CFTC Proposes Ban on Events Contracts and Gaming Derivatives

The CFTC proposed a rule to ban the listing and clearing of "events contracts" and "gaming" derivatives.

The proposed rule would amend CFTC Rule 40.11 ("Review of event contracts based upon certain excluded commodities") (i) to further specify types of event contracts that fall within the scope of CEA Section 5c(c)(5)(C) ("Special rule for review and approval of event contracts and swaps contracts"), and (ii) which 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. The proposed regulations would cover derivative products that allow bets on sporting events as well as calamities such as terrorism and assassination.

The CFTC said it 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. Further, the CFTC said it observed recent applications for exchange registration, and expressions of interest regarding exchange registration, from entities that have indicated that they want to list event contracts for trading.

The comment deadline is July 9, 2024.

Statements

CFTC Chair Rostin Behnam argued that such contracts, like ones on the outcome of a political contest such as an election, "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." He maintained that contracts involving political events ultimately "commoditize and degrade the integrity of the uniquely American experience of participating in the democratic electoral process." He asserted that "such contracts would put the CFTC in the role of an election cop."

CFTC Commissioner Summer K. Mersinger said that she cannot support this particular proposed rulemaking. She argued that the proposal: (i) exceeds the legal authority that Congress granted the Commission in the CEA; (ii) 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; (iii) 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an "economic purpose test" for evaluating the public interest that was based on a provision of the CEA that was repealed by Congress nearly a quarter-century ago; (iv) fails to do the hard work of analyzing the unique nature of event contracts, which are different in kind from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; (v) relies on unsupported conjecture, treats similar circumstances differently and raises more questions than it answers; and (vi) flies in the face of the CFTC’s mandate to promote responsible innovation as Congress directed in the CEA.

CFTC Commissioner Caroline D. Pham dissented, arguing that the proposal ignores the Supreme Court’s "Preemption Doctrine." She argued that Congress intended that the CFTC regulate event contracts "within the bounds of the section 5(c) prohibitions." She highlighted that, instead of telling market participants how the CFTC will regulate the innovative contracts and exchanges that have appeared in recent years, the CFTC "has decided to 'identif[y] the types of event contracts that may not be listed for trading or accepted for clearing' seemingly primarily to avoid the work." Commissioner Pham said that if the number of contract reviews has increased, "then the Commission should increase its resources and capacity—not to prohibit public activity."