In the Commodity Futures Trading Commission’s (CFTC) third public comment hearing regarding election contracts in the past two years, public comments overwhelmingly opposed the proposed rule, with 755 comments opposing, 7 supporting, and 59 unclear, duplications, or spam.
Information about the two prior public comment periods can be found here.
This most recent public comment period was prompted by the proposed rule passed by the CFTC Commissioners in a 3-2 vote at a May 10, 2024, public meeting. This proposed rulemaking would specify the types of event contracts that involve ‘‘gaming,” and therefore “may not be listed for trading or accepted for clearing on or through a CFTC-registered entity,” to include elections, sports, and awards. The May 10th public hearing that initiated the proposed rule prompted a 60-day public comment window, which was extended an additional 30 days until August 8, 2024.
The proposed rule and all public comments may be found here.
The 800lb Razorback in the Room
Ordinarily, this proposal would have been expected to pass on the same 3-2 vote, but two things changed.
First, the U.S. Supreme Court overturned Chevron Deference on June 28th, prohibiting regulatory agencies from interpreting ambiguous laws.
Second, former Arkansas Senator Blanche Lincoln issued a comment that undermined the CFTC’s interpretation of section 5c(c)(5)(C) of the Commodity Exchange Act (CEA). Senator Lincoln’s comment is by far the most consequential of all the 821 public comments. And possibly more so than all the other 820 comments combined.
This is because, on July 15, 2010, Senators Blanche Lincoln and Diane Feinstein engaged in a conversation (“colloquy”) that is recorded in the Congressional Record. No recording of this conversation exists on CSPAN, in the Library of Congress archives, or with the Senate video office, leading to speculation about whether it was merely inserted into the official record by staff. Regardless, the “2010 Colloquy” is the legal justification the CFTC uses for regulating event contracts that it deems “gambling,” and banning election contracts. Here is the full text of the colloquy:
EVENT CONTRACTS
Mrs. FEINSTEIN. I thank Chairman LINCOLN and Chairman DODD for maintaining section 745 in the conference report accompanying the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gives authority to the Commodity Futures Trading Commission to prevent the trading of futures and swaps contracts that are contrary to the public interest.
Mrs. LINCOLN. Chairman DODD and I maintained this provision in the conference report 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. I thank the Senator from California for encouraging Chairman DODD and me to include it. I agree that this provision will strengthen the government’s ability to protect the public interest from gaming contracts and other events contracts.
Mrs. FEINSTEIN. It is very important to restore CFTC’s authority to prevent trading that is contrary to the public interest. As you know, the Commodity Exchange Act required CFTC to prevent trading in futures contracts that were ‘‘contrary to the public interest’’ from 1974 to 2000. But the Commodity Futures Modernization Act of 2000 stripped the CFTC of this authority, at the urging of industry. Since 2000, derivatives traders have bet billions of dollars on derivatives contracts that served no commercial purpose at all and often threaten the public interest. I am glad the Senator is restoring this authority to the CFTC. I hope it was the Senator’s intent, as the author of this provision, 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. Will 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 a 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.
Mrs. FEINSTEIN. And does the Senator agree that this provision will also 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?
Mrs. LINCOLN. I do. National security threats, such as a terrorist attack, war, or hijacking pose a real commercial risk to many businesses in America, but a futures contract that allowed 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.
Mrs. FEINSTEIN. I thank the Senator for including this provision. No one should profit by speculating on the likelihood of a terrorist attack. Firms facing financial risk posed by threats to our national security may take out insurance, but they should not buy a derivative. A futures market is for hedging. It is not an insurance market. [Emphasis added]
You can see the colloquy used to justify the proposed rule itself:
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.”
In the proposed rule on event contracts, the colloquy is mentioned 30 times.
During the oral arguments in the Kalshi lawsuit against the CFTC’s rejection of election contracts, Deputy General Counsel Anne Stukes uses the colloquy to justify the CFTC’s ban on election contracts:
First, the Commission looked at that the ordinary dictionary definition of gaming and found that gaming in its ordinary dictionary meaning is synonymous or interchangeable with gambling. And that’s actually supported in the congressional record when we see that colloquy between Senators Feinstein and Lincoln, where the first thing, I think, that Senator Lincoln’s comment says is this section of the CEA, 5CC5C, is intended to prevent gambling, using the futures markets for gambling.
