may initiate
a 90-day review to evaluate whether a
particular event contract is of a type that
may not be listed for trading or accepted
9 From 2006–2020, DCMs listed for trading an
average of approximately five event contracts per
year. In 2021, this number increased to 131, and the
number of newly-listed event contracts per year has
remained at a similar level in subsequent years.
Since 2021, DCMs also have listed for trading a
substantial number of event contracts not associated
with traditional commodities, financial indices, or
economic indicators. These have included event
contracts based on the occurrence or nonoccurrence of international events, natural disasters
in specific U.S. cities, heating/cooling degree days
and cumulative average temperature in specific
cities, the timing of video game and album releases,
Oscar award winners, COVID–19 case levels and
restrictions, the outcome of cases pending before
the Supreme Court of the United States, the passage
of specific laws by the U.S. Congress, U.S.
Presidential approval ratings, confirmation of U.S.
executive branch officials, National Football League
(‘‘NFL’’) television ratings, the discovery of
exoplanets, and the occurrence of a National
Aeronautics and Space Administration moon
landing before a certain date.
10 As of February 12, 2024, Commission staff were
reviewing several pending applications for contract
market designation from entities with a stated
interest in offering event contracts for trading.
Commission staff have received multiple additional
inquiries from other entities indicating an interest
in applying for exchange registration in order to
offer event contracts for trading.
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for clearing. Further specifying, in
§ 40.11, the types of event contracts that
may not be listed for trading or accepted
for clearing should provide registered
entities with a better understanding
regarding appropriate event contract
parameters and should, in turn, reduce
the likelihood that contract filings that
raise potential public interest concerns
are submitted to the Commission. From
a resource allocation perspective, this
will be of significant benefit to the
Commission and its staff, since, in the
Commission’s experience, a single
§ 40.11(c) review is resource-intensive
and consumes hundreds of hours of staff
time.
Finally, the Commission proposes to
make certain amendments to § 40.11 to
further align the language of the
regulation with the statutory text of CEA
section 5c(c)(5)(C), and also proposes to
make certain technical amendments to
the regulation in order to enhance
clarity and organization.
B. Commission History With Event
Contracts
CFTC-registered exchanges have
listed a variety of event contracts for
trading for several decades.11 On
February 18, 2004, the Commission
designated the first contract market
dedicated to trading event contracts.12
In 2008, the Commission published a
concept release (the ‘‘2008 Concept
Release’’), requesting input from
interested persons, and those with
expertise, on the appropriate regulatory
treatment of event contract markets.13
The 2008 Concept Release was
prompted by the Commission’s receipt
of a substantial number of requests for
guidance related to application of the
CEA to event contract markets.14 The
Commission sought both general input
and responses to 24 enumerated
questions. The Commission received 31
comments in response to the 2008
11 Since 1992, CFTC-registered exchanges have
listed for trading event contracts involving interests
such as regional insured property losses, the count
of bankruptcies, temperature volatilities, corporate
mergers, and corporate credit events. See Concept
Release on Appropriate Regulatory Treatment of
Event Contracts, 73 FR 25669, 25671 (May 7, 2008).
12 See CFTC Order of Designation for
HedgeStreet, Inc. (‘‘HedgeStreet’’) (Feb. 20, 2004),
available at https://www.cftc.gov/sites/default/files/
opa/press04/opa4894-04.htm (last visited Mar. 7,
2024). HedgeStreet listed daily and weekly event
contracts on various corporate mergers, weather
events, and economic indicators. Effective June 21,
2009, HedgeStreet changed its name to North
American Derivatives Exchange, Inc., or ‘‘Nadex.’’
Nadex continues to list event contracts on foreign
exchange, equity indices, commodity prices, and
digital assets.
13 73 FR 25669.
14 Id.
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Concept Release,15 but ultimately did
not take further action at that time. In
2010, Congress addressed the
Commission’s regulatory authority with
respect to certain event contracts in
section 745(b) of the Dodd-Frank Act,
which added section 5c(c)(5)(C) to the
CEA. Thereafter, in 2011, the
Commission adopted § 40.11, which
implements CEA section 5c(c)(5)(C).
As discussed above, in recent years,
the Commission has observed
applications for exchange registration,
and expressions of interest regarding
exchange registration, from entities that
appear to be interested primarily, or
exclusively, in listing event contracts for
trading.16 The Commission also has
observed a significant increase in the
number of event contracts listed for
trading by registered entities, and in the
diversity of occurrences and events
underlying such contracts.
C. Statutory Authority and Prior
Commission Action
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1. CEA Section 5c(c)(5)(C)
As discussed above, a registered
entity that seeks to list event contracts
for trading, or accept such contracts for
clearing, must comply with the
substantive and procedural
requirements that apply, more generally,
to the listing for trading or acceptance
for clearing of derivative contracts.17
15 See Comment File for Federal Register Release
73 FR 25669, CFTC, https://www.cftc.gov/
LawRegulation/PublicComments/08-004.html (last
visited Mar. 7, 2024).
16 The Commission’s Division of Market
Oversight (‘‘DMO’’) also has issued staff no-action
positions to two academic institutions which
provide that, subject to specified terms, DMO will
not recommend to the Commission enforcement
action against the academic institutions for
operating, without registration as a DCM, SEF, or
foreign board of trade (‘‘FBOT’’), small-scale, notfor-profit markets that offer trading in political and
economic indicator event contracts for academic
purposes. See CFTC Staff Letter No. 93–66 issued
to the University of Iowa (June 18, 1993), available
at https://www.cftc.gov/sites/default/files/idc/
groups/public/@lrlettergeneral/documents/letter/
93-66.pdf. This no-action position superseded the
operative terms of a more limited no-action position
issued in 1992. See also CFTC Staff Letter No. 14–
130 issued to Victoria University of Wellington,
New Zealand (Oct. 29, 2014), available at https://
www.cftc.gov/csl/14-130/download. The terms of
these staff no-action positions contemplate that
each event market will be operated by the relevant
academic institution for academic purposes and
without compensation. The terms of the no-action
positions also contemplate limitations on, among
other things, the number of market participants and
the number of contracts that each market
participant may hold. In issuing each of the noaction positions, DMO explicitly noted that it was
not rendering an opinion on the legality of the
academic institutions’ activities under state law.
17 Registered entities seeking to list event
contracts for trading, or accept such contracts for
clearing, must abide by the CEA and Commission
regulations, including applicable statutory core
principles. See, e.g., CEA section 5(d), 7 U.S.C. 7(d)
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Notably, for example, a DCM or SEF is
required to ensure that the derivative
contracts that it lists or permits for
trading are not readily susceptible to
manipulation; to ensure enforcement of
the terms and conditions of those
contracts; and to monitor trading in
those contracts in order to prevent
manipulation, price distortion, and
disruption of the settlement process.18
CEA section 5c(c)(5)(C) further grants
the Commission the authority to
prohibit registered entities from listing
or making available for clearing or
trading certain event contracts that
involve particular activities, if the
Commission determines that such
contracts are contrary to the public
interest.
Section 5c(c)(5)(C) was added to the
CEA by section 745(b) of the DoddFrank Act, which amended, more
generally, the contract and rule
submission requirements set forth in
CEA section 5c(c). In a short colloquy
with the late Senator Diane Feinstein on
the Senate floor regarding the proposed
Dodd-Frank Act provision that
ultimately was enacted as CEA section
5c(c)(5)(C) (the ‘‘2010 Colloquy’’),
Senator Blanche Lincoln, then-Chair of
the Senate Committee on Agriculture,
Nutrition, and Forestry—who is
identified in the 2010 Colloquy as one
of the authors of CEA section
5c(c)(5)(C)—stated that the provision
was intended to assure that the
Commission ‘‘has the power to prevent
the creation of futures and swaps
markets that would allow citizens to
profit from devastating events and also
prevent gambling through futures
markets.’’ 19
(Core Principles for DCMs); CEA section 5b(c)(2), 7
U.S.C. 7a–1(c)(2) (Core Principles for DCOs); CEA
section 5h(f), 7 U.S.C. 7b–3(f) (Core Principles for
SEFs). In addition, registered entities seeking to list
event contracts for trading, or accept such contracts
for clearing, must comply with the submission
requirements set forth in CEA section 5c(c), 7 U.S.C.
7a–2(c)(1), and part 40 of the Commission’s
regulations.
18 See Core Principle 3 for DCMs, CEA section
5(d)(3), 7 U.S.C. 7(d)(3), and Core Principle 3 for
SEFs, CEA section 5h(f)(3), 7 U.S.C. 7b–3(f)(3); Core
Principle 2 for DCMs, CEA section 5(d)(2), 7 U.S.C.
7(d)(2), and Core Principle 2 for SEFs, CEA section
5h(f)(2), 7 U.S.C. 7–b3(f)(2); and Core Principle 4 for
DCMs, CEA section 5(d)(4), 7 U.S.C. 7(d)(4), and
Core Principle 4 for SEFs, CEA section 5h(f)(4), 7
U.S.C. 7b–3(f)(4). For the avoidance of doubt,
regardless of whether or not a particular event
contract falls within the scope of CEA section
5c(c)(5)(C) and § 40.11, the DCM or SEF seeking to
list the event contract for trading has a statutory
obligation to ensure that the event contract is not
readily susceptible to manipulation.
19 156 Cong. Rec. S5906–07 (daily ed. July 15,
2010) (statements of Sen. Diane Feinstein and Sen.
Blanche Lincoln), available at https://
www.congress.gov/111/crec/2010/07/15/CREC2010-07-15-senate.pdf (last visited Mar. 7, 2024).
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CEA section 5c(c)(5)(C)(i) provides
that in connection with the listing of
agreements, contracts, transactions, or
swaps in excluded commodities 20 that
are based upon the occurrence, extent of
an occurrence, or contingency (other
than a change in the price, rate, value,
or levels of a commodity described in
section la(2)(i) of this title),21 by a
designated contract market or swap
execution facility, the Commission may
determine that such agreements,
contracts, or transactions are contrary to
the public interest if the agreements,
contracts, or transactions involve—(I)
activity that is unlawful under any
Federal or State law; (II) terrorism; (III)
assassination; (IV) war; (V) gaming; or
(VI) other similar activity determined by
the Commission, by rule or regulation,
to be contrary to the public interest.22
CEA section 5c(c)(5)(C)(ii) provides
that no agreement, contract or
transaction 23 determined by the
Commission to be contrary to the public
interest under section 5c(c)(5)(C)(i) may
be listed or made available for clearing
or trading on or through a registered
entity.24
The Commission interprets CEA
section 5c(c)(5)(C) to contemplate that
the Commission engage in a two-step
20 The term ‘‘excluded commodity’’ is defined in
CEA section 1a(19), 7 U.S.C. 1a(19), as: (i) an
interest rate, exchange rate, currency, security,
security index, credit risk or measure, debt or
equity instrument, index or measure of inflation, or
other macroeconomic index or measure; (ii) any
other rate, differential, index, or measure of
economic or commercial risk, return, or value that
is—(I) not based in substantial part on the value of
a narrow group of commodities not described in
clause (i); or (II) based solely on one or more
commodities that have no cash market; (iii) any
economic or commercial index based on prices,
rates, values, or levels that are not within the
control of any party to the relevant contract,
agreement, or transaction; or (iv) an occurrence,
extent of an occurrence, or contingency (other than
a change in the price, rate, value, or level of a
commodity not described in clause (i)) that is—(I)
beyond the control of the parties to the relevant
contract, agreement, or transaction; and (II)
associated with a financial, commercial, or
economic consequence.
21 There is no ‘‘section 1a(2)(i)’’ in the CEA. As
discussed in section II.A.1.a, infra, the Commission
believes that the reference in CEA section
5c(c)(5)(C)(i) to ‘‘section 1a(2)(i)’’ is a typographical
or drafting error.
22 CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a–
2(c)(5)(C)(i).
23 CEA section 5c(c)(5)(C)(i) applies in connection
with the listing of agreements, contracts,
transactions, or swaps by a DCM or SEF. 7 U.S.C.
7a–2(c)(5)(C)(i). The Commission notes that similar
phrases both later in CEA section 5c(c)(5)(C)(i) and
in CEA section 5c(c)(5)(C)(ii) refer only to
‘‘agreements, contracts, or transactions . . . .’’ The
Commission interprets either phrase to encompass
derivative contracts listed for trading on or through
DCMs or SEFs, and for simplicity refers to
‘‘agreements, contracts, transactions or swaps’’ as
‘‘contracts’’ herein.
24 CEA section 5c(c)(5)(C)(ii); 7 U.S.C. 7a–
2(c)(5)(C)(ii).
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inquiry. First, the Commission must
assess whether a contract in a specified
excluded commodity ‘‘involve[s]’’ an
activity enumerated in CEA section
5c(c)(5)(C)(i)(I)–(V) (each, an
‘‘Enumerated Activity’’) or other similar
activity as determined by the
Commission by rule or regulation
(‘‘prescribed similar activity’’). If the
Commission determines that the
contract involves such activity, the
Commission must assess whether the
contract is contrary to the public
interest. The Commission interprets
CEA section 5c(c)(5)(C) to provide that
the contract may not be listed or made
available for clearing or trading by a
registered entity if the Commission
finds both that (i) the contract involves
an Enumerated Activity or prescribed
similar activity, and (ii) the contract is
contrary to the public interest.
2. Commission Regulation 40.11
In 2011, the Commission adopted
§ 40.11 to implement CEA section
5c(c)(5)(C) as part of broader changes to
the Commission’s part 40 regulations.25
Commission Regulation 40.11(a)(1)
provides that a registered entity shall
not list for trading or accept for clearing
on or through the registered entity an
agreement, contract, transaction, or
swap based upon an excluded
commodity, as defined in Section
1a(19)(iv) of the Act, that involves,
relates to, or references terrorism,
assassination, war, gaming, or an
activity that is unlawful under any State
or Federal law.26 Although they are not
listed in precisely the same order, the
activities enumerated in § 40.11(a)(1) are
the same as the activities enumerated in
CEA sections 5c(c)(5)(C)(i)(I)–(V) and
are similarly referred to herein as the
Enumerated Activities.
Consistent with CEA section
5c(c)(5)(C)(i)(VI), § 40.11(a)(2) provides
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25 Part
40 of the Commission’s regulations, more
generally, implements the contract and rule
submission requirements for registered entities set
forth in CEA section 5c(c). For example, § 40.2 sets
forth the general process by which a DCM or SEF
may list a new derivative contract for trading by
providing the Commission with a written
certification—a ‘‘self-certification’’—that the
contract complies with the CEA, including the
CFTC’s regulations thereunder. See also CEA
section 5c(c)(1), 7 U.S.C. 7a–2(c)(1). The
Commission must receive the DCM’s or SEF’s selfcertified submission at least one business day
before the contract’s listing. 17 CFR 40.2(a)(2).
Commission Regulation 40.3 sets forth the general
process by which a DCM or SEF may elect
voluntarily to seek prior Commission approval of a
derivative contract that the DCM or SEF seeks to list
for trading. See also CEA sections 5c(c)(4)–(5), 7
U.S.C. 7a–2(c)(4)–(5). Amendments to an existing
derivative contract also must be submitted to the
Commission either by way of self-certification or for
prior Commission approval. 17 CFR 40.5, 40.6.
26 17 CFR 40.11(a)(1).
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that a registered entity shall not list for
trading or accept for clearing on or
through the registered entity an
agreement, contract, transaction, or
swap based upon an excluded
commodity, as defined in Section
1a(19)(iv) of the Act, that involves,
relates to, or references an activity that
is similar to an activity enumerated in
§ 40.11(a)(1), and that the Commission
determines, by rule or regulation, to be
contrary to the public interest.27 To
date, the Commission has not made any
such determinations.
Pursuant to § 40.11(c), when a
contract submitted to the Commission
by a registered entity, pursuant to § 40.2
or § 40.3, may involve, relate to, or
reference an activity enumerated in
§§ 40.11(a)(1) or (2), the Commission is
authorized to commence a 90-day
review of the contract.28 The
Commission must issue an order
approving or disapproving the contract
by the end of the 90-day review period
or, if applicable, at the conclusion of
any extended period agreed to or
requested by the registered entity.29
Commission Regulation 40.11(c)(1)
requires the Commission to request that
the registered entity suspend the listing
or trading of the contract during the 90day review period.30 The Commission
also must post on its website a
notification of the intent to carry out a
90-day review.31
The Commission did not, in § 40.11 or
in the 2011 adopting release for the rule,
define any of the Enumerated Activities.
The Commission acknowledged, in the
adopting release, a comment on the rule
proposal that stated that the term
‘‘gaming,’’ in particular, should be
further defined in order to enhance
clarity regarding the scope of the
prohibition set forth in § 40.11(a)(1).32
The Commission expressed agreement
27 17 CFR 40.11(a)(2). CEA section 5c(c)(5)(C)
applies with respect to agreements, contracts,
transactions, or swaps in excluded commodities
that are based upon the occurrence, extent of an
occurrence, or contingency (other than a change in
the price, rate, value, or levels of a commodity
described in section 1a(2)(i)). There is no ‘‘section
1a(2)(i)’’ in the CEA, and the Commission believes
the reference to this provision in CEA section
5c(c)(5)(C) is a typographical or drafting error. In
adopting §§ 40.11(a)(1) and (2), as well as § 40.11(c),
the Commission interpreted CEA section 5c(c)(5)(C)
to apply with respect to the excluded commodities
defined in CEA section 1a(19)(iv). See discussion in
section II.A.1.a, infra.
28 17 CFR 40.11(c). Commission Regulation
40.11(c) states that the 90-day review period shall
commence from the date the Commission notifies
the registered entity of a potential violation of
§ 40.11(a).
29 17 CFR 40.11(c)(2).
30 17 CFR 40.11(c)(1).
31 Id.
32 Provisions Common to Registered Entities, 76
FR 44776, 44785 (July 27, 2011).
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with the interest to further define
‘‘gaming’’ for purposes of the
prohibition,33 and stated that the
Commission might issue a future event
contracts rulemaking that, among other
things, addressed the appropriate
treatment of event contracts involving
gaming.34 The Commission stated that,
in the meantime, it had determined to
adopt the prohibition set forth in
§ 40.11(a)(1) with respect to the
Enumerated Activities, ‘‘and to consider
individual product submissions on a
case-by-case basis under § 40.2 or
§ 40.3.’’ 35
3. Commission Determinations Pursuant
to § 40.11
To date, the Commission has issued
two final determinations pursuant to
§ 40.11. On January 3, 2012, the
Commission commenced a 90-day
review, under § 40.11(c), of certain
event contracts on election outcomes
that had been self-certified by Nadex.36
On April 2, 2012, the Commission
issued an order (the ‘‘Nadex Order’’)
prohibiting the contracts from being
listed or made available for clearing or
trading, finding that the contracts
involved the Enumerated Activity of
33 Id.
34 Id.
35 Id. The Commission noted that a registered
entity could receive a definitive resolution of any
questions concerning the applicability of
§ 40.11(a)(1) by submitting a particular contract for
Commission approval under § 40.3: if the submitted
contract was approved by the Commission, the
registered entity would have assurance that the
Commission had reviewed and did not object to the
submission based on the prohibitions in § 40.11(a).
Id. at 44785–86. The Commission noted that,
alternatively, a registered entity could self-certify a
contract under § 40.2 and, if the Commission
determined during its review of the contract ‘‘that
the submission may violate the prohibitions in
§ 40.11(a)(1)–(2), the Commission may request that
the registered entity suspend the trading or clearing
of the contract pending the completion of a 90-day
. . . review.’’ Id. at 44786. The Commission stated
that, upon completion of that review, the
Commission would be required to issue an order
finding either that the contract violated, or did not
violate, the prohibitions in § 40.11(a)(1)–(2). Id.
36 See https://www.cftc.gov/PressRoom/
PressReleases/6163-12. Nadex self-certified cashsettled, binary contracts on whether there would be
a Democratic majority in the U.S. House of
Representatives (‘‘House’’); whether there would be
a Republican majority in the House; whether there
would be a Democratic majority in the U.S. Senate
(‘‘Senate’’); and whether there would be a
Republican majority in the Senate. The contracts
settled based on whether the named party held the
majority of seats in the identified chamber of
Congress on the expiration date. Nadex also selfcertified ten cash-settled, binary contracts on the
upcoming Presidential election. Each contract was
based on one of the leading candidates for President
and paid according to whether that candidate won
the Presidency.
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gaming and were contrary to the public
interest.37
On June 23, 2023, the Commission
commenced a 90-day review, under
§ 40.11(c), of certain event contracts
self-certified by KalshiEX LLC
(‘‘Kalshi’’) that were based on which
political party controlled each chamber
of Congress.38 On September 22, 2023,
the Commission issued an order (the
‘‘Kalshi Order’’) prohibiting the
contracts from being listed or made
available for clearing or trading, finding
that the contracts involved the
Enumerated Activities of gaming and
activity that is unlawful under State
law, and that the contracts were
contrary to the public interest.39 The
Kalshi Order is currently under judicial
review in the U.S. District Court for the
District of Columbia.40
The Commission has exercised its
authority to commence a 90-day review
of event contracts, pursuant to
§ 40.11(c), on two additional
occasions.41 On December 23, 2020, the
Commission commenced a 90-day
review of certain event contracts that
had been self-certified by Eris Exchange,
LLC (‘‘ErisX’’), that were based on the
moneyline, the point spread, and the
total points for individual NFL games.42
On August 26, 2022, the Commission
commenced a 90-day review of certain
Congressional control event contracts
submitted for Commission approval by
37 See CFTC Release No. 6224–12 CFTC Issues
Order Prohibiting North American Derivatives
Exchange’s Political Event Derivatives Contracts
(Apr. 2, 2012), available at https://www.cftc.gov/
PressRoom/PressReleases/6224-12.
38 See CFTC Release No. 8728–23, CFTC
Announces Review of Kalshi Congressional Control
Contracts and Public Comment Period (June 23,
2023), available at https://www.cftc.gov/
PressRoom/PressReleases/8728-23. The Kalshi
contracts were cash-settled, binary contracts that
settled based on the party affiliation of the leader
of the identified chamber of Congress on the
expiration date. The Kalshi contracts differed from
the Nadex contracts that the Commission had
previously disapproved, in that the Nadex contracts
settled based on the number of seats in the House
or Senate held by a given political party, while the
Kalshi contracts settled based on the party
affiliation of the leader of the House (the Speaker)
or the leader of the Senate (the President Pro
Tempore).
39 See CFTC Release No. 8780–23, CFTC
Disapproves KalshiEX LLC’s Congressional Control
Contracts (Sept. 22, 2023), available at https://
www.cftc.gov/PressRoom/PressReleases/8780-23.
40 KalshiEx LLC v. Commodity Futures Trading
Commission, 1:23–cv–03257 (filed Nov. 1, 2023)
(D.D.C.).
41 In so doing, the Commission found, pursuant
to § 40.11(c), that the subject contracts ‘‘may’’
involve an Enumerated Activity. 17 CFR 40.11(c).
42 See CFTC Release No. 8345–20, CFTC
Announces Review of RSBIX NFL Futures Contracts
Proposed by Eris Exchange, LLC (Dec. 23, 2020),
available at https://www.cftc.gov/PressRoom/
PressReleases/8345-20.
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Kalshi.43 In both of these instances, the
submitting parties withdrew their
respective contracts from consideration
before the Commission issued a final
determination pursuant to § 40.11.
A. Amendments to Further Align With
Statutory Language
II. Proposed Amendments to § 40.11
CEA section 5c(c)(5)(C) applies with
respect to agreements, contracts,
transactions, or swaps in excluded
commodities that are based upon the
occurrence, extent of an occurrence, or
contingency (other than a change in the
price, rate, value, or levels of a
commodity described in section
1a(2)(i)).44 There is no ‘‘section 1a(2)(i)’’
in the CEA, and the Commission
believes the reference to this provision
in CEA section 5c(c)(5)(C) is a
typographical or drafting error.45 In
adopting § 40.11, the Commission
interpreted the ‘‘excluded commodities’’
falling within the scope of CEA section
5c(c)(5)(C) to be those set forth in CEA
section 1a(19)(iv), and accordingly
referenced CEA section 1a(19)(iv) in
§§ 40.11(a)(1)–(2) and § 40.11(c).46
With the aim of adhering as closely as
possible to the statutory text—while, by
necessity, having to account for the
errant reference in CEA section
5c(c)(5)(C) to ‘‘section 1a(2)(i),’’ which is
not a provision in the statute—the
Commission is proposing to amend
§§ 40.11(a)(1)–(2) and § 40.11(c) to refer
to agreements, contracts, transactions, or
swaps in excluded commodities based
on the occurrence, extent of an
occurrence, or contingency (other than a
change in the price, rate, value, or levels
of a commodity described in section
1a(19)(i) of the Act). These proposed
amendments would achieve two
purposes. First, the proposed
amendments would remove from the
relevant rules the current reference to
CEA section 1a(19)(iv) and would more
precisely track the text of CEA section
5c(c)(5)(C). Second, the proposed
amendments would clarify the
Commission’s interpretation that the
In light of (i) the significant increase
that the Commission has observed in the
number and diversity of event contracts
listed for trading by Commissionregistered exchanges, and (ii) the
increased interest that the Commission
has observed, among applicants and
prospective applicants for exchange
registration, in operating exchanges that
would primarily or exclusively offer
event contracts for trading, the
Commission is proposing to amend
§ 40.11 to, among other things, further
specify types of event contracts that fall
within the scope of CEA section
5c(c)(5)(C) and are contrary to the public
interest, such that they may not be listed
for trading or accepted for clearing on or
through a registered entity. As discussed
above, the Commission believes that
these proposed amendments would
support efforts by registered entities to
ensure compliance with the CEA, and
would, correspondingly, assist
registered entities, as well as applicants
for registration, in making informed
business decisions with respect to
product design, thereby helping to
support responsible market innovation.
The Commission further believes that,
by helping to delineate appropriate
event contract parameters, the proposed
amendments would reduce the
frequency of event contract submissions
to the Commission that raise potential
public interest concerns, which would
allow for more efficient use of
Commission and staff resources by
reducing the need to conduct
individualized event contract reviews
pursuant to § 40.11(c). It may also yield
efficiencies for registered entities by
helping to avoid situations where they
expend resources to develop and submit
a contract that the Commission
subsequently determines, following a
§ 40.11(c) review, may not be listed for
trading or accepted for clearing.
In addition, the Commission is
proposing to make certain amendments
to § 40.11 to further align the language
of the regulation with the statutory text
of CEA section 5c(c)(5)(C), and also is
proposing to make certain technical
amendments to the regulation to
enhance clarity and organization.
43 See CFTC Release No. 8578–22, CFTC
Announces Review and Public Comment Period of
KalshiEx Proposed Congressional Control Contracts
Under CFTC Regulation 40.11, available at https://
www.cftc.gov/PressRoom/PressReleases/8578-22.
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1. Description of Excluded Commodities
(a) Proposed Amendments
44 CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a–
2(c)(5)(C)(i).
45 CEA section 1a(2), 7 U.S.C. 1a(2), defines an
‘‘appropriate Federal banking agency,’’ which is not
relevant to the excluded commodity definition.
46 While the adopting release did not discuss the
basis for this interpretation, it is likely that the
Commission assumed that Congress intended to
incorporate the statutory language of the ‘‘excluded
commodity’’ definition set forth in CEA section
1a(19)(iv), since CEA section 5c(c)(5)(C) tracks the
language of CEA section 1a(19)(iv) to a large extent.
The ‘‘excluded commodity’’ definition set forth in
CEA section 1a(19)(iv) is as follows: an occurrence,
extent of an occurrence, or contingency (other than
a change in the price, rate, value, or level of a
commodity not described in clause (i)) that is—(I)
beyond the control of the parties to the relevant
contract, agreement, or transaction; and (II)
associated with a financial, commercial, or
economic consequence. ‘‘[C]lause (i)’’ refers to CEA
section 1a(19)(i).
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reference to ‘‘section 1a(2)(i)’’ in CEA
section 5c(c)(5)(C) was intended by
Congress to refer to the excluded
commodities described in CEA section
1a(19)(i), namely, an interest rate,
exchange rate, currency, security,
security index, credit risk or measure,
debt or equity instrument, index or
measure of inflation, or other
macroeconomic index or measure. This
interpretation carves out from the scope
of CEA section 5c(c)(5)(C) event
contracts based on a change in the price,
rate, value, or levels of these measures,
indices, and instruments.
The measures, indices, and
instruments described in CEA section
1a(19)(i) served as underlyings for a
range of derivative contracts that were
broadly traded on CFTC-registered
exchanges at the time of enactment of
CEA section 5c(c)(5)(C).47 As such, the
Commission believes that it is unlikely
that Congress intended the heightened
authority granted to the Commission in
CEA section 5c(c)(5)(C) to apply with
respect to event contracts based on
changes in the price, rate, value or
levels of these measures, indices, and
instruments.48 The Commission notes
that it has not historically recognized
these types of event contracts as falling
within the scope of CEA section
5c(c)(5)(C) and, by extension, § 40.11.
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(b) Illustrative Examples of Event
Contracts Not Within the Scope of CEA
Section 5c(c)(5)(C) and § 40.11
The Commission believes that
registered entities and market
participants would benefit from the
Commission providing examples of the
types of event contracts that, in the
Commission’s view, fall outside of the
scope of CEA section 5c(c)(5)(C) and, by
extension, § 40.11.49 The Commission
believes that, among other things, this
will assist registered entities, as well as
47 These included derivative contracts based on
changes in the Consumer Price Index (‘‘CPI’’), home
price indices for various U.S. cities, U.S. Initial
Jobless Claims, and Gross Domestic Product
(‘‘GDP’’).
48 Consistent with the Commission’s view that the
reference to ‘‘section 1a(2)(i)’’ in CEA section
5c(c)(5)(C) was intended by Congress to refer to the
excluded commodities described in CEA section
1a(19)(i), section 201(b) of the CFTC
Reauthorization Act of 2019 included, as a
technical correction to the CEA, the replacement of
the reference to ‘‘section la(2)(i)’’ with a reference
to ‘‘section 1a(19)(i).’’ CFTC Reauthorization Act of
2019, H.R. 6197, 116th Cong. (2d. Sess. 2020).
49 For the avoidance of doubt, with respect to
these types of event contracts, a registered entity
still must comply with the substantive and
procedural requirements that apply, more generally,
to the listing for trading or acceptance for clearing
of derivative contracts, including, for DCMs and
SEFs, the statutory requirement to ensure that such
contracts are not readily susceptible to
manipulation.
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applicants for registration, in making
informed business decisions with
respect to product design, thereby
supporting responsible innovation. The
Commission believes that this also will
support the more efficient use of CFTC
staff resources in connection with the
review of event contract submissions.
While the Commission cannot
anticipate every contract design, the
Commission believes that event
contracts based on a change in the price,
rate, value, or levels of the following
would generally fall outside of the scope
of CEA section 5c(c)(5)(C) and § 40.11:
• Economic indicators, including the
CPI and other price indices; the U.S.
trade deficit with another country;
measures related to GDP, jobless claims,
or the unemployment rate; and U.S. new
home sales;
• Financial indicators, including the
federal funds rate; total U.S. credit card
debt; fixed-rate mortgage averages (e.g.,
the 30-year fixed-rate mortgage interest
rate); and end of day, week, or month
values for broad-based stock indexes;
and
• Foreign exchange rates or
currencies.
Request for Comment
The Commission requests comment
on all aspects of its proposal to amend
the language of §§ 40.11(a)(1)–(2) and
40.11(c) to more precisely track, in the
description of ‘‘excluded commodities,’’
the text of CEA section 5c(c)(5)(C). In
particular, the Commission requests
comment on its interpretation that the
reference to ‘‘section 1a(2)(i)’’ in the
parenthetical in CEA section
5c(c)(5)(C)(i) is a typographical or
drafting error, and that the intention
was to refer to the excluded
commodities described in CEA section
1a(19)(i).
The Commission further requests
comment on the examples provided of
event contracts that the Commission
believes would generally fall outside of
the scope of CEA section 5c(c)(5)(C) and
§ 40.11. In particular, the Commission
requests comment on the following
questions:
• Are there additional types of event
contracts that should be explicitly
identified by the Commission in the
non-exclusive list of contract types that
would generally fall outside of the scope
of CEA section 5c(c)(5)(C) and § 40.11?
• What indices or measures are
‘‘other macroeconomic index[es] or
measure[s]’’ for purposes of CEA section
1a(19)(i)? Are tax rates (e.g., corporate
and capital gains tax rates) among such
macroeconomic measures?
2. Contracts That ‘‘Involve’’ an
Enumerated Activity
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CEA section 5c(c)(5)(C) applies with
respect to event contracts in certain
excluded commodities that ‘‘involve’’
one of the Enumerated Activities or a
prescribed similar activity. In adopting
§ 40.11, the Commission described the
types of event contracts that may not be
listed for trading or accepted for
clearing as contracts that involve, relate
to, or reference one of the Enumerated
Activities or a prescribed similar
activity.50 Commission Regulation
40.11(c) further provides that the
Commission may engage in a 90-day
review of an event contract if the
contract may involve, relate to, or
reference an Enumerated Activity or a
prescribed similar activity.51
In order to further align the language
of the regulation with the statutory text
of CEA section 5c(c)(5)(C), the
Commission proposes to amend § 40.11
to remove the terms ‘‘relate to’’ and
‘‘reference’’ wherever they appear and
to simply refer to event contracts that
‘‘involve’’ an Enumerated Activity or
prescribed similar activity. The
proposed amendments would reaffirm
the scope of the Commission’s
prohibition authority and the standard
of review that applies with respect to an
event contract pursuant to § 40.11. The
proposed amendments would also be
consistent with the determinations
made by the Commission in the Nadex
Order and the Kalshi Order, both of
which focused on whether the event
contracts in question ‘‘involved’’ an
Enumerated Activity.52 The proposed
amendments are not intended to alter
the scope of the Commission’s
prohibition authority or the nature of
the Commission’s analysis to determine
whether a particular event contract falls
within the ambit of CEA section
5c(c)(5)(C) and § 40.11.
The term ‘‘involve’’ is not defined in
the CEA, so the Commission gives the
term its ordinary meaning.53 Definitions
of ‘‘involve’’ include ‘‘to relate to or
affect,’’ ‘‘to relate closely,’’ to ‘‘entail,’’
or to ‘‘have as an essential feature or
consequence.’’ 54 In this regard, the
50 17 CFR 40.11(a)(1) and (2). While there are no
prescribed similar activities at this juncture, the
Commission retains its authority under CEA section
5c(c)(5)(C)(i)(VI) and § 40.11(a)(2) to prescribe
similar activities in future rules or regulations.
51 17 CFR 40.11(c).
52 See Kalshi Order at 5–7; Nadex Order at 2.
53 See Asgrow Seed Co. v. Winterboer, 513 U.S.
179, 187, 115 S.Ct. 788 (1995); see also Morrisette
v. United States, 342 U.S. 246, 263, 72 S.Ct. 240
(1952) (holding that undefined statutory words that
are not terms of art are given their ordinary
meanings, frequently derived from the dictionary).
54 See ‘‘involve’’ definition, MerriamWebster.com, available at https://www.merriamwebster.com/dictionary/involve (last visited Mar. 7,
2024); Random House College Dictionary 703
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Commission reiterates that a contract
may ‘‘involve’’ an Enumerated Activity,
or prescribed similar activity, in
circumstances where such activity is
not, itself, the contract’s underlying.55
By its plain meaning, a contract
‘‘involves’’ its underlying, but it also
involves other characteristics. Further,
where the CEA specifies a contract’s
underlying, it uses the word
‘‘underlying,’’ 56 or, as syntax requires,
it refers to what the contract is ‘‘based
on’’ 57 or ‘‘based upon.’’ 58
Beyond the plain meaning of
‘‘involve,’’ the full text of CEA section
5c(c)(5)(C)(i) demonstrates that a
contract ‘‘involve[s]’’ more than just its
underlying: the provision uses the terms
‘‘based upon’’ and ‘‘involve’’ in the
same sentence and differentiates
between the two. First, CEA section
5c(c)(5)(C)(i) states that the provision
applies with respect to agreements,
contracts, transactions, or swaps in
excluded commodities that are based
upon the occurrence, extent of an
occurrence, or contingency.59 In other
words, the contract’s underlying must
be an event. Then, just a few words
later, CEA section 5c(c)(5)(C)(i) states
that ‘‘such agreements, contracts, or
transactions’’ must ‘‘involve’’ an
Enumerated Activity or prescribed
similar activity. In context, ‘‘based
upon’’ and ‘‘involve’’ must have
different meanings, with ‘‘based upon’’
referring to the underlying, and
requiring only that it be an event, and
‘‘involve’’ retaining its broader ordinary
meaning and referring not just to the
underlying, but to ‘‘such agreements,
contracts, or transactions’’ as a whole.
In effect, Congress’s choice of the
broader term ‘‘involve’’ means that CEA
section 5c(c)(5)(C) encompasses both
event contracts whose underlying is an
Enumerated Activity or prescribed
similar activity, and event contracts
with a different connection to an
Enumerated Activity or prescribed
similar activity, because, for example,
they ‘‘relate closely’’ to, ‘‘entail,’’ or
‘‘have as an essential feature or
consequence’’ such activity.
The legislative history of CEA section
5c(c)(5)(C) supports the plain meaning
of the statutory text in this regard.
During the 2010 Colloquy, Senator
(Revised ed. 1979); Riverside University Dictionary
645 (1983) 645; see also Roget’s International
Thesaurus 1040 (7th ed. 2010) (giving as synonyms
‘‘entail’’ and ‘‘relate to’’).
55 See Kalshi Order at 5–7; Nadex Order at 2.
56 E.g., 7 U.S.C. 6c(d)(2)(A)(i), 20(e),
25(a)(1)(D)(ii).
57 E.g., 7 U.S.C. 2(a)(1)(C)(i)(I), 2(a)(1)(C)(iv),
6b(e).
58 E.g., 7 U.S.C. 2(a)(1)(C)(ii).
59 7 U.S.C. 7a–2(c)(5)(C).
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Lincoln stated that, among other things,
CEA section 5c(c)(5)(C) was intended to
‘‘prevent gambling through futures
markets’’ and to restrict derivatives
exchanges from ‘‘construct[ing] an
‘event contract’ around sporting events
such as the Super Bowl, the Kentucky
Derby, and Masters Golf
Tournament.’’ 60 None of the Super
Bowl, the Kentucky Derby, or the
Masters Golf Tournament are, of
themselves, ‘‘gaming.’’ 61 Rather, the
statement of Senator Lincoln—who, as
noted above, is identified in the 2010
Colloquy as one of the authors of CEA
section 5c(c)(5)(C)—focuses on the
overall characteristics of the contract.
As noted in the Nadex Order and the
Kalshi Order, this legislative history
supports the plain meaning of the term
‘‘involve,’’ and indicates that the
question for the Commission in
evaluating whether a contract
‘‘involves’’ an Enumerated Activity or
prescribed similar activity is whether
the contract, considered as a whole,
involves one of those activities.62
Request for Comment
The Commission requests comment
on all aspects of its proposal to amend
§ 40.11 to remove the terms ‘‘relate to’’
and ‘‘reference’’ wherever they appear,
and to refer in the regulation only to
event contracts that ‘‘involve’’ an
Enumerated Activity or prescribed
similar activity.
B. The Enumerated Activities
1. Gaming
(a) Background
Neither the CEA nor current § 40.11
define ‘‘gaming’’ or any of the other
Enumerated Activities. While
acknowledging, in the adopting release
for § 40.11, the interest expressed by
certain commenters to further define the
term ‘‘gaming’’ for purposes of the
regulation, the Commission deferred at
the time from doing so, indicating that
60 See 156 Cong. Rec. S5906–07 (daily ed. July 15,
2010) (statements of Sen. Diane Feinstein and Sen.
Blanche Lincoln).
61 As noted in the Kalshi Order, it is difficult to
conceive of a contract whose underlying event,
itself, is ‘‘gaming.’’ If ‘‘involve’’ were to refer only
to a contract’s underlying, contracts based on
sporting events such as horse races and football
games would not qualify, because sports typically
are not understood to be ‘‘gaming’’—they are
understood to be ‘‘games.’’ In effect, if ‘‘involve’’
were to refer only to a contract’s underlying, the
scope of certain prongs of CEA section 5c(c)(5)(C)
could effectively be limited to a null set of event
contracts, which could not have been Congress’s
intent. Kalshi Order at 7, note 18.
62 Nadex Order at 2; Kalshi Order at 7. For
example, giving the term its ordinary meaning, a
contract ‘‘involves’’ an Enumerated Activity or
prescribed similar activity if trading in the contract
amounts to such activity. Id. at 7, note 19.
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it would instead ‘‘consider individual
product submissions on a case-by-case
basis under § 40.2 or § 40.3.’’ 63
Since the adoption of § 40.11 in 2011,
as part of the agency’s standard product
review process, CFTC staff have
evaluated whether event contracts in
certain excluded commodities may
implicate CEA section 5c(c)(5)(C) and
§ 40.11, and in four instances the
Commission has commenced a review
pursuant to § 40.11(c) to evaluate
whether event contracts implicated one
of the Enumerated Activities. In each of
these four instances, a § 40.11(c) review
was commenced, in part, to evaluate
whether the event contracts in question
implicated gaming.64
Based upon its experience
administering CEA section 5c(c)(5)(C)
pursuant to § 40.11, the Commission
believes that defining the term
‘‘gaming’’ within § 40.11 will assist in
establishing a common understanding
and more uniform application of the
term. It will thereby assist registered
entities, and applicants for registration,
in their product design efforts, and
benefit market participants and the
public by helping to ensure that event
contracts listed for trading and accepted
for clearing by registered entities are
consistent with the requirements of the
CEA and § 40.11. The Commission notes
that there may continue to be instances
where contract-specific reviews are
commenced pursuant to § 40.11(c) in
order to evaluate whether a contract
involves ‘‘gaming,’’ as proposed to be
defined. However, the Commission
expects that establishing a definition,
and thereby a common understanding of
the term, will help to reduce the
frequency of these reviews.
(b) Proposed Gaming Definition
The Commission proposes to define
‘‘gaming’’ in new § 40.11(b)(1) as the
staking or risking by any person of
something of value upon: (i) the
outcome of a contest of others; (ii) the
outcome of a game involving skill or
chance; (iii) the performance of one or
more competitors in one or more
contests or games; or (iv) any other
occurrence or non-occurrence in
connection with one or more contests or
games.65 This proposed definition is
63 Provisions Common to Registered Entities, 76
FR 44776, 44785 (July 27, 2011).
64 See https://www.cftc.gov/PressRoom/
PressReleases/6163-12 (2011 Nadex contracts);
https://www.cftc.gov/PressRoom/PressReleases/
8345-20 (2020 ErisX contracts); https://
www.cftc.gov/PressRoom/PressReleases/8578-22
(2022 Kalshi contracts); https://www.cftc.gov/
PressRoom/PressReleases/8728-23 (2023 Kalshi
contracts).
65 The Commission considers the term ‘‘contest’’
to have its ordinary meaning, and to encompass a
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consistent with the Commission’s
interpretation of the term ‘‘gaming’’ in
the Nadex Order and the Kalshi Order,66
and draws upon the ordinary meaning
of the term 67 and relevant state and
federal statutory definitions, as
discussed below. The Commission
wishes to make it clear that its proposed
definition of ‘‘gaming’’ would not have
applicability beyond the CFTC’s
administration of CEA section
5c(c)(5)(C) and § 40.11.
The proposed definition recognizes—
as the Commission did in the Nadex
Order and the Kalshi Order 68—that the
terms ‘‘gaming’’ and ‘‘gambling’’ are
used interchangeably in common usage
and dictionary definitions.69 The
proposed definition further recognizes
that, under a number of state statutes,
‘‘gambling,’’ ‘‘betting,’’ or ‘‘wagering’’ is
recognized to include a person staking
or risking something of value upon a
game or contest, or the performance of
competitors in a game or contest.70
Further, a federal statute, the Unlawful
internet Gambling Enforcement Act
(‘‘UIGEA’’), defines the term ‘‘bet or
wager’’ as the staking or risking by any
person of something of value on the
outcome of a contest of others, a
sporting event, or a game subject to
chance, upon an agreement or
understanding that the person or
another person will receive something
of value in the event of a certain
outcome.71
Accordingly, the Commission believes
that it is appropriate, for purposes of
defining ‘‘gaming’’ within § 40.11, to
focus on the staking or risking of
something of value upon a contest of
others or a game, including the outcome
of such contest or game, the
performance of competitors in such
contest or game,72 or other occurrences
or non-occurrences in connection with
such contest or game. As noted above,
this proposed approach draws upon the
approach taken in relevant state and
federal statutes to defining the terms
‘‘gambling,’’ ‘‘betting,’’ and ‘‘wagering.’’
In this regard, the proposed approach is
consistent with indications of the intent
of the drafters of CEA section
5c(c)(5)(C). In the 2010 Colloquy,
Senator Lincoln stated that the
provision was intended, in part, to
assure that the Commission had the
authority to ‘‘prevent gambling through
futures markets.’’ 73
The Commission acknowledges that
several state statutes recognize
‘‘gambling,’’ ‘‘betting,’’ or ‘‘wagering,’’ to
encompass, more broadly, a person
staking or risking something of value
upon the outcome of any contingent
event not in the person’s influence or
control—and not just a game or a
contest of others.74 The Commission is
‘‘competition.’’ See, e.g., MERRIAM–
WEBSTER.COM, available at https://www.merriamwebster.com/dictionary/contest (last visited Mar. 7,
2024) (defining the noun ‘‘contest’’ as: ‘‘1) a struggle
for superiority or victory: competition; 2) a
competition in which each contestant performs
without direct contact with or interference from
competitors’’).
66 See Nadex Order at 2–3; Kalshi Order at 8–10.
67 See note 70, infra.
68 Nadex Order at 2–3; Kalshi Order at 8–9.
69 For example, Dictionary.com defines ‘‘gaming’’
as, e.g., ‘‘gambling.’’ See ‘‘gaming’’ definition,
Dictionary.com, https://www.dictionary.com/
browse/gaming (last visited Feb. 2, 2024). Black’s
Law Dictionary also refers to ‘‘gambling’’ as
‘‘gaming’’ and cross-refers the definition of gaming
to gambling. See ‘‘GAMING Definition & Legal
Meaning,’’ Black’s Law Dictionary, 2nd Ed.,
available at https://thelawdictionary.org/gaming/
(last visited Mar. 22, 2024). Further, many state
agencies that regulate gambling are known as
‘‘gaming’’ commissions. See, e.g., Nevada Gaming
Commission and Nevada Gaming Control Board,
https://gaming.nv.gov/ (last visited Mar. 7, 2024);
New York State Gaming Commission, https://
www.gaming.ny.gov/ (last visited Mar. 1, 2024);
Illinois Gaming Board, https://www.igb.illinois.gov/
(last visited Mar. 7, 2024).
70 See, e.g., Ga. Code Ann. section 16–12–21(a)(1)
(West 2020) (A person commits the offense of
gambling when he makes a bet upon the partial or
final result of any game or contest or upon the
performance of any participant in such game or
contest.); Tex. Penal Code Ann. section 47.02(a)
(West 2019) (A person commits an offense of
gambling if he: (1) makes a bet on the partial or final
result of a game or contest or on the performance
of a participant in a game or contest’’). See also note
75, infra.
71 31 U.S.C. 5362(1)(A). The UIGEA, 31 U.S.C.
5361–5367 (2006), prohibits gambling businesses
from knowingly accepting payments in connection
with the participation of another person in a bet or
wager that involves the use of the internet and that
is unlawful under any federal or state law. Unlike
the Wire Act, 28 U.S.C. 1084 (1961), the UIGEA
defines a ‘‘bet’’, but it criminalizes it only if it is
connected with unlawful internet gambling that
violates any federal or state law. See 31 U.S.C. 5362.
The UIGEA does not alter the definitions in other
federal and state laws and expressly excludes any
transaction conducted on or subject to the rules of
a registered entity or exempt board of trade under
the CEA from the definition of ‘‘bet or wager.’’ See
id. at section 5362(1)(E).
72 This would include the performance of one or
more athletes in one or more games, as well as the
performance of one or more competitors in one or
more auto, drone, boat, horse, or similar
competitions. In addition, this would include
performance in any ‘‘fantasy’’ or simulated contest
or league in which participants own or manage an
imaginary or theoretical team and compete against
other participants based on the performance of such
teams or team members.
73 See 156 Cong. Rec. S5906–07 (daily ed. July 15,
2010) (statement of Sen. Blanche Lincoln).
74 See, e.g., N.Y. Penal Law section 225.00(2)
(McKinney 2015) (A person engages in gambling
when he stakes or risks something of value upon
the outcome of a contest of chance or a future
contingent event not under his control or influence,
upon an agreement or understanding that he will
receive something of value in the event of a certain
outcome.); Mich. Comp. Laws section 750.301
(2023) (Any person or his or her agent or employee
who, directly or indirectly, takes, receives, or
accepts from any person any money or valuable
thing with the agreement, understanding or
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48975
not proposing to define ‘‘gaming’’ in this
manner. The Commission recognizes
that this broader definition could
encompass event contracts that were not
intended by Congress to be subject to
the Commission’s heightened authority
pursuant to CEA section 5c(c)(5)(C),
including the types of event contracts
described in section II.A.1.b, supra. To
avoid going beyond what Congress may
have intended with respect to the
‘‘gaming’’ category, the Commission is
proposing to use the narrower definition
discussed herein. The Commission is,
however, proposing to define ‘‘gaming’’
to include the staking or risking of
something of value on a contingent
event in connection with a game or
contest, which the Commission believes
would be as much of a wager or bet on
the game or contest as staking or risking
something of value on the outcome of
the game or contest would be.
(c) Illustrative Examples of Gaming
In order to provide additional
guidance to registered entities and
market participants, the Commission
proposes to set forth in new
§ 40.11(b)(2) a non-exclusive list of
examples of activities that constitute
‘‘gaming,’’ as proposed to be defined.
Proposed § 40.11(b)(2) states that
‘‘gaming’’ includes, but is not limited to,
the staking or risking by any person of
something of value upon: (i) the
outcome of a political contest, including
an election or elections; (ii) the outcome
of an awards contest; (iii) the outcome
of a game in which one or more athletes
compete; or (iv) an occurrence or nonoccurrence in connection with such a
contest or game, regardless of whether it
directly affects the outcome. The
Commission emphasizes that the list of
examples provided in proposed
§ 40.11(b)(2) is non-exclusive. To the
extent that other activity falls within the
definition of ‘‘gaming’’ set forth at
proposed § 40.11(b)(1), such activity
would also constitute ‘‘gaming.’’
The first three examples in the nonexclusive list reflect types of games or
contests which, when something of
value is staked or risked upon their
outcome, have been recognized as
allegation that any money or valuable thing will be
paid or delivered to any person where the payment
or delivery is alleged to be or will be contingent
upon the result of any race, contest, or game or
upon the happening of any event not known by the
parties to be certain.); Va. Code Ann. section 18.2–
325(1) (West 2022) (Illegal gambling means the
making, placing, or receipt of any bet or wager of
money or other consideration or thing of value,
made in exchange for a chance to win a prize, stake,
or other consideration or thing of value, dependent
upon the result of any game, contest, or any other
event the outcome of which is uncertain or a matter
of chance.).
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gambling, betting, or wagering under
relevant state and federal statutes, and
would constitute ‘‘gaming’’ under the
proposed definition in § 40.11(b)(1).75
The first example reflects the
Commission’s prior determinations that
‘‘gaming’’ includes the staking of
something of value upon the outcome of
a political contest, including an
election.76 The Commission’s prior
determinations reflect, in turn, that
several state statutes, on their face, link
the terms ‘‘gaming’’ or ‘‘gambling’’ to
betting or wagering on elections.77
For purposes of proposed § 40.11(b),
the Commission would consider a
political contest to include, but not to be
limited to, a federal, state, or municipal
election or primary contest for any
political office, as well as any political
contest in a foreign jurisdiction,
75 See
section II.B.1.b, supra.
the Nadex Order, which addressed certain
event contracts on election outcomes, the
Commission found that state gambling definitions
of ‘‘wager’’ and ‘‘bet’’ were analogous to the act of
taking a position in the subject contracts.
Additionally, the Commission cited to the UIGEA
definition of the term ‘‘bet or wager,’’ and found
that taking a position in the subject contracts ‘‘fit[]
the plain meaning’’ of a person staking something
of value upon a contest of others, since the
contracts were all premised—either directly or
indirectly—on the outcome of a contest between
electoral candidates. As in the Nadex Order, in the
Kalshi Order, the Commission looked to definitions
of the terms ‘‘gaming,’’ ‘‘gambling,’’ and ‘‘bet or
wager,’’ including state and federal statutory
definitions, and found that the subject contracts
involved gaming, since taking a position in the
contracts would be staking something of value upon
the outcome of a contest of others: the contracts
were premised on the outcome of Congressional
election contests. As discussed, infra, the
Commission further found in the Kalshi Order that
the subject contracts involved ‘‘activity that is
unlawful under . . . State law’’ pursuant to CEA
section 5c(c)(5)(C)(i)(I) and § 40.11(a)(1).
77 See, e.g., 720 Ill. Comp. Stat. Ann. section 5/
28–1 (West 2011) (A person commits gambling
when he makes a wager upon the result of any
game, contest, or any political nomination,
appointment or election’’); Neb. Rev. Stat. section
28–1101(4) (2011) (A person engages in gambling if
he or she bets something of value . . . upon the
outcome of a game, contest, or election.); N.M. Stat.
Ann. section 44–5–10 (1978) (Bets and wagers
authorized by the constitution and laws of the
United States, or by the laws of this state, are
gaming within the meaning of this chapter.); N.D.
Cent. Code. Ann. section 12.1–28–01 (West 2011)
(Gambling means risking any money upon the
happening or outcome of an event, including an
election . . . over which the person taking the risk
has no control.). See also Ga. Code. Ann. section
16–12–21(a)(2) (West 2011) (A person commits the
offense of gambling when he makes a bet upon the
result of any political nomination, appointment, or
election.); Miss. Code Ann. section 97–33–1 (West
2011) (If any person shall wager or bet upon the
result of any election he shall be fined in a sum not
more than Five Hundred Dollars.); S.C. Code Ann.
section 16–19–90 (2012) (Any person who shall
make any bet or wager of money upon any election
in this State shall be guilty of a misdemeanor.); Tex.
Penal Code Ann. section 47.02(a)(2) (West 2011) (A
person commits an offense if he makes a bet on the
result of any political nomination, appointment, or
election.).
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including any political subdivision
thereof, or in a supranational
organization. For the avoidance of
doubt, the Commission would consider
an event contract to ‘‘involve’’ gaming if
the contract is premised on the outcome
of one or more political contests, or
would otherwise amount to the staking
or risking of something of value upon
the outcome of one or more political
contests.78
The inclusion of the staking or risking
of something of value upon the outcome
of a political contest as an example of
‘‘gaming’’ in proposed § 40.11(b)(2)
highlights that the Commission’s
proposed definition is not limited to
sporting events or other games. This
reflects the similar approach taken in
numerous state gambling statutes 79 as
well as in the UIGEA, which defines a
‘‘bet or wager’’ to mean, in relevant part,
the staking or risking by any person of
something of value on the outcome of a
contest of others, a sporting event, or a
game subject to chance.80 The separate
‘‘contest of others’’ category in the
UIGEA definition demonstrates that
‘‘betting or wagering’’ (and, by
extension, gaming) is recognized within
a federal statutory framework as
extending beyond sporting events and
games of chance.
In this regard, in its non-exclusive list
of examples of ‘‘gaming’’ at proposed
§ 40.11(b)(2), the Commission includes
the staking or risking of something of
value upon the outcome of an awards
contest. This would encompass, among
other things, the staking or risking of
something of value upon the outcome of
entertainment award contests such as
the Emmys, the Oscars, or the Grammys;
athletics award contests such as the
Heisman Trophy; or achievement award
contests such as the Nobel Prize or the
Pulitzer Prize. The Commission further
includes as an example of ‘‘gaming’’ in
proposed § 40.11(b)(2) the staking or
risking of something of value upon the
outcome of a game in which one or
more athletes participate. This would
encompass, among other things, the
staking or risking of something of value
upon the outcome of a professional or
amateur (including scholastic) sports
game.
Finally, the Commission includes as
an example of ‘‘gaming’’ in proposed
78 Consistent with its determination in the Kalshi
Order, where taking a position in a contract would
be staking or risking something of value upon the
outcome of a political contest, including an election
or elections, the Commission would consider the
contract also to involve activity that is unlawful
under state law, pursuant to CEA section
5c(c)(5)(C)(i)(I) and § 40.11(a)(1). See Kalshi Order
at 12–14.
79 See, e.g., notes 71, 75, and 78, supra.
80 31 U.S.C. 5362(1)(a).
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§ 40.11(b)(2) the staking or risking of
something of value upon an occurrence
or non-occurrence in connection with
any of the previously described
examples of contests or games—
regardless of whether such occurrence
or non-occurrence directly affects the
outcome of such contest or game. As
discussed above, the Commission is
proposing to define ‘‘gaming’’ to mean—
in addition to the staking or risking of
something of value upon the outcome of
a contest of others or a game of skill or
chance, or the performance of one or
more competitors in such contest or
game—the staking or risking of
something of value upon any other
occurrence or non-occurrence in
connection with a contest or game. The
Commission makes clear, in proposed
§ 40.11(b)(2), that it is of no import
whether or not such occurrence or nonoccurrence directly affects the outcome
of a contest or game. Such an
occurrence or non-occurrence would
encompass, for example: (i) whether a
particular candidate enters or
withdraws from a political contest, or
polls above or below a certain threshold;
(ii) whether a particular individual is
nominated for an award or attends an
award ceremony; and (iii) in the context
of an athletic game, the score or
individual player or team statistics at
given intervals during the game,
whether a particular player will
participate in a game, and whether a
particular individual will attend a game.
The Commission notes that a number
of states prohibit betting or wagering on
a variety of occurrences or nonoccurrences associated with athletic
games,81 as well as non-sporting
events.82 This highlights that in some
81 See, e.g. Va. Code Ann. section 58.1–4039
(A)(2) (West) (No person shall place or accept a
proposition bet on college sports.). Ohio and
Maryland have recently followed suit and banned
player-specific proposition bets on college sports.
