On 10 May, the US Commodity Futures Trading Commission voted 3-2 to advance a highly anticipated and contentious proposed rule regarding event contracts. The proposed rule advanced with the support of CFTC Chairman Rostin Behnam and Commissioners Kristin Johnson and Christy Goldsmith Romero. Republican Commissioners Summer Mersinger and Caroline Pham raised significant concerns about the proposal during an open meeting and opposed the proposed rule.
Behnam opened the meeting expressing his support for the proposed rule, which would further specify the types of event contracts that fall into the definition of "gaming” contracts that are banned from being listed for trading or cleared by CFTC-regulated entities. Behnam explained that the proposal “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.
Event contracts are a type of derivative that are structured as a binary option based on the outcome of an event. Kalshi, a CFTC-regulated market for these contracts, currently lists a wide range of these contracts and has proposed introducing event contracts based on US election outcomes. The CFTC has rejected the exchange’s proposal, and the proposed rule would implement a general ban on this type of contract.
Behnam went on to explain why he opposes the introduction of event contracts on elections. “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,” he said.
"Contracts involving political events ultimately commoditize and degrade the integrity of the uniquely American experience of participating in the democratic electoral process,” he added. "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.”
Johnson expressed her support for the proposal and said it would provide clarity to the market about how the CFTC would use its authority related to event contracts moving forward. Johnson said the proposed rule could have benefited from additional commentary and engagement with the public, including roundtables. However, she believes the proposal puts the Commission on a path to provide more clarity to the markets.
Goldsmith Romero supported the proposal but expressed her support for a proposed rule that would go further. Additionally, Goldsmith Romero raised concerns about the CFTC’s ability to identify and address fraud and manipulation of event contracts more broadly. Vincent McGonagle, the agency's director of the Division of Market Oversight, agreed that the CFTC would likely need to rely on tips from the public to address concerns related to fraud and manipulation.
Mersinger raised concerns that the proposal plants the seeds of future bans of countless event contracts, exceeds the legal authority of the Commission, and relies on inadequate legislative history and intent. Mersinger emphasized that she does not believe the Commission has the legal authority to determine, in advance, that entire categories of event contracts are contrary to the public interest. Additionally, Mersinger raised concerns about certain delegated authority to staff contained in the proposal. She even went so far as to offer an amendment to the voting draft to remove language that delegated staff the authority “to commence a 90-day review of an event contract that may involve an enumerated or similar activity.”
In her dissent, Mersinger expressed her belief that “the decision whether an event contract should be prohibited from trading is a quintessential policy question that should be made by the Commissioners who are nominated and confirmed to set policy at the agency – at every step of the way.” Ultimately, her amendment was adopted with the support of Pham and Goldsmith Romero.
Pham used her opening statement to raise broad concerns about the CFTC straying from the Administrative Procedure Act, and “how little the Commission seems to care about due process under the law.”
Pham went on to state that she has “repeatedly raised troubling concerns about the breakdown of the Commission’s internal procedures and processes” which “severely compromises” the Commission’s statutory mandates. Before the Commission “usurps” any additional jurisdiction over products or asset classes, Pham said there needs to be a broad study of the agency by the General Accounting Office, the investigative arm of the US Congress. Specific to the proposed rule,
Pham raised concerns that the proposal contains an overly broad definition of gaming that would create confusion with state gaming regulators. She also raised concerns that the proposal omits any discussion of comment letters received by the Commission in response to a 2022 Request for Comment related to political event contracts.
Additional Documents
Statement of Chairman Rostin Behnam
