[Federal Register: May 7, 2008 (Volume 73, Number 89)]
[Notices]
[Page 25669-25674]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07my08-57]
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COMMODITY FUTURES TRADING COMMISSION
Concept Release on the Appropriate Regulatory Treatment of Event Contracts
AGENCY: Commodity Futures Trading Commission.
ACTION: Request for Public Comment.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is soliciting comment on the appropriate regulatory treatment of
financial agreements offered by markets commonly referred to as event,
prediction, or information markets.\1\ For ease of reference and to
avoid classification issues, these financial agreements are referred to
herein as event contracts. In general, event contracts are neither
dependent on, nor do they necessarily relate to, market prices or
broad-based measures of economic or commercial activity.\2\ Rather,
event contracts may be based on eventualities and measures as varied as
the world's population in the year 2050, the results of political
elections, or the outcome of particular entertainment events.\3\ The
Commission's staff has received a substantial number of requests for
guidance on the propriety of trading various event contracts under the
regulatory rubric of the Commodity Exchange Act (CEA or Act). Given the
substantive and practical concerns that may arise from applying federal
regulation to event contracts and markets, the Commission believes that
it is appropriate to solicit and consider the public's comments in
advance of issuing any definitive guidance.
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\1\ See Michael Gorham, Event Markets Campaign for Respect,
Futures Industry Magazine (Jan./Feb. 2004); Justin Wolfers and Eric
W. Zitzewitz, Prediction Markets, 18 J. Econ. Persp. 107 (Spring
2004); Robert W. Hahn and Paul C. Tetlock, Using Information Markets
to Improve Public Decision Making, AEI-Brookings Joint Center for
Regulatory Studies Working Paper 04-18 (March 2005); Hal R. Varian,
Can Markets Be Used to Help People Make Nonmarket Decisions?, The
New York Times (May 8, 2003).
\2\ The term event contract is not intended to encompass
contracts that generate trading prices that predictably correlate
with market prices or broad-based measures of economic or commercial
activity, or contracts which substantially replicate other commodity
derivatives contracts, such as binary options on exchange rates or
the price of crude oil. The aforementioned contracts are
unambiguously subject to CFTC regulation.
\3\ See, e.g., Retired claims list at the Foresight Exchange,
available at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.ideosphere.com/fx-bin/ListClaims.
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DATES: Comments must be received by July 7, 2008.
ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, Attention: Office of the Secretariat. Comments may be sent by
facsimile to 202.418.5521, or by e-mail to [email protected].
Reference should be made to the ``Concept Release on the Appropriate
Regulatory Treatment of Event Contracts.'' Comments may also be
submitted through the Federal eRulemaking Portal at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Bruce Fekrat, Special Counsel, Office
of the Director (telephone 202.418.5578, e-mail [email protected]),
Division of
[[Page 25670]]
Market Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Purpose of the Release
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 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. Event contracts have been based on a wide variety
of interests including the results of presidential elections, the
accomplishment of certain scientific advances, world population levels,
the adoption of particular pieces of legislation, the outcome of
corporate product sales, the declaration of war and the length of
celebrity marriages. In response to the various requests for guidance,
and to promote regulatory certainty, the Commission has commenced a
comprehensive review of the Act's applicability to event contracts and
markets. To further its review, the Commission is issuing this release
to solicit the expertise of interested persons, including CFTC-
registered markets, exempt markets, over-the-counter derivatives
dealers, capital market participants, legal practitioners, state and
federal regulatory authorities, academicians and research institutions
with respect to the practical and regulatory issues relevant to
regulating event contracts and markets.
Broadly speaking, the Commission must determine:
1. Whether event contracts are within the Commission's jurisdiction
and if so, why (or why not)?
2. If event contracts are within the Commission's jurisdiction,
should there be exemptions or exclusions applied to them and if so, why
(or why not)?
3. How should the Commission address the potential gaming aspects
of some event contracts and the possible pre-emption of state gaming
laws?
The Commission urges interested persons to provide detailed and
comprehensive comments that will assist the Commission in conducting
its review and analysis of the Commission's regulatory purview over
event contracts, the interests that may appropriately underlie
Commission-regulated transactions, and the appropriate regulatory
treatment of markets that may offer event contracts.