See https://casinocontrol.ohio.gov/static/
NCAA%20Request%20&%20Commission’s
%20Response/Response%20to%20the
%20NCAA%20Regarding%20Proposition%20
Wagers%20on%20Student%20Athletes
%202022%2002%2023.pdf (Feb. 23, 2024 letter
from the Ohio Casino Control Commission
approving a request from the National Collegiate
Athletic Association (‘‘NCAA’’) to prohibit playerspecific proposition bets on intercollegiate athletics
competitions); https://sbcamericas.com/2024/03/
04/maryland-bans-college-athlete-props/
(describing a directive by the Maryland Lottery and
Gaming Control Agency to all sportsbook operators
in Maryland to remove college player proposition
wagers from their platforms as of Mar. 1, 2024). See
also Massachusetts Gaming Commission Says No
Super Bowl Prop Bets This Year, NewBostonPost
(Feb. 9, 2024), available at https://newbostonpost.
com/2024/02/09/massachusetts-gamingcommission-says-no-super-bowl-prop-bets-thisyear/.
82 For example, in Nevada, a sports book may not
accept wagers on a non-sporting event unless
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instances, event contracts that involve
‘‘gaming,’’ as proposed to be defined,
may also involve a second Enumerated
Activity—‘‘activity that is unlawful
under . . . State law.’’ For example, as
discussed in section I.C.3, supra, the
Commission found in the Kalshi Order
that the subject contracts involved both
gaming and activity that is unlawful
under state law.83 While the
Commission does not provide a
complete catalogue herein of the types
of betting or wagering that is prohibited
under state law, it warrants recognition
that in certain instances, event contracts
that involve ‘‘gaming,’’ as proposed to
be defined, may also involve activity
that is unlawful under state law.84
As discussed above, the Commission
recognizes that there may continue to be
instances where contract-specific
reviews will need to be commenced
pursuant to § 40.11(c) in order to
evaluate whether a particular contract
involves ‘‘gaming,’’ as proposed to be
defined. However, it is anticipated that
the proposed definition and nonexclusive list of examples will assist in
demarcating for registered entities and
market participants the types of event
contracts that involve ‘‘gaming’’ for
purposes of § 40.11(a)(l), and thereby
reduce the frequency with which such
reviews must be commenced.
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Request for Comment
The Commission requests comment
on all aspects of its proposed definition
of the term ‘‘gaming.’’ In particular, the
Commission requests comment on the
following questions:
• Are there examples of activities that
would constitute ‘‘gaming’’ that may fall
outside of the proposed definition?
• Are there other types of votes or
elections that the Commission should
specifically identify, for clarity, in the
illustrative examples in proposed
§ 40.11(b)(2)? What types of other votes
or elections should be identified, and
why?
• Should the availability at gaming
venues of bets or wagers on a particular
specifically approved by the Gaming Commission;
to date, the Nevada Gaming Commission has not
approved wagers on awards shows or other nonathletic or certain ‘‘Esports’’ related events or
contests. See Nev. Gaming Comm’n Reg. section
22.120, Permitted wagers (Rev. 2023)
83 Kalshi Order at 11–12.
84 See note 88, infra. While the Commission has
exclusive jurisdiction over futures and swaps
contracts traded on a CFTC-registered exchange,
preempting the application of state law with respect
to such transactions—and meaning that transacting
in such contracts on a CFTC-registered exchange
cannot, of itself, constitute unlawful activity for
state law purposes—this does not preclude a
contract from involving ‘‘activity that is unlawful
under . . . State law’’ for purposes of CEA section
5c(c)(5)(C).
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contingency, occurrence, or event be a
relevant factor in the Commission’s
consideration of whether an event
contract involving that contingency,
occurrence, or event involves ‘‘gaming’’
for purposes of § 40.11?
• If, on judicial review, it is
determined that staking something of
value on the outcome of a political
contest does not involve ‘‘gaming,’’ the
Commission may consider whether that
activity is ‘‘similar to’’ gaming. Is
staking something of value on the
outcome of a political contest similar to
gaming?
• The Commission may also consider
whether it should enumerate contracts
involving political contests or some
subset thereof as contracts involving a
‘‘similar activity’’ to any one or more of
‘‘war,’’ ‘‘terrorism,’’ ‘‘assassination,’’ or
‘‘activity that is unlawful under any
Federal or State law’’ under CEA section
5c(c)(5)(C)(i)(VI) and determine that
contracts involving this newly
enumerated activity of political contests
are contrary to the public interest. Are
contracts involving political contests
contracts involving a similar activity to
any one or more of ‘‘war,’’ ‘‘terrorism,’’
‘‘assassination,’’ or ‘‘activity that is
unlawful under any Federal or State
law’’? If so, should the Commission
determine such contracts are contrary to
the public interest?
2. The Other Enumerated Activities
The Commission does not believe that
it is necessary to define ‘‘terrorism,’’
‘‘assassination,’’ or ‘‘war’’ at this time.85
With respect to ‘‘activity that is
unlawful under any Federal or State
law,’’ the Commission notes that the
§ 40.11(c) review that it conducted in
connection with its determination in the
Kalshi Order evaluated whether the
subject Congressional control contracts
involved this Enumerated Activity. In
the Kalshi Order, the Commission found
that, in many states, betting or wagering
on elections is prohibited by statute or
common law, and the Commission cited
to the statutory provisions and caselaw
prohibiting such activity that it had
identified through a survey of relevant
state law.86 The Commission found that,
because taking a position in the subject
contracts would be staking something of
value upon the outcome of contests
between electoral candidates—in effect,
betting or wagering on the outcome of
elections—and because in many states
such conduct is illegal, the subject
85 The Commission clarifies, however, that it
believes that cyberattacks and other acts of
cyberterrorism constitute terrorism, and in some
cases war, and are also likely to constitute activity
that is unlawful under state or federal law.
86 Kalshi Order at 11–12.
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contracts involved activity that was
unlawful under state law.87
The Commission anticipates that that
the agency would in the future follow a
similar approach—including a survey of
relevant law—in circumstances where
there is a question regarding whether an
event contract submitted to the
Commission involves activity that is
unlawful under any state, or federal, law
for purposes of § 40.11(a)(1). The
Commission acknowledges that many
state codes include laws prohibiting
certain activity that, while not repealed,
are generally considered archaic and are
not enforced. The Commission believes
that it is unlikely that a registered entity
would seek to list for trading or accept
for clearing an event contract involving
such a law. To the extent that a
registered entity does make a
submission to the Commission
regarding a contract that may involve
such a law, the Commission believes
that it may be appropriate to commence
a review of the contract pursuant to
§ 40.11(c) to evaluate whether, in light
of the relevant facts and circumstances,
it is appropriate to recognize the
contract as involving ‘‘activity that is
unlawful under any . . . State law’’ for
purposes of § 40.11(a)(1).
The Commission notes further that a
registered entity may receive a
definitive resolution of any questions
concerning the applicability of
§ 40.11(a)(1) by submitting a contract for
Commission approval under § 40.3.
CFTC staff also may, at its discretion
and upon a request from a registered
entity, review a draft contract
87 CEA section 2(a)(1) grants the Commission
‘‘exclusive jurisdiction’’ over futures and swap
contracts traded on a CFTC-registered exchange, 7
U.S.C. 2(a)(1). This ‘‘preempts the application of
state law,’’ Leist v. Simplot, 638 F.2d 283, 322 (2d
Cir. 1980), so transacting these contracts on a CFTCregistered exchange cannot, in and of itself, be an
‘‘activity that is unlawful under any . . . State
law.’’ However, such contracts may still ‘‘involve
. . . activity’’ that is unlawful under a state law, in
the sense, for example, that transactions in the
contracts may ‘‘relate closely’’ to, ‘‘entail,’’ or ‘‘have
as an essential feature or consequence’’ an activity
that violates state law. For example, in the Kalshi
Order, the Commission found that state laws (which
are not preempted by the CEA) prohibit wagering
on elections. The Commission found that taking a
position in the subject Congressional control
contracts would be staking something of value on
the outcome of contests between electoral
candidates, such that wagering on elections was ‘‘an
essential feature or consequence’’ of the contracts.
Accordingly, the Commission found that while
transactions in the contracts on a CFTC-registered
exchange would not violate, for example, state
bucket-shop laws, they nevertheless involved an
activity that is unlawful in a number of states—
wagering on elections. The Commission found that
to permit such transactions on a CFTC-registered
exchange would undermine important state
interests expressed in statutes separate and apart
from those applicable to trading on a CFTCregistered exchange. Id. at 13, note 28.
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submission or proposal and provide
guidance concerning the contract’s
compliance with the CEA and CFTC
regulations, including § 40.11(a)(1).88
Request for Comment
The Commission requests comment as
to whether commenters agree with the
Commission’s view that a registered
entity is unlikely to seek to list for
trading or accept for clearing a contract
that involves a state law prohibiting
certain activity that, while not repealed,
is generally considered archaic and is
not enforced.
C. Public Interest Considerations
1. Overview of Proposed Amendments
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As discussed above, CEA section
5c(c)(5)(C) provides that a registered
entity may not list, or make available for
clearing or trading, contracts in certain
excluded commodities that involve an
Enumerated Activity or prescribed
similar activity, and that have been
determined by the Commission to be
contrary to the public interest.89 The
Commission interprets CEA section
5c(c)(5)(C) to provide that a contract
may not be listed or made available for
clearing or trading if the Commission
finds both that: (i) the contract involves
an Enumerated Activity or prescribed
similar activity, and (ii) the contract is
contrary to the public interest.
While CEA section 5c(c)(5)(C)
requires the Commission to determine
that a contract that involves an
Enumerated Activity or prescribed
similar activity is contrary to the public
interest, in order for the contract to be
prohibited from being listed or made
available for clearing or trading, the
statute does not require this public
interest determination to be made on a
contract-specific basis. The Commission
interprets CEA section 5c(c)(5)(C) to
authorize categorical public interest
determinations if the Commission
determines that contracts involving an
Enumerated Activity or prescribed
similar activity are, as a category,
contrary to the public interest.90 The
88 The Commission notes, however, that staff’s
guidance concerning drafts and proposals is
preliminary and non-binding. CFTC staff formally
reviews contracts only at such time as a compliant
submission is provided to the Commission pursuant
to § 40.2 or § 40.3.
89 7 U.S.C. 7a–2(c)(5)(C).
90 Further, the Commission’s general rulemaking
authority under CEA section 8(a)(5) provides the
Commission with the authority to enact
prophylactic regulations that, as proposed herein
and for the reasons discussed below, the
Commission has determined are reasonably
necessary to prevent the listing for trading or
acceptance for clearing of event contracts that will
always violate the public interest, and to diminish
the harms (such as inefficiency for market
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Commission proposes to amend
§ 40.11(a)(1) to include a determination
that event contracts involving each of
the Enumerated Activities—including
‘‘gaming,’’ as proposed to be defined—
are, as a category, contrary to the public
interest and therefore may not be listed
for trading or accepted for clearing on or
through a registered entity. The
Commission notes that, to date, it has
conducted a contract-specific public
interest analysis in connection with
each of the contract reviews that it has
commenced pursuant to § 40.11(c).91 If,
as proposed, § 40.11(a)(1) is amended to
include a categorical public interest
determination with respect to contracts
involving each of the Enumerated
Activities, the Commission would not,
going forward, undertake a contractspecific public interest analysis as part
of a review commenced pursuant to
§ 40.11(c). Rather, the focus of any such
review would be to evaluate whether
the contract involves an Enumerated
Activity, in which case, it may not be
listed for trading or accepted for
clearing on or through a registered
entity. The Commission believes this
would be appropriate to ensure the
consistent treatment of categories of
contracts that have been determined by
the Commission to be contrary to the
public interest. The Commission notes
its expectation, as discussed above, that
defining the term ‘‘gaming’’ for purposes
of § 40.11(a)(1) will further assist
registered entities in their product
design and compliance efforts, and will
reduce the instances in which contractspecific reviews need to be commenced
pursuant to § 40.11(c).
2. Factors Considered by the
Commission in Evaluating Whether a
Contract, or Category of Contracts, Is
Contrary to the Public Interest
The term ‘‘public interest’’ is not
defined in CEA section 5c(c)(5)(C). As
discussed more fully below, historically,
the Commission has evaluated whether
a contract is contrary to the public
interest with reference to the contract’s
commercial hedging or price-basing
participants) caused by regular use of post hoc
evaluations of contracts that exchanges have
already expended resources to develop. CEA
section 8(a)(5), 7 U.S.C. 12(a)(5) (authorizing the
Commission ‘‘to make and promulgate such rules
and regulations as, in the judgment of the
Commission, are reasonably necessary to effectuate
any of the provisions or to accomplish any of the
purposes of [the CEA]’’).
91 In the Nadex Order and the Kalshi Order, the
Commission first determined that the subject
contracts involved an Enumerated Activity (or
Enumerated Activities), and then separately
determined that the contracts were contrary to the
public interest and therefore prohibited from being
listed or made available for clearing or trading. See
Nadex Order at 3–4; Kalshi Order at 13–23.
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utility. The Commission has also,
however, regularly stated that other
public interest factors may be
considered.92 In that historical context,
the Commission observes that the event
contract categories listed in CEA
5c(c)(5)(C)—for example, terrorism, war,
assassination, and activity that is
unlawful under any federal or state
law—are indicative of additional public
interest concerns for Congress, beyond a
contract’s hedging and price-basing
utility, in establishing the heightened
authority set forth in that provision.
The Commission reviewed the
legislative history available to establish
its own determination of what factors
are relevant in a public interest
evaluation under CEA section
5c(c)(5)(C). The legislative history of the
provision is limited, but it does suggest
an intent on the part of the drafters for
the hedging and price-basing utility of a
contract to be relevant factors for
consideration in a public interest
evaluation.93 In the 2010 Colloquy,
Senator Feinstein and Senator Lincoln
discussed the Commission’s authority,
prior to the enactment of the
Commodity Futures Modernization Act
of 2000 (‘‘CFMA’’), to prevent trading
that is contrary to the public interest.94
Before its repeal by the CFMA, CEA
section 5(g) made it a condition of
initial and continuing contract market
designation that transactions for future
delivery not be contrary to the public
interest.95 The Commission interpreted
this statutory public interest standard to
include the concept of an ‘‘economic
purpose’’ test. Pre-CFMA guidelines
articulated the economic purpose test as
an evaluation of whether a contract
reasonably can be expected to be, or has
been, used for hedging and/or pricing
basing on more than an occasional
basis.96
92 See
note 103, infra.
Commission has recognized price basing to
occur when producers, processors, merchants, or
consumers of a commodity establish commercial
transaction prices based on the futures price for that
or a related commodity. See, e.g., Kalshi Order at
18.
94 See 156 Cong. Rec. S5906–07 (daily ed. July 15,
2010) (statements of Sen. Diane Feinstein and Sen.
Blanche Lincoln).
95 CEA section 5(g), 7 U.S.C. 7(g) (repealed).
96 The Commission adopted ‘‘Guideline No. 1’’ to
assist DCMs in preparing applications for product
approval. See Guideline on Economic and Public
Interest Requirements for Contract Market
Designation, 40 FR 25849 (June 19, 1975). Guideline
No. 1 stated that DCMs should make an affirmative
showing that a proposed futures contract was
‘‘reasonably expected to serve, on more than
occasional basis,’’ as a price discovery or hedging
tool for commercial users of the underlying
commodity. Subsequently, the Commission revised
Guideline No. 1, publishing it as appendix A to part
5 of chapter 17 of the Code of Federal Regulations.
See 47 FR 49832 (Nov. 3, 1982). As revised in 1982,
93 The
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In the 2010 Colloquy, Senator
Feinstein and Senator Lincoln
articulated the approach to evaluating a
contract’s hedging and price-basing
utility differently from how the
economic purpose test was applied
under former CEA section 5(g). Senator
Feinstein asked Senator Lincoln
whether, with respect to CEA section
5c(c)(5)(C), the intent was to ‘‘define
‘public interest’ broadly so that the
CFTC may consider the extent to which
a proposed derivative contract would be
used predominantly by speculators or
participants not having a commercial or
hedging interest.’’ 97 Senator Feinstein
further asked whether the Commission
would ‘‘have the power to determine
that a contract is a gaming contract if the
predominant use of the contract is
speculative as opposed to a hedging or
economic use.’’ 98 Senator Lincoln
replied, ‘‘That is our intent.’’ 99 Thus,
while pre-CFMA Commission
guidelines articulated the economic
purpose test as an evaluation of
‘‘whether [a] contract reasonably can be
expected to be, or has been, used for
hedging and/or price basing on more
than an occasional basis,’’ Senator
Lincoln and Senator Feinstein referred
instead to whether a contract is used
predominantly by speculators or market
participants not having a commercial or
hedging interest.
While the articulation of the approach
to evaluating hedging and pricingbasing utility differs from the pre-CFMA
articulation, the 2010 Colloquy does
suggest an intent on the part of the
Guideline No. 1 was updated to address proposed
innovations in the trading of futures contracts,
including futures contracts on financial instruments
and on various indexes and cash-settled futures
contracts. Guideline No. 1 was again revised in
1992. 57 FR 3518 (Jan. 30, 1992). The 1992
revisions eliminated redundant materials by stating
that an application for designation as a contract
market for a particular futures contract should
include a cash-market description only when the
proposed contract differed from a currently
designated contract and that a DCM need justify
only individual contract terms that were different
from terms which previously had been approved by
the Commission. 57 FR at 3521. In addition, the
1992 revisions eliminated the guideline that a DCM
provide a further, separate justification that the
proposed contract would be quoted and
disseminated for price basing, or used as a means
of hedging against possible loss through price
fluctuation on more than an occasional basis, noting
that ‘‘the economic purpose of a contract is often
implicit, or encapsulated, in the exchange’s
demonstration that the terms and conditions of the
proposed contract meet the criteria of the Guideline
[No. 1].’’ 57 FR at 3521–22, note 9. Former CEA
section 5(g) was deleted by the CFMA, and
Guideline No. 1 was accordingly also withdrawn by
the Commission.
97 156 Cong. Rec. S5906 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen.
Blanche Lincoln).
98 Id.
99 Id.
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drafters of CEA section 5c(c)(5)(C) for
the hedging and price-basing utility of a
contract to be relevant considerations in
a public interest review under that
provision. As noted, this is not
inconsistent with the approach taken in
assessing whether a futures contract was
contrary to the public interest under
former CEA section 5(g), which
contemplated application of the
economic purpose test.
In this regard, the Commission notes
further that the general ‘‘Findings and
Purpose’’ provision of the CEA, at CEA
section 3(a), states that the transactions
subject to [the CEA] . . . are affected
with a national public interest by
providing a means for managing and
assuming price risks, discovering prices,
or disseminating pricing information
through trading in liquid, fair, and
secure financial facilities.100
Accordingly, the CEA recognizes
hedging as a public interest, which
certain transactions subject to the
CEA—transactions providing a means
for managing and assuming price risk—
are intended to serve.
As such, the Commission recognizes
the utility of a contract, or category
contracts, for purposes of hedging and
price-basing to be relevant factors for
consideration in evaluating whether the
contract, or category of contracts, is
contrary to the public interest pursuant
to CEA section 5c(c)(5)(C).101 While the
articulation of the approach to
evaluating hedging and price-basing
utility differs in the 2010 Colloquy and
under the pre-CFMA economic purpose
test, the Commission anticipates that a
100 7
U.S.C. 5(a).
Commission considered hedging and
price-basing utility in its previous orders under
CEA section 5c(c)(5)(C) and § 40.11. See Kalshi
Order at 13–15; Nadex Order at 3. In the Kalshi
Order the Commission found, among other things,
that the event underlying the subject contracts—
control of a chamber of Congress—did not, in and
of itself, have ‘‘sufficiently direct, predictable, or
quantifiable economic consequences’’ for the
contracts to serve an effective hedging function. The
Commission found that, since the economic effects
of control of a chamber of Congress are ‘‘diffuse and
unpredictable,’’ the price of the subject contracts
was not directly correlated to the price of any
commodity, and so the price of the contracts could
not predictably be used to establish commercial
transaction prices. The Commission found that,
even if some level of political risk may be
embedded in the price of many commercial
transactions, that did not, in itself, support a
finding that the subject contracts served a pricebasing function. Kalshi Order at 16–17. Similarly,
in the Nadex Order the Commission found that ‘‘the
unpredictability of the specific economic
consequences of an election means that the [subject
contracts] cannot reasonably be expected to be used
for hedging purposes . . .’’ Nadex Order at 3. The
Commission found that there was no situation in
which the subject contracts’ prices could form the
basis for the pricing of a commercial transaction,
financial asset, or service, which demonstrated that
the contracts did not have price-basing utility. Id.
101 The
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contract, or category of contracts, that
does not satisfy one such articulation
also would likely not satisfy the other.
In this regard, the Commission
reiterates that it has the discretion to
consider other factors, in addition to
hedging and price-basing utility, in its
evaluation of whether a contract, or
category of contracts, is contrary to the
public interest for purposes of CEA
section 5c(c)(5)(C).102 This is consistent
with the discretion of the Commission
when evaluating whether a futures
contract was contrary to the public
interest under CEA section 5(g), prior to
its repeal by the CFMA.103 Accordingly,
for the reasons discussed herein, and
giving due consideration to the
intentions reflected in the 2010
Colloquy, the Commission has
determined that there are circumstances
where other public interest
considerations support prohibiting a
contract, or category of contracts, from
being listed for trading or accepted for
clearing on or through a registered
entity, even where such contract, or
category of contracts, may have certain
hedging or price-basing utility.104
With respect to other factors to be
considered in a public interest review,
the legislative history of CEA section
5c(c)(5)(C) supports consideration of
whether the contract, or category of
102 For example, in both the Nadex Order and the
Kalshi Order, the Commission highlighted the
public interest concerns that would be raised if
registered entities were permitted to offer trading in
event contracts involving the outcome of political
elections. Nadex Order at 4; Kalshi Order at 19–20.
103 In the Senate conference report for the
Commodity Futures Trading Commission Act of
1974, the conferees adopted an amendment that
required a board of trade to demonstrate that
transactions on it would not be contrary to the
public interest, and ‘‘note[d] that the broader
language of the Senate provision would include the
concept of the ‘economic purpose’ test provided in
the House bill subject to the final test of the ‘public
interest.’ ’’ S. Rep. 1194, 93rd Cong. 2d Sess. 36
(1974). See also Economic and Public Interest
Requirements for Contract Market Designation, 47
FR 49832, 49836 (Nov. 3, 1982) (‘‘Congress made
clear when it adopted the public interest test of
Section 5(g) of the Act, that the public interest test
is broader than, and includes, an economic purpose
test’’ (citing the above-referenced Senate conference
report). This public interest standard was not
modified by the 1992 revisions to Guideline 1. See
generally 57 FR 3518 (Jan. 30, 1992).
104 In the 2010 Colloquy, Senator Feinstein asked
Senator Lincoln whether she agreed that CEA
section 5c(c)(5)(c) would ‘‘empower the
Commission to prevent trading in contracts that
may serve a limited commercial function but
threaten the public good by allowing some to profit
from events that threaten our national security.’’
Senator Lincoln confirmed that she agreed, stating
that while national security threats ‘‘pose a real
commercial risk to many businesses in America,’’
contracts that permitted people to hedge that risk
‘‘would also involve betting on the likelihood of
events that threaten our national security. That
would be contrary to the public interest.’’ 156 Cong.
Rec. S5906–07 (daily ed. July 15, 2010) (statements
of Sen. Diane Feinstein and Sen. Blanche Lincoln).
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contracts, may threaten the public good.
In the 2010 Colloquy, Senator Feinstein
recognized contracts that would
‘‘allow[] some to profit from events that
threaten our national security’’ as a
threat to the public good.105 Senator
Lincoln similarly recognized that event
contracts that allowed for the hedging of
the commercial risks of terrorist attacks,
war, and hijacking would also ‘‘involve
betting on the likelihood of events that
threaten our national security. That
would be contrary to the public
interest.’’ 106 The Commission believes
this is plainly so given the terrible
potential consequences of these
activities. The Commission accordingly
agrees with, and adopts, the view
expressed in the 2010 Colloquy that
national security and, more broadly, the
public good, are relevant factors for
consideration in an evaluation of
whether a contract, or category of
contracts, is contrary to the public
interest for purposes of CEA section
5c(c)(5)(C).
The Commission will consider all
relevant factors in evaluating whether a
contract, or category of contracts, is
contrary to the public interest, and there
is no one factor that will be
determinative in the Commission’s
evaluation. In addition to hedging
utility, price-basing utility, and threats
to national security or other threats to
the public good, some of the factors that
may be relevant when the Commission
is evaluating whether a contract, or
category of contracts, is contrary to the
public interest include: (i) the extent to
which the contract, or category of
contracts, would draw the Commission
into areas outside of its primary
regulatory remit; 107 (ii) whether
characteristics of the contract, or
category of contacts, may increase the
risk of manipulative activity relating to
the trading or pricing of the contract; 108
105 Id.
106 Id.
107 See,
e.g., Kalshi Order at 22–23.
e.g., id. at 21–22. The Commission notes
that DCMs and SEFs have a statutory obligation to
ensure that the contracts that they list for trading
are not readily susceptible to manipulation. See
Core Principle 3 for DCMs, CEA section 5(d), 7
U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA
section 5h(f)(3), 7 U.S.C. 7b-3(f)(3). The
Commission distinguishes the type of review that
would be undertaken to evaluate whether a contract
submission to the Commission, pursuant to § 40.2
or § 40.3, demonstrates compliance with this
statutory obligation, from the type of review that
would be undertaken to evaluate whether increased
risk of manipulative activity may raise public
interest concerns regarding a contract, or category
of contracts, for purposes of CEA section 5c(c)(5)(C).
The Commission notes that a review for purposes
of CEA section 5c(c)(5)(C) would be to determine
whether a contract, or category of contracts, should
be per se prohibited from being listed for trading
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and (iii) whether the contract, or
category of contracts, could result in
market participants profiting from harm
to any person or group of persons.109
The Commission notes that the factors
that inform a public interest
determination, and the weight given to
each such factor, are likely to vary
depending on the particular
characteristics of the contract, or
category of contracts, that are being
evaluated.
Request for Comment
The Commission requests comment
on all aspects of its discussion of the
factors to be considered in evaluating
whether a contract, or category of
contracts, is contrary to the public
interest for purposes of CEA section
5c(c)(5)(C). In particular, the
Commission requests comment on the
following questions:
• Should hedging and price-basing
utility be considered as factors when
evaluating whether a contract, or
category of contracts, is contrary to the
public interest? Why or why not?
• If hedging and price-basing utility
should be considered as factors when
evaluating whether a contract, or
category of contracts, is contrary to the
public interest, how should such utility
be assessed?
• Are there factors, in addition to
those described herein, that may be
relevant when evaluating whether a
contract, or category of contracts, is
contrary to the public interest? Are there
any factors the Commission should
specifically not consider? Why or why
not?
3. The Enumerated Activities
The Commission proposes to amend
§ 40.11(a)(1) to include a determination
that any event contract that involves an
Enumerated Activity—including
‘‘gaming,’’ as proposed to be defined—
is contrary to the public interest and
therefore may not be listed for trading
or accepted for clearing on or through a
registered entity.
(a) Terrorism, Assassination, and War
The Commission recognizes the
Enumerated Activities of terrorism,
assassination, and war as activities that
pose a threat to national and
international security and entail
or accepted for clearing on or through a registered
entity because it is contrary to the public interest.
109 In the 2010 Colloquy, Senator Lincoln stated
that CEA section 5c(c)(5)(C) was intended, in part,
to ensure that the Commission had the power ‘‘to
prevent the creation of futures and swaps markets
that would allow citizens to profit from devastating
events.’’ See 156 Cong. Rec. S5906–07 (daily ed.
July 15, 2010) (statements of Sen. Diane Feinstein
and Sen. Blanche Lincoln).
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violence and human suffering. The
Commission believes that it would be
contrary to the public interest to allow
event contracts involving such activities
to trade on CFTC-regulated markets. The
Commission believes that allowing such
contracts to trade would raise a real risk
that the contracts, and markets for the
contracts, could be used to ‘‘profit from
devastating events.’’ 110 Allowing
trading in contracts involving terrorism,
assassination, or war could incentivize
certain market participants to take a
speculative position on whether these
devastating events will occur, or how
wide-reaching their impact will be—a
type of speculation that the Commission
believes, at a base level, is offensive and
has no place in CFTC-regulated markets.
Allowing trading in such contracts
might even increase the risk of a
terrorist attack, assassination, or act of
war by creating financial incentives for
a potential perpetrator to take a position
in such a contract and then profit by
carrying out the heinous act that the
contract involves. The national and
international security concerns and
threat to the public good raised by
terrorism, assassination, and war are so
significant that the Commission must
consider very seriously even the
slightest risk that CFTC-regulated
markets could create a means or motive
to profit from such activity.111
Accordingly, in circumstances where an
event contract involves terrorism,
assassination, or war, the Commission
believes that the public interest
concerns that would be raised by
allowing the contract to be traded as a
financial instrument on CFTC-regulated
markets, as described above, would
110 Id.
111 Similar concerns led to the shutdown in 2003
of the Futures Markets Applied to Prediction
(‘‘FutureMAP’’) program proposed by the Defense
Advanced Research Projects Agency (‘‘DARPA’’), an
office within the United States Department of
Defense. The FutureMAP program would have
permitted traders to take positions on questions
such as whether a particular political leader would
be assassinated or whether a bioterror attack would
occur. Senators raised concerns that the market
would permit the perpetrator of a terrorist attack to
profit from that attack. Senator Tom Daschle raised
concerns that the market could actually incentivize
terrorist attacks (‘‘How long would it be before you
saw traders investing in a way that would bring
about the desired result’’), and Senators Byron
Dorgan and Ron Wyden characterized the project as
‘‘morally repugnant,’’ ‘‘offensive,’’ and ‘‘grotesque.’’
See ‘‘Threats and Responses and Criticisms;
Pentagon Prepares a Futures Market on Terror
Attacks,’’ The New York Times, July 29, 2003,
available at https://www.nytimes.com/2003/07/29/
us/threats-responses-plans-criticisms-pentagonprepares-futures-market-terror.html; ‘‘Pentagon
Kills ‘Terror Futures Market,’ ’’ NBC News, July 29,
2003, available at https://www.nbcnews.com/id/
wbna3072985; 149 Cong. Rec. S10082–83 (daily ed.
July 29, 2003), available at https://
www.congress.gov/congressional-record/volume149/issue-114/senate-section/article/S10082-1.
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supersede any potential price-basing or
hedging utility of the contract.
The Commission therefore proposes
to amend § 40.11(a)(1) to include
determinations that any event contract
that involves terrorism, assassination, or
war is contrary to the public interest
and may not be listed for trading or
accepted for clearing on or through a
registered entity.
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Request for Comment
The Commission requests comment
on all aspects of its proposed public
interest determinations with respect to
contracts involving terrorism,
assassination, and war. In particular, the
Commission requests comment on
whether there are contracts that may
involve terrorism, assassination, or war
that do not raise the above-described
public interest concerns. Why, or why
not?
(b) Activity That is Unlawful Under
Federal or State Law
The Commission similarly proposes
to amend § 40.11(a)(1) to include a
determination that any event contract
that involves activity that is unlawful
under federal or state law is contrary to
the public interest and may not be listed
for trading or accepted for clearing on or
through a registered entity. As an
independent agency of the federal
government, the Commission exercises
the authorities granted to it by Congress
under the CEA to help ensure that U.S.
derivatives markets operate with
integrity. The Commission believes that
it is contrary to the public interest to
permit trading, in the financial markets
that the Commission is mandated by
Congress to oversee, in any event
contract that involves activity that
Congress has determined to be illegal.
The Commission further believes that
it is contrary to the public interest to
permit trading in any event contract that
involves activity that is illegal under
state law. Legislative bodies are
intended to serve the public good, and
such bodies generally bar or prohibit
activity that they recognize as causing,
or posing, public harm. Judges and
judicial bodies, applying statutes and
developing common law, also establish
the illegality of activity that is
recognized as causing, or posing, public
harm.112 The Commission thus believes
that permitting trading, on CFTCregulated markets, in contracts that
involve activity that is unlawful under
state law—and potentially in some
circumstances creating opportunities to
112 The Commission noted such common law
prohibitions, and related policy concerns, with
respect to wagering on elections in the Kalshi
Order. Kalshi Order at 11–12, note 27.
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profit from illegal activity—would
undermine important state interests,
expressed in state statutes and common
law, in protecting the public good.113
This is also a matter of comity with
states.
The Commission notes that there are
variations across state law in the
specific activities that are recognized as
unlawful. The Commission believes that
a determination that an event contract
that involves activity that is unlawful
under state law is contrary to the public
interest—which turns the focus of the
analysis to the questions of whether the
activity, itself, is recognized as
unlawful, and, if so, whether the
contract ‘‘involves’’ such unlawful
activity—eliminates the possibility that
the Commission would have to serve, in
its public interest analysis of a
particular contract involving particular
activity, as arbiter of a state’s own
public interest determination, as
expressed in statute and/or common
law, in recognizing specific activity as
causing, or posing, public harm.
Request for Comment
The Commission requests comment
on all aspects of its proposed public
interest determination with respect to
contracts involving activity that is
unlawful under federal or state law. In
particular, the Commission requests
comment on whether there are contracts
that may involve such activity that do
not raise the above-described public
interest concerns. Why, or why not?
(c) Gaming
As discussed above, the Commission
is proposing to define the term
‘‘gaming,’’ for purposes of § 40.11, as the
staking or risking by any person of
something of value upon: (i) the
outcome of a contest of others; (ii) the
outcome of a game involving skill or
chance; (iii) the performance of one or
more competitors in one or more
contests or games; or (iv) any other
occurrence or non-occurrence in
connection with one or more contests or
games. The proposed definition draws
upon the approach taken, in relevant
state and federal statutory definitions, to
defining the terms ‘‘gambling,’’
‘‘betting,’’ or ‘‘wagering,’’ which, as
discussed above, are generally used
interchangeably with the term
113 While the Commission has exclusive
jurisdiction over futures and swaps contracts traded
on a CFTC-registered exchange, preempting the
application of state law with respect to such
transactions—and meaning that transacting in such
contracts on a CFTC-registered exchange cannot, of
itself, constitute unlawful activity for state law
purposes—this does not preclude a contract from
involving ‘‘activity that is unlawful under . . . State
law’’ for purposes of CEA section 5c(c)(5)(C).
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‘‘gaming.’’ The Commission proposes to
amend § 40.11(a)(1) to include a
determination that any contract that
involves ‘‘gaming,’’ as proposed to be
defined, is contrary to the public
interest. Both economic utility and other
public interest factors inform the
Commission’s preliminarily
determination that event contracts
involving gaming should not be
permitted to trade on CFTC-regulated
markets.
The Commission believes that by
defining ‘‘gaming’’ in a manner that
draws upon the approach taken, in
relevant state and federal statutory
definitions, to defining the terms
‘‘gambling,’’ ‘‘betting,’’ or ‘‘wagering,’’
the Commission is in turn identifying,
for purposes of § 40.11, contracts that
‘‘exist predominantly to enable
gambling.’’ 114 The Commission believes
that the economic impact of an
occurrence (or non-occurrence) in
connection with a contest of others, or
a game of skill or chance—including the
outcome of such contest or game—
generally is too diffuse and
unpredictable to correlate to direct and
quantifiable changes in the price of
commodities or other financial assets or
instruments, limiting the hedging and
price-basing utility of an event contract
involving such an occurrence. Generally
speaking, the Commission believes that
something of value is staked or risked
upon an occurrence (or non-occurrence)
in connection with a contest of others,
114 In the 2010 Colloquy, when discussing the
Dodd-Frank Act provision that was ultimately
enacted as CEA section 5c(c)(5)(C), Senator Lincoln
stated that ‘‘[t]he Commission needs the power to,
and should, prevent derivatives contracts that are
contrary to the public interest because they exist
predominantly to enable gambling through
supposed ‘‘event contracts.’’ See 156 Cong. Rec.
S5906–07 (daily ed. July 15, 2010) (statements of
Sen. Diane Feinstein and Sen. Blanche Lincoln).
The Commission is aware that the legal landscape
with respect to certain forms of gambling has
changed since CEA section 5(c)(c)(5)(C) was
adopted in 2010, and § 40.11 was adopted in 2011.
Specifically, in 2018, the Supreme Court in Murphy
v. N.C.A.A., 584 U.S. 453, 138 S.Ct. 1461, struck
down The Professional and Amateur Sports
Protection Act (‘‘PAPSA’’). PAPSA had prohibited
states from authorizing state-sponsored gambling on
sporting events or permitting other persons to
operate and promote such sports gambling schemes.
Following this decision, many states have legalized
various forms of sports gambling. The Commission
highlights, however, the determination of Congress
to identify ‘‘gaming’’ as an Enumerated Activity,
separate and apart from activity that is unlawful
under federal or state law. This indicates
Congressional intent—supported by the 2010
Colloquy—to empower the Commission to prohibit
event contracts that would effectively serve as a
wagering vehicle, subject to a Commission
determination that such contracts are contrary to
the public interest. To this point, the Commission
notes that there were forms of legalized gambling
in the United States when CEA section 5c(c)(5)(C)
was adopted (e.g., casino sportsbooks in states such
as Nevada and New Jersey).
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or a game involving skill or chance, for
entertainment purposes—in order wager
on the occurrence. As such, the
Commission believes that contracts
involving such occurrences are likely to
be traded predominantly ‘‘to enable
gambling’’ 115 and ‘‘used predominantly
by speculators or participants not
having a commercial or hedging
interest,’’ and cannot reasonably
expected to be ‘‘used for hedging and/
or price basing on more than an
occasional basis.’’ 116
While there may be individuals or
entities for whom a particular
occurrence in connection with a contest
or game have more direct and more
predictable economic consequences, the
Commission believes that any such
segment of individuals or entities is
likely to be narrow as compared to the
broader universe of market participants,
including retail market participants,
who may be able to trade in an event
contract listed on a CFTC-registered
exchange—and who, the Commission
believes, are most likely to trade such
contract for entertainment purposes
only.
Moreover, the Commission believes
that an individual or entity for whom a
particular occurrence in connection
with a contest or game may have more
direct and more predictable economic
consequences may also be more likely to
have access to information and/or
influence that could be used to engage
in activity that could artificially move
the market in an event contract
involving such occurrence, potentially
raising heightened manipulation
concerns. For example, a professional
athlete or coach may be economically
impacted by their team’s wins or losses,
but may also have access to
information—for example, about a team
member’s health or a potential injury—
that could be used to trade ahead of the
market in an event contract involving
the team’s performance. Further, the
athlete or coach would potentially have
a platform—for example, access to
media, combined with public
perception as an authoritative source of
information regarding the team—that
could be used to disseminate
misinformation that could artificially
impact the market in the contract for
additional financial gain.117
115 Id.
116 See
section II.C.2, supra.
this regard, the Commission notes that, in
order to address concerns about the potential to
undermine the integrity of a sporting event or
wagering thereon, a number of states have
established prohibitions on sports wagers for
certain categories of individuals when they are
involved in a particular sporting event, including
athletes, coaches, referees, and staff of participants
117 In
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The Commission additionally notes
that, in many instances, a particular
individual or group of individuals may
be able to influence an occurrence in
connection with a contest or game.118 If
an event contract involving such an
occurrence is permitted to trade on
CFTC-registered markets, then even if
the individual, or group of individuals,
that can influence the outcome of the
occurrence are prohibited, by the
contract’s terms, from trading in the
contract, such individual or group of
individuals may be vulnerable to
pressure or persuasion by others who
have taken a position in the contract
and seek a particular outcome.119
The Commission further notes that
most contracts falling within the
proposed definition of ‘‘gaming’’ would
have no underlying cash market with
bona fide economic transactions to
provide directly correlated price
forming information. Rather, price
forming information is either
nonexistent, or driven by informational
sources that are unregulated, have
opaque underlying processes and
procedures, and may not follow
in the event. See, e.g., N.Y. Rac. Pari-Mut. Wag. &
Breed. Law § 1367 (McKinney). In the context of an
event contract traded on CFTC-regulated markets,
involving an occurrence (or non-occurrence) in
connection with a contest of others or a game of
skill or chance, the Commission notes that, even if
individuals, or groups of individuals, who may
influence the outcome of the occurrence are
prohibited by the contract’s terms from trading in
the contract, this would not prevent such
individual, or group of individuals, from engaging
in other activity—for example, the spread of
misinformation—that could artificially move the
market in the event contract.
118 This may particularly be the case for
occurrences that do not directly affect the final
outcome of a contest or game. The Commission
believes that event contracts involving such
occurrences would be akin to ‘‘novelty,’’
‘‘proposition,’’ or ‘‘prop’’ bets. Many states that
have legalized sports gambling prohibit various
types of novelty or proposition bets due, in part, to
manipulation concerns. See, e.g., Massachusetts
Gaming Commission Says No Super Bowl Prop Bets
This Year, NewBostonPost (Feb. 9, 2024), available
at https://newbostonpost.com/2024/02/09/
massachusetts-gaming-commission-says-no-superbowl-prop-bets-this-year/. See also Suspicious
betting leads to questions about Super Bowl
Gatorade color odds, New York Post (Feb. 13,
2024), available at https://nypost.com/2024/02/13/
sports/suspicious-betting-raises-questions-aboutsuper-bowl-gatorade-color-odds/.
119 Relevant to this concern, certain state gaming
regulators have prohibited, or are seeking to
prohibit, collegiate sports proposition bets due to
concerns related to ‘‘bad actors [who] have engaged
in unacceptable behavior by making threats against
student-athletes[.]’’ Could Ohio ban college sports
prop bets? Mike DeWine, NCAA president Charlie
Baker support, The Columbus Dispatch (Feb. 2,
2024), available at https://www.dispatch.com/story/
sports/college/big-10/2024/02/02/mike-dewineohio-college-sports-betting-ban-ncaa/72453967007/;
see also Va. Code Ann. section 58.1–4039 (A)(2)
(West) (No person shall place or accept a
proposition bet on college sports.).
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scientifically reliable methodologies.120
This differs from the informational
sources used for pricing the vast
majority of commodities underlying
Commission-regulated derivatives
contracts (e.g., government issued crop
forecasts, weather forecasts, federal
government economic data, marketderived supply and demand metrics for
commodities, market-based interest rate
curves). The lack of price forming
information for contracts involving
‘‘gaming,’’ or the availability of only
opaque and unregulated sources of price
forming information, may increase the
risk of manipulative activity relating to
the trading and pricing of such
contracts, while decreasing the ability of
the offering exchange, or the
Commission, to detect such activity.
Other public interest considerations
also weigh against permitting the
trading, on CFTC-regulated markets, of
event contracts involving gaming, as
proposed to be defined. The
Commission believes that permitting
such contracts to trade as financial
instruments on financial markets could
raise broad investor protection concerns
by conflating gambling and financial
instruments in a manner that could
particularly create confusion and risk
for retail market participants. Among
other things, it could improperly signal
to certain retail investors that these
contracts are instruments to be used for
investment purposes—and it could
signal to others that derivative markets
are appropriate venues for retail market
participants to trade for entertainment
purposes, which could minimize, for
those investors, unique characteristics
and risks of trading, more generally, in
derivative markets.
Moreover, the Commission notes that
in the United States, gambling is
overseen by state regulators with
particular expertise, and governed by
state gaming laws aimed at addressing
particular risks and concerns associated
with gambling.121 The Commission is
120 Notably, the most useful source of priceforming information with respect to contracts
involving ‘‘gaming,’’ as proposed to be defined,
would likely be prices of similar wagers in
gambling and sport-betting facilities. The
Commission believes that this fact further supports
the Commission’s view that trading in such
‘‘gaming’’ contracts would effectively amount to
betting or wagering.
121 See, e.g., N.Y. Rac. Pari-Mut. Wag. & Breed.
Law section 1367 (McKinney) (requiring casinos
and mobile sports wagering licensees to promptly
report to the New York State Gaming Commission
information relating to, among other things,
unusual wagering activity or patterns that may
indicate concern with the integrity of a sporting
event, any potential breach of the relevant sports
governing body’s internal rules and codes of
conduct pertaining to sports wagering (as they have
been provided by the sports governing body to the
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not a gaming regulator. The CEA and
Commission regulations are focused on
regulating financial instruments and
markets, and do not include provisions
aimed at protecting against gamblingspecific risks and concerns, including
customer protection concerns inherent
to gambling.122 Permitting event
contracts involving gaming, as proposed
to be defined, to trade on CFTCregulated markets would in effect
permit instruments commonly
understood as bets or wagers on contests
or games to avoid these legal regimes
and protections. Gambling is a rapidly
evolving field, and the Commission
does not believe that it has the statutory
mandate nor specialized experience
appropriate to oversee it, or that
Congress intended for the Commission
to exercise its jurisdiction or expend its
resources in this manner.123
The Commission notes that the nonexclusive list of examples of ‘‘gaming’’
set forth in proposed § 40.11(b)(2)
includes staking or risking something of
value upon the outcome of a political
contest, including an election or
elections, or upon an occurrence or nonoccurrence in connection with such a
contest. Consistent with its
casino or mobile sports wagering operator), and
suspicious or illegal wagering activities, including
using agents to place wagers, using confidential
non-public information, or using false
identification); Colo. Rev. Stat. Ann. section 44–30–
1506 (West) (requiring a sports betting operator
promptly to report to the Colorado Division of
Gaming any abnormal betting activity or discernible
patterns that may indicate a concern about the
integrity of a sports event or events; any other
conduct with the potential to corrupt a betting
outcome of a sports event for purposes of financial
gain, including match fixing or the use of material,
nonpublic information to place bets or facilitate
another person’s sports betting activity; and
suspicious or illegal wagering activities).
122 For example, a number of states have
developed self-exclusion programs for individuals
who experience problem gambling, which enable
such individuals to self-report to be excluded from
in-person and/or online gambling sites for a set
amount of years (or, in some cases, indefinitely).
See, e.g., Del. Code Ann. tit. 29, § 4834 (West); La.
Stat. Ann. section 27:27.1; Ariz. Rev. Stat. Ann.
section 5–1320; Iowa Gaming Association,
Responsible Gaming, available at https://
www.iowagaming.org/responsible-gaming/. A
number of states mandate the on-site posting of
problem gambling assistance notices, and some
states also mandate employee training to identify
individuals who may be struggling with problem
gambling. See, e.g., 4 Pa. Stat. and Cons. Stat. Ann.
section 3706 (West); 230 Ill. Comp. Stat. Ann. 10/
13.1; Ohio Rev. Code Ann. section 3772.18 (West).
In addition, a number of states require gambling
advertisements to include customer protection
disclosures, such as resources for problem gambling
assistance. See, e.g., N.Y. Rac. Pari-Mut. Wag. &
Breed. Law sections 1362, 1363 (McKinney); Tenn.
Code Ann. section 4–49–205 (West); Ark. Code
Ann. section 20–27–2601 (West); Conn. Gen. Stat.
Ann. section 12–863 (West).
123 See note 82, supra, for examples of certain
evolving risks related to certain bets or wagers on
contests or games.
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determinations in the Nadex Order and
the Kalshi Order, the Commission
believes that permitting trading, on
CFTC-regulated markets, in this
particular sub-set of gaming contracts
would raise unique additional public
interest concerns relating to election
integrity and the perception of election
integrity, and the appropriate role of the
Commission in this area.124 For
example, permitting trading in these
types of contracts could create monetary
incentives to vote for particular
candidates even when such votes may
be contrary to a voter’s (or organized
groups of voters’) political views. It
would also raise concerns that conduct
designed to artificially affect the
electoral process could be used to
manipulate the markets in such
contracts, or conversely, that the
markets in such contracts could be
manipulated to influence elections or
electoral perceptions. For example, false
reporting or other misinformation—such
as inaccurate polling or voter surveys or
false news reporting—could be used to
distort the information underlying price
formation in such contracts.125
124 The Commission believes that permitting
trading in contracts involving political contests in
a foreign jurisdiction, or concerning a supranational
organization, also would raise these public interest
concerns, just as permitting trading in contracts
involving political contest in the United States
would.
125 Certain commenters on the contracts subject to
the Kalshi Order asserted that event contracts
involving occurrences in connection with political
election contests could serve as a check on
misinformation and inaccurate polling, stating that
market-based alternatives tend to be more accurate
than polling or other methods of predicting election
outcomes. See Kalshi Order at 22. The Commission
notes that there is also research suggesting that
election markets may incentivize the creation of
‘‘fake’’ or unreliable information in the interest of
moving the market; a number of commenters on the
contracts subject to the Kalshi Order also raised this
concern. Id. See also Yeargain, Tyler, ‘‘Fake Polls,
Real Consequences: The Rise of Fake Polls and the
Case for Criminal Liability,’’ Missouri Law Review,
Volume 85, Issue 1 (Winter 2020) citing Enten,
Harry, ‘‘Fake Polls are a Real Problem,’’
FiveThirtyEight (Aug. 22, 2017), available at
https://fivethirtyeight.com/features/fake-polls-are-areal-problem/ (noting how a seemingly false or
unreliable poll caused significant movement on an
event contract market and suggesting that such poll
could have been, or at least could be, created to
cause such market movement; further arguing that
such false polls can have a real and detrimental
effect on elections). The Commission notes, further,
that there is no underlying cash market for political
event contracts, with bona fide economic
transactions to provide directly correlated price
forming information. Rather, price forming
information is driven in large measure by polling
and other informational sources that are
unregulated, frequently have opaque underlying
processes and procedures, and may not follow
scientifically reliable methodologies. The opaque
and unregulated sources of price forming
information for such contracts may increase the risk
of manipulative activity relating to the trading and
pricing of the contracts, while decreasing the ability
of the listing registered entity and the Commission
to detect such activity.
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The Commission notes, further, that it
is not tasked with the protection of
election integrity or enforcement of
campaign finance laws. However, if
trading was permitted on CFTCregistered exchanges in event contracts
that involve the staking or risking of
something of value on a political
contest, then the Commission could find
itself investigating the outcome of an
election itself.126 Again, the
Commission does not have the
specialized experience appropriate for
this role, and believes that it is unlikely
that Congress intended for the
Commission to exercise its jurisdiction
or expend its resources this way.
The unique additional public interest
concerns that would be raised by
permitting the trading, on a CFTCregistered exchange, of an event contract
that involves the staking or risking of
something of value on the outcome of a
political contest, or upon an occurrence
or non-occurrence in connection with
such a contest, inform the Commission’s
proposal to amend § 40.11(a)(1) to
include a determination that any such
contract is contrary to the public
interest.127
126 While certain commodities outside the
Commission’s direct remit do underlie derivatives
without giving rise to significant problems, due to
the special role of elections in our society, the
Commission believes that the oversight function in
this area is best reserved for other expert bodies. Of
course, governmental bodies are tasked with that
function, but the Commission has both the
authority and responsibility to address fraud, false
reporting, and manipulation in markets for
derivatives that trade on CFTC-registered
exchanges. See, e.g., CEA section 6(c), 7 U.S.C. 9(c);
17 CFR 180. As such, if trading were permitted in
event contracts that involve the staking or risking
of something of value on the outcome of a political
contest, or upon an occurrence or non-occurrence
in connection with such a contest, the Commission
would have a statutory responsibility to exercise its
surveillance, investigation, and enforcement
authority to ensure the integrity of the markets in
such contracts. Conversely, attempts at
manipulation of such markets could have broader
electoral implications, similarly drawing the
Commission into investigations of election-related
activities. Indeed, accusations of fraud have been
leveled at government bodies tasked with
administering elections. Such scenarios underscore
for the Commission that it has no appropriate role
in this area.
127 Many state courts have also found that
wagering on elections is contrary to sound public
policy. E.g., Alabama, White v. Yarbrough, 16 Ala.
109, 110 (1849) (‘‘A wager on an election is void
as against public policy’’); Arkansas, Williams v.
Kagy, 3 SW2d 332, 333–34, 176 Ark. 484, 3 (1928)
(‘‘Even before the passage of the statute quoted, this
court ruled . . . that wagers upon elections then
pending are calculated to endanger the peace and
harmony of society and have a corrupting influence
upon the morals and are contrary to sound policy’’);
Colorado, Maher v. Van Horn, 60 P. 949, 17–18
(Colo. 1900) (‘‘[W]ager contracts on the result of
elections are contrary to public policy and void and
will not be enforced by the courts’’); Georgia,
McLennan v. Whidon, 48 SE 201, 202–03, 120 Ga.
666 (1904), quoting Leverett v. Stegal, 23 Ga. 259
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Request for Comment
The Commission requests comment
on all aspects of its proposed public
interest determination with respect to
contracts involving gaming. In
particular, the Commission requests
comment on whether there are contracts
that may involve gaming that do not
raise the above-described public interest
concerns. Why, or why not?
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D. The Commission’s Authority To
Identify Additional Similar Activities to
the Enumerated Activities
CEA section 5c(c)(5)(C)(i)(VI) provides
that the Commission may determine, by
rule or regulation, that event contracts
in certain excluded commodities are
contrary to the public interest if the
contracts involve ‘‘other similar
activity’’ to the Enumerated
Activities.128 CEA section 5c(c)(5)(C)(ii),
(1857) (finding that all gambling contracts are
illegal but noting that ‘‘If there be any class of
gambling contracts which should be frowned upon
more than another it is bets on elections. They
strike at the foundations of popular institutions,
corrupt the ballot box, or, what is tantamount to it,
interfere with the freedom and purity of elections’’);
Indiana, Worthington v. Black, 13 Ind. 344, 344–345
(1859) (‘‘It has been often decided that wagers upon
the result of an election are against the principles
of sound policy, and consequently illegal . . .’’);
Iowa, David v. Ransom, 1 Greene 383, 383–85
(1848) (‘‘A wager or bet made between parties on
the result of an election is void. If the wager is made
before an election, illegal votes are often secured,
and others induced, contrary to the better judgment
of the voter; or if made after an election, the parties
interested might be led to exert a corrupt influence
upon the canvassing, and returns of the votes’’);
Kansas, Reynolds v. McKinney, 4 Kan. 94, 101
(1866) (‘‘[A bet] involving an inquiry into the
validity of the election of a public officer. . . . was
therefore, illegal and void on principles of public
policy’’); Massachusetts, Ball v. Gilbert, 53 Mass.
397, 400–02 (1847) (a wager upon the event of an
election to a public office—at the federal, state, or
local level—is illegal and void on numerous public
policy grounds); Missouri, Hickerson v. Benson, 8
Mo. 8 (1843) (wagers on the result of public
elections and collateral matters are ‘‘clearly’’ against
public policy and ‘‘sound morality’’ and
consequently illegal and void at common law);
Nebraska, Specht v. Beindorf, 56 Neb. 553, 76 NW
1059 (1898) (promissory note premised on the
election of a public official is a wager on the result
of an election and void on grounds of public
policy); North Carolina, Bettis v. Reynolds, 34 N.C.
344, 345–48 (1851) (‘‘the practice of betting on
elections has a direct tendency to cause undue
influence[,]’’ and even where neither party was a
voter, a wager on the result of a Presidential
election void as against public policy); Oregon,
Willis v. Hoover, 9 Or. 418, 419–20 (1881) (wagers
on the result of public elections are illegal and void
upon grounds of public policy); Rhode Island,
Stoddard v. Martin, 1 R.I. 1, 1 (1828) (all wagers on
elections and judicial decisions ‘‘are of immoral
tendency, against sound policy,’’ and therefore
void); Texas, Thompson v. Harrison, 1842 WL 3625,
at *1 (1842) (wagers on the result of public elections
are ‘‘contrary to good morals’’ and void on grounds
of public policy); Wisconsin, Murdock v. Kilbourn,
6 Wis. 468, 470–71 (1857) (wager upon the event
of a public election is contrary to public policy,
illegal, and void).
128 7 U.S.C. 7a–2(c)(5)(C)(i)(VI).
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in turn, provides that such contracts
shall not be listed or made available for
clearing or trading on or through a
registered entity. These statutory
provisions are implemented through
§ 40.11(a)(2), which provides that a
registered entity shall not list for trading
or accept for clearing an event contract
‘‘which involves, relates to, or
references an activity that is similar to
an activity enumerated in § 40.11(a)(1)
of this part’’—namely, an Enumerated
Activity—and that the Commission
determines, by rule or regulation, to be
contrary to the public interest.129 CEA
sections 5c(c)(5)(C)(i)–(ii), as
implemented through § 40.11(a)(2), thus
empower the Commission to identify,
by rule or regulation, additional, similar
activities to the Enumerated Activities,
and to prohibit registered entities from
listing for trading or accepting for
clearing event contracts involving those
activities where the Commission finds
that such contracts are contrary to the
public interest. To date, the Commission
has not exercised this authority.
While the Commission is not
proposing to exercise this authority at
this juncture, the Commission reiterates
that it retains the authority under CEA
section 5c(c)(5)(C)(VI) to determine, in
the future, that other activities are
similar to the Enumerated Activities,
and that event contracts involving such
similar activities are contrary to the
public interest and may not be listed for
trading or accepted for clearing on or
through a registered entity. This
authority will continue to be reflected in
the regulatory text of § 40.11(a)(2). As
part of any final rule resulting from this
Notice of Proposed Rulemaking, the
Commission intends to include an
Appendix E to Part 40 containing
guidance in the form of factors the
Commission may consider, in addition
to other factors the Commission deems
appropriate in light of individual facts
and circumstances, when making a
determination under § 40.11(a)(2) that
such event contracts are contrary to the
public interest, consistent with the
public interest analysis set forth above.
E. Technical Amendments
The Commission proposes to make
certain technical amendments to
§ 40.11. These proposed amendments
are intended to clarify and more
logically organize the regulation, and
are not intended to change the
regulation’s substantive meaning or
effect. As a threshold matter, the
Commission proposes to remove the
words ‘‘Review of’’ from the title of
§ 40.11, because the regulation does not
129 17
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only address contract reviews. The
Commission believes that the regulation
would be more clearly and accurately
titled ‘‘Event contracts based upon
certain excluded commodities.’’
