[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.

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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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \52\ See Kalshi Order at 5-7; Nadex Order at 2.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \59\ 7 U.S.C. 7a-2(c)(5)(C).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \63\ Provisions Common to Registered Entities, 76 FR 44776, 
44785 (July 27, 2011).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \79\ See, e.g., notes 71, 75, and 78, supra.
    \80\ 31 U.S.C. 5362(1)(a).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \89\ 7 U.S.C. 7a-2(c)(5)(C).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \100\ 7 U.S.C. 5(a).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \105\ Id.
    \106\ Id.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 http://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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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)[.]''
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \178\ See note 176, supra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \179\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \189\ Id. at 44785.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \207\ See Kalshi Dissenting Statement, n.2, supra.
---------------------------------------------------------------------------

    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