B. CFTC Experience With Event Contracts
The Iowa Electronic Markets (IEM), an electronic trading facility
that functions as an experimental and academic program, is one of the
better known and oft discussed real-money event markets currently in
operation.\4\ The IEM operates in part pursuant to a 1993 no-action
letter issued by Commission staff which, without asserting jurisdiction
or describing the potential parameters of the Commission's regulatory
purview over the market, allows the IEM to list various event contracts
subject to certain conditions and limitations for covered contracts.\5\
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\4\ The IEM is run by the University of Iowa Departments of
Accounting and Economics and the University's College of Business
Administration.
\5\ CFTC Staff Letter No. 93-66 [1992-1994 Transfer Binder]
Comm. Fut. L. Rep. (CCH) ] 25,785 (June 18, 1993). This no-action
letter superseded the operative terms of a more limited letter
issued to the IEM in 1992. The 1993 letter's relief extends to IEM
contracts based on political elections, economic indicators, and
certain currency exchange rates. The letter requires that the IEM
limit access to any one submarket to between 1,000 and 2,000
traders. The letter also sets the maximum amount that any single
participant can risk in any one submarket at five hundred dollars.
The letter makes clear that relief is premised on, among other
factors, the IEM's representations concerning the market's specific
manner of operation and academic purpose, and the assurance that the
IEM will not receive any profit or other form of compensation from
its activities.
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The IEM continues to be most recognized for its presidential
election contracts. The IEM offers a vote share contract and a winner-
take-all contract for the 2008 U.S. presidential election cycle. Its
vote share contract is ultimately associated with the candidates that
will be nominated by each party. Each vote share contract has a maximum
value of $1 and a contract payout that is directly based on the
percentage of the popular vote received by each of the two major party
candidates. For instance, a contract for a candidate who receives 40%
of the popular votes cast for both candidates will be worth $.40 at
settlement.
In contrast, the IEM's 2008 presidential election winner-take-all
contract will have a value of either $1 or $0 at settlement. The IEM's
winner-take-all-contract is also associated with a specific candidate,
but instead of having a payout that is tied to a particular percentage
of the popular vote received by each candidate, the contract will
distribute a fixed payout of $1 to its holder if and only if the
candidate referenced by the contract receives a greater percentage of
the popular vote cast. Although the IEM's presidential election
contracts are imperfect vehicles for the discovery of information,
there is some consensus on the question of whether the IEM's contracts
can function capably as predictive tools.\6\ Indeed, trading data
generated by some IEM presidential election contracts arguably have
produced better predictive indicators than data obtained from
professional polling organizations.\7\
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\6\ See, e.g., Michael Abramowicz, Information Markets,
Administrative Decision Making, and Predictive Cost-Benefit
Analysis, 71 U. Chi. L. Rev. 933, 950 (2004).
\7\ See Cass R. Sunstein, Group Judgments: Statistical Means,
Deliberation, and Information Markets, 80 N.Y.U. L. Rev. 962, 1029-
31 (June 2005).
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II. Commodity Options and Futures and the Attributes of Event Contracts
The Commission, with some exceptions, has exclusive jurisdiction
over two relevant types of derivative instruments--commodity options
and commodity futures contracts. Section 4c(b) of the Act gives the
Commission plenary jurisdiction over commodity options, and provides
that ``[n]o person shall * * * enter into * * * any transaction
involving any commodity regulated under this Act which is of the
character of, or is commonly known to the trade as, an option * * *
contrary to any rule, regulation or order of the Commission[.]''
Section 2(a)(1)(A) of the Act provides that the Commission shall have
exclusive jurisdiction with respect to accounts, agreements, and
transactions (including options) involving contracts of sale of a
commodity for future delivery. Event contracts, depending on their
underlying interests, can be designed to exhibit the attributes of
either options or futures contracts.