1. Technical Amendments to § 40.11(a)
The Commission proposes to make
certain technical amendments to
§ 40.11(a). First, the Commission
proposes to list the Enumerated
Activities, as currently set forth in
§ 40.11(a)(1), in separate sub-paragraphs
and to reorder the list of the Enumerated
Activities to match the order in which
they appear in CEA section
5c(c)(5)(C)(i). The Enumerated Activities
would be listed in new sub-paragraphs
(i) through (v) of § 40.11(a)(1).
The Commission further proposes to
replace ‘‘which’’ with ‘‘that’’ in
§ 40.11(a)(2). This is not intended to
change the meaning of the current
language. Rather, the Commission
proposes this change to make the
language of § 40.11(a)(2) consistent with
the language of § 40.11(a)(1).
The Commission additionally
proposes to state in § 40.11(a)(2) that a
contract may not be listed for trading or
accepted for clearing if the contract
involves activity that is similar to an
activity enumerated in proposed subparagraphs (i) through (v) of
§ 40.11(a)(1)—in effect, if the contract
involves activity that is similar to one of
the statutory Enumerated Activities.
This would be substantively consistent
with existing § 40.11(a)(2) and would
reflect the statutory text of CEA section
5c(c)(5)(C)(i)(VI), which states that the
Commission may make a public interest
determination with respect to contracts
involving other activity that is similar to
the Enumerated Activities set forth in
CEA sections 5c(c)(5)(C)(i)(I)–(V). The
Commission contemplates that, in the
event that it identifies activities that are
similar to the Enumerated Activities in
a future rule or regulation pursuant to
its authority under CEA section
5c(c)(5)(C)(i)(VI) and § 40.11(a)(2), such
activities would be numbered
sequentially after proposed subparagraphs (i) through (v) of
§ 40.11(a)(1).
2. Technical Amendments to § 40.11(c)
The Commission proposes to make
certain technical amendments to
§ 40.11(c). These proposed amendments
are not intended to alter the regulation’s
substantive meaning or its practical
implementation, including the timing or
procedural requirements of the
§ 40.11(c) review process. The proposed
technical amendments are simply
intended to clarify § 40.11(c) and
improve its organization.
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First, the Commission proposes
removing the phrase ‘‘and approval of
certain event contracts’’ from the title of
§ 40.11(c), because the paragraph does
not only address contract approval. The
Commission believes the paragraph
would be more clearly and accurately
titled ‘‘90-day review.’’
Next, the Commission proposes to
number the introductory paragraph to
§ 40.11(c) as § 40.11(c)(1), and to
reorganize existing §§ 40.11(c)(1) and (2)
into three new paragraphs, numbered
§§ 40.11(c)(2) through § 40.11(c)(4). In
renumbered § 40.11(c)(1), the
Commission proposes adding the
modifying phrase ‘‘made by a registered
entity’’ to clarify that submissions
pursuant to §§ 40.2 and 40.3 are made
by registered entities. The Commission
further proposes replacing the word
‘‘which’’ with ‘‘that’’ in order to make
the language consistent throughout
§ 40.11, and proposes replacing the
word ‘‘be’’ with ‘‘is’’ simply for
grammatical structure.130
The proposed reorganization of
existing §§ 40.11(c)(1) and (2) into three
new paragraphs, numbered
§§ 40.11(c)(2) through § 40.11(c)(4), and
the proposed language changes to those
provisions, are intended to improve the
clarity of § 40.11(c) by, among other
things, grouping related information
together. As amended, § 40.11(c)(2)
would address the commencement of a
90-day review period, including
notification of such commencement. As
amended, § 40.11(c)(2) would include
language explicitly stating that a
registered entity must be notified of the
commencement of a 90-day review, and
would group this language together with
a clarified version of existing language
providing that notice of the
commencement of a 90-day review will
be posted on the Commission’s website.
To further enhance clarity, proposed
§ 40.11(c)(2) would provide that the 90day review period commences ‘‘on the
date the Commission notifies the
registered entity of its determination to
conduct a 90-day review,’’ amending the
current language, which states that the
90-day review period commences from
the date the Commission notifies a
registered entity of a potential violation
of § 40.11(a). The Commission proposes
to clarify the current language to avoid
potential uncertainty as to the specific
start date of the 90-day review period.
130 As discussed above, the Commission also is
proposing to remove from § 40.11(c)(1), as proposed
to be renumbered, the words ‘‘relate to, or
reference’’, and to refer only to contracts that ‘‘may
involve’’ an activity enumerated in § 40.11(a)(1) or
§ 40.11(a)(2), in order to more closely align with the
statutory language of CEA section 5c(c)(5)(C).
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Proposed new § 40.11(c)(3) would
address the existing requirement that
the Commission request that a registered
entity suspend the listing or trading of
a contract during the pendency of the
90-day review period. To enhance
clarity, minor technical changes would
be made to the existing regulatory
language, including removal of excess
wording describing the types of
contracts that may be subject to a 90-day
review.
With the exception of a sub-heading
the Commission proposes to remove for
consistency, proposed new § 40.11(c)(4)
would include existing regulatory
language addressing Commission action
at the end of the 90-day review period.
Request for Comment
The Commission requests comment
on all aspects of its proposed technical
amendments to § 40.11.
F. Implementation Timeline
The Commission proposes making the
final rule amendments effective 30 days
after publication in the Federal
Register. The Commission believes that
this 30-day period should provide
registered entities with sufficient time to
account for the rule amendments in
their product design and compliance
procedures. However, the Commission
also proposes an implementation period
that would run for an additional 30 days
after the effective date of the final rule
amendments—for a total of 60 days from
the date of publication of the final rule
amendments in the Federal Register—
solely for event contracts that are listed
for trading as of the date of publication
of the final rule amendments, and that
are impacted by the amendments.
The Commission believes that a 60day implementation period for these
contracts will minimize any market
disruption that might be caused by the
rule amendments. In this regard, the
Commission notes that event contracts
are generally based upon a discrete
occurrence or event, and Commission
staff’s anecdotal experience indicates
that many event contracts settle within
relatively short time horizons. This,
coupled with the fact that, as discussed
further in section III.C, infra, contracts
that involve ‘‘gaming,’’ as proposed to
be defined, currently comprise a small
portion of the overall event contracts
market, suggests that few event
contracts impacted by the proposed rule
amendments, if finalized, would need to
be wound down before their existing
settlement dates.131 To the extent that a
particular event contract that is
impacted by the rule amendments has a
131 See
PO 00000
also note 171, infra.
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48985
settlement date that extends beyond the
implementation period, the Commission
believes that 60 days would provide
sufficient time for the registered entity
to ensure the orderly cessation of
trading in the contract.
For the avoidance of doubt, the
proposed extended 60-day
implementation period would apply
only to contracts that are listed and
available for trading as of the date of
publication of the final rule
amendments in the Federal Register.
The extended implementation period
would not apply to contracts that have
been self-certified under § 40.2, or
approved by the Commission under
§ 40.3, but are not listed and available
for trading as of the date of publication
of the final rule amendments in the
Federal Register. The interest in
minimizing market disruption that
informs the proposed extended
implementation period does not apply
to such contracts.
All registered entities are expected to
make good-faith efforts that will result
in conformance with the final rule
amendments by no later than the
effective date of the final amendments
(or the 60-day implementation period,
as applicable). These good-faith efforts
should take the final rule amendments
into account in all compliance, contract
design, and listing, trading, or clearing
decisions, as well as in decisions
leading to the orderly and timely
winddown of any contracts with
settlement dates beyond the 60-day
implementation period.
Request for Comment
The Commission requests comment
on all aspects of the proposed
implementation timeline. In particular,
the Commission requests comment on
the following questions:
• Would an effective date that is 30
days after publication of the final rule
amendments in the Federal Register
provide registered entities with
sufficient opportunity to comply with
the amendments?
• Would the proposed 60-day
implementation period provide
sufficient time for the expiration of, or
orderly cessation of trading in, listed
event contracts that are impacted by the
proposed rule amendments?
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires federal agencies to
consider whether the rules they propose
will have a significant economic impact
on a substantial number of small entities
and, if so, to provide a regulatory
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flexibility analysis respecting the
impact.132 Whenever an agency
publishes a general notice of proposed
rulemaking for any rule, pursuant to the
notice-and-comment provisions of the
Administrative Procedure Act,133 a
regulatory flexibility analysis or
certification is typically required.134
The rule amendments proposed
herein will affect DCMs, SEFs, and
DCOs. The Commission has previously
established certain definitions of ‘‘small
entities’’ to be used by the Commission
in evaluating the impact of its rules on
small entities in accordance with the
RFA.135 The Commission previously
determined that DCMs are not small
entities for purposes of the RFA.136
Similarly, the Commission previously
determined that SEFs 137 and DCOs 138
are not small entities for purposes of the
RFA.139
Accordingly, the Chairman, on behalf
of the Commission, hereby certifies
pursuant to 5 U.S.C. § 605(b) that the
proposed amendments will not have a
significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 140 imposes certain
requirements on federal agencies,
including the Commission, in
connection with conducting or
sponsoring any ‘‘collection of
information,’’ as defined by the PRA.
Under the PRA, an agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a valid
control number from the Office of
Management and Budget (‘‘OMB’’).141
The PRA is intended, in part, to
minimize the paperwork burden created
for individuals, businesses, and other
persons as a result of the collection of
information by federal agencies, and to
ensure the greatest possible benefit and
utility of information created, collected,
maintained, used, shared, and
disseminated by or for the federal
132 5
U.S.C. 601 et seq.
U.S.C. 553.
5 U.S.C. 601(2), 603, 604, and 605.
135 See Policy Statement and Establishment of
Definitions of ‘‘Small Entities’’ for Purposes of the
Regulatory Flexibility Act, 47 FR 18618 (Apr. 30,
1982).
136 Id. at 18618–19.
137 See Core Principles and Other Requirements
for SEFs, 78 FR 33476, 33548 (June 4, 2013).
138 See New Regulatory Framework for Clearing
Organizations, 66 FR 45604, 45609 (Aug. 29, 2001).
139 The determination about impact on small
entities in this section is limited to the RFA
analysis. Additional analysis on the impact of the
regulation is set out in the analysis of cost-benefit
considerations in section III.C.
140 5 U.S.C. 601, et seq.
141 See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
133 5
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134 See
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government.142 The PRA applies to all
information, regardless of form or
format, whenever the federal
government is obtaining, causing to be
obtained, or soliciting information, and
includes required disclosure to third
parties or the public, of facts or
opinions, when the information
collection calls for answers to identical
questions posed to, or identical
reporting or recordkeeping requirements
imposed on, ten or more persons.143
The rule amendments proposed
herein, if adopted, would result in a
collection of information within the
meaning of the PRA, as discussed
below. The Commission therefore is
submitting this proposal to the OMB for
its review in accordance with the
PRA.144 Responses to this collection of
information would be mandatory. The
Commission will protect any
proprietary information according to the
Freedom of Information Act and part
145 of the Commission’s regulations.145
In addition, section 8(a)(1) of the CEA
strictly prohibits the Commission,
unless specifically authorized by the
CEA, from making public any ‘‘data and
information that would separately
disclose the business transactions or
market positions of any person and
trade secrets or names of customers.’’ 146
Finally, the Commission is also required
to protect certain information contained
in a government system of records
according to the Privacy Act of 1974.147
1. Submission of Updated Rules to the
Commission
This proposed rulemaking affects a
collection of information for which the
Commission has previously received a
control number from OMB. The title for
this collection of information is OMB
Control No. 3038–0093, Part 40,
Provisions Common to Registered
Entities (‘‘OMB Collection 3038–0093’’).
Section 40.6 of the Commission’s
regulations 148 requires registered
entities to make rule submissions to the
Commission when they adopt a new or
revised rule or rule amendments,
including changes to product terms and
conditions. The Commission anticipates
that, if the rule amendments proposed
herein are adopted, registered entities
whose product offerings include
contracts involving ‘‘gaming,’’ as
proposed to be defined, will take certain
steps with respect to those contracts in
142 See
44 U.S.C. 3501.
44 U.S.C. 3502(3).
144 See 44 U.S.C. 3507(d); 5 CFR 1320.11.
145 See 5 U.S.C. 552; see also 17 CFR part 145
(Commission Records and Information).
146 7 U.S.C. 12(a)(1).
147 5 U.S.C. 552a.
148 17 CFR 40.6.
143 See
PO 00000
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order to comply with the rules. The
Commission anticipates that, for certain
exchanges, one step will be filing § 40.6
self-certification submissions to
permanently delist the contracts and
remove reference to them from their
exchange rules.149 These § 40.6 filings
are additional burdens under the PRA
and would increase the reporting
burden associated with OMB Collection
3038–0093.150
The Commission estimates that
approximately 30 § 40.6 filings would
need to be submitted for contracts to be
delisted if the proposed rule
amendments are adopted, taking an
average of two hours per submission.
Currently, there are six DCMs that list
event contracts for trading.151 As an
average, the new burden would be an
estimated 5 additional § 40.6 filings per
DCM. Accordingly, the Commission
estimates the additional PRA burden as
follows:
• § 40.6 submissions related to
delisting contracts
Estimated Number of Respondents: 6.
One-Time Responses by each
Respondent: 5.
Estimated Hours per Response: 2.
Estimated Total Hours: 60.
As discussed in the analysis of cost
benefit considerations in section III.C,
infra, registered entities may incur other
costs to review and implement the new
definition of ‘‘gaming,’’ if the proposed
rules are adopted. This may include
costs to update any product design and
compliance procedures that a registered
entity maintains in the regular course of
business. These activities do not
constitute ‘‘information collections,’’
however, because the PRA excludes the
maintenance of records required to be
kept in the usual and customary order
of business from the definition of a
‘‘collection of information.’’ 152
149 In this context, ‘‘delisting’’ refers to the
process of submitting rule amendments to the
Commission in order to withdraw self-certified or
approved contracts (meaning they can no longer be
listed for trading on the exchange), regardless of
whether such contracts are currently available to
market participants for trading.
150 Additional costs associated with delisting are
laid out in the analysis of cost-benefit
considerations, but are not PRA burdens because
they do not require a registered entity to submit
reports or create records for the Commission
beyond the registered entity’s existing obligations.
151 As discussed below in section III.C.2(a)(3),
note 175, only one DCM currently offers the types
of event contracts that would be prohibited and
require § 40.6 filings as a result of the proposed rule
amendments, if adopted. However, for the purposes
of the PRA, the Commission is estimating the
potential burden for all six DCMs that currently
offer event contracts.
152 5 CFR 1320.3(b)(3). The following OMB
collections address the general reporting and
recordkeeping compliance obligations for DCMs,
SEFs, and DCOs, for compliance with relevant CEA
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Moreover, updates to these types of
business records would not require
registered entities to provide responses
to a series of identical questions.153 The
Commission expects that the content
and nature of any revisions to update
product design or compliance
procedures would vary considerably
among registered entities and registered
entities retain flexibility in deciding
how to structure those procedures and
what content to include.
There are no additional capital and
start-up or operations and maintenance
costs associated with this collection.
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2. Request for Comment
The Commission invites the public
and other federal agencies to comment
on any aspect of the proposed
information collection requirements
discussed above. The Commission will
consider public comments on this
proposed collection of information in:
(1) Evaluating whether the proposed
collection of information is necessary
for the proper performance of the
functions of the Commission, including
whether the information will have a
practical use;
(2) Evaluating the accuracy of the
estimated burden of the proposed
collection of information, including the
degree to which the methodology and
the assumptions that the Commission
employed were valid;
(3) Enhancing the quality, utility, and
clarity of the information proposed to be
collected; and
(4) Minimizing the burden of the
proposed information collection
requirements on registered entities,
including through the use of appropriate
automated, electronic, mechanical, or
other technological information
collection techniques, e.g., permitting
electronic submission of responses.
Copies of the submission from the
Commission to OMB are available from
the CFTC Clearance Officer, 1155 21st
Street NW, Washington, DC 20581, (202)
418–5174 or from https://RegInfo.gov.
Organizations and individuals desiring
to submit comments on the proposed
core principles and Commission regulations: OMB
Control No. 3038–0052, Core Principles and Other
Requirements for DCMs (‘‘OMB Collection 3038–
0052’’); OMB Control No. 3038–0074, Core
Principles and Other Requirements for Swap
Execution Facilities (‘‘OMB Collection 3038–
0074’’); and OMB Control No. 3038–0076,
Requirements for Derivative Clearing Organizations
(‘‘OMB Collection 3038–0076’’). The Commission
does not anticipate that the proposed rule
amendments will affect the information collection
burden associated with these collections.
153 44 U.S.C. 3502(3)(A) (providing that a
‘‘collection of information’’ occurs when ten or
more persons are asked to report, provide, disclose,
or record information in response to ‘‘identical
questions’’).
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information collection requirements
should send those comments to:
• The Office of Information and
Regulatory Affairs, Office of
Management and Budget, Room 10235,
New Executive Office Building,
Washington, DC 20503, Attn: Desk
Officer of the Commodity Futures
Trading Commission;
• (202) 395–6566 (fax); or
• OIRAsubmissions@omb.eop.gov
(email).
Please provide the Commission with
a copy of submitted comments so that
all comments can be summarized and
addressed in the final rulemaking, and
please refer to the ADDRESSES section of
this rule proposal for instructions on
submitting comments to the
Commission. OMB is required to make
a decision concerning the proposed
information collection requirements
between 30 and 60 days after
publication of this release in the Federal
Register. Therefore, a comment to OMB
is best assured of receiving full
consideration if OMB receives it within
30 calendar days of publication of this
release. Nothing in the foregoing affects
the deadline enumerated above for
public comment to the Commission on
the proposed rule amendments.
C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders.154
Section 15(a) further specifies that the
costs and benefits shall be evaluated in
light of five broad areas of market and
public concern: (i) protection of market
participants and the public; (ii)
efficiency, competitiveness, and
financial integrity of futures markets;
(iii) price discovery; (iv) sound risk
management practices; and (v) other
public interest considerations. The
Commission considers the costs and
benefits resulting from its discretionary
determinations with respect to the
section 15(a) factors.
While, as discussed previously and
further below, the Commission believes
the amendments proposed herein—
measured relative to the baseline of
status quo conditions—would create
meaningful benefits for market
participants and the public, it also
recognizes that they likely would result
in some incremental costs. The
Commission has endeavored to
enumerate material costs and benefits
and, when reasonably feasible, assign a
154 7
PO 00000
U.S.C. 19(a).
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48987
quantitative value to them. Where it is
not reasonably feasible to quantify costs
and benefits of the proposed
amendments, those costs and benefits
are discussed qualitatively.155
The Commission identifies and
considers the benefits and costs of the
proposed amendments relative to a
baseline standard of those generated by
the current statutory and regulatory
framework applicable to event contracts,
i.e., the status quo. This framework
includes the provisions involving event
contracts in CEA section 5c(c)(5)(C) and
current § 40.11 and Commission orders
that have been issued pursuant to
§ 40.11(c)(2), which address relevant
terms such as ‘‘gaming.’’ The specific
elements of the baseline that would be
impacted by the proposed amendments
are discussed in more detail below.
2. Proposed Amendments
(a) Definition of Gaming—Proposed
§ 40.11(b)
(1) Baseline and Proposed Amendments
Pursuant to current § 40.11(a)(1), a
registered entity shall not list for trading
or accept for clearing on or through the
registered entity an event contract in
certain excluded commodities that
‘‘involves, relates to, or references’’
gaming. The term ‘‘gaming’’ is not
defined in the CEA or Commission
regulations. The Commission has issued
two orders pursuant to § 40.11(c)(2)—
the Nadex Order 156 and the Kalshi
Order 157—both of which have included
discussions of the term. The orders have
provided some insight regarding the
Commission’s understanding of what
‘‘gaming’’ means for purposes of CEA
section 5c(c)(5)(C) and § 40.11. For
example, the orders set forth the
Commission’s recognition that: (i)
relevant state and federal statutes define
the terms ‘‘gambling,’’ ‘‘betting,’’ and
‘‘wagering’’—which are generally used
155 The Commission notes that this cost benefit
consideration is based on its understanding that the
derivatives market regulated by the Commission
functions internationally with: (1) transactions that
involve U.S. persons occurring across different
international jurisdictions; (2) some persons
organized outside of the United States that are
registered with the Commission; and (3) some
persons that typically operate both within and
outside the United States and that follow
substantially similar business practices wherever
located. Where the Commission does not
specifically refer to matters of location, the
discussion of costs and benefits below refers to the
effects of the proposed rule amendments on all
relevant derivatives activity, whether based on their
actual occurrence in the United States or on their
connection with activities in, or effect on, U.S.
commerce.
156 See https://www.cftc.gov/PressRoom/
PressReleases/6224-12.
157 See https://www.cftc.gov/PressRoom/
PressReleases/8780-23.
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interchangeably with the term
‘‘gaming’’—to include staking
something of value upon a game or
contest of others; 158 (ii) the event
contracts subject to each respective
order involved ‘‘gaming,’’ because they
involved staking something of value
upon the outcome of a contest of
others; 159 and (iii) an event contract can
involve ‘‘gaming,’’ for purposes of CEA
section 5c(c)(5)(C) and § 40.11, in
circumstances where the contract’s
underlying, itself, is gaming, and in
circumstances where the contract has a
different connection to gaming, for
example because the contract ‘‘relates
closely’’ to, ‘‘entails,’’ or ‘‘has as an
essential feature or consequence’’
gaming.160
The Commission’s understanding of
the term ‘‘gaming,’’ as set forth in the
orders that it has issued pursuant to
§ 40.11(c)(2), is reflected in its proposed
definition of the term—and, more
generally, in the other amendments
proposed herein. However, the
Commission recognizes that in the
absence, to date, of a formal statutory or
regulatory definition, registered entities
may have taken somewhat different
approaches to interpreting the scope of
the term, and in some respects may have
interpreted the scope to be narrower
than the definition of ‘‘gaming’’ that the
Commission is now proposing.
Conversely, certain registered entities
may have interpreted the term more
broadly than the Commission’s
proposed definition.
The Commission is proposing to
define ‘‘gaming,’’ in new § 40.11(b)(1),
to mean the staking or risking by any
person of something of value upon: (i)
the outcome of a contest of others; (ii)
the outcome of a game involving skill or
chance; (iii) the performance of one or
more competitors in one or more
contests or games; or (iv) any other
occurrence or non-occurrence in
connection with one or more contests or
games. The Commission is proposing to
provide in new § 40.11(b)(2) that
‘‘gaming’’ includes, but is not limited to,
the staking or risking of something of
value upon the outcome of a political
contest, including an election or
elections, an awards contest, or a game
in which one or more athletes compete;
or an occurrence or non-occurrence in
158 Kalshi
Order at 8–9.
Order at 3; Kalshi Order at 10.
160 Kalshi Order at 7. See also Nadex Order at 2
(‘‘[T]he legislative history of CEA Section
5c(c)(5)(C) indicates that the relevant question for
the Commission in determining whether a contract
involves one of the activities enumerated in CEA
Section 5c(c)(5)(C)(i) is whether the contract,
considered as a whole, involves one of those
activities.’’)
159 Nadex
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connection with such a contest or game,
regardless of whether it directly affects
the outcome. In establishing the
proposed ‘‘gaming’’ definition, the
Commission, as noted above, considered
its discussion of ‘‘gaming’’ in the Nadex
Order and Kalshi Order, and drew upon
the ordinary meaning of the term, as
well as relevant state and federal
statutory definitions.161
(2) Benefits
By providing additional specificity to
determine whether a particular event
contract falls within the scope of CEA
section 5c(c)(5)(C) and is contrary to the
public interest because it involves
‘‘gaming,’’ the Commission believes its
proposed definition would reduce the
likelihood that a registered entity would
list for trading an event contract that is
contrary to the public interest.
The Commission believes that, by
establishing a common understanding
and more uniform application of the
term ‘‘gaming,’’ the proposed definition
also should assist registered entities in
their product design and compliance
efforts and help avoid situations in
which registered entities expend
resources to develop and submit a
contract that the Commission
subsequently determines may not be
listed for trading or made available for
clearing, pursuant to CEA section
5c(c)(5)(C) and § 40.11(a)(1). As
discussed above, the Commission has
observed a significant increase in the
overall number and diversity of event
contracts being listed for trading.162
While the Commission does not have
access to data or any other information
to enable it to predict the specific types
or quantities of event contracts that may
be listed for trading in the future, the
observed event contract trend causes the
Commission to anticipate that going
forward, absent these proposed rule
amendments, the number of submitted
contracts involving ‘‘gaming’’ could
increase. Accordingly, by better
delineating the types of prohibited event
contracts that involve ‘‘gaming,’’ the
proposed definition should enhance
registered entities’ confidence with
respect to product design and
compliance, potentially yielding costand resource-saving benefits for them in
the process. In addition, the proposed
definition may help guard against
market disruption that might otherwise
be caused if an event contract is listed
for trading and the Commission later
determines, following an individualized
review pursuant to (c), that the contract
161 See note 54, supra (discussing that undefined
statutory terms are given their ordinary meaning).
162 See section I.A., supra.
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is prohibited because it involves gaming
and is contrary to the public interest.
The proposed definition also would
support the Commission and its staff in
the effective oversight of derivative
markets—including by supporting the
efficient and effective administration of
the contract submission and review
process, by helping to reduce the
likelihood that contracts are submitted
to the Commission that raise public
interest concerns. In this regard, among
other things, the proposed definition
would promote the Commission’s
responsible stewardship and efficient
use of the tax dollars appropriated to it
by reducing the need for individualized
contract reviews pursuant to § 40.11(c).
In the Commission’s experience, a
review pursuant to § 40.11(c) is
resource-intensive and consumes
hundreds of hours of staff time. Based
on prior experience, the Commission
estimates that each review conducted
pursuant to § 40.11(c) takes, on average,
approximately 625 hours of Commission
staff time, at a cost of approximately
$220,012.163
163 This figure is rounded to the nearest dollar
and based on the annual mean wages for U.S.
Bureau of Labor Statistics (‘‘BLS’’) categories 19–
3011, ‘‘Economists’’ and 23–1011, ‘‘Lawyers.’’ BLS,
Occupational Employment and Wages, May 2023
(hereinafter ‘‘BLS Data’’), available at https://
www.bls.gov/oes/current/oes_nat.htm. This
estimate assumes that, of the approximately 625
hours expended for each review conducted
pursuant to § 40.11(c), approximately 25% (or 156
hours) is expended by economists, and
approximately 75% (or 469 hours) is expended by
lawyers. The ‘‘Economist’’ category consists of
professionals who ‘‘[c]onduct research, prepare
reports, or formulate plans to address economic
problems related to the production and distribution
of goods and services or monetary and fiscal
policy.’’ BLS, Occupational Employment and
Wages, May 2023: 19–3011, Economists, available
at https://www.bls.gov/oes/current/oes193011.htm.
According to BLS, the mean salary for this category
in the context of Federal, State, and Local
Government is $138,360. This number is divided by
1,800 work hours in a year to account for sick leave
and vacations and multiplied by 4 to account for
retirement, health, and other benefits or
compensation, as well as for office space, computer
equipment support, and human resources support.
This number is further multiplied by 1.0272 to
account for the 2.72% change in the CPI for Urban
Wage-Earners and Clerical Workers between May
2023 and March 2024 (298.382 to 306.502). BLS,
CPI for Urban Wage Earners and Clerical Workers
(CPI–W), U.S. City Average, All Items—
CWUR0000SA0, available at https://www.bls.gov/
data/#prices. Together, these modifications yield an
hourly rate of $316. ‘‘The ‘‘Lawyer’’ category
consists of professionals who ‘‘[r]epresent clients in
criminal and civil litigation and other legal
proceedings, draw up legal documents, or manage
or advise clients on legal transactions.’’ BLS,
Occupational Employment and Wages, May 2023:
23–1011, Lawyers, available at https://www.bls.gov/
oes/current/oes231011.htm. According to BLS, the
mean salary for this category in the context of
Federal, State, and Local Government is $159,280.
This number is divided by 1,800 work hours in a
year to account for sick leave and vacations and
multiplied by 4 to account for retirement, health,
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(3) Costs
The Commission expects that some
registered entities may incur a one-time
compliance cost to understand and
implement the proposed ‘‘gaming’’
definition.164 This may include costs to
account for the definition in the
registered entity’s product design and
compliance procedures. Costs
associated with understanding and
implementing the proposed ‘‘gaming’’
definition may vary depending on the
size of the registered entity, available
resources, and existing products,
practices and policies. Nonetheless, the
Commission preliminarily estimates
that a registered entity typically would
spend approximately 10 hours, or
$2,660 (based on an hourly rate of
$266),165 to update its product design
and compliance procedures to
and other benefits or compensation, as well as for
office space, computer equipment support, and
human resources support. This number is further
multiplied by 1.0272 to account for the 2.72%
change in the CPI for Urban Wage-Earners and
Clerical Workers between May 2023 and March
2024 (298.382 to 306.502). BLS, CPI for Urban Wage
Earners and Clerical Workers (CPI–W), U.S. City
Average, All Items—CWUR0000SA0, available at
https://www.bls.gov/data/#prices. Together, these
modifications yield an hourly rate of $364. The
rounding and modifications applied with respect to
the estimated average burden hour cost for this
occupational category have been applied with
respect to each occupational category discussed as
part of this analysis.
164 Currently, there are six CFTC-registered
exchanges that offer event contracts for trading, and
there are three CFTC-registered DCOs that accept
event contracts for clearing. However, the
Commission acknowledges that additional entities
have sought, or may seek in the future, to register
with the Commission in order to list or clear event
contracts.
165 This figure is rounded to the nearest dollar
and based on the annual mean wage for BLS
category 13–2061, ‘‘Financial Examiners.’’ BLS
Data, available at https://www.bls.gov/oes/current/
oes_nat.htm. This category consists of professionals
who ‘‘[e]nforce or ensure compliance with laws and
regulations governing financial and securities
institutions and financial and real estate
transactions.’’ BLS, Occupational Employment and
Wages, May 2023: 13–2061 Financial Examiners,
available at https://www.bls.gov/oes/current/
oes132061.htm. According to BLS, the mean salary
for this category in the context of Securities,
Commodity Contracts, and Other Financial
Investments and Related Activities is $116,520.
This number is divided by 1,800 work hours in a
year to account for sick leave and vacations and
multiplied by 4 to account for retirement, health,
and other benefits or compensation, as well as for
office space, computer equipment support, and
human resources support. This number is further
multiplied by 1.0272 to account for the 2.72%
change in the CPI for Urban Wage-Earners and
Clerical Workers between May 2023 and March
2024 (298.382 to 306.502). BLS, CPI for Urban Wage
Earners and Clerical Workers (CPI–W), U.S. City
Average, All Items—CWUR0000SA0, available at
https://www.bls.gov/data/#prices. Together, these
modifications yield an hourly rate of $266. The
rounding and modifications applied with respect to
the estimated average burden hour cost for this
occupational category have been applied with
respect to each occupational category discussed as
part of this analysis.
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implement the proposed ‘‘gaming’’
definition. The Commission estimates
that this would result in an overall
burden of 90 hours and an aggregated
cost of $23,940 (nine registered
entities 166 × $2,660).
As discussed more fully below, if the
proposed rule amendments are adopted,
the Commission anticipates that
exchanges whose product offerings
include contracts that involve
‘‘gaming,’’ as proposed to be defined,
will, in order to ensure compliance with
the rules, file § 40.6 self-certification
submissions to permanently delist the
contracts and remove reference to the
contracts in their exchange rules.167
Exchanges may also need to take steps
to effectuate the orderly wind-down of
contracts involving ‘‘gaming’’ that are
listed and available for trading as of the
date of publication of final rule
amendments in the Federal Register,
and that have settlement dates beyond
the 60-day implementation period
proposed by the Commission.
The Commission preliminarily
estimates that approximately 30 168
§ 40.6 delisting submissions would be
filed for contracts involving ‘‘gaming,’’
as proposed to be defined, taking
approximately two hours per
submission. This would result in an
estimated burden of 60 hours and an
estimated aggregated cost of $15,960
(based on an hourly rate of $266).169
As discussed above, to the extent the
proposed rule amendments are finalized
as proposed, and contracts that involve
‘‘gaming’’ are listed and available for
trading as of the date of publication of
final rule amendments in the Federal
Register and have settlement dates
beyond the 60-day implementation
period, there may be costs to the listing
exchanges, and market participants,
associated with the wind-down of those
contracts. The Commission notes that
event contracts are generally based upon
a discrete occurrence or event, and
166 See
note 165, supra.
this context, ‘‘delisting’’ refers to the
process of submitting rule amendments to the
Commission in order to withdraw self-certified or
approved contracts (meaning they can no longer be
listed for trading on the exchange), regardless of
whether such contracts are currently available to
market participants for trading.
168 This estimate is based on Commission staff
analysis of product submissions and trading data
regarding event contracts submitted to the
Commission by CFTC-registered exchanges. The
estimate contemplates that self-certified or
approved contracts involving ‘‘gaming,’’ as
proposed to be defined, would need to be delisted
regardless of whether such contracts are available
to market participants for trading at the time that
final rule amendments are published in the Federal
Register, or whether their settlement dates fall
within the 60-day implementation period proposed
by the Commission.
169 See note 166, supra.
167 In
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48989
Commission staff’s anecdotal experience
indicates that many event contracts
settle within relatively short time
horizons. This, coupled with the fact
that, as discussed below, event contracts
that involve ‘‘gaming,’’ as proposed to
be defined, currently comprise a small
portion of the overall event contracts
market, suggests that few event
contracts involving ‘‘gaming’’ would
likely need to be wound down before
their existing settlement dates.170
With respect to the limited number of
contracts that the Commission
anticipates would have settlement dates
beyond the proposed 60-day
implementation period, the Commission
expects that the costs to exchanges
associated with orderly wind-down
would include operational, compliance
and technological costs. As further
noted below, the costs to exchanges
associated with the wind-down of these
contracts may also include the inability
to realize the full anticipated return on
investment in the contracts. The
Commission notes that the precise costs
attributable to contract wind-down
would be proprietary information of the
listing exchange, to which the
Commission does not have access.
However, given the limited number of
contracts that the Commission
anticipates would need to be wound
down before their existing settlement
dates, the Commission believes that
these costs to the exchange should be
relatively modest.
The Commission further anticipates
that certain market participants may
incur losses depending on the nature of
their positions in the contracts at, and
leading up to, wind-down. Conversely,
certain market participants may profit
based on the nature of their positions at,
and leading up to, wind-down.171 The
Commission notes that the future
market losses or gains to a market
participant are not predictable with any
data and therefore, the Commission
170 The terms and conditions of event contracts
listed for trading as of the issuance of these
proposed rule amendments that the Commission
believes would be impacted by such amendments,
if finalized, generally establish that the subject
contract will settle either on a date that is expected
to be soon after the contract’s underlying
occurrence or event, or, as a backstop, on a date that
is further in the future (typically the end of the
calendar year). Based on CFTC staff’s experience in
connection with administering the agency’s product
review process, the Commission believes,
notwithstanding backstop expiration dates, most
event contracts settle close in time to the
underlying occurrence or event.
171 The Commission notes that the types of event
contracts that would be impacted by this proposed
rulemaking, if finalized, tend to be fully
collateralized, which would have a bearing on the
market risk to which market participants would be
exposed in the event of the early wind-down of
such a contract.
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believes that it is not feasible to further
quantify these costs associated with
potential contract wind-downs.
The Commission recognizes that a
further consequence, for certain
registered entities, and applicants for
registration, of establishing a common
understanding and more uniform
application of the term ‘‘gaming’’ may
be to modify such registered entities’,
and applicants’, understanding of the
types of event contracts that they may
seek to list for trading or accept for
clearing in the future. This may entail
certain modifications to a registered
entity’s, or applicant’s, business model
and projected revenue streams, and may
impact a registered entity’s, or
applicant’s, ability to realize the full
anticipated return on investment with
respect to certain aspects of its business
model. For example, a registered entity
or applicant for registration may have
invested resources into various aspects
of strategic planning (e.g., market
research, technological implementation,
and marketing) that are premised, at
least in part, on event contracts that may
be implicated by the proposed ‘‘gaming’’
definition.172 Relatedly, establishing a
common understanding and more
uniform application of the term
‘‘gaming’’ may modify, in certain
respects, the types of event contracts
that are available to market participants
for trading and clearing.
In this regard, the Commission notes
that contracts that involve ‘‘gaming,’’ as
proposed to be defined, comprise a
small portion of the overall event
contracts market, suggesting that the
above-described consequences of the
proposed ‘‘gaming’’ definition would be
relatively modest. Specifically, the
Commission estimates that contracts
involving ‘‘gaming,’’ as proposed to be
defined, comprised less than 1% of the
total trading volume in event contracts
in 2023.173
172 The Commission notes that the value of any
such lost return would be proprietary information
of the listing registered entity to which the
Commission does not have access, and therefore,
the Commission believes that it is not feasible to
further quantify this cost associated with the
proposed ‘‘gaming’’ definition.
173 To make this estimate, Commission staff
reviewed aggregated event contracts trading data
that was reported to the Commission by CFTCregistered exchanges for the period of January 1,
2023 through December 31, 2023. Based on this
review, the Commission further estimates that event
contracts that involve ‘‘gaming,’’ as proposed to be
defined, comprised approximately 6% of the total
number of event contracts listed for trading in 2023.
These event contracts were primarily comprised of
contracts based on the outcome of various
entertainment awards contests. In 2012, in the
Nadex Order, the Commission recognized certain
event contracts to involve ‘‘gaming’’ where taking
a position in the contracts would be staking
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Based on historical trading data, the
Commission recognizes that the abovedescribed anticipated costs of the
proposed ‘‘gaming’’ definition may have
more of an impact for some registered
entities—and consequently for their
customers—than others.174 The
Commission expects, however, that a
significant proportion of these registered
entities’ offerings would not be
impacted by the proposed gaming
definition, suggesting that the overall
impact to these registered entities of the
proposed definition would be relatively
modest.175
Further, the Commission believes that
providing specificity to determine
whether a particular event contract
involves ‘‘gaming’’ will support the
ability of these and other registered
‘‘something of value upon a contest of others.’’
Nadex Order at 3.
As previously discussed, the Commission notes
that it has observed a significant increase in the
number and diversity of event contracts listed for
trading by CFTC-registered exchanges, as well as
increased interest among applicants and
prospective applicants for exchange registration in
operating exchanges that would primarily or
exclusively offer event contracts for trading. This
upward trend—if it continues, as the Commission
anticipates is possible (if not probable)—potentially
could extend, absent the proposed rule
amendments, to include additional event contracts
involving ‘‘gaming,’’ as proposed to be defined. An
extension of this type would mean that a registered
entity or applicant for registration currently may
have plans to seek to list for trading or accept for
clearing, and may have invested in, event contracts
that involve ‘‘gaming,’’ as proposed to be defined.
Beyond this general observation that registered
entities or applicants for registration potentially
could have plans to list in the future, and could
have invested in event contracts involving
‘‘gaming,’’ as proposed to be defined, the
Commission lacks access to the entity-specific
proprietary data necessary to quantify what, if any,
additional costs should be attributed to such yet-tobe-listed, planned-for contracts.
To the extent that registered entities or applicants
for registration currently could have plans to list in
the future event contracts involving ‘‘gaming,’’ as
proposed to be defined, in the Commission’s view
this also supports the benefits, as discussed infra,
that defining the term would provide. Among other
things, the definition would enhance confidence
regarding product compliance that can inform
product design efforts, and would help to ensure
that contracts that are contrary to the public interest
are not traded on CFTC-regulated markets.
174 In 2023, only one CFTC-registered exchange
listed event contracts that involved ‘‘gaming,’’ as
proposed to be defined. In 2023, only one CFTCregistered DCO cleared event contracts that
involved ‘‘gaming,’’ as proposed to be defined.
175 For example, the Commission estimates that,
in 2023, event contracts involving ‘‘gaming,’’ as
proposed to be defined, comprised approximately
1% of the trading volume of the CFTC-registered
exchange that offered such contracts for trading.
The Commission further estimates that event
contracts that involve ‘‘gaming,’’ as proposed to be
defined, comprised approximately 9% of the total
number of event contracts listed by this exchange
in 2023. To make these estimates, Commission staff
reviewed aggregated event contracts trading data
that was reported to the Commission by CFTCregistered exchanges for the period of January 1,
2023 through December 31, 2023.
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entities to develop and list new
products with enhanced confidence
regarding such products’ compliance
with the CEA and CFTC regulations.
The Commission believes that this
should assist registered entities, as well
as applicants for registration, in making
informed business decisions with
respect to product design, which should
have long-term business benefits. As
discussed above, it may also yield
business efficiencies for registered
entities by helping to avoid situations
where they expend resources to develop
and submit a contract that the
Commission subsequently determines,
following a § 40.11(c) review, may not
be listed for trading or accepted for
clearing. To that end, the Commission
believes that defining the term
‘‘gaming’’ will have broader public
benefits by helping to ensure that
contracts that are contrary to the public
interest—namely, certain contracts that
‘‘exist predominantly to enable
gambling’’—are not traded, including by
retail market participants, as financial
instruments on CFTC-regulated markets.
(b) Amendments To Further Align With
Statutory Language
The proposed rule amendments
include certain changes to improve
regulatory and statutory textual
alignment that are not expected to
render material costs or benefits.176
First, when describing the contracts to
which § 40.11 applies, the Commission
is proposing to remove the terms ‘‘relate
to’’ and ‘‘reference’’ wherever they
appear, and to refer only to contracts
that ‘‘involve’’ (or, as applicable, that
‘‘may’’ involve) an Enumerated Activity
or prescribed similar activity,177 in
order to further align with the statutory
text of CEA section 5c(c)(5)(C)(i). The
Commission also is proposing to remove
from § 40.11 the reference to CEA
section 1a(19)(iv), and to more precisely
track the statutory language of CEA
section 5c(c)(5)(C)(i) when describing
the contracts to which § 40.11 applies—
while accounting for the errant
reference to ‘‘section 1a(2)(i),’’ which is
not a provision in the statute—by stating
that the regulation applies with respect
to contracts ‘‘in excluded commodities
based on the occurrence, extent of an
176 By further aligning the regulatory text of
§ 40.11 with the statutory text of CEA section
5c(c)(5)(C), the proposed amendments may be of
some limited benefit to the extent any registered
entity would unnecessarily expend resources to
resolve confusion attributable to the existing textual
variation.
177 While there are no prescribed similar activities
at this juncture, the Commission retains its
authority under CEA section 5c(c)(5)(C)(i)(VI) and
§ 40.11(a)(2) to prescribe similar activities in future
rules or regulations.
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occurrence, or contingency (other than a
change in the price, rate, value, or levels
of a commodity described in section
1a(19)(i) of the Act)[.]’’
3. Section 15(a) Factors
The Commission has evaluated the
costs and benefits of the proposed
amendments to § 40.11 in light of the
following five broad areas of market and
public concern identified in section
15(a) of the CEA: protection of market
participants and the public; efficiency,
competitiveness, and financial integrity
of the markets; price discovery; sound
risk management practices; and other
public interest considerations.
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(a) Protection of Market Participants and
the Public
The Commission believes that the
proposed amendments to § 40.11 will
help to protect the public by preventing
the listing for trading or acceptance for
clearing by registered entities of certain
event contracts that are contrary to the
public interest. The Commission further
believes that permitting trading of
contracts involving ‘‘gaming,’’ as
proposed to be defined, would conflate
gambling and financial instruments in a
manner that could particularly create
confusion and risk for retail market
participants, and that the proposed
amendments would, accordingly,
enhance protection of market
participants.
(b) Efficiency, Competitiveness, and
Financial Integrity of Markets
The Commission acknowledges that a
consequence, for certain registered
entities and applicants for registration,
of the proposed amendments may be to
modify such registered entities’ and
applicants’ understanding of the types
of event contracts that they may seek to
list for trading or accept for clearing in
the future. This may entail certain
modifications to a registered entity’s
business model and projected revenue
streams, and may impact a registered
entity’s, or applicant’s, ability to realize
the full anticipated return on certain
aspects of its business model. Based on
the types of event contracts that
different registered entities currently list
for trading or accept for clearing, the
Commission anticipates that this
consequence of the proposed
amendments may impact some
registered entities—and consequently
their customers—more than others.
However, for those registered entities
that currently list for trading or accept
for clearing contracts that involve
‘‘gaming,’’ as proposed to be defined,
the Commission estimates that a
significant proportion of their offerings
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would not be impacted by the proposed
amendments, suggesting that the overall
impact of the rule amendments should
be relatively modest.178
Moreover, the Commission believes
that, by further specifying types of event
contracts that are contrary to the public
interest and therefore may not be listed
for trading or accepted for clearing, the
proposed amendments also will support
these and other registered entities’
ability to develop and list new products
with enhanced confidence regarding
such products’ compliance with the
CEA and CFTC regulations. The
Commission believes that this should
assist registered entities, as well as
applicants for registration, in making
informed business decisions with
respect to product design, which may
enhance competitiveness and efficiency.
(c) Price Discovery
While the proposed amendments are
not likely to have an impact on price
discovery in CFTC-regulated markets,
the Commission acknowledges that
certain event contracts could have
limited informational value in other
contexts outside the scope of CFTCregulated markets that may be lost if the
proposed amendments are adopted.
(d) Sound Risk Management Practices
The Commission has not identified
any effect of the proposed amendments
on sound risk management practices.
(e) Other Public Interest Considerations
As discussed in detail above, the
primary purpose of § 40.11 is to
implement the Commission’s statutory
authority to determine that certain event
contracts are contrary to the public
interest and therefore may not be listed
or made available for clearing or trading
on or through a registered entity. The
proposed amendments seek to support
this objective by further specifying the
types of event contracts that are contrary
to the public interest and therefore may
not be listed for trading or accepted for
clearing.
Request for Comment
The Commission generally requests
comments on all aspects of its
consideration of costs and benefits,
including the identification and
assessment of any costs and benefits not
discussed herein; data and any other
information to assist or otherwise
inform the Commission’s ability to
quantify or qualitatively describe the
costs and benefits of the proposed
amendments; and substantiating data,
statistics, and any other information to
178 See
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support positions posited by
commenters with respect to the
Commission’s discussion. The
Commission welcomes comment on
such costs and benefits, particularly
from registered entities that can provide
quantitative cost and benefit data based
on their respective experiences. The
Commission also welcomes comments
on alternatives to the proposed
amendments that may be preferable on
cost-benefit grounds, and why.
D. Antitrust Considerations
Section 15(b) of the CEA requires the
Commission to ‘‘take into consideration
the public interest to be protected by the
antitrust laws and endeavor to take the
least anticompetitive means of
achieving’’ the purposes of the CEA, in
issuing any order or adopting any
Commission rule or regulation
(including any exemption under section
4(c) or 4c(b)), or in requiring or
approving any bylaw, rule, or regulation
of a contract market established
pursuant to section 17 of the CEA.179
The Commission believes that the
public interest to be protected by the
antitrust laws is generally to protect
competition. The Commission requests
comment on whether this proposed
rulemaking implicates any other
specific public interest to be protected
by the antitrust laws.
The Commission has considered the
Proposal to determine whether it is
anticompetitive and has preliminarily
identified no anticompetitive effects.
The Commission requests comment on
whether the Proposal is anticompetitive
and, if it is, what the anticompetitive
effects are.
Because the Commission has
preliminarily determined that the
Proposal is not anticompetitive and has
no anticompetitive effects, the
Commission has not identified any less
anticompetitive means of achieving the
purposes of the CEA. The Commission
requests comment on whether there are
less anticompetitive means of achieving
the relevant purposes of the CEA that
would otherwise be served by adopting
this proposed rulemaking.
List of Subjects in 17 CFR Part 40
Commodity futures, Reporting and
recordkeeping requirements.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission hereby proposes to
amend 17 CFR chapter I as follows:
179 7
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Federal Register / Vol. 89, No. 112 / Monday, June 10, 2024 / Proposed Rules
PART 40—PROVISIONS COMMON TO
REGISTERED ENTITIES
1. The authority citation for part 40
continues to read as follows:
■
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and
12, as amended by Titles VII and VIII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Pub. L.
111–203, 124 Stat. 1376 (2010).
■
2. Revise § 40.11 to read as follows:
lotter on DSK11XQN23PROD with PROPOSALS2
§ 40.11 Event contracts based upon
certain excluded commodities.
(a) Prohibition. Agreements, contracts,
transactions, or swaps described in
paragraphs (a)(1) and (2) of this section
are contrary to the public interest and
shall not be listed for trading or
accepted for clearing on or through a
registered entity:
(1) Agreements, contracts,
transactions, or swaps in excluded
commodities based upon the
occurrence, extent of an occurrence, or
contingency (other than a change in the
price, rate, value, or levels of a
commodity described in section
1a(19)(i) of the Act) that involve:
(i) Activity that is unlawful under any
Federal or State law;
(ii) Terrorism;
(iii) Assassination;
(iv) War; or
(v) Gaming.
(2) Agreements, contracts,
transactions, or swaps in excluded
commodities based upon the
occurrence, extent of an occurrence, or
contingency (other than a change in the
price, rate, value, or levels of a
commodity described in section
1a(19)(i) of the Act) that involve other
activity that is similar to an activity
enumerated in paragraphs (a)(1)(i)
through (v) of this section, and that the
Commission determines, by rule or
regulation, to be contrary to the public
interest.
(b) Gaming. (1) For purposes of
paragraph (a)(1)(v) of this section,
‘‘gaming’’ means the staking or risking
by any person of something of value
upon:
(i) The outcome of a contest of others;
(ii) The outcome of a game involving
skill or chance;
(iii) The performance of one or more
competitors in one or more contests or
games; or
(iv) Any other occurrence or nonoccurrence in connection with one or
more contests or games.
(2) For purposes of paragraph (a)(1)(v)
of this section, ‘‘gaming’’ includes, but
is not limited to, the staking or risking
by any person of something of value
upon the outcome of a political contest,
including an election or elections, an
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awards contest, or a game in which one
or more athletes compete, or an
occurrence or non-occurrence in
connection with such a contest or game,
regardless of whether it directly affects
the outcome.
(c) 90-day review. (1) The Commission
may determine, based upon a review of
the terms or conditions of a submission
made by a registered entity under § 40.2
or § 40.3, that an agreement, contract,
transaction, or swap as described in
paragraph (a) of this section may
involve-an activity enumerated in
paragraphs (a)(1) or (2) of this section,
and is subject to a 90-day review.
(2) The Commission shall notify the
registered entity of its determination to
conduct a 90-day review and post notice
of the determination on its website. The
90-day review period shall commence
on the date the Commission notifies the
registered entity of its determination to
conduct a 90-day review.
(3) The Commission shall request that
the registered entity suspend the listing
or trading of the agreement, contract,
transaction, or swap subject to the 90day review during the pendency of the
review period.
(4) The Commission shall issue an
order approving or disapproving an
agreement, contract, transaction, or
swap that is subject to a 90-day review
under this paragraph (c) not later than
90 days subsequent to the date that the
Commission commences review, or if
applicable, at the conclusion of such
extended period agreed to or requested
by the registered entity.
Issued in Washington, DC, on May 29,
2024, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Event Contracts—Voting
Summary and Chairman’s and
Commissioners’ Statements
Appendix 1—Voting Summary
On this matter, Chairman Behnam and
Commissioners Johnson, and Goldsmith
Romero, voted in the affirmative.
Commissioners Mersinger and Pham voted in
the negative.
Appendix 2—Statement of Chairman
Rostin Behnam
I support the proposed amendments to the
Commission’s rules concerning event
contracts. Before further discussion, I would
like to acknowledge the tremendous work by
many CFTC colleagues. I particularly would
like to thank Vince McGonagle, Nora Flood,
and Grey Tanzi for all of their thorough and
thoughtful work on the proposal.
Starting in 2021, there has been a
significant uptick in the number of event
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contracts listed for trading by CFTCregistered exchanges. To put that increase
into perspective, more event contracts were
listed for trading in 2021 than had been listed
in the prior 15 years combined. And that has
continued to be true each year since.
Given this exponential increase, the
Commission today proposes to further
specify the types of event contracts that fall
within the scope of CEA section 5c(c)(5)(C)
and are contrary to the public interest. The
amendments will support efforts by
registered entities to comply with the CEA by
more clearly identifying the types of event
contracts that may not be listed for trading
or accepted for clearing. These changes will
support responsible and efficient market
innovation, by helping registered entities and
new applicants to make informed decisions
with respect to product design.
Specifically, the Commission is proposing
to amend Commission Regulation 40.11 to,
among other things, further specify types of
event contracts that fall within the scope of
CEA section 5c(c)(5)(C) and are contrary to
the public interest, such that they may not be
listed for trading or accepted for clearing on
or through a registered entity. The proposal
defines ‘‘gaming’’ and provides illustrative
examples of gaming, including the outcome
of a political contest, the outcome of an
awards contest, the outcome of a game in
which one or more athletes compete, or an
occurrence or non-occurrence in connection
with such a contest or game.
The proposal includes a determination that
event contracts involving each of the
Enumerated Activities in CEA section
5c(c)(5)(C) (gaming, war, terrorism,
assassination, and activity that is unlawful
under state law) are, as a category, contrary
to the public interest and therefore may not
be listed for trading or accepted for clearing
through a registered entity. The illustrative
examples of gaming that I just mentioned are
therefore contrary to the public interest and
cannot be listed for trading.
To be clear, that means that even contracts
on the outcome of a political contest such as
an election could not be listed for trading or
accepted for clearing under the proposed
rule. Such contracts not only fail to serve the
economic purpose of the futures markets—
they are illegal in several states and could
potentially and impermissibly preempt State
responsibilities for overseeing federal
elections. This is not a new phenomenon for
the CFTC. Over the course of the last 20
years, the CFTC has remained steadfast—
through many administrations—that election
or political contracts should not be allowed
on the US futures and options markets.
Contracts involving political events
ultimately commoditize and degrade the
integrity of the uniquely American
experience of participating in the democratic
electoral process. Allowing these contracts
would push the CFTC, a financial market
regulator, into a position far beyond its
Congressional mandate and expertise. To be
blunt, such contracts would put the CFTC in
the role of an election cop.
The CFTC’s jurisdiction as mandated by
Congress and solidified in our statute, the
Commodity Exchange Act, recognizes our
expertise in markets for goods, services,
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rights, and interests—which can include
events associated with financial, commercial,
or economic consequences. We are tasked
with upholding the public interest by
ensuring that America’s derivatives markets
provide a means for managing and assuming
price risks and providing for price discovery
through liquid, fair, open, transparent, and
financially secure trading facilities. Market
integrity is featured so prominently within
that mandate that the CFTC has civil
enforcement authority when it comes to the
potential for fraud, manipulation, and other
abuses such as the dissemination of false
information in the underlying or commodity
cash markets. Political control contracts on
CFTC-regulated exchanges would push the
CFTC far beyond this historical expertise and
jurisdiction, and potentially place the CFTC
in the position of monitoring such markets
for fraud and manipulation in elections
themselves.
I thank the staff for their hard work in
producing this important proposal.
Appendix 3—Statement of
Commissioner Summer K. Mersinger
lotter on DSK11XQN23PROD with PROPOSALS2
I support the Commission 180 undertaking
a rulemaking on event contracts, which is
long overdue. During my tenure on the
Commission, I have consistently called for a
rulemaking process to establish a framework
for the Commission to exercise the
discretionary authority with respect to event
contracts that Congress granted to the agency
in our governing statute, the Commodity
Exchange Act (‘‘CEA’’).181
Unfortunately, though, I cannot support
this particular proposed rulemaking (the
‘‘Proposal’’). At first blush, it appears to be
‘‘much ado about nothing,’’ 182 as it seems to
do little more than rubber-stamp what the
Commission has already said and done.
Upon closer inspection, though, it is a ‘‘wolf
in sheep’s clothing’’ 183 because where the
Proposal departs from our past practice, it
lays the foundation to prohibit entire
categories of potential exchange-traded event
contracts whose terms and conditions the
Commission has never even seen.
In planting the seeds of future bans of
countless event contracts, sight unseen, the
Proposal—
• Exceeds the legal authority that Congress
granted the Commission in the CEA;
180 This Statement will refer to the agency as the
‘‘Commission’’ or ‘‘CFTC.’’ All web pages cited
herein were last visited on May 9, 2024.
181 See Dissenting Statement of Commissioner
Summer K. Mersinger Regarding Order on Certified
Derivatives Contracts with Respect to Political
Control of the U.S. Senate and House of
Representatives (September 22, 2023), available at
https://www.cftc.gov/PressRoom/Speeches
Testimony/mersingerstatement092223 (‘‘Kalshi
Dissenting Statement’’); and Dissenting Statement
of Commissioner Summer K. Mersinger Regarding
Commencement of 90-Day Review Regarding
Certified Derivatives Contracts with Respect to
Political Control of the U.S. Senate and House of
Representatives (June 23, 2023), available at https://
www.cftc.gov/PressRoom/SpeechesTestimony/
mersingerstatement062323.
182 Shakespeare, William, 1564–1616, Much Ado
about Nothing, London, New York (Penguin, 2005).
183 Aesop’s Fables, The Wolf in Sheep’s Clothing
(1867).
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• Relies heavily on a brief snippet of
legislative history consisting of a colloquy
between two Senators—cherry-picking parts
of the colloquy it likes, while ignoring other
parts of the same colloquy;
• Resurrects an ‘‘economic purpose test’’
for evaluating the public interest that was
based on a provision of the CEA that was
repealed by Congress nearly a quartercentury ago;
• Fails to do the hard work of analyzing
the unique nature of event contracts, which
are different in kind from traditional
derivatives contracts more familiar to the
agency;
• Relies on unsupported conjecture, treats
similar circumstances differently, and raises
more questions than it answers; and
• Flies in the face of the CFTC’s mandate
to promote responsible innovation as
Congress directed in the CEA.
My dissent should not be taken as an
indication that I am a fan of all event
contracts. But it is hard not to conclude from
the multitude of defects in this Proposal that
its significant overreach is motivated more by
a seemingly visceral antipathy to event
contracts than by reasoned analysis.
It does not matter whether we think event
contracts are a good idea or a bad idea; the
Commission must exercise its authority with
respect to event contracts within the scope of
the CFTC’s legal authority, and must
appropriately implement the authority that
Congress has provided us. This Proposal fails
both tests.
