I respectfully dissent from the Commission’s decision to commence a 90-day review, and a 30-day public comment period, regarding event contracts with respect to political control of the U.S. Senate and House of Representatives that have been submitted pursuant to the Commission’s certification procedures (the “Certified Contracts”) by KalshiEx, LLC (“Kalshi”), a CFTC-registered designated contract market (“DCM”).  The Certified Contracts reflect Kalshi’s good-faith efforts to address concerns voiced about a prior iteration of the contracts, which Kalshi had submitted for Commission approval but subsequently withdrew (the “Original Contracts”).

My dissent should not be taken as an endorsement of the wisdom of the Congressional control contracts[1] that Kalshi has submitted to the Commission.  Rather, it reflects my application of Congress’ direction to the Commission to permit event contracts to be listed for trading unless the Commission determines that they fall into certain categories enumerated in the Commodity Exchange Act (“CEA”) and are contrary to the public interest.

Given the novel nature of Kalshi’s contracts, I supported the Commission’s decision to undertake a 90-day review pursuant to CFTC Rule 40.11, which governs event contracts,[2]  to determine whether the Original Contracts could be prohibited under that standard.  I also felt it was critical to use that review as an opportunity to engage with the public on the important questions presented by these contracts.

The Commission received over 200 comment letters from a wide variety of stakeholders, including distinguished economists, academics, and professional market participants who explained why Kalshi’s Original Contracts were not contrary to the public interest.[3]  Not surprisingly, a few commenters had a different view.  Kalshi requested three extensions of the Commission’s 90-day review period and sought to use that time to discuss with Commission personnel certain potential changes to the Original Contracts that it was willing to make in order to address concerns that had been raised.  These changes consist of—

• Adding a new requirement that contracts be purchased in multiples of 5,000 contracts per order, to reduce any risk that the contracts might be used for casual betting;
• Replacing the position limits of $25,000 in the Original Contracts with larger position limits that are tiered based on the category of market participant and whether a market participant has a demonstrated established economic hedging need, in order to enhance the contracts’ hedging utility; and
• Expanding the Original Contracts’ prohibitions on trading by persons with material nonpublic information to extend to additional categories of persons and entities, in order to provide extra gating against participants associated with political campaigns and officeholders.[4]

Kalshi has now submitted the Certified Contracts, which contain these changes.  The Commission, in turn, has responded to these contract changes by commencing yet another 90-day review, with yet another 30-day comment period.

I cannot support these actions because:

1. These contracts do not fall within the categories enumerated in the CEA as required for the Commission to prohibit them, and nothing in the changes that Kalshi has made in the Certified Contracts changes that result;
2. The Commission’s actions are fundamentally unfair, seizing upon Kalshi’s contract changes to further delay a resolution; and
3. If the Commission wishes to give thorough consideration to the issue of DCM event contracts, including those relating to political control, Congress in the CEA has provided the Commission with a ready-made process to do so, namely, a rulemaking process – and Kalshi should not be punished for the Commission’s continuing failure to avail itself of that process.

The Contracts Do Not Fall Within the Enumerated Categories that are Subject to a 90-Day Review

The Dodd-Frank Act,[5] enacted in 2010, added Section 5c(c)(5)(C) to the CEA.  This section of the CEA provides that the Commission “may” determine that certain event contracts “based upon the occurrence, extent of an occurrence, or contingency” are “contrary to the public interest” if they “involve” one of five enumerated categories:  1) activity that is unlawful under any Federal or State law; 2) terrorism; 3) assassination; 4) war; or 5) gaming.[6]

The enumerated categories in CEA Section 5c(c)(5)(C) do not mention political control.  But in its only public interpretation of this provision, the Commission back in 2011-2012 concluded that contracts similar to Kalshi’s contracts that were sought to be listed by another DCM, the North American Derivatives Exchange (“Nadex”), constituted “gaming,” which is one of the enumerated categories in CEA Section 5c(c)(5)(C).[7]

In the words of Socrates, though, “it is better to change an opinion than to persist in a wrong one.” [8]  Having undertaken a 90-day review of the Original Contracts and considered the voluminous comment letters we received as part of that review, the conclusion is clear:  Kalshi’s contracts are not gaming.

Neither the CEA nor the Commission’s rules define the term “gaming.”  When it adopted Rule 40.11 governing event contracts, 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.”[9]  But no such future Commission rulemaking has been forthcoming.

Lacking any definition or clarification of the term “gaming” with which to evaluate Kalshi’s contracts, we turn to the ordinary meaning of “gaming”:  Risking money on the result of a game.  Merriam-Webster.com defines gaming as “the practice or activity of playing games for stakes; gambling;” likewise, Cambridge Dictionary defines “gaming” as “the risk of money in games of chance at a casino; gaming machines/tables.”[10]   

The legislative history of CEA Section 5c(c)(5)(C) supports this natural interpretation of the term “gaming” as well.  That legislative history, which consists of a single colloquy between Senator Dianne Feinstein and Senator Blanche Lincoln,[11] reads in relevant part as follows:

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.[12]

Thus, in responding to Senator Feinstein’s question about the Commission’s authority to determine that a contract is a gaming contract, Senator Lincoln associated gaming with sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament, i.e., games.

Nothing about the changes that Kalshi has made in its Certified Contracts – increasing order size, raising and tiering position limits, and expanding prohibitions on those who can trade – is relevant to the question whether the contracts constitute gaming.  They do not.  The Commission needs neither another 90-day review nor additional public comment to make that determination.

Undertaking Yet Another 90-Day Review and Another Request for Comment is Fundamentally Unfair

The Commission has been reviewing Kalshi’s contracts for nearly a year now.  Kalshi submitted the Original Contracts for Commission approval on July 20, 2022.  When approval of the Original Contracts was not forthcoming, Kalshi requested extensions of the 90-day review period totaling approximately six months (through May 22, 2023) and sought to discuss the potential changes, which it has now certified, with Commission personnel.