A significant number of event contracts are structured as all-or-
nothing binary transactions commonly described as binary options.\8\
Binary event contracts typically pay out a fixed amount when an outcome
either occurs or does not occur. The trading of such contracts can
facilitate the discovery of information by assigning probabilities,
through market-derived prices, to discrete eventualities. For example,
a binary contract based on whether a particular person will run for the
presidency in 2012, can pay a fixed $100 to its buyer if and only if
that individual runs for the presidency in 2012. If the contract's
traders believe that the likelihood of the individual's candidacy in
2012 is around 17 percent, the price of the contract will be around
[[Page 25671]]
$17, and will approximate the market's consensus expectation of the
individual's candidacy.
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\8\ See, e.g., Intrade Prediction Markets, Current Events
Contracts at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.intrade.com/jsp/intrade/contractSearch/.
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In addition to binary event transactions, the term event contract
has also been used to identify transactions, based on interests other
than market prices, which resemble futures contracts. For instance,
these types of event contracts can price consensus estimates of moving
values, such as the number of hours the average U.S. resident spends in
traffic or the share of votes that a particular candidate for political
office may receive. Unlike binary transactions, and similar to any
commodity futures contract, this type of contract creates continuous
and ongoing obligations that are linked to moving measures or levels,
as opposed to being dependent on the outcome of a single discrete
occurrence.
III. The Commission's Regulatory Purview
As discussed above, with some limited exceptions, the regulatory
purview of the Act extends to and includes transactions that are either
structured as options or futures when such transactions involve
interests that constitute commodities under the Act. Section 1a(4) of
the Act defines commodity in two distinct ways. First, Section 1a(4)
specifically enumerates certain articles or goods as commodities.\9\
Second, Section 1a(4) defines the term commodity as including those
articles or goods, and services, rights or interests, ``in which
contracts for future delivery are presently or in the future dealt
in.'' Therefore, an underlying interest that is not enumerated in
Section 1a(4) may be a statutory commodity under the Act if it
reasonably can underlie a futures contract on a forward looking
basis.\10\
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\9\ 7 U.S.C. 1a(4). Section 1a(4) of the Act enumerates the
following commodities: wheat, cotton, rice, corn, oats, barley, rye,
flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum
tuberosum (Irish potatoes), wool, wool tops, fats and oils
(including lard, tallow, cottonseed oil, peanut oil, soybean oil,
and all other fats and oils), cottonseed meal, cottonseed, peanuts,
soybeans, soybean meal, livestock, livestock products, and frozen
concentrated orange juice.
\10\ See United States v. Valencia, No. H-03-024, 2003 WL
23174749 at *8 (S.D. Tex Aug. 25, 2003) (noting that the
determination of whether West Coast natural gas is ``a commodity in
which contracts for future delivery are presently or in the future
dealt in,'' is a fact question, and that ``there is no evidence that
West Coast gas could not in the future be traded on a futures
exchange.'').
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In addition to Section 1a(4), Section 1a(13) of the Act identifies
certain interests as excluded commodities and thereby gives further
shape to the statutory definition of commodity.\11\ The Section 1a(13)
definition of excluded commodity is composed of four subsections. The
third subsection defines the term to include any economic or commercial
index that is based on prices, rates, values, or levels not within the
control of any party to the relevant contract. The fourth subsection of
Section 1a(13) provides that an excluded commodity includes an
occurrence, extent of an occurrence, or contingency associated with a
financial or economic consequence that is not within the control of the
parties to the relevant transaction.
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\11\ 7 U.S.C. 1a(13). Section 1a(13) of the Act provides that:
The term ``excluded commodity'' means--
(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.
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For the purpose of discussion and analysis, the types of event
contracts that Commission staff has reviewed can be categorized, albeit
imperfectly, as contracts that are based on narrow commercial measures
and events, contracts based on certain environmental measures and
events, and contracts based upon general measures and events. Narrow
commercial measures quantify and reflect the rate, value, or level of
particularized commercial activity, such as a specific farmer's crop
yield. Narrow commercial events, on the other hand, are events that
might, in and of themselves, have commercial implications, such as
changes in corporate officers or corporate asset purchases.
Environmental measures can be characterized as quantifications of
weather phenomena, such as the volatility of precipitation or
temperature levels, that do not predictably correlate to commodity
market prices or other measures of broad economic or commercial
activity. By comparison, environmental events can include the formation
of a specific type of storm, within an identifiable geographic region,
the likelihood of which will not predictably correlate to commodity
market prices or measures of broad economic or commercial activity.
