August 2024
The Commodity Futures Trading Commission (CFTC) has recently concluded the public comment period for its proposed rule to ban trading in derivatives tied to U.S. election outcomes. If approved, the proposed rule would be significant, as it seeks to amend the current framework governing event contracts under the Commodity Exchange Act (CEA).
Background
In May 2024, the CFTC voted 3–2 to advance a proposal prohibiting the trading or clearance of contracts tied to outcomes in elections, sporting events or award contests. The proposal aims to achieve this by defining “gaming,” an activity prohibited under the CEA's event contract provisions. Notably, the Republican Commissioners, Summer Mersinger and Caroline Pham, dissented from this decision, voicing concerns over the scope and impact of the proposed rule.
Given the high level of public interest, the CFTC extended the comment period until August 8, 2024.
Diverse Public Reactions
The proposed rule elicited a wide variety of responses from industry stakeholders and politicians, reflecting the complex issues at stake with the CFTC’s proposed regulation:
- Opposition to the Proposal:
- Hamilton Lincoln Law Institute, Lincoln Policy Group, Paradigm, and Coinbase: are organizations that urged the CFTC to withdraw the proposal, arguing that it adopts an overly broad and vague definition of “gaming,” which may exceed the CFTC’s statutory authority.
- Coinbase emphasized that the CFTC should focus on promoting responsible innovation by encouraging the development of certain event contracts on registered futures exchanges rather than imposing blanket prohibitions.
- The Hamilton Lincoln Law Institute argued that the CFTC’s proposal is inconsistent with the CEA’s prohibition on contracts involving “gaming” because elections and similar events do not constitute gaming. The Institute further contended that the CFTC lacks the authority to redefine “gaming” in this context. They also urged the CFTC to either withdraw the proposal or revise it to accommodate prediction markets, which they argue play a crucial role in economic forecasting and public policy.
- The Lincoln Policy Group warned that the proposed rule is “heavy-handed” and could stifle legitimate economic activity, potentially pushing such activities into unregulated offshore markets where consumer protections are minimal.
- Support for the Proposal:
- Better Markets and Public Citizen: are advocacy groups that support the proposed amendments, arguing that political event contracts could undermine the democratic process. They warned that allowing such contracts could introduce financial incentives that might lead to election manipulation and interference.
- Democratic Lawmakers: Democratic legislators expressed support for the proposal, arguing that “election gambling fundamentally cheapens the sanctity of our democratic process” and urged the CFTC to finalize the rule promptly.
- Additional Industry Concerns:
- Intercontinental Exchange Inc. (ICE): is the parent company of the NYSE, that raised concerns that the proposed rule might hinder the development of new contract types that could be suitable for exchange trading. ICE suggested that the CFTC should evaluate event contracts on a case-by-case basis rather than adopting a broad prohibition.
- NFL: cautioned against permitting sports betting futures contracts, arguing that such contracts could compromise the integrity of professional sports. The NFL emphasized that these contracts would lack the stringent regulatory oversight found in legalized sports betting.
Impact of the Supreme Court’s Decision Overturning Chevron Deference
- The Supreme Court’s decision in late June to overturn Chevron deference in Loper Bright Enterprises v. Raimondo adds an additional layer of complexity to the CFTC’s rulemaking process. Under Chevron deference, courts traditionally deferred to a federal agency’s interpretation of ambiguous statutory language as long as it was reasonable. With this doctrine overturned, the CFTC may face increased judicial scrutiny over its interpretation of “gaming” under the CEA.
- This shift means that if the CFTC moves forward with the rule, it could be subject to legal challenges on the grounds that the agency has overstepped its statutory authority. Courts may now be more inclined to independently interpret the CEA, potentially rejecting the CFTC’s expanded definition of “gaming” as it relates to event contracts. This heightened scrutiny could delay the implementation of the rule or even lead to its invalidation if the CFTC decided to move forward.
Next Steps
The CFTC is now reviewing the comments submitted during the public comment period. The commission may opt to hold additional hearings or roundtable discussions to further explore the implications of the proposed rule. Following this review, the CFTC has several potential courses of action:
- Issue a Final Rule — The CFTC could decide to proceed by publishing a final rule in the Federal Register. This would include an effective date and any adjustments made in response to public feedback. The final rule is likely to face legal challenges under the Administrative Procedure Act or other statutes.
- Reopen the Comment Period — The commission might choose to extend the comment period to gather additional input from stakeholders.
- Withdraw the Proposed Rule — If the CFTC concludes that the rule is not viable in its current form, it may withdraw the proposal entirely.
Given the approaching presidential election and the change in administration regardless of the winner, it is unlikely that this rule will be finalized before the end of the year.