I. Event Contracts in Brief
CEA Section 5c(c)(5)(C), which was added
to the CEA in 2010 by the Dodd-Frank Act,184
permits the Commission to prohibit an event
contract from being listed for trading on an
exchange 185 if: (1) the contract involves one
of five enumerated activities (i.e., activity
that is unlawful under Federal or State law;
terrorism; assassination; war; or gaming); and
(2) the Commission determines that the
contract is contrary to the public interest.
CEA Section 5c(c)(5)(C) also provides that the
Commission may determine, by rule or
regulation, that an event contract involves
‘‘other similar activity’’ to the five
enumerated activities, which would subject
event contracts involving that similar activity
to the ‘‘contrary to the public interest’’
standard.186
Congress in CEA Section 5c(c)(5)(C) did
not decree that event contracts involving
enumerated activities are contrary to the
public interest per se. Rather, if an event
contract involves an enumerated activity, the
Commission ‘‘may’’ determine that it is
184 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010) (‘‘Dodd-Frank Act’’).
185 CEA Section 5c(c)(5)(C) applies to event
contracts listed for trading by two types of
exchanges (designated contract markets (‘‘DCMs’’)
and swap execution facilities (‘‘SEFs’’)), as well as
the clearing of event contracts by derivatives
clearing organizations (‘‘DCOs’’), all of which must
register with, and are regulated by, the CFTC. For
convenience, this Statement will refer simply to
‘‘exchange trading’’ of event contracts.
186 CEA Section 5c(c)(5)(C)(i); 7 U.S.C. 7a–
2(c)(5)(C)(i).
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contrary to the public interest and prohibited
from trading—which necessarily indicates
that the Commission also has the discretion
to determine that it is not.
A year after enactment of the Dodd-Frank
Act, the Commission adopted CFTC Rule
40.11 187 to implement the CEA’s new event
contract provisions.188 It is Rule 40.11 that
the Commission is now proposing to amend.
II. The Proposed Definition of ‘‘Gaming’’ is
Significantly Overbroad
Neither the CEA nor the Commission’s
rules define the term ‘‘gaming.’’ In the Rule
40.11 Adopting Release implementing CEA
Section 5c(c)(5)(C), the Commission
acknowledged that ‘‘the term ‘gaming’
requires further clarification,’’ and said that
the Commission may issue a future
rulemaking concerning event contracts that
involve ‘‘gaming.’’ 189
I agree that, 13 years later, it is long past
time for the Commission to do so. But, the
Proposal’s definition of ‘‘gaming’’ is much
too broad.
1. The Proposal Sweeps in the Universe of
Every ‘‘Occurrence or Non-Occurrence in
Connection With’’ a Game
The proposed definition of ‘‘gaming’’
includes both the outcome of a game and the
performance of one or more competitors in a
game. So far, so good.
But it then tacks on an additional category
of ‘‘any other occurrence or non-occurrence
in connection with’’ a game. The allencompassing nature of the phrase ‘‘any
other occurrence or non-occurrence’’ is selfevident. And that universality is further
reinforced by its attachment to the ‘‘in
connection with’’ wording.
The motivation for this expansive wording
in the Proposal is likely that, where the
phrase ‘‘in connection with’’ appears in
various enforcement provisions of the CEA,
the Commission interprets it ‘‘broadly, not
technically or restrictively.’’ 190 And the
Proposal gives no indication that it should be
interpreted any differently here. In fact, the
Proposal (section II.B.1.b) goes so far as to say
that staking or risking something of value on
a contingent event ‘‘in connection with’’ a
game ‘‘would be as much of a wager or a bet
on the game . . . as staking or risking
something of value on the outcome of the
game . . . would be.’’
Under this incredibly far-reaching
formulation, there are countless
‘‘occurrence[s] or non-occurrence[s] in
connection with’’ a game that the Proposal
187 CFTC
Rule 40.11, 17 CFR 40.11.
Provisions Common to Registered Entities,
76 FR 44776 (July 27, 2011) (‘‘Rule 40.11 Adopting
Release’’).
189 Id. at 44785.
190 See Prohibition on the Employment, or
Attempted Employment, of Manipulative and
Deceptive Devices and Prohibition on Price
Manipulation, 76 FR 41398, 41405 (July 14, 2011)
(citing the U.S. Supreme Court’s decision in SEC v.
Zandford, 535 U.S. 813 (2002), interpreting the ‘‘in
connection with’’ language in SEC Rule 10b–5, 17
CFR 240.10b–5, as ‘‘particularly instructive’’; in
Zandford, the Supreme Court broadly equated the
‘‘in connection with’’ language with the word
‘‘coincide’’ and the phrase ‘‘not independent
events,’’ id. at 820–822).
188 See
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would deem to be ‘‘gaming.’’ Obvious
examples include event contracts involving
the attendance at a baseball or football game,
or whether a particular nation will be
selected to host a soccer World Cup. These
would clearly be ‘‘in connection with’’ the
underlying baseball, football, or soccer
games—but there is no reason why staking
something of value on those contingent
events should be treated the same as staking
something of value on the outcome of those
games.
Indeed, there is no better illustration of the
overbreadth of the ‘‘in connection with’’
aspect of the proposed ‘‘gaming’’ definition
than the Proposal’s own example (section
II.B.1.c) of ‘‘whether a particular individual
will attend a game.’’ It is difficult to fathom
why an event contract involving whether
Taylor Swift will attend a Kansas City Chiefs
football game should constitute ‘‘gaming’’—
and impossible to understand why the
Proposal treats similar things differently,
since whether she attends a Beyoncé concert
would not constitute ‘‘gaming.’’
I acknowledge that it might be appropriate
to extend the definition of ‘‘gaming’’ to
include events that can affect the outcome of
a game or the performance of a competitor in
a game. Event contracts involving, say,
whether an injury to Shohei Ohtani would
prevent him from playing in the World
Series, or involving the score of a football
game at halftime, might be examples of this.
But to broadly define as ‘‘gaming’’ every
‘‘occurrence or non-occurrences in
connection with’’ a game—regardless of
whether it has any bearing on the outcome
of the game or the performance of a
competitor in the game—is wholly
unwarranted.
lotter on DSK11XQN23PROD with PROPOSALS2
2. Elections and Awards Are Not ‘‘Gaming’’
The Proposal rubber-stamps two prior
Commission Orders that found that event
contracts involving political control or
elections are ‘‘gaming,’’ 191 essentially
repeating the same discussion from those
Orders—and then throwing awards into its
‘‘gaming’’ definition as well. Yet, this
definition is inconsistent with the legislative
history of CEA Section 5c(c)(5)(C)—
legislative history on which, for other issues
discussed below, the Proposal relies heavily.
That legislative history consists of a
colloquy between Senators Blanche Lincoln
and Dianne Feinstein. Senator Lincoln was
then the Chair of the Senate Committee on
Agriculture, Nutrition, and Forestry, which is
the CFTC’s authorizing committee.
In the colloquy, the Senators talked about
‘‘gaming’’ only in the limited context of
sporting events. In responding to Senator
Feinstein’s question about the CFTC’s
authority under Section 5c(c)(5)(C) to
determine that a contract is a ‘‘gaming’’
191 See Order Prohibiting North American
Derivatives Exchange’s Political Event Derivatives
Contracts (April 2, 2012), available at https://
www.cftc.gov/PressRoom/PressReleases/6224-12;
and Order In the Matter of the Certification by
KalshiEX LLC of Derivatives Contracts with Respect
to Political Control of the United States Senate and
United States House of Representatives (September
22, 2023), available at https://www.cftc.gov/
PressRoom/PressReleases/8780-23.
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contract, Senator Lincoln said that ‘‘[i]t
would be quite easy to construct an ‘event
contract’ around sporting events such as the
Super Bowl, the Kentucky Derby, and
Masters Golf Tournament.’’ 192 Thus, Senator
Lincoln clearly associated ‘‘gaming’’ with
sporting events, i.e., games.193
But rather than remain true to the
legislative history that equated ‘‘gaming’’
with only sporting events, the Proposal
broadly sweeps all ‘‘contests’’ into its
definition of ‘‘gaming.’’ And it then
concludes that elections and awards are
‘‘contests’’ and, therefore, ‘‘gaming’’—even
though neither Senator Lincoln nor Senator
Feinstein ever mentioned elections or awards
(or ‘‘contests,’’ for that matter).
The Proposal attempts to squeeze elections
and awards into the ‘‘gaming’’ category
through the following tortured chain of
reasoning:
• Gaming means gambling;
• Some State statutes link gambling to
betting or wagering on contests; therefore,
• Contests (including elections and
awards) constitute gaming.
Yet, one has to ask: If Congress had
intended for elections and awards to be
enumerated activities, is it more likely that
Section 5c(c)(5)(C) would have:
• Included elections and awards in its list
of enumerated activities; or
• Enumerated ‘‘gaming’’ and hoped the
Commission would—
Æ Define ‘‘gaming’’ to include ‘‘contests;’’
and
Æ Consider ‘‘contests’’ to include elections
and awards?
Congress easily could have included
elections and awards as enumerated
activities, but it did not. Confronted with this
Congressional silence, I do not believe the
Commission can simply decree that elections
and awards are enumerated activities. And
this is especially the case when Congress in
CEA Section 5c(c)(5)(C) provided the
Commission with a ready-made process for
determining, through a rulemaking
proceeding, whether contests, elections, and/
or awards are similar to the enumerated
activities, including ‘‘gaming.’’
I am baffled at why the Commission is
tying itself into knots by trying to reason its
way from ‘‘gaming’’ to ‘‘gambling’’ to
‘‘contests’’ to elections and awards, rather
than simply do what Congress said it could
do: consider whether elections and awards
are similar to ‘‘gaming’’ (or another
enumerated activity). This is not a matter of
form over substance. Approach matters when
it comes to exercising our authority under the
192 See
156 Cong. Rec. S5906–07 (daily ed. July
15, 2010) (statements of Senator Dianne Feinstein
and Senator Blanche Lincoln), available at https://
www.congress.gov/111/crec/2010/07/15/CREC2010-07-15-senate.pdf (‘‘Feinstein-Lincoln
colloquy’’).
193 The Senator’s view is consistent with the
natural interpretation of the word ‘‘gaming’’ as
meaning the staking of money on the outcome of
a game. For example, Cambridge Dictionary defines
‘‘gaming’’ in terms of games: ‘‘The risking of money
in games of chance, especially at a casino; gaming
machines/tables.’’ See ‘‘gaming’’ definition,
CAMBRIDGE DICTIONARY, available at https://
dictionary.cambridge.org/us/dictionary/english/
gaming.
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CEA, and I cannot support the Proposal’s
approach to stretch the statutory term
‘‘gaming’’ to include elections and awards.
III. The Commission Lacks Legal Authority
To Determine in Advance That Entire
Categories of Event Contracts Are Contrary
to the Public Interest
The overbreadth of the Proposal’s
‘‘gaming’’ definition would suffice for me to
dissent. But the Proposal’s most brazen
overreach is its determination, in advance,
that every event contract that involves an
enumerated activity is automatically contrary
to the public interest—regardless of the terms
and conditions of that contract.
The Proposal would prohibit these
contracts—sight unseen—through the
shortcut of declaring entire categories of
event contracts to be contrary to the public
interest. But the Commission lacks legal
authority under the CEA to make public
interest determinations by category.
The Proposal’s justification for its
approach (in section II.C.1) is that ‘‘the
statute does not require this public interest
determination to be made on a contractspecific basis.’’ This is backwards. The CFTC
is a creature of statute, and has only the
authorities granted to it by the CEA. There is
no provision in CEA Section 5c(c)(5)(C) for
public interest determinations regarding
event contracts involving enumerated
activities to be made by category.
Accordingly, the Commission cannot claim
that authority through the ipse dixit of
‘‘Congress didn’t say we couldn’t.’’
This is not a mere question of what
procedure to follow. The Proposal would
allow the Commission to make the
substantive policy determination that entire
categories of event contracts, regardless of
their terms and conditions, are contrary to
the public interest. And the consequences of
such a determination are severe—a complete
prohibition on exchanges’ ability to list event
contracts, and on market participants’ ability
to trade them. If Congress had intended for
the Commission to wield this immense
authority, surely it would have said so.
In fact, in another CEA provision similar to
CEA Section 5c(c)(5)(C) that also was added
by the Dodd-Frank Act, Congress did say so.
CEA Section 2(h)(2)(A)(i) specifically states
that the Commission shall review ‘‘each
swap, or any group, category, type, or class
of swaps to make a determination as to
whether the swap or group, category, type, or
class of swaps should be required to be
cleared.’’ 194
194 CEA Section 2(h)(2)(A)(i), 7 U.S.C.
2(h)(2)(A)(i) (emphasis added). For convenience,
the text will refer only to CEA Section 2(h)(2)(A)(i),
although the Dodd-Frank Act also used this same
wording explicitly authorizing the Commission to
make determinations by category in CEA Sections
2(h)(2)(B)(i), (ii), (iii)(II), and (E); 2(h)(3)(A), (B),
(C)(i), (C)(ii), and (D); and 2(h)(4)(B), (B)(iii), (C)(i),
and (C)(ii), 7 U.S.C. 2(h)(2)(B)(i), (ii), (iii)(II), and
(E); 2(h)(3)(A), (B), (C)(i), (C)(ii), and (D); and
2(h)(4)(B), (B)(iii), (C)(i), and (C)(ii).
Of particular interest is CEA Section
2(h)(4)(B)(iii), 7 U.S.C. 2(h)(4)(B)(iii), which
provides that to the extent the Commission finds
that a particular swap or category (or group, type
or class) of swaps would be subject to mandatory
clearing but no DCO has listed the swap or category
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Thus, when it enacted the Dodd-Frank Act,
Congress knew how to tell the Commission
that it could make a determination on either
an individual or categorical basis when it
wanted to do so.195 In contrast, Congress did
not say in CEA Section 5c(c)(5)(C) that the
Commission could make public interest
determinations for event contracts by
category.
The Proposal’s premise is that a grant of
authority to make a determination about one
thing necessarily includes authority to make
a determination about a category of such
things—unless Congress says otherwise. But
if that were the case, then there was no need
for Congress to tell the Commission in CEA
Section 2(h)(2)(A)(i) that it could make
mandatory swap clearing determinations
either by individual swap or by category.196
The Proposal’s determination would render
statutory text in CEA Section 2(h)(2)(A)(i)
mere surplusage in violation of established
canons of statutory construction.197 It also
would violate the canon of statutory
construction that provisions enacted as part
of the same statute (here, the Dodd-Frank
Act) should be construed in a similar
manner.198
In the absence of any statutory text in CEA
Section 5c(c)(5)(C) like that in CEA Section
(or group, type, or class) of swaps for clearing, the
Commission ‘‘shall . . . take such actions as the
Commission determines to be necessary and in the
public interest, which may include requiring the
retaining of adequate margin or capital by parties
to the swap, group, category, type, or class of
swaps.’’ (Emphasis added) Here, unlike with
respect to event contracts, Congress explicitly told
the Commission that it could make a public interest
determination either individually or by category.
195 Similarly, in another CEA provision added by
the Dodd-Frank Act, Congress told the Commission
that it could exempt swaps or other transactions
from position limits either individually or by class.
See CEA Section 4a(7), 7 U.S.C. 6a(7) (‘‘The
Commission . . . may exempt . . . any swap or
class of swaps . . . or any transaction or class of
transactions from any requirement it may establish
. . . with respect to position limits’’).
196 Nor can authority to make categorical
determinations be found in the CEA’s grant of
general rulemaking authority in CEA Section 8a(5),
7 U.S.C. 12a(5), which provides that the
Commission may adopt such rules as, ‘‘in the
judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to
accomplish any of the purposes of’’ the CEA. Again,
if that were the case, then there was no need for
Congress to tell the Commission in CEA Section
2(h)(2)(A)(i) that it could make mandatory swap
clearing determinations either by individual swap
or by category, nor was there any need for Congress
to tell the Commission in CEA Section 4a(7) that it
could exempt swaps or other transactions from
position limits requirements either by individual
transaction or by class.
197 See, e.g., Dep’t of Agric. Rural Dev. Rural
Hous. Serv. v. Kirtz, 601 U.S. 42, 53 (2024) (stating
proper respect for Congress cautions courts against
lightly assuming statutory terms are superfluous or
void of significance); City of Chicago, Illinois v.
Fulton, 592 U.S. 154, 159 (2021) (specifying the
canon against surplusage is strongest when an
interpretation would render superfluous another
part of the same statutory scheme).
198 See Turkiye Halk Bankasi A.S. v. United
States, 598 U.S. 264, 275 (2023) (The Court has a
duty to construe statutes and not isolated
provisions, and such construction must occur
within the context of the entire statutory scheme.).
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2(h)(2)(A)(i), I cannot accept that Congress
silently authorized the CFTC to make life
easier for itself through the shortcut of
making impactful determinations that entire
categories of event contracts are contrary to
the public interest and thus are prohibited
from trading on exchanges.
IV. Even if There Is Legal Authority, the
Proposal Fails To Justify Making Advance
Public Interest Determinations by Category—
for a Host of Reasons
Even if the Commission has legal authority
to make public interest determinations for
event contracts by category, the Proposal is
wholly unpersuasive in its attempt to justify
doing so. There are a multitude of failings.
1. There is No Basis To Resurrect the
Repealed ‘‘Economic Purpose Test,’’ Which
Shouldn’t be Applied to Event Contracts in
Any Event
The Proposal would ban entire categories
of event contracts as being contrary to the
public interest based largely on the
proposition that they fail the ‘‘economic
purpose test.’’ There are four significant
problems with this approach.
Congressional Intent: First, the Proposal
relies on a single, ambiguous, passage in the
legislative history to conclude that Congress
intended, for purposes of a public interest
review of an event contract, to resurrect the
‘‘economic purpose test’’ that the
Commission once used to determine whether
a futures contract was contrary to the public
interest—until Congress repealed that public
interest requirement in 2000.199
The Proposal’s resurrection of the
‘‘economic purposes test’’ is based entirely
on this one passage in the colloquy between
Senator Dianne Feinstein and Senator
Blanche Lincoln:
Mrs. Feinstein: . . . Will the CFTC have
the power to determine that a contract is a
gaming contract if the predominant use of the
contract is speculative as opposed to hedging
or economic use?
Mrs. Lincoln: That is our intent. The
Commission needs the power to, and should,
prevent derivatives contracts that are
contrary to the public interest because they
exist predominantly to enable gambling
through supposed event contracts. It would
be quite easy to construct an ‘event contract’
around sporting events such as the Super
Bowl, the Kentucky Derby, and Masters Golf
Tournament. These types of contracts would
not serve any real commercial purpose.
Rather, they would be used solely for
gambling.200
199 Before 2000, CEA Section 5(g) required that
futures contracts not be contrary to the public
interest. The Commission interpreted this statutory
public interest standard to include the ‘‘economic
purpose test.’’ See Request for Comments
Respecting Public Interest Test, Guideline on
Economic and Public Interest Requirements for
Contract Market Designations, 40 FR 25849 (June
19, 1975) (‘‘Guideline No. 1’’). In 2000, Congress
repealed Section 5(g) of the CEA and its public
interest requirement in the Commodity Futures
Modernization Act of 2000, Public Law 106–554,
114 Stat. 2763 (2000) (‘‘CFMA’’). As a result, the
Commission withdrew Guideline No. 1.
200 See Feinstein-Lincoln colloquy, n.13, supra.
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To be clear, the Dodd-Frank Act did not
codify the Commission’s prior ‘‘economic
purpose test.’’ And I cannot accept the
Proposal’s assertion that this isolated
colloquy between two Senators establishes an
intent by the whole of Congress that the
Commission conduct its public interest
reviews of event contracts based on an
‘‘economic purpose test’’ that the
Commission had withdrawn as a result of the
repeal (by the whole of Congress) of the
statutory provision it implemented a decade
earlier.
After all, neither Senator Feinstein nor
Senator Lincoln used the term ‘‘economic
purpose test’’ or referred to the Commission’s
Guideline No. 1 that set out that test. As
someone who spent over a decade working
in Congress, and who was present on the
Senate floor for countless colloquies and
even had a hand in preparing talking points
for similar floor discussions, I am confident
that if the Senators believed we should
resurrect the ‘‘economic purpose test,’’ they
would have said just that.
Difference in Kind: Second, the ‘‘economic
purpose test’’ was designed for traditional
futures contracts that have been listed and
traded on exchanges for decades.201 These
contracts differ in kind from event contracts,
which typically are structured as binary (yes/
no) options.
The two prongs of the ‘‘economic purpose
test,’’ which the Proposal adopts as a primary
basis for prohibiting entire categories of event
contracts as being contrary to the public
interest, evaluate: (1) the contract’s utility for
price basing; and (2) whether the contract can
be used for hedging purposes. Yet, the
Commission itself has previously recognized
the difference between event contracts and
the traditional futures contracts for which the
‘‘economic purpose test’’ was developed. In
a Concept Release issued in 2008, the
Commission stated that ‘‘[i]n general, event
contracts are neither dependent on, nor do
they necessarily relate to, market prices or
broad-based measures of economic or
commercial activity,’’ and elaborated as
follows:
Since 2005, the Commission’s staff has
received a substantial number of requests for
guidance on the propriety of offering and
trading financial agreements that may
primarily function as information aggregation
201 The CFTC’s Guideline No. 1, including its
‘‘economic purpose test,’’ applied to futures
contracts. See Guideline No. 1, 40 FR at 25850
(‘‘The Commission is inviting comment . . . to
assist the Commission in determining whether the
futures contracts of [certain exchanges] meet the
public interest requirements for contract market
designation . . .’’), and at 25851 (an exchange
‘‘should at this time affirm that futures transactions
in the commodity for which designation is sought
are not, or are not reasonably expected to be,
contrary to the public interest’’) (emphases added).
And the Feinstein-Lincoln colloquy makes clear
that CEA Section 5c(c)(5)(C) was drafted with
futures contracts in mind. Senator Lincoln cited
terrorist attacks, war and hijacking as examples of
events that ‘‘pose a real commercial risk to many
businesses in America,’’ but stated that ‘‘a futures
contract that allowed people to hedge that risk [of
terrorist attacks, war, and hijacking] . . . would be
contrary to the public interest.’’ Feinstein-Lincoln
Colloquy, n.13, supra (emphasis added).
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vehicles. These event contracts generally take
the form of financial agreements linked to
eventualities or measures that neither derive
from, nor correlate with, market prices or
broad economic or commercial measures.202
In other words, the Proposal would ban
entire categories of event contracts largely on
the basis of price basing and hedging
requirements that event contracts (described
in the Concept Release as ‘‘information
aggregation vehicles’’) likely—because of
their very structure—have little chance of
satisfying.
This problem is compounded by the fact
that under the Proposal, some event contracts
that fail to satisfy the ‘‘economic purpose
test’’ would be banned, while other contracts
failing the test would not. For example, the
Proposal’s statement (in section II.C.3.c) that
‘‘most contracts falling within the proposed
definition of ‘gaming’ would have no
underlying cash market with bona fide
economic transactions to provide directly
correlated price forming information’’ is
equally true of weather-related event
contracts—but those contracts would not be
banned.
Since the weather is not an enumerated
activity, event contracts involving the
weather can trade because they are not
subject to a public interest review under CEA
Section 5c(c)(5)(C). Thus, the Proposal’s
reliance on the ‘‘economic purpose test’’
means that exchanges can list for trading
event contracts (such as those involving
weather) that the Commission believes are
contrary to the public interest—which I find
untenable.
These are the inevitable results of imposing
an ‘‘economic purpose test’’ on event
contracts that was not designed for event
contracts. Certainly, a rulemaking proceeding
could be appropriate to fully explore the
economic attributes of event contracts, and to
consider how to incorporate such attributes
into a public interest review that is tailored
to the nature of event contracts. But, that is
not this Proposal.
Government paternalism: Third, the
Proposal asserts (in section II.C.3.c) that ‘‘the
economic impact of an occurrence (or nonoccurrence) in connection with a contest of
others, or a game of skill or chance . . .
generally is too diffuse and unpredictable to
correlate to direct and quantifiable changes
in the price of commodities or other financial
assets or instruments, limiting the hedging
202 Concept Release on the Appropriate
Regulatory Treatment of Event Contracts, 73 FR
25669, 25669–25670 (May 7, 2008). More
specifically, the Concept Release noted that: 1)
event contracts based on environmental measures
(such as the volatility of precipitation or
temperature levels) or environmental events (such
as a specific type of storm within an identifiable
geographic region) will ‘‘not predictably correlate to
commodity market prices or other measures of
broad economic or commercial activity;’’ and 2)
event contracts based on general measures (such as
the number of hours that U.S. residents spend in
traffic annually or the vote-share of a particular
candidate) ‘‘do not quantify the rate, value, or level
of any commercial or environmental activity,’’ and
that contracts on general events (such as whether
a Constitutional amendment will be adopted) ‘‘do
not reflect the occurrence of any commercial or
environmental event.’’ Id. at 25671.
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and price-basing utility of an event contract
involving such an occurrence.’’
But to say that there are limits to the
hedging utility of an event contract is simply
a statement that the contract may not be a
particularly good hedging vehicle. Market
participants should be permitted to make
their own choices about what financial
products meet their hedging needs. It is not
the CFTC’s role to deny them that choice
altogether because we feel a given product’s
hedging value is ‘‘limited.’’
The ‘‘Economic Purpose Test’’ Was Not
Applied to Categories of Contracts: Fourth,
even assuming that the ‘‘economic purpose
test’’ is an appropriate part of a public
interest analysis for event contracts, it does
not support making public interest
determinations for event contracts by
category—because the Commission applied
its ‘‘economic purpose test’’ to the terms and
conditions of individual contracts. The
Commission’s Guideline No. 1 provided that
‘‘[i]ndividual contract terms and conditions
must be justified’’ in order for an exchange
to demonstrate that it met the ‘‘economic
purpose test.’’ 203
The Commission took no shortcuts in
applying its subsequently withdrawn
‘‘economic purpose test’’ to futures contracts.
It did not group contracts into categories
(such as all futures contracts on wheat, corn,
gold, or silver) in evaluating the public
interest through its ‘‘economic purpose test.’’
Rather, the Commission looked at each
contract’s ‘‘individual contract terms and
conditions’’ to make that determination. If
the Proposal is going to (incorrectly) adopt
that ‘‘economic purpose test’’ in determining
whether an event contract is contrary to the
public interest, then it should apply that test
the same way.
2. The Proposal’s Application of Other
Factors Falls Far Short of Justifying Its
Prohibition of Entire Categories of Event
Contracts
Aside from the ‘‘economic purpose test,’’
the Proposal points to a hodgepodge of other
factors to try to justify prohibiting entire
categories of event contracts, whose terms
and conditions the Commission has never
seen, from being traded on exchanges. But its
discussion of these factors is conjectural and
without evidentiary support, calls into
question other contracts that are trading on
regulated exchanges, and raises more
questions than it answers. Taken as a whole,
the Proposal falls far short of justifying the
shortcut of prohibiting entire categories of
event contracts (even assuming the
Commission has the legal authority to do so).
Examples of these defects in the Proposal
abound, but I will focus here on just a few:
Hopelessly Impractical: The category of
activities illegal under State law
demonstrates the type of problems inherent
in determining that all event contracts in a
category are contrary to the public interest.
Some activities are illegal in some States, but
not others. Yet, the Proposal does not provide
any guidance on several obvious questions: Is
203 Guideline No. 1, 40 FR at 25850 (emphasis
added). See also id. at 25851 (‘‘The justification of
each contract term or condition must be supported
by appropriate economic data’’) (emphasis added).
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an event contract automatically contrary to
the public interest if it involves an activity
that is illegal in only a single State—and if
so, why? Or, if not, then how many States
have to declare an activity illegal before the
automatic prohibition on event contracts
involving that activity is triggered? More than
half? States comprising a certain percentage
of the country’s population? 204
The problem is exacerbated by the
Proposal’s suggestion that the prohibition of
event contracts can hinge on decisions by
judges. Is this reference limited to Supreme
Courts of the States? Or would a ruling by a
lower court of a State that a particular
activity is illegal trigger an automatic
determination that an event contract
involving that activity is contrary to the
public interest? What if that decision is
appealed?
While I have focused here on the category
of event contracts involving activities illegal
under State law, these types of practical
questions are a foreseeable and inevitable
result of any determination that an entire
category of event contracts is contrary to the
public interest. I recognize that a contractspecific approach to making public interest
determinations regarding event contracts may
be difficult and resource-intensive for the
CFTC. But aside from my view that a
contract-specific approach is required by the
CEA, it also is a better approach from a
policy perspective precisely because it would
permit the CFTC to consider these practical
questions in the context of the specific
circumstances applicable to a particular
event contract. We do not get to override a
requirement under the law because it will be
hard or require more work for us.
Absolutism Based on Conjecture: Another
defect in the Proposal is illustrated by the
following (in section II.C.3.c): ‘‘Generally
speaking, the Commission believes that
something of value is staked or risked upon
an occurrence (or non-occurrence) in
connection with a contest of others, or a
game or [sic] skill or chance, for
entertainment purposes—in order wager [sic]
on the occurrence. As such, the Commission
believes that contracts involving such
occurrences are likely to be traded
predominantly ‘to enable gambling’ and
‘used predominantly by speculators or
participants not having a commercial or
hedging interest’ . . .’’ (Emphasis added;
footnote omitted)
These assertions are entirely conjectural, as
the Proposal does not cite any support for
these statements. One can readily envision an
event contract involving whether a particular
US city will be awarded the summer or
winter Olympic games in a given year, which
204 The Proposal justifies its category-based
approach regarding activity that is illegal under
State law (in section II.C.3.b) on the grounds that
it ‘‘eliminates the possibility that the Commission
would have to serve . . . as arbiter of a state’s own
public interest determination . . . in recognizing
specific activity as causing, or posing, public
harm.’’ But unless the activity is illegal in all 50
States, then in determining that an event contract
involving an activity illegal in some States is
automatically contrary to the public interest, the
Commission is inherently ‘‘serv[ing] as arbiter’’ of
the determination by all the other States that the
activity does not cause, or pose, public harm.
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would be used by hotel and restaurant
owners, as well as other businesses, that
would make money if their city gets the
Olympics but not if the Olympics are
awarded elsewhere. Such an event contract
would not necessarily be used predominantly
for entertainment or speculative purposes.
Indeed, the quoted text itself uses wording
like ‘‘[g]enerally speaking’’ and ‘‘likely,’’
which is an acknowledgement that its
conclusions are not universally true. A belief
for which no evidence is cited, and that is
acknowledged not to be true across-theboard, cannot justify an absolutist
determination that all event contracts
involving an activity are automatically
contrary to the public interest, nor can it
justify a prohibition on trading all event
contracts in that category.
Calling into Question Traditional Futures
Contracts: I agree that an event contract
involving the outcome of a sporting event,
and that allows players or coaches to in trade
that contract, would be contrary to the public
interest. But consistent with its overreach,
the Proposal also concludes that even where
the terms and conditions of such a contract
prohibit such persons from trading, the
contract is nonetheless contrary to the public
interest. The Proposal’s stated rationale (in
section II.C.3.c) is that ‘‘the athlete or coach
would potentially have a platform—for
example, access to media, combined with
public perception as an authoritative source
of information regarding the team—that
could be used to disseminate misinformation
that could artificially impact the market in
the contract for additional financial gain.’’
The same can be said of many traditional
exchange-traded futures contracts. For
example, oil companies (or companies in the
agricultural or metals sectors, or other energy
companies) also have ‘‘access to media,
combined with public perception as an
authoritative source of information
regarding’’ the oil (or other) industry, ‘‘that
could be used to disseminate misinformation
that could artificially impact the market in
the contract for additional financial gain.’’
And yet, exchanges are permitted to list oil
futures for trading (in fact, oil companies are
permitted to trade them).
The Proposal offers no explanation for why
a possible incentive to spread misinformation
should render all event contracts involving
sporting events (or occurrences or nonoccurrences in connection with sporting
events) contrary to the public interest when
traditional futures contracts with the same
incentive are not. A contract-specific public
interest analysis, by contrast, could take into
account the terms and conditions of a
particular event contract—such as whether
athletes and coaches can trade, or whether
there are guardrails against the spread of
misinformation—to determine whether the
threat of misinformation in that contract is
such that it is contrary to the public interest.
Fallacies Concerning the CFTC’s
Regulatory and Enforcement Roles: The
Proposal raises in alarmist tones the red
herring that sweeping public interest
determinations are necessary so that the
CFTC does not get drawn into a regulatory or
enforcement role for which it is not wellequipped. For example, the Proposal says (in
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section II.C.2) that one factor that may be
relevant in evaluating whether event
contracts are contrary to the public interest
is the extent to which they ‘‘would draw the
Commission into areas outside of its primary
regulatory remit.’’ 205 Other examples are: (1)
the statements (in section II.C.3.c) relating to
event contracts involving elections that the
Commission ‘‘is not tasked with the
protection of election integrity or
enforcement of campaign finance laws;’’ and
(2) the statement (in the first sentence of
footnote no. 127) that ‘‘the oversight function
in this area [regarding elections] is best
reserved for other expert bodies.’’
To be clear: The CFTC does not administer,
oversee, or regulate elections, sporting
events, gambling, or any other activity or
event discussed in the Proposal—and that
will not change with respect to any event
contract that is found not to be contrary to
the public interest. Rather, the CFTC would
exercise its exact same authorities under the
CEA that it does with respect to all other
derivatives contracts.
Nor would the CFTC become some type of
‘‘election cop.’’ After all, the CFTC has antifraud and anti-manipulation enforcement
authority with respect to futures contracts on
broad-based security indices, but that does
not mean the CFTC regulates the securities
markets or that it is tasked with the
protection of the integrity of the securities
markets or enforcement of securities laws—
the Securities and Exchange Commission
(‘‘SEC’’) does all that. The CFTC similarly has
enforcement authority with respect to natural
gas and electricity since there are futures
contracts on those commodities, but that
does not mean the CFTC regulates the
transmission of natural gas or electricity or
that it is tasked with the protection of the
integrity of physical natural gas or power
markets, or enforcement of the Natural Gas
Act or the Federal Power Act—the Federal
Energy Regulatory Commission (‘‘FERC’’)
does all that.
The same is true with respect to an event
contract that is not contrary to the public
interest and thus is permitted to trade on a
regulated exchange. As the Supreme Court
has stated: ‘‘This Court’s cases have
consistently held that the use of the words
‘public interest’ in a regulatory statute is not
a broad license to promote the general public
welfare. Rather, the words take meaning from
the purposes of the regulatory
legislation.’’ 206 If a particular event contract
205 Since the CFTC has a narrow ‘‘regulatory
remit’’ restricted to regulating derivatives markets,
this factor presumably could support finding that
virtually every event contract is contrary to the
public interest.
206 NAACP v. Federal Power Commission, 425
U.S. 662, 669 (1976). The Court went on to explain:
‘‘Congress in its earlier labor legislation
unmistakably defined the national interest in free
collective bargaining. Yet it could hardly be
supposed that, in directing the Federal Power
Commission to be guided by the ‘public interest,’
Congress thereby instructed it to take original
jurisdiction over the processing of charges of unfair
labor practices on the part of its regulatees.’’ Id. at
671. Similarly, it could hardly be supposed that, in
directing the CFTC to be guided by the ‘‘public
interest’’ in evaluating event contracts, Congress
thereby instructed it to take original jurisdiction
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involving elections were found not to be
contrary to the public interest and thus
permitted to trade, the CFTC would have
absolutely no authority to administer,
oversee, or regulate the elections that are the
subject of that contract, or to enforce any
campaign finance laws. Its authority would
extend only so far as is the case with respect
to all commodities underlying derivatives
contracts within our jurisdiction, as provided
by Congress in the CEA.
Why This is Important: I can understand
why some might ask: You have been pleading
for an event contracts rulemaking for some
time now, and here it is—so what is the
problem? The problem is this: CFTC Rule
40.11(a)(1) already prohibits the listing and
trading of any event contract involving an
enumerated activity. As I explained in my
Kalshi Dissenting Statement:
Rule 40.11 contradicts the statute. CEA
Section 5c(c)(5)(C) grants the Commission
discretion to determine whether [an
exchange’s] event contract that involves an
enumerated activity is contrary to the public
interest. CFTC Rule 40.11(a), by contrast,
provides that [an exchange] ‘‘shall not list for
trading’’ a contract that involves . . . an
enumerated activity (emphasis added). Read
literally, Rule 40.11(a) removes entirely the
flexibility that Congress granted the
Commission to evaluate [exchange] event
contracts from a public interest
perspective.207
Rather than fix this problem, though, the
Proposal doubles down on it. By making
categorical public interest determinations in
advance, the Proposal would impermissibly
transform the two-step analysis that Congress
provided for event contracts into a single
step. It would transmogrify the discretion
that Congress gave the Commission to
determine that an event contract involving an
enumerated activity is contrary to the public
interest into a mandate that it do so.
The Proposal actually is quite candid in
acknowledging that it would re-write CEA
Section 5c(c)(5)(C). It states (in section II.C.1):
‘‘If, as proposed, [Rule 40.11] is amended to
include a categorical public interest
determination with respect to contracts
involving each of the Enumerated Activities,
the Commission would not, going forward,
undertake a contract-specific public interest
analysis as part of a review . . . Rather, the
focus of any such review would be to
evaluate whether the contract involves an
Enumerated Activity, in which case, it may
not be listed for trading . . .’’
If Congress had intended that every event
contract involving an enumerated activity is
automatically contrary to the public interest
and prohibited from trading, it could have
provided for such a single-step process in
CEA Section 5c(c)(5)(C). But it did not do
that, and instead provided that even if an
event contract involves an enumerated
activity, the Commission cannot prohibit the
contract without exercising its discretion in
a second step of determining that the contract
is contrary to the public interest. The
over the regulation or enforcement of laws relating
to elections, sporting events, gambling, or any other
activity or event.
207 See Kalshi Dissenting Statement, n.2, supra.
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Commission can’t short-circuit the process
that Congress established by determining that
an event contract is contrary to the public
interest—in advance and without knowing
the contract’s terms and conditions—simply
because that makes things easier for the
agency.
Granted, the Proposal makes categorical
public interest determinations only for the
activities enumerated in CEA Section
5c(c)(5)(C). I admit that I am not going to lose
sleep over a determination that all event
contracts involving terrorism, assassination,
and war are contrary to the public interest.
But this is where the ‘‘wolf in sheep’s
clothing’’ arrives. While this Proposal only
addresses event contracts involving
enumerated activities, it sets the precedent
for how the Commission can handle event
contracts involving other activities that it
determines are similar to enumerated
activities, too.
If the Proposal is adopted as final, then at
any time in the future, the Commission could
determine that other activities are similar to
enumerated activities—and could then
determine that every event contract involving
that activity is automatically contrary to the
public interest (and therefore prohibited from
trading) regardless of its particular terms and
conditions. And given all the deficiencies in
this Proposal’s categorical public interest
determinations discussed above, that appears
to be a low bar to clear.
V. Portions of the Proposal Are Inaccurate
or Extremely Weak, or Make No Sense
The fact that certain portions of the
Proposal are inaccurate, extremely weak, or
simply make no sense suggests that it either
was hastily prepared, or is motivated
primarily by the sheer hatred that the
Commission seems to bear towards event
contracts. Here are a few examples:
• The Proposal says (in section II.C.2) that
‘‘the public good’’ is a relevant factor for
consideration in an evaluation of whether an
event contract is contrary to the public
interest. It makes no sense that the
Commission should consider ‘‘the public
good’’ in evaluating whether a contract is
contrary to ‘‘the public interest.’’ This is
tautological—‘‘the public good’’ and ‘‘the
public interest’’ mean the same thing.
• The Proposal’s statement (in section
II.C.2) that in the colloquy, Senators
Feinstein and Lincoln ‘‘discussed the
Commission’s authority, prior to the
enactment of the Commodity Futures
Modernization Act of 2000 (‘CFMA’), ‘to
prevent trading that is contrary to the public
interest’’ is incorrect. Senators Feinstein and
Lincoln did not ‘‘discuss’’ the Commission’s
pre-CFMA authority. Senator Feinstein
referenced it in asking a question, but
Senator Lincoln (the Committee Chair) did
not talk about it—in fact, she did not even
mention the CFMA.
• Footnote no. 49 cites the CFTC
Reauthorization Act of 2019 as support for
the Proposal’s view that an erroneous
reference to a non-existent CEA Section
1a(2)(i) in CEA Section 5c(c)(5)(C) was
intended by Congress to refer to CEA Section
1a(19)(i) instead, since the bill included a
provision to replace the reference to Section
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1a(2)(i) with a reference to Section 1a(19)(i).
But an amendment in a bill introduced in a
subsequent Congress (nine years later) sheds
no light on what was intended by the
Congress that enacted the statutory provision
in question—especially when the referenced
bill was not enacted and nothing has
happened on it during the ensuing five years.
VI. Certain Implementation Timeline
Provisions in the Proposal Are Ill-Advised
As discussed above, I do not support the
proposal to determine that all event contracts
involving enumerated activities are contrary
to the public interest. But if the Commission
decides to do so, I oppose applying that
determination to contracts that are already
listed for trading as of the date of publication
of final rule amendments in the Federal
Register.
It is my hope that there would be few such
contracts. But for any contracts that would be
impacted, the Proposal is pollyanaish in its
rosy view (in section II.F) that ‘‘a 60-day
implementation period for these contracts
will minimize any market disruption that
might be caused by the rule amendments.’’
For one thing, given the Proposal’s repeated
emphasis (in sections II.B.1.c and section
II.C.3.c) that its examples of activities that
constitute ‘‘gaming’’ under the proposed
definition are non-exclusive, I am dubious
that exchanges and traders necessarily will
know exactly which existing event contracts
the Commission believes are now suddenly
prohibited.
Beyond that, this aspect of the Proposal is
fundamentally unfair. At any time during the
13 years since its adoption of Rule 40.11, the
Commission could have concluded that a
given event contract involving an
enumerated activity is contrary to the public
interest. Exchanges and market participants
that have listed and traded an event contract
in good faith reliance on the fact that the
Commission had not determined the contract
to be contrary to the public interest should
not pay the price (literally) for the
Commission’s inaction by having to halt
trading in a fixed amount of time because the
Commission has finally gotten around to it.
This would be the antithesis of ‘‘good
government.’’ Accordingly, I do not believe
that any rule amendments finalized as part of
this rulemaking should apply to an event
contract that is listed and available for
trading as of the date of their publication in
the Federal Register.
VII. Conclusion
Rather than undertake a rulemaking
process to do the hard work of building a
framework for evaluating event contracts
pursuant to CEA Section 5c(c)(5)(C), the
Commission squandered the 14 years since
that provision was enacted as part of the
Dodd-Frank Act. While the Commission is
now proposing an event contract rulemaking,
that hard work still has yet to be done.
Instead, the Commission is skipping right
over building a proper framework—and
simply proposing to prohibit contracts
outright.
This result seems preordained, given the
hostility that the Commission has displayed
toward event contracts since the enactment
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of the Dodd-Frank Act. This Proposal rubberstamps the Commission’s two prior Orders
finding proposed event contracts to be
contrary to the public interest. In addition, it
continues the ‘‘tradition’’ of stretching a
solitary, cryptic colloquy to form the basis for
evaluating whether event contracts are
contrary to the public interest through the
‘‘economic purpose test’’ that: (1) is not
mentioned in the statute; (2) had previously
been withdrawn due to Congress’ repeal of
the CEA provision it implemented; (3) was
not designed for this type of contract; and (4)
many event contracts, due to their structure,
likely will be unable to meet.
And now the Proposal goes even further,
adopting an overly broad definition of
‘‘gaming’’ and declaring entire categories of
event contracts to be contrary to the public
interest, sight unseen. The Commission’s
legal authority to make such determinations
by category is questionable, at best; that it is
inappropriate from a policy perspective
cannot reasonably be questioned.
The Proposal flatly contravenes Congress’
direction in the CEA that the CFTC ‘‘promote
responsible innovation.’’ 208 The
unmistakable take-away for exchanges is not
to expend resources developing an
innovative event contract because the
Commission will go to great lengths to find
that it is contrary to the public interest and
prohibit it from trading.209
I want to be very clear: My dissent should
not be taken as an endorsement of the
wisdom of event contracts generally, or of
any event contract in particular. Rather, it
reflects my application of Congress’ direction
to the Commission in CEA Section
5c(c)(5)(C). Whatever we may think of event
contracts, we cannot re-write the CEA to
claim an authority that Congress did not give
us because we have been derelict in applying
the authority that Congress did give us. Nor
should we be prohibiting an event contract
without a proper showing that it involves an
enumerated activity and is contrary to the
public interest based on the application of
well-defined factors to the particular terms
and conditions of that particular contract.
Because this wolf in sheep’s clothing fails
on many levels for the foregoing reasons, I
respectfully dissent.
Appendix 4—Statement of Commissioner
Caroline D. Pham
I respectfully dissent from the Event
Contracts Proposal because it takes the
CFTC’s regulation of event contract markets
backwards with its fundamental
misunderstanding of how we regulate
derivatives and the States regulate gaming.
Instead of thoughtfully considering how to
effectively regulate these markets while
208 CEA Section 3(b), 7 U.S.C. 5(b). The Proposal
claims (in section I.A, section II, and section
II.A.1.b) that it would help to support responsible
market innovation. I do not agree that prohibiting
broad categories of innovative event contracts
supports responsible market innovation.
209 In this regard, the Proposal even undermines
the CFTC’s commitment to its own stated Core
Value of being ‘‘Forward-Thinking’’ (i.e.,
challenging ourselves to stay ahead of the curve).
CFTC Core Values, Forward-Thinking, available at
https://www.cftc.gov/About/AboutTheCommission.
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fostering innovation, the Event Contracts
Proposal ties itself in knots over the bounds
of gaming, which Congress has neither asked
nor directed the Commission to regulate. I am
simply disappointed in this wasted
opportunity to regulate retail binary options,
sidestepping our responsibility, and
concerned about its legal impact.
The United States is built on a foundation
of federalism. Federalism reflects the
Founders’ understanding that a one-size-fitsall approach would not work for this country,
and allows for States to govern in ways that
best suit their residents.1 The simple
language of the Tenth Amendment to the
Constitution (‘‘The powers not delegated to
the United States by the Constitution, nor
prohibited by it to the States, are reserved to
the States respectively, or to the people’’)
emphasizes that the Federal government is a
government of limited and enumerated
powers.2 The Tenth Amendment,
importantly, protects the American people
from Federal encroachment.
State regulation of gaming, ranging from
betting to lotteries, is long-established in the
U.S., and is clearly a power reserved to the
States.3 No one understands their local
cultures, economies, and values better than
the States,4 which leads to State laws that
have been crafted to reflect the needs of their
residents. This approach has allowed some
States to embrace gaming and leverage it as
a source of revenue and tourism, while others
take a more conservative approach.5
When it comes to event contracts related to
gaming, I have been clear that the CFTC
should exercise caution, primarily because I
believe the Commission fundamentally
misunderstands the law in this area and
1 See Bernard Dobski, Ph.D., America Is a
Republic, Not a Democracy, The Heritage
Foundation (June 19, 2020) (examining whether
current egalitarian efforts threaten, among other
things, the diverse interests the Founders sought to
protect from factionalism), https://
www.heritage.org/american-founders/report/
america-republic-not-democracy. Interestingly, the
Event Contracts Proposal repeatedly claims to be
motivated by the increase in volume and ‘‘diversity
of event contracts listed for trading by Commissionregistered exchanges.’’ However, the Proposal
admits only one CFTC registered exchange
currently offers the types of event contracts covered
by the Proposal, out of the six CFTC registered
exchanges that are authorized to offer event
contracts. I question the motivations of any
rulemaking that seeks to quash unique products
offered by one exchange because their products are
‘‘diverse.’’
2 See Gary Lawson and Robert Schapiro, Common
Interpretation: The Tenth Amendment, National
Constitution Center, https://constitutioncenter.org/
the-constitution/amendments/amendment-x/
interpretations/129#:∼:text=
by%20Gary%20Lawson,-Phillip%20S.&
text=The%20Tenth%20Amendment%20
formally%20changed,Tenth%20Amendment%20
is%20unconstitutional%20afterwards.
3 See Tim Lynch, Gambling Regulation Belongs to
the States, Cato Institute (July 23, 1998), https://
www.cato.org/commentary/gambling-regulationbelongs-states.
4 See America Is a Republic, Not a Democracy.
5 See LexisNexis Legal Insights, States Embracing
New Form of Gambling: iGaming (Mar. 3, 2024),
https://www.lexisnexis.com/community/insights/
legal/capitol-journal/b/state-net/posts/statesembracing-new-form-of-gambling-igaming.
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Congressional intent.6 That fear has proven
well-founded with the Event Contracts
Proposal.
The CFTC has a role in regulating event
contracts as a market regulator, but it is
essential that the CFTC does not encroach
upon the prerogatives of States. An
appropriate Event Contracts Proposal would
have struck a balance between Federal
oversight and State autonomy by focusing on
the CFTC’s core mandate of promoting
market stability and protecting market
participants from fraud and abusive
practices.7 In doing so, the CFTC could have
maintained the integrity of event contracts
without undermining the authority of State
governments.
Instead, as I will explain below, the Event
Contracts Proposal bigfoots into State
regulation of gaming by drawing
unintelligible lines in the sand that will
either at best result in confusion for State
gaming authorities, or at worst push event
contracts into illegal, unregulated offshore
markets.
The Event Contracts Proposal Ignores the
Supreme Court’s Preemption Doctrine
The Constitution’s Supremacy Clause
provides that ‘‘the Laws of the United States
. . . shall be the Supreme Law of the Land;
and the Judges in every State shall be bound
thereby, any Thing in the Constitution or
Laws of any State to the Contrary
notwithstanding.’’ 8 This language is the basis
for the doctrine of Federal preemption,
according to which Federal law supersedes
conflicting State laws.9
The Supreme Court has identified two
general ways in which Federal law can
preempt State law: expressly, when a Federal
statute or regulation contains explicit
preemptive language; and impliedly when its
structure and purpose implicitly reflect
Congress’s preemptive intent.10 But the
Federal government cannot preempt
traditional State powers that are the
exclusive domain of States to regulate,
6 Dissenting Statement of Commissioner Caroline
D. Pham Regarding the Review and Stay of
KalshiEX LLC’s Political Event Contracts (Aug. 26,
2022), https://www.cftc.gov/PressRoom/
SpeechesTestimony/phamstatement082622.
7 Commodity Exchange Act (CEA) Section 3(a), 7
U.S.C. 5.
8 U.S. Const. art. VI, cl. 2.
9 Congressional Research Service, Federal
Preemption: A Legal Primer, 1 (Jul. 23, 2019) (citing
Gade v. Nat’l Solid Wastes Mgmt. Assn., 505 U.S.
88, 108 (1992)), https://crsreports.congress.gov/
product/pdf/R/R45825/1.
10 See id. at 2 (citing Gade, 505 U.S. 88, 98). The
Court has identified two subcategories of implied
preemption: ‘‘field preemption’’ and ‘‘conflict
preemption.’’ Field preemption occurs when a
pervasive scheme of federal regulation implicitly
precludes supplementary state regulation, or when
states attempt to regulate a field where there is
clearly a dominant federal interest. Id. In contrast,
conflict preemption occurs when compliance with
both federal and state regulations is a physical
impossibility (impossibility preemption), or when
state law poses an ‘‘obstacle’’ to the
accomplishment of the ‘‘full purposes and
objectives’’ of Congress (obstacle preemption). Id. at
2 (citing Fla. Lime & Avocado Growers, Inc. v. Paul,
373 U.S. 132, 142–43 (1963) and Hines v.
Davidowitz, 312 U.S. 52, 67 (1941)).
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recognizing the right to self-determination by
the people.
The Event Contracts Proposal uniquely
ignores the fact that the limits Congress
placed on the Commission’s regulation of
event contracts save the Commission from
becoming a gaming regulator. In other words,
the Commission could have relied on
implied preemption to regulate event
contracts as derivatives in our markets
separate and apart from State gaming
regulation. Instead, the Commission creates
preemption concerns by proposing a gaming
definition that incomprehensibly relies so
heavily on State law that I don’t know how
any exchange could understand where the
Commission’s rules begin and end for these
contracts.
Together, under CEA Section 5c(c)(5)(C),
Rule 40.11, and the preamble to the final
rulemaking for Rule 40.11, whether an event
contract is prohibited by Rule 40.11 depends
on the underlying activity that the contract
is based upon. When the Commission
reviewed an exchange’s political control
contracts, I raised that the underlying activity
was political control, which was neither
terrorism, assassination, war, gaming, nor
unlawful under any Federal or State law.11
Therefore, Rule 40.11(a)(1) did not apply. Yet
in disapproving the contracts, the
Commission argued that ‘‘taking a position in
the Congressional Control Contracts’’
(emphasis added) amounted to gaming.12
When taking a position in a derivatives
contract is gaming, the Commission starts to
look like a gaming regulator. Congress may
not compel a State to enact or enforce a
regulatory regime,13 and indeed, Congress
has not here. Yet in doubling down on its
logic in the Event Contracts Proposal, when
the act of entering into a derivatives contract
that meets the Proposal’s overbroad
definition of gaming, drawn from dozens of
State laws, is now gaming under the
Commission’s jurisdiction, we begin
encroaching on State gaming oversight. Stateregulated sportsbooks, in trying to
comprehend where the Commission’s gaming
derivatives begin and traditional bets end,
will be captured in this confusion and
question the need to register with the
Commission as exchanges. I certainly don’t
want the Commission to be registering Las
Vegas sportsbooks and other betting venues.
The Commodity Exchange Act Is Clear That
the Commission Regulates Event Contracts
Congress has been clear in its direction for
the CFTC.
First, in relevant part, the purpose of the
Commodity Exchange Act is to deter and
prevent price manipulation or any other
disruptions to market integrity; to ensure the
financial integrity of all transactions; to
11 Dissenting Statement of Commissioner Caroline
D. Pham Regarding the Review and Stay of
KalshiEX LLC’s Political Event Contracts.
12 See CFTC Order, In the Matter of the
Certification by KalshiEX LLC of Derivatives
Contracts with Respect to Political Control of the
United States Senate and United States House of
Representatives (Sept. 22, 2023), https://
www.cftc.gov/PressRoom/PressReleases/8780-23.
13 See New York v. United States, 505 U.S. 144
(1992).
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protect all market participants from
fraudulent or other abusive sales practices
and misuses of customer assets; and to
promote responsible innovation and fair
competition among boards of trade, other
markets and market participants.14
Second, the Commission is authorized to
review event contracts if the underlying
activity that the contract is based upon is
terrorism, assassination, war, gaming, or
unlawful under any Federal or State law.15
Read together, Congress intended that the
Commission regulate event contracts within
the bounds of the section 5(c) prohibitions.
Instead of telling market participants how we
will regulate the innovative contracts and
exchanges that have appeared in recent years,
the Commission has decided to ‘‘identif[y]
the types of event contracts that may not be
listed for trading or accepted for clearing’’
(emphasis added), seemingly primarily to
avoid the work. If the number of contract
reviews has increased, then the Commission
should increase its resources and capacity—
not to prohibit public activity.
As referenced above, the Commission then
embarks on a survey of state gaming
definitions to insert the concept into the
Commission’s rules. The Commission even
notes the approach ‘‘reflects the similar
approach taken in numerous state gambling
statutes,’’ and mentions 35 States. The word
‘‘state’’ appears in the 95 page release 133
times. The Event Contracts Proposal reads as
a defense against becoming a gaming
regulator while inserting State gaming into
our rules, which is not only confusing but
unnecessary because Congress has clearly
defined our role with respect to the States.
To make matters worse, the Commission
then leaps from the overbroad, vague
definition of gaming to provide examples of
the types of event contracts that the
Commission believes fall outside of the scope
of CEA section 5c(c)(5)(C) and, by extension,
Regulation 40.11. Given the fact that the
Event Contracts Proposal repeatedly states
14 CEA
Section 3(a), 7 U.S.C. 5.
section 5c(c)(5)(C), 7 U.S.C. 7a–
2(c)(5)(C)(i)(I)–(VI).
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that the broad range and volume of new
contracts motivated this rulemaking, I find it
stunning that the outer bounds provided are
limited to contracts based on: (1) economic
indicators, (2) financial indicators, and (3)
foreign exchange rates or currencies.
Instead of creating a framework, the
Commission is creating a vast gray area for
exchanges. Where gaming begins and the
scope of Regulation 40.11 ends is anyone’s
guess now, and I fear State gaming
authorities will be left to figure it out on their
own.
Specific Areas for Public Comment
In addition to my concerns raised above, I
highlight the following specific areas for
public comment to aid in review of the
Proposal:
Missing Comment Letters
The Event Contracts Proposal completely
omits any discussion of the comment letters
the Commission recently received on the
definition of gaming, as well as Rule 40.11
and event contracts more broadly. All told,
the Commission has received around 200
comments in response to requests for public
comment on an exchange’s political control
contracts.16 These comments came from
exchanges, academics, former CFTC officials,
and other industry participants, and were
directly on point on the issues raised in
today’s Proposal.
The Commission cannot selectively decide
to tell one side of the story. It strains
credulity that the Commission has selective
amnesia and makes no mention of these
letters in the Event Contracts Proposal.
Misplaced Election Integrity Concerns
The Commission gets hung up on the fact
that ‘‘it is not tasked with the protection of
election integrity or enforcement of campaign
finance laws’’ in justifying prohibiting event
16 The
CFTC maintains the public comment files
at: https://comments.cftc.gov/PublicComments/
CommentList.aspx?id=7311, and https://
comments.cftc.gov/PublicComments/CommentList.
aspx?id=7394.
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contracts based on political contests.
However, the Federal Election Commission
polices campaigns. Congress has never asked,
nor suggested, the CFTC should police
elections, much like the Commission has not
become the weather police for weather
derivatives. I will highlight a couple
categories of event contracts that have been
permitted since 1992:
The Commission is not the crop yield
police and hasn’t displaced the role of the
USDA. The Commission is not the police for
changes to corporate officers or asset
purchases and has not displaced the role of
the SEC. The Commission is not the police
for regional insured property losses, which is
the domain of state insurance regulators. The
Commission is not the bankruptcy police,
which is the domain of the courts. The
Commission is not the temperature police,
and so on and so forth. I do believe that the
2008 concept release from which I drew
these examples was very thoughtful, and I
wanted to familiarize myself with the full
administrative record.17
Conclusion
I would like to thank Grey Tanzi, Andrew
Stein, Lauren Bennett, Nora Flood, and Vince
McGonagle in the Division of Market
Oversight for their work on the Proposal.