However, Senator Lincoln’s public comment is crystal clear that the proposed rule, and banning election contracts in general, exceeds the authority Congress intended for the CFTC:
In prohibiting broad categories of contracts, the CFTC’s proposal relies heavily on a 2010 Senate colloquy between me and the late Senator Feinstein for support. But the CFTC proposal goes well beyond what we intended. This heavy-handed proposal to ban markets, rather than regulating them, risks undermining the core principles that underpin our financial markets – principles we strived to uphold through carefully crafted legislation that encourages innovation and provides consumer protections.
Of course, there are instruments that should not be traded on any financial market. Instruments about war, terrorism, and assassination might be inappropriate for the markets. This is precisely why we included rules in the CEA that give the government authority to prohibit contracts about war, terrorism, and assassination. We also believed that our futures markets are not meant for gambling, and so we also gave the government the authority to prohibit gambling contracts about games like the Super Bowl, the Kentucky Derby, and the Masters Tournament. But outside these narrow categories, the law is clear that the CFTC has the responsibility to regulate contracts, not ban them.
Now, however, the CFTC is attempting to prohibit all sorts of financial instruments – from instruments that have any relation to sports, such as attendance and ratings of a championship game, to instruments involving political elections, to contracts about the Nobel Prize. As the CFTC sees it, these are “gaming” contracts, and therefore fall under the prohibition we drafted in 2010.
However, it is my view that this interpretation entirely misses the mark. The law was meant to capture recreational gambling on sporting events and casino-type activities, not the Nobel Prize in Physics or the outcome of major elections. These events are nothing like the Super Bowl, the Kentucky Derby, or the Masters Tournament. If we had intended to include these events, we would have done so explicitly. We did not, because those events – unlike the result of a sports match – have real and significant economic consequences. Prohibiting futures contracts on those events would therefore inhibit the sort of legitimate economic activity that our markets are designed to promote. Further, it would push this existing legal economic activity to unregulated, offshore markets with little to no consumer protections.
By defining “gaming” so broadly, the CFTC’s proposed rule casts a dangerous shadow over the entire industry. Speculating has risks, but it is not recreational gambling. Taking a position on a future event with commercial significance, in a commercial manner, is not recreational gambling.
…
Under the CFTC’s proposed rule, sensible, commercial activity would be categorized and prohibited as gambling. That doesn’t only blur the lines between gambling and legitimate commercial activity, it obliterates it. The foundational premise of the CFTC’s new rule is that it equates all legitimate commercial speculative activity with gambling. The early history of markets was replete with similar accusations that markets were nothing but gambling dens. That accusation has since been disproven by the unparalleled economic growth made possible by our financial markets, and especially by our derivatives markets. [Emphasis added]
In her comment, Senator Lincoln goes into more detail on three points where the CFTC misinterprets her colloquy:
- Definition of Gaming
- Blanket Prohibitions
- Purpose of the Derivatives Markets
In the last point, she declares:
Elections have enormous economic impacts and pose enormous economic risks to all sorts of parties, from individuals to small businesses to trade associations to large corporations. The reasoning that the CFTC uses to conclude that event contracts will have limited hedging utility and price-basing utility is mistaken.
Combined with the end of Chevron Deference, it’s hard to see how the CFTC’s attempt to ban election contracts has a leg to stand on.
Every comment in support of the rule
Since there were only a handful of public comments in support of banning election contracts, we’re listing them all right here:
- Amy Klobuchar, U.S. Senate (73936)
- Cantrell Dumas, Better Markets (74365)
- Dennis Kelleher, Better Markets (74368)
- Jonathan Nabavi, NFL (74448)
- Steve Suppan, Institute for Agriculture and Trade Policy (74495)
- Alexandra Thornton, Center for American Progress (74312)
- Chris Barnard (73957)
A letter from Senate and congressional Democrats dated August 5th is not currently listed on the CFTC website but can be found here.