It is customary for DCMs to informally discuss new products with the Commission before certifying them, and that practice is to be encouraged.  But instead of encouragement, the Commission is responding to Kalshi’s certification by undertaking another 90-day review.  To continue to kick the can down the road is fundamentally unfair to a registered DCM that is playing by the rules as it seeks to list new contracts for trading.

Yet, a review of the questions the Commission is putting out for comment suggests that more than delay may be at work here.  Some of the questions are identical to questions we asked about the Original Contracts.[13]  Aside from needlessly putting commenters to the time and expense of re-submitting comments they have already provided, there is nothing about the changes that Kalshi has made in its Certified Contracts that implicates these questions – which suggests that the purpose of this exercise may be simply to give those opposed to the contracts a second chance to make their case.

The same can be said of the several questions that are new, but that do not specifically relate to the changes in the Certified Contracts and that could have been asked about the Original Contracts, too.[14]  Kalshi should not be forced to endure a further 90-day delay while the Commission opportunistically seeks public comment on questions it could have asked, but neglected to ask, the first time around.

Delay may not be the only point.  In fact, some of the new questions seem to suggest additional grounds of attack for commenters opposed to the contracts, which is particularly evident in the slanted nature of a new question like the following:  “Could trading in the markets for the contracts obligate the Commission to investigate or otherwise become involved in the electoral process or political fundraising?  If so, is this an appropriate role for the Commission?”[15]

In short:  It is fundamentally unfair for the Commission to use Kalshi’s good-faith efforts to improve its contracts as an opportunity to further delay a decision related to these contracts and, more concerning, avoid undertaking a rulemaking process that is both necessary and overdue with respect to these questions.  It is that topic to which I now turn.

A Commission Rulemaking Regarding Event Contracts is Long Overdue

In addition to the five enumerated categories set out above, CEA Section 5c(c)(5)(C) also includes a sixth category providing that the Commission “may” determine that a DCM event contract that involves “other similar activity” to those in the enumerated categories is contrary to the public interest.  Congress included an important caveat, though:  The Commission can only exercise its discretion to determine that a contract involving “other similar activity” is contrary to the public interest by rule or regulation.

Thus, Section 5c(c)(5)(C) contains a ready-made process for the Commission to determine, though a public rulemaking, whether event contracts relating to political control are appropriate for listing and trading by DCMs.  Such a rulemaking also would enable the Commission, for the first time, to interpret the “contrary to the public interest” standard in CEA Section 5c(c)(5)(C), and to establish the identifiable factors that it will consider when evaluating event contracts pursuant to that standard.

Further, a rulemaking process would allow the Commission to fix the obvious legal shortcomings in existing Rule 40.11, which implements CEA Section 5c(c)(5)(C).  Our rules should provide market participants and the public with clarity and regulatory certainty as to how the Commission interprets the CEA.  Unfortunately, Rule 40.11 regarding event contracts creates confusion rather than clarity by complicating a public interest review and contradicting the pertinent provisions of the CEA.[16]

At any point during the 13 years since the enactment of the Dodd-Frank Act, the Commission could have undertaken such a public rulemaking process.  After all, the Commission has been aware that there is significant interest in event contracts relating to elections for a very long time.

Indeed, in 2008, two years before the Dodd-Frank Act became law, the Commission was already struggling with the treatment of event contracts.  In its “Concept Release on the Appropriate Regulatory Treatment of Event Contracts,” the Commission stated:

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.  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.  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 . . .[17]

In addition, the Commission’s staff has issued two no-action letters permitting the offer of political indicator event contracts to U.S. persons without registration as a DCM, which relief remains in effect today.[18]  Finally, as noted above, in 2011, Nadex (a registered DCM like Kalshi) sought to list political event contracts similar to Kalshi’s contracts.

Rather than undertake the hard work of a rulemaking process to build a foundation for evaluating event contracts such as Kalshi’s contracts, the Commission has squandered the time since the enactment of the Dodd-Frank Act and the issuance of the Nadex Order.  Indeed, even during the year that it has been contemplating Kalshi’s contracts, the Commission still has not initiated a rulemaking process as expressly provided for in the CEA.

The unmistakable take-away for DCMs is not to expend resources developing innovative event contracts because the Commission may randomly subject them to a public interest analysis without providing any certainty as to the definitions and standards it will apply in doing so.[19]  The Commission’s dithering over Congressional control contracts (which it now seeks to extend by another 90 days) contravenes Congress’ direction that the Commission promote responsible innovation,[20] and undermines the Commission’s commitment to its own stated Core Values of being “Forward-Thinking” (i.e., challenging ourselves to stay ahead of the curve) and providing “Clarity” (i.e., providing transparency to market participants about our rules and processes).[21]

Conclusion

Kalshi has certified, pursuant to CEA Section 5c(c)(1) and CFTC Rule 40.2(a)(3)(iv),[22] that the Certified Contracts comply with the CEA and the Commission’s regulations thereunder.[23]  Unfortunately, the Commission’s response is to extend its review past the one-year mark through a process that is both unwarranted (because Kalshi’s contracts do not fall into the enumerated category of gaming that is subject to a 90-day review) and fundamentally unfair.

Instead, the Commission should treat Kalshi’s certification in the same manner it treats all DCM certifications of new products, and then do what Congress provided:  Undertake a public rulemaking process to establish a legal framework for exercising its discretion to determine whether event contracts, including those relating to political control, may be prohibited from trading because they are contrary to the public interest.

For all the foregoing reasons, I respectfully dissent.