The contracts causing so much
consternation for the Commission have not
been, and are not, gaming. If the Commission
could accept that and move on, we could
have a healthy discussion over how to
effectively regulate these markets as we do
any other and protect against abusive trading
in retail binary options contracts. Instead, we
have muddled it and made a mess.
I look forward to the comments.
[FR Doc. 2024–12125 Filed 6–7–24; 8:45 am]
BILLING CODE 6351–01–P
17 See Request for Public Comment, Concept
Release on the Appropriate Regulatory Treatment of
Event Contracts, 73 FR 25,669 (May 7, 2008),
https://www.federalregister.gov/documents/2008/
05/07/E8-9981/concept-release-on-the-appropriateregulatory-treatment-of-event-contracts.
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]]>Agencies
[Federal Register Volume 89, Number 112 (Monday, June 10, 2024)]
[Proposed Rules]
[Pages 48968-49000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-12125]
[[Page 48967]]
Vol. 89
Monday,
No. 112
June 10, 2024
Part II
Commodity Futures Trading Commission
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17 CFR Part 40
Event Contracts; Proposed Rule
Federal Register / Vol. 89, No. 112 / Monday, June 10, 2024 /
Proposed Rules
[[Page 48968]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 40
RIN 3038-AF14
Event Contracts
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to its rules concerning event contracts in
certain excluded commodities. The Commission is proposing amendments to
further specify types of event contracts that fall within the scope of
section 5c(c)(5)(C) of the Commodity Exchange Act (CEA or the Act) and
are contrary to the public interest, such that they may not be listed
for trading or accepted for clearing on or through a CFTC-registered
entity. Among other things, the Commission proposes to further specify
the types of event contracts that involve ``gaming.'' The Commission
also proposes to amend certain language in its event contract rules to
further align with statutory text, and to make certain technical
changes to its event contract rules in order to enhance clarity and
organization.
DATES: Comments must be received on or before July 9, 2024.
ADDRESSES: You may submit comments, identified by ``Event Contracts''
and RIN number 3038-AF14, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this release and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
Commission's procedures established in 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
FOIA.
FOR FURTHER INFORMATION CONTACT: Grey Tanzi, Assistant Chief Counsel,
(312) 596-0635, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800,
Chicago, Illinois 60604, Andrew Stein, Assistant Chief Counsel, (202)
418-6054, [email protected], Lauren Bennett, Assistant Chief Counsel,
(202) 418-5290, [email protected], or Nora Flood, Chief Counsel, (202)
418-6059, [email protected], Three Lafayette Centre, 1151 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Overview of Proposed Changes to Sec. 40.11
B. Commission History With Event Contracts
C. Statutory Authority and Prior Commission Action
1. CEA Section 5c(c)(5)(C)
2. Commission Regulation Sec. 40.11
3. Commission Determinations Pursuant to Sec. 40.11
II. Proposed Amendments to Sec. 40.11
A. Amendments to Further Align With Statutory Language
1. Description of Excluded Commodities
(a) Proposed Amendments
(b) Illustrative Examples of Event Contracts Not Within Scope of
CEA Section 5c(c)(5)(C) and Sec. 40.11
2. Contracts That ``Involve'' an Enumerated Activity
B. The Enumerated Activities
1. Gaming
(a) Background
(b) Proposed Gaming Definition
(c) Illustrative Examples of Gaming
2. The Other Enumerated Activities
C. Public Interest Considerations
1. Overview of Proposed Amendments
2. Factors Considered by the Commission in Evaluating Whether a
Contract, or Category of Contracts, Is Contrary to the Public
Interest
3. The Enumerated Activities
(a) Terrorism, Assassination, and War
(b) Activity That Is Unlawful Under Federal or State Law
(c) Gaming
D. The Commission's Authority To Identify Additional Similar
Activities to the Enumerated Activities
E. Technical Amendments
1. Technical Amendments to Sec. 40.11(a)
2. Technical Amendments to Sec. 40.11(c)
F. Implementation Timeline
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
1. Submission of Updated Rules to the Commission
2. Request for Comment
C. Consideration of Costs and Benefits
1. Introduction
2. Proposed Amendments
(a) Definition of Gaming--Proposed Sec. 40.11(b)
(1) Baseline and Proposed Amendments
(2) Benefits
(3) Costs
(b) Amendments to Further Align With Statutory Language
3. Section 15(a) Factors
(a) Protection of Market Participants and the Public
(b) Efficiency, Competitiveness and Financial Integrity
(c) Price Discovery
(d) Sound Risk Management Practices
(e) Other Public Interest Considerations
D. Antitrust Considerations
I. Background
A. Overview of Proposed Changes to Sec. 40.11
On July 27, 2011, the Commission published in the Federal Register
final rules under part 40 of the Commission's regulations, including
new Sec. 40.11.\1\ Commission Regulation 40.11 was promulgated
pursuant to authority granted under section 5c(c)(5)(C) of the CEA,\2\
which was added by section 745(b) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the ``Dodd-Frank Act'').\3\ CEA section
5c(c)(5)(C) authorizes the Commission to prohibit certain ``event
contracts'' from being listed or made available for clearing or trading
on or through a
[[Page 48969]]
registered entity,\4\ if such contracts involve an activity that is
enumerated in CEA section 5c(c)(5)(C) or ``other similar activity'' as
determined by the Commission by rule or regulation, and the Commission
determines that such contracts are contrary to the public interest.
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\1\ Provisions Common to Registered Entities, 76 FR 44776 (July
27, 2011). Commission Regulation 40.11 was adopted as part of
broader changes made to part 40 of the Commission's regulations to
implement section 745 of the Dodd-Frank Act, which amended section
5c of the CEA. Section 5c(c) of the CEA, in particular, sets forth
requirements relating to the listing for trading or making available
for clearing of derivative contracts, and the implementation of
rules and rule amendments, by ``registered entities.'' CEA section
1a(40), 7 U.S.C. 1a(40), defines the term ``registered entity'' to
include any board of trade designated by the Commission as a
contract market (``DCM''), and any derivatives clearing organization
(``DCO''), swap execution facility (``SEF''), or swap data
repository (``SDR'') registered by the Commission.
\2\ 7 U.S.C. 7a-2(c)(5)(C).
\3\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\4\ See note 2, supra. CEA section 1a(40), 7 U.S.C. 1a(40),
defines the term ``registered entity'' to include any DCM, and any
DCO, SEF, or SDR registered by the Commission.
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While the term ``event contract'' is not defined in the CEA or the
CFTC's regulations, event contracts are generally understood to be a
type of derivative contract, typically with a binary payoff structure,
based on the outcome of an underlying occurrence or event.\5\ A
registered entity that seeks to list event contracts for trading, or
make event contracts available for clearing, must comply with the
substantive and procedural requirements that apply, more generally, to
the listing for trading, or making available for clearing, of
derivative contracts. For example, CFTC-registered exchanges--namely,
DCMs and SEFs--are subject to statutory requirements to only list or
permit trading in derivative contracts that are not readily susceptible
to manipulation; \6\ to enforce compliance with contract terms and
conditions; \7\ and to monitor trading on the exchange in order to
prevent manipulation, price distortion, and disruption of the
settlement process through market surveillance, compliance, and
enforcement practices and procedures.\8\ In addition to the more
generally applicable requirements to which registered entities are
subject when listing derivative contracts for trading or making such
contracts available for clearing, CEA section 5c(c)(5)(C) grants the
Commission the authority to prohibit registered entities from listing
for trading or making available for clearing particular types of event
contracts, if the Commission determines that such contracts are
contrary to the public interest.
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\5\ Most event contracts that have traded or are currently
trading on CFTC-registered exchanges are structured as binary
options, which are generally understood as a type of option whose
payout is either a fixed amount or zero.
\6\ See Core Principle 3 for DCMs, CEA section 5(d)(3), 7 U.S.C.
7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3), 7
U.S.C. 7b-3(f)(3).
\7\ See Core Principle 2 for DCMs, CEA section 5(d)(2), 7 U.S.C.
7(d)(2), and Core Principle 2 for SEFs, CEA section 5h(f)(2), 7
U.S.C. 7b-3(f)(2).
\8\ See Core Principle 4 for DCMs, CEA section 5(d)(4), 7 U.S.C.
7(d)(4), and Core Principle 4 for SEFs, CEA section 5h(f)(4), 7
U.S.C. 7b-3(f)(4).
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Since 2021, the Commission has observed a significant increase in
the number of event contracts listed for trading by CFTC-registered
exchanges, as well as in the diversity of occurrences and events
underlying such contracts.\9\ The Commission has also observed recent
applications for exchange registration, and expressions of interest
regarding exchange registration, from entities that have indicated that
they are interested primarily, or exclusively, in listing event
contracts for trading.\10\
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\9\ From 2006-2020, DCMs listed for trading an average of
approximately five event contracts per year. In 2021, this number
increased to 131, and the number of newly-listed event contracts per
year has remained at a similar level in subsequent years. Since
2021, DCMs also have listed for trading a substantial number of
event contracts not associated with traditional commodities,
financial indices, or economic indicators. These have included event
contracts based on the occurrence or non-occurrence of international
events, natural disasters in specific U.S. cities, heating/cooling
degree days and cumulative average temperature in specific cities,
the timing of video game and album releases, Oscar award winners,
COVID-19 case levels and restrictions, the outcome of cases pending
before the Supreme Court of the United States, the passage of
specific laws by the U.S. Congress, U.S. Presidential approval
ratings, confirmation of U.S. executive branch officials, National
Football League (``NFL'') television ratings, the discovery of
exoplanets, and the occurrence of a National Aeronautics and Space
Administration moon landing before a certain date.
\10\ As of February 12, 2024, Commission staff were reviewing
several pending applications for contract market designation from
entities with a stated interest in offering event contracts for
trading. Commission staff have received multiple additional
inquiries from other entities indicating an interest in applying for
exchange registration in order to offer event contracts for trading.
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In light of these developments, the Commission proposes to amend
Sec. 40.11 to further specify types of event contracts that fall
within the scope of CEA section 5c(c)(5)(C) and are contrary to the
public interest. The Commission believes that these amendments would
support efforts by registered entities to ensure compliance with the
CEA by more clearly identifying the types of event contracts that may
not be listed for trading or accepted for clearing. The Commission
believes that these amendments would, correspondingly, assist
registered entities, as well as applicants for registration, in making
informed business decisions with respect to product design, which would
help to support responsible market innovation.
The Commission believes that amending Sec. 40.11 to further
specify types of event contracts that may not be listed for trading or
accepted for clearing would also benefit the Commission and its staff,
by reducing the need to undertake individualized, resource-intensive
contract reviews. As further discussed below, under Sec. 40.11(c), the
Commission may initiate a 90-day review to evaluate whether a
particular event contract is of a type that may not be listed for
trading or accepted for clearing. Further specifying, in Sec. 40.11,
the types of event contracts that may not be listed for trading or
accepted for clearing should provide registered entities with a better
understanding regarding appropriate event contract parameters and
should, in turn, reduce the likelihood that contract filings that raise
potential public interest concerns are submitted to the Commission.
From a resource allocation perspective, this will be of significant
benefit to the Commission and its staff, since, in the Commission's
experience, a single Sec. 40.11(c) review is resource-intensive and
consumes hundreds of hours of staff time.
Finally, the Commission proposes to make certain amendments to
Sec. 40.11 to further align the language of the regulation with the
statutory text of CEA section 5c(c)(5)(C), and also proposes to make
certain technical amendments to the regulation in order to enhance
clarity and organization.
B. Commission History With Event Contracts
CFTC-registered exchanges have listed a variety of event contracts
for trading for several decades.\11\ On February 18, 2004, the
Commission designated the first contract market dedicated to trading
event contracts.\12\ In 2008, the Commission published a concept
release (the ``2008 Concept Release''), requesting input from
interested persons, and those with expertise, on the appropriate
regulatory treatment of event contract markets.\13\ The 2008 Concept
Release was prompted by the Commission's receipt of a substantial
number of requests for guidance related to application of the CEA to
event contract markets.\14\ The Commission sought both general input
and responses to 24 enumerated questions. The Commission received 31
comments in response to the 2008
[[Page 48970]]
Concept Release,\15\ but ultimately did not take further action at that
time. In 2010, Congress addressed the Commission's regulatory authority
with respect to certain event contracts in section 745(b) of the Dodd-
Frank Act, which added section 5c(c)(5)(C) to the CEA. Thereafter, in
2011, the Commission adopted Sec. 40.11, which implements CEA section
5c(c)(5)(C).
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\11\ Since 1992, CFTC-registered exchanges have listed for
trading event contracts involving interests such as regional insured
property losses, the count of bankruptcies, temperature
volatilities, corporate mergers, and corporate credit events. See
Concept Release on Appropriate Regulatory Treatment of Event
Contracts, 73 FR 25669, 25671 (May 7, 2008).
\12\ See CFTC Order of Designation for HedgeStreet, Inc.
(``HedgeStreet'') (Feb. 20, 2004), available at https://www.cftc.gov/sites/default/files/opa/press04/opa4894-04.htm (last
visited Mar. 7, 2024). HedgeStreet listed daily and weekly event
contracts on various corporate mergers, weather events, and economic
indicators. Effective June 21, 2009, HedgeStreet changed its name to
North American Derivatives Exchange, Inc., or ``Nadex.'' Nadex
continues to list event contracts on foreign exchange, equity
indices, commodity prices, and digital assets.
\13\ 73 FR 25669.
\14\ Id.
\15\ See Comment File for Federal Register Release 73 FR 25669,
CFTC, https://www.cftc.gov/LawRegulation/PublicComments/08-004.html
(last visited Mar. 7, 2024).
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As discussed above, in recent years, the Commission has observed
applications for exchange registration, and expressions of interest
regarding exchange registration, from entities that appear to be
interested primarily, or exclusively, in listing event contracts for
trading.\16\ The Commission also has observed a significant increase in
the number of event contracts listed for trading by registered
entities, and in the diversity of occurrences and events underlying
such contracts.
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\16\ The Commission's Division of Market Oversight (``DMO'')
also has issued staff no-action positions to two academic
institutions which provide that, subject to specified terms, DMO
will not recommend to the Commission enforcement action against the
academic institutions for operating, without registration as a DCM,
SEF, or foreign board of trade (``FBOT''), small-scale, not-for-
profit markets that offer trading in political and economic
indicator event contracts for academic purposes. See CFTC Staff
Letter No. 93-66 issued to the University of Iowa (June 18, 1993),
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf. This no-action
position superseded the operative terms of a more limited no-action
position issued in 1992. See also CFTC Staff Letter No. 14-130
issued to Victoria University of Wellington, New Zealand (Oct. 29,
2014), available at https://www.cftc.gov/csl/14-130/download. The
terms of these staff no-action positions contemplate that each event
market will be operated by the relevant academic institution for
academic purposes and without compensation. The terms of the no-
action positions also contemplate limitations on, among other
things, the number of market participants and the number of
contracts that each market participant may hold. In issuing each of
the no-action positions, DMO explicitly noted that it was not
rendering an opinion on the legality of the academic institutions'
activities under state law.
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C. Statutory Authority and Prior Commission Action
1. CEA Section 5c(c)(5)(C)
As discussed above, a registered entity that seeks to list event
contracts for trading, or accept such contracts for clearing, must
comply with the substantive and procedural requirements that apply,
more generally, to the listing for trading or acceptance for clearing
of derivative contracts.\17\ Notably, for example, a DCM or SEF is
required to ensure that the derivative contracts that it lists or
permits for trading are not readily susceptible to manipulation; to
ensure enforcement of the terms and conditions of those contracts; and
to monitor trading in those contracts in order to prevent manipulation,
price distortion, and disruption of the settlement process.\18\ CEA
section 5c(c)(5)(C) further grants the Commission the authority to
prohibit registered entities from listing or making available for
clearing or trading certain event contracts that involve particular
activities, if the Commission determines that such contracts are
contrary to the public interest.
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\17\ Registered entities seeking to list event contracts for
trading, or accept such contracts for clearing, must abide by the
CEA and Commission regulations, including applicable statutory core
principles. See, e.g., CEA section 5(d), 7 U.S.C. 7(d) (Core
Principles for DCMs); CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2)
(Core Principles for DCOs); CEA section 5h(f), 7 U.S.C. 7b-3(f)
(Core Principles for SEFs). In addition, registered entities seeking
to list event contracts for trading, or accept such contracts for
clearing, must comply with the submission requirements set forth in
CEA section 5c(c), 7 U.S.C. 7a-2(c)(1), and part 40 of the
Commission's regulations.
\18\ See Core Principle 3 for DCMs, CEA section 5(d)(3), 7
U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3),
7 U.S.C. 7b-3(f)(3); Core Principle 2 for DCMs, CEA section 5(d)(2),
7 U.S.C. 7(d)(2), and Core Principle 2 for SEFs, CEA section
5h(f)(2), 7 U.S.C. 7-b3(f)(2); and Core Principle 4 for DCMs, CEA
section 5(d)(4), 7 U.S.C. 7(d)(4), and Core Principle 4 for SEFs,
CEA section 5h(f)(4), 7 U.S.C. 7b-3(f)(4). For the avoidance of
doubt, regardless of whether or not a particular event contract
falls within the scope of CEA section 5c(c)(5)(C) and Sec. 40.11,
the DCM or SEF seeking to list the event contract for trading has a
statutory obligation to ensure that the event contract is not
readily susceptible to manipulation.
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Section 5c(c)(5)(C) was added to the CEA by section 745(b) of the
Dodd-Frank Act, which amended, more generally, the contract and rule
submission requirements set forth in CEA section 5c(c). In a short
colloquy with the late Senator Diane Feinstein on the Senate floor
regarding the proposed Dodd-Frank Act provision that ultimately was
enacted as CEA section 5c(c)(5)(C) (the ``2010 Colloquy''), Senator
Blanche Lincoln, then-Chair of the Senate Committee on Agriculture,
Nutrition, and Forestry--who is identified in the 2010 Colloquy as one
of the authors of CEA section 5c(c)(5)(C)--stated that the provision
was intended to assure that the Commission ``has the power to prevent
the creation of futures and swaps markets that would allow citizens to
profit from devastating events and also prevent gambling through
futures markets.'' \19\
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\19\ 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln),
available at https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf (last visited Mar. 7, 2024).
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CEA section 5c(c)(5)(C)(i) provides that in connection with the
listing of agreements, contracts, transactions, or swaps in excluded
commodities \20\ that are based upon the occurrence, extent of an
occurrence, or contingency (other than a change in the price, rate,
value, or levels of a commodity described in section la(2)(i) of this
title),\21\ by a designated contract market or swap execution facility,
the Commission may determine that such agreements, contracts, or
transactions are contrary to the public interest if the agreements,
contracts, or transactions involve--(I) activity that is unlawful under
any Federal or State law; (II) terrorism; (III) assassination; (IV)
war; (V) gaming; or (VI) other similar activity determined by the
Commission, by rule or regulation, to be contrary to the public
interest.\22\
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\20\ The term ``excluded commodity'' is defined in CEA section
1a(19), 7 U.S.C. 1a(19), as: (i) an interest rate, exchange rate,
currency, security, security index, credit risk or measure, debt or
equity instrument, index or measure of inflation, or other
macroeconomic index or measure; (ii) any other rate, differential,
index, or measure of economic or commercial risk, return, or value
that is--(I) not based in substantial part on the value of a narrow
group of commodities not described in clause (i); or (II) based
solely on one or more commodities that have no cash market; (iii)
any economic or commercial index based on prices, rates, values, or
levels that are not within the control of any party to the relevant
contract, agreement, or transaction; or (iv) an occurrence, extent
of an occurrence, or contingency (other than a change in the price,
rate, value, or level of a commodity not described in clause (i))
that is--(I) beyond the control of the parties to the relevant
contract, agreement, or transaction; and (II) associated with a
financial, commercial, or economic consequence.
\21\ There is no ``section 1a(2)(i)'' in the CEA. As discussed
in section II.A.1.a, infra, the Commission believes that the
reference in CEA section 5c(c)(5)(C)(i) to ``section 1a(2)(i)'' is a
typographical or drafting error.
\22\ CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
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CEA section 5c(c)(5)(C)(ii) provides that no agreement, contract or
transaction \23\ determined by the Commission to be contrary to the
public interest under section 5c(c)(5)(C)(i) may be listed or made
available for clearing or trading on or through a registered
entity.\24\
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\23\ CEA section 5c(c)(5)(C)(i) applies in connection with the
listing of agreements, contracts, transactions, or swaps by a DCM or
SEF. 7 U.S.C. 7a-2(c)(5)(C)(i). The Commission notes that similar
phrases both later in CEA section 5c(c)(5)(C)(i) and in CEA section
5c(c)(5)(C)(ii) refer only to ``agreements, contracts, or
transactions . . . .'' The Commission interprets either phrase to
encompass derivative contracts listed for trading on or through DCMs
or SEFs, and for simplicity refers to ``agreements, contracts,
transactions or swaps'' as ``contracts'' herein.
\24\ CEA section 5c(c)(5)(C)(ii); 7 U.S.C. 7a-2(c)(5)(C)(ii).
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The Commission interprets CEA section 5c(c)(5)(C) to contemplate
that the Commission engage in a two-step
[[Page 48971]]
inquiry. First, the Commission must assess whether a contract in a
specified excluded commodity ``involve[s]'' an activity enumerated in
CEA section 5c(c)(5)(C)(i)(I)-(V) (each, an ``Enumerated Activity'') or
other similar activity as determined by the Commission by rule or
regulation (``prescribed similar activity''). If the Commission
determines that the contract involves such activity, the Commission
must assess whether the contract is contrary to the public interest.
The Commission interprets CEA section 5c(c)(5)(C) to provide that the
contract may not be listed or made available for clearing or trading by
a registered entity if the Commission finds both that (i) the contract
involves an Enumerated Activity or prescribed similar activity, and
(ii) the contract is contrary to the public interest.
2. Commission Regulation 40.11
In 2011, the Commission adopted Sec. 40.11 to implement CEA
section 5c(c)(5)(C) as part of broader changes to the Commission's part
40 regulations.\25\ Commission Regulation 40.11(a)(1) provides that a
registered entity shall not list for trading or accept for clearing on
or through the registered entity an agreement, contract, transaction,
or swap based upon an excluded commodity, as defined in Section
1a(19)(iv) of the Act, that involves, relates to, or references
terrorism, assassination, war, gaming, or an activity that is unlawful
under any State or Federal law.\26\ Although they are not listed in
precisely the same order, the activities enumerated in Sec.
40.11(a)(1) are the same as the activities enumerated in CEA sections
5c(c)(5)(C)(i)(I)-(V) and are similarly referred to herein as the
Enumerated Activities.
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\25\ Part 40 of the Commission's regulations, more generally,
implements the contract and rule submission requirements for
registered entities set forth in CEA section 5c(c). For example,
Sec. 40.2 sets forth the general process by which a DCM or SEF may
list a new derivative contract for trading by providing the
Commission with a written certification--a ``self-certification''--
that the contract complies with the CEA, including the CFTC's
regulations thereunder. See also CEA section 5c(c)(1), 7 U.S.C. 7a-
2(c)(1). The Commission must receive the DCM's or SEF's self-
certified submission at least one business day before the contract's
listing. 17 CFR 40.2(a)(2). Commission Regulation 40.3 sets forth
the general process by which a DCM or SEF may elect voluntarily to
seek prior Commission approval of a derivative contract that the DCM
or SEF seeks to list for trading. See also CEA sections 5c(c)(4)-
(5), 7 U.S.C. 7a-2(c)(4)-(5). Amendments to an existing derivative
contract also must be submitted to the Commission either by way of
self-certification or for prior Commission approval. 17 CFR 40.5,
40.6.
\26\ 17 CFR 40.11(a)(1).
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Consistent with CEA section 5c(c)(5)(C)(i)(VI), Sec. 40.11(a)(2)
provides that a registered entity shall not list for trading or accept
for clearing on or through the registered entity an agreement,
contract, transaction, or swap based upon an excluded commodity, as
defined in Section 1a(19)(iv) of the Act, that involves, relates to, or
references an activity that is similar to an activity enumerated in
Sec. 40.11(a)(1), and that the Commission determines, by rule or
regulation, to be contrary to the public interest.\27\ To date, the
Commission has not made any such determinations.
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\27\ 17 CFR 40.11(a)(2). CEA section 5c(c)(5)(C) applies with
respect to agreements, contracts, transactions, or swaps in excluded
commodities that are based upon the occurrence, extent of an
occurrence, or contingency (other than a change in the price, rate,
value, or levels of a commodity described in section 1a(2)(i)).
There is no ``section 1a(2)(i)'' in the CEA, and the Commission
believes the reference to this provision in CEA section 5c(c)(5)(C)
is a typographical or drafting error. In adopting Sec. Sec.
40.11(a)(1) and (2), as well as Sec. 40.11(c), the Commission
interpreted CEA section 5c(c)(5)(C) to apply with respect to the
excluded commodities defined in CEA section 1a(19)(iv). See
discussion in section II.A.1.a, infra.
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Pursuant to Sec. 40.11(c), when a contract submitted to the
Commission by a registered entity, pursuant to Sec. 40.2 or Sec.
40.3, may involve, relate to, or reference an activity enumerated in
Sec. Sec. 40.11(a)(1) or (2), the Commission is authorized to commence
a 90-day review of the contract.\28\ The Commission must issue an order
approving or disapproving the contract by the end of the 90-day review
period or, if applicable, at the conclusion of any extended period
agreed to or requested by the registered entity.\29\ Commission
Regulation 40.11(c)(1) requires the Commission to request that the
registered entity suspend the listing or trading of the contract during
the 90-day review period.\30\ The Commission also must post on its
website a notification of the intent to carry out a 90-day review.\31\
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\28\ 17 CFR 40.11(c). Commission Regulation 40.11(c) states that
the 90-day review period shall commence from the date the Commission
notifies the registered entity of a potential violation of Sec.
40.11(a).
\29\ 17 CFR 40.11(c)(2).
\30\ 17 CFR 40.11(c)(1).
\31\ Id.
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The Commission did not, in Sec. 40.11 or in the 2011 adopting
release for the rule, define any of the Enumerated Activities. The
Commission acknowledged, in the adopting release, a comment on the rule
proposal that stated that the term ``gaming,'' in particular, should be
further defined in order to enhance clarity regarding the scope of the
prohibition set forth in Sec. 40.11(a)(1).\32\ The Commission
expressed agreement with the interest to further define ``gaming'' for
purposes of the prohibition,\33\ and stated that the Commission might
issue a future event contracts rulemaking that, among other things,
addressed the appropriate treatment of event contracts involving
gaming.\34\ The Commission stated that, in the meantime, it had
determined to adopt the prohibition set forth in Sec. 40.11(a)(1) with
respect to the Enumerated Activities, ``and to consider individual
product submissions on a case-by-case basis under Sec. 40.2 or Sec.
40.3.'' \35\
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\32\ Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
\33\ Id.
\34\ Id.
\35\ Id. The Commission noted that a registered entity could
receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a particular
contract for Commission approval under Sec. 40.3: if the submitted
contract was approved by the Commission, the registered entity would
have assurance that the Commission had reviewed and did not object
to the submission based on the prohibitions in Sec. 40.11(a). Id.
at 44785-86. The Commission noted that, alternatively, a registered
entity could self-certify a contract under Sec. 40.2 and, if the
Commission determined during its review of the contract ``that the
submission may violate the prohibitions in Sec. 40.11(a)(1)-(2),
the Commission may request that the registered entity suspend the
trading or clearing of the contract pending the completion of a 90-
day . . . review.'' Id. at 44786. The Commission stated that, upon
completion of that review, the Commission would be required to issue
an order finding either that the contract violated, or did not
violate, the prohibitions in Sec. 40.11(a)(1)-(2). Id.
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3. Commission Determinations Pursuant to Sec. 40.11
To date, the Commission has issued two final determinations
pursuant to Sec. 40.11. On January 3, 2012, the Commission commenced a
90-day review, under Sec. 40.11(c), of certain event contracts on
election outcomes that had been self-certified by Nadex.\36\ On April
2, 2012, the Commission issued an order (the ``Nadex Order'')
prohibiting the contracts from being listed or made available for
clearing or trading, finding that the contracts involved the Enumerated
Activity of
[[Page 48972]]
gaming and were contrary to the public interest.\37\
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\36\ See https://www.cftc.gov/PressRoom/PressReleases/6163-12.
Nadex self-certified cash-settled, binary contracts on whether there
would be a Democratic majority in the U.S. House of Representatives
(``House''); whether there would be a Republican majority in the
House; whether there would be a Democratic majority in the U.S.
Senate (``Senate''); and whether there would be a Republican
majority in the Senate. The contracts settled based on whether the
named party held the majority of seats in the identified chamber of
Congress on the expiration date. Nadex also self-certified ten cash-
settled, binary contracts on the upcoming Presidential election.
Each contract was based on one of the leading candidates for
President and paid according to whether that candidate won the
Presidency.
\37\ See CFTC Release No. 6224-12 CFTC Issues Order Prohibiting
North American Derivatives Exchange's Political Event Derivatives
Contracts (Apr. 2, 2012), available at https://www.cftc.gov/PressRoom/PressReleases/6224-12.
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On June 23, 2023, the Commission commenced a 90-day review, under
Sec. 40.11(c), of certain event contracts self-certified by KalshiEX
LLC (``Kalshi'') that were based on which political party controlled
each chamber of Congress.\38\ On September 22, 2023, the Commission
issued an order (the ``Kalshi Order'') prohibiting the contracts from
being listed or made available for clearing or trading, finding that
the contracts involved the Enumerated Activities of gaming and activity
that is unlawful under State law, and that the contracts were contrary
to the public interest.\39\ The Kalshi Order is currently under
judicial review in the U.S. District Court for the District of
Columbia.\40\
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\38\ See CFTC Release No. 8728-23, CFTC Announces Review of
Kalshi Congressional Control Contracts and Public Comment Period
(June 23, 2023), available at https://www.cftc.gov/PressRoom/PressReleases/8728-23. The Kalshi contracts were cash-settled,
binary contracts that settled based on the party affiliation of the
leader of the identified chamber of Congress on the expiration date.
The Kalshi contracts differed from the Nadex contracts that the
Commission had previously disapproved, in that the Nadex contracts
settled based on the number of seats in the House or Senate held by
a given political party, while the Kalshi contracts settled based on
the party affiliation of the leader of the House (the Speaker) or
the leader of the Senate (the President Pro Tempore).
\39\ See CFTC Release No. 8780-23, CFTC Disapproves KalshiEX
LLC's Congressional Control Contracts (Sept. 22, 2023), available at
https://www.cftc.gov/PressRoom/PressReleases/8780-23.
\40\ KalshiEx LLC v. Commodity Futures Trading Commission, 1:23-
cv-03257 (filed Nov. 1, 2023) (D.D.C.).
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The Commission has exercised its authority to commence a 90-day
review of event contracts, pursuant to Sec. 40.11(c), on two
additional occasions.\41\ On December 23, 2020, the Commission
commenced a 90-day review of certain event contracts that had been
self-certified by Eris Exchange, LLC (``ErisX''), that were based on
the moneyline, the point spread, and the total points for individual
NFL games.\42\ On August 26, 2022, the Commission commenced a 90-day
review of certain Congressional control event contracts submitted for
Commission approval by Kalshi.\43\ In both of these instances, the
submitting parties withdrew their respective contracts from
consideration before the Commission issued a final determination
pursuant to Sec. 40.11.
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\41\ In so doing, the Commission found, pursuant to Sec.
40.11(c), that the subject contracts ``may'' involve an Enumerated
Activity. 17 CFR 40.11(c).
\42\ See CFTC Release No. 8345-20, CFTC Announces Review of
RSBIX NFL Futures Contracts Proposed by Eris Exchange, LLC (Dec. 23,
2020), available at https://www.cftc.gov/PressRoom/PressReleases/8345-20.
\43\ See CFTC Release No. 8578-22, CFTC Announces Review and
Public Comment Period of KalshiEx Proposed Congressional Control
Contracts Under CFTC Regulation 40.11, available at https://www.cftc.gov/PressRoom/PressReleases/8578-22.
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II. Proposed Amendments to Sec. 40.11
In light of (i) the significant increase that the Commission has
observed in the number and diversity of event contracts listed for
trading by Commission-registered exchanges, and (ii) the increased
interest that the Commission has observed, among applicants and
prospective applicants for exchange registration, in operating
exchanges that would primarily or exclusively offer event contracts for
trading, the Commission is proposing to amend Sec. 40.11 to, among
other things, further specify types of event contracts that fall within
the scope of CEA section 5c(c)(5)(C) and are contrary to the public
interest, such that they may not be listed for trading or accepted for
clearing on or through a registered entity. As discussed above, the
Commission believes that these proposed amendments would support
efforts by registered entities to ensure compliance with the CEA, and
would, correspondingly, assist registered entities, as well as
applicants for registration, in making informed business decisions with
respect to product design, thereby helping to support responsible
market innovation. The Commission further believes that, by helping to
delineate appropriate event contract parameters, the proposed
amendments would reduce the frequency of event contract submissions to
the Commission that raise potential public interest concerns, which
would allow for more efficient use of Commission and staff resources by
reducing the need to conduct individualized event contract reviews
pursuant to Sec. 40.11(c). It may also yield efficiencies for
registered entities by helping to avoid situations where they expend
resources to develop and submit a contract that the Commission
subsequently determines, following a Sec. 40.11(c) review, may not be
listed for trading or accepted for clearing.
In addition, the Commission is proposing to make certain amendments
to Sec. 40.11 to further align the language of the regulation with the
statutory text of CEA section 5c(c)(5)(C), and also is proposing to
make certain technical amendments to the regulation to enhance clarity
and organization.
A. Amendments to Further Align With Statutory Language
1. Description of Excluded Commodities
(a) Proposed Amendments
CEA section 5c(c)(5)(C) applies with respect to agreements,
contracts, transactions, or swaps in excluded commodities that are
based upon the occurrence, extent of an occurrence, or contingency
(other than a change in the price, rate, value, or levels of a
commodity described in section 1a(2)(i)).\44\ There is no ``section
1a(2)(i)'' in the CEA, and the Commission believes the reference to
this provision in CEA section 5c(c)(5)(C) is a typographical or
drafting error.\45\ In adopting Sec. 40.11, the Commission interpreted
the ``excluded commodities'' falling within the scope of CEA section
5c(c)(5)(C) to be those set forth in CEA section 1a(19)(iv), and
accordingly referenced CEA section 1a(19)(iv) in Sec. Sec.
40.11(a)(1)-(2) and Sec. 40.11(c).\46\
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\44\ CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
\45\ CEA section 1a(2), 7 U.S.C. 1a(2), defines an ``appropriate
Federal banking agency,'' which is not relevant to the excluded
commodity definition.
\46\ While the adopting release did not discuss the basis for
this interpretation, it is likely that the Commission assumed that
Congress intended to incorporate the statutory language of the
``excluded commodity'' definition set forth in CEA section
1a(19)(iv), since CEA section 5c(c)(5)(C) tracks the language of CEA
section 1a(19)(iv) to a large extent. The ``excluded commodity''
definition set forth in CEA section 1a(19)(iv) is as follows: an
occurrence, extent of an occurrence, or contingency (other than a
change in the price, rate, value, or level of a commodity not
described in clause (i)) that is--(I) beyond the control of the
parties to the relevant contract, agreement, or transaction; and
(II) associated with a financial, commercial, or economic
consequence. ``[C]lause (i)'' refers to CEA section 1a(19)(i).
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With the aim of adhering as closely as possible to the statutory
text--while, by necessity, having to account for the errant reference
in CEA section 5c(c)(5)(C) to ``section 1a(2)(i),'' which is not a
provision in the statute--the Commission is proposing to amend
Sec. Sec. 40.11(a)(1)-(2) and Sec. 40.11(c) to refer to agreements,
contracts, transactions, or swaps in excluded commodities based on the
occurrence, extent of an occurrence, or contingency (other than a
change in the price, rate, value, or levels of a commodity described in
section 1a(19)(i) of the Act). These proposed amendments would achieve
two purposes. First, the proposed amendments would remove from the
relevant rules the current reference to CEA section 1a(19)(iv) and
would more precisely track the text of CEA section 5c(c)(5)(C). Second,
the proposed amendments would clarify the Commission's interpretation
that the
[[Page 48973]]
reference to ``section 1a(2)(i)'' in CEA section 5c(c)(5)(C) was
intended by Congress to refer to the excluded commodities described in
CEA section 1a(19)(i), namely, an interest rate, exchange rate,
currency, security, security index, credit risk or measure, debt or
equity instrument, index or measure of inflation, or other
macroeconomic index or measure. This interpretation carves out from the
scope of CEA section 5c(c)(5)(C) event contracts based on a change in
the price, rate, value, or levels of these measures, indices, and
instruments.
The measures, indices, and instruments described in CEA section
1a(19)(i) served as underlyings for a range of derivative contracts
that were broadly traded on CFTC-registered exchanges at the time of
enactment of CEA section 5c(c)(5)(C).\47\ As such, the Commission
believes that it is unlikely that Congress intended the heightened
authority granted to the Commission in CEA section 5c(c)(5)(C) to apply
with respect to event contracts based on changes in the price, rate,
value or levels of these measures, indices, and instruments.\48\ The
Commission notes that it has not historically recognized these types of
event contracts as falling within the scope of CEA section 5c(c)(5)(C)
and, by extension, Sec. 40.11.
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\47\ These included derivative contracts based on changes in the
Consumer Price Index (``CPI''), home price indices for various U.S.
cities, U.S. Initial Jobless Claims, and Gross Domestic Product
(``GDP'').
\48\ Consistent with the Commission's view that the reference to
``section 1a(2)(i)'' in CEA section 5c(c)(5)(C) was intended by
Congress to refer to the excluded commodities described in CEA
section 1a(19)(i), section 201(b) of the CFTC Reauthorization Act of
2019 included, as a technical correction to the CEA, the replacement
of the reference to ``section la(2)(i)'' with a reference to
``section 1a(19)(i).'' CFTC Reauthorization Act of 2019, H.R. 6197,
116th Cong. (2d. Sess. 2020).
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(b) Illustrative Examples of Event Contracts Not Within the Scope of
CEA Section 5c(c)(5)(C) and Sec. 40.11
The Commission believes that registered entities and market
participants would benefit from the Commission providing examples of
the types of event contracts that, in the Commission's view, fall
outside of the scope of CEA section 5c(c)(5)(C) and, by extension,
Sec. 40.11.\49\ The Commission believes that, among other things, this
will assist registered entities, as well as applicants for
registration, in making informed business decisions with respect to
product design, thereby supporting responsible innovation. The
Commission believes that this also will support the more efficient use
of CFTC staff resources in connection with the review of event contract
submissions.
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\49\ For the avoidance of doubt, with respect to these types of
event contracts, a registered entity still must comply with the
substantive and procedural requirements that apply, more generally,
to the listing for trading or acceptance for clearing of derivative
contracts, including, for DCMs and SEFs, the statutory requirement
to ensure that such contracts are not readily susceptible to
manipulation.
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While the Commission cannot anticipate every contract design, the
Commission believes that event contracts based on a change in the
price, rate, value, or levels of the following would generally fall
outside of the scope of CEA section 5c(c)(5)(C) and Sec. 40.11:
Economic indicators, including the CPI and other price
indices; the U.S. trade deficit with another country; measures related
to GDP, jobless claims, or the unemployment rate; and U.S. new home
sales;
Financial indicators, including the federal funds rate;
total U.S. credit card debt; fixed-rate mortgage averages (e.g., the
30-year fixed-rate mortgage interest rate); and end of day, week, or
month values for broad-based stock indexes; and
Foreign exchange rates or currencies.
Request for Comment
The Commission requests comment on all aspects of its proposal to
amend the language of Sec. Sec. 40.11(a)(1)-(2) and 40.11(c) to more
precisely track, in the description of ``excluded commodities,'' the
text of CEA section 5c(c)(5)(C). In particular, the Commission requests
comment on its interpretation that the reference to ``section
1a(2)(i)'' in the parenthetical in CEA section 5c(c)(5)(C)(i) is a
typographical or drafting error, and that the intention was to refer to
the excluded commodities described in CEA section 1a(19)(i).
The Commission further requests comment on the examples provided of
event contracts that the Commission believes would generally fall
outside of the scope of CEA section 5c(c)(5)(C) and Sec. 40.11. In
particular, the Commission requests comment on the following questions:
Are there additional types of event contracts that should
be explicitly identified by the Commission in the non-exclusive list of
contract types that would generally fall outside of the scope of CEA
section 5c(c)(5)(C) and Sec. 40.11?
What indices or measures are ``other macroeconomic
index[es] or measure[s]'' for purposes of CEA section 1a(19)(i)? Are
tax rates (e.g., corporate and capital gains tax rates) among such
macroeconomic measures?
2. Contracts That ``Involve'' an Enumerated Activity
CEA section 5c(c)(5)(C) applies with respect to event contracts in
certain excluded commodities that ``involve'' one of the Enumerated
Activities or a prescribed similar activity. In adopting Sec. 40.11,
the Commission described the types of event contracts that may not be
listed for trading or accepted for clearing as contracts that involve,
relate to, or reference one of the Enumerated Activities or a
prescribed similar activity.\50\ Commission Regulation 40.11(c) further
provides that the Commission may engage in a 90-day review of an event
contract if the contract may involve, relate to, or reference an
Enumerated Activity or a prescribed similar activity.\51\
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\50\ 17 CFR 40.11(a)(1) and (2). While there are no prescribed
similar activities at this juncture, the Commission retains its
authority under CEA section 5c(c)(5)(C)(i)(VI) and Sec. 40.11(a)(2)
to prescribe similar activities in future rules or regulations.
\51\ 17 CFR 40.11(c).
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In order to further align the language of the regulation with the
statutory text of CEA section 5c(c)(5)(C), the Commission proposes to
amend Sec. 40.11 to remove the terms ``relate to'' and ``reference''
wherever they appear and to simply refer to event contracts that
``involve'' an Enumerated Activity or prescribed similar activity. The
proposed amendments would reaffirm the scope of the Commission's
prohibition authority and the standard of review that applies with
respect to an event contract pursuant to Sec. 40.11. The proposed
amendments would also be consistent with the determinations made by the
Commission in the Nadex Order and the Kalshi Order, both of which
focused on whether the event contracts in question ``involved'' an
Enumerated Activity.\52\ The proposed amendments are not intended to
alter the scope of the Commission's prohibition authority or the nature
of the Commission's analysis to determine whether a particular event
contract falls within the ambit of CEA section 5c(c)(5)(C) and Sec.
40.11.
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\52\ See Kalshi Order at 5-7; Nadex Order at 2.
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The term ``involve'' is not defined in the CEA, so the Commission
gives the term its ordinary meaning.\53\ Definitions of ``involve''
include ``to relate to or affect,'' ``to relate closely,'' to
``entail,'' or to ``have as an essential feature or consequence.'' \54\
In this regard, the
[[Page 48974]]
Commission reiterates that a contract may ``involve'' an Enumerated
Activity, or prescribed similar activity, in circumstances where such
activity is not, itself, the contract's underlying.\55\ By its plain
meaning, a contract ``involves'' its underlying, but it also involves
other characteristics. Further, where the CEA specifies a contract's
underlying, it uses the word ``underlying,'' \56\ or, as syntax
requires, it refers to what the contract is ``based on'' \57\ or
``based upon.'' \58\
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\53\ See Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 187, 115
S.Ct. 788 (1995); see also Morrisette v. United States, 342 U.S.
246, 263, 72 S.Ct. 240 (1952) (holding that undefined statutory
words that are not terms of art are given their ordinary meanings,
frequently derived from the dictionary).
\54\ See ``involve'' definition, Merriam-Webster.com, available
at https://www.merriam-webster.com/dictionary/involve (last visited
Mar. 7, 2024); Random House College Dictionary 703 (Revised ed.
1979); Riverside University Dictionary 645 (1983) 645; see also
Roget's International Thesaurus 1040 (7th ed. 2010) (giving as
synonyms ``entail'' and ``relate to'').
\55\ See Kalshi Order at 5-7; Nadex Order at 2.
\56\ E.g., 7 U.S.C. 6c(d)(2)(A)(i), 20(e), 25(a)(1)(D)(ii).
\57\ E.g., 7 U.S.C. 2(a)(1)(C)(i)(I), 2(a)(1)(C)(iv), 6b(e).
\58\ E.g., 7 U.S.C. 2(a)(1)(C)(ii).
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Beyond the plain meaning of ``involve,'' the full text of CEA
section 5c(c)(5)(C)(i) demonstrates that a contract ``involve[s]'' more
than just its underlying: the provision uses the terms ``based upon''
and ``involve'' in the same sentence and differentiates between the
two. First, CEA section 5c(c)(5)(C)(i) states that the provision
applies with respect to agreements, contracts, transactions, or swaps
in excluded commodities that are based upon the occurrence, extent of
an occurrence, or contingency.\59\ In other words, the contract's
underlying must be an event. Then, just a few words later, CEA section
5c(c)(5)(C)(i) states that ``such agreements, contracts, or
transactions'' must ``involve'' an Enumerated Activity or prescribed
similar activity. In context, ``based upon'' and ``involve'' must have
different meanings, with ``based upon'' referring to the underlying,
and requiring only that it be an event, and ``involve'' retaining its
broader ordinary meaning and referring not just to the underlying, but
to ``such agreements, contracts, or transactions'' as a whole.
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\59\ 7 U.S.C. 7a-2(c)(5)(C).
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In effect, Congress's choice of the broader term ``involve'' means
that CEA section 5c(c)(5)(C) encompasses both event contracts whose
underlying is an Enumerated Activity or prescribed similar activity,
and event contracts with a different connection to an Enumerated
Activity or prescribed similar activity, because, for example, they
``relate closely'' to, ``entail,'' or ``have as an essential feature or
consequence'' such activity.
The legislative history of CEA section 5c(c)(5)(C) supports the
plain meaning of the statutory text in this regard. During the 2010
Colloquy, Senator Lincoln stated that, among other things, CEA section
5c(c)(5)(C) was intended to ``prevent gambling through futures
markets'' and to restrict derivatives exchanges from ``construct[ing]
an `event contract' around sporting events such as the Super Bowl, the
Kentucky Derby, and Masters Golf Tournament.'' \60\ None of the Super
Bowl, the Kentucky Derby, or the Masters Golf Tournament are, of
themselves, ``gaming.'' \61\ Rather, the statement of Senator Lincoln--
who, as noted above, is identified in the 2010 Colloquy as one of the
authors of CEA section 5c(c)(5)(C)--focuses on the overall
characteristics of the contract. As noted in the Nadex Order and the
Kalshi Order, this legislative history supports the plain meaning of
the term ``involve,'' and indicates that the question for the
Commission in evaluating whether a contract ``involves'' an Enumerated
Activity or prescribed similar activity is whether the contract,
considered as a whole, involves one of those activities.\62\
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\60\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln).
\61\ As noted in the Kalshi Order, it is difficult to conceive
of a contract whose underlying event, itself, is ``gaming.'' If
``involve'' were to refer only to a contract's underlying, contracts
based on sporting events such as horse races and football games
would not qualify, because sports typically are not understood to be
``gaming''--they are understood to be ``games.'' In effect, if
``involve'' were to refer only to a contract's underlying, the scope
of certain prongs of CEA section 5c(c)(5)(C) could effectively be
limited to a null set of event contracts, which could not have been
Congress's intent. Kalshi Order at 7, note 18.
\62\ Nadex Order at 2; Kalshi Order at 7. For example, giving
the term its ordinary meaning, a contract ``involves'' an Enumerated
Activity or prescribed similar activity if trading in the contract
amounts to such activity. Id. at 7, note 19.
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Request for Comment
The Commission requests comment on all aspects of its proposal to
amend Sec. 40.11 to remove the terms ``relate to'' and ``reference''
wherever they appear, and to refer in the regulation only to event
contracts that ``involve'' an Enumerated Activity or prescribed similar
activity.
B. The Enumerated Activities
1. Gaming
(a) Background
Neither the CEA nor current Sec. 40.11 define ``gaming'' or any of
the other Enumerated Activities. While acknowledging, in the adopting
release for Sec. 40.11, the interest expressed by certain commenters
to further define the term ``gaming'' for purposes of the regulation,
the Commission deferred at the time from doing so, indicating that it
would instead ``consider individual product submissions on a case-by-
case basis under Sec. 40.2 or Sec. 40.3.'' \63\
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\63\ Provisions Common to Registered Entities, 76 FR 44776,
44785 (July 27, 2011).
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Since the adoption of Sec. 40.11 in 2011, as part of the agency's
standard product review process, CFTC staff have evaluated whether
event contracts in certain excluded commodities may implicate CEA
section 5c(c)(5)(C) and Sec. 40.11, and in four instances the
Commission has commenced a review pursuant to Sec. 40.11(c) to
evaluate whether event contracts implicated one of the Enumerated
Activities. In each of these four instances, a Sec. 40.11(c) review
was commenced, in part, to evaluate whether the event contracts in
question implicated gaming.\64\
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\64\ See https://www.cftc.gov/PressRoom/PressReleases/6163-12
(2011 Nadex contracts); https://www.cftc.gov/PressRoom/PressReleases/8345-20 (2020 ErisX contracts); https://www.cftc.gov/PressRoom/PressReleases/8578-22 (2022 Kalshi contracts); https://www.cftc.gov/PressRoom/PressReleases/8728-23 (2023 Kalshi
contracts).
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Based upon its experience administering CEA section 5c(c)(5)(C)
pursuant to Sec. 40.11, the Commission believes that defining the term
``gaming'' within Sec. 40.11 will assist in establishing a common
understanding and more uniform application of the term. It will thereby
assist registered entities, and applicants for registration, in their
product design efforts, and benefit market participants and the public
by helping to ensure that event contracts listed for trading and
accepted for clearing by registered entities are consistent with the
requirements of the CEA and Sec. 40.11. The Commission notes that
there may continue to be instances where contract-specific reviews are
commenced pursuant to Sec. 40.11(c) in order to evaluate whether a
contract involves ``gaming,'' as proposed to be defined. However, the
Commission expects that establishing a definition, and thereby a common
understanding of the term, will help to reduce the frequency of these
reviews.
(b) Proposed Gaming Definition
The Commission proposes to define ``gaming'' in new Sec.
40.11(b)(1) as the staking or risking by any person of something of
value upon: (i) the outcome of a contest of others; (ii) the outcome of
a game involving skill or chance; (iii) the performance of one or more
competitors in one or more contests or games; or (iv) any other
occurrence or non-occurrence in connection with one or more contests or
games.\65\ This proposed definition is
[[Page 48975]]
consistent with the Commission's interpretation of the term ``gaming''
in the Nadex Order and the Kalshi Order,\66\ and draws upon the
ordinary meaning of the term \67\ and relevant state and federal
statutory definitions, as discussed below. The Commission wishes to
make it clear that its proposed definition of ``gaming'' would not have
applicability beyond the CFTC's administration of CEA section
5c(c)(5)(C) and Sec. 40.11.
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\65\ The Commission considers the term ``contest'' to have its
ordinary meaning, and to encompass a ``competition.'' See, e.g.,
MERRIAM-WEBSTER.COM, available at https://www.merriam-webster.com/dictionary/contest (last visited Mar. 7, 2024) (defining the noun
``contest'' as: ``1) a struggle for superiority or victory:
competition; 2) a competition in which each contestant performs
without direct contact with or interference from competitors'').
\66\ See Nadex Order at 2-3; Kalshi Order at 8-10.
\67\ See note 70, infra.
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The proposed definition recognizes--as the Commission did in the
Nadex Order and the Kalshi Order \68\--that the terms ``gaming'' and
``gambling'' are used interchangeably in common usage and dictionary
definitions.\69\ The proposed definition further recognizes that, under
a number of state statutes, ``gambling,'' ``betting,'' or ``wagering''
is recognized to include a person staking or risking something of value
upon a game or contest, or the performance of competitors in a game or
contest.\70\ Further, a federal statute, the Unlawful internet Gambling
Enforcement Act (``UIGEA''), defines the term ``bet or wager'' as the
staking or risking by any person of something of value on the outcome
of a contest of others, a sporting event, or a game subject to chance,
upon an agreement or understanding that the person or another person
will receive something of value in the event of a certain outcome.\71\
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\68\ Nadex Order at 2-3; Kalshi Order at 8-9.
\69\ For example, Dictionary.com defines ``gaming'' as, e.g.,
``gambling.'' See ``gaming'' definition, Dictionary.com, https://www.dictionary.com/browse/gaming (last visited Feb. 2, 2024).
Black's Law Dictionary also refers to ``gambling'' as ``gaming'' and
cross-refers the definition of gaming to gambling. See ``GAMING
Definition & Legal Meaning,'' Black's Law Dictionary, 2nd Ed.,
available at https://thelawdictionary.org/gaming/ (last visited Mar.
22, 2024). Further, many state agencies that regulate gambling are
known as ``gaming'' commissions. See, e.g., Nevada Gaming Commission
and Nevada Gaming Control Board, https://gaming.nv.gov/ (last
visited Mar. 7, 2024); New York State Gaming Commission, https://www.gaming.ny.gov/ (last visited Mar. 1, 2024); Illinois Gaming
Board, https://www.igb.illinois.gov/ (last visited Mar. 7, 2024).
\70\ See, e.g., Ga. Code Ann. section 16-12-21(a)(1) (West 2020)
(A person commits the offense of gambling when he makes a bet upon
the partial or final result of any game or contest or upon the
performance of any participant in such game or contest.); Tex. Penal
Code Ann. section 47.02(a) (West 2019) (A person commits an offense
of gambling if he: (1) makes a bet on the partial or final result of
a game or contest or on the performance of a participant in a game
or contest''). See also note 75, infra.
\71\ 31 U.S.C. 5362(1)(A). The UIGEA, 31 U.S.C. 5361-5367
(2006), prohibits gambling businesses from knowingly accepting
payments in connection with the participation of another person in a
bet or wager that involves the use of the internet and that is
unlawful under any federal or state law. Unlike the Wire Act, 28
U.S.C. 1084 (1961), the UIGEA defines a ``bet'', but it criminalizes
it only if it is connected with unlawful internet gambling that
violates any federal or state law. See 31 U.S.C. 5362. The UIGEA
does not alter the definitions in other federal and state laws and
expressly excludes any transaction conducted on or subject to the
rules of a registered entity or exempt board of trade under the CEA
from the definition of ``bet or wager.'' See id. at section
5362(1)(E).
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Accordingly, the Commission believes that it is appropriate, for
purposes of defining ``gaming'' within Sec. 40.11, to focus on the
staking or risking of something of value upon a contest of others or a
game, including the outcome of such contest or game, the performance of
competitors in such contest or game,\72\ or other occurrences or non-
occurrences in connection with such contest or game. As noted above,
this proposed approach draws upon the approach taken in relevant state
and federal statutes to defining the terms ``gambling,'' ``betting,''
and ``wagering.'' In this regard, the proposed approach is consistent
with indications of the intent of the drafters of CEA section
5c(c)(5)(C). In the 2010 Colloquy, Senator Lincoln stated that the
provision was intended, in part, to assure that the Commission had the
authority to ``prevent gambling through futures markets.'' \73\
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\72\ This would include the performance of one or more athletes
in one or more games, as well as the performance of one or more
competitors in one or more auto, drone, boat, horse, or similar
competitions. In addition, this would include performance in any
``fantasy'' or simulated contest or league in which participants own
or manage an imaginary or theoretical team and compete against other
participants based on the performance of such teams or team members.
\73\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statement of Sen. Blanche Lincoln).
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The Commission acknowledges that several state statutes recognize
``gambling,'' ``betting,'' or ``wagering,'' to encompass, more broadly,
a person staking or risking something of value upon the outcome of any
contingent event not in the person's influence or control--and not just
a game or a contest of others.\74\ The Commission is not proposing to
define ``gaming'' in this manner. The Commission recognizes that this
broader definition could encompass event contracts that were not
intended by Congress to be subject to the Commission's heightened
authority pursuant to CEA section 5c(c)(5)(C), including the types of
event contracts described in section II.A.1.b, supra. To avoid going
beyond what Congress may have intended with respect to the ``gaming''
category, the Commission is proposing to use the narrower definition
discussed herein. The Commission is, however, proposing to define
``gaming'' to include the staking or risking of something of value on a
contingent event in connection with a game or contest, which the
Commission believes would be as much of a wager or bet on the game or
contest as staking or risking something of value on the outcome of the
game or contest would be.
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\74\ See, e.g., N.Y. Penal Law section 225.00(2) (McKinney 2015)
(A person engages in gambling when he stakes or risks something of
value upon the outcome of a contest of chance or a future contingent
event not under his control or influence, upon an agreement or
understanding that he will receive something of value in the event
of a certain outcome.); Mich. Comp. Laws section 750.301 (2023) (Any
person or his or her agent or employee who, directly or indirectly,
takes, receives, or accepts from any person any money or valuable
thing with the agreement, understanding or allegation that any money
or valuable thing will be paid or delivered to any person where the
payment or delivery is alleged to be or will be contingent upon the
result of any race, contest, or game or upon the happening of any
event not known by the parties to be certain.); Va. Code Ann.
section 18.2-325(1) (West 2022) (Illegal gambling means the making,
placing, or receipt of any bet or wager of money or other
consideration or thing of value, made in exchange for a chance to
win a prize, stake, or other consideration or thing of value,
dependent upon the result of any game, contest, or any other event
the outcome of which is uncertain or a matter of chance.).
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(c) Illustrative Examples of Gaming
In order to provide additional guidance to registered entities and
market participants, the Commission proposes to set forth in new Sec.
40.11(b)(2) a non-exclusive list of examples of activities that
constitute ``gaming,'' as proposed to be defined. Proposed Sec.