Sports contracts
The “NFL” above is indeed The National Football League. While almost all comments were concerned about banning election contracts and political prediction markets, sports and awards contracts are also included in the proposed ban. Below are some interesting comments related to the banning of sports contracts:
- Christopher Cylke, American Gaming Association (74361)
- Andre Fluellen, Beyond The Game Network (73942)
- Jeremy Kudon, Sports Betting Alliance (74296)
- Jeff Ifrah, RSBIX (74480)
- Joel Litvin, Calumet Consulting (73789)
Several of the comments in opposition (or expressing concerns) to the proposed rule over sports betting were to allow sports bookmakers to hedge their risk, essentially allowing an exchange for layoff bets. (Say a major casino or bookmaker is taking bets on a Yankees-Red Sox playoff series and bettors are overwhelmingly favoring the Yankees to win. The bookmaker with the unbalanced book can limit their potential losses in case of a Yankees victory by placing a “layoff bet” on the Yankees to win with another bookmaker.)
The American Gaming Association (AGA) comment describes it as:
The AGA urges the Commission to revise the Proposal to clearly allow licensed gaming entities to use event contracts on sports contests to hedge against legitimate commercial risk. As the Commission notes, gaming is a rapidly evolving field, and institutions in the space should have access to a safe, regulated market to hedge commercial risk. This can be achieved in a way that safeguards the public interest while working in concert with state and tribal regulatory regimes to support the stability and growth of the regulated sports betting market.
Notable comments against the rule
Below is a collection of notable comments broken down by category. Many of the commenters are familiar names and organizations, but the strong opposition to the rule by crypto and the decentralized finance industry was not seen in prior comment periods, possibly because the CFTC was only deliberating Kalshi’s contracts.
Legal criticism:
- Blanche Lincoln, Former Senator (74357)
- Pratik Chougule, Coalition for Political Forecasting (74507)
- Dusty Johnson, Congressman (74127)
- Hamilton Lincoln Law Institute (74343)
- Michael Philipp, Morgan, Lewis & Bockius LLP (74472)
- David Glidden (74492)
DeFi:
- Paul Grewal, Coinbase (74489)
- Tyler Meade, Gemini (?)
- JB Mackenzie, Robinhood (74488)
- Brian Mulherin, LedgerX (74478)
- Steve Humenik, Crypto.com (74483)
- Alexander Grieve, Paradigm (73943)
- Jessica Furr, Dragonfly (74493)
Markets/Exchanges:
- David Mason, Aristotle (74479)
- Eliezer Mishory, Kalshi (74500)
- Kara Dutta, Intercontinental Exchange (74374)
- Kevin Kennedy, Nasdaq (73955)
- Graham Deese, ForecastEx (74461)
- David Pollard, Susquehanna (73923)
Academia:
- Harry Crane, Rutgers (74225)
- Robert Webb, UVA (73791)
- Patricia Phillips, Columbia (74423)
- Robin Pemantle, UPenn (73688)
- Stephen Ross, Penn State (73930)
- Gerald Rosenberg, U of Chicago (73748)
- Matthew Steven Sheldon, Imperial College London (73685)
- Ilya Beylin, Seton Hall Law (73949)
- James Wilson, SMU (73770)
- James Bailey, Providence (74217)
- Jamal Ali (73992)
- Christopher Stewarts (74175)
Prediction Market experts:
- Jonathan Zubkoff, Professional event contract trader (74010)
- Maxim Lott, ElectionBettingOdds.com (73763)
Other comments of interest
Eliezer Mishory of Kalshi (74502) submitted a second comment: “Stock Index Futures at the Merc,” a 1984 speech given by the CME’s then President & CEO Clayton Yeutter arguing:
The stereotype of a futures exchange is a marketplace where only speculation occurs and wild-eyed gamblers drive prices up and down.
Nothing could be more fallacious. Futures markets do not create risk. They merely transfer it from investors, businessmen, agricultural producers, and bankers to professional traders who are willing to accept that risk in the hope of making substantial profits. This is the vital economic function of futures markets. It is what they are all about.
And lastly, of all the comments, Franklin Smith (74501) gave by far the most eloquent critique of the proposed rule:
Bottom line, this is a boomer proposal. Boomers don’t get what Tay Tay matters to people so they say no. Would have thought that a diverse commission would be a little bit more progressive and a lot less boomer.
How ironic that a Commission with no boomers was cut off at the knees by a boomer, Blanche Lincoln.