General measures can be described as measures that are not
commercial or environmental measures. As such, general measures do not
quantify the rate, value, or level of any commercial or environmental
activity and can, for example, include the number of hours that U.S.
residents spend in traffic annually or the vote-share of a particular
presidential candidate. Similarly, general events, such as whether a
Constitutional amendment will be adopted or whether two celebrities
will decide to marry, can be described as events that do not reflect
the occurrence of any commercial or environmental event. The category
of general measures and events can be further divided into a multitude
of subcategories, such as political or entertainment measures or
events.
Since 1992, Commission-regulated exchanges have listed for trading
a variety of commodity futures and options contracts with payout terms
based on interests other than price-based interests. These contracts
involve interests as diverse as regional insured property losses, the
count of bankruptcies, temperature volatilities, corporate mergers, and
corporate credit events.\12\ While not strictly price-based, the
interests underlying these contracts have been viewed by Commission
staff as having generally-accepted and predictable financial,
commercial or economic consequences. In other words, unlike the
interests that event contracts cover, these underlying interests have
been viewed as measures and occurrences that reasonably could be
expected to correlate to market prices or other broad-based commercial
or economic measures or activities.
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\12\ For example, the Chicago Board of Trade's catastrophe
single event insurance option contracts (which are no longer listed)
paid out a fixed amount if and only if insured property damage
exceeded $10 billion for a specific region during a specified
interval of time.
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IV. Further Statutory Background
Federal regulations were initially applied to commodity derivatives
trading in 1921.\13\ At that time, Congress
[[Page 25672]]
acknowledged that commodity futures markets could benefit commerce by
facilitating the hedging of commercial risks and the discovery of
reliable commodity prices.\14\ The Grain Futures Act of 1922, the
forerunner to the CEA, consequently was enacted to promote the
financial vitality of futures trading by limiting price manipulations
and other disturbances that were prevalent at the time and widely
perceived to result from excessive speculation.\15\
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\13\ See, e.g., Hearing on Futures Trading Before the House
Committee on Agriculture, 66th Cong., 3rd Sess. 1043 (1921);
Hearings on H.R. 5676 Before the Senate Committee on Agriculture and
Forestry, 67th Cong., 1st Sess. 452 (1921); Hearings on Futures
Trading Before the House Committee on Agriculture, 67th Cong. 1st
Sess. 7-9 (1921); 61 Cong. Rec. 4761 (1921) (remarks of Senator
Capper, the sponsor of the Senate bill which became the Futures
Trading Act of 1921 (later restyled as the Grain Futures Act of 1922
when found to be unconstitutional for its use of taxation to
penalize off-exchange futures trading)).
\14\ See S. Rep. No. 871 (August 23, 1922). The Congressional
record is replete with discussion of the commercial importance of
commodity futures trading. The record suggests that commercial
interests must be able to look to properly functioning commodity
futures markets for market information and products that facilitate
the making of marketing, financing, and distribution decisions. S.
Rep. No. 93-1131, at 12 (1974). The Congressional record also
indicates that an initial purpose behind regulating commodity
futures trading was to secure fair and orderly markets for producers
and other commercial participants who used the markets for price
basing and hedging. Hearings on S. 2485, S. 2578, S. 2837 and H.R.
1311 before the Senate Committee on Agriculture and Forestry, 93d
Cong., 2d Sess. at 234 (1974); see also 80 Cong. Rec. 10739 (April
11, 1974).
\15\ E.g., 61 Cong. Rec. 4761-4763 (1921) (remarks of Senator
Capper); 61 Cong. Rec. 1379 (1921) (remarks of Rep. Bland); 61 Cong.
Rec. 1313-1314 (remarks of Rep. Tincher, the sponsor of the House
bill which became the 1921 Act); 61 Cong. Rec. 1376 (1921) (remarks
of Rep. Gensman).