40.11(b)(2) states that ``gaming'' includes, but is not limited to, the
staking or risking by any person of something of value upon: (i) the
outcome of a political contest, including an election or elections;
(ii) the outcome of an awards contest; (iii) the outcome of a game in
which one or more athletes compete; or (iv) an occurrence or non-
occurrence in connection with such a contest or game, regardless of
whether it directly affects the outcome. The Commission emphasizes that
the list of examples provided in proposed Sec. 40.11(b)(2) is non-
exclusive. To the extent that other activity falls within the
definition of ``gaming'' set forth at proposed Sec. 40.11(b)(1), such
activity would also constitute ``gaming.''
The first three examples in the non-exclusive list reflect types of
games or contests which, when something of value is staked or risked
upon their outcome, have been recognized as
[[Page 48976]]
gambling, betting, or wagering under relevant state and federal
statutes, and would constitute ``gaming'' under the proposed definition
in Sec. 40.11(b)(1).\75\ The first example reflects the Commission's
prior determinations that ``gaming'' includes the staking of something
of value upon the outcome of a political contest, including an
election.\76\ The Commission's prior determinations reflect, in turn,
that several state statutes, on their face, link the terms ``gaming''
or ``gambling'' to betting or wagering on elections.\77\
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\75\ See section II.B.1.b, supra.
\76\ In the Nadex Order, which addressed certain event contracts
on election outcomes, the Commission found that state gambling
definitions of ``wager'' and ``bet'' were analogous to the act of
taking a position in the subject contracts. Additionally, the
Commission cited to the UIGEA definition of the term ``bet or
wager,'' and found that taking a position in the subject contracts
``fit[] the plain meaning'' of a person staking something of value
upon a contest of others, since the contracts were all premised--
either directly or indirectly--on the outcome of a contest between
electoral candidates. As in the Nadex Order, in the Kalshi Order,
the Commission looked to definitions of the terms ``gaming,''
``gambling,'' and ``bet or wager,'' including state and federal
statutory definitions, and found that the subject contracts involved
gaming, since taking a position in the contracts would be staking
something of value upon the outcome of a contest of others: the
contracts were premised on the outcome of Congressional election
contests. As discussed, infra, the Commission further found in the
Kalshi Order that the subject contracts involved ``activity that is
unlawful under . . . State law'' pursuant to CEA section
5c(c)(5)(C)(i)(I) and Sec. 40.11(a)(1).
\77\ See, e.g., 720 Ill. Comp. Stat. Ann. section 5/28-1 (West
2011) (A person commits gambling when he makes a wager upon the
result of any game, contest, or any political nomination,
appointment or election''); Neb. Rev. Stat. section 28-1101(4)
(2011) (A person engages in gambling if he or she bets something of
value . . . upon the outcome of a game, contest, or election.); N.M.
Stat. Ann. section 44-5-10 (1978) (Bets and wagers authorized by the
constitution and laws of the United States, or by the laws of this
state, are gaming within the meaning of this chapter.); N.D. Cent.
Code. Ann. section 12.1-28-01 (West 2011) (Gambling means risking
any money upon the happening or outcome of an event, including an
election . . . over which the person taking the risk has no
control.). See also Ga. Code. Ann. section 16-12-21(a)(2) (West
2011) (A person commits the offense of gambling when he makes a bet
upon the result of any political nomination, appointment, or
election.); Miss. Code Ann. section 97-33-1 (West 2011) (If any
person shall wager or bet upon the result of any election he shall
be fined in a sum not more than Five Hundred Dollars.); S.C. Code
Ann. section 16-19-90 (2012) (Any person who shall make any bet or
wager of money upon any election in this State shall be guilty of a
misdemeanor.); Tex. Penal Code Ann. section 47.02(a)(2) (West 2011)
(A person commits an offense if he makes a bet on the result of any
political nomination, appointment, or election.).
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For purposes of proposed Sec. 40.11(b), the Commission would
consider a political contest to include, but not to be limited to, a
federal, state, or municipal election or primary contest for any
political office, as well as any political contest in a foreign
jurisdiction, including any political subdivision thereof, or in a
supranational organization. For the avoidance of doubt, the Commission
would consider an event contract to ``involve'' gaming if the contract
is premised on the outcome of one or more political contests, or would
otherwise amount to the staking or risking of something of value upon
the outcome of one or more political contests.\78\
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\78\ Consistent with its determination in the Kalshi Order,
where taking a position in a contract would be staking or risking
something of value upon the outcome of a political contest,
including an election or elections, the Commission would consider
the contract also to involve activity that is unlawful under state
law, pursuant to CEA section 5c(c)(5)(C)(i)(I) and Sec.
40.11(a)(1). See Kalshi Order at 12-14.
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The inclusion of the staking or risking of something of value upon
the outcome of a political contest as an example of ``gaming'' in
proposed Sec. 40.11(b)(2) highlights that the Commission's proposed
definition is not limited to sporting events or other games. This
reflects the similar approach taken in numerous state gambling statutes
\79\ as well as in the UIGEA, which defines a ``bet or wager'' to mean,
in relevant part, the staking or risking by any person of something of
value on the outcome of a contest of others, a sporting event, or a
game subject to chance.\80\ The separate ``contest of others'' category
in the UIGEA definition demonstrates that ``betting or wagering'' (and,
by extension, gaming) is recognized within a federal statutory
framework as extending beyond sporting events and games of chance.
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\79\ See, e.g., notes 71, 75, and 78, supra.
\80\ 31 U.S.C. 5362(1)(a).
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In this regard, in its non-exclusive list of examples of ``gaming''
at proposed Sec. 40.11(b)(2), the Commission includes the staking or
risking of something of value upon the outcome of an awards contest.
This would encompass, among other things, the staking or risking of
something of value upon the outcome of entertainment award contests
such as the Emmys, the Oscars, or the Grammys; athletics award contests
such as the Heisman Trophy; or achievement award contests such as the
Nobel Prize or the Pulitzer Prize. The Commission further includes as
an example of ``gaming'' in proposed Sec. 40.11(b)(2) the staking or
risking of something of value upon the outcome of a game in which one
or more athletes participate. This would encompass, among other things,
the staking or risking of something of value upon the outcome of a
professional or amateur (including scholastic) sports game.
Finally, the Commission includes as an example of ``gaming'' in
proposed Sec. 40.11(b)(2) the staking or risking of something of value
upon an occurrence or non-occurrence in connection with any of the
previously described examples of contests or games--regardless of
whether such occurrence or non-occurrence directly affects the outcome
of such contest or game. As discussed above, the Commission is
proposing to define ``gaming'' to mean--in addition to the staking or
risking of something of value upon the outcome of a contest of others
or a game of skill or chance, or the performance of one or more
competitors in such contest or game--the staking or risking of
something of value upon any other occurrence or non-occurrence in
connection with a contest or game. The Commission makes clear, in
proposed Sec. 40.11(b)(2), that it is of no import whether or not such
occurrence or non-occurrence directly affects the outcome of a contest
or game. Such an occurrence or non-occurrence would encompass, for
example: (i) whether a particular candidate enters or withdraws from a
political contest, or polls above or below a certain threshold; (ii)
whether a particular individual is nominated for an award or attends an
award ceremony; and (iii) in the context of an athletic game, the score
or individual player or team statistics at given intervals during the
game, whether a particular player will participate in a game, and
whether a particular individual will attend a game.
The Commission notes that a number of states prohibit betting or
wagering on a variety of occurrences or non-occurrences associated with
athletic games,\81\ as well as non-sporting events.\82\ This highlights
that in some
[[Page 48977]]
instances, event contracts that involve ``gaming,'' as proposed to be
defined, may also involve a second Enumerated Activity--``activity that
is unlawful under . . . State law.'' For example, as discussed in
section I.C.3, supra, the Commission found in the Kalshi Order that the
subject contracts involved both gaming and activity that is unlawful
under state law.\83\ While the Commission does not provide a complete
catalogue herein of the types of betting or wagering that is prohibited
under state law, it warrants recognition that in certain instances,
event contracts that involve ``gaming,'' as proposed to be defined, may
also involve activity that is unlawful under state law.\84\
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\81\ See, e.g. Va. Code Ann. section 58.1-4039 (A)(2) (West) (No
person shall place or accept a proposition bet on college sports.).
Ohio and Maryland have recently followed suit and banned player-
specific proposition bets on college sports. See https://casinocontrol.ohio.gov/static/NCAA%20Request%20&%20Commission's%20Response/
Response%20to%20the%20NCAA%20Regarding%20Proposition%20Wagers%20on%20
Student%20Athletes%202022%2002%2023.pdf (Feb. 23, 2024 letter from
the Ohio Casino Control Commission approving a request from the
National Collegiate Athletic Association (``NCAA'') to prohibit
player-specific proposition bets on intercollegiate athletics
competitions); https://sbcamericas.com/2024/03/04/maryland-bans-college-athlete-props/ (describing a directive by the Maryland
Lottery and Gaming Control Agency to all sportsbook operators in
Maryland to remove college player proposition wagers from their
platforms as of Mar. 1, 2024). See also Massachusetts Gaming
Commission Says No Super Bowl Prop Bets This Year, NewBostonPost
(Feb. 9, 2024), available at https://newbostonpost.com/2024/02/09/massachusetts-gaming-commission-says-no-super-bowl-prop-bets-this-year/.
\82\ For example, in Nevada, a sports book may not accept wagers
on a non-sporting event unless specifically approved by the Gaming
Commission; to date, the Nevada Gaming Commission has not approved
wagers on awards shows or other non-athletic or certain ``Esports''
related events or contests. See Nev. Gaming Comm'n Reg. section
22.120, Permitted wagers (Rev. 2023)
\83\ Kalshi Order at 11-12.
\84\ See note 88, infra. While the Commission has exclusive
jurisdiction over futures and swaps contracts traded on a CFTC-
registered exchange, preempting the application of state law with
respect to such transactions--and meaning that transacting in such
contracts on a CFTC-registered exchange cannot, of itself,
constitute unlawful activity for state law purposes--this does not
preclude a contract from involving ``activity that is unlawful under
. . . State law'' for purposes of CEA section 5c(c)(5)(C).
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As discussed above, the Commission recognizes that there may
continue to be instances where contract-specific reviews will need to
be commenced pursuant to Sec. 40.11(c) in order to evaluate whether a
particular contract involves ``gaming,'' as proposed to be defined.
However, it is anticipated that the proposed definition and non-
exclusive list of examples will assist in demarcating for registered
entities and market participants the types of event contracts that
involve ``gaming'' for purposes of Sec. 40.11(a)(l), and thereby
reduce the frequency with which such reviews must be commenced.
Request for Comment
The Commission requests comment on all aspects of its proposed
definition of the term ``gaming.'' In particular, the Commission
requests comment on the following questions:
Are there examples of activities that would constitute
``gaming'' that may fall outside of the proposed definition?
Are there other types of votes or elections that the
Commission should specifically identify, for clarity, in the
illustrative examples in proposed Sec. 40.11(b)(2)? What types of
other votes or elections should be identified, and why?
Should the availability at gaming venues of bets or wagers
on a particular contingency, occurrence, or event be a relevant factor
in the Commission's consideration of whether an event contract
involving that contingency, occurrence, or event involves ``gaming''
for purposes of Sec. 40.11?
If, on judicial review, it is determined that staking
something of value on the outcome of a political contest does not
involve ``gaming,'' the Commission may consider whether that activity
is ``similar to'' gaming. Is staking something of value on the outcome
of a political contest similar to gaming?
The Commission may also consider whether it should
enumerate contracts involving political contests or some subset thereof
as contracts involving a ``similar activity'' to any one or more of
``war,'' ``terrorism,'' ``assassination,'' or ``activity that is
unlawful under any Federal or State law'' under CEA section
5c(c)(5)(C)(i)(VI) and determine that contracts involving this newly
enumerated activity of political contests are contrary to the public
interest. Are contracts involving political contests contracts
involving a similar activity to any one or more of ``war,''
``terrorism,'' ``assassination,'' or ``activity that is unlawful under
any Federal or State law''? If so, should the Commission determine such
contracts are contrary to the public interest?
2. The Other Enumerated Activities
The Commission does not believe that it is necessary to define
``terrorism,'' ``assassination,'' or ``war'' at this time.\85\ With
respect to ``activity that is unlawful under any Federal or State
law,'' the Commission notes that the Sec. 40.11(c) review that it
conducted in connection with its determination in the Kalshi Order
evaluated whether the subject Congressional control contracts involved
this Enumerated Activity. In the Kalshi Order, the Commission found
that, in many states, betting or wagering on elections is prohibited by
statute or common law, and the Commission cited to the statutory
provisions and caselaw prohibiting such activity that it had identified
through a survey of relevant state law.\86\ The Commission found that,
because taking a position in the subject contracts would be staking
something of value upon the outcome of contests between electoral
candidates--in effect, betting or wagering on the outcome of
elections--and because in many states such conduct is illegal, the
subject contracts involved activity that was unlawful under state
law.\87\
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\85\ The Commission clarifies, however, that it believes that
cyberattacks and other acts of cyberterrorism constitute terrorism,
and in some cases war, and are also likely to constitute activity
that is unlawful under state or federal law.
\86\ Kalshi Order at 11-12.
\87\ CEA section 2(a)(1) grants the Commission ``exclusive
jurisdiction'' over futures and swap contracts traded on a CFTC-
registered exchange, 7 U.S.C. 2(a)(1). This ``preempts the
application of state law,'' Leist v. Simplot, 638 F.2d 283, 322 (2d
Cir. 1980), so transacting these contracts on a CFTC-registered
exchange cannot, in and of itself, be an ``activity that is unlawful
under any . . . State law.'' However, such contracts may still
``involve . . . activity'' that is unlawful under a state law, in
the sense, for example, that transactions in the contracts may
``relate closely'' to, ``entail,'' or ``have as an essential feature
or consequence'' an activity that violates state law. For example,
in the Kalshi Order, the Commission found that state laws (which are
not preempted by the CEA) prohibit wagering on elections. The
Commission found that taking a position in the subject Congressional
control contracts would be staking something of value on the outcome
of contests between electoral candidates, such that wagering on
elections was ``an essential feature or consequence'' of the
contracts. Accordingly, the Commission found that while transactions
in the contracts on a CFTC-registered exchange would not violate,
for example, state bucket-shop laws, they nevertheless involved an
activity that is unlawful in a number of states--wagering on
elections. The Commission found that to permit such transactions on
a CFTC-registered exchange would undermine important state interests
expressed in statutes separate and apart from those applicable to
trading on a CFTC-registered exchange. Id. at 13, note 28.
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The Commission anticipates that that the agency would in the future
follow a similar approach--including a survey of relevant law--in
circumstances where there is a question regarding whether an event
contract submitted to the Commission involves activity that is unlawful
under any state, or federal, law for purposes of Sec. 40.11(a)(1). The
Commission acknowledges that many state codes include laws prohibiting
certain activity that, while not repealed, are generally considered
archaic and are not enforced. The Commission believes that it is
unlikely that a registered entity would seek to list for trading or
accept for clearing an event contract involving such a law. To the
extent that a registered entity does make a submission to the
Commission regarding a contract that may involve such a law, the
Commission believes that it may be appropriate to commence a review of
the contract pursuant to Sec. 40.11(c) to evaluate whether, in light
of the relevant facts and circumstances, it is appropriate to recognize
the contract as involving ``activity that is unlawful under any . . .
State law'' for purposes of Sec. 40.11(a)(1).
The Commission notes further that a registered entity may receive a
definitive resolution of any questions concerning the applicability of
Sec. 40.11(a)(1) by submitting a contract for Commission approval
under Sec. 40.3. CFTC staff also may, at its discretion and upon a
request from a registered entity, review a draft contract
[[Page 48978]]
submission or proposal and provide guidance concerning the contract's
compliance with the CEA and CFTC regulations, including Sec.
40.11(a)(1).\88\
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\88\ The Commission notes, however, that staff's guidance
concerning drafts and proposals is preliminary and non-binding. CFTC
staff formally reviews contracts only at such time as a compliant
submission is provided to the Commission pursuant to Sec. 40.2 or
Sec. 40.3.
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Request for Comment
The Commission requests comment as to whether commenters agree with
the Commission's view that a registered entity is unlikely to seek to
list for trading or accept for clearing a contract that involves a
state law prohibiting certain activity that, while not repealed, is
generally considered archaic and is not enforced.
C. Public Interest Considerations
1. Overview of Proposed Amendments
As discussed above, CEA section 5c(c)(5)(C) provides that a
registered entity may not list, or make available for clearing or
trading, contracts in certain excluded commodities that involve an
Enumerated Activity or prescribed similar activity, and that have been
determined by the Commission to be contrary to the public interest.\89\
The Commission interprets CEA section 5c(c)(5)(C) to provide that a
contract may not be listed or made available for clearing or trading if
the Commission finds both that: (i) the contract involves an Enumerated
Activity or prescribed similar activity, and (ii) the contract is
contrary to the public interest.
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\89\ 7 U.S.C. 7a-2(c)(5)(C).
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While CEA section 5c(c)(5)(C) requires the Commission to determine
that a contract that involves an Enumerated Activity or prescribed
similar activity is contrary to the public interest, in order for the
contract to be prohibited from being listed or made available for
clearing or trading, the statute does not require this public interest
determination to be made on a contract-specific basis. The Commission
interprets CEA section 5c(c)(5)(C) to authorize categorical public
interest determinations if the Commission determines that contracts
involving an Enumerated Activity or prescribed similar activity are, as
a category, contrary to the public interest.\90\ The Commission
proposes to amend Sec. 40.11(a)(1) to include a determination that
event contracts involving each of the Enumerated Activities--including
``gaming,'' as proposed to be defined--are, as a category, contrary to
the public interest and therefore may not be listed for trading or
accepted for clearing on or through a registered entity. The Commission
notes that, to date, it has conducted a contract-specific public
interest analysis in connection with each of the contract reviews that
it has commenced pursuant to Sec. 40.11(c).\91\ If, as proposed, Sec.
40.11(a)(1) is amended to include a categorical public interest
determination with respect to contracts involving each of the
Enumerated Activities, the Commission would not, going forward,
undertake a contract-specific public interest analysis as part of a
review commenced pursuant to Sec. 40.11(c). Rather, the focus of any
such review would be to evaluate whether the contract involves an
Enumerated Activity, in which case, it may not be listed for trading or
accepted for clearing on or through a registered entity. The Commission
believes this would be appropriate to ensure the consistent treatment
of categories of contracts that have been determined by the Commission
to be contrary to the public interest. The Commission notes its
expectation, as discussed above, that defining the term ``gaming'' for
purposes of Sec. 40.11(a)(1) will further assist registered entities
in their product design and compliance efforts, and will reduce the
instances in which contract-specific reviews need to be commenced
pursuant to Sec. 40.11(c).
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\90\ Further, the Commission's general rulemaking authority
under CEA section 8(a)(5) provides the Commission with the authority
to enact prophylactic regulations that, as proposed herein and for
the reasons discussed below, the Commission has determined are
reasonably necessary to prevent the listing for trading or
acceptance for clearing of event contracts that will always violate
the public interest, and to diminish the harms (such as inefficiency
for market participants) caused by regular use of post hoc
evaluations of contracts that exchanges have already expended
resources to develop. CEA section 8(a)(5), 7 U.S.C. 12(a)(5)
(authorizing the Commission ``to make and promulgate such rules and
regulations as, in the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to accomplish any
of the purposes of [the CEA]'').
\91\ In the Nadex Order and the Kalshi Order, the Commission
first determined that the subject contracts involved an Enumerated
Activity (or Enumerated Activities), and then separately determined
that the contracts were contrary to the public interest and
therefore prohibited from being listed or made available for
clearing or trading. See Nadex Order at 3-4; Kalshi Order at 13-23.
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2. Factors Considered by the Commission in Evaluating Whether a
Contract, or Category of Contracts, Is Contrary to the Public Interest
The term ``public interest'' is not defined in CEA section
5c(c)(5)(C). As discussed more fully below, historically, the
Commission has evaluated whether a contract is contrary to the public
interest with reference to the contract's commercial hedging or price-
basing utility. The Commission has also, however, regularly stated that
other public interest factors may be considered.\92\ In that historical
context, the Commission observes that the event contract categories
listed in CEA 5c(c)(5)(C)--for example, terrorism, war, assassination,
and activity that is unlawful under any federal or state law--are
indicative of additional public interest concerns for Congress, beyond
a contract's hedging and price-basing utility, in establishing the
heightened authority set forth in that provision.
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\92\ See note 103, infra.
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The Commission reviewed the legislative history available to
establish its own determination of what factors are relevant in a
public interest evaluation under CEA section 5c(c)(5)(C). The
legislative history of the provision is limited, but it does suggest an
intent on the part of the drafters for the hedging and price-basing
utility of a contract to be relevant factors for consideration in a
public interest evaluation.\93\ In the 2010 Colloquy, Senator Feinstein
and Senator Lincoln discussed the Commission's authority, prior to the
enactment of the Commodity Futures Modernization Act of 2000
(``CFMA''), to prevent trading that is contrary to the public
interest.\94\ Before its repeal by the CFMA, CEA section 5(g) made it a
condition of initial and continuing contract market designation that
transactions for future delivery not be contrary to the public
interest.\95\ The Commission interpreted this statutory public interest
standard to include the concept of an ``economic purpose'' test. Pre-
CFMA guidelines articulated the economic purpose test as an evaluation
of whether a contract reasonably can be expected to be, or has been,
used for hedging and/or pricing basing on more than an occasional
basis.\96\
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\93\ The Commission has recognized price basing to occur when
producers, processors, merchants, or consumers of a commodity
establish commercial transaction prices based on the futures price
for that or a related commodity. See, e.g., Kalshi Order at 18.
\94\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln).
\95\ CEA section 5(g), 7 U.S.C. 7(g) (repealed).
\96\ The Commission adopted ``Guideline No. 1'' to assist DCMs
in preparing applications for product approval. See Guideline on
Economic and Public Interest Requirements for Contract Market
Designation, 40 FR 25849 (June 19, 1975). Guideline No. 1 stated
that DCMs should make an affirmative showing that a proposed futures
contract was ``reasonably expected to serve, on more than occasional
basis,'' as a price discovery or hedging tool for commercial users
of the underlying commodity. Subsequently, the Commission revised
Guideline No. 1, publishing it as appendix A to part 5 of chapter 17
of the Code of Federal Regulations. See 47 FR 49832 (Nov. 3, 1982).
As revised in 1982, Guideline No. 1 was updated to address proposed
innovations in the trading of futures contracts, including futures
contracts on financial instruments and on various indexes and cash-
settled futures contracts. Guideline No. 1 was again revised in
1992. 57 FR 3518 (Jan. 30, 1992). The 1992 revisions eliminated
redundant materials by stating that an application for designation
as a contract market for a particular futures contract should
include a cash-market description only when the proposed contract
differed from a currently designated contract and that a DCM need
justify only individual contract terms that were different from
terms which previously had been approved by the Commission. 57 FR at
3521. In addition, the 1992 revisions eliminated the guideline that
a DCM provide a further, separate justification that the proposed
contract would be quoted and disseminated for price basing, or used
as a means of hedging against possible loss through price
fluctuation on more than an occasional basis, noting that ``the
economic purpose of a contract is often implicit, or encapsulated,
in the exchange's demonstration that the terms and conditions of the
proposed contract meet the criteria of the Guideline [No. 1].'' 57
FR at 3521-22, note 9. Former CEA section 5(g) was deleted by the
CFMA, and Guideline No. 1 was accordingly also withdrawn by the
Commission.
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[[Page 48979]]
In the 2010 Colloquy, Senator Feinstein and Senator Lincoln
articulated the approach to evaluating a contract's hedging and price-
basing utility differently from how the economic purpose test was
applied under former CEA section 5(g). Senator Feinstein asked Senator
Lincoln whether, with respect to CEA section 5c(c)(5)(C), the intent
was to ``define `public interest' broadly so that the CFTC may consider
the extent to which a proposed derivative contract would be used
predominantly by speculators or participants not having a commercial or
hedging interest.'' \97\ Senator Feinstein further asked whether the
Commission would ``have the power to determine that a contract is a
gaming contract if the predominant use of the contract is speculative
as opposed to a hedging or economic use.'' \98\ Senator Lincoln
replied, ``That is our intent.'' \99\ Thus, while pre-CFMA Commission
guidelines articulated the economic purpose test as an evaluation of
``whether [a] contract reasonably can be expected to be, or has been,
used for hedging and/or price basing on more than an occasional
basis,'' Senator Lincoln and Senator Feinstein referred instead to
whether a contract is used predominantly by speculators or market
participants not having a commercial or hedging interest.
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\97\ 156 Cong. Rec. S5906 (daily ed. July 15, 2010) (statements
of Sen. Diane Feinstein and Sen. Blanche Lincoln).
\98\ Id.
\99\ Id.
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While the articulation of the approach to evaluating hedging and
pricing-basing utility differs from the pre-CFMA articulation, the 2010
Colloquy does suggest an intent on the part of the drafters of CEA
section 5c(c)(5)(C) for the hedging and price-basing utility of a
contract to be relevant considerations in a public interest review
under that provision. As noted, this is not inconsistent with the
approach taken in assessing whether a futures contract was contrary to
the public interest under former CEA section 5(g), which contemplated
application of the economic purpose test.
In this regard, the Commission notes further that the general
``Findings and Purpose'' provision of the CEA, at CEA section 3(a),
states that the transactions subject to [the CEA] . . . are affected
with a national public interest by providing a means for managing and
assuming price risks, discovering prices, or disseminating pricing
information through trading in liquid, fair, and secure financial
facilities.\100\ Accordingly, the CEA recognizes hedging as a public
interest, which certain transactions subject to the CEA--transactions
providing a means for managing and assuming price risk--are intended to
serve.
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\100\ 7 U.S.C. 5(a).
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As such, the Commission recognizes the utility of a contract, or
category contracts, for purposes of hedging and price-basing to be
relevant factors for consideration in evaluating whether the contract,
or category of contracts, is contrary to the public interest pursuant
to CEA section 5c(c)(5)(C).\101\ While the articulation of the approach
to evaluating hedging and price-basing utility differs in the 2010
Colloquy and under the pre-CFMA economic purpose test, the Commission
anticipates that a contract, or category of contracts, that does not
satisfy one such articulation also would likely not satisfy the other.
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\101\ The Commission considered hedging and price-basing utility
in its previous orders under CEA section 5c(c)(5)(C) and Sec.
40.11. See Kalshi Order at 13-15; Nadex Order at 3. In the Kalshi
Order the Commission found, among other things, that the event
underlying the subject contracts--control of a chamber of Congress--
did not, in and of itself, have ``sufficiently direct, predictable,
or quantifiable economic consequences'' for the contracts to serve
an effective hedging function. The Commission found that, since the
economic effects of control of a chamber of Congress are ``diffuse
and unpredictable,'' the price of the subject contracts was not
directly correlated to the price of any commodity, and so the price
of the contracts could not predictably be used to establish
commercial transaction prices. The Commission found that, even if
some level of political risk may be embedded in the price of many
commercial transactions, that did not, in itself, support a finding
that the subject contracts served a price-basing function. Kalshi
Order at 16-17. Similarly, in the Nadex Order the Commission found
that ``the unpredictability of the specific economic consequences of
an election means that the [subject contracts] cannot reasonably be
expected to be used for hedging purposes . . .'' Nadex Order at 3.
The Commission found that there was no situation in which the
subject contracts' prices could form the basis for the pricing of a
commercial transaction, financial asset, or service, which
demonstrated that the contracts did not have price-basing utility.
Id.
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In this regard, the Commission reiterates that it has the
discretion to consider other factors, in addition to hedging and price-
basing utility, in its evaluation of whether a contract, or category of
contracts, is contrary to the public interest for purposes of CEA
section 5c(c)(5)(C).\102\ This is consistent with the discretion of the
Commission when evaluating whether a futures contract was contrary to
the public interest under CEA section 5(g), prior to its repeal by the
CFMA.\103\ Accordingly, for the reasons discussed herein, and giving
due consideration to the intentions reflected in the 2010 Colloquy, the
Commission has determined that there are circumstances where other
public interest considerations support prohibiting a contract, or
category of contracts, from being listed for trading or accepted for
clearing on or through a registered entity, even where such contract,
or category of contracts, may have certain hedging or price-basing
utility.\104\
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\102\ For example, in both the Nadex Order and the Kalshi Order,
the Commission highlighted the public interest concerns that would
be raised if registered entities were permitted to offer trading in
event contracts involving the outcome of political elections. Nadex
Order at 4; Kalshi Order at 19-20.
\103\ In the Senate conference report for the Commodity Futures
Trading Commission Act of 1974, the conferees adopted an amendment
that required a board of trade to demonstrate that transactions on
it would not be contrary to the public interest, and ``note[d] that
the broader language of the Senate provision would include the
concept of the `economic purpose' test provided in the House bill
subject to the final test of the `public interest.' '' S. Rep. 1194,
93rd Cong. 2d Sess. 36 (1974). See also Economic and Public Interest
Requirements for Contract Market Designation, 47 FR 49832, 49836
(Nov. 3, 1982) (``Congress made clear when it adopted the public
interest test of Section 5(g) of the Act, that the public interest
test is broader than, and includes, an economic purpose test''
(citing the above-referenced Senate conference report). This public
interest standard was not modified by the 1992 revisions to
Guideline 1. See generally 57 FR 3518 (Jan. 30, 1992).
\104\ In the 2010 Colloquy, Senator Feinstein asked Senator
Lincoln whether she agreed that CEA section 5c(c)(5)(c) would
``empower the Commission to prevent trading in contracts that may
serve a limited commercial function but threaten the public good by
allowing some to profit from events that threaten our national
security.'' Senator Lincoln confirmed that she agreed, stating that
while national security threats ``pose a real commercial risk to
many businesses in America,'' contracts that permitted people to
hedge that risk ``would also involve betting on the likelihood of
events that threaten our national security. That would be contrary
to the public interest.'' 156 Cong. Rec. S5906-07 (daily ed. July
15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche
Lincoln).
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With respect to other factors to be considered in a public interest
review, the legislative history of CEA section 5c(c)(5)(C) supports
consideration of whether the contract, or category of
[[Page 48980]]
contracts, may threaten the public good. In the 2010 Colloquy, Senator
Feinstein recognized contracts that would ``allow[] some to profit from
events that threaten our national security'' as a threat to the public
good.\105\ Senator Lincoln similarly recognized that event contracts
that allowed for the hedging of the commercial risks of terrorist
attacks, war, and hijacking would also ``involve betting on the
likelihood of events that threaten our national security. That would be
contrary to the public interest.'' \106\ The Commission believes this
is plainly so given the terrible potential consequences of these
activities. The Commission accordingly agrees with, and adopts, the
view expressed in the 2010 Colloquy that national security and, more
broadly, the public good, are relevant factors for consideration in an
evaluation of whether a contract, or category of contracts, is contrary
to the public interest for purposes of CEA section 5c(c)(5)(C).
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\105\ Id.
\106\ Id.
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The Commission will consider all relevant factors in evaluating
whether a contract, or category of contracts, is contrary to the public
interest, and there is no one factor that will be determinative in the
Commission's evaluation. In addition to hedging utility, price-basing
utility, and threats to national security or other threats to the
public good, some of the factors that may be relevant when the
Commission is evaluating whether a contract, or category of contracts,
is contrary to the public interest include: (i) the extent to which the
contract, or category of contracts, would draw the Commission into
areas outside of its primary regulatory remit; \107\ (ii) whether
characteristics of the contract, or category of contacts, may increase
the risk of manipulative activity relating to the trading or pricing of
the contract; \108\ and (iii) whether the contract, or category of
contracts, could result in market participants profiting from harm to
any person or group of persons.\109\
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\107\ See, e.g., Kalshi Order at 22-23.
\108\ See, e.g., id. at 21-22. The Commission notes that DCMs
and SEFs have a statutory obligation to ensure that the contracts
that they list for trading are not readily susceptible to
manipulation. See Core Principle 3 for DCMs, CEA section 5(d), 7
U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3),
7 U.S.C. 7b-3(f)(3). The Commission distinguishes the type of review
that would be undertaken to evaluate whether a contract submission
to the Commission, pursuant to Sec. 40.2 or Sec. 40.3,
demonstrates compliance with this statutory obligation, from the
type of review that would be undertaken to evaluate whether
increased risk of manipulative activity may raise public interest
concerns regarding a contract, or category of contracts, for
purposes of CEA section 5c(c)(5)(C). The Commission notes that a
review for purposes of CEA section 5c(c)(5)(C) would be to determine
whether a contract, or category of contracts, should be per se
prohibited from being listed for trading or accepted for clearing on
or through a registered entity because it is contrary to the public
interest.
\109\ In the 2010 Colloquy, Senator Lincoln stated that CEA
section 5c(c)(5)(C) was intended, in part, to ensure that the
Commission had the power ``to prevent the creation of futures and
swaps markets that would allow citizens to profit from devastating
events.'' See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Sen. Diane Feinstein and Sen. Blanche Lincoln).
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The Commission notes that the factors that inform a public interest
determination, and the weight given to each such factor, are likely to
vary depending on the particular characteristics of the contract, or
category of contracts, that are being evaluated.
Request for Comment
The Commission requests comment on all aspects of its discussion of
the factors to be considered in evaluating whether a contract, or
category of contracts, is contrary to the public interest for purposes
of CEA section 5c(c)(5)(C). In particular, the Commission requests
comment on the following questions:
Should hedging and price-basing utility be considered as
factors when evaluating whether a contract, or category of contracts,
is contrary to the public interest? Why or why not?
If hedging and price-basing utility should be considered
as factors when evaluating whether a contract, or category of
contracts, is contrary to the public interest, how should such utility
be assessed?
Are there factors, in addition to those described herein,
that may be relevant when evaluating whether a contract, or category of
contracts, is contrary to the public interest? Are there any factors
the Commission should specifically not consider? Why or why not?
3. The Enumerated Activities
The Commission proposes to amend Sec. 40.11(a)(1) to include a
determination that any event contract that involves an Enumerated
Activity--including ``gaming,'' as proposed to be defined--is contrary
to the public interest and therefore may not be listed for trading or
accepted for clearing on or through a registered entity.
(a) Terrorism, Assassination, and War
The Commission recognizes the Enumerated Activities of terrorism,
assassination, and war as activities that pose a threat to national and
international security and entail violence and human suffering. The
Commission believes that it would be contrary to the public interest to
allow event contracts involving such activities to trade on CFTC-
regulated markets. The Commission believes that allowing such contracts
to trade would raise a real risk that the contracts, and markets for
the contracts, could be used to ``profit from devastating events.''
\110\ Allowing trading in contracts involving terrorism, assassination,
or war could incentivize certain market participants to take a
speculative position on whether these devastating events will occur, or
how wide-reaching their impact will be--a type of speculation that the
Commission believes, at a base level, is offensive and has no place in
CFTC-regulated markets. Allowing trading in such contracts might even
increase the risk of a terrorist attack, assassination, or act of war
by creating financial incentives for a potential perpetrator to take a
position in such a contract and then profit by carrying out the heinous
act that the contract involves. The national and international security
concerns and threat to the public good raised by terrorism,
assassination, and war are so significant that the Commission must
consider very seriously even the slightest risk that CFTC-regulated
markets could create a means or motive to profit from such
activity.\111\ Accordingly, in circumstances where an event contract
involves terrorism, assassination, or war, the Commission believes that
the public interest concerns that would be raised by allowing the
contract to be traded as a financial instrument on CFTC-regulated
markets, as described above, would
[[Page 48981]]
supersede any potential price-basing or hedging utility of the
contract.
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\110\ Id.
\111\ Similar concerns led to the shutdown in 2003 of the
Futures Markets Applied to Prediction (``FutureMAP'') program
proposed by the Defense Advanced Research Projects Agency
(``DARPA''), an office within the United States Department of
Defense. The FutureMAP program would have permitted traders to take
positions on questions such as whether a particular political leader
would be assassinated or whether a bioterror attack would occur.
Senators raised concerns that the market would permit the
perpetrator of a terrorist attack to profit from that attack.
Senator Tom Daschle raised concerns that the market could actually
incentivize terrorist attacks (``How long would it be before you saw
traders investing in a way that would bring about the desired
result''), and Senators Byron Dorgan and Ron Wyden characterized the
project as ``morally repugnant,'' ``offensive,'' and ``grotesque.''
See ``Threats and Responses and Criticisms; Pentagon Prepares a
Futures Market on Terror Attacks,'' The New York Times, July 29,
2003, available at https://www.nytimes.com/2003/07/29/us/threats-responses-plans-criticisms-pentagon-prepares-futures-market-terror.html; ``Pentagon Kills `Terror Futures Market,' '' NBC News,
July 29, 2003, available at https://www.nbcnews.com/id/wbna3072985;
149 Cong. Rec. S10082-83 (daily ed. July 29, 2003), available at
https://www.congress.gov/congressional-record/volume-149/issue-114/senate-section/article/S10082-1.
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The Commission therefore proposes to amend Sec. 40.11(a)(1) to
include determinations that any event contract that involves terrorism,
assassination, or war is contrary to the public interest and may not be
listed for trading or accepted for clearing on or through a registered
entity.
Request for Comment
The Commission requests comment on all aspects of its proposed
public interest determinations with respect to contracts involving
terrorism, assassination, and war. In particular, the Commission
requests comment on whether there are contracts that may involve
terrorism, assassination, or war that do not raise the above-described
public interest concerns. Why, or why not?
(b) Activity That is Unlawful Under Federal or State Law
The Commission similarly proposes to amend Sec. 40.11(a)(1) to
include a determination that any event contract that involves activity
that is unlawful under federal or state law is contrary to the public
interest and may not be listed for trading or accepted for clearing on
or through a registered entity. As an independent agency of the federal
government, the Commission exercises the authorities granted to it by
Congress under the CEA to help ensure that U.S. derivatives markets
operate with integrity. The Commission believes that it is contrary to
the public interest to permit trading, in the financial markets that
the Commission is mandated by Congress to oversee, in any event
contract that involves activity that Congress has determined to be
illegal.
The Commission further believes that it is contrary to the public
interest to permit trading in any event contract that involves activity
that is illegal under state law. Legislative bodies are intended to
serve the public good, and such bodies generally bar or prohibit
activity that they recognize as causing, or posing, public harm. Judges
and judicial bodies, applying statutes and developing common law, also
establish the illegality of activity that is recognized as causing, or
posing, public harm.\112\ The Commission thus believes that permitting
trading, on CFTC-regulated markets, in contracts that involve activity
that is unlawful under state law--and potentially in some circumstances
creating opportunities to profit from illegal activity--would undermine
important state interests, expressed in state statutes and common law,
in protecting the public good.\113\ This is also a matter of comity
with states.
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\112\ The Commission noted such common law prohibitions, and
related policy concerns, with respect to wagering on elections in
the Kalshi Order. Kalshi Order at 11-12, note 27.
\113\ While the Commission has exclusive jurisdiction over
futures and swaps contracts traded on a CFTC-registered exchange,
preempting the application of state law with respect to such
transactions--and meaning that transacting in such contracts on a
CFTC-registered exchange cannot, of itself, constitute unlawful
activity for state law purposes--this does not preclude a contract
from involving ``activity that is unlawful under . . . State law''
for purposes of CEA section 5c(c)(5)(C).
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The Commission notes that there are variations across state law in
the specific activities that are recognized as unlawful. The Commission
believes that a determination that an event contract that involves
activity that is unlawful under state law is contrary to the public
interest--which turns the focus of the analysis to the questions of
whether the activity, itself, is recognized as unlawful, and, if so,
whether the contract ``involves'' such unlawful activity--eliminates
the possibility that the Commission would have to serve, in its public
interest analysis of a particular contract involving particular
activity, as arbiter of a state's own public interest determination, as
expressed in statute and/or common law, in recognizing specific
activity as causing, or posing, public harm.
Request for Comment
The Commission requests comment on all aspects of its proposed
public interest determination with respect to contracts involving
activity that is unlawful under federal or state law. In particular,
the Commission requests comment on whether there are contracts that may
involve such activity that do not raise the above-described public
interest concerns. Why, or why not?
(c) Gaming
As discussed above, the Commission is proposing to define the term
``gaming,'' for purposes of Sec. 40.11, as the staking or risking by
any person of something of value upon: (i) the outcome of a contest of
others; (ii) the outcome of a game involving skill or chance; (iii) the
performance of one or more competitors in one or more contests or
games; or (iv) any other occurrence or non-occurrence in connection
with one or more contests or games. The proposed definition draws upon
the approach taken, in relevant state and federal statutory
definitions, to defining the terms ``gambling,'' ``betting,'' or
``wagering,'' which, as discussed above, are generally used
interchangeably with the term ``gaming.'' The Commission proposes to
amend Sec. 40.11(a)(1) to include a determination that any contract
that involves ``gaming,'' as proposed to be defined, is contrary to the
public interest. Both economic utility and other public interest
factors inform the Commission's preliminarily determination that event
contracts involving gaming should not be permitted to trade on CFTC-
regulated markets.
The Commission believes that by defining ``gaming'' in a manner
that draws upon the approach taken, in relevant state and federal
statutory definitions, to defining the terms ``gambling,'' ``betting,''
or ``wagering,'' the Commission is in turn identifying, for purposes of
Sec. 40.11, contracts that ``exist predominantly to enable gambling.''
\114\ The Commission believes that the economic impact of an occurrence
(or non-occurrence) in connection with a contest of others, or a game
of skill or chance--including the outcome of such contest or game--
generally is too diffuse and unpredictable to correlate to direct and
quantifiable changes in the price of commodities or other financial
assets or instruments, limiting the hedging and price-basing utility of
an event contract involving such an occurrence. Generally speaking, the
Commission believes that something of value is staked or risked upon an
occurrence (or non-occurrence) in connection with a contest of others,
[[Page 48982]]
or a game involving skill or chance, for entertainment purposes--in
order wager on the occurrence. As such, the Commission believes that
contracts involving such occurrences are likely to be traded
predominantly ``to enable gambling'' \115\ and ``used predominantly by
speculators or participants not having a commercial or hedging
interest,'' and cannot reasonably expected to be ``used for hedging
and/or price basing on more than an occasional basis.'' \116\
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\114\ In the 2010 Colloquy, when discussing the Dodd-Frank Act
provision that was ultimately enacted as CEA section 5c(c)(5)(C),
Senator Lincoln stated that ``[t]he Commission needs the power to,
and should, prevent derivatives contracts that are contrary to the
public interest because they exist predominantly to enable gambling
through supposed ``event contracts.'' See 156 Cong. Rec. S5906-07
(daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and
Sen. Blanche Lincoln). The Commission is aware that the legal
landscape with respect to certain forms of gambling has changed
since CEA section 5(c)(c)(5)(C) was adopted in 2010, and Sec. 40.11
was adopted in 2011. Specifically, in 2018, the Supreme Court in
Murphy v. N.C.A.A., 584 U.S. 453, 138 S.Ct. 1461, struck down The
Professional and Amateur Sports Protection Act (``PAPSA''). PAPSA
had prohibited states from authorizing state-sponsored gambling on
sporting events or permitting other persons to operate and promote
such sports gambling schemes. Following this decision, many states
have legalized various forms of sports gambling. The Commission
highlights, however, the determination of Congress to identify
``gaming'' as an Enumerated Activity, separate and apart from
activity that is unlawful under federal or state law. This indicates
Congressional intent--supported by the 2010 Colloquy--to empower the
Commission to prohibit event contracts that would effectively serve
as a wagering vehicle, subject to a Commission determination that
such contracts are contrary to the public interest. To this point,
the Commission notes that there were forms of legalized gambling in
the United States when CEA section 5c(c)(5)(C) was adopted (e.g.,
casino sportsbooks in states such as Nevada and New Jersey).
\115\ Id.
\116\ See section II.C.2, supra.
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While there may be individuals or entities for whom a particular
occurrence in connection with a contest or game have more direct and
more predictable economic consequences, the Commission believes that
any such segment of individuals or entities is likely to be narrow as
compared to the broader universe of market participants, including
retail market participants, who may be able to trade in an event
contract listed on a CFTC-registered exchange--and who, the Commission
believes, are most likely to trade such contract for entertainment
purposes only.
Moreover, the Commission believes that an individual or entity for
whom a particular occurrence in connection with a contest or game may
have more direct and more predictable economic consequences may also be
more likely to have access to information and/or influence that could
be used to engage in activity that could artificially move the market
in an event contract involving such occurrence, potentially raising
heightened manipulation concerns. For example, a professional athlete
or coach may be economically impacted by their team's wins or losses,
but may also have access to information--for example, about a team
member's health or a potential injury--that could be used to trade
ahead of the market in an event contract involving the team's
performance. Further, the athlete or coach would potentially have a
platform--for example, access to media, combined with public perception
as an authoritative source of information regarding the team--that
could be used to disseminate misinformation that could artificially
impact the market in the contract for additional financial gain.\117\
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\117\ In this regard, the Commission notes that, in order to
address concerns about the potential to undermine the integrity of a
sporting event or wagering thereon, a number of states have
established prohibitions on sports wagers for certain categories of
individuals when they are involved in a particular sporting event,
including athletes, coaches, referees, and staff of participants in
the event. See, e.g., N.Y. Rac. Pari-Mut. Wag. & Breed. Law Sec.
1367 (McKinney). In the context of an event contract traded on CFTC-
regulated markets, involving an occurrence (or non-occurrence) in
connection with a contest of others or a game of skill or chance,
the Commission notes that, even if individuals, or groups of
individuals, who may influence the outcome of the occurrence are
prohibited by the contract's terms from trading in the contract,
this would not prevent such individual, or group of individuals,
from engaging in other activity--for example, the spread of
misinformation--that could artificially move the market in the event
contract.
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The Commission additionally notes that, in many instances, a
particular individual or group of individuals may be able to influence
an occurrence in connection with a contest or game.\118\ If an event
contract involving such an occurrence is permitted to trade on CFTC-
registered markets, then even if the individual, or group of
individuals, that can influence the outcome of the occurrence are
prohibited, by the contract's terms, from trading in the contract, such
individual or group of individuals may be vulnerable to pressure or
persuasion by others who have taken a position in the contract and seek
a particular outcome.\119\
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\118\ This may particularly be the case for occurrences that do
not directly affect the final outcome of a contest or game. The
Commission believes that event contracts involving such occurrences
would be akin to ``novelty,'' ``proposition,'' or ``prop'' bets.
Many states that have legalized sports gambling prohibit various
types of novelty or proposition bets due, in part, to manipulation
concerns. See, e.g., Massachusetts Gaming Commission Says No Super
Bowl Prop Bets This Year, NewBostonPost (Feb. 9, 2024), available at
https://newbostonpost.com/2024/02/09/massachusetts-gaming-commission-says-no-super-bowl-prop-bets-this-year/. See also
Suspicious betting leads to questions about Super Bowl Gatorade
color odds, New York Post (Feb. 13, 2024), available at https://nypost.com/2024/02/13/sports/suspicious-betting-raises-questions-about-super-bowl-gatorade-color-odds/.
\119\ Relevant to this concern, certain state gaming regulators
have prohibited, or are seeking to prohibit, collegiate sports
proposition bets due to concerns related to ``bad actors [who] have
engaged in unacceptable behavior by making threats against student-
athletes[.]'' Could Ohio ban college sports prop bets? Mike DeWine,
NCAA president Charlie Baker support, The Columbus Dispatch (Feb. 2,
2024), available at https://www.dispatch.com/story/sports/college/big-10/2024/02/02/mike-dewine-ohio-college-sports-betting-ban-ncaa/72453967007/; see also Va. Code Ann. section 58.1-4039 (A)(2) (West)
(No person shall place or accept a proposition bet on college
sports.).
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The Commission further notes that most contracts falling within the
proposed definition of ``gaming'' would have no underlying cash market
with bona fide economic transactions to provide directly correlated
price forming information. Rather, price forming information is either
nonexistent, or driven by informational sources that are unregulated,
have opaque underlying processes and procedures, and may not follow
scientifically reliable methodologies.\120\ This differs from the
informational sources used for pricing the vast majority of commodities
underlying Commission-regulated derivatives contracts (e.g., government
issued crop forecasts, weather forecasts, federal government economic
data, market-derived supply and demand metrics for commodities, market-
based interest rate curves). The lack of price forming information for
contracts involving ``gaming,'' or the availability of only opaque and
unregulated sources of price forming information, may increase the risk
of manipulative activity relating to the trading and pricing of such
contracts, while decreasing the ability of the offering exchange, or
the Commission, to detect such activity.
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\120\ Notably, the most useful source of price-forming
information with respect to contracts involving ``gaming,'' as
proposed to be defined, would likely be prices of similar wagers in
gambling and sport-betting facilities. The Commission believes that
this fact further supports the Commission's view that trading in
such ``gaming'' contracts would effectively amount to betting or
wagering.
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Other public interest considerations also weigh against permitting
the trading, on CFTC-regulated markets, of event contracts involving
gaming, as proposed to be defined. The Commission believes that
permitting such contracts to trade as financial instruments on
financial markets could raise broad investor protection concerns by
conflating gambling and financial instruments in a manner that could
particularly create confusion and risk for retail market participants.
Among other things, it could improperly signal to certain retail
investors that these contracts are instruments to be used for
investment purposes--and it could signal to others that derivative
markets are appropriate venues for retail market participants to trade
for entertainment purposes, which could minimize, for those investors,
unique characteristics and risks of trading, more generally, in
derivative markets.
Moreover, the Commission notes that in the United States, gambling
is overseen by state regulators with particular expertise, and governed
by state gaming laws aimed at addressing particular risks and concerns
associated with gambling.\121\ The Commission is
[[Page 48983]]
not a gaming regulator. The CEA and Commission regulations are focused
on regulating financial instruments and markets, and do not include
provisions aimed at protecting against gambling-specific risks and
concerns, including customer protection concerns inherent to
gambling.\122\ Permitting event contracts involving gaming, as proposed
to be defined, to trade on CFTC-regulated markets would in effect
permit instruments commonly understood as bets or wagers on contests or
games to avoid these legal regimes and protections. Gambling is a
rapidly evolving field, and the Commission does not believe that it has
the statutory mandate nor specialized experience appropriate to oversee
it, or that Congress intended for the Commission to exercise its
jurisdiction or expend its resources in this manner.\123\
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\121\ See, e.g., N.Y. Rac. Pari-Mut. Wag. & Breed. Law section
1367 (McKinney) (requiring casinos and mobile sports wagering
licensees to promptly report to the New York State Gaming Commission
information relating to, among other things, unusual wagering
activity or patterns that may indicate concern with the integrity of
a sporting event, any potential breach of the relevant sports
governing body's internal rules and codes of conduct pertaining to
sports wagering (as they have been provided by the sports governing
body to the casino or mobile sports wagering operator), and
suspicious or illegal wagering activities, including using agents to
place wagers, using confidential non-public information, or using
false identification); Colo. Rev. Stat. Ann. section 44-30-1506
(West) (requiring a sports betting operator promptly to report to
the Colorado Division of Gaming any abnormal betting activity or
discernible patterns that may indicate a concern about the integrity
of a sports event or events; any other conduct with the potential to
corrupt a betting outcome of a sports event for purposes of
financial gain, including match fixing or the use of material,
nonpublic information to place bets or facilitate another person's
sports betting activity; and suspicious or illegal wagering
activities).
\122\ For example, a number of states have developed self-
exclusion programs for individuals who experience problem gambling,
which enable such individuals to self-report to be excluded from in-
person and/or online gambling sites for a set amount of years (or,
in some cases, indefinitely). See, e.g., Del. Code Ann. tit. 29,
Sec. 4834 (West); La. Stat. Ann. section 27:27.1; Ariz. Rev. Stat.
Ann. section 5-1320; Iowa Gaming Association, Responsible Gaming,
available at https://www.iowagaming.org/responsible-gaming/. A
number of states mandate the on-site posting of problem gambling
assistance notices, and some states also mandate employee training
to identify individuals who may be struggling with problem gambling.
See, e.g., 4 Pa. Stat. and Cons. Stat. Ann. section 3706 (West); 230
Ill. Comp. Stat. Ann. 10/13.1; Ohio Rev. Code Ann. section 3772.18
(West). In addition, a number of states require gambling
advertisements to include customer protection disclosures, such as
resources for problem gambling assistance. See, e.g., N.Y. Rac.
Pari-Mut. Wag. & Breed. Law sections 1362, 1363 (McKinney); Tenn.
Code Ann. section 4-49-205 (West); Ark. Code Ann. section 20-27-2601
(West); Conn. Gen. Stat. Ann. section 12-863 (West).
\123\ See note 82, supra, for examples of certain evolving risks
related to certain bets or wagers on contests or games.
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The Commission notes that the non-exclusive list of examples of
``gaming'' set forth in proposed Sec. 40.11(b)(2) includes staking or
risking something of value upon the outcome of a political contest,
including an election or elections, or upon an occurrence or non-
occurrence in connection with such a contest. Consistent with its
determinations in the Nadex Order and the Kalshi Order, the Commission
believes that permitting trading, on CFTC-regulated markets, in this
particular sub-set of gaming contracts would raise unique additional
public interest concerns relating to election integrity and the
perception of election integrity, and the appropriate role of the
Commission in this area.\124\ For example, permitting trading in these
types of contracts could create monetary incentives to vote for
particular candidates even when such votes may be contrary to a voter's
(or organized groups of voters') political views. It would also raise
concerns that conduct designed to artificially affect the electoral
process could be used to manipulate the markets in such contracts, or
conversely, that the markets in such contracts could be manipulated to
influence elections or electoral perceptions. For example, false
reporting or other misinformation--such as inaccurate polling or voter
surveys or false news reporting--could be used to distort the
information underlying price formation in such contracts.\125\
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\124\ The Commission believes that permitting trading in
contracts involving political contests in a foreign jurisdiction, or
concerning a supranational organization, also would raise these
public interest concerns, just as permitting trading in contracts
involving political contest in the United States would.
\125\ Certain commenters on the contracts subject to the Kalshi
Order asserted that event contracts involving occurrences in
connection with political election contests could serve as a check
on misinformation and inaccurate polling, stating that market-based
alternatives tend to be more accurate than polling or other methods
of predicting election outcomes. See Kalshi Order at 22. The
Commission notes that there is also research suggesting that
election markets may incentivize the creation of ``fake'' or
unreliable information in the interest of moving the market; a
number of commenters on the contracts subject to the Kalshi Order
also raised this concern. Id. See also Yeargain, Tyler, ``Fake
Polls, Real Consequences: The Rise of Fake Polls and the Case for
Criminal Liability,'' Missouri Law Review, Volume 85, Issue 1
(Winter 2020) citing Enten, Harry, ``Fake Polls are a Real
Problem,'' FiveThirtyEight (Aug. 22, 2017), available at https://fivethirtyeight.com/features/fake-polls-are-a-real-problem/ (noting
how a seemingly false or unreliable poll caused significant movement
on an event contract market and suggesting that such poll could have
been, or at least could be, created to cause such market movement;
further arguing that such false polls can have a real and
detrimental effect on elections). The Commission notes, further,
that there is no underlying cash market for political event
contracts, with bona fide economic transactions to provide directly
correlated price forming information. Rather, price forming
information is driven in large measure by polling and other
informational sources that are unregulated, frequently have opaque
underlying processes and procedures, and may not follow
scientifically reliable methodologies. The opaque and unregulated
sources of price forming information for such contracts may increase
the risk of manipulative activity relating to the trading and
pricing of the contracts, while decreasing the ability of the
listing registered entity and the Commission to detect such
activity.
---------------------------------------------------------------------------
The Commission notes, further, that it is not tasked with the
protection of election integrity or enforcement of campaign finance
laws. However, if trading was permitted on CFTC-registered exchanges in
event contracts that involve the staking or risking of something of
value on a political contest, then the Commission could find itself
investigating the outcome of an election itself.\126\ Again, the
Commission does not have the specialized experience appropriate for
this role, and believes that it is unlikely that Congress intended for
the Commission to exercise its jurisdiction or expend its resources
this way.
---------------------------------------------------------------------------
\126\ While certain commodities outside the Commission's direct
remit do underlie derivatives without giving rise to significant
problems, due to the special role of elections in our society, the
Commission believes that the oversight function in this area is best
reserved for other expert bodies. Of course, governmental bodies are
tasked with that function, but the Commission has both the authority
and responsibility to address fraud, false reporting, and
manipulation in markets for derivatives that trade on CFTC-
registered exchanges. See, e.g., CEA section 6(c), 7 U.S.C. 9(c); 17
CFR 180. As such, if trading were permitted in event contracts that
involve the staking or risking of something of value on the outcome
of a political contest, or upon an occurrence or non-occurrence in
connection with such a contest, the Commission would have a
statutory responsibility to exercise its surveillance,
investigation, and enforcement authority to ensure the integrity of
the markets in such contracts. Conversely, attempts at manipulation
of such markets could have broader electoral implications, similarly
drawing the Commission into investigations of election-related
activities. Indeed, accusations of fraud have been leveled at
government bodies tasked with administering elections. Such
scenarios underscore for the Commission that it has no appropriate
role in this area.
---------------------------------------------------------------------------
The unique additional public interest concerns that would be raised
by permitting the trading, on a CFTC- registered exchange, of an event
contract that involves the staking or risking of something of value on
the outcome of a political contest, or upon an occurrence or non-
occurrence in connection with such a contest, inform the Commission's
proposal to amend Sec. 40.11(a)(1) to include a determination that any
such contract is contrary to the public interest.\127\
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\127\ Many state courts have also found that wagering on
elections is contrary to sound public policy. E.g., Alabama, White
v. Yarbrough, 16 Ala. 109, 110 (1849) (``A wager on an election is
void as against public policy''); Arkansas, Williams v. Kagy, 3 SW2d
332, 333-34, 176 Ark. 484, 3 (1928) (``Even before the passage of
the statute quoted, this court ruled . . . that wagers upon
elections then pending are calculated to endanger the peace and
harmony of society and have a corrupting influence upon the morals
and are contrary to sound policy''); Colorado, Maher v. Van Horn, 60
P. 949, 17-18 (Colo. 1900) (``[W]ager contracts on the result of
elections are contrary to public policy and void and will not be
enforced by the courts''); Georgia, McLennan v. Whidon, 48 SE 201,
202-03, 120 Ga. 666 (1904), quoting Leverett v. Stegal, 23 Ga. 259
(1857) (finding that all gambling contracts are illegal but noting
that ``If there be any class of gambling contracts which should be
frowned upon more than another it is bets on elections. They strike
at the foundations of popular institutions, corrupt the ballot box,
or, what is tantamount to it, interfere with the freedom and purity
of elections''); Indiana, Worthington v. Black, 13 Ind. 344, 344-345
(1859) (``It has been often decided that wagers upon the result of
an election are against the principles of sound policy, and
consequently illegal . . .''); Iowa, David v. Ransom, 1 Greene 383,
383-85 (1848) (``A wager or bet made between parties on the result
of an election is void. If the wager is made before an election,
illegal votes are often secured, and others induced, contrary to the
better judgment of the voter; or if made after an election, the
parties interested might be led to exert a corrupt influence upon
the canvassing, and returns of the votes''); Kansas, Reynolds v.
