Update 5/11/2024: CFTC proposal to ban election contracts
Summary
Meeting Details
Commodity Futures Trading Commission (CFTC) will hold an open meeting on Friday, May 10, 2024 at 10:00 a.m. (EDT) at the CFTC’s Washington, D.C. headquarters. Members of the public can attend the meeting in person, listen by phone, or view a live stream at CFTC.gov.
The Commission will consider the Proposed Rule regarding Event Contracts.
Friday, May 10, 2024
10:00 a.m. – 1:00 p.m. (EDT)
CFTC Headquarters Conference Center
Three Lafayette Centre
1155 21st Street N.W.
Washington, D.C. 20581
Domestic Toll-Free: +1-833-568-8864 or +1-833-435-1820
Webinar ID: 161 818 6148 & Passcode: 809203
To access the live meeting feed, use the dial-in numbers or stream at CFTC.gov. A live feed can also be streamed through the CFTC’s YouTube channel. Call-in participants should be prepared to provide their first name, last name, and affiliation, if applicable. Materials presented at the meeting, if any, will be made available online.
Complete event information can be found here.
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Agenda
1. Call to Order and Welcome
2. Opening Statements
Chairman Rostin Behnam
Commissioner Kristin N. Johnson
Commissioner Christy Goldsmith Romero
Commissioner Summer K. Mersinger
Commissioner Caroline D. Pham
3. Proposed Rule: Event Contracts
a. Staff Presentation
– Vincent McGonagle, Division of Market Oversight (DMO)
– Nora Flood, DMO
b. Motion
c. Commissioners’ Questions and Discussion
d. Vote
4. Chairman and Commissioners’ Closing Remarks
5. Adjournment
17 CFR § 40.11 – Review of event contracts based upon certain excluded commodities.
Commissioners
Chairman Rostin Behnam (D)
Georgetown ‘00
Syracuse Law ‘05
Official
Wikipedia
Legistorm
Cointelegraph
Commissioner Kristin N. Johnson (D)
Georgetown ‘99
Michigan Law ‘03
Official
LinkedIn
Commissioner Christy Goldsmith Romero (D)
Old Dominion ‘92
BYU Law ‘95
Official
Wikipedia
LinkedIn
Commissioner Summer K. Mersinger (R)
University of Minnesota ‘99
Catholic University Law ‘07
Official
Wikipedia
LinkedIn
Commissioner Caroline D. Pham (R)
UCLA ‘05
GW Law ‘11
Official
Wikipedia
LinkedIn
Union complaint
Rulemaking
Process
Commission Rulemaking Explained
Proposed Rules on the Federal Register
2008 Public Comments
CFTC Requests Public Input on Possible Regulation of “Event Contracts” [5/1/2008]
Proposed Rule [2008]
Federal Register [2008]
Comments [2008]
A. Request for Comment
The following questions consider the Commission’s regulator 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 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?
Recent Benham statements
ABA Business Law Section Derivatives & Futures Law Committee Virtual Winter Meeting [1/27/2022]
As such, we have included in our upcoming strategic plan a goal of encouraging innovation and enhancing the regulatory experience for market participants in the U.S. and abroad. Strategies towards achieving this goal include… addressing risks and opportunities arising from significant emerging trends in derivatives markets, including DeFi, environmental, social, and governance (ESG) investing, digital assets, and event contracts.
Futures Industry Association Expo 2023 [10/2/2023]
By the end of the year, the intermediary space will also see … a proposed rulemaking regarding event contracts.
FIA Boca 2024 International Futures Industry Conference [3/12/2024]
The Commission will spend the remainder of 2024 largely focused on finalizing rules and considering a few additional proposals currently in drafting. In the upcoming months, we anticipate considering a proposal to amend CFTC rules that address the treatment of certain types of event contracts, in order to provide additional regulatory clarity both for exchanges that seek to list event contracts, and for market participants.
Forecasting Use Cases for Event Contracts
Elections
Would the expected share of the votes represented by the market’s closing prices on Election Day match the actual share the candidates obtained more closely than the polls would? The experiment worked. The final market price corresponded to Bush’s and Dukakis’s market shares better than Gallup, Harris, CBS/New York Times and three other major polls.