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In identifying the national public interests that render federal
regulation necessary, the Act focuses on the commercial benefits that
well-functioning derivatives markets can provide by broadly expressing
their critical functions. Customarily, hedging and price basing have
been identified as two critical functions of the commodity derivatives
markets.\16\ For instance, Section 3 of the Act, as amended by the
Commodity Futures Modernization Act of 2000 (CFMA),\17\ finds that
transactions subject to the CEA are affected with the national public
interest because they provide a means for ``managing and assuming price
risks.'' Section 3 of the Act also identifies price discovery and price
dissemination as separate public interests warranting Federal
regulation.\18\
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\16\ Hedging occurs when positions acquired are economically
appropriate to the reduction of risks in the conduct and management
of a commercial enterprise. See, e.g., 17 CFR 1.3(z) (definition of
bona fide hedging). Price basing, a function of price discovery and
dissemination, can occur when commercial entities enter into
transactions in a particular commodity based upon commodity futures
prices for that or a related commodity, oftentimes at a
differential.
\17\ Appendix E, section 108, Pub. L. 106-554, 114 Stat. 2763.
\18\ The hedging and price basing purposes of commodity futures
trading are emphasized in other provisions of the Act as well. See,
e.g., 7 U.S.C. 6a, 6b, and 6c. As a matter of background, the
provision in the Grain Futures Act that was the forerunner of
current CEA Section 3 provided that:
Transactions in grain involving the sale thereof for future
delivery as commonly conducted on boards of trade and known as
``futures'' are affected with a national public interest; that such
transactions are carried on in large volume by the public generally
and by persons engaged in the business of buying and selling grain
and the products and by-products thereof in interstate commerce;
that the prices involved in such transactions are generally quoted
and disseminated throughout the United States and in foreign
countries as a basis for determining the prices to the producer and
the consumer of grain and the products and by-products thereof and
to facilitate the movements thereof in interstate commerce; that
such transactions are utilized by shippers, dealers, millers, and
others engaged in handling grain and the products and by-products
thereof in interstate commerce as a means of hedging themselves
against possible loss through fluctuations in price; that the
transactions and prices of grain on such boards of trade are
susceptible to speculation, manipulation, or control, which are
detrimental to the producer or the consumer and the persons handling
grain and products and by-products thereof in interstate commerce,
and that such fluctuations in prices are an obstruction to and a
burden upon interstate commerce in grain and the products and by-
products thereof and render regulation imperative for the protection
of such commerce and the national public interest therein.
Grain Futures Act, ch. 369, 42 Stat. 998 (Sept. 21, 1922). In
1936, Congress restyled the Grain Futures Act as the Commodity
Exchange Act and amended this provision to substitute the word
``commodity'' for ``grain.'' Pub. L. 74-675, section 2, 49 Stat.
1491 (June 15, 1936).
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Although repealed by the CFMA, former Section 5(g) \19\ of the Act
may be relevant to analyzing the findings and purposes discussed in
Section 3 of the Act. Former Section 5(g) provided that the Commission
could not designate a board of trade as a contract market unless the
board of trade demonstrated that transactions for future delivery in
the commodity for which designation as a contract market was sought
``will not be contrary to the public interest.'' \20\ The public
interest test of Section 5(g) included an ``economic purpose'' test,
subject to a final test of the public interest.\21\ The economic
purpose test applied under former Section 5(g) was used to prohibit the
trading of certain contracts. Notably, the economic purpose test
regarding contracts appropriate for trading on a futures exchange was
not necessarily congruent with the scope of the Commission's
jurisdiction. Accordingly, while futures contracts that failed the
economic purpose test were prohibited from trading on futures exchanges
and thus illegal because of the on-exchange trading requirement, they
(and any instrument with identical terms) remained futures contracts,
fully subject to the Commission's jurisdiction.
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\19\ 7 U.S.C. 7(g), as amended by the Commodity Futures Trading
Commission Act of 1974, Pub. L. 93-463, 88 Stat. 1389 (1974). In
1992, Section 5(g) was redesignated Section 5(7) of the Act. See
Futures Trading Practices Act of 1992, Pub. L. 102-546, 106 Stat.
3590 (1992). The CFMA repealed all of former Section 5 of the Act,
including Section 5(g) (redesignated as Section 5(7)), and replaced
it with current Section 5. Section 5 was radically restructured by
the CFMA to provide for designation criteria and core principles
with which a DCM must comply. Appendix E of Pub. L. 106-554, 114
Stat. 2763 (2000).