McKinney, 4 Kan. 94, 101 (1866) (``[A bet] involving an inquiry into
the validity of the election of a public officer. . . . was
therefore, illegal and void on principles of public policy'');
Massachusetts, Ball v. Gilbert, 53 Mass. 397, 400-02 (1847) (a wager
upon the event of an election to a public office--at the federal,
state, or local level--is illegal and void on numerous public policy
grounds); Missouri, Hickerson v. Benson, 8 Mo. 8 (1843) (wagers on
the result of public elections and collateral matters are
``clearly'' against public policy and ``sound morality'' and
consequently illegal and void at common law); Nebraska, Specht v.
Beindorf, 56 Neb. 553, 76 NW 1059 (1898) (promissory note premised
on the election of a public official is a wager on the result of an
election and void on grounds of public policy); North Carolina,
Bettis v. Reynolds, 34 N.C. 344, 345-48 (1851) (``the practice of
betting on elections has a direct tendency to cause undue
influence[,]'' and even where neither party was a voter, a wager on
the result of a Presidential election void as against public
policy); Oregon, Willis v. Hoover, 9 Or. 418, 419-20 (1881) (wagers
on the result of public elections are illegal and void upon grounds
of public policy); Rhode Island, Stoddard v. Martin, 1 R.I. 1, 1
(1828) (all wagers on elections and judicial decisions ``are of
immoral tendency, against sound policy,'' and therefore void);
Texas, Thompson v. Harrison, 1842 WL 3625, at *1 (1842) (wagers on
the result of public elections are ``contrary to good morals'' and
void on grounds of public policy); Wisconsin, Murdock v. Kilbourn, 6
Wis. 468, 470-71 (1857) (wager upon the event of a public election
is contrary to public policy, illegal, and void).
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[[Page 48984]]
Request for Comment
The Commission requests comment on all aspects of its proposed
public interest determination with respect to contracts involving
gaming. In particular, the Commission requests comment on whether there
are contracts that may involve gaming that do not raise the above-
described public interest concerns. Why, or why not?
D. The Commission's Authority To Identify Additional Similar Activities
to the Enumerated Activities
CEA section 5c(c)(5)(C)(i)(VI) provides that the Commission may
determine, by rule or regulation, that event contracts in certain
excluded commodities are contrary to the public interest if the
contracts involve ``other similar activity'' to the Enumerated
Activities.\128\ CEA section 5c(c)(5)(C)(ii), in turn, provides that
such contracts shall not be listed or made available for clearing or
trading on or through a registered entity. These statutory provisions
are implemented through Sec. 40.11(a)(2), which provides that a
registered entity shall not list for trading or accept for clearing an
event contract ``which involves, relates to, or references an activity
that is similar to an activity enumerated in Sec. 40.11(a)(1) of this
part''--namely, an Enumerated Activity--and that the Commission
determines, by rule or regulation, to be contrary to the public
interest.\129\ CEA sections 5c(c)(5)(C)(i)-(ii), as implemented through
Sec. 40.11(a)(2), thus empower the Commission to identify, by rule or
regulation, additional, similar activities to the Enumerated
Activities, and to prohibit registered entities from listing for
trading or accepting for clearing event contracts involving those
activities where the Commission finds that such contracts are contrary
to the public interest. To date, the Commission has not exercised this
authority.
---------------------------------------------------------------------------
\128\ 7 U.S.C. 7a-2(c)(5)(C)(i)(VI).
\129\ 17 CFR 40.11(a)(2).
---------------------------------------------------------------------------
While the Commission is not proposing to exercise this authority at
this juncture, the Commission reiterates that it retains the authority
under CEA section 5c(c)(5)(C)(VI) to determine, in the future, that
other activities are similar to the Enumerated Activities, and that
event contracts involving such similar activities are contrary to the
public interest and may not be listed for trading or accepted for
clearing on or through a registered entity. This authority will
continue to be reflected in the regulatory text of Sec. 40.11(a)(2).
As part of any final rule resulting from this Notice of Proposed
Rulemaking, the Commission intends to include an Appendix E to Part 40
containing guidance in the form of factors the Commission may consider,
in addition to other factors the Commission deems appropriate in light
of individual facts and circumstances, when making a determination
under Sec. 40.11(a)(2) that such event contracts are contrary to the
public interest, consistent with the public interest analysis set forth
above.
E. Technical Amendments
The Commission proposes to make certain technical amendments to
Sec. 40.11. These proposed amendments are intended to clarify and more
logically organize the regulation, and are not intended to change the
regulation's substantive meaning or effect. As a threshold matter, the
Commission proposes to remove the words ``Review of'' from the title of
Sec. 40.11, because the regulation does not only address contract
reviews. The Commission believes that the regulation would be more
clearly and accurately titled ``Event contracts based upon certain
excluded commodities.''
1. Technical Amendments to Sec. 40.11(a)
The Commission proposes to make certain technical amendments to
Sec. 40.11(a). First, the Commission proposes to list the Enumerated
Activities, as currently set forth in Sec. 40.11(a)(1), in separate
sub-paragraphs and to reorder the list of the Enumerated Activities to
match the order in which they appear in CEA section 5c(c)(5)(C)(i). The
Enumerated Activities would be listed in new sub-paragraphs (i) through
(v) of Sec. 40.11(a)(1).
The Commission further proposes to replace ``which'' with ``that''
in Sec. 40.11(a)(2). This is not intended to change the meaning of the
current language. Rather, the Commission proposes this change to make
the language of Sec. 40.11(a)(2) consistent with the language of Sec.
40.11(a)(1).
The Commission additionally proposes to state in Sec. 40.11(a)(2)
that a contract may not be listed for trading or accepted for clearing
if the contract involves activity that is similar to an activity
enumerated in proposed sub-paragraphs (i) through (v) of Sec.
40.11(a)(1)--in effect, if the contract involves activity that is
similar to one of the statutory Enumerated Activities. This would be
substantively consistent with existing Sec. 40.11(a)(2) and would
reflect the statutory text of CEA section 5c(c)(5)(C)(i)(VI), which
states that the Commission may make a public interest determination
with respect to contracts involving other activity that is similar to
the Enumerated Activities set forth in CEA sections 5c(c)(5)(C)(i)(I)-
(V). The Commission contemplates that, in the event that it identifies
activities that are similar to the Enumerated Activities in a future
rule or regulation pursuant to its authority under CEA section
5c(c)(5)(C)(i)(VI) and Sec. 40.11(a)(2), such activities would be
numbered sequentially after proposed sub-paragraphs (i) through (v) of
Sec. 40.11(a)(1).
2. Technical Amendments to Sec. 40.11(c)
The Commission proposes to make certain technical amendments to
Sec. 40.11(c). These proposed amendments are not intended to alter the
regulation's substantive meaning or its practical implementation,
including the timing or procedural requirements of the Sec. 40.11(c)
review process. The proposed technical amendments are simply intended
to clarify Sec. 40.11(c) and improve its organization.
[[Page 48985]]
First, the Commission proposes removing the phrase ``and approval
of certain event contracts'' from the title of Sec. 40.11(c), because
the paragraph does not only address contract approval. The Commission
believes the paragraph would be more clearly and accurately titled
``90-day review.''
Next, the Commission proposes to number the introductory paragraph
to Sec. 40.11(c) as Sec. 40.11(c)(1), and to reorganize existing
Sec. Sec. 40.11(c)(1) and (2) into three new paragraphs, numbered
Sec. Sec. 40.11(c)(2) through Sec. 40.11(c)(4). In renumbered Sec.
40.11(c)(1), the Commission proposes adding the modifying phrase ``made
by a registered entity'' to clarify that submissions pursuant to
Sec. Sec. 40.2 and 40.3 are made by registered entities. The
Commission further proposes replacing the word ``which'' with ``that''
in order to make the language consistent throughout Sec. 40.11, and
proposes replacing the word ``be'' with ``is'' simply for grammatical
structure.\130\
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\130\ As discussed above, the Commission also is proposing to
remove from Sec. 40.11(c)(1), as proposed to be renumbered, the
words ``relate to, or reference'', and to refer only to contracts
that ``may involve'' an activity enumerated in Sec. 40.11(a)(1) or
Sec. 40.11(a)(2), in order to more closely align with the statutory
language of CEA section 5c(c)(5)(C).
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The proposed reorganization of existing Sec. Sec. 40.11(c)(1) and
(2) into three new paragraphs, numbered Sec. Sec. 40.11(c)(2) through
Sec. 40.11(c)(4), and the proposed language changes to those
provisions, are intended to improve the clarity of Sec. 40.11(c) by,
among other things, grouping related information together. As amended,
Sec. 40.11(c)(2) would address the commencement of a 90-day review
period, including notification of such commencement. As amended, Sec.
40.11(c)(2) would include language explicitly stating that a registered
entity must be notified of the commencement of a 90-day review, and
would group this language together with a clarified version of existing
language providing that notice of the commencement of a 90-day review
will be posted on the Commission's website. To further enhance clarity,
proposed Sec. 40.11(c)(2) would provide that the 90-day review period
commences ``on the date the Commission notifies the registered entity
of its determination to conduct a 90-day review,'' amending the current
language, which states that the 90-day review period commences from the
date the Commission notifies a registered entity of a potential
violation of Sec. 40.11(a). The Commission proposes to clarify the
current language to avoid potential uncertainty as to the specific
start date of the 90-day review period.
Proposed new Sec. 40.11(c)(3) would address the existing
requirement that the Commission request that a registered entity
suspend the listing or trading of a contract during the pendency of the
90-day review period. To enhance clarity, minor technical changes would
be made to the existing regulatory language, including removal of
excess wording describing the types of contracts that may be subject to
a 90-day review.
With the exception of a sub-heading the Commission proposes to
remove for consistency, proposed new Sec. 40.11(c)(4) would include
existing regulatory language addressing Commission action at the end of
the 90-day review period.
Request for Comment
The Commission requests comment on all aspects of its proposed
technical amendments to Sec. 40.11.
F. Implementation Timeline
The Commission proposes making the final rule amendments effective
30 days after publication in the Federal Register. The Commission
believes that this 30-day period should provide registered entities
with sufficient time to account for the rule amendments in their
product design and compliance procedures. However, the Commission also
proposes an implementation period that would run for an additional 30
days after the effective date of the final rule amendments--for a total
of 60 days from the date of publication of the final rule amendments in
the Federal Register--solely for event contracts that are listed for
trading as of the date of publication of the final rule amendments, and
that are impacted by the amendments.
The Commission believes that a 60-day implementation period for
these contracts will minimize any market disruption that might be
caused by the rule amendments. In this regard, the Commission notes
that event contracts are generally based upon a discrete occurrence or
event, and Commission staff's anecdotal experience indicates that many
event contracts settle within relatively short time horizons. This,
coupled with the fact that, as discussed further in section III.C,
infra, contracts that involve ``gaming,'' as proposed to be defined,
currently comprise a small portion of the overall event contracts
market, suggests that few event contracts impacted by the proposed rule
amendments, if finalized, would need to be wound down before their
existing settlement dates.\131\ To the extent that a particular event
contract that is impacted by the rule amendments has a settlement date
that extends beyond the implementation period, the Commission believes
that 60 days would provide sufficient time for the registered entity to
ensure the orderly cessation of trading in the contract.
---------------------------------------------------------------------------
\131\ See also note 171, infra.
---------------------------------------------------------------------------
For the avoidance of doubt, the proposed extended 60-day
implementation period would apply only to contracts that are listed and
available for trading as of the date of publication of the final rule
amendments in the Federal Register. The extended implementation period
would not apply to contracts that have been self-certified under Sec.
40.2, or approved by the Commission under Sec. 40.3, but are not
listed and available for trading as of the date of publication of the
final rule amendments in the Federal Register. The interest in
minimizing market disruption that informs the proposed extended
implementation period does not apply to such contracts.
All registered entities are expected to make good-faith efforts
that will result in conformance with the final rule amendments by no
later than the effective date of the final amendments (or the 60-day
implementation period, as applicable). These good-faith efforts should
take the final rule amendments into account in all compliance, contract
design, and listing, trading, or clearing decisions, as well as in
decisions leading to the orderly and timely winddown of any contracts
with settlement dates beyond the 60-day implementation period.
Request for Comment
The Commission requests comment on all aspects of the proposed
implementation timeline. In particular, the Commission requests comment
on the following questions:
Would an effective date that is 30 days after publication
of the final rule amendments in the Federal Register provide registered
entities with sufficient opportunity to comply with the amendments?
Would the proposed 60-day implementation period provide
sufficient time for the expiration of, or orderly cessation of trading
in, listed event contracts that are impacted by the proposed rule
amendments?
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires federal agencies
to consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
to provide a regulatory
[[Page 48986]]
flexibility analysis respecting the impact.\132\ Whenever an agency
publishes a general notice of proposed rulemaking for any rule,
pursuant to the notice-and-comment provisions of the Administrative
Procedure Act,\133\ a regulatory flexibility analysis or certification
is typically required.\134\
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\132\ 5 U.S.C. 601 et seq.
\133\ 5 U.S.C. 553.
\134\ See 5 U.S.C. 601(2), 603, 604, and 605.
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The rule amendments proposed herein will affect DCMs, SEFs, and
DCOs. The Commission has previously established certain definitions of
``small entities'' to be used by the Commission in evaluating the
impact of its rules on small entities in accordance with the RFA.\135\
The Commission previously determined that DCMs are not small entities
for purposes of the RFA.\136\ Similarly, the Commission previously
determined that SEFs \137\ and DCOs \138\ are not small entities for
purposes of the RFA.\139\
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\135\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982).
\136\ Id. at 18618-19.
\137\ See Core Principles and Other Requirements for SEFs, 78 FR
33476, 33548 (June 4, 2013).
\138\ See New Regulatory Framework for Clearing Organizations,
66 FR 45604, 45609 (Aug. 29, 2001).
\139\ The determination about impact on small entities in this
section is limited to the RFA analysis. Additional analysis on the
impact of the regulation is set out in the analysis of cost-benefit
considerations in section III.C.
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. Sec. 605(b) that the proposed
amendments will not have a significant economic impact on a substantial
number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \140\ imposes certain
requirements on federal agencies, including the Commission, in
connection with conducting or sponsoring any ``collection of
information,'' as defined by the PRA. Under the PRA, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number
from the Office of Management and Budget (``OMB'').\141\ The PRA is
intended, in part, to minimize the paperwork burden created for
individuals, businesses, and other persons as a result of the
collection of information by federal agencies, and to ensure the
greatest possible benefit and utility of information created,
collected, maintained, used, shared, and disseminated by or for the
federal government.\142\ The PRA applies to all information, regardless
of form or format, whenever the federal government is obtaining,
causing to be obtained, or soliciting information, and includes
required disclosure to third parties or the public, of facts or
opinions, when the information collection calls for answers to
identical questions posed to, or identical reporting or recordkeeping
requirements imposed on, ten or more persons.\143\
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\140\ 5 U.S.C. 601, et seq.
\141\ See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
\142\ See 44 U.S.C. 3501.
\143\ See 44 U.S.C. 3502(3).
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The rule amendments proposed herein, if adopted, would result in a
collection of information within the meaning of the PRA, as discussed
below. The Commission therefore is submitting this proposal to the OMB
for its review in accordance with the PRA.\144\ Responses to this
collection of information would be mandatory. The Commission will
protect any proprietary information according to the Freedom of
Information Act and part 145 of the Commission's regulations.\145\ In
addition, section 8(a)(1) of the CEA strictly prohibits the Commission,
unless specifically authorized by the CEA, from making public any
``data and information that would separately disclose the business
transactions or market positions of any person and trade secrets or
names of customers.'' \146\ Finally, the Commission is also required to
protect certain information contained in a government system of records
according to the Privacy Act of 1974.\147\
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\144\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
\145\ See 5 U.S.C. 552; see also 17 CFR part 145 (Commission
Records and Information).
\146\ 7 U.S.C. 12(a)(1).
\147\ 5 U.S.C. 552a.
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1. Submission of Updated Rules to the Commission
This proposed rulemaking affects a collection of information for
which the Commission has previously received a control number from OMB.
The title for this collection of information is OMB Control No. 3038-
0093, Part 40, Provisions Common to Registered Entities (``OMB
Collection 3038-0093'').
Section 40.6 of the Commission's regulations \148\ requires
registered entities to make rule submissions to the Commission when
they adopt a new or revised rule or rule amendments, including changes
to product terms and conditions. The Commission anticipates that, if
the rule amendments proposed herein are adopted, registered entities
whose product offerings include contracts involving ``gaming,'' as
proposed to be defined, will take certain steps with respect to those
contracts in order to comply with the rules. The Commission anticipates
that, for certain exchanges, one step will be filing Sec. 40.6 self-
certification submissions to permanently delist the contracts and
remove reference to them from their exchange rules.\149\ These Sec.
40.6 filings are additional burdens under the PRA and would increase
the reporting burden associated with OMB Collection 3038-0093.\150\
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\148\ 17 CFR 40.6.
\149\ In this context, ``delisting'' refers to the process of
submitting rule amendments to the Commission in order to withdraw
self-certified or approved contracts (meaning they can no longer be
listed for trading on the exchange), regardless of whether such
contracts are currently available to market participants for
trading.
\150\ Additional costs associated with delisting are laid out in
the analysis of cost-benefit considerations, but are not PRA burdens
because they do not require a registered entity to submit reports or
create records for the Commission beyond the registered entity's
existing obligations.
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The Commission estimates that approximately 30 Sec. 40.6 filings
would need to be submitted for contracts to be delisted if the proposed
rule amendments are adopted, taking an average of two hours per
submission. Currently, there are six DCMs that list event contracts for
trading.\151\ As an average, the new burden would be an estimated 5
additional Sec. 40.6 filings per DCM. Accordingly, the Commission
estimates the additional PRA burden as follows:
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\151\ As discussed below in section III.C.2(a)(3), note 175,
only one DCM currently offers the types of event contracts that
would be prohibited and require Sec. 40.6 filings as a result of
the proposed rule amendments, if adopted. However, for the purposes
of the PRA, the Commission is estimating the potential burden for
all six DCMs that currently offer event contracts.
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Sec. 40.6 submissions related to delisting contracts
Estimated Number of Respondents: 6.
One-Time Responses by each Respondent: 5.
Estimated Hours per Response: 2.
Estimated Total Hours: 60.
As discussed in the analysis of cost benefit considerations in
section III.C, infra, registered entities may incur other costs to
review and implement the new definition of ``gaming,'' if the proposed
rules are adopted. This may include costs to update any product design
and compliance procedures that a registered entity maintains in the
regular course of business. These activities do not constitute
``information collections,'' however, because the PRA excludes the
maintenance of records required to be kept in the usual and customary
order of business from the definition of a ``collection of
information.'' \152\
[[Page 48987]]
Moreover, updates to these types of business records would not require
registered entities to provide responses to a series of identical
questions.\153\ The Commission expects that the content and nature of
any revisions to update product design or compliance procedures would
vary considerably among registered entities and registered entities
retain flexibility in deciding how to structure those procedures and
what content to include.
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\152\ 5 CFR 1320.3(b)(3). The following OMB collections address
the general reporting and recordkeeping compliance obligations for
DCMs, SEFs, and DCOs, for compliance with relevant CEA core
principles and Commission regulations: OMB Control No. 3038-0052,
Core Principles and Other Requirements for DCMs (``OMB Collection
3038-0052''); OMB Control No. 3038-0074, Core Principles and Other
Requirements for Swap Execution Facilities (``OMB Collection 3038-
0074''); and OMB Control No. 3038-0076, Requirements for Derivative
Clearing Organizations (``OMB Collection 3038-0076''). The
Commission does not anticipate that the proposed rule amendments
will affect the information collection burden associated with these
collections.
\153\ 44 U.S.C. 3502(3)(A) (providing that a ``collection of
information'' occurs when ten or more persons are asked to report,
provide, disclose, or record information in response to ``identical
questions'').
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There are no additional capital and start-up or operations and
maintenance costs associated with this collection.
2. Request for Comment
The Commission invites the public and other federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. The Commission will consider public
comments on this proposed collection of information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC
20581, (202) 418-5174 or from https://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that all comments can be summarized and addressed in the final
rulemaking, and please refer to the ADDRESSES section of this rule
proposal for instructions on submitting comments to the Commission. OMB
is required to make a decision concerning the proposed information
collection requirements between 30 and 60 days after publication of
this release in the Federal Register. Therefore, a comment to OMB is
best assured of receiving full consideration if OMB receives it within
30 calendar days of publication of this release. Nothing in the
foregoing affects the deadline enumerated above for public comment to
the Commission on the proposed rule amendments.
C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\154\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (i) protection of market
participants and the public; (ii) efficiency, competitiveness, and
financial integrity of futures markets; (iii) price discovery; (iv)
sound risk management practices; and (v) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
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\154\ 7 U.S.C. 19(a).
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While, as discussed previously and further below, the Commission
believes the amendments proposed herein--measured relative to the
baseline of status quo conditions--would create meaningful benefits for
market participants and the public, it also recognizes that they likely
would result in some incremental costs. The Commission has endeavored
to enumerate material costs and benefits and, when reasonably feasible,
assign a quantitative value to them. Where it is not reasonably
feasible to quantify costs and benefits of the proposed amendments,
those costs and benefits are discussed qualitatively.\155\
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\155\ The Commission notes that this cost benefit consideration
is based on its understanding that the derivatives market regulated
by the Commission functions internationally with: (1) transactions
that involve U.S. persons occurring across different international
jurisdictions; (2) some persons organized outside of the United
States that are registered with the Commission; and (3) some persons
that typically operate both within and outside the United States and
that follow substantially similar business practices wherever
located. Where the Commission does not specifically refer to matters
of location, the discussion of costs and benefits below refers to
the effects of the proposed rule amendments on all relevant
derivatives activity, whether based on their actual occurrence in
the United States or on their connection with activities in, or
effect on, U.S. commerce.
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The Commission identifies and considers the benefits and costs of
the proposed amendments relative to a baseline standard of those
generated by the current statutory and regulatory framework applicable
to event contracts, i.e., the status quo. This framework includes the
provisions involving event contracts in CEA section 5c(c)(5)(C) and
current Sec. 40.11 and Commission orders that have been issued
pursuant to Sec. 40.11(c)(2), which address relevant terms such as
``gaming.'' The specific elements of the baseline that would be
impacted by the proposed amendments are discussed in more detail below.
2. Proposed Amendments
(a) Definition of Gaming--Proposed Sec. 40.11(b)
(1) Baseline and Proposed Amendments
Pursuant to current Sec. 40.11(a)(1), a registered entity shall
not list for trading or accept for clearing on or through the
registered entity an event contract in certain excluded commodities
that ``involves, relates to, or references'' gaming. The term
``gaming'' is not defined in the CEA or Commission regulations. The
Commission has issued two orders pursuant to Sec. 40.11(c)(2)--the
Nadex Order \156\ and the Kalshi Order \157\--both of which have
included discussions of the term. The orders have provided some insight
regarding the Commission's understanding of what ``gaming'' means for
purposes of CEA section 5c(c)(5)(C) and Sec. 40.11. For example, the
orders set forth the Commission's recognition that: (i) relevant state
and federal statutes define the terms ``gambling,'' ``betting,'' and
``wagering''--which are generally used
[[Page 48988]]
interchangeably with the term ``gaming''--to include staking something
of value upon a game or contest of others; \158\ (ii) the event
contracts subject to each respective order involved ``gaming,'' because
they involved staking something of value upon the outcome of a contest
of others; \159\ and (iii) an event contract can involve ``gaming,''
for purposes of CEA section 5c(c)(5)(C) and Sec. 40.11, in
circumstances where the contract's underlying, itself, is gaming, and
in circumstances where the contract has a different connection to
gaming, for example because the contract ``relates closely'' to,
``entails,'' or ``has as an essential feature or consequence''
gaming.\160\
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\156\ See https://www.cftc.gov/PressRoom/PressReleases/6224-12.
\157\ See https://www.cftc.gov/PressRoom/PressReleases/8780-23.
\158\ Kalshi Order at 8-9.
\159\ Nadex Order at 3; Kalshi Order at 10.
\160\ Kalshi Order at 7. See also Nadex Order at 2 (``[T]he
legislative history of CEA Section 5c(c)(5)(C) indicates that the
relevant question for the Commission in determining whether a
contract involves one of the activities enumerated in CEA Section
5c(c)(5)(C)(i) is whether the contract, considered as a whole,
involves one of those activities.'')
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The Commission's understanding of the term ``gaming,'' as set forth
in the orders that it has issued pursuant to Sec. 40.11(c)(2), is
reflected in its proposed definition of the term--and, more generally,
in the other amendments proposed herein. However, the Commission
recognizes that in the absence, to date, of a formal statutory or
regulatory definition, registered entities may have taken somewhat
different approaches to interpreting the scope of the term, and in some
respects may have interpreted the scope to be narrower than the
definition of ``gaming'' that the Commission is now proposing.
Conversely, certain registered entities may have interpreted the term
more broadly than the Commission's proposed definition.
The Commission is proposing to define ``gaming,'' in new Sec.
40.11(b)(1), to mean the staking or risking by any person of something
of value upon: (i) the outcome of a contest of others; (ii) the outcome
of a game involving skill or chance; (iii) the performance of one or
more competitors in one or more contests or games; or (iv) any other
occurrence or non-occurrence in connection with one or more contests or
games. The Commission is proposing to provide in new Sec. 40.11(b)(2)
that ``gaming'' includes, but is not limited to, the staking or risking
of something of value upon the outcome of a political contest,
including an election or elections, an awards contest, or a game in
which one or more athletes compete; or an occurrence or non-occurrence
in connection with such a contest or game, regardless of whether it
directly affects the outcome. In establishing the proposed ``gaming''
definition, the Commission, as noted above, considered its discussion
of ``gaming'' in the Nadex Order and Kalshi Order, and drew upon the
ordinary meaning of the term, as well as relevant state and federal
statutory definitions.\161\
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\161\ See note 54, supra (discussing that undefined statutory
terms are given their ordinary meaning).
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(2) Benefits
By providing additional specificity to determine whether a
particular event contract falls within the scope of CEA section
5c(c)(5)(C) and is contrary to the public interest because it involves
``gaming,'' the Commission believes its proposed definition would
reduce the likelihood that a registered entity would list for trading
an event contract that is contrary to the public interest.
The Commission believes that, by establishing a common
understanding and more uniform application of the term ``gaming,'' the
proposed definition also should assist registered entities in their
product design and compliance efforts and help avoid situations in
which registered entities expend resources to develop and submit a
contract that the Commission subsequently determines may not be listed
for trading or made available for clearing, pursuant to CEA section
5c(c)(5)(C) and Sec. 40.11(a)(1). As discussed above, the Commission
has observed a significant increase in the overall number and diversity
of event contracts being listed for trading.\162\ While the Commission
does not have access to data or any other information to enable it to
predict the specific types or quantities of event contracts that may be
listed for trading in the future, the observed event contract trend
causes the Commission to anticipate that going forward, absent these
proposed rule amendments, the number of submitted contracts involving
``gaming'' could increase. Accordingly, by better delineating the types
of prohibited event contracts that involve ``gaming,'' the proposed
definition should enhance registered entities' confidence with respect
to product design and compliance, potentially yielding cost- and
resource-saving benefits for them in the process. In addition, the
proposed definition may help guard against market disruption that might
otherwise be caused if an event contract is listed for trading and the
Commission later determines, following an individualized review
pursuant to (c), that the contract is prohibited because it involves
gaming and is contrary to the public interest.
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\162\ See section I.A., supra.
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The proposed definition also would support the Commission and its
staff in the effective oversight of derivative markets--including by
supporting the efficient and effective administration of the contract
submission and review process, by helping to reduce the likelihood that
contracts are submitted to the Commission that raise public interest
concerns. In this regard, among other things, the proposed definition
would promote the Commission's responsible stewardship and efficient
use of the tax dollars appropriated to it by reducing the need for
individualized contract reviews pursuant to Sec. 40.11(c). In the
Commission's experience, a review pursuant to Sec. 40.11(c) is
resource-intensive and consumes hundreds of hours of staff time. Based
on prior experience, the Commission estimates that each review
conducted pursuant to Sec. 40.11(c) takes, on average, approximately
625 hours of Commission staff time, at a cost of approximately
$220,012.\163\
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\163\ This figure is rounded to the nearest dollar and based on
the annual mean wages for U.S. Bureau of Labor Statistics (``BLS'')
categories 19-3011, ``Economists'' and 23-1011, ``Lawyers.'' BLS,
Occupational Employment and Wages, May 2023 (hereinafter ``BLS
Data''), available at https://www.bls.gov/oes/current/oes_nat.htm.
This estimate assumes that, of the approximately 625 hours expended
for each review conducted pursuant to Sec. 40.11(c), approximately
25% (or 156 hours) is expended by economists, and approximately 75%
(or 469 hours) is expended by lawyers. The ``Economist'' category
consists of professionals who ``[c]onduct research, prepare reports,
or formulate plans to address economic problems related to the
production and distribution of goods and services or monetary and
fiscal policy.'' BLS, Occupational Employment and Wages, May 2023:
19-3011, Economists, available at https://www.bls.gov/oes/current/oes193011.htm. According to BLS, the mean salary for this category
in the context of Federal, State, and Local Government is $138,360.
This number is divided by 1,800 work hours in a year to account for
sick leave and vacations and multiplied by 4 to account for
retirement, health, and other benefits or compensation, as well as
for office space, computer equipment support, and human resources
support. This number is further multiplied by 1.0272 to account for
the 2.72% change in the CPI for Urban Wage-Earners and Clerical
Workers between May 2023 and March 2024 (298.382 to 306.502). BLS,
CPI for Urban Wage Earners and Clerical Workers (CPI-W), U.S. City
Average, All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of
$316. ``The ``Lawyer'' category consists of professionals who
``[r]epresent clients in criminal and civil litigation and other
legal proceedings, draw up legal documents, or manage or advise
clients on legal transactions.'' BLS, Occupational Employment and
Wages, May 2023: 23-1011, Lawyers, available at https://www.bls.gov/oes/current/oes231011.htm. According to BLS, the mean salary for
this category in the context of Federal, State, and Local Government
is $159,280. This number is divided by 1,800 work hours in a year to
account for sick leave and vacations and multiplied by 4 to account
for retirement, health, and other benefits or compensation, as well
as for office space, computer equipment support, and human resources
support. This number is further multiplied by 1.0272 to account for
the 2.72% change in the CPI for Urban Wage-Earners and Clerical
Workers between May 2023 and March 2024 (298.382 to 306.502). BLS,
CPI for Urban Wage Earners and Clerical Workers (CPI-W), U.S. City
Average, All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of
$364. The rounding and modifications applied with respect to the
estimated average burden hour cost for this occupational category
have been applied with respect to each occupational category
discussed as part of this analysis.
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[[Page 48989]]
(3) Costs
The Commission expects that some registered entities may incur a
one-time compliance cost to understand and implement the proposed
``gaming'' definition.\164\ This may include costs to account for the
definition in the registered entity's product design and compliance
procedures. Costs associated with understanding and implementing the
proposed ``gaming'' definition may vary depending on the size of the
registered entity, available resources, and existing products,
practices and policies. Nonetheless, the Commission preliminarily
estimates that a registered entity typically would spend approximately
10 hours, or $2,660 (based on an hourly rate of $266),\165\ to update
its product design and compliance procedures to implement the proposed
``gaming'' definition. The Commission estimates that this would result
in an overall burden of 90 hours and an aggregated cost of $23,940
(nine registered entities \166\ x $2,660).
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\164\ Currently, there are six CFTC-registered exchanges that
offer event contracts for trading, and there are three CFTC-
registered DCOs that accept event contracts for clearing. However,
the Commission acknowledges that additional entities have sought, or
may seek in the future, to register with the Commission in order to
list or clear event contracts.
\165\ This figure is rounded to the nearest dollar and based on
the annual mean wage for BLS category 13-2061, ``Financial
Examiners.'' BLS Data, available at https://www.bls.gov/oes/current/oes_nat.htm. This category consists of professionals who ``[e]nforce
or ensure compliance with laws and regulations governing financial
and securities institutions and financial and real estate
transactions.'' BLS, Occupational Employment and Wages, May 2023:
13-2061 Financial Examiners, available at https://www.bls.gov/oes/current/oes132061.htm. According to BLS, the mean salary for this
category in the context of Securities, Commodity Contracts, and
Other Financial Investments and Related Activities is $116,520. This
number is divided by 1,800 work hours in a year to account for sick
leave and vacations and multiplied by 4 to account for retirement,
health, and other benefits or compensation, as well as for office
space, computer equipment support, and human resources support. This
number is further multiplied by 1.0272 to account for the 2.72%
change in the CPI for Urban Wage-Earners and Clerical Workers
between May 2023 and March 2024 (298.382 to 306.502). BLS, CPI for
Urban Wage Earners and Clerical Workers (CPI-W), U.S. City Average,
All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of $266.
The rounding and modifications applied with respect to the estimated
average burden hour cost for this occupational category have been
applied with respect to each occupational category discussed as part
of this analysis.
\166\ See note 165, supra.
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As discussed more fully below, if the proposed rule amendments are
adopted, the Commission anticipates that exchanges whose product
offerings include contracts that involve ``gaming,'' as proposed to be
defined, will, in order to ensure compliance with the rules, file Sec.
40.6 self-certification submissions to permanently delist the contracts
and remove reference to the contracts in their exchange rules.\167\
Exchanges may also need to take steps to effectuate the orderly wind-
down of contracts involving ``gaming'' that are listed and available
for trading as of the date of publication of final rule amendments in
the Federal Register, and that have settlement dates beyond the 60-day
implementation period proposed by the Commission.
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\167\ In this context, ``delisting'' refers to the process of
submitting rule amendments to the Commission in order to withdraw
self-certified or approved contracts (meaning they can no longer be
listed for trading on the exchange), regardless of whether such
contracts are currently available to market participants for
trading.
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The Commission preliminarily estimates that approximately 30 \168\
Sec. 40.6 delisting submissions would be filed for contracts involving
``gaming,'' as proposed to be defined, taking approximately two hours
per submission. This would result in an estimated burden of 60 hours
and an estimated aggregated cost of $15,960 (based on an hourly rate of
$266).\169\
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\168\ This estimate is based on Commission staff analysis of
product submissions and trading data regarding event contracts
submitted to the Commission by CFTC-registered exchanges. The
estimate contemplates that self-certified or approved contracts
involving ``gaming,'' as proposed to be defined, would need to be
delisted regardless of whether such contracts are available to
market participants for trading at the time that final rule
amendments are published in the Federal Register, or whether their
settlement dates fall within the 60-day implementation period
proposed by the Commission.
\169\ See note 166, supra.
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As discussed above, to the extent the proposed rule amendments are
finalized as proposed, and contracts that involve ``gaming'' are listed
and available for trading as of the date of publication of final rule
amendments in the Federal Register and have settlement dates beyond the
60-day implementation period, there may be costs to the listing
exchanges, and market participants, associated with the wind-down of
those contracts. The Commission notes that event contracts are
generally based upon a discrete occurrence or event, and Commission
staff's anecdotal experience indicates that many event contracts settle
within relatively short time horizons. This, coupled with the fact
that, as discussed below, event contracts that involve ``gaming,'' as
proposed to be defined, currently comprise a small portion of the
overall event contracts market, suggests that few event contracts
involving ``gaming'' would likely need to be wound down before their
existing settlement dates.\170\
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\170\ The terms and conditions of event contracts listed for
trading as of the issuance of these proposed rule amendments that
the Commission believes would be impacted by such amendments, if
finalized, generally establish that the subject contract will settle
either on a date that is expected to be soon after the contract's
underlying occurrence or event, or, as a backstop, on a date that is
further in the future (typically the end of the calendar year).
Based on CFTC staff's experience in connection with administering
the agency's product review process, the Commission believes,
notwithstanding backstop expiration dates, most event contracts
settle close in time to the underlying occurrence or event.
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With respect to the limited number of contracts that the Commission
anticipates would have settlement dates beyond the proposed 60-day
implementation period, the Commission expects that the costs to
exchanges associated with orderly wind-down would include operational,
compliance and technological costs. As further noted below, the costs
to exchanges associated with the wind-down of these contracts may also
include the inability to realize the full anticipated return on
investment in the contracts. The Commission notes that the precise
costs attributable to contract wind-down would be proprietary
information of the listing exchange, to which the Commission does not
have access. However, given the limited number of contracts that the
Commission anticipates would need to be wound down before their
existing settlement dates, the Commission believes that these costs to
the exchange should be relatively modest.
The Commission further anticipates that certain market participants
may incur losses depending on the nature of their positions in the
contracts at, and leading up to, wind-down. Conversely, certain market
participants may profit based on the nature of their positions at, and
leading up to, wind-down.\171\ The Commission notes that the future
market losses or gains to a market participant are not predictable with
any data and therefore, the Commission
[[Page 48990]]
believes that it is not feasible to further quantify these costs
associated with potential contract wind-downs.
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\171\ The Commission notes that the types of event contracts
that would be impacted by this proposed rulemaking, if finalized,
tend to be fully collateralized, which would have a bearing on the
market risk to which market participants would be exposed in the
event of the early wind-down of such a contract.
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The Commission recognizes that a further consequence, for certain
registered entities, and applicants for registration, of establishing a
common understanding and more uniform application of the term
``gaming'' may be to modify such registered entities', and applicants',
understanding of the types of event contracts that they may seek to
list for trading or accept for clearing in the future. This may entail
certain modifications to a registered entity's, or applicant's,
business model and projected revenue streams, and may impact a
registered entity's, or applicant's, ability to realize the full
anticipated return on investment with respect to certain aspects of its
business model. For example, a registered entity or applicant for
registration may have invested resources into various aspects of
strategic planning (e.g., market research, technological
implementation, and marketing) that are premised, at least in part, on
event contracts that may be implicated by the proposed ``gaming''
definition.\172\ Relatedly, establishing a common understanding and
more uniform application of the term ``gaming'' may modify, in certain
respects, the types of event contracts that are available to market
participants for trading and clearing.
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\172\ The Commission notes that the value of any such lost
return would be proprietary information of the listing registered
entity to which the Commission does not have access, and therefore,
the Commission believes that it is not feasible to further quantify
this cost associated with the proposed ``gaming'' definition.
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In this regard, the Commission notes that contracts that involve
``gaming,'' as proposed to be defined, comprise a small portion of the
overall event contracts market, suggesting that the above-described
consequences of the proposed ``gaming'' definition would be relatively
modest. Specifically, the Commission estimates that contracts involving
``gaming,'' as proposed to be defined, comprised less than 1% of the
total trading volume in event contracts in 2023.\173\
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\173\ To make this estimate, Commission staff reviewed
aggregated event contracts trading data that was reported to the
Commission by CFTC-registered exchanges for the period of January 1,
2023 through December 31, 2023. Based on this review, the Commission
further estimates that event contracts that involve ``gaming,'' as
proposed to be defined, comprised approximately 6% of the total
number of event contracts listed for trading in 2023. These event
contracts were primarily comprised of contracts based on the outcome
of various entertainment awards contests. In 2012, in the Nadex
Order, the Commission recognized certain event contracts to involve
``gaming'' where taking a position in the contracts would be staking
``something of value upon a contest of others.'' Nadex Order at 3.
As previously discussed, the Commission notes that it has
observed a significant increase in the number and diversity of event
contracts listed for trading by CFTC-registered exchanges, as well
as increased interest among applicants and prospective applicants
for exchange registration in operating exchanges that would
primarily or exclusively offer event contracts for trading. This
upward trend--if it continues, as the Commission anticipates is
possible (if not probable)--potentially could extend, absent the
proposed rule amendments, to include additional event contracts
involving ``gaming,'' as proposed to be defined. An extension of
this type would mean that a registered entity or applicant for
registration currently may have plans to seek to list for trading or
accept for clearing, and may have invested in, event contracts that
involve ``gaming,'' as proposed to be defined. Beyond this general
observation that registered entities or applicants for registration
potentially could have plans to list in the future, and could have
invested in event contracts involving ``gaming,'' as proposed to be
defined, the Commission lacks access to the entity-specific
proprietary data necessary to quantify what, if any, additional
costs should be attributed to such yet-to-be-listed, planned-for
contracts.
To the extent that registered entities or applicants for
registration currently could have plans to list in the future event
contracts involving ``gaming,'' as proposed to be defined, in the
Commission's view this also supports the benefits, as discussed
infra, that defining the term would provide. Among other things, the
definition would enhance confidence regarding product compliance
that can inform product design efforts, and would help to ensure
that contracts that are contrary to the public interest are not
traded on CFTC-regulated markets.
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Based on historical trading data, the Commission recognizes that
the above-described anticipated costs of the proposed ``gaming''
definition may have more of an impact for some registered entities--and
consequently for their customers--than others.\174\ The Commission
expects, however, that a significant proportion of these registered
entities' offerings would not be impacted by the proposed gaming
definition, suggesting that the overall impact to these registered
entities of the proposed definition would be relatively modest.\175\
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\174\ In 2023, only one CFTC-registered exchange listed event
contracts that involved ``gaming,'' as proposed to be defined. In
2023, only one CFTC-registered DCO cleared event contracts that
involved ``gaming,'' as proposed to be defined.
\175\ For example, the Commission estimates that, in 2023, event
contracts involving ``gaming,'' as proposed to be defined, comprised
approximately 1% of the trading volume of the CFTC-registered
exchange that offered such contracts for trading. The Commission
further estimates that event contracts that involve ``gaming,'' as
proposed to be defined, comprised approximately 9% of the total
number of event contracts listed by this exchange in 2023. To make
these estimates, Commission staff reviewed aggregated event
contracts trading data that was reported to the Commission by CFTC-
registered exchanges for the period of January 1, 2023 through
December 31, 2023.
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Further, the Commission believes that providing specificity to
determine whether a particular event contract involves ``gaming'' will
support the ability of these and other registered entities to develop
and list new products with enhanced confidence regarding such products'
compliance with the CEA and CFTC regulations. The Commission believes
that this should assist registered entities, as well as applicants for
registration, in making informed business decisions with respect to
product design, which should have long-term business benefits. As
discussed above, it may also yield business efficiencies for registered
entities by helping to avoid situations where they expend resources to
develop and submit a contract that the Commission subsequently
determines, following a Sec. 40.11(c) review, may not be listed for
trading or accepted for clearing. To that end, the Commission believes
that defining the term ``gaming'' will have broader public benefits by
helping to ensure that contracts that are contrary to the public
interest--namely, certain contracts that ``exist predominantly to
enable gambling''--are not traded, including by retail market
participants, as financial instruments on CFTC-regulated markets.
(b) Amendments To Further Align With Statutory Language
The proposed rule amendments include certain changes to improve
regulatory and statutory textual alignment that are not expected to
render material costs or benefits.\176\ First, when describing the
contracts to which Sec. 40.11 applies, the Commission is proposing to
remove the terms ``relate to'' and ``reference'' wherever they appear,
and to refer only to contracts that ``involve'' (or, as applicable,
that ``may'' involve) an Enumerated Activity or prescribed similar
activity,\177\ in order to further align with the statutory text of CEA
section 5c(c)(5)(C)(i). The Commission also is proposing to remove from
Sec. 40.11 the reference to CEA section 1a(19)(iv), and to more
precisely track the statutory language of CEA section 5c(c)(5)(C)(i)
when describing the contracts to which Sec. 40.11 applies--while
accounting for the errant reference to ``section 1a(2)(i),'' which is
not a provision in the statute--by stating that the regulation applies
with respect to contracts ``in excluded commodities based on the
occurrence, extent of an
[[Page 48991]]
occurrence, or contingency (other than a change in the price, rate,
value, or levels of a commodity described in section 1a(19)(i) of the
Act)[.]''
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\176\ By further aligning the regulatory text of Sec. 40.11
with the statutory text of CEA section 5c(c)(5)(C), the proposed
amendments may be of some limited benefit to the extent any
registered entity would unnecessarily expend resources to resolve
confusion attributable to the existing textual variation.
\177\ While there are no prescribed similar activities at this
juncture, the Commission retains its authority under CEA section
5c(c)(5)(C)(i)(VI) and Sec. 40.11(a)(2) to prescribe similar
activities in future rules or regulations.
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3. Section 15(a) Factors
The Commission has evaluated the costs and benefits of the proposed
amendments to Sec. 40.11 in light of the following five broad areas of
market and public concern identified in section 15(a) of the CEA:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of the markets; price
discovery; sound risk management practices; and other public interest
considerations.
(a) Protection of Market Participants and the Public
The Commission believes that the proposed amendments to Sec. 40.11
will help to protect the public by preventing the listing for trading
or acceptance for clearing by registered entities of certain event
contracts that are contrary to the public interest. The Commission
further believes that permitting trading of contracts involving
``gaming,'' as proposed to be defined, would conflate gambling and
financial instruments in a manner that could particularly create
confusion and risk for retail market participants, and that the
proposed amendments would, accordingly, enhance protection of market
participants.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission acknowledges that a consequence, for certain
registered entities and applicants for registration, of the proposed
amendments may be to modify such registered entities' and applicants'
understanding of the types of event contracts that they may seek to
list for trading or accept for clearing in the future. This may entail
certain modifications to a registered entity's business model and
projected revenue streams, and may impact a registered entity's, or
applicant's, ability to realize the full anticipated return on certain
aspects of its business model. Based on the types of event contracts
that different registered entities currently list for trading or accept
for clearing, the Commission anticipates that this consequence of the
proposed amendments may impact some registered entities--and
consequently their customers--more than others. However, for those
registered entities that currently list for trading or accept for
clearing contracts that involve ``gaming,'' as proposed to be defined,
the Commission estimates that a significant proportion of their
offerings would not be impacted by the proposed amendments, suggesting
that the overall impact of the rule amendments should be relatively
modest.\178\
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\178\ See note 176, supra.
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Moreover, the Commission believes that, by further specifying types
of event contracts that are contrary to the public interest and
therefore may not be listed for trading or accepted for clearing, the
proposed amendments also will support these and other registered
entities' ability to develop and list new products with enhanced
confidence regarding such products' compliance with the CEA and CFTC
regulations. The Commission believes that this should assist registered
entities, as well as applicants for registration, in making informed
business decisions with respect to product design, which may enhance
competitiveness and efficiency.
(c) Price Discovery
While the proposed amendments are not likely to have an impact on
price discovery in CFTC-regulated markets, the Commission acknowledges
that certain event contracts could have limited informational value in
other contexts outside the scope of CFTC-regulated markets that may be
lost if the proposed amendments are adopted.
(d) Sound Risk Management Practices
The Commission has not identified any effect of the proposed
amendments on sound risk management practices.
(e) Other Public Interest Considerations
As discussed in detail above, the primary purpose of Sec. 40.11 is
to implement the Commission's statutory authority to determine that
certain event contracts are contrary to the public interest and
therefore may not be listed or made available for clearing or trading
on or through a registered entity. The proposed amendments seek to
support this objective by further specifying the types of event
contracts that are contrary to the public interest and therefore may
not be listed for trading or accepted for clearing.
Request for Comment
The Commission generally requests comments on all aspects of its
consideration of costs and benefits, including the identification and
assessment of any costs and benefits not discussed herein; data and any
other information to assist or otherwise inform the Commission's
ability to quantify or qualitatively describe the costs and benefits of
the proposed amendments; and substantiating data, statistics, and any
other information to support positions posited by commenters with
respect to the Commission's discussion. The Commission welcomes comment
on such costs and benefits, particularly from registered entities that
can provide quantitative cost and benefit data based on their
respective experiences. The Commission also welcomes comments on
alternatives to the proposed amendments that may be preferable on cost-
benefit grounds, and why.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to ``take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving'' the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market established pursuant to section 17 of the CEA.\179\
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\179\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether this proposed rulemaking implicates any
other specific public interest to be protected by the antitrust laws.
The Commission has considered the Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether the Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that the
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting this
proposed rulemaking.
List of Subjects in 17 CFR Part 40
Commodity futures, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission hereby proposes to amend 17 CFR chapter I as
follows:
[[Page 48992]]
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
0
1. The authority citation for part 40 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and 12, as amended by
Titles VII and VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Pub. L. 111-203, 124 Stat. 1376
(2010).
0
2. Revise Sec. 40.11 to read as follows:
Sec. 40.11 Event contracts based upon certain excluded commodities.
(a) Prohibition. Agreements, contracts, transactions, or swaps
described in paragraphs (a)(1) and (2) of this section are contrary to
the public interest and shall not be listed for trading or accepted for
clearing on or through a registered entity:
(1) Agreements, contracts, transactions, or swaps in excluded
commodities based upon the occurrence, extent of an occurrence, or
contingency (other than a change in the price, rate, value, or levels
of a commodity described in section 1a(19)(i) of the Act) that involve:
(i) Activity that is unlawful under any Federal or State law;
(ii) Terrorism;
(iii) Assassination;
(iv) War; or
(v) Gaming.
(2) Agreements, contracts, transactions, or swaps in excluded
commodities based upon the occurrence, extent of an occurrence, or
contingency (other than a change in the price, rate, value, or levels
of a commodity described in section 1a(19)(i) of the Act) that involve
other activity that is similar to an activity enumerated in paragraphs
(a)(1)(i) through (v) of this section, and that the Commission
determines, by rule or regulation, to be contrary to the public
interest.
(b) Gaming. (1) For purposes of paragraph (a)(1)(v) of this
section, ``gaming'' means the staking or risking by any person of
something of value upon:
(i) The outcome of a contest of others;
(ii) The outcome of a game involving skill or chance;
(iii) The performance of one or more competitors in one or more
contests or games; or
(iv) Any other occurrence or non-occurrence in connection with one
or more contests or games.
(2) For purposes of paragraph (a)(1)(v) of this section, ``gaming''
includes, but is not limited to, the staking or risking by any person
of something of value upon the outcome of a political contest,
including an election or elections, an awards contest, or a game in
which one or more athletes compete, or an occurrence or non-occurrence
in connection with such a contest or game, regardless of whether it
directly affects the outcome.
(c) 90-day review. (1) The Commission may determine, based upon a
review of the terms or conditions of a submission made by a registered
entity under Sec. 40.2 or Sec. 40.3, that an agreement, contract,
transaction, or swap as described in paragraph (a) of this section may
involve-an activity enumerated in paragraphs (a)(1) or (2) of this
section, and is subject to a 90-day review.
(2) The Commission shall notify the registered entity of its
determination to conduct a 90-day review and post notice of the
determination on its website. The 90-day review period shall commence
on the date the Commission notifies the registered entity of its
determination to conduct a 90-day review.
(3) The Commission shall request that the registered entity suspend
the listing or trading of the agreement, contract, transaction, or swap
subject to the 90-day review during the pendency of the review period.
(4) The Commission shall issue an order approving or disapproving
an agreement, contract, transaction, or swap that is subject to a 90-
day review under this paragraph (c) not later than 90 days subsequent
to the date that the Commission commences review, or if applicable, at
the conclusion of such extended period agreed to or requested by the
registered entity.
Issued in Washington, DC, on May 29, 2024, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Event Contracts--Voting Summary and Chairman's and
Commissioners' Statements
Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson, and
Goldsmith Romero, voted in the affirmative. Commissioners Mersinger
and Pham voted in the negative.
Appendix 2--Statement of Chairman Rostin Behnam
I support the proposed amendments to the Commission's rules
concerning event contracts. Before further discussion, I would like
to acknowledge the tremendous work by many CFTC colleagues. I
particularly would like to thank Vince McGonagle, Nora Flood, and
Grey Tanzi for all of their thorough and thoughtful work on the
proposal.
Starting in 2021, there has been a significant uptick in the
number of event contracts listed for trading by CFTC-registered
exchanges. To put that increase into perspective, more event
contracts were listed for trading in 2021 than had been listed in
the prior 15 years combined. And that has continued to be true each
year since.
Given this exponential increase, the Commission today proposes
to further specify the types of event contracts that fall within the
scope of CEA section 5c(c)(5)(C) and are contrary to the public
interest. The amendments will support efforts by registered entities
to comply with the CEA by more clearly identifying the types of
event contracts that may not be listed for trading or accepted for
clearing. These changes will support responsible and efficient
market innovation, by helping registered entities and new applicants
to make informed decisions with respect to product design.
Specifically, the Commission is proposing to amend Commission
Regulation 40.11 to, among other things, further specify types of
event contracts that fall within the scope of CEA section
5c(c)(5)(C) and are contrary to the public interest, such that they
may not be listed for trading or accepted for clearing on or through
a registered entity. The proposal defines ``gaming'' and provides
illustrative examples of gaming, including the outcome of a
political contest, the outcome of an awards contest, the outcome of
a game in which one or more athletes compete, or an occurrence or
non-occurrence in connection with such a contest or game.
The proposal includes a determination that event contracts
involving each of the Enumerated Activities in CEA section
5c(c)(5)(C) (gaming, war, terrorism, assassination, and activity
that is unlawful under state law) are, as a category, contrary to
the public interest and therefore may not be listed for trading or
accepted for clearing through a registered entity. The illustrative
examples of gaming that I just mentioned are therefore contrary to
the public interest and cannot be listed for trading.
To be clear, that means that even contracts on the outcome of a
political contest such as an election could not be listed for
trading or accepted for clearing under the proposed rule. Such
contracts not only fail to serve the economic purpose of the futures
markets--they are illegal in several states and could potentially
and impermissibly preempt State responsibilities for overseeing
federal elections. This is not a new phenomenon for the CFTC. Over
the course of the last 20 years, the CFTC has remained steadfast--
through many administrations--that election or political contracts
should not be allowed on the US futures and options markets.
Contracts involving political events ultimately commoditize and
degrade the integrity of the uniquely American experience of
participating in the democratic electoral process. Allowing these
contracts would push the CFTC, a financial market regulator, into a
position far beyond its Congressional mandate and expertise. To be
blunt, such contracts would put the CFTC in the role of an election
cop.
The CFTC's jurisdiction as mandated by Congress and solidified
in our statute, the Commodity Exchange Act, recognizes our expertise
in markets for goods, services,
[[Page 48993]]
rights, and interests--which can include events associated with
financial, commercial, or economic consequences. We are tasked with
upholding the public interest by ensuring that America's derivatives
markets provide a means for managing and assuming price risks and
providing for price discovery through liquid, fair, open,
transparent, and financially secure trading facilities. Market
integrity is featured so prominently within that mandate that the
CFTC has civil enforcement authority when it comes to the potential
for fraud, manipulation, and other abuses such as the dissemination
of false information in the underlying or commodity cash markets.
Political control contracts on CFTC-regulated exchanges would push
the CFTC far beyond this historical expertise and jurisdiction, and
potentially place the CFTC in the position of monitoring such
markets for fraud and manipulation in elections themselves.
I thank the staff for their hard work in producing this
important proposal.
Appendix 3--Statement of Commissioner Summer K. Mersinger
I support the Commission \180\ undertaking a rulemaking on event
contracts, which is long overdue. During my tenure on the
Commission, I have consistently called for a rulemaking process to
establish a framework for the Commission to exercise the
discretionary authority with respect to event contracts that
Congress granted to the agency in our governing statute, the
Commodity Exchange Act (``CEA'').\181\
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\180\ This Statement will refer to the agency as the
``Commission'' or ``CFTC.'' All web pages cited herein were last
visited on May 9, 2024.
\181\ See Dissenting Statement of Commissioner Summer K.
Mersinger Regarding Order on Certified Derivatives Contracts with
Respect to Political Control of the U.S. Senate and House of
Representatives (September 22, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement092223
(``Kalshi Dissenting Statement''); and Dissenting Statement of
Commissioner Summer K. Mersinger Regarding Commencement of 90-Day
Review Regarding Certified Derivatives Contracts with Respect to
Political Control of the U.S. Senate and House of Representatives
(June 23, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement062323.
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Unfortunately, though, I cannot support this particular proposed
rulemaking (the ``Proposal''). At first blush, it appears to be
``much ado about nothing,'' \182\ as it seems to do little more than
rubber-stamp what the Commission has already said and done. Upon
closer inspection, though, it is a ``wolf in sheep's clothing''
\183\ because where the Proposal departs from our past practice, it
lays the foundation to prohibit entire categories of potential
exchange-traded event contracts whose terms and conditions the
Commission has never even seen.
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\182\ Shakespeare, William, 1564-1616, Much Ado about Nothing,
London, New York (Penguin, 2005).
\183\ Aesop's Fables, The Wolf in Sheep's Clothing (1867).
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In planting the seeds of future bans of countless event
contracts, sight unseen, the Proposal--
Exceeds the legal authority that Congress granted the
Commission in the CEA;
Relies heavily on a brief snippet of legislative
history consisting of a colloquy between two Senators--cherry-
picking parts of the colloquy it likes, while ignoring other parts
of the same colloquy;
Resurrects an ``economic purpose test'' for evaluating
the public interest that was based on a provision of the CEA that
was repealed by Congress nearly a quarter-century ago;
Fails to do the hard work of analyzing the unique
nature of event contracts, which are different in kind from
traditional derivatives contracts more familiar to the agency;
Relies on unsupported conjecture, treats similar
circumstances differently, and raises more questions than it
answers; and
Flies in the face of the CFTC's mandate to promote
responsible innovation as Congress directed in the CEA.
My dissent should not be taken as an indication that I am a fan
of all event contracts. But it is hard not to conclude from the
multitude of defects in this Proposal that its significant overreach
is motivated more by a seemingly visceral antipathy to event
contracts than by reasoned analysis.
