By Lene Powell, J.D.
Derivatives industry association FIA urged the CFTC to issue “relevant, practical guidance” on what event contracts are permissible under the Commodity Exchange Act. In a letter to the CFTC, FIA President and Chief Executive Officer Walt Lukken said additional CFTC clarity and guidance would bring transparency and regulatory certainty to event contracts, which have large overseas markets and widely available products. FIA submitted the comment letter in response to the CFTC’s review of a pending proposal by KalshiEx to list political event contracts.
KalshiEx proposal to list contracts. In August, the CFTC announced it was reviewing a voluntary submission by KalshiEX, LLC, a registered exchange, regarding a proposal to list political event contracts for trading. The proposed contracts would be based on which political party will be in control of each chamber of the U.S. Congress. The CFTC released a set of questions for which it accepted public comment until September 25 and said it will attempt to issue an order by October 28.
“Gaming” and “economic purpose.” In its comment letter, FIA stressed that it does not have a position on the KalshiEx proposal or most of the questions posed by the CFTC. However, FIA views CFTC action on the proposal as significant to informing the industry and public on the regulation of event contracts. FIA urged the CFTC to set forth clear ex-ante guidance to market participants about which event contracts are permissible under the Act and applicable CFTC Regulations, including Regulation 40.11. In developing this guidance, FIA asked the CFTC to consider the association’s general observations.
First, FIA noted that to its knowledge, the CFTC has not defined “gaming” under the Act but has classified participation in certain event contracts as “gaming” in responding to requests from Nadex and Victoria University of Wellington, New Zealand. In those determinations, Commission and CFTC staff’s statements suggest that certain event contracts are permissible—and thus not against the public interest—when coupled with use and size conditions.
However, those decisions are years old, limited to specific facts, and do not apply to other market participants, said FIA. With the growth of similar political event markets in the U.S. and international markets, FIA believes it is important for the Commission to issue more relevant, practical guidance on what event contracts are permissible under the Act.
Second, FIA said the market would benefit from enhanced transparency regarding how the CFTC applies the “economic purpose test.” This should include a discussion of whether a contract “reasonably can be expected to be, or has been used for hedging and/or price basing on more than an occasional basis” remains relevant to the determination. FIA observed there are large markets overseas for these same event contracts and that Commission has previously allow limited trading in similar products.
Accordingly, FIA urged the Commission to provide clarity to the markets on what commodity contracts are acceptable products for regulated entities and, by contrast, which contracts are against the public interest and not permissible.