\20\ The House Committee on Agriculture stressed that contracts
that could be expected to be used almost entirely for speculation
would be against the public interest. H.R. Rep. No. 975, 93 Cong.,
2d Sess. 29 (1974).
\21\ See H.R. Rep. No. 1383, 93d Cong., 2d Sess. 36 (1974).
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By enacting the CFMA, Congress sought ``to promote innovation for
futures and derivatives and to reduce systemic risk by enhancing legal
certainty in the markets for certain futures and derivatives
transactions[.]'' \22\ As demonstrated by the IEM, innovative event
markets have the capacity to facilitate the discovery of information,
and thereby provide potential benefits to the public. Subject to
certain exceptions, Section 4(c)(1) of the Act gives the Commission the
authority to ``promote responsible economic or financial innovation and
fair competition'' by exempting any transaction or class of
transactions from any of the provisions of the Act, including the
requirement that they trade on Commission-regulated markets, where the
Commission determines that such action would be consistent with the
public interest. Pursuant to Section 4(c), Congress gave to ``the
Commission a means of providing certainty and stability to existing and
emerging markets so that financial innovation and market development
can proceed in an effective and competitive manner.'' \23\ Under
Section 4(c), the Commission has the discretion to grant an exemption
to certain classes of transactions without having to make a
determination that such transactions are subject to the Act in the
first instance.\24\ Notably, the Commission can use its Section 4(c)
[[Page 25673]]
exemptive authority not only on a case-by-case, or product-by-product
basis, but may also use the authority to establish a set of regulatory
provisions applicable to a defined class of products.
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\22\ House Report No. 106-711(III) September 6, 2000.
\23\ House Conference Report 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
\24\ With respect to the exercise of this discretion, the House-
Senate Conference Committee responsible for the review of Section
4(c) stated that:
The Conferees do not intend that the exercise of exemptive
authority by the Commission would require any determination
beforehand that the agreement, instrument, or transaction for which
an exemption is sought is subject to the Act. Rather, this provision
provides flexibility for the Commission to provide legal certainty
to novel instruments where the determination as to jurisdiction is
not straightforward. Rather than making a finding as to whether a
product is or is not a futures contract, the Commission in
appropriate cases may proceed directly to issuing an exemption.
Conf. Report at 3214-3215. Although Section 4(c) only speaks to
futures contracts, Section 4c(b) of the Act, the Commission's
plenary authority to regulate transactions that involve commodity
options, provides the Commission with comparable exemptive authority
for options.
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V. Issues for Comment
A. Request for Comment
The following questions consider the Commission's regulatory
purview over event contracts, the interests that may appropriately
underlie Commission-regulated transactions, and the appropriate
regulatory treatment of event contracts. The Commission encourages
comments on the specific questions posed, as well as the broad range of
issues raised in this concept release. In providing comments, please
describe your relevant experience and discuss in detail the facts and
legal provisions that support your conclusions. Furthermore, please
consider the Commission's mandate to protect commodity futures and
options markets and customers, and ensure the integrity of the
commodity derivatives marketplace, as well as the expected effects of
any Commission action on competition, efficiency, innovation and the
financial integrity of transactions. Any recommendation with respect to
the regulatory treatment of event contracts and markets should be
consistent with and supported by the Act, practical, and amenable to
effective and efficient implementation.
B. Public Interest
1. What public interests are served by event contracts that are
designed and will principally be traded for information aggregation
purposes and not for commercial risk management or pricing purposes?
2. How are these interests consistent with the public interest
goals embodied in the Act?
3. What calculations, analyses, variables, and factors could be
used to objectively determine the social value of information to the
general public that may be discovered through trading in event
contracts? Should this be a factor in determining whether the
Commission plays a role in regulating these markets?
C. Jurisdictional Determinations
4. What characteristics or traits are common to or should be used
to identify event contracts and event markets?
5. How do these characteristics and traits differ from those of
commodity futures and options contracts that customarily have been
regulated by the Commission? How are they similar?