…
A paper being prepared for publication by several Iowa professors compares the performance of the IEM as a predictor of presidential elections from 1988 to 2004 with 964 polls over that same period and shows that the market was closer to the outcome of an election 74 percent of the time. The market, moreover, does better than the polls at predicting the outcome not just around Election Day but as long as 100 days before.
Markets Predict Outcome Better Than Polls (2008)
Hurricanes
Overall, traders are remarkably accurate forecasters. Indeed, traders correctly predict a hurricane will or will not make landfall in one of eight Gulf or Atlantic regions with 84% accuracy. The most accurate forecast, the NHC forecast, correctly predicts whether or not a hurricane will make landfall in one of eight regions with 81% accuracy. Traders are more accurate than the NHC for storms more than five days from landfall (69% to 54%), but less accurate for storms two days or less from landfall (90% versus 100%).
Evolution of subjective hurricane risk perceptions: A Bayesian approach (2011)
Finance
The prediction markets were designed to forecast the market capitalization of Google at the close of the first day of trading. Market capitalization was used because our markets opened well in advance of Google announcing the expected number of post-IPO shares or initial price ranges. The markets yield three interesting results. First, the markets were relatively accurate. The final forecast exceeded the actual first-day closing market capitalization by 4.0% (using the first-day closing price as the basis). This was far closer to the actual value than the IPO price, which fell short by 15.3%. The forecast was also relatively accurate far in advance of the IPO. During the time period before Google announced their initial preliminary price range and share quantity, the market forecast averaged 6.6% higher than the actual capitalization. Second, by comparing the forecasts to information from the IPO auction, we can compare information of “outsiders” (the prediction market traders) and “insiders” (Google and their investment bankers). The degree of excess demand at the issue price suggests Google knew the auction was underpricing the issue. In fact, the demand we estimate from available information about unfilled orders suggests about the same degree of underpricing as the prediction market forecast does. Third, in addition to running the markets to get point estimates of the eventual market capitalization, we develop a method for estimating the uncertainty inherent in the forecasts. We find that the inherent uncertainty drops dramatically as the IPO process unfolds and, in particular, drops significantly on days that prospectus amendments are filed with the SEC. This indicates that the amendments contain significant, value-relevant information.
Searching for Google’s Value: Using Prediction Markets to Forecast Market Capitalization Prior to an Initial Public Offering (2009)
Infectious disease
No publicly available forecasts for influenza activity are available, but a comparison with predictions implied by historical experience can provide a benchmark for the quality of the predictions from the market. For each week, using the historical average level of activity would have correctly predicted the correct color only 36% of the time, and the prediction would have been within one color only 79% of the time. According to these raw counts, therefore, the market outperformed the historical prediction through at least 4 weeks in advance, with the single exception of exact prediction 3 weeks in advance.
Use of Prediction Markets to Forecast Infectious Disease Activity (2007)
Inflation
Headline inflation came in at 0.2%, below expectations. What’s more notable is that core inflation also came in at 0.2%, a surprise given the persistence of 0.4% (almost 5% annualized) prints from last December to May. There have been several instances of headline inflation coming in low before rebounding again, but core inflation has remained strong until now. Kalshi’s market-based forecasts were spot on in predicting June’s data, hitting when the rest of the market missed.
…
The median CPI forecasts have been equally accurate or more accurate than the Bloomberg economist survey and the Cleveland Fed Nowcast in 11 of the last 13 months.
Kalshi smashes other CPI forecasts (2023)
Interest rates
In each of the three meetings, Kalshi is more accurate than FedWatch, including an impressive 0.098% average error for the September meeting, more than half of FedWatch’s.
Kalshi offers a more accurate picture of the federal funds rate over the three FOMC meetings analyzed, offering a 0.13% more accurate measure on average. In the future, I would like to look at more meetings to see if this pattern holds. Additional prediction markets, such as Polymarket, could be incorporated into the analysis to strengthen the assessment of whether retail prediction markets outperform the CME. These diverging results also beg the question: with an efficient market, why aren’t institutional investors mimicking the trades of Kalshi if they are more accurate, or vice versa?
Predicting the Fed (2023)