CFTC to Review Proposed DCM Offering on "Congressional Control"
Commentary by Steven Lofchie
The CFTC initiated a review of a CFTC Designated Contract Market offering related to "which political party will be in control of each chamber of the U.S. Congress."
The review of the so-called "Congressional Control Contracts," will determine if the proposed contracts are comprised of or reference enumerated activities pursuant to CFTC Rule 40.11(a) ("Review of event contracts based upon certain excluded commodities") and Section 5c(c)(5)(C) of the CEA ("Common provisions applicable to registered entities"). The cited rule and section refer to contracts that relate to terrorism, assassination, war, gaming or illegal activity.
The CFTC requested that the offering platform, KalshiEX LLC, delay listing the Congressional Control Contracts for 90 days pending the outcome of the review. The CFTC promised it will complete its review of the matter no later than October 28, 2022, or "as expeditiously as is practicable while ensuring adequate time for public notice and comment and [CFTC] and staff review of the submission as well as [CFTC] review of public comments received." The CFTC published a set of questions for public comment and will be accepting responses until September 25, 2022.
CFTC Commissioner Caroline D. Pham opposed the review, asserting that "Rule 40.11 does not apply to the contracts and because the appropriate process is to review the contracts under Rule 40.3." She further stated that "the [CFTC]'s action to impose a stay will essentially run out the clock on Kalshi's ability to list contracts for the November 2022 elections." Ms. Pham urged the CFTC to consider the review under CFTC Rule 40.2 ("Listing products for trading by certification") or Rule 40.3 ("Voluntary submission of new products for Commission review and approval") instead of Rule 40.11.
Commentary
Among the questions asked by the CFTC are whether the proposed contracts are "contrary to the public interest." Section 5c(c)(5)(C)(vi) of the CEA provides that the CFTC may reject a contract if it involves "similar activity" to the other items listed in Section 5c(c)(5(C); e.g., war, but it does not give the CFTC an open-ended right to reject contracts based on the Commissioners' judgment that the contract would be contrary to the public interest. Given that elections do not, at least so far, resemble war, neither the basis of the question nor the basis for the CFTC conducting a review under CFTC Rule 40.11 is evident. Ultimately, a CFTC Commissioner may be of the opinion that the CFTC should not allow the listing of election contracts, but that opinion does not provide a statutory basis for the review.
It is awfully hard to read the relevant statutory provision and reach the conclusion that election contracts are prohibited. Likewise, there is no reasonable basis for the CFTC to be questioning the economic significance of an election that will have an impact on numerous industries and products.