It does not matter whether we think event contracts are a good
idea or a bad idea; the Commission must exercise its authority with
respect to event contracts within the scope of the CFTC's legal
authority, and must appropriately implement the authority that
Congress has provided us. This Proposal fails both tests.
I. Event Contracts in Brief
CEA Section 5c(c)(5)(C), which was added to the CEA in 2010 by
the Dodd-Frank Act,\184\ permits the Commission to prohibit an event
contract from being listed for trading on an exchange \185\ if: (1)
the contract involves one of five enumerated activities (i.e.,
activity that is unlawful under Federal or State law; terrorism;
assassination; war; or gaming); and (2) the Commission determines
that the contract is contrary to the public interest. CEA Section
5c(c)(5)(C) also provides that the Commission may determine, by rule
or regulation, that an event contract involves ``other similar
activity'' to the five enumerated activities, which would subject
event contracts involving that similar activity to the ``contrary to
the public interest'' standard.\186\
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\184\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank Act'').
\185\ CEA Section 5c(c)(5)(C) applies to event contracts listed
for trading by two types of exchanges (designated contract markets
(``DCMs'') and swap execution facilities (``SEFs'')), as well as the
clearing of event contracts by derivatives clearing organizations
(``DCOs''), all of which must register with, and are regulated by,
the CFTC. For convenience, this Statement will refer simply to
``exchange trading'' of event contracts.
\186\ CEA Section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i).
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Congress in CEA Section 5c(c)(5)(C) did not decree that event
contracts involving enumerated activities are contrary to the public
interest per se. Rather, if an event contract involves an enumerated
activity, the Commission ``may'' determine that it is contrary to
the public interest and prohibited from trading--which necessarily
indicates that the Commission also has the discretion to determine
that it is not.
A year after enactment of the Dodd-Frank Act, the Commission
adopted CFTC Rule 40.11 \187\ to implement the CEA's new event
contract provisions.\188\ It is Rule 40.11 that the Commission is
now proposing to amend.
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\187\ CFTC Rule 40.11, 17 CFR 40.11.
\188\ See Provisions Common to Registered Entities, 76 FR 44776
(July 27, 2011) (``Rule 40.11 Adopting Release'').
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II. The Proposed Definition of ``Gaming'' is Significantly Overbroad
Neither the CEA nor the Commission's rules define the term
``gaming.'' In the Rule 40.11 Adopting Release implementing CEA
Section 5c(c)(5)(C), the Commission acknowledged that ``the term
`gaming' requires further clarification,'' and said that the
Commission may issue a future rulemaking concerning event contracts
that involve ``gaming.'' \189\
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\189\ Id. at 44785.
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I agree that, 13 years later, it is long past time for the
Commission to do so. But, the Proposal's definition of ``gaming'' is
much too broad.
1. The Proposal Sweeps in the Universe of Every ``Occurrence or
Non-Occurrence in Connection With'' a Game
The proposed definition of ``gaming'' includes both the outcome
of a game and the performance of one or more competitors in a game.
So far, so good.
But it then tacks on an additional category of ``any other
occurrence or non-occurrence in connection with'' a game. The all-
encompassing nature of the phrase ``any other occurrence or non-
occurrence'' is self-evident. And that universality is further
reinforced by its attachment to the ``in connection with'' wording.
The motivation for this expansive wording in the Proposal is
likely that, where the phrase ``in connection with'' appears in
various enforcement provisions of the CEA, the Commission interprets
it ``broadly, not technically or restrictively.'' \190\ And the
Proposal gives no indication that it should be interpreted any
differently here. In fact, the Proposal (section II.B.1.b) goes so
far as to say that staking or risking something of value on a
contingent event ``in connection with'' a game ``would be as much of
a wager or a bet on the game . . . as staking or risking something
of value on the outcome of the game . . . would be.''
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\190\ See Prohibition on the Employment, or Attempted
Employment, of Manipulative and Deceptive Devices and Prohibition on
Price Manipulation, 76 FR 41398, 41405 (July 14, 2011) (citing the
U.S. Supreme Court's decision in SEC v. Zandford, 535 U.S. 813
(2002), interpreting the ``in connection with'' language in SEC Rule
10b-5, 17 CFR 240.10b-5, as ``particularly instructive''; in
Zandford, the Supreme Court broadly equated the ``in connection
with'' language with the word ``coincide'' and the phrase ``not
independent events,'' id. at 820-822).
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Under this incredibly far-reaching formulation, there are
countless ``occurrence[s] or non-occurrence[s] in connection with''
a game that the Proposal
[[Page 48994]]
would deem to be ``gaming.'' Obvious examples include event
contracts involving the attendance at a baseball or football game,
or whether a particular nation will be selected to host a soccer
World Cup. These would clearly be ``in connection with'' the
underlying baseball, football, or soccer games--but there is no
reason why staking something of value on those contingent events
should be treated the same as staking something of value on the
outcome of those games.
Indeed, there is no better illustration of the overbreadth of
the ``in connection with'' aspect of the proposed ``gaming''
definition than the Proposal's own example (section II.B.1.c) of
``whether a particular individual will attend a game.'' It is
difficult to fathom why an event contract involving whether Taylor
Swift will attend a Kansas City Chiefs football game should
constitute ``gaming''--and impossible to understand why the Proposal
treats similar things differently, since whether she attends a
Beyonc[eacute] concert would not constitute ``gaming.''
I acknowledge that it might be appropriate to extend the
definition of ``gaming'' to include events that can affect the
outcome of a game or the performance of a competitor in a game.
Event contracts involving, say, whether an injury to Shohei Ohtani
would prevent him from playing in the World Series, or involving the
score of a football game at halftime, might be examples of this. But
to broadly define as ``gaming'' every ``occurrence or non-
occurrences in connection with'' a game--regardless of whether it
has any bearing on the outcome of the game or the performance of a
competitor in the game--is wholly unwarranted.
2. Elections and Awards Are Not ``Gaming''
The Proposal rubber-stamps two prior Commission Orders that
found that event contracts involving political control or elections
are ``gaming,'' \191\ essentially repeating the same discussion from
those Orders--and then throwing awards into its ``gaming''
definition as well. Yet, this definition is inconsistent with the
legislative history of CEA Section 5c(c)(5)(C)--legislative history
on which, for other issues discussed below, the Proposal relies
heavily.
---------------------------------------------------------------------------
\191\ See Order Prohibiting North American Derivatives
Exchange's Political Event Derivatives Contracts (April 2, 2012),
available at https://www.cftc.gov/PressRoom/PressReleases/6224-12;
and Order In the Matter of the Certification by KalshiEX LLC of
Derivatives Contracts with Respect to Political Control of the
United States Senate and United States House of Representatives
(September 22, 2023), available at https://www.cftc.gov/PressRoom/PressReleases/8780-23.
---------------------------------------------------------------------------
That legislative history consists of a colloquy between Senators
Blanche Lincoln and Dianne Feinstein. Senator Lincoln was then the
Chair of the Senate Committee on Agriculture, Nutrition, and
Forestry, which is the CFTC's authorizing committee.
In the colloquy, the Senators talked about ``gaming'' only in
the limited context of sporting events. In responding to Senator
Feinstein's question about the CFTC's authority under Section
5c(c)(5)(C) to determine that a contract is a ``gaming'' contract,
Senator Lincoln said that ``[i]t would be quite easy to construct an
`event contract' around sporting events such as the Super Bowl, the
Kentucky Derby, and Masters Golf Tournament.'' \192\ Thus, Senator
Lincoln clearly associated ``gaming'' with sporting events, i.e.,
games.\193\
---------------------------------------------------------------------------
\192\ See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010)
(statements of Senator Dianne Feinstein and Senator Blanche
Lincoln), available at https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf (``Feinstein-Lincoln colloquy'').
\193\ The Senator's view is consistent with the natural
interpretation of the word ``gaming'' as meaning the staking of
money on the outcome of a game. For example, Cambridge Dictionary
defines ``gaming'' in terms of games: ``The risking of money in
games of chance, especially at a casino; gaming machines/tables.''
See ``gaming'' definition, CAMBRIDGE DICTIONARY, available at
https://dictionary.cambridge.org/us/dictionary/english/gaming.
---------------------------------------------------------------------------
But rather than remain true to the legislative history that
equated ``gaming'' with only sporting events, the Proposal broadly
sweeps all ``contests'' into its definition of ``gaming.'' And it
then concludes that elections and awards are ``contests'' and,
therefore, ``gaming''--even though neither Senator Lincoln nor
Senator Feinstein ever mentioned elections or awards (or
``contests,'' for that matter).
The Proposal attempts to squeeze elections and awards into the
``gaming'' category through the following tortured chain of
reasoning:
Gaming means gambling;
Some State statutes link gambling to betting or
wagering on contests; therefore,
Contests (including elections and awards) constitute
gaming.
Yet, one has to ask: If Congress had intended for elections and
awards to be enumerated activities, is it more likely that Section
5c(c)(5)(C) would have:
Included elections and awards in its list of enumerated
activities; or
Enumerated ``gaming'' and hoped the Commission would--
[cir] Define ``gaming'' to include ``contests;'' and
[cir] Consider ``contests'' to include elections and awards?
Congress easily could have included elections and awards as
enumerated activities, but it did not. Confronted with this
Congressional silence, I do not believe the Commission can simply
decree that elections and awards are enumerated activities. And this
is especially the case when Congress in CEA Section 5c(c)(5)(C)
provided the Commission with a ready-made process for determining,
through a rulemaking proceeding, whether contests, elections, and/or
awards are similar to the enumerated activities, including
``gaming.''
I am baffled at why the Commission is tying itself into knots by
trying to reason its way from ``gaming'' to ``gambling'' to
``contests'' to elections and awards, rather than simply do what
Congress said it could do: consider whether elections and awards are
similar to ``gaming'' (or another enumerated activity). This is not
a matter of form over substance. Approach matters when it comes to
exercising our authority under the CEA, and I cannot support the
Proposal's approach to stretch the statutory term ``gaming'' to
include elections and awards.
III. The Commission Lacks Legal Authority To Determine in Advance That
Entire Categories of Event Contracts Are Contrary to the Public
Interest
The overbreadth of the Proposal's ``gaming'' definition would
suffice for me to dissent. But the Proposal's most brazen overreach
is its determination, in advance, that every event contract that
involves an enumerated activity is automatically contrary to the
public interest--regardless of the terms and conditions of that
contract.
The Proposal would prohibit these contracts--sight unseen--
through the shortcut of declaring entire categories of event
contracts to be contrary to the public interest. But the Commission
lacks legal authority under the CEA to make public interest
determinations by category.
The Proposal's justification for its approach (in section
II.C.1) is that ``the statute does not require this public interest
determination to be made on a contract-specific basis.'' This is
backwards. The CFTC is a creature of statute, and has only the
authorities granted to it by the CEA. There is no provision in CEA
Section 5c(c)(5)(C) for public interest determinations regarding
event contracts involving enumerated activities to be made by
category. Accordingly, the Commission cannot claim that authority
through the ipse dixit of ``Congress didn't say we couldn't.''
This is not a mere question of what procedure to follow. The
Proposal would allow the Commission to make the substantive policy
determination that entire categories of event contracts, regardless
of their terms and conditions, are contrary to the public interest.
And the consequences of such a determination are severe--a complete
prohibition on exchanges' ability to list event contracts, and on
market participants' ability to trade them. If Congress had intended
for the Commission to wield this immense authority, surely it would
have said so.
In fact, in another CEA provision similar to CEA Section
5c(c)(5)(C) that also was added by the Dodd-Frank Act, Congress did
say so. CEA Section 2(h)(2)(A)(i) specifically states that the
Commission shall review ``each swap, or any group, category, type,
or class of swaps to make a determination as to whether the swap or
group, category, type, or class of swaps should be required to be
cleared.'' \194\
---------------------------------------------------------------------------
\194\ CEA Section 2(h)(2)(A)(i), 7 U.S.C. 2(h)(2)(A)(i)
(emphasis added). For convenience, the text will refer only to CEA
Section 2(h)(2)(A)(i), although the Dodd-Frank Act also used this
same wording explicitly authorizing the Commission to make
determinations by category in CEA Sections 2(h)(2)(B)(i), (ii),
(iii)(II), and (E); 2(h)(3)(A), (B), (C)(i), (C)(ii), and (D); and
2(h)(4)(B), (B)(iii), (C)(i), and (C)(ii), 7 U.S.C. 2(h)(2)(B)(i),
(ii), (iii)(II), and (E); 2(h)(3)(A), (B), (C)(i), (C)(ii), and (D);
and 2(h)(4)(B), (B)(iii), (C)(i), and (C)(ii).
Of particular interest is CEA Section 2(h)(4)(B)(iii), 7 U.S.C.
2(h)(4)(B)(iii), which provides that to the extent the Commission
finds that a particular swap or category (or group, type or class)
of swaps would be subject to mandatory clearing but no DCO has
listed the swap or category (or group, type, or class) of swaps for
clearing, the Commission ``shall . . . take such actions as the
Commission determines to be necessary and in the public interest,
which may include requiring the retaining of adequate margin or
capital by parties to the swap, group, category, type, or class of
swaps.'' (Emphasis added) Here, unlike with respect to event
contracts, Congress explicitly told the Commission that it could
make a public interest determination either individually or by
category.
---------------------------------------------------------------------------
[[Page 48995]]
Thus, when it enacted the Dodd-Frank Act, Congress knew how to
tell the Commission that it could make a determination on either an
individual or categorical basis when it wanted to do so.\195\ In
contrast, Congress did not say in CEA Section 5c(c)(5)(C) that the
Commission could make public interest determinations for event
contracts by category.
---------------------------------------------------------------------------
\195\ Similarly, in another CEA provision added by the Dodd-
Frank Act, Congress told the Commission that it could exempt swaps
or other transactions from position limits either individually or by
class. See CEA Section 4a(7), 7 U.S.C. 6a(7) (``The Commission . . .
may exempt . . . any swap or class of swaps . . . or any transaction
or class of transactions from any requirement it may establish . . .
with respect to position limits'').
---------------------------------------------------------------------------
The Proposal's premise is that a grant of authority to make a
determination about one thing necessarily includes authority to make
a determination about a category of such things--unless Congress
says otherwise. But if that were the case, then there was no need
for Congress to tell the Commission in CEA Section 2(h)(2)(A)(i)
that it could make mandatory swap clearing determinations either by
individual swap or by category.\196\ The Proposal's determination
would render statutory text in CEA Section 2(h)(2)(A)(i) mere
surplusage in violation of established canons of statutory
construction.\197\ It also would violate the canon of statutory
construction that provisions enacted as part of the same statute
(here, the Dodd-Frank Act) should be construed in a similar
manner.\198\
---------------------------------------------------------------------------
\196\ Nor can authority to make categorical determinations be
found in the CEA's grant of general rulemaking authority in CEA
Section 8a(5), 7 U.S.C. 12a(5), which provides that the Commission
may adopt such rules as, ``in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of'' the CEA. Again, if that were the
case, then there was no need for Congress to tell the Commission in
CEA Section 2(h)(2)(A)(i) that it could make mandatory swap clearing
determinations either by individual swap or by category, nor was
there any need for Congress to tell the Commission in CEA Section
4a(7) that it could exempt swaps or other transactions from position
limits requirements either by individual transaction or by class.
\197\ See, e.g., Dep't of Agric. Rural Dev. Rural Hous. Serv. v.
Kirtz, 601 U.S. 42, 53 (2024) (stating proper respect for Congress
cautions courts against lightly assuming statutory terms are
superfluous or void of significance); City of Chicago, Illinois v.
Fulton, 592 U.S. 154, 159 (2021) (specifying the canon against
surplusage is strongest when an interpretation would render
superfluous another part of the same statutory scheme).
\198\ See Turkiye Halk Bankasi A.S. v. United States, 598 U.S.
264, 275 (2023) (The Court has a duty to construe statutes and not
isolated provisions, and such construction must occur within the
context of the entire statutory scheme.).
---------------------------------------------------------------------------
In the absence of any statutory text in CEA Section 5c(c)(5)(C)
like that in CEA Section 2(h)(2)(A)(i), I cannot accept that
Congress silently authorized the CFTC to make life easier for itself
through the shortcut of making impactful determinations that entire
categories of event contracts are contrary to the public interest
and thus are prohibited from trading on exchanges.
IV. Even if There Is Legal Authority, the Proposal Fails To Justify
Making Advance Public Interest Determinations by Category--for a Host
of Reasons
Even if the Commission has legal authority to make public
interest determinations for event contracts by category, the
Proposal is wholly unpersuasive in its attempt to justify doing so.
There are a multitude of failings.
1. There is No Basis To Resurrect the Repealed ``Economic Purpose
Test,'' Which Shouldn't be Applied to Event Contracts in Any Event
The Proposal would ban entire categories of event contracts as
being contrary to the public interest based largely on the
proposition that they fail the ``economic purpose test.'' There are
four significant problems with this approach.
Congressional Intent: First, the Proposal relies on a single,
ambiguous, passage in the legislative history to conclude that
Congress intended, for purposes of a public interest review of an
event contract, to resurrect the ``economic purpose test'' that the
Commission once used to determine whether a futures contract was
contrary to the public interest--until Congress repealed that public
interest requirement in 2000.\199\
---------------------------------------------------------------------------
\199\ Before 2000, CEA Section 5(g) required that futures
contracts not be contrary to the public interest. The Commission
interpreted this statutory public interest standard to include the
``economic purpose test.'' See Request for Comments Respecting
Public Interest Test, Guideline on Economic and Public Interest
Requirements for Contract Market Designations, 40 FR 25849 (June 19,
1975) (``Guideline No. 1''). In 2000, Congress repealed Section 5(g)
of the CEA and its public interest requirement in the Commodity
Futures Modernization Act of 2000, Public Law 106-554, 114 Stat.
2763 (2000) (``CFMA''). As a result, the Commission withdrew
Guideline No. 1.
---------------------------------------------------------------------------
The Proposal's resurrection of the ``economic purposes test'' is
based entirely on this one passage in the colloquy between Senator
Dianne Feinstein and Senator Blanche Lincoln:
Mrs. Feinstein: . . . Will the CFTC have the power to determine
that a contract is a gaming contract if the predominant use of the
contract is speculative as opposed to hedging or economic use?
Mrs. Lincoln: That is our intent. The Commission needs the power
to, and should, prevent derivatives contracts that are contrary to
the public interest because they exist predominantly to enable
gambling through supposed event contracts. It would be quite easy to
construct an `event contract' around sporting events such as the
Super Bowl, the Kentucky Derby, and Masters Golf Tournament. These
types of contracts would not serve any real commercial purpose.
Rather, they would be used solely for gambling.\200\
---------------------------------------------------------------------------
\200\ See Feinstein-Lincoln colloquy, n.13, supra.
To be clear, the Dodd-Frank Act did not codify the Commission's
prior ``economic purpose test.'' And I cannot accept the Proposal's
assertion that this isolated colloquy between two Senators
establishes an intent by the whole of Congress that the Commission
conduct its public interest reviews of event contracts based on an
``economic purpose test'' that the Commission had withdrawn as a
result of the repeal (by the whole of Congress) of the statutory
provision it implemented a decade earlier.
After all, neither Senator Feinstein nor Senator Lincoln used
the term ``economic purpose test'' or referred to the Commission's
Guideline No. 1 that set out that test. As someone who spent over a
decade working in Congress, and who was present on the Senate floor
for countless colloquies and even had a hand in preparing talking
points for similar floor discussions, I am confident that if the
Senators believed we should resurrect the ``economic purpose test,''
they would have said just that.
Difference in Kind: Second, the ``economic purpose test'' was
designed for traditional futures contracts that have been listed and
traded on exchanges for decades.\201\ These contracts differ in kind
from event contracts, which typically are structured as binary (yes/
no) options.
---------------------------------------------------------------------------
\201\ The CFTC's Guideline No. 1, including its ``economic
purpose test,'' applied to futures contracts. See Guideline No. 1,
40 FR at 25850 (``The Commission is inviting comment . . . to assist
the Commission in determining whether the futures contracts of
[certain exchanges] meet the public interest requirements for
contract market designation . . .''), and at 25851 (an exchange
``should at this time affirm that futures transactions in the
commodity for which designation is sought are not, or are not
reasonably expected to be, contrary to the public interest'')
(emphases added). And the Feinstein-Lincoln colloquy makes clear
that CEA Section 5c(c)(5)(C) was drafted with futures contracts in
mind. Senator Lincoln cited terrorist attacks, war and hijacking as
examples of events that ``pose a real commercial risk to many
businesses in America,'' but stated that ``a futures contract that
allowed people to hedge that risk [of terrorist attacks, war, and
hijacking] . . . would be contrary to the public interest.''
Feinstein-Lincoln Colloquy, n.13, supra (emphasis added).
---------------------------------------------------------------------------
The two prongs of the ``economic purpose test,'' which the
Proposal adopts as a primary basis for prohibiting entire categories
of event contracts as being contrary to the public interest,
evaluate: (1) the contract's utility for price basing; and (2)
whether the contract can be used for hedging purposes. Yet, the
Commission itself has previously recognized the difference between
event contracts and the traditional futures contracts for which the
``economic purpose test'' was developed. In a Concept Release issued
in 2008, the Commission stated that ``[i]n general, event contracts
are neither dependent on, nor do they necessarily relate to, market
prices or broad-based measures of economic or commercial activity,''
and elaborated as follows:
Since 2005, the Commission's staff has received a substantial
number of requests for guidance on the propriety of offering and
trading financial agreements that may primarily function as
information aggregation
[[Page 48996]]
vehicles. These event contracts generally take the form of financial
agreements linked to eventualities or measures that neither derive
from, nor correlate with, market prices or broad economic or
commercial measures.\202\
---------------------------------------------------------------------------
\202\ Concept Release on the Appropriate Regulatory Treatment of
Event Contracts, 73 FR 25669, 25669-25670 (May 7, 2008). More
specifically, the Concept Release noted that: 1) event contracts
based on environmental measures (such as the volatility of
precipitation or temperature levels) or environmental events (such
as a specific type of storm within an identifiable geographic
region) will ``not predictably correlate to commodity market prices
or other measures of broad economic or commercial activity;'' and 2)
event contracts based on general measures (such as the number of
hours that U.S. residents spend in traffic annually or the vote-
share of a particular candidate) ``do not quantify the rate, value,
or level of any commercial or environmental activity,'' and that
contracts on general events (such as whether a Constitutional
amendment will be adopted) ``do not reflect the occurrence of any
commercial or environmental event.'' Id. at 25671.
In other words, the Proposal would ban entire categories of
event contracts largely on the basis of price basing and hedging
requirements that event contracts (described in the Concept Release
as ``information aggregation vehicles'') likely--because of their
very structure--have little chance of satisfying.
This problem is compounded by the fact that under the Proposal,
some event contracts that fail to satisfy the ``economic purpose
test'' would be banned, while other contracts failing the test would
not. For example, the Proposal's statement (in section II.C.3.c)
that ``most contracts falling within the proposed definition of
`gaming' would have no underlying cash market with bona fide
economic transactions to provide directly correlated price forming
information'' is equally true of weather-related event contracts--
but those contracts would not be banned.
Since the weather is not an enumerated activity, event contracts
involving the weather can trade because they are not subject to a
public interest review under CEA Section 5c(c)(5)(C). Thus, the
Proposal's reliance on the ``economic purpose test'' means that
exchanges can list for trading event contracts (such as those
involving weather) that the Commission believes are contrary to the
public interest--which I find untenable.
These are the inevitable results of imposing an ``economic
purpose test'' on event contracts that was not designed for event
contracts. Certainly, a rulemaking proceeding could be appropriate
to fully explore the economic attributes of event contracts, and to
consider how to incorporate such attributes into a public interest
review that is tailored to the nature of event contracts. But, that
is not this Proposal.
Government paternalism: Third, the Proposal asserts (in section
II.C.3.c) that ``the economic impact of an occurrence (or non-
occurrence) in connection with a contest of others, or a game of
skill or chance . . . generally is too diffuse and unpredictable to
correlate to direct and quantifiable changes in the price of
commodities or other financial assets or instruments, limiting the
hedging and price-basing utility of an event contract involving such
an occurrence.''
But to say that there are limits to the hedging utility of an
event contract is simply a statement that the contract may not be a
particularly good hedging vehicle. Market participants should be
permitted to make their own choices about what financial products
meet their hedging needs. It is not the CFTC's role to deny them
that choice altogether because we feel a given product's hedging
value is ``limited.''
The ``Economic Purpose Test'' Was Not Applied to Categories of
Contracts: Fourth, even assuming that the ``economic purpose test''
is an appropriate part of a public interest analysis for event
contracts, it does not support making public interest determinations
for event contracts by category--because the Commission applied its
``economic purpose test'' to the terms and conditions of individual
contracts. The Commission's Guideline No. 1 provided that
``[i]ndividual contract terms and conditions must be justified'' in
order for an exchange to demonstrate that it met the ``economic
purpose test.'' \203\
---------------------------------------------------------------------------
\203\ Guideline No. 1, 40 FR at 25850 (emphasis added). See also
id. at 25851 (``The justification of each contract term or condition
must be supported by appropriate economic data'') (emphasis added).
---------------------------------------------------------------------------
The Commission took no shortcuts in applying its subsequently
withdrawn ``economic purpose test'' to futures contracts. It did not
group contracts into categories (such as all futures contracts on
wheat, corn, gold, or silver) in evaluating the public interest
through its ``economic purpose test.'' Rather, the Commission looked
at each contract's ``individual contract terms and conditions'' to
make that determination. If the Proposal is going to (incorrectly)
adopt that ``economic purpose test'' in determining whether an event
contract is contrary to the public interest, then it should apply
that test the same way.
2. The Proposal's Application of Other Factors Falls Far Short of
Justifying Its Prohibition of Entire Categories of Event Contracts
Aside from the ``economic purpose test,'' the Proposal points to
a hodgepodge of other factors to try to justify prohibiting entire
categories of event contracts, whose terms and conditions the
Commission has never seen, from being traded on exchanges. But its
discussion of these factors is conjectural and without evidentiary
support, calls into question other contracts that are trading on
regulated exchanges, and raises more questions than it answers.
Taken as a whole, the Proposal falls far short of justifying the
shortcut of prohibiting entire categories of event contracts (even
assuming the Commission has the legal authority to do so).
Examples of these defects in the Proposal abound, but I will
focus here on just a few:
Hopelessly Impractical: The category of activities illegal under
State law demonstrates the type of problems inherent in determining
that all event contracts in a category are contrary to the public
interest. Some activities are illegal in some States, but not
others. Yet, the Proposal does not provide any guidance on several
obvious questions: Is an event contract automatically contrary to
the public interest if it involves an activity that is illegal in
only a single State--and if so, why? Or, if not, then how many
States have to declare an activity illegal before the automatic
prohibition on event contracts involving that activity is triggered?
More than half? States comprising a certain percentage of the
country's population? \204\
---------------------------------------------------------------------------
\204\ The Proposal justifies its category-based approach
regarding activity that is illegal under State law (in section
II.C.3.b) on the grounds that it ``eliminates the possibility that
the Commission would have to serve . . . as arbiter of a state's own
public interest determination . . . in recognizing specific activity
as causing, or posing, public harm.'' But unless the activity is
illegal in all 50 States, then in determining that an event contract
involving an activity illegal in some States is automatically
contrary to the public interest, the Commission is inherently
``serv[ing] as arbiter'' of the determination by all the other
States that the activity does not cause, or pose, public harm.
---------------------------------------------------------------------------
The problem is exacerbated by the Proposal's suggestion that the
prohibition of event contracts can hinge on decisions by judges. Is
this reference limited to Supreme Courts of the States? Or would a
ruling by a lower court of a State that a particular activity is
illegal trigger an automatic determination that an event contract
involving that activity is contrary to the public interest? What if
that decision is appealed?
While I have focused here on the category of event contracts
involving activities illegal under State law, these types of
practical questions are a foreseeable and inevitable result of any
determination that an entire category of event contracts is contrary
to the public interest. I recognize that a contract-specific
approach to making public interest determinations regarding event
contracts may be difficult and resource-intensive for the CFTC. But
aside from my view that a contract-specific approach is required by
the CEA, it also is a better approach from a policy perspective
precisely because it would permit the CFTC to consider these
practical questions in the context of the specific circumstances
applicable to a particular event contract. We do not get to override
a requirement under the law because it will be hard or require more
work for us.
Absolutism Based on Conjecture: Another defect in the Proposal
is illustrated by the following (in section II.C.3.c): ``Generally
speaking, the Commission believes that something of value is staked
or risked upon an occurrence (or non-occurrence) in connection with
a contest of others, or a game or [sic] skill or chance, for
entertainment purposes--in order wager [sic] on the occurrence. As
such, the Commission believes that contracts involving such
occurrences are likely to be traded predominantly `to enable
gambling' and `used predominantly by speculators or participants not
having a commercial or hedging interest' . . .'' (Emphasis added;
footnote omitted)
These assertions are entirely conjectural, as the Proposal does
not cite any support for these statements. One can readily envision
an event contract involving whether a particular US city will be
awarded the summer or winter Olympic games in a given year, which
[[Page 48997]]
would be used by hotel and restaurant owners, as well as other
businesses, that would make money if their city gets the Olympics
but not if the Olympics are awarded elsewhere. Such an event
contract would not necessarily be used predominantly for
entertainment or speculative purposes.
Indeed, the quoted text itself uses wording like ``[g]enerally
speaking'' and ``likely,'' which is an acknowledgement that its
conclusions are not universally true. A belief for which no evidence
is cited, and that is acknowledged not to be true across-the-board,
cannot justify an absolutist determination that all event contracts
involving an activity are automatically contrary to the public
interest, nor can it justify a prohibition on trading all event
contracts in that category.
Calling into Question Traditional Futures Contracts: I agree
that an event contract involving the outcome of a sporting event,
and that allows players or coaches to in trade that contract, would
be contrary to the public interest. But consistent with its
overreach, the Proposal also concludes that even where the terms and
conditions of such a contract prohibit such persons from trading,
the contract is nonetheless contrary to the public interest. The
Proposal's stated rationale (in section II.C.3.c) is that ``the
athlete or coach would potentially have a platform--for example,
access to media, combined with public perception as an authoritative
source of information regarding the team--that could be used to
disseminate misinformation that could artificially impact the market
in the contract for additional financial gain.''
The same can be said of many traditional exchange-traded futures
contracts. For example, oil companies (or companies in the
agricultural or metals sectors, or other energy companies) also have
``access to media, combined with public perception as an
authoritative source of information regarding'' the oil (or other)
industry, ``that could be used to disseminate misinformation that
could artificially impact the market in the contract for additional
financial gain.'' And yet, exchanges are permitted to list oil
futures for trading (in fact, oil companies are permitted to trade
them).
The Proposal offers no explanation for why a possible incentive
to spread misinformation should render all event contracts involving
sporting events (or occurrences or non-occurrences in connection
with sporting events) contrary to the public interest when
traditional futures contracts with the same incentive are not. A
contract-specific public interest analysis, by contrast, could take
into account the terms and conditions of a particular event
contract--such as whether athletes and coaches can trade, or whether
there are guardrails against the spread of misinformation--to
determine whether the threat of misinformation in that contract is
such that it is contrary to the public interest.
Fallacies Concerning the CFTC's Regulatory and Enforcement
Roles: The Proposal raises in alarmist tones the red herring that
sweeping public interest determinations are necessary so that the
CFTC does not get drawn into a regulatory or enforcement role for
which it is not well-equipped. For example, the Proposal says (in
section II.C.2) that one factor that may be relevant in evaluating
whether event contracts are contrary to the public interest is the
extent to which they ``would draw the Commission into areas outside
of its primary regulatory remit.'' \205\ Other examples are: (1) the
statements (in section II.C.3.c) relating to event contracts
involving elections that the Commission ``is not tasked with the
protection of election integrity or enforcement of campaign finance
laws;'' and (2) the statement (in the first sentence of footnote no.
127) that ``the oversight function in this area [regarding
elections] is best reserved for other expert bodies.''
---------------------------------------------------------------------------
\205\ Since the CFTC has a narrow ``regulatory remit''
restricted to regulating derivatives markets, this factor presumably
could support finding that virtually every event contract is
contrary to the public interest.
---------------------------------------------------------------------------
To be clear: The CFTC does not administer, oversee, or regulate
elections, sporting events, gambling, or any other activity or event
discussed in the Proposal--and that will not change with respect to
any event contract that is found not to be contrary to the public
interest. Rather, the CFTC would exercise its exact same authorities
under the CEA that it does with respect to all other derivatives
contracts.
Nor would the CFTC become some type of ``election cop.'' After
all, the CFTC has anti-fraud and anti-manipulation enforcement
authority with respect to futures contracts on broad-based security
indices, but that does not mean the CFTC regulates the securities
markets or that it is tasked with the protection of the integrity of
the securities markets or enforcement of securities laws--the
Securities and Exchange Commission (``SEC'') does all that. The CFTC
similarly has enforcement authority with respect to natural gas and
electricity since there are futures contracts on those commodities,
but that does not mean the CFTC regulates the transmission of
natural gas or electricity or that it is tasked with the protection
of the integrity of physical natural gas or power markets, or
enforcement of the Natural Gas Act or the Federal Power Act--the
Federal Energy Regulatory Commission (``FERC'') does all that.
The same is true with respect to an event contract that is not
contrary to the public interest and thus is permitted to trade on a
regulated exchange. As the Supreme Court has stated: ``This Court's
cases have consistently held that the use of the words `public
interest' in a regulatory statute is not a broad license to promote
the general public welfare. Rather, the words take meaning from the
purposes of the regulatory legislation.'' \206\ If a particular
event contract involving elections were found not to be contrary to
the public interest and thus permitted to trade, the CFTC would have
absolutely no authority to administer, oversee, or regulate the
elections that are the subject of that contract, or to enforce any
campaign finance laws. Its authority would extend only so far as is
the case with respect to all commodities underlying derivatives
contracts within our jurisdiction, as provided by Congress in the
CEA.
---------------------------------------------------------------------------
\206\ NAACP v. Federal Power Commission, 425 U.S. 662, 669
(1976). The Court went on to explain: ``Congress in its earlier
labor legislation unmistakably defined the national interest in free
collective bargaining. Yet it could hardly be supposed that, in
directing the Federal Power Commission to be guided by the `public
interest,' Congress thereby instructed it to take original
jurisdiction over the processing of charges of unfair labor
practices on the part of its regulatees.'' Id. at 671. Similarly, it
could hardly be supposed that, in directing the CFTC to be guided by
the ``public interest'' in evaluating event contracts, Congress
thereby instructed it to take original jurisdiction over the
regulation or enforcement of laws relating to elections, sporting
events, gambling, or any other activity or event.
---------------------------------------------------------------------------
Why This is Important: I can understand why some might ask: You
have been pleading for an event contracts rulemaking for some time
now, and here it is--so what is the problem? The problem is this:
CFTC Rule 40.11(a)(1) already prohibits the listing and trading of
any event contract involving an enumerated activity. As I explained
in my Kalshi Dissenting Statement:
Rule 40.11 contradicts the statute. CEA Section 5c(c)(5)(C)
grants the Commission discretion to determine whether [an
exchange's] event contract that involves an enumerated activity is
contrary to the public interest. CFTC Rule 40.11(a), by contrast,
provides that [an exchange] ``shall not list for trading'' a
contract that involves . . . an enumerated activity (emphasis
added). Read literally, Rule 40.11(a) removes entirely the
flexibility that Congress granted the Commission to evaluate
[exchange] event contracts from a public interest perspective.\207\
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\207\ See Kalshi Dissenting Statement, n.2, supra.
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Rather than fix this problem, though, the Proposal doubles down
on it. By making categorical public interest determinations in
advance, the Proposal would impermissibly transform the two-step
analysis that Congress provided for event contracts into a single
step. It would transmogrify the discretion that Congress gave the
Commission to determine that an event contract involving an
enumerated activity is contrary to the public interest into a
mandate that it do so.
The Proposal actually is quite candid in acknowledging that it
would re-write CEA Section 5c(c)(5)(C). It states (in section
II.C.1): ``If, as proposed, [Rule 40.11] is amended to include a
categorical public interest determination with respect to contracts
involving each of the Enumerated Activities, the Commission would
not, going forward, undertake a contract-specific public interest
analysis as part of a review . . . Rather, the focus of any such
review would be to evaluate whether the contract involves an
Enumerated Activity, in which case, it may not be listed for trading
. . .''
If Congress had intended that every event contract involving an
enumerated activity is automatically contrary to the public interest
and prohibited from trading, it could have provided for such a
single-step process in CEA Section 5c(c)(5)(C). But it did not do
that, and instead provided that even if an event contract involves
an enumerated activity, the Commission cannot prohibit the contract
without exercising its discretion in a second step of determining
that the contract is contrary to the public interest. The
[[Page 48998]]
Commission can't short-circuit the process that Congress established
by determining that an event contract is contrary to the public
interest--in advance and without knowing the contract's terms and
conditions--simply because that makes things easier for the agency.
Granted, the Proposal makes categorical public interest
determinations only for the activities enumerated in CEA Section
5c(c)(5)(C). I admit that I am not going to lose sleep over a
determination that all event contracts involving terrorism,
assassination, and war are contrary to the public interest.
But this is where the ``wolf in sheep's clothing'' arrives.
While this Proposal only addresses event contracts involving
enumerated activities, it sets the precedent for how the Commission
can handle event contracts involving other activities that it
determines are similar to enumerated activities, too.
If the Proposal is adopted as final, then at any time in the
future, the Commission could determine that other activities are
similar to enumerated activities--and could then determine that
every event contract involving that activity is automatically
contrary to the public interest (and therefore prohibited from
trading) regardless of its particular terms and conditions. And
given all the deficiencies in this Proposal's categorical public
interest determinations discussed above, that appears to be a low
bar to clear.
V. Portions of the Proposal Are Inaccurate or Extremely Weak, or Make
No Sense
The fact that certain portions of the Proposal are inaccurate,
extremely weak, or simply make no sense suggests that it either was
hastily prepared, or is motivated primarily by the sheer hatred that
the Commission seems to bear towards event contracts. Here are a few
examples:
The Proposal says (in section II.C.2) that ``the public
good'' is a relevant factor for consideration in an evaluation of
whether an event contract is contrary to the public interest. It
makes no sense that the Commission should consider ``the public
good'' in evaluating whether a contract is contrary to ``the public
interest.'' This is tautological--``the public good'' and ``the
public interest'' mean the same thing.
The Proposal's statement (in section II.C.2) that in
the colloquy, Senators Feinstein and Lincoln ``discussed the
Commission's authority, prior to the enactment of the Commodity
Futures Modernization Act of 2000 (`CFMA'), `to prevent trading that
is contrary to the public interest'' is incorrect. Senators
Feinstein and Lincoln did not ``discuss'' the Commission's pre-CFMA
authority. Senator Feinstein referenced it in asking a question, but
Senator Lincoln (the Committee Chair) did not talk about it--in
fact, she did not even mention the CFMA.
Footnote no. 49 cites the CFTC Reauthorization Act of
2019 as support for the Proposal's view that an erroneous reference
to a non-existent CEA Section 1a(2)(i) in CEA Section 5c(c)(5)(C)
was intended by Congress to refer to CEA Section 1a(19)(i) instead,
since the bill included a provision to replace the reference to
Section 1a(2)(i) with a reference to Section 1a(19)(i). But an
amendment in a bill introduced in a subsequent Congress (nine years
later) sheds no light on what was intended by the Congress that
enacted the statutory provision in question--especially when the
referenced bill was not enacted and nothing has happened on it
during the ensuing five years.
VI. Certain Implementation Timeline Provisions in the Proposal Are Ill-
Advised
As discussed above, I do not support the proposal to determine
that all event contracts involving enumerated activities are
contrary to the public interest. But if the Commission decides to do
so, I oppose applying that determination to contracts that are
already listed for trading as of the date of publication of final
rule amendments in the Federal Register.
It is my hope that there would be few such contracts. But for
any contracts that would be impacted, the Proposal is pollyanaish in
its rosy view (in section II.F) that ``a 60-day implementation
period for these contracts will minimize any market disruption that
might be caused by the rule amendments.'' For one thing, given the
Proposal's repeated emphasis (in sections II.B.1.c and section
II.C.3.c) that its examples of activities that constitute ``gaming''
under the proposed definition are non-exclusive, I am dubious that
exchanges and traders necessarily will know exactly which existing
event contracts the Commission believes are now suddenly prohibited.
Beyond that, this aspect of the Proposal is fundamentally
unfair. At any time during the 13 years since its adoption of Rule
40.11, the Commission could have concluded that a given event
contract involving an enumerated activity is contrary to the public
interest. Exchanges and market participants that have listed and
traded an event contract in good faith reliance on the fact that the
Commission had not determined the contract to be contrary to the
public interest should not pay the price (literally) for the
Commission's inaction by having to halt trading in a fixed amount of
time because the Commission has finally gotten around to it.
This would be the antithesis of ``good government.''
Accordingly, I do not believe that any rule amendments finalized as
part of this rulemaking should apply to an event contract that is
listed and available for trading as of the date of their publication
in the Federal Register.
VII. Conclusion
Rather than undertake a rulemaking process to do the hard work
of building a framework for evaluating event contracts pursuant to
CEA Section 5c(c)(5)(C), the Commission squandered the 14 years
since that provision was enacted as part of the Dodd-Frank Act.
While the Commission is now proposing an event contract rulemaking,
that hard work still has yet to be done. Instead, the Commission is
skipping right over building a proper framework--and simply
proposing to prohibit contracts outright.
This result seems preordained, given the hostility that the
Commission has displayed toward event contracts since the enactment
of the Dodd-Frank Act. This Proposal rubber-stamps the Commission's
two prior Orders finding proposed event contracts to be contrary to
the public interest. In addition, it continues the ``tradition'' of
stretching a solitary, cryptic colloquy to form the basis for
evaluating whether event contracts are contrary to the public
interest through the ``economic purpose test'' that: (1) is not
mentioned in the statute; (2) had previously been withdrawn due to
Congress' repeal of the CEA provision it implemented; (3) was not
designed for this type of contract; and (4) many event contracts,
due to their structure, likely will be unable to meet.
And now the Proposal goes even further, adopting an overly broad
definition of ``gaming'' and declaring entire categories of event
contracts to be contrary to the public interest, sight unseen. The
Commission's legal authority to make such determinations by category
is questionable, at best; that it is inappropriate from a policy
perspective cannot reasonably be questioned.
The Proposal flatly contravenes Congress' direction in the CEA
that the CFTC ``promote responsible innovation.'' \208\ The
unmistakable take-away for exchanges is not to expend resources
developing an innovative event contract because the Commission will
go to great lengths to find that it is contrary to the public
interest and prohibit it from trading.\209\
---------------------------------------------------------------------------
\208\ CEA Section 3(b), 7 U.S.C. 5(b). The Proposal claims (in
section I.A, section II, and section II.A.1.b) that it would help to
support responsible market innovation. I do not agree that
prohibiting broad categories of innovative event contracts supports
responsible market innovation.
\209\ In this regard, the Proposal even undermines the CFTC's
commitment to its own stated Core Value of being ``Forward-
Thinking'' (i.e., challenging ourselves to stay ahead of the curve).
CFTC Core Values, Forward-Thinking, available at https://www.cftc.gov/About/AboutTheCommission.
---------------------------------------------------------------------------
I want to be very clear: My dissent should not be taken as an
endorsement of the wisdom of event contracts generally, or of any
event contract in particular. Rather, it reflects my application of
Congress' direction to the Commission in CEA Section 5c(c)(5)(C).
Whatever we may think of event contracts, we cannot re-write the CEA
to claim an authority that Congress did not give us because we have
been derelict in applying the authority that Congress did give us.
Nor should we be prohibiting an event contract without a proper
showing that it involves an enumerated activity and is contrary to
the public interest based on the application of well-defined factors
to the particular terms and conditions of that particular contract.
Because this wolf in sheep's clothing fails on many levels for
the foregoing reasons, I respectfully dissent.
Appendix 4--Statement of Commissioner Caroline D. Pham
I respectfully dissent from the Event Contracts Proposal because
it takes the CFTC's regulation of event contract markets backwards
with its fundamental misunderstanding of how we regulate derivatives
and the States regulate gaming. Instead of thoughtfully considering
how to effectively regulate these markets while
[[Page 48999]]
fostering innovation, the Event Contracts Proposal ties itself in
knots over the bounds of gaming, which Congress has neither asked
nor directed the Commission to regulate. I am simply disappointed in
this wasted opportunity to regulate retail binary options,
sidestepping our responsibility, and concerned about its legal
impact.
The United States is built on a foundation of federalism.
Federalism reflects the Founders' understanding that a one-size-
fits-all approach would not work for this country, and allows for
States to govern in ways that best suit their residents.\1\ The
simple language of the Tenth Amendment to the Constitution (``The
powers not delegated to the United States by the Constitution, nor
prohibited by it to the States, are reserved to the States
respectively, or to the people'') emphasizes that the Federal
government is a government of limited and enumerated powers.\2\ The
Tenth Amendment, importantly, protects the American people from
Federal encroachment.
---------------------------------------------------------------------------
\1\ See Bernard Dobski, Ph.D., America Is a Republic, Not a
Democracy, The Heritage Foundation (June 19, 2020) (examining
whether current egalitarian efforts threaten, among other things,
the diverse interests the Founders sought to protect from
factionalism), https://www.heritage.org/american-founders/report/america-republic-not-democracy. Interestingly, the Event Contracts
Proposal repeatedly claims to be motivated by the increase in volume
and ``diversity of event contracts listed for trading by Commission-
registered exchanges.'' However, the Proposal admits only one CFTC
registered exchange currently offers the types of event contracts
covered by the Proposal, out of the six CFTC registered exchanges
that are authorized to offer event contracts. I question the
motivations of any rulemaking that seeks to quash unique products
offered by one exchange because their products are ``diverse.''
\2\ See Gary Lawson and Robert Schapiro, Common Interpretation:
The Tenth Amendment, National Constitution Center, https://
constitutioncenter.org/the-constitution/amendments/amendment-x/
interpretations/129#:~:text=by%20Gary%20Lawson,-
Phillip%20S.&text=The%20Tenth%20Amendment%20formally%20changed,Tenth%
20Amendment%20is%20unconstitutional%20afterwards.
---------------------------------------------------------------------------
State regulation of gaming, ranging from betting to lotteries,
is long-established in the U.S., and is clearly a power reserved to
the States.\3\ No one understands their local cultures, economies,
and values better than the States,\4\ which leads to State laws that
have been crafted to reflect the needs of their residents. This
approach has allowed some States to embrace gaming and leverage it
as a source of revenue and tourism, while others take a more
conservative approach.\5\
---------------------------------------------------------------------------
\3\ See Tim Lynch, Gambling Regulation Belongs to the States,
Cato Institute (July 23, 1998), https://www.cato.org/commentary/gambling-regulation-belongs-states.
\4\ See America Is a Republic, Not a Democracy.
\5\ See LexisNexis Legal Insights, States Embracing New Form of
Gambling: iGaming (Mar. 3, 2024), https://www.lexisnexis.com/community/insights/legal/capitol-journal/b/state-net/posts/states-embracing-new-form-of-gambling-igaming.
---------------------------------------------------------------------------
When it comes to event contracts related to gaming, I have been
clear that the CFTC should exercise caution, primarily because I
believe the Commission fundamentally misunderstands the law in this
area and Congressional intent.\6\ That fear has proven well-founded
with the Event Contracts Proposal.
---------------------------------------------------------------------------
\6\ Dissenting Statement of Commissioner Caroline D. Pham
Regarding the Review and Stay of KalshiEX LLC's Political Event
Contracts (Aug. 26, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement082622.
---------------------------------------------------------------------------
The CFTC has a role in regulating event contracts as a market
regulator, but it is essential that the CFTC does not encroach upon
the prerogatives of States. An appropriate Event Contracts Proposal
would have struck a balance between Federal oversight and State
autonomy by focusing on the CFTC's core mandate of promoting market
stability and protecting market participants from fraud and abusive
practices.\7\ In doing so, the CFTC could have maintained the
integrity of event contracts without undermining the authority of
State governments.
---------------------------------------------------------------------------
\7\ Commodity Exchange Act (CEA) Section 3(a), 7 U.S.C. 5.
---------------------------------------------------------------------------
Instead, as I will explain below, the Event Contracts Proposal
bigfoots into State regulation of gaming by drawing unintelligible
lines in the sand that will either at best result in confusion for
State gaming authorities, or at worst push event contracts into
illegal, unregulated offshore markets.
The Event Contracts Proposal Ignores the Supreme Court's Preemption
Doctrine
The Constitution's Supremacy Clause provides that ``the Laws of
the United States . . . shall be the Supreme Law of the Land; and
the Judges in every State shall be bound thereby, any Thing in the
Constitution or Laws of any State to the Contrary notwithstanding.''
\8\ This language is the basis for the doctrine of Federal
preemption, according to which Federal law supersedes conflicting
State laws.\9\
---------------------------------------------------------------------------
\8\ U.S. Const. art. VI, cl. 2.
\9\ Congressional Research Service, Federal Preemption: A Legal
Primer, 1 (Jul. 23, 2019) (citing Gade v. Nat'l Solid Wastes Mgmt.
Assn., 505 U.S. 88, 108 (1992)), https://crsreports.congress.gov/product/pdf/R/R45825/1.
---------------------------------------------------------------------------
The Supreme Court has identified two general ways in which
Federal law can preempt State law: expressly, when a Federal statute
or regulation contains explicit preemptive language; and impliedly
when its structure and purpose implicitly reflect Congress's
preemptive intent.\10\ But the Federal government cannot preempt
traditional State powers that are the exclusive domain of States to
regulate, recognizing the right to self-determination by the people.
---------------------------------------------------------------------------
\10\ See id. at 2 (citing Gade, 505 U.S. 88, 98). The Court has
identified two subcategories of implied preemption: ``field
preemption'' and ``conflict preemption.'' Field preemption occurs
when a pervasive scheme of federal regulation implicitly precludes
supplementary state regulation, or when states attempt to regulate a
field where there is clearly a dominant federal interest. Id. In
contrast, conflict preemption occurs when compliance with both
federal and state regulations is a physical impossibility
(impossibility preemption), or when state law poses an ``obstacle''
to the accomplishment of the ``full purposes and objectives'' of
Congress (obstacle preemption). Id. at 2 (citing Fla. Lime & Avocado
Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963) and Hines v.
Davidowitz, 312 U.S. 52, 67 (1941)).
---------------------------------------------------------------------------
The Event Contracts Proposal uniquely ignores the fact that the
limits Congress placed on the Commission's regulation of event
contracts save the Commission from becoming a gaming regulator. In
other words, the Commission could have relied on implied preemption
to regulate event contracts as derivatives in our markets separate
and apart from State gaming regulation. Instead, the Commission
creates preemption concerns by proposing a gaming definition that
incomprehensibly relies so heavily on State law that I don't know
how any exchange could understand where the Commission's rules begin
and end for these contracts.
Together, under CEA Section 5c(c)(5)(C), Rule 40.11, and the
preamble to the final rulemaking for Rule 40.11, whether an event
contract is prohibited by Rule 40.11 depends on the underlying
activity that the contract is based upon. When the Commission
reviewed an exchange's political control contracts, I raised that
the underlying activity was political control, which was neither
terrorism, assassination, war, gaming, nor unlawful under any
Federal or State law.\11\ Therefore, Rule 40.11(a)(1) did not apply.
Yet in disapproving the contracts, the Commission argued that
``taking a position in the Congressional Control Contracts''
(emphasis added) amounted to gaming.\12\
---------------------------------------------------------------------------
\11\ Dissenting Statement of Commissioner Caroline D. Pham
Regarding the Review and Stay of KalshiEX LLC's Political Event
Contracts.
\12\ See CFTC Order, In the Matter of the Certification by
KalshiEX LLC of Derivatives Contracts with Respect to Political
Control of the United States Senate and United States House of
Representatives (Sept. 22, 2023), https://www.cftc.gov/PressRoom/PressReleases/8780-23.
---------------------------------------------------------------------------
When taking a position in a derivatives contract is gaming, the
Commission starts to look like a gaming regulator. Congress may not
compel a State to enact or enforce a regulatory regime,\13\ and
indeed, Congress has not here. Yet in doubling down on its logic in
the Event Contracts Proposal, when the act of entering into a
derivatives contract that meets the Proposal's overbroad definition
of gaming, drawn from dozens of State laws, is now gaming under the
Commission's jurisdiction, we begin encroaching on State gaming
oversight. State-regulated sportsbooks, in trying to comprehend
where the Commission's gaming derivatives begin and traditional bets
end, will be captured in this confusion and question the need to
register with the Commission as exchanges. I certainly don't want
the Commission to be registering Las Vegas sportsbooks and other
betting venues.
---------------------------------------------------------------------------
\13\ See New York v. United States, 505 U.S. 144 (1992).
---------------------------------------------------------------------------
The Commodity Exchange Act Is Clear That the Commission Regulates Event
Contracts
Congress has been clear in its direction for the CFTC.
First, in relevant part, the purpose of the Commodity Exchange
Act is to deter and prevent price manipulation or any other
disruptions to market integrity; to ensure the financial integrity
of all transactions; to
[[Page 49000]]
protect all market participants from fraudulent or other abusive
sales practices and misuses of customer assets; and to promote
responsible innovation and fair competition among boards of trade,
other markets and market participants.\14\
---------------------------------------------------------------------------
\14\ CEA Section 3(a), 7 U.S.C. 5.
---------------------------------------------------------------------------
Second, the Commission is authorized to review event contracts
if the underlying activity that the contract is based upon is
terrorism, assassination, war, gaming, or unlawful under any Federal
or State law.\15\
---------------------------------------------------------------------------
\15\ CEA section 5c(c)(5)(C), 7 U.S.C. 7a-2(c)(5)(C)(i)(I)-(VI).
---------------------------------------------------------------------------
Read together, Congress intended that the Commission regulate
event contracts within the bounds of the section 5(c) prohibitions.
Instead of telling market participants how we will regulate the
innovative contracts and exchanges that have appeared in recent
years, the Commission has decided to ``identif[y] the types of event
contracts that may not be listed for trading or accepted for
clearing'' (emphasis added), seemingly primarily to avoid the work.
If the number of contract reviews has increased, then the Commission
should increase its resources and capacity--not to prohibit public
activity.
As referenced above, the Commission then embarks on a survey of
state gaming definitions to insert the concept into the Commission's
rules. The Commission even notes the approach ``reflects the similar
approach taken in numerous state gambling statutes,'' and mentions
35 States. The word ``state'' appears in the 95 page release 133
times. The Event Contracts Proposal reads as a defense against
becoming a gaming regulator while inserting State gaming into our
rules, which is not only confusing but unnecessary because Congress
has clearly defined our role with respect to the States.
To make matters worse, the Commission then leaps from the
overbroad, vague definition of gaming to provide examples of the
types of event contracts that the Commission believes fall outside
of the scope of CEA section 5c(c)(5)(C) and, by extension,
Regulation 40.11. Given the fact that the Event Contracts Proposal
repeatedly states that the broad range and volume of new contracts
motivated this rulemaking, I find it stunning that the outer bounds
provided are limited to contracts based on: (1) economic indicators,
(2) financial indicators, and (3) foreign exchange rates or
currencies.
Instead of creating a framework, the Commission is creating a
vast gray area for exchanges. Where gaming begins and the scope of
Regulation 40.11 ends is anyone's guess now, and I fear State gaming
authorities will be left to figure it out on their own.
Specific Areas for Public Comment
In addition to my concerns raised above, I highlight the
following specific areas for public comment to aid in review of the
Proposal:
Missing Comment Letters
The Event Contracts Proposal completely omits any discussion of
the comment letters the Commission recently received on the
definition of gaming, as well as Rule 40.11 and event contracts more
broadly. All told, the Commission has received around 200 comments
in response to requests for public comment on an exchange's
political control contracts.\16\ These comments came from exchanges,
academics, former CFTC officials, and other industry participants,
and were directly on point on the issues raised in today's Proposal.
---------------------------------------------------------------------------
\16\ The CFTC maintains the public comment files at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7311, and
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7394.
---------------------------------------------------------------------------
The Commission cannot selectively decide to tell one side of the
story. It strains credulity that the Commission has selective
amnesia and makes no mention of these letters in the Event Contracts
Proposal.
Misplaced Election Integrity Concerns
The Commission gets hung up on the fact that ``it is not tasked
with the protection of election integrity or enforcement of campaign
finance laws'' in justifying prohibiting event contracts based on
political contests. However, the Federal Election Commission polices
campaigns. Congress has never asked, nor suggested, the CFTC should
police elections, much like the Commission has not become the
weather police for weather derivatives. I will highlight a couple
categories of event contracts that have been permitted since 1992:
The Commission is not the crop yield police and hasn't displaced
the role of the USDA. The Commission is not the police for changes
to corporate officers or asset purchases and has not displaced the
role of the SEC. The Commission is not the police for regional
insured property losses, which is the domain of state insurance
regulators. The Commission is not the bankruptcy police, which is
the domain of the courts. The Commission is not the temperature
police, and so on and so forth. I do believe that the 2008 concept
release from which I drew these examples was very thoughtful, and I
wanted to familiarize myself with the full administrative
record.\17\
---------------------------------------------------------------------------
\17\ See Request for Public Comment, Concept Release on the
Appropriate Regulatory Treatment of Event Contracts, 73 FR 25,669
(May 7, 2008), https://www.federalregister.gov/documents/2008/05/07/E8-9981/concept-release-on-the-appropriate-regulatory-treatment-of-event-contracts.
---------------------------------------------------------------------------
Conclusion
I would like to thank Grey Tanzi, Andrew Stein, Lauren Bennett,
Nora Flood, and Vince McGonagle in the Division of Market Oversight
for their work on the Proposal.
The contracts causing so much consternation for the Commission
have not been, and are not, gaming. If the Commission could accept
that and move on, we could have a healthy discussion over how to
effectively regulate these markets as we do any other and protect
against abusive trading in retail binary options contracts. Instead,
we have muddled it and made a mess.
I look forward to the comments.
[FR Doc. 2024-12125 Filed 6-7-24; 8:45 am]
BILLING CODE 6351-01-P
