IATP submitted the following comment to the Secretary of the Commodity Futures Trading Commission on August 8, 2024.
The Institute for Agriculture and Trade Policy (“IATP”)2 appreciates the opportunity to comment on the Event Contracts NPR. We most recently wrote about one event contract proposal referenced in the NPR in our July 24, 2023, letter on the Kalshi “Control Contracts.”3 We urged the Commission to not approve that contract and such self-certified political event contracts and election-based betting contracts in general. IATP thanks the Commission for its decision to disapprove the “Control Contracts.”[4]
IATP strongly supports the preamble of the NPR and the proposed amendments to the § 40.11 “Review of event contracts based upon certain excluded commodities.” This short comment emphasizes the well-reasoned statutory and regulatory foundation for the NPR.
Regarding the definitions of “war” and “terrorism” in an amended § 40.11
We propose that the Commission consider further definitions of “excluded commodities” in § 40.11 to anticipate possible regulatory evasion of prohibited contracts. For example, should the current prohibition on contracts involving “war” need further definition to include not just hostile military acts between states but also state sponsoring of or state affiliation with private actors that attempt to destroy or disable computer networked physical and financial infrastructure? The preamble states, “The Commission does not believe that it is necessary to define ‘terrorism,’ ‘assassination,’ or ‘war’ at this time.” (Federal Register (“FR”), p. 48977) A footnote to this sentence explains, “The Commission clarifies, however, that it believes that cyberattacks and other acts of cyberterrorism constitute terrorism, and in some cases war, and are also likely to constitute activity that is unlawful under state or federal law.” (Footnote 85)
While IATP appreciates this clarification, preambles, although crucial for understanding an agency’s reasoning about a regulation, are not legally enforceable. The federal definitions of terrorism5 do not anticipate that the intention of a terroristic attack could be economic gain or disruption. The Commission’s Technology Advisory Committee’s cybersecurity subcommittee will soon be presenting its report and recommendations on cybersecurity and financial markets. Before the Commission finalizes its definitions for the revised §40.11, it should review the report to help it decide whether the risks to markets of cyberattacks and cyber-security failures merits an amended definition of “war” and “terrorism” in the rule or whether the footnoted clarification will suffice.
In theory, the statute and the §40.11’s inclusion of “similar activities” to those explicitly prohibited as involved in event contracts might be considered as an adequate firewall against such event contract regulatory evasion of prohibited “Enumerated Activities.” However, we live in a perilous jurisprudential landscape in which long-standing precedents in the delegation of statutory authority and administrative law are in jeopardy. Therefore, we contend, the Commission should consider defining “war” and “terrorism” as prohibited activities involved in the listing of derivatives contracts. If the Commission decides that such definitions are not warranted, we urge the Commission to include footnote 85 in the amended rule itself.
Regarding the NPR’s proposed methodology for evaluating event contracts
The NPR is not a review of a single proposed event contract. (For readers unfamiliar with event contracts, the NPR gives a sample of those contracts that Designated Contract Markets (DCMs) have self-certified for trading.6) It is important to understand the status of the NPR because if it were a review of a single contract, then Commissioner Caroline Pham would be correct to expect that the preamble to the NPR include a summary of comments on the Commission’s review of a single application for the Commission’s approval of political control event contracts. By deciding not to include a summary of comments from the Commission’s review of the Kalshi Control Contracts, the Commission is not engaged in “selective amnesia,” as Commissioner Pham charges.7
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