6. Are there criteria based on the provisions of the Act that could
be used to make jurisdictional determinations with respect to event
contracts and markets?
7. Given the purposes and history of the Act, would it be
appropriate for the Commission to apply a test premised on commercial
risk management or pricing functions to demarcate the Commission's
jurisdiction over particular contracts? If so, what factors could be
used to make such a determination?
8. Given the purposes and history of the Act, would it be
appropriate for the Commission to apply any test premised on the
economic purpose of certain types of transactions to demarcate the
Commission's jurisdiction over particular contracts? If so, what
factors could be used to make such a determination?
9. What calculations, analyses, variables and factors would be
appropriate in determining whether the impact of an occurrence or
contingency will result in a financial, commercial or economic
consequence that is identified in Section 1a(13) of the Act?
10. What calculations, analyses, variables, and factors would be
appropriate in determining whether an economic or commercial index that
is based on prices, rates, values, or levels should or should not
qualify as an excluded commodity under Section 1a(13) of the Act?
11. What identifiable factors, statutorily based or otherwise,
limit the events and measures that may underlie event contracts when
such contracts are treated as Commission-regulated transactions?
12. What objective and readily identifiable factors, statutorily
based or otherwise, could be used to distinguish event contracts that
could appropriately be traded under Commission oversight from
transactions that may be viewed as the functional equivalent of
gambling?
13. The Commission notes that Section 12(e) of the Act generally
provides that the CEA supersedes and preempts other laws, including
state and local gaming and bucket shop laws, with respect to
transactions executed on or subject to the rules of a Commission-
regulated market, or with respect to transactions exempted from the Act
pursuant to the Commission's exemptive authority under Section 4(c) of
the Act. What are the implications of possibly preempting state gaming
laws with respect to event contracts and markets that are treated as
Commission-regulated or exempted transactions?
14. Should certain underlying events or measures--such as those
based on assassinations or terrorist activities--be prohibited
altogether due to the social perception and impact of such events? What
statutory or other legal basis would support this treatment?
15. Are there event contracts, such as political event contracts,
that should be prohibited from trading under the Act, or that deserve
separate treatment or consideration, due to the nature and importance
of their outcomes? What statutory or other legal basis would support
this treatment?
D. Legal Implementation
16. Is it appropriate for the Commission to direct certain or all
event contracts onto markets that are regulated differently from and
perhaps less stringently than DCMs? For example, it may be warranted or
necessary to treat event markets that aggregate information solely for
academic or research purposes, event markets set-up for internal
corporate purposes, or event markets that offer exceedingly low
notional value contracts to traders differently than markets that
possess the attributes of traditional DCMs.
17. Is it appropriate for the Commission to use the Section 4(c)
exemptive authority of the Act for implementing a regulatory scheme for
event contracts and markets? In this regard, the Commission notes that
it has the discretion to grant an exemption under Section 4(c) to
certain classes of transactions without having to make a determination
as to whether such transactions are subject to the Act in the first
instance.
18. Is the issuance of staff no-action relief, such as the relief
issued to the IEM, an appropriate or preferable means for establishing
regulatory certainty for event contracts and markets? Is a policy
statement appropriate or preferable?
19. What are the benefits and drawbacks of permitting certain event
markets to operate pursuant to Commission established conditions that
are similar to the conditions under which the IEM operates?
E. Market Participants
20. Would it be appropriate to allow market participants, and in
particular, retail customers, to trade on Commission-regulated event
markets with the knowledge that the Commission may not be able to
effectively monitor the measures or events that underlie certain event
contracts?
21. What unique protections and prophylactic measures are
appropriate or necessary for the protection of retail users of event
contracts and markets?
22. What are the implications of permitting the intermediation of
event
[[Page 25674]]
contracts, including intermediation on behalf of retail market
participants, both with respect to trade execution and clearing?
23. Are there any types of trader or intermediary conduct, peculiar
to event contracts and markets, that should be prohibited or monitored
closely by regulators?
24. What other factors could impact the Commission's ability, given
its limited resources, to properly oversee or monitor trading in event
contracts?
Issued in Washington, DC, on May 1, 2008 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E8-9981 Filed 5-6-08; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: May 7, 2008